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Nepalese Financial System An Overview

The Nepali financial system consists of banking and non banking sector.
Banking sector consists of Nepal Rastra Bank (NRB) as the Central Bank
and the Commercial Banks. The non banking sector includes, financial
institutions licensed by NRB like Development Banks, Finance Companies,
Microfinance Development Banks, Coop Financial Institutions, NGOs
undertaking banking activities and those under different Acts like Insurance
Companies, Citizens Investment Trust, Postal Savings Offices, Employees
Provident Fund, Nepal Stock Exchange and Commodity Markets.
History
The origin of the modern Nepali Financial System can be traced to the
establishing of Nepal Bank Ltd as the first commercial bank of the country.
It was established under Nepal Bank Act, 1994 B.S. The Government of
Nepal owned 52% and general public 48%. It started the banking system in
the country and also public private partnership in financial sector. In
addition to commercial banking operations, it was also permitted to
function as banker to the Government.
Establishment of Nepal Rastra Bank under the NRB Act 2012 was another
important milestone for the development of banking system in Nepal.
Nepal Industrial Development Corporation was established in 2016 B.S.
and it brought in the concept of development banking in the country. Its
objectives were to provide technical and financial assistance to industries.
Though it was licensed to undertake banking transactions, its activities are
subdued.
Thereafter Cooperative Bank was established, which commenced the
compulsory savings scheme for farmers. Later, this was merged with
Agricultural Development Bank Ltd. The latter was primarily for
Development of Agricultural Sector. It has wide reach in both urban and
rural areas and in addition to development banking is actively involved in
Commercial Banking also.
Rastriya Banijya Bank was established as a fully government owned entity
in 2022 B.S. for Development of Commercial Banking Activities. It has a
wide branch network all over the country. A savings institution established
as a fully government owned entity in 2022 B.S. for Development of
Commercial Banking activities and has a wide branch network all over the
country.
In the aftermath of liberalization of economy, Nepal Arab Bank (presently
NABIL Bank) was established in 2041 B.S as a first foreign joint venture
bank. This was followed by other banks like Nepal Indosuez, Nepal

Grindlays etc.
A number of Commercial Banks were also established by Nepali Investors
leading to an emergence of a growing and competitive commercial banking
sector in the country.
In the last decade there was phenomenal growth of Financial Service
Industry and the present position of various participants including their
share of business is indicated below:
Number
Share of Business
Commercial Banks
Development
Banks
Finance
Companies
Micro
Finance
Development
Banks
Savings
and
Credits
Cooperatives
NGOs
Rural
Development
Banks
Total

32
87

80.8%
8.0%

79

9.6%

21

1.6%

16

Nepal
Rastra Bank
Under
the
provisions of
38
Nepal Rastra
Bank
Act
2012, Nepal
Rastra Bank
(NRB) was
established in
2013 Baisakh
14 B.S. as
254
Central Bank
of
the
Country. It played a crucial role for Development Banking Industry and has
effectively circulated Nepali Currency. NRB Act 2058 replaced the earlier
act. This has made NRB a more autonomous and responsible regulator as
well as supervisor of Financial Sector.
Section 4 of NRB Act 2058 spells out the following as its objectives:
i)
To formulate necessary monetary and foreign exchange policies in
order to maintain the stability of the price and balance of payment
for sustainable development of economy and manage it.
ii)
To promote stability and liquidity required in banking and financial
sector.
iii) To develop a secure healthy and efficient system of payment.
iv) To regulate, inspect, supervise and monitor the banking and financial
system.
v)
To promote entire banking and financial system of Nepal and to
enhance its public credibility.

To achieve these objectives the functions, duties and rights of the bank
have been details as under:
i) To issue bank notes and coins.
ii) To formulate and implement monetary and foreign exchange
policies.
iii) To determine the system of foreign exchange rate
iv) To manage and operate the foreign exchange reserves.
v) To issue license to banks and financial institutions and to regulate,
inspect, supervise and monitor their transactions.
vi) To act as a banker, advisor and agent of Government of Nepal.
vii) To act as banker to banks and financial institutions and to act as a
lender of last resort.
viii) To establish and promote a system of payment, clearing and
settlement and to regulate these activities.
As mentioned above Nepal's Financial System consists of banking and non
banking sectors. The banking sector includes NRB and A class Commercial
Banks. Non Banking sector consists of B category Development Banks, C
category Finance Companies, D category Microcredit Development Banks
(including Grameena Bikas Banks), Savings and Credits Co-operatives
(SACCOS) with limited banking license, and FINGOS with limited
banking activities and other financial institutions like Insurance companies,
Employees Provident Fund Organization, Citizens' Investment Trust, Postal
Savings Offices, Nepal Stock Exchange and the Commodity Exchange.
The semi formal sector consists of savings, credit or other cooperatives
registered with registrar of cooperatives. The informal sector consists of
informal groups like Dhukuti groups who pool their savings and extend
credit to members, moneylenders and individual.
RMDC
The Rural Microfinance Development Centre is an apex wholesale lender
and capacity building institutions for promotions and development of
Nepal's microfinance sector. It was established with ADB support in 1998.
It is promoted by NRB and Commercial Banks. Major activities include
providing wholesale loans, institutional capacity building support to partner
institutions, training support to end users in areas like adult literacy,
entrepreneurial and skills development, group development etc.

Centre for Microfinance Ltd.


The Centre for Microfinance Ltd. was registered under Companies Act in
July 2000, and is promoted by Canadian Centre for International Cooperation. It provides training, technical assistance and consultancy service
for microfinance sector. Its mission is to promote and strengthen
Microfinance Services through capacity building, training, knowledge
management, research, policy lobbying, consultancy and networking with
mutual trust and co operation among service receivers, practitioners and
stakeholders.
In addition to the aforementioned institutions the following institutions
have helped in formulating standards and ensuring compliance of the
member institutions:
i)
Nepal Bankers' Association
ii) Microfinance Bankers' Association of Nepal
iii) Microfinance Institutions' Association of Nepal
iv) Nepali Federation of Savings and Credit cooperatives Union Ltd.
v) Insurance Board- the regulator for Insurance industry
vi) SEBON
vii) Development Bankers Association
viii) Nepal Finance Companies Association
Further, National Banking Training Institute functions as an apex training
institute for the entire financial sector.
Financial Sector Reforms
Nepal's inflation rate has been hovering around 10% for the last three
years; the food inflation has been higher than non food inflation.
Historically, its inflation had correlation with inflation in India due to a
fixed peg of Nepali Rupee to the Indian Rupee, the trend has changed to the
lag in pass through of international oil prices and increase in real interest
rate.
Financial Sector Reforms (FSR) initiated from 2002 onwards has tackled
the following main issues:
a) Strengthening the autonomy of Nepal Rastra Bank and improving its
supervisory capability. This has been achieved by passing of new
Nepal Rastra Bank Act and divesting of ownership of NRB in
institutions where it has supervisory responsibility.
b) Improving the governance of Commercial Banks and Financial
Institutions: Banks and Financial Institutions Act and Debt Recovery

Act were passed to give a legal framework for improving Assets


quality and Governance issues.
c) Restructuring the Problem Banks in the Public Sector; recapitalizing
and bringing professionalism in Nepal Bank and Rastriya Banijya
Bank action initiated.
Monetary Policy
The framework of the monetary policy of the country and the
instruments of the policy are given in the following table:
Instrument
Operating
Intermediate
Goals
Target
Target
Cash Reserve Ratio Short
Term Monetary
Price Stability
Interest Rate
Aggregates
Policy Rates
Monetary Base Interest Rate
Economic
Growth
Direct
Control Excess reserve Exchange Rate
Employment
(interest setting and of Commercial
credit control)
Banks
Open
Market Domestic Credit Inflation
Exchange Rate
Operations
Stability
Moral Suasion
BOP Surplus
The monetary policy is administered by Nepal Rastra Bank through the
above instruments. The position is reviewed periodically at least once in
a year and the necessary actions to achieve the goals, including course
corrections are taken.
Capital Market
The history of Securities market began in Nepal with the issue of shares by
Biratnagar Jute Mills and Nepal Bank Ltd. in 1937. Introduction of
Companies Act, issue of Government Bond in 1964 and established of
Securities Exchange Centre in 1976 were other important milestones. The
latter was established with the objective of growth and development of
capital markets. SEC was later converted into Nepal Stock Exchange
(NEPSE) in 1993. The basic objective of NEPSE is to impart free
marketability and liquidity to government and corporate securities by
facilitating transactions through its trading floor through members and
market intermediaries like brokers, market makers etc. Government of
Nepal, NRB, NIDC and members are the shareholders of NEPSE. It has
introduced fully automated trading system from 2007 and from first of
Magh 2072, CDS was fully implemented as demt trading system. It has
adopted a T+3 settlement system. The shares, preference shares,

Government bonds and corporate securities are traded in the above


Exchange.
Banking Regulation
For Banking Regulations under NRB Act 2001 (NRB Act 2058) has given full
authority to Nepal Rastra Bank to govern as a regulator. Under this act, NRB
posses as a regulator off all Nepalese bank and financial institutions in Nepal.
With the purpose of Regulations of nepalese banking sector, government has
implemented Bank and Financial Institutions Act 2063, (BAFIA 2006).
With the help of NRB Act 2001 and BAFIA 2006, NRB is regulating nepalese
banking and financial institutions.
Retail Banking, Wholesale and International Banking, ADR, GDR and
Participatory Notes
Retail banking also known as Consumer Banking is the provision of services by
abank to individual consumers, rather than to companies, corporations or other banks.
Services offered include savings and transactional accounts, mortgages, personal loans,
debit cards, and credit cards.
Wholesale banking is the provision of services by banks to organizations such as
Mortgage Brokers, large corporate clients, mid-sized companies, real estate developers
and investors, international trade finance businesses, institutional customers (such as
pension funds and government entities/agencies), and services
International banking is the activity of banks that make financial arrangements, such
as lending money, for companies and banks in other countries
Role and Functions of Capital Market

Role of Capital Market


The primary role of the capital market is to raise long-term funds for governments, banks,
and corporations while providing a platform for the trading of securities. This fundraising is
regulated by the performance of the stock and bond markets within the capital market.
The member organizations of the capital market may issue stocks and bonds in order to
raise funds. Investors can then invest in the capital market by purchasing
thosestocks and bonds. The capital market, however, is not without risk.
It is important for investors to understand market trends before fully investing in the capital
market. To that end, there are various market indices available to investors that reflect the
present performance of the market.

Capital Market
Introduction

Introduction to Capital market/ Financial marketCapital Market is one of the significant


aspect of every financial market.Hence it is necessary to study its correct meaning. Broadly
speaking thecapital market is a market for financial assets which have a long or

indefinitematurity.
Capital markets are financial markets for the buying and selling of longterm debt or equity-backedsecurities. These markets channel the wealth of savers to those
who can put it to long-term productive use, such as companies/ governments making longterm investments.[a] Capital markets are defined as markets in which money is provided for
periods longer than a year.[1] Financial regulators, such as the UK's Bank of England (BoE)
or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in
their jurisdictions to protect investors against fraud, among other duties.
Modern capital markets are almost invariably hosted on computer-based electronic
trading systems; most can be accessed only by entities within the financial sector or the
treasury departments of governments and corporations, but some can be accessed directly
by the public.[b] There are many thousands of such systems, most serving only small parts
of the overall capital markets. Entities hosting the systems include stock exchanges,
investment banks, and government departments. Physically the systems are hosted all
over the world, though they tend to be concentrated in financial centres like London, New
York, and Hong Kong.
A key division within the capital markets is between the primary markets and secondary
markets. In primary markets, new stock or bond issues are sold to investors, often via a
mechanism known as underwriting. The main entities seeking to raise long-term funds on
the primary capital markets are governments (which may be municipal, local or national)
and business enterprises (companies). Governments issue only bonds, whereas
companies often issue either equity or bonds. The main entities purchasing the bonds or
stock include pension funds, hedge funds,sovereign wealth funds, and less commonly
wealthy individuals and investment banks trading on their own behalf. In the secondary
markets, existing securities are sold and bought among investors or traders, usually on
an exchange, over-the-counter, or elsewhere. The existence of secondary markets
increases the willingness of investors in primary markets, as they know they are likely to be
able to swiftly cash out their investments if the need arises. [2]

Role
Every capital market in the world is monitored by financial regulators and their respective
governance organization. The purpose of such regulation is to protect investors from fraud
and deception. Financial regulatory bodies are also charged with minimizing financial
losses, issuing licenses to financial service providers, and enforcing applicable laws.

Capital Markets Influence on International Trade

Capital market investment is no longer confined to the boundaries of a single nation.


Todays corporations and individuals are able, under some regulation, to invest in the
capital market of any country in the world. Investment in foreign capital markets has caused
substantial enhancement to the business of international trade.

The Primary and Secondary Markets


The capital market is also dependent on two sub-markets the primary market and the
secondary market. Theprimary market deals with newly issued securities and is responsible
for generating new long-term capital. The secondary market handles the trading of
previously-issued securities, and must remain highly liquid in nature because most of the
securities are sold by investors. A capital market with high liquidity and high transparency is
predicated upon a secondary market with the same qualities.
Functions
1. Mobilization Of Saving Capital market is an important source for mobilizing idle
savings from the economy. It mobilizes funds from people for further investments in
the productive channels of an economy. In that sense it activate the ideal monetary
resources and puts them in proper investments.
2. 6. Capital Formation Capital market helps in capital formation. Capital formation is
net addition tothe existing stock of capital in the economy. Through mobilization of
idealresources it generates savings; the mobilized savings are made available
tovarious segments such as agriculture, industry, etc. This helps in increasingcapital
formation
3. 7. Provision of Investment Avenue Capital market raises resources for longer
periods of time. Thus it provides an investment avenue for people who wish to
invest resources for a long period of time. It provides suitable interest rate returns
also to investors. Instruments such as bonds, equities, units of mutual funds,
insurance policies, etc. definitely provides diverse investment avenue for the public.
4. 8. Speed up Economic Growth and DevelopmentCapital market enhances
production and productivity in the national economy.As it makes funds available for
long period of time, the financial requirements of business houses aremet by the
capital market.It helps in research and development. This helps in, increasing
production and productivity ineconomy by generation of employment and
development of infrastructure.
5. 9. Proper Regulation of Funds Capital markets not only helps in fund mobilization,
but it also helps in proper allocation of these resources. It can have regulation over
the resources so that it can direct funds in a qualitative manner.
6. 10. Service Provision As an important financial set up capital market provides
various types of services. Itincludes long term and medium term loans to industry,
underwriting services,consultancy services, export finance, etc.These services help
themanufacturing sectorin a large spectrum.
7. 11. Continuous Availability of Funds Capital market is place where the investment
avenue is continuously available for long term investment. This is a liquid market as
it makes fund available on continues basis. Both buyers and seller can easily buy

and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital
market becomes easy.
Role and Functions of Mutual Funds
1. Concept and Role of Mutual Funds
2. 3. Meaning A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. The money thus collected is then
invested in capital market instruments such as shares, debentures and other
securities. The income earned through these investments and the capital
appreciation realized are shared by its unit holders in proportion to the number of
units owned by them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively low cost. 3
3. 4. MF Operation Flow Chart 4
4. 5. Role of Mutual funds The overall economic development is promoted. The
mutual fund industry itself, offers livelihood to a large number of employees of
mutual funds, distributors, registrars and various other service providers. Higher
employment, income and output in the economy boost the revenue collection of the
government through taxes and other means. Mutual funds can also act as a
market stabilizer, and are viewed as a key participant in the capital market of any
economy. 5
5. 6. Advantage of Mutual Fund Professional Management Diversification
Economies of scale Low Costs Liquidity Transparency Flexibility Tax benefits
Well regulated(systematic approach) 6
6. 7. Limitation of a Mutual Fund Lack of Portfolio customization Choice Overload
No control over cost Dilution 7
7. 8. Mutual Fund Scheme Mutual funds seek to mobilize money from all possible
investors. Various investors have different investment preferences. In order to
accommodate these preferences, mutual funds mobilize different pools of money.
Each such pool of money is called a mutual fund scheme. Every scheme has a
pre-announced investment objective. 8
8. 9. Frequently Used Terms : NAV:- Net Asset Value is the market value of the
assets of the scheme minus its liabilities. The per unit NAV is the net asset value of
the scheme divided by the number of units outstanding on the valuation date. Sale
Price:- Is the price you pay when you invest in a scheme. Also called Offer Price. It
may include a sales load. Repurchase Price :-Is the price at which units under
open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV
related. Redemption Price:- Is the price at which close-ended schemes redeem
their units on maturity. Such prices are NAV related. Sales Load :- Is a charge
collected by a scheme when it sells the units. Also called, Front-end load.
Schemes that do not charge a load are called No Load schemes. Repurchase or
Back-endLoad:- Is a charge collected by a scheme when it buys back the units
from the unit holders. 9

9. 10. How do Mutual Schemes Operate ? Mutual fund schemes announce their
investment objective and seek investments from the public. The investment that an
investor makes in a scheme is translated into a certain number of Units in the
scheme. Under the law, every unit has a face value of Rs10. (However, older
schemes in the market may have a different face value). The face value is relevant
from an accounting perspective. The number of units multiplied by its face value
(Rs10) is the capital of the scheme its Unit Capital. The scheme earns interest
income or dividend income on the investments it holds. Further, when it purchases
and sells investments, it leads to realized capital gains or realized capital losses as
the case may be. Investments owned by the scheme may be quoted in the market
at higher than the cost paid. Such gains in values on securities held are called
valuation gains. Similarly, there can be valuation losses.
Role and Functions of Insurance Companies

1. Provide safety and security:


Insurance provide financial support and reduce uncertainties in
business and human life. It provides safety and security against
particular event. There is always a fear of sudden loss. Insurance
provides a cover against any sudden loss. For example, in case of life
insurance financial assistance is provided to the family of the insured
on his death. In case of other insurance security is provided against
the loss due to fire, marine, accidents etc.

2. Generates financial resources:


Insurance generate funds by collecting premium. These funds are
invested in government securities and stock. These funds are gainfully
employed in industrial development of a country for generating more
funds and utilised for the economic development of the country.
Employment opportunities are increased by big investments leading to
capital formation.

3. Life insurance encourages savings:

ADVERTISEMENTS:

Insurance does not only protect against risks and uncertainties, but
also provides an investment channel too. Life insurance enables
systematic savings due to payment of regular premium. Life insurance
provides a mode of investment. It develops a habit of saving money by
paying premium. The insured get the lump sum amount at the maturity
of the contract. Thus life insurance encourages savings.

4. Promotes economic growth:


Insurance generates significant impact on the economy by mobilizing
domestic savings. Insurance turn accumulated capital into productive
investments. Insurance enables to mitigate loss, financial stability and
promotes trade and commerce activities those results into economic
growth and development. Thus, insurance plays a crucial role in
sustainable growth of an economy.

5. Medical support:
A medical insurance considered essential in managing risk in health.
Anyone can be a victim of critical illness unexpectedly. And rising
medical expense is of great concern. Medical Insurance is one of the
insurance policies that cater for different type of health risks. The
insured gets a medical support in case of medical insurance policy.

6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer.

The basic principle of insurance is to spread risk among a large


number of people. A large number of persons get insurance policies
and pay premium to the insurer. Whenever a loss occurs, it is
compensated out of funds of the insurer.

7. Source of collecting funds:


Large funds are collected by the way of premium. These funds are
utilised in the industrial development of a country, which accelerates
the economic growth. Employment opportunities are increased by such
big investments. Thus, insurance has become an important source of
capital formation.
Factoring, Forfeiting Services and OffBalance Items
Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at
a discount.
In trade finance, forfaiting is a financial transaction involving the purchase
of receivables from exporters by a forfaiter. The forfaiter takes on all the risks associated
with the receivables but earns a margin.[
Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or
financing activity not on the company's balance sheet.
Some companies may have significant amounts of off-balance sheet assets and liabilities.
For example, financial institutions often offer asset management or brokerage services to
their clients. The assets managed or brokered as part of these offered services
(often securities) usually belong to the individual clients directly or in trust, although the
company provides management, depository or other services to the client. The company
itself has no direct claim to the assets, so it does not record them on its balance sheet (they
are off-balance sheet assets), while usually has some basic fiduciary duties with respect to
the client. Financial institutions may report off-balance sheet items in their accounting
statements formally, and may also refer to "assets under management," a figure that may
include on and off-balance sheet items.

Risk Management and BASEL II An Overview


Alliances/Mergers/Consolidation
Credit Information Bureau
Bankers Fair Practice Code
Recent Developments in the Financial System in Nepal

Banker-Customer Relationship
Bankers Special Relationship
Payment and Collection of Cheques and Other Negotiable Instruments
Opening of Accounts of Various Types of Customers
Ancillary Services
Principles of Lending, Working Capital Assessment and Credit Monitoring
Priority Sector Advances
Agricultural Finance
Micro, Small & Medium Enterprises
Government Sponsored Schemes
Self-Help Groups
Credit Cards, Home Loans, Personal Loans, Consumer Loans
Documentation
Different Modes of Charging Securities
Types of Collaterals and their Characteristics
Non-Performing Assets Financial Inclusion

Essential of Bank Computerization PAYMENT System of Electronic Banking


Data Communication Network and EFT System Role of Technology ,
Upgradation and its impact on Banks Security Consideration
Marketing an Introduction Consumer Behaviour Product Pricing
Distribution Channel Management Promotion Role of Direct Selling
Agent/Direct Marketing Agent in Bank Marketing Information System
Calculation of Interest Basel II Accord An Overview Calculation of YTM
Capital Budgeting Depreciation Foreign Exchange Arithmetic
Definition and Basic Accountancy Procedures Maintenance
Cash/Subsidiary Books and Ledger Reporting Standards and their Scope

of

Bank Reconciliation Statement Trial Balance, Rectification of Errors and


Adjusting & Closing Entries Capital and Revenue Expenditure Inventory
Valuation Bills of Exchange Joint Venture Leasing and Hire-Purchase
Accounts of Non-Trading Organisations Depreciation Accounting Accounting
from Incomplete Records (Single Entry System) Ratio Analysis
Balance Sheet Equation Partnership Accounts Final Accounts of Banking
Companies Company Accounts I Company Accounts II Accounting in
Computerised Environment
The legal and regulatory framework of the banking system and
The various laws and enactment affecting day-to- day banking Operations
Establishment of Banks and Financial Institutions Functions of Banks and
Financial Institutions Management of Banks and Financial Institutions
Supervision and Regulation of Banks Preparing Accounts, Records and
Submission of Reports to Rastra Bank Winding up and merger of Banks
Prevention of Money Laundering
Basic characteristics of a Contract Lending against Various Types of Securities
General Provisions relating to Security Interest Contracts relating to
Collaterals and Deposit Contracts relation to Guarantee, Indemnity,

Subrogation and Evidences Contracts relating to Agency


Laws on Consumer Protection Incorporation of a Company Arranging
Capital for a Company Company Management Dissolution of a Company
Functions of Nepal Rastra Bank
Functions of Commercial Bank
Role of Commercial Bank
Basic Mathematics
Basic Statistics
Principle of Management
Economics
Importance of Customer Relationship
Importance of Marketing
Basic Computer Aplications
Aptitude Tests
Current affairs and General Knowledge