Working Capital Guidelines (2nd Amendment)

The guidelines, amended on 2080/05/11 (August 27, 2023)

 

* Variance सम्बन्धी व्यवस्था २०८३ साउन १ गतेदेखि मात्र लागु हुनेछ

1. The primary objectives of these guidelines are to:

• Standardize loan limit determination and monitoring processes for working capital loans, which previously varied significantly across institutions.
• Address deficiencies in analyzing borrowers' capacity for working capital loans, which led to errors and weaknesses in assessments.
• Establish transparency in the loan approval process and utilization of funds.
• Develop a fundamental methodology to ensure the proper utilization of working capital loans.

2. Working Capital Loan Limit Determination

The guidelines categorize working capital loans based on their limit and specify distinct rules for each.

2.1. Loans up to NPR 1 Crore (NPR 3 Crore for Production-Oriented Industries)

• These guidelines do not apply to borrowers whose total working capital loan utilization across the entire banking system is up to NPR 1 Crore (or NPR 3 Crore for production-oriented industries).
• BFIs can determine the limits for such loans under their own working capital loan policies.
• However, the types of loans provided for working capital purposes must align with the definitions outlined in these guidelines.

2.2. Loans up to NPR 2 Crore (NPR 4 Crore for Production-Oriented Industries)

• For firms/organizations/companies receiving a total working capital loan of up to NPR 2 Crore (or NPR 4 Crore for production-oriented industries) from one or more BFIs, the total working capital loan limit must not exceed 20% of their estimated annual turnover/sales.
• The loan duration must be 1 year or less and is renewable.
• Exception: If, after analyzing the borrower's Operating Cycle, Cash Conversion Cycle, Days Sales Outstanding, Inventory Conversion Period, Lead Time, Accounts Payable Period, etc., licensed institutions find justification, they can set the total working capital loan limit up to 50% of the estimated annual turnover/sales, provided these reasons are documented in the loan file.
• Before approving the limit, BFIs must inspect and evaluate the firm/organization/company's current assets and conduct a "realistic analysis of the loan limit and Drawing Power." The loan disbursement limit must then be determined based on the Drawing Power.

2.3. Loans Exceeding NPR 2 Crore (NPR 4 Crore for Production-Oriented Industries)

• For working capital loans exceeding NPR 2 Crore (or NPR 4 Crore for production-oriented industries) from one or more BFIs, the analysis of working capital needs must distinguish between Permanent Working Capital Need and Fluctuating Working Capital Need.
• For Fluctuating Working Capital Need, the approved loan limit must not exceed 25% of the estimated annual turnover/sales.
• Exception: Similar to 2.2, if justified by analysis of the borrower's operating cycles (Operating Cycle, Cash Conversion Cycle, etc.), licensed institutions can set this limit up to 40% of the estimated annual turnover/sales, with reasons documented.
• The loan duration must be 1 year or less and is renewable.
• For Permanent Working Capital Need, BFIs must provide a loan of 3 to 10 years duration. The limits specified for Fluctuating Working Capital Need (sub-point 'b' above) do not apply here.
• For periodic working capital loans, BFIs must analyze at least 3 years of estimated financial statements and 3 years of audited financial statements and adhere to their own working capital loan policy.
• For new firms/organizations/companies, or those operating for less than 3 years, BFIs can determine the limit based on "estimated operating expenses, and estimated cash and fund flows" as per their policy.

2.4. Combined Limits for Production-Oriented Industries

• Licensed institutions can provide both short-term (Fluctuating Working Capital Need, less than 1 year) and long-term (Permanent Working Capital Need, 3 to 10 years) working capital loans for production-oriented industries, even for amounts up to NPR 2 Crore (NPR 4 Crore for production-oriented industries), provided a Permanent Working Capital Need is identified.
• Clarification: "Production-oriented industry" refers to industries that use raw materials or semi-finished goods to produce certain commodities through the use of human labor/machinery, adding value.

- Working Capital Loan Limit Renewal

• Variance analysis as discussed below must be followed during renewal.

- Working Capital Loan Monitoring and Management

• BFIs must inspect current assets and liabilities at least once every 3 months and update the report in the loan file. At least one such inspection annually must be unannounced.
• During inspection, BFIs must check the physical stock of goods, VAT register, excise register, customer accounts, and vendor accounts. Quality and marketability of goods should also be considered. The analysis of current assets and liabilities must be reconciled with the working capital loan accounts and updated in the customer's loan file.
• If the inspection of current stock reveals that the loan is not utilized, the loan must be classified as a bad loan, 100% provisioning must be made, and recovery procedures initiated.
• The following details regarding the borrower's current assets and liabilities must be updated in the loan file:
• For working capital loans up to NPR 5 Crore: Quarterly statements certified by the borrower.
• For working capital loans exceeding NPR 5 Crore: Half-yearly statements certified by the internal auditor of the borrowing entity or an external auditor.
• No other BFI can accept as pledge or hypothecation the current assets or receivables already accepted by one BFI. However, in cases of co-financing or pari-passu agreements, BFIs can accept joint pledges.
• BFIs must register the details of current assets accepted as pledge with the Secured Transaction Registry Office. Before accepting a pledge, BFIs must obtain information from the Secured Transaction Registry Office to confirm that the asset is not already pledged with another BFI.
• BFIs must implement a system for mandatory insurance of pledged goods based on a risk analysis. They must inform the borrower at least 15 days before the insurance policy expires to renew it. If the borrower fails to renew the policy even 1 day before expiration, the BFI must renew the mandatory insurance by debiting the loan account. If there is a valid reason for not requiring insurance or for not including certain risks, it must be explicitly mentioned during loan approval.
• Licensed institutions must develop a system for continuous monitoring by integrating the borrower's current asset and liability details into their Core Banking System or an appropriate Management Information System (MIS).

- Variance Management

• Projected financial statements must be analyzed annually. Once a loan is approved based on this analysis, the loan limit cannot be reassessed based on another projected financial statement until audited financial statements are received.
• BFIs must analyze the consistency between audited financial statements and tax clearance statements and verify the realism of projected financial statements, updating this in the loan file.
• Upon receipt of audited financial statements, a Variance Analysis must be performed by comparing them with the projected statements for the same period.
• If the borrower's actual turnover, as per the Variance Analysis is more than 20% lower than the projected turnover, the working capital loan limit must be adjusted as follows:
• Working Capital Loan Limit = (Estimated Turnover × Sanctioned Loan Limit Percentage *) × (1 – 0.50 × Variance **)
• Sanctioned loan limit percentage means the percentage determined by taking the estimated turnover amount as the basis when approving the loan.
• Variance indicates the negative percentage difference between the audited actual statement and the estimated statement and should be calculated in decimal form in this formula.
• For working capital loans provided for multi-year projects under contract agreements related to government, semi-government, and multinational organizations, where construction businesses are involved, the loan limit does not necessarily have to be reduced based on variance analysis during renewal and reassessment for the duration of the project.
• However, BFIs must ensure that the borrower's working capital loan outstanding does not exceed a certain percentage of Net Trading Assets (NTA) as per their own working capital policy.
• The limit for periodic loans provided for Permanent Working Capital Need must also be reassessed based on Variance Analysis. If the average annual turnover for the past 3 years (audited) is more than 25% lower than the estimated amount, the periodic loan limit must also be reassessed. If the periodic loan limit needs to be reduced, the borrower must be given 1 year to repay the excess disbursed loan.

 

- Working Capital Loan Utilization

• Working capital loan funds must be utilized only for business purposes.
• Funds cannot be paid or transferred to unrelated individuals or partners/proprietors/directors/employees. If such payment is found, the entire working capital loan must be classified as a bad loan, 100% provisioning made, and recovery initiated.
• Borrowers using working capital loans must operate their current account and loan account separately.
• All of the borrower's revenue or sales proceeds must be deposited into the current account at the licensed BFI. Borrowers can provide Standing Instructions to the bank to transfer funds from the current account to the loan account as needed. BFIs must automatically deposit funds from the current account to the loan account as per the Standing Instruction.
• Loan funds for business purposes can only be utilized by transferring them directly from the loan account.
• Cash withdrawals or direct transfers to other accounts exceeding 2% of the monthly loan limit are not permitted.
• Working capital loan funds cannot be used for repayment of any other type of loan (installments/interest/other fees). If such repayment is found, the loan for which payment was made will be considered unpaid, and BFIs must classify the loan as per prevailing regulations and arrange for the repayment of the amount to the working capital loan account. However, this does not apply to the repayment of import-related loans upon opening of Letters of Credit (LCs) if approved as working capital loans.
• For Cash Credit (CC) loan accounts among various working capital loan accounts, the outstanding balance must be less than 10% of the loan limit for at least 7 consecutive days during any one period of the fiscal year.
• Transitional Arrangement: 
• First year: Less than 30% of total loan limit for 7 consecutive days.
• Second year: Less than 20% of total loan limit for 7 consecutive days.
• After the third year: Less than 10% of total loan limit for 7 consecutive days.

- Other Provisions

• Working capital loan types must be as listed in Schedule 1 (Cash Credit Loan, Short-term Loan, Import/Export Related Loan, Periodic Working Capital Loan). The decision on which loan to provide depends on the nature of the borrower's business and the BFI's working capital loan policy.
• No new loan or additional limit can be provided to repay any existing loan within the same institution or other institutions. However, if there is an unexpected need for financial resources for a project related to the borrower's business, an adhoc working capital loan of an accidental nature can be provided with direct transfer to the relevant project. Such loans can also be provided for seasonal businesses (e.g., chemical fertilizer purchase, festival-related trade) based on justification. If such loans are not renewed or not utilized for the intended purpose, they must be classified as bad loans, and 100% provisioning must be made. If a borrower needs adhoc loans of an accidental nature more than twice in one fiscal year, the BFI's Board of Directors can decide to provide such loans.
• The working capital loan limit cannot be reassessed within 6 months of approval. This also applies if the loan is transferred from another BFI or credit purchased/taken over.
• BFIs must ensure that the borrower has not used working capital loans for capital expenditure or creation of fixed assets. If found, the loan must be classified as a bad loan and 100% provisioning must be made.
• If the borrower fails to make payments for raw materials as per agreed terms, the BFI cannot count such unpaid raw materials as current assets.
• BFIs must obtain a self-declaration from the borrower regarding timely payment of legal liabilities (employee salaries, social security funds, taxes, and other government dues) and demand other relevant documents as needed to ensure compliance before loan renewal or reassessment.
• Licensed BFIs must obtain loan information from the borrower and, if another institution has provided a loan exceeding NPR 1 Crore, must obtain a No Objection Certificate (NOC) from that institution before disbursing the loan. The institution providing the NOC or information should do so within 5 working days of receiving the request.
• Licensed BFIs must obtain loan information from the borrower and verify the total loan utilized across the entire banking system, updating this semi-annually.
• If a customer is utilizing a total working capital loan of NPR 10 Crore or more from more than one licensed institution, the lending institutions must have a pari-passu agreement among themselves before disbursing/renewing such loans. This agreement must include provisions for loan recovery, collateral liquidation, and dispute resolution in case of non-repayment.
• If any problems are observed in the business operations of a borrower utilizing working capital loans from more than one BFI, if loan misuse is found, or if regular payments are not made, BFIs must immediately exchange such information among themselves.
• The working capital limit cannot be increased in the last month of each quarter (Ashoj, Poush, Chaitra, Asar), and no new working capital loans can be approved under any heading for old borrowers. Additionally, working capital loan accounts cannot be debited to recover loan interest/installments. This provision does not hinder loan renewal or disbursement within the approved limit during these months.
• If, despite no problems with the borrower's financial condition or cash flow, there is a tendency for irregular loan repayment or misuse of funds, and non-payment of loan dues within the stipulated time, such borrowers must be identified as wilful defaulters, the loan classified as bad, 100% provisioning made, and the borrower placed on the black list.
• If audited financial statements show errors or fraudulent statements are presented, the BFI must immediately file a complaint with the Nepal Chartered Accountants Association.
• Category 'B' and 'C' financial institutions are not allowed to provide loans by hypothecating current assets.
• If a borrower requests time to submit audited financial statements due to clear reasons for non-completion of the previous fiscal year's audit, BFIs can grant a reasonable extension. However, upon receipt of the audited financial statements, a variance calculation must be performed and the limit adjusted as necessary.
• If a borrower wishes to repay a periodic loan provided for working capital purposes, BFIs cannot charge prepayment charges. However, this provision is not mandatory if the loan is transferred to another BFI or credit purchased/taken over.
• Implementation of Working Capital Guidelines, 2079:For working capital loans disbursed before 2079/07/01 (October 17, 2022), classifying the loans as Fluctuating Working Capital and Permanent Working Capital during the first reassessment or renewal will not be considered as reclassification or restructuring for provisioning purposes.
• For working capital loans disbursed before 2079/07/01 (October 17, 2022), if the loan disbursed is higher than the limit specified by these guidelines during the first reassessment or renewal, the excess amount must be adjusted to the periodic loan heading with half-yearly repayment as per the following schedule by 2082 Asar Masant (mid-July 2025). This adjustment will not be considered as reclassification or restructuring for provisioning purposes. The loan duration, repayment schedule, and installment amount cannot be changed. Additionally, BFIs cannot charge prepayment charges if the loan is repaid early

- Schedule 1: Types of Working Capital Loans

• Cash Credit (CC) Loan: Renewable loans provided by BFIs by pledging or hypothecating current assets for the management of industrial and commercial firms'/organizations'/companies' current assets.
• Short-term Loan: Single-payment loans provided by BFIs for specific short-term working capital needs of industrial and commercial firms'/organizations'/companies' by pledging or hypothecating current assets. These loans are not renewable.
• Import/Export Related Loan: Loans provided for the purpose of paying for goods during import or export, up to the amount mentioned in the Commercial Invoice against Letters of Credit (LCs) or other instruments for industrial and commercial purposes. This includes Trust Receipt (TR) loans. These loans are not renewable.
• Periodic Working Capital Loan: Loans provided for a duration of 3 to 10 years to meet the Permanent Working Capital Need identified during the assessment of a business's working capital requirements.

 

Source: NRB Guideline