Dean's Office Official Model Question Paper

Objective of BAFIA 2073

BAFIA 2073 was enacted to enhance public trust in the national financial system, protect depositors’ and investors’ interests, promote healthy banking competition, and establish statutory prudential governance rules for bank licensing, operations, and liquidation.

Promissory Note vs. Bill of Exchange

• Promissory Note: An unconditional written promise made by the maker (debtor) to pay a certain sum of money to a specified person or bearer on demand or at a fixed future date (2 parties: Maker and Payee).
• Bill of Exchange: An unconditional written order signed by the drawer directing a drawee to pay a specified sum of money to a payee (3 parties: Drawer, Drawee, and Payee).

KYC and Legal Basis

KYC is a mandatory customer due diligence procedure requiring financial institutions to verify the true identity, beneficial ownership, address, source of wealth, and risk profile of clients to prevent the banking system from being utilized for money laundering and terrorist financing.

Banking Offence

Under the Act, a banking offence includes drawing checks without sufficient bank balance (check bounce), obtaining loans through fraudulent collateral, unauthorized diversion of borrowed funds, tampering with electronic banking records, and insider fraud by bank executives.

Banker’s General Lien

A banker’s general lien is the legal right of a bank to retain possession of goods, securities, and negotiable instruments deposited with it in the ordinary course of business by a customer until all outstanding debts owed by that customer to the bank are fully discharged.

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

The NRB Act 2058 established the central bank as an autonomous statutory regulatory institution.

1. Core Objectives of NRB

• Formulate and execute monetary and foreign exchange policies to maintain domestic price and financial sector stability.
• Foster liquidity and stability in the banking and payment system.
• Regulate, inspect, supervise, and monitor licensed financial institutions.

2. Key Supervisory and Regulatory Powers

• Monetary Authority: Exclusively issuing currency notes and coins; setting policy interest rates, reserve ratios (CRR, SLR), and open-market repo operations.
• Bank Licensing and Classification: Sole authority to grant and revoke banking licenses for Class A (Commercial), Class B (Development), Class C (Finance), and Class D (Microfinance) institutions.
• On-Site Inspection & Off-Site Surveillance: Conducting CAMELS-based inspections of commercial banks; sanctioning non-compliant banks and executive boards.
• Lender of Last Resort (LOLR): Providing emergency liquidity assistance to solvent banks facing liquidity runs.

Corporate Governance and Board Regulations Under BAFIA 2073

BAFIA 2073 enforces strict corporate governance rules to prevent insider abuse and conflict of interest.

1. Board Composition and Qualifications

• Board must consist of between 5 and 7 directors, including at least one independent director with specialized banking/economic expertise appointed from an NRB-maintained roster.
• Minimum qualification: Master’s degree in economics, management, law, or chartered accountancy with certified executive experience.

2. Key Disqualifications for Directors

• An individual declared bankrupt or convicted of fraud, corruption, or money laundering.
• A director, executive, or employee of another competing bank or financial institution.
• A borrower categorized as a willful blacklisted defaulter by the Credit Information Bureau (CIB).
• Individuals holding political executive office or statutory audit appointments.

3. Term Limits

• Bank Directors and CEOs are legally restricted to a maximum of two consecutive terms (4 years per term) to prevent entrenchment and oligarchic control.

Legal Provisions and Remedies for Dishonored Cheques

Issuing a check without sufficient funds triggers legal remedies across two distinct statutes in Nepal:

1. Civil Remedy under Negotiable Instruments Act 2034 (Section 107a)

• When a check is dishonored for insufficient funds, the holder issues a formal notice demanding payment within 30 days.
• If unpaid, the holder files a lawsuit in the District Court.
• Sanctions: Court orders recovery of the face amount of the check plus interest at 10% per annum from the date of presentation, and may impose imprisonment up to 3 months or a fine up to Rs 3,000.

2. Criminal Remedy under Banking Offence and Punishment Act 2064

• The payee reports the case to the Central Investigation Bureau (CIB) of Nepal Police.
• Sanctions: Recovery of the entire swindled check amount, imposition of an equal fine, and imprisonment ranging from 1 month to up to 5 years depending on the amount.
• Blacklisting: The defaulter is formally blacklisted by the Credit Information Bureau (CIB), freezing their bank accounts, passport renewal, and corporate directorships.

Anti-Money Laundering (AML/CFT) and FIU-Nepal

The Money Laundering Prevention Act 2064 establishes Nepal’s statutory framework to combat illicit financial flows.

1. Core Obligations on Banks

• Customer Due Diligence (CDD): Identifying beneficial owners and applying enhanced due diligence (EDD) for Politically Exposed Persons (PEPs).
• Threshold Transaction Reporting (TTR): Mandatory reporting of any cash transaction exceeding Rs 1,000,000 to the FIU within 7 days.
• Suspicious Transaction Reporting (STR): Mandatory reporting of any transaction regardless of amount that shows unusual velocity, inconsistent business rationale, or links to criminal activity.

2. Role of the Financial Information Unit (FIU-Nepal)

• Autonomous administrative unit housed within Nepal Rastra Bank.
• Receives, analyzes, and disseminates financial intelligence (TTRs and STRs) to investigative agencies (Department of Money Laundering Investigation, Police CIB, and CIAA).

Case Analysis: Legal Violations and Recovery at Prabhu Capital Bank

a. Specific Statutory Violations

1. Conflict of Interest & Insider Lending (BAFIA 2073): Section 52 strictly prohibits banks from extending credit to entities where a bank director or their close family members hold significant ownership. The chairman’s indirect 25% stake represents illegal insider financing.
2. Misappropriation and Fund Diversion (Banking Offence Act 2064): Diverting Rs 400 million into speculative real estate violates Section 3, constituting a major criminal banking offense.
3. Evergreening & Loan Misclassification (NRB Unified Directive No. 2): Failing to classify the defaulted loan as a Non-Performing Loan (NPL) and artificially capitalizing unpaid interest violates central bank prudential provisioning regulations.

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b. Legal Liabilities and Penalties

• Chairman & Accomplice Directors: Subject to immediate dismissal by NRB; criminal prosecution by CIB under the Banking Offence Act carrying mandatory asset confiscation, recovery of swindled principal (Rs 1.5 billion), equivalent fines, and imprisonment of 3 to 5 years.
• Disqualification: Lifelong disqualification from serving as a director or executive in any financial institution.
• Credit Officers & Management: Criminal liability as accomplices for facilitating fraudulent loan documentation.

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c. Recovery Procedures under Debt Recovery Act 2058 (DRT)

1. 35-Day Public Auction Notice: Publish formal public auction notices in national daily newspapers to seize and sell mortgaged land and plant machinery.
2. Filing with Debt Recovery Tribunal (DRT): File a debt recovery petition before the DRT; the tribunal issues attachment orders freezing all bank accounts and properties of the borrowing company and personal guarantors.
3. Execution by Debt Recovery Officer (DRO): DRO auctions personal assets of guarantors and places promoter-directors on the national travel ban / exit control list.

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d. NRB Corrective Supervisory Action Plan

1. Prompt Corrective Action (PCA): Take over management control by appointing an NRB-led Management Committee to replace the compromised board.
2. Mandatory 100% Loan-Loss Provisioning: Force the bank to write down the entire Rs 1.5 billion exposure as a ‘Loss’ category NPL, recalibrating Capital Adequacy Ratio (CAR).
3. Freeze on Dividend Distribution & Branch Expansion: Bar the bank from declaring dividends or opening new branches until CAR meets the statutory 11% threshold through fresh capital calls.