Nepal Rastra Bank (NRB) has issued a new circular to banks and financial institutions (BFIs), and one particular change is causing quite a buzz in the financial sector. In a move aimed at cutting down conflicts of interest in BFIs, the NRB has now placed more stringent restrictions  on loans and other financial facilities to key stakeholders like major shareholders, auditors, legal advisors, and employees. If you’ve got ties to a BFI, whether as a shareholder or employee, this directive is something you’ll want to be aware of. So let’s break it down in a way that’s easy to digest.

Who Does This Affect?

First up, let’s talk about who’s in the crosshairs of this directive. The NRB is targeting people who have significant influence in BFIs. Specifically:

• Shareholders: Now, if you hold more than 0.5% of the total paid-up capital in a bank, you’re in the restricted zone. The NRB is keeping a close eye on these influential players. Earlier, only shareholders owning more than 1% shares in the BFIs were placed in the restricted category. 
• Family Members: It’s not just the shareholders themselves; even their family members are included in this restriction. The aim here is to prevent any sort of indirect access to favorable financial benefits.
• Auditors and Legal Advisors: These are folks who have an insider’s view into a bank’s workings. With the sensitive nature of their roles, it makes sense that they’re also part of this restriction.
• Employees: If you’re an employee with a financial stake in the bank or financial institution, either through shares or other interests, this rule also applies to you. 
• Firms/Companies/Businesses of Shareholders/Employees: If shareholders holding more than 1% of the total paid-up capital, or employees have over 10% shareholding in any firm, company or business, then those businesses also fall under this restriction.

What Exactly is Being Restricted?

This is where things get interesting. The NRB has placed a full ban on loans and other financial facilities for these key individuals. But it doesn’t stop at loans—it also covers non-fund-based facilities like letters of credit or bank guarantees. That means even forms of financial support that don’t directly involve lending money are off the table.

There is some respite for the shareholders from the promoters group, directors, CEOs and their family members. Under the existing provision, the BFIs are not allowed to disburse loans with their assets as collateral. But now an exception has been made where promoter shareholders with up to 0.5% shareholding and other shareholdings with up to 1% shareholding can offer their assets as collateral against any loan disbursed by the BFI. 

Here are the main takeaways:

1. Shareholders Holding More Than 0.5%: If you hold more than 0.5% of a BFI’s paid-up capital, both you and your family members can no longer secure loans from that institution. The idea here is to prevent people with major financial stakes from using their influence to gain benefits that regular customers can’t access.
2. Auditors, Legal Advisors, and Executives: These individuals, given their roles and insights into the bank’s financial health, are barred from receiving any loans or financial services. It’s a precaution to avoid misuse of insider knowledge.
3. Firms Linked to Shareholders: The restriction doesn’t just apply to individuals; it extends to any firm, company, or organization where these shareholders have more than 1% control. That means if a major shareholder also runs a business that deals with the bank, that business won’t be getting loans either. Also, if an employee has over 10% shareholding in any firm or business, those entities also fall under this restriction. This means such firms, companies, or organizations won't be eligible for loans or non-fund-based facilities, closing any loopholes that could allow influential individuals to benefit through associated businesses.

Why Is NRB Doing This?

In simple terms, the NRB wants to prevent conflicts of interest. There’s always been a concern that insiders—people who have influence over the bank whether through ownership or key positions at the banks—could use that influence to secure loans on favorable terms, or worse, default on those loans without facing the same consequences as an ordinary borrower. By drawing a clear line on who can and cannot access these loans, NRB is trying to ensure that the system remains fair and transparent for everyone.

What About the Exceptions?

As with any rule, there are a few exceptions. If any loan has been agreed upon before this new directive came into play, then the amendment will not affect the same. However, no new loans will be issued under these updated rules. This is designed to strike a balance between being strict with major shareholders while not punishing smaller ones who don’t hold as much sway over the bank’s decisions.

What’s the Bigger Picture Here?

This move is part of a larger trend in Nepal’s financial sector, where regulators like the NRB are focusing more on transparency and fair play. It’s no secret that conflicts of interest have been a problem in the past. Allowing major shareholders or high-level insiders to access loans could lead to situations where those loans don’t get paid back, ultimately hurting the bank and its customers.

By placing these restrictions, the NRB hopes to avoid that scenario and ensure that loans are given based on merit, not connections. It’s also a safeguard against loan defaults, where influential individuals may have previously been able to default on loans without facing significant repercussions. Now, everyone has to play by the same rules.

Final Thoughts: A Step Toward Accountability

At the end of the day, this directive from the NRB is all about leveling the playing field. By limiting the ability of major shareholders, auditors, legal advisors, and employees to access loans, the central bank is making a clear statement: No one should have an unfair advantage in the financial system. This move not only aims to enhance accountability but also protects the broader banking system from potential risks posed by influential insiders. It’s a solid step toward ensuring that Nepal’s financial institutions operate in a fairer, more transparent manner.

This might seem like a tough rule for those involved, but for the banking sector as a whole, it’s a positive change that promotes fairness and keeps the system healthy. What do you think of these changes? 

Link to NRB circular