Bank and Financial Institution Act 2073 – BAFIA 2073 Summary

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Bank and Financial Institution Act 2073 – BAFIA 2073 Summary and Questions

Bank and Financial Institution Act 2073 – BAFIA 2073 Summary

The Bank and Financial Institution Act, 2073 (BAFIA 2073), enacted in 2016, provides the legal framework governing the establishment, regulation, and supervision of banks and financial institutions (B&FIs) in Nepal. The Act aims to ensure the stability and sound operation of the financial system, protect depositors’ interests, promote public trust in financial institutions, and support the economic development of the country. Here’s a comprehensive explanation of the provisions under BAFIA 2073 (source: Bank_And_Financial_Instituion_Act_2017):

Key Objectives of BAFIA 2073:

  1. Promote Public Trust in B&FIs:
    • Enhance public confidence in the financial system by ensuring reliable banking services.
  2. Ensure Quality Banking Services:
    • Establish a framework for providing high-quality, transparent, and reliable banking services to individuals and businesses.
  3. Keep Investors’ and Depositors’ Rights and Interests Secure:
    • Safeguard depositors’ funds and investors’ interests, ensuring fair treatment and transparency in banking operations.
  4. Mitigate Banking Hazards and Risks:
    • Protect the financial system from risks such as fraud, insolvency, and mismanagement.
  5. Promote Economic Liberalization:
    • Encourage market-driven economic policies to foster financial sector growth and national economic development.
  6. Legal Provisions for B&FIs’ Incorporation, Management, and Winding-Up:
    • Define the legal process for incorporating, managing, operating, and closing banks and financial institutions.

Key Features of BAFIA 2073:

  • Umbrella Regulatory Law: BAFIA is the primary law regulating B&FIs in Nepal.
  • Comprehensive Financial Regulation: The Act integrates the regulation of various financial institutions into one law.
  • Focus on Good Governance: Emphasis on maintaining transparency, accountability, and ethical standards within the financial sector.
  • Stability and Compliance: Aimed at ensuring financial stability and compliance with national and international standards (e.g., Anti-Money Laundering).
  • Legal Framework for Share Transactions and Buybacks: Provisions regarding capital structure, shareholding, and buyback of shares.
  • Focus on Consumer Protection: A significant portion of the Act is dedicated to protecting depositors and promoting transparency.

Major Provisions of BAFIA 2073:

1. Incorporation of B&FIs:

  • Prior Approval from NRB: Any new bank or financial institution must get prior approval from Nepal Rastra Bank (NRB) before incorporation.
  • Public Company Requirement: Banks and financial institutions can only be incorporated as public companies.
  • Documents Required: The application to NRB for incorporation must include:
    • Memorandum of Association (MOA)
    • Articles of Association (AOA)
    • Feasibility Study Report
    • Promoters’ details
  • NRB’s Approval Timeline: NRB has to provide approval or refusal within 120 days from the application date.
  • Conditions for Refusal: NRB may refuse approval if:
    • Promoters have criminal charges (e.g., fraud, money laundering).
    • The proposed name is similar to an existing B&FI.
    • Objectives and activities violate legal provisions.

2. Capital Formation and Share Transactions:

  • Capital Structure Requirements:
    • At least 30% of shares must be allocated to the general public.
    • At least 51% must be held by promoters.
    • Maximum 0.5% for employees.
  • Share Issuance: B&FIs must submit a prospectus to NRB before issuing share capital.
  • Share Transaction Approval: Any share transactions must be reported to NRB within 7 days.
  • Lock-Up Period:
    • 10 years for promoters to convert shares to the public.
    • 5 years for promoters to transfer shares.
  • Buyback of Shares:
    • B&FIs can buy back shares, but only if it’s specified in the AOA, after obtaining approval from NRB, and using profits.
    • The buyback amount cannot exceed 20% of the general reserve fund.

3. Board of Directors (BOD):

  • Composition:
    • The BOD should consist of 5-7 members.
    • Members can serve a maximum of 2 terms.
    • Only one member from each family is allowed.
  • Qualifications of Directors:
    • General directors must have at least a Master’s degree or Bachelor’s degree with 3 years of work experience.
    • Independent directors must meet specific educational qualifications depending on the class of bank.
  • CEO Appointment:
    • The BOD appoints the CEO, who can serve up to 2 terms.
    • The CEO must hold a Master’s degree, or have 10 years of relevant experience.

4. Licensing and Operation:

  • Prior License Requirement: No B&FI can operate without NRB approval.
  • License Application: To obtain a license, an application must be submitted along with documents like AOA, MOA, and other relevant papers.
  • NRB Approval: NRB reviews and issues approval within 120 days, with a refusal option within 90 days.

5. Capital Funds and Reserves:

  • Capital Adequacy: B&FIs must maintain capital funds as prescribed by NRB, including a general reserve fund.
  • Foreign Exchange Reserves: B&FIs must maintain foreign exchange reserves.
  • Liquidity Requirements: B&FIs must also maintain a liquidity fund as per NRB’s guidelines.
  • Dividend Distribution: NRB approval is required for declaring and distributing dividends.

6. Loan Provisions and Loan Recovery:

  • Loan Advances: B&FIs must follow proper procedures when advancing loans, conducting loan inspections, and ensuring recovery processes comply with NRB regulations.

7. Compliance with Money Laundering Act:

  • B&FIs must comply with the Money Laundering Prevention Act to prevent illegal financial activities.

8. Accounting, Auditing, and Record Management:

  • B&FIs are required to maintain proper accounting records, undergo regular audits, and follow proper record-keeping practices as prescribed by NRB.

9. Mergers and Acquisitions:

  • B&FIs must seek NRB’s approval for mergers and acquisitions, ensuring these processes comply with legal and regulatory requirements.

10. Voluntary and Compulsory Winding Up:

  • The Act outlines provisions for the voluntary and compulsory winding up of B&FIs, with NRB’s role in the process.

11. Punishment and Penalties:

  • Penalties are imposed on B&FIs that violate the provisions of the Act, including operations without a valid license or failure to comply with NRB’s directions.

12. Deposit Protection and Transparency:

  • B&FIs are mandated to ensure transparency in deposits and protect depositors’ rights, including clear disclosure of terms and conditions of deposits.
  • There is a provision to protect depositors in case of a financial institution’s failure.

Key Provisions in Relation to Share Buyback:

  • Conditions for Buyback:
    • If AOA contains provisions for share buyback.
    • The SGM passes a resolution for the buyback.
    • Buyback is executed only from profits and within the limit of 20% of the general reserve fund.
    • NRB’s prior approval is mandatory for the buyback.
  • Process:
    • An application detailing the buyback rationale, methodology, and terms must be submitted to NRB.
    • NRB will approve or refuse the application based on the details provided.
    • Once approved, the buyback must occur within 6 months, or 1 year from the date of resolution.
    • After the buyback, B&FIs must deregister the shares within 120 days.

Conclusion:

The Bank and Financial Institution Act, 2073 (BAFIA) serves as the primary legal framework governing the financial sector in Nepal. It ensures the sound and stable operation of banks and financial institutions, protecting both the interests of depositors and the overall financial system. The Act’s comprehensive provisions, ranging from incorporation and capital formation to share transactions, governance, and mergers, are aimed at ensuring transparency, compliance, and effective financial management in the country’s banking sector.

Questions from the Bank and Financial Institution Act, 2073 (BAFIA):

  1. What is the process for incorporating a Bank and Financial Institution (B&FI) under BAFIA 2073?
  2. What documents are required to obtain prior approval from Nepal Rastra Bank (NRB) for incorporating a B&FI?
  3. What are the minimum and maximum capital requirements for B&FIs under BAFIA?
  4. What is the lock-up period for promoter shares under BAFIA 2073?
  5. What qualifications are required for the Board of Directors (BOD) of a B&FI under BAFIA?
  6. What is the process for appointing and terminating the CEO of a B&FI?
  7. What are the provisions for maintaining capital adequacy ratio and reserve funds in B&FIs?
  8. What is the procedure for declaring and distributing dividends by a B&FI under BAFIA?
  9. How does BAFIA ensure compliance with the Money Laundering Prevention Act?
  10. What are the penalties for B&FIs that operate without a license under BAFIA?

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