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CHAPTER -I
INTRODUCTION

1.1 Background of the study

Nepal, being a developing country, is trying to embark upon the path of economic development
by economic growth rate and developing all sectors of economy. Even though the process of
economic development depends upon various factors, however economists are convinced that
capital formation and its proper utilization plays a vital role. The network of a well organized
financial resources of the country has a great bearing in this regard. It collects scattered financial
resource from the masses and inverts them among the engaged in commercial and economic
activities of the country. In this way, the financial institutions provide saver highly liquid divisible
assets at lower rate while the investors receive a large pool of resources. Integrated and speedy
development of the country is possible only when competitive service reaches hooks and corners
of the country. It has been well established that the economic activities of any country can hardly
be carried forward without the assistance and support of financial institutions. Financial
institutions have catalytic role in the process of economic development.

It is true that the proper development and functioning of functioning institutions, that is the
commercial banks and non -banks financial institutions have their profound effect on the economy.
The commercial bank deals with the activities of trade, commerce, industry and agriculture. The
establishment of financial institutions depends upon the level of economic activities and monetary
transactions. Because of growing financial and business activities within the nation and
institutional progress in the neighbouring countries, had forced Nepal to think of new
establishment of financial institutions. Consequently, Nepal bank act 1936 having elementary
functions of commercial bank. Later, in 1956, the first central bank named as the “Nepal Rastra
Bank” was set up with an objectives. Another commercial bank fully owned by the government
named as “Rastriya Banijya Bank” was established in 1966 A.D. to spread banking services to
both rural and urban areas. In 1963, a cooperative bank was established that was converted later
into agricultural development bank in 1967. The pace of financial sector, development enhanced
rapidly after the financial liberalizations policy introduced by the government in 1984 A.D. Since
then, various financial institution i.e. JVB is domestic commercial banks, development banks,
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finance companies, cooperative banks credit guarantee corporation, employee provident fund,
national insurance corporation. Nepal stock exchange has come into existence to cater the financial
needs of the country there by assisting financial development of the country. So commercial banks
are the heart of our financial system. They hold the deposit of millions of persons, government and
business units. “They make fund available through their investing and lending activities to borrow
individual business units and government” (W3etal, 1978, pp.1-9).

They facilitate to flow the goods and services from the producers to consumers and other financial
activities to government. They provide information related to finance and trade which affected
monetary policy of overall nation.

They collect the deposit from the public and flow them or mobilized them to different kind of
sector like commercial and industrial sector, agricultural sector, deprive sector and other
productive sector due to which the overall development of nation goes on success. The facts show
that the commercial banking system of the nation is important to the functioning of our economy.
The ability of the commercial bank system to perform its tasks efficiently and in harmony with
national needs and economic goals depends on large measures on efficient management. The
management of bank is not only involved with personal management, material management, but
also its primary functions are the management of money.

In short, banks are extremely necessary for the healthy and prompt progress of a country, its
citizens and the societies it has. By creating and mobilizing the capital and rendering various
financial services, banks are contributing to establishment and development of so many small and
large scale industries and domestic as well as international trade and commerce. “Banks provide
an effective payments and credit system, which facilitates the channeling of funds from the surplus
spending units (savers) to the deficit spending units (investors) in the
economy”(Garhal,1993,p.25).

The investment policy should be carefully analysed. So, commercial bank should be careful while
performing credit creation function. Investment policy should ensure minimum risk and maximum
profit from lending. Commercial banks have to consider government and Nepal Rastra Bank’s
instructions and upliftment of the national economy can be solved through formation of sound
investment policy. Sound investment policy can be minimize interest rate of deposit and ensure
maximum amount of investment to all sectors with proper utilization with effective rate of interest.