Chapter 5 Commercial Banks

 Chapter 5 Commercial Banks

Commercial Bank
A commercial bank is a financial institution which accepts deposit from the public and provides business loans and facilitates various financial transactions. Commercial banks play a crucial role in the economy by facilitating the flow of money and supporting economic activities.

As per NRB there are 20 commercial banks in Nepal (2082/03/31)

Functions of Commercial Bank

Deposit Function

The prime function of the commercial bank is to accept all types of deposits from savers by offering different types of accounts. The customer can withdraw their money from their account in any time if they need.

Providing Loan

After receiving deposit commercial bank keeps certain portion of deposit as reserves (As directed by NRB) and remaining amount is available to provide loan to the customer for their business or other purpose.

Investment of funds

The commercial banks also make investment of excess amount of the bank in different type's securities such as Government securities, corporate securities and other securities.

Credit creation

Credit creation is the process by which commercial banks create more purchasing power or deposits than the same amount from fixed deposits received from their customers. The main source of credit creation of the bank is the deposit amount in the bank.

Agency Functions

Various types of work performed by commercial banks on behalf of customers are called the work of agents. The Commercial bank performs the role of an agent in paying telephone and electricity bills, remittance (collection and transfer) of fund, collection of cheque etc.

General Utility Functions

The general utility services are innovative and the services that facilitate the customer are also provided by commercial banks. General utility services include locker facility, Debit card (ATM) credit card, merchant banking, letter of credit, etc.

 

Services Offered by Commercial Bank

 

·        Deposit Services

The major service provided by commercial bank is to accept all types of deposits from savers by offering various types of accounts. The customer can withdraw their money from their account in any time if they need. This service includes account opening, issue cheques, payments of interest etc.

 

·        Loan Services

The primary service provided by commercial bank is to provide Loan service to the customers. Commercial bank provide different types of credit service such as term loan, cash credit, overdraft, retail loan etc. to the customer for their business or other purpose.

 

·         Payment service

Banks help people send and receive money safely and quickly. They provide services like using cheques, transferring money online, and paying with debit or credit cards. These services make handling money easier, faster, and more secure.

·         Remittances service

Commercial banks provide remittances services that facilitate the transfer of funds from one account to another, from one place to another generally one country to another country, with the help of modern payment systems.

 

·         Remittances service

A locker service is a facility provided by banks where customers can keep their valuable items like jewelry, documents, and other assets safely. The bank provides a secure locker inside a strong room, which only the customer can access with a key or code. This service helps protect valuables from theft, loss, or damage.

 

·         Cash management service

A cash management service is provided by banks to help businesses handle their cash flow efficiently. It includes services like cash deposits, withdrawals, fund transfers, and payments. This helps businesses manage their money safely and smoothly.

 

·        Investment Banking Services ( security related service)

Commercial banks provide investment banking services through their subsidiary company (Merchant Banker) to their customers; these services include issue management, portfolio management, DP, fund management services, etc.

 

·        Electronic Banking

Banking facilities with the help of electronic devices are known as electronic banking, and nowadays, modern banks are providing electronic banking facilities that help customers access banking facilities 24 hours a day without physically visiting the bank.

·        Other Services

The commercial bank offers various other services such as safe custody, safe deposit, locker facilities, mutual fund services etc.

Types of Deposit accounts

1. Checking Deposit Account ( Current Account)

2. Saving Deposit Account

3. Time Deposit Account (Fixed Deposit )

4. Call Deposit Account

5. Money Market Account

                                                        (short explain yourself)

Categories of loan

1. Consumer loan

Real Estate loans 

Gold and silver loans

Fixed Deposit loans

Security loans

Auto loans

Personal overdraft loan

Education loan

Deprived sector loan  

2. Business Loan 

Term loan

Working Capital loan

Trust receipt loan

Overdraft loan

Hire purchase loan

Industrial project loan

other loan

 

Nepal Rastra Bank

 

Nepal Rastra bank is a central bank of Nepal, established in 2013/01/14 BS (1956 – April-26) under Nepal Rastra Bank Act 2012 (1955), given privileged control over production and distribution of money and credit for the nation.

Nepal Rastra Bank is responsible for formulation and implementation of monetary policy and regulation of Bank and Financial Institution (BFI).

 

Function of Nepal Rastra Bank (Central Bank)

 

i.       Issue of Paper Money and Coins

Nepal Rastra Bank has monopoly rights to issue paper notes and coins in Nepal. In order to issue notes, the central bank has to keep gold, silver, and other valuable assets as collateral equal to the value of the note to be issued. Nepal Rastra Bank has been issuing notes and coins since 2016 BS.

ii.     Bank to the Government

The central bank is also known as the government's bank because it accepts funds received in the name of the government as deposits and performs payments and transfers of government funds.

iii.  Agent to the Government

Central Bank also performs various acts as an agent to the government. Central Bank performs agent role in collecting domestic debt by issuing treasury bills and treasury bonds.

iv.   Adviser to the Government

The central bank serves as a crucial financial and economic advisor to the government, providing crucial advice and suggestions in formulating fiscal, foreign exchange, financial planning, budget, and commercial policies.

v.     Custodian of the Banks

The Central Bank authorizes the establishment of new banks. In times of financial crisis, it lends money to those banks and supervises their operations. The central bank is also referred to as the bank of banks since it offers financial services to commercial banks and other financial organizations. The central bank performs the roles of a bank, financial advisor, custodian, and custodian of bank's funds.

vi.   Custodian of Foreign Currency

The National Rastra Bank (NRB) receives and pays for foreign currency and is responsible for managing and safeguarding a country's foreign currency reserves, including gold and other assets, to maintain monetary stability and ensure the availability of foreign exchange for economic needs.

vii. Lender of Last Resort

If a commercial bank is facing a financial crisis and cannot secure financing from other sources, the central bank acts as the lender of last resort, providing loans to protect the bank from financial crises.

viii. Credit Control

The central bank plays a crucial role in controlling credit created by commercial banks. Large loans from these banks increase the economy's money supply and price level, while controlled credit flow leads to a currency shortage. To maintain this balance, the central bank can adjust the reserve ratio, exchange rate, lending limits, moral pressure, and direct intervention.

ix.   Control and Supervision of Financial Institution

Nepal Rastra Bank supervises and regulates Nepali banks and financial institutions by formulating and implementing rules and policies, ensuring stability, and conducting inspections and corrective measures.

x.     Transfer of Fund

At the time of transfer huge amount of cash from one place to another place central bank takes the responsibility to transfer the funds with own special vehicle with high security.

xi.   Clearing House Function

A portion of the total deposits made by commercial banks and financial institutions must be deposited with the central bank, which serves as a clearing house. Funds from various commercial banks and financial institutions must be received by one another. Therefore, the work of a clearing house is limited to account reconciliation in order to settle transactions through the Central Bank rather than using checks, drafts, cash, etc.

xii. Publication of Economic and statistical information

The central bank gathers and publishes economic data for government policy formulation, conducts research and surveys on economic activities, and collects and publishes this data for public.

xiii. Promotional and Development Functions

Banking services in remote and rural areas are not easily accessible, and people from rural areas do not have much knowledge about banking services. In our context, Nepal Rastra Bank plays an important role in promoting and developing the banking system and making banking services accessible to the public.

xiv. Miscellaneous Functions

Miscellaneous functions of Nepal Rastra Bank include formulation for monetary policy; maintain relationship with international financial institutions such as the International Monetary fund (IMF), World Bank, and Asian Development Bank (ADB) etc.

 

 

NRB Classification of Financial Institutions

Nepal Rastra Bank classifies financial institutions operating in Nepal into four categories based on minimum paid-up capital, such as Class A: commercial banks. Class B: Development Banks, Class: C Finance Company, Class: D Microfinance. Class and Number of Bank and financial institutions operating in Nepal under Nepal Rastra Bank are as follows:

Class	Name	Number
A	Commercial Banks	20
B	Development Banks	17
C	Finance Company	17
D	Micro Finance	52
	Infrastructure Bank	1

Source: Nepal Rastra Bank (Mid Jan 2025)

 Commercial Banks

Nepal Rastra Bank has classified commercial banks as Class A financial institutions, which have to require a minimum of Rs. 8 billion paid-up capital as per the Bank and Financial Institutions Act 2073. Before increasing to 8 billion in capital, paid-up capital was 2 billion. As a result of the increased capital, many banks were merged to fulfill the capital requirement of the NRB.

Development Bank

Development Banks are the Class B financial institutions according to classification made by Nepal Rastra Bank. On The basis of Capital requirement and district they cover Nepal Rastra Bank has classified Development Banks into three categories, which can be listed as follows:

S. N.	categories	Paid up capital Requirement
1	National Level	2.5 billion
2	Province Level	1.2 billion

Finance Company

Nepal Rastra Bank has classified Finance Company as a Class C financial institution, and Nepal Rastra Bank also classified Finance Company in two parts National level and Province level. The classification of a finance company as an NRB can be shown as follows:

S.N.	Categories	Paid up Capital Requirement
1	National Level	800 Million
2	Province Level	400 Million

Micro Finance Company

According to Nepal Rastra Bank, Microfinance Companies are classified as Class D financial institution in Nepal. Microfinance companies are classified into two classes National level and province level by Nepal Rastra Bank. The classification made by Nepal Rastra bank can be listed as follows:

S. N.	categories	Paid up capital Requirement
1	National Level	100 Million
2	Province Level	60 Million

Infrastructure Bank

The Nepal Infrastructure Bank (NIFRA), established under BAFIA 2073, is the country's first and only infrastructure development bank, aiming to invest in infrastructure development areas by raising funds from both domestic and foreign markets.