Cooperative Seeking a Development Bank Licence
Sagarmatha Savings and Credit Cooperative in Dhangadhi has 8,500 members, NPR 1.4 billion in member deposits, NPR 1.2 billion in loans, and no NRB licence. Its signage and radio advertisements call it a 'bank' and promise a 9% annual return on deposits. Encouraged by members, the board wants to convert into a national-level development bank. It has NPR 1.8 billion paid-up capital, 28 promoters, and the largest promoter would hold 18%. One promoter is an elected municipal chairperson. A foreign investor has offered 12% equity. The cooperative has no written transition plan for deposits, no independent credit review, and 22% of loans are overdue by more than 90 days. The board asks whether it can keep using 'bank' while the application is pending and what must change before NRB would consider a licence.
1. Can the cooperative continue to call itself a 'bank' and accept public deposits while its application is pending? Identify the main legal and regulatory problems.
Read the worked answer
No. A cooperative registered under the Cooperative Act may accept member deposits within cooperative rules, but it cannot hold itself out as a bank or solicit deposits from the general public as a bank without an NRB licence. Using 'bank' in signage and advertising a 9% return while unlicensed is misleading and exposes the cooperative to immediate NRB stop orders and consumer-protection action. The 9% promise also needs to be tested against deposit-solicitation and advertising rules; it cannot be treated as a guaranteed return. The existing member deposits are not automatically converted into bank deposits. Before any licence, the cooperative must stop the bank branding, correct its advertisements, ring-fence member funds, and prepare a credible transition plan. The 22% overdue-loan ratio and lack of independent credit review are also serious supervisory red flags: NRB will not licence an institution whose asset quality and governance cannot be verified.
2. Assess the capital, promoter, foreign-equity and fit-and-proper issues in the proposal.
Read the worked answer
The capital is short. For a national-level development bank, the minimum paid-up capital is NPR 2.5 billion; NPR 1.8 billion leaves a NPR 700 million gap. The gap must be met with genuine paid-up capital, not borrowed or temporarily parked funds. The 18% single-promoter holding must be checked against NRB's individual promoter and promoter-group limits; if the individual cap is 15%, the holding must be reduced or a specific waiver obtained. The 12% foreign equity is not automatically disqualifying, but it requires NRB approval, source-of-funds verification, due diligence, and compliance with foreign-investment caps. The elected municipal chairperson raises a clear conflict-of-interest and fit-and-proper issue: the person may need to resign the elected post or be excluded from the promoter group. The board must also show that all 28 promoters are fit and proper, have clean regulatory records, and are not using borrowed money.
3. Outline the sequenced path NRB would expect before the cooperative can operate as a development bank.
Read the worked answer
A realistic sequence is: first, obtain a clear member and board mandate to convert; second, incorporate a company under the Companies Act with the proposed promoters and capital; third, apply to NRB with a feasibility study, business plan, capital plan, ownership details, fit-and-proper declarations, and a deposit-transition plan for existing members; fourth, satisfy NRB's licensing review, including independent credit review, provisioning, risk management, and AML/CFT systems; fifth, complete the capital infusion and any required promoter restructuring; sixth, receive the licence and only then use 'bank' or 'development bank' in public branding. Until the licence is issued, the entity must not accept public deposits as a bank. Prior to filing, it should clean up the overdue loan book, commission an independent audit, and remove the municipal chairperson's conflict. NRB will also expect a credible plan for the NPR 700 million capital shortfall.