21 The function of Commercial Banks in Nepal with Role and Authority
This post is about the Function of Commercial Banks in Nepal. This post also includes functions, role, and authority of a commercial bank in Nepal.
Before going to the topic function of Commercial Banks in Nepal, Let’s discuss first what is a bank?
Introduction of bank
A bank is an organization, which deals with money and credit. The bank may be a company, firm, business, organization or person, which is involved in lending and borrowing activities. In the modern term, we can not say that bank activities are limited to just borrowing and lending. This is a very primitive concept.
In modern concept, the bank is an institution that deals in monetary transactions. Monetary transactions mean dealing with money and credit. It accepts the deposits from different sectors in different accounts and provides loans of different types to the needed sector.
Some definitions of the bank from experts:
According to R.S. Sayers, “a bank is an institution whose whole debts are widely accepted in settlement of other people’s debts.”
In the words of Crowthese, “the banker business is to take debts of other people to offer his own in exchange and thereby create money.”
According to Horace white, ‘bank is manufacturer of credit and money so facilitating exchange.”
Origin of the word “bank’
The word bank is derived from the Italian word ‘Banco’ that means bench. The early years, people transacted their business at benches in the marketplace in Italy. When people failed in business their benches, (Banco) was broken up and the word bankrupt derived. The word bench, which was termed as “Banco” in Italy, was used, as Back” in the German language, “banke” in French and “bank” is England So, the word bank derived to this world.
See Also: Central banking system in Nepal
Summary of Bank Introduction
Therefore, bank means ‘a financial institution which accepts deposits gives a loan, exchange or issue money, performs financial functions, control credit and perform agency functions.
Introduction of Commercial bank
Commercial banks are an institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.
In Nepal, Nepal Rastra Bank is the central bank of Nepal. Nepal Rastra Bank, the governing body of banking and financial institution has categorized the bank and financial institution in four distinct categories. i.e. ‘A’ Class, ‘B’ Class, ‘C’ class and ‘D’ class institutions. Commercial banks are categorized under A class banks in Nepal. These categories of banks in Nepal differ according to capital and service provided by them.
A commercial bank is taken as the backbone of eth nation as well as the helping hands of the National bank. When we talk about the commercial banks of Nepal, there are altogether many banks having many branches. Commercial bank mostly plays the role of supporting the economy by investing the huge amount through their different function they give the services of various helps to the person of the nation for promoting their living standard.
When people get to connect with a commercial bank, they get the chance of improving their standard of life. Commercial banks are also the moving parts of the nation that stands out in every remote to Urban places for facilitating the customer by their services.in Nepal also, the government always come ahead for opening the branches in remote to an urban area.
Cash revolution is only possible by the establishment and opening of bank everywhere. Cash can be only collected in a huge amount by the people of the nation through its channel. The country can only step up its growth with its help because it takes more courage and concusses about its growth.
That is why the commercial bank is always in the search of best places to expand their network or branch. Commercial banks mostly deal with all types of customer and always is always inclines to provides their best services to the customer.
It has also the special features of clasping all the customer without analyzing and evaluating by dress up and faces. It does the full advocacy of national growth. As we know that the nations runs and forms the economic collection with the help of banks and their services.
The government also plays a role to grasp the economic condition of a nation by its fluxion of money and creating scarcity. Commercial banks are the main pillar for making the economic growth increment and improvement that effects the national economic growth by its services, many people get the chance to channel their condition and misery of life.
That is why the commercial bank is commonly known as the financial institution which deals with the motto of accepting deposits, announcing loans, granting welfare services if needed and other relevant services too.
According to Culbertson,—“Commercial Banks are the institutions that make short make short-term bans to business and in the process create money.” If we highlight the other role of the commercial bank then we can see that it is mostly based on profit motives.
The commercial bank is organized and opened with the themes of earning the profit least for welfare and socialization objectives. Commercial banks in Nepal mostly highlights their earning from providing loans to the small businessman, merchant and industrialist and other class of people for various purposes.
There also exist government commercial banks which explores the reason for the establishment for national growth and people welfare but working mostly for collecting the higher profits which are exposed by their financial statement. A commercial bank in Nepal is operating their services w by many channels from urban to rural by their different services.
Total number of commercial banks in Nepal
There are 28 commercial banks in Nepal. Here is the list of grade commercial bank of Nepal which are operating its luxurious services through their networks and channel to lower to higher class people.
- Nepal Bank (नेपालबैङ्कलिमिटेड)
- Rastriya Banijya Bank Limited (राष्ट्रीयवाणिज्यबैङ्कलिमिटेड)
- Agriculture Development Bank Limited (कृषिविकासबैङ्कलिमिटेड)
- Nabil Bank Limited (नबिलबैङ्कलिमिटेड)
- Nepal Investment Bank Limited (नेपालइन्भेस्टमेन्टबैङ्कलिमिटेड)
- Standard Chartered Bank Nepal Limited (स्ट्याण्डर्डचार्टर्डबैङ्कनेपाललिमिटेड)
- Himalayan Bank Limited (हिमालयनबैङ्कलिमिटेड)
- Nepal SBI Bank Limited (नेपालएस.बी.आई. बैङ्कलिमिटेड)
- Nepal Bangladesh Bank Limited (नेपालबङ्ग्लादेशबैङ्कलिमिटेड)
- Everest Bank Limited (एभरेस्टबैङ्कलिमिटेड)
- Kumari Bank Limited (कुमारीबैङ्कलिमिटेड)
- Bank of Kathmandu Limited (बैङ्कअफकाठमाण्डौलिमिटेड)
- Nepal Credit and Commerce Bank Limited (नेपालक्रेडिटऍण्डकमर्सबैँकलिमिटेड)
- Laxmi Bank Limited (लक्ष्मी बैङ्क लिमिटेड)
- Global IME Bank Limited (ग्लोबल आईएमई बैङ्क लिमिटेड)
- Citizens Bank International Limited (सिटीजन्स्बैङ्कइन्टर्नेशनल लिमिटेड)
- Prime Commercial Bank Limited (प्राइम कॉमर्शिअल बैङ्क लिमिटेड)
- Sunrise Bank Limited (सनराइज बैङ्क लिमिटेड)
- NMB Bank Nepal Limited (एनएमबी बैङ्क नेपाल लिमिटेड)
- NIC Asia Bank Limited (एन.आई.सि. एशिया बैङ्क लिमिटेड)
- Machhapuchhre Bank Limited (माछापुच्छ्रे बैङ्क लिमिटेड)
- Mega Bank Nepal Limited (मेगा बैङ्क नेपाल लिमिटेड)
- Civil Bank Limited (सिभिल बैङ्क लिमिटेड)
- Century Bank Limited (सेञ्चुरी बैङ्क लिमिटेड)
- Sanima Bank Limited (सानिमा बैङ्क लिमिटेड)
- Janata Bank Nepal Limited (जनता बैङ्क नेपाल लिमिटेड)
- Siddhartha Bank Limited (सिद्धार्थ बैङ्क लिमिटेड)
- Prabhu Bank Limited (प्रभू बैङ्क लिमिटेड)
Click here to see the total name list and detail of all the commercial banks in Nepal.
Types of commercial banks
There are many commercial banks in Nepal but have their capital right to a specific person only and they run the banks in their personal decision. But there also exist some of the banks which have other systems and man to circulate it. There are three types of commercial banks and they are:
Commercial banks also run under the instruction of a particular person because they have their capital investment. So in that commercial organization, the only particular person runs the whole bank because of their more percentage of investment. Individual and private business hold the large percent of share due to that, they do saw their sway in the institution.
In Nepal also, there are many private sectors commercial banks like as Sanima bank, Prabhu bank, NIC Asia Bank, NCC bank, Everest bank and many other else. In all these banks, a large amount of capital investment is held by any individual and particular groups.
The recruitment and selection of an employee for the vacant post are acted by nepotism rather select the best candidates. These banks mostly register the banks as a limited company to collect more capital by announcing the share. Although, the decision making is done by some particular person.
Public sectors are the combination of capital by both parties that is the government and private sectors too. It is taken as the formation of both capitals which helps to stands in giants size. The government also invest their amount and capital to operate the banking sectors.
In some sectors government self invest eth huge amount to makes the bank full in their own rights. This is also taken as governmental commercial banks due to a large part of the amount is invested by the government. Mainly it is seen that the government hold the equity of 51% or more and the rest percentage of equity is held by private sectors.
In it, all the systems are operated by the coordination and cooperation of both sectors through mutual meeting and suggestion or discussion. Such public sectors or governmental commercial banks are Agricultural development bank, Rashtriya Banijaya bank, Nepal bank and other too.
It also defines the commercial banks which are established and operates under the instruction of foreign investors. The banks are operated under the investment of commercial banks because its investor is from outside the country Nepal.
The decision and system are also operated according to them. It has its head office in some other country and operating its banking channel in other countries as multination companies. This is also taken as foreign investment in Nepal. The foreign sectors commercial banks are Everest bank, SBI bank, Standard chartered bank, Nabil bank and other too. All the commercial banks deal for fulfilling the financial requirement of the public.
Functions of a commercial bank in Nepal
Commercial banks deserve their role in more portion to conduct their system. There are many functions of the commercial bank which is furnished below:
1. Accepting the deposit:
It deals with the collection of deposit which is its first function. The banks also do not have the entire amount as it also collects the amounts for further purpose. The amount collected is deposited into their personal accounts by giving guarantees.
In today time, a person does not want to keep the huger amount in their pocket or in their cupboard because of much offending expectations. People do not want to see anyone success and stepping upward. Commercial banks provide the trust to them and convince to deposit their amount in daily, monthly and weekly basis however you get easy.
The amount is deposited into three accounts having three objectives and three features: Fixed account, Current account, Saving account. All the account have different features. Bank provides the interest of their depositing amount according to the account.
Fixed account get high rates of interest than other, then saving account and current account. The current account has not any barriers of depositing and withdrawing of the amount because banks do not provide them the interest in high portion.
But in a fixed account, there are barriers of time for withdrawing the deposited amount according to an agreement because it provides you a large percentage of interest. Many people earn and deposit their amount portion in their personal account according to their earning portion.
2. Providing loans:
The next function of commercial banks is providing the loans to needy people it provides the loans to businessman, merchant, farmers and other too who demands. As the bank collects the deposit, they are invested as loans into the market to gain profit.
The difference between the interest rate that they pay in depositing amount and providing loans amount is taken as the profit of bank including all the expenses. Loans are also provided in term wise that is short term, medium term loan, and long-term loan.
The term of the loan is classified according to the amount that he takes a loan. When there is bound made for paying the loan within or less that one year then it is taken as a short-term loan. If the contraction is done for paying the loan in less than 3 years then it is medium loans. Its loan amount is higher than a short-term loan.
And the high terms loan is repaid in and above 5 years. The amount and portion of loan define the period of time for repayment. Mostly the industrialist and merchant take the long-term loan because of their large network business and the short-term loan is taken by a small businessman.
Where the short-term loan is mostly taken by Macro industrialist, farmers, and handicraft industry. the loan is given on the base of the mortgage. The mortgage is evaluated first and then only on the base of it, the loan is provided. Mostly it is estimated that the bank provides only 40% of the loan after evaluating the value of assets for giving mortgage loan. The loan is given after the analysis of property of loan taken taking some days for analyzing.
3. Overdraft facilities
It means that some of eth trusted customer are given the facilities of withdrawing the amount more than the deposited amount in their account. The facilities are given only to reliable customers who are doing their transaction for a long time.
This facility is not given of long-term, it the facilities of short time provided in case of urgency. After giving these services, bank charges some interest and even deduct from the account holder’s account after taking these services. These facilities decrease the problems and hazard of money to the customer for some period of time to get rid of that critical situation.
4. Bills of exchange:
This is also one of the honorable services which banks always looks in active mode to help the coming customers. Bills of exchange are even done before its maturity period to make easy communication and transaction with the customer. Bank retakes the amount from the party who had accepted the bills of exchange.
Bank pays the stipulated amount of bills to the holder after d deducting some of the commission for giving services. It is the services of reducing the mental burden of the customer. Moreover, bills of exchange are referred as promising bills where the promise is made to pay the amount of money after some period of time or maybe in demands or according to the instruction and agreement that the bills expose.
5. Agency functions:
This is also one of eth measure function of commercial banks which is taken as the major strength of the commercial banks. This services gives the easiness and do not let them tension and or dragged into the maze. After paying these services to the customer, the bank charges some amount as a commission from their customer or clients. Some of the major agency functions are :
This the major function of sending and receiving the money from the third part from far distances. There are many clients who receive the money from the foreign country and even some sent it to from domestic country.
Transfer and receipt of money from one country to another country and even in native lands from places to places is called remittance. Moreover, the banks provide the services of transferring the funds directly into respective person’s accounts by the different mediums like drafts, mail transfer and so on.
7. Acceptance and payment of different items:
Its main function also deals with the collecting of many bills like cheque, dividends, bills, other periodical receipts, rents, exchange bill, discounting bills, offers letter, etc. on the request and instruction of customer. The customer also wants to solve all the extra problems with the help of the bank if possible.
To deals with that, the bank provides the services of paying the electricity bills, telecommunication bills, recharge, insurance premium and other taxes on behalf of the customer request and instructions.
8. Purchase and sale of securities:
Commercial banks also solve the problems of buying and selling stocks, shares, debentures. Most of the organization do their transaction through commercial banks for reliable trust.
Both private and government sector do their works of buying and selling of stocks, shares and different papers by the bridges of commercial banks for making trustable transaction having proof. When some of any private or governmental organization have the necessity of equity of capital, then they use the road of commercial banks by announcing the number of shares giving the instruction of paying the amount through commercial banks.
9. Services of foreign exchange:
The rate of foreign currency and the domestic currency is determined by the Nepal Rastra bank but it transacted through some other banks. When people from foreign come to Nepal, they have to change their money into Nepalese money at that time they use the commercial bank for exchanging the money. Commercial banks convert their money into Nepalese money for making their visit and landing in Nepal easily. Commercial banks also charge as a commission after giving these services too.
10. Trustee and Executor:
Commercial banks are also taken as a friend of the customer because they do not keep anything confidential which will harm the customer rights. commercial banks do their dusty very neatly and as trustee. When people make some mistakes, they are even taught and make them understand the relevant issues.
In the same case, when the person gets out of contact and transaction for a long time, what types of account are checked and informed for keeping it in active mode. if the account is not transacted for six months, they become passive. Moreover, when some account holder dies, the amount in their account is given to the beneficiary person whom he or she has referred.
11. Acts as a tax consultant:
Commercial banks also give the consultation to their reliable customer and mostly to a great trader who deals with large transaction about tax payment and process of doing it neatly and cleverly. It provides the instruction, advice, process, and laws relating to it to makes the clients more clear about the policy.
12. Letter of references:
This is also the additional function of commercial banks that it facilitated with. Banks provide information about their amount that is in their account even from direct or indirect contact. Bank has started the new model’s services for making the customer satisfied and protecting them.
For making these services more better, now the bank has operated its services is SMS mode. The customer gets a notification through the message of their deposited and withdrawn amount after the transaction. This service is also taken as the pleasuring servicing to get connected and informed about the amount of account.
13. Locker facilities:
The commercial bank also provides locker facility to their reliable and good character customers. Most people do not want to keep expensive jewelry, ornament, and valuable articles or papers at home considering security purposes.
The customer wants to keep it all safe in safe places. Banks is the most secure places to keep all the things safely in lockers. The customer provides their personal locker and their key where they keep all their valuable materials. For these services also, they charge the commission. Banks also provide the loan on the base of gold. In that case, also, the customer uses this locker services.
14. Traveler cheque:
By keeping the consideration of customer safety in the journey, the bank is providing the traveler cheque for safe journey many times we have faced with unexpected problems because of cash loot, or theft, pickpocketing. These kinds of crimes are normally happening with the customer during their long journey.
And this issue makes them irritating and sad in their journey due to the empty wallet and an empty pocket. So commercial banks provide traveler cheques as a card that avoids the tension of carrying the cash in the pocket which arises the mental pressure throughout the journey.
15. Letter of credit:
This is also the more effective function of customers in which banks work as the mediator of paying the amount to the third party after giving instruction as a letter of credit. Bank pays the amount to the third party after the agreement and instruction of account holder. This is mostly done to communicate with foreign trade. The foreign trader is paid money directly by the bank by standing as a guarantee on behalf of the first party.
16. Underwriting the securities:
Due to having the largest network and reputed image in the nation by their size and services, it is also taken as a reliable and faithful financial institution. Securities are announced by its medium because of the public or common people mostly belief on it.
17. Creation of money:
Commercial banks collect the money from large groups mostly from commerce, industrialist and provide them loans. The difference between the deposits made by them and the loan taken by them has a large gap.
People commonly deposit the small amount of money into their account but takes the huge amount from the money after depositing the money of many people, it forms a large amount of cash which is used to provide loans to a needy person. This is also the way of creating money by various deposits.
18. ATM banking:
Commercial banks are also famous for giving these services in places to places mostly in crowd area and emergency area like Hospital, Supermarket, Mall, etc. Nowadays the youth are updating themselves with a change of technology and time.
People of today also want to make their work terminated within a few time because of their busyness. They do not want to stand in a queue in banks of withdrawing and depositing the amount. Thus, banks provide the ATM card to the customer who demands it and charges some amount annually.
19. MASTER CARD:
This is also the invisible function of commercial banks because this service is taken by a few people only mostly by the VIP person. The richest person or great businessman who makes traveling around the world and another country mostly keep it in their wallet.
Master card is also called the international card which is used for withdrawing the money from a bank or ATM anywhere without limits of the territory. Normally, it is also called a universal card because we can use it anywhere. the giving of this kind of services upgrade the value and increases the appreciation of commercial banks.
Instead of giving these services, banks charge some money as commission. Master card provides the license for using this card anywhere in the world for their easiness. More withdrawing the money anywhere in the world, there must be the amount in the account.
20. Internet banking:
It is also the function of commercial banks which develops the trust of the customer without reaching to offices. Nowadays a person is busier and wants to compete for their task by sitting on the chair. That is why the bank is trying to give more and more standard and dynamite services for protecting the customer and keeping in touch. Customer also runs to that institution who transform their bunches of works into small or easier.
Internet banking is such services which reduce the pressure of sending money to anyone departing to the offices. A person can send their money to anyone account directly by self and also know about the personal amount and account details. This service increases the happiness of customer because of their self-control of c account.
They can view their account anytime and know about the transaction for these services, the customer has to notices and requests to provide it. Instead of taking these services, banks c also charges very few amounts and even some do not charge. It is operated and can be conducted only if the connection is linked with an internet browser.
21. Treasury bill:
It is also colloquially called T-bills which is one of the major instrument to makes the economic condition of the nation stable. T- bills are announced by the government for collecting the money when there occurs the crisis in the economy.
By the via of T- bills, government collect a huge amount from the public of the country and invest in the different sector for balance the condition. T-bills is also taken as the short-term loan taken by the government. It is mostly announced at the time critical situation even government have no anyway and have not money in hands.
Government borrow from the public and again return it with interest. It has a period of six months and can be exceeded to one year but not more than that. When the government announces the T-bills, public invest their amount indirectly through the commercial banks for belief and trust. Public care gave the draft as proof of payment.
They return the amount with interest in calculating their period of time used by the government. But the government gives very few interest rate.
Summary for Function of Commercial Banks in Nepal
Its function and capital classify its category that Nepal RastraBank has divided and ranked. According to Nepal Rastra Bank, for getting ”A” grade commercial bank, the bank should have capital of 8 billion rupees, and for ”B” grade, they should have 2 billion rupees. Similarly, for ”C” grade they should have 60 Crore and for ”D” grade, they must have 20 Crore capital.
In Nepal if we talk about the branches expansion among all the commercial banks then, the first number is held by agriculture development bank and then other, is partial government financial institution.
According to the reports and data of Nepal Rastra bank, there exist presently in Nepal 28 ”A” grade bank. It was first before two years ago 32 in number but after merging it comes to 28. and the ”B” grade banks exist in the number of 40 and grade ”C” exist in the number of 32 and ”D” grade banks I Nepal exist in a number of 46.
We can also say that there is the existence of a banking revolution in Nepal by looking at the area of Nepal and the number of banks. Although, the having small country, there is no scarcity of bank anywhere in Nepal that may be Hilly, Himalayan and Madhesh region.
For best analysis, ”A” grade bank in Nepal are performing their best and active role to deny all the obstruction of national growth and other are working as helping hands. ”A” grade banks are directly linked with the national bank because having large capital and heavyweight.
It is also acceptance and belief that where there is the establishment of banks there is the best development in every sector. There are no people who can singularly establish and long project without taking any help from the bank. the government also takes the help of a commercial bank to become safe from economic crisis and inflation.
Nepal bank is taken as the first bank which has planted the seed of banking institution in 1995 B.S. for the themes and thinking of healing the growth of the nation by reaching everywhere.
As we, all know that finance is the lifeblood of trade, commerce, and industry. Nowadays, the banking sector acts as the backbone of modern business. We also know that the central bank of country issues notes and currencies for exchanging purpose. Likewise, the basic functions, roles, the authority of Commercial Banks in Nepal are as follows:
- Commercial Banks accepts deposits from different people and organizations. Banks allow for opening three types of accounts to accept deposit from customer i.e. current, saving and fixed deposit account.
- Commercial Banks provides different types of loans to peoples, organizations, business houses, etc. the amount of loan given to these peoples, organizations, business houses depends upon the collateral provided.
- Commercial Banks provide a letter of credit and guarantee facilities, which boost up international trade.
- Commercial Banks provide locker facilities to customers for safekeeping of valuable documents and precious articles.
- Commercial Banks provide various card services like debit cards, credit cards, ATM card that avoids risk in carrying money.
- Commercial Banks provide services like the clearing of cheques and perform various agencies functions like discounting bills of exchange, transfer fund, pay house rent, telephone bills, etc.
- Commercial banks provide easy payment and withdrawal facility to their customers in the form of cheques and drafts. It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.