Borrowing and Lending Law in Nepal: Rules, Interest, and Legal Framework

Borrowing and Lending Law in Nepal (Lenden Kanoon)

In Nepal, lending and borrowing practices—collectively known as "Lenden"—are regulated under the Muluki Civil Code 2074. The term "Lenden" refers to the exchange of money, goods, or services on credit, with the understanding that the value will be repaid in the future. This is a common practice in both formal (legally binding) and informal (based on mutual trust) financial systems.

In formal settings, such transactions are backed by legal agreements, banking laws, and contractual rules. In contrast, informal practices are often based on customary norms, especially in rural areas, where trust plays a key role. Any exchange between individuals involving repayment conditions is considered a borrowing-lending transaction.

Loan Definition

When an individual is required to repay a sum or item to another, it is legally regarded as a loan, and the debtor is obligated to return it to the creditor.

Requirement of a Written Deed

According to the Civil Code, a "deed" refers to any document that validates a transaction—such as a cheque, bill, receipt, or voucher. Transactions must be documented with a proper deed. No transaction should take place without preparing such a deed.

Essential Elements in a Transaction Deed

A legally valid lending or borrowing deed must include the following:

• Full name, surname, age, and address of all parties involved, along with their parents' and grandparents’ names. For married persons, the spouse’s name must also be included.
• Purpose of the transaction
• Total amount or value involved
• If goods are exchanged, their value
• Whether the transaction is a loan or other form of credit
• Description of the goods (if any)
• Repayment deadline
• Interest rate, if applicable
• A clause allowing recovery from the debtor's assets if they default
• Place and date of the deed execution
• Any other relevant information specific to the transaction

Rules on Interest Collection

• Creditors may charge interest only if it's specified in the deed.
• Creditors may charge interest only if it's specified in the deed.
• If the deed only mentions "interest" without specifying a rate, the default rate is 10% per year.
• If "profit" is mentioned instead of interest without an amount, it will be treated as interest at the same legal rate.
• If no interest is mentioned at all, the creditor cannot charge any.
• Interest exceeding the principal is strictly prohibited.
• Compound interest (interest on interest) is also not permitted.

Procedures for Payment and Receipt

Deed Validity Duration

1. When a debtor repays the loan in full, the creditor must acknowledge it by tearing the deed or signing and noting payment on its back.
2. If the deed is missing at the time of repayment, the creditor must issue a receipt confirming payment and the date.
3. For partial payments, the amount must be recorded on the deed. If the deed is unavailable, a separate signed receipt must be provided by the creditor.
   • A household-level deed is valid for up to 10 years.
   • If repayment or an extension occurs within that period, the deed remains valid for another 10 years from that date.
   • If a case is filed within this period and the court allows recovery, the creditor is entitled to both principal and interest as per the verdict.

Restrictions on Transactions with Incompetent Individuals

• If a transaction is carried out with someone legally incompetent or semi-competent, it may not be recognized by the law.

Recovery from Shared (Common) Property

• If the head of the family hasn't signed the deed, the creditor cannot claim repayment from common property unless the debtor’s legal claim to it is established.
• If the head of the household repays the loan, the amount can be recovered.
• If repayment is not made, the creditor must file a lawsuit within 10 years.
• Once the debtor’s right to shared property is confirmed, recovery of dues is allowed.

Recovery Without a Formal Deed

Even in the absence of a properly executed deed, if evidence such as a cheque, banking record, voucher, receipt, or account book suggests a transaction took place, the court may allow recovery based on that documentation.

Exceptions to Statute of Limitations

No time bar (statute of limitation) applies in the following cases:

• Transactions intended to exploit, defraud, or cause harm to a legally incompetent or semi-competent individual
• Collection of compound interest
• Fraudulent misrepresentation or concealment of material factsCharging interest exceeding 10% annually

Lending and borrowing in Nepal, whether personal or institutional, are regulated to promote transparency, accountability, and fairness. The Muluki Civil Code 2074 lays out strict rules for executing, validating, and enforcing lending-related transactions, including interest limitations, deed requirements, and time limitations. This legal framework protects both creditors and debtors while discouraging exploitative practices and informal abuse of power in financial dealings.