Banking and Financial Regulation
Legal architecture
Regulation rests on the Nepal Rastra Bank Act 2058, the Bank and Financial Institution Act (BAFIA) 2073 and NRB's annual unified directives. NRB licenses, regulates and supervises four classes of BFIs and may impose conditions, restrict business, remove directors, appoint management or liquidate.
Prudential rules
- Capital: Basel III ratios of 8.5 percent Tier 1 and 11 percent total capital including the 2.5 percent conservation buffer, plus NRB's paid-up capital floors.
- Credit classification: pass, watch, substandard, doubtful and bad, with provisioning typically 1, 5, 25, 50 and 100 percent, higher for unsecured exposures.
- Single obligor and group exposure limits; insider lending restricted and requiring board approval.
- AML/CFT: KYC, customer due diligence and suspicious transaction reporting to the Financial Information Unit under the Prevention of Money Laundering Act 2064.
- Directed lending: minimum shares of credit to the deprived and priority sectors.
- Deposit protection through the Deposit and Credit Guarantee Fund.
Worked example
A bank holds Tier 1 capital NPR 800 million, Tier 2 capital NPR 300 million and risk-weighted assets NPR 10,000 million. Total capital = 1,100, so CAR = 11.0 percent - exactly at the minimum. Tier 1 = 8.0 percent, below the 8.5 percent requirement. The bank passes the total ratio but fails the Tier 1 test, so it must raise core capital, not subordinated debt. That distinction is a favourite exam point.
Traps
Counting ineligible Tier 2 capital without checking limits. Mixing the NPL ratio with provisioning coverage. Omitting off-balance-sheet items from risk-weighted assets.