Prudential Regulations

Prudential Regulations:
• Regulation means a rule or restriction made by an
authority.
• Prudential means acting with or showing care and
thought for the future.
• So Prudential Regulations here means those
regulations issued by a regulator, (who has got the
authority to issue it) with a view to have a safe and
sound financial system in the country.
 Prudential Regulations

• Issuance of such regulations for the banks and

financial institutions are required because:
• Banks play an important role in the economy
• Their safety and soundness is very much
required for a sound financial system and
• They play with other people’s money and such
money must be made safe and secure.
 Prudential Regulations

• Requirements, restrictions and guidelines designed

to create market transparency between the banking
and fi with whom they conduct business.
• Section 49 of chapter 7 of BAFIA and Section 79 of
chapter 9 of NRB act 2058 have delegated power to
NRB to regulate the BFI in Nepal
 Prudential Regulations

• Power of central bank

• to issue license
• to appoint and remove BOD
• to regulate business
• to give directions
• to inspect and supervise banks
• to regulate auditing
• merger and acquisitions
• credit info
• impose penalties etc
 Prudential Regulations

• NRB act 2058

• BAFIA
• Company act 2063
 Deregulations

• The process of removing or reducing state regulation

particularly in economic sector
• It becomes common in the industrial sector to deregulate
• It became new trend in 70s and 80s
• mainly because
• inefficiencies of the government agencies
• controlled by the regulated industries and companies
for their benefit
• recklessness of the companies to the consumer and
the economy as a whole
 Prudential Regulations

• The areas covered by such Prudential

Regulations can be summarized as follows:
1. How much capital they must have.
1. What should be included in such
Capital
1. How should their assets be classified
 Prudential Regulations

4. Under what circumstances banks must be

required to make loan loss provision
5. How much such loan loss provision they
must make
6. What should be the parameter for banks to
book interest income
7. What type of risk management system
banks must have
 Prudential Regulations

8. Should banks be allowed or debarred

from making connected lending
9. How to make sure that banks
exposure is not concentrated in one
borrower.
10.How to comply banks with regard to
corporate social responsibility.
 Prudential Regulations

2. What should be included in such Capital as per capital

adequacy framework 2015
• A. Core Capital
1) Paid-up Capital
2) Share Premium
3) Non Redeemable Preference Share
4) General Reserve Fund
5) Cumulative Profit/(Loss) (Up to Last Year)
6) Current Year Profit/(Loss)
7) Capital Redemption Reserve
8) Capital Adjustment Fund
9) Other Free Reserves
10) Dividend Equalization Fund
 Prudential Regulations

• B. Supplementary Capital
1) General Loan Loss Provision
2) Asset Revaluation Reserve
3) Hybrid Capital Instruments
4) Unsecured Subordinated Term Debt
5) Exchange Equalization Fund
6) Additional Loan Loss Provision
7) Investment Adjustment Reserve
8) Interest Spread Reserve
9) Contingent Reserves
10) Provision for Loss on Investment
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 Corporate Governance

• Directive no. 6 lays down following for board, employee, audit etc.

• Directors of the Licensed Institution to Observe Minimum Acceptable Standard of Code of

Conduct

• Not to be Involve in Activities against the Interest of the Licensed Institution

• Prohibition for part-time working

• Prohibition to become Director of more than one licensed institution

• Prohibition to misuse the position

• Records and Reports to be maintained Complete and Accurate

• Maintenance of Confidentiality
 Black Listing

• Directive no. 12 of unified directive lays down the

provision for credit information and black listing

• the black list is the coercive weapon of the regulatory

authority to the wilful defaulter of the bank. It is
maintained by debt recovery bureau, on the basis of
information provided by BFI under the concerned law.
Its main objective is to recover the dues from the
defaulter and give informations to concerned certain