Meaning and Definition of Bank
A bank is a financial institution which accepts deposits from the public,
makes funds available to those who need them in the form of loans and advances,
and facilitates the remittance (transfer) of money from one place to another.
Role of Banking System in the Economy
- Mobilization of Savings: Banks collect scattered savings and channel them into productive uses.
- Capital Formation: Banks convert savings into investment.
- Monetisation of Economy: Banks promote the use of money and banking instruments.
- Promotion of Employment: Banks finance industries and businesses.
- Poverty Alleviation: Credit and microfinance services help reduce poverty.
- Remittance of Money: Banks facilitate domestic and international money transfer.
- Safety of Wealth: Banks provide safe custody of money and valuables.
- Removal of Exploitation: Banking reduces dependence on moneylenders.
- Development Finance: Banks finance priority and development sectors.
- Rapid Economic Development: Banks support trade, industry, and agriculture.
Types of Banks
Central Bank
The central bank is the apex institution of the banking system. It controls
the money supply, issues currency notes, and regulates the credit system
of the country.
Commercial Bank
A commercial bank is a financial institution which accepts deposits from the
public and provides loans and advances with the main objective of earning profit.
Development Bank
A development bank is a specialized financial institution established to promote
and develop specific sectors such as agriculture, industry, and infrastructure.
Functions of Central Bank
- Monopoly of note issue
- Banker, agent, and adviser to the government
- Banker’s bank
- Lender of the last resort
- Clearing house function
- Control of credit
- Custodian of metallic reserves and foreign exchange
- Developmental functions
Functions of Commercial Bank
A. Primary Functions
- Accepting Deposits:
- Demand deposits
- Saving deposits
- Fixed deposits
- Providing Loans and Advances:
- Cash credit
- Overdraft
- Loans and advances
- Call loans
B. Secondary Functions
- Remittance of money
- Collection and payment of credit instruments
- Purchase and sale of securities
- Receipt and payment of income
- Acting as trustee and executor
C. Contingent Functions
- Locker facility
- Traveller’s cheque
- Letter of credit
- Dealing in foreign exchange
- Collection of statistics
Money Market
The money market is the market in which short-term financial instruments such as
treasury bills, certificates of deposit, and commercial bills are traded.
The maturity period is one year or less.
Features of Money Market
- Short maturity period
- Use of short-term credit instruments
- Presence of financial institutions
- Short-term purpose of loans
- Low risk
- Close relationship with the central bank
- High level of regulation
Capital Market
The capital market deals with long-term financial instruments such as shares
and bonds. Institutions like development banks, finance companies, and
insurance companies operate in this market.
Features of Capital Market
- Long maturity period
- Long-term credit instruments
- Specialized financial institutions
- Long-term purpose of loans
- Higher risk compared to money market
- Indirect relationship with the central bank
- Regulated market
Monetary Policy
Monetary policy refers to the policy adopted by the central bank to control
and regulate the supply of money and credit in the economy. In Nepal,
it is formulated by Nepal Rastra Bank.
Types of Monetary Policy
- Expansionary Monetary Policy: Increases money supply during economic slowdown.
- Contractionary Monetary Policy: Reduces money supply to control inflation.
Province-wise Distribution of Banks and Financial Institutions in Nepal
Up to mid-March 2021, a total of 139 banks and financial institutions were in
operation in Nepal.
- 26 Commercial banks
- 18 Development banks
- 20 Finance companies
- 74 Microfinance institutions
- 1 Infrastructure development bank
There are altogether 10,430 branches across the country. Bagmati Province
has the highest number of branches (2,677) and Karnali Province has the lowest (406).