Salient Features of Banks and Financial Institutions Act, 2016
We mentioned earlier that the Government of Nepal legislated the Banks and Financial Institutions Act, 2016 in effect and repealed BAFIA, 2006. This act has 14 chapters and 134 sections. Banks and other financial institutions, such as development banks, finance companies, and micro-finance development banks, are established and operated under this act. This act has the following salient features.
1. Incorporation of Banks and Financial Institutions
Provisions regarding the incorporation of banks or financial institutions are made in chapter two of the act. According to the provision of the act, the persons desiring to establish a bank or financial institution should register the public limited company. But, before incorporating the company, the applicant for the registration of the company should take prior approval of Nepal Rastra Bank (NRB). Application for approval should be submitted to NRB with the necessary documents. The memorandum of association, article of association, feasibility study report, certified copy of the agreement, if any, with the promoters, evidence of tax clearance by promoters, and other necessary documents and details as prescribed by Nepal Rastra Bank should be submitted along with the application. NRB may grant its approval to incorporate the bank if it deems appropriate to do so or refuse its approval within 120 days from the receiving da of the application.
BAFIA 2016 has a provision regarding the incorporation of joint-venture banks and subsidiaries of foreign banks in Nepal. Foreign banks or financial institutions can incorporate banks jointly with the organized organizations established in Nepal or Nepalese citizens after approval of NRB. Sinülarly, foreign banks or financial institutions may establish their branches in Nepal after completing the legal process as prescribed by the act. No bank can open and operate its subsidiaries and branches without the due approval of NRB.
2. Issuing the Securities
Section 8 through section 13 of this act has made the provisions on the issue of securities of the banks and other financial institutions. The act has made it mandatory for the concerned bank to take the approval of the Securities Board of Nepal (SEBON) before registration of the prospectus of the bank with NRB for issuing its securities. The concerned bank should take the approval of SEBON before making its prospectus public and registering it with NRB. Similarly, every bank has to set aside at least 30 percent of its total issued capital for the general public and maxinaum 0.5 for its employees, but promoters can issue the shares to the public until they turn into minority owners of the bank. Banks should comply with the prevailing acts on issuing, allotments, and securities transactions while issuing the shares to the general public.
Sinülarly, the act has the provision on the issue of debenture and other securities. According to the provision of the act, a bank should take prior approval of NRB. NRB may put the condition while granting the approval to issue debenture and other financial instruments and the concerned banks should comply with such conditions while issuing such instruments.
3. Board of Directors and Chief Executive Officer
Chapter four of the act has the provision regarding boards of directors, chief executive officer (CEO), and professional experts. The act has made the provision that the board of directors should consist of a minimum of 5 and maximum 7 directors including one independent professional director. The term of the director is 4 years and they can be reappointed but Executive Director and Managing Director can be appointed for two consecutive terms and independent professional director will be appointed just for one term.
The act has prescribed the minimum qualification of the board of directors of the bank. According to the provision of the act, any person having the experience of 5 years in government services at officer level or experience of at least 5 years of director in a domestic bank or foreign bank or other organized institutions can be a director of a bank. A person having a Bachelor’s degree and 3 years of experience as a director of a domestic or foreign bank or as government service at officer level can be a director of a bank, but it has lifted 3 years of experience in the case of a person with Master degree in a specified subject. In the case of an independent director, qualification is prescribed by NRB. Directors should carry out the functions as prescribed by the act.
Similarly, the act has made provisions regarding the disqualifications of the directors. A person with unsound mind, age below 25 years, bankrupt person, black listed person, sitting directors of other banks and financial institution, auditor or debtors of the concerned bank, members of securities markets, shareholders not having the ownership of a prescribed number of shares, employees of NRB and Nepal Government-owned corporations, a person not having tax clearance, and with a criminal record is disqualified for the director. The act has provisions regarding the appointment, qualification, condition of service, duties, and responsibilities of the CEO of the banks and financial institutions. According to the provision of the act, the board appoints the CEO for a four-year term and it can reappoint the same person for the next term. But, candidates for, CEO should have the qualification as prescribed by the act. According to the provision of the act, the candidates for CEO should be Chartered Accountant or Master degree in prescribed subjects from the recognized university with at least 10 years experience of officer level in the financial sector, universities and international institutions and organization. The act has given a board of directors the free hands to determine the remuneration, perks, and other facilities of the CEO. The responsibility of the CEO is to operate the banks according to the article of association, memorandum of association, and other prevailing acts and regulations; and s/he is responsible to the board of directors.
4. Provision Relating to License
Chapter 5 of the act has made the provision relating to licensing of financial institutions, classification of financial institutions, special provision regarding the branches of foreign banks, and conversion of a lower institution into a higher institution. The act has prohibited carrying on financial transactions by anyone other than banks and financial institutions. It has made the approval of NRB mandatory for carrying on financial transactions. NRB may issue the license to any bank and financial institution applying for carrying on the financial transactions. But, the act has empowered NRB to decline to issue the license for carrying on the financial transactions.
The act has a provision of the minimum paid-up capital required for a license for carrying on the financial transactions. On the basis of prescribed minimum capital, financial transactions, and prescribed jurisdiction of the financial institutions, licensed institutions are classified into A, B, C, and D classes. In addition to issuing the license to Nepalese institutions, the act has special provisions relating to opening the branches of foreign banks or financial institutions. NRB may issue the license for foreign banks or financial institutions to open branches in Nepal.
5. Provision Relating to Capital
Chapter 6 of the act has provisions regarding the minimum capital to be maintained by banks and financial institutions, capital funds, capital to be increased, different types of funds such as risk-bearing fund, capital reserve fund, exchange equalizer fund, restriction on dividend, maintenance of liquidity, and provision for loan losses. The act has empowered NRB to prescribe the minimum paid-up capital of licensed banks and financial institutions and has prescribed the maximum limit of investment of a single investor. A single investor can invest a maximum of 15 percent of the paid-up capital of the bank. The act has a provision that banks should maintain minimum capital funds on the prescribed ratio of their risk-weighted assets.
The licensed financial institutions should maintain the provision for possible losses on loans and advances and other assets and off-balance assets as prescribed by NRB and they should set aside 20 percent of their net profit for general reserve. As per the provision of the act, banks and financial institutions licensed for foreign exchange transactions have to set up exchange equalizer funds by setting at least 25 percent of the profits earned from the revaluation of the foreign currencies aside for the fund. The act has restricted any bank or financial institution to declare and distribute the dividend until it amount of preliminary expenses and losses sustained by it until a year.
6. Operation of Financial Transactions
Chapter 7 of the act has provisions regarding the operation transactions of a bank. The act has prescribed financial transactions and cannot be carried on by licensed banks. The financial carried on by licensed institutions are more or less similar. As per the act, major financial transactions to be carried on by banks financial institutions are accepting the deposits; supplying different credits; carrying on merchant banking business; obtaining accepting, paying, discounting, and selling bills of exchange, checks, drafts, and other financial instruments; foreign currency-issuing guarantee on behalf of customers; and acting as commission Similarly, the act has prohibited banks and financial institutions to sell off goods and merchandises, and immovable properties for purpose. Further, it has restricted the banks to advance the credit security of their own shares and extend the credit facilities to shareholders having the subscription of I percent or more than 1 shares, and family members of such persons and companies and/or which are entitled to nominate or appoint the directors. Similarly, the act prohibits banks to invest in the securities of licensed institutions.
7. Regulation, Inspection, and Supervision
The act has empowered NRB to regulate, inspect and supervise financial institutions. NRB may frame the necessary rules and by-laws; the orders, directives, and circular to the banks and financial institutions for the purpose of the regulation, inspection, and supervision. In addition, it has to issue directives to banks and financial institutions in relation to the banking system, credit and currency, and interest rates to be paid on and charged on credits. Thus, the act has empowered NRB to control the credit, interest rates, and currency. NRB may take any banks and financial under its control if it is satisfied that they have violated the NRB bylaws under the provision of BAFIA, and directives issued by it. Further, the empowered NRB to appoint, suspend, dismiss and remove the board of directors and take the licensed financial institution under its control.
8. Supply and Recovery of Credits
Chapter 8 of the act has the provisions relating to the supply and credits. As per the provision of the act, banks can supply the credits as directives of NRB and credit policy of the concerned bank. Sinülarly, the given the right to licensed institutions to write the concerned office to withhold the property lodged as a security of the credits, recover the principal and interest on loans by disposing of the property pledged for securiües.
9. Accounts, Records, Returns, and Reports
Chapter 7 of the act has the provision regarding accounts, records, returns reports of the banks. The act has Inade banks mandatory to maintain the based on the universally accepted principles of the double-entry book system. Banks should prepare financial statements in the prescribed within the three months of the end of the fiscal year and submit them to NRB, publish profit and loss account, and balance sheet within nine months following fiscal year for the knowledge of the general public. In addition, the provision regarding the formation, right and duties of the auditing committee.
10. Merger and Acquisition of Banks
The act has the provision regarding the merger and acquisition of institutions. According to the provision of the act, banks can merge each only after completing the procedures prescribed by the act. Merger and acquisition may be voluntary or as per the directive of NRB. The act has empowered NRB to issue the directive to merge banks and financial and acquire other banks or financial institutions and acquire other banks or financial institutions in the prescribed conditions of many banks and financial institutions. Both licensed institutions wishing to be merged shall make a special resolution in their respective general meeting for a merger, and shall make a joint application to NRB along with the necessary documents.
11. Liquidation of Banks
Chapter 11 of the act has provisions regarding voluntary liquidation of banks and chapter 12 has provisions for a compulsory liquidation of banks. According to the provision of the act, the bank that wants to go on voluntary liquidation can apply to NRB for voluntary liquidation and banks go on voluntary liquidation after receiving approval from NRB for liquidation. According to the provision of the act, NRB should apply to the court for a compulsory liquidation of the bank with necessary documents as prescribed by the act and publish the notice about the application for liquidation for public knowledge. NRB should justify the compulsory liquidation of a bank. Unable to pay off the bank liabilities in time and negative capital funds are the fundamental conditions of compulsory liquidation of a bank. The court appoints the liquidator and the liquidator after the completion of the liquidation process should submit the report to the court. The court after examination of the report declares the liquidation of the concerned bank and financial instituüons.
12. Actions, Offence, and Punishment
Chapter 13 has the provision on regulatory acüons, offenses, and punishment to the default banks. The act has empowered NRB to take the regulatory actions against the bank not complying with the provision of BAFIA, regulation framed under this act, and directives issued by it under the relevant acts and regulations. NRB may issue the warning, directive for necessary corrective actions, written notice to comply with the regulations, bye-laws, and directives, restrict to distribute the dividend, but the ceiling on the deposits and loans, and put the partial or full restriction on the transactions of the concerned banks. NRB has the right even to cancel the license in extreme cases of violation of acts, regulations, and directives issued by it.
According to the provisions of the act, carrying on the financial transactions without a license; violation of directives of NRB; paying and receiving interest in contravention of terms prescribed by NRB; dealing with foreign exchange in contravention of the act and directives issued by NRB; and failure of any officer responsible to maintain the secrecy on financial transactions, accounts, records, and other account-related documents are deemed to be a commission of an offense under BAFIA. Depending upon the degree of offense, NRB has the right to award the fine and imprisonment ranging from one year to 5 years.