Banks and Financial Institutions Act, 2073 (2017)

A bank or financial institution must be incorporated as a public limited company under the Companies Act before applying for a licence. Its memorandum must state the class of institution it intends to operate.

Institutions are classified as Class A commercial banks, Class B development banks, Class C finance companies and Class D microfinance institutions. Each class may carry on only the activities permitted for it.

No person may carry on banking or financial business without a licence from Nepal Rastra Bank. The Bank may attach conditions to a licence and may refuse an application where the promoters lack financial soundness.

A foreign bank may open a branch in Nepal with the approval of Nepal Rastra Bank, subject to the minimum capital and reporting conditions set for that branch.

The board of a bank must have between five and seven directors, including at least one independent director with expertise in banking, finance or law. Directors serve for a term of four years.

A person who is a borrower in default, has been blacklisted, or holds office in another bank may not be a director. A person removed by Nepal Rastra Bank may not serve for five years.

Directors must act in good faith in the interest of depositors and the institution, avoid conflicts of interest, and ensure compliance with directives issued by Nepal Rastra Bank.

The board appoints a chief executive officer for a term of four years, renewable once. The appointment requires the prior approval of Nepal Rastra Bank.

A licensed institution may accept deposits, extend loans, issue guarantees and letters of credit, deal in foreign exchange and provide payment services within the limits of its class.

A bank may not lend to its own directors, their family members or firms in which they hold a substantial interest, except against fixed deposits. Lending to a single borrower group is capped at a percentage of core capital.

Where a borrower defaults, the institution may auction the collateral after giving thirty-five days' public notice. Any surplus after recovery is returned to the borrower.

Information about a customer's account may be disclosed only with the customer's consent, on the order of a court, or on the request of Nepal Rastra Bank or an authority acting under law.

Nepal Rastra Bank may inspect any licensed institution at any time, require production of records and issue binding directives on capital, liquidity and risk management.

Where an institution's capital falls below the required level, Nepal Rastra Bank may restrict dividends, require a capital plan, replace management or place the institution under its control.

Two or more institutions may merge with the approval of their shareholders and Nepal Rastra Bank. The Bank may also direct a merger where it considers this necessary to protect depositors.