The bank is a financial institution established according to the country law to receive deposits, advance loans and provide financial services such as wealth management, currency exchange and so"/>
The bank is a financial institution established according to the country law to receive deposits, advance loans and provide financial services such as wealth management, currency exchange and so"/>
Concept and Background
Kedar Nath Bhatta, (Assistant Director) Beema Samiti.
The bank is a financial institution established according to the country law to receive deposits, advance loans and provide financial services such as wealth management, currency exchange and so on. It is a legal entity where customers can save or borrow money moreover it collects the scattered small amount of money from different sector of the economy through different account scheme and provides lending facilities to the customers under an agreement to pay the money back to the bank at a later time, with interest. Banks Provide life to the economy as they provide various financial services for every section of the economy. It gives us a safe place to store our cash through variety of accounts (current account, saving account and certificates of deposit and other account schemes) and pay interest on our investment. We can conduct routine banking transactions like deposits, withdrawals, check writing, and bill payments via bank. Additionally, It also provides credit opportunities such as car loans, credit cards, mortgages and other debt vehicles which helps to create liquidity in the market maintaining better money supply in an economy. The goal of a bank is to earn profit for its owners (shareholders) by providing competitive banking services. It charges more interest on the loans and other debt they issue to borrowers than they pay to people for various savings vehicles. Bank ranges in size based on its capital, location, group of people they serve, their banking facilities and so on. Modern banking is termed as banking industry and its function is called banking product. "Bank of venis" located in Venis of Italy is considered the oldest bank and "Bank of England" established during the year 1694 A.D. is termed as the first bank to adopt modern banking.
Different Authors and Economists have given some structural and functional definitions on bank from various perspectives “Bank is a financial intermediary institution which deals in loans and advances” Cairn Cross. “Bank is an institution which collects idle money temporarily from the public and lends to other people as per need.” R.P. Kent. “Bank provides service to its clients and in turn receives perquisites in different forms”. P.A. Samuelson. “Bank is such an institution which creates money by money only”. W. Hock. “Bank is such a financial institution which collects money in current, savings or fixed deposit account; collects cheques as deposits and pays money from the depositors" account through cheques.” Sir John Pagette.
In common parlance, bank indicates commercial bank and its functions. Central bank is a separate entity and plays distinctive roles. Bank collects deposits from the public and lend those deposits for the development of agriculture, industry, trade and commerce. In modern banking, Bank carries out many other activities, e.g. creation of debts and money, transmission of money from one country to another, increase of foreign trade, preservation of valuables in safe custody and so on. Bank earns profits by executing various activities. Historically, commercial bank came into existence for commercial purpose. The inception of modern banking is the outcome of commercial bank. According to Professor Roger “the bank which deals with money and money's worth with a view to earning profit is known as "Commercial bank". Professor Hart says, “A banker is one who, in the ordinary course of business, honors cheques drawn upon him by persons for and for whom he receives money on current account.” Banks have various objectives such as maximizing profits, collecting the scattered savings or idle money from the public at a lower rate of interests and lend at a higher rate, creating propensity of savings amongst the people, motivating people for investing money with a view of bringing solvency in them, creating money against money as an alternative for enhancing supply of money, build up capital through savings, expedite investments, extend services to the customers and so on.
The bank which governs banking system and money market is Central Bank. The primary function of a central bank is to assist Government in formulating economic policy, in controlling and conducting money-market and also controlling the functions of bank and financial institutions. Decock, “The central bank is a banking system in which a single bank has either a complete or a residuary monopoly of note issue.” Professor Hatley says, “Central Bank is the lender of the last resort.” It performs different functions such as: issue of notes and coins, acts as the bank of Government & banker’s bank, lender of the last resort, reservoir of foreign currency, clearing house etc. It follows various ways of controlling credit: (a) Change in bank rates (b) Open market operation (c) Change (increase or decrease) in reserve- ratio (d) Selective credit (e) Direct influence (f) Moral suasion (g) propaganda etc. It acts as a controller and guardian of the currency market, stabilize exchange Rate, control gold reserve, Stabilize Price-Level, formulates credit policy and with this spirit, it takes necessary steps to protect economic depression for stabilizing business activities, provides employment opportunities, performs expansion and development functions agriculture, industrial and natural resources, conducts various economic research works and formulates policies for economic development & conducts the survey on different economic issues for the knowledge of the general public in the country.
The word "Bank" is widely and extensively used and circulated in todays world. The origin of english word "Bank" came into being (when, where and how) could not be specifically identified. According to some writer the word "Bank" was derived from Italian word "Banco", Latin word "Bancus" and the French word "Banque" or "Banc" all of which mean a bench upon which the mediaeval European Money-lenders and Money –Changers used to display their coins. In the Mediaeval age Italian states were sound and solvent economically and commercially. At that time a group of people used to conduct transaction of money sitting on a stool or bench which was replaced by "Banco", "Banko","Banca" etc. Banking-experts pass their opinion that banking system was introduced from the primitive stages of human civilization. Reviewing the historical backgrounds of social, economic and religious activities the origin of modern banking can be better known & justified:
1. Introduction of coins: From the ancient times coins were introduced in different countries as a medium of exchange. So, banking system came in to existence for preservation and safety of coins. The discovery of archaeological symbols has intensified the arguments. At that time excess residual coins were kept with the religious and local elite persons for the purpose of extending help to the needy poor people. Gradually, this becomes a profitable business for the businessmen and money-lenders.
2. Different Civilization: Different archaeological symbols provide the evidences of existence of banks and coins. for example, during Indus Civilization (5000-2000) coins were available in Mohenjudaru of Pakistan, in mummy of Pyramid of Egypt, Moynamati of Comilla and Paharpur of Bogra of Bangladesh and so on.
3. Expansion of business and trade: The expansion of business and trade played a vital role for the advancement, improvement and smooth functioning of the monetary transactions.
4. Various Religions and Religious books: Information regarding banking business incorporated in the Quran, the Bible, the Vedas and so on.
(a) The Goldsmiths:
From the very ancient periods the Goldsmiths, over and above their own activities, used to act as custodians of the surplus funds of the general people of the society. For that reason, they were recognized as a symbol of honesty, sincerity, solvency and security. On receipt of money they used to issue receipts and on return of money they used to take acknowledgements. Later on, these receipts were treated as deposit slip and cheque respectively. The deposits receipts were undoubtedly acceptable and popular as notes of the goldsmiths and afterwards converted into bank notes. Besides these, they used to lend money with interest to the needy people and thus, the words interest and profit were introduced.
(b) The Money-Lenders:
The Money-Lenders(Mahajan) also played an important role for the growth and development of modern banking. They used to keep surplus money of the people and refund those in case of need. Later, they took it as a profession. They used to pay interest to the depositors and earn interest on loans. They also used to take security, mortgage against loan.
(c) Businessmen:
Businessman also played vital role for the growth and development of modern banking. From the ancient periods the Businessman were trustworthy to the general people. They were honest, faithful and solvent. As a result, general people used to deposit money to them for the safety and security of fund. In course of time they were involved in money-lending business.
1. Receiving Deposits: The primary function of bank is to receive or collect deposits from the public through different accounts for example current, savings & term deposits. No interest is charged in the current account, lower rate of interest is charged in the savings account, and comparatively higher interest rates charged in the fixed deposits.
2. Accommodation of loans and advances: It provides loans at a higher rate than the deposit rates and thus earns profits on it. It extends financial accommodation for the development of agriculture, commerce and industry. Credit accommodation is provided to the entrepreneurs for reviving sick and old industries as per Government policy.
3. Creation of loan deposits: It does not only receive deposits from public and Provides loans but also creates loan deposits. e.g. while disbursing loans, the amount of loan is credited to the borrower's account but the borrower may not withdraw the full amount at a time. The residual amount i.e. balance left in the account creates loan deposits.
4. Creation of medium of exchange: Central Bank has got exclusive right to issue notes. Commercial bank creates medium of exchange by issuing cheque which is transferrable like notes in banking transactions.
5. Contribution in foreign trade: It plays a vital role in expediting foreign exchange and foreign trade (import, export etc.). It contributes greatly in the economy through import and export finance and thus, earn foreign exchange for the country.
6. Formation of capital: Commercial bank extends financial assistance in the trade, commerce and industries which expedites capital formation and overall economic development.
7. Creation of Investment Environment: It plays a significant role in creating investment environment in the country.
8. Remittance of Money: Remittance of money to the public from one place to another is one of the most important function of commercial bank.
9. Help in trade and commerce: It helps to expand trade and commerce in inland and foreign trade by allowing credit accommodation to its customers in the form of letter of credit, bill purchased, discounted and so on.
Besides above all, the bank provides locker services to the customers for safe custody of valuables, helps in foreign exchange business, act as a referee for and on behalf of the customers, provides valuable advice to the customers on different products, helps for business growth and so on. It also collects utility service bills like water, electricity, gas, telephone etc. as a social commitment, purchase and sale of prize bonds, sanchaya patra, shares etc., helps people travel abroad through issuance of travelers cheques, drafts, cash etc. in favor of the customers, engaged in collection and payment of cheque, bill of exchange, promissory notes, pension, dividends, subscription, insurance premium, interest etc. on behalf of the clients, Maintains secrecy of customers data, act as a trustee on behalf of the customer, works for economic development and welfare activities of the country and so on.
A. Before 1993(Historic Age)
In the very beginning money lenders and goldsmiths used to advance loan and used to take grains, ghee etc. as interest. King "Gunakamdev" issued the currency named "Gunanka" and restructure Kathmandu valley taking loan with general people in eighth century whereas "Mandev" issued "Mananka". Shankhadhar Shakhwa started Nepal Sambat clearing the debt to be paid to the state by the people of kathmandu and Bhaktapur at the end of eighth century. Monetary transaction by king Jayasthiti Malla, copper coin by Ratna Malla, silver coin by Mahindra Malla and gold coin(Asarfi) by Jayaprakash Malla is considered significantly important in the history regarding the use of money. "Tejarath Adda" established by Ranodip Singh in 1933 B.S. used to advance loan to the people in mortgage of gold. Establishment of "Taxar Adda" in 1989 B.S. to issue coin also can be explained as the important event for the development of Nepalese banking sector.
B. From Starting of Institutional Banking to the starting of economic Liberalization (1994-2040B.S)
Establishment of Nepal Bank Limited under Nepal Bank Act, 1994 on 30th Kartik 1994 B.S. is treated as the great movement for the starting and development of institutional banking in Nepalese banking history. Paper notes named Mo.Ru was issued from "Sadar Mulukikhana" on 1st Aswin 2002 B.S. Nepal Rastra Bank was established under NRB Act, 2012 in 14th Baisakh 2013 B.S. and Nepal Industrial Development Corporation in 1st Asar 2016 B.S. under NIDC Act (NIDC merged with RBB on 19th Baisakh, 2075 B.S i.e. May-2, 2018). In order to monetised economy and with the objective of reducing the use of indian currency in Nepal Nepal Rastra Bank issued paper notes of Rs. 1, 5, 10 and 100 in 7th falgun 2016. Establishment of cooperative Bank in Bhadra 2020B.S., Rastriya Banijya Bank on 10th Magh 2022B.S., Agriculture Development Bank Limited in 7th Magh 2024 B.S. under ADBL Act, 2024, "Banking Promotion committee" for organized banking system in 2025 B.S., merger of "Bhumi Sudhar Bachat Sanstha" in ADBL in 2030 B.S etc. broadened banking concept throughout the country. Enactment of "Commercial bank Act, 2031". to governs two commercial banks (RBB and ADBL) and Starting of " Saghan Banking" in 2038 B.S. are also the important part of Nepalese banking history.
C. From starting of "Liberalized Economic Policy" to starting of "Akikrit Banking Kanoon (BAFIO)"[2040-2060 B.S.]
Establishment of Nepal Arab Bank (Current Nabil Bank) and other joint venture bank as the entry of private sector banking after economic liberalization initiates the establishment and development of private banking sector. Enactment of "Finance Company Act, 2042", establishment "Rural Development Bank" in each development region (now merged), and enactment of "Development Bank Act, 2052" promoted the banking thoughts and development bank and finance companies came in to operation. Starting of "Financial Sector Reform Program" in 2057 B.S., and enactment of Nepal Rastra Bank Act, 2058 brought the great revolution in banking regulation and qualitative banking thoughts.
D. From starting of "Akikrit Banking Kanoon (BAFIO)" to current situation (2060 B.S onwards).
Enactment of Bank and Financial Institution Ordinance (BAFIO) replaced NIDC Act, 2016, ADBL Act, 2024, Commercial Bank Act, 2031, Finance Company Act, 2042 and Development Bank Act, 2052. and focused on Quality of BFIs. Nepal Rastra Bank started unification in financial functions by issuing of unified directive for BFIs in 2062 B.S. Classification of Bank and financial institutions as "A", "B", "C" and "D" class based on BFIs capital, function and network differentiate BFIs and their functions. "Merger by law, 2068" motivate BFIs to merge, as a result more than 200 BFIs are merged till now. Monetary Policy of F.Y 2072/073 B.S. compelled BFIs to increase their capital up to four times up to the end of Ashar, 2074 B.S. According to the concept of "technology based banking" NRB issued the guidelines regarding Mobile Banking, Branchless Banking, e- Banking, customer protection and set the rule for free SMS Alert service compulsorily to every customers of BFIs.
Section (37) of Bank And Financial Institutions Act, 2073 states that, The Rastra Bank shall, based on minimum paid up capital of the bank or financial institution submitting application pursuant to Section 33 for carrying on banking and financial transactions and transaction to be operated on by such bank or financial institution and working areas, classify banks or financial institutions in classes “A”, “B”, “C” and “D” and issue license to concerned banks or financial institutions accordingly but infrastructure development is not classified in any category. Bank and financial institutions are classified according to their Capital requirements, Nature of transaction they perform, their working area, tenure of transaction, Scope of upgradation etc. Nepal Rastra Bank (NRB) regulates all the banks and financial institutions (BFIs) of Nepal. NRB has grouped the BFIs into four major categories as below:
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Up to Mid-Jan,2021, 27 Commercial banks with 4,613 branches, 19 development banks with 1048 branches, 21 finance companies with 254 branches, 76 microfinance companies with 4,272 branches and 1 Infrastructure Development Bank (i.e. total no of BFIs of A, B, C, D class and IDB stood at 184 with 10187 branches) are operation. Due to the introduction of the merger by-laws, several development bank and finance companies have entered in to merger/acquisition aggressively with commercial banks as a result number of BFIs has gradually declined in Nepal. Bagmati state has highest penetration in terms of number of branches i.e. 2,640 and karnali has lowest i.e. 399 branches including 188 microfinance branches. out of 753 local levels commercial banks have reached to 745 local level. After the launch of a program called "Bank account for all Nepalese" the number of bank account has increased due to financial literacy. In state 5, Banks have reached in all the local levels. 3.46 crores deposit accounts exist in the A, B and C class banks, out of which A class includes 2.97 crores. Accordingly, 16.01 lakh borrowers have taken loan facilities from these BFIs. Only commercial banks have 1,685 branchless banking centers with 2,01,676 branchless banking customers. A, B, C class BFIs have 4,254 ATMs (A class 3,891), 1.26 crores customers of mobile banking, 10.90 lakhs user of internet banking, 80.49 lakh customers are user of debit card, 1.76 lakh of credit card and 55,617 of customer of prepaid cards.
• Financial literacy: BFIs promote financial literacy with the expansion of branches, people are being aware of financial dealings, they realized the importance of deposits, learnt about banking facilities and have started making financial plans.
• Financial access: Reaching most of the local level with various banking facilities like mobile banking, ATM, internet banking, remittance services except accepting deposits and advancing loans.
• Economy promotion: Facilitating various industries, business house and different sector of the economy with productive sector lending.
• Financial transparency: Standing with AML to prove credibility across the globe.
• Facilitate entrepreneurship: promoting business and entrepreneurship at larger scale by providing loan over hypothecation.
• Facilitates government transactions: Mediator of government transaction supporting pension scheme, revenue collection, tax payment and so on.
• Coping the global trend: Supporting the global movement of the cashless economy.
In Nepal banking is colored with various features such as: heterogeneous institutions, similar product and policy, increasing size, digital and virtual banking, AML/CFT issues, legislative restructure, lack of sufficient skilled manpower, high staff turnover, increasing operational risk, volatile liquidity situation, regulatory reform and enforcement (Capital adequacy framework issued by NRB and implementing major provisions of BASEL, provisions such as buffer capital , capital conservation buffer, countercyclical buffer and other prescribed micro prudential based regulations have been implemented, implementing Risk Management Guidelines, formulating electronic banking directives, drastic changes in KYC regulations, shift from compliance based modality to risk based supervision, NRB established separate payment and settlement department to make effective and secure payment system in banking system, RTGS have been implemented) etc.
Nepalese banking system is growing with several challenges/problems created by quantitative increment rather to qualitative banking, low saving habit and weak propensity to save, urban focused financial activities, low economic growth rate, political instability, lack of sophisticated modern technology and competent manpower, lack of banking awareness, increasing banking crime, traditional banking system and low returnable investment, entry in WTO and increasing national/international competition, high unemployment, lack of banking professionalism, increasing NPA, lack of project analysis, lack of research and innovation, low productive sector lending, week monitoring, mortgage based lending system etc. However, various possibilities of banking development are being raised through enough source of investment (Agriculture, Health, Education, Energy etc.), liberalized economic system and open market policy, availability of low cost manpower, easy way for modernize and technology based banking, increasing banking awareness, saving habit, growing income and employment sector, availability of new banking product, low cost deposit, high inflow of remittance, opportunities gained from the entry of WTO, increasing fee based business and agency function, capital formation and mobilization, increasing market and globalization etc.
Banking sector of Nepal is moving towards the goal of integrated financial service because of competition, frequently changing technology and customers' expectations. (Kattel, 2014). In order to develop the qualitative banking service and to increase the contribution of banking industry in the GDP, banking practices should focus on technology based banking activities, service delivery, and customer's transactions. Financial activities should be based on digital system and automated use of mobile banking, internet banking, electronic payment system and so on. There should be proper changes in HRM thoughts with the ideas of work from home. Investment in information technology, digital literacy, research and exploration of new product should be increased. Existing regulations should be reviewed, reduction in cost and rationalize shareholders reform, strong risk management practice, arrangements of additional loanable funds, government relief fund (special relief should be provided by government by categorizing industries and projects that has long term impact and has significant contribution to the growth of state's economy, relief package for agriculture, hotel, tourism, transportation and other sector of the economy.), an indicative framework for effective corporative governance (Intense board oversight, engaged leadership network, supporting policymaker and regulator, concerted and monitored business continuity, factual enterprise risk management, taking care of shareholder, reassessing long term strategy) may create the sustainable growth and development of Nepalese banking industry.
Source:
https://www.nrbcommercialbank.com/downloads/BankIts%20Origin,%20Meaning,%20Objectives%20&%20Function.pdf
Bank and financial institutions Act, 2073
Nepal Ratsra Bank Act, 2058
Journal of banking and finance, vol.1. (year 2), aygust, 2020
Nepal rastra Bank, (2020), midterm review of monetary policy, NRB research department, 2020, March.
Thapa, R.B. and rawal, D.(2010), principles practices of Nepalese banking.
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