Banking Management

An Overview of Banks and Their Services

By
Arpan Paudel 1
An Overview of Banks and Their
Services

The purpose of this chapter is to learn about the many roles

banks play in the economy today and see how recent trends in
banking, including increased completion, technological
changes, consolidation, and globalization, can affect a bank
managers’ decision making.
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 Concentration

Unethical Practices

Surplus Market
Depositor’s Interest
Deposit: NPR 100
protection

Fraud/Malpractices

Market Expansion
Conceptual Framework

Deposit

Inadequate Resources
BFIs

Operational Lapses
Risks
Less Liquidity : NPR 10
Loanable Fund: NPR 90

Interest Rates
: NPR 100

Regulation
System/Process Failure

Inadequate Policies

Unfair Competition
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Competencies

Diversification

National Agendas
Loanable Fund: NPR 90

Reputation
Deficit Market

Other
INTRODUCTION
 Most heavily regulated business
 Changing as a place to find a job rather traditionally
it was.
 Operating costs are more likely fixed costs
 Automated service world
 Wave of consolidation
 Industry in change
 Something in banking that never change—service
 Relationship business
 Unlike other jobs requires both technical & people
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skill
Banks and Financial Institutions
 It is the intermediary between the deficit and surplus
of financial resources.
 Intermediary between who lend and who borrow.
 Plays an important role in the economic development
of the country.
 Leading buyers of govt. debt instruments
 Financial system contains two components:
- Depository financial institutions
- Non-depository financial institutions

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Traditional Services Offered By Banks
 Exchange of Currency
 Commercial Notes and Loans
 Offering Savings Deposits
 Safekeeping of Valuables
 Supporting Government Activities with
Credit
 Checking Accounts
 Trust Services

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 Recent Services of Banks
 Consumer Loans
 Financial Advice
 Cash Management
 Equipment Leasing
 Venture Capital Loans
 Selling Insurance Products
 Security Underwriting and Brokerage
Services
 Mutual Funds and Annuities
 Merchant Banking Services 7
Competing Banking

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The Roles of Commercial Banks

 Intermediation Role
 Payment Role
 Guarantor Role
 Risk Management Role
 Savings/Investment Advisor Role
 Safekeeping/Certification of Value Role
 Agency Role
 Policy Role
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Trends Affecting All Banks

 Competition
 Deregulation
 Rising Funds Costs
 Increased Interest Rate Sensitivity
 Technology
 Service Proliferation
 Consolidation and Geographic Expansion
 Increased Risk of Failure
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Risk and Regulations
 These institutions inherent a large amount of risks,
broadly categorized into two segments:
1. On-Balance Sheet or Portfolio Risks
2. Off-Balance Sheet Risks
• Such risks in excessive form had led many Banks to go
bankrupt in a number of countries.

 Banks are mostly regulated in two ways:

1. Off-Site Supervision
2. On-Site Supervision

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Player’s Soundness
 The word CAMELS can be used to judge the soundness
of a Bank.

 It stands for:
C : Capital
A : Assets Quality
M : Management Quality
E : Earnings
L : Liquidity
S : Sensitivity to Market Risks

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History of Banking
Ancient time
-Money changers in the temple of Jerusalem. *
-Temple of Delphi and Olympia in Greece
- depositories of peoples fund
- Money lending transactions
-Rome – Greek Pattern (Roman Empire Justinian in
565 AD)
Middle Age
• Revival of trade & commerce
• Jews dominate Christians
• In about 13th Century, Christians also took to
the lucrative Business of money lending.
Bank of Venice, founded in 1157 was the first
public Banking Institutions 13
 - Bank of Barcelona - 1401
 - Bank of Genoa - 1407
 (Operated until the end of the 18th century)
 Lombards migrated to England and other parts of
Europe from Italy.
 Number of Private Banking houses in Europe and slowly
it spreads throughout the world.
 - Bank of Amsterdam set up in 1609 was very
popular then.
 - Bank of England was established in 1694.
 In United Kingdom:
 The growth of banks accelerated only after the
introduction of Banking Act-1833.
 The Bank of Hindustan established in 1770 is regarded
as the first Bank in India. 14
Development of Banking Industry in Nepal
 In the country the development of banking is
relatively recent.
 Shankhardhar Shakhwa, a Sudra merchant of Kantipur
in 879 A.D. paid all the outstanding debts in the
country.
 Towards the end of 8th century, Gunakam Dev had
borrowed money to rebuild the Kathmandu valley.
 In 11th century, during Malla regime there was an
evidence of professional moneylenders and bankers.
In the absence of any regulatory measures, the
unscrupulous moneylenders were known to have charged
exorbitant rates of interest and other extra dues on
loans advanced. 15
 The establishment of the ‘Tejarath Adda’ during the year 1877 AD
(during the period of Rana Prime Minister Ranodeep Singh in 1933
B.S.) was fully subscribed by the government of Kathmandu valley,
which played a vital role in the banking system.
 Government started trade with India and Tibet. The need of
banking institutions was realized. This was even strongly
supported by the situation caused during 1934 AD's earthquake
where there was a need of finance for the reconstruction of
works.
 Reviewing these situations, the “Udyog Parisad” (Industrial
Development Board) was constituted in 1936 AD.
 One year after it’s formulation, it formulated the “Company Act”
and Nepal Bank Act” in 1937 AD.
 The establishment of Nepal Bank Ltd, came into existence as the
first commercial bank of Nepal, inaugurated by His Majesty King
Tribhuwan on November 1937.
 49% ownership of public and 51% ownership of HMG/Nepal in 1994
B.S. 16
 At that time, Nepalese economy was characterized by
the prevalence of dual currency system.
 There was an immediate need of central bank. As a
result, Nepal Rastra Bank was established as a central
bank of the country in 2013 B.S.
 Then in 2016 B.S. the government established Nepal
Industrial Development Corporation (NIDC).
 Rastriya Banijaya Bank (RBB) was set up in 2022 BS.

 The financial shapes of the two old banks have a

tremendous impact on the economy.
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 Agricultural Development Bank of Nepal (ADB/N) was established in
the government sector in 2024 BS.

 The Security Exchange Center (SEC) was set up in 2032 B.S. in order to
provide the liquidity to government securities.

 At the same time, Employee's Provident Fund Corporation, Nepal

Insurance Corporation and other institutions were established.

 Financial liberalization took place in Nepal in the mid 1980’s.

 The inception of Nepal Arab Bank Limited (renamed as NABIL Bank

Limited since January 01, 2002) in B.S. 2041-03-29 (12 July 1984) as
the first joint venture Bank (with Dubai Bank Ltd.) proved to be a
milestone in the history of banking.

 Because of liberal economic policy adopted by the successive

governments, other many commercial Banks were18 established and
started their operations.
 The scope for opening finance companies emerged. In 2042 B.S.
, Finance company Act was passed.

 First company Nepal Housing and Development Finance

Company came in Shrawan, 2049.

 The second came in the Poush of the same year, Nepal Finance
and Saving Company.

 At present, we got 27 commercial banks, 19 Development

Banks, 20 finance companies and 76 Micro Credit Development
banks, working under the Banking and Financial Institution Act
2063.

 Reforms were introduced with the changes in Commercial Bank

Act 2031 B.S. and its amendment in 2041 BS.

 The immediate impact of policy was the number of joint

venture commercial banks and private sector commercial banks
and financial institutions that came into operation.
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 Nepal has got acts guiding the working of different institutions
falling in the financial sector. But, there are many flaws in these
laws giving opportunity for manipulation.

 The banking sectors remained still for a long period of time but
as the time passed on many developments occurred. In the
present scenario, Nepalese Banking System is evolved itself as a
powerful instrument of planning and economic growth of all the
developed and underdeveloped sectors. The scope and scale of
banking too have undergone substantial change in response to
the saving and credit needs of people.

 *Merger and acquisitions taking place to get more strength on

capital base as well as on operation efficiency.

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Banking Players In Nepal
 As of Magh End, 2078

 Organization Number
 Central Bank 1
 Commercial Banks 27
 Development Banks 17
 Finance Companies 17
 Micro-Credit Development Banks 66
 Infrastructure Development Bank 1
 Other Institutions (NRB licensed) 12
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Organization Chart for a Typical Bank
 Most banks in the U.S. are very small by world standards though
American banking industry also contains some other largest
banking organizations on the planet eg. JP Morgan Chase, Bank
of America, Wells Fargo, Citicorp

 The influence of bank size upon internal organization can be

seen on typical organizational structure

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 Common Classifications of U.S. Banks 1999
8774 Banks
Deposits of Nonmember Banks 33%

Deposits of Federal Reserve Member Banks 67%

Deposits of National Banks 56%

Deposits of State Banks 44%

Insured Nonmember Banks 61%

Series2
Insured Federal Reserve Member Banks 39% Series1

Insured w ith State Charters 72%

Insured w ith National Charters 28%

Uninsured Banks 2%

FDIC Insured Banks 98%

0 0.2 0.4 0.6 0.8 1 1.2

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Number of U.S. Banks

4.60%

Largest U.S. Banks - > 1 Billion in Assets

35.30%
Medium U.S. Banks - $100 Mill. To 1 Bill. In
Assets
Smallest U.S. Banks - < $100 million in Assets
60.10%

In 2018, number of banks = 4746

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Assets Held by U.S. Banks

4.20%

13.20%

Assets Held By Large Banks - > $1 Billion

Assets Held By Medium Banks - $100 Mill. To

$1 Bill.
Assets Held By Small Banks - < $100 Million

82.60%

*It is estimated that banking assets were equal to 56 percent of the U.S.
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economy in 2018.
Organizational Chart of a Typical Bank
The organizational chart for a small bank

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Organizational Chart of a Typical Bank
Fig. 1: The organizational chart for a large bank

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Organizational Chart of a Typical Bank
The organizational chart for Nepal Bank Ltd.

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Differences between large and small Bank’s
Organizational Charts

 Service operation
 Coordination
 Centralization Vs. Decentralization
 Simplicity Vs. Complexity
 Hierarchy maintenance
 Economies of scale
• Largest banks posses some advantages over small and medium
size banks because they serve many different markets with
many different services
• Raise financial capital relatively at low cost
• More power to resist the unanticipated shocks
(Law of large numbers) 29
Conclusions Regarding the Impact of
Organizational Type
 The Profitability of a Bank is Not Determined by How it is Organized
 Small Banks Can Successfully Compete with Large Banks
 Branch Banks and Banks Affiliated with Holding Companies Have
Greater Protection from Failure
 Prices and Deposit Interest Rates Do Not Depend on Organizational
Type
 The Type of Bank Does Not Appear to be a Key to Economic Growth
 The U.S. Banking Industry is Consolidating
 M&A getting gear in Nepal.

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 Unit Banks
Offer All Services From One Office

Branch Banks
 Offer Full Range of Services from Several
Locations

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Branch Banking Proponents and Opponents
Proponents Opponents
• Greater Operating Efficiency • Drives Out Smaller Competitors
• Availability and Convenience • Higher Service Fees
of Services • Drains Scarce Resources from
• Fewer Failures Local Community

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Correspondent Banking
Interbank relationship to provide financial services
efficiently.
 Interbank cheque clearing
 Fund transfer
 Consortium loans (Participation loans)
• For the above, needs to an extensive system of
correspondent banking in which banks set up both
formal and informal relations with each other

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Bankers Bank
 Garn-St. Germain Depository Institutions Act, 1982 permitted the
federally chartered Banker’s Bank.
 Group of banks could set up joint special service firms to
facilitate development and delivery of certain financial services
that are too costly for one or a few banks.
 In 1990s, there were 16 Banker’s bank in U.S. (stocks owned by
155 banks) and about 3,700 banks were taking their services.
 Functions like Correspondent banks
• Making loans to banks having short of cash
• Clearing checks
• Investing in securities for member banks
• Credit card operation
• ATM network
• Credit sale (secondary market)

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 Networking Systems
Banks Communicating Through Electronic
Systems to Collect and Move Funds
eg.
 Networks of Automated Teller Machine (ATM)
 Pont of Sale (POS) Network.
 SWIFT: Society for Worldwide Interbank Financial
Telecommunications

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Joint Ventures (JV)
 A joint venture (JV) Bank is an entity that is established with the
mutual agreement of two or more parties/banks to pool their
resources for the purpose of accomplishing a specific task. This
task can be a new project or any other business activity.
 Other Functions like:
• Jointly owned automated teller machines
• Check printing companies
 Key Advantage:
• Sharing risk, raising sales volume, lower operating cost
 Key disadvantage:
• Dispute between the partners (cost sharing, revenues, and
sales territories).

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Develop Learning Attitude
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• Unified Directive-078
• Banks and Financial Institution Act
• Latest Updates of Banking Sector

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 Individual Assignment-1

How many types of banking institutions are

operating in Nepal? Please highlight their
inherent features and major services.

Guideline: Please refer Bank and Financial Institution Act and visit
office/website of different banks and financial institutions (BFIs).

Handwritten response to be individually updated in VC class room within 3 Days.

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Group Assignment-1
S.N. Captions Group
1 Exploring Nepali Banking Regulation Banking Regulation

2 Exploring Nepali Resources Management in Banking Resource Mgmt

3 Exploring Nepali Banking Management (Asset & Liability, Asset and Liability
Liquidity) Mgmt
4 Exploring Nepali Banking Business (Credit and Risk Risk Asset Mgmt
Management)
5 Exploring Nepali Banking Innovation Performance Evaluation
and Outlet Mgmt

Guideline: Please refer Bank and Financial Institution Act and visit
office/website of different banks and financial institutions (BFIs).

Complete computerized response of assignment to be uploaded in VC within next

session. Additionally, all group members are strictly advised to be fully prepared for the
class presentation during next session (max time 15 min). Group performance shall be
jointly evaluated by attendees.
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