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DOMESTIC
LEGAL PROVISIONS REGARDING BANKING SECTOR
Nepal
Rastra Bank Act, 2002 has given full authority to the Nepal
Rastra Bank regarding regulation, inspection and supervision of
the banks and financial institutions. Any person wishing to
incorporate a bank or financial institution to carry on financial
transactions should incorporate a bank or financial institution
as a registered public limited company under the prevailing law
of Nepal with prior approval of NRB by fulfilling the conditions
prescribed in section 4 of the ordinance. The individual desiring
for the incorporation of such entity is required to submit an
application to NRB for prior approval with the prescribed
documents.
The bank
or financial institution desiring to conduct financial
transaction must submit an application for license to the NRB in
the prescribed form including the prescribed fees, documents and
description. NRB will grant license if it is satisfied with the
basic physical infrastructure of the bank or financial
institution;
The NRB
can issue directives to the license holder entity to increase its
authorized, issued and paid-up capital if it deems necessary.
Similarly, the license holder entity must maintain a capital fund
according to ratio prescribed by NRB based on the basis of its
total asset or risk weighted assets, and other transactions. At
the same time, the license holder entity must maintain a risk
fund according to ratio prescribed by NRB based on the basis of
liability relating to its total asset and the other risk to be
borne from off balance sheet transaction. The license holder
entity must maintain general reserve fund regularly every year
till the amount becomes double of the paid up capital of such
entity.
EXISTING
RULES AND REGULATIONS RELATING TO THE BANKING SECTOR
Followings
are the requirements for establishing a new commercial bank in
Nepal
Regarding
Paid up capital Requirements
1.
To
establish a new commercial bank of national level, the paid up
capital of such bank must be at Rs. 2000 million.
2.
To have an
office in Kathmandu, the bank is required to have either joint
venture with foreign banks and financial institutions or a
technical service agreement (TSA) at least for three years with
such institutions.
3.
In
general, the share capital of commercial banks will be available
for the promoters up to 70 percent and 30 percent to general
public. The foreign banks and financial institutions could have a
maximum of 75 percent share investment on the commercial banks of
national level. In order to provide adequate opportunity for
investment to Nepali promoters in National level banks, only 20
percent of total share capital will be made available to general
public on the condition that the foreign bank and financial
institution are going to acquire 50 percent of total share.
4.
Banks that
are already in operation and those who have already obtained
letter of intent before the enforcement of these provisions have
to bring their capital level within seven years, i.e., by 16 July
2009 as per this recently declared provision. In order to
increase in the capital such increase should be at a rate of 10
percent per annum at the minimum.
5.
Banks to
be established with foreign promoters' participation have also to
be registered fulfilling all the legal processes prescribed by
the prevalent Nepal laws.
6.
Banks to
be established outside Kathmandu Valley could be allowed to
operate throughout the kingdom including Kathmandu Valley only on
the condition that they have operated satisfactorily at least for
a period of three years and they have brought their paid up
capital level up to Rs. 2000 million and also fulfilled other
prescribed conditions. Unless and until such banks do not get license
to operate throughout the kingdom, they will not be allowed to
open any office in Kathmandu Valley.
7.
Of the
total committed share capital, the promoters has to deposit in
NRB an amount equal to 20 percent along with the application and
another 30 percent at the time of receiving the letter of intent
on the interest free basis. The bank should put into operation
within one year of receiving the letter of intent. The promoters
have to pay fully the remaining balance of committed total share
capital before the banks comes into operation. Normally, within 4
months from the date of filing of the application, NRB should
give its decision on the establishment of the bank whether it is
in favor or against it. If it declines to issue license, it has
to inform in writing with reasons to the concern body.
PROCEDURAL
ASPECTS FOR ESTABLISHING A COMMERCIAL BANK
The
following documents should be submitted sequentially while
applying for the establishment of a Commercial Bank.
1.
Following documents are required to be submitted along with the
application to establish a commercial bank: -
a)
Application
b)
Bio-data
of promoters
c)
Feasibility
Study Report on the proposed commercial bank in the format
prescribed by the Nepal Rasta Bank.
d)
Attested
photocopies of the minutes within the promoters to organize the
bank.
e)
Promoters
agreement relating to operation of the bank
f)
Copies of
Articles of Association and Memorandum in the prescribed format
in the Company Act, 1996. The memorandum should compulsorily
include, inter alia, the provision that no person, firm, company
and related group of company will be allowed to hold beyond the
10 percent stake on the issued capital in one bank and altogether
15 percent stake in all the commercial banks.
2.
Requirements in the case of participation of the firm established
in Nepal:
a)
Photocopy
of firm registration certificate
b)
Broad
resolution stating the amount to be invested in the proposed bank
c)
Certified photocopies
of Articles of Association and Memorandum of the investing firm.
d)
List of Directors and proportion
of their share ownership
e)
Tax
clearance Certificate of the firm and its directors
3.Certified
documents on prescribed amount deposited in the Nepal Rastra Bank
4.
Commitment document of the collaborating foreign bank and
financial institutions providing Technical Service Agreement in
the case of proposed national level commercial bank to be
established in the Kathmandu valley.
5.
Additional requirements in the case of joint venture of foreign
banks:
a)
Certified
minute of the board of directors of the foreign bank with a
commitment of the amount to invest on the proposed bank
establishing in Nepal.
b)
Clearance
letter from the regulatory authority or the central bank of the
collaborating foreign bank.
c)
Last three
year's audited balance sheet, profit and loss statement and cash
flow statements.
d)
Certified
copies of joint venture agreement with Nepalese promoters to
invest in the proposed bank
e)
A statement,
in the case of the joint venture foreign bank has a holding bank
and financial institution or a branch office or a representative
office or liaison office in Nepal.
f)
A
justification, in the case of the joint venture foreign bank
already has a joint venture in any bank or financial institution
in Nepal.
Nepal
Rasta bank will provide the letter of intent to the applicants to
establish a bank within the four months of period the promoters
of the proposed commercial banks have had submitted all the
necessary documents and after the study and analysis of such
documents only if it would be appropriate to incorporate the
bank.
For this,
to obtain a the Letter of Intent form the Nepal Rasta Bank, the
certified document stating that the prescribed amount has been deposited,
should be produced. If the bank is not appropriate to establish,
the applicant will be notified by such information. The Nepal
Rastra Bank will also provide the required period to make the
bank operation while granting the letter of Intent. If the bank
will not come into the operation within such time period, it can
cancel the letter of intent provided to such bank.
Providing
of letter of intent shall not be regarded as the approval to
conduct the banking transactions.
After
obtaining the letter of intent, following additional documents
should be produced to the Nepal Rastra Bank seeking the approval
to conduct banking transactions:
1. An
Application
2.
Technical service agreement in case of foreign joint venture
3.
Certified documents stating that the committed amount by
promoters has been deposited fully in the Nepal Rastra Bank.
4. The
agreement document, if the bank premises are in rent, and the
site plan of the bank building along with necessary layout
required for bank operation.
5.
Information on recruitments of Staffs
6.
Statements on Software Application
7. Credit
Policy Guidelines (CPG) of the Bank
8.
Employees by-laws
9.
Information on all the physical infrastructure that are required
to operate a bank
The
operating license will be provided only after the conformation
that all the statements and documents are complete and on the
basis of physical infrastructure inspection report submitted by
physical inspection team comprising of members from Bank
Operations Department, Inspection and supervision Department and
Information Technology Department of this Bank.
Presently,
Nepal has not yet allowed foreign bank branches in the country
and only permits commercial presence by a foreign financial
institution – presently this is limited to a maximum equity of
75% (seventy five percent). However, during the course of accession
negotiation for membership in WTO and at the request of some WTO
members, Nepal has committed to allow foreign bank branches in
the context of wholesale banking, only after 1 January 2010 (i.e.
the transition period). In the mean time, the new Bank and
Financial Institution Ordinance has been enforced from 2004,
which has also incorporated a provision under section 4(3) that
allows incorporating a bank and financial institution in Nepal,
fully owned as a subsidiary of a Foreign Bank or a Financial Institution.
During the
course of negotiating for accession to WTO, Nepal made
commitments for bank branches. However, three aspects are worth
mentioning. First, there is a transition period where foreign
bank branches are only allowed as of January 1, 2010. Second,
entry of financial institutions are limited to a rating of at
least “B” by Credit Rating Agency e.g. MOODI, Standard & Poor
etc. Lastly, establishment of foreign bank branches are subject
to the domestic laws, rules and regulations and terms and
conditions of the Nepal Rastra Bank.
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