Banks and Financial Institutions Act, 2073 (BAFIA)

Overview

The Banks and Financial Institutions Act, 2073 (BAFIA) was authenticated on 10 Baisakh 2074 as Act No. 1 of 2074. It amended and consolidated the law on the establishment, operation, management, regulation, inspection and supervision of banks and financial institutions (BFIs). Its preamble stresses public confidence, protection of depositors and healthy competition. The consolidated text carries three amending Acts, the last dated 2081, which changed the lending provisions in s.55.

Key definitions (s.2)

• Bank: an institution doing class A business under s.49(1); the term also covers an infrastructure development bank.
• Financial institution: a development bank, finance company or microfinance institution.
• Significant ownership: holding 2 percent or more of paid-up capital, alone or jointly, or being able to influence management through shareholding.

Incorporation and licensing

1. Obtain prior approval of NRB (s.4).
2. Register as a public limited company under company law (s.3).
3. Apply to NRB for a licence (s.33). If all requirements are met, NRB may grant the licence within 120 days (s.34).

Classes (s.37 and s.32)

NRB classifies an institution on the basis of minimum paid-up capital, the business it carries on and its working area.

An infrastructure development bank is not placed in any class.

Shares and capital

• Promoters cannot sell or pledge their shares until five years after the institution starts business (s.11). After ten years promoter shares may be converted to ordinary shares with NRB approval.
• Minimum paid-up capital is whatever NRB fixes from time to time (s.41). NRB may limit one investor to 15 percent of paid-up capital in a single BFI.
• Capital fund must be kept at the ratio NRB sets on total or risk-weighted assets (s.42).
• General reserve fund: at least 20 percent of annual net profit until the fund is double the paid-up capital, then at least 10 percent (s.44).
• Exchange equalisation fund: at least 25 percent of revaluation gain on foreign currencies other than the Indian rupee (s.45).
• Dividend needs NRB approval (s.47).

Board and chief executive

• The Board has five to seven directors, appointed by the general meeting (s.14).
• There must be at least one independent director; a promoter or a person holding more than 0.1 percent of shares cannot be one. Only one person from a family can sit on the Board at a time.
• A director's term is at most four years and can be renewed; an independent director serves one term only (s.15).
• A person under 25, or blacklisted and not yet three years clear, cannot be a director (s.18).
• The chief executive is appointed by the Board for up to four years and may be reappointed for one more term; NRB is informed within seven days (s.29).

Permitted and prohibited activities

Section 49 lists what each class may do: class A banks may accept deposits, lend, deal in foreign exchange, issue guarantees, letters of credit and cards. Section 50 forbids a BFI from:

• buying and selling goods for trade, or acquiring immovable property beyond its own need;
• lending against its own shares;
• lending to directors, shareholders with 1 percent or more, the chief executive or their families;
• exceeding the single obligor limit fixed by NRB.

Loans to related persons are also barred (s.52).

Merger and acquisition (Chapter 10)

• BFIs may merge or acquire one another with NRB approval. A class D institution may merge only with class D. An infrastructure development bank cannot merge with a BFI (s.69).
• NRB can order a merger where capital is inadequate or the financial position has declined for three years.

Problematic institutions

A BFI unable to meet its obligations must tell NRB within 15 days. NRB declares it problematic under s.86B of the NRB Act, 2058 and may take over management or order corrective action.

Exam pointers

• Public limited company, prior approval, licence within 120 days.
• Board 5 to 7; director term 4 years; independent director limit 0.1 percent.
• Significant ownership 2 percent; promoter lock-in 5 years.
• General reserve 20 percent until double the paid-up capital.
• Class D merges only with class D.