Banking System and Financial Institutions of Nepal

Overview

Nepal's financial system is bank-dominated. Nepal Rastra Bank (NRB), the central bank, licenses, regulates and supervises banks and financial institutions (BFIs) under the Nepal Rastra Bank Act, 2058 (2002) and the Banks and Financial Institutions Act, 2073 (2017), commonly called BAFIA.

Milestones in Nepali banking

The first Governor of NRB was Himalaya Shumsher J.B. Rana, who took office on 26 April 1956.

Classes of licensed institutions

Under Section 37 of BAFIA 2073, NRB classifies an applicant on the basis of three things: its minimum paid-up capital, the transactions it will carry out, and its working area. It then issues a licence in the matching class.

Points that are examined often:

• An infrastructure development bank is licensed under BAFIA but is not placed in any class (proviso to Section 37). Its functions are in Section 49(5).
• A lower-class institution may apply to be converted to the class one level higher, but a class D institution cannot be converted into a higher class (proviso to Section 38).
• Every BFI must be incorporated as a public limited company (Section 3) and needs NRB's prior approval before registration (Section 4).
• In BAFIA, 'bank' means a class A institution (and an infrastructure development bank), while 'financial institution' means a class B, C or D institution.
• Significant ownership means holding two percent or more of the shares of a BFI, alone or jointly, so as to be able to influence management (Section 2).

Structure of the financial system and its regulators

1. Banking sector: class A, B, C and D institutions and infrastructure development banks, regulated by Nepal Rastra Bank.
2. Securities market: stock exchange, brokers and merchant bankers, regulated by the Securities Board of Nepal (SEBON).
3. Insurance: life, non-life and reinsurance companies, regulated by the Nepal Insurance Authority.
4. Cooperatives: registered and regulated under cooperative law by the cooperative authorities; the NRB Act also lets NRB issue standards for savings and credit cooperatives.
5. Payment institutions: payment system operators and payment service providers, licensed by NRB.

NRB's objectives under Section 4 of the NRB Act, 2058 are price and balance-of-payments stability, financial-sector stability with wider access to financial services, and a secure, healthy and efficient payment system.

Exam pointers

• First bank: Nepal Bank Limited, 30 Kartik 1994 (15 November 1937). Central bank: NRB, 1956.
• RBB: 10 Magh 2022 under the Rastriya Banijya Bank Act, 2021. ADBL: 7 Magh 2024.
• A = commercial bank, B = development bank, C = finance company, D = microfinance.
• Classification is done by NRB under Section 37 of BAFIA 2073 on capital, transactions and working area.
• Infrastructure development banks have no class; class D cannot move up.
• A BFI must be a public limited company; significant ownership starts at 2 percent.
• Do not memorise the number of BFIs as a fixed fact; mergers change it every year.