COMMERCIAL

BANKING
OPERATIONS
Introduction
 History of Banking
• Derived from Bancus or Banque (Bench)
• Jews used to do the deposit and lending
business in bench
• Babylon: temples of Ephesus and Delphi
(limited functions of deposit and withdrawal)
• Money dealers at Florence….received and
loaned money
• Goldsmiths of England
• In eastern civilization, Manu Smriti suggests
traces of banking…rules, papers, interest,
installments etc
 History … Continued
• Bank of Geneva (1157 AD)
• Bank of Barcelona (1401 AD)
• Bank of Genoa (1407 AD)
• Bank of Amsterdam (1609 AD)
• Bank of England (1694 AD)
 What is Bank?
Bank is the financial institution dealing with money and credit. It is a
financial intermediary to transfer money from surplus sector to deficit
sector of the economy. Although basic banking is the business of
accepting deposit and granting loans, today’s banking has increased its
horizon to provide various financial solutions to the customers as well.

Today’s Banks
• Accepts deposits
• Makes sizeable fund
• Lends it
• Credit creation
• Provides Other financial services
• Provides utility services
• Plays role of a catalyst for the economy
 Banking Vs Other Business
[Link]. Banking Business Other Business

1 Deals with money and financial Deals with product in the form of goods
products and services

2 Creator of credit. Accepts deposit Engaged in manufacturing, trading and

and lends providing other services

3 Controlled by regulator (NRB) and No any dedicated controller or regulator

other regulatory body to ensure
trust and confidence of people.

4 Provision of using fund after All resources can be used

complying regulatory guidelines for
ensuring liquidity

5 Can have responsible and balanced Freedom to record huge profits by

profitability with social justice and organizing business
welfare.

6 Transparent, financials to be Usually once in a year except from some

published in public domain listed in the stock exchange
quarterly
Functions of Commercial Banks
• Deposit Collection
• Advancing Loans
• Credit Creation
• Payment system
– Clearing cheques
– Online payment interface
• Agency Functions
– Remittance Functions
– Collection of credit instruments
– Execution of standing orders
– Purchasing and sale of securities
– Collection of dividend on shares
– Income tax consultancy
– Acting as trustee and executor
– Acting as representative and correspondent
 Functions…… CONTD
• Utility Functions
– Safe deposit locker
– Traveler Cheques
– Letter of credit and Bank guarantee (Trade Facilitations)
– Collection of statistics
– Underwriting securities
– Foreign exchange services
– Card services
– E banking/ mobile banking with utility facilities
– Mutual fund management
– Bancasurance
 Roles of Banking
• Intermediation Role
• Payment Role
• Guarantor Role
• Agency Role
• Policy Role
 Importance of Banks
• Replacement of informal lending
• Capital Formation
• Resource Utilization at Optimum level
• Encouraging entrepreneurs
• Monetization of economy
• Boost economic activities, growth and stability
• Implementation of Monetary Policy
• Promotion of trade and industry
• Promotion of right industries
• Regional Development
• Agricultural, priority and deprived sector development
 Types of Bank
• Central Bank (Regulator): Apex institution which controls,
regulates and supervises the banking system of the country.
• Commercial Bank: Performs all kind of banking functions
including financing trade and commerce.
• Development Bank (Specific purpose and need):
Banking institution established for the development of specific
sector or region.
• Merchant Banks: Carries out functions like issuing,
management and underwriting of shares, advising companies
on merger and acquisition, loan syndication, financial and
management consultancy etc.
• Industrial Banks (Investment Banks): Established in the
motive of facilitating medium and loan term financial needs of
industries.
 Types of Bank
• Exchange Banks: Banks dealing with foreign exchange and
specialized in foreign trade. They are dealer of foreign
currencies.
• Saving Banks: Main purpose is to promote saving habits
among the general public and mobilize the scattered deposits.
• Rural Banks: Established for the development of rural
economy by developing agriculture, trade, commerce and
industry and other productive activities in the rural area.
• Cooperative Banks: Institutions established with the basic
principle of cooperation. Objectives of such institutions is to
facilitate rural credit and to promote thrift and self help
among the economically weaker sections of the society.
• Building Societies: Developed to give loan for the
construction of buildings.
Types of Bank and Fis (In context of Nepal as per
Bafia 2073)

• Nepal Rastra Bank (Regulator)

• Commercial Bank (Class A)
• Development Bank (Class B)
• Finance Companies (Class C)
• Micro Finance Companies (Class D)

• Infrastructure Bank
 Financial System
• Financial institutions are those institutions who deals with financial and
monetary services such as deposit mobilization, investment, extending loans,
financial guarantee, underwriting, currency exchanging etc. Under the broad
definition of financial institution, banks, development banks, finance
companies, insurance companies, brokerage companies, Citizen Investment
Trust, Employee Provident Fund, micro credits etc are included. They all act
as the capital fund creator and fund mobilizer of the economy and pay their
own roles for channelizing funds from surplus sector to deficit sector.
• Existence of bank and non bank financial institutions is called financial
system.
• Transfer of funds from surplus area/sector to deficit area/sector
• Financial Intermediaries- Banks and other financial institutions
• Financial System: Financial institutions, financial instruments and financial
market
• Financial market—serves different set of customers with different securities
• Money Market and Capital Market
• Capital Market: Primary and secondary market
• OTC market (Over the Counter Market)
 Various Institutions in Nepalese Financial System

A. Depository Financial Institutions

a) Accepts deposits from public
b) All types of banking institutions in this group
B. Non-depository Financial Institutions
a) Raises funds from public in the form other than deposits i.e.
premiums and provident fund or retirement benefit deductions
b) All life, non-life, reinsurance companies, EPF, CIT, retirement
funds and mutual funds belongs to this type
C. Ancillary Financial Institutions
a) In this group institutions like merchant bankers, CDS and
clearing limited, depository participants, stock dealer, stock
broker agencies, DCGF, Nepal Stock Exchange Limited, Credit
Rating Companies and Credit Information Center are grouped
D. Others
a) Various types of cooperatives: Saving and Credit, multipurpose,
agricultural and dairy
b) NGOs working for economic upliftment of people under poverty
line
 Importance of Financial System

• Helps to accumulate scattered resources

• Promotes investment
• Creates market
• Creates employment opportunities
• Promotes technological innovations
• Public debt to Government easy in sound financial
system
• Overall growth of economy
Nepalese Financial System
 History of Nepalese Financial System
• Gunakamdev, Sankhadhar Sakhwa & Newa Sambat and trade with Tibet
• Tejarath Adda by Rannodip Singh (1876 AD)
• NBL (1937 AD)
• NRB (1956) as per NRB act 1955 under 5 year development plan mid 1950
• NIDC (1959)
• EPF (1962)
• Cooperative Bank (1964) and LRSC (1966)
• Merged to form ADBN
• RBB (1966)
• National Insurance Corporation (1967) and Nepal Insurance Corporation (1968)
• Credit Guarantee Corporation (1974)
• Securities marketing center (1977)=>Securities Exchange
Center(1984)=>NEPSE (1992)
• Till mid 80’s 2 banks and 2 development banks fully owned by Government
• Financial liberalization policy played crucial role for development of banking
sector
• Amendment of Commercial Bank Act (1974), enactment of Finance Company Act
(1985) and Development Bank Act (1992)
• Nabil Bank Limited (1984)- First joint venture bank
• After political change of 2047 BS (1990 AD)- banking sector flourished
 History of Nepalese …CONTD
• Decade after 2050 BS- due to insurgency economic activities severely
affected. Banking sector remained almost unaffected
• As number of Banks and Fis grew up, the sector start to show problematic
symptoms…..
• NBL/RBB affected weak credit management and poor governance
• Regulator strengthened by NRB act 2002
• Monitoring/regulating functions given priorities and several directives where
issued as problems arose
• NCC-NBB case/HNB Development Bank Case
• By end of Ashad 2069, no of commercial banks up to 32
• Enactment of Bafia in 2006
• Capital enhancement of Bank and Financial Institutions
• No positive result other than ballooning
• Business people and bankers (No separation)
• Merger and acquisition facilitation
• Big Merger/Merger incentives
 Data as of Mid April 2023
Type of Fis Nos

Commercial Banks 20

Development Banks 17

Finance Companies 17

Micro Finance Companies 67

Infrastructure Bank 1
 Other Players
• Cooperatives under the supervision of Cooperative Board-
Limited Banking Service within members
(Poor regulation and inspections, fraudulent cases come
frequently)

• Postal Savings
 Central Bank (NRB)
• Financial & Banking services to Government
• Formulation and implementation of monetary policy
• Government's Bank
• Issuer of currency
• Holder of foreign exchange reserve of the nation
• Bank of the banks
• Lender of last resort
 Functions of Central Bank
• Formulation and implementation of Monetary Policy
• Issue of currency and notes
• Advisory or agency function
– Banker of the Government
– Agent of Government
– Financial adviser to Government
• Bank of banks
– Cash reserve of banks
– Lender of last resort
– Clearing house
 Functions ….. CONTD
• Holder of foreign exchange
• Credit Control
– Excess credit creation causes inflation
– Reduced credit creation causes stagnation
– Sectoral development
• Boosts Economic Development
– Price and exchange stability
• Licensing, regulating and supervising Banks and Fis
• Other functions
– Research
– Statistics
– Liaison with international agencies
– Raising banking habits and knowledge in People
– Conduct trainings to bankers
– Publishes periodical reports
Challenges of Our Financial System
• Development of investment friendly environment
• Traditional products not much innovations
• Urban centered but recently focused to rural areas
• Informal sectors like money lenders, gold merchants still persists…
• Reach to common people is low, big banks focusses on big credits
• Domestic banks need to be strengthened to compete with
international standards
• Basel III guideline followed, hard to give expected return.
• Problem of efficient manpower…eg in technical sector like IT,
Treasury, Trade Finance etc
• Cut throat (unhealthy) competition among banks. More players to
enjoy same business cake.
• Chance of misutilization of banking resources as no proper
segregation of bankers and business people has been done.