REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

In the event of coming up with 3rd edition of PRINCIPLES & PRACTICES OF

BANKING we have made following changes in the 2nd edition book :

UNIT 1
Page 3

Figure 1.1 Total Assets/Liabilities Structure of Nepalese Financial institutions, has been changed as
illustrated below :

4.8% 3.1% A Class Banks

13.3%
B Class Banks
C Class Finance Companies
D Class Financial Institutions
78.7%
Commercial Bank
occupied 78.7 percent of total assets/liabilities followed by Development Banks 13.3 percent, Finance
Companies 4.8 percent and Micro-finance Development Bank 3.1 percent. (Source - "Banking and Financial
Statistics, No. 61 published by Nepal Rastra Bank)
1.1.1 Roles and Functions of the Central Banking Authority
First 2 sentences have been replaced by :

Central bank is an autonomous organization entrusted by the government to administer certain key
monetary functions. The central bank is primarily responsible for price stability formulating required
monetary policies.

Page 4

1.1.2 Functions, Duties and Powers of Nepal Rastra Bank

Point No. (c) changed to -
(c) To formulate foreign exchange policies

1.1.2.3Cash Reserve Ratio (CRR)

First line changed to - Cash Reserve Ratio (CRR) is the mandatory deposit to be held by Banks with the
central bank.

Page 5
Phrase in bold & italics has been added -

Nepalese banking system has now a wide geographic reach including recently formed local bodies and
institutional diversification. geographic reach including recently formed local bodies and institutional
diversification.

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

The portion of text between " In the context of promulgation of the Banks………….(Source : Monetary
Policy for as of mid April 2016)" can be read as follows :

In the context of promulgation of the Banks and Financial Institutions Act (BFIA), the existing prudential
regulations and directions, which were separately issued for banks and financial institutions, have already
been revised and integrated into a unified directive and came into implementation from July 16, 2005 and
subsequently amended . The Banks and Financial Institutions Act (BAFIA) has classified the financial
institutions from ‗A‘ to ‗D‘ classes on the basis of capital. Class A (commercial banks), class B-
(development banks), class C (finance companies) and class D (Micro-finance Development). In latter-day,
Central bank has lunched the merger and Acquisition policy to reduce the number of financial institution
and provides safe lending way for problematic institution as well. It reduces the B class and C class
financial institution significantly.
As of mid-Jan 2017, the total number of banks and financial institutions( BFIs) stood at 169 including 28
commercial banks (―A‖ Class), 57 development banks (―B‖ Class), 36 finance companies (―C‖ Class) and
48 microfinance institutions (―D‖ Class). Besides, there are 48 cooperatives and 25 NGOs licensed by NRB
for limited banking transactions. (Source : List of Bank and Financial Institutions NRB).

The figure 1.3 Compositions of Assets/Liabilities of Commercial Banks

has been changed as follows :

Other Capital Others, 7.80 Liquid

Liabilities, Fund, 6.9 % Funds, 14.1
9.6% % 0%
Borrowing
, 1.0%
Investments
, 15.90%

Deposits,
82.5%
Loans and
Liabilities Advances,
Assets
62.20%

Source : Banking & Finance Statistics, No. 61, NRB

Page 6

First paragraph changed as follow :

The composition of liabilities of commercial banks shows that, the deposit has occupied the dominant share
of 82.5 percent followed by others 9.6 percent, capital fund 6.9 percent and Borrowings 1 percent. The share
of loans and advances to total assets remained at 62.2 percent. Similarly, share of investment and liquid
funds to total assets registered 15.9 percent and 14.1 percent respectively (source-"Banking and Financial
Statistics ublished by Nepal Rastra Bank)

The heading of section 1.1.7 has been changed to "Micro Finance Institutions"

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

UNIT 2
Page 10

In section 2.1 Introduction -

"Banks and Financial Institutions Act, 2063(2006)" has been replaced by Banks and Financial
Institutions Act, 2073 (2017)

Page 11

In section 2.3.1 - "NRB has issued…….throughout the country." has been replaced by " NRB has
issued and put in circulation notes in the denomination of Rs.1, 2, 5, 10, 20, , 50, 100, , 500 and 1000,
& coins and circulates throughout the country."

Page 12

In the 9th line - "Risk-Based Onsite…………approved by NRB Board" has been changed to

" Risk-Based Onsite Inspection Manual prepared with technical support from the IMF has been approved
by the NRB Board and now is in implementation."

2.3.5 Development of the Financial System

Points no. iii) and iv) have been changed as follows :
iii) NRB's commitment on enhancing access to finance for rural poor is clearly visible as it has
established five rural development banks in five development regions during 1990s (now
merged with new name Nepal Grameen Bank Ltd.)decade to do micro financing activities
replicating Grameen model.
iv) NRB is also supporting the agriculture , rural development activities, export and
earthquake victims through its refinancing window.

2.3.7 Monetary Control

The last line changed to "The NRB issues monetary policy for the country for monetary control."

Page 15

2.5.5 Sectoral credit restrictions

The last sentence has been changed to - " Loan against the security of land and real estate shall not be more
than 40 percent of the fair market value of the housing land and real estate under collateral security in
Kathmandu valley and 50% in out of valley."

2.6 LET US SUM UP

The 2nd last paragraph has been changed as follows -

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

NRB has also given direction for lending to Lending to Deprived Sector. At present the
lending in deprived sector must be 5% of total outstanding loans As regards lending to
priority sector, Banks should lend at least 25% in sectors like agriculture (10%), energy (5%),
tourism (5%) and rest of the amount in others sector (export,smalland medium enterprises,
pharmaceuticals, cement and garment).

UNIT 3
Page 18
3.1.2 Retail Products
A statement under Retail Deposit Products - "Simplified KYC…..in their Deposit accounts" has been
modified as -
• Simplified KYC Account for Small savers with less than Rs. 0.1 million in their deposit accounts
Page 20-
3.1.5 Retail Banking in Nepal
The portion towards the end - " Recently, banks are also …..were not thought by bankers." has been changed
to :
"Recently, banks are also instructed to maintain 25 percent of their total credit to priority sectors by mid
July 2018 of which at least 10 percent has to be allocated to agriculture sector alone. Earlier individual
customers as a separate market segment were not thought of by bankers."

3.2.2 Products
In the last line "one of the leading banks" has been changed to "banks".

Page 24 -
In the content under "Regulation regarding investment in Nepal", we have changed "Industrial Enterprises Act
(IEA) 1992" to " Industrial Enterprises Act (IEA) amended 2073(2016)."

UNIT 4
Page 31-32
4.1.9 Intermediaries in an Issue in the Primary Market
The Minimum paid capital prescribed has been changed as under:
1. Issue Manager NRs. 50,000,000
2. Securities Underwriter NRs.70,000,000
3. Share Registrar NRs.30,000,000
4. Portfolio Manager NRs. 30,000,000
An applicant requesting for all types of Merchant Banking Business as prescribed under these regulations
should have at least NRs.200, 000,000 as paid up capital by 2075 Ashad end.

UNIT 5
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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

Page 40

5.4 BENEFITS OF A MUTUAL FUND.

Content of option a) has been changed to -

a) Small Amount of investment possible-
The biggest benefit for small investors is that they can invest using very small amounts of money. In the
absence of mutual funds many of these investments would not have been possible at all.

UNIT 6
6.3 CHECK YOUR PROGRESS
In question No. 2. "As of mid July 2017.." has been changed to -
"As of mid July 2017…."

UNIT 8

Page 62

Table pertaining to maintaining minimum CAR has been revised as follows :

Minimum Capital Fund to be maintained based on the risk weighted
Institutions asset (percent)
Core Capital Capital Fund
A Class As per Capital Adequacy Framework 2015
National Level B Class As per Capital Adequacy Framework 2007 (Updated July 2008)
Other B & C Class 5.5 11
Source - Unified Directives Nepal Rastra Bank 2074

New section 8.2.5 BASEL III in brief has been added to this unit.
8.2.5 BASEL III in brief -
8.2.5 BASEL III in brief
Basel Committee on Banking Supervision released Basel III Capital regulation in 2010 to improve the
banking sector‘s ability to absorb the shocks arising from financial and economic stress. It has focused on
the bank level or micro prudential regulation to strengthen the banking institution in distress situation.
Besides, another reform i.e. macro prudential regulations are to address system wide risk arising in the
banking sector. The outcome of these two standards focus to raise the quality and level of capital (Pillar I).
Nepal Rastra Bank has introduced a simplified version of Basel III Capital Accord since mid July 2016 as a
transitional arrangement in parallel mode. The major consideration under this arrangement are common
equity capital ratio, capital conversion buffer, counter cyclical buffers, leverage ratio and liquidity coverage
ratio.

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

UNIT 9
Page 73
Towards the end of the section 9.2 Merger in Page 73 - Following has been added -
As of Ashad end 2074 (mid July 2017) total of 150 banks and financial institutions were involved in merger
and acquisition process and license of 111 institutions were cancelled resulting in creation of 39
institutions.

9.5 CONSOLIDATION IN THE NEPAL BANKING SCENARIO

Second sentence - " Over the past 20 years……..as of mid March 2014" has been changed to -
" Over the past 20 years the banking sector in Nepal grew from a total of seven banks in 1990 to 214 at the
end of 2012, and to 149 after merger and acquisition initiatives as of mid- July 2017."
Page 74
In the 1st line - "(CAR) of 10…….CAR of 11 percent." has been replaced by -
as determined by NRB from time to time .

Table after byelaw No. 8 has been deleted and instead following has been added -
Nepal Rastra Bank issued Acquisition Byelaws -2070 to facilitate the Bank/FIs involved in this process.
Presently , merger and acquisition Byelaws 2073 is in place.

UNIT 10

Page 78

10.1.6 Removal of name from the black list

Option " d " has been added as follows -
d) If a person is blacklisted due to drawing of cheque without having adequate balance in his account
and make payment of the cheque amount to the payee.

UNIT 11
Page 82-84
Changes have been made at several places in Section 11.1 to Section 11.4 and the updated
content is as follows -

11.1 STRUCTURE OF FINANCIAL SYSTEM IN NEPAL

The Financial sector in Nepal as of mid July 2017 comprised of 28 commercial banks, 40 development
banks, 28 finance companies, and 53 microfinance development banks. In addition, 15 savings and credit

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

cooperatives and 25 microfinance nongovernment organizations (NGOs) are licensed by the central bank.
The insurance sector has one public insurer and 24 private insurers. The capital market has the Nepal
Stock Exchange, the country‘s only stock exchange market.
A total of 53 microfinance institutions are operating as ―D‖ class financial institutions; including one
Grameen Bikas Bank (Rural Development Bank), 23 replicates of Grameen Banking and 3 wholesale
lending microfinance institutions. "Rural Self Reliance Fund (RSRF) Operational Directive 2012" has
been implemented in order to expand the investment coverage of RSRF which was established to provide the
wholesale loan to cooperatives and NGOs in 1991

11.2 REFORMS TO STRENGTHEN THE FINANCIAL SYSTEM

The financial sector in Nepal went through two major reform programs. The first reform was started in
1985 when the country faced an economic crisis, this prompted the government to initiate a structural
adjustment program with the International Monetary Fund. The second reform program was initiated in
2002 and was trigged by a political crisis—in particular the Maoist insurgencies in the late 1990s—which
compelled the Government of Nepal to embark on broader economic reforms. International development
agencies played a role in these reforms. These reform programs contributed to the finance sector‘s growth
and improved governance. The government decided to restructure and privatize the three major state-owned
banks: Agricultural Development Bank Limited, Nepal Bank Limited, and Rastriya Banijya Bank.
However, privatization of these state-owned banks is yet to be completed. The country adopted liberalization
route in the financial sector by removing the entry barriers for private and foreign banks and financial
institutions. In 1984, the government amended the Commercial Bank Act to open the sector for foreign
ownership through joint venture banks. Following this amendment, NRB gave licenses to three joint
venture banks during 1984–1987.
Before the start of reform process NRB was setting interest rates for all banks and financial institutions. In
1984, NRB deregulated the interest rates. In the initial period commercial banks were given partial
relaxation to fix loan interest rates from 1.0% to 1.5% above the deposit rates. In 1986, this range was
eliminated, allowing banks to offer higher interest rates to any level above the fixed minimum level. Interest
rates were completely deregulated in the year 1989.Prudential norms were introduced by NRB in 1988.
including capital adequacy requirement, loan classification, loan loss provisioning, interest income
recognition, single borrower limit, and account disclosure norm.
Government introduced a priority sector lending program in the year 1974, which required all commercial
banks to lend 12% of their total portfolio to priority sector, of which 3% must be lent as microcredit to the
poor (deprived sector lending scheme). The government phased out the priority sector lending program in
2005, but maintained the deprived sector lending scheme. In 2012, the government reintroduced the priority
sector lending program, which mandated the banks to increase lending to the agriculture and energy sector
to 10% of their total loan portfolio. In 2014, the target was increased to 12%. At present the banks should
lend at least 25% of total loans and advances to the priority sector by mid July 2018. The priority sector
includes agriculture , energy , tourism and other sector like small and medium enterprises, pharmaceutical,
cement and garment. Out of these sectors total 20% of loan outstanding should be in agriculture, energy
and tourism.
The reform period (2000–2012) coincides with the rapid growth of remittance to the country. From 2000 to
2012, the official remittance inflow to Nepal grew by more than 30 times, from NRs 0.1 billion in 2000 to
NRs3.5 billion in 2012 and now it has reached NPR 695.45 billion in 2017. This remittance growth fuelled
household consumption and service sector expansion in the real sector. Remittance helped to maintain the
expositive balance of payments and accelerated credit growth. Remittance also eased banks‘ liquidity
crunch, especially for 2010–2011.The credit expansion from early 2001 is largely owed to this rapid
remittance growth. Improved liquidity position of banks also helped NRB to implement some of the reform
measures.
11.2.1 Bank Restructuring and Privatization

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

The objective of the restructuring was to improve the two banks‘ viz. Rastriya Banijya Bank (RBB) and
Nepal Bank Limited (NBL) the corporate governance and reduce government ownership in the finance
sector. In the organizational restructuring, VRS programs were introduced and staff size was reduced from
over 5,000 employees in 2002 to below 2,600 employees by 2009. To improve profitability, RBB reduced the
number of bank branches from over 200 to 123during the same period the core banking system was
installed in 64 branches. At NBL, also VRS, branch reduction, and system up gradation were undertaken.
But the restructuring did not bring the much-needed change to the ownership, governance, and
management of RBB and NBL. After four failed attempts, NRB took over NBL‘s management according to
Section 86C of the NRB Act of 2002—―Action Against the Problematic Commercial Bank or Financial
Institution. (Source- ADB South Asia Working Paper Series No. 28 July 2014).After 13 years, Nepal Rastra
Bank handed over the management of NBL to newly elected board of directors.
11.2.3 Other developments in the financial sector
The government enacted several acts and ordinances, including the amended NRB Act in 2002, Debt
Recovery Act in 2002, Secured Transaction Act in 2005, Banks and Financial Institutions Act in
2017(2073), Insolvency Act in 2006, and Companies Act in 2006. The Banks and Financial Institutions Act
is an umbrella act, which repealed the preceding acts related to banks and financial institutions. Merger
and Acquisition byelaws 2073 has been introduced combining merger byelaws 2068 and acquisition byelaws
2070.
On other finance sector infrastructure, a Credit Information Bureau was established in 1989 to blacklist
defaulters. Under the Debt Recovery Act 2002, a Debt Recovery Tribunal was established in 2003. The
National Banking Training Institute, a professional training institute on banking and financial subjects,
was established in 2009 to provide short-to medium-term professional training, including training outside
Kathmandu.

11.3 DEVELOPMENTS UNDERTAKEN BY NEPAL RASTRA BANK

Measures have been taken to address the fall in real estate and capital market are now in place. These
include easing conditions for restructuring real estate and margin loans, increasing the loan-to-value ratio
ceiling, for loans against promoter shares, and postponement of a reduction in the limit on real estate sector
loans to 25 percent of total loans. Efforts have been made to strengthen regulation and supervision, and to
facilitate mergers acquisitions and credit diversification. In particular some of the important measures
undertaken by NRB are as under
a) Strengthening capital base of banks / FIs by increasing paid up capital conservation buffer.. Some
Basel III elements—including 4.5 percent common equity Tier 1—are also in implementation.
b) For swift resolution of problem banks amendments to NRB Act is in final stages.
c) Stress test guidelines have been issued as well as guidelines on Internal Capital Adequacy
Assessment Process (ICAAP).
d) The NRB has asked banks to extend loans at least 25% in the priority sectors like agriculture,
energy, tourism and cottage and small scale industry. Out of which at least 20% must be lent in
agriculture , energy sector and tourism. Lending to deprived sector must be 5% of total outstanding
loans.
e) Banks are required to calculate and disclose their base rate in website on monthly basis &
information on issuance of guideline on Calculating Base rate. As per latest directive Interest
spread should not be more than 5%.
f) Stress testing guidelines issued and implemented.
g) Risk Management Guidelines issued and implemented.
h) Interest rate of loans is now based on base rate plus premium of respective bank and financial
institution.
i) Loan against shares is to be provided 40% of core capital.
j) Institutional deposit to be maintained 45% of total deposits.
k) Risk base audit of bank and financial institutions.

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

l) Loan value ratio of real estate loans has been tightened.

m) Expansion of banking outreach opening bank branches in all the recently formed local bodies.

11.4 DEVELOPMENTS IN SECURITIES MARKET

Nepalese financial system is characterized by small but a growing capital market. During the past 16 years
of its operation, securities market has witnessed three market phases of ups and downs In spite of expansion
in size, the securities market is yet to make quality transformation gaining depth and maturity. However,
after 2013/14remarkable improvement has been observed in securities market with the increase in paid up
capital of banks and FIs. The share of insurance sector is gradually increasing . The entrance of
hydropower companies in capital market has been encouraging sign for capital market. Several reforms
have been introduced such as establishment of central depository system, dematerialization of securities,
introduction of application supported by blocked account (ASBA) for IPO etc. The application of online
security trading is in final stage.The NEPSE index as on mid July 2017 was 1582.7 points and the total
number of listed companies in NEPSE was 208.

11.6 Developments in rural financing-

Last portion - "Recently, banks are also………..September 2013 (Dhulikhel, Nepal)" has been
replaced by -
"In order to promote rural financing Nepal Rastra Bank has been encouraging bank and FIs. Commercial
Banks have been primarily involved in wholesale lending by investing minimum 5% of loan outstanding.
Other micro finance institutions have been involved in direct lending to the intended people."

Page 85
11.8 Check your progress -
Last answer option (d) of Question no. 3 has been changed as "25%".

UNIT 12
Page 88
12.2 DEFINITION OF A BANK, FINANCIAL INSTITUTION AND NON FINANCIAL INSTITUTION
Some changes have been made in the first 7 lines and the updated 7 lines appear as follows-
Banks and Financial Institutions Act, 2073 (2017) has defined the terms Bank, Financial Institution, and
Non- financial Institution as under-
―Bank‖ means a corporate body incorporated to carry on financial transactions as referred to in Sub-
section (1) of Section 49;
―Financial institution‖ means a corporate body incorporated to carry on the transactions as referred to in
Sub-section (2), (3) or (4) of Section 49, and this term also includes a development bank, finance company
or micro-finance development bank;

Page 90

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

12.9.1 Introduction
The last portion - " licensed by Nepal Rastra Bank on 17 Aug 2009 (2066, Bhadra -1)" has been replaced by -
"with amendment from time to time. Recently , Nepal Rastra Bank has made provision for heavy penalty in
case of non-compliance of directives on AML amending directive No. 19."
Page 92
Account- Holders
Under the section- (a) Personal Accounts following 4 points have been added-

(10) Involved business/profession

(11) PAN No. if available or as required by other instruction
(12) Birth certificate and any identification cards of guardian in case of minor accounts
(13) Other necessary documents (to be specified by Bank /Financial Institution).

Under the section- (b) Accounts of Partnership Firm or Individual Firm following 7 points have
been added-

(9) Nature of business transaction

(10) Annual estimated transaction amount
(11) Audited Financial Statement of last FY
(12) Tax clearance certificate or tax payment receipt
(13) Number of branches and address
(14) Working area
(15) Other necessary documents (to be specified by Bank /Financial Institution).

Page 93-94
Sentences which read as " Other necessary documents (to be specified by Bank/Financial
Institution)" has been replaced by -

"Other necessary documents (to be specified by Bank /Financial Institution) as per annex 19.1, NRB
Directive No. 19/074"
After the option (12) of section - (f) Accounts of Public Trust or Private Trust (Guthi) the following has been
added -
Detail information is required to obtain from other account holders such as school/collage, INGOs, Foreign
national, foreign company, diplomatic mission/ambassador, NRNs as detailed in same NRB directive No. 19
annex 19.1

Page 97

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

12.13.1 Merchant Banking

Option (b) has been changed to
(b) Planning and timing of IPO/FPO.

UNIT 15
Page 118

15.1.1 Savings Account

The sentence - "The interest in saving………basis." has been replaced by -
The interest in saving account is paid on quarterly/monthly basis.

Page 122
15.3.5 Closure of accounts
The first paragraph has been re-written as -
Account holders can close the account by giving a day‘s notice in writing. They need to surrender unitized
cheque leaves and the card related to the account. As per the prevailing service charges norms of NRB ,
account closure charges can be levied if the account is closed within 6 months of its opening.

UNIT 17
Page 135

17.6 DIFFERENCE BETWEEN TERM LOANS AND WORKING CAPITAL

The last option (ii) has been changed as follows -

(ii) Term loans are usually of medium- or long-term duration and are repayable in monthly/quarterly/
half yearly/ yearly instalments over an agreed period of time.
Page 136

17.7 CREDIT APPRAISAL TECHNIQUES

In the sentence - "In Nepal working capital loans ……………. outstanding with other banks)." (90 days)" has
been changed to "180 days".

Page 140
17.14 CREDIT MONITORING
The last option (e) has been changed as follows -
(e) Ad hoc limits are sanctioned for periods not exceeding six months.

UNIT 18
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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

Page 146

Section 18.3 to 18.5 has been amended and re-written as follows -

18.3 STEPS TAKEN FOR ENHANCING LENDING TO PRODUCTIVE SECTORS

As per the directives in force NRB has asked banks to increase lending to two major sectors i.e Agriculture
and Energy sectors. As a policy to promote productive sector lending, commercial banks were required to
prepare and submit a plan to provide minimum 25 percent loan from their total loan and investment on
various productive sectors like agriculture, energy, tourism, household and small industries by mid-July
2018 and also, minimum 10 percent loan should be provided to agriculture and other small industries by
mid-July 2018.
18.4 RECENT DEVELOPMENTS IN PRODUCTIVE SECTOR LENDING
The productive sector lending for the year 2015/16 was approximately 16.59% (average) of total loan and
advances which is below the minimum requirement of 20% as per the NRB directive. The deprived sector
lending average for commercial banks for the fiscal year 2015/16 was 5.61 % which increased from 5.11%
in fiscal year 2014/15. The deprived sector lending was above the NRB minimum requirement of 5% in the
review year. (Source- Bank Supervision Report 2016 Page-30)
As per financial stability report Jan 2016 Issue No. 8 published by NRB, as on mid July 2016, the
commercial banks had provided 16.59 percent of their total loan on productive sector which includes 7.22%
in agriculture, 2.73% in energy sector and 3.27% in tourism sector and 3.37% in cottage and small
industries respectively. Commercial banks have lent 9.95% in combined agriculture and energy sector
which is less than the regulatory limit of 12%. The productive sector lending of commercial banks in mid
July 2015 was 22.5%. However, share of agriculture sector on total credit exposure remained just about
4.6%.
As per Monetary Policy for Fiscal Year 2017/18 , announced by NRB, commercial banks ―A‖ class, have
to lend 25% to productive sector including 15% in Agro & Energy sector by 2075 Ashad (mid-July 2018). In
addition to this, Class B and C have to lend 15% and 10% in the sectors as above by 2073 Ashad (mid-July
2016).
As per Monetary Policy for Fiscal Year 2017/18, announced by NRB the refinance rate for agriculture,
hydropower, livestock and fishery and other specified productive sectors has been reduced from 5 percent to
4 percent. Existing other refinance rates have been kept unchanged .NRB has assured that arrangements
will be made to ensure the availability of credit at 5 percent interest rate from commercial banks for
livestock, herbs, horticulture, dairy, fishery, mushroom farming, agriculture storage, animal
slaughterhouse and meat related businesses. In case of need refinance will be made available from NRB.
18.5 LET US SUM UP
For the long-term benefit of the economy as well as for financial up liftment of the mass of people living
below the poverty line, it is necessary to invest in productive sector. To meet this noble cause Nepal Rastra
Bank framed a policy known as directed lending (priority/deprived/product sector). This policy was
introduced for the first time in 1974. The scheme was called as "Priority Sector Credit" in 1976, Banks
were asked to extend 70 percent of their total deposits under the priority sector. In 1986, the priority lending
was linked with total lending of bank. In 2002, Nepal Rastra Bank came up with a policy to gradually
expand development banks and other micro financing institutions to cater the need of rural areas and
dispense with the compulsory provision of directed lending. The scheme was phased out in 2007.
In 2012, the government reintroduced the priority sector lending program, which mandated the banks to
increase lending to the agriculture and energy sector to 10% of their total loan portfolio. In 2017 the target
has been increased to 15 %. As a result of the policies implemented to increase the loan in productive
sectors the loan floated in such sectors are increasing.

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UNIT 19
Page 150

19.3 INITIATIVES UNDERTAKEN BY THE GOVT. AS WELL AS NEPAL RASTRA BANK

Last sentence of 2nd paragraph has been re-written as -

Recently, Nepal Rastra Bank has urged banks to invest at least 25 percent of total loan portfolio in
productive sectors as; agriculture, energy and rural and small industries, tourism and other special type of
industries.

19.4 FINANCING ACTIVITY IN RURAL AREAS

1st sentence of the 2nd paragraph has been modified as -
Grameen Bikas Bank established in 1990s decade by NRB provides concessional credit to the poor/deprived
rural households.

UNIT 20
Page 155
20.6 LET US SUM UP
The first sentence has been changed to -
In Nepal, around 63 per cent (as per 4th periodic plan (2073/74-2075/76) of the total population is engaged
in Agriculture but it provides seasonal employment.

UNIT 21
Page 158

21.2 EFFORTS MADE SO FAR IN INCREASING THE LENDING TO DEPRIVED SECTOR

In the 3rd line of "a)" option - "only if they also open two outside it" has been replaced by -
"only if they also open three outside it"

Page 158-161
Section 21.3 to 21.7 has been re-written as follows -

21.3 PROVISIONS RELATING TO LENDING TO DEPRIVED SECTOR

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21.3.1 Direct financing categorized as deprived sector lending

As per the directives of NRB the following loans and advances directly extended by the licensed class "A",
"B" and "C" banks development banks and finance companies are to be included under the deprived
sector lending:-
a) Micro credit extended up to Rs. 1,00,000 per group/individual against group/personal guarantee to
the deprived or low income individual for operating micro business;
b) Extension of loan not exceeding Rs. 1,00,000 per house hold family for the purpose of Solar-Home-
System, solar cooker, solar dryer, solar pump, bio-gas, improved water mills, improved cooking stoves
according to renewable energy technology;
c) Micro enterprise credit up to Rs. 300,000 for each business extended to deprived or low income
individual to operate the micro industries against acceptable collateral/to group members against the
guarantee of the group gradually enhanced;
d) Loans up to Rs.150,000 per person extended to the individuals who are going for foreign employment
on the basis of the tripartite loan agreement between the bank, the person going for foreign
employment and the concerned Manpower Company that can produce assurance letter from the
employer companies of the employing nation confirming the employment and recovery of loan in
installment;
e) Loans extended up to Rs. 150,000/- per person with or without collateral to persons going for foreign
employment;
f) Foreign employment loan extended by any "A" class licensed bank in coordination with a bank
prescribed by Government of Nepal to workers going for foreign employment under the Youth Self-
employment and Employment Training Program of the Government of Nepal;
g) Loan not exceeding Rs. 300,000 per family extended by bank or financial institutions to per
individual/family eligible to receive deprived sector lending for sheep farming to produce wool
necessary for carpet or for maintaining handloom to weave carpet against acceptable collateral
security shall be calculated as the deprive sector lending.
h) Loan not exceeding Rs. 300,000 per family extended by banks or financial institutes to per family
eligible to receive the deprived sector lending for purchasing fertilizer or installation of cold storage
for seeds and collection, collective storage, products marketing, small irrigation, shallow tube wells.
i) Loans granted to hospitals by the licensed commercial banks ("A" class), development banks ("B"
class) and finance companies ("C" class) provided the hospital is established as non-profit company,
Loan amount does not exceed 5 percent of the bank‘s core capital, the hospital makes a provision to
provide at least 10 percent of its total bed capacity free of cost to the people belonging to deprived
sector.
j) Business loan up to NPR 1 Million to micro enterprises.
21.3.2 Indirect financing categorized as deprived sector lending
a) Wholesale loan extended against the institutional capability and institutional guarantee to the "D"
class licensed institutions, established for performing micro credit related works.
b) Wholesale loan extended to the Co-operative Societies established and in operation in rural area for
the purpose of extension of deprived sector loan.
c) Extension of wholesale loan to "D" class micro finance development bank established for the
purpose of providing wholesale credit to Small Farmer Cooperative Societies and institutions
conducting micro credit activities.
d) Loans not exceeding Rs. 150,000/- extended to the workers going for foreign employment by the
licensed financial institutions by borrowing funds from "A", ―B‖ and "C" class licensed institutions.

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e) The promoter share capital investment made by the licensed "A", ―B‖ and "C" class banks and
financial institutions in the class ―D‖ financial institutions shall also be calculated as indirect
deprived sector lending.
21.4 OTHER CATEGORIES INCLUDED AS DEPRIVED SECTOR LENDING
21.4.1 Low Cost Housing Loans
The loan not exceeding four hundred thousand rupees provided against secured collateral to a group or
individuals provided it is stated in the credit policy of the bank.
21.4.2 Micro-Credit
Fully secured micro-finance of up to Rs. 1 million granted to the intending individuals who are not
affiliated to any Group by"D" class micro-finance institutions.
21.4.3 Young and Small Entrepreneurs Self-Employment Fund
A class, B class and C class banks have to deposit a certain percentage of amount as advised by NRB, in the
fund created by Government of Nepal, Ministry of Finance. The amount so deposited in the fund shall be
deemed to be the loan extended to the Fund by the bank and financial institutions, and such fund shall be
considered as the deprived sector lending
21.5 PRESENT GUIDELINES REGARDING LENDING TO DEPRIVED SECTOR
21.5.1 Mandatory lending by different class of banks
The "A" class licensed institutions are required to lend at least 5% of their total outstanding loan and
advances (including bills purchased and discounted), "B" class licensed institutions are required to lend at
least 4.5 percent of their total credit (including the bills purchased and discounted) and class "C" licensed
institutions are required to lend at least 4 percent to deprived sector.
21.5.2 Lending by subsidiary companies
BFIs are now allowed to open "D" class financial institution as subsidiary company to provide credit to
deprived sector as subsidiary company only at designated geographical area with low financial access.
Those nine districts are Manag, Humla, Dolpa, Kalikot, Mugu, Jajarkot, Bajhang, Bajura and Darchula.
21.5.3 Ceiling on amount of loan to be granted by “D” class financial institutions
"D class financial institutions have to provide the loan of maximum 0.3 million to deprived and poor
people against group guarantee and up to Rs. 0.5 million against acceptable collateral for microenterprises
and 1 million for those enterprises operating in VDCs where presence of BFIs is nil.
21.6 PENAL CLAUSE
Nepalese commercial banks are required to disburse 5 percent of their total loan portfolio to the deprived
sector. As per Sec 81 of Nepal Rastra Bank Act, 2058 (2002)if any commercial bank or financial institution
does not lend as per the directives issued by NRB or the lending is less than prescribed amount, NRB may
recover as fine an amount equal to the amount that results when applying highest % interest rate the
concerned BFI is charging on loan to the amount of credit not advanced or advanced less than the
prescribed amount..
21.7 LET US SUM UP
Since the late 1950s Nepal‘s government and NRB have made many efforts to increase access to financial
services, especially for low-income households and small businesses. Steps taken include mandating banks,
both private and public, to direct a certain percentage of their loans to low-income households and small
businesses. Deprived sector lending includes small loans for microfinance, microenterprise, agriculture and
livestock, housing, foreign employment, hydropower, youth and small entrepreneur projects, and
community hospitals etc. Loans are extended for the operation of self-employment oriented micro-

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

enterprises for the up liftment of economic and social status of deprived sector up to the limit specified by
NRB is termed as "deprived sector lending".
Lending to Deprived Sector includes direct lending and indirect lending, Low Cost Housing Loans, fully
secured micro-finance. Contribution by BFIs to Young and Small Entrepreneurs Self-Employment Fund, is
considered as the deprived sector lending. In case of not meeting the mandatory requirement the concerned
Commercial Bank/s, monetary penalty is imposed by NRB.

UNIT 22
Page 163

22.1 SHG – DEFINITION

1st sentence of 3rd paragraph has been changed to -
The members volunteered to organise themselves into a groupto uplift the living standard through
mutual cooperation.

UNIT 23
Page 168-169
The numerical data have been updated in various sections as under -
23.1.1 Internet Banking

As on mid July 2017, there are 7,66,958 Internet banking users of commercial banks.
23.1.2 Mobile Banking
As on mid July 2017, there are 24,38,222 mobile banking customers of the Nepalese commercial banks.

23.1.3 Debit Card

There were 46,94,066 debit card users of the commercial banks throughout the country in mid July 2017.

23.1.4 Automated Teller Machines (ATMs)

As on mid July 2017, there are 1,874 ATMs installed by commercial banks throughout the country.

23.1.5 Credit Card

As on mid July 2017, there are 68,966 credit card customers in the Nepalese banking industry.

23.1.6 Prepaid Card

As on mid July 2017, there were 1,01,458 prepaid card customers.

23.1.7 Branchless Banking

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

As on mid July 2017, there are 1,27,004 branchless banking customers and 1008 branchless banking
centers throughout the country

23.2.2 The Procedure and Practices for Home Loans

Page 170
Eligibility Criteria:
The first line - "The criteria for…..is as follows" has been changed to
The so as criteria for availing home-loans from a bank, but not mandatory are as follows:
In option (e) "8 feet" has been changed "13 feet"
The portion under Quantum of loan has been re-written as -
"Normally banks grants 50% of fair market value of property or construction cost or renovation cost for
properties inside Kathmandu valley and 60% for properties located outside Kathmandu valley."

Page 171
23.3.2 Types of personal loans and other conditions
Eligibility:
In option b) "eight" has been changed to "13".
Eligible Amount:
The 2nd sentence has been changed to -
The loan amount is limited to 40 to 50 % of the fair market value of property offered as security depending
on its location.

UNIT 26
Page 186
26.4.2 Recent directives of NRB
The whole content has been replaced by -
Hither to banks were granting Trust receipt loans for a period up to 180 days. NRB has advised banks that
Trust receipt loan need to be paid off within a maximum period of 120 days. According to a recent directive
by the Nepal Rastra Bank (NRB), banks and financial institutions (BFIs) are not allowed to extend other
types of loans to businesses to clear TR loan if the same is not well addressed at the time of loan
sanctioning.

26.5 MARGIN STIPULATION WHILE LENDING

The whole content has been replaced by -

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

This loan/ overdraft is provided against the shares of the companies, which are listed in Nepal Stock
Exchange (NEPSE) and acceptable to the bank. Generally lending is at 50% margin on the market price of
securities (Subject to change as per NRB guidelines from time to time).The maximum period for which such
loan is extended is 12 months. It can be renewed subject to satisfactory repayment of interest and/or
principal.

UNIT 27
Page 190
27.2.2 Classification of Loans
(a) Option (i) has been deleted
(b) Last sentence deleted.

Page 191
(e) Last option No. (x) has been deleted.

Page 192

27.3 POSITION OF NON PERFORMING LOANS

The whole content under this has been revised as follows-

The total volume of non- performing loans of the commercial banks decreased by Rs.3.74 billion in the
fiscal year 2015/16 and reached Rs. 23.77 billion, which is 1.74 percent of total outstanding loan and
advances as at Mid July 2016.
NPL of private banks amounted to Rs. 15.32 billion whereas that of public banks was Rs. 8.45 billion
in 2015/16. The NPL ratio of public banks was 3.76 percent in Mid July 2016 while that of private
banks was 1.35 percent. The NPL of the 3 Public sector banks accounted 36 percent of total NPL of
commercial banks, rest of which was accounted to private sector Banks as of mid-July 2016. Detailed
figures are shown below.

NPL RATIO OF COMMERCIAL BANKS (MID JULY 2016)

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

NON-PERFORMING LOAN OF COMMERCIAL BANKS (MID JULY 2016)

(Source : Bank Supervision Report 2016 published by NRB)

)

27.4 PROVISIONING REQUIREMENTS

The whole content under this has been changed as follows-

In case of loans and bills purchase classified according to the directives, issued by NRB the following loan
loss provision shall be maintained based on the remaining amount of principal.
The Loan classification Minimum Provision for loan loss is required as under
(a) Pass 1 percent
(b) Watch list 5 percent
(c) Sub-standard 25 percent

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

(d) Doubtful 50 percent

(e) Loss loan/the loan extended to blacklisted persons, firms, company or corporate body 100 percent
However, in case of the credit issued by DICGC, it would be required to make provision of only 25 percent
of the provision referred to above.

UNIT 28

Page 197
28.2 POLICY FRAME WORK
2nd paragraph has been revised as follows -
Within this provision, formal financial institutions engaged to promote financial inclusion are commercial
banks (CBs), development banks (DBs), finance companies (FCs), microfinance development banks
(MDBs), financial intermediary NGOs (FI-NGOs) and financial cooperatives. As of mid July 2016, there
are 28 CBs, 67 DBs, 40 FCs, 42MDBs, 15 Saving & Credit Cooperatives Limited Banking Activities) and 28
NGOs (Financial Intermediaries) (Source- Bank Supervision Report 2016 published in April 2017)

Page 199
28.4 RECENT INITIATIVES OF GOVT. OF NEPAL AND NRB
The option No. 2 has been revised as -
2. Introducing branch expansion policy, 3 outside valley and I in Kathmandu Valley

UNIT 34

Page 284
34.3.3 Importance of Marketing for Banks in Nepal
The 4th paragraph has been revised as -
During two decades, Nepal witnessed tremendous increment in number of financial institutions. Nepalese
banking system has now a wide geographic reach and institutional diversification With just 3 commercial
banks and 2 development banks in 1980, As of mid-July 2017, the total number of banks and financial
institutions (BFIs) stood at 149 including 28 commercial banks (―A‖ Class), 40 development banks (―B‖
Class), 28 finance companies (―C‖ Class) and 53 microfinance institutions (―D‖ Class).(Source-Banking &
Financial Statistics as of mid July 2017)

UNIT 36
Page 323
36.7 BANK PRICING
The table has been changed as follows -

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REVISION FOR 3 RD EDITION: PRINCIPLES & PRACTICES OF BANKING

TABLE 36.4 Bank Charges for Some of the Services

Balance Confirmation Fee
Good for Payment
Cancellation of Good for Payment
Uncollected cheque book destruction charge
after 3 months of issuance
Withdrawal Slip
Special Clearing Cheque other than Nepal
Clearing House Ltd. (NCHL)
Electronic Cheque Clearing (NCHL)
Local Outstation Cheque (Collection)
Cash Management
Credit Information Bureau Charges
Listing / De-listing of Customers (cheque
bounced for amount above 10 Mio.)
Listing / De-listing of Customers (cheque
bounced for amount below 10 Mio.)
LC/Amendment advising charge
(Source-Standard Tariff of Charges (STC) 26 Shrawan ,2074 (10 August, 2017),Bank of Kathmandu
http://www.bok.com.np/uploads/stc/Approved ....
RS 1,000 for new accounts; Rs 500 for accounts older than
one year.
Rs 150 for additional copies
Free for Audit purpose (Once in a Fiscal Year)
RS 300 up to RS 1 mio.
RS 500 above RS 1 mio.
RS 100 for Corporate Clients
For FCY USD 5 or equivalent
RS250
RS350
RS 50
(to be deducted at the time of payment but incase has to be
issued because of Bank fault, not to be charged)
Inward : RS 700
Outward : RS 1,000
Nil for amount below NRS 200,000
NRS 30 per cheque for amount NRS 200,000 and above
NRS 30 per cheque for Foreign Currency cheques
RS 350.00 Flat
0.10%
Actual basis (Current Rs. 3000)
Actual basis (Current Rs. 2000)
Rs 3,500 flat

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