FS IN NEPAL UNIT IV

Banks and Financial Institutions

Nischal Risal, Faculty

MBM III Semester
 Outline
• Incorporation
• Major functions
• Regulation and supervision of banks and
financial institutions by NRB
• Financial sector reforms
• Governance issues and challenges
• Assignments/Article Critiquing/Case analysis
 Incorporation of Financial Institutions
• BAFIA 2063 (2006): An act made to amend and
consolidate legislation relating to banks and financial
institutions.
• It shall extend to the whole of the state of Nepal and
also apply to all offices opened anywhere outside the
state of Nepal by Banks and Financial Institutions.
• ‘Rastra Bank’ means the Nepal Rastra Bank established
under the Nepal Rastra Bank Act, 2058 (2002).
• ‘Bank ‘ means a corporate body incorporated to carry
on financial transactions as referred to in Sub-section
(1) of section 47
• ‘Financial Institution’ means a corporate body
incorporated to carry on the transactions as referred to
in Sub-section (2), (3) or (4) of section 47, and this term
also includes a development bank, finance company or
microfinance development bank.

• License ‘ means the license issued by the Rastra Bank to

a bank or financial institutions to carry on financial
transactions, pursuant to this act.

• In chapter 2 , section 3, in BAFIA, there is a provisions

relating to incorporation of banks or financial
institutions, and securities thereof.
 INCORPORATION OF BANK OR FINANCIAL INSTITUTIONS

• A person who is desirous of incorporating a bank or

financial institution to carry on financial transactions
pursuant to BAFIA act may do so by getting such bank or
financial institution registered as a public limited company
in accordance with the laws in force.
• The authority empowered under the laws in force to
register a company pursuant to Sub-section (1) shall
register the same subject to section 4.
– Section 4 (1); The concerned person shall, before making an
application for the registration of the bank or financial institutions
pursuant to the laws in force, make an application, accompanied
by the following documents and the fee prescribed by NRB, to the
NRB for prior approval:
• Memorandum of association of the proposed bank
or financial institution
• Articles of association of the proposed bank or
financial institution
• Feasibility study report of the proposed bank or
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 a bank or financial institution in
relation to the incorporation of the bank or financial
institution
• Evidence of tax clearance by the promoters up to the
fiscal year immediately preceding the making of
application pursuant to this section 4
• Such other particulars and documents as may be
prescribed by NRB in relation to the incorporation of a
bank or financial institution
• Section 4 (2); If it finds appropriated to grant approval
upon the examination of the submitted documents,
grant its approval to incorporate such bank or financial
institutions within 120 days after the making of
application, with or without prescribing any conditions.
– If there exists a ground for refusing to grant such approval,
information thereof, accompanied by the reason for such
refusal, shall be given to the applicant.
• Section 4 (3); in case of foreign bank
application, in joint investment with a
corporate body in the state of Nepal or with a
citizen or as a subsidiary company subscribing
cent percent shares of the foreign bank or
financial institution, NRB shall grant approval
for the incorporation of such bank or financial
institutions pursuant to sub section 1.
 Power to Refuse to Grant Approval If;
Chapter 2, Section 5

• Name of proposed bank or FIs is identical to

existing bank or Fis.
• Financial transactions to be carried out by
proposed bank and Fis appears to be improper or
undesirable in view of public interest, decency,
etiquette, religion, nationalities or communities.
• Objectives of proposed bank or Fis are contrary to
the laws in force.
• the incorporation of the bank or financial
institution seems to be technically inappropriate.
• a study of feasibility study report, particulars and
documents and information and other
infrastructures of proposed does not provide trust
that it can carry transactions in a healthy and
competitive manner.
• MOA and AOA has not been made in the names of
all promoters members of proposer as per the
prescribed format.
• promoters has not agreed to subscribe at least one
share of that bank or FIs.
• promoters have not clearly specified the number
of shared to be subscribed.
• The fees required to be paid and the
documents to be submitted pursuant to
Section 4 have not been paid or submitted.
• Condition prescribed by NRB is not fulfilled.
• Proper registration of MOA and AOA has not
done.
 If granted;
• Chapter 2 section 6, Prospectus (IPO process,
we studied it previously)
• Section 7, allotment of shares
– Maximum 5 % set a side to employees
– At least 30 percent of total issued capital for
subscription by general public.
• Section 8, dealing in securities (sale,
allotment, recovery of amounts, base to laws
in force)
• Section 9, prohibition on selling or pledging
shares and debentures.
– promoter shares- no sell no pledge any share
registered in him/her name for at least 5 years
from the date of commencement of financial
transactions.
• Section 10, prohibition on purchase by bank or
financial institution of its own shares
– (1) No bank or financial institution buy back its
own shares or lend money against own security.
– (2) with the approval of NRB, out of its free reserves available
for being distributed as dividends, not exceeding the
percentage prescribed by NRB, in the given conditions, may buy
back their own security;
• Shared issued are fully paid up
• Already listed in Securities board
• Authorized by AOA of concerned bank
• AGM decision
• If the ratio of debt owed by the bank or financial institution is not
more than twice the capital and general reserve fund
• If the value of shares to be bought back by a bank or finanial
institutions is not more than twenty percent of the total paid up capital
and general reserve fund of that bank or financial institutions.
– Section 11, Restriction on dealing in securities
• Prohibited to director, chief, executive, auditor, secretary of bank or
any person directly involved or their family to sell, purchase or pledge.
(for more go through BAFIA ACT )
MAJOR FUNCTIONS OF BANKS AND FIs

• Your job
• Regulation and supervision of bank and Fis by
NRB
– Your job
 Financial Sector Reform

• Means gradual liberalization of financial market

and its players and opening of all types of
depository institutions and other non-
depository financial institutions to the private
sector.
• In most developing and transition economy, the
financial sector is dominated by banking sector,
which is a largest mobiliser of deposits, shares,
bonds, bankers acceptances, premium from
insurance policies, employer and employees
contributions etc.
• Financial policy makers/planners, financial
supervisors/supervision authorities and
monetary authorities should be very cautious
while reforming the financial sector.
• Should be in systematic and sequential order.
• The reform or liberalization of financial sector
is a continuous process.
• It takes a long period to complete the process
of financial reform.
 Financial Sector Reforms – Recent 2014/15

• Financial sector is the backbone or engine of

growth of any economy.
• It mobilizes and allocates financial resources
most productively and efficiently and induces
investment, increase employment
opportunities and productivity, achieve
growth targets and attains overall macro-
economic development (Shrestha, 2005)
• In a global financial system, each country has
to reform its financial sector.
• Nepal initiated FSR in mid 1980s, when the
country faced an economic crisis, which
prompted the government to initiate a
structural adjustment program with IMF.

• Second reform program was initiated in 2002

and was trigged by a political crisis- in
particular Maoist insurgencies in the late
1990s which compelled the GON to embark
on broader economic reforms. ( International
development agencies played major reform
roles).
• The task of financial sector reform continues
even after completion of FSRP in 2011 which
was initiated in 2002/2003 under the loan and
grant assistance of GON, World bank, DFID.
• The overall financial position of both Nepal bank
limited and RBB which are in the reform plan
execution process, has been satisfactory due
credit to their notable growth in the paid up
capital and deposits, decrease in the volume of
Non performing loans with both banks running
in operating profit during the review period.
Position of NB and RBB
• International consulting firm KPMG, Portugal &
local partners CSC and Co. Chartered
Accountants and TR Upadhaya & CO have been
selected to carry out special monitoring task of
total 54 banks and financial institutions under
development policy credit program of GON
with financial and technical assistance of the
UK DFID.
– 22 commercial banks
– 20 development banks
– 12 finance companies
(Source: economi c survey 2014/15)
• 64 complaints lodged at Grievance Management
Committee of NRB in the period between mid april
2014 to mid march 2015.
– 42 complaints completed
– 16 cases (initiative taken by NRB)
• 5 companies have got licenses as per the policy of
arrangement of granting permits to hire purchase
credit lending companies.
• Arrangement has been made for licensed banks
and financial institutions to set average spread rate
not exceeding by more than 5 percent between
interest paid on deposits and charged on loans.
• Four class D microfinance institutions have been
availed a total of Rs 12 million zero percent interest
loans
– Rs 3 million each under the provision of availing such
facility to those microfinance financial institutions that
open and operate branches in 22 districts as provisioned in
Directives issued for licensed D class microfinance
institution, 2014.
• Provision has been made to provide micro-credit to
under-privileged and low income people to a
maximum of Rs one hundred thousand per group
member to carry out small enterprise or business on
group guarantee. (3 lakh with collateral)..5 lakh with
last 2 years good credit standing.
• Arrangement has been made to count credit
flows by banks and financial institutions of up
to Rs 400000 to women operated micro
enterprises and project loan up to Rs 700000
provided to women entrepreneurs against
collateral.
• Some of the glimpses of FSRP in Nepal based
on ADB report :
 Major Governance Issues and Challenges
• Maintaining price stability against 9.3 % inflation for last
5 years is a challenge to monetary policy.
• After the recent devastating earthquake, Inflation in
Nepal has been influenced more by non-monetary
factors than monetary ones.
– Heavy inflow of foreign air for reconstruction and
rehabilitation of damaged infrastructures,
– Likelihood of prices of food grains to soar due to drop in major
agricultural production
– Probability of weaknesses in supply management
• Hence, maintaining a coordination between monetary
policy and fiscal policy for price stability is a must.
• Only 40 percent of the country’s population are using
financial services from the formal sector indicates that
presence of banks and financial institutions has not
expanded to the desired extent in rural and remote areas.
• Though the banking sector has excessive liquidity, it has
not been able to utilize it in the productive sector.
• Maintaining financial stability by enhancing public
confidence towards the financial system remains a
challenge.
• Despite contribution of saving and credit cooperative
institutions to the expansion of financial accessibility, lack
of regulation and supervision and absence of corporate
governance have added challenges to the financial
stability.
 Assignments (Individuals)
• What are the pros and cons of FSRP in the
context of Nepal ? What will be the actions for
better outcome of the reforms ?
• Explain about the relationship between RBB ,
NB with FSRP.
• Summarize the major highlights of monetary
policy and financial sector programs for
2014/15.
 Useful Resources
• NRB Act
• BAFIA Act
• Monetary Policy 2014/15
• Economic survey of NRB 2014/15
• Financial sector reform in Nepal- What works, What
doesn’t,; ADB South Asia Working Paper series
• Financial Sector Reforms in Nepal, Article by GK Shrestha
• Study on Financial Sector Reform in Nepal, by South
Asian Network of Economic Institutes (SANEI)