Borrowing and Lending Law in Nepal (2026): Civil Code 2074 + NRB

Borrowing and lending in Nepal sit on two parallel legal tracks. The first is the Muluki Civil Code 2074 (2017), in force since 17 August 2018, which governs private loans between individuals and any lending outside a licensed financial institution — the Tamasuk on a friend's loan, the family advance to a relative, the inter-company informal credit. The second is the Nepal Rastra Bank (NRB) regulatory framework — BAFIA 2073, NRB directives, and the Insolvency Act — which governs lending by commercial banks, development banks, finance companies, microfinance institutions and cooperatives. The two frameworks share principles but differ on interest ceilings, recovery routes, and prudential supervision. See Alpine's business-law practice area for related matters.

This 2026 (2083 BS) guide covers what every borrower and lender in Nepal needs to know: the Civil Code 2074 lending provisions including Section 478 on interest and the critical Section 481 cap that total cumulative interest cannot exceed the principal; the Tamasuk loan deed and the documentation that makes a loan enforceable; secured versus unsecured lending through pledge, mortgage and hypothecation; the 10-year limitation period for loan recovery; the regulatory layer for licensed lenders under NRB; civil-suit recovery routes at the District Court; cheque-bounce as a parallel recovery weapon under the Penal Code; and the foreign-currency loan framework requiring NRB approval.

Alpine Law Associates — Nepal Bar Council-registered banking and recovery team handling loan drafting, Tamasuk attestation, secured-creditor enforcement, cheque-bounce litigation and civil recovery suits at District Courts across Nepal.

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What does Nepali law mean by "borrowing and lending"?

Borrowing and lending in Nepal covers any transaction where one party (the lender) transfers money or fungible goods to another party (the borrower) on the understanding that the borrower will return an equivalent amount, with or without interest, at a future time. The Muluki Civil Code 2074 treats lending as a named contract type and devotes a chapter to its core obligations — Sections 476 onwards govern interest, repayment terms, security, limitation and remedies on default. Outside the Civil Code, the BAFIA 2073 regulates licensed banks and financial institutions, the Cooperatives Act regulates cooperative lending, and NRB directives operate as the prudential supervisory layer for everyone in the licensed sector.

The distinction between private lending and licensed lending matters at every step. A private lender under the Civil Code is bound by the Section 481 interest cap and the 10-year recovery limitation, but is free to set its own interest rate by agreement; a licensed lender under NRB regulation may charge interest at rates set by its own product schedule (subject to NRB ceilings and floor rates), enforces security under specialised statutes (Secured Transaction Act, BAFIA), and operates under capital adequacy, exposure-limit and prudential rules. Borrowing from a friend and borrowing from a commercial bank look similar economically but live in entirely different legal frameworks.

Interest under the Civil Code — Section 478 and the Section 481 cap

The Civil Code 2074 deals with interest in two pieces. Section 478 establishes that a lender may charge "benefit interest" on the loan, with the rate set by the parties' agreement. There is no statutory floor or ceiling rate in Section 478 itself — practitioners report that the industry-standard rate for unsecured personal loans in Nepal hovers around 10 percent per annum, but this is a market norm, not a statutory cap. Parties remain free to negotiate higher or lower rates in the Tamasuk; what they cannot do is breach the Section 481 ceiling.

Section 481 is the critical statutory cap: the total cumulative interest payable on a loan cannot exceed the principal amount. Once the lender has received interest equal to the original principal, no further interest is collectable, even if the loan remains outstanding. This rule — sometimes called "principal once over" — is the borrower-protection backbone of Nepali private lending. It means a lender who lends NPR 1,000,000 cannot collect more than NPR 1,000,000 in cumulative interest, regardless of how long the loan runs unpaid. The cap operates independently of the agreed rate; high-rate loans hit the cap faster, low-rate loans hit it later, but every private loan eventually reaches the ceiling if left unpaid.

Compound interest is generally not permitted on personal / consumer loans under the Civil Code. The lender's interest accrues only on the unpaid principal, not on accumulated unpaid interest. Where lenders attempt to compound interest in the Tamasuk, courts strike down the compounding provision and recompute interest on simple basis. The compound-interest rule is one of several places where Civil Code lending diverges from licensed banking practice — banks operate compound interest on overdue accounts under separate NRB-sanctioned product structures.

Tamasuk — the loan deed that makes a loan enforceable

Tamasuk is the Nepali term for a written loan acknowledgement signed by the borrower in favour of the lender. While a loan can be made orally and is still legally valid, a written Tamasuk is the practical gateway to enforcement — without documentary evidence, the lender faces an evidentiary uphill battle at the District Court. The Tamasuk should record the parties, the principal amount, the interest rate, the repayment schedule, the security if any, and the witnesses. For an in-depth treatment of the document itself, see our dedicated guide to Tamasuk in Nepal.

Best-practice Tamasuk drafting includes: full names and citizenship numbers of both parties; the principal amount in words and figures; the interest rate per annum (subject to the Section 481 cap); the repayment date or schedule; the consequences of default (acceleration, additional interest within statutory limits); the security or guarantor details; signatures of borrower, lender and two witnesses; and where land or significant value is involved, notarial attestation. Some lenders also take a post-dated cheque from the borrower for the full loan amount — bounce of that cheque on the due date opens a parallel criminal route under the Penal Code Section 484, in addition to the civil recovery suit.

Secured versus unsecured lending — pledge, mortgage, hypothecation

Unsecured loans rely entirely on the borrower's personal credit and the documentary trail; on default, the lender's only route is a civil money suit at the District Court. Secured loans add a property layer — the lender holds a security interest over identified property of the borrower (or a third-party security provider), giving the lender priority over unsecured creditors and a faster enforcement route.

Three security modes operate under Nepali law:

• Pledge (dhito over movables with possession transfer). The borrower hands over movable property — gold, jewellery, securities — to the lender as security. The lender holds possession until the loan is repaid; on default, the lender can sell the pledged property after notice. Used extensively in gold-loan and pawn-broking practice.
• Mortgage (bandhak over immovable property). The borrower retains possession of land or building but creates a registered charge over it in favour of the lender at the Land Revenue Office. On default, the lender enforces by obtaining a District Court decree and auctioning the property under the court's auction procedure. Registration is essential — unregistered mortgages are unenforceable against third parties.
• Hypothecation (charge over movables without possession). The borrower retains possession and use of movable property (vehicles, machinery, stock) but the lender holds a registered charge. Used heavily in vehicle finance and inventory finance. The Secured Transaction Act 2063 governs the registration framework for hypothecation in the licensed-lender sector.

The choice of security depends on the asset type, the loan size and the enforcement comfort of the lender. Gold pledge gives the fastest and cleanest recovery; immovable mortgage gives the highest security but the slowest enforcement; hypothecation gives operational continuity to the borrower but the highest enforcement friction.

Limitation — the 10-year clock for loan recovery

Nepali law sets a 10-year limitation period for filing a recovery suit on a loan. The clock starts on the date the loan falls due — not the date of execution of the Tamasuk. Where the loan is repayable on demand, the clock starts when the lender first makes a demand and the borrower fails to pay. Where the loan has a fixed maturity date, the clock starts on that date. After 10 years, the lender's right to file a recovery suit is barred regardless of the merits.

Several events can reset or extend the limitation clock. A written acknowledgement of the debt by the borrower (a fresh undertaking, a part-payment receipt acknowledging the balance, a written request for extension) restarts the clock from the date of acknowledgement. A part-payment by the borrower also restarts the clock — every payment is treated as a fresh acknowledgement. Lenders running long outstanding loans should obtain a written acknowledgement every few years to keep the recovery option alive; lenders who let the loan sit unacknowledged for the full 10 years lose the suit window.

Licensed-lender framework — NRB, BAFIA and the regulated sector

Banks, development banks, finance companies and microfinance institutions licensed by Nepal Rastra Bank operate under a different framework. The Bank and Financial Institutions Act 2073 (BAFIA), the NRB Act, and a stack of NRB directives govern: minimum and maximum interest rates on different product categories; capital adequacy under Basel norms; exposure limits to single borrowers and connected groups; provisioning for non-performing loans; and prudential reporting. Cooperatives are regulated separately under the Cooperatives Act and the Department of Cooperatives, with NRB supervisory overlay for systemically large cooperatives.

Interest in the licensed-lender sector is set by each institution's published product schedule, within ceilings and floors set periodically by NRB. Spread restrictions (the maximum gap between deposit and lending rates) operate as a prudential ceiling on lending rates. The Section 481 "principal once over" cap does not strictly apply to licensed lenders in the same statutory form, because licensed lending operates under specialised statutes that override Civil Code defaults; in practice, NRB-imposed rate ceilings and the limited tenure of most bank loans keep cumulative interest well below the principal.

Recovery — the civil suit route at the District Court

When a private loan goes into default, the lender's primary recovery route is a civil money suit at the District Court of the place where the borrower resides or where the cause of action arose. The pre-suit steps that matter are: a written demand and notice to the borrower (preserves limitation, evidences the breach, opens settlement); collection and proof of the Tamasuk and any acknowledgements; interest computation up to the Section 481 cap; court-fee calculation on the principal-plus-interest claim. The suit pleads the loan, the default, the demand and the relief — typically a money decree for principal, capped interest, and costs.

Once decreed, enforcement runs through the court's execution process: attachment of the borrower's bank accounts, attachment and auction of movable and immovable property, garnishment of salary or trade receivables. Where security exists, enforcement against the security follows the security-specific procedure (auction of pledge after notice, court-supervised auction of mortgaged immovable, repossession of hypothecated movable). Licensed lenders enforce security under the Secured Transaction Act and BAFIA, generally faster than the Civil Code route. For severely distressed corporate borrowers, the Insolvency Act 2063 offers a restructuring or liquidation route, with secured creditors having priority on their security and unsecured creditors ranking pari passu in the residue.

Cheque-bounce as a parallel recovery route

Where the lender holds a cheque from the borrower (either issued at the time of the loan or as a post-dated repayment instrument), dishonour of that cheque on presentation opens a parallel route under the Penal Code Section 484. The standard process is: present the cheque at the borrower's bank, obtain the bounce memo recording the reason for dishonour, issue a 35-day notice to the borrower demanding payment, and on continued default, file a criminal complaint at the District Court. Cheque-bounce is a criminal offence in Nepal punishable by imprisonment and fine — the threat of criminal proceedings is a strong recovery lever, often producing settlement before the case progresses. For the full procedure, see our dedicated guide to cheque-bounce cases in Nepal.

Best practice for lenders is to take a post-dated cheque at the time of issuing the loan for the full repayment amount. The cheque adds a second weapon to the civil recovery route — a defaulting borrower facing both a civil suit and a criminal cheque-bounce complaint settles faster than one facing only a civil suit. The two proceedings can run in parallel; settlement of one does not automatically settle the other unless the parties expressly agree.

Foreign-currency loans — the NRB approval framework

Lending and borrowing in foreign currency is restricted in Nepal under the Foreign Exchange Regulation Act and NRB directives. A Nepali resident cannot freely borrow in foreign currency from a non-resident lender, or freely lend in foreign currency to a non-resident borrower, without prior NRB approval. The approval process scrutinises the purpose, the borrower's repayment capacity, the interest rate (subject to LIBOR / SOFR-linked ceilings), and the security. External commercial borrowings (ECBs) by Nepali corporates are a specific approval category, with NRB issuing approval letters specifying the permitted tenor, rate cap and repayment route.

Repayment routing also requires NRB clearance — funds leaving Nepal as principal or interest repayment to a foreign lender must be remitted through a licensed bank with supporting NRB approval documentation. Informal foreign-currency lending (hundi, hawala-style channels) is unlawful and exposes both parties to criminal and regulatory consequences under the foreign-exchange and anti-money-laundering framework.

How can Alpine Law Associates help with borrowing and lending?

Alpine Law Associates provides full-spectrum borrowing and lending support. On the lender side, we draft enforceable Tamasuk and loan agreements, structure security through pledge / mortgage / hypothecation, advise on the Section 481 interest cap and compute capped interest, run civil recovery suits at the District Court, file cheque-bounce criminal complaints under Penal Code Section 484, and enforce decrees through attachment and auction. On the borrower side, we review loan agreements for usurious provisions and Section 481 compliance, negotiate restructuring and settlement, defend recovery suits where the loan documentation is defective, and represent corporate borrowers in insolvency proceedings.

For licensed-lender clients, we advise on NRB compliance, secured-transaction registration under the Secured Transaction Act, BAFIA enforcement actions, and Insolvency Act proceedings. For foreign-currency lending, we run the NRB approval workflow and structure the documentation to satisfy the foreign-exchange framework. As a full-service law firm in Nepal, we coordinate lending engagements with related contract and dispute work in a single counsel relationship.

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Last reviewed: April 2026