Bank and financial institutions in Nepal are mainly governed by Bank and Financial Institution Act 2073 and Nepal Rastra Bank Act 2058. All the regulatory provisions are not applicable to all the banks/financial institutions. The applicability of provisions of these Acts to a bank/financial institution depend on its constitution i.e. whether it is a bank or financial institution. There are restrictions at the entry by the way of licensing and then the requirement of permission intimation for opening or shifting of branches.
In general, a bank means a commercial bank. A common definition of bank is that bank is a financial institution that accepts deposits and creates credit. It means banks create assets from its liabilities.
A financial institution means a financial institution licensed under the prevailing bank and financial institution law by Nepal Rastra Bank to carry out ‘B’, ‘C’and ‘D’ class financial transactions and the term also mean a co-operative or a person or firm or company or institution licensed to carry out foreign exchange business or purchase and sell foreign currency or any company licensed for insurance business, insurance brokering and also securities market or business operated as per prevailing laws.
Thus, a bank/financial institution
- Should be a corporate body registered as per relevant law.
- Should have obtained a license from Nepal Rastra Bank for the purpose.
- Is authorized to do only such financial transactions which Banks and Financial Institution Act, 2073 and other relevant law permits to do.
- Should be supervised and controlled as per the directives issued by Nepal Rastra Bank.
After 1980, when Nepal adopted financial sector liberalization, the door opened for foreign banks to open joint venture in Nepal. Nepalese Financial system comprises commercial banks, development banks, financial companies, micro finance, which are popularly known as A,B,C,D class financial institution according to section 37 of BAFIA classified by NRB, on the basis of their paid up capital required for license and their working areas. Working areas of different classes has been mentioned in section 49 of BAFIA. They have wide geographic reach and institutional diversification. Recently amended BAFIA has mentioned about infrastructure development bank but has not put it under any of the existing classifications. Commercial banks hold dominant share i.e. around 80% on the major banks components of financial system.
A bank/financial institution must be registered as a public limited company under prevailing law of Nepal with prior approval of Nepal Rastra Bank by fulfilling the conditions prescribed in section 4 of BAFIA 2073. A person or institution willing to incorporate a bank/financial institution have to submit an application to NRB along with the fee prescribed by NRB for obtaining prior approval accompanied by the following documents.
- Memorandum of Association (MOA), Article of Association (AOA) of the proposed bank or financial institution.
- Feasibility study report of the proposed bank/financial institution.
- Personal details of the promoters in the form prescribed by NRB.
- A certified copy of the agreement, if any, entered into between the promoters prior to the incorporation of a bank or financial institution in relation to the incorporation of the bank or financial institution.
- Evidence of tax clearance by the promoters.
- Details as to whether or not the promoters of the proposed bank/financial institution is declared bankrupt in Nepal and abroad, whether or not any loan is availed from any bank or financial institution, whether or not a period of three years passed after being blacklisted in any transaction with bank or financial institution, if any.
- Details as to whether actions taken against or punished to promoters of the proposed bank or financial institution in Nepal or abroad for being involved in cheating, fraud, dishonesty or other criminal act.
- Self declaration as to whether or not action is taken against promoter of the proposed bank or financial institution in Nepal or abroad by any regulating or supervisory authority or whether or not license of the company or licensed institution in which s/he is associated has been suspended, revoked or subjected to mandatory dismissal or is in the course of so.
- Details as to name, address and relationship of he members of family of promoters of the proposed bank or financial institution, significant ownership and capacity of each of them and if any of them is director, official or employee in any institution, details as to the title of posts each of them hold.
- If any institution or corporate body is a promoter, details of the person having significant ownership and capacity as referred to in this sub section and audited financial statements of the last three years.
- Written authority given to NRB to allow it conduct any inquiry by itself or to cause to conduct by an agency established according to the prevailing laws as to the financial, criminal and professional background of promoters of the proposed bank or financial institution and to share such notice or information.
- Any other details or documents specified by NRB from time to time.
NRB shall grant its prior approval upon the examination of the above mentioned submitted documents to incorporate bank or financial institution within 120 days after filing of the application, with or without prescribing any conditions in regards to the status of the existing banks or the duty of the concerned BFIs to abide by such terms and conditions.
According to section 6 of BAFIA, in case any internationally rated bank or financial institution desires to open branch office to carry out transactions in Nepal, they have to submit application to NRB for prior approval of the branch; they have to submit the following documents and details along with the fee specified by NRB.
- Written commitment of BOD of the concerned foreign BFIs that it will make available on demand of NRB the amount necessary for fulfilling its entire liabilities with regard to commercial activities of its branch, sub-branch representative or liaison office in Nepal and any other liabilities.
- Details as to the location of the proposed branch or office of the foreign bank or financial institution.
- Details as to the probable officials to be engaged in the proposed branch or office of the foreign bank or financial institution.
In case NRB deems it appropriate while conducting inquiry of the additional documents submitted may grant approval to incorporate a branch or representative or liaison office in Nepal within 120 days after filing of the application with or without prescribing any condition.
According to section 7 of BAFIA, NRB may deny granting the prior approval for the incorporation of a bank or financial institution or foreign branch in any of the following circumstances.
- If the name of the proposed bank or financial institution is not found to be appropriate or desirable from the point of view of public interest, religion, caste and ethnicity or communal harmony.
- If the objective of the proposed BFIs is contrary to the law in force.
- Doesn’t seem technically appropriate.
- If the provided documents do not provide the ground to believe that it may carry the financial transactions in a healthy and competitive manner.
- If all promoters of the proposed bank or financial institution have not signed in MOA or AOA.
- If any condition prescribed by NRB is not fulfilled.
Similarly according to subsection 3 of section 4 of BAFIA, no prior approval shall be given to open a bank or financial institution to the following person or group.
- Having been subjected to regulatory actions of NRB
- Having been convicted and punished in cheating, fraud, forgery
- Having been convicted and punished according to the laws against AML/CFT
- Having been convicted and punished with imprisonment according to laws against corruption
- Having been convicted and punished in serious types of offences of human trafficking, kidnapping, hostage-taking, rape.
Section 34 of BAFIA has mentioned about the final license of BFIs. After observing the submitted documents, if all requirements under the BAFIA are met, NRB may issue license of any class within 120 days to operate banking transactions based on the classification. Before granting license, NRB shall have to ascertain in the following matters.
- Granting of license for operation of BFIs will result in development of healthy competition and effective financial intermediary transactions and it will result in protection of interest of depositors.
- It is capable to operate banking and financial transaction subject to BAFIA and Nepalese legal framework.
- Submitted documents and details of physical infrastructure as adequate.
- Any official to be appointed or included in the bank or financial institution is capable of carrying out banking and financial transactions.
Ref. NRB Act 2058, BAFIA 2073