Banking and Financial Institutions

Banking instruments commonly used in Nepal and their importance

Banking instruments are the written, legally recognised means through which banks and financial institutions (BFIs) transfer funds, extend credit and settle transactions. In Nepal, the following are commonly used:

1. Cheque A written order by an account holder directing the bank to pay a specified sum to a named person or bearer. Varieties in use are bearer cheque, order cheque, crossed cheque and account-payee cheque. It is the most widely used instrument for domestic payments and salaries. The Negotiable Instruments Act, 2034 (1977) governs cheques in Nepal.

2. Draft (Bank Draft / Demand Draft) A prepaid instrument issued by a bank branch on another branch or correspondent, payable to a specified party. Since the amount is paid in advance, it is safe for remitting funds to distant places where the payee has no account.

3. Bill of Exchange An unconditional written order by the drawer asking the drawee to pay a certain sum to the payee. It is used mainly in trade finance, often supported by documents such as invoices, bills of lading and insurance certificates.

4. Letter of Credit (LC) A bank's irrevocable undertaking to pay the exporter on presentation of stipulated documents. Nepal Rastra Bank regulates LC operations under the Foreign Exchange (Regulation) Act, 2019 (1962). It is the backbone of Nepal's import trade, as it reduces the exporter's risk of non-payment and the importer's risk of non-delivery.

5. Bank Guarantee A bank's commitment to pay a beneficiary if the applicant fails to perform a contractual obligation. Performance, bid and advance-payment guarantees are common in public procurement and construction contracts.

6. Promissory Note An unconditional written promise by the maker to pay a sum to the payee on demand or at a fixed future date. It is used in short-term lending and as collateral.

7. Traveller's Cheque and Credit/Debit Cards Traveller's cheques are pre-denominated instruments for safe travel spending, while debit and credit cards (Visa, Mastercard, SCT, etc.) provide electronic access to accounts and credit lines. Cards are increasingly dominant in retail payments.

8. Electronic instruments — RTGS, connectIPS, mobile banking and QR payments Real Time Gross Settlement (RTGS) settles high-value interbank payments instantly; connectIPS, mobile banking and QR codes handle retail transfers. These are regulated by Nepal Rastra Bank under the Payment and Settlement Systems Act, 2019 (2076).

Importance

• Safety: Reduces the risk of carrying cash; cheques, drafts and cards protect against loss and theft.
• Convenience and speed: Enable quick transfer of funds across distances and, through RTGS and digital wallets, in real time.
• Credit creation and trade facilitation: LC, bank guarantee and bills of exchange allow importers, exporters and contractors to transact without immediate cash outlay.
• Financial inclusion: Mobile banking, QR payments and branchless banking extend services to rural and unbanked populations.
• Record and evidence: Instruments provide documentary proof of payment, aiding accounting, audit and legal enforcement.
• Monetary management: Instruments channel savings into the banking system, supporting NRB's monetary policy and reducing dependence on cash.
• Economic growth: Efficient payment and credit instruments lower transaction costs, promote trade and support overall economic activity.

In short, banking instruments in Nepal serve as the backbone of the payment and credit system, ensuring safety, efficiency and wider access to finance.