1

1. INTRODUCTIONOFCOMMERCIALBANKING

The banking sector is a vital cog in the machinery of any modern economy. It is one of the
major financial pillars of the financial system. Banks are one of the oldest of financial
intermediaries in the financial system. They play a crucial role in themobilization of deposits
and disbursal of credit in of credit to various sectors of the economy. A wellfunctioning
banking system efficiently deploys mobilized savings in productive sectors and a solvent
bankingsystemensuresthatthebankiscapableofmeetingitsobligationstothedepositors.In
Nepal,thebankingsectoristhedominantformoffinancialinstitutionandaccountsformore
majorityoftheassetsofthefinancialsector.

MeaningoftheBank
AccordingtoKentAbankisanorganizationwhoseprincipaloperationsareconcernedwiththe
accumulationoftemporarilyidlemoneyofthegeneralpublicforthepurposeofadvancingto
othersforexpenditures.

The Banking Regulation Act, 1949 of India defines banking as accepting for the purpose of
lending or investment, of deposits of money from the public, repayable on demand or
otherwiseandwithdrawablebycheque,draft,orderotherwise.

Section 2(b) of BAFIA bank means a corporate body incorporated to carry on financial
transactionsasreferredtoinSubsection(1)ofSection47.

TYPESOFBANKS
1. Deposit Banks: The most important type of deposit banks is the commercial banks. They
have connection with the commercial class of people. These banks accept deposits from the
public and lend them to needy parties. Since their deposits are for short period only, these
banks extend loans only for a short period. Ordinarily these banks lend money for a period
between3to6months.Theydonotliketolendmoneyforlongperiodsortoinvesttheirfunds
inanywayinlongtermsecurities.
2. Industrial Banks: Industries require a huge capital for a long period to buy machinery and
equipment.Industrialbankshelpsuchindustrialists.Theyprovidelongtermloanstoindustries.
Besides,theybuysharesanddebenturesofcompanies,andenablethemtohavefixedcapital.
Sometimes, they even underwrite the debentures and shares of big industrial concerns. The
importantfunctionsofindustrialbanksare:
1.Theyacceptlongtermdeposits.
2.Theymeetthecreditrequirementsofindustriesbyextendinglongtermloans.
3. These banks advise the industrial firms regarding the sale and purchase of shares and
debentures.
Theindustrialbanksplayavitalroleinacceleratingindustrialdevelopment.

3. Savings Banks: These banks were specially established to encourage thrift among small
savers and therefore, they were willing to accept small sums as deposits. They encourage

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

savingsofthepoorandmiddleclasspeople.InNepalwedonothavesuchspecialinstitutions,
butmostofthebanksacceptthesavingdeposits.
4.AgriculturalBanks:Agriculturehasitsownproblemsandhencethereareseparatebanksto
financeit.Thesebanksareorganisedoncooperativelinesandthereforedonotworkonthe
principleofmaximumprofitfortheshareholders.Thesebanksmeetthecreditrequirementsof
thefarmersthroughtermloans,viz.,short,mediumandlongtermloans.
5.ExchangeBanks:Thesebanksfinancemostlyfortheforeigntradeofacountry.Theirmain
functionistodiscount,acceptandcollectforeignbillsofexchange.Theybuyandsellforeign
currency and thus help businessmen in their transactions. They also carry on the ordinary
bankingbusiness.
6. Miscellaneous Banks: There are certain kinds of banks which have arisen in due course to
meetthespecialisedneedsofthepeople.InEnglandandAmerica,thereareinvestmentbanks
whoseobjectistocontrolthedistributionofcapitalintoseveraluses.AmericanTradeUnions
have got labour banks, where the savings of the labourers are pooled together. In London,
therearetheLondonDiscountHousewhosebusinessistogoaboutthecityseekingforbillsto
discount. There are numerous types of different banks in the world, carrying on one or the
otherbankingbusiness.

FunctionsofCommercialBanks
These can be broadly divided into two categories: (a) Primary functions and (b) Secondary
functions.
A.PrimaryFunctions
1. Acceptance of Deposits: Accepting deposits is the primary function of a commercial bank
mobilisesavingsofthehouseholdsector.Banksgenerallyacceptthreetypesofdepositsviz.,(a)
CurrentDeposits(b)SavingsDeposits,and(c)FixedDeposits.
(a)CurrentDeposits:Thesedepositsarealsoknownasdemanddeposits.Thesedepositscanbe
withdrawnatanytime.Generally,nointerestisallowedoncurrentdeposits,andincase,the
customerisrequiredtoleaveaminimumbalanceundrawnwiththebank.Chequesareusedto
withdrawtheamount.Thesedepositsarekeptbybusinessmenandindustrialistswhoreceive
and make large payments through banks. The bank levies certain incidental charges on the
customerfortheservicesrenderedbyit.
(b)SavingsDeposits:Thisismeantmainlyforprofessionalmenandmiddleclasspeopletohelp
them deposit their small savings. It can be opened without any introduction. Money can be
depositedatanytimebutthemaximumcannotgobeyondacertainlimit.Thereisarestriction
on the amount that can be withdrawn at a particular time or during a week. If the customer
wishes to withdraw more than the specified amount at any one time, he has to give prior
notice.Interestisallowedonthecreditbalanceofthisaccount.Therateofinterestisgreater
thantherateofinterestonthecurrentdepositsandlessthanthatonfixeddeposit.Thissystem
greatlyencouragesthehabitofthriftorsavings.
(c)FixedDeposits:Thesedepositsarealsoknownastimedeposits.Thesedepositscannotbe
withdrawn before the expiry of the period for which they are deposited or without giving a
prior notice for withdrawal. If the depositor is in need of money, he has to borrow on the
securityofthisaccountandpayaslightlyhigherrateofinteresttothebank.Theyareattracted

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

bythepaymentofinterestwhichisusuallyhigherforlongerperiod.Fixeddepositsarelikedby
depositorsbothfortheirsafetyandaswellasfortheirinterest

2.AdvancingLoans:Thesecondprimaryfunctionofacommercialbankistomakeloansand
advances to all types of persons, particularly to businessmen and entrepreneurs. Loans are
made against personal security, gold and silver, stocks of goods and other assets. The most
commonwayoflendingisby:
(a)OverdraftFacilities:Inthiscase,thedepositorinacurrentaccountisallowedtodrawover
and above his account up to a previously agreed limit. Suppose a businessman has only Rs.
30,000/ in his current account in a bank but requires Rs. 60,000/ to meet his expenses. He
mayapproachhisbankandborrowtheadditionalamountofRs.30,000/.Thebankallowsthe
customertooverdrawhisaccountthroughcheques.Thebank,however,chargesinterestonly
on the amount overdrawn from the account. This type of loan is very popular with business
houses.
(b) Cash Credit: Under this account, the bank gives loans to the borrowers against certain
security.Buttheentireloanisnotgivenatoneparticulartime,insteadtheamountiscredited
intohisaccountinthebank;butunderemergencycashwillbegiven.Theborrowerisrequired
to pay interest only on the amount of credit availed to him. He will be allowed to withdraw
smallsumsofmoneyaccordingtohisrequirementsthroughcheques,buthecannotexceedthe
creditlimitallowedtohim.Besides,thebankcanalsogivespecifiedloantoaperson,forafirm
againstsomecollateralsecurity.Thebankcanrecallsuchloansatitsoption.
(c)DiscountingBillsofExchange:Thisisanothertypeoflendingwhichisverypopularwiththe
modern banks. The holder of a bill can get it discounted by the bank, when he is in need of
money. After deducting its commission, the bank pays the present price of the bill to the
holder.Suchbillsformgoodinvestmentforabank.Theyprovideaveryliquidassetwhichcan
bequicklyturnedintocash.Thecommercialbankscanrediscount,thediscountedbillswiththe
centralbankswhentheyareinneedofmoney.Thesebillsaresafeandsecuredbills.Whenthe
billmaturesthebankcansecureitspaymentfromthepartywhichhadacceptedthebill.
(d)MoneyatCall:Bankalsograntloansforaveryshortperiod,generallynotexceeding7days
to the borrowers, usually dealers or brokers in stock exchange markets against collateral
securities like stock or equity shares, debentures, etc., offered by them. Such advances are
repayableimmediatelyatshortnoticehence,theyaredescribedasmoneyatcallorcallmoney.
(e) Term Loans: Banks give term loans to traders, industrialists and now to agriculturists also
againstsomecollateralsecurities.Termloansaresocalledbecausetheirmaturityperiodvaries
between 1 to 10 years. Term loans, as such provide intermediate or working capital funds to
the borrowers. Sometimes, two or more banks may jointly provide large term loans to the
borrower against a common security. Such loans are called participation loans or consortium
finance.
(f) Consumer Credit: Banks also grant credit to households in a limited amount to buy some
durableconsumergoodssuchastelevisionsets,refrigerators,etc.,ortomeetsomepersonal
needs like payment of hospital bills etc. Such consumer credit is made in a lump sum and is
repayableininstalmentsinashorttime.
(g) Miscellaneous Advances: Among other forms of bank advances there are packing credits
given to exporters for a short duration, export bills purchased/discounted, import finance
advancesagainstimportbills,financetotheselfemployed,credittothepublicsector,creditto

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

the cooperative sector and above all, credit to the weaker sections of the community at
concessionalrates.

3.CreationofCredit:Auniquefunctionofthebankistocreatecredit.Bankssupplymoneyto
traders and manufacturers. They also create or manufacture money. Bank deposits are
regardedasmoney.Theyareasgoodascash.Thereasonistheycanbeusedforthepurchase
ofgoodsandservicesandalsoinpaymentofdebts.Whenabankgrantsaloantoitscustomer,
it does not pay cash. It simply credits the account of the borrower. He can withdraw the
amount whenever he wants by a cheque. In this case, bank has created a deposit without
receivingcash.Thatis,banksaresaidtohavecreatedcredit.Sayerssaysbanksarenotmerely
purveyorsofmoney,butalsoinanimportantsense,manufacturersofmoney.

4. Promote the Use of Cheques: The commercial banks render an important service by
providingtotheircustomersacheapmediumofexchangelikecheques.Itisfoundmuchmore
convenienttosettledebtsthroughchequesratherthanthroughtheuseofcash.Thechequeis
themostdevelopedtypeofcreditinstrumentinthemoneymarket.

5.FinancingInternalandForeignTrade:Thebankfinancesinternalandforeigntradethrough
discounting of exchange bills. Sometimes, the bank gives shortterm loans to traders on the
security of commercial papers. This discounting business greatly facilitates the movement of
internalandexternaltrade.

6. Remittance of Funds: Commercial banks, on account of their network of branches

throughout the country, also provide facilities to remit funds from one place to another for
their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal
commission charges. As compared to the postal money orders or other instruments, bank
drafts have proved to be a much cheaper mode of transferring money and has helped the
businesscommunityconsiderably.

B.SecondaryFunctions
Secondarybankingfunctionsofthecommercialbanksinclude:
1.AgencyServices
2.GeneralUtilityServices
Thesearediscussedbelow.
1. Agency Services: Banks also perform certain agency functions for and on behalf of their
customers.Theagencyservicesareofimmensevaluetothepeopleatlarge.Thevariousagency
servicesrenderedbybanksareasfollows:
(a) Collection and Payment of Credit Instruments: Banks collect and pay various credit
instrumentslikecheques,billsofexchange,promissorynotesetc.,onbehalfoftheircustomers.
(b) Purchase and Sale of Securities: Banks purchase and sell various securities like shares,
stocks,bonds,debenturesonbehalfoftheircustomers.
(c) Collection of Dividends on Shares: Banks collect dividends and interest on shares and
debenturesoftheircustomersandcreditthemtotheiraccounts.

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

(d)ActsasCorrespondent:Sometimesbanksactasrepresentativeandcorrespondentsoftheir
customers.Theygetpassports,travellersticketsandevensecureairandseapassagesfortheir
customers.
(e)IncometaxConsultancy:Banksmayalsoemployincometaxexpertstoprepareincometax
returnsfortheircustomersandtohelpthemtogetrefundofincometax.
(f)ExecutionofStandingOrders:Banksexecutethestandinginstructionsoftheircustomersfor
making various periodic payments. They pay subscriptions, rents, insurance premia etc., on
behalfoftheircustomers.
(g) Acts as Trustee and Executor: Banks preserve the Wills of their customers and execute
themaftertheirdeath.

2. General Utility Services: In addition to agency services, the modern banks provide many
generalutilityservicesforthecommunityasgiven.
(a)LockerFacility:Bankprovidelockerfacilitytotheircustomers.Thecustomerscankeeptheir
valuables,suchasgoldandsilverornaments,importantdocuments;sharesanddebenturesin
theselockersforsafecustody.
(b) Travellers Cheques and Credit Cards: Banks issue travellers cheques to help their
customerstotravelwithoutthefearoftheftorlossofmoney.Withthisfacility,thecustomers
neednottaketheriskofcarryingcashwiththemduringtheirtravels.
(c)LetterofCredit:Lettersofcreditareissuedbythebankstotheircustomerscertifyingtheir
creditworthiness.Lettersofcreditareveryusefulinforeigntrade.
(d) Collection of Statistics: Banks collect statistics giving important information relating to
trade, commerce, industries, money and banking. They also publish valuable journals and
bulletinscontainingarticlesoneconomicandfinancialmatters.
(e)ActingReferee:Banksmayactasrefereeswithrespecttothefinancialstanding,business
reputationandrespectabilityofcustomers.
(f) Underwriting Securities: Banks underwrite the shares and debentures issued by the
Government,publicorprivatecompanies.
(g)GiftCheques:Somebanksissuechequesofvariousdenominationstobeusedonauspicious
occasions.
(h) Accepting Bills of Exchange on Behalf of Customers: Sometimes, banks accept bills of
exchange, internal as well as foreign, on behalf of their customers. It enables customers to
importgoods.
(i) Merchant Banking: Some commercial banks have opened merchant banking divisions to
providemerchantbankingservices.

However, subsection (1) of Section 47 of BAFIA 2063 states that subject to this Act and the
memorandum of association and articles of association, a Class A licensed institution may
carryonthefollowingfinancialtransactions:
(a)Acceptingdepositswithorwithoutinterest,andrefundsuchdeposits;
(b)SupplyingcreditasprescribedbytheRastraBank;
(c)Dealinginforeignexchange,subjecttothelawsinforce;
(d)Supplyingcreditforhirepurchase,hypothecation,leasing,housingandservicebusiness;
(e)Engaginginmerchantbankingbusiness,subjecttothedirectivesoftheRastraBank;

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

(f) Making arrangements for jointly supplying credits on the basis of cofinancing in
collaborationwithotherlicensedinstitutionsinaccordancewiththemutualagreemententered
intoforthedivisionofthecollateralparipassu;
(g) Issuing guarantees on behalf of its customers, having such customers execute necessary
bonds in consideration thereof, obtaining security, and acquire their movable or immovable
assetsascollateraloronmortgage,ortheassetsofthirdpersonsascollateral;
(h)Supplyingcreditagainsttheguaranteeprovidedbyanynativeorforeignbankorfinancial
institution;
(i) Issuing, accepting, paying, discounting or purchasing and selling letters of credit, bills of
exchange,promissorynotes,cheques,travelerscheques,draftsorotherfinancialinstruments;
(j) Accepting deposits, making payments and transfer funds through telephones, telex, fax,
computers or magnetic tapes or similar other electronic means or equipment, subject to the
directivesissuedbytheRastraBank;
(k)Issuingandacceptingcreditcards,debitcards,chargecardsandotherfinancialinstruments,
aswell,andappointingagentstodischargefunctionsrelatingthereto,subjecttothedirectives
issuedbytheRastraBank;
(l) Accepting, making payments and supplying credit through automated teller machines and
cashdispensingmachines;
(m)Providingoverdrafttopersonswhomittrusts;
(n) Supplying a fresh credit in lump sum or by installment against the security of the same
movable or immovable assets which have already been furnished with it or with any other
licensedinstitutionassecurity,totheextentcoveredbythetotalvalueofsuchsecurity;
(o)ActingasanagentoftheRastraBankontheconditionsprescribedbytheRastraBank,and
carryingongovernmentalandothertransactionsonbehalfoftheGovernmentofNepal;
(p) Remitting or transmitting funds to different places within or outside the State of Nepal
throughbillsofexchange,chequesorotherfinancialinstruments,purchasingandsellinggold
andsilverbullion,shares,debentures,bonds,etc.,andrecoveringdividendsaccruingonshares
andinterestonpromissorynotes,debentures,bonds,etc.;
(q)Actingasacommissionagentofitscustomers,takingcustodyofandarrangingforthesale
orpurchaseofshares,debenturesorsecurities,collectinginterest,dividendsetc.accruingfrom
shares,debenturesorsecurities,remittingortransmittingsuchinterestsordividendstoplaces
withinoroutsidetheStateofNepal;
(r) Purchasing, selling or accepting bonds issued by the Government of Nepal or the Rastra
Bank;
(s)Arrangingforsafedepositvaults;
(t)Carryingonoffbalancesheettransactionsonsuchconditionsasmaybeprescribedbythe
RastraBank;
(u) Supplying credits not exceeding the amount prescribed by the Rastra Bank, against
individual or collective guarantee, for the economic upliftment of the destitute class, low
incomefamilies,victimsofnaturalcalamitiesandinhabitantsinanyareaofthecountry;
(v) Exchanging with the Rastra Bank or any other licensed institutions particulars of,
information or notices on debtors or customers who have obtained credits from it or other
licensedinstitutions;
(w) Providing guarantee for the supply of credit to its customers by any other licensed
institution;

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

(x) Mobilizing capital through shares, debentures, bonds, loanbonds, savingbonds or other
financialinstrumentswithinthelimitprescribedbytheRastraBank;
(y)ObtainingrefinancecreditfromtheRastraBankaspernecessity,orobtainingorsupplying
creditstoorfromotherlicensedinstitutions;
(z)Doing,orcausingtobedone,study,researchandsurveyworkrelatingtotheestablishment,
operation and evaluation of projects, and providing training, consultancy and other
information;
(aa) Supplying funds received from the Government of Nepal or other native or foreign
agenciesascreditsforthepromotionofprojects,ormanagingsuchcredits;
(bb)Prescribingconditions,asrequired,inordertoprotectitsinterestswhilesupplyingcredits
toanypersonsorinstitutionsordoinganytransactionwiththem;
(cc)Obtainingcreditsbypledgingitsmovableorimmovableassetsascollateral;
(dd)Writingoffcredits,subjecttothebyelawsframedbytheBoard;
(ee)Properlymanagingorsellingitsassets;
(ff)PerformingsuchotherfunctionsasmaybeprescribedbytheRastraBank

BasicPrinciplesofBanking(GoalsofBank)
1. PrincipleofIntermediation
Banksarefinancialintermediariesthattheyfacilitateinlendingthefundsofdepositors
asbanksareexpertmiddlemanbetweensaversandborrowers.
2. PrincipleofLiquidity
Banksacceptsdepositswhicharerepayableondemandsotheyhavetomaintaincertain
percentagesofdepositsinliquidformwhicharemandatorilyrequiredaswellsuchCRR
andSLR.
3. PrincipleofProfitability
Profitability is of course the concern for any banking business. However, spread
between interest received on lending and interest paid on deposits shall be guiding
basisfortheprofitability.Also,thevolumeofoperatingcostincludingstaffcostshallbe
componenttoguideprofitability.
4. PrincipleofSolvency
Unlike liquidity, solvency means long term soundness of the bank. The long term
soundnessofthebankdependsoncapitalstructureofthebank,capitaladequacyratios,
banksportfolioofriskexposuresandratioofnonperformingassets.
5. PrincipleofTrust
Thetrustamongitsstakeholdersisthemostcrucialcomponentforthesuccessofthe
bank.Thetrustamongpublicisverymuchessentialasbanksplaycrucialroleincapital
formationinnationaleconomy.

ConstraintsofBanking
The bank have to maximize its shareholders wealth by making appropriate balance between
riskandreturn.Bankfacesmanyconstraintsinmanagingitsportfoliossuchas:
- Thebankingbusinessitselfisdependentinoveralleconomyofthestateasitsexposures
havebeenspreadoverdifferentsectorsoftheeconomy.Hence,ifeconomyboomsthe
banksperformancegrows.Similarly,duringrecessionineconomybanksalsosuffer.

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

- Thebankasbeingpartofthesociety,collectingfundsfromthepublic,lendingmoney
for public expenditures directly or indirectly shall have some types of social
responsibilitiestowardsit.Thus,banksperformsocialactivitiesintheformofitsCSR.
- Therearenumberoflegalorregulatoryrequirementforbankswhichshallhavegreater
impactsinitsperformanceandgrowth.Suchascreditcontrolintermsofvolumesand
sectorial lending limit, debt borrowing constraints, capital constraints, etc. However,
theseregulatoryrequirementsareimposedforlongtermsustainabilityofthebanking
businesscausingandmaintainingpublicfaithandtrust.

InternalOrganizationsofBankingFirms
Organizationalstructureisthewayinwhichorganization'sactivitiesaredivided,organizedand
coordinated.
TypesofOrganizationalstructuresmaybe
- Functionalorganization(UForm)
- DivisionalOrganization(MFormorHForm)
- MatrixOrganization(MatrixForm)
- NetworkOrganization

TheUform isacentralizedmultifunctionalorganizationalstructureinwhichthemajoractive
units are functional divisions. That is, there is specialization by function such as production.
sales,finance,andresearchanddevelopmentwithdecisionmakingresponsibilitieslocatedat
thetoplevelsoftheorganization.TheUformfavorstherealizationofeconomiesofscaleand
theinternalspecializationoflabor,butasthefirmexpandsthisformcreatesthefollowingset
ofproblems:
1) Bounded rationality managers cannot act optimally because they cannot process large
volumesofinformation:
2) Opportunism the tendency for managers and employees to engage in behavior benefiting
themselvesasopposedtostockholders:and
3) Subgoal pursuit placing shortterm nonprofit maximizing goals ahead of longterm value
maximizinggoals.
In contrast, the Mform substitutes quasiautonomous operating divisions for the functional
divisions of theUform.Theseoperatingdivisionsareorganizedmainlyalongproduct,brand,
market,orgeographiclines.Eachofthedivisionsmaysubsequentlybedividedalongfunctional
lines to ensure its autonomy or independence from heavyhanded decision making within
higherlevelsoftheorganization.U

InNepalesebanking,thereareespeciallyUformsoforganizationstructures.However,divisionalforms
ofstructurestendtobedevelopingwithincreaseinvolumeoftransactionswiththeincreasingnumber
ofbranchbanking.
Simpledemonstrationsoffunctionalanddivisionalorganizationalstructuresareshownbelow:

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

UFromOrganizationalStructure

BOD

CEO/GM/MD

Marketing
Finance Operations HR Credit R&D

MFromOrganizationStructure

CEO/MD

DivisionA DivisionB DivisionC

Sales Marketing Operations Sales Marketing

SizeandMarketSharesofCommercialBanksinNepal
Commercial banks in Nepal are categorized as A class financial institution as per the BAFIA
2063.Thereare188bankandfinancialinstitutionsunderthelawofBAFIA.Outofthem,29are
commercial banks, 72 development banks (B Class), 46 Finance Companies (C Class) and 41
MicroFinance(DClass).[Source:NRBMonthlyStatisticsMidApril2016]
However, there are compulsion to bank and financial institutions to achieve paid up capital
requirement within short deadline i.e. Ashad 2074 which urge them for mergers and
acquisitions decisions among themselves as many have already gone through mergers and
acquisitions.So,incomingdaysthenumberofbanksandfinancialinstitutionsmayreducein
fewnumbers.
Out of total paid up capital of banking industries more than 50% have been covered by
commercial banks. Similarly, almost 83% of the total deposit market have been covered by
commercialbanksandsimilaristheratioincaseofcoverageofcreditcreation.
ThemajorfinancialinformationpertainingtobanksandfinancialinstitutionsasofthemidJuly
2016areasfollows:

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

 10

Class"A" Class"B" Class"C" Overall

A. Credit,DepositRatios(%)
1 TotalDeposit/GDP 72.6 11.5 3.3 87.5
2 TotalCredit/GDP 56.7 9.78 3.0 69.6
3 TotalCredit/TotalDeposit 78.1 84.6 92.2 79.5
4 LcyCredit/LcyDeposit& Core Capital 75.2 83.5 94.2 77.0
5 FixedDeposit/TotalDeposit 27.2 26.1 39.3 27.5
6 SavingDeposit/TotalDeposit 39.3 51.1 50.2 41.2
7 CurrentDeposit/TotalDeposit 10.4 2.00 0.1 8.9
8 NPL/TotalLoan 2.22 2.51 13.9 2.7
9 TotalLLP/TotalLoan 2.89 2.62 14.0 3.3
10 DeprivedSectorLoan/Total Loan 5.46 6.35 4.3 5.5
B. LiquidityRatios(%)
1 Cash&BankBalance/Total Deposit 13.3 15.9 22.1 14.0
2 InvestmentinGov.Security/Total 12.1 2.00 3.9 10.5
3 TotalLiquidAssets/Total Deposit 27.2 30.8 34.1 27.9
C. CapitalAdequacyRatios(%)*

1 CoreCapital/RWA 10.1 14.1 19.5 11.0

2 TotalCapital/RWA 11.7 14.9 20.4 12.5
D. FinancialAccess
1 No.ofBranches 181 856 205 287
2 No.ofDepositAccounts 123750 32055 54636 161270
3 No.ofLoanAccounts 72358 29606 4802 10676
4 No.ofBranchlessBanking Centers 769 76
5 No.ofBranchlessBanking Customers 21460 21460
6 No.ofNonoperatedBranchless 83 83
7 No.ofMobileBankingCustomers 14355 13790 1583 15892
8 No.ofInternetBankingCustomers 45307 2057 255 47621
9 No.ofATMs 157 227 21 182
10 No.ofDebitCards 40215 49578 3647 45538
11 No.ofCreditCards 4358 4358
12 No.ofPrepaidCards 7920 7920
E. InterestRate(%)
1 Wt.AvgInterestonDeposit 2.94
(a)Saving 2.06
(b)Fixed 5.50
(c)Call 2.85
2 Wt.AvgInterestonCredit 9.06
[Source:NRBMonthlyStatisticsMidApril2016]

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

 11

AssetsandLiabilitiesofCommercialBanks
Thebalancesheetofacommercialbankisastatementofitsassetsandliabilities.Assetsare
what others owe the bank, and what the bank owes others constitutes its liabilities. The
businessofabankisreflectedinitsbalancesheetandhenceitsfinancialpositionaswell.The
balancesheetisissuedusuallyattheendofeveryfinancialyearofthebank.Thebalancesheet
of the bank comprises of two sides; the assets side and the liabilities side. It is customary to
recordliabilitiesontheleftsideandassetsontherightside.Thefollowingistheproformaofa
balancesheetofthebank.

S.N. CapitalandLiabilities Consolidated %

1 PaidupCapital 115,658 5.94%
2 ReserveandSurplus 63,671 3.27%
3 DebentureandBond 11,232 0.58%
4 Borrowings 24,237 1.25%
5 Deposits 1,633,755 83.95%
6 IncomeTaxLiability 1,358 0.07%
7 OtherLiabilities 96,240 4.95%
TotalCapitalandLiabilities 1,946,151 100%
1 CashandBankBalance 218,114 11.21%
2 MoneyatCallandShortNotice 28,604 1.47%
3 Investments 346,770 17.82%
4 LoansandAdvances 1,265,775 65.04%
5 FixedAssets 19,253 0.99%
6 NonBankingAssets 1,284 0.07%
7 OtherAssets 66,351 3.41%
TotalAssets 1,946,151 100%

Capital&Liabilities
1.Capital:Thebankhastoraisecapitalbeforecommencingitsbusiness.Authorisedcapitalis
themaximumcapitaluptowhichthebankisempoweredtoraisecapitalbytheMemorandum
ofAssociation.Paidupcapitalrepresentscapitalpaidincashbyshareholdersorcapitalization
ofprofit.
2.ReserveFund:Reservefundistheaccumulatedundistributedprofitsofthebank.Thebank
maintainsreservefundtotideoveranycrisis.But,itbelongstotheshareholdersandhencea
liabilityonthebank.InNepal,thecommercialbankisrequiredbylawtotransfercertainper
centofitsannualprofitstothevariousformsofreserves.
3. Deposits: The deposits of the public like demand deposits, savings deposits and fixed
depositsconstituteanimportantitemontheliabilitiessideofthebalancesheet.Thesuccessof
anybankingbusinessdependstoalargeextentuponthedegreeofconfidenceitcaninstillin
themindsofthedepositors.Thebankcanneveraffordtoforgettheclaimsofthedepositors.
Hence,thebankshouldalwayshaveenoughcashtohonourtheobligationsofthedepositors.
4. Borrowings from Other Banks: Under this head, the bank shows those loans it has taken
fromotherbanks.Thebanktakesloansfromotherbanksforashorterperiodoftimeaslong
termborrowingsareprohibitedbyNRB.

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA

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5. Debenture and Bond: These include long term debt issued by the bank. The bank pays
contractualinterestonit.However,NRBhasputlimitationonextentoflongtermdebttobe
issued.
6. Other Liabilities: Other liabilities include every item not fallen under above heads such as
payables,provisions.
7.ContingentLiabilities:Contingentliabilitiescompriseofthoseliabilitieswhicharenotknown
inadvanceandareunforeseeable.Everybankmakessomeprovisionforcontingentliabilities.

Assets
According to Crowther, the assets side of the balance sheet is more complicated and
interesting.Themostimportantguidingprinciplesofthedistributionofassetsofthebankare
liquidity,profitabilityandsafetyorsecurity.
Now,wehavetoanalysethevariousitemsontheassetsside.
1.CashandBank:Itconstitutesthemostliquidasseti.e.cashatvault,oratcentralbank,etc
which can be immediately used to meet the obligations of the depositors. Cash on hand is
called the first line of defence to the bank. In addition to cash on hand, the bank also keeps
somemoneywiththecentralbankorothercommercialbanks.Thisrepresentsthesecondline
ofdefencetothebank.
2.MoneyatCallandShortNotice:Moneyatcallandshortnoticeincludesloanstothebrokers
inthestockmarket,dealersinthediscountmarketandtootherbanks.Theseloanscouldbe
quicklyconvertedintocashandwithoutloss,asandwhenthebankrequires.Atthesametime,
thisitemyieldsincometothebank.Thesignificanceofmoneyatcallandshortnoticeisthatit
isusedbythebankstoeffectdesirableadjustmentsinthebalancesheet.Thisprocessiscalled
WindowDressing.Thisitemconstitutesthethirdlineofdefencetothebank.
3. Investments: This item includes the total amount of the profit yielding assets of the bank.
Thebankinvestsapartofitsfundsingovernmentandnongovernmentsecurities.
4.LoansandAdvances:Loansandadvancesconstitutethemostprofitableassettothebank.
The very survival of the bank depends upon the extent of income it can earn by advancing
loans. But, this item is the least liquid asset as well. The bank earns quite a sizeable interest
fromtheloansandadvancesitgivestotheprivateindividualsandcommercialfirms.
5.FixedAssets:Fixedassetsincludebuilding,furnitureandotherpropertyownedbythebank.
Thisitemincludesthetotalvolumeofthemovableandimmovablepropertyofthebank.Fixed
assetsarereferredtoasdeadstocks.
6.NonBankingAssets:Thisincludesthoseassetsheldandownedbybankbutarenotinuse
forordinarilybybankforitsbankingpurpose.Forexampledefaulter'scollateralcouldnotbe
soldthroughauctionbanktransfersthemintheirnamewhichiscategorizedunderthishead.
7.OtherAssets:Thisincludessundryreceivables,inventoryitems,advances,deposits,interest
receivables,etc.
Balance sheet of a bank acts as a mirror of its policies, operations and achievements. The
liabilitiesindicatethesourcesofitsfunds;theassetsarethevariouskindsofdebtsincurredby
abanktoitscustomers.Thus,thebalancesheetisacompletepictureofthesizeandnatureof
operationsofabank.

COMMERCIALBANKMANAGEMENT CA.NIRMALSHRESTHA