Banks Notes

BAFIA 2073 Major Highlights/Summary – Banking Notes

— April 9, 2022 add comment
BAFIA

Development of BAFIA

Financial System of Nepal

Following are the entities of the financial system of Nepal.

  1. Bank and financial institutions – Regulated by NRB
  2. Insurance companies – Regulated by Beema Samiti
  3. Capital Market – Regulated by SEBON
  4. Mutual Funds – Regulated by SEBON
  5. Cooperatives – Regulated by Sahakari Bhibag
  6. Contractual funds  (Saving institution) – Regulated by Government of Nepal. For example
    1. Nagarik Lagani Kosh – Citizen Investment Fund 
    2. Karmachari Sanchaya Kosh – Employee Provident Fund
    3. Samajik Surakchya Kosh – Social Security Fund 

In Nepal, Bank and Financial Institutions are regulated as per the Bank and Financial Institution Act 2073 (BAFIA 2073).

Objectives of Bank and Financial Institution Act (BAFIA)

  1. To promote public trust towards BFIs.
  2. To promote reliable and quality banking in Nepal.
  3. To protect the right and interest of the depositors and investors.
  4. To protect from banking hazards and protect from banking risks.
  5. To adopt economic liberalization for the development of economic status of Nepal.
  6. To promote corporate governance and financial stability.
  7. To make legal provision relating to incorporation, management, operation and winding up of BFIs.

What are the Features of BAFIA 2073

Feartures लेख्दा हरुलाई आधार बनाएर लेख्नुपर्छ।

  1. BAFIA is an umbrella law.
  2. It is an integrated banking/regulating law.
  3. BAFIA focused on financial good governance.
  4. It focuses on maintaining the financial stability.
  5. BAFIA is compliance with Money Laundering Prevention Act.
  6. Allow buyback of shares.
  7. Provision to incorporate BFIs only as public company.
  8. Promote economic liberalization.
  9. Promote transparency and protection of deposit and depositors.
  10. Two types of winding up provisions are outlined such as Voluntary and Compulsory.
  11. BAFIA mentioned prohibited functions of BFIs.
  12. BAFIA mandatory the use of KYC.
  13. BFIs must use external auditor and publish financial report on time.
  14. Merger, acquisition of problematic BFIs.
  15. Special provision relating to infrastructure development bank.
  16. If there arise the conflict among BFIs then NRB’s decision will be final decision.
  17. BAFIA classifies BFIs into 5 types and 4 categories. Such as

Types of Nepali Bank

Major Provisions of BAFIA 2073

1. It has provision of incorporation of BFIs

Before proceeding the incorporation of Banks and Financial Institution, it is necessary to get prior approval from Nepal Rastra Bank. Bank and Financial Institution can be incorporated as public company only. To get prior approval from the NRB, following documents should be submitted.

  • Memorandum of association (MoA).
  • Article of association (AoA).
  • Feasibility study report.
  • Sustainability report.
  • Individual details of the promotors.
  • Tax clearance of promotors.
  • Pre-incorporation contracts if any.
  • Punishment status and clearance of the promotors.
  • Source of income.

NRB shall provide approval within 120 days from the date of application submission. NRB can refuse to provide prior approval in the following conditions.

  • Promotors are accused by the criminal offense such as Money Laundering, rape, banking offense, fraudulent, forgery etc.
  • If the proposed name is same as previously registered BFIs.
  • If the objective and functions stand against the prevailing law.

Incorporation of BFIs with joint venture or foreign investment need to get prior approval from the NRB. To expand branches, BFIs need to get prior approval from NRB. Incorporation of the BFIs is according to the company act.

2. It has provision relating to the capital formation /share transaction

All the BFIs must submit their prospectus to NRB before issuing share capital.

BFIs must allot their capital as per the following structure.

  • Minimum 30% for the general public.
  • Minimum 51% for the promotors.
  • Maximum 0.5 for the employees.

To make share transaction, they must assign share registrar and send notice it within the 7 days of an agreement.

Lock up period for converting promotor share into public share is 10 years.

Lock u period for the transaction of promotor share is defined as 5 years and to make a transaction of promotor share who holds more than 2% share capital must get prior approval from NRB.

BFIs can buy back their share if the fulfill the necessary condition outlines by the law.

3. Provision relating to the buy back of shares

BFIs can buy back their share in the following conditions. (Explain Conditions, Procedure and Method)

Conditions

  • If AoA contains the provision of share buy back.
  • If SGM make a resolution to buy back share capital.
  • If the share capital is listed in the stock market.
  • If company is making profit. (Can buy back only from profit)
  • Only up to the 20% of general reserve fund.

Procedure

  • Need to get prior approval from NRB.
  • Submit the application to NRB with its rationale why, who, how much, where from and what rate? (buy back गर्नुको औचित्य देखाउनु पर्छ। )
  • NRB approves the proposal or can refuse based on the document submitted.
  • After getting approval from NRB, they must buy back share capital within 6 months from the date of approval or within 1 year from the date of special resolution.
  • Method
  • BFIs can buy the share either from stock market of directly with the shareholder proportionally.
  • After buyback, they must deregister all the buyback share within 120 days.

4. Provision relating to the transaction of securities

5. Provision relating to the BoD and Chief Executives

See – Functions, Duties and Rights of the Chief Executive.

6. Provision of license.

7. Provision relating to the  operation of BFIs transactions.

8. Provision relating to the disbursement and recovery of credits.

9. Provision relating to the account, records, details, and reporting.

10. Provision relating to the merger and acquisition of BFIs.

11. Provision relating to the voluntary and mandatary liquidation of BFIs.

12. Provision relating to the actions, offenses and punishment .

Background

As the number of banks and financial institutions increased rapidly, to control the number and increase the service quality, Bank and Financial Institution Ordinance 2061 (BAFIO 2061) drafted in the tenure of King Gyanendra Shah. After issuing BAFIO, it categorized the BFIs in A, B, C and D categories.  Later after 2062/63 political changes, the parliament converted ordinance into act in 2073 and issued Bank and Financial Institution Act 2073 (BAFIA 2073).

Ordinance (अध्यादेश ) – मन्त्रिपरिषदले बनाएको तर संसदमा पास नभएको ऐन कानुनलाई अध्यादेश भनिन्छ।

Probable Questions

  1. How BAFIA promote Internal Control, Financial Governance, Corporate Governance?
  2. What is the provision relating the incorporation of BFIs as per BAFIA?
  3. What are the provision relating to the capital formation of the BFIs?
  4. What are the provision relating to the prior-approval of BFIs according to BAFIA?
  5. Define the condition of share buy back according to BAFIA.
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