Bank and Financial Institution Act 2073

BAFIA
Authentication = 2074.1.10
Total Chapter= 14
Total section= 134
1. Objectives of BAFIA 2073
 Objectives
• To make necessary legal provisions relating to the
establishment, operation, management, regulation
and inspection & supervision of banks and financial
institutions.
• to promote the trust of the general public in the
overall banking and financial system of the country,
• to provide quality and reliable banking and financial
intermediary services to the general public through
healthy competition among banks and financial
institutions,
• to minimize risks relating to the banking and
financial system ,
 Cont……
• Boost and consolidate the economy of the
State of Nepal by liberalizing the banking and
financial sectors,
• To promote good governance in banking
sector
• To maintain financial stability of banking and
financial sectors
• to protect and promote the rights and
interests of depositors,
 BAFIA 2063 repeal following banking
law
• Agriculture Development Bank Act 2024
• Commercial Bank Act 2031
• Finance Company Act 2042
• Nepal Industrial Development Corporation Act
2046
• Development Bank Act 2052 and integrated micro
financial institutions.

• BAFIA 2073 repealed to BAFIA 2063

2. Features of BAFIA 2073
 Features of BAFIA 2073
• An Integrated and umbrella bank law of Nepal.
– It has the provision relating to incorporation,
operation, mgmt, winding up, regulation for all
types of BFIS Regulating law for Banking sector:
license and directives, NRB is define as a regulator
for Banking sector.
 Features of BAFIA 2073
• Special law and regulating for Banking sector
• Focus to Corporate and financial good
governance of Banking sector.
• Law with the provision of share buyback for BFI’s,
• Compliance with AML law and
Corporate(Company law),
• Adaptation of liberalization in Banking sector for
operating Banking Businesses.
• Focus to maintain Financial Stability of BFI’s ,
• Focus to maintain transparency on transaction
 Features of BAFIA 2073
• Provision of up gradation into higher classes
• Special provision for infrastructure development Bank
• Delegation of authority to form rules, bylaw and directives,
• Focus to protect the rights and interest of depositors and
consumers.
• Banking law with the provisions of :
– Prior Approval for incorporation
– Lockup Period
– Investment ceiling
– Board formation with the qualification of directors
– Types of BFI’s and their classification
– Functions and Functions not to be carried out
– Auditing
– Merge and acquisition of BFI’s
– Voluntary and compulsory winding up of BFIs are provisioned
– regulating punishment to BFI’s
 3. Major changes in BAFIA-2073
• Lockup Period
• Share allotment
• Board Formation
• Qualification and disqualification of directors
• CEO tenure and qualification
• Types of BFI’s and removing the degradation
provisions
• Infrastructure Development
• Compliance with AML law
• Monitoring of loan
• Provisions of liquidation of BFIs.
4. Major Provisions of BAFIA 2073
 ……………….Major provisions
• NRB Approval is required to incorporation of BFI’s as a Public
Company
• Capital allotment and transaction
• Board Formation, qualification, disqualification of directors
• Board meeting and right duties of board of directors
• CEO appointment and function right and duties
• Providing Banking license
• Capital and capital funds of BFIs
• Investment ceiling for the investment in BFIs
• Functions and functions not to be carried out by BFIs
• Provisions Relating to Disbursement and Recovery of Credits,
• Information of Suspicious Transaction to be furnished
• Monthly Publication of BFIs list which are operating by obtaining
license by NRB
• To open branches in Nepal by foreign BFI’s NRB approval/license
is required
 ……………….Major provisions
• Provisions on Accounts, Records, Audits and Reporting
• Provisions Relating to Merger or Acquisition of Banks or Financial Institutions
• Voluntary and compulsory Liquidation of Banks or Financial Institution
• Provisions Regarding Actions, Offences and Punishment
• Special Provisions Relating to Infrastructure Development Bank

• Security of Deposits, Banking Secrecy

• Statement of Unclaimed Deposits
• .Government of Nepal to be a Plaintiff
• Provisions Relating to Transparency
• Provisions Relating to Protection of Customers’ Interests
• Exemption and facilities
• Expenditures Management
• Settlement of Disputes
• Power to issue Order or Direction: Power to frame Rules,
Byelaws and Power to Frame Byelaws and Working
Procedures.
 10. Capital and Capital Funds of Bank
and financial institutions

• Financial Stability of Banking sector(BFIs)

 (Capital and Capital related provisions)
To maintain financial stability of BFI’s. sec 41-48
• Capital requirement as per NRB directives
• Investment ceiling is max 15% and for next BFI’s max. 1%
• Base to maintain capital fund: Total assets, total risk bearing
assets and NRB directives
• GRF= min20% and after double of paid up then min 10% of net
annual income
• Foreign exchange equalization fund = min 25% of annual profit
generated from Foreign exchange transaction
• Liquidity Fund and loss provision : As per NRB directive
• To declare and distribute Bonus: NRB approval is required
• To decrease/increase capital fund: NRB order is required.
 11. Functions of BFI’s. sec 49
• Functions of BFI’s are defined as per their
types:
– For Commercial
– For development
– For Finance Company
– For Microfinance
– For Infrastructure
 Functions not to be carried out by BFI’s. sec 50
(a) To purchase and sell goods with an objective of business and to
construct buildings and to purchase immovable land and except
those are necessary for its own purposes,
(b) To disburse credit against security of its own shares,
(c) To provide any type of credit facility to the Directors, persons
having subscribed one percent or more than that of the paid up
capital, the Chief Executive, or a member of family of such
persons, or the firm, company or organization having significant
ownership or financial interest in any person, firm, company or
organization having the authority to nominate or appoint a
Director or a managing agent,
(d) To provide credit or facility exceeding per customer limit
prescribed by the Rastra Bank from its capital fund to a single
customer, company, companies or partnership firms of the same
group and relevant persons,
 Functions not to be carried out by BFI’s. sec 50
(e) To provide any type of credits to any person, firm, company or institution
on the guarantee of promoters, Directors, or the Chief Executive,
(f) To make investment in the securities of a bank or financial institution of
class “A”, “B” and “C”, as classified by the Rastra Bank,
(g) To invest any amount more than the limit as prescribed by the Rastra
Bank in share capital of any other institution,
(h) To create any type of monopoly or other type of restrictive practices in
banking and financial transactions in collusion with banks or financial
institutions,
(i) To commit any act with a view for creating an artificial hurdles in the
competitive environment in the financial sectors with a intention to get
undue advantage,
(j) To carry out any other acts which are prescribed by the Rastra Bank as
the business not be carried out by a bank or financial institution.
 Provisions Relating to Merger or Acquisition of Banks or
Financial Institutions
For Acquisition: (Sec 69 (4)
• (a) In cases where more than one bank or financial institution belonging to
single group of persons, firms and companies are in operation and there is an
unhealthy financial relation
• (b) In cases where the rights and interests of the depositors, ordinary
shareholders, and other costumers could not be protected due to the negative
impact, if the bank or financial institution is operated in the status quo,
• (c) In cases where system-based risks are increased and the licensed
institution is unable to pay its liabilities,
• (d) In cases where shares have not been issued in the ordinary group within
the prescribed time, the issued shares have not been sold or subscribed, or
the prescribed minimum proportional paid up capital has not been met,
• (e) In cases where the bank or financial institution is subjected to actions of
rapid reforms for three times or more or good governance has become weak
due to arising of frequent disputes in the Board of Directors of the bank or
financial institution.
 Process of M&A (sec 71 to 74)
• First, they must make special resolution from General
Meeting,
• Make decision from BOD to demand theoretical consent from
NRB, through joint committee,
• NRB shall provide Theoretical consent for M&A,
• After having TC from NRB, appoint independent valuator for
valuation of property, liability and transactions.
• Make independent valuation of property, liability and
transactions,
• Make(determine) share swap ration based on net worth and
no. of share,
• They shall prepare (make) final agreement with detail
requirement.(detail subject of an agreement)
• Demand final approval from NRB with final an agreement,
• They can start joint transaction after having final agreement
from NRB.
 15. Provisions for winding up
Outline the provisions for liquidation of BFI’s as per the
provision of BAFIA 2073.

Ans:
Chapter 11 and chapter 12 of BAFIA 2073
a) Voluntary Winding Up (Liquidation):
sec. 75 and 76
b)Compulsory Liquidation:
Condition to compulsory liquidation: (sec 79)

Provisions form (sec 78)

 16. Regulatory Punishment

What are the regulatory action for

BFI’s by NRB in terms of violating
rules, bylaw and directives of NRB ?

Ans:
Sec 99 subsection (1) and (3)
 Provision for Regulatory Punishment by NRB
Following actions against the bank or financial institution:-
(a) To admonish or issue a warning in writing,
(b) To cause the Board of Directors to enter into a bond for taking
reformative steps,
(c) To issue an order in writing not to violate this Act or Rastra Bank
Act or Rules, Byelaws, Directives or Order framed thereunder or to
take reformative steps.
(d) To prohibit to distribute dividends or issuing bonus shares to the
shareholders of bank or financial institution or to prohibit to
distribute dividends or issues bonus shares,
(e) To specify limits on, or prohibit, accepting deposits or disbursing
credits or accepting deposits or disbursing credits by the bank or
financial institution,
(f) To impose complete or partial ban on the transactions of the
bank or financial institution.
(g) Suspend and revoked the banking license.
 Punishment for Individuals(directors, position
holder and employees)
(a) To forfeit and freeze
the subscribed shares of the concerned bank or
financial institution and to give direction to the Board of Directors
to sell the said shares to other persons,
(b) To give direction the Board of Directors to freeze or suspend some
or all of the facilities including meeting allowances, monthly
remuneration of the Board of Directors, Director, office bearer,
employee or any other relevant person of the bank or financial
institution,
(c) If the Chairperson, Director, Chief Executive or the person acting in
the capacity of the Chief Executive or an employee is, upon an
inspection or monitoring of the Rastra Bank, found that such a
person has not worked in the interests of the depositors,
shareholders, and license holding institution, he/she may be
removed from the position.
(d) If any bank or financial institution is found to have taken or given
remuneration or other facilities contrary to this Act or in an
unnatural manner, to recover all of such service facilities or the
amount to be required for such facilities and the interests to be
accrued thereon from the person giving such facilities
What are the conditions where Rastra Bank may suspend or revoke a
license to carry out banking or financial transactions issued to a bank
or financial ?
Ans: form Sec. 99(2)
(a) In cases where the banking and financial transactions are not initiated
within six months from the date of obtaining the license for carrying
out banking and financial transactions,
(b) In cases where banking and financial transactions have been closed
without obtaining approval from the Rastra Bank,
(c) In cases where the bank or financial institution has operated banking
and financial transactions in such a manner as to be against the
interests of the depositors or it does not reimburse of fails to
reimburse the deposited amount or amount whose maturity date has
expired,
(d) In cases where there is violation of or non-compliance with the Rastra
Bank Act, this Act, and the Rules, Byelaws, Orders, Directives framed
thereunder or the terms and conditions as fixed by the Rastra Bank,
(e) If it is found that the bank or financial institution obtained the license
submitting false descriptions,
(f) If the deposits have not been guaranteed as per the prevailing laws.
 BAFIA 2073- Corporate Good Governance
Factors Provisions
Transparency Auditing(Auditor, Audit committee
Reporting of transaction
Report publication

Accountability Accountability and responsibility of directors , sec 23

CEO (sec 30)

Responsibility Accountability and responsibility of directors , sec 23

CEO (sec 30)
Participation in mgmt Board Formation and Board Meeting
Investment ceiling
Share allotment
Quality of Banking Functions of BFI’s
Functions not to be carried out by BFI’s
Qualification and disqualifications of directors and CEO
Rule of Law in Banking BAFIA, rules, bylaw, directives of regulators
Functions, procedures, MOA, AOA, AGM, Prospectus
 BAFIA 2073- Corporate Good Governance
Factors Provisions
Decentralization Work division, BOD, CEO, Authority delegation

Discipline Banking Offence and Punishment

Regulatory Punishment
Licensing, Approval/non approval

Protection Deposit security

Lending and recovery
Regulation by NRB
Other provisions:
• Formation of Board of directors
•Eligibility to directors
•Board Meeting
•Provisions of Minutes
•Reporting of appointing of directors and CEO
•NRB can make directives for BFI’s for good governace
 AML and BAFIA
• Bank and Financial institutions are defined as a reporting units.
• BFI’s are responsible unnamed transactions and shell banking.
(restriction in Nepal)
• Customer identification sec. 53
• Recording and reporting sec. 53
• CIC and FIU are the units to share info. regarding misconduct in
loan and suspicious transactions,
• Source of investment sec. 4
• Tax clearance Certificates of promoters is required 4 and 34
• KYC for borrower sec 55, other depositors (deposit security) in sec
109
• NRB can issue directives of AML 54
• Submission of property details of directors , others 24-25
• Property detail of position holders must be reported within 60
days of …
• Provisions of transparency by publishing risk status and financial
status of BFI’s. 117
 19. Need to be address
• Required to make Clear demarcation of businessman and bankers.
• Weak inspections and supervision provisions and role of NRB in
BAFIA
• Not having provisions relating to security of banking system and
technology uses,
• Offences are being redundant with the provisions of BOP Act 2064
• Unclear provisions for Infrastructure development bank.
• Standardization on facilities and remuneration to employees
• No clear-cut standards to maintain good governances,
• Licensing from province law for province level BFI’s is unclear.