Bank and Financial Institution Act, 2073 (2017) Complete Simplified Study Notes

ACT AT A GLANCE

• Full Name: Bank and Financial Institution Act, $2073$ ($2017$)

• Authentication Date: $2073/01/10$ BS (April $23$, $2017$ AD)

• Act Number: Act No. $1$ of the Year $2074$

• Replaces: Banks and Financial Institutions Act, $2063$ ($2006$)

• Regulator: Nepal Rastra Bank (NRB / Rastra Bank)

• Court: Commercial Bench designated by GoN with SC approval

• Total Chapters: $14$ Chapters + $1$ Schedule

• Classes of BFIs:

  • Class A: Bank

  • Class B: Development Bank

  • Class C: Finance Co.

  • Class D: Micro Finance

WHY BAFIA WAS ENACTED (PREAMBLE)

• To enhance public confidence in the banking and financial system

• To protect and promote the rights and interests of depositors

• To provide quality and reliable banking services through healthy competition

• To make the national economy strong and strengthened

• To maintain financial stability

• To make legal provisions for the incorporation, operation, management, regulation, inspection, and supervision of Banks and Financial Institutions (BFIs)

CHAPTER 1 — PRELIMINARY (SECTIONS 1–2)

• Significant Ownership: Owning $2\%$ or more shares of a BFI (alone or jointly) that gives influence on management

• Borrower: An individual, firm, company, or institution that has obtained credit from a BFI

• Credit: Any amount lent by a BFI, including re-finance, restructuring, guarantee, and renewal

• Chief Executive: The CEO, Executive Chairperson, or Managing Director who heads the BFI

• Net Worth: Total Assets minus External Liabilities (as shown in the balance sheet)

• Paid-up Capital: The portion of issued capital actually paid by shareholders

• Liquid Assets: Cash balance + current account balance + NRB balance + assets specified by NRB

• Capital Fund: Primary Capital + Supplementary Capital as specified by NRB

• Primary Capital: Paid-up capital + share premium + non-redeemable preference shares + general reserve + accumulated P&L

• Deposits: Amounts in current, savings, or fixed accounts, including those through financial instruments

• Deposit Guarantee: Security of deposit pursuant to Section $108$

• Financial Interests: When a Director, $1\%$ or more shareholder, CEO, or their family or entity holds $\geq 10\%$ in another firm

• Affiliated Person: A Director, office bearer, family member, or entity with substantial ownership in the BFI

• Leasing: Possessory right of an asset for a period while ownership stays with the BFI

• Off-balance-sheet transaction: Includes LC, guarantees, acceptances, commitments, swaps, options, and FX forwards

• Hypothecation Loan: A loan against stock kept under the borrower's possession

• Voluntary Liquidation: BFI-initiated winding up under Chapter $11$

• Liquidator: A Court-appointed person for the mandatory liquidation process

• Acquiring Institution: The holding BFI that acquires another licensed institution

• Targeted Institution: The BFI being merged or acquired along with all its assets and liabilities

CHAPTER 2 — INCORPORATION (SECTIONS 3–7)

• Structure: Must be registered as a PUBLIC LIMITED COMPANY under prevailing company laws

• Prior Approval: Before registration, an application must be submitted to NRB with a prescribed fee and documents

• NRB Decision Time: Within $120\,\text{days}$ from the application date

• Foreign Joint Venture: A foreign BFI may incorporate a subsidiary or take shares in an existing local BFI with NRB approval

• Foreign Branch: An internationally rated foreign bank requires NRB prior approval; the branch is registered under company laws, followed by an NRB license within $90\,\text{days}$

• Branch Abroad: A Nepali BFI can open a branch outside Nepal with NRB approval

• Entities ineligible for Prior Approval (Section 4(3)):

  • Those under regulatory investigation by NRB

  • Persons convicted of banking offences

  • Persons convicted of cheating, fraud, or forgery

  • Persons convicted of money laundering or terrorist financing

  • Persons convicted of corruption

  • Persons convicted of serious crimes such as trafficking, kidnapping, hostage-taking, or rape

• NRB Refusal Grounds: If the name or activities offend public interest, religion, or ethnicity; if objectives are contrary to law; if it is technically inappropriate; if feasibility is not convincing; if the Memorandum is not signed by all promoters; if share ratios are not maintained; or if it is contrary to NRB licensing policy

CHAPTER 3 — SECURITIES TRANSACTIONS (SECTIONS 8–13)

• Prospectus (Section 8): Must be registered at NRB after getting Securities Board approval; cannot be published without NRB registration

• Public Share Allotment (Section 9): A minimum of $30\%$ of total issued capital must go to the general public (natural persons only)

• Employee Shares: An additional $0.5\%$ (over the $30\%$) may be set aside for employees

• Lock-in Period (Section 11): Promoters cannot sell or pledge shares for a minimum of $5\,\text{years}$ from the commencement of transactions

• After 5 Years: Promoters can sell with NRB approval; approval is not needed if the transfer is less than $2\%$ of paid-up capital

• After 10 Years: Promoter shares can gradually convert to ordinary shares with NRB approval

• Buy-back (Section 13): Generally prohibited; allowed only with NRB approval from free reserves with a maximum percentage set by NRB

• Buy-back Window: Within $6\,\text{months}$ from NRB approval or $12\,\text{months}$ from special resolution (whichever is later)

• Buy-back Limit: Maximum of $20\%$ of total paid-up capital + general reserve fund

• Cancellation: Shares must be cancelled within $120\,\text{days}$ of buy-back; a Capital Redemption Reserve Fund must be created

• Insider Trading (Section 12): Directors, CEO, auditor, or company secretary cannot buy or sell BFI securities while in office or within $1\,\text{year}$ after leaving

• Promoter Share Transfer Special Circumstances (Section 11(2)):

  • Board meetings are not possible for $3$ consecutive times due to lack of quorum

  • No decision is possible due to disputes among directors

CHAPTER 4 — BOARD OF DIRECTORS & CEO (SECTIONS 14–30)

• Board Composition:

  • Total Directors: Minimum of $5$ and maximum of $7$

  • Independent Director: At least $1$ must be appointed by the Board

  • Family Restriction: Maximum of $1$ family member on the Board at any time

  • Chairperson: Elvgected by Directors from among themselves by majority vote

• Terms:

  • Director Term: Maximum of $4\,\text{years}$ (renewVable/re-appointable)

  • Independent Director Term: Only $1$ term; cannot be re-appointed

  • Executive Chair/MD: Maximum of $2$ consecutive terms after this Act

  • CEO Term: Maximum of $4\,\text{years}$; can be re-appointed for $1$ more term (maximum of $2$ terms)

• Board Meetings:

  • Frequency: Minimum of $12$ per year

  • Interval: Maximum of $60\,\text{days}$ between two meetings

  • Quorum: Must be attended by at least $51\%$ of total directors

  • Casting Vote: Chairperson exercises a casting vote in case of a tie

• Director Qualifications (Section 16):

  • Option A: $5+$ years experience as a Director or officer level in BFI, corporate, or GoN (no degree required)

  • Option B: Bachelor's degree and $3+$ years experience at Director or officer level

  • Option C: Master's degree in a prescribed subject

• Independent Director Qualifications (Section 17):

  • Class A Bank/Class B (National): Master's degree in NRB-prescribed subject plus prescribed experience

  • Class B (Regional)/Class C: Bachelor's degree in NRB-prescribed subject plus prescribed work experience

  • Class D: Qualifications and experience as prescribed by NRB

• CEO Qualifications (Section 29):

  • Master's degree in management, banking, finance, monetary, economics, commerce, accountancy, statistics, maths, business administration, or law

  • OR: $10+$ years officer-level experience in banking, finance, government, corporate, or university after a Bachelor's degree in the above subjects

  • CEO must notify NRB within $7\,\text{days}$ of appointment

  • Cannot hold any other business position (exception: Director in Infrastructure Development Bank where BFI has investment)

  • Can be removed by the Board for unsatisfactory performance with an opportunity for clarification ($3$ to $15\,\text{days}$)

• Director Disqualifications (Section 18): A person is ineligible if:

  • Age is below $25\,\text{years}$

  • Unsound mind or insane

  • Declared bankrupt in Nepal or abroad

  • Blacklisted by any BFI (until $3\,\text{years}$ after removal from the list)

  • Currently a Director of another licensed BFI or an employee of GoN/NRB/BFI

  • A borrower of the concerned BFI

  • An incumbent auditor or advisor of the BFI

  • A securities broker or merchant banker

  • A tax defaulter

  • Convicted of theft, cheating, forgery, fraud, corruption, moral turpitude, or banking offence (until $10\,\text{years}$ after sentence)

  • Regulatory action taken against them (until $5\,\text{years}$ after action)

  • For Independent Director: must not hold more than $0.1\%$ shares of the BFI

• Constitutional Position: No person holding a constitutional position can be on the Board or be the CEO (Section $20$)

• Reporting: Director details must be submitted within $7\,\text{days}$ of appointment; changes must be reported to NRB within $15\,\text{days}$

CHAPTER 5 — LICENSING (SECTIONS 31–40)

• License requirement: No person can perform banking/financial transactions without an NRB license (Section $31$)

• Naming Restrictions:

  • Cannot use "Bank" or "Finance" without NRB approval (Section $32$)

  • Class B must use "Development Bank"; Class C must use "Finance Company"; Class D must use "Micro Finance Financial Institution"

• Timeframe: NRB issues a license within $120\,\text{days}$ from application

• Classification: Based on minimum paid-up capital, transaction type, and working area

• Upgrading: Class D cannot upgrade. Others can apply with conditions:

  • $5$ consecutive profitable years

  • Capital fund maintained per NRB for $5\,\text{years}$

  • Average Non-Performing Loans (NPL) within NRB limits

  • Preliminary expenses written off

  • Public shares issued

• Revocation/Suspension Grounds:

  • Transactions not started within $6\,\text{months}$ of licensing

  • Transactions closed without NRB approval

  • Operations against depositors' interests or failure to repay deposits

  • Violation of NRB Act, BAFIA, rules, or directives

  • License obtained via false information

• Transparency: NRB must publish a list of all operating BFIs every month (Section $39$)

CHAPTER 6 — CAPITAL, CAPITAL FUND & LIQUID ASSETS (SECTIONS 41–48)

• Minimum Paid-up Capital: As prescribed by NRB from time to time

• Investment Limits:

  • Single investor limit: Maximum $15\%$ of paid-up capital of any one BFI

  • Cross-investment: Investment in a second BFI must be less than $1\%$ of its paid-up capital

• Capital Fund Breach: Board must inform NRB within $1\,\text{month}$ with reasons and a recovery plan

• General Reserve Fund: Minimum $20\%$ of net profit added each year until paid-up capital is doubled; then minimum $10\%$ per year. Prior NRB approval is needed to spend/invest this fund

• Exchange Equalization: BFIs with forex business must credit minimum $25\%$ of revaluation profit to this fund each year

• Dividends: Need NRB approval prior to declaration; cannot declare until preliminary expenses are recovered, losses are covered, and required funds (capital, loss, general reserve) are maintained

• Capital Decrease: NRB can order a decrease in issued and paid-up capital (Section $48$)

CHAPTER 7 — BANKING OPERATIONS (SECTIONS 49–54)

• Class Powers:

  • Class A: Most comprehensive; deposits, loans, forex, LC, guarantees, etc.

  • Class B: Most of Class A functions except direct forex (needs approval), gold/silver, and limited govt transactions

  • Class C: Focus on hire-purchase, leasing, housing, and consumer lending

  • Class D: Micro-credit services for low-income groups

  • Infrastructure Development Bank: Infrastructure project loans; not classified as A, B, C, or D

• Prohibited Acts (Section 50):

  • Cannot buy/sell goods for business or immovable property (except for own use)

  • Cannot lend against own shares

  • Cannot provide credit to Directors, $1\%$ shareholders, CEO, or their families/firms

  • Cannot exceed per-customer credit limits set by NRB

  • Cannot invest in securities of Class A, B, or C BFIs

  • Cannot create monopolies or artificial competition hurdles

• Exceptions: Housing/facilities for employees; loans against GoN/NRB bonds or own fixed deposits (applicable even to promoters/directors/CEO)

• Suspicious Transactions (Section 53): BFIs must identify holders and report activity per AML/CFT laws

CHAPTER 8 — CREDIT DISBURSEMENT & RECOVERY (SECTIONS 55–57)

• Requirement: Credit is only disbursed after purpose disclosure and collateral/guarantee acquisition

• Property Withhold: BFI writes to concerned offices to withhold mortgaged property from transfer

• Priority Lending: NRB can direct lending to low-income groups or specific regions

• Recovery/Auction: BFIs can auction mortgaged property if the borrower defaults to recover principal and interest; leftovers from auction go to the borrower

• Blacklisting: BFI writes to Credit Information Centre to blacklist non-repaying borrowers

• Passport Withholding: BFI can request NRB (who forwards to GoN) to withhold/confiscate a borrower's passport for unrecovered credit

CHAPTER 9 — ACCOUNTS, RECORDS & REPORTING (SECTIONS 58–68)

• Accounting: Double-entry bookkeeping system required

• Deadlines:

  • Balance Sheet submission to NRB: Within $3\,\text{months}$ of fiscal year end

  • External Audit completion: Within $4\,\text{months}$ of fiscal year end (extension up to $2\,\text{months}$ possible)

  • Publicly manifest audited BS: Within $9\,\text{months}$ of the next fiscal year

• Audit Committee (Section 60): $3$ members; convened by a non-executive Director; Chairperson and CEO cannot be members; meets every $3\,\text{months}$

• Auditor Appointment: By General Meeting; same auditor maximum of $3$ consecutive terms. Class A/B/C must use a Chartered Accountant; Class D can use CA or Registered Auditor

• Auditor Duties: Inform NRB if there are violations of BAFIA or if the auditor is prevented from reporting correctly

CHAPTER 10 — MERGER & ACQUISITION (SECTIONS 69–74)

• Rules: Any BFI can merge with another, but Class D can only merge with another Class D. Infrastructure Development Banks cannot merge or acquire others

• NRB-Forced Merger: Ordered if capital fund is inadequate for $3\,\text{years}$, depositor interests are harmed, or for competitive capacity

• NRB-Forced Acquisition: Ordered if a single group runs multiple BFIs with unhealthy relations, systemic risk increases, or if subjected to rapid reforms $3+$ times

• Process: Board decision -> Joint application -> Approval in principle -> Asset-liability valuation -> Special resolution -> Final approval (within $45\,\text{days}$ if rejected)

CHAPTER 11 — VOLUNTARY LIQUIDATION (SECTIONS 75–77)

• Initiation: BFI submits an application and action plan to NRB; NRB checks if the BFI can repay ALL deposits and liabilities

• Notification: Within $7\,\text{days}$ inform Registrar; within $30\,\text{days}$ notify depositors and publish in a national newspaper

• Final Approval: Granted after audit; license revoked simultaneously. Liability of Directors and CEO continues after liquidation

CHAPTER 12 — MANDATORY LIQUIDATION (SECTIONS 78–98)

• Circumstances: Cannot pay matured deposits, negative capital fund, NRB inspection recommendation, or frequent violations of BAFIA/directives

• Filing: NRB files in court; depositors holding > 25\% of total deposits or > 1\% of all depositors can also file with NRB approval

• Liquidator: NRB recommends $3$ names within $15\,\text{days}$; Court appoints $1$. Staff terminated; Board dissolved

• Advance to Depositors: Up to $\text{Rs. } 100,000$ per account adjusted at settlement

• Priority of Payments:

  1. Liquidation expenses

  2. Deposit insurance amount

  3. Remaining deposits

  4. Employee liabilities (salaries/allowances)

  5. GoN / Local bodies / NRB dues

  6. Amounts payable to other BFIs

  7. Other creditors

  8. Shareholders (Last)

• Void Transactions: Preferential ($6\,\text{months}$), related persons ($1\,\text{year}$), undervalued ($1\,\text{year}$), fraudulent ($2\,\text{years}$)

CHAPTER 13 — OFFENCES & PUNISHMENT (SECTIONS 99–106)

• Fines for Non-Compliance with Information:

  • First 2 weeks: $\text{Rs. } 100,000$ per day

  • Up to 1 month: $\text{Rs. } 125,000$ per day

  • Beyond 1 month: $\text{Rs. } 150,000$ per day

  • Individual fine: Maximum $\text{Rs. } 1,000,000$

• Specific Offence Punishments:

  • Operating without license: Confiscation + fine up to $3x$ amount + up to $5\,\text{years}$ imprisonment

  • License via false statements: Confiscation + fine up to $2x$ amount + up to $2\,\text{years}$ imprisonment

  • Violations (Forex/Credit/Irregularities): Confiscation + fine equal to amount + up to $1\,\text{year}$ imprisonment

  • If no amount identified: Fine of $\text{Rs. } 10\,\text{lakh}$ to $\text{Rs. } 50\,\text{lakh}$

• Appeal: Filed within $35\,\text{days}$ at Court; requires a deposit of $50\%$ of the fine. Shareholders filing an appeal must represent $\geq 25\%$ paid-up capital

CHAPTER 14 — MISCELLANEOUS (SECTIONS 107–134)

• Banking Secrecy (Section 109): Customer info cannot be disclosed except to NRB, courts, inquiry committees, or auditors

• Dormant Accounts (Section 112): Statement to NRB for accounts dormant for $10+\,\text{years}$; notice every $5\,\text{years}$; after $20\,\text{years}$ unclaimed funds go to Banking Development Fund

• Mortgage Exemption: No registration or revenue stamp fee for deeds up to $\text{Rs. } 1,000,000$ for agriculture, cottage, or small industry credits

• Asset Statement (Section 121): Directors, CEO, and officers must submit asset/liability statements within $60\,\text{days}$ of fiscal year end to NRB

• Oath of Office (Section 127): Administered to Chairperson by NRB; to Directors/CEO by Chairperson; to staff by CEO

• Supremacy (Section 129): BAFIA provisions prevail over other laws in banking matters

QUICK REFERENCE — ALL KEY NUMBERS

• Board Quorum: $51\%$

• Director Age: Minimum $25\,\text{years}$

• Public Share Allotment: Minimum $30\%$

• Promoter Lock-in: $5\,\text{years}$

• Promoter to Ordinary conversion: After $10\,\text{years}$

• Buy-back limit: $20\%$ of (Paid-up Capital + General Reserve)

• Shares cancelled after buy-back: Within $120\,\text{days}$

• Prior approval/License issue time limit: $120\,\text{days}$

• Director info reporting: Within $7\,\text{days}$; changes within $15\,\text{days}$

• Post-removal bar: $5\,\text{years}$ ineligible for BFI service