Nepal Rastra Bank has made the rules stricter for banks and financial institutions when taking over collateral used against loans.
The central bank has now said that banks must complete the collateral auction process at least three times before they can take ownership of the property. Earlier, banks were allowed to take over the collateral if it was not sold even after one auction attempt.
Banks and financial institutions are allowed to recover unpaid loans by selling the collateral kept as security. This includes recovering both the remaining loan amount and interest. However, under the new rule, banks can take over the collateral only if the loan is still not recovered even after completing the auction process three times.
When a bank finally takes over the collateral, it must value the property at either the current market price or the total outstanding loan amount up to the previous day, whichever is lower.
If the market value of the collateral is lower than the outstanding loan amount, the difference must be recorded as an expense in the profit and loss account for the same financial year, as mentioned in the accounting policy.
However, until the full outstanding amount related to such non-banking assets is settled, banks are not allowed to show the interest portion as income in the profit and loss account. Instead, that amount must be transferred to a provision for loss on non-banking assets.
