Nepal Rastra Bank’s (NRB) recent instruction to banks and financial institutions (BFIs) to ask for tax clearance certificate from businesses while renewing old and extending new loans is likely to affect credit demand.

According to bankers, the credit appetite of majority of their borrowers, especially small and medium sized enterprises will fall due to the central monetary authority’s new decision.  

Businesses will now need to submit a tax clearance certificate as well as their balance sheet to the banks in order to renew old loans and to apply for new loans.

Most borrowers are caught in a bind as they generally engage in tax evasion by preparing two balance sheets—one with higher revenue and profit to present at banks for credit approval and another with lower revenue and profit for the tax office.

For example, enterprise ABC shows revenue of Rs10 million and takes loan of Rs5 million from a bank. But enterprise ABC maintains a different book showing revenue of Rs2 million to present it before the tax office so that it will have to pay lower tax. This type of tax evasion is rampant among businesses in Nepal. Now, with BIFs strictly asking for the tax clearance certificate, borrowers that maintain two types of books will not qualify for the loan amount they were enjoying earlier.

The new provision has also put BFIs into a difficult situation. “Once the businesses come at us with the balance sheet with lesser revenue that the one presented at the tax office, the amount of credit they qualify for will be very low,” said a banker seeking anonymity. “This created havoc among BFIs and there is confusion among bankers regarding what be our next move should be in such a situation.”  

There is a high chance that the credit demand will go down, with borrowers turning towards unregulated cooperatives, according to the banker.  

However, some other bankers say fall in credit demand will be a momentary phenomenon lasting for a couple of months. “Definitely there is lot of confusion among the bankers as well as borrowers right now. But things will settle within a couple of months,” said Bhuvan Dahal, CEO of Sanima Bank. “The borrowers will start adapting to the situation by maintaining a single balance sheet for banks as well as the tax office.”  

As it is a good move by the central bank to control the tax evasion in order to meet the ambitious revenue collection target of the government, all have to follow it, added Dahal. “The central bank seems determined with no possibility of back tracking from the decision,” he said.

“Therefore, in it is in the best interests of everyone to follow the instruction.”