Bank Governance and Fit-and-Proper Requirements
Board seats, qualifications, and the 1 per cent rule that ends a shareholder's ability to borrow from its own bank.
Board composition
BAFIA requires a bank or financial institution to have a board of at least five and not more than seven directors. That range is fixed by statute. A shareholders’ agreement cannot expand it to accommodate more nominees, and in a bank with a dispersed register, the normal case in Nepal given the 15% shareholding cap and the public-offer requirement, seven seats is not many for the number of parties who want one.
Three further constraints sit on top of the number.
At least one director must be a professional director appointed by the board and meeting prescribed qualifications, serving a single term. No more than one member of a family may be a director of the same institution at the same time, a rule aimed squarely at the promoter-family blocks that characterised Nepali finance companies in the 2000s. And a director’s term is capped at four years, with reappointment possible except for the professional director.
An incoming investor negotiating board representation should therefore establish, before drafting, how many seats exist, how many are already committed to promoter groups, when each term expires, and whether the candidate would clear NRB’s screening. In practice the last question decides the others.
Fit-and-proper tests
Statutory disqualification comes first. BAFIA excludes, among others, persons under 25, undischarged bankrupts, blacklisted borrowers, persons convicted of specified offences, tax defaulters, and serving employees of a competing institution. A person disqualified on those grounds cannot be appointed however well qualified they are.
Positive qualification comes second. A director must have five years’ experience at director level in banking or finance, or a bachelor’s degree with three years’ relevant experience, or a master’s degree in a related field. NRB tightened and codified this in a 2017 bylaw on qualification and work experience for chief executives and boards.
| Role | Class A, B, C | Class D |
|---|---|---|
| Chief executive | Master’s in management, banking, finance, economics, commerce, accounting, statistics, mathematics, business administration or law; or a bachelor’s in those fields plus 10 years’ relevant experience | Same educational fields, 3 years’ experience |
| Director | 5 years in public service or an international organisation; or a bachelor’s plus 3 years as a government or bank officer; or a master’s in a listed field | Higher secondary plus 2 years’ government or banking experience; or a relevant bachelor’s |
The chief executive’s appointment is subject to NRB’s satisfaction. A candidate who fails the education-or-experience test cannot be appointed by board resolution.
For a foreign investor, the ten-year experience route is usually the relevant one for a nominee executive, and the listed disciplines are narrower than they look. A career in general management outside financial services does not obviously qualify.
Shareholding and credit restrictions
Two rules regularly surprise counterparties who have negotiated the commercial terms first.
The 15% shareholding ceiling. BAFIA section 41 limits any person, firm, company or institution to 15% of the paid-up capital of one bank or financial institution, and to less than 1% of any other. A shareholder at the ceiling is a significant investor with no statutory entitlement to control and no automatic board seat. Nominee rights have to be negotiated with other shareholders and then survive NRB’s screening of the nominee.
The related-party credit prohibition. Section 50 bars a bank from extending any credit facility to a director, the chief executive, a holder of 1% or more of paid-up capital, family members of any of them, or entities related to them. The threshold is one per cent, well below the shareholding ceiling.
The interaction is the part that gets missed. An industrial group that takes a small equity position in its own bank, a common way of cementing a relationship in other South Asian markets, extinguishes its ability to borrow from that bank. The equity and the credit line cannot coexist above 1%. Groups that want both end up holding the stake in one bank and banking with another, and the exposure limits in Exposure Limits: Single Obligor, Group and Sector Concentration then bind on the second relationship.
A third provision reinforces the pattern. Directive 10 caps a licensed institution’s own investment in other financial institutions at 15% for NRB-licensed banks and financial institutions and 1% for others, with 25% and 10% equivalents for class D. Institutions out of compliance have until Ashadh 2087 (mid-2030), and the sanction for missing it is a dividend restriction or a mandatory merger.
Committees and audit
BAFIA establishes the audit committee, and Directive 6 of the Unified Directives builds the wider governance apparatus around it: board committees, conflicts, minuting, delegation and the internal control framework. NRB’s risk-based supervision explicitly assesses board oversight, internal control, compliance and internal audit as part of the supervisory rating, and the outcome feeds the Supervisory Review and Evaluation Process, which can produce an institution-specific capital add-on.
Enforcement runs through consents rather than penalties in the first instance. NRB approves the annual financial statements before publication and approves dividends, and it attaches conditions to both. A governance failing therefore shows up first as a dividend that does not get paid, which in a market where retail shareholders hold most bank equity is a powerful lever.
Beyond that, the NRB Act allows the central bank to direct removal of a director who acts against the interests of the institution or its depositors, and the Prompt Corrective Actions Bylaws 2012 supply a graduated regime that has been applied to finance companies and development banks during 2025 and 2026.
Governance by circular
Directive 6 is no principles-based code. The amending circular of 15 December 2025 added a requirement that the board approve any foreign travel by the chairman, the chief executive or a director.
That provision tells you more about Nepali bank governance than a page of principles would. NRB regulates conduct at the level of specific acts, by circular, and adjusts as issues arise. A governance policy written for a Nepali bank subsidiary from a group template will not anticipate rules of that kind, and the compliance function has to track the circular series rather than a code.
What remains unresolved
The loan portfolio review of the ten largest commercial banks produced qualitative findings on credit practice — documentation, monitoring, site visits, evergreening — that are governance findings rather than capital findings. NRB has been asked to develop an action plan addressing them, and that plan, when it appears, is the thing to read for where board-level obligations are heading.
At the level of the regulator itself, the IMF has recorded that the amendments to the NRB Act now before Parliament leave the Secretary of the Ministry of Finance with a voting seat on the central bank’s own board. A framework that constrains commercial bank boards this tightly, while leaving that arrangement at the top, is worth noticing.
Sources
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Bank and Financial Institution Act, 2073 (2017) — unofficial English translation
Nepal Rastra Bank · Act 2017; translation posted 2019 · Tier 1 — Primary legal instrument
Supports: Section 14 on the formation of the board and its size, the family restriction and the professional director; section 15 on tenure; section 16 on director qualifications; section 18 on disqualifications; section 29 on appointment of the chief executive; section 41 on capital and the 15% shareholding ceiling; section 50 on the prohibition of credit to connected persons; and section 60 establishing the audit committee.
Accessed 26 August 2026
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NRB sets criteria for CEOs, directors of BFIs
The Himalayan Times · 4 August 2017 · Tier 6 — Professional or news source
Supports: The NRB bylaw of 2017 on qualification and work experience for chief executives and boards of licensed institutions, and its educational and experience thresholds for class A, B and C institutions and for class D.
Accessed 26 August 2026
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Flash Alert on Circular No. 08/082/83
PKF T R Upadhya and Co. · Circular dated 15 December 2025 · Tier 6 — Professional or news source
Supports: The requirement under Directive 6 for board approval of foreign travel by the chief executive, chairman or board members; and the cross-investment caps under Directive 10 of 15% in NRB-licensed institutions and 1% in others, with a compliance deadline of Ashadh 2087 enforced by dividend restriction or mandatory merger.
Accessed 26 August 2026
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Bank Supervision Report 2022/23
Nepal Rastra Bank, Bank Supervision Department · April 2024 · Tier 2 — Official publication
Supports: That NRB's risk-based supervision assesses board oversight, internal controls, compliance and audit; the enforcement function including conditions on dividend approval and consent to annual financial statements; and the existence of the Prompt Corrective Actions Bylaws 2012.
Accessed 26 August 2026
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Nepal Rastra Bank Act, 2058 (2002)
Nepal Rastra Bank, Legal Division · 2002, as amended · Tier 1 — Primary legal instrument
Supports: Section 79 as the source of NRB's power to issue binding directions, and Chapter 9 powers to direct removal of directors and to intervene in a problematic institution.
Accessed 26 August 2026
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International Monetary Fund · 8 June 2026 · Tier 3 — Multilateral institution
Supports: The loan portfolio review's qualitative findings on bank credit practices and the requirement for NRB to develop an action plan addressing them, and the observation that NRB Act amendments retain a voting seat for the Finance Secretary on the NRB Board.
Accessed 26 August 2026
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