Nepal Rastra Bank Act 2058 - Study Note For Bank Preparation

Nepal Rastra Bank Act was formulated for the first time in 2012 BS. Nepal Rastra Bank was established under this act in Baishakh 14, 2013 BS. Nepal Rastra Bank Act 2012 was formulated with the major objectives of establishing the Central bank and replace the Indian currency. Later this act was amended in 2058 with some major changes.

Objectives of Nepal Rastra Bank Act 2058

To establish Nepal Rastra Bank
To manage and operate Nepal Rastra Bank
To formulate necessary monetary policy and foreign exchange policy
To maintain relationship with government
To maintain stability of the price
To consolidate Balance of Payment (BoP)
To develop effective and efficient payment system
To regulate other bank and financial institutions such as issue license, Issue directives, inspection, supervision and monitoring
To increase public trust in the banking
To increase public involvement in the banking service
To assign role of the central bank such as
1. Issuing bank notes and coins
2. Act as bank of the bank as lender of last resort
3. Act as financial advisor/agent of the government of Nepal etc.

Objectives of Nepal Rastra Bank

There are three main objectives of Nepal Rastra Bank.

To formulate necessary monetary policy and foreign exchange policy
To maintain and promote financial stability and liquidity required in banking and financial sectors
To develop efficient and effective payment system

If 10 question is asked, you have to explain this three points in details.

The objective of Nepal Rastra Bank is to maintain economic stability, sustainable economic development, the balance of payment (BoP) increases public trust and increase public access in the banking system.

Function of Nepal Rastra Bank

To issue bank notes and coins
To formulate necessary monetary policy and foreign exchange policy and implement them
To determine the FOREX rate
To manage the FOREX reserve
Issue license to BFIs
Act as lender of the last resort
Act as agent/banker/financial advisor for government of Nepal
Develop and promote efficient and effective payment system
Perform other activities to meet the objective of NRB

Prohibited Function of Nepal Rastra Bank (Section – 7)

Not to accept deposit from the general public
Not to provide credit to general public
Not to make any type of financial gift
Not to purchase any share capital of other commercial bank and public organizations
Not to operate any types of business
Not to acquire any movable and immovable properties

Facilities Provided by Nepal Rastra Bank Act 2058 (Section -8)

Exemption in the tax, fees, charges in any types of capital transaction, house, land carried out by NRB
No need to pay the registration fee for registration activities while providing loans or refinancing
No requirement of revenue stamps on any of the documents relating to bank
Exemption in all types fees, charges, customs, duty on the import export of bank notes, coins, golds, silvers, chemicals, papers, metal and other required materials used for printing the bank notes and minting coins.

Formation of Nepal Rastra Bank Board of Director (Section -14)

The Board of Director consists of 7 members.

Board	7 Members (4 internal, 3 external)
Chaired by	Governor
Appointed by	Government of Nepal
Tenure	5 Years
Repeat	Any number of time
Oath from	Chief Justice
Can Resign to	Government of Nepal

After retirement, board members cannot work in other BFIs at least for three years.

Designation	Who	Number
Chairperson	Governor	1
Member	Deputy Governor	2
Member	Secretary of Minister of Finance	1
Director	Appointed by GoN from amongst the person renowned in the field of economic, monitory, banking, finance and commercial law.	3
Total		7

Functions, Rights, Duties and Power of NRB Board? (Section – 29)

To frame monetary and FOREX policies.
To take necessary decision regarding the denominations of the bank notes, coins, the figures, size, metal type, materials, for printing notes and minting coins.
To frame the necessary policies for causing the supervision and inspection of BFIs.
To frame the policies for other BFIs.
To frame the policies regarding the promotion, transfer, dismissal, remuneration, pension, provident fund, leave, code of conduct, and other terms and conditions to be followed by the employees of the bank.
To frame the necessary policies regarding the issues of license of BFIs.
To approve the limit of loan to be provided to the Government of Nepal by the bank.
To approve the limit of loan to be provided to the BFIs.
To make necessary policies regarding the membership and relationship of Nepali banks with international organizations.
To frame the policies regarding the investment and mobilization of bank’s financial resources.

Appointment of Governor (Section 15)

Government of Nepal, the council of minister shall appoint the governor as per the recommendation from the recommendation committee. The recommendation committee consists of thee members chaired by Minister of Finance – chairperson, ex-governor – member, and one renowned person -member in the field of economies, finance, commerce and banking sector.
The recommendation committee must recommend at least three candidates renowned in the field of economics, monetary, banking, finance, commerce, management commercial law and from among the deputy governor.
Governor taker oath from chief justice.
Governor can give resignation to the Government of Nepal.
Governor can not work in other BFIs after the retirement or after resignation.
Government of Nepal can remove the governor, deputy governor and other directors. To remove governor, three member’s committee should be formed. The committee led by ex-chief justice will inspect the work of governor for one month. If the committee finds the disqualification of the governor then Government of Nepal, the Council of Minister can remove governor.

What are the Functions, Rights, Duties and Power of Governor? (Section 30)

Implement the decision made by BoD.
Operate and manage the bank.
Systematize the functions to be carries out by the bank.
Represent the Nepal Rastra Bank in the international platforms.
Implement and cause to implement the monetary policies and FOREX policy.
Frame the interest rate related policies of the BFIs.
Formulate the policies related to liquidity of the BFIs.
Frame the necessary policies regarding the gold and other valuable metal transactions.
Fix the fees and commision of the BFIs.
Take the necessary decision regarding the expansion criteria of the BFIs.
Make the necessary arrangement for the development and operation of information system of other banks.
To frame the necessary policies about revocation of the license of the BFIs.
To take the necessary decisions within the power delegated by BoD.

Appointment of Deputy Governor (Section -16)

There shall be two deputy governors in the board. Government of Nepal, the Council of Minister shall appoint the deputy governor on the recommendation of governor.
While making the recommendation, the Governor shall recommend double the number of vacant posts from among the special class officers on the basis of their performance and capability.
Deputy governor will have 5 years of tenure and can not repeat for the same post.
Take oath from governor.
After retirement or resignation, deputy governor cannot work in other BFIs for at least 3 years.

Formation of Audit Committee

Audit committee comprise of 3 members chaired by the director, 1 member from chief of the internal audit department, 1 member from among the senior officer.

Functions, Rights, Duties and Power of Audit Committee

Submit audit report to the NRB BoD.
The audit committee can recommend for the preparation of budget and audit procedure, support to prepare a periodic balance sheet and other document.
Supervise the implementation of the NRB policies of measures.
Audit managerial and performance appraisal of the NRB entity.
Frame bylaws relating to audit under the provision of prevailing law.

Financial Management of Nepal Rastra Bank

When talking about financial management of the NRB, there are majorly 5 topics to cover. They are –

Capital of the bank
Allocation of income
Expenditure
Accounting system
Budget

1. Capital of the bank – The capital for the bank shall be 5 billion rupees (5 Arba).

2. Allocation of income – The bank shall allocate the net income as follow

Title	Amount in %
Monetary Liability Fund	5%
Financial Stability Fund	5%
Re-valuation fund	All the income from re-valuation of FOREX
General Reserve Fund	Min. 10% and Max. up to cover the capital expenditure.
Government of Nepal (Government reserve fund)	All the rest of the income

3. Expenditure – The bank shall allocate the net loss as follow

All the general expenditure of the general operation shall be debited from general reserve fund (GRF).
All the capital debited from the general reserve fund (GRF).
Re-valuation loss shall be debited from revaluation fund (RF).

4. Accounting – The bank shall prepare an account of its profit and loss as per Nepal Accounting Standard (NAS) but bank shall use International Accounting Standard (IAS) as per the requirement.

5. Budget – The budget is prepared by NRB Board and sent to the government of Nepal.

What are the Conditions to Declare Problematic BFIs by NRB?

Following are the condition where NRB can declare any BFIs a problematic.

Act against the interest of depositor, shareholder, and promotors.
Act of not fulfilling financial liabilities.
If any BFIs going towards insolvency.
If BFIs submit fake documents and acknowledge later.
If BFIs are unable to maintain the capital structure and capital fund.
If BFIs initiate the process of voluntary liquidation.
If BFIs carry out the business that is restricted by NRB.
Unable to pay the amount

Action Taken by NRB to Problematic BFIs

Can issue an order to issue new share to increase paid-up capital.
Can suspend the voting right of shareholders.
Order to stop the dividend payment to shareholders.
Can maintain efficient arrangement to liquidity management.
Can limit the transaction of BFIs.
Can order to prohibit to do specific business.
Can issue an order to suspend director, manager, or staff.
Can suspend BoD.
Can issue an order to delist from the stock market.
Can make necessary arrangement that NRB feels it is necessary.

Relationship Between NRB and Nepal Government

Following are the relationship points between Nepal Rastra Bank and Government of Nepal.

Work as bank of the government.
Work as the financial advisor and agent of the government.
Provide consultation regarding the reform of financial laws.
Provide consultation regarding foreign debt of the government.
Represent Nepal government in the international platforms.
Issue currencies for the Government of Nepal.
Work as the policy formulator for the government of Nepal.
Work as system builder for the payment system, settlement & clearing houses and credit creation.

What is to be improved?

Financial infrastructure should be developed and maintained.
Focus on internal banking control.
Spread financial literacy.
Properly monitor and implement Anti Money Laundering Act.
Develop implement banking software.
Minimize banking related offense.
Secure the online transaction as the security challenges is getting riskier.
Manage employees properly.

If Nepal Rastra Bank seriously follow the above-mentioned point for the betterment of the central bank operation the it will ultimately help in strengthening the operation in long term.

Nepal Rastra Bank Act 2058 – Study Note For Bank Preparation