Bank, Insurance and Financial Institutions

Commercial bank is a financial institution that accepts deposits from the public, provides loans and advances, and renders other banking services with the main motive of earning profit. In Nepal, commercial banks are established and operated under the Nepal Rastra Bank Act and the Bank and Financial Institutions Act (BAFIA), and they must obtain a licence from Nepal Rastra Bank.

Six functions of a commercial bank:

1. Accepting deposits: A commercial bank collects savings from the public in the form of current accounts, savings accounts and fixed deposits. This is the main source of its funds. Current accounts are suitable for traders, savings accounts for general people, and fixed deposits for those who want higher interest by keeping money for a fixed period.

2. Providing loans and advances: The bank lends the deposited money to individuals, firms and industries as overdrafts, cash credits, demand loans, term loans and home or vehicle loans. It charges interest higher than the interest paid on deposits, and this difference (spread) is its main source of profit.

3. Agency functions: The bank acts as an agent of its customers. It collects cheques, drafts and bills, pays insurance premiums, taxes and utility bills, purchases and sells shares and securities, and transfers money on behalf of customers.

4. Remittance of money: The bank transfers money from one place to another through drafts, telegraphic transfers, electronic fund transfers and mobile banking. This makes it safe and easy to send money within the country and abroad.

5. Credit creation: By keeping only a small part of deposits as cash reserve and lending out the rest, the bank creates credit (deposits) many times larger than its original cash. This increases the money supply in the economy and helps in economic development.

6. Other miscellaneous functions: The bank provides locker facilities for safe custody of valuables, issues letters of credit and bank guarantees for trade, discounts bills of exchange, deals in foreign exchange, and provides ATM, internet banking and remittance services. It also acts as a banker to the government and to other banks.

Besides these, commercial banks help in capital formation, promote trade and industry, and support the economic development of the country by mobilising idle savings into productive investment.

Commercial Bank

A commercial bank is a financial institution that accepts deposits from the public, provides loans and advances, and performs various other financial services with the motive of earning profit. It acts as a bridge between those who have surplus money (depositors) and those who need money (borrowers). In Nepal, commercial banks are established and regulated under the Nepal Rastra Bank Act and the Bank and Financial Institution Act (BAFIA). Examples include Nepal Investment Mega Bank, Nabil Bank, and Rastriya Banijya Bank. Its main objective is to earn profit by collecting deposits at low interest and lending at higher interest.

Six Functions of a Commercial Bank

1. Accepting Deposits: A commercial bank collects money from the public in the form of savings deposits, fixed deposits, current deposits and recurring deposits. It pays interest on these deposits. This is the primary source of a bank's funds.

2. Providing Loans and Advances: The bank lends the deposited money to individuals, businesses and industries as loans, overdrafts and cash credits. It charges interest higher than the interest paid to depositors, and this difference is its main source of profit.

3. Facilitating Payments and Remittances: Banks help in transferring money from one place to another through cheques, drafts, electronic transfer and mobile banking. This makes trade and commerce easy and safe.

4. Creating Credit: Commercial banks create credit by issuing loans and advances. When a bank gives a loan, it opens a deposit account in the borrower's name, which increases the total money supply in the economy. This is called credit creation.

5. Providing Agency Functions: Banks act as agents of their customers by collecting cheques, bills and dividends, paying bills and taxes, buying and selling shares and securities, and transferring funds on behalf of customers.

6. Providing Other Services: Banks provide various utility services such as locker facilities for safe custody of valuables, issuing letters of credit and guarantees for trade, foreign exchange facilities, and financial advice to customers.

In this way, a commercial bank plays a vital role in the economic development of a country by mobilising idle money, encouraging savings and financing trade, industry and commerce.

Central Bank

A Central Bank is the apex monetary institution of a country that controls, regulates and supervises the entire banking and financial system. It issues currency, formulates monetary policy and acts as the banker, adviser and guardian of the government and commercial banks. In Nepal, Nepal Rastra Bank (established 1956 A.D.) is the Central Bank.

Functions of Central Bank

1. Currency Issue (Note Issue) The Central Bank has the sole monopoly right to issue currency notes and coins. In Nepal, Nepal Rastra Bank issues the country's bank notes and coins under the Nepal Rastra Bank Act. This ensures uniformity, controlled money supply and public confidence in currency.

2. Banker, Agent and Adviser to the Government It acts as the banker, fiscal agent and financial adviser to the government. It keeps the government's accounts, receives revenue, makes payments, grants loans to meet budget deficits, manages public debt and advises on economic and monetary matters.

3. Banker's Bank and Supervisor It is the banker to all commercial banks. It accepts their deposits, provides loans and rediscount facilities in times of need, and acts as the lender of last resort. It also supervises, inspects and regulates banks and financial institutions to ensure their soundness and protect depositors.

4. Clearing House The Central Bank acts as the clearing house for commercial banks. It settles the mutual claims, cheques and inter-bank transactions of member banks through book entries, which saves time, cost and the need for cash transfer.

5. Controller of Credit (Monetary Policy) It controls the volume and direction of credit in the economy to maintain price stability and economic growth. For this it uses quantitative tools (bank rate, open market operations, cash reserve ratio, statutory liquidity ratio) and qualitative tools (margin requirements, moral suasion, selective credit control).

Other functions (brief): Custodian of foreign exchange reserves, maintenance of external stability of the currency, promotion of a healthy financial system and acting as the lender of last resort.

Conclusion Thus, the Central Bank is the apex institution that maintains monetary stability, guides the banking system and supports balanced economic development of the country.

Society for Worldwide Interbank Financial Telecommunication

SWIFT is the international network used by banks to send and receive secure financial messages for foreign remittance and interbank transactions.

The Citizen Investment Trust was established in 2047 B.S. (1991 A.D.).

1994 B.S.

Nepal Bank Limited, the first bank of Nepal, was established in 1994 B.S. (1937 A.D.).

2013 B.S. (1956 A.D.)

Nepal Rastra Bank, the central bank of Nepal, was established on 14 Baisakh 2013 B.S. (26 April 1956 A.D.) under the Nepal Rastra Bank Act, 2012 B.S.

Life insurance and general insurance.

Life insurance covers the risk of death of the insured person (e.g., term life, endowment), while general insurance covers risks other than death, such as fire, marine and health insurance.

Remittance is the amount of money sent by a person (usually a relative working abroad) to their family or another person in their home country. In accounting, it is recorded as a cash receipt of the business or household.

Banking Instrument

A banking instrument is a written, legally recognised document or medium issued or accepted by a bank through which financial transactions such as payment, deposit, transfer or withdrawal of money are carried out. Examples: cheque, draft, bill of exchange, promissory note, ATM card.

Five Banking Instruments

1. Cheque A cheque is a written order drawn by a depositor (drawer) on a bank (drawee) directing it to pay a certain sum of money to a specified person or bearer. It is the most common instrument for withdrawing money or making payments. A cheque is payable on demand and must be dated and signed by the drawer. It may be bearer, order or crossed. If the drawer's account has insufficient balance, the cheque is dishonoured.

2. Bank Draft (Demand Draft) A bank draft is an instrument issued by a bank on its own branch or another bank, ordering payment of a certain sum to a specified person. The bank itself is the drawer and the payer, so it is more reliable than a cheque. It is used to send money to distant places or to persons whose creditworthiness is not known. The bank issues the draft only after receiving the amount plus commission, so there is no risk of dishonour.

3. Bill of Exchange A bill of exchange is a written, unconditional order signed by the drawer, directing the drawee to pay a certain sum to a specified person or to the bearer on a fixed date or on demand. The drawee accepts it by signing, and then it becomes a legal liability. It is widely used in trade to settle credit transactions. It can be discounted with a bank before maturity to get cash early.

4. Promissory Note A promissory note is a written, unconditional promise made by one person (maker) to pay a certain sum of money to another person (payee) on demand or on a specified date. Unlike a bill of exchange, it is made by the debtor himself. It is a legal acknowledgement of debt and is used to obtain loans or to settle business dues. It needs no acceptance, as the maker is the payer.

5. ATM Card (Debit/Credit Card) An ATM card is a plastic banking instrument issued by a bank to its customer, which allows the holder to withdraw cash, check balance, transfer funds or make payments through automated machines and electronic terminals. A debit card uses the money in the customer's own account, while a credit card allows spending up to a sanctioned limit. It is convenient, quick and available 24 hours.

Other instruments: bank overdraft, traveller's cheque, letter of credit, mobile banking.

Kumari Chowk Adda was established in 1993 B.S.

A cheque is drawn by the account holder on his or her own account and may be dishonoured if funds are insufficient, whereas a bank draft is issued by a bank after receiving payment in advance, so it is safe and certain to be honoured.

Under the Banks and Financial Institutions Act, 2073, a finance company is classified as a "C" class financial institution.

The Sveriges Riksbank (Bank of Sweden), established in 1668 A.D., is regarded as the first central bank of the world.

Nepal Bank Limited, established in 1994 B.S. (1937 A.D.), is the first commercial bank of Nepal.

Introduction to Financial Institutions

Financial institutions are those organisations which collect idle savings from the public and channel them into productive investment by providing loans and other financial services. They act as a bridge between those who have surplus money (savers) and those who need money (borrowers). In Nepal, financial institutions include commercial banks, development banks, finance companies, micro-credit institutions, cooperatives and insurance companies. They are established and regulated under the laws of the country, and they play a vital role in the economic development of the nation by mobilising capital, encouraging saving habits and supporting trade, industry and agriculture.

Five Functions of Financial Institutions

1. Collection and Mobilisation of Savings (Deposit Function): The primary function of financial institutions is to collect scattered and idle savings from the public in the form of deposits — current, saving and fixed deposits. By offering interest on deposits and providing safety, they encourage people to save. These collected savings are then mobilised as loans and investments for productive purposes. In this way, small savings of many people are converted into large capital, which is essential for economic development.

2. Providing Loans and Advances (Credit Function): Financial institutions accept deposits from the public and provide loans and advances to individuals, businesses and the government. They charge a higher rate of interest on loans than the rate they pay on deposits, and the difference (spread) is their main source of income. They provide different types of loans such as cash credit, overdraft, demand loans, term loans and mortgage loans. By supplying credit, they help trade, commerce, agriculture and industry to grow.

3. Remittance and Payment Services: Financial institutions transfer money from one place to another, both inside and outside the country. They issue bank drafts, telegraphic transfers, traveller's cheques and electronic transfers. In Nepal, remittance sent by workers abroad is a major source of foreign currency, and financial institutions play a key role in receiving and distributing it. They also make payments on behalf of customers through cheques, and collect bills, dividends and interest for them.

4. Agency and Utility Services: As an agent of customers, a financial institution collects cheques, drafts and bills, pays insurance premiums, taxes and bills, buys and sells shares and securities, and acts as a trustee and executor. As utility services, it provides locker facilities for safe custody of valuables, issues letters of credit and guarantees, issues traveller's cheques, provides foreign exchange facilities and supplies market information to customers.

5. Promotion of Trade, Industry and Economic Development: Financial institutions provide short-term and long-term finance to industries and traders, which helps in the growth of production, employment and national income. They help in the formation of capital by encouraging savings and investment. They also assist the government by providing loans, collecting taxes and selling government securities. Through these activities, they contribute directly to the economic development of the country.

Bank overdraft is a facility by which a bank allows a current account holder to withdraw more money than the balance in the account, up to an agreed limit. Interest is charged only on the amount actually overdrawn, for the period it is used, and it is meant for short-term financial needs.

Insurance is a contract in which one party (the insurer) agrees to pay a fixed sum or compensate for loss to another party (the insured) on the happening of a specified risk, in return for a payment called the premium. It transfers the risk of loss from an individual to the insurance company.

Nepal Rastra Bank is the central bank of Nepal. It was established on 14 Baisakh 2013 B.S. and controls the money supply and regulates the banking system.