BFIs barred from imposing fine exceeding 2pc of loan installment

Kathmandu / Aug 02: Banks and financial institutions (BFIs), from now onwards, cannot collect annual fine exceeding two per cent of the outstanding loan instalment amount from borrowers.

The provision was introduced after BFIs started extracting exorbitant sum in the name of penal interest from borrowers who have failed to pay the credit instalment on time.

“The situation had become so worse many borrowers had to allow BFIs to auction the assets they had pledged as collateral, as they could not repay the outstanding debt which continued to bulge because of penalties,” said a senior official of Nepal Rastra Bank, the central monetary authority.

Issuing the Unified Directive for Fiscal Year 2016-17 today, NRB said BFIs should fix annual fine amount based on principal and interest installments that were not paid on time. “Such penal interest should not exceed two per cent of the outstanding installment amount. And no interest should be imposed on penal interest,” says the directive, which is expected to provide some relief to borrowers, who have obtained various types of loans, including those using credit card.

The new Unified Directive has also barred BFIs from collecting any service fee from clients acquiring up to Rs 200,000 of any branch banking service (ABBS). Under ABBS, clients dealing with one branch office of a bank or financial institution can acquire any service from any other branch office of BFIs. Currently, the free transaction slab for ABBS is fixed at Rs 100,000.

Also, the latest directive has made it mandatory for BFIs to reduce the portion of institutional deposit to 50 per cent of the total deposit. Currently, the share of institutional deposit — funds parked by institutions, such as insurance companies and contractual saving institutions — can stand at up to 60 per cent of the total deposit.

“If BFIs are currently maintaining institutional deposit in excess of 50 per cent of the total deposit, then that portion should be brought down to 50 per cent within mid-July 2017,” says the directive.