Cheque — meaning: A cheque is a written, unconditional order drawn by a customer (drawer) on the bank (drawee) where he/she maintains an account, directing the bank to pay a certain sum of money to a specified person or to the bearer. It is a negotiable instrument under the Negotiable Instruments Act, 2034, and is the most common means of making payment through a bank account.

Points a bank employee must pay attention to while paying a cheque:

1. Genuineness of the cheque — The cheque form must be the bank's own genuine form, not altered, overwritten or erased in any material part.
2. Date — The cheque must be dated. A stale cheque (older than 6 months) or a post-dated cheque should not be paid without proper authority.
3. Signature — The drawer's signature must tally exactly with the specimen signature on record; if in doubt, refer to the supervisor.
4. Sufficient balance — Confirm that the account has adequate balance or an overdraft limit to honour the cheque.
5. Proper endorsement — In case of a crossed or order cheque, the endorsement and its continuity must be verified; the identity of the presenter should be checked.
6. No material alteration — Any alteration in amount, name or date must bear the drawer's full signature; otherwise the cheque is returned.
7. Stop payment / legal order — Check whether payment has been stopped by the drawer or the account is frozen by a court or other competent authority.
8. Crossing — If the cheque is crossed, payment must be made only through a bank account, not across the counter.
9. Account status — The account must be operative (not dormant, blocked or closed) and free from any lien or hold.
10. Posting and records — The payment must be entered in the ledger/system immediately and the cheque retained as a voucher, with initials of the paying officer.

In short, the employee must satisfy himself that the cheque is genuine, properly drawn, endorsed and covered by sufficient balance before making payment, so that the bank is protected from loss and legal liability.

Methods used to detect counterfeit notes

Counterfeit notes are detected mainly by the following methods:

1. Watermark test — Hold the note against light. A genuine note shows a clear watermark (e.g., the portrait of the national figure) that is formed inside the paper itself. In a fake note the watermark is usually printed on the surface, looks dull, or is missing.

2. Security thread test — A genuine note has a thin metallic/dark thread running vertically through the paper. It should appear as a continuous line when held against light and should not be printed on the surface. In counterfeit notes the thread is often drawn or printed and breaks under light.

3. See-through / registration test — When the note is held against light, the design on the front and back should fit exactly into each other (perfect registration). In fake notes the two sides do not align properly.

4. Raised intaglio printing (feel test) — Genuine notes are printed by intaglio process, so the portrait, denomination numerals and some text feel rough and raised when rubbed with the finger. Counterfeit notes feel smooth and flat.

5. Latent image / hidden image test — Tilting the note at eye level reveals a hidden denomination or symbol in the latent image area. This is absent or unclear in fake notes.

6. Micro-lettering test — Very small letters/numbers printed on the note can be read only with a magnifying glass. In fake notes these appear as blurred lines or dots.

7. Ultraviolet (UV) light test — Under UV lamp, genuine notes show specific fluorescent fibres and glowing elements in fixed places, while the paper itself does not glow. Fake notes either glow all over or show no correct fluorescence.

8. Magnetic ink test — Some denominations use magnetic ink in certain parts; a magnetic detector confirms its presence. Counterfeit notes fail this test.

9. Serial number and colour-shift ink check — Serial numbers must be in the correct font, colour and sequence, and colour-shifting ink (if used) must change shade on tilting. Irregular serial numbers or non-shifting ink indicate a fake note.

10. Physical comparison — Comparing the suspect note with a known genuine note of the same denomination for size, paper quality, print sharpness and edge cutting.

Key security measures applied in cash handling

1. Dual control / joint custody — Cash is counted, handled and stored by at least two authorised staff members together; no single person has sole access.

2. Segregation of duties — The person receiving cash, the person recording it and the person reconciling it are kept separate to prevent fraud.

3. Daily tallying and reconciliation — Cash is counted at the close of each day and matched with the cash book/ledger; differences are reported immediately.

4. Secure storage — Cash is kept in a strong room, safe or vault with restricted access, locked and alarmed, and the key/combination is held only by authorised officials.

5. Limits on cash holding — A maximum cash balance (cash limit) is fixed for the counter and branch; excess cash is transferred to the vault or remitted to the head office/currency chest.

6. Use of cash counting and detection machines — Notes are counted and checked on counting machines with UV and magnetic sensors to detect counterfeits quickly.

7. Proper packing and sealing — Cash bundles are packed, labelled and sealed as per denomination; seal numbers are recorded before dispatch or receipt.

8. Armed guard and CCTV surveillance — Strong room and counter areas are covered by CCTV and guarded, with restricted entry of outsiders.

9. Insurance and transit security — Cash in transit is insured and carried in a secured vehicle with armed escort and route secrecy.

10. Staff accountability and rotation — Duties are rotated, staff are verified, and surprise checks/audits are conducted by internal and external auditors.

11. Reporting and record keeping — Every receipt and payment is supported by vouchers and entered in the system; counterfeit notes detected are impounded and reported to Nepal Rastra Bank/police as per rules.

Digital Filing System

Digital filing system refers to the electronic storage, organisation, and management of documents and records in a computerised form instead of maintaining them in paper files. Documents such as account opening forms, KYC details, loan agreements, transaction records, and reports are scanned or created electronically and stored in a structured database or document management system (DMS), where they can be retrieved, searched, and shared instantly.

Importance in Modern Banking

1. Speed and Easy Retrieval – Any document can be searched and accessed within seconds using keywords, account numbers, or dates, which speeds up customer service and internal decision-making.

2. Space and Cost Saving – It eliminates the need for large storage rooms, cupboards, and paper, reducing the cost of stationery, printing, and physical storage.

3. Data Security and Confidentiality – Access is controlled through passwords, user rights, and encryption, so only authorised staff can view or modify records. This protects customers' financial information better than paper files, which can be lost, stolen, or damaged.

4. Accuracy and Reliability – Digital records reduce errors of misfiling and duplication. Backup copies can be kept in separate servers or cloud storage, so records survive fire, flood, or other disasters.

5. Regulatory Compliance and Audit – Nepal Rastra Bank and other regulators require banks to maintain records for specified periods. A digital system makes it easy to produce accurate records during audits, inspections, and legal proceedings.

6. Efficiency in Operations – Multiple staff members can access the same document simultaneously from different branches, supporting loan processing, remittance, and reporting without delay.

7. Support to Digital Banking – Online banking, mobile banking, and ATM services depend on accurate electronic records. A digital filing system provides the base for such paperless, real-time banking.

Conclusion: A digital filing system makes banking faster, safer, cheaper, and more transparent. For a modern bank like Nepal Bank Limited, it is not merely a convenience but a necessity for efficient service delivery, strong internal control, and compliance with regulatory requirements.

Payment System

A payment system is the set of institutional arrangements, rules, procedures, and technological infrastructure through which funds are transferred from a payer to a payee to settle financial transactions. It includes the participants (banks, financial institutions, central bank, clearing houses), the instruments (cash, cheques, cards, digital wallets), and the channels (branch counters, ATMs, internet, mobile) that together enable the transfer of monetary value. In Nepal, the payment system is regulated and operated under the Nepal Rastra Bank Act, 2058 and the Payment and Settlement Act, 2075, with Nepal Rastra Bank (NRB) as the regulator and operator of the core clearing and settlement systems.

Major instruments used in payment systems

1. Cash — Currency notes and coins issued by NRB. It is legal tender, requires no intermediary, and settles instantly, but is unsuitable for large or remote transactions.

2. Cheque — A written order directing a bank to pay a specified sum from the drawer's account to the payee. It is the traditional instrument for both retail and corporate payments and is cleared through the Nepal Clearing House Ltd. (NCHL) or NRB's clearing system.

3. Drafts / Payment Orders / Traveler's Cheques — Bank-issued instruments where the bank itself promises to pay. They are safer than personal cheques and are used for remittances and payments to parties without an account relationship.

4. Payment Cards — Debit cards, credit cards, and prepaid cards. Debit cards draw funds directly from the customer's account; credit cards allow payment on credit within a sanctioned limit; prepaid cards are loaded in advance. They are used at POS terminals and ATMs and are settled through card networks.

5. Electronic Funds Transfer (EFT) / Direct Debit and Credit — Bulk, file-based transfers used mainly for salary payments, dividends, pensions, and utility bill collections.

6. Real Time Gross Settlement (RTGS) — Used for high-value, time-critical interbank payments, settled individually and irrevocably in central bank money.

7. Real Time Retail Payment (RTSP) / connectIPS — Instant, round-the-clock retail transfers between accounts of different banks, including QR-code based payments.

8. Mobile Banking and Digital Wallets — Transactions initiated through mobile apps or wallets (e.g., eSewa, Khalti, IME Pay), linked to bank accounts or pre-funded balances.

9. Remittance Instruments — Including hundi (informal), and formal channels such as SWIFT-based bank transfers, money transfer operators, and digital remittance services.

Importance of these instruments in the payment system

• Efficiency and speed — Electronic instruments such as RTGS and RTSP settle transactions within seconds, reducing the time and cost of moving funds compared to cash or paper cheques.
• Safety and security — Cheques, cards, and digital channels leave an audit trail, reduce the risk of theft or loss associated with carrying cash, and enable authentication through PINs, OTPs, and digital signatures.
• Financial inclusion — Mobile banking, wallets, and QR payments extend payment services to rural and unbanked populations, supporting NRB's goal of universal access to finance.
• Support to trade and commerce — Reliable instruments such as drafts, EFT, and cards facilitate domestic and cross-border business transactions, enabling timely payments to suppliers and employees.
• Monetary and economic stability — Formal payment instruments channel remittances and savings into the banking system, improve liquidity management, and give NRB better oversight of money flows.
• Reduced reliance on cash — Digital instruments lower the cost of printing, handling, and transporting currency, and help curb informal transactions and money laundering.

In short, payment instruments are the operational backbone of the payment system: they determine how quickly, safely, and inclusively value can be transferred between parties, and their continuous modernization is essential for a stable and efficient financial system.

Importance of Office Layout in Service Delivery (5 marks)

Meaning: Office layout refers to the arrangement of physical facilities — counters, desks, equipment, seating, walkways and service points — within an office so that work flows smoothly and customers are served efficiently.

Importance in service delivery:

1. Smooth workflow: A proper layout places related activities in a logical sequence (e.g., token counter → deposit counter → cash counter), reducing unnecessary movement of staff and customers.
2. Faster service: Easy accessibility of files, computers and cash drawers near the service point reduces the time taken per transaction, so more customers can be served.
3. Reduces congestion and queues: Separate counters for deposits, withdrawals, remittances and enquiries spread the customer load and shorten waiting lines.
4. Comfort and convenience: Adequate seating, lighting, ventilation and clean space make customers feel at ease while waiting.
5. Better supervision and security: A layout with clear visibility allows the supervisor to monitor counters, and separate cash areas with limited entry strengthen security.
6. Effective use of space and resources: Optimum use of available floor space lowers cost and raises productivity of staff and equipment.
7. Good public image: A neat, well-organised office creates a favourable impression on customers and builds trust in the bank.

How it helps to retain customers in the banking sector (my opinion):

In banking, the product (money and financial services) is almost the same in every bank, so service quality becomes the main basis of competition. In my opinion, office layout directly influences customer retention in the following ways:

• Less waiting time: When counters are well placed and adequate in number, customers finish their work quickly. A customer who is served promptly is unlikely to shift to another bank.
• Privacy and personal attention: A layout with separate cabins or enclosures for account opening, loan counselling and complaints lets customers discuss their financial matters confidentially, which builds confidence in the bank.
• Comfortable environment: Proper seating, drinking water, air flow and a help desk reduce the irritation caused by long waits, especially for elderly and disabled customers.
• Elderly and disabled friendly: Ramps, low-level counters and clear signage make the bank usable for all, which increases loyalty among such customers.
• Reduced errors and disputes: A systematic layout keeps documents and records within easy reach, so transactions are handled accurately and complaints are fewer.
• Trust and satisfaction: A well-planned, secure and attractive office makes the customer feel valued. Satisfied customers not only stay with the bank but also recommend it to others, which brings new business.

Conclusion: Office layout is not merely a physical arrangement; it is a tool of service quality. In the banking sector, where competition is intense and customers are highly price- and time-sensitive, a good layout reduces waiting time, protects privacy, ensures comfort and security, and thereby creates satisfaction — and satisfied customers are the ones who are retained.

Nepal Bank Limited (NBL), established in 1937 AD (2000 BS), is Nepal's first commercial bank. It is a Class "A" bank with majority government ownership. Its financial status on the main indicators is as follows (figures are approximate and vary by fiscal year; see the latest annual report).

Conclusion: NBL is stable and satisfactory. Capital, deposits and liquidity are sound and NPL is controlled, but profitability is only moderate. It needs to focus on high-yield lending, cost control, recovery of loans and digital banking.

Basel-III: Introduction, Importance and its Relation to Risk Management in Banks

1. Introduction to Basel-III

Basel-III is a comprehensive set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) under the Bank for International Settlements (BIS), Basel, Switzerland. It was introduced in 2010 (endorsed at the G20 Seoul Summit) and came into effect from 2013, with full implementation phased up to 2019 (some buffers extended to 2023). It succeeded Basel-I (1988) and Basel-II (2004).

Basel-III was formulated mainly in response to the Global Financial Crisis of 2007–08, which exposed serious weaknesses in banks' capital base, liquidity position and risk management practices. Its core objective is to strengthen the regulation, supervision and risk management of banks by improving their ability to absorb shocks arising from financial and economic stress.

Basel-III rests on three pillars:

• Pillar 1 – Minimum Capital Requirements: Prescribes minimum capital ratios, liquidity standards and leverage limits.
• Pillar 2 – Supervisory Review Process: Empowers supervisors to assess banks' internal capital adequacy and risk management.
• Pillar 3 – Market Discipline: Requires public disclosure of risk and capital information to bring transparency.

Key elements of Basel-III:

In Nepal, Nepal Rastra Bank (NRB) has implemented Basel-III norms for commercial banks (fully from 2015/16, with buffers phased in), requiring a minimum CRAR of 11% (including buffers) and CET1 of 8.5% for commercial banks.

2. Importance of Basel-III in the Banking Sector

1. Stronger capital base: It raises both the quantity and quality of capital (emphasis on CET1 – common equity), so banks can absorb losses without collapsing.
2. Liquidity discipline: LCR and NSFR ensure banks hold sufficient high-quality liquid assets to survive short-term and long-term stress.
3. Reduces systemic risk: By curbing excessive leverage and pro-cyclical lending, it protects the banking system from contagion and collapse.
4. Better risk management: It promotes use of internal models, stress testing and proper risk-weighting of assets.
5. Transparency and market discipline: Pillar 3 disclosures allow depositors, investors and regulators to judge a bank's soundness.
6. Protects depositors and public confidence: A well-capitalised, liquid bank is safer for depositors' money and sustains trust in the financial system.
7. International harmonisation: It creates a level playing field for banks operating across borders and facilitates cross-border supervision.
8. Supports economic stability: A stable banking sector channels credit smoothly, supporting growth and reducing the frequency of banking crises.

3. Relation of Basel-III to Risk Management in Banks

Basel-III is essentially a risk-based regulatory framework; each of its standards is designed to address a specific category of risk.

(a) Credit Risk

Credit risk is the risk of loss when a borrower or counterparty fails to meet its obligation. Basel-III addresses it through:

• Risk-weighted assets (RWA): Different assets are assigned risk weights (e.g., government securities low, unsecured loans high), so capital is held in proportion to credit risk.
• Standardised Approach / Internal Ratings-Based (IRB) Approach: Banks with sound systems may use internal models to measure Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD).
• Higher capital for risky exposures: Loans to unrated corporates, real estate and high-risk sectors attract higher capital.
• Concentration limits and large exposure rules: Prevent over-exposure to a single borrower or sector.
• Stress testing: Banks assess how credit portfolios behave under adverse scenarios.

(b) Market Risk

Market risk is the risk of loss from changes in market prices – interest rates, exchange rates, equity prices and commodity prices. Basel-III deals with it through:

• Capital charge for trading book exposures using Standardised Measurement Approach or Internal Models Approach (VaR-based).
• Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM) for securitisation and default risk in the trading book.
• CVA (Credit Valuation Adjustment) risk capital for derivative counterparties.
• Liquidity standards (LCR/NSFR) to withstand market stress and funding runs.

(c) Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, people, systems or external events (fraud, cyber-attack, natural disaster). Basel-III addresses it through:

• Operational risk capital charge under Basic Indicator, Standardised or Advanced Measurement Approach.
• Strong governance, internal control and audit systems.
• Business continuity planning and IT security.
• Disclosure of operational risk profile under Pillar 3.

(d) Capital Adequacy

This is the central pillar of Basel-III. Banks must maintain:

• CET1 ≥ 4.5%, Tier 1 ≥ 6%, Total Capital ≥ 8% of RWA
• Capital Conservation Buffer 2.5% and Countercyclical Buffer 0–2.5%
• Leverage Ratio ≥ 3% to limit balance-sheet build-up
• Capital buffers ensure banks build capital in good times to absorb losses in bad times.

(e) Financial Stability

Basel-III contributes to financial stability by:

• Making banks more resilient to shocks through higher capital and liquidity.
• Reducing pro-cyclicality (lending booms and busts) via countercyclical buffers.
• Limiting systemic risk from large, interconnected institutions.
• Improving supervision and resolution of weak banks.
• Enhancing market confidence through transparency.

4. Conclusion

Basel-III is a landmark global regulatory framework that strengthens bank capital, liquidity and risk management. It directly links capital requirements to credit, market and operational risks, and thereby promotes the safety and soundness of individual banks as well as the stability of the entire financial system. For Nepal, its effective implementation by NRB helps build a resilient banking sector capable of supporting sustainable economic growth.

Nepal Bank Limited — Introduction, Strengths and Weaknesses

Introduction

Nepal Bank Limited (NBL) is the first bank of Nepal, established on 30 Kartik 1994 BS (15 November 1937 AD) under the Nepal Bank Limited Act, 1994 BS. It was founded under the initiative of Juddha Shumsher Jung Bahadur Rana with an authorized capital of Rs 10 lakh and paid-up capital of Rs 8 lakh 42 thousand. Its first branch outside the Kathmandu Valley was opened in Biratnagar in 1950 AD. The bank remained the sole banking institution of the country until Nepal Rastra Bank was established in 1956 AD. NBL was nationalised in 2013 BS (1956 AD) and later registered as a public limited company under the Companies Act, 2053 BS. It is now a government-owned commercial bank with majority shareholding of the Government of Nepal (about 51%) and Nepal Rastra Bank. Its central office is at Dharmapath, Kathmandu, and it operates through a wide network of branches, ATMs and extension counters across all 77 districts. It provides commercial banking services such as deposits, loans, remittance, trade finance, card services, mobile banking and digital banking. NBL is also the pioneer institution in introducing banking habits, cheque system and formal credit culture in Nepal.

Strengths of Nepal Bank Limited in the Current Situation

1. Oldest and most trusted brand: As the first bank of Nepal, it enjoys strong public trust, goodwill and brand recognition built over more than eight decades.
2. Wide branch network: It has one of the largest branch and ATM networks in the country, giving it strong geographical reach, including rural and remote areas.
3. Government backing: Majority ownership by the Government of Nepal provides financial credibility, depositor confidence and access to state support.
4. Large deposit base and customer base: Its long history has given it a huge number of depositors and borrowers, ensuring a stable and low-cost source of funds.
5. Experienced human resources: It has experienced staff and established internal systems for credit, operations and compliance.
6. Diversified services: It offers a full range of commercial banking services, including digital banking, remittance and trade finance.
7. Role in financial inclusion: It has contributed significantly to extending banking services to unbanked and rural populations.
8. Strong regulatory framework: As a licensed commercial bank under Nepal Rastra Bank, it operates under a well-defined legal and supervisory environment.

Weaknesses of Nepal Bank Limited in the Current Situation

1. High non-performing loans (NPLs): A large volume of bad loans inherited from the past and from directed lending has weakened its asset quality and profitability.
2. Weak capital base: Its capital fund and capital adequacy position are comparatively weaker than those of large private commercial banks, limiting its lending capacity.
3. Low profitability: High operating costs, provisioning for bad loans and low interest spread have kept its profit growth modest.
4. Political and bureaucratic interference: Government ownership often brings political pressure in appointments, lending decisions and management, reducing efficiency.
5. Outdated technology and systems: Compared with modern private banks, its digital infrastructure, core banking and service delivery are less advanced.
6. Poor customer service and branch image: Long queues, slow transactions and less customer-friendly service reduce its competitiveness.
7. Weak recovery mechanism: Recovery of overdue loans is slow due to legal delays and weak follow-up, which further increases NPLs.
8. Skill gap and low motivation of staff: Lack of regular training, modern banking skills and performance-based incentives reduces staff productivity.
9. Strong competition: Private commercial banks with better technology, service quality and marketing have captured a large share of the market, putting NBL under pressure.
10. Weak risk management: Credit appraisal, monitoring and internal control systems are not as strong as required in the present competitive environment.

Conclusion

Nepal Bank Limited is a historic and nationally important institution with a strong brand, wide network and government backing. However, in the current competitive situation, its high NPLs, weak capital base, low profitability, outdated technology and political interference are major challenges. For its long-term survival and growth, NBL should focus on strong recovery of bad loans, capital strengthening, modernization of technology, improvement in customer service, professional management and effective risk control.

Under the Nepal Rastra Bank Act, 2057, Section 4 sets out the objectives of the Bank and Section 5 sets out the functions, duties and powers by which it achieves them.

Specific objectives (Section 4):

• To formulate necessary monetary and foreign exchange policies to maintain price stability and balance of payments stability, for sustainable economic growth.
• To promote stability and liquidity required in banking and financial sectors.
• To develop a secure, healthy and efficient system of payment.
• To regulate, inspect, supervise and monitor the banking and financial system.
• To promote public confidence in the banking and financial system.

Functions, duties and powers to achieve them (Section 5):

1. Formulate and implement monetary and foreign exchange policies.
2. Issue and manage banknotes and coins.
3. Act as banker, adviser and financial agent of the Government of Nepal.
4. Act as banker to banks and financial institutions and as lender of last resort.
5. License, regulate, inspect and supervise banks and financial institutions.
6. Manage foreign exchange reserves and regulate foreign exchange transactions.
7. Develop and regulate the payment and settlement system.
8. Issue directives, conduct research and publish statistics.
9. Perform other functions as prescribed by law.

Banking offence: Under the Banking Offence and Punishment Act, 2064 (2008), a banking offence is an act declared punishable by the Act, such as banking business without a licence, obtaining or granting a loan through false or forged documents, misusing a loan, embezzling the funds of a bank or financial institution, obstructing inspection, or leaking confidential information. Such acts harm depositors and the stability of the financial system.

Four penalties (the exact amount and term depend on the offence and its seriousness):

1. Fine - a fine, often linked to the amount involved in the offence.
2. Imprisonment - a prison term from a short period up to several years, according to the gravity of the offence.
3. Fine and imprisonment together - the court may impose both for serious offences.
4. Recovery and forfeiture - the amount misappropriated is recovered from the offender, and property may be confiscated or attached. The offender can also be barred from holding a post in a bank or financial institution, and a bank or institution found guilty may lose its licence.

Under the Negotiable Instruments Act of Nepal, a negotiable instrument (cheque, bill of exchange or promissory note) is dishonoured when the person liable to accept or pay it refuses or fails to do so when it is duly presented. There are two kinds of dishonour.

1. Dishonour by non-acceptance (bill of exchange): it is dishonoured when

• the drawee refuses to accept it when presented;
• the drawee cannot be found after reasonable search;
• the drawee is insolvent or dead; or
• acceptance is qualified in a way the holder has not agreed to.

2. Dishonour by non-payment: a promissory note, bill or cheque is dishonoured when

• the maker, acceptor or drawee fails or refuses to pay on the due date when duly presented;
• the maker or acceptor cannot be found at the place of payment after reasonable search; or
• the maker or acceptor becomes insolvent or dies and nobody is available to pay.

Cheques: a bank returns a cheque unpaid for reasons such as insufficient funds, signature mismatch, stale cheque, stopped payment or closed account. Penalties for cheque dishonour are provided separately by the Cheque Dishonour (Offence and Punishment) Act, 2064.

Effect: the holder must give notice of dishonour to the drawer and endorsers within the time allowed, and may then sue the parties liable for the amount, interest and costs.

1. Concepts

Financial Access — The availability of affordable, convenient and appropriate formal financial services (savings, credit, insurance, remittance, digital payment) to people and enterprises. It is measured by physical reach — number of branches/ATMs per population, distance to the nearest service point, and the share of adults holding an account.

Financial Literacy — The knowledge, skill, attitude and behaviour that enable a person to understand financial products (interest, inflation, loan terms, insurance, digital fraud) and to take sound financial decisions such as budgeting, saving and borrowing wisely.

Financial Inclusion — The broader goal of bringing the unbanked and under-served into the formal financial system so that they can access and use suitable services at a reasonable cost, with dignity and consumer protection. Financial access and financial literacy are its two main pillars — access without literacy leads to misuse and over-indebtedness, while literacy without access leaves people with no product to use.

2. Problems in Nepal

Related to financial access

• Difficult Himalayan and hilly geography; many remote wards still lack a bank branch, ATM or agent point.
• High cost of delivering services in sparsely populated areas, so banks prefer urban centres.
• Low income and lack of collateral or acceptable documents (citizenship, land ownership) for loans.
• Weak digital access — poor internet, low smartphone ownership, load-shedding and power problems.
• Social exclusion of women, Dalits, Janajatis and illiterate groups; many accounts remain dormant (opened only for remittance or subsidy).

Related to financial literacy

• Low overall financial literacy — NRB's Financial Literacy Survey (2023) placed the score at only around 57 per cent, and much lower among women and rural people.
• Weak awareness of banking products, insurance, digital wallets, interest calculation and loan conditions.
• Continued reliance on dhukuti, gold and moneylenders at very high interest rates.
• Low insurance penetration and poor understanding of deposit insurance and consumer rights.
• Awareness materials mostly in English/Nepali; local languages and low education levels limit reach.
• Rising digital fraud, phishing and OTP fraud due to lack of digital financial literacy.

3. Measures

To improve access

• Expand branch, branchless banking and agent (banking correspondent) networks to every local level; use solar-powered ATMs and mobile banking vans in remote areas.
• Simplify KYC and account opening for small-value accounts; accept alternative identity documents.
• Expand priority-sector and subsidized lending to agriculture, small enterprises and deprived groups.
• Strengthen digital infrastructure and low-cost mobile/digital payment services.

To improve literacy

• Run nationwide financial literacy campaigns through FM radio, local languages, street drama and school/college curricula.
• Train teachers, local leaders and cooperative staff as financial literacy promoters.
• Conduct women- and youth-focused training on budgeting, saving, borrowing and digital fraud safety.
• Strengthen consumer protection, grievance-handling and deposit insurance awareness.

Policy level — Effective implementation of the National Financial Inclusion Strategy with coordination among Nepal Rastra Bank, commercial banks, microfinance institutions and cooperatives, supported by regular monitoring and impact evaluation.

Before a bank or financial institution can be established under the Banks and Financial Institutions Act, 2073, the promoters must complete the following documents and procedures.

1. Application to Nepal Rastra Bank (NRB) in the prescribed form, with:
   • the draft Memorandum of Association and Articles of Association;
   • a feasibility study and business plan;
   • details of promoters (citizenship, PAN, tax clearance, assets and liabilities) and proposed directors and chief executive;
   • details of share subscription and proof of the paid-up capital deposit.
2. Minimum paid-up capital, as set by NRB for each class and deposited in a bank account. The approximate current figures are Rs 8 arba for Class "A" commercial banks, Rs 2.5 arba for national-level Class "B" development banks, and Rs 80 crore for Class "C" finance companies.
3. Fit and proper test of promoters and directors, with no legal disqualification.
4. Approval or letter of intent from NRB, then registration of the company at the Office of the Company Registrar and PAN registration.
5. Licence from NRB after the legal and capital requirements are met. The institution must begin operations within the period given.
6. Other requirements: name approval, AML/KYC compliance and a reserve fund.

Why banks and financial institutions should be monitored regularly

1. Protection of depositors' money — Banks hold public savings. Regular monitoring ensures that deposits are safe and that the bank maintains enough liquid assets to repay depositors on demand.
2. Maintenance of financial stability — Banks are interlinked. The failure of one bank can spread to others and cause a systemic crisis. Supervision keeps the whole financial system stable.
3. Prevention of financial crimes — Monitoring detects money laundering, terrorist financing, fraud, insider lending and misuse of public funds at an early stage.
4. Compliance with laws and directives — Banks must follow the NRB Act, BAFIA, directives on capital adequacy, loan classification, provisioning and interest rates. Monitoring verifies this compliance.
5. Sound credit and investment policy — It checks whether loans are granted on the basis of capacity to pay, proper security and productive use, and prevents concentration of loans in a few hands or sectors.
6. Public confidence — A well-supervised banking system keeps people's trust in banks, which is essential for saving mobilisation and economic development.
7. Healthy competition — Supervision discourages unfair practices such as unhealthy interest-rate competition and ensures a level playing field.

Issues to be considered while monitoring banks and financial institutions

1. Capital adequacy — Whether the bank maintains the prescribed capital fund (paid-up capital, reserves, retained earnings) against risk-weighted assets as required by Basel norms.
2. Asset quality — Classification of loans into pass, substandard, doubtful and bad, and adequacy of loan-loss provisioning; level of non-performing loans.
3. Management quality — Competence, integrity and independence of the board of directors and management; internal control and corporate governance.
4. Earnings — Profitability, spread rate, return on assets and equity, and whether income comes from sustainable sources rather than risky lending.
5. Liquidity — Maintenance of cash reserve ratio, statutory liquidity ratio and other liquid assets to meet depositors' withdrawal demands.
6. Sensitivity to market risk — Exposure to interest-rate risk, foreign-exchange risk and investment risk.
7. Internal control and audit — Effectiveness of internal audit, risk management and compliance functions.
8. Legal and regulatory compliance — Observance of NRB directives, anti-money-laundering rules, and reporting requirements.
9. Consumer protection — Fair treatment of customers, transparency in service charges and grievance-handling mechanism.
10. Ownership and lending concentration — Prevention of related-party lending and excessive credit concentration.

Conclusion — Regular monitoring by Nepal Rastra Bank through off-site surveillance and on-site inspection is necessary to keep banks safe, sound and trustworthy; while monitoring, the supervisor must give balanced attention to capital, asset quality, management, earnings, liquidity and sensitivity (CAMELS) along with legal compliance.

Digitization in the banking sector means the process of converting traditional, paper-based and branch-based banking activities into electronic or digital form by using computers, the internet, mobile phones and other digital technologies. In other words, it is the use of digital tools and platforms to deliver banking products and services without the customer necessarily visiting a branch. Examples include ATM services, mobile banking, internet banking, debit/credit cards, QR code payments, digital wallets, online fund transfers, and digital lending.

Contribution of digitization to customer services:

1. Convenience and anytime-anywhere banking: Customers can check balance, transfer funds, pay bills, and recharge mobiles 24 hours a day, 7 days a week from home or anywhere, without depending on branch opening hours. This saves both time and travel cost.

2. Speed and efficiency: Digital systems process transactions within seconds. Services like real-time fund transfer, instant loan approval, and instant card issuance reduce queues in branches and speed up service delivery.

3. Wider access and financial inclusion: Through mobile banking, QR payments, and branchless banking, even people in remote areas who cannot easily reach a branch can access banking services. This helps bring the unbanked population into the formal financial system.

4. Better security and record-keeping: Features like PIN, OTP, biometric verification, and encryption protect customers' money and data. Every transaction is recorded digitally, so customers can get statements and transaction history easily and errors or frauds can be traced.

5. Variety of services and personalization: Customers can use cards, wallets, online shopping payments, insurance, and utility bill payments from one platform. Banks can also study customer behaviour and offer tailored products, reminders, and offers.

6. Reduced cost and errors: Less paperwork means fewer manual errors and lower transaction costs, and these benefits are partly passed on to customers through lower or free service charges.

Conclusion: Thus, digitization has transformed banking from a time-consuming, branch-bound activity into a fast, convenient, and accessible service. It has improved customer satisfaction by providing safe, easy, and round-the-clock banking facilities, and it continues to play a key role in expanding financial inclusion in Nepal.

Nepal Bank Limited (NBL) manages customer deposits so that it can repay depositors on demand (liquidity) while also earning a return (profitability).

1. Statutory reserves: it keeps the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) required by Nepal Rastra Bank, in cash, balances with NRB and liquid assets.
2. Liquidity management: it holds enough liquid assets to meet withdrawals and monitors liquidity ratios daily.
3. Deposit diversification: it mobilises current, savings and fixed deposits from many customers and areas, so it does not depend on a few large depositors.
4. Prudent lending: it lends to productive and priority sectors (including deprived and agriculture sectors) at interest rates above its cost of funds, within the credit-deposit ratio limit set by NRB, after credit analysis and with collateral.
5. Investment: it places surplus funds in safe and liquid securities such as government bonds and treasury bills.
6. Asset-liability management: it matches the maturity of assets and liabilities to avoid liquidity gaps.
7. Monitoring: it controls non-performing loans through follow-up and recovery and keeps its interest spread positive.

Clearing House

A clearing house is a central institution or arrangement through which banks settle the cheques, drafts and other payment instruments drawn on one another. Instead of each bank separately presenting instruments to every other bank and collecting cash, all member banks meet at one place (or through an electronic system) and settle only the net difference of their mutual claims. In Nepal, Nepal Clearing House Ltd. (NCHL) performs this function under the umbrella of Nepal Rastra Bank, which acts as the settlement bank. The main objectives are to save time and cost, avoid the physical movement of cash, reduce the risk of fraud and error, and ensure prompt and orderly settlement of interbank obligations.

Underlying Processes

1. Presentation of instruments: Each member bank collects the cheques and other instruments deposited by its customers that are drawn on other member banks and presents them at the clearing house (or through the electronic clearing system) in the prescribed clearing session.

2. Exchange and sorting: The presenting bank and the paying (drawee) bank exchange the instruments. The paying bank examines them for signature, balance, date, endorsement and other legal requirements. Instruments that are in order are accepted; those that are defective are returned with reasons in the return clearing.

3. Determination of net position: After the exchange and return, the accounts of all member banks are totalled. Each bank's total receivables are set off against its total payables, and only the net amount payable or receivable by each bank is worked out. This is the essence of the clearing house — multilateral netting.

4. Settlement: The net positions are settled through the settlement accounts maintained by the member banks with the central bank (Nepal Rastra Bank) or through the settlement account of NCHL. The central bank debits the accounts of the net payers and credits the accounts of the net receivers. Settlement may be same-day or as per the clearing cycle (e.g., morning and afternoon sessions).

5. Return and follow-up: Dishonoured instruments are returned to the presenting bank within the stipulated time, and the customer's account is debited or credited accordingly. Records of each clearing session are maintained for audit and reconciliation.

Thus, the clearing house works as a common meeting point and settlement mechanism that makes interbank payments safe, fast and economical.

The Banking Offence and Punishment Act, 2064 (2008) treats the following as banking offences:

1. Unauthorised banking business - carrying on banking or financial transactions without a licence from Nepal Rastra Bank.
2. Accepting deposits without authority - collecting deposits without a licence or after the licence has been suspended or cancelled.
3. Obtaining a loan through false documents - taking a loan with false or forged documents or by misrepresenting facts.
4. Granting a loan through false documents - disbursing a loan on the basis of false or forged documents or statements.
5. Misuse of a loan - using a loan for a purpose other than the one for which it was taken.
6. Embezzlement of bank funds - directors, officials, employees or others misappropriating or causing loss to the funds, deposits or assets of a bank or financial institution.
7. Obstructing inspection or investigation - refusing to provide documents or information required by NRB or an authorised official.
8. Illegal control of a bank - taking over the management of a bank or financial institution illegally.
9. Leaking confidential information - disclosing customer or bank information without legal authority.
10. Non-compliance with NRB orders - failing to follow NRB's orders or directives.
11. Attempt, abetment or assistance in any of the above offences.

Roles of banks in preventing money laundering — 5 marks

Money laundering is the process of hiding the illegal source of money and making it appear legitimate. Banks act as the first line of defence because almost all illegal money must pass through the banking system. Their main roles are:

1. Customer Due Diligence (Know Your Customer): Banks verify the identity, address, occupation and source of income of every customer before opening an account, and update these records from time to time. This stops anonymous or fake accounts.

2. Monitoring transactions: Banks keep a watch on unusual or suspicious transactions — for example, large cash deposits, many small deposits just below the reporting limit, or transactions that do not match the customer's profile.

3. Reporting suspicious transactions: Under the Prevention of Money Laundering Act, 2064 and NRB directives, banks must report suspicious transactions to the Financial Information Unit (FIU) and submit prescribed reports such as the threshold transaction report.

4. Record keeping: Banks must maintain complete records of all transactions and customer identification for at least five years, so that they can be produced to regulators or investigating agencies when required.

5. Compliance and internal control: Every bank must have an AML policy, an AML compliance officer, staff training programmes and internal audit, so that employees can recognise and stop laundering attempts.

6. Reporting and cooperating with authorities: Banks freeze accounts, report to the FIU and assist the police, NRB and other agencies in investigations.

Conclusion: By verifying customers, monitoring and reporting suspicious dealings, and following NRB and FIU rules, banks help detect illegal money at its entry point and protect the integrity of the financial system.

Negotiable Instrument

A negotiable instrument is a written, signed, unconditional document that promises or orders the payment of a certain sum of money to a specified person or to the bearer, and whose ownership can be freely transferred from one person to another by mere delivery or by endorsement and delivery. The transferee who takes it in good faith and for value gets a good title to it, even if the transferor's title was defective. In Nepal, negotiable instruments are governed mainly by the Negotiable Instruments Act, 2034 (1977).

Two Common Types of Negotiable Instruments Used at Nepal Bank Limited

1. Cheque A cheque is a written order drawn by a customer (drawer) on Nepal Bank Limited, directing the bank to pay a certain sum of money to a specified person or to the bearer. It is the most widely used negotiable instrument in banking transactions. The customer can use it to make payments to others, to withdraw cash from the account, or to transfer funds. A cheque may be bearer, order, or crossed. A crossed cheque must be deposited into a bank account and cannot be encashed over the counter, which makes it safer for large payments. A cheque is payable on demand and remains valid for the period prescribed by the bank (generally six months from the date of issue in Nepal).

2. Draft (Bank Draft / Demand Draft) A bank draft is an instrument issued by Nepal Bank Limited itself, ordering its another branch or office to pay a certain sum of money to a specified person on demand. The bank first collects the amount from the customer along with a commission and then issues the draft. Since it is issued and guaranteed by the bank, it is a very secure means of transferring money, especially for payments to distant places or to parties not personally known to the customer. The customer can use a bank draft for remitting funds, paying bills, or making payments where a personal cheque may not be acceptable.

Conclusion Cheques and bank drafts are the two most common negotiable instruments used by customers of Nepal Bank Limited. Both are transferable, payable on demand, and provide a convenient and secure medium for settling monetary transactions.

Commercial banks are profit-making financial institutions licensed by Nepal Rastra Bank under the Bank and Financial Institutions Act, 2073 (2016). They are the backbone of Nepal's financial system. Their major functions are:

1. Primary Functions

(a) Accepting Deposits

• Current deposits: Withdrawn by cheque anytime, no interest paid, meant for traders and institutions.
• Saving deposits: Small amount can be deposited and withdrawn; nominal interest is paid.
• Fixed deposits: Deposited for a fixed period at a higher rate of interest; withdrawn only after maturity.
• Call deposits / recurring deposits: Deposited regularly or repayable on demand.

(b) Advancing Loans

• Overdraft: Current account holders may withdraw more than their balance up to a sanctioned limit.
• Cash credit: Loan given against the security of stock or assets.
• Demand loan: Short-term loan repayable on demand, secured by movable or immovable property.
• Term loan: Given for a fixed period (short, medium or long) for trade, industry, agriculture and housing.
• Consumer loan / hire purchase: For buying vehicles, household goods, education and health needs.

(c) Creating Credit Banks create derivative deposits while advancing loans, thus increasing the money supply in the economy.

2. Secondary Functions

(a) Agency Functions

• Collecting cheques, drafts and bills on behalf of customers.
• Making payments of rent, insurance premium, loan instalments and taxes.
• Transferring money from one place to another through drafts, telegraphic transfers and remittances.
• Acting as trustee, executor and attorney of customers.
• Purchasing and selling shares, debentures and government securities for customers.

(b) General Utility Functions

• Issuing letters of credit, bank guarantees and traveller's cheques.
• Providing safe deposit lockers for valuables and documents.
• Exchanging foreign currency and dealing in foreign exchange business.
• Discounting bills of exchange and providing merchant banking and consultancy services.
• Acting as a referee and providing credit information to customers.

3. Other Functions in the Nepalese Context

• Mobilising savings: Collecting scattered savings and investing them in productive sectors, thereby promoting capital formation.
• Financing priority sectors: As directed by Nepal Rastra Bank, they must lend a fixed percentage to agriculture, small and medium enterprises, energy and tourism.
• Branch expansion: Opening branches in rural and remote districts to extend banking access.
• Agent of government: Collecting revenue, disbursing salaries and pensions, and investing in treasury bills and development bonds.
• Promoting trade and industry: Financing imports, exports and industrial ventures, and issuing letters of credit.
• Employment and GDP: Creating employment and contributing to national income.
• Modern banking services: Providing ATM, mobile banking, internet banking, QR payment and digital wallet services.

Conclusion Commercial banks in Nepal mobilise deposits, supply credit, operate the payment system, act as agents of customers and the government, and provide modern utility services. Through these functions they accelerate capital formation, support priority sectors and contribute significantly to the country's economic development.

Systemic risks in the banking sector due to over competition and aggressive expansion

Systemic risk is the risk that the failure or distress of one bank, or a common shock hitting many banks at once, spreads through the whole financial system and disrupts the real economy. In Nepal's banking sector, intense competition among a large number of banks and aggressive expansion of branches, lending and deposits have created several such risks:

1. Credit risk concentration and deterioration in asset quality To grow the loan book quickly, banks lower credit standards, relax collateral requirements and lend to borrowers with weak repayment capacity. Credit is concentrated in a few sectors — real estate, housing, hire purchase, share loans and a handful of large borrowers. When any one of these sectors slows down, many banks suffer losses at the same time. The rise in non-performing loans (NPL) in recent years is evidence of this.

2. Liquidity risk and deposit market distortion Aggressive expansion of branches and balance sheets forces banks to compete for deposits by offering higher interest rates. When credit growth outpaces deposit growth, banks become dependent on short-term and volatile funds. A run or sudden withdrawal by large depositors can leave a bank short of liquid assets, and distress in one bank can trigger panic withdrawals in others — a classic contagion effect.

2. Interest rate risk and squeezed margins Over competition compresses the spread between lending and deposit rates. To protect profits, banks take on riskier loans or mismatch the maturity of assets and liabilities (borrowing short and lending long). A sudden change in interest rates or in the base rate then hits the capital and earnings of many banks simultaneously.

4. Concentration and "too many banks" risk Nepal has a large number of commercial banks relative to the size of its economy. Many are small and lack the capital, technology and skilled manpower to compete. Aggressive expansion stretches management capacity, weakens internal control and increases operational and fraud risk. If several small banks fail together, depositor confidence in the whole system is shaken.

5. Herd behaviour and common exposure Banks copy each other — all rush into the same sectors, the same products and the same borrowers. This herding means that a shock to one common exposure (for example, a real estate price fall or a share market crash) affects the entire banking system rather than a single institution.

6. Contagion through interbank and payment linkages Banks are linked through interbank lending, the interbank payment system and common depositors. Failure of one large or highly connected bank can cause losses to other banks and block the payment system, spreading the problem across the sector.

7. Pro-cyclicality and credit bubbles During good times aggressive lending fuels asset price bubbles; when the cycle turns, banks cut credit sharply, which deepens the downturn. This pro-cyclical behaviour amplifies both booms and busts and increases systemic instability.

8. Regulatory and supervisory strain When expansion is faster than the capacity of Nepal Rastra Bank to supervise, weak banks go undetected. Poor enforcement of capital adequacy, liquidity and concentration limits allows risks to build up silently until they become system-wide.

Conclusion Over competition and aggressive expansion thus create systemic risk through loose credit standards, sectoral concentration, deposit market distortion, thin margins, herd behaviour, contagion and pro-cyclicality. The remedy lies in stronger prudential regulation, effective supervision, consolidation of weak banks, and a growth strategy based on quality of assets rather than speed of expansion.

(b) CRR

Open market operations (OMO) are conducted through repo, reverse repo, and outright sale/purchase of securities. CRR (Cash Reserve Ratio) is a direct monetary policy tool, not an open market operation instrument.

(d) Smart Card

A smart card has an embedded microchip that stores and processes data securely, so it is the technology most commonly used in ATMs (and debit/credit cards) for secure transactions.

Main functions of commercial banks as per the Banks and Financial Institutions Act, 2073 (BAFIA)

BAFIA, 2073 (2017) is the umbrella law that governs the licensing, operation and regulation of banks and financial institutions (BFIs) in Nepal. Under this Act, a commercial bank (Class "A" BFI) is a company licensed by Nepal Rastra Bank to carry on banking business. Its main functions are:

1. Acceptance of deposits A commercial bank may accept deposits from the public through savings accounts, current accounts, fixed deposits and call deposits. Section 49 of BAFIA prohibits a BFI from accepting a deposit of less than Rs 100 or such amount as prescribed, and from accepting deposits without the approval of NRB. Deposits form the main source of bank funds.

2. Lending and investment The bank provides loans, overdrafts, cash credit, bills discounting and project financing to individuals, firms and industries. Section 50 imposes restrictions on credit: a BFI cannot grant credit against the security of its own shares, cannot grant unsecured credit beyond the prescribed limit, and cannot lend more than the prescribed percentage of its capital to a single borrower or a group of related borrowers. The bank also invests in government securities and other approved securities.

3. Payment and remittance services Commercial banks issue cheques, drafts, traveller's cheques and electronic payment instruments, and carry out domestic and foreign remittance, collection of cheques and bills, and safe custody services. They act as agents of customers in making and receiving payments.

4. Foreign exchange business Licensed commercial banks may deal in foreign exchange — buying and selling foreign currency, opening letters of credit, issuing bank guarantees and handling foreign remittance — subject to the Foreign Exchange Regulation Act and NRB directives.

5. Agency functions Banks act as agents of customers and of the government: collecting dividends, interest and rents, paying insurance premiums, taxes and utility bills, underwriting shares, and acting as trustee or executor.

6. Advisory and other services Banks provide financial advice on investment, portfolio management, merger and acquisition, and provide locker facilities, merchant banking and other modern services permitted by NRB.

7. Maintaining financial discipline and compliance Under BAFIA, every BFI must maintain prescribed capital funds (Section 8), maintain a prescribed reserve fund and liquid assets (Sections 55–56), publish audited financial statements, and submit returns to NRB. It must also follow the "know your customer" and anti-money-laundering provisions and cannot engage in activities prohibited by Section 52.

Conclusion Thus, as per BAFIA, 2073, commercial banks mainly perform the functions of mobilising public deposits, extending credit and investment, operating the payment and remittance system, dealing in foreign exchange, acting as agents and advisers, and complying with the prudential and regulatory requirements set by Nepal Rastra Bank.

(a) Formation of the Board of Directors (Nepal Rastra Bank Act, 2058)

The Act vests the general direction and management of the Bank in a Board of Directors. The main provisions are:

• Composition: the Board has six members: the Governor (Chairperson), one Deputy Governor, the Secretary of the Ministry of Finance (ex officio) and three non-executive directors.
• Directors: the three directors are appointed by the Government of Nepal from among experts of high repute in monetary, banking, financial, economic, commercial, accounting or legal fields.
• Term: an appointed director serves for 4 years and may be reappointed once.
• Disqualification: a person cannot be a director if he or she is of unsound mind, insolvent, convicted of a crime involving moral turpitude, a defaulter of a bank or financial institution, a political party office-bearer, or holds an interest in a licensed institution.
• Removal and vacancy: the Government may remove a director for incapacity, misconduct or absence from meetings, after giving a chance to defend. A vacancy is filled for the remaining term in the same way.
• Functions and meetings: the Board formulates monetary and foreign exchange policy, approves the budget and accounts, and oversees the Bank. It meets as often as needed, a majority of members forms the quorum, and decisions are by majority, with the Chairperson holding a casting vote.

(b) Appointment of the Governor

• Appointing authority: the Governor is appointed by the Government of Nepal on the recommendation of a Recommendation Committee headed by the Finance Minister.
• Qualification: a Nepali citizen with at least a Master's degree in economics, banking, finance, commerce, management, accounting, statistics or law, and long experience (about 10 years) in the banking, financial or economic field.
• Disqualification: the same grounds as for directors (insolvency, moral turpitude, loan default, political office, conflict of interest).
• Term: 5 years, with reappointment allowed for only one more term.
• Oath: the Governor takes the oath of office before the President (or the person the Government designates) before assuming charge.
• Remuneration: salary and benefits are fixed by the Government and cannot be reduced during the term.
• Removal: the Government may remove the Governor before the term ends only for specified grounds, such as incapacity, serious misconduct, loss of qualification or breach of duty, and only after giving a reasonable chance to defend.
• Role: the Governor is the chief executive and legal representative of the Bank and chairs the Board.

Risks Associated with Banks and Financial Institutions in Nepal

Banks and financial institutions (BFIs) in Nepal face several types of risks in their day-to-day operations. The major risks are described below:

1. Credit Risk This is the risk of loss arising when a borrower or counterparty fails to repay the loan or meet contractual obligations on time. It is the biggest risk for Nepali BFIs because a large portion of their assets is in the form of loans and advances. Defaults, over-exposure to a single borrower or sector, and weak credit appraisal increase this risk.

2. Liquidity Risk This is the risk that a bank will not have enough cash or liquid assets to meet depositors' withdrawals and other short-term obligations. In Nepal, this risk becomes visible during festive seasons, political instability, or when deposits are withdrawn suddenly. Mismatch between short-term deposits and long-term loans worsens it.

3. Market Risk This arises from changes in market prices such as interest rates and exchange rates. Fluctuation in interest rates affects the bank's net interest income, while depreciation or appreciation of the Nepalese rupee against foreign currencies affects foreign exchange dealings and foreign currency deposits.

4. Operational Risk This is the risk of loss due to failed internal processes, people, systems, or external events. In Nepal, this includes fraud by employees, weak internal control, errors in documentation, computer system failure, and even natural disasters like earthquakes and floods.

5. Capital Adequacy (Solvency) Risk This is the risk that the bank does not have enough capital to absorb unexpected losses. If capital falls below the level required by Nepal Rastra Bank (NRB), the bank may become insolvent and lose public confidence.

6. Reputation Risk This is the risk of damage to the bank's image due to negative publicity, poor customer service, fraud, or regulatory penalties. Loss of reputation leads to loss of depositors and business.

7. Strategic and Compliance Risk Strategic risk arises from wrong business decisions, while compliance risk arises from failure to follow laws, NRB directives, and prudential regulations. Non-compliance invites penalties and restrictions from the regulator.

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Measures to Mitigate These Risks

1. Measures to Mitigate Credit Risk

• Follow a sound credit appraisal and loan approval process before disbursing loans.
• Maintain proper diversification of loans across sectors, borrowers, and regions to avoid concentration.
• Obtain adequate collateral and periodically review its value.
• Conduct regular monitoring, follow-up, and classification of loans as performing, substandard, doubtful, and bad.
• Maintain adequate loan loss provisions as directed by NRB.

2. Measures to Mitigate Liquidity Risk

• Maintain sufficient liquid assets such as cash, bank balances, and government securities.
• Comply with NRB's Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.
• Prepare contingency funding plans and conduct regular liquidity gap analysis.
• Balance the maturity structure of assets and liabilities.

3. Measures to Mitigate Market Risk

• Use asset-liability management (ALM) to manage interest rate exposure.
• Fix prudent limits on foreign exchange exposure and open positions.
• Hedge foreign currency risks where possible and review exchange rate positions daily.

4. Measures to Mitigate Operational Risk

• Strengthen internal control systems and separate duties among staff.
• Conduct regular internal audit, external audit, and surprise checks.
• Install reliable IT systems with data backup and disaster recovery plans.
• Provide regular training to staff and enforce a code of conduct.

5. Measures to Mitigate Capital Risk

• Maintain capital adequacy ratio (CAR) above the minimum prescribed by NRB (currently 11% for commercial banks, including buffers).
• Retain profits and raise capital through rights issues or other sources when needed.
• Follow Basel III norms as adopted by NRB.

6. Measures to Mitigate Reputation and Compliance Risk

• Ensure timely and accurate disclosure of financial information.
• Comply strictly with NRB directives, the Bank and Financial Institutions Act (BAFIA), and other applicable laws.
• Handle customer complaints promptly and maintain transparency.
• Conduct regular compliance audits and adopt a strong corporate governance framework.

Conclusion Thus, Nepali BFIs face credit, liquidity, market, operational, capital, reputation and compliance risks. Through sound credit policy, adequate liquidity and capital, strong internal control, and strict regulatory compliance, these risks can be effectively managed.

Internal Audit vs External Audit

Importance of Auditing in a Bank

1. Verification of financial statements — Confirms that the balance sheet and profit and loss account show a true and fair view of the bank's financial position.
2. Detection of frauds and errors — Banks handle large public deposits; regular audit helps detect misappropriation, forgery and embezzlement early.
3. Safeguarding assets and cash — Auditing checks cash, securities, loans and other assets, ensuring they actually exist and are properly recorded.
4. Strengthening internal control — Audit points out weaknesses in internal control and recommends improvements, reducing the risk of loss.
5. Compliance with laws and NRB directives — Ensures the bank follows the Companies Act, Nepal Rastra Bank Act, directives on capital adequacy, loan classification and provisioning.
6. Protection of depositors' and shareholders' interests — Builds confidence that their money is safe and properly managed.
7. Basis for loan and investment decisions — Audited statements give reliable information to depositors, borrowers, investors and regulators.
8. Aid to management — Provides independent feedback on efficiency and effectiveness, helping management take corrective action.
9. Regulatory supervision — NRB relies on audit reports for supervising banks and taking timely corrective measures.
10. Public confidence and goodwill — A clean audit report enhances the bank's reputation and trustworthiness in the market.

Determination of Interest Rate in the Banking System and the Role of Nepal Rastra Bank

1. Introduction

Interest rate is the price paid by a borrower to a lender for the use of money over a period of time. In the banking system it is the price of credit — the rate at which banks accept deposits and the rate at which they lend. Since interest rate directly affects saving, investment, price level and the balance of payments, its determination is not left entirely to the market; the central bank, Nepal Rastra Bank (NRB), actively influences it through monetary policy.

2. How the Interest Rate is Determined in the Banking System

Interest rate is determined at two levels — at the market level by the demand for and supply of loanable funds, and at the bank level by the cost and risk structure of each bank.

(a) Market forces — demand and supply of loanable funds

• Demand for loanable funds comes from borrowers — traders, industries, government and households. Higher demand for credit pushes the interest rate up.
• Supply of loanable funds comes from depositors and from the central bank's injection of liquidity. Higher supply pulls the interest rate down.
• The equilibrium where demand equals supply gives the market rate of interest. Liquidity in the banking system is the single most important determinant in Nepal — when deposits and remittances rise faster than credit demand, rates fall sharply, and vice versa.

(b) Bank-level factors

• Cost of fund — the average rate a bank pays on its deposits. A bank cannot lend below this cost.
• Operating cost — administrative and management expenses per unit of loan.
• Risk premium — compensation for default risk, which differs by borrower and sector.
• Profit margin — the spread the bank wants to earn.
• Competition — more banks and branches mean keener competition and lower spreads.

(c) Macroeconomic factors

• Inflation (lenders demand a higher nominal rate to protect real return), economic growth and investment demand, government borrowing, and foreign capital inflow/outflow.

3. Role of Nepal Rastra Bank in Determining the Interest Rate

NRB does not fix every rate directly, but it sets the framework within which banks determine rates. Its roles are:

(a) Formulation of monetary policy — NRB issues an annual monetary policy (and mid-term review) setting the stance, the policy rates and the credit growth target. This is the base from which all other rates are derived.

(b) Operating the interest rate corridor — NRB keeps the short-term market rate within a corridor:

The repo rate is the reference rate; the bank rate is the ceiling at which NRB lends to banks, and the deposit collection rate is the floor at which it absorbs liquidity. By shifting these rates, NRB moves the whole structure of deposit and lending rates.

(c) Open Market Operations (OMO) — NRB buys or sells government securities through repo, outright purchase/sale and deposit collection auctions. Buying securities injects liquidity and lowers rates; selling absorbs liquidity and raises rates.

(d) Reserve requirements — By changing the Cash Reserve Ratio (CRR, currently 4%) and the Statutory Liquidity Ratio (SLR, currently 12%), NRB alters the volume of lendable funds. A higher CRR/SLR squeezes credit and pushes rates up; a lower one releases funds and pulls rates down.

(e) Refinancing and special facilities — Concessional refinance at low rates for productive sectors (agriculture, tourism, small enterprises) directs cheaper credit to priority areas.

(f) Regulation of base rate and spread — NRB requires banks to publish a base rate computed on cost of fund, operating cost and a minimum return, and has capped the spread between deposit and lending rates at 4%. This prevents arbitrary pricing and protects depositors and borrowers.

(g) Moral suasion and directives — NRB advises banks through circulars, meetings and directives to keep deposit rates attractive and lending rates reasonable, especially during tight liquidity.

(h) Managing external sector and inflation — Through foreign exchange intervention and open market operations, NRB manages capital flows and inflation, both of which feed into domestic interest rates.

4. Conclusion

Interest rate in the banking system is thus a market-determined price — set by the demand for and supply of loanable funds and by each bank's cost, risk and profit considerations — but it moves within a framework designed and controlled by Nepal Rastra Bank. Through the interest rate corridor, OMO, CRR/SLR, refinance and spread regulation, NRB steers the rate towards the objectives of price stability, adequate credit to productive sectors and a stable external sector.

मुद्रा नीतिका उद्देश्यहरू

नेपाल राष्ट्र बैंक ऐन, २०५८ अनुसार मुद्रा नीतिका मुख्य उद्देश्यहरू यी हुन्:

1. मूल्य स्थिरता कायम गर्नु।
2. बाह्य क्षेत्र (भुक्तानी सन्तुलन) को स्थायित्व कायम गर्नु।
3. वित्तीय क्षेत्रको स्थायित्व कायम गर्नु।
4. आर्थिक वृद्धि, रोजगारी र विकासमा सहयोग पुर्‍याउनु।
5. गरिबी निवारण तथा वित्तीय पहुँच विस्तारमा योगदान दिनु।

आ.व. २०७९/८० को मुद्रा नीतिमा वित्तीय क्षेत्र सुधार तथा नियमनसम्बन्धी प्रमुख व्यवस्थाहरू

1. तरलता व्यवस्थापन: स्थायी तरलता सुविधा, खुला बजार कारोबार र अन्य उपकरणमार्फत तरलतालाई मूल्य र बाह्य क्षेत्र स्थायित्वअनुरूप व्यवस्थापन गर्ने।
2. कर्जा नियमन: शेयर धितो कर्जा, सवारी साधन कर्जा र अनुत्पादक उपभोग्य कर्जामा नियन्त्रण; उत्पादनशील क्षेत्रमा कर्जा प्रवाहलाई प्राथमिकता।
3. निष्क्रिय कर्जा तथा जोखिम व्यवस्थापन: कर्जा जोखिम, बजार जोखिम र सञ्चालन जोखिमको प्रभावकारी व्यवस्थापन; निष्क्रिय कर्जा न्यूनीकरणका लागि सुपरिवेक्षण कडा बनाउने।
4. सुपरिवेक्षण: जोखिममा आधारित सुपरिवेक्षण प्रणाली सुदृढ गर्ने र स्थलगत तथा गैरस्थलगत निरीक्षण प्रभावकारी बनाउने।
5. संस्थागत सुशासन: बैंक तथा वित्तीय संस्थामा सुशासन सुदृढ गर्ने र सञ्चालक समितिको भूमिका स्पष्ट पार्ने।
6. गाभ्ने–गाभिने: बैंक तथा वित्तीय संस्थाको समायोजनलाई प्रोत्साहन गरी संस्थाहरू सबल बनाउने।
7. डिजिटल भुक्तानी: डिजिटल भुक्तानी प्रणाली र डिजिटल वित्तीय सेवालाई प्रोत्साहन; साइबर सुरक्षा सुदृढ गर्ने।
8. वित्तीय पहुँच तथा साक्षरता: वित्तीय पहुँच विस्तार र वित्तीय साक्षरता अभिवृद्धिका कार्यक्रम।
9. लघुवित्त र वित्त कम्पनी: लघुवित्त संस्थाको नियमन र सुपरिवेक्षण प्रभावकारी बनाउने।
10. विदेशी विनिमय व्यवस्थापन: विदेशी विनिमय सञ्चिति सुरक्षित राख्ने र विनिमय दर व्यवस्थापन व्यवस्थित गर्ने।
11. ब्याजदर: ब्याजदरलाई बजारमुखी बनाउँदै निक्षेप र कर्जाबीचको ब्याजदर अन्तर (स्प्रेड) घटाउने।

निष्कर्ष: आ.व. २०७९/८० को मुद्रा नीतिले मूल्य तथा बाह्य क्षेत्र स्थायित्वलाई प्राथमिकता दिँदै वित्तीय क्षेत्रको स्थायित्व, सुशासन र पहुँच विस्तारमा जोड दिएको छ।

Risk Management Structure in Commercial Banks

१. वित्तीय संस्थाहरूको जोखिम व्यवस्थापन संरचनामा समावेश हुनुपर्ने कुराहरू

नेपाल राष्ट्र बैंकको "जोखिम व्यवस्थापन निर्देशन, २०७५" तथा बासेल सिद्धान्त अनुसार वित्तीय संस्थाको जोखिम व्यवस्थापन संरचनामा निम्न कुराहरू समावेश हुनुपर्दछ:

१. सञ्चालक समितिको सक्रिय संलग्नता (Board Involvement)

• जोखिम व्यवस्थापन नीति तथा रणनीति स्वीकृत गर्ने
• जोखिम सीमा (Risk Limits) तोक्ने र त्यसको अनुगमन गर्ने
• वरिष्ठ व्यवस्थापनको जवाफदेहिता सुनिश्चित गर्ने

२. जोखिम व्यवस्थापन समिति (Risk Management Committee)

• सञ्चालक समितिको मातहतमा समिति गठन
• जोखिम नीति, प्रक्रिया र सीमाको नियमित समीक्षा
• जोखिम सम्बन्धी प्रतिवेदन सञ्चालक समितिमा पेश गर्ने

३. स्वतन्त्र जोखिम व्यवस्थापन विभाग (Independent Risk Management Department)

• व्यवसाय सञ्चालन गर्ने विभागबाट स्वतन्त्र (Independent) रहने
• जोखिम पहिचान, मापन, अनुगमन र नियन्त्रण गर्ने
• प्रमुख जोखिम अधिकृत (Chief Risk Officer) को नेतृत्व

४. जोखिम व्यवस्थापन नीति तथा प्रक्रिया

• लिखित जोखिम नीति, कार्यविधि र म्यानुअल
• जोखिम भोग्ने क्षमता (Risk Appetite) निर्धारण
• जोखिम सीमा र एकाग्रता सीमा (Concentration Limits)

५. तीन-स्तरीय सुरक्षा प्रणाली (Three Lines of Defense)

• पहिलो स्तर: व्यवसाय सञ्चालन गर्ने विभाग (Risk Taking)
• दोस्रो स्तर: जोखिम व्यवस्थापन तथा अनुपालन विभाग (Risk Control)
• तेस्रो स्तर: आन्तरिक लेखापरीक्षण (Independent Assurance)

६. जोखिम मापन तथा मूल्याङ्कन प्रणाली

• जोखिम भारित सम्पत्ति (Risk Weighted Assets) गणना
• पुँजी पर्याप्तता अनुपात (Capital Adequacy Ratio) कायम
• Value at Risk (VaR), Stress Testing, Scenario Analysis

७. सूचना प्रविधि तथा डाटा व्यवस्थापन

• जोखिम सूचना प्रणाली (MIS) को सुदृढीकरण
• समयमै सही तथ्याङ्क उपलब्ध गराउने व्यवस्था

८. आन्तरिक नियन्त्रण तथा अनुपालन (Internal Control & Compliance)

• आन्तरिक नियन्त्रण प्रणालीको प्रभावकारिता
• कानुन, निर्देशन तथा मार्गदर्शनको अनुपालन

९. पुँजी व्यवस्थापन (Capital Management)

• जोखिम अनुसार पुँजीको पर्याप्तता
• Stress Testing मार्फत पुँजी आवश्यकता पहिचान

१०. जोखिम संस्कृति तथा तालिम

• संस्थागत जोखिम संस्कृतिको विकास
• कर्मचारीहरूलाई नियमित तालिम तथा सचेतना

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२. प्रभावकारी जोखिम व्यवस्थापनका लागि जोखिमको वर्गीकरण (Classification of Risks)

व्यावसायिक बैंकहरूको जोखिमलाई मुख्यतया दुई भागमा वर्गीकरण गर्न सकिन्छ:

क. वित्तीय जोखिम (Financial Risks)

१. क्रेडिट जोखिम (Credit Risk)

• ऋणीले साँवा तथा ब्याज भुक्तानी नगर्ने जोखिम
• यो बैंकको सबैभन्दा ठूलो जोखिम हो
• NPL (Non-Performing Loan) को रूपमा प्रकट हुन्छ

२. बजार जोखिम (Market Risk)

• ब्याजदर जोखिम (Interest Rate Risk)
• विनिमय दर जोखिम (Foreign Exchange Risk)
• इक्विटी मूल्य जोखिम (Equity Price Risk)

३. तरलता जोखिम (Liquidity Risk)

• निक्षेपकर्ताको माग धान्न नसक्ने जोखिम
• अल्पकालीन दायित्व पूरा गर्न नसक्ने अवस्था

४. पुँजी पर्याप्तता जोखिम (Capital Adequacy Risk)

• जोखिम भारित सम्पत्ति अनुसार पर्याप्त पुँजी नहुने जोखिम

ख. गैर-वित्तीय जोखिम (Non-Financial Risks)

५. सञ्चालन जोखिम (Operational Risk)

• आन्तरिक प्रक्रिया, मानव संसाधन तथा प्रणालीको कमजोरीबाट उत्पन्न
• धोखाधडी, त्रुटि, प्रणाली विफलता

६. रणनीतिक जोखिम (Strategic Risk)

• गलत रणनीति तथा व्यवसायिक निर्णयबाट उत्पन्न

७. प्रतिष्ठा जोखिम (Reputation Risk)

• बैंकको छवि तथा विश्वसनीयतामा असर पर्ने जोखिम

८. कानुनी तथा अनुपालन जोखिम (Legal & Compliance Risk)

• कानुन तथा नियमको उल्लङ्घनबाट उत्पन्न हुने जोखिम

९. सूचना प्रविधि जोखिम (IT/Cyber Risk)

• साइबर आक्रमण, डाटा चोरी तथा प्रणाली सुरक्षा जोखिम

१०. मुद्रा जोखिम तथा देश जोखिम (Country Risk)

• विदेशी मुद्रामा कारोबार गर्दा उत्पन्न हुने जोखिम

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निष्कर्ष: प्रभावकारी जोखिम व्यवस्थापनका लागि सञ्चालक समितिको नेतृत्व, स्वतन्त्र जोखिम विभाग, स्पष्ट नीति तथा सीमा, र नियमित अनुगमन अनिवार्य हुन्छ। जोखिमलाई वित्तीय र गैर-वित्तीय गरी वर्गीकरण गरी प्रत्येकको पहिचान, मापन र नियन्त्रण गर्दा बैंकको स्थायित्व कायम रहन्छ।

Meaning of cheque: A cheque is a negotiable instrument in writing, drawn on a bank, containing an unconditional order signed by the drawer to pay a certain sum of money on demand to a certain person or to the bearer. Under the Negotiable Instruments Act, 2034, a cheque is a bill of exchange drawn on a bank and payable on demand. Its three parties are:

1. Drawer — the account holder who writes and signs the cheque.
2. Drawee — the bank or financial institution that must pay.
3. Payee — the person to whom the amount is payable.

Main features of a cheque:

1. It must be in writing and signed by the drawer.
2. It contains an unconditional order to pay.
3. The amount is certain and written in both words and figures.
4. It is drawn on a bank and is payable on demand.
5. It is payable to a named person, to order, or to the bearer.
6. It is transferable by delivery (bearer) or by endorsement and delivery (order).
7. It is valid for 6 months from the date of issue; after that it is stale.
8. It is honoured only if the account has sufficient balance; dishonour is punishable under the Banking Offence and Punishment Act, 2064.

Types of cheques issued by banks and financial institutions:

Conclusion: Cheques make payment safe, convenient and traceable. Crossing and endorsement reduce the risk of fraud, while the 6-month validity and legal penalty for dishonour keep the instrument reliable in Nepal's banking system.

Bank

A bank is a financial institution licensed by the central bank (in Nepal, Nepal Rastra Bank) that accepts deposits from the public, keeps them safe, and lends them out to those who need funds. It acts as a bridge between people who have surplus money (depositors) and people who need money (borrowers), earning profit mainly from the difference between the interest it pays on deposits and the interest it charges on loans.

Functions of a Commercial Bank

1. Accepting deposits – Collects savings from the public through current accounts, savings accounts, fixed deposits and recurring deposits.
2. Lending loans and advances – Provides loans, overdrafts, cash credits, and discounting of bills to individuals, businesses and industries.
3. Payment and settlement – Issues cheques, drafts, and transfers funds through RTGS, connectIPS and other electronic means, settling payments between parties.
4. Agency functions – Acts as an agent of customers by collecting cheques, paying bills, remitting money, and buying/selling securities on their behalf.
5. Utility functions – Issues letters of credit, bank guarantees, traveller's cheques, safe deposit lockers, and provides foreign exchange services.
6. Credit creation – Creates credit by keeping only a fraction of deposits as reserve and lending the rest, thus expanding money supply in the economy.
7. Promoting trade and industry – Finances domestic and foreign trade and provides working capital and term loans to industries.
8. Acting as a trustee and adviser – Manages trusts, estates and wills, and advises customers on investment and financial matters.
9. Transfer of money – Remits money from one place to another quickly and safely through branches and remittance services.
10. Contribution to economic development – Mobilises idle savings into productive investment, supports government policy, and helps in capital formation.

Meaning of Bank Keeping

Bank keeping (also called bank reconciliation or keeping of bank records) means the systematic recording, comparing and reconciling of the bank balance shown by the organisation's Cash Book (Bank Column) with the balance shown by the Bank Statement (Pass Book) issued by the bank, so that the correct bank balance on a particular date can be ascertained and the causes of difference identified.

In simple words, bank keeping is the process of maintaining bank-related records and matching them with the bank's own records to find out why the two balances differ.

Advantages of Preparing Bank Keeping

1. Ascertainment of true bank balance – The real balance available in the bank on a given date is known.
2. Detection of errors – Errors committed by the business (in Cash Book) or by the bank (in Pass Book) are easily located and rectified.
3. Prevention of fraud – Unauthorised withdrawals, forged cheques and misappropriation by employees come to light.
4. Control over cash – It acts as an internal control device over receipts and payments through bank.
5. Accuracy of financial statements – The Bank column of Cash Book is verified, so the Balance Sheet shows the correct bank balance.
6. Better relationship with bank – Differences are settled promptly, avoiding disputes with the bank.
7. Helpful for planning – Correct knowledge of bank balance helps in meeting liabilities and planning payments.
8. Timely correction of mistakes – Cheques issued but not presented, cheques deposited but not collected, etc. are properly adjusted.

Differences between Accounting and Bank Keeping

Example to distinguish: If a firm buys furniture for Rs 1,00,000 by cheque, accounting records the whole transaction (Furniture A/c Dr., Bank A/c Cr.). Bank keeping only checks whether this Rs 1,00,000 cheque has been debited by the bank in the Pass Book on the same date or not.

Public Debt Management

Public Debt Management is the process by which the government plans, raises, manages, and repays its debt in a prudent and cost-effective manner. It involves deciding how much to borrow, from where (domestic or external sources), in what instruments, and at what cost, while keeping the debt burden sustainable and consistent with the country's fiscal and monetary objectives. In Nepal, this function is carried out by the Public Debt Management Office (PDMO) under the Ministry of Finance, in coordination with Nepal Rastra Bank, which acts as the government's banker and debt manager.

The main objectives of public debt management are:

• Meeting the government's financing needs at the lowest possible cost.
• Keeping risks (interest rate risk, exchange rate risk, refinancing risk) within acceptable limits.
• Developing a stable and liquid domestic debt market.
• Ensuring debt sustainability so that future generations are not overburdened.

Instruments of Public Debt Management in Nepal

Nepal uses both domestic and external instruments.

A. Domestic Instruments

1. Treasury Bills (T-Bills) — Short-term instruments issued by Nepal Rastra Bank on behalf of the government to raise funds for a period of 28, 91, 182, or 364 days. They are sold through auction and are used mainly for managing short-term liquidity and budget deficits. They carry no default risk and are highly liquid.

2. Development Bonds — Medium- and long-term instruments issued to raise funds for development projects. They are sold to banks, financial institutions, and the general public. In Nepal these are issued in both interest-bearing and discount forms.

3. National Savings Bonds — Long-term bonds aimed at mobilising savings from the general public, including small savers. They offer attractive interest rates and are issued in denominations suitable for individuals.

4. Citizen Savings Bonds — Similar to national savings bonds, these are targeted at citizens and institutions to encourage domestic resource mobilisation and reduce dependence on foreign borrowing.

5. Special Bonds / NRB Bonds — Issued by Nepal Rastra Bank for monetary management purposes (open market operations) rather than for direct government financing. They help absorb excess liquidity from the banking system.

B. External Instruments

1. Bilateral Loans — Loans obtained from friendly countries (e.g., India, China, Japan) on concessional terms for specific projects.

2. Multilateral Loans — Loans from international institutions such as the World Bank, Asian Development Bank, and International Monetary Fund. These are usually long-term and carry lower interest rates.

3. Foreign Currency Bonds / Sovereign Bonds — Instruments issued in international markets to raise foreign currency. Nepal has been exploring this option to diversify its borrowing sources.

C. Institutional and Policy Instruments

1. Annual Borrowing Plan — Prepared by PDMO to determine the amount, timing, and mix of borrowing for the fiscal year.

2. Auction System — T-Bills and bonds are issued through competitive auctions conducted by Nepal Rastra Bank.

3. Debt Recording and Reporting — Maintaining a central debt database and publishing periodic debt reports for transparency.

4. Debt Sustainability Analysis — Assessing whether the existing and future debt levels can be serviced without distress.

Conclusion: Public debt management in Nepal combines short-term instruments like Treasury Bills with long-term instruments like development and savings bonds, supported by external loans and a proper institutional framework. Effective use of these instruments helps the government finance development while keeping debt sustainable.

Legal basis: Section 3 of the Bank and Financial Institution Act (BAFIA), 2073 divides financial institutions into four classes — 'Ka' (commercial banks), 'Kha' (development banks), 'Ga' (finance companies) and 'Gha' (microfinance institutions). Nepal Rastra Bank (NRB) licenses and regulates them. 'Ga' class institutions are finance companies.

Financial transactions allowed to 'Ga' class institutions:

1. Deposit collection — accepting savings, fixed, recurring, call and other public deposits as permitted by NRB.

2. Lending (credit) transactions — providing loans and advances such as:

   • Working capital loans and overdrafts
   • Term loans (short, medium and long term)
   • Hire purchase and lease financing (a core function of finance companies)
   • Consumer, personal and housing loans (within NRB limits)
   • Bridge loans and participation in syndicated lending with other institutions

3. Discounting and bill financing — discounting/purchasing bills of exchange and financing against bills (domestic).

4. Guarantees — issuing bank guarantees and performance bonds as permitted by NRB. (Note: issuance of letters of credit is NOT permitted to 'Ga' class; LC business is reserved for 'Ka' class commercial banks.)

5. Remittance services — domestic and foreign remittance as an agent/sub-agent of licensed remittance companies or with NRB approval.

6. Agency and utility services — acting as agent for insurance companies, collecting premiums, paying pensions, distributing government bonds, collecting taxes and utility bills.

7. Investment — investing in shares, debentures and securities within NRB-prescribed limits.

8. Merchant banking — permitted to 'Ga' class finance companies to the extent specified by NRB (e.g., issue management, underwriting, portfolio management).

9. Other transactions — issuing drafts, traveller's cheques, safe deposit lockers, and any other transaction permitted by NRB from time to time.

Transactions NOT allowed to 'Ga' class:

• They cannot issue letters of credit or conduct full foreign exchange business (reserved for 'Ka' class).
• They cannot accept government deposits or act as banker to the government.
• They cannot issue credit cards or operate as full commercial banks.
• They cannot perform functions specifically reserved for other classes under BAFIA/NRB directives.

Conclusion: A 'Ga' class institution (finance company) may accept public deposits, provide loans, hire purchase and lease finance, issue guarantees, provide remittance and agency services, undertake limited merchant banking, and make permitted investments — but its scope is narrower than 'Ka' class commercial banks, and it must operate within NRB directives under BAFIA 2073.

Positive aspects of the current monetary policy in Nepal's financial sector

1. Price stability and inflation control — The policy has kept inflation within a targeted band (around 5–6.5%), protecting the purchasing power of the poor and fixed-income groups.
2. Adequate liquidity management — Through open market operations, repo/reverse repo auctions and the standing liquidity facility, banks have been kept liquid, preventing artificial credit crunches.
3. Lower cost of credit — Reduction in the policy (bank) rate and the deposit collection rate has pushed down lending rates, making loans cheaper for productive sectors.
4. Directed lending to productive sectors — Mandatory provisions (agriculture, SME, energy, tourism, etc.) ensure that credit does not flow only to consumption and real estate.
5. External sector stability — Foreign exchange reserves have remained comfortable (covering more than a year of imports), and remittance inflows have been channelled through the formal banking system.
6. Financial inclusion — Expansion of branch networks, digital banking, mobile wallets and QR payments has brought banking services to rural and unbanked populations.
7. Strengthened supervision — Risk-based supervision, capital adequacy (Basel III) and provisioning norms have made banks more resilient.
8. Support during shocks — Refinance facilities and concessional loans were used to cushion the economy during COVID-19 and other disruptions.

Negative aspects / limitations

1. High interest rate spread — Despite policy rate cuts, the gap between deposit and lending rates in Nepal remains high compared to regional peers, meaning benefits are not fully passed to borrowers.
2. Credit diversion — Directed lending is often not genuinely used in the target sector; funds are diverted to real estate, share markets or consumption.
3. Weak transmission mechanism — Monetary policy signals do not transmit smoothly because of a shallow financial market, limited competition and a large informal economy.
4. Persistent liquidity volatility — Periodic tightness (especially around festival seasons and tax payment periods) forces banks to rely on the central bank's liquidity windows.
5. Pressure on reserves — High import demand and gold imports have at times strained the balance of payments, forcing import restrictions that distort the market.
6. Limited instruments — Nepal lacks a deep bond market; open market operations are constrained by the small stock of government securities.
7. Impact on small borrowers — Small and micro enterprises still face collateral requirements and higher risk premiums, so the intended benefit of cheap credit does not reach them.
8. Conflict with fiscal policy — When government spending is delayed or borrowing is heavy, monetary policy alone cannot deliver growth and stability.

Conclusion — The current monetary policy has broadly succeeded in maintaining liquidity, price and external stability and in expanding financial access, but its effectiveness is limited by a weak transmission channel, high spreads, credit diversion and dependence on a narrow set of instruments. Coordination with fiscal policy and deepening of the financial market are needed to make it more effective.

Bank Reconciliation Statement

Bank reconciliation is the process of comparing and matching the bank balance as shown in the cash book (bank column) of a business with the balance shown in the bank statement (pass book) issued by the bank, and explaining the difference between the two, so that the correct bank balance can be determined on a particular date.

When the two balances do not agree, the causes are found out and a statement is prepared to reconcile them. This statement is called a Bank Reconciliation Statement (BRS).

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Reasons for Difference between Cash Book and Bank Statement

The two balances differ mainly because of the following reasons:

A. Cheques issued but not yet presented for payment

• Cheques issued to suppliers/parties are recorded immediately in the cash book (balance decreases), but the bank debits the account only when the cheque is presented. Until then the bank statement shows a higher balance.

B. Cheques deposited but not yet collected/cleared

• Cheques paid into the bank are recorded immediately in the cash book (balance increases), but the bank credits the account only after collection. Until then the bank statement shows a lower balance.

C. Amounts credited by the bank but not recorded in the cash book

• Interest allowed by the bank, dividends or other collections made by the bank on behalf of the customer, etc.

D. Amounts debited by the bank but not recorded in the cash book

• Bank charges, commission, interest on overdraft, insurance premium or loan instalment paid by the bank under standing instructions, dishonour of a cheque deposited, etc.

D. Errors

• Errors committed by the business in the cash book (wrong amount, wrong side, omission).
• Errors committed by the bank in the pass book/statement.

E. Other reasons

• Direct payment by a customer into the bank account.
• Cheques deposited but dishonoured.
• Interest on investments collected by the bank.

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Methods of Preparing Bank Reconciliation Statement

There are two main methods:

1. Without Adjusting the Cash Book (Statement Method) Under this method the cash book balance is not corrected. The BRS is prepared starting either from the cash book balance or from the bank statement balance, and the reconciling items are added or deducted to arrive at the other balance. It may be prepared in either of two ways:

• Starting with the cash book balance and arriving at the bank statement balance.
• Starting with the bank statement balance and arriving at the cash book balance.

2. With Adjusting the Cash Book (Adjusted Cash Book Method) Under this method, all items appearing in the bank statement but not in the cash book (bank charges, interest, dishonoured cheques, etc.) are first recorded in the cash book to bring it up to date. The adjusted cash book balance is then compared with the bank statement balance, and a BRS is prepared for the remaining items only (cheques issued but not presented and cheques deposited but not collected).

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Proforma of Bank Reconciliation Statement

(Starting with Cash Book Balance)

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Conclusion

Bank reconciliation is an important internal control tool. It helps to detect errors and frauds, prevents manipulation of cash, keeps the cash book up to date, and ensures that the true bank balance is known. A BRS should therefore be prepared regularly, preferably every month, by every business and bank customer.

1. Classification of Financial Institutions in Nepal

Under the Bank and Financial Institution Act (BAFIA), 2073, financial institutions in Nepal are classified into four classes:

Class 'C' financial institutions are Finance Companies — licensed, regulated and supervised by Nepal Rastra Bank. They operate under a narrower scope of business than Class A and B institutions.

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2. Types of Transactions Allowed to Class 'C' Institutions

(a) Deposit Collection

• Savings deposits and fixed (time) deposits from individuals and institutions.
• Recurring deposits, call deposits and margin deposits.
• They cannot accept foreign currency deposits and generally cannot open current accounts in the manner of commercial banks.

(b) Lending and Credit Facilities

• Hire-purchase financing — the traditional core business of finance companies (vehicles, machinery, consumer durables).
• Lease financing (financial lease of equipment, vehicles, plant).
• Working capital loans, overdrafts, demand loans and term loans.
• Housing and personal loans, subject to NRB ceilings.
• Deprived-sector and priority-sector lending as directed by NRB.

(c) Investment

• Investment in government securities (treasury bills, development bonds).
• Investment in shares and debentures of other companies within NRB-prescribed limits.
• Investment in NRB-licensed institutions subject to approval.

(d) Other Permitted Transactions

• Bill discounting and purchase of local bills.
• Issuance of bank guarantees and performance bonds (domestic).
• Agency functions — collection of cheques, utility bill payments, government pension/allowance distribution.
• Remittance business only as an agent/sub-agent of an authorized institution, with NRB approval.
• Safe deposit vault and locker services.

(e) Transactions NOT Allowed

• Foreign exchange transactions — Class 'C' institutions are not authorized dealers; they cannot buy/sell foreign currency or open foreign currency accounts.
• Opening import Letters of Credit (LC) and foreign trade financing.
• Dealing in foreign bills and overseas remittance on their own account.
• Any transaction specifically prohibited by NRB's Unified Directives.

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3. How Such Transactions Are Addressed in the Balance Sheet in Nepal

(a) Uniform Format Prescribed by NRB

NRB prescribes a common balance sheet format (Annexure of the Unified Directives on Financial Statements) applicable to all classes — A, B, C and D. Hence, transactions permitted to Class 'C' institutions are presented under the same standard heads as those of commercial banks, ensuring comparability.

(b) Presentation of Assets

(c) Presentation of Liabilities and Capital

(d) Loan Classification and Provisioning

Loans are classified as Pass, Sub-standard, Doubtful and Bad as per NRB's loan classification directive, and provision is made at prescribed rates (e.g., 1% for pass, 25% for sub-standard, 50% for doubtful, 100% for bad). The provision is deducted from the respective loan head or shown as a liability, and the net figure is disclosed.

(e) Absence of Forex-Related Heads

Since Class 'C' institutions cannot deal in foreign exchange, heads such as "balances with foreign banks", "foreign currency deposits" and "foreign bills purchased" remain nil or not applicable in their balance sheets. Similarly, import LC-related contingent liabilities are absent.

(f) Off-Balance Sheet Items

Guarantees, commitments and other contingent liabilities permitted to Class 'C' institutions are disclosed in the notes to accounts / off-balance sheet schedule, not in the main balance sheet.

(g) Regulatory Ratios Reflected

The balance sheet must reflect compliance with NRB norms — minimum paid-up capital, capital adequacy ratio (Basel III), CRR, SLR, single obligor limit and liquidity ratios — which are disclosed in the accompanying schedules and notes.

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4. Conclusion

Class 'C' financial institutions in Nepal are permitted to collect deposits, extend hire-purchase, lease and other credit facilities, invest in securities and perform limited agency functions, but are prohibited from foreign exchange and foreign trade financing. In the balance sheet prepared as per NRB's uniform format, these transactions are presented under standard asset, liability and capital heads, with loans shown net of NRB-prescribed provisions, and forex-related heads remaining nil — thereby maintaining uniformity, transparency and regulatory compliance across all classes of financial institutions in Nepal.

1. Meaning of Liquidity Ratio

Liquidity ratio is the ratio that measures a bank's ability to meet its short-term obligations (deposits withdrawal, loan demand, and other immediate payments) using its liquid assets. It shows how quickly a bank can convert its assets into cash without significant loss.

$\text{Liquidity Ratio} = \frac{\text{Liquid Assets}}{\text{Total Deposits (or Current Liabilities)}} \times 100$

Liquid assets include cash in hand, balance with Nepal Rastra Bank, balance with other banks, money at call, and highly marketable securities.

2. Assets to Deposit Ratio

Assets to Deposit Ratio is the ratio of a bank's total assets to its total deposits. It is expressed as:

$\text{Assets to Deposit Ratio} = \frac{\text{Total Assets}}{\text{Total Deposits}} \times 100$

It shows how much of a bank's assets are financed by deposits and how efficiently the bank is utilizing its deposit funds to create assets (loans, investments, etc.).

3. Why It Is an Important Indicator

The assets to deposit ratio is considered an important indicator while operating a commercial bank for the following reasons:

1. Measures Liquidity Position: It indicates whether the bank has enough liquid assets to meet depositors' demands. A very high ratio may mean deposits are heavily tied up in assets (possibly illiquid), while a very low ratio may signal that deposits are lying idle or the bank depends on other funding sources.

2. Shows Fund Utilization Efficiency: It reflects how effectively the bank has mobilized its deposits into income-generating assets like loans and investments. A higher ratio generally means deposits are being productively deployed; a very low ratio suggests under-utilization of deposit funds.

3. Indicates Financial Stability and Solvency: A sound ratio assures depositors, regulators (NRB), and investors about the bank's ability to repay deposits and remain solvent.

4. Helps in Risk Management: It helps management monitor credit risk, liquidity risk, and investment risk. Too high a ratio (over-lending) raises liquidity risk; too low a ratio means idle funds and low profitability.

5. Basis for Regulatory Compliance: Nepal Rastra Bank prescribes minimum ratios (e.g., CD ratio, liquidity ratio) to ensure banks operate safely. This ratio helps the bank comply with such directives.

6. Aids Decision Making: Management uses it for planning loans, investments, and borrowing decisions. It also helps compare performance with other banks.

4. What It Indicates

• If ratio is high (assets significantly exceed deposits): Deposits have been aggressively converted into assets (loans/investments). This may boost profitability but can increase liquidity risk if assets are not easily liquidated.
• If ratio is low (assets close to or below deposits): A large portion of deposits remains unutilized or the bank relies on other liabilities; profitability may be low, though liquidity is comfortable.
• If ratio is balanced (around 100% or as per NRB norms): The bank is efficiently using deposits while maintaining adequate liquidity and safety.

Conclusion

Thus, the assets to deposit ratio is a key indicator of a commercial bank's liquidity, profitability, fund utilization, and overall financial health. It guides management and regulators in maintaining a safe and sound banking operation.

Answer (10 marks)

Meaning of Risk in a Bank

Risk means the possibility of loss, or of not earning the expected return, arising from uncertainty in a bank's business activities. Since a bank deals mainly with other people's money (deposits), it must identify, measure, monitor and control risk. The major risks faced by a financial institution are explained below.

1. Credit Risk (Default Risk)

This is the risk that a borrower or counterparty will fail to repay the principal and interest as agreed. It is the biggest risk of a bank because loans and advances form the largest part of its assets. It arises from poor appraisal, over-financing, weak follow-up, diversion of funds, and lending to a single borrower or sector in excess. It includes:

• Default risk – the borrower simply does not pay.
• Concentration risk – too much lending to one borrower, sector or region.
• Country/sovereign risk – a foreign borrower's country cannot pay.

2. Liquidity Risk

The risk that the bank cannot meet its short-term obligations (deposit withdrawals, loan disbursements, interbank payments) when they fall due, or can meet them only at a high cost. It arises when too much of the bank's funds are locked in long-term or illiquid assets while deposits are short-term. In the extreme, it causes a "run" on the bank.

3. Market Risk

The risk of loss from changes in market prices. It has three parts:

• Interest rate risk – loss due to changes in interest rates, which affect the bank's net interest income and the value of its assets and liabilities.
• Foreign exchange risk – loss due to movement in exchange rates on foreign currency assets, liabilities and off-balance-sheet positions.
• Equity/price risk – loss from changes in the market price of shares and securities held by the bank.

4. Operational Risk

The risk of loss from failed internal processes, people, systems or external events. Examples: fraud by staff, cash misappropriation, cheque forgery, computer failure, cyber-attack, robbery, error in documentation, and weak internal control. It also covers legal risk (loss from unenforceable contracts or lawsuits) and reputational risk (loss of public trust).

5. Interest Rate Risk in the Banking Book

Arises when assets and liabilities are mismatched in amount or maturity (e.g. fixed-rate loans funded by floating-rate deposits). A rise or fall in rates then squeezes the bank's spread.

6. Capital Adequacy Risk (Solvency Risk)

The risk that the bank does not hold enough capital to absorb unexpected losses. If capital falls below the regulatory minimum, the bank may face restrictions or even closure.

7. Other Risks

• Country/sovereign risk – political or economic instability in a foreign country.
• Technology risk – failure of ATMs, core banking, mobile banking, cyber theft.
• Reputation risk – loss of goodwill due to poor service or negative publicity.
• Strategic risk – loss from wrong business decisions, expansion or product choice.
• Compliance risk – loss from not following laws, NRB directives and AML/CFT rules.

How Banks Manage These Risks

Banks follow a continuous process of identification → measurement → monitoring → control → reporting, using the following tools:

1. Risk management framework and policy – a written risk policy approved by the Board, a Risk Management Committee, an Asset-Liability Management Committee (ALCO), and a separate Risk Management Department independent of business departments.

2. Credit risk management – strict loan appraisal (5 Cs: Character, Capacity, Capital, Collateral, Conditions), credit rating and scoring, collateral and guarantees, loan documentation, periodic follow-up and monitoring, rescheduling/restructuring, and loan loss provisioning as per NRB directives. Limits are fixed for single borrower, sector and related parties (single obligor limit, directed lending limits).

3. Liquidity management – holding adequate liquid assets (cash, bank balance, unencumbered government securities), maintaining the CRR and SLR as required by Nepal Rastra Bank, liquidity gap analysis, maturity matching, a Contingency Funding Plan, and access to the Lender of Last Resort facility of NRB.

4. Market risk management – fixing exposure limits (open position limits, stop-loss limits, gap limits), using derivatives and hedging, diversifying the portfolio, and daily mark-to-market valuation of trading positions.

5. Operational risk management – segregation of duties, dual control, rotation of staff, mandatory leave, internal audit and compliance checks, staff training, insurance (fidelity guarantee, fire, cash-in-transit), strong IT security, backup systems and disaster recovery plans.

6. Capital management – maintaining capital above the Basel III / NRB minimum (including capital conservation buffer), internal capital adequacy assessment (ICAAP), and stress testing.

7. Internal control and audit – three lines of defence: business units, risk and compliance function, and internal audit; plus external audit and NRB supervision/inspection.

8. Diversification – spreading loans and investments across sectors, industries, regions and customers to reduce concentration risk.

9. Contingency planning – business continuity plan, crisis management team and periodic stress testing to prepare for adverse situations.

Conclusion

Thus, a bank faces credit, liquidity, market, operational, capital and other risks. It manages them through a sound risk management framework, limits, diversification, provisioning, adequate capital, strong internal control and effective supervision by Nepal Rastra Bank. Good risk management protects depositors' money, ensures solvency and sustains public confidence in the banking system.

2.1 Banking in Nepal: Evolution and Present Scenario

• Early period: Moneylending by Tejarath Adda (established 1880 BS under Ranodip Singh) gave loans against gold and silver. It was the first organised financial office.
• 1994 BS (1937 AD): Nepal Bank Limited, the first commercial bank, established.
• 2013 BS (1956 AD): Nepal Rastra Bank established as the central bank under the NRB Act, 2012.
• 2022 BS (1966 AD): Rastriya Banijya Bank established; Agricultural Development Bank followed in 2024 BS (1968).
• 1984 onwards: Liberalisation; joint-venture banks such as Nabil Bank (1984) were established, followed by a rapid growth of private banks, development banks, finance companies and microfinance institutions.
• Present: After mergers, about 20 commercial banks (Class A), 17 development banks, around 17 finance companies and about 50 microfinance institutions operate, regulated by NRB. Mobile banking, QR payment, ATMs, branchless banking and connectIPS have grown quickly, and consolidation continues.

2.2 Financial Sector Reform Program

Launched in about 1999 (2056 BS) with World Bank and IMF support to make the sector sound and competitive.

• Restructuring of the two government banks (Rastriya Banijya Bank and Nepal Bank) and the Agricultural Development Bank.
• Strengthening NRB's autonomy and supervision.
• New laws, including the NRB Act, 2058 and Banking and Financial Institution Acts.
• Capital market and insurance sector reform, and promotion of mergers and acquisitions.
• Improvement of credit information, recovery and risk management.

2.3 Role and Functions of NRB and Commercial Banks

Nepal Rastra Bank (central bank):

• Issues currency notes (coins are issued by the Government).
• Formulates and implements monetary policy to maintain price stability.
• Acts as banker, advisor and financial agent of the Government.
• Acts as banker to banks and lender of last resort; operates clearing.
• Holds and manages foreign exchange reserves and regulates the exchange system.
• Licenses, regulates and supervises banks and financial institutions.

Commercial banks:

• Primary functions: accepting deposits (current, saving, fixed, recurring) and giving loans and advances (term loan, overdraft, working capital).
• Secondary functions: agency functions (collection of cheques and bills, remittance, payment of utility bills, dealing in securities) and general utility functions (lockers, letters of credit, guarantees, foreign exchange).

2.4 Management of Commercial Banks

• Deposit management: mobilising deposits at low cost, maintaining a good deposit mix (high share of low-cost current and saving accounts), and keeping liquidity (CRR and SLR).
• Lending management: sound credit policy, appraisal using the 5 Cs (character, capacity, capital, collateral, conditions), sector limits, monitoring and recovery, and loan classification (pass, watchlist, substandard, doubtful, loss) with provisioning.
• Cost management: controlling interest expense, staff and operating costs, use of technology to improve the cost-to-income ratio.
• Risk management: identifying, measuring and controlling credit, liquidity, interest-rate, market, operational and reputational risk, guided by Basel norms and the NRB capital adequacy framework.

2.5 Cheque, Draft and Bill Collection

• Cheque: an unconditional written order on a bank to pay a certain sum on demand. Types: bearer, order, crossed, open, post-dated, stale (valid for 6 months), account payee, manager's cheque.
• Draft: an instrument issued by a bank directing another branch or bank to pay a certain sum to the named person (demand draft). It is safer than a cheque because the bank is the drawer.
• Bill collection: the bank collects payment on behalf of customers. Clean collection involves financial documents only (bills, cheques); documentary collection involves bills along with shipping or title documents.
• Handling: check date, signature, amount in words and figures, crossing, endorsement and balance; enter in clearing; dishonoured items are returned with a return memo.
• Reconciliation: matching bank records with the customer's or the bank's own books (bank reconciliation statement, inter-branch and nostro reconciliation) to identify differences and correct them.

2.6 Nepal Rastra Bank Act, 2058

Replaced the NRB Act, 2012 and gave NRB autonomy.

• Objectives: price stability, financial sector stability, a sound payment system and promotion of the banking system.
• Authorised capital: Rs 10 arba, wholly owned by the Government.
• Governance: Board headed by the Governor, appointed by the Government for a term of 5 years.
• Powers: monetary policy, foreign exchange management, licensing, regulation and supervision, issuing directives, and taking action against defaulting institutions.

2.7 Banks and Financial Institutions Act, 2073

Replaced the Bank and Financial Institution Act, 2063.

• Classifies institutions as A (commercial banks), B (development banks), C (finance companies) and D (microfinance institutions).
• Licensing by NRB with minimum paid-up capital (Rs 8 arba for national-level commercial banks).
• Rules on corporate governance, restrictions on lending to directors and related persons, single obligor limits, and prohibited transactions.
• Provisions on merger and acquisition, liquidation, and resolution of problem institutions.
• Establishment of the Deposit and Credit Guarantee Fund; penalties and NRB's power to take action.

2.8 Banking Offence and Punishment Act, 2064

Defines offences related to banking and their penalties.

• Offences: forgery of documents and money, fraud, cheque dishonour without sufficient balance, unauthorised banking, wilful default, and other malpractice.
• Penalty: imprisonment and/or fine; for a dishonoured cheque, a fine up to the cheque amount and/or imprisonment up to 2 years (as per the Act), with compensation to the payee.
• Cases are heard by the Special Court or the designated authority and the Act provides for compensation and recovery.

2.9 Asset (Money) Laundering Prevention Act, 2064

Money laundering is the process of making illegally earned money appear legal, in three stages: placement, layering and integration.

• Banks must carry out KYC and customer due diligence, keep records, monitor transactions and report suspicious and threshold transactions to the Financial Intelligence Unit (FIU) of NRB.
• The Act provides punishments including imprisonment and fines, and confiscation of property.
• It supports Nepal's obligations as a member of the Asia/Pacific Group on Money Laundering and the FATF standards.

2.10 Negotiable Instruments Act, 2034

Governs instruments that can be transferred by delivery or endorsement.

• Types: promissory note, bill of exchange and cheque.
• Features: free transferability, a holder gets good title, and the holder can sue in his own name.
• Endorsement: blank, full (special), restrictive, conditional and partial.
• Holder in due course: a person who takes the instrument for value, in good faith, before maturity and without knowledge of any defect; he gets a better title than the transferor.
• Dishonour, noting and protest: on dishonour, the holder gives notice to the parties liable and may have the instrument noted and protested through a notary or authority to preserve his right of recourse.