Parliament Approves First Amendment to Banks and Financial Institutions Act

On Thursday, the House of Representatives (HoR) approved the Banks and Financial Institutions Bill 2024, marking the first amendment to the Banks and Financial Institutions Act (BAFIA) of 2017. This significant legislation, designed to regulate the nation's critical financial market, was passed after two and a half months of parliamentary deliberation. The bill, initially approved by the Cabinet on February 8, was presented to the lower house on March 18.

The revised BAFIA introduces several new provisions, including conditional validation of digital currencies and setting an age limit of 70 years for individuals serving as board members of any bank or financial institution (BFI). While the current BAFIA imposes a term limit for chief executive officers (CEOs) of BFIs, it does not limit the terms for board directors. The new bill addresses this by implementing an age bar for board members.

One of the key features of the new bill is the introduction of digital currencies. The Nepal Rastra Bank (NRB) will issue these currencies and can grant licenses to other entities to operate as digital banks. These digital banks, guided by NRB's regulations, will be authorized to accept deposits, provide loans, and conduct other financial transactions involving digital currencies.

The bill also proposes reducing the maximum stake an individual can hold in a BFI from two percent to one percent of the paid-up capital. For the first time, the concept of collateral is clearly defined, stating that any asset provided to a BFI as security for a loan is considered collateral.

Additionally, the bill mandates that microfinance institutions must offer primary shares to their borrowers, with a limit set at 40 percent of the offerings allocated for the general public. The bill also prohibits individuals from serving as board members in more than one BFI and restricts the tenure of a board member to two terms.

Further qualifications for board members are also proposed, requiring a master's degree and increasing the required work experience from three years to five years.

Parliament has given lawmakers a 72-hour deadline to submit any additional notes or revisions to the approved bill. After this process is completed, the bill will be forwarded to the Parliamentary Finance Committee for further discussion.