BANKING

MEANING OF BANK

The bank is an institute which deals with money and credit. It accepts deposits from the public, next the
fund available to those who needs it and helps in remittance of money from one place to other. A modern
bank performs variety of function so it is difficult to define a bank in a single word. So, bank is defined
by different economist differently. In the words of Walter Leaf, “A bank is a person or corporation who is
always ready to receive money in deposits to be returned against the cheques of their depositors.”

Crowther defined bank as, “An institution which collets money from those who have it, out of their
income and lend this money out of those who require it.”

TYPES OF BANK:

a. Central bank:

Central bank is the monetary authority or nation. It is the controller, regulator, monitor and supervisor of
all kinds of financial institutions. CB issues notes. It is the bank of the bank, bank of the government,
adviser of the government agent of the government.

b. Commercial Bank:

Commercial bank is established to provide short term loan to traders so it is called commercial bank. But
at present commercial bank has been providing loan to several sectors like agriculture, industry, trade,
tourism, etc. It has been providing not only short term loan rather providing medium and long term loan.

c.Agricultural Bank:

Agricultural bank is established for the development and modernization of agriculture sectors. It provides
short term loan to farmers to purchase fertilizers, seeds as well as to pay wages. It also provides long term
loan to farmers to purchase land and heavy agricultural equipment.

d. Industrial Bank:

Industrial bank provides industrial consultancy and loan for the establishment of industries. It also
purchases, sales and underwrites the share and debenture of industries. Not only this as per the
requirement it also invests in industries.
e. Exchange Bank:

Exchange bank deals with foreign currency and its objective is to help in international trade. It provides
loan for foreign trade and helps in the settlement of debt between two countries. It provides loan to the
importers by discounting their bills and remit he money of the importers to their parties.

f. Saving Bank:

Saving bank is established to collect the scattered saving of low income people and to mobilize their
small savings. In this bank people open their account and there is issue of postal cash certifications. On
the basis of postal cash certifications depositors can withdrew a definite amount of money once a week.

g.Cooperative Bank:

The bank which is organized by the people for their own collective benefit is called cooperative bank.
Basically, such banks are established in rural area for promotion of agriculture sectors. But now days
there are such banks is every sector.

ROLE OF BANK

a. Capital formation:

Capital formation is one of the essential parts of economic development. There is the lack of capital
formation in most of the developing countries like Nepal. So, bank collects ideal money from the people
and invest that shaving on the productive sector. That causes capital formation as well as development of
the nation.

b. Encourages Innovation:

Banking system encourages entrepreneurial innovation because due to development of banking system
bank can provide requested amount of loan to the entrepreneur at the reasonable rate of interest by which
there is the increment of participation of private sector.

c. Monetization of money:

Establishment of bank and their branches in remote and rural area helps to increase banking habit of
people. People keep their excess income in bank and withdraw the money at the time of need. It helps
government to implement the fiscal and monetary policies.

Monetization – use of money

Fiscal policy – budgetary, tax, expenditure policy

Monetary – rate of interest

d. Influence the economic activity:

Bank can influence economic activities by changing the rate of interest. If bank charges low rate on loan
then there is more demand of fund for investment. As a result, economic activities increases and vice-
versa.

e.Facilities of monetary and fiscal policy:

Effective banking system is necessary for effective implementation of fiscal and monetary policy of
nation. The instruments of fiscal and monetary policy such as regulation of credit, interest rate, tax, etc
are properly used only if banking system of the country is sound.

f.Raising deposits and financing loans:

Bank by offering attractive rate of interest can increase the saving and deposits then after collected money
can be provided to the investors at the reasonable rate of interest.

g.Remittance of money:

The bank remits the money to its customers from one place to the other place without any risk. It helps to
promote the economic activities inside the country.

ROLE OF CENTRAL BANK WITH SPECIAL REFERENCE TO THE NEPAL RASTRA BANK:

Central bank is the supreme monetary institution, which is remained at the apex body of the monetary and
banking structure of a country. It is the leader of money market and it controls, regulates and supervises
the activities of the banks and financial institutions.

A central bank performs many important and essential functions which are explained as follows:

a. Monopoly of note issue:

The central bank has monopoly power of note issue in every country. The granting of monopoly right of
issue makes it easier to maintain uniformity in money and control the quantity of money. It is also easier
for the government to control and make supervision of note issuing function. The uniformity in notes
ensures people’s confidence in notes. In Nepal, Nepal Rastya Bank had started to issue notes since 2016
Phalgun. The notes are issued against the fixed % reserve of gold, silver and foreign currency.

b. Banker, adviser and agent of government:

The central bank acts as a banker, agent and adviser of the government. Central bank keeps the banking
accounts of government departments, boards and performs the same function as a commercial bank
performs for customers. It keeps the deposits from the government and undertakes the collection of
cheques and drafts deposited in the government account. It also provides short-term loans such as
overdraft to the government. It also provides foreign exchange facilities to the government.

As a financial adviser it gives advice to the government in economic, monetary, financial and fiscal policy
such as devaluation, trade policy, foreign exchange policy, etc.

As an agent of government manage the public debt and issue the new loan and treasury bill on behalf of
the government.

c.Banker’s Bank:

The central bank works as the banker of the other banks. Central bank holds the right of supervision,
control on other banks. Acting as the custodian of the cash reserve of commercial banks, the central bank
maintains the cash reserve of the commercial banks. Every commercial bank of the country has to keep a
certain percentage of the cash balance as deposits with the central bank. Such reserve can be used by
commercial banks to meet the emergencies.

d. Lender of last resort:

As a lender of the last resort, in time of crisis, the central bank provides financial helps to the commercial
banks by rediscounting their bills or by providing loans against the short-term securities.

e.Clearing house function:

The central bank is the clearing agent of the transactions between the different banks. Since, all the banks
have their account with central bank; it makes debit in one bank’s account and credit in other bank’s
account.

f.Control of credit:
The credit should be controlled to maintain the price stability. In order to control the credit, the central
bank may use various tools such as bank rate policy, open market operation, change in reserve ratio and
selective methods, etc.

g.Maintenance of exchange rate:

Central bank has right to regulate and control the foreign exchange rate. Central bank tries to maintain the
stability in value of domestic currency. To maintain the stable exchange rate, central bank is always
prepared to buy and sell foreign currency.

h.Development function:

There are various development functions of central bank, which are as follows:

Development of banks: The NBR helps in the development of banks and non-banking financial
institutions. It encourages banks to open branches in remote areas by providing compensation and interest
free loan.

Special program: The programs like priority sector credit program, cottage and small industries projects,
micro-credit for women have been launched with the initiative of NRB.

Publicity: Central bank/NRB has been regularly publishing reports, journals and bulletins related to the
economic activities.

Relationship with international agencies: It establishes friendly relationship with international financial
institutions such as IMF, WB, ADB, etc.

Economic study and research: Central bank conducts several research works and economic survey in
specific economic issues. It also provides necessary information for plan formulation.

COMMERCIAL BANK

Commercial banks act as intermediates between those, who have surplus money and those who need it.
To receive deposits and advance loans are the main functions of all commercial banks. In brief they
borrow to lend.

They work to earn profit. The main functions of the commercial banks are discussed below:

a. ccepting Deposits:
Bank attracts idle saving of people in the form of deposits. These deposits may be of any of the following
types:

i. Current account/ Demand deposits: These are repayable on demand without any notice. Since, the
bank should keep all the money in reserve and can’t make investment; no interest is paid in this account.
On the other hand a little commission is charged for the management of the money. Sometimes, however,
a small interest is paid for the people who keep large balance.

ii.Saving Account: In this account certain percent interest is paid to the depositors. There is given cheque
or ATM facilities to withdraw money. Depositors can withdraw only the predetermined amount or to
withdraw big amount of money pre-notice should be given to the bank.

iii.Fixed/Time Account: Generally, the deposit in the account will be form 3 months to 5 yrs. The
deposit can be withdrawn only after the expiry of the maturity period of the deposit. Higher interest is
paid in ths account.

b.Advancing loans and Advances:

The deposits received by commercial banks are lent to others for short period only. But in present time, it
also provides medium and long term loan to some extent. The banks advance loan in any one of the
following ways:

i. Overdraft: Commercial banks provide overdraft facility to its customers by which they are allowed to
withdraw more than their deposits. But they have to pay interest on the extra amount, which has to be
repaid within a short period.

ii.By creating deposit: Under this type of loan, banks advance loan to the borrower against his current
assets such as Bonds, Stocks, Debentures, etc or fixed assets like Gold, Silver, Land, House, etc.

iii.Discounting bills: It is another way of lending money. The bank purchase bills from bill broker and
discount them. These bills provide very liquid form of assets, which can be easily turned into cash. Banks
immediately pay cash for the bill after deducting the discount (interest) from its face value.

iv.Remitting funds:Commercial banks remit funds for their customers through bank drafts from one
place to another.

c.Agency function:
The commercial bank works as an agent of their customers. The bank receives the rent, dividend, interest
of shares and debentures. Similarly, it receives and make payments of insurance premium, income tax,
electricity fee, etc on behalf of its customers.

d.Credit creation:

This is an unique function of commercial bank. When a bank advances loan to its customers, it doesn’t
lend all cash but opens account on the name of borrower and deposits only the required amount. Creation
of such deposit is called credit creation by which there increases money stock in an economy.

e.Issue credit instruments:

The bank issues the letter of credit, travelers’ cheque, draft, master card to the customers.

f. General utility functions:

In addition to agency services, the modern banks provide many general utility services, which are given
below:

Purchase and sale of securities

Providing valuable advisory service to its customers

Exchanging the foreign currency of its customers

Providing various economic and statistical information

Helps to the central bank to implement various fiscal and monetary policies.

MONEY MARKET

Money market refers to the transaction of short term/run credit instrument. These instruments are highly
liquid, easily marketable with little chance of loss. The maturity period of these instruments are less than
one year. The examples of instruments are treasury bill, bill of exchange, promissory note.

The main function of money market is to make available working capital to the business sector and short
term loan to the government.

According to World Bank, a market in which short term securities such as treasury bills, certificates of
deposits and commercial bills are traded.
 CAPITAL MARKET

The market which deals with medium and long term financial instruments is called capital market. There
are long term security transactions in capital market for more than one year to 25. Bonds, shares,
debentures, etc are long term securities. There are also transactions of non-security component for
example long term loan provided by banks.

There are two sectors i.e. organized and unorganized. Banks, finance companies, insurance companies,
stock exchange centers and center bank are included under the organized sectors as well as traditional
money lender, traders, merchants, etc are under unorganized sectors.

According to World Bank, the market in which long term financial instruments such as equities and
bonds are raised and traded.

DIFFERENCES BETWEEN MONEY MARKET AND CAPITAL MARKET

Basis Money Market Capital Market

Maturity of instruments Less than one year More than one year to 25
years

Risks Less High

Instruments Treasury bills, bills of exchange, promissory notes Bonds, debentures stock, etc

Finance Short Long

Relation with central Direct Indirect

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