Banking Operations and Financial Institutions

Tasks, duties and powers for achieving the objectives of Nepal Rastra Bank (NRB Act, 2057)

Objectives of NRB (Sec. 4–5): maintain price stability, promote a sound banking and financial system, and support the balanced development of the economy.

Tasks and duties (Sec. 5):

1. Issue of notes and coins — sole authority to issue banknotes and coins; regulate money supply to maintain price stability.
2. Formulation and implementation of monetary policy — determine bank rate, open market operations, cash reserve ratio, statutory liquidity ratio, etc.
3. Foreign exchange management — fix exchange rate system, hold and manage foreign exchange reserves, regulate foreign exchange transactions.
4. Regulation and supervision of banks and financial institutions — license, inspect, supervise and, if needed, take corrective/ punitive action (Sec. 55–100).
5. Act as banker, advisor and fiscal agent of the Government — keep government accounts, make payments, manage public debt, act as debt manager.
6. Lender of last resort — provide emergency credit to banks and financial institutions facing liquidity problems.
7. Payment and settlement system — operate, regulate and supervise the clearing house and payment systems.
8. Development of the financial sector — promote financial inclusion, stability and institutional development.

Powers (Sec. 5, 6, 49–100):

• To issue directives, circulars and orders binding on banks and financial institutions.
• To grant, suspend or cancel the licence of banks and financial institutions.
• To conduct on-site inspection and off-site supervision, and to impose fines, penalties or restrictions.
• To determine interest rates, reserve requirements and other monetary instruments.
• To buy and sell securities, gold and foreign currency in the open market.
• To act as lender of last resort and to grant credit against approved collateral.
• To appoint liquidators and take over the management of a troubled institution in the interest of depositors.

Conclusion: Through these tasks, duties and powers, NRB maintains monetary stability, safeguards depositors' interests and ensures a healthy financial system for balanced economic development.

Banking offence: A banking offence is any act done dishonestly or knowingly, in breach of the Banking Offence and Punishment Act, 2064 or the laws governing banks and financial institutions, that the Act makes punishable. Examples are embezzling or misappropriating deposits, unauthorised loan sanction or disbursement, falsifying accounts, misusing electronic banking, and obstructing Nepal Rastra Bank inspection. It can be committed by an outsider or by a director, official or employee of a bank or financial institution.

Four penalties under the Act:

1. Fine, set by the seriousness of the offence and often linked to the amount involved.
2. Imprisonment for the term the Act prescribes for that offence.
3. Confiscation of property or proceeds obtained through the offence.
4. Recovery of the embezzled or misappropriated amount from the offender, with additional punishment for directors and officials, such as removal from office or debarment.

Under the Negotiable Instruments Act, a negotiable instrument is treated as dishonoured when it is duly presented for acceptance or payment and the person liable refuses or fails to honour it. This happens in three main situations.

(a) Dishonour by non-acceptance (bill of exchange)

• The drawee refuses to accept the bill, or does not accept it within the time allowed (24 hours) after due presentment.
• The drawee is a fictitious person, is incapable of contracting, or cannot be found after reasonable search.
• Only some of several drawees (who are not partners) accept.
• Presentment for acceptance is excused (for example, the drawee cannot be traced) and the bill remains unaccepted.

(b) Dishonour by non-payment (promissory note, bill or cheque)

• The maker, acceptor or drawee fails or refuses to pay the whole or part of the amount when the instrument is duly presented on its due date.
• Payment is not made because the person liable cannot be found at the place of payment after reasonable search.

(c) Dishonour of a cheque

• The bank returns a cheque unpaid, for example for insufficient funds, signature mismatch, closed account, or a stop-payment instruction from the drawer.

Notice of dishonour: When an instrument is dishonoured, the holder must promptly give notice of dishonour to the drawer and the endorsers whom he wants to hold liable. If he does not, those parties are discharged from liability. The maker or acceptor remains liable in any case.

1. Concepts

• Financial Access: The availability and ease of using formal financial services—savings, credit, insurance, remittance, digital payments—at an affordable cost and within reasonable distance. It is mainly a supply-side concept: bank branches, ATMs, branchless banking, agents, digital channels, simple KYC rules, etc.
• Financial Literacy: The knowledge, skill, confidence and behaviour needed to make informed financial decisions—budgeting, saving, wise borrowing, investing, insurance, digital transactions, avoiding fraud, and knowing consumer rights and complaint mechanisms. It is mainly a demand-side capability.
• Financial Inclusion: The broader outcome in which all adults and enterprises have access to and actually use appropriate, affordable, timely and responsibly delivered financial services. It combines access + literacy + usage + quality + consumer protection. In short, access is the door, literacy is the ability to use it, and financial inclusion is the result.

2. Problems in Nepal

Financial access:

• Banks, ATMs and service centres are concentrated in urban and accessible areas; remote hills, Karnali, Madhesh and rural areas remain underserved.
• Documentation barriers: citizenship, land ownership, KYC, lack of collateral and credit history.
• High interest rates, service charges, minimum balance requirements, and travel cost/time.
• Weak digital infrastructure—internet, electricity, smartphones—among poor and rural people.
• Large informal sector and remittance recipients still use informal channels; low insurance and formal credit usage.
• Gender, caste, disability, elderly and illiteracy gaps.
• Over-indebtedness, multiple borrowing, misuse of microfinance loans, and digital wallet fraud.

Financial literacy:

• Low awareness of banking products, interest calculation, digital fraud and consumer rights.
• Programs are scattered, one-time and poorly coordinated among NRB, BFIs, cooperatives and local governments.
• Content is rarely in local languages; low reach among women, illiterate and remote groups.
• School curriculum lacks practical financial education.
• Remittance income is spent mostly on consumption; low saving and productive investment.
• Trust deficit due to past cooperative and microfinance problems.

3. Measures

• Expand branchless banking, ATMs, agent banking, mobile banking, QR and connect IPS in unbanked areas; give priority to remote districts.
• Simplify KYC and account opening; accept national ID, voter ID or local recommendation; promote collateral-free and group-guarantee loans; expand credit guarantee and credit information.
• Strengthen digital infrastructure and financial consumer protection; regulate digital lenders and control wallet fraud; make complaint handling easy.
• Prepare a national coordinated financial literacy strategy involving NRB, Ministry of Finance, local governments, BFIs, cooperatives and schools.
• Include financial literacy in school curriculum; run campaigns in local languages through radio/FM, women’s groups, cooperatives and community leaders.
• Train women, youth, farmers and remittance households in budgeting, saving, insurance, digital transactions and fraud prevention.
• Promote microinsurance, pension and formal remittance channels; link remittance to productive investment.
• Conduct regular financial access and literacy surveys; publish district-wise data and monitor progress.

According to the Banks and Financial Institutions Act, 2073 (2016), no person or institution may establish or operate a bank or financial institution in Nepal without obtaining a licence from Nepal Rastra Bank (NRB). The following documents and procedures must be completed:

1. Application to Nepal Rastra Bank

• An application must be submitted to NRB in the prescribed format for obtaining a licence to establish a bank or financial institution.
• The application must clearly state the type of institution (commercial bank, development bank, finance company, microfinance, etc.), proposed name, registered address, and authorised/issued/paid-up capital.

2. Documents to be submitted with the application

• Memorandum of Association (MOA) and Articles of Association (AOA) of the proposed institution.
• Feasibility study report showing the economic and financial viability of the proposed institution.
• Details of promoters — name, address, citizenship, educational qualification, experience, and financial status.
• Details of proposed directors and chief executive officer, with their qualifications and experience.
• Source of capital and proof of deposit of the minimum paid-up capital in a bank account.
• Business plan / operational plan covering at least the first three years.
• Details of proposed share distribution and share subscription.
• Tax clearance certificate and citizenship certificate of promoters.
• Statement of assets and liabilities of promoters.
• Any other documents prescribed by NRB.

3. Minimum capital requirement

• The applicant must deposit the minimum paid-up capital prescribed by NRB (as specified from time to time) in a bank account before applying.

4. Examination and investigation by NRB

• NRB examines the application, documents, feasibility study, and financial capacity of promoters.
• NRB may conduct an investigation or seek additional information if required.

5. Approval and licence

• If NRB is satisfied that the application fulfils all legal requirements, it grants a licence in the prescribed format.
• The licence must be obtained before commencing business.
• The institution must be registered at the Office of the Company Registrar and obtain a PAN from the Inland Revenue Office.

6. Post-licence formalities

• Deposit the prescribed licence fee.
• Commence business within the time limit prescribed by NRB.
• Comply with NRB directives on capital, reserves, and operations.

Conclusion Thus, under the Banks and Financial Institutions Act, 2073, establishing a bank or financial institution requires submission of a prescribed application with MOA, AOA, feasibility study, promoter details, capital proof, and business plan, followed by NRB's examination, approval, licence, and registration.

Regular monitoring of banks and financial institutions — why it is needed, and what to consider while monitoring

Why banks and financial institutions should be monitored regularly

1. Protection of depositors' money — Banks hold the savings of millions of people. Regular monitoring ensures that these deposits are safe and that the bank does not use them recklessly.
2. Maintenance of public trust — The whole banking system runs on confidence. If people lose faith in one bank, it can spread to the entire banking system. Monitoring keeps that confidence intact.
3. Financial stability of the country — Banks are the backbone of the economy. Failure of a big bank can create a chain reaction (systemic risk) and disturb the whole economy. Monitoring prevents such a crisis.
4. Prevention of financial crimes — Regular inspection helps detect and control fraud, forgery, embezzlement, money laundering, terror financing, insider lending and misuse of depositors' funds at an early stage.
5. Compliance with laws and directives — Banks must follow the Nepal Rastra Bank Act, 2058, the Bank and Financial Institution Act (BAFIA), 2073, and various NRB directives. Monitoring checks whether these are being followed.
6. Healthy competition and good governance — Monitoring discourages unhealthy competition, over-lending, and concentration of loans in a few hands, and promotes transparency and good corporate governance.
7. Protection of the interest of shareholders and the government — It safeguards the investment of shareholders and the revenue and credibility of the government.
8. Early warning and corrective action — Through off-site and on-site supervision, weak banks can be identified in time and corrective action (warning, restriction, restructuring, liquidation) can be taken before the situation becomes serious.

Issues to be considered while monitoring banks and financial institutions

1. Capital adequacy — Whether the bank maintains the minimum paid-up capital and capital fund–to–risk-weighted assets ratio as prescribed by NRB (Basel norms).
2. Asset quality — Classification of loans into pass, sub-standard, doubtful and bad (non-performing assets), and whether loan loss provisions have been made properly.
3. Management quality — Competence, honesty and independence of the board of directors and management; whether related-party (insider) lending is within limits.
4. Earnings and profitability — Whether profit is genuine or created by window dressing; level of non-performing loans, spread rate, operating expenses and productivity.
5. Liquidity — Whether the bank can meet depositors' withdrawals on demand; maintenance of cash reserve ratio (CRR), statutory liquidity ratio (SLR) and liquid assets.
6. Sensitivity to market risk — Exposure to interest rate risk, exchange rate risk and investment risk.
7. Compliance with laws, directives and prudential norms — Observance of NRB directives, anti-money laundering rules, and reporting requirements.
8. Internal control and risk management system — Strength of internal audit, credit policy, recovery policy and management information system.
9. Corporate governance and transparency — Timely and true disclosure of financial statements, audit reports and other information to the public.
10. Consumer protection — Fair treatment of customers, reasonableness of service charges and interest rates, and an effective grievance-handling mechanism.
11. Use of supervisory tools and methods — Proper mix of off-site surveillance (analysis of returns) and on-site inspection, use of CAMELS/CAS ratings, and follow-up on past inspection reports.
12. Prompt corrective action and legal enforcement — Whether timely action is taken against defaulting promoters, directors and borrowers, and whether the monitoring is free from political and personal influence.

Conclusion — Regular monitoring is not merely a legal formality; it is the protective shield of the depositors, the banking system and the national economy. Therefore, monitoring should be continuous, risk-based, transparent and strictly according to the prevailing laws and prudential norms.

Information technology (IT) has become the backbone of modern banking, transforming it from a manual, branch-based system into a fast, accurate and round-the-clock service delivery mechanism. Its role can be explained under the following points:

1. Core Banking System (CBS): IT enables all branches of a bank to be connected to a single central server, so a customer can deposit or withdraw money from any branch. Transactions are updated in real time, which removes the need for manual ledgers and reconciliation.

2. Anywhere and Anytime Banking: Through ATMs, debit/credit cards, mobile banking and internet banking, customers can check balance, transfer funds, pay bills and make purchases 24 hours a day, 7 days a week, without visiting a branch.

3. Speed and Accuracy in Transactions: IT systems process thousands of transactions per second with high accuracy. Electronic Funds Transfer (EFT), Real Time Gross Settlement (RTGS) and connectIPS allow instant interbank transfers, reducing the time and cost of clearing cheques.

4. Digital Payment and Payment Gateways: Technologies such as QR code payment, mobile wallets, POS terminals and online payment gateways have made cashless transactions possible. This supports financial inclusion and reduces the risk of handling physical cash.

5. Record Keeping and Accounting: Computerised accounting software automatically posts entries, prepares ledgers, trial balances and financial statements. This reduces the workload of cashiers and accountants and minimises arithmetic errors.

6. Customer Service and CRM: IT tools such as Customer Relationship Management (CRM) systems, SMS/email alerts, IVR (interactive voice response) and chatbots provide quick information to customers and help banks understand customer needs.

7. Risk Management and Fraud Control: IT helps in detecting suspicious transactions, monitoring money laundering, maintaining audit trails and applying encryption and multi-factor authentication to protect accounts from fraud and cyber-attacks.

8. Decision Making and Management Information System (MIS): MIS and data analytics give management timely reports on deposits, loans, liquidity and profitability, which support better planning and policy decisions.

9. Financial Inclusion: Branchless banking, biometric smart cards and mobile banking extend banking services to remote rural areas where opening a physical branch is not economical.

10. Cost Reduction: IT reduces paperwork, staff workload and branch operating costs, while increasing productivity and profitability of the bank.

Conclusion: Thus, IT has made banking more efficient, accessible, secure and customer-friendly. However, it also brings challenges such as cyber-crime, system failure and the need for skilled manpower and strong data protection laws.