Foreign Loan Investment in Nepal: Legal Perspective

The major sources of investment in most financing are debt, equity and earnings/income of any transaction. Most capital-intensive projects like hydropower projects cannot be driven without debt financing. Based on different sources of literature, development of 40,000 MWs of hydropower plant in Nepal is said to be feasible from an engineering perspective; however financing through Nepali banks and financial institutions alone for generating 40,000 MW seems impractical due to capital inadequacy. In view of this, foreign lending should be promoted and effectively encouraged through adequate legal framework.

Since the enactment of Foreign Investment and Technology Transfer Act 1992 (Former FITTA), loan investment has been categorised as foreign investment, and the foreign loan regime has been highly regulated by a series of directives, circulars, by-laws and notices issued by the Central Bank of Nepal under Foreign Exchange (Regulation) Act, 1962 (FERA). In present context, Foreign Investment and Technology Transfer Act, 2019 has replaced FITTA and introduces new paradigm of foreign loan investment. NRB has enacted the Foreign Investment and Foreign Loan Management by-laws, 2021 (2078) (NRB Bylaw) replacing almost 12 NRB notices/circulars in relation to foreign equity and loan investment. Some key concerns on the foreign loan investment in local law perspective has been provided as follows:

Foreign Loan

FITTA allows loan to be obtained only from foreign financial institutions by any industry with foreign investment (pre-existing equity investment) in the form of project loan or project financing by entering into an Agreement. The scope of foreign loan investment provided under FITTA does not allow loans from: (a) Nepali citizens residing outside Nepal including relatives, other individual, Non-Resident Nepali (NRN) or any association of NRN, (b) parent company/ group of companies (c) authorised finance companies, (d) foreign companies/entities, and (e) foreign shareholders (Other Loans) as envisaged by the NRB Bylaw. Further, FITTA disqualifies obtaining foreign loan by any industry without pre-existing foreign equity investment. This will effectively exclude Nepali entrepreneurs from accessing foreign loan. However, the NRB has been providing foreign loan investment approval for Other Loans eligible under NRB Bylaws which are not addressed under FITTA. In addition the terms “project loan” or “project financing” are not legally defined terminologies and there is no clarity whether such loan include corporate loan or not. The Bylaws enacted by NRB provides different categories of foreign lending including project financing which are not provided under FITTA. Overlapping legislation on loan approval has been a matter of ambiguity in existing foreign loan investment regime. Reform should be done for synchronisation of qualifying criteria for foreign loan regime provided under FITTA and NRB laws.

Entry: Approval Requirement

The foreign loan investment under FITTA mandates to obtain NRB approval for foreign loan investment after obtaining recommendation from Ministry of Industry, Commerce and Supplies. FITTA provides statutory timeline of seven days for the purpose of foreign investment approval from the date of submission of application along with all required documents at one-point service center. However, this statutory timeline is rarely achieved in practice. The approval process takes almost 3-6 months.

Except project financing, foreign loan investment shall be obtained from the regulatory authority of a firm/company/entity prior obtaining foreign loan investment from NRB which is again contradictory to the approval requirement of FITTA. The timeline for foreign loan investment under NRB Bylaws is 15 days from the date of application which is yet to be tested in practice. In case of loan investment above six billion under the Public Private Partnership Act, 2019, additional approval is required from the Investment Board Nepal (IBN). This has resulted in duplication of screening for foreign loan investment approval as the same transaction has to be screened by (a) Ministry, (b) NRB and also from (c) IBN in case of investment approval of more than six billion. There should be simpler document review requirements and screening should be mostly done on the basis of (i) amount of investment and (ii) sectors of investment, for example. Currently, regulatory authorities require review of all the commercially negotiated documents (like loan agreement) at each government authority such as one point service center/IBN/Ministry and NRB which takes substantial time for screening process. The FITTA provides for automatic route for foreign investment and notification can be done to make the entry efficient. From the policy perspective, Government of Nepal should activate the automatic route-based on the threshold of investment and sector of investment.

Priority to Eligible Local lenders

NRB requires that the Nepali borrower first attempt to avail loan from local BFIs. Only when the borrower fails to obtain loan from local BFIs (due to inadequate bankability or high interest rate etc.), can s/he opt for foreign lender including (a) Foreign Banks and Financial Institutions, (b) Authorised Finance Companies/ Financial Institutions, (c) Foreign Companies/ Entities, (d) Multilateral or Regional Financial Institutions, (e) Loan from Individual Foreign Shareholders. At the time of filing for foreign loan investment the borrower is required to file documents regarding requirement to obtain foreign loan investment and failing to obtain loan from local BFIs. This requirement protects local BFIs on lending transaction however this could be a discouraging factor for foreign loan investor. The potential differentiation between foreign and local lenders would be revisited and priority regime should be carved out for foreign loan friendly investment system.

Interest Rate

The interest rate on foreign loan investment has been regulated by NRB and it has provided fixed rate of interest depending on nature and type of foreign loan investment except in case of project loan and project financing. In general, the loan from foreign BFIs has been capped based on the nature of and type of lending. For instance the loan from foreign BFIs to a project company is capped under a year LIBOR + upto 5.5% per annum. However, the interest rate depends upon the different foreign loan investment as envisaged under NRB Bylaws. The NRB Bylaws do not provide fixed interest rate in case of foreign lending through project financing and for the first time there is clarity on the all-in cost in interest rate. Which means the approved interest rate ceiling shall be inclusive of all expenses, cost, commissions, fees such as commitment fees, front-end fees, applicable taxes and payable charge to lending. The interest rate has been based on London Interbank Offered Rate (LIBOR) in general, Marginal Cost of Fund-based Lending Rate (MCLR) for loan investment from India, and Loan Prime Rate (LPR) is applicable for lending from China.
In the global arena, LIBOR is in transmission phase and it is like to discontinue at the end of 2021. In this context, NRB should start working on identifying alternative interest benchmark which will accurately reflect the economic reality of borrowing. Further, NRB has not determined separate benchmark for determining the floating interest rate at different periods. The provision on floating interest rate should be revisited by NRB.

Recording Requirement

NRB mandates recording of foreign loan investment within six months post disbursement of foreign loan through proper banking channel. The NRB Bylaw provides one time recording opportunity for those foreign loan investments which are yet to be recorded within a year from the date of enactment of the Bylaw (i. e. within June 7, 2022). The NRB will issue certificate of foreign loan investment recording within seven days from the date of application. Without furnishing certificate of recording, NRB can allow repatriation of foreign loan investment.


The NRB Bylaw provides priority to BFIs over foreign lenders in case of repayment as well. This is inferred from the NRB Bylaw which states that at the time of repatriation of foreign lending, a borrower shall submit (a) Document certifying that the borrower has not been blacklisted by Credit Information Bureau of Nepal (CIB) and (b) a self-declaration stating that there are no pending loans payable to local BFIs.

This is inconsistent with the approach of Nepali law and agreement clause which allows payment of secured creditors (foreign lender in case of foreign lending) before other creditors. However, the NRB Bylaw does not provide any provision or procedures as to how NRB will process repatriation approval if the borrower is blacklisted. In lack of this clarity and in view of the requirement of NRB Bylaw to submit proof of borrower not being blacklisted and self-declaration regarding default loan, NRB is unlikely to permit repatriation approval in such cases. Therefore, it can be inferred that NRB effectively gives priority and seeks to protect local BFIs over foreign lenders.

In terms of repayment of loan, prior enactment of NRB Bylaw provisions that each time approval from NRB is required for repayment of principal and interest amount. However, in present context NRB approval is not applicable for repatriation of foreign loan investment. Foreign exchange facility is provided by the local BFIs which has received amount for foreign lending but the list of documents to be submitted at local BFIs remains intact as before. The repatriation of foreign loan is allowed into the bank account of the lender (in the country of lender) from where the foreign loan disbursement has been made through proper banking channel.


A foreign investor providing loan to an industry or company against mortgage or collateral of movable or immovable property can auction or forfeit such property for non-payment of loan for recovering the amount under prevailing laws of Nepal. Such action can be exercised against an industry or company and not against a person. NRB has issued a circular on December 28, 2018 permitting a local commercial bank to act as security trustee and agent for the foreign lender, and such agent is entitled to recover the loan and enforce the securities on behalf of the foreign lender. However, there is no clarity on loan recovery and enforcement of security mechanism without involvement of local commercial bank.

Way Forward

Recently NRB has enacted ‘Foreign Investment and Foreign Loan Management Bylaws 2021 (2078)’ which can be marked as a milestone development on foreign loan and equity investment. However, NRB Bylaw has not addressed the prevalent issues encapsulated in the foreign loan investment regime as briefly highlighted in above paragraphs.

Government agencies including NRB should be mindful of providing mitigation measures on the prevailing issues by harmonisation of the legal framework on foreign loan investment provided under FITTA and NRB, activating automatic route, providing non-discriminatory and national treatment to foreign lenders, introducing alternative bench mark on interest rate, clarity in floating interest rate, and dual approval requirement, applying autonomous self-help remedy, areas of utilisation fund should be open ended with assurance of easy exit.

On a short note, the potential future should offer periodic legal reforms in conformity with NRB laws and FITTA regime addressing issues highlighted above to avoid inconsistency and ambiguous regime in order to ensure certainty and convenience. Furthermore, consultation with concerned stakeholders should be completed before enacting any laws or consultation should be done at the time of drafting stage of any laws in order to address practical issues in relation to foreign loan investment adopting a pragmatic approach.

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Lajula Maharjan

Lajula Maharajan is a corporate legal practitioner and has been associated with Pioneer Law Associate as Senor Associate. She regularly advises clients on diverse transaction matters including foreign investment, project finance, corporate compliances and consumer protection matters.

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