LAW5802 Banking and Negotiable Instruments — Unit 3: Laws Relating to Bank and Financial Institutions in Nepal

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Unit 3: Laws Relating to Bank and Financial Institutions in Nepal

3.1 Licensing for Operating and Carrying on Financial Transaction

No institution may carry on banking or financial transactions in Nepal without a licence from Nepal Rastra Bank. The governing statute is the Bank and Financial Institutions Act, 2073 (2017) (BAFIA), which consolidated the earlier Act of 2063. An applicant must show minimum capital, a fit-and-proper promoter group and management, a credible business plan, and a permissible institutional class. NRB may refuse a licence for recorded reasons. The licence can be cancelled for serious violations after due process.

3.2 Formation, Composition of Banks and Financial Institutions

3.2.1 Commercial Bank

A “class A” institution. It accepts demand and time deposits from the public and provides the full range of credit, payment, and trade-finance services. Incorporation under company legislation plus a BAFIA licence — the dual-door rule: corporate form first, banking licence second.

3.2.2 Development Bank

A “class B” institution. It finances priority sectors — agriculture, hydropower, tourism, small industry — often with a regional or sectoral focus. Its licence restricts the scope of business compared with commercial banks.

3.2.3 Finance Companies and Co-operatives

Finance companies (“class C”) — hire-purchase finance, consumer credit, and deposit taking with narrower limits.
Co-operatives — member-owned savings and credit societies operating under cooperative legislation; where they conduct financial transactions beyond the cooperative framework’s scope, the supervisory debate over “bye-bank” cooperatives has been a live policy issue in Nepal.

3.3 Power and Function of Banks and Financial Institutions

3.3.1 Carrying Financial and Monetary Transactions

Institutions may conduct the transactions their class licence permits: deposits, credit, guarantees, remittance, trade finance, and related services — all within the monetary policy and directive framework of NRB.

3.3.2 Accepting Deposit

Deposits may be accepted in current, savings, fixed, and other permitted forms. The banker becomes debtor to the depositor (Unit 4 develops the relationship). NRB sets deposit-rate floors or bands from time to time by directive.

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