Banking: Meaning, Principles and Evolution in Nepal

Meaning of Banking

Banking is the business of accepting deposits from the public, keeping them safe, and lending them to individuals, firms and the government at interest, together with services such as remittance, payment, foreign exchange and credit creation. A bank is a licensed financial institution that acts as an intermediary between savers (surplus units) and borrowers (deficit units). It earns profit mainly from the spread between the interest it charges on loans and the interest it pays on deposits.

Principles of Banking

1. Liquidity - keep enough cash and near-cash assets to meet withdrawals on demand, so that public confidence is maintained.
2. Safety - deposits are public money held in trust, so loans and investments must be made only where the principal is secure.
3. Profitability - a bank must earn enough to cover costs, pay dividends and build reserves.
4. Balance of liquidity and profitability - the two pull in opposite directions; sound banking lies in balancing them.
5. Diversification of risk - spread loans over many sectors, borrowers and regions rather than concentrating them.
6. Secrecy - keep customers' accounts and transactions confidential, except where the law requires disclosure.
7. Public trust and service - banking is a business with public interest, so honesty and service to the community are essential.
8. Legality - all operations must follow the Nepal Rastra Bank Act, the Bank and Financial Institutions Act (BAFIA) 2073 and NRB directives.

Evolution of Banking in Nepal

1. Traditional phase (before 1937). Informal arrangements such as dhukuti, hundi and moneylenders met credit needs. The Tejarath Adda (1877 A.D., B.S. 1934) lent to government employees and the public, but did not accept deposits and was not a true bank.

2. Beginning of modern banking (1937-1960).

• Nepal Bank Limited was established in 1937 A.D. (B.S. 1994) as the first commercial bank of Nepal.
• Nepal Rastra Bank was established in 1956 A.D. (B.S. 2013) as the central bank, to issue notes, regulate money and credit, and supervise banks.
• Nepal Industrial Development Corporation followed in 1959 A.D.

3. Expansion of state-owned banking (1960-1984).

• Rastriya Banijya Bank (RBB) was established in 1966 A.D. (B.S. 2022) as a fully government-owned commercial bank, to extend banking services to trade, industry and rural areas.
• Agricultural Development Bank was set up in 1968 A.D. for agricultural credit.
• Other specialised institutions, such as housing and cooperative finance bodies, also began.

4. Liberalisation phase (1984-2000).

• Nepal Arab Bank (now Nabil) started in 1984 A.D. as the first joint-venture bank.
• Other joint-venture banks followed, such as Nepal Indosuez, Nepal Grindlays (now Standard Chartered) and Himalayan Bank.
• The Commercial Bank Act, 2031 (1974) and later the BAFIA 2063 gave the legal framework for licensing and supervision. (BAFIA 2073 now replaces BAFIA 2063.)
• After 1990 many private banks and finance companies entered the market.

5. Consolidation and modernisation (2000-present).

• Adoption of Basel capital norms and risk-based supervision by NRB.
• NRB's merger and acquisition policy reduced the number of banks and financial institutions.
• Growth of development banks, microfinance institutions and cooperatives.
• Digital banking: ATMs, mobile and internet banking, QR payments, ConnectIPS, and branchless banking to improve financial inclusion.

Conclusion

Banking in Nepal has grown from informal lending and the Tejarath Adda to a regulated, technology-driven system led by Nepal Rastra Bank. Banks such as RBB, the oldest government-owned commercial banks, still serve a vital role in mobilising savings, financing development and extending services across the country.

Introduction of Corporate Governance

Corporate Governance is the system of rules, practices, and processes by which a company is directed, controlled, and held accountable. It defines the relationship among a company's stakeholders — shareholders, board of directors, management, employees, customers, suppliers, and the wider society — and lays down how the objectives of a company are set, how performance is monitored, and how risks are managed. In essence, it is the mechanism through which the interests of owners (shareholders) are balanced against those of other stakeholders, while ensuring transparency, fairness, and accountability in corporate decision-making. Good corporate governance rests on a clear separation of ownership from management, an independent and effective board, reliable financial reporting, and strong internal controls. In the banking sector, corporate governance assumes special importance because banks handle public deposits and their failure can threaten the entire financial system; hence regulators such as Nepal Rastra Bank issue directives on corporate governance for banks and financial institutions.

Fundamental Principles of Corporate Governance

The fundamental principles of corporate governance, as recognized internationally (OECD principles) and by Nepal Rastra Bank, are:

1. Transparency — Timely, accurate, and adequate disclosure of financial and non-financial information (financial statements, related-party transactions, risk exposures) to stakeholders so they can make informed decisions.

2. Accountability — The board and management are answerable for their decisions, actions, and performance to shareholders and other stakeholders; roles, responsibilities, and reporting lines are clearly defined.

3. Fairness — Equitable treatment of all shareholders, including minority shareholders, with equal access to information and protection of their rights; no misuse of insider position.

4. Responsibility (Corporate Social Responsibility) — The company acts as a responsible corporate citizen, complies with laws and regulations, and considers the interests of society, employees, and the environment.

5. Independence / Integrity — Presence of independent directors and independent audit and risk committees, with decisions taken honestly, ethically, and free from conflict of interest.

6. Disclosure and Reporting — Regular, reliable, and comparable reporting of operating results, ownership structure, and governance practices to regulators and the public.

7. Risk Management and Internal Control — Sound systems to identify, measure, monitor, and control risks (credit, liquidity, market, operational) and to safeguard assets.

8. Stakeholder Interest Protection — Recognition and protection of the rights and legitimate interests of depositors, creditors, employees, and the community at large.

These principles together ensure that a bank or company is managed in a prudent, ethical, and sustainable manner, thereby protecting depositors' money, shareholders' wealth, and public confidence in the institution.

Office Management and the Importance of Filing

Office Management

Office management is the process of planning, organising, directing, coordinating and controlling the activities and resources of an office so that its work is carried out efficiently, economically and on time. It involves managing men (staff), materials (stationery, equipment, records), methods (procedures, systems) and the office environment to achieve the goals of the organisation.

In short, office management means getting the right office work done, by the right people, in the right way, at the right time and cost. Its main objectives are:

• Smooth and timely flow of information and paper work
• Maximum efficiency with minimum cost
• Proper utilisation of office staff, machines and space
• Maintenance of accurate records and records security
• Good working environment and staff morale
• Support to management in planning, decision-making and control

Importance of Filing in Office Management

Filing is the systematic arrangement and preservation of documents, letters, vouchers, contracts and other papers in such a way that they can be located and produced quickly whenever needed. Its importance in office management can be described as follows:

1. Ready reference – Filed documents can be traced and produced within seconds when a question, dispute or query arises. This saves time and avoids delay in office work.

2. Evidence and proof – Files serve as legal and documentary evidence in audits, tax matters, court cases and investigations. In a bank, vouchers, loan documents and KYC records must be preserved as proof of transactions.

3. Decision-making support – Past records, reports and correspondence help managers take informed decisions by referring to previous policies, precedents and performance.

4. Continuity of work – If an employee leaves or is transferred, the files remain in the office. The new staff can understand past dealings and continue the work without interruption.

5. Protection of documents – Proper filing protects important papers from loss, theft, fire, moisture, insects and mishandling. Valuable documents like land ownership certificates, agreements and share certificates are kept safe.

6. Efficient office system – A good filing system reduces unnecessary paper handling, duplication of work and searching time, thus increasing the speed and accuracy of office operations.

7. Control and audit – Filing makes internal control possible. Auditors, supervisors and regulators can verify records, check compliance and detect irregularities.

8. Saving of space and cost – Scientific filing (using cabinets, folders, digital filing) uses office space economically and reduces the cost of maintaining records.

9. Goodwill and service – Quick retrieval of information helps the office serve customers, clients and other departments promptly, which builds the image and goodwill of the organisation.

10. Statutory requirement – Laws such as the Company Act, tax laws and banking regulations require offices (especially banks) to keep records for a fixed period. Filing ensures legal compliance.

Conclusion

Office management is the backbone of organised office work, and filing is one of its most essential tools. Without a proper filing system, an office cannot supply information quickly, cannot prove its transactions and cannot function smoothly. Therefore, filing is not merely storage of papers — it is a means of efficient record keeping, quick reference, legal protection and effective management control.

Types of Accounts Maintained by Commercial Banks

Commercial banks maintain the following major types of accounts:

1. Current Account – Mainly opened by business firms, companies and institutions. It requires a minimum balance, allows unlimited transactions, provides overdraft facilities, and generally pays no interest.

2. Saving Account – Opened by individuals and salaried persons. It earns a nominal interest, has restrictions on the number of withdrawals, and requires a minimum balance.

3. Fixed Deposit Account – Money is deposited for a fixed period at a higher rate of interest. It cannot be withdrawn before maturity without penalty; a fixed deposit receipt is issued.

4. Recurring Deposit Account – A fixed amount is deposited every month for a fixed period. The accumulated amount with interest is paid at maturity.

5. Call Deposit Account – Also called a margin/current deposit account. Money is deposited for a short period and can be withdrawn on demand; a lower rate of interest is paid.

6. Other Accounts – Salary account, pension account, minor account, joint account, institutional/corporate account, NRN account, and foreign currency account.

Procedure for Opening an Account

1. Selection of account type – The customer decides the type of account (current, saving, fixed, etc.) suitable to his/her need.

2. Application form – The customer fills in the prescribed account opening form with name, address, occupation, citizenship number, contact details, etc., and submits it with a passport-size photograph.

3. Submission of documents – Citizenship certificate/passport (for individuals), registration certificate, PAN/VAT certificate, board resolution and authorized signatory details (for institutions) are submitted.

4. Introduction/verification – The customer is introduced by an existing account holder or the bank verifies the documents and the customer's identity.

5. KYC and due diligence – The bank completes Know Your Customer formalities, checks the customer against blacklists, and assesses the risk category.

6. Specimen signature – The customer puts his/her specimen signature on the signature card in the presence of the bank official.

7. Deposit of initial amount – The minimum initial deposit prescribed for that account type is deposited.

8. Approval by authorized official – The branch manager or authorized officer approves the account.

9. Issue of account number and cheque book – The bank allots an account number, opens the account in the system, and issues a cheque book/passbook and ATM card as applicable.

10. Operation of the account – The customer can then deposit and withdraw money as per the rules of the account.

Meaning of Bank

A bank is a financial institution that accepts deposits from the public, keeps them safe, and lends money to those who need it. It acts as a bridge between people with surplus money (depositors) and people who need funds (borrowers). In Nepal, banks are licensed and regulated under the Bank and Financial Institutions Act (BAFIA), 2073 and supervised by Nepal Rastra Bank, the central bank. A bank earns profit mainly from the difference between the interest it charges on loans and the interest it pays on deposits.

Main Functions of a Bank

Functions are divided into primary and secondary functions.

A. Primary Functions

1. Accepting deposits. Banks collect savings through various accounts:

   • Current account - for businesses, usually no interest, unlimited withdrawals.
   • Savings account - for the general public, modest interest, limited withdrawals.
   • Fixed deposit account - money kept for a fixed period at higher interest.
   • Recurring deposit account - a fixed amount deposited regularly.

2. Advancing loans. Banks lend deposits to individuals, businesses and industries and earn interest. Forms include:

   • Overdraft - allows a current account holder to withdraw beyond the balance up to a limit.
   • Cash credit - a limit against security, drawn as needed.
   • Demand loan - short-term loan repayable on demand.
   • Term loan - medium or long-term loan for business and industry.
   • Discounting of bills - paying the holder of a bill before maturity after deducting discount.

3. Credit creation. Banks keep only a part of deposits as reserve and lend the rest; the loans return as new deposits, increasing the money supply.

4. Payment and settlement. Banks help transfer money through cheques, drafts, electronic transfers and mobile banking.

B. Secondary Functions

1. Agency functions. Banks act as agents of customers by:

   • collecting cheques, drafts and bills;
   • paying insurance premiums, taxes, loan instalments and similar dues on standing instructions;
   • buying and selling shares and securities;
   • acting as trustee or executor of wills;
   • providing references and credit information.

2. General utility functions.

   • Remittance - sending money from one place to another, including foreign remittance.
   • Foreign exchange - buying and selling foreign currency and issuing travellers' cheques.
   • Locker facility - safe custody of valuables and documents.
   • Letters of credit and guarantees - assuring payment in trade.
   • Advisory services - advice on investment and financial matters.
   • Government business - collecting revenue, paying salaries and pensions.

Conclusion

A bank is more than a place to keep money. It mobilises idle savings, channels them into productive investment, creates credit and provides many financial services. In Nepal, banks like Rastriya Banijya Bank contribute to deposit collection, rural credit, remittance handling and financial inclusion.

The Banking Offence and Punishment Act, 2064 (2008) was enacted to prevent and punish offences committed against banks and financial institutions, to protect depositors, and to maintain the credibility of the banking system. The acts treated as banking offences include the following.

1. Forgery of banking documents - forging or altering cheques, drafts, deposit slips, negotiable instruments, cards, seals, signatures or records of a bank or financial institution, or using such forged documents knowingly.
2. Fraud in obtaining loans - taking a loan or credit facility by submitting false or forged documents, false valuation or by misrepresentation, or using a loan for a purpose other than the one it was given for in a fraudulent way.
3. Misappropriation and embezzlement - a director, employee or other person misusing, embezzling or unlawfully diverting the money, deposits, securities or property of a bank.
4. Falsification of accounts - making false entries in, or destroying or tampering with, the books, vouchers, ledgers or electronic records of a bank, or giving false statements or reports to the regulator.
5. Electronic and card-related offences - unauthorised access to a bank's computer system, ATM or card fraud, theft or alteration of electronic data, and tampering with electronic banking systems.
6. Unauthorised banking business - carrying on banking or financial transactions, or accepting deposits from the public, without a licence from Nepal Rastra Bank.
7. Misuse of authority and bribery - a director or employee abusing position for undue personal gain, or giving or taking a bribe in connection with banking transactions.
8. Disclosure of confidential information - revealing customers' account details or the bank's confidential affairs without lawful authority.
9. Obstruction - obstructing inspection, supervision or investigation by Nepal Rastra Bank or other authorised officers, or concealing property to defeat recovery of a loan.
10. Abetment, conspiracy and attempt - helping, instigating, conspiring or attempting to commit any of these offences.

Punishment. Depending on the gravity of the offence, the Act provides imprisonment and fines, with recovery of the amount involved and, for offences by an organisation, liability of the persons responsible. A separate Special Court (Banking Offence) and investigation by the concerned authorities deal with such cases.

Categories of Bank and Financial Institutions as per BAFIA, 2073

The Bank and Financial Institution Act (BAFIA), 2073 classifies banks and financial institutions into the following four categories:

1. Commercial Banks (Class "A") These are the largest financial institutions, licensed to perform all types of banking transactions including accepting deposits, lending, and foreign exchange. Examples: Rastriya Banijya Bank, Nepal Investment Mega Bank, Nabil Bank.

2. Development Banks (Class "B") Licensed to provide medium and long-term loans, primarily for industrial and infrastructural development. They are classified into national, provincial, and regional levels based on paid-up capital. Examples: Nepal Development Bank, Muktinath Bikas Bank.

3. Finance Companies (Class "C") Licensed to provide hire-purchase loans, consumer loans, and other financial services, but they cannot accept foreign exchange or deal in foreign currency. Examples: various finance companies operating at national and regional levels.

4. Microfinance Financial Institutions (Class "D") Licensed to provide micro-credit and small-scale financial services to low-income groups, rural communities, and small entrepreneurs. Examples: various microfinance institutions operating at national and regional levels.

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Functions of Commercial Banks

Commercial banks perform the following major functions:

A. Primary Functions

1. Accepting Deposits: They collect savings from the public through current accounts, savings accounts, fixed deposits, and recurring deposits.
2. Providing Loans and Advances: They provide loans in the form of cash credit, overdrafts, demand loans, and term loans to individuals, businesses, and industries.
3. Discounting Bills of Exchange: They discount bills of exchange and provide immediate cash to the holder.
4. Investment: They invest funds in government securities, shares, and debentures to earn income.

B. Secondary Functions

5. Agency Functions: They act as agents of customers by collecting cheques, paying bills, transferring funds, and purchasing securities on behalf of customers.
6. General Utility Functions: They provide services such as locker facilities, letters of credit, bank drafts, traveler's cheques, and foreign exchange facilities.
7. Remittance Services: They facilitate domestic and international money transfers.

C. Other Functions

8. Credit Creation: Commercial banks create credit by expanding deposits through the lending process.
9. Economic Development: They mobilize idle savings and channel them into productive investments, contributing to national economic development.
10. Government Functions: They act as bankers to the government by collecting taxes, making payments, and managing public debt.

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Conclusion: BAFIA, 2073 provides a four-tier classification of banks and financial institutions (A, B, C, D) based on capital, scope, and function. Commercial banks, as Class "A" institutions, are the backbone of the financial system, performing deposit, lending, agency, and utility functions that drive economic growth.

Investment Management

Investment Management is the process of managing an individual's or an institution's investment portfolio in order to achieve specified financial goals. It involves deciding where to invest (selection of securities), how much to invest (allocation of funds), when to buy or sell (timing), and how to monitor and review the portfolio over time. In simple words, it is the professional management of various securities — shares, bonds, debentures, deposits, mutual funds, real estate, etc. — to meet the investment objectives of the investor while keeping risk within acceptable limits.

Investment management is performed either by the investor himself (individual investment management) or by professional fund managers, banks, and financial institutions (institutional investment management).

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Importance of Investment Management

1. Achievement of Financial Goals — It helps the investor plan investments in line with specific goals such as education, marriage, buying a house, or retirement, so that the required amount is available at the right time.

2. Maximization of Return — By selecting the right mix of securities and timing the market properly, investment management aims to earn the highest possible return on the funds invested.

3. Minimization of Risk — Through diversification (spreading investment across different securities, sectors and time periods), it reduces the risk of loss. "Don't put all your eggs in one basket" is the guiding principle.

4. Proper Asset Allocation — It balances investment between safe assets (fixed deposits, bonds) and risky assets (shares, mutual funds) according to the investor's age, income, and risk-bearing capacity.

5. Liquidity Management — It ensures that a part of the investment is kept in easily convertible (liquid) form so that the investor can meet emergencies without heavy loss.

6. Protection against Inflation — By investing in growth-oriented assets whose value rises with prices, investment management protects the real value of savings from being eroded by inflation.

7. Tax Planning — Proper investment management uses tax-saving instruments and exemptions so that the investor's tax liability is reduced and net income increases.

8. Better Use of Surplus Funds — Idle savings are put to productive use, which benefits both the individual (income) and the economy (capital formation).

9. Professional Expertise and Monitoring — Professional managers have knowledge, experience, and market information; they continuously monitor and review the portfolio and make timely changes.

10. Economic Development — By channelizing savings into productive sectors, investment management supports capital formation, employment generation, and overall economic growth of the country.

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Techniques of Investment Management

1. Security Analysis — Studying the economy, industry, and company (fundamental analysis) and price movements (technical analysis) to select undervalued and sound securities.

2. Portfolio Construction — Building a balanced portfolio by combining securities with different risk–return characteristics, based on the investor's objectives and constraints.

3. Diversification — Spreading funds among different securities, industries, sectors, and geographical areas to reduce unsystematic risk.

4. Asset Allocation — Dividing the total fund among equity, debt, and other assets in a planned proportion (e.g., 60% equity, 30% debt, 10% gold).

5. Fundamental Analysis — Evaluating a company's financial statements, earnings, management quality, and growth prospects to estimate its intrinsic value.

6. Technical Analysis — Studying price charts, trends, and indicators (moving averages, RSI, etc.) to decide the right time to buy or sell.

7. Portfolio Revision (Rebalancing) — Periodically reviewing and changing the portfolio when market conditions or the investor's goals change.

8. Portfolio Evaluation — Measuring performance using measures such as Sharpe's ratio, Treynor's ratio, and Jensen's alpha to judge whether the portfolio is performing as expected.

9. Hedging and Derivatives — Using futures, options, and swaps to protect the portfolio against adverse price movements.

10. Systematic Investment Plan (SIP) — Investing a fixed amount at regular intervals, which averages out the cost of purchase and reduces timing risk.

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Conclusion: Investment management is thus a systematic and continuous activity that balances risk and return to fulfill the investor's financial objectives. Its importance lies in protecting savings, increasing wealth, and contributing to national capital formation, while its techniques — from security analysis to portfolio evaluation — provide the practical tools for achieving these goals.

Differences among Interest, Discount and Exchange

Why Interest, Discount and Exchange are Necessary in the Banking System

1. Interest — source of income and mobilisation of deposits Banks accept deposits and pay interest to depositors, and lend money and charge interest from borrowers. The difference between the two (spread) is the main income of a bank. Interest also encourages people to save and makes credit available for trade, industry and agriculture.

2. Discount — meeting short-term credit needs Business firms holding bills of exchange need cash before maturity. The bank discounts such bills and provides ready money by deducting discount in advance. This supplies working capital, keeps trade and commerce running, and gives the bank a safe earning.

3. Exchange — transfer of funds and settlement of payments Trade and business take place between different places and countries. Banks transfer money through drafts, telegraphic transfers and remittances, and settle foreign exchange for imports and exports. Without exchange facilities, payments over distance would be risky, slow and costly.

4. Overall importance

• They help in the creation and expansion of credit in the economy.
• They encourage saving and investment habits among the people.
• They provide liquidity and safety in financial transactions.
• They earn profit for the bank and help it survive and grow.
• They support trade, industry, agriculture and government transactions.
• They assist in maintaining a stable monetary and exchange system.

Conclusion: Interest, discount and exchange are the three pillars of banking business. Without them, banks cannot earn income, cannot provide short-term finance, and cannot transfer funds smoothly. Hence they are essential for the smooth functioning of the banking system and the economic development of the country.

Part 1: Role of information in minimising credit risk

Credit risk is the risk that a borrower will fail to repay principal or interest. Accurate and timely information is the main safeguard, and credit risk rises sharply when it is missing or unreliable.

1. Before lending (appraisal). Information about the borrower's character, repayment capacity, capital, collateral and business conditions (the "5 Cs") lets the bank judge whether to lend and on what terms. The Credit Information Bureau (CIB) of Nepal Rastra Bank shows a borrower's existing loans and default history.
2. Pricing and limits. Information on risk grades helps set the interest rate, loan size and security required.
3. Monitoring. Regular financial statements, stock and site visits and account behaviour give early warning of stress, so action can be taken before the loan becomes bad.
4. Avoiding adverse selection and moral hazard. Where information is asymmetric, borrowers can hide facts, take loans from several banks, or divert funds. Sharing information among banks reduces this.
5. Provisioning and decisions. Proper classification of loans depends on accurate information about overdue status and recoverability.

Information fails to protect the bank when it is incomplete, stale, falsified (fake documents, inflated valuation, window dressing), poorly analysed, or not shared among lenders. Credit risk is then high.

Part 2: Loan classes classified as bad debts

Under Nepal Rastra Bank's directive on loan classification and provisioning, loans are classified as follows:

Bad debts are loans in the Loss class: overdue for more than 12 months, or where the borrower has absconded or is bankrupt, the security is insufficient or cannot be realised, the business has closed with no hope of revival, or legal remedies have been exhausted. The Sub-standard and Doubtful classes together with Loss are known as non-performing loans (NPLs), and a 100% provision must be made for loss loans.