BANKING LAW

Introduction
Meaning and Concept of Bank and Financial Institutions

• Financial institutions are those who deals with financial and monetary services such
as deposit mobilization, investment, extending loans, financial guarantee,
underwriting, currency exchanging etc. Under the broad definition of financial
institution, banks, development banks, finance companies, insurance companies,
brokerage companies, Citizen Investment Trust, Employee Provident Fund, micro
credits etc are included. They all act as the capital fund creator and fund mobilizer of
the economy and pay their own roles for channelizing funds from surplus sector to
deficit sector.

• Banks are the financial institutions which deals with credit. Banks buys credit from in
the form of various types of deposits and sells the credit in the form of loans to the
borrowers. Banks collects the scattered deposits from the surplus sector of the
economy and makes a sizeable fund out of it and ultimately lends it to the deficit
sector (needy customers). In other words, banks are the vital financial intermediaries
which make the economy run and prosper. Modern banking is not limited to deal with
deposits and credits only but it has evolved as an important segment which provides
ranges of financial services like agency services, custodian services, foreign exchange
services, trade finance solutions, digital banking services etc to the customers.
Customers of banks are individuals, business entities, corporations, Government and
her bodies.

• A per BAFIA, 2073 BS, “Bank or financial institution” means a bank or a financial
intuition which has obtained a license pursuant to this ACT for carrying on banking
and financial transactions.
 Features of Banks

• Deals with money, one of the most sensitive product or asset in the world.

• Collects scattered deposits from surplus sector and creates sizeable capital fund and
lends it to the needy or deficit sector.

• Credit Creation: ability to expand its liabilities in multiple of reserves as an multiplier

effect in the economy.

• Earns responsible profit only as a commercial institution unlike others

• Creates demand deposit and runs the payment system in the economy

• Reservoir of economic growth

• The medium to implement the economic and monetary agenda of a nation.

 History of Banking in the World

 Historical backdrop of banking presents the advancements of bank and banking

practices through history characterized up to the current days’ banking practice.
The word bank itself is derived from the word Bancus or Banque, which means
bench.
 Jews people started the primitive banking by sitting on a bench, they started basic
lending and deposit function and if unfortunately they turned insolvent, in such
case, the bench used to be broken and the word bankrupt evolved from there.
Money dealers were found in ancient Florence who used to receive and lend
money. Goldsmiths of England were also engaged in the ancient practices of
receiving and lending money.
 In the eastern civilization as well, we can trace out existence of loan practice as
per Manu Smriti where as in some parts of this book has been spoken about the
rues, interest and installments.
 So far as, the modern baking is concerned, ancient Rome and present Italy is the
pioneer. The same has been started with the establishment of Bank of Venice in
1157 AD.
Name of Bank Establishment Year (AD)

Bank of Venice 1157

Bank of Barcelona 1401
Bank of Genoa 1407
Banca Monte Dei Paschi di Siena 1472
Bank of Amsterdam 1609
Bank of England 1694
 History of Nepalese Banking
Although the modern banking in Nepal doesn’t have such huge history, Nepal being an
ancient and independent nation, we can trace out the ancient banking practices here from
very early time even from the Vedic era. It is found documented that a new era named
Nepal Sambat was started by Sankhdhar Sakhwa, a philanthropist, after paying all loans
of the people of the country in 879 AD. It is also found documented that Gunakamadev
had taken loan to reconstruct Kathmandu (8th Century).

In Malla era also (11th Century), the proof of existence of money lenders and financiers
can be traced out from the historical documents. People in Nepal used to trade with Tibet
that time also but the banking sector was not associated with Nation or institutionalized
rather they were carried out by sahu, Mahajan, who used to charge heavy interest and fees
on the money lending.

Tejarath Adda (1880)- established by Prime Minister Ranodeep Singh started somehow
formal credit mobilization in Nepal but This was not for common public. The deposit were
given by the Government only and the same used to be loaned to Government employee
and landlords only.

Nepal Bank Limited (1937)- with a authorized capital, issued capital and raised capital of
100 lakh, 25 lakh and 8.42 lakh respectively. It is the starting of commercial banking in
Nepal.

Nepal Rastra Bank (1956) - with a global necessity to meet international standard and
help the Government to make policies and govern the banking sector as the central bank.
 History of Nepalese Banking
• NIDC (1959)
• EPF (1962)
• Cooperative Bank (1964) and LRSC (1966)
• Merged to form ADBN
• RBB (1966)
• Till mid 80’s 2 banks and 2 development banks fully owned by Government
• Financial liberalization policy played crucial role for development of banking
sector
• Amendment of Commercial Bank Act (1974), enactment of Finance Company
Act (1985) and Development Bank Act (1992)
• Nabil Bank Limited (1984)- First joint venture bank
• After political change of 2047 BS (1990 AD)- banking sector flourished
• Decade after 2050 BS- due to insurgency economic activities severely
affected. Banking sector remained almost unaffected
• As number of Banks and Fis grew up, the sector start to show problematic
symptoms…..
• NBL/RBB got affected due to weak credit management and poor governance
• Regulator strengthened by NRB act 2002
• Monitoring/regulating functions given priorities and several directives where
issued as problems arose
• NCC-NBB case/HNB Development Bank Case
 History of Nepalese Banking
• By end of Ashad 2069, no of commercial banks up to 32
• Enactment of Bafia in 2006
• Capital enhancement of Bank and Financial Institutions
• No positive result other than ballooning
• Business people and bankers (No separation)
• Merger and acquisition facilitation
• Big Merger/Merger incentives
As per date of Mid June, 2023

Type of Bank and FIs Nos

Commercial Banks 21

Development Banks 17

Finance Companies 17

Micro-finance Companies 63

Infrastructure Bank 1
 Evolution of Banking Law in Nepal
Tejarath Addaha (1933 BS)
 First step in the institutional development in banking
 Extended loan at 5% per annum against gold, silver and ornaments
Taksar and Muluki Khana (1988 BS)
 Issued coin and also issued notes of 1, 5, 10 and 100 into practice on 1 st Ashwin, 2002 as body of
then Government-Sadar Muluki Khana
Establishment of NBL under Nepal Bank Act 1993
 Commencement of modern banking in Nepal.
 It was a milestone in Nepalese Banking History
 Till NRB was established, some authorities of central bank were also assigned which were later
withdrawn.
 Went under Banijya Bank Act of 2020 after its enactment.
NRB Act 2012
 Starting banking of international standard and formats of financial statements dragged the
realization of the necessity of central bank.
 NRB was established in 2013 as per the NRB act 2012 as the regulator of banking sector.
 Apart from this, NRB,
 Issues notes and coins
 Acts as financial advisor of the Government
 Public debt management
 Foreign exchange regulation
 Determination of interest rate
 Controller of credit and money supply
 Evolution of Banking Law in Nepal
Nepal Industrial Development Corporation Act 2016
 To provide loans and technical advise the institutions that are working in the area of the industrial
development of the nation.
 Later merged with RBB.
Banijya Bank Act 2021
 Establishment of Rastriya Banijya Bank in the year 2022 as per Banijya Bank Act 2021.
 Later Banijya Bank Act 2020 and 2021 are taken over by Banijya Bank Act, 2031, which was
designed to incorporate all commercial banks under it.
Agriculture Development Act 2024
 ADBL was established on Magh 7, 2024 under Agriculture Development Act, 2024.
 It was a merger of Cooperative Bank and Land Reform and Saving Corporation (LRSC).
 The purpose of establishing ADBL was to optimization of agriculture sector and work for economic
welfare of people by providing agricultural loans at minimal interest rate.
 Later also got permission to operate as a commercial bank under Banijya Bank Act, 2031
Banijya Bank Act 2031
 After the enactment of this act, Banijya Bank Acts of 2020 and 2021 were dismissed.
 The purpose/objectives of this act were
 Economic upliftment of people by simplification of commercial, industrial and agricultural
loans.
 Providing banking services to country and people
 Mobilizing various types of interest bearing and interest free deposits
 Providing loans against collateral, hire purchase loans, consortium financing etc
 Carrying out various investment functions
 Issuing, accepting, paying, discounting and selling letter of credit, bills of exchange,
promissory notes, cheques, traveller’s cheques, draft and other financial instruments.
 Evolution of Banking Law in Nepal
Finance Company Act, 2042
 Enactment of finance company act for the unification of widely scattered
capital in surplus sector and make the funds available to the needy or
deficit sector.
 Limited area of operation then commercial banks.
Development Bank Act, 2052
 Enacted for the purpose of development, expansion and productivity
improvement of agricultural, industrial, commercial as well as other
prospective sectors and providing them with not only the funds but also
the necessary equipment and technologies.
 Many rural development and development banks are established under
this act.
NRB Act, 2058
 NRB act 2012 was amended and NRB Act 2058 was enacted from 17 th
Magh, 2058.
 It reformed the Nepal Rastra Bank itself and give the full and complete
authority to NRB as the powerful regulator of banking sector. Earlier, NRB
act 2012, was turned unable to address the banking issues of the country
due to lack of providing enough power to NRB to regulate the sector.
 Evolution of Banking Law in Nepal

BAFIA, 2063
 Different types of financial institutions working for same purpose are being
operated under different acts, which had created difficulties in licensing,
supervising, controlling, directing, issuing directives etc.
 To overcome this problem, a single unified act was developed and enacted
after which separate acts for different financial institutions were deactivated.
 The main features were
 Unified law promoting autonomous banking system with systematic law and
provisions
 Integrated concept for company administration of this sector.
 Regulation based control and balance
 Clear provision in relation to capital – Capital Adequacy, branch banking and joint
investment
 Re-registration required for earlier financial institutions to come under BAFIA 2063
 Adoption of uniform and appropriate accounting system and provision of
accountability
 Clear provision for merger and acquisition
 Clear provision in relation to punishment
 Evolution of Banking Law in Nepal

BAFIA, 2073
 After the enactment of BAFIA 2063, it was amended as BAFIA 2073 to rectify
various short comings and making it m0re stringent.
 The objectives of the amended acts were to
 Promote public trust towards banks and financial institutions
 Provide reliable and quality banking service
 Protect right and interest of depositors and investors
 Protect from banking hazards and risks
 Promote the economy by liberalization
 Promulgate legal provisions to incorporate, manage, operate and wind up bank and financial
institutions
 The features of BAFIA, 2073 are
 Its an integrated umbrella law
 It is focused to get geed governance in licensed institutions and overall financial stability
 Compliance of various acts like Asset Laundering Prevention Act
 Incorporation of banks and fis as a public company
 Ensuring transparency and protection of deposits
 Classification of banks and Fis
 Voluntary and compulsory winding up – outlining of provisions
 Prohibited functions for bank and financial institutions
 Role of Banking in Socio-economic Development

 Capital Formation
 Encourages entrepreneurial innovation and creativity
 Monetization of economy
 Develops saving habits in people
 Increases employment opportunities
 Boosts economic activities and economic mobilization
 Development of infrastructure
 Implementation of monetary policy
 Promotion of trade and industry
 Encourages right type of industry
 Maintains balance of payment
 Regional Development
 Development of underprivileged sectors
 Ensures balanced development