Note: The data are provided for informational purposes only and in some cases, the information may be incomplete, not fully accurate or out of date. For more information on how data are compiled, see "A Note About Sources." The date of the last update for each country is marked in the section "Country Indicators." We welcome updates and comments. Click here to write to us.
Nepal
Country Indicators
Information Last Updated
November 2006
Information Compiled by
Jeremiah Grossman, IRIS Center
Population (Millions)
27.1 [2005]
Population Density (per sq km)
190 [2005]
GNI per capita (US$)
270 [2005]
GNI per capita (PPP US$)
1530 [2005]
Total Unemployment (% of labor force)
1 [1999]
Employment in Agriculture (% of total employment)
78 [1995]
Gross domestic saving (% of GDP)
13 [2005]
% Population under $2/day (PPP)
82.5 [1995]
Depth of Financial Sector (M2/GDP)
38 [2005]
Exchange rate
1 US Dollar (USD) = 72.60 Nepalese Rupees (NPR)(as of Jan 2006).
Percentage of population with access to banking services
Commercial Banks: US$-244 million (Rs. -17.7 billion) (due to inclusion of negative retained earnings from public banks Nepal Bank Limited and Rastriya Banijya Bank) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank). NBFIs: Development Banks (except Rural Development Banks and Micro Finance Development Banks): US$64.7 million (Rs. 4.7 billion); Finance Companies: US$51.0 million (Rs. 3.7 billion); Rural Development Banks: US$4.36 million (Rs. 0.32 billion); Micro Finance development Banks: US$7.02 million (Rs. 0.51 billion); Licensed Cooperatives: US$4.12 million (Rs. 0.3 billion). (Banking and Financial Statistics – January 2006, Nepal Rastra Bank). Stock Market: US$937 million (Rs. 68 billion) (as of mid-October 2005) (Main Economic Indicators, 2005, Nepal Rastra Bank).
Ownership structure of banks (and financial institutions if available)
The government has been liberalizing the financial sector, but its influence is still strong, with significant stakes in commercial banks, development banks, and the Rural Development Banks. However, private financial institutions include certain commercial and development banks, finance companies, and private Micro-Finance Development Banks. Furthermore, the NRB Act, 2002 allows the NRB to hold no more than a 10% equity share in any financial institution. Therefore, the NRB must gradually divest itself of its holdings above 10% (World Bank 2002) (NRB in 50 Years).
In addition, the government has begun to privatize the Rural Development Banks as they become profitable. Under the government’s 5-Year Restructuring Program, the NRB is restructuring the RDBs and divesting its majority shares of profitable RDBs, maintaining 10% equity while selling 40-50% of the banks’ equity to clients and staff. (Nepal Rastra Bank 2005)
As of July 2003, there were 2 public commercial banks (controlling 38.9% of commercial banking assets), 6 foreign (joint-venture) commercial banks (17.14%), and 9 private local commercial banks (43.96%). (Pernia, et al. 2004)
Formal and Semi-Formal Sources of Microfinance
Commercial banks; Development banks; Finance companies; Rural Development Banks (RDBs); Micro-Finance Development Banks (MFDBs); NRB-licensed Financial Intermediary Cooperatives (FINCOOPs); Financial Intermediary Non-Governmental Organizations (FINGOs). (Banking with the Poor 2004).
Cooperatives [Savings and Credit Cooperative Societies (SCCS)] (unlicensed); Non-Governmental Organizations (NGOs) (unlicensed).
(Banking with the Poor 2004).
Moneylenders, followed by self-help groups, informal savings and credit organizations, traders, friends and relatives, “dhikuti” (informal groups that pool funds to extend informal credit among members.
(Banking with the Poor 2004)
Wholesale Lender(s)
Commercial banks: Currently commercial banks are mandated to have 3% of lending in the “deprived” sector (0.25%-3% for their first 3 years of existence), which may be done by on-lending to MFIs. In addition, commercial banks have been required to lend as much as 12% of their credit portfolios to "priority sectors", which included agriculture, cottage industries, and the services sector. This requirement is being phased out and the requirement currently stands at 4% (FY 2004-05). In FY 2005-06, this will drop to 2%, and the requirement will disappear by FY 2006-07 (Nepal Rastra Bank 2005).
RSRF (Rural Self-Reliance Fund): A fund created by government for providing on-lending funds to MFIs, and Saving and Credit Cooperative Societies (SCCS) ( The Centre for Micro-Finance 2003).
RMDC (Rural Micro-Finance Development Centre): An apex wholesale lending institution established under Development Bank Act, 1995 to provide on-lending funds to MFIs.
NRB (Nepal Rastra Bank) Refinancing/Line of Credit: The NRB provides banks and other financial institutions with access to refinance and a line of credit, particularly for microfinance and agriculture. However, refinance has been limited to 6-12 months since 2002, and only with sufficient collateral (Nepal Rastra Bank 2005).
Definitions of microfinance or microcredit
Financial intermediation means the mobilization of micro-savings and supply of micro-credit to low income people to involve them in income- and employment-oriented micro-enterprises (defined as an enterprise with 10 or less employees) (Financial Intermediary Societies Act 1998, Preamble and Section 2; see also Microfinance Bill 2002). The NRB has defined micro credit as a loan of up to US$551 (NPR 40,000) by a Micro Finance Development Bank (MFDB), raised from US$413 (NPR 30,000) in 2004-5 (Economic Survey 2005-6), and has defined micro saving as savings mobilized by the groups of MFDBs. The Rural Self-Reliance Fund (RSRF) has defined micro credit as a loan up to US$551 (Rs. 40,000) (individual) or US$1,377 (Rs. 100,000) (group project loan). (Nepal Rastra Bank 2005).
NGO microfinance provider formalization or transformation issues
The Financial Intermediary Societies Act 1998 requires that all NGOs engaged in microfinance be licensed, follow specific accounting practices, and set up a risk-bearing provision fund. Societies registered under the Act are permitted to mobilize micro-savings, as are NGOs registered under the Society Registration Act 1978 or Social Welfare Act 1991. Due to the more stringent requirements for societies under the FISA 1998, most NGOs register under the other two acts instead.
Cooperatives are supposed to register as Financial Cooperatives (FINCOOPs) through the Cooperative Act 1992 but instead choose to register as Savings and Credit Societies through the Society Registration Act 1977 to avoid the prudential regulations (such as minimum capital requirements for branches, capital adequacy ratios, and limits on deposit mobilization) that FINCOOPS are subject to. Both types of institutions may mobilize member deposits
(World Bank 2005) ( Directives Issued by NRB to Limited Banking Transaction License Holder Cooperative Society 2002, Section 2).
Ongoing microfinance policy development status
In an effort to address issues and concerns in the microfinance sector, the central bank is developing a National Micro Finance Policy. As of FY 2004-05, the central bank has formed a Steering Committee to coordinate and implement policy changes (Nepal Rastra Bank 2005).
Safety net availability: insurance, pension, etc.
Nepal has three forms of social safety nets:
1) Old-Age Pension: Men and women over 75 can receive a monthly pension, administered by municipalities or village development committees. As of the early 2000s, this pension was reaching over 80% of all eligible individuals.
2) Disabled Persons Allowance
3) Pension for Widows: Widows over 60 with no other form of support are given a monthly stipend.
(Chronic Poverty Research Centre 2003)
General Participation in the Financial Services Market
No. of institutions
No. of clients
Total Assets
Deposits
Target Market
Constraints to provision of microfinance services
Banks
Commercial Banks
17, with 381 branches, plus 47 branches of the Agricultural Development Bank that are providing commercial banking services (as of mid-January 2006) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank)
US$5.94 billion (Rs. 431.4 billion) (mid-Jan 2006) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank). Total Outstanding Credit: US$2.37 billion (Rs. 171.7 billion) (mid-Jan 2006 per Nepal Rastra Bank)
Commercial activities, including production, the service industry wholesale/retail activities, transportation and communication, construction, agriculture, and others.
Commercial banks also participate in microfinance by lending to MFIs (to satisfy the 3% “deprived sector” lending requirement), as well as agriculture, cottage industries, and the services sector (to satisfy the “priority sector” lending requirement, which is being phased out).
High operating costs and inadequate infrastructure in rural areas (Nepal Rastra Bank 2005)
Development Banks
40: (mid-Jan 2006) 29 Development Banks (DBs); 5 Rural Development Banks (RDBs); 6 Micro-Finance Development Banks (MFDBs) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank)
RDBs: 165,217 members, 147,550 borrowers (as of Jan. 2006) MFDBs: 130,275 members (Jan. 2006) (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Total: US$412 million (29.9 billion NPR) (January 2006) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank). RDBs: Total Loans: US$162 million (11.76 billion NPR); outstanding loans: US$17.1 million (Rs. 1.24 billion) (Jan. 2006) MFDBs: Total Loans: US$77.1 million (5.60 billion NPR); outstanding loans: US$13.1 million (950 million NPR) (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Total: US$483.57 million (35.11 billion NPR) (January 2005) Development Banks (excluding RDBs and MFDBs): US$472.3 million (34.29 billion NPR) Rural Development Banks: US$6.29 million (0.46 billion NPR) Micro-Finance Development Banks: US$4.98 million (0.36 billion NPR) (Banking and Financial Statistics – January 2006, Nepal Rastra Bank).
Agricultural sector; national priority industries; and poorer households (mainly women) (Nepal Rastra Bank 2005)
Shortage of loanable funds; high operational costs; MFIs are often forced to charge unsustainably low interest rates to avoid being targeted by Maoist insurgents. (Nepal Rastra Bank 2005)
US$ million (Rs. 433.5 million) savings and deposits from members (Banking and Financial Statistics – January 2006, Nepal Rastra Bank), licensed NGOs are prohibited from accepting deposits from non-members (FISA 2002).
Poor members of society who lack access to credit services.
Farmers, artisans, landless or unemployed or low-income individuals, workers, general consumers, or social workers. FINCOOPs can provide financial services to non-members as well as members. However, FINCOOPs are not alowed to mobilise savings/deposits from non-members. (Directive Issued to the Limited Banking Transaction License Holder Cooperative Society 2002)
Outdated cooperative legislation allows undesirable players to act as cooperatives without being subjected to regulation or supervision.
(World Bank 2005).
Non-profit institutions
Unlicensed Microfinance Organizations
Unlicensed Savings & Credit Cooperative Societies: 2,262 (as of July 2002)
(Banking with the Poor 2004).
Unlicensed NGOs: Unknown.
Savings and Credit Cooperative Societies: Farmers, artisans, landless or unemployed or low-income individuals, workers, general consumers, or social workers.
NGOs: Poor members of society who lack access to credit services.
General Approach to Regulating
Legal basis for regulating
Definition or description of institution
Regulator(s) and role of regulator(s)
Activity that determines required regulatory status
Private, public, or foreign (joint-venture) institutions that engage in all forms of financial transactions.
The Nepal Rastra Bank (NRB) is responsible for monitoring the overall stability and development of the commercial banking system, and protecting depositors from bank failure.
All forms of financial services, including electronic transactions and hypothecation credit (loans where securities are pledged as collateral). Highest minimum capital requirements.
Public and private institutions that focus upon the development of the rural sector, agriculture, industry, and microfinance.
The Nepal Rastra Bank (NRB) is responsible for monitoring Development Banks to ensure financial viability and protection of depositors.
Development Banks: Most forms of financial services, except accepting securities as collateral. Lower minimum capital requirements than commercial banks. Focus on rural, agricultural, and industrial development.
Microfinance Development Banks: Financial services limited to the provision of microfinance services. Lower minimum capital requirements than commercial banks, other development banks, and finance companies.
Private institutions that offer installment credit for the purchase of assets; for leasing financing; or, for enterprise finance.
(World Bank 2002)
The Nepal Rastra Bank (NRB) is responsible for ensuring the financial stability of finance companies through regular monitoring. However, provisions are being made to create a separate, second-tier institution to regulate and supervise non-bank financial institutions.
(Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Provision of lease financing to individuals, companies, institutions, and firms. Finance Companies can also accept time deposits, with maturities ranging from 3 months to 6 years.
With NRB permission, Finance Companies may also perform merchant banking activities ( Nepal Rastra Bank 2003)
Licensed Non-Governmental Organizations (FINGOs)
Nepal Rastra Bank Act 2002, Section 79; Financial Intermediary Societies Act 1998, (as amended in 2002).
Non-profit organizations licensed as financial intermediaries that provide micro-credit to low-income persons for income-generating purposes (Financial Intermediary Societies Act 1998)
The Nepal Rastra Bank (NRB) is responsible for monitoring licensed NGOs to ensure their financial sustainability. However, provisions are being made to create a separate, second-tier institution to regulate and supervise cooperatives and other non-bank financial institutions. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Provision of micro-credit to poor individuals and groups. Deposit-taking and savings mobilization from non-members are prohibited. License allows these NGOs to accept loans and grants from local and foreign banks and organizations.
Cooperative societies and unions for the social and economic development of farmers, artisans, landless or unemployed or low-income individuals, workers, general consumers, or social workers (Cooperative Act 1992)
Ministry of Agriculture, Department of Cooperatives and Nepal Rastra Bank (NRB). The Department of Cooperatives and NRB are responsible for monitoring licensed cooperatives to ensure financial sustainability.
However, provisions are being made to create a separate, second-tier institution to regulate and supervise cooperatives and other non-bank financial institutions. Small Farmer Cooperatives are already being regulated by the Small Farmers Development Bank (SFDB). (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Provision of geographically-bound microfinance services (including savings and credit) to members and credit to non-members. Deposit-taking and savings mobilization from non-members are prohibited. Small Farmer Cooperatives’ members must be small farmers. (Banking with the Poor 2004)
Savings & Credit Societies: Cooperative societies and unions for the social and economic development of farmers, artisans, landless or unemployed or low-income individuals, workers, general consumers, or social workers (Cooperative Act 1992).
NGOs: Non-profit organizations that provide micro-credit to low-income persons for income-generating purposes.
Savings and Credit Cooperatives: Ministry of Agriculture, Department of Cooperatives. (Banking with the Poor 2004).
Savings and Credit Cooperatives: Provision of geographically-bound microfinance services (including savings and credit) to members only. (Banking with the Poor 2004)
NGOs: Provision of micro-credit to poor individuals and groups.
Permission to register as a Bank or Financial Institution: NRB
Public Limited Company
Minimum 30% stake reserved for general public, except if foreign banks/institutions acquire 50% or more of the shares of a national bank, in which case 20% must be reserved for general public.
Foreign banks or institutions may acquire up to 67% ownership stake in national banks (as of May 16 2002) ( Nepal Rastra Bank 2003)
Costs: Prior to registration, must apply to the NRB for approval to open a bank or financial institution and pay 0.01% of the issued capital.
After registration, must submit an application for a license to carry out financial transactions and pay 0.02% of the issued capital.
(Banks and Financial Institutions Ordinance, 2004, Sections 4(1) and 29(2)).
The World Bank estimates the following:
Registering a Business: 21 days, US$182
Obtaining Necessary Licenses: 147 days, US$819
(Doing Business, Nepal)
Permission to register as a Bank or Financial Institution: NRB
Public Limited Company
MFDBs: Minimum 30% stake reserved for general public; No individual, company, or promoter may own more than 15%. Foreign institutional investors (but not individuals) can own a stake of 10-51%. (Nepal Rastra Bank 2005)
Costs: Prior to registration, must apply to the NRB for approval to open a bank or financial institution and pay 0.01% of the issued capital.
After registration, must submit an application for a license to carry out financial transactions and pay 0.02% of the issued capital.
(Nepal Ministry of Finance 2005; Banks and Financial Institutions Ordinance, 2004, Sections 4(1) and 29(2)).
The World Bank estimates the following:
Registering a Business: 21 days, US$182
Obtaining Necessary Licenses: 147 days, US$819
(Doing Business, Nepal)
Permission to register as a Bank or Financial Institution: NRB
Public Limited Company
Costs: Prior to registration, must apply to the NRB for approval to open a bank or financial institution and pay 0.01% of the issued capital.
After registration, must submit an application for a license to carry out financial transactions and pay 0.02% of the issued capital.
(Banks and Financial Institutions Ordinance, 2004, Sections 4(1) and 29(2)).
The World Bank estimates the following:
Registering a Business: 21 days, US$182
Obtaining Necessary Licenses: 147 days, US$819
(Doing Business, Nepal)
No person may hold more than 20% of total share capital (except government or governmental agencies). Foreign cooperatives societies/unions that are members of the International Cooperative Alliance may own up to 20% of total share capital. (Cooperative Act, Section 23)
Non-profit institutions
Unlicensed Microfinance Organizations
Social Welfare Act 1991; Society Registration Act 1977 (Registration of Associations Act).
The Social Welfare Act designates the Social Welfare Council. The Society Registration Act designates the Office of the Chief District Officer. (Asian Development Bank 1999)
Savings and Credit Cooperative Societies: No person may hold more than 20% of total share capital (except government or governmental agencies). Foreign cooperatives societies/unions that are members of the International Cooperative Alliance may own up to 20% of total share capital. (Cooperative Act, Section 23)
Licensing Requirements and Standards
Standards for ownership officers
Feasibility study/business plan
Audit of Proposed Founders, Owners, Officers
Operating Manuals
Prohibited sources of funds
Banks
Commercial Banks
Owners: One-third of promoters should be chartered accountants or at least a graduate of a recognized institution, with major in economics, accountancy, finance, law, banking, or statistics. One-fourth of promoters should have work experience at a financial institution. Promoters may not have a record of non-payment of past loans; be on the Credit Information Bureau’s blacklist (or removed from the blacklist fewer than 5 years ago). (Nepal Rastra Bank 2003)
Directors: There must be 5-7 Directors, at least one of whom must be certified as a “Professional Director” by the Nepal Rastra Bank. At least two-thirds of the Directors must have acquired at least a relevant bachelor's degree, and gained at least five years' work experience in government, banking, or other corporate entity. At least one Director must be a “Professional Director” (as defined by the Banks and Financial Institutions Ordinance, 2004 (BFIO), Sections 12-13). Both the Professional Director and the CEO must meet the requirements detailed in the BFIO.
The following may not serve as Directors: Under 21 years of age; insane or of unsound mind; those blacklisted from a bank or financial institution; those working for or having contracts with another bank or financial institution; securities dealers on the Stock Exchange; current and former high-ranking government or central bank employees; those with unpaid tax liabilities; those punished for a crime of moral turpitude, cheating or corruption; those who were formerly subject to an action by the central bank. (BFIO, Sections 12, 13, 18, 19, 26)
Required pre-Registration: Memorandum of Association; feasibility study
Required post-Registration: Memorandum of Association; Certificate of Registration; organizational structure; credit policy; minimum capital maintenance plan; infrastructure plan and other details. (BFIO, Sections 4 & 29)
Directors: There must be 5-7 Directors, at least one of whom is certified as a “Professional Director” by the Nepal Rastra Bank (as defined by the Banks and Financial Institutions Ordinance, 2004 (BFIO), Sections 12-13). At least two-thirds of Directors must have acquired at least a bachelor's degree in management, economics, accountancy, finance, law, banking or statistics, and gained at least five years' experience in government, banking, or other corporate entity.
Directors may not be under 21 years of age; insane or of unsound mind; blacklisted from a bank or financial institution; working for or entering into contracts with another bank or financial institution as employee, Director, or auditor; securities dealers; government or central bank employees; those with unpaid tax liabilities; have been punished for a crime of moral turpitude, cheating or corruption; have been subject to an action by the central bank (for a period of 5 years following the action). (BFIO, Sections 12, 13, 18, 19, 26)
Micro-Finance Development Banks (MFDBs): Minimum 15 promoters, who can hold a combined maximum 70% stake. (Nepal Rastra Bank 2005) The minimum qualifications of the “Professional Directors” for MFDBs shall be prescribed by the Central Bank. (BFIO, Sections 12-13)
Required pre-Registration: Memorandum of Association; feasibility study
Required post-Registration: Memorandum of Association; Certificate of Registration; organizational structure; credit policy; minimum capital maintenance plan; infrastructure plan and other details. (BFIO, Sections 4 & 29)
Directors: There must be 5-7 Directors, at least one of whom must be certified as a “Professional Director” by the Nepal Rastra Bank (as defined by the Banks and Financial Institutions Ordinance, 2004 (BFIO), Sections 12-13). At least two-thirds of the Directors must have acquired at least a bachelor's degree in management, economics, accountancy, finance, law, banking or statistics, and gained at least five years' experience in government, banking, or other corporate entity.
Both the Professional Director and the CEO must meet requirements detailed in the BFIO.
The following may not serve as Directors: Under 21 years of age; insane or of unsound mind; those blacklisted from a bank or financial institution; those working for or entering into contracts with another bank or financial institution; securities dealers on the Stock Exchange; current and former high-ranking government or central bank employees; those with unpaid tax liabilities; those punished for a crime of moral turpitude, cheating or corruption; those who were formerly subject to an action by the central bank. (BFIO, Sections 12, 13, 18, 19, 26)
Required pre-Registration: Memorandum of Association; feasibility study
Required post-Registration: Memorandum of Association; Certificate of Registration; organizational structure; credit policy; minimum capital maintenance plan; infrastructure plan and other details. (BFIO, Sections 4 & 29)
Upon application for license, the NGO must submit names, addresses, and occupations of directors and officers of the organization. (Financial Intermediary Societies Act 1998, Section 4(b))
Directors: One-half of all Directors should have passed a graduate level or equivalent exam for metropolitan or sub-metropolitan societies. For municipality societies, at least 3 Directors should have passed such an exam. For societies in other districts, at least 2 Directors should have such qualifications. Minimum 7 Directors.
Directors may not have a record of non-payment of past loans; be on the Credit Information Bureau’s blacklist in the last five years.
CEOs must have passed a graduate-level exam in economics, commerce, or similar; and gained at least 2 years of experience as an officer of a licensed bank or financial institution. CEOs may not have declared bankruptcy or been convicted of crime involving fraud or dishonesty; been suspended or had action taken against them; be on the Credit Information Bureau’s blacklist in the past five years.
Cannot invest in shares of another cooperative society, unless approved by the NRB (except for district/national level cooperative unions or banks); may only invest in corporations listed on the Nepal stock exchange board; may not invest more than 5% of share capital in a corporation, or more than 15% of share capital in all shares and debentures. (Directive Issued to the Limited Banking Transaction License Holder Cooperative Society 2002)
Capital and Reserves
Minimum capital
Minimum capital adequacy/gearing ratios
Forms of capital recognized
Risk-weighting of assets
Loan loss provisioning, write-off
Reserves, Liquidity requirements
Banks
Commercial Banks
Class A financial institutions: National Banks with Headquarters in Kathmandu Valley: US$13.77 million (1 billion NPR); Banks outside Kathmandu Valley: US$3.44 million (250 million NPR) (as of May 16 2002). Banks already in operation that do not meet these requirements must increase their capital at least 10% per year until the requirements are met, and no later than May 2009. (Nepal Rastra Bank 2003) [Note: Under the Banks and Financial Institutions Ordinance, 2004, banks and financial institutions are now classified according to their minimum capital. Therefore, it is possible that certain institutions within this category may be subject to different minimum capital requirements than those listed here. In general, however, commercial banks qualify as Class A institutions.]
Tier I (Primary Capital): Paid-up capital, share premium; non-redeemable preference shares; general reserve fund; cumulative profit and loss account (up to previous FY); current-year profit and loss (as per balance sheet)
Tier II (Supplementary Capital): General loan-loss provisions; exchange equalization reserves; assets revaluation reserves; hybrid capital instruments; unsecured subordinated term debt; interest-rate fluctuation reserves; other free reserves not allocated for a specific purpose. (Pernia, et al. 2004)
Follows Basel I guidelines, except no 50%-weight asset category for advances secured with a primary mortgage on residential property
(Pernia, et al. 2004). Nepal is in the process of implementing the Basel II framework for capital requirements. (Banking Supervision Annual Report 2001-02, Nepal Rastra Bank)
Provisioning (FY 2004-05):
Good: 0-3 months overdue: 1%
Sub-standard: over 3 months-6 months overdue: 25%
Doubtful: over 6 months-1 year overdue: 50%
Bad: over 1 year overdue: 100%
For loans extended without collateral, banks must provision an extra 20% per category (i.e. 21% for good). Banks must provision good rescheduled, restructured, or swapped loans at 12.5%. For loans insured by the Deposit Insurance & Credit Guarantee Corporation (loans to the priority sector), banks must provision only 1/4 of the regular rates. (Pernia, et al. 2004).
Write-Offs: Currently, the Nepal Rastra Bank lacks a write-off policy. (World Bank 2005)
Exchange Equalization Fund: Institutions with a license to deal in foreign exchange must set aside 25% of revaluation profits for this fund.
Mandatory Cash Deposit at Central Bank: 5% of domestic liabilities (as of July 2004). (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Mandatory Cash on Hand: 2% of total deposit liabilities.
Liquidity Reserve: None (Pernia, et al. 2004)
Development Banks
Class C financial institutions (FIs): National FIs (general): US$0.68 million (50 million NPR); National FIs (leasing companies): US$2.06 million (150 million NPR); FIs Operating in 1 District Only (general): US$0.28 million (20 million NPR); FIs Operating in 1 District Only (for districts in Mid-Western or Far Western Region): US$0.14 million (10 million NPR) (Economic Survey – FY 2004-05, Nepal Ministry of Finance) [Note: Under the Banks and Financial Institutions Ordinance, 2004, banks and financial institutions are now classified according to their minimum capital. Therefore, it is possible that certain institutions within this category may be subject to different minimum capital requirements than those listed here. In general, however, most Finance Companies qualify as Class C institutions.]
Development Banks & Class B FIs: 12% (6% primary capital) as of FY 2005-06. All Class D FIs including MFDBs: 8% total capital (min. 4% primary (Tier I) capital) as of FY 2005-06 (Economic Survey – FY 2005-06, Nepal Ministry of Finance)
Development Banks & Class B FIs: Tier I (Primary Capital): Paid-up capital; share premium; nonredeemable preference shares; general reserve fund; retained earnings/loss. Tier II (Supplementary Capital): General loan-loss provision; assets revaluation reserve; convertible debentures; other free reserves; investment adjustment reserve. (Pernia, et al. 2004)
MFDBs: Tier I (Primary Capital): Paid-up capital, general reserves, retained earnings, premium on shares. Tier II (Supplementary Capital): Other reserves (Nepal Rastra Bank 2005)
Development Banks and Class B FIs: Basel I guidelines for risk-weighting of assets were adopted for deposit-taking financial institutions in 2001 (Pernia, et al. 2004)
MFDBs: 0%: Cash in vault, cash in central bank, investments in central bank or government securities; 20%: Balance with commercial banks or financial institutions; 50%: Other investments; 100%: Microcredit loans and advances; fixed assets; other assets. (Nepal Rastra Bank 2005)
Provisioning (Development Banks):
Good: 0-3 months overdue: 1%
Sub-standard: over 3 months-6 months overdue: 25%
Doubtful: over 6 months-1 year overdue: 50%
Bad: over 1 year overdue: 100%. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Provisioning (MFDBs):
Good: 0-3 months overdue: 1%
Sub-standard: over 3 months-9 months overdue: 25%
Doubtful: over 9 months-1 year overdue: 50%
Bad: over 1 year overdue: 100% (Nepal Rastra Bank 2005)
Write-Offs (General): Currently, the Nepal Rastra Bank lacks a write-off policy. (World Bank 2005)
Development Banks and Class B FIs: Exchange Equalization Fund: Institutions with a license to deal in foreign exchange must set aside 25% of revaluation profits for this fund.
Liquidity: 1% of total deposit liability and provident fund as cash on hand; 7% of total deposit liability in liquid assets. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
MFDBs: Mobilization of financial resources (savings and loans) limited to 20 times the amount of Tier I (core) capital.
Liquidity: Min. 2.5% of savings deposits, of which at least 0.5% must be cash. Other “liquid” sources include investment in government or central bank securities; and balances at licensed commercial banks or other financial institutions. (Nepal Rastra Bank 2005)
Non-bank Financial Institutions
Financing Companies
Class C financial institutions (FIs): National FIs (general): US$0.7 million (50 million NPR); National FIs (leasing companies): US$2.1 million (150 million NPR); FIs Operating in 1 District Only (general): US$0.3 million (20 million NPR); FIs Operating in 1 District Only (for districts in Mid-Western or Far Western Region): US$0.15 million (10 million NPR) (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
[Note: Under the Banks and Financial Institutions Ordinance, 2004, banks and financial institutions are now classified according to their minimum capital. Therefore, it is possible that certain institutions within this category may be subject to different minimum capital requirements than those listed here. In general, however, most Finance Companies qualify as Class C institutions.]
Tier I (Primary Capital): Paid-up capital; share premium; nonredeemable preference shares; general reserve fund; retained earnings/loss.
Tier II (Supplementary Capital): General loan-loss provision; assets revaluation reserve; convertible debentures; other free reserves; investment adjustment reserve. (Pernia, et al. 2004)
Basel I guidelines for risk-weighting of assets were adopted for deposit-taking financial institutions in 2001. (Pernia, et al. 2004)
Provisioning:
Good: 0-3 months overdue: 1%
Sub-standard: over 3 months-6 months overdue: 25%
Doubtful: over 6 months-1 year overdue: 50%
Bad: over 1 year overdue: 100%. (Pernia, et al. 2004)
Write-Offs: Currently, the Nepal Rastra Bank lacks a write-off policy. (World Bank 2005)
Deposit Mobilization: Up to 2.5 times the company’s primary capital.
Reserves: Min. 1% cash deposit at either the NRB or a commercial bank. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Liquidity: 7% of total deposit liabilities (Pernia, et al. 2004)
Write-Offs: Currently, the Nepal Rastra Bank lacks a write-off policy. (World Bank 2005)
Reserves: Must establish a risk-bearing fund, consisting of a prescribed percentage of total outstanding credit, which may be invested in government or NRB securities. (Financial Intermediary Societies Act 1998, Section 25)
Cooperatives/Credit Unions
Licensed Cooperatives (FINCOOPs)
Operations in Metropolitan District: US$0.14 million (10 million NPR); Operations in Sub-Metropolitan District: US$68,800 (5 million NPR); Operations in Municipal District: US$34,400 (2.5 million NPR); Operations in Other District: US$13,700 (1 million NPR) FINCOOPs that lack sufficient share capital have to increase their share capital by at least 20% per year for up to 5 years (beginning in FY 2003-04, and completed no later than FY 2007-08). (Directive Issued to the Limited Banking Transaction License Holder Cooperative Society 2002)
8% total capital (min. 4% Tier I), since FINCOOPs also fall under the Class D FI classification (Economic Survey – FY 2004-05, Nepal Ministry of Finance)[NOTE: There is some confusion over the CAR for FINCOOPs, as the Directive Issued to the Limited Banking Transaction License Holder Cooperative Society 2002 lists a minimum CAR of 10% (min. 5% primary capital) for FY 2003-04. However, it appears that FINCOOPs do qualify as Class D FIs, and are therefore subject to the lower CAR].
Tier I (Primary Capital): Share Capital; General Reserve; Retained Earnings/Loss
Mandatory Cash Deposit: Min. 0.5% mandatory cash deposit must be maintained with the NRB (or a commercial bank in areas where the NRB is not present) (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Non-profit institutions
Unlicensed Microfinance Organizations
N/A
Savings and Credit Societies & NGOs: None (World Bank 2005)
N/A
Savings and Credit Societies & NGOs: Reserves: Must allocate 10% of annual operating profit to a reserve fund.
Liquidity Requirements: None
(World Bank 2005)
Risk Management Guidelines
Guidelines & restrictions on financial services
Guidelines & restrictions on operational rules
Guidelines & restrictions on interest rates
Concentration of risk
Connected/insider business
Banks
Commercial Banks
Class A Institutions (most Commercial Banks): Full banking operations, including electronic transactions. (Pernia, et al. 2004)
[Note: Nepal has recently instituted a format that classifies institutions as Class A, B, C, or D (based upon minimum capital requirements). As a result, it is possible for financial institutions to move between the various classes and gain or lose the ability to perform certain financial services.]
Management and operating expenses may not exceed limits prescribed by the Central Bank. (BFIO, Section 84)
The Governor of the NRB Board of Directors reserves the right to formulate interest rate policies (Nepal Rastra Bank Act 2002, Section 30(f-g)). However, the NRB can delegate the power over interest rates to the banks and financial institutions in question (BFIO, Section 51).
Any one individual or group of related borrowers may borrow up to 25% of the core capital fund for fund-based loans and advances, and up to 50% of the core capital fund for non-fund-based off-balance sheet facilities (letters of credit, guarantees, acceptances, commitments).
Banks must separate sector exposures in 2 levels of concentration, and ensure adequate monitoring and control: Level 1: Loans, advances, and facilities from 50-100% of core capital in a single sector; Level 2: Over 100% of core capital in a single sector. (Pernia, et al. 2004)
Shareholders with equity investments of 1% or more are barred from obtaining loans from the institution. (Pernia, et al. 2004)
Development Banks
Class B Institutions (most Development Banks): Full banking operations, except for issuance of loans taking securities as collateral. (Pernia, et al. 2004)
Class D Institutions (most Micro-Finance Development Banks): A variety of microfinance-related activities, including micro-lending, borrowing, deposit-taking, and mobilization of member savings.
(BFIO, Section 47(4))
[Note: Nepal has recently instituted a format that classifies institutions as Class A, B, C, or D (based upon minimum capital requirements). As a result, it is possible for financial institutions to move between the various classes and gain or lose the ability to perform certain financial services.]
Management and operating expenses may not exceed limits prescribed by the Central Bank. (BFIO, Section 84)
Development Banks: Require prior approval of the NRB to open branches. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
MFDBs: MFDBs have autonomy over expansion, closure, and merger of branches. Expansion beyond approved geographic area requires central bank approval. (Nepal Rastra Bank 2005)
The Governor of the NRB Board of Directors reserves the right to formulate interest rate policies (Nepal Rastra Bank Act 2002, Section 30(f-g)). However, the NRB can delegate the power over interest rates to the banks and financial institutions in question (BFIO, Section 51).
Development Banks and Class B FIs: Any one individual may borrow up to 25% of the bank’s core capital for fund-based loans and advances, and up to 50% of core capital for non-fund-based off-balance sheet facilities. Maximum lending exposure to a particular sector ranges from 50%-70.5% for the following sectors: agriculture (60%); industry (60%); services (70.5%); land development/housing and building construction (50%); poor groups (50%); and the commercial sector (50%) (Economic Survey – FY 2004-05, Nepal Ministry of Finance) MFDBs: Loans are limited to US$551 (40,000 NPR) maximum, except for “graduated” members with proven projects, who can borrow up to US$1,377 (100,000 NPR). MFDBs cannot spend more than 25% of total loan/investment portfolio on larger loans (Nepal Rastra Bank 2005)
Shareholders with equity investments of 1% or more are barred from obtaining loans from the institution. (Pernia, et al. 2004)
Non-bank Financial Institutions
Financing Companies
Class C Institutions (most Finance Companies): Real-estate business, project financing, merchant banking, consortium financing, transactions in Indian currency. Loans taking securities as collateral are prohibited. (Pernia, et al. 2004)
[Note: Nepal has recently instituted a format that classifies institutions as Class A, B, C, or D (based upon minimum capital requirements). As a result, it is possible for financial institutions to move between the various classes and gain or lose the ability to perform certain financial services.]
Management and operating expenses may not exceed limits prescribed by the Central Bank. (BFIO, Section 84)
The Governor of the NRB Board of Directors reserves the right to formulate interest rate policies (Nepal Rastra Bank Act 2002, Section 30(f-g)). However, the NRB can delegate the power over interest rates to the banks and financial institutions in question (BFIO, Section 51).
Any one individual or group of related borrowers may borrow up to 25% of the core capital fund for fund-based loans and advances, and up to 50% of the core capital fund for non-fund-based off-balance sheet facilities (letters of credit, guarantees, acceptances, commitments). (Pernia, et al. 2004)
Shareholders with equity investments of 1% or more are barred from obtaining loans from the institution. (Pernia, et al. 2004)
Any “financial interest” must be disclosed to shareholders, depositors, customers, and interested members of the general public. “Financial interest” occurs when any connected person (owner, director, shareholder, etc.) owns 10% or more of the total paid-up capital of another firm or corporation. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Licensed Non-Governmental Organizations (FINGOs)
Permitted: Provision of micro-credit; obtaining loans or grants from local organizations, foreign organizations, or the Central Bank for micro-credit and operating expenses (Financial Intermediary Societies Act 1998, Section 8)
Prohibited: Deposit-taking and savings mobilization (World Bank 2005).
FINGOs must state their proposed geographical area of operation when applying for a financial intermediary license (Financial Intermediary Societies Act 1998, Section 4(e)).
Permitted: Savings deposits and term deposits (up to 3 years)
Prohibited: Off-balance-sheet transactions (letters of credit, guarantees, etc.); overdrafts; commercial sale/purchase of goods; credit without sufficient collateral; agricultural products, gold, or silver as collateral; accepting current deposits; transactions in foreign currency. (Directive Issued to the Limited Banking Transaction License Holder Cooperative Society 2002)
Must report changes to policies/procedures regarding deposit collection, credit disbursement, penalty interest, and capitalization of interest to the NRB’s non-banking management division and inspection/supervision division.
Individuals: Any person or family can borrow up to 5% of the core capital for the first loan, up to 10% for the second loan, and up to 20% for all future loans.
The Central Bank charges registration and licensing fees to help cover supervision costs.
Banks and Financial Institutions must submit to the NRB on a “regular basis” the following information: On-balance sheet and off-balance sheet transactions; income statements; foreign exchange business; processes of electronic or other payment systems; such other particulars and documents as are prescribed by the NRB. (BFIO, Section 55)
Disclosure: No requirement to publish accounts (World Bank 2005)
The Deposit Insurance and Credit Guarantee Corporation (DICGC) currently only guarantees “priority sector” loans and provides insurance for livestock and credit cards. Depositor protection is mentioned in the DICGC’s Articles of Association, but it has not yet been implemented. (”The Objectives of DICGC”, Deposit Insurance and Credit Guarantee Corporation, 2003)
The Central Bank charges registration and licensing fees to help cover supervision costs.
Reporting: Banks and Financial Institutions must submit to the NRB on a “regular basis” the following information: On-balance sheet and off-balance sheet transactions; income statements; foreign exchange business; processes of electronic or other payment systems; such other particulars and documents as are prescribed by the NRB.(BFIO, Section 55)
Development Banks and Class B FIs: Must submit reports audited by an approved auditor to the NRB 30 days before each annual meeting. (Economic Survey – FY 2004-05, Nepal Ministry of Finance)
Micro-Finance Development Banks (MFDBs): Capital Adequacy monitored biannually
The Central Bank charges registration and licensing fees to help cover supervision costs.
Reporting: Banks and Financial Institutions must submit to the NRB on a “regular basis” the following information: On-balance sheet and off-balance sheet transactions; income statements; foreign exchange business; processes of electronic or other payment systems; such other particulars and documents as are prescribed by the NRB.(BFIO, Section 55)
Licensed Non-Governmental Organizations (FINGOs)
NRB can demand any information or document from the organization at any time, and can inspect or investigate offices or activities of a Society as needed. (Financial Intermediary Societies Act 1998, Sections 9, 17)
If a Society’s license or registration is cancelled, the NRB will meet any financial liabilities that the Society’s assets cannot cover. (Financial Intermediary Societies Act 1998, Section 23)
Weekly: mandatory cash balance and liquid assets; Bi-annual: state of capital fund; interest rate and service fee rate; financial statements, including loan-loss provisioning; investments; Annually: audited financial statements (a single auditor may be used no more than 3 times; information on auditor must also be submitted)
Disclosure: Must publish interest rate and service fee rate in a national newspaper every 6 months; must publish approved balance sheet and profit & loss statement in the newspaper annually.
Distributions from an entity to its shareholders are treated as taxable dividends, and are subject to withholding tax (Income Tax Act, 2000, Section 54(1)).
Financial and Insurance Services are exempt from VAT (VAT Act 1995, Schedule 1(11(2))).
Provisions are tax-deductible for up to 5% of the total outstanding loan, according to NRB directives. (Income Tax Act, 2000, Section 59(1a))
MFI-specific
MFI-specific
FINGOs: The government may grant full or partial income tax exemption, through notification in the Nepal Rajapatra
(Financial Intermediary Societies Act 1998, Section 31)
Other Relevant Business Legislation
Debt Enforcement and Collection
Credit Rating and Reporting Requirements, Services
Security interests: Forms accepted
General Applicability
General Applicability
The Debt Recovery Tribunal (DRT) was created in Oct. 2003 and has been fully functional since February 2004. Its goal is to clear a backlog of cases by ruling on loan default cases on a time-bound basis (Government of Nepal (2004)). Issues still faced by the DRT include difficulties with issuance of summons and enforcement. As of March 2005, only 1 of 43 judgments issued had been fully enforced.
In addition, Nepal is in the process of establishing an Asset Management Corporation to help banks resolve non-performing loans. (World Bank 2005)
NRB Act 2002, Section 88 mandates the creation of a Credit Information Centre and the cooperation of banks and financial institutions with regard to sharing of information. The government intends to replace the existing Credit Information Bureau (CIB) with a new CIB during FY 2004-05 (Economic Survey – FY 2004-05, Nepal Ministry of Finance).
Blacklisting directives were strengthened in Sept. 2003 to penalize willful defaulters, and modified in June 2004 to streamline information listing requirements and ensure consistency with limited liability provisions of the Company Act (Government of Nepal (2004)).
A Secured Transaction Ordinance is in the process of being developed to create security interests in movable property and a mechanism for enforcement of these interests. The Debt Recovery Act 2003 and the Banks and Financial Institutions Ordinance 2004 provide for enforcement of a secured claim without court intervention. In practice, however, court-issued stay orders continue to hamper loan collection. (World Bank 2005)
MFI-specific
MFI-specific
FINGOs: No registration fee or revenue stamp fee is charged for registering property obtained as collateral from a borrower, or on the sale or purchase of immovable property. (Financial Intermediary Societies Act 1998, Section 30)
