The Nepal Rastra Bank amended its Unified Directives this week to permit banks and financial institutions to capitalize unpaid interest on loans extended to long-term projects until those projects begin generating cash flow from commercial operations. Previously, this facility applied only to select sectors such as hydropower and tourism. Long-term projects are defined under the directive as those requiring at least two years before production begins.
The amendment also introduces special concessions for hydropower projects delayed by transmission line construction and for projects affected by natural disasters, allowing partial interest capitalization without automatic reclassification as restructured loans in some circumstances. The NRB simultaneously tightened accountability requirements for banks regarding credit risk management on such loans.
The directive is intended to reduce financial pressure on project developers during extended construction phases, though analysts note that expanded capitalization also increases banks' exposure to potential non-performing assets if projects fail to reach commercial viability.