ELITE CA: CLASS NOTES ONLY: FOR CAP III & CA MEMBERSHIP EXAMINATION: FINANCIAL INTERMEDIARY ACT

1. "Financial intermediation" means the act of collecting micro savings and providing micro-credit pursuant to this Act and “Institution” means an institution which has been
registered under the Associations Registration Act, 2034 (1977) and obtained license to carry out the act of financial intermediation pursuant to this Act.
2. Previously Financial Mediator could only be an association registered under the Societies Registration Act, 2034, which is a non-profit motive organization and not allowed
to distribute the profits to its members. But now, Financial Mediators fall under "D" class Financial Institutions according to BAFIA, 2073 therefore they are regulated
with Banks and Financial Institutions Act, 2073 and Companies Act, 2063 as well.
3. Functions, duties and powers of the Financial Intermediary Institutions or Financial Mediators (FII) (Section ….)
a) To encourage the persons with low income to form groups and carry on micro business,
(“Micro-business” means an income generating business being operated with the involvement of less than 10 persons.)
b) To collect micro-savings from groups or members of groups,
(“Micro-saving” means the amount of saving to be collected by FII from the persons or group of persons, who are members of a group and have low income, in such
a manner as prescribed by NRB from time to time.)
c) To disburse micro-credit with or without taking security or guarantee of any movable, immovable property to a group or the members of a group to carry on a micro-
business,
(“Micro-credit” means a credit to be disbursed by FII within the ceiling as specified by NRB from time to time for carrying on micro-business.)
d) To obtain loans or grants from the GoN or NRB or native or foreign organization, association etc. and to use such loans or grants in the disbursement of micro-credit
or in the activities making such act effective,
Provided, however, that in obtaining loans, grants or other assistance from a foreign organization, association etc., FII has to obtain approval of the Government of
Nepal through the Bank.
e) Prior to disbursing the micro-credit, to evaluate the work for which the credit has been demanded, and identify whether such a work is feasible or not,
f) To make publicity about the micro-businesses which are of such nature as to bring about improvement in the economic condition of the persons with low income,
g) To hold symposia about the micro-business, give training to formulate projects, render assistance, provide technical knowledge and bring about technical assistance
as per necessity,
h) To provide necessary services to the groups in relation to the mobilization of the micro-saving and micro-credit,
i) To take necessary action towards the recovery of micro-credit in time,
j) To make inquiry, from time to time, into whether the microcredit has been properly utilized or not, and if, in the course of making such inquiry, it appears that the
micro-credit has not been utilized properly, to give necessary direction or take necessary action,
k) To perform such other functions as prescribed in relation to the collection of the micro-saving and disbursement of the micro-credit,
l) To act as an agent of BFI.
4. Activities not to be done by such FII
a) Purchase shares or debentures of any corporate body,
(However, on approval from the bank, shares or debentures of corporate bodies engaged in transactions of micro credit may be purchased)
b) Provide micro credit to managing director or his family members, and
c) Purchase or sale moveable or immoveable assets, except for own use.
5. The transaction of registering the property taken by FII from a borrower as a security in the name of FII or of sale or purchase of any immovable property by FII shall be
exempted from the registration fee or revenue stamp. (Section ….)
6. GoN may, by publishing a notice in the Nepal Gazette, grant exemption of income tax fully or partly on the income earned by FII. (Section ….)

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7. Licensing (Section ….)

After the commencement of this Act, no one shall carry out, or cause to be carried out, the act of financial intermediation pursuant to this Act, without obtaining license.
For the purpose of operating micro level financial Nepal
intermediary’s transactions group consisting 4 to 10 Inquiry, in satisfaction, grant license within 75 days Rastra
persons with low income may be formed whose
qualifications shall be as follows: Apply, in the prescribed format, with fees and following documents: (Section ….) Bank
a) Committed foster the economic status of the a) Association registration certificate and the statute, (NRB)
group by engaging in micro financial transactions b) Total number of members and office-bearers, their names, addresses and occupations,
and working for community. c) Copy of citizenship and recent photograph of officials,
b) Nepali citizen d) Details of movable and immovable properties,
c) Attained 16 years of age e) Proposed work area and geographical area where such FII intends to carry out the act of financial
d) With sound mind intermediation, details about custom, occupation, poverty, unemployment, etc. of the people
e) Residing in the jurisdiction and work area of the residing in such area,
organization f) Short summary of activities carried out by the organization till date, if any,
f) Not involved in any business competitive with g) Previous year’s audited financial statements of the organization, if any,
that of the organization h) If the organization is affiliated to social welfare council, copy of such affiliation certificate,
g) With knowledge of importance of micro credit i) Three years Projection of income statement and activities to be performed,
j) If the organization had made an agreement with some national or foreign entities, organizations
or persons to receive loan or grants, copy of such agreement,
k) Written consent from the promoters of the organizations that “liabilities pending, if any after the
organization is closed down, shall be settled even by selling the personal assets of the promoters.”
Notes:
1. While making examination of application and submitted documents, NRB may ask for/seek additional information or details and it shall be the duty of the concerned
to submit such additional information or details. (Section ….)
2. In issuing the license NRB may specify terms required to be abided by FII in carrying out the act of financial intermediation and it shall be the duty of FII to abide by
such terms specified. (Section ….)
3. Renewal of License (Section ….)
 Renew every 2 years
 Apply to NRB along with fees and following documents within 35 days prior to the expiry of license:
a) Annual Financial Statements pursuant to section 32 of this act and other financial statements prescribed by the bank
b) Copy of renewal obtained pursuant to societies registration act, 2034
c) Details about changes in work area, objectives or management, if any
d) Other documents prescribed by NRB
 In not renewed, such license shall ipso facto be canceled.
4. FII shall submit to NRB a preliminary annual report of the activities carried out by its in relation to the financial intermediation, along with its profit and loss statements
within Three months after the expiration of each financial year. (Section ….)

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8. Mobilization of credit and its recovery (Section …., …. & ….)

 In disbursing the micro-credit, such FII shall enter into agreement in writing with the borrower, containing the following matters:
a) Repayment period of the loan,
b) Statement that FII may require the borrower to repay the credit in the event of violation of any terms specified by FII,
c) Recovery shall be done from the security or collective guarantee furnished by the borrower, and
(In taking security from the borrower, FII shall not take security of any person that is not related with the group.)
d) Such other terms as required for the protection and proper use of the credit.

 FII may, recover its principal and interest by auctioning the security furnished or held by the borrower to or with FII, if:
 Any borrower does not abide by the agreement or terms thereof entered into with FII or
 Fails to repay the micro-credit to FII within the period specified in the deed or
 If, upon an inquiry held by FII, it appears that the borrower has misused or misappropriated the amount of the micro-credit so borrowed,

 FII may, require the borrower to furnish additional security covering the credit for the same within the time-limit specified by FII, if:
 The borrower transfer, in any manner, the title to the security which the borrower has furnished with FII to any other person or
 For any reason, the price of the security furnished with FII is devalued.
and if the borrower fails to furnish such a security within the time-limit specified by FII, FII may recover its principal and interest by auctioning the property furnished
as the security.
 If any asset is kept as security against credit facility disbursed by FII, FII shall write to the concerned office, by disclosing details of such asset, for earmark (rokka) of
such assets and on receipt of such information form FII, the concerned office shall, immediately earmark (rokka) and provide the written information about it to FII.
 If, in making recovery by making auction, the whole of the principal and interest of FII cannot be recovered from such a security, FII may recover its principal and
interest by auctioning other assets of a member where the member has borrowed the micro-credit personally and of the members of a group where the micro-credit
has been borrowed collectively.
 The amount of expenditure incurred in making auction sale of the property and principal and interest of FII shall be deducted from the proceeds of the auction sale
made pursuant to this Section, and the remaining amount shall be returned to the concerned person.
 If, in making auction sale pursuant to this Section, any one does not take over, FII may itself take over the property as prescribed.
 FII shall write to the concerned office (E.g.: Land Revenue Office) for registration or transmission of the assets auctioned by it in the name of the person who has
taken over it on such auction and when so requested, the concerned office shall make registration or transmission in the name of the person who has taken over it on
such auction.
 Any assets taken over by FII pursuant to sub section 5 shall be sold within a year.

9. Rate of Interest (Section ….)

FII shall itself determine the interest to be charged and given by it on the micro saving and micro-credit, subject to the policies and directions of NRB and if NRB considers,
it may give direction to FII to alter the rate of interest determined by FII, and it shall be the duty of the concerned institution to abide by such direction.

10. Service Charges (Section ….)

FII may collect service charge in consideration for any service, facility, technical knowledge or training it has provided to any person or group in relation to the mobilization
of the micro-saving and microcredit.
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11. Power of NRB

 Inspect or inquiry or cause to inspect or inquiry, as required, in relation to the activities or office of FII and it shall be the duty of the concerned FII and employees to
provide the documents or details as demanded by the person making inspection or inquiry in the course of making inspection or inquiry. (Section ….)
 Power to give direction for reforms: (Section ….)
 NRB may from time to time give directions to FII in relation to the matters to be carried out by FII pursuant to this Act or the Rules framed under this Act, and it
shall be the duty of the concerned institution to abide by such directions.
 If, in the course of inspection or inquiry, an institution is found to have committed any of the following acts, NRB may give direction to FII to make reforms in
any activity to be carried out by FII or to make any specific provision, within the period as specified by the NRB:
a) Having failed to do any act as required to be done pursuant to this Act,
b) Having done any ac that is contrary to the depositors/savers and borrowers,
c) Having failed to properly maintain its books of accounts, accounts or documents,
d) Having failed to abide by the terms specified and directions given by the Bank,
e) Having misappropriated the funds of FII or used the received amounts in any activity that is contrary to the objectives of this Act,
f) Having failed to provide such details, data or documents as demanded pursuant to this Act.
 Power to suspend or cancel license of such institutions (Section ….)
 If such institution violates any direction given by NRB, it may warn it or restrict any act of FII for reforms and if such violation is for three times, NRB may
suspend or cancel the license of such an institution.
 If such institution does any of the following acts, NRB may suspend or cancel the license of such an institution:
a) Abandons the act of financial intermediation,
b) Misappropriates the funds of FII or does not use the amount in the purpose for which it has been obtained,
c) Failed to make reforms or make any specific provision in relation to any activity with specification of the period,
d) Failed to obtain renewal pursuant to the Association Registration Act, 2034 (1977) and this Act.
 Prior to issuing order to cancel the license, NRB may, if it considers necessary, make necessary inquiry or examination in relation thereto and also grant an
opportunity to the concerned institution to submit explanation.
 Power to prevent from carrying out financial intermediation activities (Section ….)
If it is not appropriate to allow any institution to keep on carrying out the act of financial intermediation by the reason that FII has done any act as referred to in Section
18, NRB shall give an opportunity to such an institution to make necessary reforms, and may prevent such an institution from carrying the act of financial
intermediation.
 Power to recover from personal properties (Section ….)
NRB shall recover, or cause to be recovered, the amount so misappropriated from the personal properties of such an office-bearer or from the movable and immovable
properties held in his or her name and ownership in Nepal, if:
 Any office-bearer of an institution carries out, or causes to be carried out the act of financial intermediation being guided by personal interest or with mala fide
intention, and contrary to the objectives of this Act or
 Misappropriates the amounts of FII.

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12. Voluntary cancellation of license (Section ….)

 If any FII makes an application to NRB that it be relieved of carrying out of the act of financial intermediation and if it appears that all liabilities to be paid by such
FII seem to have been paid up, NRB may allow such FII to stop doing the act of financial intermediation.
 If such FII is unable to pay up all liabilities, NRB may prevent such FII from carrying out the act of financial intermediation and shall write to the GoN for the
payment of the liabilities from the assets of FII pursuant to the Association Registration Act, 2034 (1977).
 Prior to dissolving FII pursuant to the Associations Registration Act, 2034 (1977), NRB shall be consulted. (Section ….)
13. Merger (Section ….)
 If 2/3 members of the number of members present at the general meeting of FII supports a proposal to merge another FII to it or be merged to another FII, the proposal
shall be deemed to have been passed by the general meeting. (Merger can be done with FII only.)
 The proposal passed shall be submitted to the office registering FII to be merged and come into force only when separate approval is received from that office and
NRB and on receipt of such approval, the legal identity of such FII shall be deemed to have ipso facto lapsed.
 The assets of FII to be merged shall be transferred to the merging institution, and the merging institution shall bear all liabilities of that institution.
14. Fund of FIIs (Section….)
 FII shall have a separate fund of its own, and the following amounts shall be credited to the fund:
a) Amount received from the Government of Nepal or Province Government or native or foreign organization, institution etc. as a grant or loan,
b) Amount received upon collecting the micro savings,
(The amount collected from the micro-saving and received for the micro-credit shall not be spent for other purpose.)
c) Amount received from a commercial bank or financial institution,
d) Amount as prescribed out of the fees received from the members of the Association,
e) Amount of service charge received in consideration for the service provided by FII,
f) Amount including interest, fee received from the micro-credit.
g) Amount received from any other source.
 All expenses made in the name of FII shall be chargeable on the fund.
 Amount of the fund shall be deposited in an account opened with any BFI, and such account shall be operated as prescribed.
 If there is a situation that FII cannot disburse the micro-credit for the time being, FII may, with the approval of NRB, make investment in periodic deposits for a
maximum period of six months.
15. Accounts and Audit (Section ….)
 FII shall maintain separate accounts of the activities relating to financial intermediation, and prepare a balance sheet for each financial year, and get the same audited
by any recognized auditor appointed by the general meeting of FII within 6 months after the expiration of the financial year.
 The same person or firm shall not be appointed as auditor for more than 3 consecutive times.
 The remuneration of auditor shall be as specified by the general meeting of FII.
 If NRB wishes, it may at any time examine or cause to be examined the accounts of FII.

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16. Risk Bearing Fund (Section ….)

 FII shall establish a separate risk bearing fund for the purpose of bearing the possible loss and damage while disbursing the micro-credit, and the amount to be set as
prescribed of the remaining total credit applied in the investment by the last day of each financial year shall be credited to this fund.
 FII may invest the amount deposited in this fund in the securities of the GoN or NRB or periodic deposits of BFI.
 The amount deposited in this fund shall be used only for the remission of the micro-credit, on approval of NRB.

Classification of loans
Performing Loans Non-performing Loans
Pass Sub-standard Doubtful Loss
Not Overdue & overdue up to 3 months Overdue: 3 – 6 months Overdue: 6 months – 1 year Overdue: Above 1 year
General Loan Loss Provisions Specific Loan Loss Provisions
0 10% 50% 100%

17. Offence & Punishment (Section ….) Fine (Rs.) or Imprisonment Or Both And
If a person carries out the act of financial intermediation without obtaining the license Max 20,000.00 Max 6 months √ -
pursuant to this Act.
(Where any FI has done such an act, the office-bearer doing the activities of such FII
shall be liable to such punishment.)
If any institution Max 10,000.00 Max 6 months √ The amount in question
 does not abide by this Act or the framed under this Act or any order or direction shall be recovered from
given by NRB or such an employee.
 does not provide or submit any details or document demanded or
 provides false details deliberately and
 any such act that has resulted in any loss and damage.
If any employee of FII misappropriates the cash or in-kind of FII or Amount in Max 5 years The amount in question
uses the same for his or her personal purpose. question shall be recovered from
such an employee.
If any employee of FII cheats or illegally grieves or harasses a borrower NRB or concerned party may institute action against him or her in accordance
with the prevailing law.

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