Banking and Financial Institutions

Banking instruments commonly used in Nepal and their importance

1. Cheque — A written order by an account holder directing the bank to pay a specified sum to a named person or bearer. In Nepal, cheques are governed by the Negotiable Instruments Act, 2034 (1977). Types: bearer, order, crossed, and account-payee cheques. Importance: safest and cheapest means of payment for large transactions; provides legal proof of payment; reduces the need to carry cash.

2. Draft (Bank Draft / Demand Draft) — An instrument issued by a bank branch on another branch or bank, payable at a distant place. Importance: used for inter-city and inter-bank remittances; the payee is assured of payment because the issuing bank itself is the payer; no risk of dishonour as in a personal cheque.

3. Bill of Exchange — An unconditional written order by a creditor (drawer) on a debtor (drawee) to pay a certain sum to a specified person. Importance: central to trade financing; forms the basis of bills purchased, discounted, and accepted by banks; facilitates domestic and foreign trade on credit.

4. Letter of Credit (L/C) — A bank's guarantee to pay the exporter on behalf of the importer, on presentation of stipulated documents. Importance: the backbone of Nepal's foreign trade; removes the exporter's risk of non-payment and the importer's risk of non-delivery; enables trade with unknown parties.

5. Promissory Note — A written unconditional promise by one person to pay a certain sum to another. Importance: evidence of debt; used in lending and in inter-bank transactions.

6. Bank Guarantee — A bank's undertaking to pay a beneficiary if the applicant fails to perform a contractual obligation. Importance: used in contracts, tenders, and customs; substitutes the bank's credit for the customer's.

7. Remittance Instruments (Telegraphic/Electronic Transfer and Money Transfer) — Funds sent through banks and licensed money transfer operators by telegraphic or electronic transfer, SWIFT, or remittance companies, in place of informal channels such as hundi, which is an unofficial and unlawful route in Nepal. Importance: channels remittances from abroad into the formal banking system; supports the balance of payments.

8. Bills of Lading and Other Trade Documents — Though not strictly negotiable instruments, they accompany L/Cs. Importance: title to goods and proof of shipment.

9. Debit/Credit Cards, ATM Cards, Mobile and Internet Banking — Modern electronic instruments. Importance: convenience, 24-hour access, reduced branch load, financial inclusion.

10. Treasury Bills and Development Bonds — Short- and long-term government securities issued through Nepal Rastra Bank. Importance: instruments of open market operations and government borrowing; provide safe investment avenues to banks.

Importance in the Nepalese context:

• Mobilisation of savings and credit — instruments channel idle funds into productive use.
• Safe and speedy remittance — critical for a remittance-dependent economy.
• Trade facilitation — L/Cs and bills of exchange make import-export possible with reduced risk.
• Monetary management — Nepal Rastra Bank uses T-bills and bonds to control liquidity and credit.
• Financial inclusion — cards, mobile banking, and branchless banking extend services to rural areas.
• Reduction of cash transactions — lowers the risk of theft, forgery, and black money.
• Economic development — efficient payment and credit systems support investment, employment, and GDP growth.

In short, banking instruments are the lifeline of Nepal's financial system: they ensure safety, speed, and trust in transactions, support trade and remittances, and give the central bank the tools to manage the economy.