1.What impact does credit risk and liquidity risk have on equity value? Explain with illustration.

The credit risk affects the equity value of the financial institutions.
Therefore, it is important to check the credit worthiness of the customers before lending to them. Regular monitoring
of the borrowers must be done to avoid credit risk. The impact of credit risk on the profitability of financial institutions
is very high. Financial institution, for example a bank, which accepts deposit at 4 percent and lends at 7 percent
earns a margin of only 3 percent. But if it loses the interest and principal of its lending because of default of the
borrower, it will reduce the net worth of the financial institution. For example, a bank has R$ 1,000 million in gross
amount of lending. If some of its borrowers holding Rs 100 million will default, the gross amount of loan will fall by Rs
100 million and at the same time the value of equity in balance sheet will also fall by Rs 100 million.
Liquidity risk arises when depositors demand for cash cannot be met immediately with the cash balance a financial
institution holds. When the demand is abnormal, the financial institution must either borrow additional funds or sell
assets to meet the demand for withdrawal of funds. In case, borrowing fails short, the assets have to be sold at a
price significantly lower than fair market value. Selling assets at low prices threatens financial institution's profitability.
For example, suppose a financial institution has Rs 300 million in cash balance and Rs 700 million in non-liquid asset.
These assets were funded with Rs 800 million in deposits and Rs 200 million in owner's equity. If depositors
unexpectedly applied to withdraw Rs 400 million, the financial institution will use its cash balance to pay to the
depositors. But it is inadequate because it has only Rs 300 million in cash balance. The financial institution must sell
its non-liquid assets to meet Rs 100 million of the liquidity shortage. The financial institution cannot sell the non-liquid
assets at its fair market value in short period; it can do at substantially low price orly. If it can realize only 50 percent
of the fair market value, the financial institution should sell Rs 200 million worth of assets to meet Rs 100 million of
the withdrawal. Thus, the financial institution suffers a loss of Rs 100 million from the sale of assets. Such a loss will
have to be written off against the equity. Thus, liquidity risk also affects the equity value.

2. Define operational risk? Do you think that operational risk is an important consideration in Nepali financial
institutions? Explain.
Bank for International Settlements defines operational risk as the risk of loss resulting from inadequate or failed
internal processes, people, and systems or from external events. Operational risk includes technological risk,
reputational risk and strategic risk as part of definition of the operational risk. Technological innovations are taking
place rapidly and they have revolutionized the services of financial institutions. The major objective of technological
expansion is to lower operational costs, capture new markets and increase profit. However, there are chances that
the adoption of technology may fail to deliver the expected outcomes Technological risk occurs when technological
investments do not produce the anticipated benefits. It often arises because of high obsolescence rate in information
technology and computing technology used in financial institutions.
Operational risk is partly related to technological risk and can arise due to technological malfunctions or back-office
support systems break down. In addition, employee fraud, misrepresentations, and account errors are also examples
of operational risk. Incidences like these badly damage the reputation of the financial institution.
Operating risk remains an important consideration in Nepali financial institutions. Financial institutions in Nepal are
still lacking behind in terms of use of sophisticated technology with efficiency. Many banks are still lacking the
problem of efficient resources. In many cases, some financial institutions are still not free from employee frauds. For
example, Himalayan Bank Limited lost huge amount in 2014 because of the misuse of its IT service by its own
employee. So, operational risk is one of the basic considerations for financial institutions in Nepal.

3.Explain the principal type of intermediation services provided by financial intermediaries.

The principal types of financial intermediation services provided by financial intermediaries are as follows:
1. Maturity intermediation: Maturity intermediation is the intermediation for matching the maturity period of
financial assets and liabilities.
Maturity period for the funds demanded and the funds supplied may not match. Financial intermediaries
provide the loans to demander of funds for desired period. Similarly, they invest the funds of suppliers for
desired investment horizon. Thus, they play the role of maturity intermediation. Maturity intermediation
allows investors more choices for their investments and also allows borrowers more choices for the maturity
of their debt obligation.
2. Risk diversification: Diversification is a process of transforming more risky assets into less risky by investing
in different financial assets.
Individual may lack sufficient funds to create a more diversified investment. So financial intermediaries
create a pool of funds from small investors and invest into large number of assets thereby creating a risk
diversified portfolio of investment.
3. Cost of contracting and information processing; Individual investors and borrowers may have to incur larger
cost of contracting the investment and borrowing deals. For example, investor may require more time to
develop the required skills for evaluating investment. This involves high opportunity costs. Similarly, they
need to draw loan contract by hiring lawyer, which also involves cost. Similarly, Investors need information
about the issuers, borrowers and financial assets before investing their funds. So they have to incur
 information processing cost. Financial intermediaries employ their own specialists for these purposes and
thus they can reduce the cost of contracting and information processing.
4. Payment mechanism: Financial intermediaries also make payment easy by providing payment mechanisms
to their clients. We can use checks, credit cards, debit cards and electronic transfer of funds services
provided by financial intermediaries. The payments through these mechanisms are cheap and safe.

4. What are the services provided by financial institutions? Explain.

The enterprises producing and selling financial products such as deposits, loans, and remittance, foreign currency,
insurance policies and so on are known as financial institutions. Some financial institutions accept the deposits and
some do not. So, financial institutions are broadly classified into depository financial institutions and non-depository
institutions.
Depository institutions are those financial institutions that accept deposit from general public. Commercial banks,
finance companies, development banks, saving and credit cooperatives are depository institutions. Non-depository
institutions are financial institutions that do not accept the deposits from general public. Insurance company, pension
funds and mutual funds are non-depository institutions.
Services provided by financial institutions are as follows:
a) Transformation of financial assets: Financial institutions receive the funds from their customers and
transform the funds into different assets.
For example, depository institutions receive the deposits from their customers and they transform deposit
into different products and sell in the markets. Non-depository institutions also receive funds from their
customers and invest in different financial assets. For example, insurance companies collect the insurance
premium from their policyholders and invest the money collected from their customers.
b) Exchange of financial assets: Financial institutions provide brokerage service on behalf of their customers
buy and sell different financial assets such as shares, bonds, debentures and Treasury bills. In addition to
exchanging of financial assets on behalf of customers, some firms buy different types of financial assets on
their own account and sell them from their own account.
c) Underwriting services: Financial institutions such as investment banks assist other financial and non-
financial enterprises to create the appropriate financial instruments to raise the funds. In addition to assisting
enterprises to create appropriate instruments to raise funds, investment banks work as means for selling the
securities and raising the required funds. Investment banks underwrite the financial instruments and sell
them to uitimate investors and provide the guarantee to sell the issued instruments.
d) Investment advice: Financial institutions provide the investment advice to their clients. For example,
development banks provide the advice to the investors in the potential projects. They provide both technical
and financial advice to their customers regarding the potential projects.
e) Management of portfolios: Most individual investors are not professionally competent to create optimal
portfolios to diversify risk and manage their investment efficiently. So, some of the financial institutions such
as mutual funds, provident funds and pension funds employ professional staff to manage the portfolios of
the investment.

5. Explain the concept of financial intermediation. How does the possibility of financial intermediation increase the
efficiency of the financial system?
Financial intermediaries are the financial institutions involved in financial intermediation process. They include
commercial banks, saving and loan association, mutual saving banks, credit unions, insurance companies, pension
funds, investment companies, investment bankers, securities brokers and dealers and finance companies. Financial
intermediaries channel the savings generated in one part of economy to the investment in another part of economy.
They act as intermediaries between savers and users of the funds. They collect the savings from savers by
committing to provide satisfactory return in the form of interest income to them. They also lend or invest funds to the
various users to generate rate of return.
Thus, financial intermediaries generate the liabilities while obtaining the funds from surplus units and create the
assets while mobilizing the funds to the deficit units of economy. They basically perform the functions of direct and
indirect investment. They invest their own funds directly to the users of funds and they also make indirect investment
of the funds generated from surplus units. It is to be noted that the claims against the financial intermediaries are
indirect investment. For example, if individual investors purchased the bonds issued by Nepal Investment.

Bank Ltd, individuals have claims against this bank. So, the investment of individual on bonds is indirect investment
but investment of this bank in business loan is direct investment for the bank. In short, investment made through the
financial intermediaries is indirect investment and investment made by surplus unit directly to deficit unit or
investment made by financial intermediaries to deficit units is direct investment.
Financial intermediaries play important role in transforming the savings into investments. They transform the less
desirable assets into more desirable ones. Thus, financial intermediation makes the financial system efficient. The
financial intermediation process of financial intermediaries makes our financial system efficient through the following
roles:
a. Maturity intermediation: Maturity intermediation is the intermediation for matching the maturity period of
financial assets and liabilities.
Maturity period for the funds demanded and the funds supplied may not match. Financial intermediaries
provide the loans to demander of funds for desired period. Similarly, they invest the funds of suppliers for
desired investment horizon. Thus, they play the role of maturity intermediation. Maturity intermediation
allows investors more choices for their investments and also allows borrowers more choices for the maturity
of their debt obligation:
b. Risk diversification: Diversification is a process of transforming more risky assets into less risky by investing
in different financial assets.
Individual may lack sufficient funds to create a more diversified investment. So financial intermediaries
create a pool of funds from small investors and invest into large number of assets thereby creating a risk
diversified portfolio of investment.
c. Cost of contracting and information processing: Individual investors and borrowers may have to incur larger
cost of contracting the investment and borrowing deals. For example, investor may require more time to
develop the required skills for evaluating investment. This involves high opportunity costs. Similarly, they
need to draw loan contract by hiring lawyer, which also involves cost. Similarly, Investors need information
about the issuers, borrowers and financial assets before investing their funds. So they have to incur
information processing cost. Financial intermediaries employ their own specialists for these purposes and
thus they can reduce the cost of contracting and information processing.
d. Payment mechanism: Financial intermediaries also make payment easy by providing payment mechanisms
to their clients. We can use checks, credit cards, debit cards and electronic transfer of funds services
provided by financial intermediaries. The payments through these mechanisms are cheap and safe.

6. Explain the concept of securities firms and investment banks with their examples in the context of Nepal.
Generally, securities firms refer to those firms that help investors to buy and sell securities in the secondary securities
markets. They serve for fund suppliers and users as brokers. As a brokers, securities firms intermediate between
fund suppliers and users. Securities dealers and brokers are the securities firms. These firms specialize in purchase,
sale and brokerage of existing securities. More specifically, brokers specialize in retail side of trading of existing,
securities in the secondary markets. Merchant bankers specialize in issue management, shäre registration,
underwriting, portfolio management and corporate advisory. In Nepal, legally we call brokers and merchant bankers
collectively securities business person. Securities Act, 2007 has classified the securities business into securities
brokerage, securities trade, issue and sales management, investment management, investment consultancy
services, collective investment fund management, securities registration or securities central deposit service or
custodial service, services relating to the settlement of account of securities transactions, and market maker. -
Investment banks are those firms that specialize in originating, underwriting, and distribution of new securities issued
by companies and government. We can make distinction between securities firms and investment banks. More
precisely, securities firms involve in the trading of securities in the secondary markets and investment banks do in
distribution of new securities. Further, investment banks involve in advising on mergers and acquisitions, and
restructuring the existing companies.
In Nepal, by mid-July 2023, 58 brokers, 30 merchant bankers, and. 1 stock dealer are in operation in Nepal. Besides
these securities firms, there are other types of firms licensed by Securities Board of Nepal (SEBON) to work on
securities related services in primary and secondary markets of Nepal. They include CDS and Clearing Limited, and
credit rating agencies like ICRA Nepal and CARE Ratings Nepal Limited (CRNL). CDS & Clearing Ltd. is a subsidiary
company of Nepal Stock Exchange Limited (NEPSE) established in 2010 to provide centralized depository, clearing
and settlement services of securities in Nepal. It provides central depository for various financial instruments such as
equity and bonds to handle securities in dematerialized form and facilitates the transfer of ownership rights of these
instruments.
ICRA Nepal Limited (ICRA Nepal), the first Credit Rating Agency in Nepal, is a Subsidiary of ICRA Limited (ICRA) of
India. It was incorporated on November 11, 2011 and granted license by the Securities Board of Nepal (SEBON) on
October 3, 2012. Similarly, CRNL is the second credit rating agency established in November 16, 2017, which has
also been licensed by the Securities Board of Nepal. These rating agencies in Nepal provide grading to IPO, FPO,
rights issue ant ratings for the bank facilities including tenn loans, working capital limits, and non-funded exposures.
Besides, they also, cover rating of issuers including insurance companies, asset management companies, and
various instruments such as bonds, debentures, bank deposits, structured finance and other debt instruments,

7.What are the activity areas of securities firms and investment banks? Explain.
• The key activity areas of securities firms and investinent banks are as follows:
 1. Investing: Investing is one of the major activity areas of securities firms and investment banks. It involves
managing pools of assets such as closed-end and open-end mutual funds. Securities firms manage pools of
assets either as an agent or as principal. As an agent, securities firms manage such funds for other
investors and as a principal, they manage funds for themselves and their shareholders.
2. Investment Banking: Investment banks have expert hands to handle the new issues of securities.
Companies consult and make a contract with a single investment bank or syndicate of investment banks for
handling new issues of securities and raise the capital from the investors. Thus, a single investment bank or
syndicate of many investment banks agrees to underwrite and distribute new issues of securities.
Underwriting and distributing new issues of securities of companies or government securities are known as
investment banking activities.
3. Market Making: Securities firms and investment banks make a secondary market of corporate securities and
government securities. There are two transactions of market making: (1) agency transactions and (2)
principal transactions. In agency transactions, securities firms and investment banks, on behalf of their
customers, act as stock brokers and dealers for fee or commission. In agency transaction, they buy
securities from one customer and sell to another customer. So, agency transactions are two ways
transactions. In agency transactions, securities firms and investment banks, as stock dealers, buy the stock
at lower price and sell at higher price. We call the difference between buying and selling price bid-offer
spread and it represents a large proportion of profit of market maker. Market makers in principal transactions
buy and sell in their own and take a profit on the price movement of securities.
4. Trading: Trading of securities is another activity area of securities finns and investment banks. As traders of
securities, securities firms and investment banks take net position in the underlying assets and gain in the
trading of securities.
They may take short position or long position in the underlying securities depending upon the market
condition of the securities. In long position, they own the securities and in short position they borrow the
securities. They take a short position in the securities if they believe that price of securities in the near future
is decreasing. They make profit when they borrow the securities and short sell them and buy the securities
at lower price and reimburse the borrowed securities. We call difference between the short and long position
as net position. In net position, either short position (amount of a security) is more than long position or long
position is more than short position. We call the net position net short position when short position is more
than the long position in a given securities and net long position when long position is more than the short
position in a given securities. Investment banks take long position when they believe that price of securities
in position increases in near future. Investient bank makes profit buying securities at lower price and selling
at higher price in net long position.
5. e. Cash Management: Cash management is the next activity area of securities firms and investment banks.
They offer bank deposit account to their individual customers. This account allows customers to write checks
against some types of mutual funds accounts.
6. f.
7. Merger and Acquisition: Investment banks can help merger and acquisition in many ways. First, they can
provide the advice and assist the merger and acquisitions. They assist in finding merge partners. They can
underwrite any new securities to be issued by merged firm, assess the value of target firms, and recommend
terms of the merger agreement. Sometime they assist the target firm to prevent the merger.
8. 8. Other Service Functions: In- addition to above-mentioned activity areas of securities firms and investment
banks, there are other activity areas such as custody services, clearance and settlement services, and
research and advisory services. Similarly, investment banks are carrying out the traditional banking services
such as small business lending and trading of loans. Investment banks as an agent perform these functions
for fee.

8.Describe the regulations of securities firms and investment banks in Nepal.

Regulations of investment banks and securities firms in Nepal come under the regulatory regime of Security
Board of Nepal (SEBON). The SEBON has enforced two regulations for regulating, investment banks and
securities firms. They are: discussed below:
*Regulations for Merchant Bankers
According to Merchant Banker Regulations, 2008, a corporate body desirous to carry out securities business
as merchant banker should submit an application to the Board in the prescribed format and should obtain
the license to carry out merchant banking functions. Merchant banker having obtained the license may carry
out one or more than one of the following functions: (a) all the functions related to issue and sales
management of securities including drafting of prospectus, offer documents and other related documents,
 (b) underwriting by entering into agreement with body corporate and undertake to purchase the
unsubscribed portion of securities offered by body corporate, (c) provide share registration related services
such as maintaining register of ownership of securities and execute name transfer on behalf of the body
corporate, (d) provide portíolio management services to the clients by entering into an agreement.
Before
providing merchant banking services, a merchant banker should enter into an agreement with the relevant person or
body corporate by mentioning the services it provides and rights and obligation of both the service users and
providers.
As an issue manager, the merchant baker is responsible for all the issue related activities inclusive of information
and disclosures, opening of the subscription list and collecting money, allotment of securities, refund - and
distribution of
• certificates. As a share registrar, the merchant banker is responsible to execute transfer of securities received
after completion of required transfer procedures, verify ownership of securities, maintain the record of the holders
of securities and carry out other activities related to share registration. As a securities underwriter.

the merchant banker is responsible to subscribe for the unsold portion of the securities it agreed to underwrite and
make payment for the security. Finally, as a portfolio manager, the merchant banker is responsible for porifolio
management. opening client's accounts, buying and selling securities on behalf of the clients as per the terms of
agreement, make payment and provide other portfolio related services.
Besides, a merchant banker should keep its books of accounts, prepare financial reports including profit and loss
accounts, balance sheet and cash flow statements in the fermat and standards as prescribed under the prevailing
laws and submit its audited financial statement for each financial year and business report for the period to the Board
within three months from the end of the financial year.

*Regulations for Securities Businesspersons

According Securities Businessperson Regulations, 2008 (for stock broker, securities dealer and market maker),
anybody willing to obtain license for operating securities business as a stock broker, securities dealer and market
maker should submit an application in the prescribed format along with the application fee and recommendation from
stock exchange to the Board. In case of banks and financial institutions established under the prevalent laws should
conduct securities business as stock broker, securities dealer and market maker through their respective fully owned
subsidiary company.
According to the provisions made in regulations, the stock broker, securities dealer and market maker may carry out
following functions: (a)
The stock broker may provide brokering services of purchasing or selling the securities in the name of client only as
per the client's order.
(b)
The stock broker is not allowed to carry out other business pursuant to these Regulations other than the business as
stock broker.
(c) The securities dealer and the market maker may carry out the functions such as: to purchase or sell the securities
on own account; to quote the buying and selling price of the securities and purchase or sell such securities on own
account and act as a market maker.
(d)
The stock. broker company is not allowed to make purchase or sale of the securities on its own name or in the name
of the Director, Chief Executive, and representative, employee or any of the members of their respective joint
families.
(e)
The securities dealer and the market maker are not allowed to carry out the trading of the securities issued by itself.
Besides, the stock broker, securities dealer and market maker should keep the updated record regarding its
securities trading and accounts thereof, and records regarding the clients in a transparent and truthful manner. They
should also keep their books of accounts and prepare financial reports including profit and loss accounts, balance
sheet and cash flow statements in the format and standards as prescribed under the prevailing laws. Further, they
should submit audited financial statements of the fiscal year and annual report containing activities of that year to the
Board within three months of completion of each fiscal year.

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6. Explain the features of cooperatives along with their key principles.
Cooperatives refer to the autonomous, democratic and voluntary associations of people having common social,
cultural, and economic goals and needs. Main objective of a cooperative is to promote the socio-economic interests
of its members. Cooperatives have several essential features. For example, they are open and voluntary associations
of people. Similarly, they have a democratic structure, with each member having one vote. And, they have an
equitable and. fair distribution of economic results based on the volume of operations made through them. It implies
that profits generated by cooperatives are either reinvested in the enterprise or proportionally distributed among the
associated members. In this sense, cooperatives are enterprises that serve the needs of their members, who, in turn,
contribute to the cooperatives' capital.
The operation of a cooperative is governed by several values such as values of self-help, self-responsibility,
democracy, equality, equity, and solidarity. In the tradition of their founders, cooperative members believe in the
ethical values of honesty, openness, social responsibility and caring for others. To realize these values, cooperatives
work with seven major principles. They are as follows:
1. Voluntary and open membership: Cooperatives are based on the principle of voluntary and open
membership. This principle advocates that cooperatives are open to all persons with common socio
economic interests irrespective of their gender, social, racial, political and religious differences.
2. Democratic member control: Cooperatives are democratic organizations. They are controlled by members,
who participate actively in the process of formulating policies and making decisions. The principle of
democratic control is exercised in cooperatives by using equal voting rights among the members..
3. Member economic participation: The principle of member economic participation states that each member
should participate in a cooperative as the shareholder. All members in a cooperative should contribute
capital justifiably and control the cooperative democratically.
4. Autonomy and independence: Cooperatives are autonomous, independent and self-help organizations
controlled by members. The principle of autonomy and independence implies that members of cooperatives
should enjoy freedom to take decisions about their cooperatives without having any undue influence from
others.
5. Education, training and information: According to the principle of eduçation, training and information, a
cooperative should make provision for providing education and training to its members. There is a need of
proper training education and information to each and every member of the cooperative including its elected
representatives, managers and employees so that they can contribute effectively for development of the
cooperative.
6. Cooperation among cooperatives: The principle of cooperation among cooperatives emphasizes that
cooperatives should strengthen and orient their members to work together for the promotion and
development of cooperative movements locally, nationally and internationally. There should be effective
teamwork among members of cooperatives to ensure the cooperation.
7. Concern for community: Cooperatives are more concerned with the collective interests of people in the
community. According to this principle, cooperatives should work for the sustainable development of the
community by implementing policies and programs accepted by associated members.

7. Describe different types of cooperatives.

Cooperatives may be of various types depending on their objectives, services offered and the way that the members
are organized. Some major types off cooperatives are discussed below:
1. Producer cooperatives: Producer cooperatives produce, process, and market the goods and services of their
members. Producer cooperatives are also known as marketing cooperatives. In these types of cooperatives,
the members' produce similar types of products and supply to the cooperatives, which in turn market them in
processed and value-added form. Hence, the basic function of this type of cooperative is to commercialize
and market the members' output by seeking the best possible price in the market.
2. Consumer cooperatives: Consumer cooperatives are cooperative societies owned and managed by their
customers. These cooperatives aim to provide goods and services to their members. The consumers
themselves are the members of the cooperative and provide capital used to finance the entity. These
cooperatives acquire the products and services required by their members at the lowest possible cost with
the highest possible quality.
3. Financial cooperatives: Financial cooperatives are established to provide financial services to their
members. These cooperatives are also known as saving and credit cooperatives. They provide saving and
lending services to their members. In addition, they provide remittance services, insurance agency services,
etc: They also provide additional financial services such as trust service, insurance service, to their
members. Financial cooperatives are special types of cooperatives that often establish under legislation
developed for the uniqueness of the financial services being provided to their members.
4. Worker Cooperatives: Worker cooperatives are owned, managed and controlled by their employees. The
purpose of worker cooperatives is to provide employment opportunities to their associated members. In
these types of cooperatives, workers, as the members, supply capital to finance the business and each
member shares the costs and risk of the ownership. They also allow members to participate in profits. The
employee-members are allowed to involve in the policy-making process. They elect board of directors to
magage the operation of cooperatives.
5. Multiple-purpose Cooperatives: Multiple-purpose cooperatives carry on activities of more than one type of
cooperative described above. For example, the same cooperative may carry on activities of saving and
credit cooperative as well as that of consumer cooperative.
 6. To serve as powerful instrument against poverty: Microfinance institutions serves as a powerful instrument
against poverty. Access to sustainable financial services enables the poor to increase incomes, build assets,
and reduce their vulnerability to external shocks.
7. To build up sustainable financial system: Microfinance is a means of building financial systems that
sustainably serve for the poor. Pour people constitute the considerable percent of the population in most of
the developing countries.
Significant number of the poor people still lack the access to basic financial services. Therefore,
microfinance institutions serve as an integral part of the financial sector in order to achieve large number of
the poor.
8. Explain the productivity andI efficiency indicators that are useful in performance evaluation of MFIs.
Productivity refers to the output or volume of business created by an MFl using a given amount of input or resources.
Similarly, efficiency refers to the cost per unit of output. Productivity and efficiency indicators are used to measure the
extent to which an MF is capable of generating revenue to cover its expenses. The major productivity and efficiency
indicators are discussed below.
1.Number of active loans per staff: Number of active loans per staff is the average number of borrowers managed by
per staff member of the MFI. It is calculated as:
Number of active loans per staff =-
Total number of active borrowers
Total number of staff members
This ratio varies depending on the method of credit delivery of MFIs because they extend loans to individuals and
group members. If larger number of borrowers are managed by fewer staff, it results into significant decline in staff
cost. But, at the same time, the chance of loan losses increases if a staff is burdened by larger number of borrowers.
Hence, an MFT should fix the optimal number of borrowers that each staff can manage effectively.

b. Number of active clients per staff. This ratio is used to measure the overall productivity of the MFl's staff in terms of
managing clients. The clients consist of both borrowers and voluntary savers including others. It is calculated as:
Total number of active clients
Number of active clients per staff « Total number of staff members
This ratio is more relevant to those MFIs, which offer diversified products to cater to the need of their clients. A
positive trend observed with regard to this ratio is considered better for an MFI.

c. Average loan outstanding. This ratio measures the average amount of loan outstanding per borrower. This ratio is
used to measure how much of the loan is available to each borrower. It is calculated as:
Gross amount of loan portfolio
Average loan outstanding -
Total number of borrowers
Higher of this ratio generally enhances the profitability of MFis because higher average amount of loan per borrower
implies that the MFl generates more in interest income per borrower.

d. Average loan disbursed. This ratio measures the average amount of loan disbursed per new borrower during the
period. It is calculated as:
Value of loan disbursed during the period
Average loan disbursed " Number of loan disbursed during the period
This ratio is indicative of whether the average loan sizes are increasing or decreasing. The growth in average loan
size may be demand driven reflecting the growth in clients' business. It may also be supply driven reflecting the credit
officers' incentives to increase the loan size

e. Operating cost ratio. This ratio measures operating efficiency of MFis. It compares operating expenses of MiFis
relative to its average value of loan portfolio. It is calculated as:
Total operating cost
Operating cost ratio = Average loan portfolio
By using this ratio, we can monitor the trend whether the MFI is increasing its operating efficiency with growth in its
loan portfolio. Lower operating cost ratio is the indicative of higher efficiency of MFIs.

f. Cost per loan. Cost per loan for an MFI refers to the average operating cost incurred by it for each of its active
borrower. It is calculated as:
Total operating cost
Cost per loan * Total number of borrowers
This ratio measures the efficiency of an MFI in a sense that lower the average operating cost of maintaining an active
borrower, higher the efficiency of the MIFI.
 g Cost per active client. This ratio measures the extent to which an MEI spends in operating expenses to serve a
single active client. This ratio is calculated as:
Total operating cost
Cost per active client * Total number of active clients
Using this ratio, an MFI can target the revenue that it must eam from each client to be profitable: It is also a measure
of efficiency of an MIFI because lower average cost per active client implies the higher efficiency of the MFI

Next chap
6. Explain the key principles of microfinance.
The key principles of microfinance are as follows:
1. Configuration with the needs and preferences of clients: The delivery of appropriate financial services to low-
income people requires for good understanding of their needs and desires. Microfinance should configure
with needs and preferences of clints having a good understanding of needs and desires through an ongoing
investment in client research and feedback mechanisms.
2. Access to financial services: The poor people need access to a wide range of financial services that are
convenient, flexible, and reasonably priced. Depending on their circumstances, poor people generally need
not only credit, but also access to savings, cash transfers, and insurance.
3. Instrument against poverty: Microfinance should allow poor households to move from everyday survival to
planning for the future, investing in better nutrition. improved living conditions, and children's health and
education. Microfinance products and services should be designed taking clients' vulnerability and poverty
context in mind.
4. Building financial systems that serve for the poor: Microfinance is seen as a marginal sector and primarily a
development concern for donors, governments, and socially responsible investors. In order to achieve its full
potential of reaching a large number of poor, microfinance needs to become an integral part of the financial
sector.
5. Financial sustainability: Financial sustainability is the ability of a microfinance service provider to cover all of
its costs. It allows the continued operation of the microfinance service provider and the ongoing provision
and expansion of financial services to the poor. Achieving financial sustainability requires minimizing costs,
offering products and services that meet client needs, finding innovative ways to reach poor who have not
access to financial services provided by traditional institutions, and charging interest rates and fees that
cover costs.
6. No interest rate ceilings: Interest rate ceilings can damage poor peoplé's access to financial services: The
per unit costs involved in making many small loans are significantly higher than those associated with fewer,
larger loans. Likewise, operating in high inflationary environments with weak financial markets, and
engaging in uncollateralized lending to people living in remote areas, is considerably more expensive than
collateralized lending to urban residents in a developed and stable economy. It is therefore not appropriate
to compare interest rates and fees across countries, geographical locations, and clients.
7. Credit is not always appropriate: Credit is not appropriate for everyone or every situation. The needy and
hungry who have no income or means of repayment typically need other forms of support before they can
make effective use of loans.In many cases, small grants, community infrastructure improvements, health
and education services, employment and training programs and other non-financial services may be more
appropriate tools for poverty alleviation. Wherever possible, poor clients should be encouraged and
supported to build a small savings base and develop basic fund management skills prior to taking on the
risks associated with credit.

7. What are the objectives of microfinance institutions? Explain.

Main objectives of microfinance institutions are as follows:
1. To provide access to financial services: Microfinance institutions should provide the poor the access to
financial services with an opportunity to build their financial capacity and ability to grow to financial self-
sufficiency:
2. To Empower women: Women constitute the majority of the poor and they do nob have access to financial
services. They are considered disadvantaged and
backward group of the society. So, MFls target is to empower the women and make financial services
accessible to them.
3. To serve as multipurpose tool: Poor people need a wide range of financial services that are convenient,
flexible, and reasonably priced. Depending on their circumstances, poor need not only credit, but also
savings, cash transfers, and micro insurance services. Thus, microfinance has become a multi-purpose tool
 thatz development activists use to tackle not mere financial needs of communities but? also many other
aspects of peoples lives.
4. To serve as powerful instrument against poverty: Microfinance institutions serves as a powerful instrument
against poverty. Access to sustainable financial services enables the poor to increase incomes, build assets,
and reduce their vulnerability to external shocks.
5. To build up sustainable financial system: Microfinance is a means of building financial systems that
sustainably serve for the poor. Pour people constitute the considerable percent of the population in most of
the developing countries.
Significant number of the poor people still lack the access to basic financial services. Therefore,
microfinance institutions serve as an integral part of the financial sector in order to achieve large number of
the poor.

8.Explain the concept of microfinance. Why microfinance is more taken as a socio-economic development tool simply
than banking services?
Microfinance is defined as attempts to provide financial services to households. and micro-enterprises that are
excluded from traditional commercial banking services. Typically, these are low-income, self-employed or informally
employed individuals, with no formalized ownership titles on their assets and with limited formal identification papers.
So, the term microfinance refers to the provision of financial services to low-income and self-employed people.
Microfinance is a formal arrangement to satisfy the financing need of low-income, poor, self-employed and small
entrepreneurs to set up stall-scale businesses. It gives a source of livelihood to people from economically and socially
backward areas and helps them to increase their standard of living by funding the small-scale projects.
Microfinance services include the affordable financial services consisting of provision of small loans, small savings,
micro insurance, funds transfer facilities and many others. These services are extended to socially and economically
poor people from disadvantaged segments of the society with a view to empower them socially and financially with
improved standard of living
The people from economically backward segments are not able to borrow money and receive other financial services
from other financial institutions. Therefore, the basic objective of microfinance is to promote social and economic
status of poor and disadvantaged section of the society by empowering them through microfinance services.
The target groups of MFis are socially and economically backward and disadvantaged section of the community such
as backward communities, backward area and women. So, they mobilize micro credit to the target groups.
They receive loans from wholesale MFls and loans and grants from Government of Nepal and foreign Government
and international organizations and mobilize the resources to the target group of the society. They provide loans to
micro
enterprises on the collateral or group guarantee. These are the financial intermediation services provide by MFls.
Besides financial intermediation, MFls also provide social intermediation services. They provide micro entrepreneur
training and advice necessary to promote and run the micro enterprises; they involve in group formation and help
members of the group to build up self-confidence. In addition, they provide training in financial literacy and help in
building management capabilities among members of a group. In this way, the concept of microfinance includes both
financial and social intermediation.
Microfinance is, therefore, much more taken as a socio-economic development tooi simply than banking services.

8. Explain the growth of insurance industry in Nepal. What is the status of prevailing regulatory and supervisory
mechanism of insurance industry in Nepal?
The history of insurance industry in Nepal began with the establishment of Nepal Transport and Insurance Company
in 1947. Before that period, Indian insurance companies used to carry on insurance business in Nepal. In the year
1968, Government of Nepal established Rastriya Beema Sansthan to meet growing need of insurance business and
to check outflow of Nepalese money in the form of insurance premium. Initially, it started only non-life business; and
added life business only in 1972. After 1972 the insurance sector stagnated for about one and half decade. Nepal
Transport and Insurance Company operated non-life business and Rastriya Beema Sansthan operated life and non-
life business till 1986. The stagnation on the number of insurance companies was primarily due to the government
policy. At that period, the government did not permit new private companies to operate insurance business. In mid-
eighties, the government relaxed its policy and allowed new private companies to operate insurance business. As a
result, National Life and General Insurance Company was established in 1986.
In carly nineties, the govemment became more liberal towards insurance sector and encouraged private sector in
insurance business. It replaced Rastriya Beema Sansthan Act of 1968 with new Insurance Act in 1992. It gave
momentum to the establishment of, insurance companies. The number of non-life: insurance companies increased
from 5 in 1992 to. 12 by 2000 and to 17 by mid-July 2009.
Similarly, Life Insurance Company increased from 2 in 2000 to 9 by mid-July 2009.
Until the period, there are total 40 insurance companies dealing with life, non-life and comprehensive insurance
businesses. There are total 19 insurance companies purely involved in life insurance business. Similarly total number
of non-life insurance companies to the date is 20. There is only one government owned insurance company, Rastriya
Beema Sansthan, that deals with both life and non-life insurance business.
The growth of insurance business is not limited to the number of insurance companies. The premium collection has
also increased over period. For example, the premium collected by life insurance companies increased from Rs
2,989.5 million in 2004/05 to Rs 17,817.0 million in 2013/14. Similarly, the premium collected by non-life insurance
companies increäsed from Rs 2,692.9 million to Rs 9,666.2 million over the same period. The compound annual
growth rate in insurance premium over the period 2004/05 through 2013/14 is 19.1 percent. The growth rate in life
insurance premium over the same period is annual 21.9 percent while it is 15.3 percent for non-life premium.
Regulation and supervision of insurance industry in Nepal comes under the core function of Insurance Board (Beema
Samiti). Insurance Board was created under the Insurance Act of 1968. Before promulgation of this act, there was no
regulatory and supervisory authority of insurance industry in Nepal. Later on this Act was replaced by Insurance Act
of 1992.
As mandated by Insurance Act of 1992, the Insurance Board plays important role in regularizing insurance
companies as follows:
o Provides necessary suggestions to the Government of Nepal in formulating, the policy to systematize,
regularize, develop, and regulate the insurance business, Formulates the policy for the investment of the
insurance premium received by insurance companies and to prescribe the priority sectors.
o Registers and renews the insurer, insurance agent, surveyor and broker, and to cancel or cause to cancel
such registration.
o Attributes in the dispute arises between the insurer and the insured
o Makes decision on the complaints filed by the insured against the insurer regarding settlement of liability of
the insurance.
o Issues necessary directives to the insurer from time to time regarding the insurance business.
o Formulates necessary provisions for the protection of interests of the policyholders:
Insurance Board works for policyholder protection at large for the healthy growth of insurance industry. As an apex
regulator of insurance industry in Nepal, the Board suggests the goyernment on formulation of insurance policy, acts
and regulations as per the international best practices. The regulatory activities carried out by Insurance Board
consist of a set of functions. They are as follows:
o • Develop and amend the insurance related directives.
o Develop and amend investment guidelines for insurers.
o Approve the terms and conditions of new products:
o Issue and renew the license of insurers, surveyors, insurance agents and
brokers.
9. What are different types of insurance? Explain.
(10 marks)
There are different types of insurance. The insurance companies are largely classified according to the types of
insurance business they deal with. They are as follows:
1. Life insurance: Life insurance is a contract between insured person and a life insurance company. According
to this contract, the life insurance company collects life insurance premium from the insured person
periodically or in a lump sum. In tum, the life insurance company agrees to pay a designated beneficiary an
insured sum of money, upon the death of the insured person. Life insurance contract provides the protection
against the possibility of untimely death. illness and retirement. The most common feature of life insurance is
that it pays a fixed amount of insurance upon the death of insured or at the expiry of certain period.
2. Health insurance: Health insurance is a contract between a person and insurance company that covers
medical ari surgical expenses incurred by the insured person. According to this contract, the insurance
company, in return of premium, agrees to pay the insured for medical treatment expenses and
hospitalization cost against any disease during the insured period. Health insurance may offer different types
of coverage. For example, some health insurance policies only pay for health care up to certain amount. The
insured person is required to pay extra premium for additional health service. Some health insurance
packages are designed to offer annual or lifetime coverage to a given limit.
3. Property and casualty insurance: Property-casualty insurance protects against losses in personal or
commercial property and against legal liability resulted from the loss or damage to the property. There are
several types of property and causality insurance. For example, fire insurance and allied lines insurance
protects against the perils of fire, lightning, and removal of property damaged in fire, homeowners multiple
peril insurance protects against multiple perils of damage to a personal dwelling and personal property as
well as providing liability coverage against the financial consequences of legal liability due to injury done to
others, commercial multiple peril insurance protects firms against perils similar to homeowners multiple peril
insurance; automobile liability and physical damage insurance provides protection against loss resulting
from legal liability due to the ownership or use of the vehicle and theft or damage to vehicles. Besides they
 are also concerned with the coverage of other types of liabilities such as employee liabilities related to
working conditions; professional liabilities that arise from the practice of a particular profession; product
liabilities that arise from the sale of products to customers and resulting damage to any customer due to the
defect in the product

10. Explain the role of Beema Samitee (Insurance Board) in regularizing insurance companies in Nepal.
Regulation and supervision of insurance industry in Nepal comes under the core function of Insurance Board (Beema
Samiti). Insurance Board was created under the Insurance Act of 1968. Before promulgation of this act, there was no
regulatory and supervisory authority of insurance industry in Nepal. Later on this Act was replaced by Insurance Act
of 1992
As mandated by Insurance Act of 1992, the Insurance Board plays important role in regularizing insurance
companies as follows:
o Provides necessary suggestions to the Government of Nepal in formulating the policy to systematize,
regularize, develop, and regulate the insurance business,
o Formulates the policy for the investment of the insurance premium received by insurance companies and to
prescribe the priority sectors
o Registers and renews the insurer, insurance agent, surveyor and broker, and to cancel or cause to cancel
such registration.
o Attributes in the dispute arises between the insurer and the insured.
o Makes decision on the complaints filed by the insured against the insurer regarding settlement of liability of
the insurance.
o Issues necessary directives to the insurer from time to time regarding the insurance business.
o Formulates necessary provisions for the protection of interests of the policyholders.
Insurance Board works for policyholder protection at large for the healthy growth of insurance industry. As an apex
regulator of insurance industry in Nepal, the Board suggests the government on formulation of insurance policy, acts
and regulations as per the international best practices. The regulatory activities carried out by Insurance Board
consist of a set of functions. They are as follows:
o Develop and amend the insurance related directives.
o Develop and amend investment guidelines for insurers.
o Approve the terms and conditions of new products.
o Issue and renew the license of insurers, surveyors, insurance agents and brokers.
11. How the insurance products, are packaged into different types of insurance companies? Explain.
Insurance products can be packaged into different types. As a result insurance companies are specialized on the
basis of insurance packages they offer.
Traditionally life insurance companies used to offer both life and health insurance packages. However, in recent
period, many.
insurance companies are being
specialized in health insurance separate from the life insurance. Similarly, property and casualty insurance products
are generally offered by specialized property & casualty insurance companies. They are also called non-life insurance
companies.
Some insurance companies offer both life and non-life packages so they are called multiline insurance companies.
Besides life insurance packages, life insurance companies also offer investment-oriented insurance products, long-
term care insurance and disability insurance. In recent period, pure disability insurance companies have also
emerged.
Though several companies offer one or more combinations of insurance products, each differ in terms of policy
offered under a particular product. In case of Nepal, insurance companies are differentiated as life insurance and
non-life insurance companies. There are 18 insurance companies that only offer life insurance packages and 20
companies that only offer non-life packages. Only one insurance company, Rastriya. Beema Sansthan, offers both
life and non-life packages.
Nepalese insurance market has a limited range of products. Most popular life insurance packages among Nepalese
insurance companies are whole life, term life and endowment policies. Several variations of these packages are
being offered by life insurance companies in Nepal. Similarly, non-life products popular in Nepal are, automobile and
home owners policies, and third party insurance, among others. More innovative products are yet to be designed.

12.
What are the basic changes taken place in insurance industry? Explain.
The basic changes taken place in insurance industry are as follows.
Deregulation: Insurance industries were highly regulated in any economy since the past, which still continue to be
regulated under the strong regulatory framework of governments in many countries. However, because of the
competitive nature of insurance industry, governments in some countries have realized that deregulation brings
benefits to insurance consumers similar to those realized in other deregulated industries. As a result, insurance
industry has experienced significant deregulation in many aspects. The rapid rise in insurance. premium costs
coupled with the problem of obtaining insurance at any cost for some applicants hurried a crisis in the insurance
industry. Deregulation has appeared as a solution for this problem in a sense that actions of a free market are only
the efficient means of controlling costs and affordability.
ii. Globalization: The process of globalization is one of the major trends which the insurance industry is facing
worldwide. With globalization, insurance sector has gained the international character of risk sharing through cross-
border relations with respect to many other lines of business. Increasingly, insurance coverage for households or
companies is granted beyond national borders. Moreover, many insurance companies offer their products in foreign
insurance markets or have become part of multinational insurance group. The reduction of legal barriers to cross-
border activities of financial services companies, the opening-up of new markets to foreign providers and a
deregulation of many national markets have played key role in the context of globalization of insurance industry.
it Demutualization: Demutualization is the process of converting a mutual company into stock company. Although
mutual companies have been immensely successful stable enterprises, they suffered disadvantages compared to
stock companies in areas which, at certain times, may be critical. Most seriously, they lack the ability to raise capital
though equity financing. High market interest rates not only make debt financing expensive but, with respect to
certain types of insurance, create a greater need for capital. Mutual companies whose investment portfolios have
weakened also experience greater capital needs than in the past. Unlike mutual companies, stock companies may
sell stock or reduce their borrowing costs with convertible debt instruments. Thus, the growing trend of
demutualization in insurance industry has been emerged.

13. Discuss the role of insurance industry in risk sharing, and savings and investment intermediation.
The role of risk management industry is broadly classified into two types: risk sharing and savings and investment
intermediation. They® are discussed
below:
a. Risk sharing; Insurance companies play significant role in risk intermediation.
They can reduce the level of risk through portfolio diversification. They sell insurance to a large number of
consumers, where the causes of loss are independent of each other. As a result, insurance companies face less risk
than the sum of risks faced by individuals. Similarly, in competitive markets, manufacturing and trading companies
have to take business risks in order to make profit. The existence of insurance markets allows, these companies to
transfer some of the risks associated with their business decisions. So, insurance makes the business decision-taking
process itself less risky.
Insurance industry also provides protection against risks involved in international trade. The risks associated with
international trade are related to damage or loss of goods in transit and risk of non-payment by foreign customers. In
this case, cargo marine insurance and international credit insurance facilitate international trade by protecting from
these risks.
The risk intermediation by insurance companies can also be viewed in terms of the efficient use of capital. In the
absence of insurance markets to transfer risks, companies would need to have more precautionary capital to run their
businesses. Insurance companies supply. contingent equity capital to companies in other sectors. As a result, they
need less equity capital to support their business activities across the economy as a whole. Insurance and
reinsurance companies also provide loss prevention, safety and risk management services to their customers. These
services are beneficial to individuals and companies, even when they have adequate levels of insurance. Insurance
companies also provide some risk support for commercial banks and other depository financial institutions by
providing deposit and credit insurance services in transferring risk. Credit insurance service works as the input for the
supply of bank loan products. With the existence of credit insurance service, banks are not required to hold more
precautionary capital to absorb these risks by themselves.

b. Savings and investment intermediation: Insurance companies stimulate savings in the economy: In general, all
insurance contracts promote private savings in economy. We know that insurance premiums are paid in advance by
customers, while claims and policy settlements are made to customers at a later date. The time lag between the
receipt of premiums and the payment of claims to customers helps in the accumulation of funds for investment. In
addition, insurance companies retain back the accumulated profit from investment for reinvestment, which further
contributes to generate more savings. Historically, life insurance has been an important way by which lower-income
people could be able to save and invest effectively for the longer term. Insurance companies design simple life
insurance and savings contracts, which can be purchased in small amounts on a regular basis. By this, insurance
companies can pool savings from many small investors and accumulates large funds for investment.
Insurance companies transform the savings into investment by investing the premiums paid by policyholders in wide
range of financial securities. The transmission of savings into investment takes place through the capital market.
Savings mobilized and invested in the capital market by insurance companies act as an important stimulus to the
growth of the capital market itself. Besides, insurance companies are not only able to invest in a wider range of
investments than individuals, they are also able to invest in larger scale and more risky investment opportunities that
are more beneficial to the economy.

14.
What is insurance? Explain the nature of business of different types of insurance.
Insurance is a contract between an insurance company and an insured person whereby the insured person pays
premium to the insufance company for covering a loss that arises due to loss of life, or damage or destruction of
some property. In this sense, the insurance companies accept the risk in return of insurance premium and thus work
as the risk bearer.
There are different types of insurance. The insurance companies are largely classified according to the types of
insurance business they deal with. They are as follow's:
1. Life insurance: Life insurance is a contract between insured person and a life insurance company. According
to this contract, the life insurance company collects life insurance premium from the insured person
periodically or in a lump sum. In tum, the life insurance company agrees to pay a designated beneficiary an
insured sum of money, upon the death of the insured person. Life insurance contract provides the protection
against the possibility of untimely death, illness and retirement. The most common feature of life insurance is
that it pays a fixed amount of insurance upon the death of insured or at the expiry of certain period.
2. Health insurance: Health insurance is a contract between a person and insurance company that covers
medical and surgical expenses incurred by the insured person. According to this contract, the insurance
company, in return of premium, agrees to pay the insured for medical treatment expenses and
hospitalization cost against any disease during the insured period. Health insurance may offer different types
of coverage. For example, some health insurance policies only pay for health care up to certain amount. The
insured person is required to pay extra premium for additional health service. Some health insurance
packages are designed to offer annual or lifetime coverage to a given limit.
3. Property and casualty insurance: Property-casualty insurance protects against losses in personal or
commercial property and against legal liability resulted from the loss or damage to the property. There are
several types of property and causality insurance. For example, fire insurance and allied lines insurance
protects against the perils of fire, lightning, and removal of property damaged in fire; homeowners multiple
peril insurance protects against multiple perils of damage to a personal dwelling and personal property as
well as providing Liability coverage against the financial consequences of legal liability due to injury done to
others; commercial multiple peril insurance protects firms against perils similar to homeowners multiple peril
insurance; automobile liability and physical damage insurance provides protection against loss resulting
from legal liability due to the ownership or use of the vehicle and theft or damage to vehicles. Besides they
are also concerned with the coverage of other types of liabilities such as employee liabilities related to
working conditions; professional liabilities that arise from the practice of a particular profession; product
liabilities that arise from the sale of products to customers and resulting damage to any customer due to the
delect in the product.

15. What is life insurance policy? Discuss different types of life insurance policies with examples.
Life insurance policy represents. a contract between insured person and a life insurance company in which the life
insurance company collects life insurance premium from the insured person periodically or in a lump sum and, in turn,
the life insurance company agrees to pay a specified beneficiary an insured sum of money, upon the death of the
insured person. Life insurance policy provides the protection against the possibility of untimely death, illness and
retirement. The most common feature of life insurance is that it pays a fixed amount of insurance at the time of death
or at the expiry of certain period. A variety of life policies are available to cater different needs of individuals and
group of persons. They are discussed below:
i. Term life policy: Term insurance is the life insurance policy which is affected for shorter term. Under this policy, the
insurance policy is issued for 1 year to 10 years. If insured person lives until the term of insurance, the policy amount
is not paid. But if the insured person dies within the term of insurance, the policy amount is paid to the beneficiary.
This policy is useful to those who need extra protection for short duration or who need protection for long duration but
are unable to purchase cash value life policy for the time being because of ill health or uncertain income. The
disadvantage of this policy is that it has to be renewed after the expiry of every stated term to keep it in effect. It
requires additional cost of the renewal.
ii. Whole life policy: Whole life insurance is in effect over the entire life of the policyholders. It is a cash value policy. It
provides lifetime protection. Under this policy, risk is covered for the entire life of the policyholders. The insured
amount and bonus are payable only to the nominee or beneficiary upon the death of policyholder. In this policy, there
is no survival benefit. In other words, policyholder does not get any benefit during his/her lifetime. In case of ordinary
whole life policy, the insured person must go on paying premium. until he/she lives. The insured amount is paid to the
beneficiary after the death of insured person.
Whole life policies have different methods of premium payment. In case of ordinary whole life policy, the premium is
paid annually so long as the insured alive. Under fixed payment whole life policy the premium is paid for a fixed
number of years.
One of the serious drawbacks of whole life policy is that the insured person may have to pay premium up to a longer
years because it is not certain when the insured person dies. The policyholder may get difficulty in paying the
insurance premium when s/ he retires from the active caming life in the old age. iii. Endowment life policy:
Endowment life policy pays the policy, amount if the insured dies, but it also pays the policy amount if the policyholder
survives until the term of policy. For example, if a person purchases a ten-year endowment policy of R$ 1,000,000
face amount, the person will be paid Rs 1,000,000 policy amount after the expiry of ten years if s/he lives or it is paid
to her/his nominee if s/he dies before ten years. This policy does have relatively larger premium to he paid by insured
as compared to other policies, because the insurer has to pay policy amount regardless of whether insured person
dies.
Under pure endowment policy, the amount of policy is paid to the insured if s/he survives to the end of policy period.
The policy amount is not payable if the insured dies before the policy period. Similarly, double endowment policy pays
double of the insured sum to the insured person if s/ he lives until policy matures.
But if s/he dies, only the insured sum is paid to the nomince. Further, with deferred endowment policy, the policy
amount is paid only after the expiry of policy period regardless of whether the insured person dies before maturity. In
case of anticipated endowment policy a part of insured sum is paid at certain intervals say at the end of each five
years for a 15-year policy and the balance is paid at maturity. In the event of death of insured person, any time during
policy period, full sum assured is payable to nominee without any deduction of previously repaid installments.
iv. Universal life policy: Universal life policy is a recent innovation in life insurance market. Like traditional whole life
policies, this policy provides premature death protection and saving accumulation. However, under this policy there is
greater flexibility with respect to payments of insurance premium. The cash value of benefits to be paid to insured
also varies over the time according to premium payments, expense and mortality charges. There is no fixed schedule
of premium payments with universal life policy. The policyholder has flexibility in timing and amount of premium
payment. This is the reason that cash value of policy is not fixed in advance under this policy.
v. Fixed period life annuity policy: A fixed period life annuity policy is that which pays insured person equal annuity
payment starting from certain age or after the expiry of certain number of years. There are several variations of
annuity policy.
For example, with single payment annuity policy, the insured is required to pay a lump sum amount of premium at the
beginning that allows her/ him to receive an equal amount of annual payment starting from the expiry of certain
number of years. With instalment payment annuity, the insured has to pay premium in several instalments up to a
certain number of years. Then, s/ he receives annual equal payment from the insurer until s/ he survives. This policy
is useful to those who want to ensure regular cash after the expiry of certain age, when there is no other source of
income for spending the life.

16. Explain the asset and liability structure of commercial banks with reference to Nepalese commercial banks.
Nepalese banking system has now a wide geographic reach and institutional diversification. NRB has published the
Banking and Financial Statistics for Mid-march 2019. As of mid-March 2019, total numbers of commercial banks have
been increased to 28 with thousands of branches scattered across different districts.
Until the period, total of 12 commercial banks have gone into merger and acquisition process to strengthen their
competitive capacity. As of mid-March 2019, total assets and liabilities of commercial banks have been increased to
Rs
3,485,680.46 million accounting for a total deposit of Rs 2,690,260.8 million until this period. The deposit constitutes
77.18 percent of the total assets to the date. The outstanding credit of conimercial banks to the date stands at the
level of Rs 2,39,434.16 million, which constitutes 68.75 percent of the total assets. Similarly, liquid funds and
investments account for the 8,34 percent and 8.44 percent, respectively, of the total assets. The capital fund to the
date is 10.8 percent of total assets. The commercial banks are known for large loan syndication, foreign transaction
and the security they offer. Nepalese commercial bank captures about 86 percent of total deposit and credit market in
Nepalese financial system.

17. Property and liability insurance companies.

Property and liability insurance companies offer the types of insurance coverage that help protect the policyholders
against the loss and damages of properties.
They also provide liability coverage if the policyholders are found legally responsible for an accident that causes
injuries to other or damage to other's property. Property insurance basically incorporates the insurance coverage
against the loss of property. On the other hand, liability insurance broadly incorporates liability coverage of an
individual or organization for negligent acts or omissions.
However, many of the insurance companies offer the combined features of property insurance and liability insurance
so distinction between these two types of insurance has been disappeared.
15.
2064 Q.No. 10(c)|Life insurance companies.
Life insurance companies offer life insurance policies that provide the protection against the possibility of untimely
death, illness and retirement. The most common. feature of life insurance is that it pays a fixed amount of insurance
at the time of death or at the expiry of certain period. Life insurance is a contract between insured person and a life
insurance company. According to this contract, the life insurance company collects life insurance premium from the
insured person periodically or in a lump sum. In turn, the life insurance company agrees to pay a nominated
beneficiary an insured sum of money, upon the death of the insured person.

18. What are the principal assets and liabilities of commercial banks? How they have changed over time?
Assets of Commercial Banks
Principal assets of commercial banks can be grouped into nine subcategories:
2. Cash balance: Cash Balance. and Balance with Nepal Rastra Bank, cash at vault (cash balance), balance with
other banks/financial institutions and cash on collection process.
1. Balance with banks/financial institutions: This item of assets includes the balance with the other banks and
financial institutions. Commercial banks may have balance in current account and other account of other
licensed banks and financial institutions, and foreign banks. The balance with other licensed banks and
'institutions in current and other accounts is counted in local currency, but balance with foreign banks is
counted in Indian currency and convertible foreign currency.
2. Money on call and short notice: Banks lend the money to borrowers with high creditworthy on the condition
that borrowers should repay the money on call and short notice. This type of lending is highly liquid and
banks can get back their money whenever they need it to meet the liquidity need. Money on call and short
notice may be local currency and foreign currency. In Nepal, banks have to subcategorize this item into
money on call and short notice into local currency and foreign currency.
3. Investments: The next item of assets of commercial banks is investment. This item of asset of banks
consists of items such as interest-bearing deposits at other banks and financial institutions, interbank
lending, repurchase agreement, government securities issued by the federal government, goverment
agencies and local government, mortgage-backed securities, and other debt and equity securities.
4. Loans, advances and bill purchased: Loans, advances and bill purchased are the major items of balance
sheet of commercial banks. Loans are the major eaming assets of banks and major portion of revenue of
banks comes from loans, advances and bill purchased but they are the least liquid asset. They are the
source of credit and liquidity risk for most banks.
5. Fixed assets: Banks' assets such as land and building, vehicles, machinery, office equipments and other
assets fall under fixed assets.
Non-banking assets: Banks takes a possession of the assets-put as the collaterals of loans on the default of
the payment of due interest and principal. Such assets are called non-banking assets.
6. Other assets. All tangible and intangible assets not mentioned earlier fall under other assets. Stationery
stock, accrued interest on investment, accrued interest on loans, sundry debtors, expenses not written off,
staif lending and advances, advance payment, cash in-transit, check in-transit, branch adjustment account,
deferred tax assets and payment of draft without notice are examples of other assets.
Liabilities of Commercial Banks
Banks finance their assets by different sources which we call their liabilities.
Liabilities of a bank are categorized into nine categories: share capital, reserves and funds, debentures and bonds,
loans and borrowings, deposits, bills payables, proposed cash dividend, income tax liabilities, and other liabilities,
1. Share capital: Commercial bank has to maintain minimum level of equity capital to act as a buffer against
losses from off- and on- balance sheet assets. Share capital consists of ordinary shares, redeemable
preference shares, non-redeemable preference shares, proposed bonus shares and calls in advance:
2. Reserves and funds: This is the part of the equity capital. Banks maintain different types of reserves. They
maintain general/statutory reserves, capital reserve funds, capital redemption reserve funds, capital
adjustment reserve funds and other reserve funds.
3. Debentures and bonds: These include liabilities of commercial banks in the form of debt securities
outstanding such as debentures and bonds. Banks rarely raises funds by issuing debentures and bonds.
They collect deposits on different accounts.
4. Loans and borrowings! Banks may borrow from other licensed institutions, government and central banks to
meet its emergency liquidity needs. They may borrow through repo agreement. All these are shown under
loans and borrowings.
5. Deposits liabilities: Major portion of commercial bank liabilities are in the form of deposit liabilities. Deposits
are classified into demand deposits, saving deposits and time deposits. Commercial banks accept these
deposits to raise funds for investment and lending.
6. Bills payable: Outstanding amount of draft, telegraphic transfer, mail transfer, and pay orders issued by one
branch to another branches of banks and licensed financial institutions, bills drawn on the banks by local
and foreign banks and financial institutions all are accounted in bills payable.
 7. Proposed and payable dividend: Purposed dividend and amount of the unpaid dividend as approved by the
general meeting are the current liabilities of the bank
8. Income tax liabilities: Banks have to pay tax according to the tax act of the concerned country. They may
pay the taxes in advance and settle down after the assessment of their tax liabilities. But they have to make
a provision for possible tax liabilities assessed according to the tax act for the concerned fiscal year and the
amount of the provision for tax liabilities is shown under income tax liabilities
9. Other liabilities: Other than the liabilities stated earlier all other liabilities of the banks are included under this
item. Bonus payable, interest payable on deposits, interest payable on borrowing, unearned commission,
sundry creditors, etc. fall under this item.

19.What are the key sources and uses of a commercial bank's funds?
Explain.
There are three major sources of a commercial bank's funds. They are discussed below:
a. Deposits: Commercial banks offer deposit accounts to individual and institutions.
Basically, there are three types of deposit accounts offered by commercial banks: demand deposits, time deposits
and saving deposits. Demand deposits are those deposits which are withdrawn on demand. In other words, banks
are subject to give the cash on demand deposit on the demand of depositors. Time deposits have fixed maturity
period and banks restrict the depositors to withdraw the cash prior to their maturity. Depositors may borrow from
banks by lodging the certificate of deposits as collateral. But depositors may withdraw the money deposited in time
deposit accounts prior to its maturity but customer has to pay bank the penalty Saving deposits have some features
of demand deposits and some of time deposits. Banks are subject to make the payment on demand on these
accounts But customers have to maintain minimum balance and comply with the restriction imposed on the amount of
withdrawals. Banks pay interest on saving accounts.
b. Non-deposit borrowings: Banks can meet their funding needs by borrowing from central banks and other financial
institutions. Central bank, as a last resort of banks, lends banks for short period on the collateral of financial assets.
Interbank borrowing and borrowing from the central bank are for short-term. Banks may borrow funds from money
markets for short period. Similarly, it can borrow intermediate to long-term funds from the bond markets. Banks may
issue the bonds and other debt instruments to raise medium- term and long-tenn funds,
C.
Common stock and retained earnings: Common stock is the ownership capital of commercial banks. They issue
shares of common stock by the way of initial public offerings, further public offerings, and right offerings to raise
equity funds.
Similarly, commercial banks retain the part of profits it has earned over the years for the purpose of reinvestment and
meet the fund requirement.
The major uses of commercial banks funds are as follows:
1. Lending Lending is the main uses of commercial banks' funds. They lend to household, businesses and
government on short-term and long-term basis to satisfy borrowers financing needs. The major forms of
commercial bank lending remain in the form of personal overdraft, business overdraft, project loan, term
loan, automobile and hire purchase loan etc.
2. Investments: Besides lending commercial banks also utilize their funds by making investment into securities
issued by other institutions. They basically invest in securities of corporations to utilize surplus funds and
they also invest in T-bills to maintain liquidity.

20. Give at least three reasons for staying up'to date with bank technology.
By implementing new technology, banks communicate to their customers that they are up to date and progressive.
Thus, one reason for staying up to date with bank technology is to use it as a marketing tool that can attract
customers. Another reason to offer the latest technology to the public is to improve the competitiveness of the bank.
Technology enables the bank to reach out to customers beyond traditional market boundaries. Furthermore,
technology serves to enhance the convenience of using the bank's financial services. The best examples of this type
of technology are credit cards, debit cards, ATM services, telephone bill-paying services, and internet based
payments. The other reasons why a bank should stay up to date with new technologies are as follows:
o Availability of a wide range of inquiry facilities, assisting the bank in business development and follow-up.
o Immediate replies to customer queries without reference to ledger-keeper as terminals are provided to bank
managers and staffs
o Automatic and prompt carrying out of standing instructions on. due date and generation of reports.
o Generation of various management information system (MIS) reports and periodical returns on due dates.
o Fast and up-to-date information transfer enabling speedier decisions, interconnecting computerized
branches and controlling offices.

21. Define bank growth. Why might super growth be a problem for a bank?
Bank growth refers to the growth in market share of a bank. Market share is the proportion of assets, deposits, loans,
and total financial services held by a bank in its business region relative to other banks. Failure to meet market share
demands normally will result in a decline in market share and hence the bank growth.
Market share can affect the earnings of the bank. For example, given that the bank's rate of return on assets did not
change, if its asset size declined then earnings per share would decline. It happens so because the number of shares
does not change while total earnings of the banks are falling in line with the erosion of the asset base. Conversely,
growing too fast can lower equity returns, because assets are expanding but profitability may not be. For example, if
the bank's assets grew by 10 percent but the net income after taxes decreased by 5 percent, the earnings per share
of the bank would decline. It happens so because higher deposit rate had to be offered to the public to attract
sufficient funds to finance relatively rapid rate of asset expansion. Furthermore, growth may not only affect the
profitability but it may also change the perceived riskiness of the bank by the financial market, perhaps because of
increased credit risk, which would also result in a loss of share value. Thus, growth for the sake of growth alone is not
a suitable goal.

21. What constraints do banks face in achieving their goal? Explain.

The primary goal of a bank is to maximize shareholder wealth. Bank management should maintain a risk-return trade-
off to maximize shareholder wealth. However, in maximizing shareholder wealth, a bank may face several
constraints. They are as follows:
a. Market constraints: A bank's growth and profitability is limited by the growth rate of the economy that it serves. If
the economy is growing and prosperous, a soundly managed bank should grow and be profitable. If the economy is
uncertain, due to inflation, natural disasters, recessions, or for other reasons, banks will suffer too. Most bank failures
occur during periods of economic distress.
Similarly, there is competition from other providers of financial services and from the capital market. Such competition
may be, for example, related to interest rate on lending which impacts a bank.
1. Social constraints Social constraints restrain from the historical position of commercial bank at the core of
the financial system. Banks are supposed to provide deposit and credit services to the communities they
serve. Because the financial performance of a bank is linked with the economic health of the community it
serves, bankers perform numerous social functions. They have to devote their resources to promote
economic development and quality of life in the community to some extent, which constraints their
profitability.
2. Legal and regulatory constraints: Commercial banks face a number of legal and regulatory constraints. For
example, they face constraints on balance sheet composition, including prohibition on holding equity
securities and capital requirements. They face constraints on customer relationship, including a large
number of consumer protection laws. Most legal and regulatory constraints on bank behavior are designed
either to reduce the risk of failure or to restrict the allocation of bank credit. which may constraint the bank's
profitability.
16. What is meant by securitization? What is the significance of securitization for a bank? Explain.
Securitization is the issuance of a debt instrument in which the promised payments are derived from revenues
generated by a defined pool of loans. The pools include mortgage loans, credit card loans, car loans, and loans to
businesses.
The significance of securitization for a bank can be observed in improvement of liquidity and decomposition of lending
process. They are described below:
1. Improvement of liquidity: Prior to the development of securitization, smail loans were considered
unmarketable, and they remained on the balance sheets of the banks. However, securitization allows banks
to package and sell the loans thereby improving banks' liquidity and increasing their access to the capital
markets,
2. Decomposition of lending process: In addition, securitization has allowed the traditional lending process to
be decomposed into various parts such as originating loans, packaging them for sale to others, servicing
loans, and funding them. The decomposition of the lending process has opened the door for non-bank firms
as well to compete in bank loan markets.

17. Discuss current status of commercial banks in Nepal.

The initiation of formal banking system in Nepal connenced with the establishment of Nepal Bank Limited (NBL) in
1937. It is the first commercial bank in Nepal. Nearly after three decades of NBL's establishment, Rastriya Banijya
Bank (RBB), a commercial bank under the ownership of Govemment of Nepal, was established, In the mid 1980s,
Government of Nepal adopted open and liberalized policies. In its. liberalization process, the government initiated
structural adjustment program emphasizing privatization. With the adoption of
Liberalization policy, there has been rapid development of the domestic financial system in terms of number of
commercial banks. Thus the decade of 1980s saw a
major structural change in financial sector policies, regulations and institutional developments. Government
particularly emphasized the role of the private sector for the investment in the financial sector. The financial sector
liberalization, started already in the carly eighties with the liberalization of the interest rates, encompassed further
deregulation of interest rates, relaxation of entry barriers for domestic and foreign banks, restructuring of public sector
commercial banks and withdrawal of central bank control over their portfolio management. These policies opened the
doors for foreigners to enter into banking sector under joint venture. Consequently, the third commercial bank in
Nepal, or the first foreign joint venture bank, was set up as Nepal Arab Bank Ltd in 1984. This bank is now called as
NABIL Bank Limited. Thereafter, two foreign joint venture banks, Nepal Indosuez Bank Limited (now called as Nepal
Investment Bank) and Nepal Grindlays Bank Limited (now called as Standard Chartered Bank Nepal Limited) was
established in 1986 and 1987, respectively. Thereafter, another 12 commercial banks have been established within
the period of 12 years.
Nepalese banking system has now a wide geographic reach and institutional diversification. As of mid-July 2016, total
numbers of commercial banks have been increased to 28 with 1,869 branches scattered across different districts.
Until the period, total of S commercial banks have gone into merger and acquisition process to strengthen their
competitive capacity. As of mid-July 2016, total assets and liabilities of commercial banks have been increased to Rs
2,141,216.3 million accounting for a total deposit of Rs 1,$20,953.8 million until this period. The outstanding credit of
commercial banks to the date stands at the level of Rs 1,392,5026 million. Similarly, cash reserve, liquid assets, and
loans and advances constitute 12,9 percent, 12.9 percent, and 99.4 percent, respectively; of the total deposit.
Nepalese commercial bank captures about 51.5 percent share in Nepalese financial system.
Although Nepalese financial sector is dynamic, a lot of scope for development of this sector exists. Overdue loans
and inefficiency of the older and the larger of commercial banks have aggravated and have been made to compete
with the new organized banks with no rural operations. Also, the commercial banks, domestic or joint venture, have
shown little innovation and positive attitude in identifying new areas of saving and investment opportunities.

22. Explain the internal organization of a commercial bank.

Internal organization of a commercial bank refers to the organization structure representing authority-responsibility
relationship of different position holders in the bank. The internal organization structure of commercial banks varies
depending on the size and types of services offered by banks. For a large sized public commercial bank, organization
structure is rather complex than that of small size and private sector bank. However, the internal organizations of all
commercial banks are more or less similar as all banks perfom similar kind of activities. For example, every bank
appoints board of directors through annual general meeting of shareholders. The chairman of the board is the head of
board of directors. The bank has several committees such as risk management committee, audit committee, and
AML/CFT Committee under board of directors. The bank management is led by chief executive officer (CEO). In a
large size bank, there is also the provision of deputy CEO. Similarly, banks appoint several deputy general managers
to look after different departments and divisions. The organization structure of a typical commercial bank is as
follows:

23. Explain the structure of assets and liabilities of Nepalese commercial banks.
Nepalese banking system has now a wide geographic reach and institutional diversification. NRB has published the
Banking and Financial Statistics for Mid-march 2019. As of mid-March 2019, total numbers of commercial banks have
been increased to 28 with thousands of branches scattered across different districts.
•Until the period, total of 12 commercial banks have gone into merger and acquisition process to strengthen their
competitive capacity. As of mid-March 2019, total assets and liabilities of commercial banks have been increased to
Rs3,485,680.46 million accounting for a total deposit of Rs 2,690,260.8 million until this period. The deposit
constitutes 77.18 percent of the total assets to the date. The outstanding credit of commercial banks to the date
stands at the level of Rs
2,39,434.16 million, which constitutes 68.75 percent of the total assets. Similarly, liquid funds and investments
account for the 834 percent and 8.# percent, respectively, of the total assets. The capital fund to the date is 10.8
percent of total assets. The commercial banks are known for large loan syndication, foreign transaction and the
security they offer. Nepalese commercial bank captures about 86 percent of total deposit and credit market in
Nepalese financial system.
Nepal Rastra Bank (NRB) was established on 2013 B.S. as the central bank of Nepal. Goverment of Nepal has
empowered the NRB by law to regulate, supervise and monitor the banking sector for better economic environment.
Such power is authorized by the NRB Act, 2002 (2058 B.S.). As per the provision made in this Act, NRB issues
directives and regulates commercial banks for proper efficiency, management and functioning of banking sector in
Nepal. Regulatory system includes the formulation of rules, amendments of rules, and circulating them to the banks
under regulations. The NRB generally formulates regulations for credit control, foreign exchange, liquidity, interest
rate, priority sector, capital adequacy and assets quality. It issues directives for banks and financial institutions
periodically to cope with the changing economic situation and government policy Regulation is essential to safeguard
the public deposit in the commercial banks and financial institutions. To prevent the contagious effect, NRB acts as a
lender of the last resort, which is necessary to prevent the national economy from crisis. NRB regulations also,
prevent the commercial banks from performing undesired activities in view of the national economy. It helps to
prevent the banks from being suffered, by several economic problems, promote efficiency of commercial banks to
operate in profit, ensure adequate funds to meet all cash demands, maintain clear and fraud free financial
transactions.
Nepal Rastra Bank (NRB) has played a prominent role in the
establishment, extension, development, supervision, inspection and monitoring of banks and financial institutions in
Nepal. There are several acts, rules, guidelines, regulations and policies to regulate the banking system. The banks
and financial institution are required to perform their activities in compliance with these acts, directives, policies and
guidelines. Some of the acts.
policies, guidelines and directives include: NRB Act, 2058; Bank and.
Financial Institution Act (BAFIA), 2073; Company Act 2063; Licensing Policy.
2062; Unified Directives; Foreign Exchange Regulation Act; Other prevailing laws and regulations, International Best
Practices and Basel Capital Accord- I de 1l:
International Conventions, Policies, and Guidelines; Orders and correspondence of other regulatory authorities and
Monetary Policy Statement.

23. Describe the major functions performed by the commercial banks in Nepal.
A commercial bank is a financial institution that accepts deposits and grant loans to the industries, individual and
traders with a view to eam profit. Apart from lending and deposits, commercial banks also render services like
collection of bills and cheques, safekeeping of valuables, providing financial advices to their customer and so on.
According to Company Act of Nepal, commercial banks refer to such banks which deal with money exchange,
accepting deposits, advance loan and commercial transaction except specific banking related to cooperative,
agriculture, industry and other objective. According to Banks and Financial Institution Act (BAFIA), 2073, commercial
banks are Class 'A' financial institutions which carry on the financial transactions like accepting deposits, supplying
credit as specified by Nepal Rastra Bank, dealing in foreign exchange, issuing guarantees on behalf of its customers,
issuing, accepting paying, discounting of purchasing and selling letters of credits, bills of exchange, promissory notes,
cheques, and any other financial transactions as specified in the Subsection 1 of Section 49 of BAFIA
2073.
The main functions of commercial banks are classified into three categories: payments, financial intermediation, other
financial services. They are described below:
Payments: Banks are the core of the payment system. Payment refers to the means by which financial transactions
are settled. Many financial transactions involve checking account at commercial banks. Therefore, the means by
which such payments are settled is an integral part of the payment system. The payments system also involves the
settlement of credit card transactions, electronic banking wire transfers and other aspects in the movement of funds.
In the lack of these payment mechanisms, individuals and traders would have carried volume of currency which might
involve the risk of theft and robbery. Commercial banks basically offer two types of payment system. One is the retail
payment system. It is used by individuals to pay their bills or receive funds. Other payment system is large-volume
payment system. It is used by business organizations and governments to handle larger domestic and international
payments and receipts The important payment functions include collecting cheques, drafts, bills of exchange and
dividends of the shares for their customers, and making payment for their clients and at times accept the bills of
exchange of their customers for which payment is made at the fixed time.
b. Financial intermediation: Financial internediation function of commercial banks includes deposit and loan function.
They are discussed below:
o Deposit function: The most important function of commercial banks is to accept: deposits from the public,
traders, businessman and industries. Generally, commercial banks accept three types of deposits: current
deposits, fixed deposits and saving deposits. Current deposits are the deposits which the depositors can
withdraw and deposit money whenever they desire. Since banks have to keep the deposited amount of such
accounts in cash always, they carry no interest. These deposits are called as demand deposits because
these can be demanded or withdrawn by the depositors at any time they want. Such deposit accounts are
highly useful for traders and big business firms because they have to make payments and accept payments
many times in a day. Fixed deposits are deposited for a definite period of time. This period is generally not
less than one year and, therefore, these are called as long term deposits. These deposits cannot be
withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits.
These deposits generally carry a higher rate of interest because banks can use these deposits for a definite
time without having the fear of being withdrawn. In saving deposits, money up to a certain limit can be
deposited and withdrawn once or twice in a day. On such deposits, the rate of interest is very less. As is
evident from the name of such deposits their main objective is to mobilize small savings in the form of
deposits. These deposits are generally done by salaried people and the people who have fixed and less
income.
o Loan function: The second important function of commercial banks is to advance loans to its customers.
Banks charge interest from the borrowers and this is the main source of their income. Banks advance loans
not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing
 the money in the accounts of borrowers. In other words, theys create loans out of deposits and deposits out
of loans. This is called as credit creation by commercial banks. Commercial banks
give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand
proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done
mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan.
Commercial banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured
loan. Banks generally give following types of loans such as cash credit, demand loans, short-term loan, project loans
to the individuals and businesses
Banks also advance loans to its customers up to a certain limit by providing overdraft facilities, if there are no
deposits in the current account. For this banks demand a security from the customers and charge relatively high rate
of interest.
Similarly, discounting of bills of exchange is also the most prevalent and important method of advancing loans to the
traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by
discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of
their maturity.
c. Other financial services: Besides above functions, commercial banks also discharge other financial services. They
include the following:
o Paying insurance premium of their customers
o Depositing loan installments, income-tax, interest etc. as per directions
o Purchasing and selling shares and debentures on behalf of their customers
o Arranging to transfer money from one place to another for the convenience of their customers, etc.
o Arrangement of lockers for the safe custody of valuable assets of their custom-ers.
o Issuance of reference for their customers
o Collection of necessary and useful statistics relating to trade and industry.
o Sell and purchase foreign exchange to facilitate foreign trade.
o Advising as specialists to the clients in investment decisions.
Underwriting primary market offering of securities and issuing letters of credit.