BAFIA English few question answers Krishna Niraula (CA)

BAFIA, 2073 Krishna Niraula (CA)

Banks and Financial Institutions Act (BAFIA) , 2073 certification and publication 2074/1/10

Act no. 1 of 2074

Preamble: ( Reasons for implementing BAFIA)
• To increase public confidence in the country's overall banking and financial system ,
• To protect and promote the rights of depositors ,
• To provide quality and reliable banking and financial services through healthy competition of
BFIs
• To make the national economy strong and sound.
• To make timely integration and amendment of prevailing laws for the establishment, operation,
management, regulation , inspection and supervision of BFIs in order to maintain financial
stability.
The Legislature-Parliament has made this Act in accordance with Article 296 (1) of the Constitution of
Nepal.

A Glimpse of the Act: (Chapters 14, Sections 134, Schedule 1)

Chapter Sec. Main provision
No.
1. 1-2 Preliminary
Sec. 1: Act shall apply to the whole of Nepal and shall also apply to the branch or
liaison office opened by the BFI established in Nepal abroad.
Sec. 2: Definitions including substantial ownership, loan, risk weighted assets,
financial interest , letter of credit , bank, hypothecation loan etc.
2. 3-7 Provisions on Incorporation of BFI
3. Incorporation of BFI:
4. Prior-approval to be obtained to incorporate BFI
5. Prior Approval to be obtained for Incorporation of BFI on Foreign Investment
6. Approval to be obtained to open Branch Office of BFI
7. Prior Approval may be denied
3. 8-13 Provisions Concerning Transactions of Securities
8. Prospectus
9. Allotment of shares
10. Transactions of Securities
11. Provision on Sale or Pledging of Securities
12. Prohibition on Transaction of Securities
13. Prohibition on purchase by BFI of its’ own Shares
4. 14- 30 Provisions related to the Board of Directors and the Chief Executive
14. Formation of Board of Directors
15. Term of Office of the Director
16. Director Qualification
17. Qualification of independent Director
18. Disqualification of Director
19. Ineligibility to remain in the office of Director
20. As to an incumbent Constitutional Position Holder
21. Meeting of Board of Directors
22. Functions , Duties and Powers of the Board of Directors
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23. Accountability and Responsibility of the Director

24. Details of the Director to be collected
25. Information of Director and Record
26. Sub-Committees may be formed
27. Delegation of power
28. Director's allowance and facilities
29. Appointment of Chief Executive and Terms & Condition of Service
30. Functions , duties and powers of the Chief Executive
5. 31-40 Provisions on License
31. Prohibition on carrying on Financial Transactions by anyone other than BFI
32. Use of Name of BFI
33. Application to be filed to obtain License for carrying on Banking and Financial
Transactions
34. License may be granted for carrying out Banking and Financial Transactions
35. Issuance of License may be denied
36. Rastra Bank may Specify Conditions
37. Classification of banks or financial institutions
38. Can be converted to upper class BFI
39. List to be Published
39a. Provisions relating to the operation of financial institutions in province
40. Special provisions for branch of foreign bank
6. 41-48 Provisions on capital , capital fund and liquid assets
41. Capital to be maintained
42. Capital Fund
43. Provision on possible loss
44. General reserve fund
45. Exchange Equalization Fund
46. Liquid Assets to be maintained
47. Dividend declaration and distribution
48. Order may be issued to decrease Capital
7. 49-54 Provisions on Operation of Banking and Financial Transactions
49. BFI may carry on Banking and Financial Transactions
50. Acts not to be carried out by BFI
51. Provisions regarding subsidiary company
52. Prohibition on carrying out transactions with related persons
53. Information of Suspicious Transaction to be furnished
54. Rastra Bank may issue Directive
8. 55-57 Provisions related to credit disbursement and recovery
55. Provisions on Disbursement of Credit
56. Monitoring regarding utilization of credit amount
57. Provisions on Recovery of Credit
9. 58-68 Provisions on accounts , records , details and reporting
58. Accounts need to be maintained accurately
59. Balance-sheet, Profit and Loss Accounts to be prepared
60. Audit Committee
61. Functions , duties and powers of the Audit Committee
62. Auditing
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63. Appointment and remuneration of auditors

64. Ineligibility for Appointment as Auditor
65. Details to be furnished
66. Functions, Duties and Powers of Auditor
67. Recommendation for taking actions against Auditor
68. Auditor to certify
10. 69-74 Provision on merger and acquisition of a BFI
69. BFIs may be merged or acquired
70. Application to be submitted for Merger or Acquisition
71. Provisions for valuation of assets and liabilities
72. Provisions on Agreement
73. Provisions on approval
74. Transactions may be acquired
11. 75-77 Voluntary Liquidation of Banks or Financial Institutions
75. Voluntary liquidation of a BFI
76. Commencement of voluntary liquidation
77. No change in Liability
12. 78-98 Provisions on Mandatory Liquidation of BFIs
78. Application may be filed before the Court for Mandatory Liquidation of BFI
79. Circumstance leading to compulsory liquidation of a BFI
80. Transaction to be suspended
81. Appointment of liquidator
82. Functions, Duties and Powers of Liquidator
83. Effects of Order Relating to Liquidation
84. Records of Assets and Liabilities
85. Transactions may be terminated
86. Notice to submit claims
87. The liquidator may accept or reject the claim
88. Claim classification
89. Meeting of Creditors
90. Liquidation plan
91. Advance Payment may be made to Depositors Immediately
92. Powers to sell Assets
93. Notice of Settlement of Claims
94. Order of Priority for Payment
95. Unclaimed Goods or Amount
96. Decision of Liquidation
97. Mandatory Liquidation of BFI carrying on transactions in more than one Country
98. No claim to be entertained
13 99-106 Provisions on action , offences and punishment
99. Regulatory Actions may be taken
100. Fines may be imposed
101. Procedure for action
102. Control over licensed institutions
103. Offences
104. Punishment
105. Appeal
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106. No obstruction to punishment

14 107 Miscellaneous
134 107. Special provision on infrastructure development bank
108. Security of Deposit to be made
109. Banking secrecy to be maintained
110. Power to give instructions to freeze accounts
111. Right to Claims over the deposits
112. Statement of unclaimed deposits
113. Recovery from or confiscation of deposits
114. Recovery from Director
115. Claims may not be made
116. Government of Nepal to be plaintiff
117. Provision on transparency
118. Provisions on protection of customers' interest
119. Exemptions and facilities
120. Expenditures management
121. Statement of Assets to be submitted
122. Credit, Liabilities and Titles against the Collateral of Credit may be purchased or
sold
123. Settlement of Disputes
124. Not to be liable for acts done in good faith
125. Actions taken not to be invalidated
126. Study Committee or Sub-committee may be formed
127. Oath of Office
128. Amendment of Memorandum of Association and Articles of Association
129. This Act shall be Prevailed
130. Power to Remove Difficulties
131 Power to issue Order or Direction
132. Power to frame Rules, Byelaws
133. Power to frame Byelaws and Procedures
134. Repeal and saving

Chapter 1
Sec.2: Definitions

(f) “Significant Ownership” means a situation where any person has, solely or jointly in association with
other person or institution, subscribed two percent or more shares of a BFI and due to which he/she/it
may have influence on management of the BFI.

(h) “Credit” means the amount lent by BFI to any person, firm, company, institution or other business
enterprise subject to repay principal, interest or other charge within certain time limit, direct or indirect
commitment, interest or other charge of the credit, re-finance, restructuring and renewal of the credit,
guarantee and other commitment issued for the repayment of such credit and the term also includes
any type of credit as specified by the Rastra Bank by publishing public notice.

(o) “Risk-weight asset” means the total assets calculated by multiplying the amounts coming under each
heading of on-balance sheet and off-balance sheet operations of a BFI by the risk-weight on the format
as prescribed by the Rastra Bank.
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(t) “Deposits” means amounts deposited in current, savings or fixed accounts of a BFI through costumer
with or without accruing interests and the term also includes such amounts which a BFI accepts through
different financial instruments as specified by the Rastra Bank from time to time.

(w) “Family” means Director’s husband or wife, son, daughter-in-law, daughter, adopted daughter,
father, mother, stepmother including elder brother, elder sister-in-law, younger brother, younger sister-
in-law, elder sister and younger sister of the Director, to be cared or nurtured by him or her.

(w) “Family” means Director’s husband or wife, son, daughter-in-law, daughter, adopted daughter,
father, mother, stepmother including elder brother, elder sister-in-law, younger brother, younger sister-
in-law, elder sister and younger sister of the Director, to be cared or nurtured by him or her.

(y) “Capital Fund” means the total sum of primary capital and supplementary capital of a BFI as specified
by the Rastra Bank and the term also includes other fund or amount as specified by the Rastra Bank
from time to time.

(aa) “Letter of credit” means a letter written by one BFI in the name of any other BFI stating thereon to
accept cheques, drafts, or bills of exchange of any specified person within the limit of the amount
specified therein.

(cc) “Primary Capital” means the funds of a BFI listed under such headings as the paid-up capital, share
premium, non-redeemable preference shares, general reserve fund and accumulated profit and loss,
and the term also includes such other funds listed under other headings as may be prescribed as
primary capital by the Rastra Bank from time to time.

(ee) "Acquisition" means the act of acquisition by a BFI to another BFI having settled the accounts of
entire assets and potential liabilities by winding up the legal capacity of such BFI and the term also
includes the act of accepting all contractual liabilities by the acquiring BFI created by the target
institution before its merger.

(gg) “Bank” means a corporate body incorporated to carry on banking and financial transactions
pursuant to Sub-Section (1) of Section 49 and the term also includes a branch office of a foreign bank
located in Nepal, a branch office opened outside of Nepal by a bank incorporated in Nepal and an
Infrastructure Development Bank to carry on functions pursuant to sub-Section (5) of Section 49 and
branch office of the same bank.

(ii) “Bonus share” means a share issued as an additional share to shareholders, by capitalizing the saving
earned from the profits or the reserve fund of a BFI, and this term also includes the increase of the paid
up value of a share by capitalizing the saving or other fund.

(jj) “Fixed Account” means a periodic account of funds deposited with a BFI for a specified term, during
such term normally the deposited amount cannot be withdrawn.

(pp) "Liquidator" means the person appointed for carrying out the functions of liquidation of the BFI
according to an order of a court or a resolution passed by a meeting of the creditors and the word also
includes an office carrying out the function of liquidator.
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(qq) "Leasing" means the act of acquiring only the possessory right of a movable or immovable assets for
specified period of time by retaining the ownership thereof with the BFI and subject to pay amount
therefor in specified timetable by the costumer according to an agreement.
(rr) "Off-balance-sheet transaction" means letter of credit, letter of guarantee, letter of acceptance,
commitment, swap, option and transaction in advance concerning foreign exchange having possibility of
bearing liabilities by a BFI and the word also includes transaction of the instruments as specified by the
Rastra Bank from time to time.
(ss) “Financial institution” means a corporate body incorporated to carry on banking and financial
transactions pursuant to sub-sections (2), (3) or (4) of Section 49 and the terms also includes a branch
office of a development bank, finance company, micro finance institution or a branch office of a foreign
finance company located in Nepal or a branch office opened in abroad by a financial institution
incorporated in Nepal.
(tt) “Financial interests” means a situation where any Director, shareholder subscribing one percent or
more shares or Chief Executive or family member of such person or the person, company, or corporate
body having authority to appoint a Director subscribes ten percent or more shares of a firm, company or
corporate body separately or jointly, such person or persons are deemed to have financial interests in
the institution having ten percent or more shares, and the term also include the interests which the
Rastra Bank specifies as having financial interests depending upon the nature and circumstance of
financial transaction.

(vv) “Electronic transaction” means the business of accepting deposits, making payments and
transferring funds through telephone, telex, computers or magnetic tapes or similar types of other
electronic equipment; and this term also includes the transactions to be carried on through terminal,
automated teller machines and cash dispensing machines, as well as those to be carried on through
charge cards, debit or credit card.

(ddd) “Affiliated person” means a Director, official of BFI or his/her family member or any firm, company
or institution having substantial ownership of such person or any person, firm, company or institution
having substantial ownership in such firm, company or institution or beneficial owner with substantial
ownership thereof.

(hhh) "Hypothecation Loan" means the loan disbursed having entered into an agreement between a BFI
and a Borrower against the collateral security of the stock having retained such stock under possession
of the concerned borrower.

Chapter 2

1. Explain the provisions relating to Incorporation of a Bank or a Financial Institution. (10 marks)

The provisions of incorporation of a BFI are given in Chapter 2 of BAFIA (Sec. 3 to Sec. 8) which are
briefly summarized below:

Sec.3: BFI shall be incorporated after registering it as a public limited company as per prevailing laws.

Sec. 4: Prior approval shall be required of NRB for which prescribed fees and following documents are
required:
BAFIA English few question answers Krishna Niraula (CA)

a. Memorandum of Association
b. Articles of Association
c. Feasibility study report
d. Certified copy of agreement between applicants prior to incorporation regarding incorporation of BFI.
e. Personal details of the applicant in the format prescribed by NRB,
f. Details of source of investment and proof of tax clearance up to the previous financial year,
g. Details of not being bankrupt, not taking loan from any BFI, not being blacklisted in any BFI
transaction, and if blacklisted, period of three years to be elapsed after removal from blacklist.
h. Self-declaration of no action taken and no punishment imposed in Nepal or abroad for cheating, fraud
or criminal offence under the prevailing law.
i. Details of any regulatory or supervisory action or company/institution under suspension or revocation
of license or mandatory dismissal.
j. Name, surname and relationship of family member and the details of ownership and the status of each
person if they have worked as an director, official or employee in any organization.
If the applicant is organization, the details of person with significant ownership, the audited financial
statements of the last three financial years and the tax clearance certificate.
k. Written authority to NRB to inquire into financial and business background,
l. Undertaking to guarantee or insure deposits as prescribed by NRB.
m. Other details and documents prescribed by NRB from time to time.

NRB may grant approval within 120 days after filing of the application, with or without conditions.

No approval shall be given to the following persons and the firms or companies having substantial
ownership of such personsand of the membersof their family:
(a)Being investigated inregulatory actions of the Rastra Bank,
(b)Convicted of
• any banking offence,
• cheating, fraud, forgery,
• any offence of money laundering and terrorist financing activities,
• corruption,
• serious types of offences such as trafficking-in-person, kidnapping, Hostage, taking and rape.

Sec. 5: It contains provisions of Prior Approval for incorporating BFI on Foreign Investment where
additional documents are required regarding foreign incorporation and approval from the country
concerned.

Sec. 6: It contains provisions for opening branch office of BFI

Sec. 7: It contains provisions for power of NRB to grant refusal for opening branch office.

Hence, Chapter 2 of BAFIA contains provisions of incorporation of BFI where NRB approval is required.

Chapter 3

2. Explain the provisions relating to transaction of securities of BFIs as per BAFIA, 2073.
Chapter 3 of BAFIA (Sec. 8 to Sec. 13) contains provisions relating to transactions of securities of BFIs,
which are briefly explained below:
BAFIA English few question answers Krishna Niraula (CA)

a. Before public offering of securities, prospectus should be registered at NRB after obtaining the
necessary approval from regulatory authority for issue of securities.
b. Allotment of Shares:
• BFIs shall set aside at least 30% share of total issued capital for subscription by general
public, and maximum 0.5% to employees. However, it is not applicable to BFI with
significant ownership of government and to Infrastructure Development bank.
• Promoter shares may be converted to ordinary shares after fulfilling process specified by
NRB provided Share ownership of Promoter shares group shall not be less than 51%.
• Application money shall be 100% of the face value of shares.
c. Transaction of securities:
• While issuing securities to public, sale, allotment and exchange shall be in accordance with
the prevailing laws relating to securities.
• BFI shall submit agreement copy on the transactionof securities through any institution
dealing withsecurities before the Rastra Bank, within seven days from the date of the
conclusion of such agreement.
• Pre-approval of NRB is required for issuing debenture or any financial instrument
d. Provision of Sale or Pledging of Securities:
• Promoter shall not be entitled to sell or pledge shares for at least 5 years from the date of
commencement of financial transactions. But in "special circumstances", shares can be
transacted amongst promoters by obtaining NRB approval.
• After 5 years promoters may sell/pledge by obtaining NRB approval and shares shall remain
in promoter group. NRB approval is not required for less than 2% shares.
e. Director, CEO, Auditor, Company Secretary, or employee directly involved in management and
finance of BFI, while being on the office or up to 1 year from the date of retirement, shall not be
allowed to purchase/ sell, pledge, gift, exchange or deal in any manner of the securities of such BFI.

However, restrictions shall not be for bonus shares, right shares, shares to employees, newly issued
shares, following NRB directions, selling total shares held by an institution being director or having
right to appoint director, merger or acquisition, transaction within directors after NRB approval
when operation & management has been affected, restructuring or liquidation of problematic BFI.

f. Buy Back of Shares:

BFIs shall buy back own shares on following situations only after obtaining prior approval from NRB,
so that the buyback would be from the free reserve available for distributing dividend not exceeding
the % prescribed by NRB:-
• Shares fully paid up and listed in stock exchange
• Provision in articles
• Special resolution in general meeting
• Debt Equity ratio not more than 2:1
• Buy back amount not more than 20% of share capital & free reserve
• Capital fund regulation and NRB regulation of buyback not contravened
BFI, after obtaining approval from NRB may, buyback its shares within 6 months from the date of
approval or 12 months from the date of passing Special Resolution, whichever is later.

Hence, Chapter 3 of BAFIA has several provisions of securities transactions of BFIs. The main intention of
the chapter is to focus on transparency and public ownership in securities of BFIs.
BAFIA English few question answers Krishna Niraula (CA)

Chapter 4

3. Explain the provisions relating to formation and tenure of Board of Directors of BFIs.
Sec. 14 and 15 of BAFIA, under Chapter 4 contain provisions relating to the formation and tenure of BOD
of BFIs.
Sec. 14 Formation of BOD
1. BOD of BFI shall consist not less than 5 and not more than 7 directors.
2. The appointment of directors shall be made at General Meeting as per this Act and articles.
BUT,
a. Promoter shall appoint directors till the first AGM of the BFI
b. BOD can appoint another director in case of casual vanancy in the office of director till next AGM
c. Institutional shareholder can nominate director(s) based on the proportion of shareholding, and one
individual shall not be nominated for director of more than 1 BFI.
But such restriction shall not apply to become the director of Infrastructure Development Bank
3. BOD shall appoint at least one person with qualifications as per Sec. 17 as independent director.
However, promoter, director or shareholder holding more than 0.1% of shares and his/her family
members, shall not be appointed as an independent director.
4. More than 1 person from the same family members shall not be allowed to become director in a BFI.
5. Chairman of the BOD shall be the person voted among the directors.
6. Institutional Shareholder appointing nominee director, can appoint an alternate director who shall act
on the absence of original director.

Sec. 15 Tenure of Office of Director

1. The tenure of the office of director shall be as specified in articles subject to the maximum of 4 years
and director can be re-appointed/nominated.
2. However, independent director shall be appointed for a single tenure only.
3. However, Executive Chairman or Managing Director can hold the office maximum up to 2 tenures
only.

4. Explain the provisions of qualification and disqualification of director of a BFI.

Sec. 16 and 18 under Chapter 4 of BAFIA contain provisions of qualification and disqualification of
director.
Sec. 16:
1. Person to be appointed as director shall have following qualifications:-
a. Having at least 5 years of experience as an Officer GON, or director or officer of foreign or national BFI
or institutions of related sector;
b. Holding Bachelor Degree and having at least 3 years of experience as in point a.
c. Completed Master’s Degree in specified subject.
2. Educational qualification and experience for director of ‘D’ class shall be specified by NRB.

Qualifications of independent director is given in Sec. 17

Sec. 18:
Following persons shall not be qualified to be the director of BFI:-
a. Not completed the age of 25 years;
b. Unsound mind or insane;
c. Declared insolvent in or outside Nepal
d. Blacklisted in any BFI transaction in or outside Nepal, and 3 years not lapsed from the date of removal
BAFIA English few question answers Krishna Niraula (CA)

from blacklist;
e. Director or employees in any BFI or an institution collecting deposit or insurance company;
f. Borrower, auditor or advisor holding the office, any person/firm/company having interest in any
contract with the BFI
g. Merchant Banker or person holding the membership to act as securities dealer in Stock Market;
h. Director in a licensed institution (BFI);
i. Not subscribing the minimum qualification shares required to become the director of the BFI pursuant
to its articles
j. Serving employee of GON, institution where GON has substantial interest, NRB or BFI;
Provided that, this provision shall not be applicable for the nomination of director in IDB or microfinance
in which GON, or institution having substantial interest of GON, NRB or BFI;
k. Tax not cleared as per the prevailing law;
l. Convicted of stealing, fraud, falsification, alteration, corruption or any criminal or banking offence
involving moral turpitude and 10 years not lapsed from the date of such conviction;
m. Punished by supervising authority as per the prevailing law and 5 years not lapsed from the date of
such punishment;
n. In case of Independent director, person holding promoter share or more than 0.1% share of the BFI
o. Not served full sentence or any dues of fine imposed by the court yet to be settled.