Section 12 of the Foreign Exchange (Regulation) Act 1962 (2019) (the “FERA 1962“) empowers Nepal Rastra Bank (the “Central Bank“) to issue the directives, bylaws or notices to implement the provisions of the said Act. In exercise of the said power and for the purpose of Section 10A, Section 10 B, and Section 10C of the FERA 1962, the Central Bank has issued following circulars in relation to foreign loans (collectively the “NRB Circulars”):
Under the NRB Circulars the Central Bank has imposed various terms and conditions on foreign loans. Discussed below are the key provisions of the NRB Circulars:
1. The NRB Circulars require the borrower to first attempt to avail of the loan from commercial banks and financial institutions in Nepal. Only in the event the borrower fails to obtain the amount of funds it requires at a competitive rate of interest locally, the borrower can obtain loan from foreign lenders.
2. Foreign Loan by Nepalese Citizens:
2.1. A Nepalese citizen can obtain foreign loan for business purpose from his/her relatives residing outside Nepal, non-resident Nepalese or foreign entities, with the approval of the Central Bank.
2.2. Following conditions are applicable to obtaining of foreign loan by Nepalese citizens:
(a) Amount of foreign loan shall not exceed USD 200,000;
(b) Loan shall be interest free;
(c) Loan repayment period shall be at least 5 years;
(d) The individual borrower shall submit details of the business and purpose for which he/she is proposing to obtain the loan; and
(e) The loan shall be remitted through proper banking channels.
3. Foreign Loan by Nepalese Firms / Companies / Industries / Entities:
Priority of Eligible Lenders
A. Foreign Banks and Financial Institutions
In the event the Nepalese borrower cannot obtain loan locally, the borrower is first required to attempt to avail of foreign loan from foreign banks and financial institutions.
B. Authorized Finance Companies / Financial Institutions:
Only in the event it becomes difficult to obtain foreign loan from foreign banks and financial institutions, the borrower can obtain loan from any finance company or financial institution which has been authorized to provide loan as per the approval obtained by such finance company or financial institution from their respective government, central bank or any other regulatory authority.
C. Foreign Companies / Entities:
In the event the borrower is unable to obtain loan from the entities under paragraphs 3.1(A) and 3.1(B) above, the borrower can obtain foreign loan from a foreign company or other entities. In respect of loan from foreign companies / entities- (i) the financial details of the lending entity certified by its auditor (or audited accounts), (ii) source of funds for the loan, and (iii) schedule for the transfer of loan amount by the lender, and repayment of the same by the borrower, are required to be provided to the Central Bank.
3.2 Loan from Individual Foreign Shareholders:
3.2.1 Pursuant to the NRB Circular dated November 04, 2015, Nepalese firms, companies, industries, and such other entities are permitted to obtain loan from its individual foreign shareholders in the event such entities are unable to obtain the required loan amount from local commercial banks and financial institutions at competitive rate of interest.
3.2.2 From the wordings used in the NRB Circular dated November 04, 2015, the said NRB Circular (a) is applicable to the lending made by an existing foreign individual (natural person) shareholder to the borrower company, and (b) is not applicable to the lending made by an existing institutional shareholder to the borrower company. Any lending made by a foreign institutional shareholder to the borrower company as a shareholder should be subject to the regulations discussed in paragraph 3.1 above.
3.2.3 The amount of loan from foreign individual shareholder should be such that the debt to equity ratio of the foreign individual shareholder in the borrower entity does not exceed 60:40. As an example, in the event the amount of equity investment of such shareholder in the borrower entity is USD 4 million, the amount of loan he/she can provide to the borrower entity would be capped at USD 6 million.
4. Multilateral or Regional Financial Institutions:
Notwithstanding the provisions contained above, foreign loans can be availed from multilateral or regional financial institutions such as the World Bank, IFC, ADB, in accordance with the decision of the Central Bank. In case of borrowing from such institutions, the requirement to obtain such loan locally (or the requirement under Paragraph 3.1 above) shall not be applicable.
5. Regulation of Interest Rate
5.1 The rate of interest on all foreign loans shall be consistent with the rate of interest prevalent in the international market.
5.2 As discussed above, the rate of interest on loans availed by individual Nepalese borrowers shall be nil.
5.3 The rate of interest on loans availed by Nepalese firms, companies, industries, and such other entities in accordance with Paragraph 3.1 above shall not exceed the prevalent 1 year LIBOR rate + 5.5% per annum.
5.4 The rate of interest on loans availed by Nepalese firms, companies, industries, and such other entities from its foreign individual shareholders (in accordance with Paragraph 3.2 above) shall not exceed the prevalent 1 year LIBOR rate + 2% per annum.
5.5 No specific restrictions have been imposed on the rate of interest on loan from multilateral or regional financial institutions (as discussed in Paragraph 4 above), and the same shall be in accordance with the decision of the Central Bank.
6. Repatriation Conditions
6.1 Some of the documents that need to be submitted for repatriation of loan principal and interest include- (a) document certifying that the borrower has not been blacklisted by the Credit Information Bureau of Nepal, and (2) self-declaration by the borrower that there are no matured loans payable to banks or financial institutions in Nepal.
6.2 From the above conditions it appears that in the event the borrower (a) is blacklisted, or (b) has failed to repay any loan from the banks or financial institutions in Nepal, then repayment of loan or interest cannot be made to foreign lenders.