Introduction

• A bank is a commercial or state institution that

provides financial services , including issuing money
in various forms, receiving deposits of money,
lending money and processing transactions and the
creating of credit.
• A bank is a financial institutions which deals with
money i.e. collect the money from surplus unit and
lend to deficit unit.
• A bank is financial institution, which deals with money and
credit. Bank accepts deposits from the public and mobilizes the
fund to productive sectors. Bank also provides remittance
facility to transfer money from one place to another. Generally,
bank accepts deposits from business institutions and
individuals, which is mobilized into productive sectors mainly
business and consumer lending. So bank is also called a dealer
of money.
• At present context, a bank may engage in different types of
functions such as remittance, exchange currency, joint venture,
underwriting, bank guarantee, discounting bills etc. The
modern bank refers to an institution having the following
characteristics:
• It raises funds by accepting deposits, borrowing funds
and issuing equity which is used to buy securities and to
make loans. Moreover, it creates credit and supports for
the formation of capital.
• The principle operations of bank are concerned with the
accumulation of temporarily idle money of the public for
the purpose of advancing to others for expenditure.
• In short,
• Bank deals with money: it accepts deposits and advances loans.
• Bank also deals with credit: it has the ability to create credit by
expanding its liabilities.
• * Bank is commercial institution: it aims at earning profit.
• Origin of the word “bank’
• The word bank is derived from the Italian word ‘Banco’ that
means bench. The early years, people transacted their
business at benches in the market place in Italy. When
people failed in business their benches, (Banco) was broken
up and the word bankrupt derived. The word bench, which
was termed as “Banco” in Italy, was used, as Back” in the
German language, “banke” in French and “bank” is England
So, the word bank derived to this world.
• Therefore, bank means ‘a financial institution which accepts
deposits gives a loan, exchange or issue money, performs
financial functions, control credit and perform agency
functions.
Types of Banks
• Central bank
• Commercial bank
• Development Bank
• Investment Bank
• Agricultural Bank
• Cooperative Credit Bank
• Regional Rural Bank
• Non Banking Financial Companies
 Central Bank
• Central bank is a non-commercial body or government agency
often charged with controlling interest rates and money
supply across the whole economy. They generally provide
liquidity to the banking system and act as Lender of last resort
in event of a crisis.
• The money market that acts as the central monetary
authority of the country , serving as the government bank as
well as the bankers’ bank is known as a central bank of the
country.
• The main functions of central bank of a country are functions
of note issue, bankers to government, bankers bank etc.
The NRB (established in 2013 Baisakh,14 B.S. under the Nepal Rastra
Bank Act 2012) as the central bank of the country is the centre of the
Nepalese financial and monetary system. It has been guiding,
monitoring, regulating, controlling, and promoting destiny of the
Nepalese Financial system.

NRB is an autonomous and corporate body having perpetual succession

that act as the banker of the government and serves as a lender of last
resort. It has a pivotal role in the country’s economic system as it
formulates monetary and financial policies,

It is quite young compared with such central banks as the Bank of

England, Risks bank of Sweden, and the Federal Reserve Board of the
U.S. etc.
 Functions
As the central banking authority of Nepal, the NRB performs
the following traditional functions of the central bank:
• It provides currency and operates the clearing system for the
government and banks.
• It formulates and implements monetary and credit policies.
• It functions as the government’s and banker’s bank
• It supervises the operations of credit institutions.
• It regulates foreign exchange transactions.
• It moderates the fluctuations in the exchange value of the
rupee.
 In addition to the traditional functions of the central
banking authority, the NRB performs several functions
aimed at developing the Nepalese financial system:
• It seeks to integrate the unorganized financial sector
with the organized financial sector.
• It encourages the extension of the commercial banking
system in the rural areas.
• It influences the allocation of credit.
• It promotes the development of new institutions.
 Commercial Bank
• Commercial banks comprising public sector banks, foreign
banks, and private sector banks represent the most important
financial intermediary in the Nepalese financial system.
• A commercial bank is usually defined as an institution that
both accepts deposits and makes loans; there are also
financial institutions that provide selected commercial
banking services without meeting the legal definition of a
such bank.
• Many banks offer ancillary financial services to make
additional profit; for example, most banks also rent safe
deposit boxes in their branches.
• Currently in most jurisdictions commercial
banks are regulated & require permission to
operate. Operational authority is granted by bank
regulatory authorities which provides rights to
conduct the most fundamental banking services
such as accepting deposits and making loans.
Functions of Commercial Banks

Commercial Banks

Primary Agency General

Functions Functions Functions
1. RECEIVING DEPOSITS
Commercial banks receive deposits from the people who
have surplus money and willing to deposit with banks for the
purpose of safety and interest etc.

To meet the needs of people the banks offer following

deposit schemes:
• Current Account
• Saving Account
• Fixed Deposit (Term/Time Deposits)
• Profit and Loss Sharing (PLS) accounts
• Foreign Currency Accounts
2. ADVANCING LOANS
Commercial bank lend the money collected from the people
under different accounts, to the borrowers.
The bank provide loans in the following shapes.
• Cash credit
• Over draft
• Call loans
• Discounting of bills
• Investment loans
• Short-term loans
• Medium-term loans
• Long-term loans
Agency Functions
• Collection & Payment Services (via cheque,
drafts, bills and hundis)
• Purchase & Sale Service (trading of securities)
• Execution of Standing Instructions
• Collection of Dividends and Interest on Securities
• Transfer of Funds (via drafts and wire transfer)
• Bank as Guarantor
• Income Tax Facility
• General Utility Functions
• Issuance of Letter of Credit
• Discounting of Bills
• Issuance of Traveler’s Cheques
• Lockers Facility
• Foreign Exchange Transactions
• Act as an under writer
• Compile Statistics
The role of Commercial Banks in the Economic Growth &
development of a country
• 1. Mobilizing Saving for Capital Formation:
The commercial banks help in mobilizing savings through
network of branch banking. People in developing
countries have low incomes but the banks induce them
to save by introducing variety of deposit schemes to suit
the needs of individual depositors. They also mobilize
idle savings of the few rich. By mobilizing savings, the
banks channelize them into productive investments.
Thus they help in the capital formation of a developing
country.
• 2. Financing Industry:
The commercial banks finance the industrial sector in a
number of ways. They provide short-term, medium-term
and long-term loans to industry. In India they provide
short-term loans. Income of the Latin American countries
like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks
also advance long-term loans to industry.
• 3. Financing Trade:
• The commercial banks help in financing both internal
and external trade. The banks provide loans to retailers
and wholesalers to stock goods in which they deal. They
also help in the movement of goods from one place to
another by providing all types of facilities such as
discounting and accepting bills of exchange, providing
overdraft facilities, issuing drafts, etc. Moreover, they
finance both exports and imports of developing
countries by providing foreign exchange facilities to
importers and exporters of goods.
• 4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in
a number of ways. They provide loans to traders in agricultural commodities.
They open a network of branches in rural areas to provide agricultural credit.
They provide finance directly to agriculturists for the marketing of their produce,
for the modernisation and mechanisation of their farms, for providing irrigation
facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy farming, sheep
breeding, poultry farming, pisciculture and horticulture. The small and marginal
farmers and landless agricultural workers, artisans and petty shopkeepers in rural
areas are provided financial assistance through the regional rural banks. These
regional rural banks operate under a commercial bank. Thus the commercial
banks meet the credit requirements of all types of rural people.
• 5. Financing Consumer Activities:
People in underdeveloped countries being poor and
having low incomes do not possess sufficient financial
resources to buy durable consumer goods. The
commercial banks advance loans to consumers for the
purchase of such items as houses, scooters, fans,
refrigerators, etc. In this way, they also help in raising the
standard of living of the people in developing countries
by providing loans for consumptive activities.
• 6. Financing Employment Generating Activities:
The commercial banks finance employment generating
activities in developing countries. They provide loans for the
education of young person’s studying in engineering, medical
and other vocational institutes of higher learning. They
advance loans to young entrepreneurs, medical and
engineering graduates, and other technically trained persons in
establishing their own business. Such loan facilities are being
provided by a number of commercial banks in India. Thus the
banks not only help inhuman capital formation but also in
increasing entrepreneurial activities in developing countries.
• 7. Help in Monetary Policy:
The commercial banks help the economic development of a
country by faithfully following the monetary policy of the
central bank. In fact, the central bank depends upon the
commercial banks for the success of its policy of monetary
management in keeping with requirements of a developing
economy.
Thus the commercial banks contribute much to the growth of
a developing economy by granting loans to agriculture, trade
and industry, by helping in physical and human capital
formation and by following the monetary policy of the
country.
• Income distribution :Commercial banks borrow from the people of the
higher-income group and lend it to the people of the lower income
group.
• Poverty alleviation :Commercial bank help the poor people by lending
money so as to improve their standard of life
• Creation and distributors of money: They purchases securities and
allow money to play an active role in the economy.
• Influencing economic activity: Commercial banks influence economic
activity in two ways. First by lowering the interest rate. Secondly , by
making the capital available to the investors.
• Export promotion cell: To boost up exports, banks have established
export promotion cells to provide information and guidance to
exporters. Through this, export volume increases, which fetches more
foreign exchange.
 Development Banks
• A development bank may be defined as a financial institution
concerned with providing all types of financial assistance to
business units in the form of loans, underwriting, investment
and guarantee operations and promotional activities-economic
development in general and industrial development in
particular
• A development bank is basically a term lending institution. It
is a multipurpose financial institution with a broad
development outlook.
 Factors for growth of Development Banks

• Fostering industrial growth

• Long term assistant
• Balanced development
• Promotional services
• Infrastructure building
• Economic policies
• Entrepreneur Development
• Socio economic objectives
 Investment Banks
Meaning:- Financial intermediaries that acquire the savings
of people and direct these funds into the business
enterprises seeking capital for the acquisition of plant and
equipment and for holding inventories are called
‘investment banks’.
Features:-Long term financing, Security, merchandiser,
Security middlemen, Insurer, Underwriter
Functions:- Capital formation, Underwriting, Purchase of
securities, Selling of securities, Advisory services, Acting
as dealer.
Cooperative Banking Sector
• These banks play a vital role in mobilizing savings and
stimulating investment in small scale.
Merchant Banks
Meaning:- Institution that render wide range of services such
as the management of customer’s securities, portfolio
management, counseling, insurance, etc.
Functions:- Sponsoring issues, Loan syndication, Servicing
of issues, Portfolio management, Arranging fixed deposits,
Helps in merger& acquisition.
 Indigenous bankers
Indigenous bankers are those individuals or private firm
who receives deposits and lend money or deals with funds.
Feature
• Funding source
• Professional bodies
• Urban center
• Socialized financing
• Mode of lending
• Personalized Saving
 Services Typically Offered by Banks
• Types of Bank Services
• In the modern world, banks offer a variety of services to attract
customers. However, some basic modern services offered by the
banks are discussed below:
• Advancing of Loans.
• Overdraft.
• Discounting of Bills of Exchange.
• Check/Cheque Payment
• Collection and Payment Of Credit Instruments
• Foreign Currency Exchange.
• Consultancy.
• Bank Guarantee.
• Remittance of Funds.
• Credit cards.
• ATMs Services.
• Debit cards.
• Home banking.
• Online banking.
• Mobile Banking.
• Accepting Deposit.
• Priority banking.
• Private banking.
 Financial transactions can be performed through many
different channels:
1. A branch, banking centre or financial centre is a retail location
where a bank or financial institution offers a wide array of face to
face service to its customers.
2. ATM is a computerized telecommunications device that provides a
financial institution's customers a method of financial transactions in
a public space without the need for a human clerk or bank teller
3. Telephone banking is a service provided by a financial institution
which allows its customers to perform transactions over the
telephone
4. Online banking is a term used for performing transactions,
payments etc. over the Internet through a bank.
 Trends affecting banks

1. Service proliferation:
2. Competition:
3. Deregulation:
4. Rising cost of funding:
5. Interest-sensitive customer:
6. Technological revolution:
7. Geographic expansion:
8. Globalization of banking:
9. Increased risk of failure:
 Steps in the Lending Process
• Finding prospective loan customers,
• Evaluating a prospective customer’s character and
sincerity of purpose,
• Making site visits and evaluating a prospective
customer’s credit record,
• Evaluating a prospective customer’s financial condition,
• Assessing possible loan collateral and signing the loan
agreement,
• Monitoring compliance with the loan agreement and
other customer service needs.