Loksewa Sarathi Banking Note

✍ Rajeshower Bhattarai "Banking Note" ✍Sudikshya Poudel
1. Explain the functions of commercial banks.
Answer: Commercial banks are profitable organizations promoting trade, commerce as well
as monetizing the economy. Functions of Commercial banks are stated in BAFIA,2073.Some
of the major functions are:
 Deposit Collection of individuals/institutions (Current Deposit, Saving Deposit, Fixed

Deposit,Call Deposit, Margin Deposit)
 Advancing Loans to individuals and institutions (Short Term Loan,Long Term Loan,
Working Capital Loan, Term Loan, Consumer Loan,etc.
 Credit Creation through credit multiplier of primary deposit by which credit facility
multiplies.
 Trading of Bullion (Gold/Silver)
 Remittance of money (through draft, fax,swift,ABBS,etc.)
 Trade Finance (LC, Bank Guarantee, Trust Receipt Loan,etc.)
 General Utility Functions (Safe deposit locker of valuable items, Merchant Banking,
ATM, E-Banking, Utility payment, Dealing in foreign exchange,etc.)
 Agency Functions [Collection and Payment of credit instruments (cheques, Bills of

Exchange, Promissory Notes), sale and purchase of securities, Fund Transfer,etc.]
 Others(Technical consultancy, Government Transactions, Stock and Brokerage

Services Bancassurance,etc.)
2.Explain the functions, duties and powers of Nepal Rastra Bank.
Ans. The functions, duties and powers of Nepal Rastra Bank as mentioned in Section 5 of
NRB Act, 2058 are as follows:
 Issuing bank notes and coins
 Formation and implementation of monetary policy
 Formation and implementation of foreign exchange policy
 Determining the system of foreign exchange rate
 Management and operation of foreign exchange reserve
 Issuing the license for financial transaction to commercial banks and financial
institutions and making regulation, inspection, supervision and follow up for such
transaction
 Working as a banker of commercial banks and financial institution and lender of last
resort and advisor and financial agent of Government of Nepal.
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 Establishing and maintaining the system of payment, clearing and settlement,and

their regulation.
 Operation of open market transaction through necessary instruments or,liquidity

management. Other functions to achieve the objectives of the Act.,
3. What are the principles of central bank? Explain in brief.
Ans. A central bank is an independent national authority that issue monetary

policy,,regulates banks, and provides financial services including economic research. Its
goals are to,stabilize the nation's currency, keep unemployment low, and prevent inflation.
The principles,of central bank are as follows;,
 To work in the principle of national interest.
 Act as the monetary body of the country
 Perform open market operations
 Act as debt reservoir and lender of last resort
 Free from political interference
 Free from competition
 Work as banker of commercial banks and financial institutions,
4. Explain the functions, duties and powers of Board of Directors of NRB.
Ans: The formation of Board of Directors of NRB and its functions, duties and powers
are,mentioned in Section 29 of NRB Act,2058.
Functions,Duties and Powers of the Board:
 To frame monetary and foreign exchange policies.
 To take necessary decisions with regard to the denominations of bank notes,and

coins, the figures, size, metal, materials for printing notes, and other,materials; and
to frame appropriate policies with regard to their issue.
 To frame necessary policies for causing the supervision and inspection o,commercial
banks and financial institutions and banking and financial,arrangement.
 To approve Rules and Bye-laws of the Bank and to frame policies applicable to,the
operation and management of the Bank.
 To frame policies with regard to the appointment, promotion, transfer, dismissal,

remuneration, pension, gratuity, provident fund, leave, code of conduct and other
terms and conditions relating to the service of the employees of the Bank.
 To approve the annual programs and budget of the Bank and the annual auditing of
accounts, and to submit its report to Government of Nepal for information.
 To approve the annual report on the activities of the Bank.
 To frame necessary policy for the issue of license to commercial banks and financial
institutions and for revoking such license.
 To approve the limit of the loan to be provided to the Government of Nepal by the
Bank.
 To fix the amount, limit and terms and conditions of the loan and refinance which
the Bank provides to the commercial banks and financial institutions.
 To make decision with regard to the Bank's membership to international

organizations, associations.
 To frame policy for the mobilization and investment of Bank's financial resource.
 To submit proposal to Government of Nepal along with the reasons there for if it is
necessary to make amendment to this Act.
 To take decision on all other matters excluding the matters which are within the
authority of Governor under this Act.
 To delegate the powers vested on the Board to the Governor or the subcommittee
constituted by the Board with or without fixing the time limit.
5. Explain the role of commercial banks in development of nation.
Ans: Commercial bank is a type of financial institution which accepts deposits, disburses
credit and provides basic financial services like remittance, foreign currency exchange,etc.
The role of commercial banks in the development of nation can be described below:
 Works to assist in capital formation
 Expansion of credit by the act of credit creation
 Consolidated funds invested in productive sector
 Creates jobs for the youth
 Assist in the development of the industrial sector
 Expansion of financial sector
 Assistance in foreign trade business.
6. Explain the features of Double Entry Systems.
Ans. Double entry system is a system under which each transaction is regarded to have
twofold aspects and both the aspects are recorded to obtain the complete record of
dealings. The features of double entry system are:
 Based on double effect concept: every transaction has two sided effects, debit and
credit.
 Both debit and credit sides are equal.
 Versatile system, so can be changed as per the requirement.
 System having scientific principle and concept
 Transactions are recorded in systematic and chronological order.
 Helps to control costs.
 Simple system although being scientific and helps to conduct audit effectively.
 Used worldwide as being systematic and trustworthy.
7. Write down the objectives of book keeping and accounting.
Ans. Book keeping and accounting are two functions which are extremely important for
every
business organization. In the simplest of terms, bookkeeping is responsible for the

recording
of financial transactions whereas accounting is responsible for interpreting, classifying,
analyzing,reporting, and summarizing the financial data. The objectives of book keeping
and
accounting are:
 to maintain systematic record
 to ascertain the financial position of business
 to ascertain the operational profit or loss
 to facilitate rational decision making
 to provide knowledge of debtors and creditors
 to provide knowledge of purchase and sales
 to provide knowledge of cash and bank balance
 to provide knowledge of closing stock and goods to act as a basis of income tax and
VAT.
Hence, the overall objective of book keeping and accounting is to properly enter all
financial transactions as well as to provide financial information through financial
statements to the management, shareholder, government and all the other stakeholders.
8. Write down the advantages and disadvantages of double entry system.
Ans. Double entry system is the most scientific and accurate system of accounting,where
each transaction has two equal but opposite folds, namely debit and credit.The advantages
and disadvantages of this systems are:
Advantages
 Easy record maintenance
 complete accounts of transaction
 Determining results become easier
 Clarity regarding assets and liabilities
 Helps to maximize income and minimize expenditure
 Detection of frauds and errors
Disadvantages
 Lots of paperwork involved
 Complex system
 Expensive system
 Qualified persons having accounting knowledge required
 Chances of mistakes and errors
 Secrecy of information not maintained
Double entry system, despite being an accurate and complete system has some
disadvantages, too.These days, due to several accounting software, double entry system
has become easier through computerized data entry system.
9. Explain the types of accounts relating to debit and credit principle double entry
system.
Ans: Double entry system is a system of accounting having two equal but opposite
folds,namely debit and credit.The traditional types of accounts as per this system are:
1. Real Account:
All assets of a firm, which are tangible or in tangible, fall under the category "Real
Accounts".Tangible real accounts are related to things that can be touched and felt
physically. Few examples of tangible real accounts are building, machinery, stock, land, etc.
Intangible real accounts are related to things that can't be touched and felt physically.Few
examples of such real accounts are goodwill, patents, trademarks, etc. Golden rule for real
accounts.
 Debit:what comes in
 Credit:What goes out
2.Personal Accounts
These accounts are related to individuals, firms, companies, etc. A few examples of
personal accounts include debtors, creditors, banks, outstanding/prepaid accounts,
accounts of credit customers, accounts of goods suppliers, capital, drawings,etc. Golden
rule for personal accounts
 Debit:the receiver
 Credit: the giver
3. Nominal Account
Account which are related to expenses, losses, incomes or gains are called Nominal
accounts. The dictionary meaning of the word "nominal" is "existing in name only" and the
meaning remains absolutely true in accounting sense too, because nominal accounts do not
really exist in physical form,but behind every nominal account money is
involved.E.g.Purchase A/C,Salary A/C, Sales A/C, Commission received A/C etc.
The final result of all nominal accounts is either profit or loss which is then transferred to
the capital account. Golden rule for nominal accounts
 Debit: all expenses & losses
 Credit:all incomes &gains
10. Write down the scope of book keeping and accounting.
Answer: Book keeping and accounting are two tasks that are very important to every
business organization.In simple terms, book keeping is responsible for recording financial
transactions while accounting is responsible for the interpretation, classification, analysis,
reporting and summary of financial data.
 Keeping financial records
 Preparation of ledger accounts
 Recording financial transactions on the basis of accounting standards
 Appoint appropriate manpower for accounting etc.
Therefore, the scope of book keeping sets forth specific guidelines for the accounting
method. The accounting method starts only after the book keeping is completed.
The scope of accounting includes:
 Data collection and preparation
 Data processing and evaluation using accounting standards
 Convert data to appropriate reports (such as profit and loss statement,balance

sheet,cash flow statement,etc.)
 After the preparation of the financial report, reporting to the shareholders, the
government, concerned agencies and stakeholders
Therefore,the scope of accounting includes reporting all financial information after

recording financial transaction by book keeping.
11. Promissory Note, Bills of Exchange and Cheques
Promissory Note:
As per section 2(f), it's means an instruments in writing except government or bank note
containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money, or to order of, a certain person, or to the bearer of the instruments.
 The person who makes the promissory note and undertakes obligations to pay a
certain sum of money mentioned there on is called Makers.&
 The person to whom the payment is to be made is called payee.
Essential Elements of Promissory Note:
 It must be in writing.
 It must contain a promise to pay.
 It must be signed by maker.
 Parties of the instrument must be certain.
 The sum payable must be certain.
 There must be a promise to pay money only. Formalities are to be fulfilled.
Bills of Exchange
As per section 2(g), it means an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay a certain sum of money to, or to the
order of a certain person or to the bearer of the instrument in a certain date or after
certain period of time or on the demand.
There are three parties:
 Drawer: The person giving order in writing to pay money or who makes the bill.
 Drawee: The person to whom such direction is given to pay a certain sum of money to
payee. When the drawee accepts the bill, he called accepter.
 Payee: The party to whom the payment is to be made, i.e.the receiver or beneficiary
of the amount stated on the instrument.
The drawer or the payee who is in possession of the bill called the holder or the instrument
& the holder must present the bill to the drawee for his acceptance.
Essential Element of Bills of Exchange:
 It must be in writing.
 The order must be unconditional.
 It requires 3 parties, i.e.drawer, drawee &payee
 Parties must be certain.
 It must be signed by the drawer/maker.
 The drawer/maker and payee may be the same and a single person.
 It must contain an order to pay money only
Different Between of Promissory Note and Bill of Exchange
Cheques :
As per section 2(h),the cheque means a bill of exchange drawn on a certain bank payable on
demand.
 It is always drawn on a specified bank and always payable on demand.
 All cheques are Bills of Exchange but all Bill of Exchange are not cheques.
Holder & Holder in due course
A person who holds instrument is called holders & A holders who takes the instruments
bona-fide to value before it is overdue and without any notice of defects in the title of the
person who transferred it to him.
Types of cheque:
1. Bearer cheque (Payable to possessor)
2. Order Cheque (Payable to specified person)
3. Crossed Cheque (crossed with two parallel lines, either across the whole check or through
the top left-hand corner of the check.)
A crossing is an instruction to the paying banker to pay the amount of cheque to a

particular banker and not over the counter. The crossing of the cheque secures the
payment to a banker.
Types of crossed cheque:
1. General Crossing-cheque bears across its face an addition of two parallel transverse
lines.
2. Special Crossing - cheque bears across its face an addition of the banker's name.
Maker or holder may cross the cheque by specifying the bank name.
3. Restrictive Crossing - It directs the collecting banker that he needs to credit the
amount of cheque only to the account of the payee. Not negotiable Crossing-The
cheque can be transferred but cannot be negotiated. In such cases, the 'cheque
holder' will bear the title of a transferor only.
12. What is the provision of crossed cheques according to Negotiable Instruments Act,2034?
Elaborates.
Answer:
Negotiable Instruments Act,2034
Negotiable Instruments Act, 2034 was issued by NRB in order to ease banking transactions
through various Negotiable instruments. The Provision of cross cheques according to
chapter 8 of Negotiable instruments act, 2034 are as follows
 General cross cheque: A Cheque bears across its face an addition of two parallel
transverse lines
 Special crossed cheque: A cheque bears across its face an addition of the name of a
banker
 Crossing after issue: The holder may make uncrossed cheque general or special
crossed cheque or may add the word “Not Negotiable" when cheque is general or
special and where a cheque is crossed specially to the banker s/he may again cross it
especially to another banker.
 Payment of crossed cheque: The banker on whom it is drawn shall not pay it
otherwise than to a banker
 Payment of cheque bearing “Account payee": The banker shall make the payment of a
crossed cheque bearing the word “Account Payee".
 Payment of cheque crossed specially more than once: Where the cheque is crossed to
more than one banker,the banker shall refuse except when crossed to an agent for
the purpose of collection.
 Payment in due course of crossed cheque: The banker on whom a crossed cheque is
drawn has paid the same in due course respectively entitled to a placed in if the
amount of the cheque has been paid to and received by the true owner.
 Payment of crossed cheque out due course: Any banker paying a crossed cheque
without completing the procedures of the section 84 & 85 shall be liable to the owner
of the cheque for his/her loss.
 Cheque bearing “Not Negotiable": A person taking a cheque crossed bearing "Not
Negotiable" shall not be capable of giving a better title to the cheque.
 Non-Liability of banker receiving payment of cheque: In the case the cheque proves
to be defective incur any liabilities a banker shall not receive such payment.
 Application of this chapter to drafts: The provision of this chapter shall apply to any
draft as if the draft were a cheque.
13. What is a bank draft? Explain the types of bank draft.
Answer: Bank draft is a pre-paid Negotiable Instrument,wherein the drawee bank

undertakes to make payment in full when the instrument is presented by the payee for
payment. From the beginning to the end of the draft,the following four parties are involved
in various ways.
a) First party-Sender
b)Second Party-Payee
c) Third Party-Draft Drawing Bank
d) Fourth party-the paying bank
The major types of bank draft are as follows:
a. Cashier's Cheque: Cashier's cheques are drawn against the funds of the bank, and the
bank provides a guarantee of payment when the cheque is presented. Cashier's cheques
originate either with a cash payment or by debiting the account of the customer making the
payment. Bank account of customer is not mandatory and this type of draft is used
especially for real estate and brokerage transaction.
b. Certified Cheque: Certified cheque is a draft where customer signs his cheque and bank
official do the counter signature, thus providing guarantee of payment. It is known as
manager's cheque or treasurer's cheque.
C.Money Order: It is a payment instrument just like cashier's cheque but the amount is
limited.Such drafts are issued by non-banking financial institutions, post offices, etc.
Globally, such a draft is usually no more than $ 1000.
14.What are the points to be remembered by a bank staff while handling cheques? Mention.
Answer: Cheque is a type of negotiable instrument which a bank has to pay on demand. A
bank's staff should keep in mind the following points in cheque handling:
 Date of cheque should not be more than 6 months old or nor should be of future date.
 If the cheque is bearer, it should be paid to the bearer, if it is order cheque, should
be paid after verifying identity and if the cheque is cross cheque, it should be
deposited in payee's account
 Amount should be paid only if the balance in account is sufficient -Amount should be
equal in words and letters.
 Signature done on the face of cheque by account holder should be verified from CBS.
 If the cheque is endorsed, signature should be there at backside at appropriate place

and it should be verified.
 The ink in writing should be same in cheque (as per NRB, only black ink)
 If cash is demanded, denominations should be filled at the backside of the cheque
 If customer wants to make bank draft from cheque, same should be done after proper
verification of the beneficiary.
15.What is bank draft? What are the points to be remembered for proper use/handling of
bank drafts?
Answer: Bank draft is a pre-paid Negotiable Instrument, wherein the drawee bank
undertakes to make payment in full when the instrument is presented by the payee for
payment. From the beginning to the end of the draft, the following four parties are
involved in various ways.
A.First party-Sender
B.Second Party-Payee
C.Third Party-Draft Drawing Bank
D.Fourth party - the paying bank
The points to be remembered for proper use/handling of bank drafts are:
 Especially for larger sums one should be careful when accepting a banker's draft
due to the number of instances of fake drafts being presented.For example, for the
payment of cars.
 Banker's drafts aren't guaranteed against fraud. If we lose one or it's stolen, someone
else could use it fraudulently. So extra care should be taken.
 Every record of each bank draft should be properly recorded.
 Any problems in bank draft should be immediately informed to the concerned bank.
 Receipt copy should be safely stored once a bank draft is paid to beneficiary
Whether payment of draft is completed or not, should be inquired either with the
bank or with the beneficiary after some days, as the applicant can't know himself.
16. What is Balance Sheet? Why is it prepared?
Answer: Balance Sheet is a statement presenting the value of assets, liabilities and capital
of any organization or firm at point of time. It is also known as a major financial indicator
as it shows the condition of assets, liabilities and capital. Balance Sheet can be shown by
the accounting equation:
Assets=Capital +Liabilities
Before preparing Balance Sheet, Trial Balance is prepared. And then Profit and Loss
Statement is prepared from which net profit/loss is taken to balance sheet and condition of
assets, liabilities and capital is known.
Objectives of Preparing Balance Sheet:
 to know the financial strength of organization
 ta complete financial statement
 to show the financial position
 to know the capital structure of organization
 to analyze solvency capacity
 to make able to the stakeholders to analyze the financial health of organization
 to summarize all capital nature expenditures
 to know the net worth of the organization
 to assist in auditing
 to know the strength and weakness of organization
17.How do banks should present Balance Sheet? Explain.
Answer: Banks and financial institutions should submit financial statements in the NFRS
framework as per Nepal Rastra Bank directive 4.
Balance Sheet is a key part of the financial statements. Banks present the balance/financial
statement in the following manner:
 Annual financial statement should be published in the Annual Report Book and
updated on its website after the audit is completed within the stipulated period.
 Balance Sheet must be published annually within nine months after the fina audit is
conducted.
 The same should be published quarterly with internal audit within 3 days of the end
of the quarter.
 The main strategy adopted during the preparation of the quote should be mentioned
in the title.-Regulatory adjustments prescribed by the Rastra Bank have to be made
while preparing the balance.
 Banks should also prepare a group balance sheet of subsidiary companies, if any.
 Banks should upload balance sheet in prescribed excel sheet format in the website
www.reporting.nrb.org.np within 15 days after the end of the month.
Balance Sheet is a report of assets and liabilities that periodically summarizes the
financial position of the business at a specific point of time. The basic principle of balance
sheet is based on the accounting equation,where the sum of the total assets should be equal
to the sum of the total capital and liabilities.
In the presentation of balance sheet, capital and liabilities are shown on left side and
assets are shown in the right side. Likewise, balance sheet can also be presented vertically,
i.e.showing assets and then capital & liabilities.
Balance sheet structure of General organization
Capital &Liabilities Amount Assets Amount
Share Capital *** Fixed assets ***
Reserve and surplus *** Investment ***
Long Term Debt *** Current assets ***
Current liabilities *** Fictitious assets ***
Total **** Total ****
 Share capital includes: Equity share, preference share, share premium
 Reserve and surplus include: General reserve, surplus, funds
 Long term debt includes: Debenture, mortgage,bond, public deposit,bank loan
 Current liabilities include: Creditors, payable, outstanding expenses, dues, to be pay,

advance income, bank overdraft, provision for tax, provision for dividend
 Fixed assets include: Tangible assets like land, building, plant,

machineries,furniture & fixtures,vehicles,Intangible assets like goodwill, patent,
copyright,trademark, franchises.
 Investment includes: Purchase of share, debenture,t-bill,government bond etc.
 Current assets include: Debtors (book debt),inventory (Closing stock), cash, bank,
receivable, prepaid (advance paid), marketable securities,
 Fictitious assets include:Preliminary expenses, discount on issue of share debenture,

deferred expenditure, underwriting commission.
18.What is Balance Sheet? Why is it called Statement of Financial Position?
Answer: Balance Sheet is a report of assets and liabilities that periodically summarizes
the financial position of the business at a specific point of time.The basic principle of
balance sheet is based on the accounting equation,where the sum of the total assets should
be equal to the sum of the total capital and liabilities. (Assets=Capital+Liabilities)
In the presentation of balance sheet,capital and liabilities are shown on left side and
assets are shown in the right side.Likewise,balance sheet can also be presented
vertically.i.e.showing assets and then capital & liabilities.
Balance Sheet is also called statement of financial position due to the following reasons:
 Displays the status of overall assets and liabilities
 There is no profit or loss calculation of any period as in profit-loss account, but it

shows the financial position of the organization at some point of time.
 Displays the total position of the shareholders through the shareholder fund so that
the ability to generate sustainable returns can be assessed.
 The interest cost of the organization can be determined by studying the long-term
liability of the institution
 Similarly,the position of liquidity required to pay off short-term liabilities can be

understood. It is possible to see how much the firm's fixed assets and current assets
are, and how much the firm is capable of mobilizing working capital using current
assets.
 Similar investments made by the entity in securities,fixed assets,etc.of other

companies can be studied whether they are risky or with good returns.
Therefore,Balance Sheet is called the statement of financial position as it can completely

study the assets,liabilities and shareholder funds of the organization.
19. What is the main purpose of the Banking Offences and Punishment Act,1? Write down
the provisions of the Special Investigation Team specified in the Act.
Answer: The main objectives of the Banking Crimes and Punishment Act, 2 are in the
preamble to the Act, which are as follows:-
 To minimize the impact and risk of the banking and financial system in the banking
and financial system business.
 To increase the reliability of the banking and financial system
 To make legal arrangements regarding banking offenses and penalties.
The following are the provisions regarding the Special Investigation Team as specified in
Section 19ka of the Act:
 Regardless of what is written in the existing law,Nepal Government may constitute a

research team, including a specialist on banking matters, to investigate the issue of
banking, in consultation with the Attorney General,the Inspector General of Police
and the Nepal Rastra Bank.
 The Special Investigation Team shall have the same rights as the officer conducting
the investigation and investigation pursuant to this Act or the applicable law.
20.What are the main objectives of Banking Offence and Punishment Act? How has the act
defined " Dhukuti" transaction?
Answer: With the modern and expanding business in the banking sector,the banking sector
has become synonymous with the economy.Due to voluminous transactions, there are
possibilities of equal risks, theft, hacking etc. in banking industry. Banking Offence and
Punishment Act was thus, needed to minimize the banking risks and take proper action
against the offences.
The main objective of Banking Offence and Punishment Act, is given in the preamble of the
Act which is given below:
 to minimize the effects and risks that may arise due to offences in banking and
financial system transactions
 to increase the credibility of the banking and financial systems
 to make legal arrangements regarding banking offences and penalties.
As per the Act,"Dhukuti" transaction means the transaction of raising money by mutual
agreements and to either give or take money on one to one basis. The Act has placed the
business of Dhukuti under the Banking Offences and has imposed penalty and
imprisonment for such transaction.
21.What is Money Laundering?
Answer: Money Laundering is the process by which illegal funds and assets are converted
into legitimate funds and assets.
22.What is the current scale of Money Laundering worldwide?
Answer: Measuring the current scale of money laundering is extremely difficult. The
World Bank and IMF have estimated volume of money laundering to between 3 and 5
percent of global gross domestic product (GDP) equivalent to approximately US$2.2 trillion
to US$3.7 trillion annually.
23.How does money laundering work?
Answer: Money laundering works in following three stages.
1. Placement: Illegal funds or assets are first brought into the financial system. This
placement makes the funds more liquid. Money launderers place illegal funds using a
variety of techniques like, depositing cash into bank accounts or purchasing insurance
products and using cash to purchase assets.
2. Layering: To conceal the illegal origin of the placed funds and thus make them more
useful,the funds have to be moved, dispersed and disguised. This activity is known as
“layering". At this stage, money launderers use many different techniques to layer the
funds like,using multiple banks and accounts, having professionals act as intermediaries
and transacting through corporations and trusts. This helps the launderers to disguise the
origin of the funds.
3. Integration: The last stage of the money laundering process is called “integration". The
“cleaned” funds can now be made available for investment in legitimate or illegitimate
businesses.Thus,the original “dirty” money has achieved the appearance of legitimacy.
24. What is Anti Money laundering(AML)?
Answer: Anti Money Laundering (AML) refers to a set of procedures, laws and regulations
designed to stop the practice of generating income through illegal actions.
25. What is Terrorist Financing?
Answer: Terrorism financing refers to activities that provide financing or financial

support to individual terrorists or terrorist groups.
26.What is Combating Financing of Terrorism (CFT)?
Answer: Combating the Financing of Terrorism (CFT) involves investigating, analyzing,

deterring and preventing sources of funding for activities intended to achieve political,
religious or ideological goals through violence and the threat of violence against civilians.
27.What is the difference between Money Laundering and Terrorist Financing?
Answer: Money Laundering involves the disguising of fund derived from illegal activity so
they may be used without detection of the illegal activity whereas terrorist financing
involves the use of legally derived money to carry out illegal activities.
28.Why is AML/CFT important?
Answer: AML/CFT is important for following reasons:
 To protect the financial system;
 To prevent criminals from enjoying the proceeds of crimes;
 To prevent criminals to build formidable economic powers and challenge the

stability
30.What is Financial Information Unit (FIU)?
Answer: Financial Information Unit (FIU) shall mean the Financial Information Unit (FIU
established on April 21, 2008 pursuant to Section 9 of the Assets (Money) Laundering
Prevention Act,2008 within Nepal Rastra Bank (the Central bank) as an independent unit in
order to work against the money laundering and terrorist financing activities. It is the
financial intelligence unit of the State of Nepal. It is the central, national agency
accountable for receiving, processing, analyzing and disseminating financial information
and intelligence on suspicious money laundering and terrorist financing activities.
31. What is Shell Bank/Shell Entity?
Answer: Shell Bank/entity shall mean any bank or entity, which has no physical presence
in the country in which it is incorporated,licensed or located, and which is not affiliated
with a regulated financial services group that is subject to effective consolidated
supervision. For the purpose of this clause, presence of local agent or junior level staff
does not constitute physical presence.Shell banks/entities in themselves may not be illegal
as they may have legitimate business purposes. However, they can also be a main
component of underground activities, especially those based in tax havens.
32.What are the sources of illegal funds?
Answer: There are many sources of illegal funds. Major sources are as below:
 Participation in an organized criminal group, racketeering
 Terrorism,including terrorist financing
 Trafficking in human being s and migrant smuggling
 Sexual exploitation including sexual exploitation of children
 Illicit trafficking in narcotic drugs and psychotropic substance
 Illicit arms trafficking
 Illicit trafficking in stolen and other goods
 Corruption and bribery
 Fraud
 Counterfeiting currency
 Counterfeiting and piracy of products
 Environmental crime
 Murder, grievous bodily injury
 Kidnapping, illegal restraint and hostage taking
 Robbery and theft
 Smuggling (including in relation to customs and excise duties and taxes)
 Tax crimes (related to direct and indirect taxes)
 Extortions
 Forgery
 Piracy
 Insider taking and market manipulation
33.What is Know Your Customer (KYC)?
Answer: KYC is a process of identifying a customer trying to maintain business

relationship or has already maintained such relationship or has requested for occasional
transaction/s. It helps the Bank to identify and verify the customer/s; assess risk and
manage it; develop risk-based effective, efficient and economic control system; and
identify further business potential. Know Your Customer (KYC) and CDD can also be taken
as a unit in certain business context.
34. What are the key elements of Know Your Customer (KYC)?
Answer: The key elements of KYC policy are:
a) Customer Acceptance Policy
b) Customer identification Procedures
c) Monitoring of Transactions
d) Risk Management
35. What is customer acceptance policy?
Answer: Customer Acceptance Policy (CAP) lays down the criteria for acceptance of
customer/s. The guidelines in respect of the customer relationship in the Bank broadly are:
 No account shall be opened in the name altering from the primary identity document,
anonymous or fictitious(benami) name(s), blank names or numeric/alphanumeric
characters.
 Accounts shall be opened only in the name of natural and legal person/organization,
the name being the same as in the primary identity document of the person/entity.
Accounts may however be opened with different account titles identifying the
nature/use/purpose/type/ of account at the written request of the legal
person/organization with appropriate control parameters.
 Minimum required information and documents i.e. proper identification and

information pertaining to the prospective client shall be obtained prior to opening
account or performing business relation of any kind, as per the AML Act, AML
Rule,FIU Directives,NRB regulations/Directives and as per the product
paper/policy/guidelines set forth by the Bank.
 Necessary checks/examinations/ verifications shall be made before opening a new

account so as to ensure that the identity of the customer does not match with any
person with.....criminal background or with banned entries such as terrorist
individual/s or terrorist organization/s etc.
 Not to open an account: Where the staff/s designated to open new accounts, find
sufficient ground/s that the identity of the prospective customer/s could not be
verified and/or the prospective customer/s is not disclosing the required identity.
the reason for opening account, transaction frequency and volume, etc and any other
such information/s deemed necessary for account opening. The refusal shall be
documented properly, and shall be communicated to the HO AML compliance Officer
through Branch AML Compliance Officer.
 Further, the Bank shall freeze an existing account under the situation when the
designated staff/s is unable to apply appropriate customer due diligence measure/s
i.e. unable to verify the identity and/or obtain document/s required as per the risk
categorization, due to non-cooperation of the customer or non-reliability of the data
/information furnished to the Bank.Decision for closure of such accounts shall be
approved by Senior Management level official under recommendation of AML
Compliance Officer at HO and also after giving due notice to the customer explaining
the reason for such decision, Closure of such accounts shall be informed to the FIU in
written.
 The Bank shall not establish any business relationship/s with the shell companies
and the institution/s that deal with shell companies. Any identified business
relationship/s with the financial and other institution/s that allow the transaction of
shell bank, shall be discontinued.The bank shall not be associated with the entities
located in the non-cooperative jurisdictions as identified by the FATF or those
sanctioned by the agencies that the Bank refers to like,UN, OFAC,HMT,EU etc.
 Implementation of CAP should not be too restrictive resulting into denial of banking
services to the general public,especially those who are financially or socially
disadvantaged.
The decision to open an account for Politically Exposed Persons (PEPs) and Person in
Influential Position (PIP) shall be approved by the senior Management Level official/s.
Information of such account shall be provided to the AML Compliance Officer at HO.
36.What are the customer identification procedures?
Answer: Customer identification/verification means identifying the customer and

verifying his/her identity by using reliable, independent source documents, data or

information to the Bank's satisfaction and also to satisfy the independent authorities that
the due diligence was observed based on the risk profile of the customer in compliance
with the extant guidelines in place.
While identifying the natural person or legal person, the bank shall obtain the documents,
data and information as mentioned below. All the documents and information pertaining to
the identification of the natural and legal person shall be retained in a legible manner
and in the managed way.
Natural Person's
1.Legal name
2. Permanent and current mailing address
3. Mailing address of current working organization
4. Date of birth and gender
5. Full name of Father and Mother
6. Nationality
7. In case of Nepalese citizen, Citizenship copy or Election voting identification card

or driving license or Passport number with issued date,issued place and expiry date.
8. In case of those Nepalese citizens who have not obtained the citizenship
certificates, recommendation letter issued by the local government.
9. In case of foreign nationals, passport number, issued date issued place and
validity.
10. In case of Indian citizens who do not have passport, legal certificate verifying
Indian citizenship with certificate number, issued date, issuing authority and place.
11.In case of the refugee, identity card issued by government and international
authorities with identity number,issued and expiry date and issued place.
Legal Person's
1.Name of the legal person's
2. Detail information of registered address or business address with phone number,

email address, website or other mailing address,if any.
3.Legal entity and nature of business.
4. Registration certificate, license, certificate to commence business,renewal

certificate with issued date,expiry date,issuing authority and issuing country.
5. Registration and approval certificate of business, if any, required as per the

nature of the entities.
6. Permanent Account Number (PAN) certificate.
7. Personal details of Board of Directors or Management Committee or such higher

level committee if any.
8. Personal details of proprietor or partners or shareholders subscribing 10% or

more shares of the company.
9.Personal details of account operator.
10.In case a company holds 10% or more shares of another company, personal details
of shareholders subscribing 10% or more shares of the former company.
Legal arrangement:
1. Name of legal arrangement, main objectives and functions.
2. Registration or incorporation certificate, country of its operation and its address,

contact number, email, website or any other detail contact address.
3. Approval certificate or License and approval letter for transaction, renewal

certificate, date of issue, validity. particulars of issuing authority and issuing
country.
4. Name, permanent address or current contact address of

trustee,controller,protector or settler.
5. Permanent Account Number or such certificate issued by government entity for

taxation purpose.
6. Name and address of beneficiary.
7. Personal details of account operator.
37.When to identify or verify the customers?
 While establishing a banking relationship.
 While opening the account.
 While transferring fund through wire transfers.
 Whenever the Bank feels that it is necessary to obtain additional information from
the existing customers based on the conduct or behavior of the account.
 When the bank sells third party products as an agent.
 When high risk customer's and politically exposed person's conduct each transaction.
 When the bank has a doubt about the authenticity/veracity or the adequacy of the
previously obtained customer identification data.
 Customer identification shall also be carried out in respect of the non-account

holders approaching the bank for high value one-off transaction/s as well as any
person or entity connected with a financial transaction which can pose significant
reputational or other risks to the Bank.
38.What is Customer Due Diligence(CDD)?
Answer: Customer due diligence is a process of identifying the customer and verifying that
customer's identity using reliable, independent source documents, data or information. It
includes;
 Identifying customers, including beneficial owners.
 Gathering information on customers and beneficial owners and creating a customer

risk profile.
 ·Applying established customer acceptance policies to new customers.
 Maintaining customer and beneficial owner information on an ongoing basis.
 Monitoring customer's transactions and relationship with the customer on an

ongoing basis.
39.Why is KYC/CDD important?
Answer: It allows the institutions to know and understand their customers and their
transactions better, which in turn allows the institutions to intercept any fraudulent
dealing.
40.When does KYC apply?
Answer: KYC will be carried out for the following but is not limited to:
 ·Opening a new account.(deposit/borrow)
 Opening a subsequent account where documents as per current KYC standards not
submitted while opening the initial account.
 Opening a locker facility where these documents are not available with the bank for
all locker facility holders.
 When the bank feels it is necessary to obtain additional information from existing
customers based on the conduct of the account.
 After periodic intervals based on instructions received from RBI.
 When there are changes to signatories, mandate holders,beneficial owners,etc.
41.What are the types of CDD?
Answer: Based on the risk profiling of the customers, the Bank adopts following 3 types of
CDD.
1. Simplified CDD
2. Normal CDD
3. Enhanced CDD
1. Simplified Customer Due Diligence:
Simplified CDD is the lowest level of due diligence that can be completed on a customer.
This is implied to the customer with low risk category. The customer can be categorized as
low risk in the risk assessment of AML/CFT IT system conducted as per the AML Act,AML
Rules and NRB Directive are met.
2. Normal Customer Due Diligence:
Normal CDD is implied to the customers in general or in medium risk or those who do not
fall under high risk or low risk. The AML/CFT IT System of the Bank provides workflow for
entering,storing,updating,and retrieval of the normal CDD information.
3.Enhanced Customer Due Diligence:
Enhanced CDD shall be applied to the customers categorized as high risk. ECDD includes
higher degree of CDD that requires collection of additional information and documents as
well as surveillance in every stage of transaction. The Bank aims to reach to the reality of
the customer and transactions through ECDD process. Certain customer or transactions
may need special and extended attention of the bank. Hence, a rigorous and robust
additional KYC/CDD process shall be applied for ECDD customer or transactions with
additional reasonable measures to verify and validate the customer's identity,
understand and test the customers profile, business and account activity as well as risk
associated. Prior approval shall be taken from management in account opening and high
value transaction for the customer through the quickest means for high-risk category.
42.When to update/review KYC?
Answer: Update and review of a customer shall be based on the risk as follows, at a
minimum, unless circumstances need something else or there is urgent need of changing
the category of risk:
 High risk one year
 Medium risk three year
 Low risk five year
43.Who are Politically Exposed Persons (PEPs)?
Answer: PEPs means politically exposed persons. It includes both domestic and
international PEPs.
Domestic PEPs includes The President,Vice President,Ministers, Members of parliaments,

Officers of the Constitutional Bodies, Judges of the different courts, senior politicians,
Members of national political parties, Officers of special class of GoN, seniors executives of
any institutions partially or fully owned by the government etc.
International PEPs includes head of the state or the government, senior politicians, central
members of political parties, senior governments, judiciary military officials, diplomats
etc.
44.Why to screen PEPs customers?
Answer: PEPs are high risk customers. So,each and every customer should be screened
against PEPs list and if any customer falls under it,approval from high authority should be
taken before opening the account.
45.What is STR?
Answer: STR means suspicious transaction report.Suspicious transactions are those

transactions that deviate from the profile, characteristics and usual transactions pattern,
transaction reasonably suspected to have been conducted with the purpose of evading the
reporting and financial transaction conducted using fund alleged to be attributable to
predicate offences.
Suspicious transactions should be reported within 3 days of arriving at the conclusion that
the transaction is suspicious.
46.What are STR triggers?
 Cash: Cash transactions conducted in an unusual amount; relatively small amount

but with high frequency; transactions conducted by using several different
individual names for the interest of a particular person; purchase of several
insurance products in cash in a short period of time or at the same time with
premium payment entirely in a large amount and followed by policy surrender prior
to due date and purchase of securities by cash, transfer,or checks under other
person's name.
 Economically irrational transactions: Transactions having no conformity with the

initial purpose of account opening; transactions having no relationship with the
business of the relevant customer; transaction amount and frequency are different
from that of normally conducted by the customer; receipts/payments of funds made
by using more than one(1) account, either in the same name or a different one; fund
transfers using the account of reporting entities' employee in an unusual amount; if
multiple inward or outward remittance transaction is conducted with the person
from the country or region where terrorist organizations operate.
 Fund Transfers: Fund transfers to and from high-risk offshore financial centers
without any clear business purposes; receipts of fund transfers in several phases
and once accumulated the funds are subsequently transferred entirely to other
account; receipts and transfers of funds at the same or approximately the same
amount and conducted in a relatively short period(pass-by).
 Behaviors of the Customer: Unreasonable behaviors of the relevant customer when

conducting a transaction (nervous, rushed, unconfident, etc.); unusual curiosity
about internal system, control and reporting; customer/prospective customer gives
false information with respect to his/her identity, sources of income or businesses;
Customer/prospective customer uses identification document that is unreliable or
alleged as fake such as different signature or photo; customer opens account for a
short period.
47.What is TTR?
Answer: Threshold transactions includes following transactions.
1. Credit and debit transaction of NPR 1 million or more in the account of any person
or entity particularly of cooperative, private company, NGOs either by single or
multiple transactions through any mode in a day.
2.Payment of remittance of NPR 1 million or more by any person or entity to any

person or entity through single or multiple transactions in a day.
3. Exchange transactions of NPR 5,00,000 or more provided to any person or entity

through single or multiple transactions in a day.
Threshold transactions should be reported within 15 days of such transactions.
48.What is tipping off?
Answer: Tipping off means telling the clients that his/her account is being monitored or
informing the client that there is an element of suspicion on the transaction or disclosing
the information to designate authority. When an institution identifies a suspicious
transaction, the customer should not be "tipped off'or informed.
49.What are the penalties for non-compliance of AML/CFT?
 To fine from NPR 1 million to NPR 50 million for FIs and NPR 1,00,000 to NPR 10 million
for other Res
 To impose full or partial restriction on the business
 To suspend or cancel registration/permission/license
 To impose other appropriate sanctions.
50.What is risk classification of the customers?
Answer: For proper risk assessment of business relationship with customers and evolving
suitable monitoring mechanism, all new customers are to be categorized as High risk,
Medium risk and Low risk. It is to be specifically noted that risk categorization is meant for
proper monitoring of accounts and does not reflect in any way on the account holders. Risk
Categorizations done by the Branch should not be disclosed to the customers. While the
extent of knowledge /information available on customers to prove their identity
sufficiently will determine the risk perception and concomitantly risk categorization.
We give below an illustrative list of Accounts/ customers/groups who may be assigned

different risk categories:
1.High risk
2. Medium risk
3.Low risk
51.Who are high risk customers?
 Customer identified as high risk with higher rank of risk scoring by RBA module in
screening result and KYC risk profiling in the AML/CFT IT System and national,
regulatory and internal risk assessment.
 All account of customers domiciled in high risk countries as categorized by FATF and
updated by FIU/Home Ministry from time to time.
 All other accounts classified by FIU-NRB as high risk accounts.
 Customer or transactions related with a jurisdiction fundamentally deficient for the

control of following types of crimes in general, but not limited to :
 Terrorism and Financing of terrorist activities,
 Money Laundering
 Proliferation Financing,Arms and Ammunition
 Corruption
 Tax/Revenue evasion
 Narcotic Drugs and psychotropic substances
 Human trafficking
 Organized crime
 Counterfeiting
 Customer or transactions related with a jurisdiction largely deficient for the control
of above listed types of crimes in general or are under a kind of international
monitoring
 Non face-to-face Customers or Business Transactions,particularly.
 Cross border correspondent banking
 Wire transfers
 Business relation through Internet,Telephone,Fax,Postal service etc.
 Internet Banking,ATM Transaction,Mobile Banking
 Transaction through instruction/request by Fax/wire
 Transaction through Wire or prepaid card,etc.
 Politically exposed persons (PEPs) both domestic and foreign PEPs their family
member and person associated with them.
 Antique dealers (individuals and entities), Money service bureaus, Dealers in arms,
Casinos, Bullion dealers including sub dealers &jewelers.
 Business of precious herbs and medicines.
 Export/import trade,Travel agencies,Cooperatives, and company service providers,

real Estate agents,Dealers in vehicles.
 All accounts of Trusts, NGOs,Charities, Charities and Organizations receiving

domestic or foreign donations and accounts operated by Power of Attorney holders
may be classified as High Risk.
 STR reported customer
 Customer under investigation or prosecution or convicted
 Customer with suspected Beneficial Owner.
52.Who are low risk customers?
Answer: These are the type of customers whose identity and source of income clearly
disclosed and the transactions in the accounts by and large do not raise any suspicion.
Normally,following customers may be categorized as low risk:
 Salaried employees/pensioners whose salary structure is well defined.
 People belonging to lower economic strata of the society whose accounts show small
balances and low turnover.
 Current account and saving account having annual turnover less than NPR 1 Lakh.
 Government departments and Government owned companies, Regulators, Financial

Institutions, Statutory Bodies, etc.
 All deposit and borrower accounts pertaining to the Government of

Nepal,Governmental bodies/Corporations/Companies/Organizations, Joint ventures
with Government, Regulators, Financial Institutions and Statutory Bodies may be
classified as low risk account.
 All borrower accounts other than those classified as high risk and medium risk.
53.What type of transactions are non face to face transactions?
Answer: Non face to face transactions include but not limited to;
 business relationships concluded over the Internet or by other means such as through
the post;
 services and transactions over the Internet;
 use of ATM machines;
 telephone banking;
 transmission of instructions or applications via facsimile or similar means; and
 making payments and receiving cash withdrawals as part of electronic point of sale
transaction using prepaid or re-loadable or account-linked value cards.
54.Who is beneficial owner?
Answer: Beneficial Owner means the natural person/s who ultimately own or control a
customer and/or the person on whose behalf a transaction is being conducted. It also
incorporates those persons who exercise ultimate effective control over a legal person,
entity or arrangement.
55.Why to identify beneficial owners?
Answer: The term Beneficial Owner is important to understand because a person in whose
name an account is opened with an institution may not necessarily be the person who
ultimately controls or is entitled to the funds or investments. The distinction is important
because the focus of anti-money laundering guidelines is on the person who has the
ultimate level of control or entitlement.
56.How long the transactions record of the customers should be kept?
Answer: Bank shall keep a record of every transaction, customer and beneficial owner data,
and data obtained for the purpose of identification, risk analysis, monitoring and other
related information along with the date,time and nature, KYC/CDD documents,
correspondence with the customers, sources of fund, as well as all documents related to
money laundering activities such as files on suspicious activity reports, documentation of
AML account monitoring, etc. These records must be kept for a minimum of 5 years until
other policy/act is prescribed for more time.
57.Write the features of Banks and Financial Institutions Act, 2073.
Answer: Banks and Financial Institutions Act (BAFIA), 2073 is the umbrella Act of Banks and
Financial Institutions (BFIs) in Nepal. Its main features are as follows:
A. The Act aims to enhance public confidence in the overall banking and financial
system of the country and to protect and promote the rights of depositors.
B. The Act aims to provide quality and reliable banking and financial services through
healthy competition among BFIs
C. The Act aims to strengthen financial stability of the national economy.
D. The Act has clearly stated the provision for the incorporation,
operation,management, regulation, inspection and supervision of BFIs.
E. Provision has been made to obtain approval of Nepal Rastra Bank (NRB) for
establishment and licensing of BFls,branch expansion, transactions etc.
F. Provision has been made for BFIs to be set up in the form of a public limited company
as a profitable organization.
G. There is a clear arrangement for BFIs to issue at least 30 percent share to the public
in the ownership of shares.
H. There is a provision of prohibiting the Director,Executive Chief, Auditor, Company

Secretary & person directly involved in accounting work of BFIs to trade in the BFI
securities while holding office and within 1 year of retirement.
I. There are provisions for BFIs not to be allowed to buy or sell goods or trade in
movable and immovable property for the purpose of trading
J. No BFI is allowed to invest in "A", "B" and "C" class securities.
K. In order to maintain good corporate governance, the Board of Directors, which has
an independent director, will formulate the policy, CEO works as per the policy and
management is supervised by the audit committee.
L. BFIs are classified on the basis of paid up capital and work and are licensed by NRB
M. Provision can be made by completing the procedure prescribed by NRB if class "B"
and "C" want to become upper class except "D" class.
N. Provision for BFIs to operate financial institutions at the state level under the
federal structure subject to conditions, limits or directives specified by the NRB.
O. Provisions for credit disbursement and recovery through auction are clear.
P. The procedure required for the audit work of BFIs, auditors etc. have been clearly
mentioned.
Q. Provisions have been made for mergers, acquisitions, etc. of BFls
R. Voluntary and compulsory conditions for liquidation of BFIs have been clarified
S. Violation of this Act or the NRB Act or the rules, regulations, directives or orders
issued under it provides for action and punishment.
T. Removed the confusions in claim on deposit, etc.
Thus BAFIA, 2073 has many features besides the above. As the banking business continues
to grow globally and various complications arise due to it, the objective of BAFIA seems to
be achieved if the Act is constantly updated in a timely manner to overcome such
complexities.
58.Write down the provisions on Incorporation of BFI.
Answer: Sec. 3. Incorporation of BFI: Any person, desirous of incorporating a BFI shall have
to incorporate it by registering the BFI as a public limited company in accordance with the
prevailing laws.
Sec.4.Prior-approval to be obtained to incorporate BFI :
Before applying to register a BFI in accordance with the prevailing law, the person or
institution concerned should attach the following documents and submit an application to
NRB for prior approval along with the fee prescribed by NRB.
Documents of proposed BFI
a. Memorandum of Association
b. Articles of Association
c. Feasibility study report
d. If there is any agreement between the petitioner to establish it,then a certified copy
of such agreement
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 in Nepal or abroad, not taking loan from any BFI, not
being blacklisted in any transaction with BFI, and if blacklisted, period of three
years to be elapsed after removal from blacklist.
h. Self-declaration that no action has been taken in Nepal or abroad for cheating, fraud
or criminal offence under the prevailing law and no punishment has been imposed
for such offense.
i. Details of whether or not under any regulatory or supervisory action in Nepal or

abroad, or the company or institution involved is whether or not under suspension
or revocation of license or mandatory dismissal or it is in process.
j. The name, surname and relationship of the family member and the details of the
mentioned ownership / status and the status of each person if they have worked as
an director, official or employee in any organization, including the status of each
person.However, if the applicant is an organized organization, the details of the
person having significant ownership or status in the organization, the audited
financial statements of the last three financial years and the tax payment certificate
of the organization should also be attached.
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.
After examining the application along with the above mentioned documents, Nepal Rastra
Bank may give prior approval within 120 days if it deems it appropriate to give prior
approval.
Conditions for refusing prior approval:
(a) Subjected to regulatory actions of the Rastra Bank,
(b) Punished in banking offence,
(c) Punished in cheating,fraud,forgery,
(d) Punished in the offence of money laundering and terrorist financing,
(e) Punished in the offence of corruption,
(f) Punished in the serious types of offences such as human trafficking, kidnapping,
hostage, and rape.
59.What are the additional documents for prior approval required to establish a BFI with
foreign investment ?
Answer: In addition to the documents mentioned in Section 4, when a foreign BFI applies
for the purpose of obtaining prior approval to establish a BFI as a subsidiary in a joint
venture with an organized institution or Nepali citizen established in Nepal or as a
subsidiary as prescribed by NRB, following documents and details should be submitted
along with the fee prescribed by the NRB: -
A. Copy of MOA, AOA and a copy of certificate of incorporation in the concerned country
and capital structure,
B. A copy of the license obtained to conduct banking and financial transactions in the
country concerned,
C. Details of the principal place of business,
D. Certified copy of audited balance sheet and profit and loss account for the last three
financial years
E. Details related to the proposed business plan, business strategy and type of
transactions to be carried out, internal control and risk management,
F. The decision to open a BFI in Nepal in accordance with the law of the country
concerned and the authority given by the regulatory body of such country.
NRB may give prior approval within 120 days specifying or without specifying any
condition if it deems it appropriate to give approval while examining the application and
the documents.
60.Write down the arrangements in BAFIA for opening a branch within Nepal by an
internationally ranked foreign BFI and for banking transactions.
Answer: Sec. 6 Prior approval is required to open a branch office of a BFI. Approval must
be obtained.
For this, in addition to the details of Sec. 5 in the application along with the capital and fee
specified by the NRB, the following additional documents and details should also be
submitted:
A. Written commitment made by the Board of Directors to provide the amount required
by NRB to fulfill all its obligations related to the business activities of the branch or
representative or liaison office in Nepal.
B. Details of proposed branch office,
C. Details of potential office bearers of the proposed branch office.
If required, NRB may demand additional documents or details, and if it deems it

appropriate to give prior approval during examination, it may give permission to open a
branch office in Nepal within 120 days.
After obtaining prior approval, such foreign BFI shall register the branch office in
accordance with the prevailing company law.
After registration, for the approval to do banking and financial transactions in Nepal, an
application has to be submitted to NRB by attaching the following documents and details
along with the requisite fee:
A. Registration certificate registered in accordance with the prevailing company law

for conducting banking and financial transactions in Nepal as a branch office,
B. Letter of approval or consent given by the government or central bank or regulatory

body of the foreign BFI to such foreign BFI to open a branch office in Nepal in
accordance with the law of the country concerned.
C. Details of discrepancy if any found, after submitting an application to NRB or

obtaining prior approval from the NRB,in accordance with this Act,
D. Other information and details as demanded by NRB.
NRB may approve banking and financial transactions in Nepal within ninety days if it
deems it appropriate to approve the application.
61.Write the provisions that NRB may refuse to give prior approval to establish a BFI or to
open a branch office of a foreign BFI.
Answer: Sec. 7 Denial to give prior approval: NRB may deny to give prior approval to
establish a BFI or to open a branch office of a foreign BFI in the following cases:
A. If the name or business does not seem desirable from the point of view of public
interest, religion, caste or creed, etc.
B. If the purpose is contrary to the prevailing law,
C. If not technically suitable for incorporation,
D. If study of feasibility study report, details and documents and other infrastructure,
don't provide a ground to believe that financial transactions will be conducted in a
healthy and competitive manner.
E. If not all promoters of the proposed BFI have signed the MOA and AOA, also stating
their names, address and number of shares subscribed by them, in the presence of
witness and the name and address of the witnesses have not been mentioned,
F. If per person investment limit and share ownership ratio are not found to be as
prescribed by NRB from time to time,
G. Is. If it is found to be contrary to the policy regarding establishment and licensing of

banks or financial institutions of NRB,
H. H. If it is not found that other conditions specified by NRB have been fulfilled.
Denial to give prior approval shall be given to applicants by NRB, stating reasons thereof.
62.Explain the provisions on Capital, Capital Fund and Liquid Assets as per BAFIA, 2073.
Answer: Chapter 6 of BAFIA has the following provisions on Capital,
Capital Fund and Liquid Assets.
 Sec. 41: Capital to be Maintained:
BFIs shall maintain paid up capital prescribed by NRB. Similarly, NRB may restrict any
person, firm or company to invest only up to 15% of paid up capital in any BFI Investor
of 1 BFI shall have to make investment less than 1% in other BFI.
 Sec. 42: Capital Fund
BFls shall maintain capital fund ratio on the basis of total assets or risk weighted assets
as prescribed by NRB, & in case of failure, BFI shall inform NRB with a plan to increase
& restore it. NRB may issue directive to implement the capital increment plan with or
without alteration or amendment.
 Sec.43:Provisions on Possible Loss:
BFls shall make provisions on loan loss as prescribed by NRB to cover potential risks of
loans & liabilities incurring from off balance sheet transactions.
 Sec.44:General Reserve Fund:
BFls shall maintain general reserve fund of at least 20% of each fiscal year's profit until
the fund becomes twice of paid up capital, & at least 10% thereafter. The fund may not
be invested or transfered to other headings without NRB approval.
 Sec. 45: Exchange Fluctuation Fund:
BFls shall transfer at least 25% of revaluation gain engaged current to exchange
fluctuation fund & except NRB approval, it may only be used to adjust loss of foreign
currency devaluation. In case of Indian currency, revaluation treatment shall be as
prescribed.
 Sec. 46: Assets to be maintained by BFls as prescribed by NRB.
 Sec. 47: Declaration and Distribution of Dividends:
NRB approval is required before declare distributing dividends, and it shall not be
allowed until:
 recovery of preliminary expenses & losses till last year
 fulfill capital, capital fund and loan loss provision as prescribed by NRB
 comply general reserve as per Sec,44
 full allotment of shares to general public.
 Sec. 48: Order may be issued by NRB to decrease Capital not withstanding anything
contained in prevailing laws.
63.Write the provisions of credit disbursement & recovery as per the BAFIA,2073.
Answer: Chapter 8 of BAFIA has following major provisions regarding credit disbursement
& recovery;
Sec. 55: Credit investment provisions to be followed by BFIs
 Loan should be disbursed only after disclosing the purpose, subject to the credit
policy determined by the NRB Directive and the Board of Directors.
 Loans should be secured by collateral or appropriate guarantee for disbursement &

in a way that protects BFI's & depositors' interest.
 Collateral shall be registered/ transferred/ withheld in BFI's name and sent in

writing to the concerned office so that it cannot be in someone else's name and the
concerned office should do the same accordingly.
 Lending towards deprived and productive sector shall be as specified by NRB.
 The terms, conditions and interest of the loan shall be as mentioned in the loan deed
or contract.
 Necessary proof of identity of all borrower, guarantor, directors of firm companies,

shareholders holding more than specified shares by NRB, family, beneficiaries shall
also be taken.
 Information of Loan amount, interest, penalty, installment repayment schedule shall

be given clearly to the borrower and guarantor in writing.
 BFI shall provide details of principal payable or paid, interest, penalty, fees & loan
deed as demanded by the borrower.
Sec. 56: BFIs shall monitor utilization of credit amount
Sec. 57: Rights of BFls regarding debt recovery
 If the Borrower does not comply with the terms of the loan or does not repay the loan,
interest, penalty within timeframe or misuses the loan, BFI may sell the securities in
auction or recover from other arrangements.
 BFI may direct borrower to keep additional collateral security within a certain
period of time if he relinquishes the right of collateral to someone or the value of
collateral decreases and in case of failure of borrower, BFI may recover principal &
interest from other movable and immovable property.
 If the bank recovers principal, interest, penalty from auction sale or other
arrangements, the remaining amount should be returned to the debtor.
 BFI shall send a letter to the concerned office to transfer ownership in the name of
the person buying the property at auction or in BFI's own name if not sold in auction
& the office shall do accordingly.
 In case of refusal or obstruction in possession of collateral by the previous owner,

the concerned government body shall take action to allow possessory right .
 No one shall be allowed to stop the recovery of written off loan made as per
prevailing Credit Write off Byelaws.
 BFI shall send a letter to the credit information center to blacklist the default
borrower.
 Credit may also be recovered from other assets in abroad, If all the actions fail to
recover the loan, the passport may be withhold or confiscate through NRB &
forwarded the request to government.
 Proceedings for other legal offenses shall not be deemed to have been stopped due to
credit recovery proceedings.
Thus, Chapter 8 of BAFIA has various provisions for credit disbursement and recovery.
64.What are the provisions in BAFIA for final agreement after principal consent from NRB
for merger/acquisition?
Answer: Sec.72 of Chapter 10 of BAFIA provides for an agreement between the BFIs on
merger or acquisition after principal consent from NRB,which shall contain:
1) Provisions regarding protection of interest of depositors, lenders and shareholders,
2) Valuation and matching of assets and liabilities
3) details of investment and business management, inter-institutional ownership and

transactions, securities or guarantees, non-banking transactions and asset/liability
management,
4) details of merger or acquisition, process, timne and cost,
5) operation and management structure and list of directors,
6) Employee (Human Resource)Management,
7) Details of all shareholders,
8) The name, memorandum, articles, capital structure, restructuring and class if BFIs
are to be merged or acquired as a new BFI
9) Letter of approval from the regulatory body concerned in case of foreign BFI
10) Details, if the foreign BFI acquires the business of BFI in Nepal or sells its entire
business in Nepal,
11) stakeholder grievance (complain handling system,
12) the prevailing law and the procedure for compliance,
13) Other necessary details required by NRB.
After receiving the principle consent from NRB, a special resolution in General meeting
should be passed and a joint application should be submitted to the NRB for final approval.
NRB shall conduct a “fit and proper test" & provide final approval or state the reasons
denying approval within 45 days.

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✍ Rajeshower Bhattarai "Banking Note" ✍Sudikshya Poudel

1. Explain the functions of commercial banks.

 Deposit Collection of individuals/institutions (Current Deposit, Saving Deposit, Fixed

 Trading of Bullion (Gold/Silver)

 Remittance of money (through draft, fax,swift,ABBS,etc.)

 Trade Finance (LC, Bank Guarantee, Trust Receipt Loan,etc.)

 Agency Functions [Collection and Payment of credit instruments (cheques, Bills of

 Others(Technical consultancy, Government Transactions, Stock and Brokerage

2.Explain the functions, duties and powers of Nepal Rastra Bank.

 Issuing bank notes and coins

 Formation and implementation of monetary policy

 Formation and implementation of foreign exchange policy

 Determining the system of foreign exchange rate

 Management and operation of foreign exchange reserve

 Establishing and maintaining the system of payment, clearing and settlement,and

 Operation of open market transaction through necessary instruments or,liquidity

3. What are the principles of central bank? Explain in brief.

Ans. A central bank is an independent national authority that issue monetary

 To work in the principle of national interest.

 Act as the monetary body of the country

 Perform open market operations

 Act as debt reservoir and lender of last resort

 Free from political interference

 Free from competition

 Work as banker of commercial banks and financial institutions,

4. Explain the functions, duties and powers of Board of Directors of NRB.

Functions,Duties and Powers of the Board:

 To frame monetary and foreign exchange policies.

 To take necessary decisions with regard to the denominations of bank notes,and

 To frame policies with regard to the appointment, promotion, transfer, dismissal,

 To approve the annual report on the activities of the Bank.

 To make decision with regard to the Bank's membership to international

5. Explain the role of commercial banks in development of nation.

 Works to assist in capital formation

 Expansion of credit by the act of credit creation

 Consolidated funds invested in productive sector

 Creates jobs for the youth

 Assist in the development of the industrial sector

 Expansion of financial sector

 Assistance in foreign trade business.

6. Explain the features of Double Entry Systems.

 Both debit and credit sides are equal.

 Versatile system, so can be changed as per the requirement.

 System having scientific principle and concept

 Transactions are recorded in systematic and chronological order.

 Helps to control costs.

 Used worldwide as being systematic and trustworthy.

7. Write down the objectives of book keeping and accounting.

business organization. In the simplest of terms, bookkeeping is responsible for the

of financial transactions whereas accounting is responsible for interpreting, classifying,

 to maintain systematic record

 to ascertain the financial position of business

 to ascertain the operational profit or loss

 to facilitate rational decision making

 to provide knowledge of debtors and creditors

 to provide knowledge of purchase and sales

 to provide knowledge of cash and bank balance

8. Write down the advantages and disadvantages of double entry system.