Banking Finance Law

Banking and financial law are hereby necessary to promote quality banking in Nepal, to protect the rights and interests of investors and depositors, and to protect from any banking risks. Hence, banking law is the branch of civil law that tries to perpetuate the credibility of the banking business.

  On the basis of the nature of business banking, it can be classified as follows:

- Central Bank, Commercial Bank, Development Bank, Cooperative Bank, Financial Institution.

On the basis of the Scope of business:- Domestic Bank, Multinational Bank,  International Bank

According to BAFIA, banks are classified as:-  Commercial Bank, A class-licensed Institutions;  Financial Institutions, B, C, and D class licensed Institutions

Company law confers personality and identity for each company established in any legal system. Section 3 of the BAFIA makes compulsory provision for incorporation and mention no individual can be recognized as a banking institution with incorporation. But to be a financial intermediary there are some provisions in banking business after fulfilling the requirement determined by the central bank and as provided in Financial Intermediaries Act, 2055.

Section 3 of BAFIA, 2073 allows every person who wants to establish a bank or financial institution to conduct financial transactions under this act.

A person intending for this may do so by registering it as a public limited company under the provision of existing company law.

Section 4 of BAFIA, makes the provision for prior approval to be obtained from NRB before registration of a public limited company for the purpose of establishing a bank or financial institution. And after being registered as a banking company it needs to obtain a license from NRB to start the transaction. Hence, in our legal system, every bank or financial institution has to pass out 3 steps for its establishment. These are:-

1. Prior approval of NRB.
2. Incorporation of the company.
3. Getting a License for transactions.

Prior approval (Letter of Intent) of NRB.

The documentary requirements necessary for the prior approval are listed below:-

1. Memorandum of Association of the proposed bank or financial institution. (3 copies required)
2. Article of Association of the proposed bank or financial institution. (3 copies required)
3. The feasibility study report of the proposed bank or financial institution. (6 copies required) and in the case of the financial institution of class D, only the business plan is enough.
4. Personal particulars of the promoters in the form prescribed by NRB.
5. A certified copy of the agreement signed, if any, among the promoters before the establishment of the bank or financial institution in relation to the establishment of the bank or financial institution.
6. Evidence of clearance of tax by the promoters up to the fiscal year immediately preceding the date of application under this section.
7. Other particulars and documents prescribed by NRB in relation to the establishment of a bank or financial institution. (This includes a citizenship certificate and latest academic qualification and proof of experience.)

The banks or financial institutions having joint ventures with foreign banks or financial institutions have to provide the following further requirements as follows:-

1. Copy of the decision of the board of directors regarding their interest to invest in the proposed Nepalese bank or financial institution.
2. No objection letter from the central bank or regulator of the respective country.
3. Audited balance sheet, profit and loss account, and cash flow statement of last three years.
4. Certified copy of joint venture agreement.
5. Documents about the investment, branch, representatives, or contact office in Nepal, if any.

In case of any legal person registered under Nepalese law as a promoter of any proposed bank or financial institution, such organization should furnish the following documents:-

1. Copy of the certificate of incorporation and license for the transaction.
2. Copy of the decision of the board of directors about the amount of investment and representative, if any.
3. Certified copy of the memorandum of association, article of association, and regulation of such company.
4. Name of directors, the proportion of share ownership, name of the organization in which they have a financial interest, and detail of directors of that organization.
5. Tax clearance certificate of such organization and directors for the previous year.
6. Audited balance sheet and profit loss account of the previous two years showing a profit.

After submission of these documents and necessary fees, NRB will decide to give or reject issues prior to approval by scrutiny of the details of such application within 120 days.

The basis for the rejection is determined in the Policy and   Procedural Arrangement for Incorporation of Bank or Financial Institution, 2063, such are listed below:-

1. If the name of the proposed bank or financial institution is identical to the already established one.
2. If the name and financial transaction are against the public interest, common morality, religion, caste, or ethnicity, and inappropriate for any reason.
3. If the objective is against the law.
4. If it is inappropriate to establish.
5. If there is no point to believe the transaction will be fair and competitive on the basis of the feasibility report and another document.
6. If the application is not received from all the promoters and authorized persons for the registration of the memorandum and article of association of the proposed bank or financial institution.
7. In the case of lacking the name and signature of the witness in MOA and AOA.
8. If all the promoters have not agreed to subscribe to a minimum of one share of the proposed bank or financial institution.
9. If the number of shares, to which promoters have agreed to subscribe, is not mentioned in MOA.
10. In case of not submission of fees and documents determined by section 4 (1) of BAFIA.
11. In case of not submission of the documents on time as demanded by NRB while examining the application of prior approval.
12. If there is a chance of transferring the personal or organizational risk in banking, depositors are deemed to be at risk when providing the license to any person or organization.

Addition on, BAFIA 2073, section 4(3) Letter of intent (LOI) cannot be issued if the promoters of the proposed company are:-

1. If punished by NRB under its regulatory authority.
2. Convicted for a crime related to Banking Offenses.
3. Convicted fraud, and forgery.
4. Convicted of a crime related to Money Laundering and Terrorist Financing.
5. Convicted in corruption.
6. Convicted in heinous crimes like human trafficking, abduction, and rape. etc.

Process of getting LOI for the company with Foreign Investment

Section 5 of BAFIA, 2073 makes the following requirements to submit the application of LOI by such company to NRB for LOI.

1. MOA and AOA of foreign banks or financial institutions and a copy of the certificate of incorporation and capital structure thereof.
2. Copy of license of the foreign bank or financial institution obtained from the concerned country for carrying on banking and financial transactions.
3. Details as to the principal place of business.
4. Certified copy of the audited balance- sheet and profit and loss account of the latest three years of the foreign bank or financial institution.
5. Details as to the proposed business plan in Nepal, business strategies and types of transactions to be carried out internal control, and risk management.
6. Decision made by the foreign bank or financial institution as per the prevailing laws of the concerned country to open a bank or financial institution in Nepal and authority granted by the regulatory body of a concerned country.

*After getting the application along with the above-mentioned documents the NRB can decide to grant LOI within 120 days of application.

We hereby certify that a renowned law firm in Kathmandu offers legal services to national and international banks and financial institutions by assisting with the issues of

1.) Banking Consulting,

2.) Banking Compliance,

3.) Structuring of Transactions,

4.) Debt Recovery,

5.) Drafting and reviewing loan documents,

6.)Foreign exchange,

7.) Dispute Resolution,

8.) Represents the banks and financial institutions in court, providing legal opinions on various legal matters inherent to the banking and financial sectors.