Banking Adbl English

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Part i
Introduction Of Banks
BANKING CONCEPT AND DEVELOPMENT
A bank is a financial institution which deals with deposits and
advances and other related services. It receives money from
those who want to save in the form of deposits and it lends
money to those who need it.
Concept of a Bank
Oxford Dictionary defines a bank as "an establishment for custody
of money which it pays out on customers order."
Definition of Bank
 Bank in simple terms means a place where we keep our money
for safekeeping and from where we can borrow money in case of
need. So, in other words a bank is an organization, which
collects funds from the public in form of deposit and mobilizes
these deposits to the public as loan and thereby makes a profit.
However, many individuals and institutions have defines bank in
their own ways:
 G.Crowther in “An outline of money” defines bank as “an
institution, which collects money from those who have it spare
or who are saving it out of their income and lends this out to
those who require it.”
 According to R.S. Sayers in” Modern Banking”: I believe in the
fact the fact that banks are not merely purveyors of money, but
also, in an important sense manufacturers of money.
IN SUMMARY:
 Bank is financial institutions that deals with money and collect
the money from surplus units and provide to deficit unit of the
society.
Concept of bank can be explained through the following three
aspects:
 Economic Function: Bank is a financial intermediary between
saving sector and deficit sector.
Columbia Academy, New Baneshwor, ktm. Ph: 4784657 [1] www.facebook.com/columbia977
 Service offered: Bank collect deposits, provide loans, credit

creation, fund transfer and foreign currency transaction.
 Legal Aspects: Bank is a financial institution established under
certain law of country.
Thus, bank is a financial institution which collects deposits, advance
loan and provide wide range of financial service.
World history of bank

The term bank is either derived from Old Italian word banco
or from a French word banque both mean a Bench or
money exchange table. In olden days, European money
lenders or money changers used to display (show) coins
of different countries in big heaps (quantity) on benches
or tables for the purpose of lending or exchanging.
The evolution of bank is not a phenomenon .There was crude
firm of banking even in an ancient era. The terms banking
such as deposits, pledge, policy of loan, interest rates etc
can be found in the “manusmriti.”
The Roman Empire collapse in the last of 15th century and
consequently, commercial banking transactions were
started because of revival of commercial and other
trading activities in Europe countries .According to the
opinion of great economist Geoffrey Crowther, following
community groups are the ancestor of modern banking:
• The Merchant trader
• The Goldsmith
• The money lenders
History tells us that it was the merchant banker who first
evolved the system of banking by trading in commodities
then money .Their trading activities required the
remittance of money from one place to another for which
they issued different documents as the near substitutes of
money, called draft or hundies in modern days.
Finally, money lenders in the early age had contributed in the

growth of banking to a larger extent. They used to
advance the coins on loan by charging interest a safe
guard they used to keep some money in reserve.
Therefore goldsmith and moneylenders became bankers
who started performing the two functions of bank i.e.
accepting deposits and providing loans and advances.
“The bank of Venis” of Italy was established in 1157A.D.
as the first banking institution in the world. The second
banking institution namely “the bank of Barcelona” of
Spain was established in 1401 A.D. It’s function is to
exchange money, receive deposits and discount bill of
exchange, both for their own citizens and for the foreigner
during 1407 A.D. “The Bank of Genon”-was established in
1609 A.D. “The Bank of England” was incorporated in
1694 A.D. as a joint stock bank and later on the 1844 A.D.
it becomes a first central bank in the word. The word
‘bank’ is not a new word to us. We have heard this word
almost each and every day. We know bank is a financial
institution that accepts deposits and channels the money
into lending activities. So it is such an indispensable
industry about which only a few of us can afford to be
ignorant. A financial institution that is licensed to deal
with money and its substitutes by accepting time and
demand deposits, making loans, and investing in
securities. The bank generates profits from the difference
in the interest rates charged and paid.
Nepalese History of Bank

The stepwise periodical history of development of banking in
Nepal is as follows:-
Before Nepal Bank Limited: Phase-I(i.e Before 1994 Kartik 30)

 The establishment of “Tejarath Adda” during the tenure of Prime

Minister Ranoddip singh in 1933 B.S (1876 A.D) was the first
step towards the institutional development of banking in Nepal.
It was fully subscribed by the government in Kathmandu.
 Tejarath provide credit (loans) to the general public at 5%
interest rate on securities like gold, silver and other ornaments.
 It failed to accept deposits from general public.
 In this phase there was a lack of modern banking system
because “ Tejarath Adda” act like a bank but did(carried ) only
government transaction.
Nepal Bank Limited to Nepal Rastra Bank: Phase-II (i.e. 1994-7-
30 to 2013-01-14)
 In 1994 Kartik 30, “Tejarath” was replaced by the establishment
of first commercial bank, Nepal Bank limited with authorized
capital of Rs.10 Million.
 It seems as the pillar for modern banking system in Nepal.
 The primary function of Nepal Bank was to manage government
transaction.
In this phase:
 Regulator and Regulate, both the role was played by Nepal Bank
Limited.
 There was monopoly of NBL.
 There was fewer or limited public access in banking sector.
 Low financial literacy
Nepal Rastra Bank to before privatization over banking: Phase-
III(ie. 2013 to 2041 B.S)
 Nepal Rastra Bank was established on 2013-01-14 B.S as the
central Bank under the Nepal Rastra Bank Act, 2012 B.S.
 Its main function was to supervise commercial bank and guide
the basic monetary policy of Nepal nation.
 At the same time i.e in 2013 B.S. Industrial development center
was established and later on it was converted into Nepal
Industrial Development Corporation (NIDC) in 2016 B.S

 As the monetary transaction got more and more complicated on

2022-10-10 B.S. Rastriya Banijya Bank was established as a fully
government owned commercial bank.
 Agriculture Development Bank was then established on 2024-
10-07 B.S to help(boost) the agriculture side of the country.
 In 2031 B.S, “Commercial Bank Act, 2031” was enacted, to
operate all commercial banks uniformly under single act.
 In the later part of this phase, this is in beginning 2041 B.S.,
Nepal government decided to establish five rural development
banks in five development regions under the control and
supervision on Nepal Rastra Bank.
In sum up, in this phase:

 There was appearance of regulator and regulate.
 Credit creation was in average
 Increase public access over banking
 Banking sector was shifted towards oligopoly
After Public Private Partnership (PPP) i.e after liberalization in

banking industry to till now: Phase-IV (i.e. 2041 B.s to
Present)
 After 2040 B.S., with the aim to provide quality banking service,
efficiency and healthy competition
 Foreign investment and new technology in banking sector was
introduced by adopting liberalization policy.
 Then, the first joint venture bank, Nepal Arab Bank was
established in 1984 A.D (2041-03-29) i.e. NABIL Bank.
 Similarly, Two foreign commercial banks named Nepal Indosuez
Bank limited and Nepal Grind Layz Bank(S.C.B) Limited entered
in Nepal in the forms of joint venture and the trend is
continuous till today as many Nepalese owned banks are also
running .eg. Prabhu Bank, Mega Bank, NCC Bank etc.
 In 2058 BS Nepal Rastra Bank Act-2058 was enacted.
 In 2063 BS Bank and Financial Institutions Act (BAFIA) 2063
was enacted.
 In 2073 BS Bank and Financial Institutions Act (BAFIA) 2073

was enacted
In this phase:
 There is high degree of credit creation.
 Increase in interest rate competition
 Core banking system was introduced (i.e. use of computer
technology in banking system)
 Foreign as well as private investment introduced.
 Trend of merger and acquisition grew rapidly.
Present Scenario of Banking in Nepal

Modern banking Services
Banking system has been changing throughout the history and will be changing
in the future. New technology, ideas or crisis leads to this change. Modern
banking systems have significant potential benefits for consumers, banks and
even the regulator.
 Direct deposit, mobile deposit services
 E-Banking
 Access to ATMs
 Access to Credit Cards
 Online Bill Payment
 Digital Banking Services
 connect IPS is a single payments platform that allows the customers to link
their bank account(s) to enable payment processor, fund transfer and biller
payments.

 Merger and acquisition has broadened.

 Bank and financial institutions are managing themselves
according to new federalize system.
Nepal Rastra Bank’s monthly report (Poush 2076)

No. of BFIs
A-27
B-25
C-22
D-91
Central Bank-1
Infrastructure Development Bank-1
Nepal Rastra Bank’s monthly report (Falgun 2077)
No. of BFIs Branches

A-27 4632
B-19 1069
C-20 256
D-76 4473
Central Bank-1
Infrastructure Development Bank-1
Total number of branches: 10430
Local level 749 places
(NOTE: Please look at the website of Nepal Rastra Bank

before 1 week of exam for accurate data-
www.nrb.com.np-statistics-monthly statistics)
CHALLENGES OF BANKING SECTOR IN NEPAL

 Only quantitative increase in banking sector rather than
qualitative.
 Low financial inclusion
 Lack of modern banking knowledge in near about half of the
population of Nepal
 Duplicate note.
 Low economic growth
 Managing bank and their branches according to new federalize
system is a difficult task.
 High NPA
 Globalization (Domestic and International Competition)
 Costly new technology.
 Lack of investment friendly environment
 Liquidity Crisis
 Highly increased interest rate competition. (Or unhealthy
interest rate competition)
 Decrease spread rate.
OPPORTUNITIES OF BANKING SECTOR IN NEPAL

 Opportunity to obtain stock broker license.
 Decreased cash reserve ratio (CRR)
 Economic Liberalization (It promote private sector)
 New technology development
 Low operating cost due to cheap manpower

 High amount of share capital
 So-called stable government
 Skilled and IT friendly manpower
 Investment opportunity in physical infrastructure
development.
Types of Banks and Functions

 Retail Banks. The majority of people are the most familiar with retail
banks, as they are aimed primarily at consumers.
 Commercial Banks. Commercial banks service primarily individuals
and small businesses.
 Cooperative or Mutual Banks.
 Investment Banks.
 Private Banks.
 Online Banks.
Types of Bank Meaning of Banks
Central Bank A central bank is a financial institution given

privileged control over the production and distribution
of money and credit for a nation or a group of nations.
Commercial Bank A commercial bank is a financial institution which
performs the functions of accepting deposits from
the general public and giving loans for investment
with the aim of earning profit.
Development Development bank, national or regional financial
Bank institution designed to provide medium- and long-
term capital for productive investment, often
accompanied by technical assistance, in poor
countries.
Finance A finance company is a business which lends
Companies money to people and charges them interest while
they pay it back. It may offer loans to both
individuals and businesses.
Micro Finance focused on micro credit.
A microfinance institution is an organization that
offers financial services to low income
populations. Almost all give loans to their

members, and many offer insurance, deposit and
other services. A great scale of organizations is
regarded as microfinance institutes.
Infrastructure Infrastructure Development Bank of the nation,
Development the bank aims to bridge
Bank the infrastructure financing gap by raising
resources from domestic and international market
through innovations
Industrial Bank An industrial bank is a financial institution that grants
loans to individuals and companies that are
associated with specific industry types.
Agriculture Bank A type of bank that lends money to farmers for longer
periods of time and charges them
less interest than other types of banks
Rural Bank A type of bank that lends money to rural area of people
Co-operative Co-operative banks are financial entities established
Bank on a co-operative basis and belonging to their
members. This means that the customers of a co-
operative bank are also its owners.
These banks provide a wide range of
regular banking and financial services.
Exchange Bank Basically, an exchange bank allows customers to
exchange one money currency for another one.
Often they are a stand alone business but may be
part of a larger institution
Community Bank A community bank is a depository or lending
institution that primarily serves businesses and
individuals in a small geographic
area. Community banks tend to emphasize
personal relationships with their customers.
Saving Bank A savings bank is a financial institution whose
primary purpose is accepting savings deposits and
paying interest on those deposits
Export-Import EXIM provides trade financing solutions –
Bank including export credit insurance, working capital
guarantees, and guarantees of commercial loans to
foreign buyers.

Functions of Banks
 Accepting deposits
 Advancing loan
 Credit creation
 To work as an agent
 Exchange of foreign currency
 To encourage trade
 Transfer of money
 Issuing letter of credits, L.C
LEVELWISE BANKING SYSTEM (A, B, C, D

CLASSIFICATION)
The bank and financial institutions of Nepal are classified in
to A, B, C & D class named as commercial bank,
development bank, finance company and micro finance
financial institutions respectively, which is known as level
wise banking. The main purpose behind such
classification is for parallel development of overall
economic sector of Nepal . Nepal Rastra Bank has used the
following basis for such classification:
a) Paid up capital
b) Functions
c) Functional area.
The various level of Nepalese banking sector can be clarified
from the following table:
Functional Area National Level Province Level
Class
A 8 Arab -----
B 2 Arab 50 Crore 1 Arab 20 Crore
C 80 Crore 50 Crore
D 10 Crore 2 Crore
Commercial banks are established to boost the commerce,

trade and industrial sector likewise specific sector of
economy (such as agriculture, tourism, etc.) or specific
are of country is aimed to develop through development
bank. One the same way finance company usually finance
middle level business. Micro finance financial institutions
are generally focused in micro-credit program for the
upliftment of rural economy. They provide micro credit
facility to deprived sector, destitute family, poor family,
very small business etc.
We can find various legal provision regarding level wise
banking in different section of bank and financial
institutions act (BAFIA) 2073, some of which are as
follows:
Section-32, Sub-section-5
Class “A”,“B”, class “C” and class “D” licensed institutions shall be
entitled to use the names Commercial Bank, Development Bank,
Finance Company and Microfinance Financial Institutions
respectively. And there will be one Infrastructure Development
Bank.
Section-37
 Classification of licensed institutions : The Rastra Bank shall
classify the licensed institutions into “A”, “B”, “C” and “D” classes
on the basis of the minimum paid-up capital required for the
license to be issued pursuant to Section 30 to carry on the
financial transactions pursuant to Section 47, and issue the
license to the concerned bank or financial institution
accordingly.
 The minimum paid-up capital of the licensed institutions
classified under Sub-section (1) shall be as prescribed by the
Rastra Bank.
Section-38
Conversion of licensed institution of lower class into licensed
institution of higher class:
(1) Any licensed institution of a lower class which meets the

following conditions may, with the approval of the Rastra Bank,
be converted into a licensed institution of a higher-class:
(a) If it has the capital prescribed by the Rastra Bank for a licensed
institution of such higher class;
(b) If it has been able to earn profits since five consecutive years;
(c) If its total non-performing loan is within the limit prescribed by
the Rastra Bank;
(d) If it has met all conditions as prescribed by the Rastra Bank.
Section 49
In this section we can see various functions can be
performed by A, B, C & D class BFI’s. as per which there is
much more similarities in the functions of A, B & C class.
Functions of D class institutions are focused on micro
credit. Some of the functions that only A class institutions
may carry on but not by B and C are as follows:
 Hypothecation loan business
 Supplying credit against the guarantee provided by any
native or foreign bank or financial institution;
 Carrying on governmental and other transactions on
behalf of the Government of Nepal
 Remitting or transmitting funds outside the State
 Purchase and sales of gold and silver
 Fascinating as a guarantor in between transactions of two
parties
The only one function that A class institution cannot carry on
but by B and C is:
 Obtaining credits by pledging its movable or immovable
assets as collateral
In this way level wise banking is in practice in Nepal.

ROLE OF COMMERCIAL BANK IN ECONOMIC

DEVELOPMENT OF NEPAL
Introduction of commercial Bank
Role of commercial bank in economic development of
Nepal.
Banks play an important role in the economic development of a
country. Commercial banks are the heart of a financial
system, holding the deposits of millions of people,
governments and business units. They make funds available
through their lending and investing activities to borrowers;
individuals, business houses and governments. Doing so,,
they facilitate both the flow of goods and services from
producer to consumers and the financial activities of the
government.
Commercial banks play an important and active role in the
economic development of a country like Nepal. If the
banking system in a country is effective, efficient and
disciplined it brings about a rapid growth in the various
sectors of the economy. The following is the significance
of commercial banks in the economic development of a
country.
1. Banks promote capital formation
2. Investment in new enterprises
3. Promotion of trade and industry.
4. Development of agriculture
5. Balanced development of different regions
6. Influencing economy activity
7. Implementation of Monetary policy
8. Monetization of the economy
9. Export promotion cells

Functions, Rights and Duties of Commercial Bank

In Nepal the main functions of commercial banks are accepting
deposits from the public and advancing them loans. However,
besides these functions there are many other functions which
these banks perform. All these functions can be divided under
the following heads:
1. Accepting deposits
2. Giving loans
3. Overdraft
4. Discounting of Bills of Exchange
5. Investment of Funds
6. Agency Functions
7. Miscellaneous Functions
1. Accepting Deposits:
The most important function of commercial banks is to accept
deposits from the public. Various sections of society, according
to their needs and economic condition, deposit their savings
with the banks.
For example, fixed and low income group people deposit their
savings in small amounts from the points of view of security,
income and saving promotion. On the other hand, traders and
businessmen deposit their savings in the banks for the
convenience of payment.
2. Giving Loans:
The second important function of commercial banks is to advance
loans to its customers. Banks charge interest from the
borrowers and this is the main source of their income.
Banks advance loans not only on the basis of the deposits of the
public rather they also advance loans on the basis of depositing
the money in the accounts of borrowers. In other words, they
create loans out of deposits and deposits out of loans. This is
called as credit creation by commercial banks.
Modern banks give mostly secured loans for productive purposes.
In other words, at the time of advancing loans, they demand
proper security or collateral. Generally, the value of security or
collateral is equal to the amount of loan. This is done mainly
with a view to recover the loan money by selling the security in

the event of non-refund of the loan.
3. Over-Draft:
Banks advance loans to its customer’s up to a certain amount
through over-drafts, if there are no deposits in the current
account. For this banks demand a security from the customers
and charge very high rate of interest.
4. Discounting of Bills of Exchange:
This is the most prevalent and important method of advancing
loans to the traders for short-term purposes. Under this system,
banks advance loans to the traders and business firms by
discounting their bills. In this way, businessmen get loans on the
basis of their bills of exchange before the time of their maturity.
5. Investment of Funds:
The banks invest their surplus funds in three types of securities—
Government securities, other approved securities and other
securities. Government securities include both, central and state
governments, such as treasury bills, national savings certificate
etc.
Other securities include securities of state associated bodies like
electricity boards, housing boards, debentures of Land
Development Banks units of UTI, shares of Regional Rural banks
etc.
6. Agency Functions:
Banks function in the form of agents and representatives of their
customers. Customers give their consent for performing such
functions. The important functions of these types are as follows:
(i) Banks collect cheques, drafts, bills of exchange and dividends of
the shares for their customers.
(ii) Banks make payment for their clients and at times accept the
bills of exchange: of their customers for which payment is made
at the fixed time.
(iii) Banks pay insurance premium of their customers. Besides this,
they also deposit loan installments, income-tax, interest etc. as
per directions.

(iv) Banks purchase and sell securities, shares and debentures on

behalf of their customers.
(v) Banks arrange to send money from one place to another for the
convenience of their customers.
7. Miscellaneous Functions:
Besides the functions mentioned above, banks perform many other
functions of general utility which are as follows:
(i) Banks make arrangement of lockers for the safe custody of
valuable assets of their customers such as gold, silver, legal
documents etc.
(ii) Banks give reference for their customers.
(iii) Banks collect necessary and useful statistics relating to trade
and industry.
(iv) For facilitating foreign trade, banks undertake to sell and
purchase foreign exchange.
(v) Banks advise their clients relating to investment decisions as
specialist
(vi) Bank does the under-writing of shares and debentures also.
(vii) Banks issue letters of credit.
(viii) During natural calamities, banks are highly useful in
mobilizing funds and donations.
(ix) Banks provide loans for consumer durables like Car, Air-
conditioner, and Fridge etc.
According to BAFIA-2073 functions of commercial bank(A

Class) are as follows:
(a) Accepting deposits with or without interest or mobilization of
deposit through various financial instruments and refund such
deposits;
(b) Accepting deposits, making payments and transfer funds
through telephones, telex, fax, computers or magnetic tapes or
similar other electronic means or equipment,
(c) Supplying credit for hire-purchase, hypothecation, leasing,

housing and overdraft

(d) Making arrangements for jointly supplying project or

hypothecation credits on the basis of co-financing in
collaboration with other licensed institutions in accordance with
the mutual agreement entered into for the division of the
collateral pari passu;
(e) Supplying credit against the guarantee provided by any native
or foreign bank or financial institution;
(f) Supplying a fresh credit in lump sum or by installment against
the security of the same movable or immovable assets which
have already been furnished with it or with any other licensed
institution as security, to the extent covered by the total value of
such security;
(g) Issuing guarantees on behalf of its customers, having such

customers execute necessary bonds in consideration thereof,
obtaining security, and acquire their movable or immovable
assets as collateral or on mortgage, or the assets of third persons
as collateral;
(h) Obtaining refinance credit from the Rastra Bank as per
necessity, or obtaining or supplying credits to or from other
licensed institutions;
(i) Supplying funds received from the Government of Nepal or
other native or foreign agencies as credits for the promotion of
projects, or managing such credits;
(j) Writing off credits, subject to the bye-laws framed by the Board;
(k) Mobilizing capital through shares, debentures, bonds, loan-
bonds, saving-bonds for fulfilling capital fund
(l) Issuing, accepting, paying, discounting or purchasing and selling
letters of credit, bills of exchange, promissory notes, cheques,
travelers cheques, drafts or other financial instruments;
(m) Issuing and accepting credit cards, debit cards, charge cards
and other financial instruments, as well, and appointing agents
to discharge functions relating thereto,subject to the directives
issued by the Rastra Bank;
(n) Dealing in foreign exchange, subject to the laws in force;

(o) Acting as an agent of the Rastra Bank on the conditions

prescribed by the Rastra Bank, and carrying on governmental
and other transactions on behalf of the Government of Nepal;
(p) Purchasing, selling or accepting bonds issued by the
Government of Nepal or the Rastra Bank;
(q) Remitting or transmitting funds to different places within or
outside the State of Nepal through bills of exchange, cheques or
other financial instruments,
(r) Acting as a commission agent of its customers, taking custody of
and arranging for the sale or purchase of shares, debentures or
securities, collecting interest, dividends etc. accruing from
shares, debentures or securities, remitting or transmitting such
interests or dividends to places within or outside the State of
Nepal; and manage safe deposit vault for customer.
(s) Carrying on off-balance sheet transactions
(t) Supplying credits not exceeding the amount prescribed by the
Rastra Bank, against individual or collective guarantee, for the
economic upliftment of the destitute class, low-income families,
victims of natural calamities and inhabitants in any area of the
country;
(u) Exchanging with the Rastra Bank or any other licensed
institutions particulars of, information or notices on debtors or
customers who have obtained credits from it or other licensed
institutions;
(v). Purchase and sales of gold and silver.
(w) Doing, or causing to be done, study, research and survey work
relating to the establishment, operation and evaluation of
projects, and providing training, consultancy and other
information;
(x) Properly managing or selling its assets;
(y)Facilating as a guarantor in between transactions of two parties.
(z) Performing such other functions as may be prescribed by the
Rastra Bank.

Functions,Rights and Duties of Nepal Rastra Bank

Introduction of Nepal Rastra Bank
Nepal Rastra Bank (NRB), the Central Bank of Nepal, was
established in 1956 under the Nepal Rastra Bank Act, 1955, to
discharge the central banking responsibilities including guiding
the development of the embryonic domestic financial sector.
Since inception, there has been a significant growth in both the
number and the activities of the domestic financial institutions.
To reflect this dynamic environment, the functions and objectives
of the Bank have been recast by the new NRB Act of 2002, the
preamble of which lays down the primary functions of the
Bank as:
 to formulate necessary monetary and foreign exchange policies
to maintain the stability in price and consolidate the balance of
payments for sustainable development of the economy of Nepal;
 to develop a secure, healthy and efficient system of payments;
 to make appropriate supervision of the banking and financial
system in order to maintain its stability and foster its healthy
development; and
 to further enhance the public confidence in Nepal's entire
banking and financial system.
The Bank is eminently aware that, for the achievement of the
above objectives in the present dynamic environment,
sustained progress and continued reform of the financial
sector is of utmost importance. Continuously aware of this
great responsibility, NRB is seriously pursuing various
policies, strategies and actions, all of which are conveyed in
the annual report on monetary policy.
Functions, Right and Duties
As a central bank of Nepal Nepal rastra bank perform following
functions:
1. Bank Note Issue:
The central bank has the sole monopoly of note issue in almost
every country. The currency notes printed and issued by the
central bank become unlimited legal tender throughout the
country.
The main advantages of giving the monopoly right of note issue to

the central bank are given below:
(i) It brings uniformity in the monetary system of note issue and
note circulation.
(ii) The central bank can exercise better control over the money
supply in the country. It increases public confidence in the
monetary system of the country.
(iii) Monetary management of the paper currency becomes easier.
Being the supreme bank of the country, the central bank has full
information about the monetary requirements of the economy
and, therefore, can change the quantity of currency accordingly.
(iv) It enables the central bank to exercise control over the creation
of credit by the commercial banks.
(v) The central bank also earns profit from the issue of paper
currency.
(vi) Granting of monopoly right of note issue to the central bank
avoids the political interference in the matter of note issue.
2. Banker, Agent and Adviser to the Government:
The central bank functions as a banker, agent and financial adviser
to the government,
(a) As a banker to government, the central bank performs the same
functions for the government as a commercial bank performs for
its customers. It maintains the accounts of the central as well as
state government; it receives deposits from government; it
makes short-term advances to the government; it collects
cheques and drafts deposited in the government account; it
provides foreign exchange resources to the government for
repaying external debt or purchasing foreign goods or making
other payments,
(b) As an Agent to the government, the central bank collects taxes
and other payments on behalf of the government. It raises loans
from the public and thus manages public debt. It also represents
the government in the international financial institutions and
conferences,
(c) As a financial adviser to the lent, the central bank gives advise to
the government on economic, monetary, financial and fiscal
^natters such as deficit financing, devaluation, trade policy,

foreign exchange policy, etc.
3. Bankers' Bank:
The central bank acts as the bankers' bank in three capacities:
(a) custodian of the cash preserves of the commercial banks;
(b) as the lender of the last resort; and (c) as clearing agent. In this
way, the central bank acts as a friend, philosopher and guide to
the commercial banks
As a custodian of the cash reserves of the commercial banks the
central bank maintains the cash reserves of the commercial
banks. Every commercial bank has to keep a certain percentage
of its cash balances as deposits with the central banks. These
cash reserves can be utilised by the commercial banks in times
of emergency.
4. Lender of Last Resort:
As the supreme bank of the country and the bankers' bank, the
central bank acts as the lender of the last resort. In other words,
in case the commercial banks are not able to meet their financial
requirements from other sources, they can, as a last resort,
approach the central bank for financial accommodation. The
central bank provides financial accommodation to the
commercial banks by rediscounting their eligible securities and
exchange bills.
The main advantages of the central bank's functioning as the
lender of the last resort are :
(i) It increases the elasticity and liquidity of the whole credit
structure of the economy.
(ii) It enables the commercial banks to carry on their activities
even with their limited cash reserves.
(iii) It provides financial help to the commercial banks in times of
emergency.
(iv) It enables the central bank to exercise its control over banking
system of the country.
5. Clearing Agent:
As the custodian of the cash reserves of the commercial banks, the
central bank acts as the clearing house for these banks. Since all
banks have their accounts with the central bank, the central
bank can easily settle the claims of various banks against each
other with least use of cash. The clearing house function of the
central bank has the following advantages:
(i) It economies the use of cash by banks while settling their claims
and counter-claims.
(i) It reduces the withdrawals of cash and these enable the
commercial banks to create credit on a large scale.
(ii) It keeps the central bank fully informed about the liquidity
position of the commercial banks.
According To Nepal Rastra Bank Act 2058:-
Functions, Duties and Powers of the Nepal Rastra Bank:
(1) In order to achieve the objectives of the bank the functions,
duties and powers of the Bank shall be as follows:
(a) To issue bank notes and coins;
(b) To formulate necessary monetary policies in order to maintain
price stability and to implement or cause to implement them;
(c) To formulate foreign exchange policies and to implement or
cause to implement them;
(d) To determine the system of foreign exchange rate;
(e) To manage and operate foreign exchange reserve;
(f) To issue license to commercial banks and financial institutions
to carry on banking and financial business and to regulate,
inspect, supervise and monitor such transactions;
(g) To act as a banker, advisor and financial agent of Government of
Nepal;
(h) To act as the banker of commercial banks and financial
institutions and to function as the lender of the last resort;
(i) To establish and promote the system of payment, clearing and
settlement and to regulate these activities; and
(j) To implement or cause to implement any other necessary
functions which the Bank has to carry out in order to achieve the
objectives of the Bank under this act

Part ii
Banking Services
REMITTANCE
 In general remittance is a transfer of money by a foreign
worker to an individual in his or her home country.
 Transfer of fund from one place to another place is called
remittance process.
 Money sent home by migrants competes
with international aid as one of the largest financial
inflows to developing countries. Workers' remittances are
a significant part of international capital flows, especially
with regard to labour-exporting countries. Remittances
are playing an increasingly large role in the economies of
many countries. They contribute to economic growth and
to the livelihoods of those countries. Remittances are
generally thought to be counter-cyclical. The stability of
remittance flows amidst financial crises and economic
downturns make them a reliable source of foreign
exchange earnings for developing countries
 The main source of banking deposit from external source
is remittance in developing countries like Nepal.
 Currently contribution of remittance in GDP is about 27%
as per economy survey, 2075/2076.
 Remittance is main component for current account
surplus and favorable BOP (Balance of Payment).
 Remittance contribute for the import of goods and
services from abroad.
 Remittance are divided into Internal and External
Remittance.
Types of remittance:
 Inward remittance: Money transmitted from other foreign
countries to Nepal.
 Outward remittance: Money transmitted from Nepal to
other foreign countries.
Instruments of Remittance
 Cheque
 Draft
 Letter of credit
 Telephone, Telex, Fax
 Internet Banking
 Mobile Banking
 Digital Cards
 Wire Transfer
Impact of Remittance in Nepalese Economy
Positive impact
 It help to maintain Balance of Payment
 Inflow of foreign currency
 Increase in foreign currency reserve
 Increase in non-funded business of bank and financial
institutions
 Increase in employment
 Increase in deposit fund of bank
 Help to reduce poverty.
 Help in economic development
Negative impact
 Brain-drain
 Inflow of foreign bad culture
 Decrease in innovative work
 Increase in dependency
 Negative effect on balance of payment if it is used in
luxurious goods.
Factor affecting remittance

 Exchange rate
 Country’s foreign employment policy
 Level of income of people who involve in foreign
employment
 Availability of instruments of remittance
 Level of regulation on illegal way of remittance
 Number of people in foreign employment
 Financial Literacy and inclusion
 No of workers in foreign employment
 Category of people in foreign employment. (Worker or
professionals)
DEPOSIT
 Amount collected by bank and financial institutions from
its customer with or without paying interest, with the
condition of refund after specific time period, is known as
deposit.
 One of the main functions of banks is to accept deposits.
Deposits may be fixed, saving, current e.t.c. .Banks will
have to pay interest to the customers on the basis of the
amount deposited by them. Deposits are used for the
purpose of lending but since banks are using other
people’s money to do business, it should make sure that it
will be able to repay the deposits to the respective
customers when they claim for it.
 The term “Deposit” means amount deposited in current,
fixed and saving deposit account of bank or financial
institutions.
 According to BAFIA-2073, “Deposits means amounts
deposited in current, savings or fixed accounts of a bank
or financial institution, and this term also includes such
amounts as a bank or financial institution accepts through

such various financial instruments as prescribed by the
Rastra Bank.”
DEPOSIT TYPES AND MOBILIZATION

Deposit mobilization consists of acquitisions of stable and low
cost depostit for the banking business and utilizing them for
earning high return at low risks. Banks are not only dealers in
money but also manufacturers of credit money. It is in the sense
of manufacturing that the concept of credit creation is used.
Similarly deposit creation is an important function of
commercial banks. Without deposit they cannot lend at all.
When the banks receive cash from customers, deposit are
created . Therse deposits may be current, saving or fixed.
Types of Deposits
Deposits of commercial banks can be categorized into
following two categories
A. Interest bearing deposit
B. Non- interest bearing deposit
Interest Bearing Deposit

a. Saving Deposit
The purpose of saving deposit is to encourage the habit of
saving among the common people and institutions. Saving
deposits attract interest which is normal less than that of
long-term deposit but more than that of short-term
deposit. There is restriction in this account to withdraw
any amount. The customer is restricted to withdraw his
deposit to the maximum amount in each transaction by
the bank regulation. In this way as the withdrawal is
limited in such account, in each transaction, the bank is

provided with more funds for the credit activities, interest

is paid in this deposit account.
According to BAFIA-2073, the saving account means an
account of amounts deposited in a bank for savings
purposes.
The main features of such accounts are as follows:
i. Interest bearing
ii. Restriction or limitation in respect of both the amount of
withdrawal and frequency withdrawal.
iii. Purpose and period of such deposit is for savings purpose
for the individuals who do not want frequent withdrawals
and who do not want to keep money for fixed long period.
iv. Flexible interest rate
b.Fixed Deposit/ Term Deposit
Another source of deposit is the fixed deposit account. Money
in this account is deposited for a fixed period of time,
which cannot be withdrawn before the maturity of time.
The rate of interest on this account is higher than other
accounts. It is also known as time deposit. General this is
for three months to five years.
According to to BAFIA-2073, fixed account means the
account of amount deposit in a bank for a certain period
of time.
The main features of such accounts are as follows:

i. Specific period : Normally the bank is not bound to repay
the amount until the maturity of the fixed deposit.
However, on request of the depositor, a banker may
liquidate the fixed deposit and repay the amount; interest
will be paid at the discretion of the banker.
ii. Non operative : Fixed deposit account is non - operative
i.e. depositing into or withdrawal from fixed deposit
account as in case of savings and current deposit account

is not allowed.
c. Call Deposit
The banks may accept deposit for short period of time to
meet the short fall and such deposits secured from money
market and having element of overnight stay is called call
deposits. The rates of interest of such funds are not fixed
hut are dependent on demand and supply of funds in the
money market. Such all deposits become payable on
demand and hence such deposits become payable
demand and hence such deposits are considered demand
liabilities of the bank.
i. Non-operative
ii. Short term: overnight stay
iii. Interest rate not fixed
iv. Payable at demand
d. MARGIN DEPOSIT
This account is meant for holding margin money of the
customers as deposit(non-interest bearing) to avail
various facilities from the bank . Customers are not
allowed to withdraw any amount from such accounts till
the expiry of the availed facilities. Margins are required
for Guarantee, remittance and some other facilities.
e. Other Deposit
It is a scheme of special type of deposit where some specified
amount of money for specific period of note is accepted as
deposit against a certificate given by the banker to a
customer. A
bank issues such certificates without mentioning name
address and any other particulars of the customer. The
bank receives the principal amount and will issue the will

issue the certificate for such amount which will include

the interest payable at maturity on the amount deposited.
On maturity date any person presenting the certificate at
the bank can encase the same. Such types of deposits are
considered as time liabilities.
The major features of such deposit are as follows:—

i. Negotiable with prepaid interest having fixed maturity.
ii. No particulars of the depositor contained in the certificate.
iii. Opening of account is not required.

iv. It could be discontented before maturity.
Non- interest Bearing Deposit
a. Current Deposit Account
Current deposit is also known as demand deposit as the
deposit is with draw able on demand. Current deposits
are withdrawn able on the demand of the customers.
Banks have to make themselves ready to pay the
depositors at hand to pay according to the wish of the
customer. If the bank cannot pay the customer according
to the demand, the reputation of the bank may fall of the
banking activities may tail. The business people, business
institutions who have to withdraw at any time, normally
open it. Since banks have to maintain high liquidity to
meet customers demand, no interest is paid on such
deposit. According to to BAFIA-2073, the current account
means an account of amounts deposited in bank that may
be drawn at any time on demand.
i. No yield
As the cost of providing the facilities of current account
becomes considerable to the banks do not pa any interest
on the balance of current account.
ii. Highly liquid and no limitation

There is no limitation on withdrawal and deposit of any
amount within banking hours
Factor affecting deposit mobilization:

 Interest rate
 Tax rate
 Inflation rate
 Distribution of income
 Level of income
 Level of employment
 Remittance
 Goodwill of bank
 Financial literacy and access
 Availability of modern banking instruments
Concept types, classifications and management
of Credit
Introduction
The extension of credit is one of the major functions of
banking business. Major source of income for the bank
and financial institution comes from their Loans and
Advances. Credit management is the management of loan
and advances. Success of banking business depends on
the efficient and effective management of credit. Poor
credit management has proved to be one of the major
causes of bank failures throughout the world. Loan
uncollectible due to mismanagement, illegal manipulation
of loan, misguided lending policies or unexpected
economic downturn are main reasons for a bank getting
into serious problem.

Credit can be offered in a variety of types/categories as per

the need of potential market. Credit management is
always a challenging task in the banking business because
there are several environmental influences and risks
associated with the credit operation and administration.
Credit Risk is that risk which arises where the borrower
fails to meet the obligation on agreed terms. The volume
and impact of credit risk is very high among the various
types of risk associated in the banking business.
Definitions
 Credit is the combination of following components:
 Principle
 Interest rate
 Collateral
 Specific time period
 By Bank or financial institutions
 To Specific person or institutions
 Specific purpose
 Credit (function) can be defined as the channelization of
the fund from the people/entities that have excess fund to
the people/entities that have deficit (of fund).
 "Credit is a contractual agreement in which a borrower
receives something of a value with the explicit agreement
to repay the lender at some date in future. The borrower
pays interest as compensation (to the lender) for allowing
the use of fund."
 According to BAFIA-2073, “ Credit means a direct or
indirect commitment to supply funds, and in return
therefor, the right to recover the invested funds, and
payment of interest or other charges on such credit, re
finance issued against the security of a credit or
investment, restructuring and renewal of a credit,
security issued for there to be carried on through

automated teller machines and cash dispensing machines,
as well as those to be carried on through charge cards,
debit cards and credit cards.”
Various Types of Credit

Funded or Non-Funded Funded
Funded loan
Funded loan refers to the loan which is disbursed in the
forms cash or any other payments made on behalf of
customers. Whenever a bank disburses a loan and cash
goes out of the bank immediately, then it is classified as
funded loan. Funded loans are recorded in the books of
accounts and appear in the balance sheet under the
heading of loan and advances.
Some examples of funded loans are;
 Overdraft/ Cash Credit/Hypothecation Loan
 Importers' Loan/ Trust Receipt Loans
 Exporters' Loan/ Packing Credit Loan
 Short Term Loan/ Demand Loan
 Long Term Loan
 Home Loan/Hire Purchase/ Consumer/ Mortgage Loan/
Auto / Loan
 Credit Cards
 Bills purchase
Non Funded loan
Bank's commitment for the future payment or any other
conditional payment on behalf of its customer is known as
non-funded facility. In non-funded facilities banks don't
have to pay cash but need to commit a conditional
payment. Non funded facility involves the issuing bank's
commitment to honor certain promises as per the letter of
credit or guarantee or similar documents favoring a third

party, without requiring any immediate outlay of funds by
the bank at the time of making a commitment. However
outlay of the may take place in the event of development of
commitment on the issuing bank. These commitments do
not appear in the banks on balance sheet. It is presented as
contingent liabilities outside the balance sheet hence they
are also known as off balance sheet items.
Some examples of non-funded loans are;
 Letter of Credit
 Guarantee (Bid bond, Performance bond, Advance payment,
Retention etc.)
 Acceptance and endorsement
 Commitments
Fixed Term or Working Capital
The loans which are granted for the creation of longer term
assets (Capital Expenditure) are known as fixed term loans.
These types of loans are generally for more than one year
and repaid on fixed installments over the loan tenor. These
loans are secured mortgaging the specific fixed assets
financed or the entire block of fixed assets of a particular
project. Examples are;
 Project loan
 Home/house
 Hire purchase
 Other term loans
Business requires working capital for its day to day
operation. Working capital loans are granted to finance
the working capital requirement ol the business. The
working capital requirement relate to processing
production, sale of goods and services which are granted
for bridging the financial gaps in the production cycle of
the business. Banks sanction a specified credit limit to the

borrower against the security of stock, book debts or any
other assets acceptable to banks which are pledged
/hypothecated. Some examples are;
 Pledge
 Hypothecation
 Overdraft
 Demand Loan
 Cash Credit
Retail/Consumer or Corporate
Retail/Consumer loans are the loans which are granted for the
consumptions purpose. These loans are based on the
security and the future cash flow (disposable income) of the
borrower. Some examples are;
 House/Home loan
 Vehicle loan/ Auto
 Education loan
 Personal loan/ Management loan
Corporate loans are the loans which are granted for big
business houses, the corporate loans are appraised on the
basis of detail analysis of the borrowers past performance,
projected balance sheet, profit and loss account, cash flow
statements etc. to determine financial viability of the
project and its debt servicing capacity. The technical,
managerial, commercial viabilities of the project are also
critically examined by the banker before granting these
loans. For example; all the loans disbursed to the corporate
sector.
Other Loan Products

 Bills Purchased: Loan granted to the customer purchasing
different types of commercial bills viz. Travelers Cheque,
Bank cheques, Export/Import bills. These types of limits are

granted for very short (generally 90 days) period of time.
 Credit Card: Limit assigned to the borrower and loaded in a
card to make withdrawal or to pay the prices of goods and
services. Repayment can be made after a fixed period of
time. The banks generally avail revolving types of limit for
the credit card customers. Some brands of credit cards are
Master Card, Visa Card etc.
 Loan against Fixed deposit: Banks lend against the fixed
deposit receipt of own banks as well as other banks.
Various new loan products are being developed in the market
as a result of rise in the competitive environment and
advancement in the technology as well. Furthermore, there
are various bank specific special loan products available in
the Nepalese market.
Lending/Credit Process
Banks and financial institutions have to pass through a
predetermined process of granting loan. Well defined
process helps to minimize credit risk as well as other
potential complexities of future. In general following steps
are taken as credit processes;
 Credit appraisal;
 Credit approval;
 Credit Documentation;
 Disbursement;
 Credit monitoring;
 Credit recovery and restructuring
Credit Appraisal
Credit Appraisal is the process whereby the risks relating to
the repayment of a loan are evaluated. It is the first step in
credit process which involves analysis of borrower's
capacity to repay the loan. Good credit appraisal may be a
milestone in maintaining good credit portfolio in the

banking business. Better credit quality may be regarded as
outcome of the better credit appraisal technique.
Credit approval
The loan is approved by competent authority after
completion of the credit appraisal on the basis of the
recommendation of credit analyst as well as credit risk
officer. Approving authority may enquire and make
addition in terms and conditions of the credit agreement
during the stage of approval. Principally the approval
process needs to be started after completion of the
documentation process.
Credit Documentation
Credit documentation means obtaining and executing
necessary legal documents in order to protect the interest
of the Bank. As discussed earlier, credit is an agreement
between the bank and the borrower. The borrower must
present the documents before being availed the loan as
specified in the agreement. Documentation means the
execution of credit documents in the proper form as
required by bank's internal policies as well prevailing legal
provisions. It establishes the contractual relationship
between lending bankers and the borrowers. Documents
are essential to avoids ambiguities and settlement of future
disputes.
 Major Credit Documents
 Approved Credit Appraisal (Memo) /Approved Credit
Facility Request (CFR)
 Offer letter/Sanction letter
 Evidence of Income Sources & Financial Statements
 Evidence of Identification and Business Incorporation
Certificates & Tax Registration Certificate
 Mortgage deed with all necessary legal documents.

 Loan deed
 Personal guarantee/cross guarantee/corporate guarantee
 Promissory notes
 Hypothecation of stocks & supplementary agreement to
hypothecation
 Hypothecation of book debts & power of attorney
 Insurance documents
 Transfer of ownership of vehicle
 Subordinate agreement from other creditors
 Hire purchase agreement etc.
Disbursement
After ensuring that all the documents have been obtained from
the borrower, banks disburse the approved loan limits. The
disbursement may be in full or in partial amount as per the
approved terms and conditions. In case of revolving credit
banks provide limit to the customer and in case of long
term financing the disbursement is guided by the terms and
conditions specified in the offer letter.
Credit Monitoring
Credit monitoring is the process of ensuring the lent fund is
utilized for the sanctioned purposes. Whether the borrower
is complying with terms and condition specified in the
credit agreement, is the main concern of credit monitoring.
Regular monitoring process of credit provides important
information, which can be the early warning signals for
future risk.
Credit Recovery and Restructuring
All the borrowers may not serve interest as well as principal on
time according to the agreed term and conditions. Some of
them become delinquent in payment. In such case banks
need to take recovery action. When borrower fails to meet
obligation, banks take recovery action as per the recovery

policy of the bank. The actions regarding recovery are;
issue reminder notice, 7/15/35 days notice as per
prevailing laws. The bank may go for recovery of its dues
through selling of the mortgaged/ pledged/lien assets
when there is no chance of repayment by the borrower.
In general following process may use while providing
loan to the natural or artificial person :
 Loan marketing
 Preliminary observation and initial interview
 Collection of initial documents
 Preparation of loan file or credit appraisal
 Approval of loan
 Collection of legal documents
 Disbursement of loan
 Post supervision of loan
Principles of Lending
 Principle of Safety and Security:
This principle is based on the assumptions that the bankers
should lend their fund in such area where there is least
probabilities of default. To follow this principle banks
should develop an appropriate mechanism of credit
appraisal system and good credit policy. While granting a
loan, bank carefully examines the economic financial and
commercial viability of the business, quality of its
management (integrity, honesty, willingness to pay,
reputation in market etc.) and the past track record. Bank
should give priority to have possession or control over a
cashable security for future precaution in adverse
situation.
 Principle of Liquidity:

The banks should have best mechanism to manage the assets

and liabilities in a sound manner. Banks have various
sources of funds for conducting its lending business.
During the course, it has to attune the maturities of its
assets (loan) with the maturities of liabilities (deposit).
Bank should not delay or default in making payment to its
depositors or other liabilities, as this would result in loss
of trust and faith of customers. Bank must comply the
various regulatory requirement regarding liquidity like
CRR (Cash reserve ratio), SLR (Statutory Liquidity ratio).
 Principle of Risk Diversification:
There are various risks involved in lending business and
bank can be away from such risk. This principle focuses
on better credit risk management through tolerable credit
limit in different sector and parties.
This principle is based on the proverb "Do not put all eggs in
a single basket". So concentration risk should be
monitored and managed through credit diversification.
The credit risk can be minimized through diversification
of credit portfolio that means prevention from excessive
concentration of loans into few borrowers/industries/
sectors.
 Principle of Profitability:
Banks are commercial organizations an profit making is
their main objective. Profit is necessary for the bank'
sustainability and growth. They need to pay adequate
return to their shareholder. Banks take risk for securing
the reasonable level of return. This principle advocate that
maximum possible return should] be considered while
lending decision is made.
 Principle of loan purpose:

Banks always need to be careful about purpose and

objective of the loan. Analysis of borrowing cause is very
important aspect in credit analysis. If the disbursed loan
from the bank is mutualized, there will be less chances of
repayment by their borrower. Lending activities should
be guided by banks' own credit policy and remained
within the boundaries of legal framework Banks need to
be careful to prevent lending in money laundering
terrorist activities, conducting illegal business etc.
 Principle of directives
Loan and advance should be provided as per directive of Central
bank or monetary authority. Central bank suggests to
commercial bank to invest money on deprived sector,
agricultural sector, and creates ceiling for the investment in one
sector.
In conclusion,
Providing loan is not end of work but the birth of new
responsibility. Collection of document is not guided by providing
loan principle but assurance of interest and investment refund.
Before providing loan CAMPARI model and 5 Cs model should
be analyze properly. Under 5 Cs, Capital, Collateral, Condition,
Capacity and character of the customer should be analyzed
properly.
LOAN CLASSIFICATION AND LOAN LOSS PROVISION
Nepal Rastra Bank Unified Directives-2076,
Directive No. 2
Provisions Relating to Classification of Loans/advances

and Loan Losses is as follows:
Classification of loans/advances
(1) Performing loan
(I) Pass: Loans/advances which have not overdue and which are
overdue by a period up to one month.
Additional provisions relating to pass loans:

The following loans may be included in the pass loan:-
(a) Loans/advances extended against the collateral of gold and
silver up to 10 Lakh;
(b) Loans/advances of fixed receipts
(c) Loans/advances of Government of Nepal securities and
loans/advances made against the collateral of Nepal Rastra
Bank bonds;
Provided that the cases of the loans/advances against the fixed
receipts or Government of Nepal securities or Nepal Rastra Bank
bond as the additional collateral, such loans and advances shall
also have to be classified in accordance with the directive
referred to into Point No. 1 above.
(2) The working capital loan having the deadline of up to one year
for repayment may be included in the pass loan class. In case the
interest to be received from the loans of working capital nature
is not regular, such loans have to be classified on the basis of the
duration of interest to be due.
(II) Watch List Loan:

 Loans which (principle and interest) are due for more than 1and
up to 3 months.
 Loans provided to those customers whose loan in other financial
institutions falls in NPA category.
 Loans provided to those firm, company or institution whose net
worth are negative and are in loss for past two years.
(2) Non Performing Loan

(III) Sub-standard loans: Loans/advances which are overdue
by a period from three months to a maximum period of six
moths.
(IV) Doubtful loans: Loans/advances which are overdue by a
period from six-months to a maximum period of one year.
(V) Loss loans: Loans/advances which are overdue by a
period of more than one year. The loans which are in pass class
and which have been rescheduled/restructured are called as
"the performing loan, and the sub-standard, doubtful and loss

categories are called non-performing loans.
Note: Loans/advances also include bills purchased and
discounted.
Additional Provisions Relating to Loss Loans
In case there seems any of the following discrepancies in any of the
following loans, whether or not the deadline for repayment of
which is expired, such loans and advances has to be categorized
as the loss loan:
(a) The market price of the collateral cannot secure the loans;
(b) The debtor is bankrupt or has been declared to be bankrupt;
(c) The debtor disappears or is not identified;
(d) In case non-fund based facilities such as purchased or
discounted bills and L/C and guarantee which have been
converted into fund-based loan, are not recovered within ninety
days from the date of their conversion into loan;
(e) Loan is misused;
(f) Expiry of six months of the date of auction process after the loan
could not be recovered or a case is pending at a count under the
recovery process;
(g) Providing loan to a debtor who has been enlisted in the black-
list of Credit Information Bureau Ltd;
(h) The Project/business is not in a condition to be operated or
project or business is not in operation
(i) The credit card loan is not written off within 90 days from the
date of expiry of the deadline;
(j) While converting the L/C, guarantee and other possible
liabilities into a fund based loan under the regular process, if the
said loan is not recovered within 90days; and
(k) In case of expiry of the deadline of a trust-receipt loan.
Additional Provisions Relating to Term-Loan

In cases of the term loans extended in installments, if the deadline
of installment of the principal amount expires, remaining entire
loan amount has to be classified based on expiry of the deadline
of the installment amount. Provided that in cases of the
installment of the term loan given by licensed institution not

having the facility of engaging in overdraft transaction, entire
loan amount has to be categorized as loss loan only if the
installment amount has crossed the deadline by a period of
more than one year. In case the installment amount has crossed
the deadline by a period of less than one year, only such
installment amount has to be classified in the loss loan with a
provision of loan loss. However, this clause shall not be deemed
to have hindered if the licensed institution wants to classify the
entire loan amount as the loss loan.
Additional Provisions Relating to Gold/Silver Loan

The licensed Banks and financial institution of classes "A", "B" and
"C" may provide loan having mortgages gold/silver subject to
the following conditions:-
(a) The provisions of providing loan by mortgaging gold and silver
has to be stated in the credit policy/byelaws of the institution;
(b) Prior to carry out transaction of gold/silver loan, provisions
relating to necessary security, evaluation of the collateral, vault
insurance and checkers have to be made;
(c) Annual studies have to be conducted whether or not the
gold/silver loan is useful and profitable to the financial
institution and annual monitoring has to be conducted from the
Board of Directors.
Provision to be maintained for loan loss

Loan classification Minimum
Provision for loan loss
(a) Pass 1 percent
(b)Watch List 5 percent
(b) Sub-standard 25 percent
(c) Doubtful 50 percent
(d) Loss loan 100 percent
Provision for restructured and rescheduled loan

If it was in pass group before restructuring and rescheduling =

12.5%
If it was in any other group (except pass group) before
restructuring and rescheduling = As same percent at it was
before up to two years.
Instruments for Payments

The various instruments, which are used to pay certain sum
of amount at the time of ownership transfer of various
goods as well at the time of service delivery, are known as
instruments for payments.
A payment system is any system used to settle financial
transactions through the transfer of monetary value, and
includes the institutions, instruments, people, rules,
procedures, standards, and technologies that make such
an exchange possible. A common type of payment system
is the operational network that links bank accounts and
provides for monetary exchange using bank deposits.
In ancient age there exists “Barter system”, for payment but
in this modern era various banking instruments are used
in order to made payment, some of which are as follows:
1. Bank note and Coins
2. Cheque
3. Draft
4. Letter of credit
5. Mobile banking
6. Internet/ Online banking
7. SWIFT
8. Debit/Credit cards
9. Third party payment service provider (eSewa,
connectIPS, khalti etc.)
IN DETAIL:
 Bank note and Coins
A banknote (often known as a bill, paper money, or simply

a note) is a type of negotiable promissory note, made by
a bank, payable to the bearer on demand. Nowadays bank
note and coins are issued by central bank in Nepal by
Nepal Rastra Bank.
Letter of Credit
Letter of credit is a commitment/ undertaking in the form of
written instrument by a bank on behalf of its customer
(known as buyer/importer) to pay the "counter value" of
goods/services within a given date to its supplier (known
as seller/exporter) according to agreed stipulations and
against presentation of specified documents as specified
in the instrument. A "Letter of Credit" is used as an
instrument for settlement of payment arising out of
commercial transactions like sales/purchases. In such
credit, payment obligation arises only upon fulfillment of
specified conditions.
A letter of credit is a document from a bank guaranteeing
that a seller will receive payment in full as long as certain
delivery conditions have been met. In the event that the
buyer is unable to make payment on the purchase, the
bank will cover the outstanding amount.
Import/export — the same credit can be termed an import or
export LC depending on whose perspective is considered. For
the importer it is termed an Import LC and for the exporter of
goods, an Export LC
Standard Process for LC Transaction

1. Negotiations between buyer and seller and thus
finalization of deal & Buyer approach its bank to open
import LC.
2. Issuing bank issues the LC through its advising bank &
advising bank informs and advises the LC to the exporter.
3. Exporter prepares the goods and makes the shipment

through the carrier Exporter prepares the documents
demanded in the credit and furnishes to its negotiating
bank.
4. Negotiating bank forwards the documents to issuing bank
for payment.
5. Issuing bank obtains payment from importer and
provides the documents.
6. Importer obtains the goods shipped by exporter through
carrier (or its agent).
7. Issuing bank releases the payment to negotiating bank
through reimbursing bank.
8. Exporter receives payment through negotiating bank.
Types of letter of credit.
 Revocable — the buyer and the bank that established the LC are
able to manipulate the LC or make corrections without
informing or getting permissions from the seller. However
importer makes change in terms and condition after Negotiation
or got information after negotiation then the term and condition
shall not be change. According to UCP 600, all LCs are
irrevocable, hence this type of LC is obsolete.
 Irrevocable — any changes (amendment) or cancellation of the
LC (except it is expired) is done by the applicant through the
issuing bank. It must be authenticated and approved by the
beneficiary. If the documents has been negotiated than liable for
payment.
 Confirmed — An LC is said to be confirmed when a second bank
adds its confirmation (or guarantee) to honor a complying
presentation at the request or authorization of the issuing bank.
 Unconfirmed — this type does not acquire the other bank's
confirmation.
 Restricted — Only one advising bank can purchase a bill of
exchange from the seller in the case of a restricted LC.

 Unrestricted — The confirmation bank is not specified, which

means that the exporter can show the bill of exchange to any
bank and receive a payment on an unrestricted LC.
 Revolving letter of Credit; can negotiate the LC within the stated
amount and time.
 Transferable;
 At sight LC: payment to be made immediately to the
beneficiary/seller/exporter upon presentation of the correct
documents. A time or date LC specifies when payment is to be
made at a future date and upon presentation of the required
documents. (normally 5 days)
 Usance/Acceptance Letter of credit: Payment shall be made on
the terms and condition of documents after specific time or on
due date. The Tenor bills of exchange issued. Maximum date
shall be 180 days.
 Stand by Letter of credit: for specific completion of work. It
works as bank guarantee.
SWIFT
The Society of worldwide Inter-Bank Financial
Telecommunication is an international society for
enabling international electronic fund transfer between
member banks worldwide. In this system, members
banks are connected through a high speed closed user
group communication system. Structure and codified
message are sent by the remitting bank to the receiving
bank for crediting the beneficiary account situated with it.
The inter-bank settlement of account done via
correspondent banks. The funds’ transfer system is fast
secure and efficient. It is the best means of remittance and
payment.
Cheque
Cheque is an instrument in writing containing an
unconditional order, addressed to a banker, sign by the
person who has deposited money with the banker,

requiring him to pay on demand a certain sum of money
only to or to the order of certain person or to the bearer
of instrument.
A cheque is a document that orders a bank to pay a specific
amount of money from a person's account to the person
in whose name the cheque has been issued. The person
writing the cheque, the drawer, has a transaction banking
account (often called a current, cheque, chequing or
checking account) where their money is held. The drawer
writes the various details including the monetary amount,
date, and a payee on the cheque, and signs it, ordering
their bank, known as the drawee, to pay that person or
company the amount of money stated.
Cheques are a type of bill of exchange and were developed as
a way to make payments without the need to carry large
amounts of money. Paper money evolved
from promissory notes, another form of negotiable
instrument similar to cheques in that they were originally
a written order to pay the given amount to whoever had it
in their possession (the "bearer").
A cheque is a negotiable instrument instructing a financial
institution to pay a specific amount of a specific currency
from a specified transactional account held in the
drawer's name with that institution. Both the drawer and
payee may be natural persons or legal entities. Cheques
are order instruments, and are not in general payable
simply to the bearer as bearer instruments are, but must
be paid to the payee. In some countries, such as the US,
the payee may endorse the cheque, allowing them to
specify a third party to whom it should be paid.

A cheque is a bill of exchange drawn on a specified banker. It

is expressed to be payable otherwise than on demand.
Some Features of a Cheque
 A cheque must be in writing and duly signed by the
drawer.
 It contains an unconditional order.
 It is issued on a specified banker only.
 The amount specified is always certain and must be
clearly mentioned both in figures and words.
 The payee is always certain.
 It is always payable on demand.
 The cheque must bear a date otherwise it is invalid
and shall not be honored by the bank.
Essentials features:
 Must be in writing
 Express order to pay
 Definite and unconditional order
 Signed by drawer
 Order to pay certain amount
 Payable on demand
Parties:
Drawer: The maker of a bill of exchange.
Drawee: The person directed to pay the money by the
drawer.
Payee: To whom or to whose order the money ore directed
to be paid by the instruments. The person named in the
instrument only.
Different Kinds / Types of Cheques
1. Bearer Cheque
When the words "or bearer" appearing on the face of the
cheque are not cancelled, the cheque is called a bearer
cheque. The bearer cheque is payable to the person
specified therein or to any other else who presents it to

the bank for payment. However, such cheques are risky,
this is because if such cheques are lost, the finder of the
cheque can collect payment from the bank.
2. Order Cheque
When the word "bearer" appearing on the face of a cheque is
cancelled and when in its place the word "or order" is
written on the face of the cheque, the cheque is called an
order cheque. Such a cheque is payable to the person
specified therein as the payee, or to any one else to whom
it is endorsed (transferred).
3. Uncrossed / Open Cheque
When a cheque is not crossed, it is known as an "Open
Cheque" or an "Uncrossed Cheque". The payment of such
a cheque can be obtained at the counter of the bank. An
open cheque may be a bearer cheque or an order one.
4. Crossed Cheque
Crossing of cheque means drawing two parallel lines on the
face of the cheque with or without additional words like
"& CO." or "Account Payee" or "Not Negotiable". A crossed
cheque cannot be encashed at the cash counter of a bank
but it can only be credited to the payee's account.
5. Ante-Dated Cheque
If a cheque bears a date earlier than the date on which it is
presented to the bank, it is called as "ante-dated cheque".
Such a cheque is valid upto three months from the date of
the cheque.
6. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date)
then it is known as post-dated cheque. A post dated
cheque cannot be honoured earlier than the date on the
cheque.
7. Stale Cheque
If a cheque is presented for payment after three months from
the date of the cheque it is called stale cheque. A stale
cheque is not honoured by the bank.
Some reasons for cheque bounce/rejection
 Mistake in date
 Insufficient balance in account
 If signature is not verified
 If more than one ink is used to write cheque
 If cheque is not in a good condition. ( Due to water, sun,
oil, tear etc.)
 If account is debit restricted
 If the amount written in word is different from digit.
Difference between demand draft and cheque

Automated Teller Machine (ATM)

 An automated teller machine (ATM) is an electronic banking
outlet that allows customers to complete basic transactions
without the aid of a branch representative or teller. Anyone with
a credit card or debit card can access most ATMs.
 The first ATM appeared in London in 1967, and in less than 50
years, ATMs spread around the globe.
 There are two primary types of ATMs. Basic units only allow
customers to withdraw cash and receive updated account
balances. The more complex machines accept deposits, facilitate
line-of-credit payments, transfers, and report account

information. To access the advanced features of the complex

units, a user must be an account holder at the bank that operates
the machine.
Debit/Credit Card
Debit Card
A debit card (also known as a bank card or check card)
is a plastic payment card that can be used instead
of cash when making purchases. It is similar to a credit
card, but unlike a credit card, the money comes directly
from the user's bank account when performing a
transaction.
Some cards may bear a stored value with which a payment is
made, while most relay a message to the cardholder's
bank to withdraw funds from a payer's designated bank
account. In some cases, the primary account number is
assigned exclusively for use on the Internet and there is
no physical card.
Credit Card
A credit card is a payment card issued to users
(cardholders) to enable the cardholder to pay a merchant
for goods and services, based on the cardholder's promise
to the card issuer to pay them for the amounts so paid
plus other agreed charges. The card issuer (usually a
bank) creates a revolving account and grants a line of
credit to the cardholder, from which the cardholder can
borrow money for payment to a merchant or as a cash
advance.
A credit card is different from a charge card, where it
requires the balance to be repaid in full each month. In
contrast, credit cards allow the consumers a continuing
balance of debt, subject to interest being charged. A credit
card also differs from a cash card, which can be used like
currency by the owner of the card. A credit card differs
from a charge card also in that a credit card typically

involves a third-party entity that pays the seller and is
reimbursed by the buyer, whereas a charge card simply
defers payment by the buyer until a later date.
 If it is over right
Moblile Banking
 Mobile banking is a service provided by a bank or
other financial institution that allows its customers to
conduct financial transactions remotely using a mobile
device such as a smartphone or tablet. Unlike the
related internet banking it uses software, usually called
an app, provided by the financial institution for the
purpose. Mobile banking is usually available on a 24-hour
basis. Some financial institutions have restrictions on
which accounts may be accessed through mobile banking,
as well as a limit on the amount that can be transacted.
 Transactions through mobile banking may include
obtaining account balances and lists of latest
transactions, electronic bill payments, and funds
transfers between a customer's or another's accounts.
Some apps also enable copies of statements to be
downloaded and sometimes printed at the customer's
premises; and some banks charge a fee for mailing
hardcopies of bank statements.
Internet/Online Banking
Online banking, also known as internet banking, e-
banking or virtual banking, is an electronic payment
system that enables customers of a bank or other financial
institution to conduct a range of financial
transactions through the financial institution's website.
The online banking system will typically connect to or be
part of the core banking system operated by a bank and is

in contrast to branch banking which was the traditional
way customers accessed banking services.
To access a financial institution's online banking facility, a
customer with internet access will need to register with
the institution for the service, and set up a password and
other credentials for customer verification. The
credentials for online banking is normally not the same as
for telephone or mobile banking.
Share and Debenture
Meaning of share:
A share is a document that acknowledges the ownership of a
company to the limit of the amount contributed. So, the
share is defined as an interest in the company reflecting
the ownership thereof and entitling to receive profit
proportionately. The share capital of a company is divided
into fixed number of units, and each such unit is called
share. Therefore, a share can be defined as a unit of share
capital reflecting the extent of interest of a shareholder.
Types of shares:
1) Equity shares:
Equity shares are those, which will get dividend and refund
of capital only after preference shareholders are paid.
Equity shares are also known as ordinary shares or
common shares. There is no fixed rate of equity dividend.
The dividend on these shares is paid from profits only
after paying interest on debentures and dividends on
preference share capital. Equity shareholders can
participate in management and enjoy the voting rights to
elect some members of Board of Directors. Equity
shareholders are the real owner of the business.
The importance of equity share capital are as follows:
i)Importance to the company

No need to pay dividend, in case of loss of the company.
No need to refund to the equity shareholders before
winding-up of the company.
The directors are elected from the equity shareholders for
the effective management of the company
ii)Importance to the shareholders
Every shareholder has a voting right to elect the company’s
BOD.
Equity shareholders can enjoy a higher amount of
dividend in case of a higher profit.
Equity shareholders can easily sell or transfer their
shares to others.
2)Right shares:
The shares entitling to be subscribed by the existing
shareholders of the company are called right shares.
These are additional equity or common shares offered by
a company of its shareholders to subscribe within a
specified period at a specific price.
3)Preference shares:
Preference shares are those shares that are entitled to
certain privileges. The dividend on preference share is
paid at a fixed rate. The dividend on such shares is paid
before any dividend is paid to equity shareholders.
Similarly, at the time of winding-up the company, the
preference capital is repaid before such a repayment is
made to the equity shareholders. Preference shareholders
do not have any voting rights.
Types of preference shares are as follows:
 Cumulative preference share:

Cumulative preference shares are those shares on which the

amount of unpaid dividends is accumulated and is carried
forward as a liability.
 Non-cumulative preference share:
They are those shares on which the arrears of dividend do
not accumulate.
 Redeemable preference share:
They are those shares that can be redeemed within a specific
period of time. The terms and conditions for redemption
of preference shares need to be specified at the time of
the issue of shares.
 Irredeemable preference share:
They are those, which can be redeemed only at the time of
liquidation of the company.
 Convertible preference share:
They are those shares, which can be converted into equity
shares. The conversion becomes possible when the
company provides such option.
 Non-convertible preference share:
They are those shares, which cannot be converted into equity
shares. Preference share are non-convertible unless
otherwise stated.
 Participating preference share:
They are those shares, which have the right to participate in
any surplus profit of the company after paying dividend
on equity shareholder.
 Non-participating preference share:
They are those shares, which do not carry such rights. If the
Article of Association of the company is silent, preference
shares are assumed to be non-participating preference
share.

Difference between equity share and preference share:

Equity share Preference share
Dividend on preference
Dividend on equity share is
share is paid before the
paid after the payment
payment of equity
of preference dividend.
share.
Rate of dividend on equity Rate of dividend on
share may vary from preference share is
year to year. fixed.
Arrears of dividend may be
Arrears of dividend cannot
accumulated in case of
be accumulated in any
cumulative preference
case.
share.
In case of dissolution of the
In case of dissolution of the
company, equity share
company, preference
capital is refunded after
share is refunded before
the repayment of
the repayment of equity
preference share
share capital.
capital.
It can not be convertible. It may be convertible.
Equity shareholder enjoy Preference shareholders do
voting rights. not have voting rights.
4) Deferred share:
The share allotted to the promoters as a token of reward for
the company is called deferred shares. Founders or
management shares are the other terms which are used
to refers such shares.
Deferred shares enjoy rights to share on profit after
paying off preference dividend and equity dividend.

Debentures
Meaning and definition:
The term “debenture” indicates to long loan or long-term
debt. A company may raise its long-term fund either by
issuing of shares or by issuing of debenture. If a company
decide to raise capital, it issue shares and if long-term
loan then it issues debenture. A debenture is a certificate
issued by a company acknowledging debt of public
borrowing. It is a portion of loan capital. The owners of
debentures are called debenture holders. They are the
creditors of the company and are entitled to receive an
agreed and fixed rate of interest on their debentures
regularly. Generally, the debentures are redeemed at the
end of its maturity. The debenture holders have no right
over the management and control of the company.
Features of debentures:
The following are the main features of debentures:
 It is a written certificate issued by the company as an
acknowledgement of a debt
 It is issued under the company’s seal
 It contains the rate of interest to be paid to the
subscribers
 It contains mode of payment of the principal amount and
interest
 It is a long term public borrowing from a large section of
the general public
Types of debentures:
a) Registered debentures: A debenture that cannot be
transferred by a mere physical delivery is called
registered debenture. The name of the holder of such
debenture is registered with the company.

b) Bearer debenture: A debenture, which is

transferable by a mere delivery, is called bearer
debenture. The holders of such debentures are its owners
and are called debenture holders.
c)Secured debenture : A debenture, which is issued
against a specific fixed asset as security is called, secured
debenture. Upon default of such debenture on due date,
the debenture holder can realize their sum out of the sale
realized from such fixed asset. Secured debenture are also
called mortgaged debenture.
d) Unsecured debenture: Debentures issued without any
security are called unsecured debentures. The holders of
such debentures are not given any security for the issue of
such debentures. The holders of such debentures are
treated as the general creditors of the company.
e) First debenture: A debenture which is issues against a
specific fixed asset not currently pledge as a security for
the issue is called first debenture. Such debenture needs
to be repaid fully before second debentures are issued.
f) Second debenture: A debenture which is issued against
a specific fixed asset already used as a security is known
as second debenture. Such debentures are repaid only
after the first debentures have been fully settled.
g) Redeemable debenture: The debentures which are to be
repaid within a specified date as per the terms of their
issue are called redeemable debentures. The company is
bound to pay the principal to debenture holders after the
expiry of the period specified at the time of issue.
h) Convertible debenture: A debenture which is issued
with an option to convert it into common share,
preference share or a new debenture within a specified

period at a conversion ratio is called convertible

debenture.
i) Non-convertible debenture: The debentures, which
have no option of being converted into equity or
preference shares or new debentures, are called non-
convertible debenture.
j) Collateral Debenture: Debentures may also be issued
to money lenders, i.e to the banks and financial
institutions as an additional security along with the
principal security for the sanction of the bulk amount of
loan. Such debentures are called collateral debentures.
The moneylenders can exercise its rights as debenture
holders if issuing company fails to pay the loan amount
and principal security falls short to recover the loan.
Difference between shares and debentures:
Shares Debentures
Shareholders are the owners Debenture holders are the
of the company creditors of the company
Dividend is paid on shares out
A fixed rate of interest is to be
of profits on the
paid to the debenture
recommendation of
holders
directors
Rate of dividend on the share
A rate of interest is prefixed
capital is not fixed
In the event of liquidation, the In the event of liquidation,
shareholders fund is debenture holders are
refunded after every claim refunded before payment
is settled to shareholders.
Importance of debentures
The importance of debenture can be pointed out as follows:
 Debenture holders receive a fixed rate of return on their
investment.
 Debenture is refunded before the refund of share capital

at the time of winding-up of the company.
 Debenture holder's investments are secured.
 Debentures are transferable from one person to another.
CLIENT PROTECTION PRINCIPLE

The Client Protection Principles describe the minimum protection
microfinance clients should expect from providers. These
Principles are distilled from the path-breaking work of
providers, international networks, and national microfinance
associations to develop pro-consumer codes of conduct and
practices. While the Principles are universal, meaningful and
effective implementation will require careful attention to the
diversity within the provider community and conditions in
different markets and country contexts.
General Principles for Financial Consumer Protection
PRINCIPLE 1 Equitable and fair treatment
Banks should deal fairly and honestly with consumers at all stages
of their relationship, so that it is an integral part of the culture of
a bank. Care should also be made and special attention given to
the needs of vulnerable persons and groups.
PRINCIPLE 2 Disclosure and transparency
Banks should provide up to date informationabout products and
services to consumers. Thisinformation should be easily
accessible, clear,simple to understand, accurate, not misleading
and include any potential risks for the consumer. It should
include the rights and responsibilities of each party, including
the mechanism for either party to end the banking relationship,
as well as details of fees, pricing and any potential penalties that
the consumer may incur.
PRINCIPLE 3 Financial education and awareness
Banks should develop programmers and appropriate mechanisms
to help existing and future consumers develop the knowledge,
skills and confidence to appropriately understand risks,

including financial risks and opportunities, make informed

choices, know where to go for assistance when they need it.
PRINCIPLE 4 Behavior and work ethic
Banks should work in a professional manner for the benefit of
customer during their relationships, where a bank is primarily
responsible for the protection of the financial interests of the
client.
PRINCIPLE 5 Protection against fraud
Banks should protect and monitor consumer deposits and savings
and other similar financial assets through the development of
control systems with a high level of efficiency and effectiveness
to reduce fraud, embezzlement or misuse.
PRINCIPLE 6 Protection of privacy
Consumers financial and personal information should be protected
through appropriate control and protection mechanisms. These
mechanisms should define the purposes for which the data may
be collected, processed, held, used and disclosed (especially to
third parties).
PRINCIPLE 7 Complaints handling
Consumers should have access to adequate complaints handling
mechanisms that are accessible, affordable, independent, fair,
accountable, timely and efficient .
PRINCIPLE 8 Competition
Consumers should be able to search, compare and where
appropriate, switch between products, services and providers
easily and clearly at a reasonable cost.
PRINCIPLE 9 Third parties
Banks and their authorized agents should have as an objective, to
work in the best interest of their consumers and be responsible
for upholding financial consumer protection. Banks should also
be responsible and accountable for the actions of their
authorized agents.
PRINCIPLE 10 Conflict of interest
Banks should have a written policy on conflict of interest, and
ensure that this policy will help to detect potential conflicts of
interest. When the possibility of a conflict of interest arises

between the bank and the third party, this should be disclosed
to the consumer.
Consumer Responsibilities
The responsibilities of consumers will be supported by on-going
consumer education and awareness programmers as well as
initiatives by the various banks for their own consumers.
Consumer responsibilities include the following:
1 Be honest with the information you provide.

Always give full and accurate information when you are filling in
any bank documents. Do not give false details or leave out
important information.
2 Carefully read all information provided by your bank.

When you submit your application, you should receive full details
on the obligations for your service or product. Make sure you
have access to the details of your obligations, that you
understand them and that you can comply with them.
3 Ask questions.
It is important to ask questions to bank employees about anything
that is unclear or a condition that you are unsure about. The
staff will answer any questions in a professional manner to help
you in your decision making.
4 Know how to make a complaint.

You can be proactive in using this service and knowing how to
escalate your issue to higher levels, if appropriate. Your bank
will provide you with details on how to complain and the
timeframe for their response.
5 Use the product or service in line with the terms and

conditions.

Do not use the product or service, except in accordance with the

terms and conditions associated with them, and after making
sure of your complete understanding.
6 Avoiding risk.
Do not purchase a product or service where you feel that the risks
do not suit your financial situation. Some financial products or
services carry risks and your bank should clearly explain these
to you.
7 Apply for products and/or services that meet your needs.

When making a request for a product or service, you should make
sure that is suits your needs. You should disclose all financial
obligations with all parties to ensure the decision is based on
your ability to meet you additional obligations after contracting
for the product or service.
8 Report unauthorized transactions to your bank.

If you have discovered unauthorized transactions on your account,
you should report this to your bank immediately.
9 Do not disclose your banking information.
Under no circumstances should you provide any bank account
details or other sensitive personal or financial information to
any other party.
10 Talk to your bank if you are encountering financial

difficulties.
By talking to your bank, you can discuss possible alternative
repayment arrangements that will enable you to fully discharge
your responsibilities.
Customer Relationship Management
Customer
Although in general terms, a customer is a person or
organization that a marketer believes will benefit from
the goods and services offered by the marketer’s

organization; it is possible to distinguish them as internal

and external customers. Internal customers are people
who work and develop activities within any organization.
On the contrary, external customers are people or entities
outside the organization and conduct business with it.
Hence, a customer is not necessarily
someone who is currently purchasing or conducting
business from any marketer. In fact, customers may fall
into one of three customer groups:
- Existing Customers – Consists of customers who have
purchased or otherwise used an organization’s goods or
services, typically within a designated period of time. For
some organizations the timeframe may be short, for
instance, a coffee shop may only consider someone to be
an Existing Customer if they have purchased within the
last three months. Other organizations may view someone
as an Existing Customer even though they have not
purchased in the last few years (e.g., television
manufacturer). Existing Customers are by far the most
important of the three customer groups since they have a
current relationship with a company and, consequently,
they give a company a reason to remain in contact with
them. Additionally, Existing Customers also represent the
best market for future sales, especially if they are satisfied
with the relationship they presently have with the
marketer. Getting these Existing Customers to purchase
more is significantly less expensive and time consuming
than finding new customers mainly because they know
and hopefully trust the marketer and, if managed
correctly, are easy to reach with promotional appeals (i.e.,
emailing a special discount for new product).

- Former Customers – This group consists of those who

have formerly had relations with the marketing
organization typically through a previous purchase.
However, the marketer no longer feels the customer is an
Existing Customer either because they have not
purchased from the marketer within a certain timeframe
or through other indications (e.g., a Former Customer just
purchased a similar product from the marketer’s
competitor). The value of this group to a marketer will
depend on whether the customer’s previous relationship
was considered satisfactory to the customer or the
marketer. For instance, a Former Customer who felt they
were not treated well by the marketer will be more
difficult to persuade to buy again compared to a Former
Customer who liked the marketer but decided to buy from
someone else who had a similar product that was priced
lower.
- Potential Customers – The third category of customers
includes those who have yet to purchase but possess what
the marketer believes are the requirements to eventually
become Existing Customers. The requirements to become
a customer include such issues as having a need for a
product, possessing the financial means to buy, and
having the authority to make a buying decision. Locating
Potential Customers is an ongoing process for two
reasons. First, Existing Customers may become Former
Customers (e.g., decide to buy from a competitor) and,
thus, must be replaced by new customers. Second, while
we noted above that Existing Customers are the best
source for future sales, it is new customers that are
needed in order for a business to significantly expand. For
example, a company that sells only in its own country may
see less room for sales growth if a high percentage of

people in the country are already Existing Customers. In
order to realize stronger growth the company may seek to
sell their products in other countries where Potential
Customers may be quite high.
Every customer comes into the customer situation with
different needs. While they are difficult to identify in
advance, it is possible to affirm that every customer
expects or look for any of five different experiences every
time they conduct business. These basic needs are:
service, price, quality, action and appreciation.
Service
To understand the importance of customer service and its
implications in the operations of an organization, it is
important to understand the nature of service. The
distinction between a product and a service is difficult to
make, because the purchase of a product is accompanied
by some facilitating service and the purchase of a service
often includes facilitating goods. But at the end is the
consumer who has the final voice the purchasing process.
A service is an activity or series of activities of more or less
intangible nature that normally, but not necessarily, take
place in interactions between customer and service
employees and/or systems of the service provider, which
are provided as solutions to customer problems The
nature of service comprises a wide variety of activities.
From the basic activities included in cleaning to the more
complex and difficult tasks involved in professional
activities such as engineering, law or medical practices.
Customer service

Customers live in a completely different world and speak a

different language than organizations. In fact, it can be
defined as an opposite world; while organizations provide
solutions, customers have needs that are accumulated in
an “infinite capacity” pool. No matter the main objective
of the organization, the customer will expect to be taken
care in such manner that their needs will be satisfied in
the best possible way from their point of view. When it
comes to managing customers, an important non-product
benefit that affects customers’ feelings about a company
is customer service, which is defined as activities used by
the organization to support the purchaser’s experience
with a product. Thus, good customer service is the
lifeblood of any business.
Some definitions for customer service found are:
"Customer service is the ability to provide a service or
product in the way that it has been promised"
"Customer service is about treating others as you would like
to be treated yourself" "Customer service is an
organization's ability to supply their customers' wants
and needs"
"Customer Service is a phrase that is used to describe the
process of taking care of our customers in a positive
manner"
"Customer Service is any contact between a customer and a
company, that causes a negative or positive perception
by a customer"
"Customer service is a process for providing competitive
advantage and adding benefits in order to maximize the
total value to the customer"
"Customer Service is the commitment to providing value
added services to external and internal customers,
including attitude knowledge, technical support and

quality of service in a timely manner"
"Customer service is a proactive attitude that can be
summed up as: I care and I can do."
Skills for Customer Service
• Know about your organization
• Learn the technical parts of the job
• Communicate well
• Be consistent
• Be organized
• Know your place in the team and be a team Player
 Develop “Promise less - deliver more” habit
Importance and Objectives of Customer Service
In today's highly competitive business environment, there's a
constant and never-ending struggle that every
entrepreneur must face. Those who can adapt will survive
and thrive, resulting in near-boundless financial success
and market saturation. Those who cannot see the
proverbial forest through the trees, suffer a slow and
inevitable death.
And while there are ample reasons why any person should
start a business in the first place, everyone needs to pay
homage to the customer so that they can stay in business.
The less short-sighted the approach is from any
enterprise, the more likely it will be to achieve long term
success.
1. Customer retention is far less expensive than customer
acquisition.
2. Existing customers are more likely to buy for you than new
customers.
3. Great customer service results in a reduction of overall
problems.
4. Excellent customer service improves public persona and

strengthens your brand.
5. You're more likely to retain your customers for longer.
6. Word-of-mouth advertising is the best kind of advertising
that money can't buy.
7. It improves employee turnover in your business.
8. Great customer service opens doors for new partnerships
and other opportunities.
9. It conveys strong moral values and beliefs in the
company's mission.
10. It elongates the life of any business.
Know Your Customer (KYC)
The term "Know Your Customer" (KYC) has been in use
since the 1980s, and is convenient term to describe
the process of obtaining; retaining and using
information about a customer such that his identity
and residential address is verified, the source of his
funds and wealth is understood, his financial
circumstances are understood, and the nature of j
ltd' transactions he undertakes are understood in
the context of his known personal circumstances
and activities.
Importance of KYC
 To prevent money laundering
 To minimize operational as well as other risks
 For better client protection
 To maintain better customer relationship
 For product design and targeting.
 To prevent any other banking fraud
KYC Procedure
 KYC form fill-up
 Personal interview and observation

 Collection of supportive documents
 Classification of Customers (Low risk, medium risk,
high risk)
 Regular update.
Legal Provisions for KYC
Provisions in Money Laundering Prevention Act -2064
Chapter -3
Provision Relating to Identity, Transactions and Details
of the Customers
Customers to be identified
 Any bank, financial institution or non-financial Institution
shall maintain clear record of identity of a person while
establishing any kind of business relationship with such
person or while transacting the amount above the
threshold, either in a single transaction or in series of
transactions as prescribed by Rastra Bank from time to
time by publishing a notice.
 Bank, financial institution or non-financial institution,
while identifying the customer shall cause the person
establishing business relationship or having transactions
with it to submit the documents as follows:-
(a) In case of a natural person his/her name, family surname,
copy of citizenship or passport including other necessary
documents that substantiate his/her permanent
residential address and profession or business,
(b) In case of the person or firm except those provided in
Clause (a), copy of the document certifying incorporation,
establishment or registration of the institution,
documents that mention name, surname, address,
profession, business of board of directors and executive
director or proprietor of firm or partners of partnership

firm,
(c) In case of business relation or transactions to be
established or made on behalf of someone else,
documents relating to principal's identity, address
including power of attorney clarifying the business of the
principal,
(d) Name, surname, address of close relative, person or
institution benefiting from business transaction,
(e) In case of transactions made through negotiable
instruments, name, surname and address of the issuer
and payee of such instrument,
(f) Other documents as prescribed by the Financial
Information Unit from time to time.
 Bank, financial institution or non-financial institution

shall maintain a separate record of documents and
transactions of each customer, including date and nature
of transactions, type of account and code number.
Liability of Government Entity, Bank, Financial
Institution and Non- Financial Institution:-
 The government entity, bank, financial institution and
non-financial institution shall fulfill the following
responsibilities for the purpose of this Act:-
(a) To maintain records of amount transacted beyond the
threshold prescribed by Rastra Bank at a single or in a
series of transactions by a person,
(b) To investigate and inquire any transaction which appears
to be suspicious or transacted with the motive of asset
laundering or so laundered or there are reasonable
grounds for suspicion,

(c) To inform the Financial Information Unit about the

transactions mentioned in Clause (a) within fifteen8 days
of event and the transactions mentioned in clause (b)
immediately after the event.
 In case there is any suspicion on the transactions of
persons having regular business relation or transactions,
the concerned entity, bank, financial institution or non-
financial institution shall inform the Financial
Information Unit after making an inquiry.
 The bank, financial institution, or non-financial institution
shall maintain a secured record of transaction referred to
in this Section at least for a period of five years from the
date of such transaction.
 Responsibility of Professionals: Notwithstanding anything
contained in existing law, the professionals shall
immediately report suspicious transaction to the
Financial Information Unit if they know of any suspicious
transaction in course of their professional performance.
Best of Luck

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Columbia Academy, New Baneshwor, ktm. Ph: 4784657 [1] www.facebook.

 Service offered: Bank collect deposits, provide loans, credit

World history of bank

Finally, money lenders in the early age had contributed in the

Nepalese History of Bank

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 The establishment of “Tejarath Adda” during the tenure of Prime

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 As the monetary transaction got more and more complicated on

In sum up, in this phase:

After Public Private Partnership (PPP) i.e after liberalization in

 In 2073 BS Bank and Financial Institutions Act (BAFIA) 2073

Present Scenario of Banking in Nepal

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 Merger and acquisition has broadened.

Nepal Rastra Bank’s monthly report (Poush 2076)

No. of BFIs Branches

(NOTE: Please look at the website of Nepal Rastra Bank

CHALLENGES OF BANKING SECTOR IN NEPAL

OPPORTUNITIES OF BANKING SECTOR IN NEPAL

 Low operating cost due to cheap manpower

Types of Banks and Functions

Types of Bank Meaning of Banks

Central Bank A central bank is a financial institution given

populations. Almost all give loans to their

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LEVELWISE BANKING SYSTEM (A, B, C, D

Commercial banks are established to boost the commerce,

(1) Any licensed institution of a lower class which meets the

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ROLE OF COMMERCIAL BANK IN ECONOMIC

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Functions, Rights and Duties of Commercial Bank

with a view to recover the loan money by selling the security in

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(iv) Banks purchase and sell securities, shares and debentures on

According to BAFIA-2073 functions of commercial bank(A

(c) Supplying credit for hire-purchase, hypothecation, leasing,

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(d) Making arrangements for jointly supplying project or

(g) Issuing guarantees on behalf of its customers, having such

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(o) Acting as an agent of the Rastra Bank on the conditions

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Functions,Rights and Duties of Nepal Rastra Bank

The main advantages of giving the monopoly right of note issue to

^natters such as deficit financing, devaluation, trade policy,

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Factor affecting remittance

amounts as a bank or financial institution accepts through

DEPOSIT TYPES AND MOBILIZATION

Interest Bearing Deposit

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provided with more funds for the credit activities, interest

The main features of such accounts are as follows:

account as in case of savings and current deposit account

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issue the certificate for such amount which will include

The major features of such deposit are as follows:—