Procedure for Opening a new Commercial Bank in Nepal

Procedure for Opening a new Commercial Bank in Nepal

Facebook:      https://www.facebook.com/rktiwari.sagar Twitter:                     https://twitter.com/rktiwari991 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. FORAIGN BANK BRANCH: 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.