A Report on Banking Sector

SUBMITTED BY:

Passang Bhote

Pranish Pradhan

Tshering Lopsang Gurung

Prakhyat Thapa

Nishant Bista

Addit Thapa

SUBMITTED TO:

Rahish Lal Shrestha

Ace Institute of Management

Pokhara University

SUBMITTED ON:

18th March, 2020

 Acknowledgement

we would like to express our deepest appreciation to all those who provided us the possibility to
complete this report. A special gratitude we give to our instructor Mr. “Rahish Lal shrestha”
whose contribution in stimulating suggestions and encouragement, specially in writing this
report. Special thanks goes to our colleagues in completing this report and helped us out with
their abilities and finally we would like to thank Ace Institute of Management whose direct and
indirect support was considered most in submitting this report.
Introduction:
The banking sector is the lifeline of any modern economy. It is one of the important
financial pillars of the financial sector, which plays a vital role in the functioning of an economy.
It is very important for economic development of a country that its financing requirements of
trade, industry and agriculture are met with higher degree of commitment and responsibility.
Thus, the development of a country is integrally linked with the development of banking. In a
modern economy, banks are to be considered not as dealers in money but as the leaders of
development. They play an important role in the mobilization of deposits and disbursement of
credit to various sectors of the economy. The banking system reflects the economic health of the
country. The strength of an economy depends on the strength and efficiency of the financial
system, which in turn depends on a sound and solvent banking system. A sound banking system
efficiently mobilized savings in productive sectors and a solvent banking system ensures that the
bank is capable of meeting its obligation to the depositors.

The history of banking in Nepal dates back to the year 1937 AD with the establishment
of Nepal Bank Limited as the first commercial bank in Nepal. It was established as a semi-
government bank with METALLIC COINS worth NRs 10 million as the authorized capital.
Banknotes in Nepal weren’t introduced up until the mid-1940s. It was in the year 1945 that the
earliest banknotes were issued by the treasury “Sadar Muluki Khana”. These notes were signed
by a “Khajanchi”, the head of the treasury who also was a high Hindu Priest.
Later in the year 1955, Nepal Rastra Bank Act was formulated for a better banking
system and Nepal Rastra Bank was established in 1956 as the Central Bank of
Nepal accordingly. After this date, the banknotes were issued by the Central Bank with the
signatures of the governors of the institution. Till the 1980s, the banking sector was wholly
owned by the government, with Agriculture Development Bank, Rastriya Banijya Bank,
NBL and NRB being the pillars of financial institution in Nepal. 1984 saw the start of the private
banking industry with the establishment of Nabil Bank and the introduction of foreign banks
such as the Nepal Arab Bank, Nepal Indosuez Bank and Nepal Grindlays. The banking sector in
Nepal has faced many hurdles and hindrances. It has undergone various political conflicts and
instability. But today, it stands more liberalized and modernized. There are various types of
banks working in the modern banking system in Nepal. As per the list issued by NRB as of Mid-
June 2018, the modern banking sector includes 28 Commercial Banks, 33 Development Banks,
25 Finance Companies, and 63 Micro Credit Development Banks.

Cash Machines
The growth in the banking sector has drastically changed the paying habits of people. It
wasn’t long ago when people only dealt with hard cash. Queuing in banks to withdraw the
smallest amount of money also wasn’t unusual. But today, more and more Nepali people find it
convenient to carry plastic money in their wallets instead of hard cash.
If we look back into banking history of Nepal, the first credit card in Nepal was
introduced by Nabil Bank in 1990, and the first ATM was introduced by the Himalayan Bank in
1995. However, it couldn’t take a swift leap into people’s behavior. Although ATM was
introduced, it wasn’t in an adequate amount at the time. But now, there are more than 9 ATMs
per one thousand adults in Nepal, belonging to different banks in various regions of the country.
And according to the Central Bank, there were 68,19,602 debit cards issued as of December
2019.
Furthermore, vendors have started using Electronic funds transfer at point of sale (POS)
machine, enabling customers to electronically transfer funds. And Nepali people definitely have
developed a culture of using cash machines without a moment’s thought.
Mobile and Internet Banking in Nepal
The history of banking in Nepal has taken a swift jump with the implementation
of mobile banking and internet banking. The technological evolution has further enabled people
to better utilize the banking services. In case of Nepal, Kumari Bank was the initiator of internet
banking. It started its e-banking services in 2002. And soon was accompanied by Laxmi
Bank with its mobile (SMS) banking in 2004.
The easy accessibility of internet has greatly fostered e-banking. Hard cash was replaced
by banks issued cheque. But in recent history, credit/debit cards, e-banking, and mobile banking
have come to the emergence and slowly has been replacing the hassle of carrying cash and
cheque at all. Picturing the development of mobile banking, internet banking and digital
payments in Nepal, NRB has issued revised directive on payment systems in 2019.
Although banks played a major role in the emergence of mobile transaction, it was
Fonepay, a service offered by F1 Soft International which brought a revolution in the early
2000s. Not only did it provide SMS banking but also enabled people to receive remittance
through mobile phones. Another company that enabled banks to provide mobile banking system
was HelloPaisa. It was founded in 2009 to help bank clients in paying bills, sending/receiving
money within Nepal, receiving money from abroad, and purchasing airtime for their mobile
phones or making merchant payments.
With the global business trend and need of payment gateway for the growth of digital
commerce, F1 Soft International introduced eSewa which brought a new and innovative concept
in Nepali financial market. With eSewa customers could pay their bills online regardless of their
choice of banks. It became a quick hit as people would rather make an online account and pay
their bills than standing in a queue for hours to pay their electricity or phone bills. Currently,
eSewa has partnered with most of the commercial banks in the country and partnered with
various vendors which accept payment through eSewa.
In terms of digital wallet services, companies such as Khalti are not much behind in
revolutionizing the financial sector. People can recharge mobile phones, pay electricity and water
(Khanepani) bills, pay DTH and ISP bills, book movie tickets and flight tickets, book hotels
online and more. Along with making online payments, Khalti users are also provided with
various offers, bonuses and cashback on transactions.
Accessing banking services in this way has not only become convenient but also essential
for a number of reasons. Not only is it more convenient, but being able to bank on the move
helps people to maintain better control of their finances. This makes sense when people consider
the benefits of being able to call up their financial balance as they pay up their bills.

Types of Banking In nepal:

 Central bank
 Commercial bank
 Industrial bank
 Agricultural bank
 Foreign Exchange bank
 Indigenous bank
 Rural bank
 Co-operative bank
PEST ANALYSIS

1. Political/Legal Factor:
Government and NRB policies affect the banking sector. Sometimes looking into
the political advantage of a particular party, the Government declares some measures to
their benefits like waiver of short-term agricultural loans, to attract the farmer’s votes. By
doing so the profits of the bank get affected. Various banks in the cooperative sector are
open and run by the politicians. They exploit these banks for their benefits. Sometimes
the government appoints various chairmen of the banks. Various policies are framed by
the NRB looking at the present situation of the country for better control over the banks.
The overall restrictions limitations, and boundaries are taken into account in the banking
system. This helps to support the new investment which will be anticipated from
government. It is best to recognize the patterns that how stable and shape the political
enviroment I and what type of government policies will help to impace the laws. These
laws then regulate in the banking industry and are implemented for the apparent taxed. It
is advisable to check that the government is involved in trading agreement or not because
it will be able to manage the bankinbg market.
Following are the political and legal factors which affects in making a table banking
system.

 Government stability and its type

 Laws, corruption and level of bureaucracy
 The role of press and social media
 Regulated and de-regulated trends
 Tax policies
 Employment legislation

2. Economic Factor:
Banking is as old as authentic history and the modern commercial banking are
traceable to ancient times. In Nepal, banking has existed in one form or the other from
time to time. The present era in banking may be taken to have commenced with
 establishment of bank of Bengal in 1809 under the government charter and with
government participation in share capital. Allahabad bank was started in the year 1865
and Punjab national bank in 1895, and thus, others followed Every year RBI declares its
6 monthly policy and accordingly the various measures and rates are implemented which
has an impact on the banking sector. Also the Union budget affects the banking sector to
boost the economy by giving certain concessions or facilities. If in the Budget savings are
encouraged, then more deposits will be attracted towards the banks and in turn they can
lend more money to the agricultural sector and industrial sector, therefore,booming the
economy If the FDI limits are relaxed, then more FDI are brought in India through
banking channels.
Following are the important factors which affects the economy in banking industry.

 A proper business cycle

 The current economic growth
 Costs of labor
 Globalization
 Unemployment rate
 Interest rates and inflation
 Change in economic enviroment
 Level of income distribution

3. Socio-Cultural Factor:
Before nationalization of the banks, their control was in the hands of the private
parties and only big business houses and the effluent sections of the society were getting
benefits of banking in India. In 1969 government nationalized 14 banks. To adopt the
social development in the banking sector it was necessary for speedy economic progress,
consistent with social justice, in democratic political system, which is free from
domination of law, and in which opportunities are open to all. Accordingly, keeping in
mind both the national and social objectives,bankers were given direction to help
economically weaker section of the society and also provide need-based finance to all the
sectors of the economy with flexible and liberal attitude. Now the banks provide various
 types of loans to farmers, working women, professionals, and traders.They also provide
education loan to the students and housing loans, consumer loans, etc.Banks having big
clients or big companies have to provide services like personalized banking to their
clients because these customers do not believe in running about and waiting in queues for
getting their work done. The bankers also have to provide these customers with special
provisions and at times with benefits like food and parties. But the banks do not mind
incurring these costs because of the kind of business these clients bring for the bank.
Banks have changed the culture of human life in India and have made life much easier for
the people.
Following are the factors that affcets the socio-Cultural of the banking sectors.

 The growth of population

 Health consciousness
 Attitudes and lifestyle changes
 Health, social mobility, population attutudes
 Changes in socio-cultural changes

4. Technological Factor:
Technology environment plays a very important role in bank’s internal
control.The latest developments in technology like computer and telecommunication
have promoted the bankers to change the concept of branch banking to anywhere
banking. The use of ATM and Internet banking has allowed ‘anytime, anywhere banking’
facilities. Automatic voice recorders now answer simple queries, currency accounting
machines makes the job easier and self-service counters are now encouraged. Credit card
facility has encouraged an era of cashless society. Today MasterCard and Visa card are
the two most popular cards used world over. The banks have now started issuing
smartcards or debit cards to be used for making payments. These are also called as
electronic purse. Some of the banks have also started home banking through
telecommunication facilities and computer technology by using terminals installed at
customers home and they can make the balance inquiry, get the statement of accounts,
give instructions for fund transfers, etc. Through ECS we can receive the dividends and
interest directly to our account avoiding the delay or chance of loosing the post. Today
banks are also using SMS and Internet as major tool of promotions and giving great
utility to its customers. For example SMS functions through simple text messages sent
from your mobile. The messages are then recognized by the bank to provide you with the
required information. All these technological changes have forced the bankers adopt
customer-based approach instead of product-based approach.
Following are the important factors affecting the technology of the banking sectors.

 Technological transfer and its impace

 Emerging technologies
 Internet, remote working and communication costs
 Rate technological change
 MAJOR RECOMMENDATION TO BANKING SECTORS:

In Nepal, banks are playing a crucial role in socio-economic progress of the country. The
banking sector is dominant in Nepal as it accounts for more than half the assets of the financial
sector. Nepal banks have been going through a fascinating phase through rapid changes brought
about by financial sector reforms, which are being implemented in a phased manner.

Standardisation and Security:

i. There should be an appropriate institutional arrangement for key management and

authentication by way of a certification agency. RBI may consider appointing IDRBT as the
certification agency for security management.

ii. Banks should adopt widely used standard of cryptography procedures to prevent data tamper
during transmission.

iii. The technology should be allowed to evolve into standard-based solutions for multi-vendor
heterogeneous environment working co-operatively and collectively for EFTPOS, including the
debit, credit and smart cards based operations.

Issues Relating to Human Resource Development:

Education of staff on IT should be given due importance. The training establishments of

the banks should be strengthened with adequate personnel and other infrastructure facilities, to
impart necessary IT training to all levels о staff.

Make Executives Accountable:

Accountability is answerability, blameworthiness, liability, and the expectation of

account-giving. When there are certain changes in the banking sectors the senior bank executives
must take responsiblity for failure in their devision. It is beacause there are more carelessness
happening in the banking sectors and no one accountable for that purpose. If the senior
executives are accountable then the banking sector will be much more effective and reliable.
Make it Easier for New Banking Entrants:

It is very difficult to enter into a banking industry as it requires a tough governtment

policies and a huge amount of capital. According to the policies of Nepal. To enter into a
banking sector one should have to cross different level. Such as opening a banks in the rural
areas and then extending into cities, requires huge amount of budget as a gurantee. Which should
be made easir and should have a competition in the market so the general public can get the best
rates and facilities from the commercial and other types of banks.

Higher capital adequacy requirements for bank:

The NRB should implement the higher capital adequacy for banks inorder to protect the
customers and banks from the risk. It is not sure that all the banks goes on profit so if the banks
goes on loss then the NRB should pay back the amount of the public from that amount. This
higher capital adequacy also reduces the number of banks and maintain the quality of banks and
its sustainability.