Bank and Financial Institution Act 2073 – BAFIA 2073

Structure Nature – Regulating law

Total section 14
Last formation 2074/01/10 (2074 Baishakh 10)

Objectives if Bank and Financial Institution Act (BAFIA)

1. To promote public trust towards B&FIs.

2. To provide quality & reliable banking service.
3. To protect the right and interest of depositors and investors.
4. To protect from banking hazards/ and protect from banking risks.
5. To promote the national economy by using/adopting economic liberalization.
6. To make legal provision relating to incorporation, management, operation and winding up of B&FIs.

Features of BAFIA

NOTE- Features हरु लेख्दा Provision लाई आधार बनाएर लेख्ने!

1. BAFIA is an umbrella banking law.

2. It is integrated banking law/regulating law.
3. BAFIA focused on financial good governance.
4. Focused on maintaining financial stability.
5. Compliance with Money Laundering Prevention Act.
6. Allow to buyback shares.
7. Provision to incorporate B&FIs only as a public company.
8. Use of economic liberalization.
9. Promotion of transparency and protection of deposits.
10. It classifies B&FIs into 5 types and 4 classes.
11. Two types of winding up provisions are outlined – such as Voluntary and Compulsory
12. Prohibited functions of B&FIs are clearly mentioned.

Major Provisions of BAFIA 2073 (मुख्य मुख्य व्यवस्थाहरु)

1. It has a provision of incorporation of Banks and Financial Institutions.

– Before the incorporation of the Banks and Financial Institution, it is necessary to get prior approval from Nepal Rastra
Bank.

– Bank can be incorporated only as a public company.

– To get prior approval from NRB, it is required to submit related documents along with the application.

Documents needed

 Memorandum of Association (MOA)

 Article of Association (AOA)
 Feasibility Study
 Details of the promotors
– NRB shall provide approval within 120 days from the date of application received.

– NRB can refuse to provide prior approval in the following conditions.

 Promotors are accused by criminal offenses such a money laundering, rape, banking offense, fraudulent,
forgery, etc.
 If the proposed name is the same as previously registered B&FIs.
 If the objectives and functions are against the provision and law.

– Incorporation of B&FIs with a joint venture or foreign investment need to get prior approval from NRB.

– To expand branches, need to get prior approval from NRB.

– Incorporation od B&FIs is based on company act.

2. It has provision relating to the capital (Share, Stock) formation/ Share Transaction

– All the B&FIs must submit their prospectus to NRB before issuing share capital.

– Must a lot their capital as per the following structure

 Minimum 30% for the general public

 Minimum 51% for promoters.
 Maximum 0.5 for employees

-To make a share transaction, they must assign capital/share manager and notice it within 7 days of an agreement.

-Lock up period for converting promotor share into the public is defined as 10 years.

-Lock up period for the transaction of promotor share is defined as 5 years and to make a transaction of promotor share
who holds more than 2% share capital of B&FIsmust ger prior approval from NRB.

-B&FIs can buy back their share if they fulfil the conditions which are outlined by law.

3. It has provision relating to the formation of BOD

 BOD can be of 5-7 members

 Members can be elected maximum 2 times
 Independent members cannot be repeated
 Only one member from a single family can be in BOD
 BOD member cannot involve in other BFIs.

4. It defines the qualification of BOD.

 For general director – at least masters degree in related field or Bachelors + 3 years work experience of 5
years of work experience in a related field.
  Independent director – Masters degree for A and class Bank, a bachelor for C class and as per the NRB for D
class.

5. Provision relating to rights, obligation, the responsibility of BOD

6. Provision relating to the appointment of CEO, his/her functions, rights and duties.

 BOD can appoint CEO

 CEO cab be elected two times
 If no qualification of BOD, Masters degree as per the law, then CA or Bachelor with 10 years of experience
can be CEO.

7. Provision relating to the punishment of BFI’s who operate without getting a license.

8. Provision relating to license for banking operation

 For incorporation of BFIs, prior approval from NRB is needed.

 Without getting a license, a bank cannot be incorporated
 To ger bank license, required documents and application must be submitted.
 Documents include AOA, MOA
 NRB provides approval notice within 120 days or refusal notice within 90 days

9. Provision relating to the capital and capital fund

 BFIs must maintain the capital fund and Capital Adequacy Ratio as per the direction of NRB
 Must maintain a general reserve fund
 Must maintain a foreign exchange reserve fund
 Must maintain liquidity fund as per the direction of NRB
 Dividend announcement and distribution as per the direction of NRB
 NRB approval needed an increase and decrease of capital

10. Provision relating to the functions and prohibited functions as per their class

11. Compliance with Money laundering prevention act 2064

12. Provision relating to loan advancement, loan inspection, and loan recovery

13. Provision relating to the accounting, auditing, record management of the BFIs

14. Provision relating to the merger, acquisition of BFIs

15. Provision relating to the voluntary and compulsory winding up of BFIs

16. Provision relating to the punishment by NRB to other BFIs in the case of violation of the rules and regulation

17. Provision relating to the banking offense and punishment

18. Provision relating to the incorporation and operation of an infrastructure development bank

19. Provision relating to the rights of the depositors

20. Provision relating to the protection of depositors, transparency in the deposits, etc.

B&FIs can buy back their share in the following conditions

1. If AOA contains the provision of share buyback.

2. Is SGM make a resolution to buyback share capital.
3. If the share capital is listed in the stock market.
4. Can buyback only from profit.
5. Only up to the amount of the 20% of general reserve funds.
6. Need to get approval from NRB.

Procedure to get approval

 Submit an application to NRB with its rationale why who, how much, where from and what rate?
 NRB should provide the approval to buyback or refuse to provide approval based on the submitted
document.
 After getting approval from NRB, they must buyback share capital within the 6 months from the date of
approval received or within 1 year from the date of a special resolution.

Method to buyback

 Either from the stock market or directly with shareholder proportionally

 After the buyback, they must deregister all the buyback share within 120 days.