Unit -2

Central Bank and Legal system

Functions, Duties and Rights of Nepal Rastra
Bank (NRB)

 The central bank is established in every

country for the monetary, banking and
financial development. The central bank
is established for regulating the banks
and financial institutions as well as
helping in formulating the monetary
policies in the economy. The major
functions and rights of the central bank
are as follows
Functions and Duties of Nepal Rastra Bank

 To issues bank notes and coins

 To formulate necessary monetary policies and implementation in order to maintain
price stability
 To formulate foreign exchange policies and to implement or cause to implement them
 To manage and operate foreign exchange reserve
 Issuing license to commercial banks and financial institutions to carry on banking and
financial business and to regulate, inspect, supervise and monitor them
 Act as banker/ agent/ financial advisor of the Government of Nepal
 Act as the bank of the banks and to function as the lender of the last resort
 Develop and promote a secure, healthy, efficient payment system
 Raising money for the Government of Nepal
 Make appropriate supervision of the baking and financial system in order to maintain
its stability and foster its healthy development
 Perform other activities required to obtain other objectives
Functions and Legal power of NRB
 Issue of paper money and coins
 Bankers to the government
 agent to the government
 advisor to the government
 Custodian of the banks
 Custodian of the foreign currency
 lender of The Last Resort
 credit control
 transfer of fund
 clearing house functions
 publication of economic and statistical information
 promotional and development functions
 miscellaneous functions

NRB Relationship with Government and
other agencies.
 Relation Between Government of Nepal and the Bank
 Co-ordination with Public bodies
 International co-operation and relationship.
 Chapter-3

Structure and Formation of Bank

and Financial Institutions

Shiva raj Sharma

Learning objectives of this chapter

 Understand the licensing policy for bank and financial

institution.
 Capital requirement of financial institution
 Eligible criteria and fit in proper test for potential promoter
 Types and functions of bank and financial institution
 Know the composition and roles and responsibility of bod.
Types of bank and financial institution
in Nepal.
 Commercial Bank (A Class)
 Development Bank (B class)
 Financial Company (C class)
 Micro Finance Company (D class)
 Nepal Infrastructure Development Bank
Functions of bank and financial institutions
as per BAFIA 2073

Functions of Commercial bank

(a) To accept deposits or to mobilize deposits through various financial
instruments and make payment thereof with or without interest,
(b) (b) To accept deposits, making payments, carrying out transactions, carry out
intermediary services and transfer funds to other headings through various
electronic instruments or devices,
(c) (c) To lend loans including hire-purchase, leasing, housing and overdrafts,
(d) (d) To lend loans on collateral of project and hypothecation and lending or
causing to be lend loans in consortium financing having divided the collateral
on pari passu basis according to mutual agreement entered into between one
another,
Functions of a commercial bank

A commercial bank is a profitable organization that provides all kinds of banking

services to monetize the industry, trade and economy of the country. Commercial
banking activities are mentioned in the Banking and Financial Institutions Act, 2073,
Section 49 (1). Here are some important ones:
1. Deposit collection (current, savings, term, call and margin) of an individual /
institution and deposit mobilization and its payment through various financial
instruments,
2. Loan flow to individuals/institutions (loans including hire purchase, leasing,
housing, overdraft etc.)
3. Project Lending and consortium financing and hypothecation loans,
4. Providing loan on the guarantee of foreign bank or financial institution
5. Refinancing from Rastra Bank or borrow from other BFIs as required,
6. Issue, accept, pay, discount or buy or sell letters of credit, bills of exchange,
affidavits, cheques, travellers cheques, drafts or other financial instruments.
7. Buying and selling gold and silver ,
8. Foreign exchange trading,
9. To conduct government business as per the instructions of NRB
10. Issuing digital or card devices for electronic transactions,
11. Remittance service (from Draft , Swift , Fax , ABBS, etc.)
12. Performing Off-Balance Sheet transactions
13. To buy or sell bonds issued by the Government of Nepal or NRB
14. To provide loans as prescribed by the National Bank on individual or collective
guarantee for the economic upliftment (utthan) of the poor, low income and residents of
any area,
15. Other functions (such as technical consulting, agent for protection as well as sale or
purchase of securities, safe deposit Vault, etc.)

In conclusion, commercial banks provide banking services in accordance with the

policy adopted by the economy.
Functions of development bank
The functions of Development Bank ("B" class) are given in Section 49 (2) of
BAFIA, 2073. The main functions are given below:
1. Accept deposits with/without interest or mobilize deposits by issuing various
instruments and paying them off
2. To accept deposits, making payments, having transactions, carry on
intermediary services and transfer funds through various electronic
instruments or devices,
3. Hire Purchase, leasing, Housing, overdraft and other lending,
4. Re-finance from Rastra Bank or borrow from other BFIs as required ,
5. To conduct foreign exchange business under the prevailing law.
6. To buy or sell bonds issued by the Government of Nepal or NRB
7. Performing Off-Balance Sheet transactions
8. To provide loans as prescribed by NRB on individual or collective guarantee for
the economic upliftment of the poor, low income and residents of any area.
9. . Providing project collateral and co-financing loans,
10. Issuance of security on behalf of the customer,
11. Bills, Pledges, Cheques, Travellers Cheques, Draft Issuance, Acceptance,
Payment, Discount or Purchase,
12. Borrowing loans on the mortgage of movable/immovable assets,
13. To transact letters of credit and remittances with the prior approval of the
National Bank,
14. Transferring money within Nepal,
15. Other functions (such as securing securities as commission agents, buying and
selling securities, arranging safe deposit vaults, etc.)

In conclusion, BAFIA has barred the development bank from carrying out
many activities like commercial banks, especially foreign exchange transactions,
gold and silver transactions, intermediaries, hypothecation loans, issuance of
digital cards, etc.
Functions of a finance company
The functions to be performed by a finance company ("C" class) are given in
Section 49 (3) of the BAFIA, some of the main functions of which are as follows.
1. Accept deposits with/without interest or mobilize deposits by issuing various
instruments and paying them off
2. To accept deposits, making payments, having transactions, carry on
intermediary services and transfer funds through various electronic instruments
or devices,
3. Re-finance from NRB or borrow from other BFIs as required
4. To provide loans as prescribed by NRB on individual or collective guarantee for
the economic upliftment of the poor, low income and residents of any area.
5. Giving loans including hire purchase, leasing, housing,
6. Consortium financing,
7. Borrowing loans on the mortgage of movable/immovable assets,
8. Bills, Pledges, Cheques, Travellers Cheques, Draft Issuance, Acceptance,
Payment, Discount or Purchase,
9. To transact letters of credit and remittances with the approval of NRB,
10. Provide installment or hire purchase loans for vehicles , machine tools,
equipment , household durables or similar movable property
11. To rent vehicles, machinery, tools, equipment, household durable goods, or
similar movable property or to provide loans for rent (lease finance),
12. Issue guarantee on the basis of bank guarantee with terms and conditions,
secure loans, to take mortgage of movable/immovable assets or take third party
guarantee
13. Sell or lease any or all of property,
14. Other functions (such as securing securities as commission agents , buying
and selling securities, arranging safe deposit vaults, etc.)

In conclusion, although finance companies have slightly less scope of work

than commercial banks and development banks, their special importance is seen
in the work of lending and leasing finance for movable property and hire
purchase.
Functions of Micro finance Institution
The functions to be performed by a microfinance financial institution ("D" class)
are given in Section 49 (4) of BAFIA which are as follows.
1. To disburse micro-credit, with or without any movable or immovable property
as the collateral or security, for operating any micro-enterprise prescribed by
the Rastra Bank to any project, any group or a member thereof which/who have
regularly saved for the period and maintained the prescribed saving,
2. To accept loans or grants from any bank or financial institution or native(desi)
or foreign organization or institution, and use such loans or grants(anudan) for the
supply of micro-credit or for making the same effective, Provided that approval
of the Rastra Bank shall be obtained prior to obtaining loans or grants from any
foreign organization.
3. Prior to disbursing micro-credits, evaluating the schemes for which micro-
credits have been requested and determining whether or not they are feasible,
4. To provide necessary services and consultation to groups with regard to
mobilization of micro finance,
5. To carry out necessary actions for recovery of the micro credits on time,
 6. To accept deposits and refund such deposits subject to the limit prescribed by
the Rastra Bank by getting approval of the Rastra Bank,
7. To issue shares, debentures, bonds, etc. for the purpose of meeting the capital
fund requirements,
8. To exchange information or notices on debtors or customers who have obtained
credit or any kind of facility from it and other bank or financial institutions with
the Rastra Bank or any other bank or financial institutions particulars of,
9. To carry out such other functions as may be prescribed by the Rastra Bank.

In conclusion , MFIs provide microcredit to promote micro-enterprises.

Functions of Infrastructure Development
Bank. (NIFRA)
The functions to be performed by Infrastructure Development are given in Section 49
(5) of BAFIA which are as follows.
1. To Disburse loans and financing in shares in projects relating to infrastructure
development
2. To Finance in securities of the companies operating projects relating to
infrastructure development,
3. 3. To open letters of credits and issue guarantees for purchase, sale or supply or
installation of machineries, equipment and tools required for construction and
operation of projects relating to infrastructure development,
4. 4. To issue financial instruments in national or foreign currencies with approval of
the Rastra Bank for collecting fund required for investment in projects concerning
infrastructure development and to acquire loan to that effect,
5. To mobilize resources by accepting long term deposits or issuing
debenture,
6. To carry on leasing transactions with approval of the Rastra
Bank,
7. To provide loans and facilities for projects by accepting
guarantee of foreign banks and financial institutions,
8. To carry out other functions as prescribed by the Rastra Bank.
In conclusion, the Infrastructure Development Bank works to
invest in infrastructure development.
 Composition of board of director
Formation of BOD
 Not less than 5 director and not more than 7 directors.
 At least one independent director from the list of professional export must be
selected.
 The structure of BOD must be based on for motor and public share ratio.
 More than one member from same family is not eligible for BOD.
 In case of independent director of his/her family who Subscribed more than 0.1
% of concerned BFIs are not eligible for independent directors.
 Same person does not eligible for different BFIs BOD.
 The tenure of chairman, Managing Director and chief executive officer(CEO) for
two terms but independent directors has been kept at just one year.
Roles and responsibilities of board of director

 Functions duties and power of board

 Delegation of authority
 power to form sub-committees
 appointment of director
Disqualification of directors
 who is below 25 years of age
 Who is of unsound mind or insane.
 If he or she has been declared bankrupt in Nepal or abroad for being unable to pay debt
 who has been blacklisted in Connection with any transition of bank and Financial
Institutions And a period of at least three year has not Complete Remove from that list.
 who is a director of any Bank in finance institution
 who is partner in any kind of contract agreement with the concern bank or financial
institution.
 membership of stock exchange
 Who is the serving employee of the Government of Nepal, NRB or BFIs.
 In case of retirement of higher class employee, just like governor, Deputy Governor or
special class employee at least one year from the date of such retirement from the
service has not completed
 Who is convicted by a court of an offense(aparad) involving moral turpitude(naitik patan)
and sentenced (punished).
 Who is convicted by a court of an offense of corruption or cheating.
 A period of 5 year has not left after the date on which the NRB has taken action.
Responsibilities and duties of Directors

 A Director shall not commit or cause to be committed any act for

personal benefit through a bank or financial institution or in the course
of the business of the bank or financial institution.
 A Director shall be personally liables (self responsible) for any act carried
out exceeding his/her authority as of a Director of a bank or financial
institution.
 A Director of a bank or financial institution shall assume responsibility
with regard to the risks management and internal control by following
sound business strategies of the institution.
 A Director shall not intervene(barrier) in the day to day business and
activities of the management of a bank or financial institution.
 A Director shall have to fully comply (implement) with the directives
issued by the Rastra Bank from time to time.
The End.
Chapter -4

Major Banking Law

Shiva raj Sharma

Feature of Nepal Rastra Bank act 2058

 Preliminary
 Establishment objectives and functions, duties and powers
 Formation of board and functions, duties and power
 Financial provisions
 Monetary functions and operation of open market
 Monetary units, banknote and coins
 Foreign exchange policy Regulation and reserve
 Relation with government of Nepal
 Regulation inspection and supervision of the bank
 Balance sheet, Auditing and report
 Offence punishment and proceeding
 Miscellaneous Provisions
Feature and provision of Bank and financial
institution act 2073 (BAFIA 2073)
BAFIA 2073 issued for regulate, monitor and control the entire banking activities in Nepal.
The BAFIA has following feature.
 Classification of bank and financial institution
 Issue Capital for general public and employees
 Conversion of promoters shares into public shares
 Prohibited for translations
 Disqualification of directors
 Allotment of shares
 prohibited for securities transactions
 Provision related to board of directors
 Provision related to qualification of board of directors
 provisions related to independent directors
 provision related to chief executive officer (CEO)
 Age of directors
 Provision regarding person holding constitutional post
 Promotion of bank and financial institution
 Provision of auditing
 Provision of possible losses
 Provision for tenure of directors
 Provisions of subsidiary company
 Take permission to open foreign Bank and financial institution
 Provision of merger and acquisition
 Provision of offence and punishment
 Supply and recovery of credits
 Functions of Bank and Financial Institutions
 Provision of dividend announcement and distribution
 other provisions
Banking offense and punishment act 2064
 This act establishment 2064/10/23
 First amendment 2073/06/18
 Second amendment 2076/01/02
Features
Chapter 1. Preliminary : In this chapter described about meaning of title Which is related to bank in financial institution
Chapter 2. banking offences
 3.Not to open an account or demand cash payment in an unauthorized manner
 4.Rejected from the first amendment.
 5. Not to make unauthorized withdrawals or payment
 6. Not to obtain or make payment by way of abuse or unauthorized use of electronic means.
 7. Not to avail or provide loan in an unauthorized manner
 8. Not to misuse credit
 9. Not to misuse banking resources, means and assets
 10. Not to acquire assets or open account by borrower who has over dues
 11. Not to stop the credit facility in the way to lose the working project of the borrower.
 12.Not to make a loss by making alternation in the account or ledger or by committing forgery or fraud.
 12(a) Not to transaction by fraudulent to BFIs or Cooperative or Union
 13.Not to derive excess, low or false evaluation or financial statement
 14.Not to carry out and causes to carry out irregular economic or financial transaction
 14(a) Dhukuti should not be traded.
 14(b) Not to carry out illegal banking transactions.
Chapter 3. Punishment

Suit amount up to imprisonment

 Up to 10 lakh rupees  1 year

 Above 10 lakh up to 50 lakh  2-3 year
 Above 50 lakh up to 1 crore  3-4 year
 Above 1 crore up to 10 crore  4-6 year
 Above 10 crore up to 50 crore  6-8 year
 Above 50 crore up to 1 arba  8-10 year
 Above 1 arba  10-12 year
Chapter 4. preceding and disposal of the suits
17. Time and limitation for the Lodgment of First Information Report
18. Government to be the plaintiff
19. Proceeding may be initiated by determining into the custody
19(A) To form a special investigation team
19(B) can demanded more details.
Chapter 5. Miscellaneous
20. help for investigation
21. action not be initiated on ground of breach of secrecy.
23. notice to be published.
26 waiver in the claim of punishment may be happen.
27. to be considered ineligible.
Money Laundering Prevention Act, 2064

 Date of Authentication and publication: 14 Magh, 2064,

 1st Amendment: 2068/02/18
 2nd Amendment: 2070/12/12
Features of the Anti-Money Laundering
(AML) Act, 2064
The Prevention of Money Laundering Act has been enacted(लागु गर्ु) in Nepal to make
legal provision for the prevention of money laundering and financial investment in
terrorist activities. The features of the Act are as follows.
 1. The Act has made clear provisions on what kind of activities like asset laundering,
terrorist activities, terrorist organizations, etc.
 2. The Act has defined the scope of the Act by giving a clear definition of financial
institutions and non-financial professionals and businesses.
 3. The Act prohibits transactions in anonymous or fictitious (benami or kalpanik) names.
 4. The Act prohibits the establishment and operation of shell banks that are not
physically present in Nepal and do not fall under the scope of regulation and
supervision.
 5. The Act provides for customer identification, Politically exposed persons (PEPs)
identification, beneficial owner identification, broad customer identification,
simplified customer identification and existing customer identification according
to customer category while establishing business relationship with the customer,
opening account, casual transactions etc.
 6. The Act provides for wire transfer and cross-border (sima par karobar) corresponding
banking.
 7. The Act stipulates(bewastha) that in case of failure to identify the customer, the
reporting entity or organization will not be allowed to open an account or
conduct business.
 8. The Act stipulates that customer identification and transaction records must be
kept in the company for 5 years.
 9. Similarly, the act has provided that the details of suspicious (sankaspat)
transactions should be given to the financial information unit within three days.
 10. The Act clarifies the responsibilities of the regulatory body and the functions,
duties and rights of the regulatory body.
 11. For the AML , the National Coordinating Committee has been set up under the
coordination of the Secretary to the Prime Minister and the Office of the Council of
Ministers to coordinate the inter-agency and give necessary suggestions to the
Government of Nepal. .
 12. Similarly, a financial information unit has been set up to analyze suspicious
transactions and related information related to AML .
 13. In order to conduct investigation related to AML /, it is prescribed to set up an Asset
Laundering Department, to lodge a complaint(ujuri darta) and various powers of the
investigating officer such as detention (hirasad ma rakhnu) for investigation, withholding
of property, requesting even in the country concerned.
 14. Provision has been made to put it on the website of the Ministry of Home Affairs listed
as a terrorist person, group or organization.
 15. The Act seeks to incorporate the anti-money laundering recommendations made by
the Financial Action Task Force.
 Anti-money laundering act 2064
 Chapter-1 preliminary
 Chapter-2 Provision relating to offences
 Chapter- 3 provision relating to identity, transaction and details of the customers
 Chapter 4 provision for coordination committee and financial information unit
 chapter 5 provisions for formation of the department and its functions duties and power
 Chapter 6 provisions for investigation and enquiry
 chapter 6(a) Provision regarding proclamation of currency and holder exchange
authorization
 Chapter 6 (b) special provision regarding property and fund retention
 Chapter 7 punishment
 chapter 8 miscellaneous
Foreign exchange act 2019

 2019/03/15
 2066/10/07
 2072/11/13
 Short title , Extension and commencement
 definition about the act
 License to be obtained to carry on a foreign exchange transaction. (a. Power of bank to take
action )
 Describe about the Process of carrying on Foreign Exchange transaction.
 Restriction(pratibanda) on export or import of certain currency and Bullion
 Power of government of Nepal to obtain foreign exchange.
 Duties of person who have source to obtain foreign exchange
 To receive payment of value of exported goods
 Restriction on making or receiving payment
 Restriction on making or receiving payment
 Restriction on export and transmission (namsari) of securities
 Power to demand statement (b. To search suspicious (sankaspat) person, d.Power to
search building or place of translation. e. Power to arrest(pakrau), f. Power to hold
in detention(hirasad)
 Power of bank to give direction frame bye law or issue order or notice
 16.Provision of the bank to be obtained to open account
 17. Punishment
 18. Enquiry and Institution of case (a.filing of case)
 20. Reward to be provided for provision of information
 21. Claim or complaint not to lie
 22. power to frame rules
 23. Replace To fir region exchange conversion Control Act 2017
The major provisions of the company act 2074 are given by following points
 Relaxation of the provisions relating to issuance of share at premium price
 Mandatory requirement for telecommunication service provider companies to be converted
into a public company .
 Investment companies exempted from investment ceiling
 No mandatory conversion requirement for private companies
 Special provision for the de-registration of the defunct and defaulting companies
 Increase in the maximum number of shareholders of a private company
 Protection of of Corporate name or brand
 Provision for specific time limitation to bring action
 Extended prohibition on availing loans to officers and shareholders.
 Extended coverage of substantial property transaction
 Extended prohibition To provide financial assistance
 Extended prohibition To provide financial assistance
 Mandatorily participation in the General Meeting
 Additional requirement for private companies in relation to Annual General
Meeting
 Specified timeline for holding extra ordinary General Meeting
upon requisition
 Maximum number of directors
 requirement of mandatory female director
 statutory recognition to online system
 Reduction of the statutory timeline for registration of Companies
 Provision of services from the branch offices of the office of the company
registrar
 Compliance with the anti money laundering requirement.
 miscellaneous
The End.
 - Shiva raj Sharma

Chapter-5

Bank Regulation and Central

Bank Policy For BFIs
 Concept of bank Regulation
Bank regulation is a form of government regulation which subjects
banks to certain requirements, restrictions and guidelines, designed
to create market transparency between banking institutions and the
individuals and corporations with whom they conduct business,
among other things.
The banking system in Nepal is regulated by the Nepal Rastra Bank,
the central banking authority in the country in keeping with the
Nepal Rastra Bank act 2012. regulation of banking is not
peculiar(विशिष्ट/फरक) authority in terms of the law of the respective
country concerned. even in UK, where banking has not been defined
under any statute book, the banking system is regulated by the bank
of England in terms of an enactment.
Need and significance of regulation

 To ensure the safety and soundness of banks and Financial

Institutions.
 To provide an efficient and competitive financial system.
 To provide monetary stability.
 To maintain the integrity of the Nation’s payment system.
 To protect consumers from abuses by credit
granting institutions.
Advantages And Disadvantages Of Bank
Regulation

Advantages Disadvantages
 To build public confidence  It does not prevent bank failure
 Safety/protect deposit  less profit; Unnecessary control
and heavy regulation may restrict
 Credit Control
banks to perform their tasks freely.
 Fairness in financial service to all So, banks cannot earn adequate
customers. profit.
 Protection of investor  Costly and time consuming
 Avoidance of monopoly  It can not eliminate(हटाउर्) risk in
 Implementation of policy the economic development.
Advantages & Disadvantages of Financial
Regulation
 Impact of Deregulation
Concept of Deregulation
The term deregulation, when specifically applied to the banking industry, often
refers to policies which allow financial institutions to assume a greater level
self-authority and, at times, risk in their activities without incurring penalties
from the federal government.
The opening up of markets to competition by reducing one or more barriers
to entry. The aim is to increase market supply, stimulate competition and
innovation and drive prices down for consumers.
Deregulation refers to the deletion, abandonment or relaxation of various laws,
rules and regulations that affect business and industry. However, the topic
of regulation is best understood by first understanding the purposes and effects
of regulations. the impact of deregulation on banking performance are explain by
following points.
 Market share
 Interest rate volatility
 Availability of bank credit
 Competition and profitability
 Increase in risk
Major prudential regulation of central bank
Major prudential regulation of the Central Bank includes Capital adequacy, loan
classification and provisioning, and corporate governance.

Capital adequacy concept

 The capital adequacy ratio (CAR) is a measure of how much capital a bank has
available, reported as a percentage of a bank's risk-weighted credit exposures.
The purpose is to establish that banks have enough capital on reserve to handle a
certain amount of losses, before being at risk for becoming insolvent(unable to pay
debts).

 The main objective of this framework is to develop safe and sound financial
system by way of sufficient amount of qualitative capital and risk management
practices.
Provision in united directive
Tier 1 capital 6%
Total capital 10.5% according to Basel III ( now in Nepal tier 1= 6.7% and total= 13.9%)
Loan classification and provisioning Concept

1. Performing loan 2. Non-performing loan

Loan loss provision Loan loss provision

 Pass/ good 1% (1.3%)  Sub-standard 25%

 Watch list 5%  Doubtful 50%
 loss 100%
 Restructuring loan
Corporate governance concept
 Corporate governance is a combination of Corporate policies and best practices adopted by
the corporate bodies to achieve its objectives in relation to their stakeholders.
 The following directives have been issued with regard to the provisions to be complied
with by licensed institutions concerning good corporate governance having exercised the
powers conferred by section 79 of Nepal Rastra Bank Act 2002.
1. Provisions relating to code of conduct to be observed by directors
2. Not to be involved in activities against the interest of the licensed institution
3. Prohibition for part time working
4. Prohibition to become director of more than one licensed institution
5. Prohibition to hold trusteeships
6. Prohibition to misuse the position
7. Records and reports to be maintained complete and accurate
8. Maintenance of confidentiality
9. fair and equal treatment
10. Written information to be provided
11. Report to be submitted
Blacklisting concept
All borrower or associated guarantors of any loan facility falling under bad loan with
100% loan loss provision should be blacklisted in credit Information Bureau (CIB) Nepal.
The process of blacklisting is governed by NRB directive number 12.

Conditions of being blacklisted

Any borrowers or persons enjoying loan facility of Rupees 1 million or above from
licensed bank and financial institution are to be sent for a blacklisting process under
following conditions.
 In case the borrower failed to repay their principal or interest by more than a year from
their last payment date.
 If the funds are misused by borrower
 If mortgaged Collateral are misused by borrower
 If the borrower gets absconded. Or can not contact with in 90 days.
 If the borrower becomes Bankrupt as per prevailing laws.
 If the borrower is sued by licensed bank or financial institution
 If the borrower Is reported to the department of recovery Tribunal.
 others
Condition for not being blacklisted

 If the borrower be the victims of floods, landslides,

earthquakes like natural disasters/ act of God.
 If the refinance facility is provided on the
Recommendation of sick industry rehabilitation
committee.
 If the Nepal government acquires all belonging of
borrower.
Condition for removal from blacklisting

 If the borrower clears their entire principal, interest and

other dues.(remove with in three working days)
 If account holders have issued cheques with insufficient
fund to the party have made payment to the party equal
to the cheques amount.
 Restructure of loan as guided by NRB directive.
 other
The end.
 Chapter -6

legal Provision Relating to Negotiable

Instrument
Learning objectives
 Understand the concept and feature of cheques.
 Concept and functions of draft.
 Concept and function of bills of exchange
 Describe the promissory note.

- Shiva raj Sharma

Concept of negotiable instrument
 Negotiable Instruments are written contracts whose benefit could
be passed on from its original holder to a new holder. In other
words, negotiable instruments are documents which promise
payment to the assignee (the person whom it is assigned to/given
to) or a specified person. These instruments are transferable
signed documents which promises to pay the bearer/holder the
sum of money when demanded or at any time in the future.
 As mentioned above, these instruments are transferable. The
final holder takes the funds and can use them as per his
requirements. That means, once an instrument is transferred,
holder of such instrument obtains a full legal title to such
instrument.
 The major negotiable instruments are cheques, bills of exchanges
and promissory notes.
Feature of negotiable instrument
 Freely transferable
 Holder’s title free from defects
 The holder can sue in his own name
 A negotiable instrument can be transferred infinitum.
 A negotiable instrument is subject to certain presumptions.
Features of Negotiable Instruments

 Easily Transferable: A negotiable instrument is easily and freely transferable. There are
no formalities or much paperwork involved in such a transfer. The ownership of an
instrument can transfer simply by delivery or by a valid endorsement.
 Must be in Writing: All negotiable instruments must be in writing. This includes
handwritten notes, printed, engraved, typed, etc.
 Time of Payment must be Certain: If the order is to pay when convenient then such an
order is not a negotiable instrument. Here the time period has to be certain even if it is
not a specific date. For example, it is acceptable if the time of payment is linked with
the death of a specific individual. As death is a certain event.
 Payee also must be certain: The person to whom the payment is to be made must be a
specific person or persons. Also, there can be more than one payee for a negotiable
instrument. And “person” includes artificial persons as well, like body corporates, trade
unions, chairman, secretary etc.
 Right to sue in his own name.
Cheque

 A cheque is a document you can issue to your bank, directing it to pay the
specified sum mentioned in digits as well as words to the person whose
name is borne (bahan) on the cheque. Cheques are also called negotiable
instruments.
Parties
1. Drawer (Account holder)
2. Payee (who received money)
3. Drawee (bank)
 Features of Cheque

 Cheques can be issued against savings or current accounts

 A cheque is always drawn on a specified banker
 It is an unconditional order
 The payee of a cheque is fixed and certain and cannot be changed
 The payment will only be made in the name of the payee/beneficiary
 It is an instrument that is payable on demand
 A cheque will be considered invalid if does not contain the date
 Signed by the drawer
Types of cheque
`
Bearer cheque
• Payment of this type of cheque is made to anyone who presents the
cheque over the counter of the bank regardless of whatever name of
payee is written in the cheque.
Account payee or crossed cheque
• Payment of this type of cheque is made to the person only whose
name is written in cheque as payee. also, that person could not
directly cash this cheque. First he has to deposit this amount in his
or her own account and later has to withdraw from self account.
& co cheque
• This cheque can not be encashed over the counter and has to be
deposited in the account first. However, in account payee cheque it
is not mandatory that the account should be of the same person
whose name is mentioned in cheque.
Draft
 Draft also called it as demand draft is also a cheque. but it is to
be noted that there might be chances of this dishonoring or
bouncing of any normal cheque where the drafts are granted by
bank to make payment. there is no chance of bouncing of any
draft guaranteed by bank itself. in draft the banker themselves
will be a drawer and shall issue the other bank cheque. it is also
regarded as one of the types of remittance module as well.
 BASIS FOR
COMPARISON
CHEQUE DEMAND DRAFT
Meaning A cheque is a written document which contains an Demand Draft is a negotiable instrument, issued by
order to the bank, to pay a certain sum of money to the bank in favour of a certain person or entity, to
a specified person. transfer of money from one place to another.

Order of payment By the account holder to the bank. By the branch of a bank to another branch of the
same bank.

Payment Payable either to order or to bearer. Always payable on demand to a specified party.

Issuance The cheque is issued by a customer of the bank. Demand Draft is issued by a bank.

Bank Charges for No Yes

issuance

Drawer Customer of the bank. Bank itself.

Signature It must be signed by the party issuing it, be it an It contains seal and signature of the authorized
individual or authorized signatory of a firm. officer and the rubber stamp of the bank.

Parties Involved Three Parties Two Parties

Dishonor Yes No
Bill of Exchange

 "Billof Exchange" means an unconditional order in writing,

addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay
on demand, or at a fixed or determinable future time, a sum
certain in money to or to the order of a specified person or to
bearer.
 Bill of Exchange
cheque

1) Cheque may be drawn only on a Banker. It can be drawn on any person including a Banker.

2) The amount is always payable on demand The amount may be payable on demand or after a
specified Time.

3) The Cheque is not entitled to days of grace. It is entitled to 3 days of Grace.

4) Acceptance is not needed A bill payable after sight must be accepted.

5) A cheque can be crossed Like a Cheque, Crossing of the bill of exchange is

not possible.
Promissory note

 "Promissory note" means an instrument signed by a person

with an undertaking to pay, without any condition, a fixed
amount to any particular person referred to in such
instrument or to the person ordered by such person or to
the bearer of such instrument on a fixed date or on
demand.
Dishonor of cheque
 Insufficient fund
 irregular signature
 Alteration
 Post dated cheque
 stale cheque and expired cheque
 When payment is stopped
 Frozen account
 Double writing
 double script/ language
 Double Ink
 Amount in words and figures not matched
 stamp missing in company account
Rights and duties of various parties involved
in instruments(Cheque, draft and bills of exchange)

Parties involved in the negotiable instrument

 Maker
 Drawer
 Drawee
 Payee
 Acceptor
 Acceptor for honor
 Endorser
 endorsee
Right and duties of various parties
 Chapter- 7

Bank and Customer Relationship

Learning Objectives
 Define customer
 Describe the legal nature of bank and customer relationship
 understand relationship of trustee beneficiary
 describe the relationship of Agent principal
 describe the relationship of debtors and creditors relationship
 understand the types of customer of banks
 explain the account opening and closing process
 understand about the know your customer (KYC)
Definition of customer
 In simple word a person or business that consume product or service,
purchases a commodity or service that is called customer. But in banking term
a person or organization having an account with a bank or who takes the
continue banking service that is called banking customer.
 Any individual or an organization, which conduct banking transition with a
bank, is the customer of bank. however there are many persons who do
utilize service of banks but do not maintain any account with the bank. The
bank customer can be categorized in to four categories as under;
1. Those who maintain account relationship with bank that is existing
customers.
2. those who had account relationship with bank that is former customer
3. Those who do not maintain in account relationship with the bank but
frequently visit branch of a bank for availing banking facilities such as for
purchasing a draft, encashing a cheque etc. Technically they are not
customer as they do not maintain any account with the bank branch
4. Prospective or potential customer
Legal nature of bank and customer relationship

 The relationship between a Banker and customer

depends on the activities; product or services
provided by bank to its customers or availed by the
customer. thus the relationship between a Banker and
customer is the transactional relationship. Banks
business depends much on the strong bondage with
the customer. “Trust” play an important role in
building healthy relationship between a Banker and
customer.
 Trustee-beneficiary
 Agent principal
 Debtors-Creditors
 Creditor-Debtors
Special types of customers
 On the basis of legal existence
 Individual customers
 Corporate customers

 On the basis of core service

 Deposit customers
 Loan customers

 On the basis of risk

 Low risk customers
 Medium risk customer
 High risk customer (HPPs, PEPs, NF2F)

 Other
 Remittance customers
 Utility related customers
 Payroll customers
 Demat/C-ASBA customers
Procedure of account opening
1. Filling up various forms
I. Fill up account opening forms
II. Fill up KYC form
III. Fill up CDD form
IV. Fill up E-CDD form
2. Verify application form
3. Acuity online compliance test
4. Generation of account number
5. Providing deposit Bi-products
Procedure of account closing

1. Fill up the account closing form

2. Submission of closing form
3. Closing the account
Know your customer (KYC)

 know your customer Policy is an important steps to develop a

globally to prevent identity theft, Financial fraud, money
laundering, and terrorist financing. The objectives of KYC is
to enable banks to know and understand their customers
better in help them manage their risky prudently.

 KYC is a regulatory and legal requirement and privacy KYC

policies are framed by prospective Banks incorporating the
key elements following the Nepal Rastra Bank such as
customer acceptance policy, customer identification
procedures, monitoring of transactions and risk management.
Following are the guidelines provided by NRB on KYC

 Customer identification
 customer acceptance
 sealing of cash transaction
 Monitoring of cash transaction
 risk management
 monitoring procedures
 verification of the submitted document
 prevention of records up to 5 year
 Periodic reporting and loan disclosure
 Submit the transaction to the Nepal Rastra Bank
The end.
 Chapter- 8

Bank lending and Security

Learning objectives
After completion of this chapter, you should be able for;
 Understand the process of lending
 describe the Credit Policy guidelines
 Understand the credit sanction, limit and authority
 Understand the Legal procedure for recall and recovery of bank loans
 Understand the definition of collateral and its feature
 Describe the various types of collateral used in banking
Process/procedure for bank lending
The credit process being before a loan is made. the board of directors established of loan policy and considered the
risk reduction techniques.
1. Credit analysis/appraisal
A Key part of the credit appraisal process involves the 6C’s of credit.
 Character (Personal characteristics of the borrower, honesty and attitude about willing and commitment to pay debts )
 capacity (The borrower’s Success in running a business cash flow)
 Capital (The financial condition of the borrower net worth)
 Collateral
 Conditions (Economic condition)
 Compliance (Compliance with laws and regulations)
2. Credit approval
3. Credit documentation
4. Disbursement of loan
5. Credit monitoring and supervision
6. Credit recovery and restructuring
Legal procedure for recall and recovery of
banks loan

 Visit or phone calls

 issue first recovery letter (Deadline of this letter is 15 days)
 issue second recovery letter (deadline of this letter is 7 days)
 issue third recovery letter (deadline of this letter is 35 days)
 Auctioning the Collateral and writing off loan
Meaning and definition of collateral and security

Collateral also known as security and generally termed as

collateral security is the backups for utilizing any loan facility
from banks in the assumption that the same Collateral security
could be auctioned and recover the loan amount in case of any
default by the borrower. the banks generally accept land,
building, machinery and equipment, working capital assets etc.
as a Collateral security.
Legal features of collateral and security

 Auction right
 Restricted trading
 Restricted ownership transfer
 Tax obligation
 post mortgage construction
 property release
 post mortgage auction
Generally Accepted security in Nepalese banking

 Land and building

 good and commodities
 share and debenture
 deposit certificate
 personal guarantee
 Promissory note
 Saving Bond
 Valuation of collateral
It is the process of estimating the value of collateral offered for any bank loans.
banks basically accept real estate Collateral (land and building).

Assumptions of collateral
 The government value of the property should be exactly the same prescribed
by Malpot office of the concerned districts.
 Market value of the property is derived on the basis of current transaction
practice of nearby area.
 The authorized valuator derives the fair market value (FMV) by combining
weighted average price of both Government and market.
The end.
 Chapter -9

Legal aspect of trade finance

Introduction
 Products and financial instruments that a company uses in
order to support international commerce and trade are
referred to as trade finance. Trade finance facilitates
exporters and importers to facilitate their trade
and business transactions smoothly.
 Trade finance is a broad term which covers several financial
products that companies and bankers make use of to make
transactions go through with no hassles (jhanjhat).
Meaning of trade Finance

 trade finance means a bank lending for trade. for any trade transaction
there should be a seller to sell the goods or services and a buyer who will
buy the goods or use the services. various intermediaries such as banks
and Financial Institutions facilitate these trade transactions by financing
the trade. In other words an exporter requires an importer to prepay for
goods shipped. the importer naturally wants to reduce risk by asking the
exporter to document that the goods have been shipped. The importer’s
Bank assists by providing a letter of credit to the exporter (or exporter's
bank) providing for payment upon presentation of certain documents, such
as a bill of landing. The exporter’s Bank May make a loan to the exporter
based on the export contact.
Guarantee
 bank guarantee is an agreement between three parties viz. the bank, the
beneficiary (party to whom the guarantee is given) and the applicant (party seeks
the bank guarantee from the bank). Bank guarantees are an important banking
agreement and play a vital role in promoting International and Domestic trade .

Basic feature of guarantee

 The period until which the guarantee holds is clearly specified.
 The guarantee is always issued for a specific amount
 the propose of the guarantee is clearly stated
 the guarantee is valid for a specifically defined period
 the grace period allowed to enforce guarantee rights is also stated in the
guarantee
 Guarantee clearly states the events under which it can be enforced.
Importance of guarantee

 Adds to creditworthiness
 Assessment of business
 confidence of performance
 risk reduction
Types of bank guarantee

 Bid Bond guarantee

 Performance guarantee
 advance payment guarantee
 payment guarantee or loan guarantee
 foreign bank guarantee
 Deferred payment guarantee
 shipping guarantee
 guarantee for warranty obligation or warranty Bond
 Letter of credit

 What Is a Letter of Credit?

A letter of credit, or "credit letter," is a letter from a bank
guaranteeing that a buyer's payment to a seller will be received
on time and for the correct amount. In the event that the buyer is
unable to make a payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase. It
may be offered as a facility.
Due to the nature of international dealings, including factors
such as distance, differing laws in each country, and difficulty in
knowing each party personally, the use of letters of credit has
become a very important aspect of international trade.
Key takeaways

 A letter of credit is a document sent from a bank or

financial institute that guarantees that a seller will
receive a buyer's payment on time and for the full
amount.
 Letters of credit are often used within the international
trade industry.
 There are many different letters of credit including one
called a revolving letter of credit.
 Banks collect a fee for issuing a letter of credit.
Process of letter of credit
Feature of letter of credit

 Negotiability
 Revocability
 transfer and assignment
 sight and time draft
Types of letter of credit
 Commercial letter of credit
 Standby letter of credit
 revocable letter of credit
 Irrevocable letter of credit
 Unconfirmed form letters of credits
 Confirm letter of credit
 clean letter of credit
 Transferable letters of credit
 Back to back letter of credit
 advance payment (red clause) letter of credit
 sight LC and usance (time draft) letter of credit
Parties involved in trade Finance
 Applicant of letter of credit
 LC issuing bank
 Beneficiary party
 advising Bank
 confirming bank
 Negotiating Bank
 Reimbursing bank
 Second beneficiary
Essential documents

1. Firm registration certificate

2. Attested photocopy of citizenship
3. Income tax certificate
4. Sales contract (harmonic number) to be mentioned
5. Country of origin
6. Delivery term
7. Application form
8. BI BI NI form
9. Insurance of required
10. Account related with the issuing bank
11. In case of private limited, minuting must be presented.s
Risk associated with letter of credit

 General risks in letter of credit

 Country risk (political risk)
 Fraud risk

 Foreign exchange risk

 Risks to the applicant
 Risk to the Beneficiary
 Risks to the bank
The end.
 Chapter 10
legal challenges in banking business

Objectives of this chapter

 Understand the concept of Banking fraud
 describe the concept of cybercrime
 understand the concept of innovative product
 understand the anti money laundering
 describe the concept of electronic banking
 understand the Global access of Banking service
concept of Banking fraud

 Bank fraud is the use of potentially illegal means to obtain money,

assets, or other property owned or held by a financial institution, or
to obtain money from depositors by fraudulently posing as a bank or
other financial institution. In many instances, bank fraud is a criminal
offence.
 Bank fraud can be defined as an unethical and/or criminal act by an
individual or organization to illegally attempt to possess or receive
money
 Types of banking fraud
 Bill discounting fraud
 Stolen cheques
 payment card fraud
 Cheque kiting
 stolen payment cards
 Forgery and altered cheque
 duplication or skimming of card
 Accounting fraud
information
 Uninsured deposit
 identity theft or impersonation
 Rogue traders
 Phishing and internet fraud
 Fraudulent loans
 money laundering etc.
 Forged or fraudulent document
 Wire transfer fraud
Types of cyber-crime in Nepal
 Criminal Copyright Infringement
 Identity Theft
 Hacking
 Cyberstalking
 Spams and Phishing
 Trade of Restricted materials
 Malvertising (online advertisement)
 Innovative product

 Innovative product is the introduction of new process through

computer device. The Introduction of Computer device like
electronic data, interchange, email, electronic bulletin board etc.
With the introduction of these new changes, the procedures and
methods of banking business has undergone of Revolutionary
change. Banking innovative products are: ATM facility, tele
banking, Mobile banking, home Banking, Anytime and anywhere
banking etc.
Important facility provided by E-banking/
innovative banking

 Computerisation
 ATM facility
 all day banking
 anywhere banking
 mobile banking
 Net banking or online banking etc
Electronic banking
 Electronic banking refers to any banking activities
accessed by electronic means. E-banking covers facilities
such as – fund transfer, checking account statements,
utility bill payments, opening of bank account, locating
nearest ATM, obtain information on financial products and
services, applying for loans, etc. using a personal
computer, smartphone, laptop or personal digital assistant.
Types of electronic banking

 Internet banking
 mobile banking
 ATM card
 debit card, credit card
 branchless banking
 Electronic fund transfer EFT ( RTGS, NEFT, ECS,
Connect IPS, wallet, etc.)