Financial Ratio Analysis and Financial Health Assessment

1. Concept of Financial Ratio Analysis

Financial ratio analysis is a technique of analyzing financial statements—the balance sheet, profit and loss account, and cash flow statement—by establishing mathematical relationships between different financial items. It converts raw accounting figures into meaningful indicators that reveal a firm's profitability, liquidity, solvency, efficiency, and market performance. It is a relative measure, so it allows comparison across time (trend analysis), across firms (inter-firm comparison), and against industry benchmarks.

2. How Ratio Analysis Helps Assess Overall Financial Health

(a) Liquidity Assessment. Ratios such as the current ratio (current assets ÷ current liabilities), quick ratio, and cash ratio show whether the business can meet its short-term obligations as they fall due. A current ratio of 2:1 is conventionally treated as satisfactory. This directly measures the risk of technical insolvency.

(b) Profitability Assessment. Gross profit margin, net profit margin, return on assets (ROA), and return on equity (ROE) indicate how efficiently the firm converts revenue into profit. ROE, in particular, shows the return generated on owners' funds and is decomposed through the DuPont analysis (net profit margin × asset turnover × equity multiplier) to identify whether profitability comes from margins, efficiency, or leverage.

(c) Solvency / Leverage Assessment. Debt-to-equity ratio, debt-to-total-assets ratio, and interest coverage ratio measure the firm's long-term financial stability and its capacity to service debt. A high debt ratio with low interest coverage signals financial distress.

(d) Efficiency / Activity Assessment. Inventory turnover, debtors turnover (receivable days), creditors turnover, and total asset turnover reveal how productively assets are being used. Slow inventory movement or long collection periods tie up working capital and depress profitability.

(e) Trend and Comparative Diagnosis. By computing ratios for several years, one can see whether financial health is improving or deteriorating. Comparison with industry averages shows whether the firm is a leader or a laggard. This helps in forecasting, budgeting, and early detection of warning signals (e.g., declining margins with rising debt).

(f) Stakeholder Decision-Making. Ratios serve lenders (creditworthiness), investors (return and risk), management (operational control), and regulators (compliance and stability). They form the basis of credit appraisal, investment decisions, and performance evaluation.

3. Effectiveness of Ratio Analysis in Nepali Banks and Financial Institutions (BFIs)

(a) Regulatory Supervision by Nepal Rastra Bank. NRB uses ratios as statutory supervisory tools. Under the Bank and Financial Institution Act, 2073 and NRB directives, BFIs must maintain a minimum capital adequacy ratio (Basel III: 8.5% core capital plus buffers, 11% total capital), a minimum liquidity ratio, a credit-to-core-capital-deposit (CCD) ratio of 90%, a non-performing loan (NPL) ratio within tolerance, and a spread ceiling. These ratios directly determine whether a bank is financially sound and whether it can expand credit or pay dividends.

(b) CAMELS-Based Rating. NRB's off-site supervision and CAMELS rating rely on capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk—all measured through ratios. This enables early corrective action (e.g., restrictions on new branches or lending) before a bank fails.

(c) Credit Appraisal and Loan Decisions. Banks in Nepal assess borrowers using ratios such as debt-service coverage ratio, debt-equity ratio, and current ratio before sanctioning loans. This reduces default risk and protects depositors' funds.

(d) Performance Comparison Among BFIs. With around 20 commercial banks, 17 development banks, and 17 finance companies, ratio analysis allows meaningful comparison of ROA, ROE, NPL, and cost-income ratio. It helps depositors choose safe banks and investors choose profitable ones. Publication of quarterly financial highlights by NRB supports this.

(e) Merger and Acquisition Decisions. During the recent consolidation drive in Nepal's banking sector, ratios such as capital adequacy, NPL, and net worth were central to determining swap ratios and evaluating the financial health of merging institutions.

(f) Limitations. Ratio analysis is only as reliable as the underlying financial statements. Window-dressing, differing accounting policies (e.g., loan-loss provisioning), inflation, and the absence of a uniform benchmark reduce comparability. Ratios are historical and quantitative; they ignore qualitative factors such as management quality and brand value. Hence, ratios should be used along with other tools, not in isolation.

Conclusion

Financial ratio analysis is an indispensable diagnostic tool that summarises a business's liquidity, profitability, solvency, and efficiency into comparable indicators, thereby giving a clear picture of its overall financial health. In Nepal, its effectiveness is particularly high because NRB has institutionalised ratios as mandatory prudential norms, making them the backbone of bank supervision, credit appraisal, and performance evaluation. However, its usefulness is maximised only when interpreted with caution, in combination with trend analysis, industry benchmarks, and qualitative judgement.

Development of Nepal's Banking and Financial System

1. Early phase (pre-1930s): Before the advent of modern banking, informal institutions such as dhukuti, chit funds, and guthi met the credit needs of the people. The first modern bank, Nepal Bank Limited, was established in 1937 (1994 BS) as a semi-government bank with monopoly rights.

2. Post-Rana to Panchayat phase (1950s–1980s): After the fall of the Rana regime in 1951, banking expanded. Rastriya Banijya Bank was set up in 1966. The Nepal Rastra Bank was established in 1956 (2013 BS) as the central bank under the Nepal Rastra Bank Act. In 1965, the monopoly of Nepal Bank Ltd. was ended. Agricultural Development Bank (1968) and Nepal Industrial Development Corporation were created to channel credit to agriculture and industry. Joint-venture banks began entering after 1984 (e.g., Nepal Arab Bank Ltd., now Nabil Bank).

3. Liberalisation phase (1990s–2000s): After the restoration of democracy in 1990, financial liberalisation allowed many private commercial banks, development banks, finance companies, and microfinance institutions to open. The NRB Act 2058 (2002) and Bank and Financial Institutions Act (BAFIA) 2063 (2006) strengthened regulation. Nepal joined the WTO in 2004, further opening the sector.

4. Consolidation and modern phase (2010s–present): NRB pursued a merger/acquisition policy to reduce the number of BFIs and build stronger institutions. Mobile banking, internet banking, QR payments, and digital wallets (eSewa, Khalti, IME Pay) have spread rapidly. Nepal now has a central bank, commercial banks, development banks, finance companies, microfinance institutions, cooperatives, insurance companies, and a stock exchange (NEPSE).

Contribution to Economic Development

1. Capital mobilisation: Banks collect small scattered savings and channel them into productive investment, raising the savings–investment ratio.
2. Credit for productive sectors: Directed lending to agriculture, SMEs, tourism, and infrastructure supports output and employment.
3. Monetary stability: NRB uses monetary policy tools to control inflation and maintain external sector balance, creating a stable environment for growth.
4. Payment system and financial inclusion: Digital payments, branch expansion, and microfinance bring the unbanked rural population into the formal financial net.
5. Government financing: Banks subscribe to treasury bills and development bonds, helping the government fund development plans.
6. Foreign exchange and remittance channel: The banking system channels remittances into productive use and manages foreign reserves.
7. Capital market growth: NEPSE and merchant banks mobilise long-term capital for industry.
8. Employment and entrepreneurship: The financial sector itself creates jobs and provides start-up capital to entrepreneurs.

Conclusion: From a single bank in 1937 to a diversified, technology-driven system today, Nepal's banking sector has become a backbone of the economy. Its role in savings mobilisation, credit delivery, financial inclusion, and monetary stability directly supports economic growth and development.

Meaning

Liquidity management means controlling the amount of money (reserves) available in the banking system so that interest rates, credit, inflation and the exchange rate stay consistent with monetary policy objectives. In Nepal, Nepal Rastra Bank (NRB) is responsible for this under the Nepal Rastra Bank Act, 2058.

Instruments for Liquidity Management

A. Direct (quantitative and regulatory) instruments

1. Cash Reserve Ratio (CRR): the share of deposits that banks must keep with NRB as non-interest-bearing reserves. Raising it drains liquidity; cutting it releases liquidity.
2. Statutory Liquidity Ratio (SLR): the share of deposits to be held in liquid assets such as cash, government securities and balances with NRB.
3. Bank rate and refinance rate: the rate at which NRB lends to banks; it works as the upper limit of the interest rate corridor.
4. Credit ceiling and margin requirements: limits on lending to particular sectors (for example loan-to-value limits on real estate and share loans) and on total credit growth.
5. Moral suasion: NRB directives, meetings and advice that persuade banks to act in line with policy.

B. Indirect (market-based) instruments

1. Open Market Operations (OMO): NRB buys or sells government securities and issues its own bonds, mainly through
   • Reverse repo / deposit collection auctions to absorb excess liquidity, and
   • Repo and outright purchase to inject liquidity.
2. Standing Liquidity Facility (SLF): overnight lending to banks against eligible securities, at the upper bound of the corridor.
3. Standing Deposit Facility (SDF) and Deposit Collection Rate: banks can park surplus funds with NRB at the floor rate.
4. Interest rate corridor: the policy (repo) rate lies between the floor (deposit collection rate / SDF rate) and the ceiling (SLF rate / bank rate), keeping the interbank rate stable.
5. Foreign exchange swap and purchase or sale of foreign currency: NRB injects rupee liquidity when it buys foreign currency, and drains it when it sells.

How NRB Has Used These Instruments

Assessment

• NRB has gradually moved from direct controls to market-based tools, and the corridor has anchored short-term rates.
• Liquidity has remained broadly manageable, and the reserve position recovered after the 2022 tightening.
• Weaknesses remain: a shallow government securities market, dependence on remittance inflow, a persistent pegged exchange rate to the Indian rupee, and a large informal and cooperative sector outside NRB's direct reach.

Conclusion

NRB uses a mix of CRR, SLR, bank rate, OMO, SLF, SDF and the interest rate corridor. By absorbing liquidity in surplus periods and injecting it in scarce periods, it has largely kept liquidity and interest rates stable, though deeper capital markets and better forecasting are needed.

Deposit Services Provided by Banks and Financial Institutions in Nepal

Deposits are the main source of funds for banks and financial institutions (BFIs) in Nepal. The major types of deposit services are:

1. Current (Demand) Deposit

• Withdrawn any number of times without prior notice, mainly by traders and institutions.
• No interest is paid (or a very nominal rate), but overdraft facility is available.
• Operated through cheques, drafts and now through digital channels.

2. Saving Deposit

• Meant for small savers; a limited number of withdrawals per month.
• Interest is paid at a lower rate than fixed deposits.
• Variants: ordinary saving, saving with cheque facility, salary account, minor's account, women's saving account, ASBA account, etc.

3. Fixed (Time) Deposit

• Amount deposited for a fixed period (3 months to 5 years or more) at a fixed interest rate.
• Higher interest than saving deposit; premature withdrawal allowed with a penalty (interest reduced to the saving rate).
• A fixed deposit receipt can also be pledged as collateral for loans.

4. Other Special Deposits

• Recurring Deposit: monthly fixed instalment, maturity amount paid with interest.
• Call Deposit: withdrawable on demand after giving notice; interest at call rate.
• Foreign Currency Deposit: non-resident Nepali and foreign currency accounts (e.g., NRN account, convertible account).
• Institutional/Corporate Deposit: bulk deposits of companies, government bodies and BFIs.
• Digital/Wallet-linked Deposits: mobile banking, QR-based and internet banking deposits.

Main Regulatory Provisions of Nepal Rastra Bank on Deposits and Deposit Interest Rates

Nepal Rastra Bank (NRB), under the Nepal Rastra Bank Act, 2058 and the Bank and Financial Institution Act (BAFIA), 2073, regulates deposits as follows:

1. Licensing and Deposit Collection

• Only BFIs licensed by NRB may accept public deposits. Unlicensed persons accepting deposits are punishable under BAFIA, 2073.

2. Deposit Insurance

• Deposits are insured by the Deposit and Credit Guarantee Fund (DCGF). The insured amount is Rs 5 lakh per depositor per institution (as revised from time to time).

3. Interest Rate Regulation

• NRB issues a Monetary Policy every fiscal year fixing the interest rate corridor:
  • Bank Rate (upper limit of the corridor),
  • Policy Rate / Repo Rate (middle),
  • Deposit Collection Rate (lower limit of the corridor).
• The spread between the average lending rate and average deposit rate of commercial banks is capped (about 4–4.5% in recent monetary policies).
• Interest rates on deposits are determined by BFIs themselves within the corridor, but NRB may fix a minimum interest rate on saving deposits and direct BFIs to pay interest accordingly.
• Interest on saving deposits must be calculated on a daily balance and paid at intervals prescribed by NRB directives.

4. Reserve Requirements

• BFIs must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on their deposit liabilities as prescribed by NRB.

5. KYC and Anti-Money Laundering

• BFIs must follow "Know Your Customer" norms, verify depositor identity and report suspicious transactions as per NRB directives.

6. Deposit Collection Restrictions

• BFIs cannot accept deposits beyond the limit prescribed by NRB, cannot offer gifts or extra benefits to attract deposits, and cannot discriminate among depositors.

7. Reporting and Supervision

• BFIs must submit periodic deposit and interest rate reports to NRB; NRB conducts on-site and off-site supervision and may penalise violations.

Conclusion: NRB regulates deposit collection and interest rates to protect depositors, maintain financial stability and ensure fair competition among BFIs in Nepal.

The Information Technology Guideline issued by Nepal Rastra Bank requires banks and financial institutions (BFIs) to protect their information assets. The main information security provisions are:

1. Information security policy: a board-approved policy, reviewed regularly, covering the security of information and systems.
2. Governance: an Information Security Committee and a dedicated information security officer or unit, independent from IT operations.
3. Access control: access on a need-to-know basis, unique user IDs, strong password rules, and periodic review of access rights.
4. Data classification: information classified by sensitivity, with protection suited to each class.
5. Encryption: sensitive data protected in transit and in storage.
6. Network and system security: firewalls, intrusion detection and prevention, antivirus and timely patching.
7. Physical and environmental security: controlled access, CCTV and fire protection for the data centre and server rooms.
8. Incident management: procedures to detect, respond to and report security incidents, including reporting to NRB.
9. Business continuity and disaster recovery: BCP and DR plans with a DR site, tested regularly.
10. Third-party and outsourcing security: security requirements and agreements with vendors.
11. Awareness and training: regular security training for staff and customer awareness.
12. Audit and compliance: periodic IT and information security audit, vulnerability assessment and penetration testing, and compliance with the Electronic Transactions Act and NRB directives.

Audit Committee under the Nepal Rastra Bank Act, 2058 (Section 61)

(a) Composition. The Board of Directors forms an Audit Committee of three members, one of whom is the Chairperson. The Board designates the members from among the non-executive directors of the Board, and the committee is headed by a Chairperson chosen from among them. The committee's meeting procedure is as decided by the Board.

(b) Functions, duties and powers.

1. Examine the internal control system, accounting policy and financial reporting procedures of the Bank and recommend improvements to the Board.
2. Review the internal audit of the Bank and monitor the work of the Audit Department, including the audit plan, findings and follow-up action.
3. Review the financial statements of the Bank before they are submitted to the Board for approval.
4. Recommend to the Board the appointment of the external auditor and review the external auditor's report and management letter.
5. Review the audit reports of the Auditor General and the Board's directives, and see that deficiencies and irregularities pointed out are corrected.
6. Review the Bank's compliance with the Act, rules, bye-laws and directives, and the risk management system.
7. Submit reports and recommendations to the Board on the matters above and obtain from any employee the records and information it needs for its work.

Through these functions the Audit Committee strengthens financial discipline, transparency and accountability in the central bank.

Disqualifications for a director of a bank or financial institution (Banks and Financial Institutions Act, 2073)

Under the Act, a person is disqualified from being appointed or remaining a director if he or she:

1. is not a citizen of Nepal or has not attained the age of 21 years (minor);
2. is of unsound mind;
3. has been declared insolvent or bankrupt;
4. has been punished by a court for a criminal offence involving moral turpitude (such as fraud, forgery, corruption or cheating) and the sentence has not been served or the prescribed period has not passed;
5. has been blacklisted, or is a defaulter who has not repaid a loan from any bank or financial institution, or is a guarantor of such a defaulting loan;
6. has been removed from a post of a bank or financial institution, or from public office, for misconduct or abuse of authority;
7. is already a director, employee, auditor or adviser of another licensed institution of the same class, or has a conflict of interest with the institution;
8. is an employee of the Government of Nepal or of NRB, or an auditor of the institution;
9. has been punished under the Banking Offence and Punishment Act, or the Act itself, or whose licence or position has been cancelled; or
10. does not meet the "fit and proper" criteria set by Nepal Rastra Bank.

A director who becomes disqualified after appointment must vacate the post, and NRB may also remove a director who violates the Act or its directives.

The Foreign Exchange (Regulation) Act, 2019 (BS 2019 / AD 1962) contains the following punishment provisions:

1. Unauthorised foreign exchange transactions — A person who deals in foreign exchange without the permission of Nepal Rastra Bank, or who operates an unauthorised foreign exchange business, is punishable with a fine equal to the amount involved in the transaction and/or imprisonment.

2. Failure to sell or surrender foreign exchange — A person who receives foreign exchange and fails to sell or deposit it with an authorised dealer or Nepal Rastra Bank within the prescribed period is punishable with a fine and the foreign exchange may be confiscated.

3. Misuse of foreign exchange facilities — Obtaining foreign exchange for one purpose and using it for another attracts a fine and recovery of the amount involved.

4. False declaration or forged documents — Making false statements or submitting forged documents to obtain foreign exchange facilities is punishable with a fine and imprisonment.

5. Offences by companies or firms — If an offence is committed by a company or firm, the person responsible for the act at the time of the offence is personally liable to punishment.

6. Confiscation and licence action — In addition to fine and imprisonment, the Act provides for confiscation of the foreign currency or property involved in the offence, and Nepal Rastra Bank may suspend or cancel the licence of the authorised dealer or money changer concerned.

7. Limitation period — Prosecution for offences under the Act must be initiated within the time limit prescribed by the Act; otherwise the case lapses.

In short, the Act provides for fine, imprisonment, confiscation of foreign exchange or property, and suspension or cancellation of licence as punishment, with the fine generally linked to the value of the foreign exchange involved in the offence.

Introduction. The Banking Offence and Punishment Act, 2064 was enacted to define offences in the banking sector, prescribe punishments and provide a speedy process for trial and recovery. A healthy banking sector needs public trust, financial discipline and legal deterrence, and this Act supports all three.

Role of the Act in creating a healthy banking environment

1. Defines banking offences clearly. Forgery, fraud, misappropriation of bank funds, false statements, illegal transactions, obstruction of NRB inspection and similar acts are named as offences, so bankers, borrowers and customers know the limits of lawful conduct.
2. Deterrence through punishment. Imprisonment and fines, often linked to the amount involved, discourage insiders and outsiders from committing offences. Heavier penalties apply to grave offences.
3. Protects depositors and public confidence. Penalising the misuse of deposits and fraudulent activity protects savers' money and raises trust in banks and financial institutions.
4. Strengthens financial discipline. Willful defaulters, loan misuse and false collateral valuation are brought under legal action, which improves credit culture and loan recovery and reduces non-performing loans.
5. Recovery of loss and compensation. The Act allows the loss caused to a bank to be recovered from the offender and from property involved, so that the institution and its customers are not left to bear the burden.
6. Accountability of bank staff and directors. Directors, executives and employees who abuse their position face punishment and can be barred from office, promoting good governance.
7. Speedy and specialised adjudication. Banking offence cases are dealt with under a defined procedure, and NRB and investigating bodies are empowered to act, so cases are not delayed.
8. Supports financial stability and compliance. Together with the NRB Act, BAFIA and anti-money laundering law, it helps keep the system sound and credible nationally and internationally.

Conclusion. The Act acts as the legal shield of the banking system. By defining offences, penalising wrongdoing and enabling recovery, it builds discipline, trust and stability, which are the basis of a healthy banking environment in Nepal.

Past Efforts Carried Out for Merger and Acquisition of Banks and Financial Institutions in Nepal

1. Legal and Institutional Foundation (Early Efforts)

• The Companies Act, 1964 (2021 BS) and later the Companies Act, 2006 provided the basic legal framework for amalgamation and acquisition of companies, including banks.
• The Banking and Financial Institutions Act (BAFIA), 2006 gave the legal mandate to Nepal Rastra Bank (NRB) to regulate and supervise mergers and acquisitions of banks and financial institutions (BFIs).
• NRB issued the Merger and Acquisition Bylaw, 2011 (2068 BS) (later revised in 2013 and 2016), which laid down the procedure, valuation method, and regulatory approval process for merger/acquisition.

2. Policy Push Through Monetary Policy and Directives

• From FY 2068/69 (2011/12) onwards, NRB began announcing merger/acquisition-friendly provisions in its Monetary Policy and Annual Bank Supervision Reports.
• NRB introduced incentives such as:
  • Relaxation in capital adequacy, branch expansion, and priority sector lending requirements for merged entities.
  • Tax concessions (carry-forward of losses, exemption on capital gains tax on merger) through coordination with the Ministry of Finance and Inland Revenue Department.
  • Refinance facility and lower CRR for a certain period to merged banks.
  • Reduced licensing fees and faster approval process.

3. Regulatory Pressure Through Capital Requirements

• NRB raised the minimum paid-up capital of BFIs in phases:
  • Commercial banks: Rs 2 arba (2011) → Rs 4 arba (2014) → Rs 8 arba (2017).
  • Development banks and finance companies: similarly raised in tiers.
• This forced many small and weak BFIs to either merge or exit, as they could not meet the capital floor on their own.

4. Formation of a Merger Coordination Committee

• NRB formed a Merger and Acquisition Coordination Committee and later a dedicated Merger Cell to facilitate negotiations, provide technical support, and monitor the merger process.
• It also issued directives on due diligence, asset-liability valuation, and share swap ratio to bring uniformity.

5. Specific Merger Cases Facilitated

• 2011–2013: Merger of Nepal Bangladesh Bank with Nepal Sri Lanka Merchant Bank; merger of Kist Bank with Nepal Bank of Ceylon; merger of Global Bank with ICFC Finance.
• 2014–2017: Merger of Nepal Investment Bank with Nepal Bangladesh Bank (2016), Nabil Bank with Nepal Bangladesh Bank (later), Rastriya Banijya Bank with Nepal Bank (proposed but not completed), Nepal Credit and Commerce Bank with Nepal Bank of Ceylon.
• 2018–2022: Major consolidations such as Nepal Investment Bank with Nabil Bank (2018), Nepal Bank with Rastriya Banijya Bank (proposed), Machhapuchchhre Bank with Kist Bank, Global IME Bank with Janata Bank, NIC Asia with Nepal Bangladesh Bank, and the merger of 33 BFIs into 20 by 2022.
• By mid-2023, the number of commercial banks came down from 32 (2011) to 20, and total BFIs from over 200 to around 100.

6. Encouragement of Acquisition

• NRB allowed acquisition of weak BFIs by strong ones under BAFIA Section 57, with provisions for management takeover, capital injection, and restructuring.
• Examples: acquisition of Nepal Bank of Ceylon by Nepal Credit and Commerce Bank, acquisition of Kist Bank by Global IME, and acquisition of Nepal Bangladesh Bank by Nabil Bank.

7. Coordination with Government and Other Regulators

• NRB worked with the Ministry of Finance, Inland Revenue Department, and Securities Board of Nepal (SEBON) to remove legal hurdles in share swap, taxation, and listing.
• It also coordinated with Nepal Insurance Authority for bank-insurance mergers where applicable.

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Major Achievements from These Efforts

1. Reduction in Number of BFIs

• Commercial banks reduced from 32 to 20; development banks and finance companies also reduced substantially.
• This created a more manageable and less fragmented banking sector.

2. Strengthening of Capital Base

• Merged banks emerged with larger paid-up capital, meeting and exceeding NRB's capital requirements.
• Example: After merger, Nabil Bank and NIC Asia became among the largest banks by capital and assets.

3. Improved Financial Stability

• Weak and problem BFIs were either merged or acquired, reducing the risk of bank failure and systemic risk.
• Non-performing loans (NPLs) of merged entities were better managed through restructuring and recovery.

4. Increased Operational Efficiency

• Merged banks achieved economies of scale, reduced duplication of branches and staff, and lowered cost of operations.
• Use of technology and digital banking expanded after consolidation.

5. Enhanced Capacity to Finance Large Projects

• Larger capital and deposit base enabled merged banks to finance infrastructure and mega projects without exceeding single-borrower limits.
• This supported national priority sectors and economic growth.

6. Improved Corporate Governance

• Mergers brought professional management, better board practices, and stronger internal control systems.
• NRB's supervision became more effective with fewer but stronger institutions.

7. Expansion of Branch Network and Financial Access

• Merged banks used branch expansion incentives to reach rural and semi-urban areas, supporting financial inclusion.

8. Increased Competitiveness and Credibility

• A smaller number of well-capitalized banks improved public confidence and international credibility of Nepal's banking sector.
• It also made the sector more attractive to foreign investment and strategic partners.

9. Reduction in Regulatory Burden

• NRB could focus its supervisory resources on fewer institutions, improving quality of regulation and supervision.

10. Contribution to Monetary Stability

• A stronger banking system transmitted monetary policy more effectively, supporting price and external sector stability.

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Conclusion:
Nepal's merger and acquisition efforts, driven by BAFIA, NRB bylaws, capital requirements, and incentive packages, have transformed a fragmented banking sector into a more consolidated, stable, and efficient one. The achievements—reduced number of BFIs, stronger capital, better governance, and improved financial access—have contributed significantly to the stability and development of Nepal's financial system.

Nepal Rastra Bank — Assistant (Level 2)

"Nepal Rastra Bank is the bank of banks"

Nepal Rastra Bank (NRB), established on 14 Baisakh 2013 BS (26 April 1956) under the Nepal Rastra Bank Act, 2012 BS, is the central bank of Nepal. The expression "bank of banks" means that NRB is the bank for all commercial banks and other financial institutions operating in the country — it does not deal with the general public as ordinary banks do. The statement is justified as follows:

1. Banker to banks: Commercial banks and other BFIs maintain their current accounts with NRB and keep a part of their deposits (cash reserve ratio) there. NRB receives their deposits and makes payments on their behalf.
2. Lender of last resort: When a bank faces a liquidity crisis and cannot borrow from any other source, NRB lends to it as the final source of credit, thereby protecting depositors and the banking system.
3. Clearing house: NRB operates the clearing house through which cheques, drafts and other instruments of different banks are settled among themselves.
4. Supervisor and regulator: NRB licenses, regulates, inspects and supervises all banks and financial institutions, and can take punitive action against defaulters.
5. Guardian of the payment system: NRB runs and oversees the national payment and settlement systems (RTGS, connectIPS, cheque clearing) in which banks are the direct participants.

Thus, just as a bank serves its customers, NRB serves the banks — hence it is rightly called the bank of banks.

Functions, Duties and Rights of Nepal Rastra Bank

A. Functions

1. Issue of currency (note issue): NRB has the sole monopoly of issuing notes and coins in Nepal. It issues notes of Rs 5, 10, 20, 50, 100, 500 and 1000 and coins of smaller denominations. It keeps a minimum reserve of gold, foreign currency and government securities against the notes issued.

2. Banker, adviser and agent of the Government: NRB acts as the banker, fiscal agent and financial adviser to the Government of Nepal. It keeps government deposits, makes payments on behalf of the government, manages public debt, and provides loans and advances to the government.

2. Banker to banks: As explained above, it accepts deposits from BFIs, provides them loans and advances, and acts as lender of last resort.

3. Lender of last resort: It provides emergency credit to banks facing liquidity problems.

4. Regulator and supervisor of BFIs: It grants licences, issues directives, conducts on-site and off-site supervision, and takes corrective action against banks and financial institutions.

5. Manager of foreign exchange: NRB formulates and implements foreign exchange policy, fixes the exchange rate of the Nepalese rupee, and manages the country's foreign exchange reserves.

6. Monetary policy formulation and implementation: NRB formulates and implements monetary policy to maintain price stability, balance of payments equilibrium and adequate credit flow for productive sectors.

7. Clearing house and payment system: It operates the clearing house and modern electronic payment and settlement systems.

8. Promoter of financial inclusion and stability: It promotes financial literacy, financial inclusion and overall stability of the financial system.

B. Duties

1. To maintain the stability of the Nepalese currency and the general price level.
2. To maintain an adequate level of foreign exchange reserves.
3. To promote a sound, healthy and competitive banking and financial system.
4. To act as the lender of last resort and protect the interests of depositors.
5. To formulate and implement monetary, foreign exchange and credit policies in the interest of the nation.
6. To advise the Government of Nepal on economic and financial matters.
7. To supervise and inspect banks and financial institutions and ensure they follow the law and directives.
8. To promote financial inclusion and expand banking services to rural and remote areas.

C. Rights

1. Right to issue notes: Only NRB can issue notes and coins; no other institution can do so.
2. Right to license and regulate: It can grant, suspend or cancel the licence of any bank or financial institution.
3. Right to inspect and supervise: It can inspect the books, accounts and records of any BFI at any time.
4. Right to issue directives: It can issue necessary directives, circulars and orders to BFIs and they are binding on them.
5. Right to take punitive action: It can fine, warn, suspend the board or management, or liquidate a defaulting institution.
6. Right to determine interest and exchange rates: It can fix bank rates, interest rate corridors and the exchange rate of the rupee.
7. Right to act as lender of last resort: It can provide emergency loans to banks on such terms as it deems fit.
8. Right to manage foreign exchange: It can regulate all foreign exchange transactions and hold and manage the country's reserves.

Conclusion

Nepal Rastra Bank is the apex monetary institution of Nepal. By issuing currency, regulating banks, managing foreign exchange and formulating monetary policy, it works as the bank of banks and the guardian of the country's financial system. Its effective functioning is essential for price stability, financial stability and sustainable economic development of Nepal.

Major Banking Services Provided by Banks and Financial Institutions (BFIs)

1. Deposit Mobilization

• Saving deposits, current deposits, fixed deposits, recurring deposits, call deposits and institutional deposits.
• Collection of small savings from rural and urban areas through branches and branchless banking.

2. Loan and Credit Facilities

• Working capital loan, term loan, overdraft, cash credit, demand loan and trust receipt loan.
• Hire purchase, mortgage loan, home loan, vehicle loan, education loan and personal loan.
• Project financing, consortium financing, syndicated lending, SME and SME-focused lending.
• Deprived sector lending, microfinance and priority-sector lending (agriculture, energy, tourism).

3. Payment and Remittance Services

• Cheque, bank draft, telegraphic transfer, RTGS, connect IPS and interbank fund transfer.
• Domestic and international remittance (inward and outward).
• Debit card, credit card, prepaid card, QR-code payment and mobile/internet banking.

4. Foreign Exchange and Trade Services

• Foreign currency exchange, foreign currency accounts, remittance handling.
• Letter of Credit (LC), bank guarantee, performance bond and trade financing.

5. Agency and Utility Services

• Collection of electricity, water, telephone and internet bills.
• Collection of government revenue, distribution of pension and salaries, and acting as agent for insurance (bancassurance).

6. Other Services

• Safe deposit locker, remittance of shares, merchant banking, portfolio management, share registrar and underwriting.
• Advisory services on investment, credit and foreign exchange.

Improvements to be Made by Nepal Rastra Bank (NRB)

1. Stronger Supervision: Adopt risk-based and consolidated supervision; enforce prompt corrective action against weak institutions.
2. Financial Inclusion: Expand branch and branchless banking in remote districts; promote digital financial literacy.
3. Modern Payment System: Ensure full interoperability of cards, wallets and mobile banking; strengthen RTGS/IPS and cybersecurity standards.
4. Consumer Protection: Fix and monitor service charges, simplify grievance-handling and compensation mechanisms.
5. Credit Infrastructure: Strengthen Credit Information Bureau, credit guarantee and collateral registry systems.
6. Regulatory Reform: Update BAFIA, NRB Act and AML/CFT rules; encourage healthy merger and acquisition for strong capital base.
7. Financial Stability: Improve deposit insurance, stress testing and crisis-management framework.

Improvements to be Made by BFIs

1. Customer-Centric Approach: Doorstep banking, simplified account opening, quick loan processing and polite service delivery.
2. Technology Adoption: Mobile/internet banking, e-KYC, digital onboarding, ATM/QR networks and core banking upgrades.
3. Financial Literacy: Regular campaigns in schools, villages and among women and small entrepreneurs.
4. Sound Credit Culture: Better credit appraisal, follow-up and recovery to reduce non-performing loans.
5. Corporate Governance: Transparent charge lists, independent board, internal control and audit compliance.
6. Product Innovation: Tailor-made products for agriculture, SME, renewable energy and remittance families.
7. Human Resource Development: Regular training on banking law, technology and customer service.
8. Cybersecurity and Data Privacy: Strong IT security, fraud monitoring and customer data protection.

Conclusion: NRB should act as an effective regulator and facilitator, while BFIs should adopt technology, good governance and customer-friendly practices. Together they can make financial services accessible, affordable, safe and efficient for all.

Importance of Financial Literacy and Financial Inclusion

1. Introduction

Financial literacy is the knowledge, skill and confidence to manage personal finances effectively — budgeting, saving, borrowing, insuring and investing wisely. Financial inclusion is the process of ensuring access to appropriate, affordable and timely financial products and services (savings, credit, insurance, remittance, digital payment) to all segments of society, especially the unbanked and low-income groups. In Nepal, where a large share of the population is still outside the formal financial system, both are central to the financial sector reform agenda of Nepal Rastra Bank (NRB).

2. Importance of Financial Literacy

1. Informed financial decisions: Helps households distinguish between needs and wants, prepare budgets and avoid impulsive or debt-driven consumption.
2. Protection from exploitation: Literate consumers can identify unfair interest rates, hidden charges, Ponzi schemes, illegal deposit-taking and digital fraud.
3. Better saving and investment habits: Encourages systematic saving, use of bank deposits, insurance and retirement products, and diversification of risk.
4. Responsible borrowing: Reduces over-indebtedness and multiple borrowing by making people aware of repayment capacity, cost of credit and credit discipline.
5. Effective use of digital finance: Enables safe use of mobile banking, QR payment, wallets and remittance channels, reducing dependence on cash.
6. Improved financial discipline in enterprises: Small entrepreneurs can keep accounts, assess cash flow and access formal credit on better terms.
7. Informed policy participation: Financially literate citizens understand monetary policy, inflation, deposit insurance and consumer rights, and thus respond better to NRB's policies.

3. Importance of Financial Inclusion

1. Access to formal finance: Brings the unbanked, rural, women, Dalit, Janajati, small farmers and micro-entrepreneurs into the banking network.
2. Mobilisation of small savings: Small and scattered savings are pooled into the banking system and channelled into productive investment.
3. Cheaper and safer credit: Reduces reliance on informal moneylenders who charge exploitative interest rates.
4. Risk mitigation: Micro-insurance, remittance services and pension products protect poor households against shocks (illness, death, disaster).
5. Financial stability: A broad deposit base and wider credit outreach make the financial system more stable and inclusive.
6. Empowerment: Especially economic empowerment of women and marginalised groups through accounts, credit and enterprise.
7. Efficient delivery of state benefits: Direct Benefit Transfer (DBT) of allowances, subsidies and remittances through bank accounts reduces leakage and corruption.

4. Role of Financial Inclusion in Poverty Alleviation

1. Productive investment by the poor: Access to micro-credit and small loans enables poor households to start or expand micro-enterprises (livestock, agriculture, petty trade), generating income and employment.
2. Smoothing consumption: Savings and credit help poor families meet consumption needs during lean seasons, illness or disasters without selling assets or falling into debt traps.
3. Asset building: Micro-savings, micro-insurance and remittance-linked accounts help the poor accumulate assets and build a buffer against shocks.
4. Human capital development: Income from micro-enterprises is spent on education, health and nutrition of children, breaking the intergenerational poverty cycle.
5. Reduction of informal debt: Formal credit at reasonable interest replaces high-cost moneylender loans, preventing further impoverishment.
6. Women's empowerment: Accounts and credit in women's names raise their bargaining power within the household and community, which is strongly linked to poverty reduction.
7. Financial cushion against vulnerability: Insurance and pension products reduce the risk of falling back into poverty after a shock.

5. Role of Financial Inclusion in Reducing Economic Inequality

1. Broadening access to opportunities: When the poor can save, borrow and insure, they can participate in the market economy on better terms, narrowing the gap between rich and poor.
2. Redistribution through credit: Priority sector lending, deprived sector lending and microfinance direct credit to low-income groups, correcting the historical bias of formal finance toward the rich.
3. Reducing the rural–urban gap: Branch expansion, mobile banking and branchless banking in remote districts reduce the urban concentration of financial services.
4. Inclusive growth: Financial inclusion enables the poor to share in growth through enterprise and employment rather than depending only on trickle-down effects.
5. Reducing intergenerational inequality: Access to education and health financed by micro-enterprise income improves the next generation's chances, reducing persistent inequality.
6. Reducing exploitation: Elimination of exploitative informal credit reduces the transfer of income from poor borrowers to rich lenders.
7. Strengthening social cohesion: Inclusive finance reduces the sense of exclusion among marginalised groups, contributing to social and political stability.

6. Role of NRB and Way Forward

NRB has adopted financial inclusion as a strategic objective through the Financial Inclusion Roadmap, Financial Literacy Framework, Deprived Sector Lending requirement, priority sector lending, branch expansion policy, mobile banking and QR payment expansion, and Deposit and Credit Guarantee Corporation protection. For further progress, Nepal needs:

• Expansion of digital financial services in rural and remote areas.
• Financial literacy campaigns in schools, local levels and mother groups.
• Simple, low-cost products suited to the poor (no-frills accounts, micro-insurance, micro-pension).
• Strong consumer protection and grievance-handling mechanisms.
• Coordination among NRB, local governments, banks, microfinance institutions and cooperatives.

7. Conclusion

Financial literacy and financial inclusion are complementary: literacy without access is useless, and access without literacy is risky. Together they empower the poor to save, borrow, invest and insure, thereby raising income, building assets and reducing vulnerability. In this way, financial inclusion directly contributes to poverty alleviation and to reduction of economic inequality, supporting Nepal's goal of inclusive and sustainable growth.

Capital Market of Nepal: Problems and Practical Suggestions

Introduction

The capital market is that segment of the financial system which deals in long-term securities — shares, debentures, bonds and government securities. In Nepal it consists of the Securities Board of Nepal (SEBON) as regulator, Nepal Stock Exchange (NEPSE) as the secondary market, CDS and Clearing Limited as depository, and licensed brokers, merchant bankers, mutual funds and depository participants. Although the market has grown rapidly in recent years, it is still small, shallow and institutionally weak. The major problems and their practical solutions are discussed below.

Problems Seen in the Capital Market of Nepal

1. Small size and low liquidity. The market is dominated by a few dozen listed companies, most of them commercial banks and financial institutions. Trading is concentrated in a handful of scrips, so investors cannot buy or sell large volumes without disturbing prices.

2. Dominance of banking and financial institutions. Manufacturing, agriculture, tourism and infrastructure are barely represented. The market therefore does not channel funds to productive sectors and does not reflect the real economy.

3. Weak institutional investors. Insurance companies, Employees Provident Fund and Citizen Investment Trust participate, but their investment is limited by legal ceilings. Mutual fund industry is small. As a result, the market is driven by retail investors who lack research capacity.

4. High price volatility and speculative tendency. Share prices often move on rumours, tips and social media rather than on fundamentals. Small investors buy at the peak and sell at the bottom, suffering heavy losses.

5. Inadequate and unreliable information. Many listed companies publish financial statements late, do not hold timely general meetings, and do not disclose price-sensitive information. Insider trading and market manipulation are reported but rarely punished.

6. Weak regulatory and supervisory capacity. SEBSE and NEPSE lack sufficient trained manpower and technology to monitor thousands of daily transactions. Penalties are small and legal proceedings are slow, so deterrence is weak.

7. Shortage of skilled manpower and instruments. There are few qualified analysts, portfolio managers and underwriters. Derivative products, corporate bonds and infrastructure bonds are almost absent, leaving investors with limited choice.

8. Low financial literacy among investors. A large number of investors do not understand risk, diversification or the difference between primary and secondary markets. Many open DEMAT accounts only during a bull run.

9. Poor market infrastructure and technology. Though online trading has expanded, system failures, order-matching problems and delays in settlement still occur. Brokerage offices are concentrated in Kathmandu.

10. Weak primary market. Very few companies issue shares to the public; most new issues are small and oversubscribed. The primary market is not used as a genuine source of long-term corporate finance.

Practical Suggestions for Solution

1. Increase the supply of quality securities. Bring large public enterprises, hydropower companies, insurance and manufacturing companies to the exchange. Encourage corporate bond and infrastructure bond issues with tax incentives.

2. Strengthen institutional investors. Raise the investment ceilings for insurance companies and provident funds in listed securities, and develop mutual funds and pension funds as long-term investors.

3. Improve disclosure and enforcement. Make electronic filing of financial statements mandatory, publish them on NEPSE's website within a fixed time, and impose heavy fines, debarment and criminal liability for insider trading and price manipulation.

4. Build regulatory capacity. Recruit and train Chartered Accountants, lawyers and IT experts in SEBON and NEPSE; adopt surveillance software for real-time monitoring of trading; and set up a fast-track tribunal for securities cases.

5. Expand financial literacy. Run investor awareness programmes through schools, colleges, FM radio and social media; make securities education a part of the school curriculum; and require brokers to explain risks before opening DEMAT accounts.

6. Develop market infrastructure. Extend online trading and depository services to all districts, upgrade the trading software, and move towards a T+1 settlement cycle.

7. Encourage new instruments. Introduce derivatives, exchange-traded funds, mutual fund schemes and securitised instruments gradually, with proper rules and investor protection.

8. Improve credit rating and research. Strengthen credit rating agencies and encourage independent equity research so that investors can take informed decisions.

9. Reform the primary market. Simplify the public issue process, reduce unnecessary regulatory delays, and allow book-building for large issues so that pricing is realistic.

10. Coordinate monetary and securities policy. Ensure that interest rate policy, margin lending rules and capital market regulation move together, so that sudden shifts do not destabilise the market.

Conclusion

The capital market of Nepal suffers from small size, narrow participation, weak institutions, poor disclosure and speculative trading. These problems cannot be solved by the regulator alone. A combined effort of SEBON, NEPSE, the government, listed companies, brokers and investors is needed. If the above suggestions are implemented in a phased manner, the capital market can become a reliable source of long-term finance and contribute meaningfully to capital formation and economic growth in Nepal.

(b) नेपाल राष्ट्र बैंक

नेपाल राष्ट्र बैंक ऐन, २०५८ को दफा ५ अनुसार विदेशी विनिमय (foreign exchange) नीति तर्जुमा तथा कार्यान्वयन गर्ने पूर्ण अधिकार नेपाल राष्ट्र बैंकलाई छ।

(c) २०

Nepal currently has 20 Class "A" commercial banks licensed by Nepal Rastra Bank. The number came down to 20 after a series of mergers and acquisitions among banks in recent years.

(b) भुक्तानी सन्तुलनको अवस्था कायम राख्ने (maintaining the balance of payments position).

Under the Nepal Rastra Bank Act, 2058, maintaining the balance of payments is stated as an objective of the Bank (Section 4), not as a listed function. The functions, duties and powers in Section 5 include formulating monetary policy, determining the exchange rate system, and regulating and supervising banks and financial institutions, so options (a), (c) and (d) are functions.

(A) हिमालय शमशेर ज.ब.रा.

नेपाल राष्ट्र बैंकको स्थापना वि.सं. २०१३ बैशाख १४ (सन् १९५६ अप्रिल २६) मा भएको थियो र यसका प्रथम गभर्नर हिमालय शमशेर जंगबहादुर राणा नियुक्त भएका थिए। उनले वि.सं. २०१३ देखि २०१७ सम्म गभर्नरको जिम्मेवारी सम्हालेका थिए।

(c) Central Bank Digital Currency

CBDC stands for Central Bank Digital Currency — a digital form of a country's fiat currency issued and regulated by the central bank. Nepal Rastra Bank has been studying the feasibility of issuing a digital version of the Nepali rupee (digital NPR) as part of its modern monetary management.

(b) वित्तीय शिक्षा (Financial education)

Financial literacy is the outcome — the knowledge, skill, awareness and access that let a person make sound financial decisions. Financial education is the process or means used to achieve that outcome, so it is not itself a main attribute of financial literacy.

Nepal Rastra Bank (NRB) is the central bank of Nepal, established in 2013 B.S. (1956) and now governed by the Nepal Rastra Bank Act, 2058 (2002). It is an autonomous corporate body with perpetual succession.

Objectives (Section 4)

1. To formulate necessary monetary and foreign exchange policies so as to maintain price stability and balance of payments stability for sustainable economic development.
2. To promote stability and liquidity in the banking and financial sector.
3. To develop a safe, healthy and efficient payment system.
4. To regulate, inspect, supervise and monitor the banking and financial system.
5. To enhance public confidence in the banking and financial system of the country.

Functions (Section 5)

(a) Currency issue. NRB has the sole right to issue banknotes and coins and to manage their circulation, withdrawal and replacement.

(b) Monetary and foreign exchange policy. It formulates and implements monetary policy (through the bank rate, open market operations, CRR, SLR, repo/standing facilities, moral suasion) and foreign exchange policy, and determines the exchange rate system in consultation with the Government.

(c) Banker, advisor and agent of the Government. It keeps government accounts, makes receipts and payments, manages public debt, and advises the Government on monetary, financial and economic matters.

(d) Banker to banks and financial institutions. It holds their reserves and acts as lender of last resort.

(e) Licensing, regulation and supervision. It licenses banks and financial institutions, issues directives, inspects and supervises them, and takes corrective action against those breaching the law.

(f) Management of foreign exchange reserves. It holds and manages the country's foreign exchange reserves and regulates foreign exchange transactions.

(g) Payment and clearing systems. It operates the clearing house and promotes safe, efficient payment and settlement systems.

(h) Financial sector development. It promotes financial inclusion, competition and the healthy development of the financial sector, and performs other functions assigned by the Act or by the Government.

Overall, NRB's objectives centre on price, external and financial stability, while its functions turn these into practice through currency issue, monetary policy, government banking, bank supervision and reserve management.

Under the Banks and Financial Institutions Act, 2073 (BAFIA), Nepal Rastra Bank (NRB) can order a bank or financial institution (BFI) to be liquidated when it cannot be saved by corrective measures. The process is as follows.

1. Grounds for liquidation. NRB may decide to liquidate a BFI if it:

• fails to submit or implement the corrective action plan, or remains in a weak condition despite NRB's corrective and resolution measures;
• has liabilities exceeding assets and cannot be revived, or cannot pay its liabilities (depositors) when due;
• repeatedly violates the Act, NRB directives or licence conditions;
• has its licence cancelled; or
• continues to operate against the interest of depositors and the public.

2. Liquidation order and notice. NRB issues the order, cancels the licence, and publishes a notice in the Nepal Gazette and national newspapers. The Company Registrar's Office and the concerned court are informed, and the BFI stops accepting deposits and doing business.

3. Appointment of liquidator. NRB appoints a liquidator (a competent person or institution). The board and management cease to function, and the liquidator takes control of the assets, books, documents and records.

4. Powers and duties of the liquidator.

• Collect the assets and recover dues and loans.
• Sell movable and immovable property.
• Start or defend legal proceedings on behalf of the BFI.
• Prepare a list of creditors and depositors and invite and verify claims.
• Keep accounts and report periodically to NRB.

5. Order of payment. Proceeds are applied in this order:

1. liquidation expenses and the liquidator's remuneration;
2. depositors' claims (the insured part is met through the Deposit and Credit Guarantee Fund);
3. dues of NRB and the Government of Nepal;
4. other liabilities as prescribed; and
5. the balance, if any, to shareholders.

6. Completion and dissolution. After settling claims, the liquidator submits a final report to NRB. NRB then orders dissolution, the name is struck off the Company Registrar's records, and the institution ceases to exist.

Thus liquidation is a last resort that protects depositors and the financial system through orderly asset realisation and payment by priority.