Introduction: Bank and Financial

Institutions
 Banks
• A bank is a financial institution licensed to receive
deposits and make loans. Banks may also provide
financial services, such as wealth management,
currency exchange and safe deposit boxes.
• The major function of Bank is to gather money from
various people and to lend that money out to other
people.
• A bank is a financial institution whose main business is
to accept money on deposit from some people and to
advance loans on interest to some others.
• Professor Geoffrey Crowther has defined bank in his
book "An outline of Money" in the following words,
‘bank is a firm which collects money from those who
have it spare. It lends money to those who require it’.
 Major Functions
• Depository
• Lending
• Intermediaries
 Definitions
• A financial establishment for the deposit, loan,
exchange or issue of money and for the transmission
of funds. (Black's Law Dictionary)
• A business which holds money for its clients, lends
money at interest and trades generally in money. (P.H.
Collin's Dictionary of Banking and Finance)
• A person or company carrying on the business of
receiving money and collecting drafts, for customers
subject to the obligation of honoring cheques drawn
upon them from time to time by the customers to the
extent of amount available on their current accounts.
(Dr. Hart on his book Law of Banking)
• A bank is an institution which receives
deposits of money and advances
loans.(Professor Kinley)
• A banker is an individual, partnership or
corporation, whose sole or predominating
business is banking i.e. the receipt of money
on current and deposit account, and the
payment of cheques drawn by and collection
of cheques paid by a customer. (Halsbury's
Law of England)
• A bank is quasi public institution, for the custody
and loan of money, the exchange and
transmission of the same by means of bills and
drafts, and the issuance of its own promissory
notes, payable to bearer, as currency, or for the
exercise of one or more of these functions, not
always necessary chartered, but some times so,
created to sub-serve public ends, or a financial
institution regulated by law. (Michie on his book
Banks and Banking)
 Definitions under BAFIA
• ‘Bank’ means incorporated body established for the
financial activities determined by section 49 (1) (A class
commercial Banks) and the term includes the branch of
Foreign Banks in Nepal, foreign branch of Banks
established in Nepal and Infrastructure Development Bank
established pursuant to section 49(5) of this Act.
• “Financial Institutions” includes incorporated body
established for the financial activities determined under
section 49 (2), (3), (4). (Includes B, C, and D class financial
institutions i.e. Development Bank, Finance Institution and
Micro Finance)
• Only A class commercial banks can properly write the term
“Bank” in their name.
 Bank v Financial Institution
• Sometimes term ‘Financial Institution’ is used to refer non
banking financial institutions like insurance companies,
investment funds, finance firms, etc.
• FI is a umbrella term and includes both Bank and other
types of FIs.
– Bank: Bank are the types of FI which perform specific function of
Accepting deposit and Lending
– Financial Institutions: There are several types that include Banks,
Non banking financial companies, insurance companies, pension
funds, mutual funds, hedge funds, micro finance, cooperatives,
stock exchanges, etc.
• However, for the purpose of study of Banking Law, the term
“Bank” shall include both Banks and Financial Institutions.
 Characteristics of Bank
• Lord Denning in the United Dominions Trust Ltd. v. Kirkwood,
(1966) case states following characteristics of bank:
– they accept money from and collect cheques for their customers and
place them to their credit,
– they honor cheques or orders drawn on them by their customer
when presented for payment, and debit their customers accordingly.
– they keep current accounts, or something of that nature, in their
books in which the credit and debit are entered.
• Characteristic features of Bank
– Dealing in money
– Accepting money deposits
– Deposits must be withdrawn able
– Dealing with credit
– Commercial in nature
– Nature of agent
 Banking Law
• Law that governs how banks and financial
institutions conduct business. Banks should
comply with various regulations.
• Banking laws especially imposes regulations in
respect to:
– Establishment of Bank
– Operation of Bank
– Transaction through the Bank
•
 What do banking laws provides for:
• Transparency for consumers
• Reduce risk for banking customers
• Avoid misuse of banks for purposes of money laundering
• Allow consumers to bank with confidentiality
• Prevent other crimes
• Promote bank lending according to social and economic priorities
• Provide fair banking and equal opportunities for banking
• Prevent terrorism
• Create fair debt collection practices
• Make credit card agreements fair for consumers
• Prevent banks from making unfair loans to insiders
• Allow customers to reasonably raise disputes
• Manage electronic transactions and business
• Check fraud against electronic transactions, wallets and digital currency
 Evolution of Banking
• It can be presumed that before invention of the money the
barter system was in place to give effect to the business
transactions.
• There is proof of existence of different forms of money in
ancient society of Greece and Rome before 2000 BC.
• Babylonians had developed some features of banking
system using their temples as banks.
• In eastern society, Manu speaks about the earning of
interest as the business of the Vaishyas in Manusmiriti.
• Modern sense of banking has been started from 12th
century when the Bank of Venice founded in 1157 AD.
• Banking in past was limited in money changing, interest and
lending.
• The Bank of Venice founded in 1157 AD was the first public
banking institution.
• Bank of Barcelona and Bank of Geneva were established on the
year 1401 AD and 1407 AD respectively. These are important dates
in development of bank.
• The Bank of Amsterdam established in 1609, and the Bank of
England established in 1694 AD made another record in
development of banking system of the world by introducing
heterogeneous metallic money and credit deposit in their books
and introducing payment system by bank cheques.
• The concept of establishment of joint stock bank was started in
1834 by the establishment of The London and Westminster Bank.
• Experience of Hindustan Bank established in 1770, The Bengal
Bank established in 1785, Central Bank of India, 1791 were some
Indian contribution in the development of modern banking.
 Evolution of Banking Institutions in
Nepal
• Nepalese proven history of money and coins starts
from the period of Lichachivi as ‘Mannank’ the coin
issued by the King Manadev is available. This practice
of minting coins was continued in later days.
• In past the minting industry was highly developed as
Nepal used to export coins in foreign countries.
• Other indigenous and unorganized institutions like,
Shahukar, Mahajan, Tankadhari, etc. were also there
for the activities which are presently covered by
banking companies
 Ancient History
• Tejarath Adda
– It is said that development of banking system in Nepal was
started in the reign of “Ranodip Singh” in the year 1933 B.S.
– “Tejarath Adda” was established in Kathmandu 1880 A.D.
(1937) by Ranodip Singh to provide credit facility to the
general public at a concessional rate of interest.
– It can be conceived as the beginning of the process of
credit mobilization in Nepal.
– However, since it did not accept deposits from the public, it
faced financial problems.
– It used to provide loans to the government officials and
people against deposit of gold and silver.
– It had also extended its branches outside Kathmandu valley
but this office had no right to accept deposit of public and
therefore it had no characteristics of a modern bank.
• Taksar
– It was established in 1989 which was an Mint Department
that used to make coins.
– Now, this Department makes & distributes gold coins, &
also works as the gold reserve.
• Sadar Muluki Khana
– It was established in 1989 (1945) for management of the
government accounts and for issuing Nepalese currency
notes.
– It issued the first Nepalese currency notes of
denominations: 1, 5, 10 and 100.
– It had been a Central Treasury from September 1945.
– NRB took over the treasury functions of Sadar Muluki
Khana in 1959 and subsequently started issuing currency
on behalf of the Government of Nepal (GoN).
 Modern History
• Nepal Bank Limited:
– Establishment of Nepal Bank Limited in 1994 BS under Nepal Bank
Kanoon 1994 marks the introduction of modern banking system in the
country.
– The key features of Nepal Bank Limited was:
• Authorized capital of the bank was 1 crore and paid up capital was 8.42 lakhs.
• 52% government share and remaining 48% share of general public.
• It was authorized for commercial banking and to work as a banker of the
government.
• Branches in major cities: Birgunj, Biratnagar, Janakpur, Gaur, Nepalgunj, etc.
• Monopoly in banking sector in Nepal until establishment of Rastriya Banijya
Bank in 2022 BS.
• This bank was given authority and responsibility of central bank of that time but
with the change in time the need for a separate central bank was realized.
– NBL not only started modern banking in the country but also
contributed for the development of Private Public Partnership in
financial sector.
• Nepal Rastra Bank
– Establishment of Nepal Rastra Bank (NRB) on 14th
Baishakh, 2013 as the central bank of the country under
Nepal Rastra Bank Act, 2012 is another milestone in
development of modern banking in Nepal.
– NRB as a central bank has played a very important role for
the development of banking system in Nepal and has
substituted the Indian Currency by effectively circulating
Nepalese Currency through different mechanisms.
– NRB in addition to promoting different banks and financial
institution in Nepal, has also played a role to promote
systematic banking business in the nation.
– Presently NRB Act 2058 governs the power, functions and
operation of Nepal Rastra Bank. The present Act repealed
NRB Act 2012.
• Nepal Industrial Development Cooperation (NIDC)
– Establishment of Nepal Industrial Development Corporation
(NIDC) in 2016 BS under Nepal industrial Development
Cooperation Act, 2016 B.S. marked another development in
Nepalese banking sector.
– It introduced the concept of development banking in Nepal.
– It was established to help industrial development by providing
technical and financial assistance to the industries.
– With the introduction of BAFIA 2063, this Bank latter obtained a
B class license under the BAFIA and operated for certain period
as a national level development bank under the name of “NIDC
Development Bank”.
– In May 2018, it merged with Rastriya Banijya Bank to be
operated thereafter under the name of Rastriya Banijya Bank
holding license for A Class Commercial Bank.
• Co-operative Bank/ADB
– The Co-operative Bank established under the
provision of Co-operative Act, 2017 was next step on
the development of specialized banking in the
country.
– This bank started compulsory saving scheme for
farmers.
– Later on it was merged with Agriculture Development
Bank (ADBN) in 2024 B.S.,
– ADBN was a new bank established under the
Agriculture Development Bank Act 2024.
– ADBN was latter kept under umbrella BAFIA 2063 and
is being operated as A Class Financial Institution
licensed by NRB
• Rastriya Banijya Bank (RBB)
– RBB was established in 10th Margh, 2022 BS by the government
having sole ownership in stake for development of banking
activities in the nation under the provision of Rastriya Banijya
Bank Act, 2021.
– Later this Act was substituted by Commercial Bank Act 2031 and
RBB was incorporated as commercial bank under the new
Commercial Bank Act.
– With the introduction of BAFIA 2063, it was categorized as A class
licensed commercial bank.
– NIDC was recently merged into the RBB in 2018 A.D (2075 B.S. )
• Saving Institution
– Saving Institution established in 2022 BS to help land
development and reform in the country can be taken another
exemplary event in the development of modern banking in Nepal
– It had a very specific function and represented the concept of
modern specialized investment bank.
Development after liberalization…
• Nepal Arab Bank Limited (presently known as
NABIL Bank), was established in 21st Ashadh,
2041 BS.
– First joint venture bank established with venture of
Dubai Bank Limited and other Nepalese investors.
• Nepal Inosuez Bank Limited was established in
16th Chaitra, 2052.
• Nepal Grindlays Bank Limited (presently Standard
Chartered Bank Nepal Limited) was established in
2043 B.S.
• Bank with foreign Joint ventures established after
liberalization:
– Himalayan Bank Limited,
– Nepal SBI Bank Limited, Nepal Bangladesh Bank
Limited, Everest Bank Limited,
– Bank of Kathmandu Limited
• Bank established by the initiation of Nepalese
investors:
– Machhapuchchhre Bank Ltd.,
– Kumari Bank Ltd.,
– Laxmi Bank Ltd.,
– Siddhartha Bank Ltd., etc.
Consolidation of all Banks and FI under
umbrella regulation
• Nepal Rastra Bank Act 2058
– The Nepal Rastra Bank Act of 2002 (2058 BS) was passed replacing the
NRB Act 1955 thereby defining NRB as the central bank of Nepal and
defining its various powers and functions.
– It allowed NRB to be more autonomous in exercising decisions relating
to formulation of monetary and foreign exchange policy as well as
monitoring and regulating banks and financial institutions across the
nation.
• BAFIA 2063
– It was felt that the existing situation of multiple numbers of Acts under
banking and financial institution sector made the process of regulation
and monitoring system very cumbersome.
– As a result and as a process of financial sector reform program, all those
diversified Acts were grouped together under the umbrella Act called
'Bank and Financial Institution Act (BAFIA), 2006 (2063 BS).
– Now BAFIA 2063 being replaced by BAFIA 2073.
 Present status…
• One Central Bank- NRB
• 27 A class Commercial Banks
• 24 B class Development Banks
• 22 C class Finance Companies
• 90 D class Microfinance Financial Institutions
• 14 Saving and Credit Cooperatives with Limited
banking functions
• 24 Non Government Organizations which are
licensed to provide financial services
• 10 other institutions serving banking functions
(Note: the data is as of January 2020 B.S.)
 Banking Laws in Nepal
• Past legal instruments
– There were few provisions in Muluki Ain, 1910 about the
lending and interest rate. (Sahu Riniko, Sahu Tirnako, Sahu
Asamiko, Dhito Samunako, Dhito Lekhadako, Damasahiko)
– Nepal Bank Kanoon in 1994 was the first legal instruments
directly related to banking
– Nepal Rastra Bank Act, 2012-
• amendments were made in 2015, 2017, 2019, 2020, 2023, 2031,
2039, 2043, 2046, 2047, 2047 and 2049
• It was later replaced by NRB Act 2058
– Nepalese Currency Circulation Promotion Act 2014
– Nepal Industrial Development Corporation Act of 2016 B.S.
– Foreign Exchange Control Act 2017. It was later replaced by
Foreign Exchange Control Act 2019
– National Debt Act 2017
– Cooperative Bank Act, 2017
– Currency Act 2019: It was later replaced by Currency
Act 2040 which in turn was further repealed by NRB
Act 2058
– Commercial Bank, Act, 2020
– Rastriya Banijya Bank Act 2021
– Agriculture Development Bank, 2024
– Commercial Bank Act, 2031: It was replaced later by
two laws i.e. Commercial Bank Act 2020 and RRB Act
2021. Later both were repealed by BAFIA 2063
– Finance Company Act, 2042
– Development Bank Act, 2052
 Exiting laws relating to banking
• Directly relevant Acts of Parliament:
– Nepal Rastra Bank Act, 2058
– Bank and Financial Institution Act 2073 (replaced Bank
and Financial Institution Act, 2063)
– Negotiable Instruments Act, 2034
– Financial Intermediaries Act, 2055
– Bank and Financial Institutions Debt Recovery Act,
2058
– Banking Offence and Punishment Act, 2064
– Foreign Exchange (Regulation and Control) Act, 2019
• Other relevant Acts of Parliament:
– Cooperative Act, 2048
– Contract Act, 2056
– Companies Act, 2063
– Secured Transaction Act, 2063
– Insolvency Act, 2063
• Other relevant laws and regulations:
– Various NRB Regulations
– Various directives Issued by NRB. Eg. Unified
Directives
– Various Circulars and guidelines issued by NRB
– Other Act specific regulations
– Universally accepted customs, and
– Decisions of Supreme Court
 Role of Banking Institution for socio
economic development
• Channelize Saving to Investment: Savings are
channelized to productive resources in from of
investment. Mobilizes savings for capital formation.
• Helps in Growth of Capital Market: Provides Fixed
Capital and Working Capital in from of short term or
long terms loans. It finances industries.
• Regularize Government Securities Markets: It enables
the governments to raise short term and long term
funds through issue of bills and bonds which carries
attractive rates of interests with tax concessions.
• Helps in Infrastructure and Growth: Provides fund for
growth of infrastructure industries eg. hydropower.
• Helps in Development of Trade: helps in promotion of
both domestic and international trade due to
pre-shipment and post-shipment finance by
commercial banks.
• Boosts Employment Opportunities: Provides working
capital to the businessmen and manufactures due to
which production increases, resulting in generating
more employment opportunities.
• Helps in Growth of Venture Capital: FI will contribute
part of their investable finds for the promotion of new
ventures.
• Ensures Balanced Growth: Credit flow or lending in
such way that available funds will be distributed to all
sectors in such a manner, that there will be a balanced
growth in industries, agriculture and service sectors.
• Helps to Maintain Fiscal Discipline and Control of
Economy: government can create congenial business
atmosphere so that neither too much of inflation nor
depression is experienced. The industries should be given
suitable protection so that their credit requirement will be
met even during difficult period. Government can regulate
unwanted and speculative transactions.
• Helps in Balanced Regional Development: by providing
various concessions or priority on lending to marginalized
sectors. Commercial Banks help in proper allocation of
funds among different regions of the economy.
• Attracts Foreign Capital: FI promotes capital market and
capital market attracts domestic and foreign funds.
• Economic Integration: Possibility of adopting the economic
and fiscal polices of successful countries.
• Financing Agriculture and Allied Activities: extending
credits for agricultural development.
 Roles relating to Economic
Development
• Mobilization of savings for capital formation
• Financing Industries
• Financing Trade
• Financing Agriculture
• Financing Consumer Activities
• Financing employment generating activities
• Help in monetary policy