Banking

Meaning :

A bank is a financial institution. It accepts deposits in different accounts and provides loan for various purposes.

According to World Bank , “Banks are financial institutions that accepts funds in the form of deposit repayable on demand or short notice.”

Role of banking in the economy:

A well- developed banking system is a necessary condition for economic development of a country. Banks are taken as financial wheels for economic development. Bank helps in mobilization and allocation of scarce resources that are essential for economic development. The role of banking system in an economy is as follows:-

·         Mobilization of saving:

The banks encourage people for saving. It provides interest on saving and fixed deposit. Thus, bank has made it possible to collect scattered saving and mobilize it.

·         Capital formation :

Adequate capital formation is necessary for economic development of a country. The bank collects ideal money from people and channelizes it for productive investment. This increases capital formation which intern raises the level of employment and standard of living.

·         To create employment opportunity:

The establishment of many commercial banks and their branches create direct and indirect employment opportunities. Likewise, the banks also make direct investment in different sector, which also create employment opportunities.

·         Monetization of economy:

Monetization of an economy is essential to accelerate the trade and economic activities. Banks are creators and distributors of money. They spread money in different parts of the country through their branches.

·         Promotion of entrepreneurship:

The banks increase the participation of private sector in economic development by making available loans at low rate of interest. This encourages entrepreneurship in the country.

·         Remittance of money:

The money can be transferred easily from one person to another and from one country to another by the help of bank. It has facilitated transactions in distant places. It helps to expand internal and international trade.

·         Upliftment of poor:

The banks make available loans to poor rural people on low interest. This makes farmers to undertake agriculture and non-agricultural works. The rural development banks have been established for the upliftment of the poor.

Types of Bank

There are various types of bank which are as follows :

·         Central Bank:

A central bank is established in every country. This bank is established under complete government ownership. The main function of central bank is to issue notes and coins. This bank makes monetary management in the country and implements the monetary policy of the government. This bank is also called banker to the government because it makes transactions of government revenue and expenditure, provides loan to the government and provides advice to the government. The objective of central bank is not profit making. Nepal Rastra Bank is the central bank of Nepal.

·         Commercial Bank:

The commercial bank is regarded as the oldest financial institution in the history of bank. The main objective of this bank is profit maximization. This bank collects deposits in current saving and fixed accounts from general public and institutions. It also provides loan to individuals and institutions from the deposits. The difference between the rate of interest on deposits and loans is the main source of its income. Nepal bank limited is the first commercial bank of Nepal which was established in 1994 BS.

·         Industrial Development Bank:

The bank established for the development of industries is called industrial development bank. This bank provides long ter loans and industrial consultancy for the establishment, development and modernization of industries. It also purchases and sales share and debenture of individuals. It also makes direct investment in industries in case of need.

·         Agricultural Development Bank:

The bank established for the development and modernization of agriculture sector is called agriculture development bank. This bank makes available short term and long term loans to the farmers.

·         Exchange Bank:

The bank established to deal foreign currency is called exchange bank. Its objective is to help in international trade. This bank provides loan for foreign trade. There is no separate exchange bank in Nepal. The foreign exchange activities in Nepal are managed by Nepal Rastra Bank.

·         Rural Development Bank:

The concept of rural development bank was developed in Bangladesh in 1976 AD. It provides banking services to the poor people of rural areas. It also mobilizes small savings, provides credit to marginal farmers without tangible deposit. It provides short term credit in income generating activities. Rural Development Bank was introduced in 2049 B.S.

Functions of Central Bank:

A central bank performs the following functions:

·         Note Issue:

The central bank is given the monopoly of note issue in every country. It issues paper notes on the basis of proportional reserve system. According to this system, the central bank has to maintain 50% security like gold, silver and valuable coins and 50% security of foreign currency while issuing paper notes. In Nepal, Nepal Rastra Bank is the central bank. It has monopoly right to issue notes.

·         Bank of all banks:

The central bank works as the banker of all other banks. It is the guardian of all financial institutions established in the economy. It is the only institution that gives permission to establish new banks and financial companies in the economy. It also controls and supervise all banks and financial companies in the country.

·         Lender of last resort:

Central bank is the lender of last resort for all commercial banks, development banks and other financial institutions. It also provides loan to other banks at the financial crisis.

·         Control of credit:

Credit control I the most important function of central bank for economic stability. Excess credit creation causes inflation and inadequate credit creation causes deflation in the economy. Both inflation and deflation are unfavorable condition for the economy.

·         Foreign exchange control:

The central bank has given monopoly power to control foreign exchange. The central bank handles foreign currency to maintain stable value of domestic currency. The foreign exchange is determined based on demand and supply of foreign currency.

·         Government’s Banker, Agent and Advisor:

The central bank works as the banker, agent and advisor of the government. It provides banking services to the government. It maintains government account. It provides short-term loan to the government. It also provides advice to the government to formulate and implement fiscal and monetary policy of the government.

·         Mobilization of capital and Management of public debt:

The central bank also manages public debt and mobilizes capital for development. It has been managing public debt by issuing treasury bills and development bonds. These help to raise short term and long-term loan to the government.

Functions of Commercial Bank

The functions of commercial bank can be classified into 3 groups. They are:

1.       Primary function:

The most important and original functions of commercial bank is called primary function. This function includes the following functions:

·         Accepting deposits:

The first and most important function of commercial bank is to accept deposits from customers. Generally, customers prefer to deposit their saving in the bank not only for interest but also for security. Commercial banks maintain 3 types of account while accepting deposits from the customers i.e. fixed deposit, saving deposit and current deposit. The bank has to pay interest on fixed deposit and saving deposit.

·         Providing loans:

The second important function of commercial bank is to provide different types of loan in the field of trade, commerce, industry and agriculture sector. This bank provides 3 types of loan i.e. short-term, medium-term and long-term loans. The bank charges interest on loans.

2.       Secondary function:

The secondary function of commercial banks are as follows:

·         Collection of credit instruments:

The commercial bank may receive the credit instrument like cheque, bill of exchange, draft of the customers and make payment to them.

·         Income receiving and payment:

The commercial banks may receive the dividend, interest of debenture and bonds of the customers on their request. It also receives and makes payment of insurance premium, rent and income tax of the customers.

·         Purchase and sale of securities:

The commercial banks may purchase and sale the securities like share, debentures, bonds in stock exchange market and other market on request of customers.

·         Remittance of money:

Commericial banks may remit money of customers from one place to another on their request.

3.       Contingent function:

·         It provides safely to valuable documents, gold, diamond, etc.

·         It issues credit instruments like letter of credit, traveller’s cheque, draft, master card, etc.

·         It deals foreign currency under the direction of central bank.

·         It publishes monthly and annual bulletians to give information about the situation of trade, industry and bank interest rate.

Concept of Money market and Capital market

Money Market:

The market where short term credit instruments are purchased and sold is called money market. Thus, it is a short term financial market. The main function of money market is to supply working capital to the business and short term loan to the government. The credit having maturity less than one year are the instrument of money market. The main instruments of money market are treasury bills, commercial papers, promissory notes, etc.

According to World Bank, “A market in which short term securities such as treasury bills, certificate of deposits and commercial bills are traded is called money market.”

Capital Market:

The market dealing long term finance is called capital market. This market makes available funds for long term investments. The main instruments of capital market are bonds, shares and debentures which are long term in nature.

According to World Bank,” the market in which long term financial instruments such as equities and bonds are raised and traded is called capital market.”

Differences between Money market and Capital market:

Money market	Capital market
The maturity of credit instruments of this market is less than one year.	The maturity of credit instrument of this market is more than one year.
The credit instruments of this market are treasury bills, commercial papers, promissory notes, etc.	The credit instruments of this market are shares, bonds and debentures.
Capital investment of this market is less risky.	Capital investment of this market is more risky.
This market provides short-term funds to the customers.	This market provides long-term funds to the customers.