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A Bill Framed to Provide for Financial Intermediary Societies
Preamble: Whereas it is expedient to provide for Societies working
as financial intermediaries for the supply of micro-credit on an
institutional basis to low-income people living in different parts
of the country so as to involve them in income and employment
oriented enterprises and thus improve their economic condition,
now therefore, the Parliament has enacted this law in the 27th year
of the reign of His Majesty King Birendra Bir Bikram Shah Dev.
Chapter 1
Preliminary
1. Short Title and Commencement
(1) This Act may be called the Financial Intermediary
Societies Act, 2055 (1998).
(2) It shall come into force on such date as may be
prescribed by His Majesty's Government by notification in
the Nepal Rajapatra.
2. Definitions
Unless otherwise meant with reference to the subject or
context, in this Act,
(a) Financial intermediation means the supply of micro-credit
under this Act.
(b) Society means a Society which has obtained a license to
work as a financial intermediary under this Act.
(c) License means a license issued under Section 5 to work as
a financial intermediary.
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(d) Bank means the Nepal Rastra Bank established under the
1955 Nepal Rastra Bank Act.
(e) Income and employment oriented enterprise means an
income-oriented enterprise run with 10 persons or less,
either family members or wage-workers.
(f) Low-income person means a person with an income lower
than the income prescribed by the Nepal Rastra Bank from
time to time.
(g) Group means a group of low-income persons which has been
formed by fulfilling the prescribed formalities.
(h) Collective guarantee means a guarantee bond issued to a
Society by the members of a group collectively pledging
to repay micro-credit obtained by any member of the group
if he failed to do so.
(i) Micro-Credit means a credit supplied for the operation of
an income and employment oriented enterprise subject to
the limit prescribed by the Bank from time to time.
(j) Borrower means a group or any member of a group who has
obtained micro-credit from a Society.
(k) Security means any movable or immovable property pledged
as collateral, mortgage, or otherwise according to
current law while obtaining micro-credit.
(l) Employees mean persons appointed by a Society to work for
it with or without remuneration; the term includes
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office-bearers of the Society.
(m) Prescribed or as prescribed means prescribed or in the
manner prescribed in the rules or by-rules framed under
this Act.
Chapter 2
Licensing Arrangements
3. Prohibition to Work as Financial Intermediary Without
Obtaining License
After the commencement of this Act, no one shall work or
instigate others to work as a financial intermediary without
obtaining a license.
4. Application to be Filed for License
In case any Society which has been registered under the 1977
Registration of Associations Act with the objective of working
as a financial intermediary desires to work as a financial
intermediary under this act, it must submit an application to
the Bank in the prescribed form explicitly mentioning the
following particulars:
(a) Certificate of registration and Constitution of the
Society.
(b) Names, addresses, and occupations of office-bearers of
the Society.
(c) Total number of members of the Society.
(d) Movable and immovable assets of the Society.
(e) Geographical area where the Society wishes to work as a
financial intermediary.
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(f) Other matters as prescribed.
5. Issuance of License
(1) On receipt of an application under Section 4, the Bank
shall conduct necessary enquiries into it, and, if it so
deems necessary in the course of such enquiries, it may
demand additional information or particulars from the
applicant-Society.
(2) In case the Bank so deems appropriate in the course of
conducting enquiries under Sub-Section (1), it shall
collect the prescribed fee and issue to the applicant in
the prescribed form a license to work as a financial
intermediary.
(3) Licenses to be issued under Sub-Section (2) shall be
issued within 30 days from the date of receipt of the
application, or of the additional information or
particulars demanded under Sub-Section (1).
(4) In case the Bank does not consider it appropriate to
issue a license in the course of conducting enquiries
under Sub-Section (2), it shall notify the applicant
accordingly within seven days.
6. Power to Prescribe Conditions
(1) While issuing a license under Section 5, the Bank may
prescribe the conditions to be fulfilled by the concerned
Society while working as a financial intermediary.
(2) It shall be the duty of the concerned Society to fulfil
the conditions prescribed under Sub-Section (1).
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7. Renewal
(1) A Society must renew its license every year within the
prescribed time limit on payment of the prescribed
renewal fee to the Bank.
(2) Any license which is not renewed within the time limit
mentioned in Sub-Section (1) shall be ipso facto
cancelled.
(3) Other arrangements concerning renewal of license shall be
as prescribed.
Chapter 3
Functions, Duties, and Powers of Societies
8. Functions, Duties, and Powers of Societies
The functions, duties, and powers of a Society, in addition to
those mentioned elsewhere in this Act, shall be as follows:
(a) To encourage low-income persons to form groups.
(b) To supply micro-credit to any group or member thereof for
operating an income and employment oriented enterprise,
with or without any movable or immovable property as
collateral or guarantee.
(c) To obtain loans or grants from the Bank or any local or
foreign organization or association, and use them for the
supply of micro-credit or for making the process of
supplying such credit effective.
Provided that it shall be mandatory for a Society to
secure the approval of the Bank before obtaining loans or
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grants from any local or foreign organization or
association.
(d) To evaluate schemes for which micro-credit have been
requested, and determine whether or not they are
feasible, before supplying micro-credit.
(e) To organize publicity and extension programs about income
and employment oriented programs of the type which help
to improve the economic condition of low-income persons.
(f) To organize workshops on income and employment oriented
enterprises, extend help and provide training in the
formulation of schemes, make available technical know-
how, and mobilize technical assistance according to need.
(g) To provide necessary services to a group in respect to
the mobilization of micro-credit.
(h) To take necessary actions for the timely realization of
micro-credit.
(i) To conduct investigations from time to time to determine
whether or not micro-credit has been properly utilized,
and, if it is not found to have been properly utilized,
to issue necessary directives.
(j) To perform all such functions as are prescribed in
connection with the supply of micro-credit.
9. Power to Demand Information, Data, or Documents
The Bank may demand any information, data, or document
relating to micro-credit from any Society, and it shall be the
duty of the concerned Society to furnish such information,
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data, or documents.
10. Agreements to be Signed
(1) While supplying micro-credit, a Society must execute a
written agreement with the borrower by prescribing
conditions deemed essential for the protection and proper
utilization of the credit.
(2) While executing an agreement under Sub-Section (1), the
Society may prescribe any time limit for repayment of its
micro-credit, or a condition to the effect that it may
have the borrower repay the principal and interest if he
violates the conditions prescribed by it, or to recover
the same from the collateral pledged or collective
guarantee furnished by the borrower.
Provided that a Society shall not accept the security
furnished by any person not connected with the concerned
group while obtaining a security from the borrower.
11. Power of Societies in the Event of Breach of Conditions
(1) In case any borrower fails to abide by the agreement
signed or terms stipulated with a Society, or to repay
the micro-credit of a Society within the time limit
stipulated in the bond, or in case a Society finds
through investigations that the borrower has misused or
misappropriated the amount of the micro-credit, the
Society may, notwithstanding anything contained in
current law, auction any property pledged to it, or any
security deposited with it, according to current law, and
thus recover the principal and interest.
(2) In case any borrower relinquishes in any manner title to
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the property pledged to a Society as collateral, or the
value of such collateral declines due to any reason, the
Society may, notwithstanding anything contained in
current law, ask him to furnish additional collateral
which is sufficient to cover the credit within the period
prescribed by it. In case the borrower fails to furnish
additional collateral within the time limit prescribed by
the Society, the Society may recover its principal and
interest by auctioning the collateral pledged to it.
(3) In case the principal and interest cannot be fully
recovered through the auction sale of the collateral
pledged to the Society under Sub-Section (1) or (2), the
Society may recover the balance by auctioning the other
assets of the concerned member in case any member of a
group has obtained the micro-credit on an individual
basis, and of all the members of the group in case the
micro-credit has been obtained on a collective basis.
(4) The amount of principal and interest and expenses
incurred in auction shall be deducted from the amount
raised through the auction of the assets under this
Section, and the balance shall be refunded to the
concerned borrower.
(5) In case no one offers a bid in an auction held by a
Society under this Section, the concerned Society may
itself take over the ownership of such assets.
12. Registration or Transfer
(1) In case the bid offered by anyone is approved in the
course of auctioning the assets pledged as collateral
under Section 11, or in case a Society itself takes over
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the ownership of such assets on the ground that no one
offered a bid in an auction, the Society shall write to
the appropriate Land Tax Office for registration or
transfer in its records according to current law of the
concerned assets in the name of the person whose bid has
been approved, or in the name of the Society.
(2) In case the appropriate Land Tax Office receives a
written request from any Society for registration or
transfer of assets under Sub-Section (1), it must do so
accordingly.
13. Approval of the Bank to be Obtained
It shall be mandatory for a Society to secure the approval of
the Bank in advance in case it is required to purchase any
movable or immovable property other than goods which are
needed for working under this act.
14. Power to Determine Interest Rates
(1) A Society shall itself determine the interest rates to be
charged on its micro-credit subject to the conditions
prescribed by the Bank. It must furnish information about
the same to the Bank within seven days.
(2) Notwithstanding anything contained in Sub-Section (1),
the Bank may, if it so deems necessary, direct the
Society to increase or reduce the interest rates fixed by
it, and it shall be the duty of the Society to comply
with such directives.
15. Power to Collect Service Charges
A Society may collect a service charge as prescribed from any
individual or group in consideration of any service, facility,
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technical know-how, or training provided by it to him/it in
connection with income and employment oriented enterprises or
mobilization of micro-credit.
16. Records to be Maintained
A Society must maintain records of its work as a financial
intermediary on a current basis.
Chapter 4
Functions, Duties, and Powers of the Bank
17. Power to Conduct Inspection or Investigation
(1) The Bank may inspect or investigate the office or the
functions and activities of a Society, or make
arrangements for doing so, according to need.
(2) It shall be the duty of the concerned employees to supply
the documents or particulars demanded by the inspector or
investigator in the course of conducting inspection or
investigation under Sub-Section (1).
(3) Other arrangements concerning inspection or investigation
shall be as prescribed.
18. Power to Issue Directives
(1) In case it is found in the course of inspection or
investigation under Section 17 that a Society has taken
any of the following actions, the Bank may direct the
Society to introduce reforms or make any special
arrangement in respect to any of its functions and
activities by prescribing a time limit for that purpose:
(a) In case it has not taken any action which it is
required to take under this Act.
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(b) In case it has taken any action which adversely
affects the borrowers.
(c) In case it is not found to have properly maintained
its ledgers, accounts, or documents.
(d) In case it has not complied with any condition
prescribed or directive issued by the Bank.
(e) In case it has misappropriated its funds, or not
used in micro-credit the funds received for the
purpose.
(f) In case it has not supplied particulars, data, or
documents demanded under this Act.
(2) The Bank may issue directives from time to time to a
Society in respect to functions which it has to perform
under this Act or the rules framed hereunder. It shall be
the duty of the concerned Society to comply with such
directives.
19. Power to Cancel License
(1) The Bank may cancel the license of a Society if it
repeatedly violates the directives issued under Section
18, or takes any of the following actions:
(a) In case the Society stops working as a financial
intermediary.
(b) In case the Society misappropriates its funds, or
does not use such funds for purposes for which they
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have been received.
(c) In case the Society does not comply with the
directives issued by the Bank to introduce reforms
or make any special arrangement in respect to any
of its functions and activities by prescribing a
time limit for that purpose.
(2) The Bank may, if it so deems necessary before issuing an
order of cancellation of license under Sub-Section (1),
have necessary enquiries or investigations conducted in
that connection.
(3) Before cancelling a license under Sub-Section (1), the
Bank shall provide the concerned Society with an
opportunity to submit its explanations.
20. Power to Impose a Ban (on a Society) to Work as a Financial
Intermediary
In case it is not deemed appropriate to allow any Society to
continue working as a financial intermediary on the ground
that it has taken any of the actions mentioned in Section 18,
the Bank may provide it with an opportunity to introduce
necessary reforms and impose a ban on it to work as a
financial intermediary for a specified period of time.
21. Restriction on Relinquishment of Functions of a Financial
Intermediary
In case any Society applies to the Bank for permission to
relinquish its functions of a financial intermediary, the Bank
shall not let the Society do so until the Society fully
recovers all amounts invested as micro-credit by it.
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Provided that in case it becomes unavoidable for any
appropriate reason to allow any Society to relinquish its
functions of a financial intermediary, the Bank may itself
bear the entire liability relating to financial intermediation
carried out by the Society and allow the Society to relinquish
its functions of a financial intermediary.
22. Power of the Bank to Itself Recover Micro-Credit
In case the license or registration of a Society is cancelled
under this act or current law, or in case it is granted
permission to relinquish its functions of a financial
intermediary under Section 21, the Bank may itself recover the
micro-credit supplied by the Society, or have it recovered by
any other Society, under this act.
23. Final Obligation to Vest in the Bank
In case the license or registration of a Society is cancelled
under this act or current law, or in case the Society is
granted permission to relinquish its functions of a financial
intermediary under Section 21, the final obligation to meet
such financial liability relating to the financial
intermediation of the Society as cannot be met from the
Society's assets shall vest in the Bank.
Chapter 5
Fund, Accounts, and Audit of Societies
24. Micro-Credit Fund
(1) A Society shall have a separate Micro-Credit Fund, which
shall comprise the following amounts:
(a) Grants or loans received from the Bank or local or
foreign organizations or associations.
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(b) A prescribed amount from the fees collected from
the members of the Society.
(c) Service charges collected in consideration of the
services provided by the Society.
(d) Interest, fees, etc. received from micro-credit
transactions.
(e) Amounts received from other sources.
(2) All expenses to be incurred in the name of the Society
shall be borne from the fund mentioned in Sub-Section
(1).
(3) The amounts credited to the fund shall be deposited in an
account opened in a commercial bank. The (bank) account
shall be operated in the prescribed manner.
25. Risk-Bearing Fund
(1) A Society must establish a separate risk-bearing fund, in
addition to the fund mentioned in Section 24, for the
purpose of bearing any possible loss in the course of
supplying micro-credit. The prescribed (percentage) of
the total outstanding credit invested until the day of
the expiry of each financial year must be credited to
that fund.
(2) The amounts credited to the fund mentioned in Sub-Section
(1) may be invested by the Society in the securities of
His Majesty's Government or the Bank.
(3) The fund established under Sub-Section (1) shall be used
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only for waiving micro-credit. In case it becomes
necessary to waive any micro-credit, the Society must
obtain the approval of the Bank.
26. Accounts and Audit of Societies
(1) A Society must maintain separately the accounts and
records of its functions as a financial intermediary. It
must prepare a balance sheet of each financial year and
have it audited by a registered auditor appointed by its
general meeting within six months after the expiry of the
concerned financial year.
(2) While appointing an auditor under Sub-Section (1), the
same individual or firm shall not be appointed for more
than three consecutive terms.
(3) The remuneration of the auditor shall be as prescribed by
the general meeting.
(4) The Bank may, if it so wishes, inspect or make
arrangements for inspecting the accounts and records of a
Society at any time.
27. Ceiling on Administrative Expenses
No Society may spend more than the prescribed amount for such
administrative purposes as payment of salaries and allowances
to employees and meeting of office expenses.
Chapter 6
Penalties
28. Penalties
(1) In case any person works as a financial intermediary
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without obtaining a license under this act, he shall be
punished with a fine not exceeding Rs 20,000, or with
imprisonment for a term not exceeding six months, or with
both. In case any Society does so, the office-bearer
discharging the functions of that Society shall be
subjected to such punishment.
(2) In case any Society does not comply with this act or the
rules framed hereunder, or with any order or directive
issued by the Bank, or fails to supply or submit
particulars or documents demanded from it under this act,
or submits false information intentionally, and in case
any loss or damage results therefrom, the amount involved
in the loss or damage shall be recovered from the
concerned employee, who shall also be punished with a
fine not exceeding Rs 10,000, or with imprisonment for a
term not exceeding six months, or with both.
(3) In case any employee of a Society misappropriates its
cash or supplies, or uses them for his personal purposes,
the amount involved shall be realized from him, in
addition to punishing him with a fine equal to that
amount, or with imprisonment for a term not exceeding
five years, or with both.
(4) In case any employee of a Society cheats or illegally
harasses or causes any hardship to any borrower, the Bank
or the concerned party may initiate legal action against
him according to current law.
29. Power to Take Action According to Current Law
In case any Society takes any action which is punishable under
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current law, this Act shall not be deemed to have prejudiced
the power to take action against it accordingly.
Chapter 7
Miscellaneous
30. Exemption From Registration Fee or Revenue Stamp Fee
No registration fee or revenue stamp fee shall be charged on
the registration of any property in the name of a Society
which it has obtained from a borrower as a collateral, or on
the sale or purchase of any immovable property by a Society.
31. Income Tax
His Majesty's Government may, by notification in the Nepal
Rajapatra, grant full or partial income tax exemption on the
income earned by a Society.
32. Annual Reports to be Submitted
A Society must submit to the Bank an annual report of its
functions in the capacity of a financial intermediary along
with a statement of its income and expenditure within three
months after the expiry of each financial year.
33. Bank to be Consulted
It shall be mandatory to consult the Bank before dissolving a
Society under the 1977 Registration of Associations Act.
34. Immunity for Action Taken With Bonafide Motives
The members or employees of a Society shall not be held
individually or collectively responsible for any function
discharged by them with bonafide motives subject to this Act
or the rules framed hereunder.
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35. Applicability of Current Law
Notwithstanding anything contained in current law, action in
respect to matters provided for in this Act or the rules
framed hereunder shall be taken accordingly, and in respect to
other matters, action shall be taken according to current law.
36. Power to Frame Rules
The Bank may frame rules in order to implement the objectives
of this Act. Such rules shall come into force only after they
are approved by His Majesty's Government.
37. Power to Frame By-Rules
A Society may frame by-rules according to need in order to
manage its functions, subject to this act or the rules framed
hereunder. Such by-rules shall come into force only after they
are approved by the Bank.
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