KATHMANDU : Nepal Rastra Bank (NRB) has introduced new rules aimed at making vehicle financing more transparent and customer-friendly.
The central bank issued the “Policy and Procedural Provisions for Granting Approval to Hire Purchase Companies, 2070 (Sixth Amendment 2083)” on Tuesday. The new provisions set clearer limits on interest rates, service fees, collateral, lending and other aspects of hire purchase loans.
The new rules are expected to benefit vehicle buyers while bringing greater discipline to hire purchase companies.
Key provisions are:
1. Service fee capped at 1%
Hire purchase companies cannot charge more than 1% as a service fee when providing loans.
2. Interest rates must be based on cost of funds
Companies cannot set interest rates arbitrarily. They must determine lending rates based on their cost of funds, including the cost of equity and the weighted cost of borrowed funds.
3. Interest rates can vary by only 2 percentage points
Companies must publish their lending rates based on their cost of funds. They cannot increase or decrease the published rate by more than 2 percentage points.
4. Penalty interest capped at 2%
The annual penalty interest charged on overdue installments cannot exceed 2 percentage points.
Companies also cannot charge interest on penalty interest. The penalty can only be calculated on the principal amount of the overdue installment for the delayed period.
5. Loans capped at 80% of collateral value
Hire purchase companies can provide loans of up to 80% of the value of the collateral, subject to the loan-to-value ratio prescribed by NRB.
For vehicle purchases, the current regulatory LTV limit allows financing of up to 60% of the vehicle value.
6. Companies cannot finance only one vehicle brand
Hire purchase companies cannot focus their investment on a single vehicle brand. They must invest across multiple brands.
A company also cannot provide loans exceeding 30% of its net worth to a single borrower or group.
7. PAN mandatory for loans above Rs 2.5 million
Borrowers taking more than Rs 2.5 million in vehicle loans must provide a Permanent Account Number (PAN).
The provision is aimed at improving transparency in vehicle financing transactions.
8. Borrowing capped at 10 times net worth
A hire purchase company cannot borrow or take loans exceeding 10 times its net worth.
The new rules also require hire purchase companies to maintain a minimum paid-up capital of Rs 300 million.
