Amendment to the Banks and Financial Institutions Act (BAFIA) 2073: Reforms and New Provisions in the Banking Sector

To further strengthen and organize Nepal's banking sector, a proposal to amend the Banks and Financial Institutions Act (BAFIA) 2073 is currently under consideration in the House of Representatives. The Ministry of Finance has pushed the BAFIA amendment bill forward to implement the latest practices developed in national and international financial systems, enhance financial security, and adapt to technological changes. This bill seeks to bring four major changes to the banking sector.

1. Proposal to Separate Bankers and Entrepreneurs

One of the main challenges in Nepal's banking sector is the relationship between bank investors and entrepreneurs, and the associated risks. The bill proposes that any individual holding more than 1% of the paid-up capital of any bank should not be allowed to borrow from other banks or financial institutions. The current limit is 2%. This provision aims to tighten controls on investors in the banking sector and reduce the possibility of uncontrolled investments.

Under Section 52 of the BAFIA bill, it is proposed that banks and financial institutions should not provide any loans or facilities to affiliated persons or those with significant ownership in any bank. This provision is expected to help minimize financial risks in the banking sector. However, stakeholders have expressed concerns that this provision might negatively impact the investment climate due to investments made by businesses in the banks.

Chandra Prasad Dhakal, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), stated that this provision could make it difficult for businesses to invest and create jobs. He said, "The private sector, which is just in the process of expansion, might be unable to invest because of this law, so flexibility is needed."

2. Provision to Separate Bank Investors and Managers

The bill proposes separating managers and directors in banks and financial institutions. This provision aims to prevent board members from interfering in the bank's day-to-day management. Currently, directors are not allowed to be directly involved in management, but this provision seeks to make it a legal requirement.

While this was already in effect through Nepal Rastra Bank's directives, the proposed bill would formally enforce it by law. The bill also introduces a provision to prevent directors from holding their positions for more than two consecutive terms. This is believed to promote impartial and organized operations in banks.

3. Legal Recognition of Digital Currency

To address the growing popularity of digital banking and digital currencies, the BAFIA amendment bill proposes granting legal recognition to digital currency. Several countries, including neighboring India, have already moved forward with policy frameworks for digital currency, and some have even launched digital currencies. Nepal has also embraced this in the bill.

Former Executive Director of Nepal Rastra Bank, Narbahadur Thapa, expressed confidence that this provision would benefit banking security and cost control. "Consumers are always willing to move towards technology-based banking concepts," Thapa said. "Granting legal recognition to digital currency through the Act will make its credibility and scope expansion easier."

Legal recognition of digital currency is expected to enhance banking security and strengthen the country's financial system, contributing to transparency in financial transactions.

4. Mandatory Appointment of Women and Independent Directors

The bill also mandates that banks and financial institutions appoint at least two independent directors, including one woman. This provision aims to maintain gender equality in the banking sector and provide opportunities for people from diverse backgrounds to represent the banking sector.

Currently, there is a provision for at least one independent director, but it did not mandate the inclusion of women. The new provision is expected to increase women's participation and promote diversity in financial institutions.

Other Key Provisions of the Bill

• Elimination of Conflict of Interest: The BAFIA amendment bill aims to eliminate conflicts of interest in the banking sector. It proposes that any person or their family members should not have loans exceeding 1% of the paid-up capital of the bank they wish to serve as a director.

• Control of Loan Misuse: The bill incorporates various measures to prevent loan misuse in the banking sector, helping make loan disbursement transparent and responsible.

• Concept of Digital Banks: The BAFIA amendment bill further elaborates on the concept of digital banks, aiming to provide legal validity and help secure the future of digital banking.

Potential Impact of the Bill

The main objective of the BAFIA amendment bill is to strengthen the banking sector in Nepal. However, it could also pose some challenges. For example, the provision to control loan disbursement to directors may make it difficult to attract new investors.

Rajesh Agrawal, President of the Confederation of Nepalese Industries, said, "If businesses are not allowed to take loans, how can the sector expand? The scope of income will shrink, so stakeholder concerns should be addressed before implementing this provision."

Conclusion

The BAFIA amendment bill proposes significant provisions to make the banking sector in Nepal more transparent, secure, and robust. The bill aims to reduce various risks in the banking sector, promote digital banking, and ensure gender equality. However, some of its provisions could also create new challenges for private sector investors and businesses.

Therefore, it will be crucial to consider stakeholder feedback before finalizing the bill to ensure that the banking sector can achieve its objectives and further strengthen the country's economic stability.