Bank Directors and CEOs Reprimanded by Nepal Rastra Bank Deemed Ineligible, Supreme Court Rules

Kathmandu / June 30: The Supreme Court of Nepal has ruled that directors and chief executive officers (CEOs) of banks and financial institutions who have been formally cautioned or reprimanded by the Nepal Rastra Bank (NRB) are ineligible to hold their positions under prevailing banking laws.

The full text of the verdict, delivered by a joint bench of Justices Dr. Nahakul Subedi and Nripadhwaj Niraula, was recently made public.

The ruling came in response to a writ petition filed by advocate Madhu Kumar Chaulagain against Nepal Rastra Bank, several commercial banks, and their respective directors and CEOs.

According to the judgment, Section 18(1)(e) of the Bank and Financial Institutions Act (BAFIA), 2017 (2073 B.S.) provides that any person who has been subjected to regulatory action for violating the law and for whom five years have not yet elapsed since such action was taken is disqualified from serving as a bank director.

However, the Supreme Court declined to issue a writ of mandamus ordering the immediate removal of the officials concerned. The Court held that since Nepal Rastra Bank had not exercised its authority under Section 100(2)(e) of the Nepal Rastra Bank Act to formally order their removal from office, the Court itself could not directly remove them. On that basis, the writ petition seeking their dismissal was rejected.

Nevertheless, the Court issued a directive to Nepal Rastra Bank instructing it to ensure strict implementation of the legal provisions governing the disqualification of directors and senior officials of banks and financial institutions. The Court also directed the central bank to notify the concerned financial institutions accordingly and to effectively monitor compliance.

The judgment clarifies that disciplinary actions such as issuing warnings or formal reprimands under Section 100 of the Nepal Rastra Bank Act, although they may appear to be minor sanctions, nonetheless constitute regulatory actions. The Court stated that allowing individuals subjected to such disciplinary measures to continue serving as directors or senior executives would undermine good governance in the banking sector and jeopardize the interests of depositors.

The Court further explained that all sanctions prescribed under Section 100 of the Nepal Rastra Bank Act—from warnings to removal from office—are imposed as consequences of violating laws or regulatory directives. Since the law does not distinguish between “minor” and “major” disciplinary measures, individuals who have received warnings or reprimands are also considered ineligible under the law.

Sections 100(2)(a) through (d) of the Act provide for sanctions including warnings and fines. Section 100(2)(e), however, separately authorizes Nepal Rastra Bank to direct a bank’s board of directors to remove an official from office.

The Court reasoned that if a warning alone automatically resulted in removal from office, there would have been no need for the Act to provide a separate legal mechanism for removal. Therefore, in the absence of a formal removal order issued by Nepal Rastra Bank, the Court concluded that it could not directly dismiss the officials, leading to the dismissal of the writ petition.

The judgment also reaffirmed that Section 18(1)(e) of BAFIA disqualifies any individual who has been subjected to regulatory action within the preceding five years from serving as a bank director, a provision that also applies to chief executive officers. Since a warning or reprimand issued by Nepal Rastra Bank constitutes regulatory action, individuals receiving such sanctions are no longer eligible to serve as directors or CEOs during the prescribed period.

Emphasizing the sensitive nature of the banking and financial sector, where public deposits are entrusted to financial institutions, the Court stated that legal provisions must be implemented in both letter and spirit to safeguard banking governance and protect depositors’ interests. It further observed that allowing disciplined individuals to remain in office could erode public confidence in the country’s financial system.

The writ petition named directors and chief executives of Prabhu Bank, Global IME Bank, Himalayan Bank, Nabil Bank, NIC Asia Bank, Kumari Bank, Prime Commercial Bank, Garima Bikas Bank, and Reliance Finance as respondents. Several officials from these institutions had received warnings or formal reprimands from Nepal Rastra Bank during the 2023/24 fiscal year (FY 2080/81 B.S.) for various regulatory violations.