Laws · Analysis

Local borrowing: federal consent required by one Act but not mentioned in another, and local guarantees for user groups' loans with no clear legal basis

Laws Analysis

Research candidate — not legal advice. This is a starting point for lawmakers and legal reviewers, drawn from official reports. It has not been reviewed by a qualified lawyer and does not establish that any law is invalid or that a loophole exists.

Gap in the lawMedium confidenceEnacted ActReform recommendation

The Intergovernmental Fiscal Arrangement Act 2074 requires provinces and local levels to obtain the federal government's consent before taking internal loans. The Local Government Operation Act 2074 lets municipalities borrow within the Commission's limit with their assembly's approval, without mentioning federal consent. The Fiscal Commission reports that 17 local governments borrowed from the Town Development Fund in FY 2082/83 without federal consent, and that local levels have stood as guarantors for loans taken by user groups although no law appears to allow this.

Laws and sections involved

  • अन्तर–सरकारी वित्त व्यवस्थापन ऐन, २०७४ s.14(1) proviso, 14(3)–(4)
    Our translation: the federal government, provinces and local levels may take internal loans within the limit recommended by the Commission; provided that provinces and local levels must obtain the consent of the Government of Nepal before taking an internal loan. A request for consent must include the project, expected returns, repayment plan and lender details.
    Law Commission consolidated text; authenticated 2074/6/27; amended 2075/3/32 and 2075/11/19. s.14 on PDF p.8. Later amendments not confirmed. Official text
  • स्थानीय सरकार सञ्‍चालन ऐन, २०७४ · Local Government Operation Act, 2017 s.68(1), 68(4)
    Our paraphrase: rural municipalities and municipalities may take internal loans for productive, employment-generating, revenue-raising and capital works within the limit recommended by the Commission, with approval of their assembly; other arrangements for borrowing shall be as provided by federal law.
    Law Commission consolidated text of the Local Government Operation Act 2074 (authenticated 2074/6/29); the title page lists four amending Acts, the latest of 2081/12/18. s.68 on PDF pp.64–65. Official text
  • सार्वजनिक ऋण व्यवस्थापन ऐन, २०७९ s.14(1)–(4); s.8(4)
    Our paraphrase: s.14 provides for guarantees given by the Government of Nepal (for foreign loans for approved projects, for loans of public institutions building approved infrastructure, and counter-guarantees for provincial and local internal loans taken with federal consent). We found no provision in it allowing a local level to guarantee another body's loan. s.8(4) lets the federal government deduct unpaid loans taken from or guaranteed by it from a province's or local level's revenue share.
    Law Commission text; authenticated 2079/06/23 (Act No. 28 of 2079). The title page lists no amending Act. s.8(4) on PDF p.5; s.14 on PDF pp.7–8. Official text

The apparent issue

Two related uncertainties. First, the Local Government Operation Act sets out how municipalities borrow (Commission limit plus assembly approval) without mentioning federal consent, while the Intergovernmental Fiscal Arrangement Act requires that consent; it is not spelled out whether a loan taken without consent is invalid, merely irregular, or valid. Second, no Act we read expressly allows or forbids a local level to guarantee a loan taken by a user group or similar body, so the legal status and the liability of such guarantees are unclear.

Evidence

  • The Commission reports that, according to the Ministry of Finance, no province or local level has sought consent under s.14, yet 17 local levels borrowed from the Town Development Fund in FY 2082/83 (16 in FY 2081/82) without federal consent, and 7 borrowed without including the loan in their annual budget. It recommends that the legal requirement be followed. National Natural Resources and Fiscal Commission s.7.4 implementation table items 3–6, printed p.271 (PDF p.299); s.7.4 suggestions items 3–5, printed p.272 (PDF p.300)
  • The Commission found that local levels had stood as guarantors when various user organisations borrowed from the Town Development Fund, that the prevailing law relating to local governments does not appear to provide for such guarantees, and recommended that local levels not act as guarantors for any body's loan without a legal basis. National Natural Resources and Fiscal Commission s.7.4 suggestions item 6, printed p.272 (PDF p.300)
  • The Auditor General reports that 16 local governments raised Rs 37.19 crore of internal loans from the Town Development Fund in FY 2081/82 and says local levels must fully follow fiscal discipline when borrowing. Office of the Auditor General National Natural Resources and Fiscal Commission section, para 5, printed p.73 (PDF p.105)
  • s.14 of the Intergovernmental Fiscal Arrangement Act, s.68 of the Local Government Operation Act and ss.8 and 14 of the Public Loan Management Act were read in the official texts. Nepal Law Commission IGFA PDF p.8; LGOA PDF pp.64–65; PLMA PDF pp.5, 7–8

Possible readings

  1. Reading 1: the two Acts work together — s.68(4) of the Local Government Operation Act sends 'other arrangements' to federal law, which includes the consent requirement in s.14 of the Intergovernmental Fiscal Arrangement Act; borrowing without consent is therefore contrary to law.
  2. Reading 2: borrowing is a local fiscal power and s.68(1) sets its own conditions (Commission limit and assembly approval); the federal consent requirement may be read narrowly, for example as applying to loans that need a federal guarantee or affect federal liabilities, and a loan meeting s.68(1) is valid even if consent was not sought.
  3. On guarantees, one reading is that a local level may do only what law allows, so a guarantee without a legal basis is beyond its powers; another is that a guarantee could be treated as part of supporting local development projects under the local government's general functions, though no provision saying so was found.

Why it matters in practice

If local borrowing or guarantees fall outside the law, local budgets could carry debts and contingent liabilities that neither the federal government nor the Commission tracks, and lenders such as the Town Development Fund face uncertainty about enforceability. If they are within the law, the federal consent rule may be a dead letter in practice and could be revisited.

Hypothetical example

Hypothetical: a municipal assembly approves a Rs 5 crore loan from a development fund for a bus park, within the Commission's limit, but the municipality never asks the federal government for consent. It also signs as guarantor for a drinking-water users' committee's Rs 1 crore loan. The committee defaults; it is unclear whether the municipality must pay.

Possible improvements and trade-offs

  • Amend s.68 of the Local Government Operation Act to cross-refer expressly to the consent requirement in s.14 of the Intergovernmental Fiscal Arrangement Act, and state the consequence of borrowing without consent.
    Removes ambiguity and supports debt monitoring; may be seen as limiting local fiscal autonomy and adds a federal approval step.
  • Make an express legal rule on whether, when and within what limits local levels may guarantee loans of user groups and similar bodies, with recording and reporting of such contingent liabilities.
    Either legitimises a practice that may support community projects, with controls, or ends it; a ban could cut off credit to small community projects.
  • Replace case-by-case federal consent with a rules-based system (borrowing within the Commission's limit, budgeted and reported to a central debt registry), as a lighter alternative.
    Less administrative burden and respects local autonomy; requires amending s.14 and a working reporting system, which the Commission says is not yet in place.

Questions for legal review

  1. Is a local loan that meets s.68(1) of the Local Government Operation Act but lacks federal consent under s.14 of the Intergovernmental Fiscal Arrangement Act valid, voidable or merely irregular?
  2. Does any law (including the Town Development Fund Act or local laws) authorise a local level to guarantee a loan taken by a user group or similar body?
  3. Is the federal consent requirement compatible with the borrowing powers implied for local levels by the Constitution (Schedule 8 and Art. 251(1)(f))?

Research status

Researched
2026-10-12
Confidence
Medium confidence — The provisions were read in official texts and the Commission reports both the unconsented borrowing and the guarantees directly. Confidence is not high because the Town Development Fund Act and local-level laws, which might provide a basis, were not opened.
Review
Not yet reviewed by a qualified lawyer.

Still unresolved

  • The Town Development Fund Act and its rules were not opened; they may contain borrowing or guarantee provisions relevant here.
  • The constitutional schedule entries on local borrowing were not checked in detail.
  • No information was found on whether any guaranteed loan has defaulted.

Sources

  1. राष्ट्रिय प्राकृतिक स्रोत तथा वित्त आयोगको आठौं वार्षिक प्रतिवेदन, २०८३ (Eighth Annual Report, 2083) Checked 2026-10-11
  2. महालेखापरीक्षकको त्रिसट्ठीऔँ वार्षिक प्रतिवेदन, २०८३ (63rd Annual Report of the Auditor General, 2083) Checked 2026-10-11
  3. अन्तर-सरकारी वित्त व्यवस्थापन ऐन, २०७४ (Intergovernmental Fiscal Arrangement Act, 2074) — consolidated Nepali text Checked 2026-10-11
  4. स्थानीय सरकार सञ्चालन ऐन, २०७४ (Local Government Operation Act, 2074) — consolidated Nepali text Checked 2026-10-11
  5. सार्वजनिक ऋण व्यवस्थापन ऐन, २०७९ (Public Debt Management Act, 2079) — official Nepali text Checked 2026-10-11