Chapter 2

Financial Institution, Financial

Intermediaries & Assets
Management Firms
Santosh Bhandari, GMMC
Pokhara
 Learning Objectives
After reading this chapter, students will understand;
Financial Institution & its types,
Different services provided by financial institutions,
Financial Intermediaries and its role,
Assets & Liability management for financial institutions,
Concerns of regulators, and
Asset Management Firms , Hedge Funds

Santosh Bhandari, GMMC

Pokhara
 Concept of Financial Institutions

 The enterprises that are involved in producing and

selling of financial products and services are known as
financial institutions.
 Broadly financial institution can be classified as follows;
1. Depository Institutions
2. Non- Depositary Institution
 वित्तीय उत्पादन र सेवाहरूको उत्पादन र बिक्रीमा संलग्न उद्यमहरूलाई वित्तीय संस्था भनिन्छ।
 व्यापक रूपमा वित्तीय संस्थालाई निम्नानुसार वर्गीकरण गर्न सकिन्छ;
 निक्षेप संस्थाहरू
 गैर-निक्षेप संस्थाहरू

Santosh Bhandari, GMMC

Pokhara
 A. Depositary Institution
Financial institution that accept
deposit from general public. For
e.g. Commercial Banks,
development banks, saving &
credit cooperatives.

सर्वसाधारणबाट निक्षेप स्वीकार गर्ने वित्तीय संस्था ।

उदाहरणका लागि वाणिज्य बैंक, विकास बैंक, बचत
तथा ऋण सहकारी संस्थाहरु ।

Santosh Bhandari, GMMC

Pokhara
 B. Non- Depositary Institution
Financial institutions that
do not accept deposit from
general public.
For e.g. pension funds,
mutual funds, finance
companies and so on.

सर्वसाधारणबाट निक्षेप स्वीकार नगर्ने वित्तीय

संस्थाहरू। उदाहरणका लागि पेन्सन कोष,
म्युचुअल कोष, वित्त कम्पनीहरु र आदि ।

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution

 Transforming the financial Assets(वित्तीय सम्पतिको रुपान्तरण

)
 Exchanging of financial Assets (वित्तीय सम्पत्तिको आदानप्रदान)
 Underwriting services (अंडरराइटिङ सेवाहरू)
 Investment Advice (लगानी सम्बन्धी सल्लाह / सुझाब )
 Management of Portfolios (पोर्टफोलियो को व्यवस्थापन)

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution
 Transforming the financial Assets(वित्तीय सम्पतिको रुपान्तरण ): यो वित्तीय
संस्थाहरूको मध्यस्थता कार्य हो। वित्तीय संस्थाहरूले आफ्ना ग्राहकहरूबाट रकम प्राप्त गर्छन् र रकमलाई विभिन्न
सम्पत्तिहरूमा रूपान्तरण गर्छन्। उदाहरणका लागि, निक्षेप संस्थाहरूले आफ्ना ग्राहकहरूबाट निक्षेपहरू प्राप्त गर्छन् र
तिनीहरूले निक्षेपलाई विभिन्न उत्पादनहरूमा रूपान्तरण गर्छन् र बजारमा बिक्री गर्छन्। यसरी, वित्तीय संस्थाहरूले
आफ्नो बजारको आवश्यकता अनुसार वित्तीय सम्पत्तिहरूलाई एक रूपबाट अर्को रूपमा रूपान्तरण गर्छन्।
 This is the intermediary function of financial institutions. Financial
institutions receive the funds from their customers and transform the
funds into different assets. For example, depository institutions receive
the deposits from their customers and they transform deposit into
different products and sell in the markets. Thus, financial institutions
transform the financial assets from one form to another one as per the
needs of their markets.

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution
 Exchanging of financial Assets (वित्तीय सम्पत्तिको आदानप्रदान): यो ब्रोकर सेवाहरूसँग
सम्बन्धित छ। ब्रोकरहरूले आफ्ना ग्राहकहरूको तर्फ बाट विभिन्न वित्तीय सम्पत्तिहरू जस्तै सेयर, ऋणपत्र, डिबेञ्चर र
ट्रेजरी बिलहरू खरिद र बिक्री गर्छन्। ग्राहकहरूको तर्फ बाट वित्तीय सम्पत्ति आदानप्रदानको अतिरिक्त, के ही फर्महरूले
आफ्नै खातामा विभिन्न प्रकारका वित्तीय सम्पत्तिहरू खरिद गर्छन् र तिनीहरूलाई आफ्नै खाताबाट बेच्छन्। धितोपत्र
डिलर फर्महरूले यी कार्यहरू बोक्छन्। सेक्युरिटी डिलर फर्महरूले आफ्नै खातामा वित्तीय सम्पत्तिहरू खरिद गर्छन् र
तिनीहरूलाई आफ्नै खाताबाट बेच्छन्।
 This is related to the broker services. Brokers on behalf of their
customers buy and sell different financial assets such as shares,
bonds, debentures and Treasury bills. In addition to exchanging of
financial assets on behalf of customers, some firms buy different types
of financial assets on their own account and sell them from their own
account. Securities dealer firms carry these functions. Security dealer
firms buy financial assets on their own account and sell them from
their own account.
Santosh Bhandari, GMMC
Pokhara
 Services provided by
Financial Institution
 Underwriting services (अंडरराइटिङ सेवाहरू): एउटै फर्मले ब्रोकरेज, डिलरशिप र अंडरराइटिङ सेवाहरू
प्रदान गर्न सक्छ। कम्पनीहरूलाई रकम चाहिन्छ र तिनीहरूले विभिन्न प्रकारका वित्तीय उपकरणहरू जारी गरेर कोष उठाउँछन्। तर
उनीहरूसँग वित्तीय साधनको समस्या व्यवस्थापन गर्न र कोष जुटाउनको लागि विशेष व्यावसायिक कर्मचारी हुदैनन्। लगानी बैंकहरूले
विभिन्न प्रकारका वित्तीय उपकरणहरूको समस्याहरू व्यवस्थापन गर्न र अन्य कम्पनीहरूको लागि कोष जुटाउन विशेष बिज्ञ
कर्मचारीहरूको व्यबस्था गरेका हुन्छन्। तसर्थ, आवश्यक रकम जुटाउनका लागि उपकरणहरू बेचिएन भने, इन्भेष्टमेण्ट बैंकहरूले
अण्डरराइटरको रूपमा बिक्री नभएका उपकरणहरू किन्छन् र जारी गर्ने कम्पनीहरूको लागि आवश्यक रकम जुटाउँछन्।
 The same firm may provide the brokerage, dealership and underwriting
services. Companies need funds and they raise funds by issuing different types
of financial instruments. But they do not have specialized professional staff to
manage the issue of financial instruments and raise the funds. Investment
banks have specialized professional staff to manage the issues of different
types of financial instruments and raise the funds for other companies.

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution
 Investment Advice (लगानी सम्बन्धी सल्लाह / सुझाब ): वित्तीय संस्थाहरूले आफ्ना
ग्राहकहरूलाई लगानी सल्लाह दिन्छन्। उदाहरण को लागी, विकास बैंकहरूले सम्भावित आयोजनाहरूमा
लगानीकर्ताहरूलाई सल्लाह दिन्छन्। तिनीहरूले सम्भावित परियोजनाहरूको बारेमा आफ्ना ग्राहकहरूलाई प्राविधिक र
वित्तीय सल्लाह प्रदान गर्छन्। लगानी बैंक, सेक्युरिटी ब्रोकर फर्म र डिलर फर्महरूले धितोपत्रमा लगानी गर्ने सम्बन्धमा
लगानीकर्ता र अन्य बजार सहभागीहरूलाई सल्लाह दिन्छन्।
 Financial institutions provide the investment advice to their clients. For
example, development banks provide the advice to the investors in the
potential projects. They provide both technical and financial advice to
their customers regarding the potential projects. Investment banks,
security broker firm and dealer firms provide their advices to investors
and other market participants regarding the investment in securities.

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution
 Investment Advice (लगानी सम्बन्धी सल्लाह / सुझाब ): वित्तीय संस्थाहरूले आफ्ना
ग्राहकहरूलाई लगानी सल्लाह दिन्छन्। उदाहरण को लागी, विकास बैंकहरूले सम्भावित आयोजनाहरूमा
लगानीकर्ताहरूलाई सल्लाह दिन्छन्। तिनीहरूले सम्भावित परियोजनाहरूको बारेमा आफ्ना ग्राहकहरूलाई प्राविधिक र
वित्तीय सल्लाह प्रदान गर्छन्। लगानी बैंक, सेक्युरिटी ब्रोकर फर्म र डिलर फर्महरूले धितोपत्रमा लगानी गर्ने सम्बन्धमा
लगानीकर्ता र अन्य बजार सहभागीहरूलाई सल्लाह दिन्छन्।
 Financial institutions provide the investment advice to their clients. For
example, development banks provide the advice to the investors in the
potential projects. They provide both technical and financial advice to
their customers regarding the potential projects. Investment banks,
security broker firm and dealer firms provide their advices to investors
and other market participants regarding the investment in securities.

Santosh Bhandari, GMMC

Pokhara
 Services provided by
Financial Institution
 Management of Portfolios (पोर्टफोलियो को व्यवस्थापन): धेरैजसो
व्यक्तिगत लगानीकर्ताहरू जोखिम विविधीकरण गर्न र आफ्नो लगानीलाई कु शलतापूर्वक व्यवस्थापन
गर्न उपयुक्त पोर्टफोलियोहरू सिर्जना गर्न व्यावसायिक रूपमा सक्षम हुदैनन् । तसर्थ, के ही वित्तीय
संस्थाहरू जस्तै, म्युचुअल फण्ड, सञ्चय कोष र पेन्सन कोषहरूले लगानीको पोर्टफोलियोहरू
व्यवस्थित गर्न बिज्ञ कर्मचारीहरूलाई काममा लगाउँछन्।
 Most individual investors are not professionally competent
to create optimal portfolios to diversify risk and manage
their investment efficiently. So, some of the financial
institutions such as mutual funds, provident funds and
pension funds employ professional staff to manage the
portfolios of the investment.

Santosh Bhandari, GMMC

Pokhara
 Financial Intermediaries

 Financial Intermediaries- collection from

saving units and lend to deficit unit is
financial intermediation.
 Direct investment –Investment made directly
to deficit units
 Indirect investment- Investment made
through the financial intermediaries

Santosh Bhandari, GMMC

Pokhara
 Role of Financial Intermediaries
 Maturity Intermediation- The intermediation for matching the
maturity period of financial assets and liabilities. Thus, financial
intermediaries play roles in providing the loans for desired period of
deficit units and investing the funds as per the desired investment
horizon.
 परिपक्वता अवधीको मध्यस्थता - वित्तीय सस्थाहरुले वित्तीय सम्पत्ति र दायित्वहरूको परिपक्वता अवधि मिलानका
लागि मध्यस्थता भूमिका गर्दछन्। तसर्थ, वित्तीय मध्यस्थकर्ताहरूले माग एकाइहरूको वांछित अवधिको लागि ऋण
उपलब्ध गराउन र इच्छित लगानी अबधी अनुसार कोष लगानी गर्ने भूमिका खेल्छन्।
 Reducing risk via diversification- A process to transform more
risky assets into less risky asset by investing in many more financial
assets. They cannot invest their funds in many securities and diversify
the risk in investment. So, it is almost impossible for small investor to
diversify and reduce the risk. But, for financial institutions, it is easy to
reduce risk via diversification.
Santosh Bhandari, GMMC
Pokhara
 Role of Financial Intermediaries
 Reducing risk via diversification- A process to transform more
risky assets into less risky asset by investing in many more financial
assets. They cannot invest their funds in many securities and diversify
the risk in investment. So, it is almost impossible for small investor to
diversify and reduce the risk. But, for financial institutions, it is easy to
reduce risk via diversification.
 विविधीकरण मार्फ त जोखिम घटाउने - धेरै वित्तीय सम्पत्तिहरूमा लगानी गरेर बढी जोखिमपूर्ण सम्पत्तिहरूलाई कम
जोखिमपूर्ण सम्पत्तिमा रूपान्तरण गर्ने बित्तिय मध्यस्तकर्ता को एक प्रमुख भूमिका हो। साना साना लगनिकर्तहेउ धेरै
सेक्युरिटीहरूमा आफ्नो कोष लगानी गर्न सक्दैनन् र लगानीमा जोखिम विविधीकरण गर्न सक्दैनन्। तसर्थ, साना
लगानीकर्ताहरूको लागि विविधीकरण र जोखिम कम गर्न लगभग असम्भव छ। तर, वित्तीय संस्थाहरूको लागि,
विविधीकरण मार्फ त जोखिम कम गर्न सजिलो छ।

Santosh Bhandari, GMMC

Pokhara
 Role of Financial Intermediaries
 Cost of contracting & information processing- Collection of
required information about issuers and financial assets, opportunity cost,
and time cost. अनुबंध र सूचना प्रशोधन लागत - बित्तिय सम्पतिहरुको जारीकर्ता र वित्तीय सम्पत्ति, अवसर
लागत, र समय लागत बारे आवश्यक जानकारी को संग्रह र विज्ञता वित्तीय संस्था संग रहने हुदा सो भूमिका सहजै पूर्ण गर्न
सक्दछन ।
 Providing payment mechanism- Payment mechanism is the method
of making payments. We always do not make payment in cash. In
developed financial system, payments in cash are not often made. We
make payments using checks, credit cards, debit cards and electronic
transfer of funds. These methods of payments are cheap and safe
Financial intermediaries provide the mechanism for these methods of
payment. भुक्तानी संयन्त्र प्रदान गर्ने - भुक्तानी संयन्त्र भुक्तानी गर्ने विधि हो। हामी सधैँ नगदमा भुक्तानी गर्दैनौं।
विकसित वित्तीय प्रणालीमा, नगदमा भुक्तानी प्रायः गरिँदैन। हामी चेक, क्रे डिट कार्ड, डेबिट कार्ड र कोष को इलेक्ट्रोनिक
स्थानान्तरण प्रयोग गरेर भुक्तानी गर्छौं। यी भुक्तानी विधिहरू सस्तो र सुरक्षित छन् वित्तीय मध्यस्थहरूले यी भुक्तानी
विधिहरूको लागि संयन्त्र प्रदान गर्छन्।
Santosh Bhandari, GMMC
Pokhara
 Overview of Asset/ Liability
management for financial Institution.

 Liabilities- These are the different sources of funds &

they have the amount and timing of cash flows to be
satisfied as per the terms of the contracts.
 दायित्वहरू- वित्तीय संस्थाहरुको कोषका विभिन्न स्रोतहरू हुन्छन्। तेस्ता दायित्व हरुको भुक्तानी
समय र रकम तिनीहरूसँग सम्झौताका सर्तहरू अनुसार फरक फरक हुन्छन्।
 Spread- Difference between the interest cost on the
purchase of money and interest revenue on the sale of
money.
 स्प्रेड - पैसाको खरिदमा ब्याज लागत र पैसाको बिक्रीमा ब्याज आम्दानी बीचको भिन्नतालाई
स्प्रेड भनिन्छ।

Santosh Bhandari, GMMC

Pokhara
 Types of Liabilities

 Type- I Liabilities- Liabilities whose timing and amount are

known with certainty. For e.g- Guaranteed Investment
Contract(GIC- Insurance)
 Type- II Liabilities- Liabilities whose amount is known with
certainty but timing of cash outlay is unknown. For e. g
General Insurance policy
 Type- III Liabilities- Liabilities whose timing of cash outlay
is known but amount of outlay is uncertain. For e. g CD
with floating rate.
 Type- IV Liabilities- Liabilities whose timing and amount of
outlay is uncertain. For example automobile insurance.
Santosh Bhandari, GMMC
Pokhara
 Types of Liabilities
 Type- I दायित्वहरू- दायित्वहरू जसको समय र रकम निश्चित रूपमा थाहा छ। उदाहरणका
लागि- ग्यारेन्टेड लगानी सम्झौता (GIC- बीमा)
 Type- II दायित्वहरू- दायित्वहरू जसको रकम निश्चित रूपमा थाहा छ तर नगद परिव्ययको
समय अज्ञात छ। अगाडी। उदहारण का लागि- साधारण बीमा पोलिसी
 Type- III दायित्वहरू- दायित्वहरू जसको नगद परिव्यय(रकम)को समय थाहा छ तर
परिव्ययको रकम अनिश्चित छ। उदहारण का लागि- फ्लोटिंग दरको साथ जारी गरिएको सीडी।
 Type- IV दायित्वहरू- दायित्वहरू जसको समय र परिव्यय(रकम) को मात्रा अनिश्चित छ।
उदहारण का लागि- सवारी साधन तथा सम्पति को बीमा

Santosh Bhandari, GMMC

Pokhara
 Liquidity Concern

 Some liabilities have certainty of timing of

outflows of cash and some do not.
Holders of some liabilities of financial
institution may have right to change the
nature of their liabilities.
 Holders may withdraw prior to maturity,
take loan, surrender policy, loan against
policy & so on.
Santosh Bhandari, GMMC
Pokhara
 Regulation & Taxation

 A number of regulation influence the

investment policy of financial institution.
 Nepal government relating to priority
sector are the examples of regulation ad
policy that affect the investment policy of
depository institutions.
 similarly tax factor also affects the
investment policy of financial institution.
Santosh Bhandari, GMMC
Pokhara
 Concern of Regulators
 Nepal Rastra Bank- Regulator of all
depositary institutions,
 Insurance Board(Beema Samiti) -
Regulator for both life and non-life
insurance companies,
 Securities board of Nepal- Regulator for
financial institution related to securities
business.
Santosh Bhandari, GMMC
Pokhara
 Concern of regulators

1. Credit Risk
2. Credit Concentration Risk
3. Operational Risk
4. Market Risk
5. Liquidity Risk
I. Market Liquidity Risk
II. Funding Liquidity Risk
Santosh Bhandari, GMMC
Pokhara
 Assets Management Firms
 Assets Management firms are those firms which manage
the funds of individuals, business, endowments,
foundations, state and local governments.
 These firms are also known as money management
firms and fund management firms.
 Person who manage the funds are known as fund
managers, asset managers, portfolio managers and
money managers
 Assets management firms receive management service
fee for their services.

Santosh Bhandari, GMMC

Pokhara
 Hedge Funds

 Hedge funds are alternative investment vehicle

available only to sophisticated investors, such as
institutions and individuals with significant
assets.
 Hedge fund is any pooled investment vehicle
that is privately organized and administrated by
the professional money manager.

Santosh Bhandari, GMMC

Pokhara
 Types of Hedge Funds

1. Market Directional Hedge funds- market

directional hedge funds are those funds which
retain some exposer to systematic risk*.
Market directional hedge funds follow different
strategies. Some funds follow equity long/short
strategy and some do equity market timing and
some do short selling strategy.
*Systematic risk refers to the risk inherent to the entire market or market
segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or
“market risk,” affects the overall market, not just a particular stock or industry. This
type of risk is both unpredictable and impossible to completely avoid.
Santosh Bhandari, GMMC
Pokhara
 Types of Hedge Funds

2. Corporate Restructuring Hedge funds- Asset

manager positions the portfolio to capitalize on
the anticipation of major corporate events such
as merger, acquisition or bankruptcy in
corporate restructuring hedge funds. Corporate
restructuring hedge funds falls into three
groups;
 Bankruptcy or near to bankruptcy firm’s securities
 Merger
 Corporate events other than merger or acquisition
Santosh Bhandari, GMMC
Pokhara
 Types of Hedge Funds

3. Convergence Trading Hedge funds- This

type of funds are seeking to take
arbitrage benefits from misalignment
securities in the market. The strategy to
make profit on the misalignment of price
is called arbitrage strategy. In this
strategy, profit is riskless.

Santosh Bhandari, GMMC

Pokhara
 Types of Hedge Funds

4. Opportunistic Hedge funds- Assets

manager can invest in any securities
such as equity, and different types of
debt instruments and formulate the well
diversified portfolio.
There are two group of opportunistic funds;
1.Global macro Hedge funds
2.Funds of hedge funds

Santosh Bhandari, GMMC

Pokhara