Bank and Financial Institutions Act, 2073 (BAFIA 2073) is an umbrella law in Nepal that regulates the establishment, operation, management, and supervision of banks and financial institutions.
Objectives of BAFIA 2073
- To regulate the establishment and operation of banks and financial institutions.
- To maintain financial stability and discipline in the banking sector.
- To protect the interests of depositors and the public.
- To promote a safe, transparent, and reliable banking system.
- To empower the central bank to supervise and regulate financial institutions effectively.
Major provisions of the Bank and Financial Institution Act 2073.
| Chapter/Section | Provision |
|---|---|
| Chapter 2 | Incorporation of BFIs |
| Sec 3 | Incorporation of BFIs |
| Sec 4 | Prior approval to be obtained from NRB |
| Sec 5 | Prior approval to be obtained for Int'l BFIs |
| Sec 6 | Prior approval to be obtained to open branch of BFIs |
| Sec 7 | Power to refuse to grant prior approval |
| Chapter 3 | Provision of security transaction |
| Sec 13 | Provision relating to the buy back of own share |
| Chapter 4 | Provision relating to the BoD and CEO |
| Sec 14 | Formation of BoD |
| Sec 15 | BoD terms |
| Sec 16 | Qualification of Director |
| Sec 17 | Qualification of Independent Director |
| Sec 18 | Disqualification of Director |
| Sec 21 | Meeting of BoD |
| Sec 22 | Functions, Duties and Powers of BoD |
| Sec 29 | Appointment of CEO |
| Sec 30 | Functions, Duties and Powers of CEO |
Chapter 2:
Sec 3: Incorporation of BFIs
Any person wishing to incorporate a bank to conduct financial transactions must register it as a public company.
Section 4: Prior approval should be obtained for the incorporation of BFIs
A person or institution seeking to incorporate BFIs should submit an application to the Nepal Rastra Bank for prior approval. The following documents should be submitted to NRB for approval in the prescribed format.
- MoA of the proposed bank
- AoA of the proposed bank
- Feasibility report of the proposed bank
- Personal details of the applicant
- Evidence of the income source disclosure and tax clearance of the last fiscal year
- Details of proof of proposed banks, and the person has not been blacklisted or bankrupt. If so, whether or not a period of three years has lapsed after having such a blacklisting.
- Self-declaration of the applicant that he/she is not convicted of any type of cheating, fraud, or criminal offences.
- Details of whether or not the proposed bank has been suspended or subjected to compulsory liquidation.
- Details of the name, surname, address, and relationship of the family member of the application, substantial ownership, and capacity of each of them.
- Written authority to NRB to allow any inquiry to the applicant about the financial and professional background whenever needed.
- Other required documents are specified by Rastra Bank from time to time.
If Rastra Bank finds all the submitted applications deemed, it grants the approval within 120 days after filing of the application, with or without prescribing any conditions.
No prior approval shall be given to incorporate a bank or financial institution to the following persons and the firms or companies having substantial ownership of such persons and of the members of their family, if they have been
- Being investigated in regularity actions of the central bank
- Convicted of any banking offence
- Convicted of cheating, fraud, forgery
- Convicted of any offence AML CFT
- Convicted of any corruption
- Convicted of any serious types of offences such as human trafficking, kidnapping, hostage-taking, rape etc.
Section 5: Prior approval to be obtained for the incorporation of BFI in foreign investment
Foreign BFIs can establish a subsidiary company in accordance with this Act in a joint venture with a corporate body registered in Nepal or with a Nepali citizen, or to maintain share capital as specified by the Rastra Bank, shall submit the following documents along with the specified fees.
- MoA, AoA of the foreign bank.
- Copy of the certification of the incorporation of the bank in the concerned Bank.
- Capital structure of the proposed bank.
- Details of the principal place of business.
- Audited Balance Sheet, Profit and Loss account of the last three years.
- Details of the proposed business plan, strategies in Nepal, types of transactions, internal control, and risk management.
- Decision of the foreign bank to open a bank in Nepal and proof of the authority granted by the regulatory body of the concerned bank.
Rastra Bank can grant the approval after thorough examination of the application and submitted documents, after 120 days of the application submission date, with or without prescribing any conditions.
Section 7: Power to refuse to grant prior approval
Nepal Rastra Bank may refuse to grant prior approval for the incorporation of a bank and for opening a branch of a foreign bank if
- If the name and transaction to be carried out by the proposed bank are not appropriate from the view of public interest, religion, ethnicity or community.
- If the objectives of the proposed bank are contrary to the laws in force.
- If the incorporation of the proposed bank does not seem technically appropriate.
- If a study of the feasibility study report, details, documents and other infrastructures submitted by the proposed bank or financial institution does not provide a ground to believe that it may carry out financial transactions healthily and competitively.
- If all promoters of the proposed bank or financial institution have not signed the MoA and AoA, stating their names, addresses and number of shares subscribed by them, in the presence of a witness, and the name and address of the witnesses have not been mentioned.
- If the per-person share investment limit and share ownership ratio have not been found to have been maintained as specified by the Rastra Bank from time to time.
-
If it is found to be contrary to the policy relating to the incorporation of banks or financial institutions and the licensing policy issued by the Rastra Bank.
-
If any condition as prescribed by the Rastra Bank is not fulfilled.
Nepal Rastra Bank shall give information to the applicant along with the rejection reason.
Sec 13: Provision relating to the Buyback of its own share by the bank
A bank or financial institution (BFI) is not allowed to buy back its own shares. A BFI is also not allowed to provide loans against the security of its own shares.
BFI may buy back its own shares only with the approval of Nepal Rastra Bank (NRB) and from free reserves available for dividend distribution, within the limit prescribed by NRB.
Conditions for Buy-Back
A bank or financial institution can buy back shares only if the following conditions are fulfilled:
- Fully Paid Shares: Shares to be bought back must be fully paid up.
- Listed in the Securities Market: The shares must be listed in the securities market.
- Authorization in AoA: The Articles of Association must authorize buy-back.
- Special Resolution: A special resolution must be passed in the General Meeting approving the buy-back.
- Debt Ratio Limit: After buy-back, total debt must not exceed twice the capital and general reserve fund.
- Buy-Back Limit: The value of shares bought back must not exceed 20% of the total paid-up capital and general reserve fund.
- Compliance with Capital Fund Directives: Buy-back must comply with NRB directives regarding the capital fund.
- Compliance with NRB Directives: Buy-back must not violate any directives issued by NRB.
Application to Rastra Bank
To obtain approval for buy-back, the bank must submit an application to NRB, including:
- Reason, necessity, duration and method of buy-back.
- Analysis of the impact on the financial condition of the bank.
- Type, face value and number of shares to be bought back.
- The maximum or minimum amount required and the source of funds.
- Other details required by NRB or prevailing law.
NRB may approve the buy-back after reviewing the application and documents. After approval, shares may be bought back:
- Through the securities market, or
- From existing shareholders on a proportional basis
Buy-back must be completed within 6 months of NRB approval or within 12 months of the special resolution, whichever is later. Within 30 days after buy-back, the bank must submit a report to NRB including:
- Number of shares bought back
- Amount paid
- Other necessary details.
The bank must create a Capital Redemption Reserve Fund equal to the face value of shares bought back.
Q) Explain the provisions relating to buy-back of shares by a bank or financial institution as per BAFIA 2073.
Q) Under what conditions can a bank or financial institution buy back its own shares according to BAFIA 2073? Explain.
Q) Discuss the procedure and conditions for buy-back of shares by a bank or financial institution as per BAFIA 2073.
Other Act and Summary