Foreign Banks and Regulatory Framework in Nepal

Nepal being small country with small size of economy between two giant countries in term of size as well as in economy has great prospects for the establishment of foreign banks in order to promote of international trade and to welcome foreign investment. With the purpose to welcome foreign banks in proper manner and to fulfill the obligation after becoming a member of WTO in 23rd April 2004, policy to open branch office by foreign banks has been formed in 2010 by NRB with an objective to allow foreign banks and financial institution to conduct whole business which would ultimately help for the economic development of the country.

Though Nepal has made law for the establishment of foreign bank branch in 2010, entry of foreign bank in the form of joint-ventures could be seen from the much earlier time and number of private banks has been established with joint-venture of foreign banks after the establishment of democracy in 1990 and adoption of free-economy policy by the government.

First foreign bank that entered in Nepal was Standard Charter Bank in 1987, by forming joint-venture Bank as Standard Chartered Bank Nepal Limited, with a 70% share of Standard Chartered Group and remaining 30% share of Nepalese general public. Later on Nepal SBI Bank was established in 1993, as subsidiary of State Bank of India (SBI), with 55% equity share holding by SBI India and remaining 15% from local partner (Employment provident Fund) and 30% from general public.

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Technical Service Agreement has been concluded between Nepal SBI Bank and SBI India, through which SBI India provide management support to Bank in Nepal. In the present context, there are almost 1000 employee are working in Nepal SBI Bank limited, with 76 branches all over Nepal and involved in conducting retail transactions.

Similarly, Punjab National Bank (PNB) of India has also entered in Nepal as a foreign Bank, through be establishment of joint-venture Bank as Everest Bank Limited. PNB being one of the largest nationalized bank of India has acquired 20% equity shareholding in Everest Bank of Nepal. PNB, as a joint venture partner has been providing management service to the Bank through the Technical Service Agreement. In the present Context, Everest Bank Limited has been conducting retail banking transactions through the 92 branches all over the country.

In the present, context we can see that various banks from foreign country has been entered to Nepal through means of establishment of joint ventures banks in Nepal. Most of the largest bank owned by the private sector has been established with the joint- venture of foreign banks, such as Nepal Bangladesh Bank is established with the joint- venture of IFIC Bank Limited, Bangladesh, Nepal Investment Bank previously known as Nepal Indosuez Bank limited was established as joint venture between Nepalese partner and French Company. Currently there are 5 foreign joint-venture banks out of 25 private bank are operating in Nepal.

However, Nepal has made WTO commitment in 2004 for allowing foreign bank to open branch office in Nepal and similarly has made law to allow the opening of foreign bank branch in 2010. There is no substantial effect of these initiatives because till date only Doha bank, one of the largest bank of Qatar has got license to open branch in Nepal as a foreign bank and it has opened its Nepal branch office in 19th December 2018.

Nepal has made various request to Chinese Banks to open branch office in Nepal as china itself is one of the largest trade partner of Nepal, However Nepal fails to welcome the Chinese bank to establishment the branch office despite of the various initiatives taken by the authority to welcome the Chinese Bank, till date China is not much willing open branch office to Nepal. Various analyst has said that major reasons behind the Nepal failure to welcome foreign bank is the requirement of high level of investment in comparison to less return, allowing to conduct only wholesale transaction where the size of market itself is small and the political instability.

Modes of operation of Foreign Banks in Nepal

Globally there are various modes where host country permits, foreign bank to conduct business. Depending Upon various factors such as size, need of market certain restriction are made over the foreign banks to conduct the business. Bank and Financial Institutions Act (BAFIA), has prescribed the various modes for the operation of foreign banks in Nepal, which are briefly discussed below:

Joint Banking Venture: It is the mode of operation where arrangement is made between the domestic bank of host country and the foreign bank, through the agreement to provide technical and other kinds of support for the conducting of business. Section 5 of BAFIA has made provision for the requirement of prior approval for the establishment of banks and financial institution on the  joint investment with foreign banks or organization. In Nepal, Everest bank limited, Nepal Bangladesh bank limited has been operating under this mode.

Banking Subsidiary: it is mode of operation where foreign bank establishes its subsidiary company on the host country through banking business is carried on. Foreign bank hold equity interest of the local subsidiary bank in the host country and control the activities of the bank in host country through directly or indirectly. Section 5 of BAFIA has made provision for the requirement of prior approval for establishment subsidiary banks and financial institution of foreign banks. In Nepal, Nepal SBI Bank limited has been established under this mode.

Foreign Bank Branch: it is a mode of operation where a branch of foreign bank is opened to the host country and acts as just a branch of other commercial banks. Section 6 of BAFIA has made provision for the requirement of prior approval for the opening of branch office by the international rated foreign bank, Similarly Nepal Rastra Bank (NRB) has made policy to open branch office by foreign banks 2010. In Nepal, Doha Bank has opened branch office in Kathmandu for the conducting of business transaction, however under this branch is only allowed to conduct wholesale tranasactions.

Licensing of foreign in Nepal

Licensing of subsidiary and joint-ventures banks Bank and Financial institution act, 2073 has made provision for the registration of subsidiary and joint-venture bank in Nepal. If any foreign bank is willing to establish subsidiary bank or establish joint-venture bank in Nepal, it has to take prior approval form the Nepal rastra bank.

While making application for the prior approval from NRB, foreign bank requires to furnish document such as certificate of registration and capital structure of foreign bank in home country, memorandum of association and Articles of Association of foreign bank, certificate of authorization provided by the regulator of home country for conducting banking business in Nepal, certified audit report of foreign bank, detailed plans for the business and the details of the place in Nepal for conducting business in Nepal.

Once foreign bank willing to start its business in Nepal has made application for the prior approval by furnishing above mentioned documents along with the document required for the domestic bank, NRB shall examine the application and document received for the prior approval and if satisfies with the document NRB within 120 days shall provide prior approval for the establishment of foreign bank. NRB while examining the application and document if finds that willing foreign bank does not meet the requirement then it shall deny to provide prior approval.
After receiving prior approval from NRB, foreign bank willing to establish subsidiary or Joint-Venture bank shall then register the bank and financial institution as a company under the Company

Act, 2063. Once subsidiary or joint-venture bank is registered under the company Act, it requires license to carry on financial transaction. Subsidiary or Joint-Venture Bank in order to get license from the NRB shall have make application along with the documents such as approval letter from the home country regulator of foreign bank to conduct financial transactions in Nepal, details of if any requirement that is not fulfilled by the willing bank and other document as prescribed by NRB. While examing the application and document furnish by foreign bank in pursuant to section 33, if NRB satisfies that it fulfills the requirement then NRB shall within 120 days provide license to carry on financial transaction.

Licensing of Foreign Bank Branch

Bank and Financial Institution Act,2073 and policy provision for opening branch office by foreign bank or financial institution in Nepal 2010 enacted by NRB mainly deals with licensing of foreign bank branch in Nepal.

If any internationally rated foreign bank is willing to open branch office in Nepal, it requires prior approval for the opening of the branch in Nepal , such foreign bank shall require to make application along with prescribed fee and required capital. Similarly, while making application for the approval foreign bank willing to establish branch office in Nepal shall furnish no-objection letter, letter mentioning that regulation and supervision of such branch shall be done in integrated manner by the regulator home country and Nepal jointly, letter indicating that banking company is at least rated as a BBB for continuous three year.

Once approval is received from the NRB, then again willing foreign bank shall make application to carry on financial transaction. While making application willing foreign bank is required to present prescribed document and fees (i.e. 5% of prescribed capital structure). Upon the examination of the document, if NRB satisfies that branch has fulfilled all the requirements then NRB shall provide approval to carry out financial transaction by the foreign bank.

Foreign bank willing to open the branch in Nepal and carry out financial transaction shall meet the capital structure of minimum 20 million US Dollar for a branch and if any foreign bank is willing to expand its branch from more than one then it requires additional 5 million US Dollar for each additional branch.

Permitted activities for the foreign Banks

Foreign banks in Nepal can enter through joint- venture or subsidiary mode and foreign Bank branch mode. Permitted activities for these two categories of banks are different. Foreign Banks that are established under joint-venture or subsidiary mode are considered equal to the domestic banks and once they get license for the commencement of business then they can perform activities listed in Section 49 of BAFIA, 2017 in accordance with their category.

While in context of foreign Bank Branch, they are only permitted to do whole sale transactions, they are only permitted to deal with large transactions rather than small transaction. Whole sale transactions includes acceptance of deposit of at least one hundred million rupees at once from one corporate entity, providing loan of at least two hundred million rupees for the infrastructure development project, involve in investment of securities issued by government and having more than one year maturity period.

Regulatory Framework of Foreign Banks in Nepal

In Nepal, any subsidiary bank, joint-venture bank established by the foreign bank along with the branch office established by the foreign bank falls under the scope of definition bank. Nepal Rastra Bank, as a central bank of the Nepal has statutory power to regulation, supervision and the give necessary direction to the bank and financial institutions. Section 5 of the Nepal Rastra Bank Act, 2002 has provided power to NRB to regulate, supervise and provide necessary directions to the bank and financial institution. Along with Nepal Rastra Bank Act, 2002 Bank and Financial Institution Act, 2073 made ample provisions for the regulation of Bank and financial institution with in Nepal.

Subsidiary bank or joint-venture bank established in Nepal is considered as a domestic bank and the all the regulatory rules, direction issued by the NRB for the purpose of the regulating domestic bank are equally applicable. Similarly in case of branch of foreign bank also, such branches are considered as a domestic bank registered in Nepal and unless otherwise is mentioned all the rules, by-laws, order, directions issued by the Nepal Rastra bank shall be equally applicable.

This indicates that though the procedures and formalities that is to be fulfilled by the foreign bank while establishing financial institution Nepal is different than domestic banks but after the incorporation or entering into financial market of Nepal, treatment for the foreign banks in course of regulating supervision is similar to the domestic bank.

Consolidate Supervision and regulation:

Nepal has been participating on international forum and have also made various commitments in the international forum. In course of making such commitment Nepal has also accepted the BASEL principle accepted the idea of consolidated supervision of foreign banks.

Nepal has adopted consolidated supervision mechanism for the regulation and supervision of the foreign bank, law has made provision for the exchange of mutual cooperation and exchange of the information to the supervisory authority of the home country of foreign bank. While having mutual cooperation between supervisory authority of home country and NRB, concerned foreign bank shall have to work as a facilitator and help to establish the connection between two supervisors.

Supervision and Inspection:

• A) Bank Supervision Department:

NRB in order to execute its supervisory power provided by the act, has established Bank Supervision Department under its organizational structure. Department is responsible for the implementing polices, guideline, laws issued by NRB for the commercial banks. Department prepares plan at the starting of the fiscal year, get approved form the board and conduct banking supervision on the basis of that plan.

• B) Supervisory Methodology:

Nepal has continued to adopt methodology laid down in Core principle for effective banking supervision formulated by the BASEL Committee. Principle has laid down off-site and on-site supervisory technique for the supervision of bank. In light of this principle, Nepal has also adopted off-site and on-site supervisory methodology to supervise the banks.

BSD can have supervision of bank and financial institution by authorizing team of department to go the bank itself. This category of supervision is carried on for overall site supervision, objective supervision, and special supervision. Similarly BSD can also have off-site supervision of bank and financial institution on the basis of information provided by the bank and financial institution.

Issue of Directives, policies and order.

NRB as a central bank has been established with the main purpose of maintaining financial stability in country and to increase the public confidence over the banking system of country. In order to achieve this objective NRB issues various directives, polices and order to the commercial banks in country and this power to issue directives, polices, guidelines and order has been provided by NRB Act, 2002. NRB can frame and issue any bye-laws, directives, policies, order and guidelines to commercial banks on any issues which it feels appropriate. All the commercial banks are abide to follows those bye-laws, directives, polices and guidelines.

As NRB is central bank of Nepal and its main objective is to maintain financial integrity of the country. In order to achieve this objective NRB has framed and issued various bye-laws, directives, polices and guide-line. For the purpose of inspection and supervision of commercial banks, Bye-law relating to inspection and supervision of bank has issued. Similarly in order to regulate and facilitate the establishment of foreign bank, policy provision for opening foreign bank branch in Nepal. Similarly NRB issues directives to regulate foreign exchange, to furnish the information by commercial banks which indicate its financial position, to discourage money laundering.

Nepal has accepted the concept of equal treatment of foreign banks, law has clearly stated that all those directives, polices and guide-lines issued by the NRB shall be equally applicable to foreign banks. All the foreign banks that entered in Nepal in any form either in subsidiary, joint-venture or branch shall have abide directives, policies, guidelines issued by the NRB.

Minimum Capital requirement

Bank and Financial institution’s deals with the money and their business revolves around movement of capital. While performing its business bank and financial institution poses various kinds of risk. One of the major risk that bank and financial institution bear is capital adequacy risk. This risk involves that bank and financial institution may have lack of capital while performing its business. In order to mitigate this central bank requires commercial banks and financial institution to meet minimum capital adequacy required by central bank.

Foreign banks, are also involved in different categories of banking business so they are required to meet the capital adequacy as determined by NRB. In Nepal, there are two categories of minimum capital requirement for foreign bank. These two categories includes one for joint-venture and subsidiary banks where as another is foreign bank branch.

Foreign banks established inform of joint-venture and subsidiary requires minimum paid-up capital of two hundred crore Nepali rupees.Similarly, minimum paid up capital required for the opening of foreign bank branch in Nepal is 20 million US Dollar, beside this if foreign bank wants to extend the branch office it requires 5 million US Dollar for opening of each branch.

Control on Board of directors

Cancellation of license.

Provision for the cancellation of license of domestic bank is equally applicable in case of joint-venture foreign banks and subsidiary of foreign bank, however if foreign bank is operating is in more than one country then license is cancelled in accordance with international rules and practices. BAFIA, 2017 has prescribed two mode for the cancellations of license of joint-venture and subsidiary foreign banks. These two are voluntary cancellation which is applicable when bank and financial institution itself is willing to cancel its license and forceful cancellations which means NRB when satisfies that bank and financial institution is not able to perform its business properly when with the order of court license is cancelled.

Similarly in case of foreign bank branch, their license are cancelled if they did not comply with the BAFIA,2017 and NRB Act,2002 , along the directives, policies, guidelines issued by NRB on time to time basis as per requirement.

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