Nepalese Banking & Financial System: Development & Structure

Nepalese Banking & Financial System: Development & Structure

1. Concept/Meaning of Banking
2. Development/Evolution/Origin of Banking system in world
3. Development/History of Banking system in Nepal
4. Present Scenario of B&FIS in Nepal
5. Challenges of B&FIS in Nepal
6. Opportunities of B&FIS in Nepal
7. What is Financial System ?
8. Structure of Financial System of Nepal ?
9. Services provided by the Financial System.
10. Challenges of the Nepalese Financial System.
11. What should be done to provided banking & financial services in rural & remote area in Nepal ?
12. Competition in the banking sector is increasing, whether a country with a small country economy like ours needs so many banks and financial institutions. (In the face of increasing competition in the banking sector are the existing B&FIS more or less based on the size of our country’s economy? Discuss.)
13. Why B&FIS are Classified or Classification, Justification of classification of B&FIS, Objectives of Classifications of B&FIS, Important of Classification ?
14. On what bases the B&FIS are Classified ?
15. Classification of B&FIS in Nepal/ Banking system in Nepal/Different Class of Banks?

Concept/Meaning of Banking

• A bank is the financial institutions, which accepts the deposit from the customer and lend (provide) the loan to the needy people or sectors.
• An Organization that provide various financial services.
• According to C.W Crothers: Bank is an institutions which collects money from those who have it to spare and who are saving it out of their income and lends this money out to those who required it.
• Banking Concept :
  • Traditional Concept: Banks which collects the deposits and provide loan.
  • Modern Concept: Banks which accepts deposits, provides loans, transfers currency, acts as agents and perform various functions based on technology.

History and Development of Bank in World:

• The world bank is derived from Latin word “Banco“ or “Banca” French word “Banque” or “Banka” which all means the financial institutions which keeps the money and keeps the records of it. ( Common meaning )
• The concept of banking was started from Greek, Roman merchants & Goldsmiths; they are the beginning of the banking process or system. They used to invest, lend money to needy people or exchange the money.
• First bank of world was Bank of Venice (Italy) – 1157 AD. Bank of Barcelona (Spain) in 1401 AD. Bank of Holland in 1609 and Bank of Germany in 1619 AD.
• First modern bank was Bank of England, which was established in 1694 AD.
• In 1791, Bank of  the United States was established.
• In Asia, Bank of Calcutta in 18^th century.
• In Nepal in 1994 BS Karthik 30, (1937 AD) Nepal Bank Limited was established by King Tribhuvan Bir Bikram Shah Dev & NBL Authorized capital was Rs 10 millions and Paid up Capital was 892 thousand with 10 Shareholders.
• After the establishment of banks all over the world, the banking industry have faced various up & down in economy (1940s The Great depression and 2008s Recessions) but still banking industry are providing services to public & they are the one of the essentials elements of today’s economy.
• With the pass of the time Technology, Banking services & facilities are also upgrading day by day.

Development of Banking In Nepal or History of Banking In Nepal:

Before 1994 B.S ( 1^st Phase )

In Ancient period people use to take loan from Shau Majhan at the certain interest, At the time of paying interest they used to pay the interest in term of goods like Ghee, Rice, Wheat or sometime in the form of labor work.

Gorkha King Ram Shah had set the interest rate on loan of 10% for cash payment, and if the interest is pay in Goods & labor work then, 20% of interest rate was set.

Likewise in 8^th century, Ghunak Kam Dev has made the debt free the people of Kathmandu & Bhaktapur from “Shau Majhajan” by paying the debt of people.

In 16^th century various coins of Gold, Silver and Copper were issued by various King of Nepal ( 22 & 24 Rajyaa )

An officially step taken by Nepal for the development of banking system in Nepal was by establishing “Tejarath Adda” on 1933 BS (1876 AD) under the prime minister of Ranoddip Singh.

Tejarath Adda used to provided loans to the general pulic at 5% interest rate on the securities of Gold, silver and other ornaments.

Taskar Adda or Departmenr was established to issued coins in Nepal in 1989 BS.

From 1994 BS to 2040 BS ( 2^nd Phase )

In 1994 BS Karthik 30, (1937 Nov 15), Nepal Bank Limited was established by King Tribhuvan Bir Bikram Shah Dev & NBL Authorized capital was Rs 10 millions and Paid up Capital was 892 thousand with 10 Shareholders. (Beginning of formal banking in Nepal, Golden day for Nepal in Banking Industry)

Sadar Muluki Khana which was established in 1945 AD for the management of Government Accounting and for the issuing Nepalese Currency.

Nepal Rastra Bank was established on 2013 Baishak 14 under NRB Act 2012 as the central bank for supervision & guiding of commercial bank.

In this phase various banks like Nepal Industrial Development Bank (NIDC), Rastriya Banijiya Bank (RBB), Agricultural development Bank (ADBL) and various cooperative bank were established.

In this phase all the B&FIS functions were Government Centric, all rules & regulations regarding interest rate, investment etc. were formulated and control by Government.

In 2^nd phase of development of Bank in Nepal, there were 1 Central Bank, 2 Development Bank, 2 Commercial Bank. All were Government owned and control.

The condition of economy and Banking industry in Nepal at this phase was not good, the country was facing of economic crisis like: Huge Deficit Budget, Increase in Debt to GDP, Increase in Government Expenditure etc.

From 2040 BS to 2068 BS ( 3^rd Phase)

Under the Recommendation of ADB, Nepal adopt the Economic Liberalization Policy: Concept of Free Entry & Free Exit Policy

By Economic Liberalization, various Private investment were enter into the country for the investment in Banking sectors. So first joint venture bank was Nepal Arab Bank (Now Nabil Bank ) with cooperation of Dubai Bank of Saudi Arab.

In this phaseFirst (2040 BS) & 2^nd (FY 2058/59 BS) Financial Sector Reform Program (FSRP) was also adopted under the recommendation of World bank, IMF & ADB for the Financial Sector Stability.

Various Act Like NRB Act 2058, BAFIA Act 2063 (Now BAFIA 2073), AML Act 2064, Company Act 2063, Classification of B&FIS, Development Act, Finance Company Act, etc.

 2^nd Joint Venture bank Nepal Indosuez Bank with cooperation with French Indosuez Bank.

1^st Finance Company of Nepal, Nepal Housing Development Finance Company Limited.

First Commercial Bank established by Nepalese private investor was Lumbini Bikash Bank.

During this phase (2068 BS), there were 10 A Class Banks, 83 B Class Banks, 35 C Class Banks & 11 D Class Banks, Total : 145 Banks.

From 2068 BS to Till Now:

Merger & Acquisitions Policy Formulated,

• NIDC Merger with RBB

BAFIA Act 2073 Amendment

NIFRA established

Focus on Advance Technology

 Strick supervisions of NRB towards B&FIS.

Focus on Financial Literacy & Financial Inclusion

Present Scenario of B&FIS in Nepal or Current Situation/Status of B&FIS in Nepal.

The current situation of B&FIS in Nepal can be express in two different approach.

• Quantitative Approach
• Qualitative Approach

Quantitative Approach:

Category	No of Banks	No of Branches
Central Bank	1	8
A Class “ Commercial Bank”	27	4972
B Class “ Development Bank”	17	1108
C Class “Finance Company”	17	264
D Class “ MFIS”	65	5109
Infrastructure D. Bank	1	–

 Source: NRB Till mid-may 2022 AD

Qualitative Approach:

• Increase in Digital Banking
• Increase in Financial Awareness
• Merger & Acquisitions Conditions
• Liquidity Crunch condition in economy
• Fluctuation in interest rate
• Strick supervisions of NRB towards B&FIS.

Current Challenges & Opportunities of B&FIS in Nepal.

Current Challenges:

1. B&FIS has not reach yet to all part of country.
2. Lack of investment in big plans & project.
3. Information Technology:
   1. High cost
   1. Security challenges
   1. Technology uses awareness
4. Unhealthy Competitions. (More No. of B&FIS as compare to other developing country)
5. Increases in NPA and losses of B&FIS & decrease in profit.
6. Financial Literacy only 68% even with high supply of B&FIS services.
7. Slowdown of economy
8. Liquidity Management
9. Strong presence of Shadow banking especially in rural areas.

Opportunities of B&FIS in Nepal:

1. Possibilities of acquiring international market by establishing “A Class” banks in other country, by international transactions through trade & business.
2. Possibility of getting higher benefits by focusing on healthy competitions.
3. Establishing of B&FIS in Rural areas or Rural Banking
4. Focus on digital banking is also one of major opportunities for Nepalese banking industry.
5. If NRB focus on reducing the shadow banking then there is huge opportunities for B&FIS.
6. Collaboration Investment in huge & big project.
7. Opportunities is there if we focus on reaching of B&FIS in all over part of country.
8. If B&FIS focus on increasing financial literacy then there will be more use of B&FIS, and expansion of B&FIS.

What should be done to provide banking and financial services in rural and remote areas in Nepal ? (नेपालको ग्रामीण तथा दुर्गम क्षेत्रमा बैंकिङ तथा वित्तीय सेवा उपलब्ध गराउन के गर्नुपर्छ ?)

Background:

Nearly 85 years has been cross, the established of NBL or banking system in Nepal but also must of the people are unable to get or touch with the banking services and facilities. Especially, in rural and remote area most of B&FIs are established in metro areas or city centered. (नेपालमा एनबीएल वा बैंकिङ प्रणाली स्थापना भएको झण्डै ८५ वर्ष भइसक्यो तर पनि जनताले बैंकिङ सेवा र सुविधा पाउन वा छुन सकेका छैनन् । यसको कारणहरू विशेष गरी ग्रामीण र दुर्गम क्षेत्रमा धेरै जसो B&FIहरू महानगरीय क्षेत्र वा शहर केन्द्रित छन्। )

Measure should be taken to increase financial access in remote and rural areas of Nepal are as follows:

1. The government should provided tax benefits to the B&FIs for expanding their branches in remote and rural areas. (सरकारले दुर्गम तथा ग्रामीण क्षेत्रमा शाखा विस्तार गर्नका लागि बैंक तथा वित्तीय संस्थाहरूलाई कर छुट दिनुपर्छ । )
2. The government should also focus on increasing of financial literacy among the people through awareness programs. (सरकारले जनचेतनामूलक कार्यक्रममार्फत वित्तीय साक्षरता अभिवृद्धिमा पनि ध्यान दिनुपर्छ । )
3. Development of product as per the need and requirement of  rural and remote peoples. (ग्रामीण तथा दुर्गम जनताको आवश्यकता र आवश्यकता अनुसार उत्पादनको विकास गर्ने । )
4. Effective branch expansions policy should be mentioned in NRB Directives. (प्रभावकारी शाखा विस्तार नीति NRB निर्देशनहरूमा उल्लेख हुनुपर्छ )
5. Government and NRB should encourage to others B&FIs for the expansions of  branches in rural and remote areas. (सरकार र राष्ट्र बैंकले ग्रामीण तथा दुर्गम क्षेत्रमा शाखा विस्तारका लागि अन्य बैंक तथा वित्तीय संस्थाहरूलाई प्रोत्साहन गर्नुपर्छ। )
6. Basic banking services and facilities ( ATM , Deposit, Withdrawal etc. ) should be try to  provided in remote and rural areas rather than opening of fully operated branches. (आधारभूत बैंकिङ सेवा र सुविधाहरू (एटीएम, निक्षेप, निकासी आदि) पूर्ण रूपमा सञ्चालित शाखाहरू खोल्नुभन्दा दुर्गम र ग्रामीण क्षेत्रमा उपलब्ध गराउने प्रयास गर्नुपर्छ। )
7. Effective advertisement should be done by B&FIs or Effective marketing. (प्रभावकारी विज्ञापन B&FI वा प्रभावकारी मार्केटिङद्वारा गरिनुपर्छ। )
8. Focus on the uses of digital banking services and facilities. (डिजिटल बैंकिङ सेवा र सुविधाहरूको प्रयोगमा ध्यान केन्द्रित गर्नुहोस्।
9. Launching of awareness programs with the collaboration of GON + NRB + B&FIs. (GON + NRB + B&FIs को सहकार्यमा चेतनामूलक कार्यक्रमहरूको सुरुवात। )
10. Arrangement of License to B&FIs through regional NRB office for the expansion of branches. (शाखा विस्तारको लागि क्षेत्रीय NRB कार्यालय मार्फत B&FI लाई इजाजतपत्रको व्यवस्था गर्ने। )

Competition in banking sectors is increasing. Consider whether a country with a small economy like ours needs so many banks and financial institutions. Or In the face of increasing competition in the banking more or less based on the size of our country’s economy? Discuss.

Background:

From establishing of NBL from 1994 BS very few number of  government centric banks were established between the period of 1994 to 2041 BS.

In this phase all the B&FIS functions were Government Centric, all rules & regulations regarding interest rate, investment etc. were formulated and control by Government.

In this phase, there were 1 Central Bank, 2 Development Bank, 2 Commercial Bank. All were Government owned and control.

The condition of economy and Banking industry in Nepal at this phase was not good, the country was facing of economic crisis like: Huge Deficit Budget, Increase in Debt to GDP, Increase in Government Expenditure etc.

After the liberalization the number of B&FIS started increasing in Nepal and B&FIS were classified into A, B, C & D categories on the bases of paid up capital and working area.

With the increasing of B&FIS, the problem related banking were also increasing, banking frauds, competitions among banks also increase.

Under the following bases we can say there are more or less banks in Nepal or like small economy:

        Under this condition, we can consider there are More B&FIS in Nepal:

As compare to other developing country in SAARC regions. Yes we can say that we have highest number of B&FIS as compare to GDP.

	Nepal	India	Bangladesh	Pakistan
No. B&FIS	132 +	136 +	185 +	69 +
GDP	36 B	3.1 T	409 B	347 B

                                Source: Data From 2021 AD From Internet

From the above table data, we can say that as per the economy (GDP) comparison with other developing country we can say that we have more number of B&FIS.

Reasons for the more number of B&FIS and unhealthy competitions in Nepal are:

• Till 2068 BS NRB was mainly focus on increasing entering or establishing of new B&FIS rather than expansions of branches of banks all over part of Nepal.
• Due to low market area (limited number) of deposit & demanding loan in economy may be the reasons of unhealthy competitions.

Under the following condition we can say there are less number of B&FIS in Nepal:

• B&FIS has not reached all over parts of country especially in rural and backward areas.
• Financial literacy is 68%.
• Lack of investment in big plans and projects
• Lack of technology in banking sectors.

Why B&FIS are Classified or Classification, Justification of classification of B&FIS, Objectives of Classifications of B&FIS, Important of Classification?

As per the B&FIS are categories A, B, C & D as per their paid up capital and working area.

Reasons & Justification, Important of Classification of B&FIS:

• In order to develop the trust of public toward B&FIS system of country.
• To protect the right of deposits and investor
• To provide quality & reliable banking services to the public through healthy completions among B&FIS.
• For the development of all sector of economy.
• To increase the efficiency & confidence of domestic & foreign investment.
• To play role in the development of infrastructure of country such as commerce, agriculture, energy, tourism, industry & trade.

How B&FIS are Classified as per BAFIA or Bases for the Classification of B&FIS ?

NRB has categories the B&FIS into 4 categories. In sections 37 of BAFIA, NRB should categories the B&FIS on the bases of following factors:

• Minimum paid up capital
• Nature of transactions
• Working area
• Scope of upgradation
• On the bases of functions

Factors	Class A	Class B	Class C	Class D
Paid up capital	800 Cr	250 Cr, 120 Cr	80 Cr, 50 Cr	10 Cr, 2 Cr
Working area	National	N & R	N & R	N & R
Nature of transactions	Commercial	Development	Customer	Working Group
Scope of upgradation	No	Yes (A)	Yes (A & B )	No
Function	49(1)	49(2)	49(3)	49(4)
Name	Commercial	Development	Finance Co.	Micro Finance

Infrastructure Development Bank:

Minimum paid up capital: 20 Arab

Working Area: National

Nature of working: Infrastructure related work (Construction of roads, infrastructure)

Tenure of Transactions: Long term

Upgradation: No

Function: Section 49(5)

Name: Infrastructure Development Bank

What is Financial System? What are the components of Financial System? What are the services provided by financial system? Nepalese Financial system/Structure of Nepalese financial system (Financial Structure)?

Financial System is the systematic arrangements of financial institutions of country, which are interrelated and interconnected with each other, which has the purpose of funds mobilizations for investments, and providing financial services and facilities, including payment system within economy is called financial system.

The components of financial system are:

• Financial market
• Financial institutions
• Financial services provider
• Currency (Money)

The services provided by financial system are:

• Risk sharing
• Liquidity
• Information

Structure of Nepalese Financial System: