UNIT – 1

INTORDUCTION
Meaning and Concept of Bank and Financial Institution
A bank is an institution that accepts various types of deposits and then advances money in the
form of loans to people requiring it. In other words, banks collect the surplus funds from
savers who are widely scattered. The money so collected is channelized to the people who
need it.
A bank is an institution which deals with money and credit. It accepts deposit from the public
and makes the funds available to those who needs and helps in the remittance of money from
one place to another. In fact, a modern bank performs such a variety of functions that it is
difficult to give a precise and general definition of it.
A bank has following features:
a. It deals with money; it accepts money and lend to the people who need.
b. It also deals with credit; it has ability to create credit i.e. the ability to expand its
liabilities as a multiple of its reserves.
c. It is a commercial institution; it aims at earning profit.
d. It is a unique financial institution that creates demand deposit which serves as a
medium of exchange and as a result, the bank manages the payment system of
country.
According to Crowther “Bank collects money from those who have it to spare or who are
saving it out of their incomes and it lends this money to those who require it.”
According to Kinley “A bank is an establishment which makes to individuals such advances
of money as may be required and safely made and to which individual entrust money when
not required by them for use.”
According to R. S. Sayers, “Banks are institution whose debts usually referred to as bank
deposits are commonly accepted in final settlement of other people’s debts.”
According to British Law, “A banker is one who in the ordinary course of his business,
honours cheques drawn upon him by persons from and for when he receives money on
current accounts
Form the above definition it can be concluded that banks help in money growth and capital
formation. They are reservoirs of resources for economic growth and development of the
nation. They help in building the infrastructure, boosting the agriculture, setting up industries
and aid to industries capacity of the nation and boost the pace of economic growth.
History of Banking:
World Banking History
The history of banking refers to the development of banks and banking through history with
banking defined by contemporary sources as an organization which provides facilities for
acceptance of deposit and provision of loans.
The history begins with the first prototype banks of merchants of the ancient world, which
made grain loans to farmers and traders who carries goods between cities. This began around
2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire,
lender based in temples made loans and added two important innovations; they accepted
deposit and changed money. Archaeology from this period in ancient China and India also
shows evidence of money lending activity.
Many histories position the crucial historical development of a banking system to Medieval
and Renaissance Italy and particularly the affluent cities of Florence, Venice and Genoa.
The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing
branches in many other parts of Europe. The most famous Italian bank was the Medici bank,
established by Giovanni Medici in 1397. The oldest bank still in existence is Banca Monte
dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously
since 1472.
The development of banking spread from northern Italy throughout the Holy Roman Empire,
and in the 15th and 16th century to northern Europe. This was followed by a number of
important innovations that took place in Amsterdam during the Dutch Republic in the 17th
century and in London in the 18th century. During the 20th century, developments in
telecommunications and computing caused major changes to banks' operations and let banks
dramatically increase in size and geographic spread. The financial crisis of 2007–2008 caused
many bank failures, including some of the world's largest banks, and provoked much debate
about bank regulation.

Nepalese Banking History

Banking service is the oldest service industry in Nepal. It has gone through the various stages
of evolution and development since the Vedic times (200 to 1400 B.C.) Though the modern
banking institution has a very recent origin in Nepal, some crude bank operations were in
practice even in the ancient time In the Nepalese Chronicle, it was recorded that the new era
known as Nepal Sambat was introduced by Shankhadhar, a sudra merchant of Kantipur in
879 or 880 A.D; after having paid all the outstanding debts in the country. This shows the
basis of money lending practice in ancient Nepal. Towards the end of 8th century, Gunkam
Dev had borrowed money to rebuild the Kathmandu Valley. In 11th century, during Malla
regime there was an evidence of professional money lenders and bankers. It is further
believed that money-lending business, particularly for financing the foreign trade with Tibet,
became quite popular during regime of Mallas. However, in the absence of any regulatory
measures, the unscrupulous money lenders were known to have charged exorbitant rates of
interest and other extra dues on loan advanced.
These inconveniences led the Prime Minister Ranodeep (1877-1885) to establish Tejarath
Addha in Kathmandu, which was a government financial institution supplying credit to the
people at 5% rate of interest against security of gold, silver and ornaments. The government
servants were also entitled to take loans from Tejarath, repayable from their salary at the
source. During the time of Chandra Shamsher (1901-1929), credit facilities of Tejarath were
extended to some other parts of the country by opening its branches. It is believed that the so-
called well-to-do persons used to take loans from private money lenders even at a higher rate
of interest than those from the government institution, for they were not prepared to disclose
in public anything that was likely to affect their prestige. When they were approached by this
type of clients, the professional money lenders used to raise loans in their own names from
Tejarath at 5% rate of interest against gold and ornaments, which were not their own but
brought to them by their clients as security for the loans to be financed from the funds raised
from Tejarath itself. Thus, without any resources of their own and without any risks on their
own part, the money lenders could manage very well to exploit their special type of clients
just playing the role of middleman between their clients and the government institution. To
control spurious rates of interest and also to curb unfair practice on the part of the
unscrupulous money lenders, legislative measures were also taken.
Later, with the growing necessity of the commercial banks in the Nepal, Nepal Bank Limited,
the first commercial bank of Nepal, came into existence in 1937 A.D (1994 BS) replacing the
older system of banking. In the present scenario different types of banks are being practiced
in Nepal, but among them commercial banks play a vital role in the economic development of
the country.
As mentioned above, with the motive to develop the trade and industry in the country
commercial bank called Nepal Bank Limited was established in 1937 A.D. It was established
under the Nepal Bank Act of 1936 A.D. and the late King Tribhuvan Bir Bikram Shah Dev
inaugurated this bank. At that time the authorized capital of Nepal Bank Limited (NBL) was
Rs. 10 millions, divided into 100000 shares of Rs. 100 each. Nepal Bank Limited had a
responsibility of attracting people towards banking sector from predominant sahu-mahajan's
transaction and introducing other banking services as well. Being a commercial bank, it was
natural that Nepal Bank Limited paid more attention to profit generating business. But it is
the duty of the government to look into the neglected sectors. Therefore Nepal Bank Limited
was established with 51% ownership of His Majesty Government (HMG) (Now Nepal
Government) and 49% of the equity participation from private sector. With the development
of banking sector and to help the government, formulate monetary policies, Nepal Rastra
Bank was set up in 1956 A.D. (14th Baisakh 2013 B.S), the central bank of the country. Since
then it has contributed to the growth of financial sector.
The growth and development of the country is possible only when competitive banking
services reach each and every corner of the country. However, as the central bank, Nepal
Rastra Bank had its own limitations and as a commercial bank it was not logical for Nepal
Bank Limited to go to unprofitable sectors. So, to catch up with these problems, the
government established Rastriya Banijaya Bank in 2022 B.S. (1965 A.D), under Banijya
Bank Act 1965 A.D. as a fully state owned commercial bank. Then the establishment of
Nepal Industrial Development Corporation, Employee Provided Fund, Agriculture
Development Bank etc, followed the formation of financial institutions.
With the aim to provide quality-banking service, enhance the efficiency and healthy
competition, foreign investment and new technology in banking sector was introduced. Nepal
Arab Bank, the first joint venture bank of Nepal was established in 1984 A.D. (2041 B.S).
The bank was the outcome of joint venture with Dubai Bank Limited of United Arab
Emirates. The footstep of this bank was followed by Nepal Indosuez Bank a joint venture
bank with a Bank of Paris in 1986 A.D. (2042 Chaitra 16) and later other joint venture banks
are established in Nepal. These commercial banks have played a very significant role in
creating banking habit among the people, widening area, and business communities and the
government in various ways.
Evolution of Banking Law in Nepal
Tejarath Addaha:
 It was established in 1933 BS during the reign of Ranodip Singh.
 Supply credit to the people at 5% rate of interest against security of gold, silver and
ornaments.
 First step in institutional development of banking system.
Taksar and Muluki Khana:
 Established in 1988 BS.
 Coin issued; 1, 5, 10 and 100 rupee notes were brought into practice from Aswin 1st
2002 from institutional body of Nepal Government – SadarMulukiKhana.
 Nepal Bank Act 1993 BS and establishment of Nepal Bank Limited:
 Modern banking system was started after commencement of Nepal Bank Act 1993.
Establishment of Nepal Bank Limited
 It is the first bank of Nepal that accepts deposit and provides credit so it is considered
most important in history of Nepalese Banking System.
 At the beginning some of the authorities were assigned that should be performed by
the Central Bank.
 After the commencement of Nepal Rastra Bank Act 2012, the authorities assigned
were drawn.
 Dismissal of Nepal Bank Act after the introduction of Banijya Bank Act 2021 and
hence Nepal Bank limited operated under the same act.
Nepal Rastra Bank Act 2012:
 International standard of banking system and formats of financial statements made to
realize the need of central bank in the country.
 Establishment of Nepal Rastra Bank under Nepal Rastra Bank Act 2012.
 Nepal Rastra Bank was initiated as a supervisory and a regulatory body of the other
banks.
Besides this:
 Issue of notes and coin.
 Financial advisor of Government of Nepal.
 Capital stimulation and public debt management.
 Foreign exchange regulation.
 Determination of interest rate.
Milestone of modern banking – as the sole authorities and responsibilities of supervision and
control of banking system were handed over to the Nepal Rastra Bank operating under Nepal
Rastra Bank Act 2012.
Agriculture Development Act 2024:
 Agriculture Development bank was established in 2024 Magh 7 in collaboration with
the finance companies operating then, under Agriculture Development Act 2024.
 Optimization of agriculture sector of the country and to work for the economic
welfare of people by providing them with agricultural loans at minimal rate of
interest.
 Permission from the Rastra bank to provide the banking service for the people of the
country.
 Operated under Banijya Bank Act 2031.

Banijya Bank Act, 2031:

 Establishment of Ratriya Banijya Bank Limited in 2022 under Banijya Bank Act
2021.
 Nepal Bank limited was established under Banijya Bank Act 2020.
 Both the acts were dismissed and the introduction of Banijya Bank Act 2031.
Objectives of Banijya Bank Act 2031:
 Economic upliftment of the people. Agricultural, industrial and commercial sector
loans simplified.
 Providing banking service to the country and the people.
 Deposits with and without interest.
 Opening of fixed, savings and current deposits.
 Providing loan against collateral.
 Investments.
 Provide hire-purchase credit.
  Consortium financing.
 Transaction of foreign currency.
 Issuing, accepting, paying, discounting or purchasing and selling letters of credit, bills
of exchange, promissory notes, cheques, traveller’s cheques, draft or other financial
instruments.
Finance company Act, 2042:
 Commencement of Financial institution Act 2042, for the unification of widely
scattered capital and to invest them.
 58 finance companies are established under this act to comply with the objectives
thereof.
Nepal industrial Development Act, 2046
 Industrial Development Corporation was established under Industrial Development
Corporation Act 2016.
 The corporation provides loans and technical advice to the institutions that are
actively working for the industrial development of the country.
Development Bank Act, 2052:
 Development, expansion and productivity improvement of agriculture, industrial,
business and other prospects and providing them with required equipment and
technologies.
 5 Gramin Bikash Bank and 37 development banks are established under this act.
Nepal Rastra Bank Act, 2058:
 Nepal Rastra Bank Act, 2012 was dismissed and Nepal Rastra Bank Act 2058 was
enacted from 2058 Magh 17.
 Reform of the NRB Act is already done for the reconstruction and development of
problematic banks.
Bank and Financial Institution Act 2063:
 Different Laws and regulations existed for the establishment, operation, regulation
and inspection of the banks and financial institutions during the time.
 Banks and financial institutions mainly accepted deposits and provided loans and act
as a financial mediator and hence the need for the unified directive for the control and
supervision of the banks and financial institution was realized.
 Same types of financial institutions were being operated under various acts which
created a situation of rough banking phenomena. Thus to Overcome the situation,
BAFIA 2063 was enacted.
Features of BAFIA 2063
 Unified law
 Autonomous banking system
 Systematic law provision and process
 Integrated concept in relation to company administration
  Regulation based on control and balance
 Clear provision in relation to capital
 Re – registration of present bank and financial institution
 Clear provision in relation to joint investment and branch banking
 Provision of accountability
 Appropriate accounting system
 Clear provision in relation to merger and acquisition
 Clear provision in relation to account suspension
 Clear provision in relation to punishment

Role of banking institutions for socio-economic development

A developed banking system is necessary pre – condition for economic development in a
modern economy. Structural as well as functional reforms in the banking system are needed
to enable the bank’s performance as developmental role in underdeveloped countries.
Bank and financial institution play an important role in the development of a country. The
economic progress in the present days, developing economies largely depends upon the
growth of sound banking system in these economies. Bank and financial institutions
contribute to a country’s economic development in the following ways.
a. Capital formation: Capital formation is the most important determinant of economic
development and BFIs promote capital formation. Generalization of saving,
mobilization of saving in productive uses are the stages, in which BFIs plays crucial
role.
b. Encouragement of entrepreneurial innovation: In underdeveloped countries,
entrepreneurs generally hesitate to invest in new ventures and undertake innovations
largely due to lack of funds. Facilities of the bank loans enable the entrepreneurs to
step up their investment and innovation activities, adopt new methods of production
and increase productive capacity of the economy.
c. Monetization of economy: Monetization of the economy is essential for accelerating
trade and economic activity. Banks, which are creditors and distributors of money,
allow money to play an active role in the economy.
d. Influencing economic activity: Bank can directly influence economic activity and
hence, the pace of economic development through its influence on a) the rate of
interest b) availability of credit
e. Implementation of monetary policy: Economic development needs an appropriate
monetary policy. But, a well-developed banking system is a necessary pre-condition
for the effective implementation of the monetary policy. Control and regulation of
credit by the monetary authority is not possible without the active co-operation of
banking system in the country.
f. Promotion of trade and industry: Economic progress in the industrially advanced
countries in the last 200 years or so is mainly due to expansion in trade and
industrialization which could not have been made possible without the development
of banking system.
g. Encouragement of right type of industries: By granting loans, the banks can provide
financial resources to the right type of industries to secure necessary materials,
resources and other inputs.
h. Regional development: Bank can also play an important role in achieving balanced
development in different regions of the economy. They can transfer surplus capital
from developed regions to less developed regions where it is scare and most needed.
i. Development of agricultural and other neglected sector: Underdeveloped economics
are primarily agricultural economies and majority of the population in these
economics live in rural areas. So far banks in underdeveloped countries have been
playing more attention to trade and commerce and have almost neglected agriculture
and industries. The necessary structural and functional reforms in the banking system
of the underdeveloped countries should be made in order to encourage the banks to
play development as role in these economies.