Central Bank Eases Financing Rules for Long-Term Projects, Tightens Risk and Crime Controls

Kathmandu — Nepal Rastra Bank has introduced a major regulatory amendment aimed at easing the financial burden on long-term projects while making banks more accountable for risk management and financial crime control.

Through an amendment to the Unified Directive 2082, the central bank has allowed banks and financial institutions to capitalise interest on long-term project loans during the construction or moratorium period until the project begins commercial operation and starts generating cash flow.

The new arrangement is expected to provide relief to projects that require a long gestation period before generating income. Hydropower, infrastructure, tourism, manufacturing and other capital-intensive projects are likely to benefit from the provision, as such ventures often face a long gap between loan disbursement and revenue generation.

Under the revised rule, interest accrued before the project begins earning income may be added to the loan amount instead of being paid immediately by the borrower. This means project developers will not face immediate cash pressure to service interest while construction is still under way.

The central bank has also clarified what qualifies as a long-term project. A project will be considered long-term if it takes at least two years from investment to begin commercial operation or production and generate cash flow.

However, the facility is not automatic. Banks must clearly mention the interest capitalisation arrangement in the loan agreement. They must also prepare a separate internal procedure covering eligible sectors, cash flow analysis, repayment terms for capitalised interest, the proposed capital plan and the debt-equity structure of the project.

The decision to capitalise interest must be approved by the board of directors of the concerned bank or financial institution. This requirement is intended to make banks more responsible and prevent branch-level or case-by-case discretion from weakening credit discipline.

The amendment provides relief to borrowers, but it also introduces tighter safeguards for banks. If a bank extends the grace period after it has already been fixed and continues capitalising interest, the loan will be treated as restructured.

In such cases, banks will have to maintain at least 25 percent loan loss provisioning on the total loan amount. This is a significant regulatory cost and is expected to discourage banks from repeatedly extending grace periods without properly assessing the real condition of the project.

This provision has an important policy meaning. The central bank is allowing flexibility for genuine long-term projects, but it is also trying to stop banks from hiding weak loans behind repeated grace-period extensions.

In the past, some project loans could appear less risky because banks extended repayment schedules and carried lower provisioning. The new rule makes such extensions more expensive for banks and forces them to recognise higher risk when project delays are not properly justified.

Nepal Rastra Bank has also required banks to record capitalised interest separately under the heading “Interest Capitalized Term Loan.” This separate accounting treatment will make it easier to identify how much of a borrower’s liability comes from unpaid interest added to the loan.

The ICTL provision is important for transparency. Without separate accounting, the original project loan and the accumulated interest burden could become difficult to distinguish. A separate heading gives regulators, auditors and bank management a clearer picture of project exposure.

The central bank has made a special exception for some hydropower projects. If a hydropower project has completed construction and started production but cannot operate at full capacity because the required transmission line or evacuation infrastructure is not ready, interest capitalisation will not be treated as restructuring.

This is a significant relief for the hydropower sector, where many projects face delays not because of their own construction failure but because of missing transmission infrastructure. In such cases, project revenue may be lower even after production begins, creating repayment stress despite the project being physically completed.

The central bank has also allowed some flexibility for projects damaged by circumstances beyond the borrower’s control, such as natural disasters, floods, landslides, earthquakes or riots. If such events damage a project and require more than two years for restart, banks may extend the grace period and capitalise interest.

However, this relief comes with conditions. The borrower must first clear all overdue principal and interest before receiving the extended facility. Such loans will still be treated as restructured, but banks will need to maintain at least 12.5 percent loan loss provisioning instead of 25 percent.

This shows that the central bank is taking a differentiated approach. Projects delayed by weak execution or financial stress will face stricter provisioning, while projects affected by external shocks will receive relatively softer treatment.

The amendment also covers several priority sectors. These include hydropower, domestic raw material-based cement industries, pharmaceutical industries, cable car projects, sugar industries, dairy industries, medical colleges, tourist-standard hotels, hospitals, fruit and herbal-based long-term agricultural projects, and paper industries using domestic raw materials.

For these sectors, the ability to defer interest payment until the project reaches the operating stage could improve investment appetite. Many long-term projects in Nepal struggle during the construction phase because loan servicing begins before revenue starts.

The new rule could therefore help reduce early-stage financial stress and improve the bankability of large projects. It may also support infrastructure investment at a time when Nepal needs significant capital for energy, tourism, production and connectivity.

But the policy also carries risks. Capitalising interest increases the total loan size. If the project later fails to generate expected cash flow, the borrower may face a larger debt burden and the bank may face higher credit risk.

For that reason, the success of the policy will depend on the quality of project appraisal by banks. Banks will need to assess whether the project delay is temporary and justified, whether future cash flow is realistic, and whether the borrower has enough equity commitment.

The second major part of the amendment deals with financial crime control. Nepal Rastra Bank has directed banks and financial institutions to make arrangements for immediate account freezing and release in cases linked to financial crime.

Under the new provision, if an investigating agency or a law enforcement official makes a verbal or written request, banks must be able to freeze accounts linked to financial crime for a short period without delay.

To implement this, banks must set up a 24/7 operational mechanism. They must also publish a dedicated contact number on their websites so that investigation officials can quickly reach them for account-freeze related matters.

The central bank’s focus on round-the-clock response reflects the changing nature of financial crime. In cyber fraud and digital payment abuse, stolen funds can move across several accounts within minutes. Delay during holidays or outside office hours can allow suspects to withdraw or transfer money before action is taken.

The amendment builds on the existing digital account-freeze system. Banks already receive account-freeze and release instructions through the central bank’s official online portal. They are required to treat instructions received through that system as official and act accordingly.

Nepal Rastra Bank has also made banks and responsible officials accountable if they fail to act on official instructions. After freezing or releasing an account, banks must submit the details through the Supervisory Information System.

Banks must also provide account-related details directly and promptly if requested by an authorised investigating or law enforcement official. This is expected to speed up investigations into cyber fraud, suspicious transactions, illegal fund transfers and other financial crimes.

The policy shift has two clear messages. On the lending side, the central bank is trying to support long-term investment by reducing construction-period repayment pressure. On the supervisory side, it is tightening transparency, provisioning and accountability so that flexibility does not turn into hidden credit risk.

The amendment also signals a broader regulatory direction. Nepal Rastra Bank appears willing to support productive investment, but not at the cost of weakening banking discipline. At the same time, it is pushing banks to respond faster to the risks created by digital banking and cyber-enabled fraud.

For project developers, the new provision may improve financing conditions. For banks, it increases the responsibility to conduct stronger due diligence. For regulators, it creates a clearer system to track capitalised interest, restructured loans and emergency account-freeze actions.

Overall, the new directive is a balancing measure. It provides breathing space to long-term projects, especially those with delayed cash flow, but it also places stricter responsibility on banks to recognise risk, maintain proper provisioning and cooperate quickly in financial crime investigations.