Legal Aspects of

Banking and Insurance

Syllabus - BBA-BI (PU)
POKHARA UNIVE RSI T Y
COURSE CODE NUM B E R – L AW 29 2
YE AR\SEME ST E R - I II /VI
CREDIT HOURS - 0 3 L E ARNING HOURS - 48
B ACHEL OR IN B USINE SS ADM INIST RATION- B I (BB A-B I)
Course Objectives
Main Objectives
The aim of this course is to familiarize students with the legal environment and framework
in which banking and insurance companies operate. Specifically, the course enables students
to comply with banking and insurance regulations while working in banks and insurance industries.
Course Description
This course provides an understanding of the legal framework in which banks and
insurance companies operate. It introduces the nature of banking and insurance regulations and
regulators and discusses regulations related to bank establishment and bank operation, laws
relating to capital requirements and reporting. Similarly, the course also covers insurance laws
related to insurance contract, tariff setting and claim settlement process. Finally, it deals with
corporate governance of banks and insurance companies and important provisions of acts related
to the conduct of banking and insurance businesses.
 Course Outcomes
On successfully completing this subject, students will be able to:
 Understand the nature and development of banking and insurance laws;
Apply the rules and regulations in the establishment of banking and insurance companies;
 Assess capital requirements of banks and insurance companies comply with the reporting requirements
of regulators and other stakeholders;
 Fulfill duty of disclosure and understand the effects of non-disclosure;
 Apply due process in claim settlements and understand semi judiciary role of Insurance Board in claim
settlement;
 Explain basic principles of corporate governance; and
 Demonstrate the knowledge of understanding of important provisions of major acts related to banking
and insurance businesses and the role of Nepal Rastra Bank and Nepal Insurance Authority in regulating
banks and insurance companies.
Course Contents
Unit I: Introduction to Banking and Insurance Laws : 3 hours
The need of regulation in banks and insurance companies; development of banking and
insurance laws in Nepal.

Unit II: Registration of Bank and Insurance Companies : 8 hours

Bank and insurance companies as legal personality; memorandum of association; articles of
association; application for registration; capital requirements; categorization of banks and
insurance companies; Relevant provisions of Banks and Financial Institutions Act and Insurance
Act in the registration of banks and insurance companies.
Unit III: Corporate Affairs, Accounting and Reporting : 10 hours
Corporate reporting; directors’ meetings; provisions relating to maintenance of accounts and
auditing, applications of accounting standards to banks and insurance companies; and reporting
to shareholders and regulators.
Unit IV: Bank Operations : 5 hours
Laws relating to deposit, lending, international trade, remittance and ancillary services; negotiable instruments;
capital adequacy ratio; prudential norms relating to capital; and consequences of non-compliance.
Unit V: Legal Framework of Insurance : 3 hours
Insurance and the law of contract: general requirements of an enforceable contract; void and voidable; special
legal characteristics of insurance contract: insurance as a contract of indemnity, insurance as a personal
contract, insurance as a unilateral contract, insurance as a conditional contract, insurance as a contract of
adhesion, insurance as a aleatory contract, and insurance as a contract of utmost good faith.
Unit VI: Regulation of Insurance Industry : 6 hours
Goals of insurance regulation; current regulatory structure; federal versus state regulation; areas of regulation:
solvency regulation, market regulation, regulation of rates; claim procedures and settlement; breach of
contract; disputes of insurance; semi judiciary role of Insurance Board in claim settlement; and ombudsman.
Unit VII: Corporate Governance in Banks and Insurance Companies : 3 hours
Principles of corporate governance; Nepal Rastra Bank’s directives to banks on corporate governance; and
Insurance Board’s directives to insurance companies on corporate governance.
Unit VIII: Major Regulations and Regulators of Banking and Insurance : 10 hours
Features and coverage of Banks and Financial Institutions Act 2006; features and coverage of Insurance Act
1992; features and coverage of NRB Act; features and coverage of debt recovery act and banking offence act;
role of Nepal Rastra Bank in regulating banks, and role of Insurance Board in regulating insurance companies.
Unit I: Introduction to Banking and
Insurance Laws

The need of regulation in banks and insurance companies

development of banking and insurance laws in Nepal
Law ????

“Don’t run with scissors in your hand!

“Don’t drive your car on the sidewalk!”

“Do not steal your neighbor’s property!”

Law ????
The principles and regulations established in a community by some authority and applicable to
its people, whether in the form of legislation or of custom and policies recognized and
enforced by judicial decision.
Any written or positive rule or collection of rules prescribed under the authority of the state or
nation, as by the people in its constitution. Compare bylaw, statutory law.
The controlling influence of such rules; the condition of society brought about by their
observance: maintaining law and order.
A system or collection of such rules.
 Law ????
Where do Laws come from?
The Constitution is the ultimate source of the law. However, it was never designed to address every specific legal
question. Within the boundaries of the Constitution, there are two primary sources of law, common law and
statutory law
Common Law
This law comes from the judicial branch. Though the courts do not pass laws, they do interpret them. This means
that the judiciary bases their legal decisions on what is written in the Constitution, and on previous court rulings in
similar cases. This is a process called stare decisis which in Latin means “let the decision stand.”

Statutory law
Statutes are laws created by the legislative branch through the lawmaking process. Statutes are written, discussed,
argued and voted on in Congress or in the legislature of a state. The courts then apply and interpret these statutes
on a case by case basis
What is financial regulation?
Financial regulation refers to the rules and laws firms operating in the financial industry, such as
banks, credit unions, insurance companies, financial brokers and asset managers must follow.

However financial regulation is more than just having rules in place - it's also about the ongoing
oversight and enforcement of these rules.
Why is financial regulation
important?
All of us depend on the financial system in one way or another. For example, savers rely on
banks to have their money available when they need it. Businesses need to be able to borrow
to maintain and develop their business. Consumers taking out a mortgage or insurance may
need to get advice on the best product for them. In the case of insurance companies,
policyholders rely on getting claims paid when something goes wrong.
Poorly regulated financial institutions have the potential to undermine the stability of the
financial system, harm consumers and can damage the prospects for the economy. That's why
strong financial regulation is important - to put rules in place to stop things from going wrong,
and to safeguard the wider financial system and protect consumers if they do go wrong.
How does financial regulation work?
Ensuring firms have the funding to trade safely, have the appropriate risk controls in place and
are appropriately governed is known as "prudential regulation".
Ensuring firms treat customers fairly from the sales process to how complaints are managed, is
known as "consumer protection".
An important part of prudential regulation is authorization. We call this our "gatekeeper role"
and means we only allow firms to operate in the financial system once they have fulfilled a
number of criteria, including governance and risk control.
Consumer protection rules are also in place. These spell out how firms must treat their
customers when selling them financial products. So for example, a regulated firm must ensure
that it "acts honestly, fairly and professionally in the best interests of its customers and the
integrity of the market".
What about supervision?
To make sure firms abide by the rules of regulation, they have to be supervised. Our
supervision work is intrusive, and allows us to monitor financial service providers to make sure
they are following the rules.
Central Bank staff review and report on all aspects of firms' businesses to judge whether they
are being run in a safe and sound manner. They also go on-site in firms to meet key decision-
makers and inspect aspects of the business. The number of Central Bank staff doing this job
has increased rapidly in recent years, leading to more in-depth supervision.
How closely firms are supervised is based on how much risk they present to the financial
system or to consumers. The greater the potential harm, the closer the supervision. This is why
we call it "risk-based supervision".
When a bank fails, it can create problems for the wider
economy.

People and businesses can lose money they have placed with the bank. This can mean they
also lose confidence in banks so are unwilling to bank with them again. It can also disrupt the
services that banks provide to customers. For example, payments systems – you might not be
able to use your account for a while if your bank failed.
But why do banks fail?
Banks can fail for a number of reasons, for example:
If they make poor investment decisions and not enough profits so they go bust (just like any
company).
If people and companies who have put their money in a bank account take it out quicker than
the bank can manage. This is what happens in a bank run – there is a great example of this in
the 1946 film It’s a wonderful life Opens in a new window (and a real example is Northern Rock
in 2007).
When banks fail, they can also make it more likely that other banks will, too. The 2007-2009
financial crisis showed that problems can spread from one bank to another, like a fire spreading.
The crisis wreaked havoc on the rest of the economy.
 How does regulation help?
Regulation helps make sure that banks have good management so they don’t make bad investments or are too
risky. An example of this is the Senior Managers Regime which makes sure that senior bankers are held
accountable for their decisions. Regulation also makes banks hold shock absorbers to help deal with bad
investments. These shock absorbers are referred to as capital.
Regulation is used to make it less likely people will take out their money unexpectedly. There is a deposit
guarantee scheme that ensures that even if a bank fails all deposits under £85,000 will be protected. Banks also
have to hold cash (or assets that can be sold very quickly) to cover unexpected withdrawals. This should help
make bank runs less likely.
Throughout 2018, regulation is also being used in large UK banks to ‘ring-fence’ some services from other parts
of the bank. Doing this helps to protect your access to the banking services we all depend on every day.
Reasons for Insurance regulation

Insurers are regulated primarily by the states and also by the federal government. Major
reasons for the regulation of insurance include the following:
Maintain insurer solvency
Compensate for inadequate consumer knowledge
Ensure reasonable rates
Make insurance available
Development of Banking and Insurance
Laws in Nepal
Banking Laws

Commercial Banking Act (Bank and Financial Institutions Act (BAFIA).

Directives of NRB to commercial Banks
Various Circulars

Insurance Laws
Further more, after the restoration of democracy in 1990 AD, insurance environment began to change
simultaneously along with other factors

Thus to meet the requirements of the changing situation, Insurance Act, 1968 was repelled by new
Insurance Act, 1992 (Beema Ain, 2049)
 Banking Regulations
Evolutionary Development of Central Banking in Nepal

The history of development of Central Banking in Nepal can be divided into four phases:

1. First Phase (before 1993 B.S.)

2. Second Phase (1994 B.S. to 2012 B.S.)
3. Third Phase (2013 B.S. to 2058 B.S.)
4. Fourth Phase (2058 B.S. to the present)
FIRST PHASE (before 1993 B.S.): Money is the basis of establishment of central banking. In the
eastern society, Manusmriti is the Hindu scripture that contains the rules regarding the
transaction of money and loan, and recovering the loan with interest. Kautilya ko Arthashartra
(300 BC) contained the matters regarding currency and its transactions. Similarly, Mahabharat
is another Hindu inscription, contains about Vriddhipajivi, the then money lender was involved
in money lending transaction. In the Ramayana, Ram had managed Vriddhipajivi at the time of
returning home from 14 years of Jungle-residence.
 Nepal Rastra Bank as a Central Bank
In Nepal, the job of Central Banking has been being performed by Nepal Rastra Bank from the period of its
establishment. The Nepal Rastra Bank Act, 2058 clearly contains that, there shall be a Central Bank established
in the name as Nepal Rastra Bank in order to carry out the functions of Central Bank.The Preamble of Nepal
Rastra Bank Act, 2058 clearly mentions that the priorities and purposes of establishment of Rastra Bank are to
discharge the functions as the Central Bank of Nepal, which is as follows:

To formulate necessary monetary and foreign exchange policies, and to maintain the stability of price;
To consolidate balance of payment for sustainable development of the economy of the Nepal
Government, and to develop a secure, healthy and efficient system of payment;
To appropriately regulate, inspect and supervise in order to maintain the stability and healthy development of
BFI system;
For the enhancement of public credibility towards the entire banking and financial system of the country
 The Banks and Financial Institutions
Acts of 2063 and 2073
While the Nepal Rastra Bank Act, 2058 had already given a wide range of powers to Nepal Rastra Bank as a
Central Bank. The Banks and Financial Institutions Act, 2073 has been further elaborated and strengthened the
central banking role of the Rastra Bank, in connection to bank regulation and supervision of the BFIs. The draft
was prepared by the taskforce coordinated by the NRB Executive Director Bhaskar Mani Gyawali. The Bill was
tabled in the Parliament in 2014. Lately, the Bill was passed by the Parliament on Poush 26, 2073 B.S.
Finally, the presidential assent was given and the Act was published in Nepal Gazette on Baisakh 10, 2074 B.S.,
after which it came into force, and repealed the erstwhile BAFIA of 2063.
The Banks and Financial Institutions Act, 2073 has extended the power of the central bank in the areas like
corporate governance. Besides, protection of right and interest of depositors, promotion of quality and reliable
banking and financial intermediary facilities through the healthy competition between the BFIs, etc. are the
new features of the BAFIA, 2073.
 Independence of Central Bank: A
Future Need
Mostly, Central Bank is a state owned entity. Central Banks are granted certain autonomy by the law. However,
being an instrumentality of the government and owned by the government, there always exist possibilities of
governmental interventions in matters relating to monetary policy and other functions of the Central Bank.
A Central Bank with a high degree of discretion in conducting monetary policy would find itself under constant
political pressure to boost the economy and reduce unemployment, but since the economy cannot exceed its
potential GDP or its natural rate of unemployment over time, this policy would instead only lead to higher
inflation in the long run. A solution to this could be ensuring independence to the Central Bank in formulating
its policies by lessening the governmental intervention as matters of both law and practice. This means
that in addition to enacting legislations confirming the independence of Central Bank, the concerned
government should also act in good faith as to this regard, and not put pressures on the Central Bank for
political purposes or for gaining political mileage.
Presently, the Nepal Rastra Bank Act, 2058 and Banks and Financial Institutions, 2073 are the two major
prevailing laws pertaining to central banking in Nepal. These two legislations have given the NRB wide powers
in regard to carrying out the central banking powers and functions such as formulation of monetary and
foreign exchange policies, issuing notes and minting coins, providing license to banks and financial
institutions, supervise, inspect and regulate the banks and financial institutions in operation, act as the
banker, advisor and financial agent of the Government of Nepal, act as the banker of banks and financial
institutions in operation, serve as a lender of last resort, manage the system of payment, clearing and
settlement, manage liquidity, etc