Kathmandu. There is a provision that banks can provide loans by keeping the founder's shares of banks and financial institutions as guarantors. While disbursing such loans, banks have to fulfill various conditions set by Nepal Rastra Bank. The Central Bank through the integrated directive has provided that various conditions must be fulfilled in relation to the provision of loans by securing the founder's shares as collateral.

Conditions are

(a) Necessary measures must be taken to control and manage the risks that may arise while providing loans with founder shares as collateral.

(b) Shareholders of the founder/founder group holding more than 1 percent of the founder shares of a licensed bank and financial institution shall not be allowed to take loans by mortgaging more than 50 percent of the founder shares held by them. A bank or financial institution that records mortgage withholding shall keep mortgage withholding only in compliance with this provision.

(c) A founding shareholder holding 2 percent or more shares of any licensed organization may pledge or sell shares in his name to other banks only with the approval of this bank.

(d) When seeking approval according to sub-item (c), the organization whose shares are to be mortgaged must also submit details of its share ownership and non-mortgage and request approval.

(e) When evaluating shares to be kept as security for the purpose of providing loans on the collateral of founder shares, the value shall be fixed on the basis of the maximum of 50 percent of the average price of ordinary shares for the last 180 working days or the value of the last transaction of the founder shares, whichever is lower. A maximum of 50% of the value fixed in this way can be given a loan. After revaluation of the shares under the security of such loan, which has been paid once, no additional loan limit can be maintained or additional loan can be granted. However, in case the market price is low and the loan is unsecured, additional protection will have to be arranged.

(f) When the founder shares are pledged as a loan, such shares cannot be transferred to non-banking assets and thus the founder shares held as a mortgage must be sold within 6 months of the expiry of the payment period subject to the prevailing laws and the instructions of this bank.

(g) In the case of loans granted by keeping the founder shares as collateral, the repayment period of such loans shall be specified and such period shall not exceed 1 year.

(h) In the case of providing loans by pledging the founder's shares as collateral, such loans cannot be renewed, restructured and rescheduled, but if the founder owning up to 0.5 percent of the founder's shares is availing the loan by keeping the shares as collateral, then the loan is regular and the entire outstanding interest of the loan has been paid. Renewal will not be hindered.

(i) While disbursing loans with the founder's shares as collateral, provision for 100% loan loss shall be made in cases other than good loans.

(j) If the loan is not repaid within the specified payment period, the founder/operator must be blacklisted within 7 days after giving 35 days' notice with the reason for blacklisting, and recommending to the credit information center to be blacklisted within 7 days. The related provision should be mentioned in the loan agreement to the borrower while disbursing the loan.

(k) Banks and financial institutions should clearly mention the arrangements mentioned above from (a) to (j) in their credit policies/regulations.