Law of Banking & Negotiable Instruments- Notes

 Unit 1: Introduction

Origin of Bank

The origin of the banking business in the world is found to have occurred along with the development and needs of society. It appears that humans started the concept of banking to protect the property they possessed. In today's world, an economy without a bank cannot even be imagined. The word 'Bank' is estimated to have derived from the Italian word 'Banco'. It means 'bench' in the Italian language. Because transactions related to currency were done by sitting on a bench, this business was later called banking and the word became 'Bank'. Defining it from the Italian word 'Banco', an institution that trades or transacts in money is called a bank.

In ancient times, traders, money lenders, and goldsmiths were found to perform the work of taking and giving personal money. In the current global world, that very word 'Bank' indicates modern, facility-equipped banks. In this way, the process of modern banking development can be studied by dividing it into the following stages:

(1) Money lenders (Sahu Mahajan)
(2) Creditors
(3) Goldsmiths

Meaning and Definition of Bank

In a general sense, financial institutions established according to the law that deal with or transact in money are called banks. Such institutions are established with the objective of conducting economic transactions, providing customers with facilities to deposit and withdraw money whenever they want. When dealing with money, a modern bank generally performs functions such as accepting deposits, transferring loans, foreign exchange, risk management, and credit creation. Therefore, it is found difficult to obtain a universally accepted definition of a bank.

According to the Nepal Brihat Shabdakosh (Nepali Comprehensive Dictionary): "A bank is a commercial, government, or non-governmental institution that accepts money by giving interest, pays back the saved amount upon demand, provides loans, and conducts transaction businesses like tejrath (historical financial system)." In summary, a bank is not just an institution that accepts deposits and provides loans; in modern times, an important function of a bank is also the creation of currency and credit.

Types of Banks

The development and expansion of the banking system have taken place due to economic awareness among people, changing times, the industrial revolution, and the scientific revolution. Based on providing banking services to bank customers, the currently observed types of banks can be presented as follows:

1. Central Bank
2. Commercial Bank
3. Development Bank
4. Finance Company
5. Microfinance Development Bank
6. Agricultural Development Bank
7. Infrastructure Development Bank
8. Industrial Bank
9. Cooperative Bank
10. Exchange Bank

Tiered Banking System (Class A, B, C, D Classification)

The classification of licensed banks and financial institutions into tiers based on paid-up capital is called a tiered banking system. The institutions licensed by the Nepal Rastra Bank are classified into Class 'A', 'B', 'C', and 'D' respectively as Commercial Banks, Development Banks, Finance Companies, and Microfinances and provided duties, responsibilities, and authority accordingly. The classification and minimum paid-up capital requirements for banks and financial institutions are as follows:

Required Minimum Paid-up Capital

Class	National Level	Regional Level	Up to 3 Provinces (10 Districts)	Up to 3 Provinces (5 Districts)
Class A (क)	800 Crore	-	-	-
Class B (ख)	250 Crore	-	120 Crore	50 Crore
Class C (ग)	80 Crore	-	80 Crore	40 Crore
Class D (घ)	10 Crore	6 Crore	2 Crore	1 Crore

Note: 1 Crore = 10 Million.

Similarly, to reduce operational risks of banks and financial institutions and to increase public trust, the Banks and Financial Institutions Act (BAFIA) 2063 was repealed, and the Banks and Financial Institutions Act (BAFIA) 2073 was enacted. According to this Act, banks and financial institutions are divided into 4 classes as follows:

• Class 'A' – Commercial Bank
• Class 'B' – Development Bank
• Class 'C' – Finance Company
• Class 'D' – Microfinance Company

Currently, there are 20 commercial banks, 17 development banks, 17 finance companies, and 52 microfinance companies in Nepal.

 

Need and necessity for the Banking System

Because of monetary transactions, the importance of banking operations is immense. The following points explain why and how banking development is important and necessary for the economic growth of Nepal:

·        Basis of Economic Development: Every sector of the country—such as industry, trade, agriculture, transport, and communication—requires funding and financial advice. Since banks fulfill this role, the development of a banking system is essential.

·        Credit Creation: Banks do not just collect money; they also create money through credit creation. By earning the public's trust, a bank generates credit, often transacting a volume of money up to 10 times higher than the actual cash collected.

·        Saving of Valuable Metals: By expanding credit within the banking system, banks reduce the physical circulation of precious metals like gold and silver. Instead, they facilitate transactions using checks, bank drafts, and bills of exchange.

·        Capital Formation: Large-scale industries are crucial for a nation's development, requiring massive capital. Banks facilitate this by mobilizing small, scattered savings from the general public into a large pool of productive capital.

·        Loan Facility: By accumulating capital, banks offer credit facilities to everyone, driving the growth of both small and large businesses. They generate further capital through interest income and expand credit by opening loan accounts rather than handing out raw cash.

·        Development of Money Market: Money requirements fluctuating based on trade, industry, and daily human activities. In such situations, the Central Bank regulates the money market by expanding or contracting credit money to match the market's current demand.

Historical Background of Banking System and Banking Law of Nepal

The term banking system generally refers to the modern banking system, but in Nepal, a traditional banking system developed before the modern one. In the process of developing the traditional banking system, King Gunakamadeva of the Licchavi period took loans to build the city of Kathmandu around 720 BS. In 936 BS, Shankhadhar Sakhwa, a merchant from Kantipur, cleared the debts of the general public and initiated the Nepal Sambat calendar. After the unification of Nepal, King Prithvi Narayan Shah established the 'Kausi Toshakhana' and minted metal coins in his own name. These events are considered significant highlights.

Overall, the historical development and background of Nepal's banking system can be presented in a bulleted format as follows:

1. Historical Period (Before 1994 BS)

• When studying the development process of Nepal's banking system, the business transactions of village money lenders are considered first. During this time, money lenders provided loans and collected interest in return. Back then, collateral was taken in the form of grain, labor, or land deeds.
• Following the establishment of the Taksar (Mint) Department in 1989 BS, Nepal scientifically began the minting of coins. Alongside the issuance of currency, providing loans to the general public also commenced.

2. Beginning of Government & Institutional Banking Business (1994 BS – 2040 BS)

• Following the introduction of the first Company Act in 1993 BS, the Nepal Bank Act was enacted in 1994 BS. Based on this Act, Nepal Bank Limited was established on Kartik 20, 1994 BS.
• The Nepal Rastra Bank issued paper banknotes for the first time on Falgun 7, 2016 BS, introducing four denominations: Rs 1, Rs 5, Rs 10, and Rs 100.

3. Commencement of Liberalization in Banking Business (2041 BS to 2058 BS)

• Since the early 1980s, a wave of global liberalization was observed, which subsequently influenced Nepal's banking sector. Private sector banks were allowed to enter the market to compete with government banks that had held a monopoly for a long time.
• Economic liberalization gained momentum, and due to the growing enthusiasm of domestic and foreign investors, the development process of banks and financial institutions in the country accelerated rapidly during this phase.

4. Development of Open Banking Business (2059 BS – 2068 BS)

• This period saw the development of open concepts in the banking and financial institutions sector. The Banks and Financial Institutions Ordinance was approved and implemented in 2060 BS.
• Because the Nepal Rastra Bank adopted open policies regarding the establishment of banks and financial institutions during this phase, numerous banks and financial institutions were established across the country.

5. Post-Implementation of Merger Regulations (2068 BS to Present)

• Economic liberalization, loose licensing policies, and growing investor enthusiasm had caused a flood of banks and financial institutions to open in the country.
• This rapid increase led to an oversupply, resulting in more banks and financial institutions than required by the country's economy and actual demand.
• Following the implementation of merger regulations to manage this oversupply, several banks and financial institutions went into liquidation, merged, underwent downgrades, or acquisition. At present, 20 Commercial Banks, 17 Development Banks, 17 Finance Companies, and 52 Microfinance institutions are operational and conducting financial business.

Unit 2: Law Relating to Central Bank

A central bank is defined as the apex bank established with the purpose of regulating the country's monetary system, positively controlling the monetary system, and operating, regulating, evaluating, and monitoring the activities of all banks and financial institutions. The central bank is also called the "bank of banks." It is the highest banking authority in the country. It contributes significantly to the economic and monetary development of the nation. It works to maintain internal stability within the overall economy and achieve structural stability in the external sector. Every nation establishes and operates a central bank with various objectives, including maintaining public trust by regulating, inspecting, and supervising the country's banking and financial system.

According to the Dictionary of Banking and Finance: "A central bank is defined as the principal bank of a country, controlled by the government, which fixes interest rates to control the country's financial matters, issues currency, supervises commercial banks, and determines and controls foreign exchange rates."

In some countries, the central bank is also called the State Bank, Reserve Bank, or Monetary Authority. The central bank of Nepal is the Nepal Rastra Bank. The functions of the Nepal Rastra Bank can be briefly categorized into two groups:

(A) Traditional Functions: The traditional functions of the Nepal Rastra Bank include issuing banknotes, acting as the government's bank and primary advisor, regulating and inspecting/supervising banks and financial institutions, managing and accumulating foreign exchange and gold/silver reserves, acting as the lender of last resort during financial crises in the banking sector, managing the money supply, providing clearinghouse services, and maintaining relations with international financial institutions.

(B) Developmental Functions: Depending on the nation's needs, the Nepal Rastra Bank must conduct developmental activities alongside traditional ones. Therefore, the developmental functions of the Rastra Bank include studying, surveying, and conducting research on topics like credit and deposits to support the development of banks and financial institutions; promoting loan programs like microcredit, rural credit, and deprived sector credit through various funds; operating programs for poverty alleviation; and providing refinance facilities to sick industries and specific priority sectors.

In summary, the core functions of a central bank can be highlighted as follows:

·        Note Issuance: The central bank holds a monopoly over issuing banknotes. When printing and issuing notes, approval must be taken from the respective government.

·        Bank of Banks: The central bank acts as the parent or bank for other banks. Approval from the central bank is mandatory to establish, operate, expand branches, or conduct other business operations for any bank.

·        Government's Bank and Chief Advisor: The central bank serves as the government's primary bank and chief financial advisor. It regularly provides various suggestions and financial advice regarding economic transactions to the government.

·        Foreign Exchange Control: The central bank is the formulator of the government's foreign exchange policy. The government prepares its policies regarding foreign currency based on the central bank's recommendations and advice.

·        Credit Control: The central bank holds the authority to control credit within its country. If credit creation is intended to mobilize large capital, credit control is exercised to curb excessive capital expansion and credit control must be exercised to reduce inflation. For this, the central bank formulates and implements the necessary rules and regulations with the approval of the government.

Apart from these, the central bank also performs the following functions:

• Protecting the cash reserves of banks
• Buying and selling securities, and transferring cash to banks
• Acting as the lender of last resort
• Performing clearing house functions
• Representing the nation in the International Monetary Fund (IMF)
• Issuing monetary policy

Establishment of Nepal Rastra Bank

To function as the central bank in Nepal, Nepal Rastra Bank was established on Baishakh 14, 2013 BS under the Nepal Rastra Bank Act, 2012 BS. Nepal Rastra Bank is an autonomous, corporate body with perpetual succession. The bank shall have its own separate seal for its operations. Subject to this Act, the bank may acquire, possess, sell, or otherwise dispose of movable and immovable property.

Functions, Duties, and Powers of Nepal Rastra Bank

According to Section 5 of the Nepal Rastra Bank Act, the functions, duties, and powers of the Bank to achieve the objectives mentioned in Section 4 shall be as follows:

·        To issue bank notes and coins,

·        To formulate necessary monetary policies to maintain price stability and to implement or cause to implement those policies,

·        To formulate foreign exchange policies and to implement or cause to implement those policies,

·        To determine the exchange rate system,

·        To manage and operate foreign exchange reserves,

·        To issue licenses to commercial banks and financial institutions to conduct banking and financial transactions, and to regulate, inspect, supervise, and monitor such transactions,

·        To act as the banker, advisor, and financial agent of the Government of Nepal,

·        To act as the bank of banks and the lender of last resort for commercial banks and financial institutions.

The lien/priority rights of Nepal Rastra Bank according to Section 6 of the Nepal Rastra Bank Act shall be as follows:

Priority Right of the Bank: (1) For the purpose of recovering any loan provided by the Bank to a borrower or any other claim, the Bank shall have the first right to secure its claim over cash deposited in the borrower's account with the Bank or with any other commercial bank or financial institution, or over any other type of movable or immovable property owned by the borrower.

Role of Nepal Rastra Bank in Economic Development

Central banks play a vital role in the economic development of developing nations like Nepal. Apart from traditional functions like note issuance, acting as the government's bank, bank of banks, credit control, and foreign exchange regulation, the role of Nepal Rastra Bank as a central bank for economic stability is highly significant, which can be highlighted as follows:

·        Economic Growth: Economic growth depends on the availability of financial resources and means. Nepal Rastra Bank has been working to manage adequate financial sources to achieve economic growth.

·        Development of Banking System: To give continuity to the country's economic development, Nepal Rastra Bank is seen moving forward by prioritizing the development of the banking system. Banking services throughout all parts of the country. The central bank remains proactive with the objective of providing banking services, while encouraging mergers to provide long-term stability to the large number of established banks. This directly contributes to various aspects of the country's economic development.

·        Capacity Enhancement of Banks and Financial Institutions: Nepal Rastra Bank conducts various studies and research regarding the actual condition of the economy and provides information about the possibilities of economic development and opportunities for the banking sector.

·        Development of Banking Habits: By inspecting and regulating banks and financial institutions, Nepal Rastra Bank plays an important role in increasing public trust toward them. In this way, it works specially to give continuity to economic activities and achieve economic development by developing banking habits even among the rural-level population.

Unit 3: Law Relating to Commercial Bank

Commercial Bank

A commercial bank refers to a financial institution that deals in money, accepts deposits from various savings in different accounts, provides loans from the collected funds for various purposes, and provides other banking facilities to customers. Commercial banks are considered carriers of the country's monetary system and play a vital role in economic development. Generally, economic and financial institutions established in every country with the objective of earning a profit are called commercial banks. In Nepal, according to the Banks and Financial Institutions Act (BAFIA), 2073, commercial banks are recognized as Class 'A' licensed financial institutions.
The functions of commercial banks are of various types, among which the major functions can be highlighted as follows:

·        Accepting Deposits: Commercial banks accept small and scattered savings from individuals and institutions, opening accounts in the customer's name to deposit the funds.

·        Providing Loans: Commercial banks provide loans by charging a certain interest rate, investing the collected deposit funds into various productive sectors.

·        Fund and Cash Transfer: Transferring cash or funds is another major function of commercial banks. Banks transfer funds from one place to another through drafts, T.T. (Telegraphic Transfer), fax, Swift, remittance, etc.

·        Foreign Exchange-Related Work: Commercial banks obtain licenses from the central bank to trade in foreign currency and arrange payments for foreign trade. In doing so, they charge a specified fee from the customers.

According to the provisions mentioned in the Banks and Financial Institutions Act (BAFIA), 2073, the functions, duties, and powers of Class 'A' licensed commercial banks are as follows:

Operation of Banking and Financial Transactions by Banks or Financial Institutions: (1) Subject to this Act, the memorandum of association, rules, and the limits, conditions, or restrictions prescribed by the Rastra Bank, a Class 'A' bank may perform the following banking and financial transactions:

·        To accept deposits with or without interest, or to mobilize funds through various financial instruments and refund such deposits,

·        To accept deposits, make payments, handle transactions, intermediate, and transfer funds through electronic instruments or means,

·        To extend loans including hire purchase, leasing, housing, and overdrafts,

·        To provide loans against the collateral of projects and hypothecation, and to make arrangements for providing joint loans (consortium financing) on a pari-passu basis according to agreements made between participating banks,

·        To provide loans against the guarantee of foreign banks or financial institutions.

A commercial bank refers to a legally established institution that accepts deposits, provides loans by taking necessary collateral, sends money from one place to another, and handles foreign exchange. The establishment of a commercial bank includes specific exemptions and facilities. According to the Banks and Financial Institutions Act (BAFIA) 2073, a bank must be re-established after completing the required procedures. To provide banking services to the general public keeping their economic interests in mind, prior approval must be taken before establishing a commercial bank. There is a legal provision that an application must be submitted to the Nepal Rastra Bank along with the documents prescribed by the Rastra Bank for such approval. Any person wishing to establish a commercial bank to conduct banking and financial business under the Banks and Financial Institutions Act must register it as a Public Limited Company according to prevailing laws.

According to Section 111 of the Banks and Financial Institutions Act, 2073, banks and financial institutions receive the following exemptions and facilities:

1.     Written registration shall not be required for collateral of movable or immovable property up to a maximum of 10 Lakh (1 Million) Rupees provided to a Nepali citizen or an institution established under prevailing laws for any business, including agriculture, cottage and small industries, irrigation, and hydropower generation as specified by the Government of Nepal.

2.     The interest rate on loans and deposits shall be as prescribed by the bank and financial institution.

3.     No income ticket fee (stamp duty) shall be charged on any kind of document related to a bank or financial institution.

Nepal Bank Limited

The development of the banking system in Nepal began with Nepal Bank Limited, which was established as a commercial bank in 1994 BS. It is the first organized bank in Nepal, in which the Government of Nepal holds 51 percent shares and the general public holds 49 percent shares; hence, it remains a semi-government commercial bank.The inauguration of Nepal Bank was done by King Tribhuvan on Kartik 30, 1994 BS. This marked the beginning of institutional banking services in Nepal.

Agricultural Development Bank (Krishi Bikash Bank)

The Agricultural Development Bank was established on Bhadra 7, 2024 BS as a cooperative bank under the Cooperative Bank Act, 2019 BS. The Agricultural Development Bank started providing short-term, mid-term, and long-term loans to cooperatives and other organizations, as well as to individual farmers. It also began investing capital in government bonds and securities for agricultural projects, and purchasing shares in organizations involved in agricultural production, distribution, and marketing. Since the working areas of the Land Reform Savings Corporation (established in 2023 BS) and the Agricultural Development Bank overlapped, the Land Reform Savings Corporation was merged into the Agricultural Development Bank on Shrawan 1, 2030 BS.

Objectives of Agricultural Development Bank:

·        To maintain the welfare and facilities of the farming community.

·        To provide short-term, mid-term, and long-term loans for agricultural development to individuals, cooperative societies, village development committees, and organized institutions as prescribed.

·        To perform general banking operations for the general public in rural areas.

·        To help tenant farmers (Mohi Kisan) benefit from farming and to provide loans for purchasing land to support them.

·        To provide loans to small farmers and small farmer groups under individual or collective responsibility based on specified terms and conditions.

 Functions of Agricultural Development Bank

·        To provide short, medium, and long-term loans for agricultural development to individuals, cooperative societies, and organized institutions as prescribed.

·        To provide credit assistance to farmers for required inputs like fertilizers, tools, machinery, pumps, tractors, and pesticides, or to directly provide these goods.

·        To provide general banking facilities to the general public in rural and urban areas.

·        To invest in agro-processing small-scale industries or industries manufacturing tools required for agricultural development.

·        To provide loans for establishing and operating agricultural, cottage, and small-scale industries, as well as consumer loans.

Role and Importance of Agricultural Development Bank

Since a large portion of the population in Nepal depends on agriculture, the Agricultural Development Bank has played a significant role in increasing agricultural production and productivity. Its role and importance can be outlined as follows:

·        Institutional financial source

·        Development bank functions

·        Capital accumulation and mobilization

·        Development of cooperative (Sajha) institutions

·        Development of rural and cottage industries

·        Development of appropriate technology

·        Training management

Rastriya Banijya Bank (Rastriya Banijya Bank)

This bank was established on Magh 10, 2022 BS in accordance with the then 'Rastriya Banijya Bank Act, 2021'. Later, while operating under the 'Commercial Bank Act, 2031', it currently operates under the Banks and Financial Institutions Act (BAFIA), 2073, 'Company Act, 2063', and 'Nepal Rastra Bank Act, 2058' (First Amendment: 2063/5/25), along with other prevailing laws, as a Class 'A' government-owned commercial bank.

Major Objectives of Rastriya Banijya Bank:

·        To maintain the trust and economic interest of the general public and to integrate scattered capital across the country to support economic development as a commercial bank through institutional financial transactions.

·        To mobilize necessary financial resources from internal and external sources for the establishment, development, expansion, capacity building, and productivity increase of agriculture, industry, service, trade, and other commercially viable productive businesses, thereby providing dynamic support to the country's industrial, commercial, and agricultural sectors.

·        To operate various functions related to financial intermediation.

·        To act as an institutional insurance agent.

Core Functions of Rastriya Banijya Bank:

·        To accept deposits with or without interest, or to mobilize deposits through various financial instruments and refund them.

·        To accept deposits, make payments, execute transactions, mediate, and transfer funds through electronic instruments or means.

·        To extend loans including hire purchase, leasing, housing, and overdrafts.

·        To provide loans against the collateral of projects and hypothecation, and to arrange for joint loans (consortium financing) on a pari-passu basis according to mutual agreements.

Unit 4: The Banker Customer Relationship

Possible Relationships

Under customer relationship management, once a good customer is identified, it includes the way that customer is treated. Along with searching for new customers, the bank must always try to satisfy old customers as well through good behavior and quality services. While managing relationships with customers, attention must be paid to the following matters:

• The bank must always behave in a friendly manner with its customers.
• Always listen to customer grievances and try to resolve them.
• Provide services to customers using new technologies.

Any bank and financial institution adopts various methods and mediums to make the banking services it provides customer-oriented and effective. Through such service delivery, banks and financial institutions keep retaining their customers for a long period. In the customer relationship management of banks and financial institutions, effective service delivery plays the following roles:

• Retaining customers within their institution,
• Making the service delivery process more results-oriented and qualitative,
• Making the service delivery fast, agile, and effective,
• Gaining a competitive advantage,
• Customer satisfaction.

 

a. Bailor – Bailee: Bailor (Nikhshepak) refers to a person or party who deposits property/goods or stands as a guarantor, whereas Bailee (Nikhshepagrahita) refers to the person or party who accepts that deposited property/goods. In certain situations, a relationship of Bailor-Bailee exists between a bank and a customer. Here, the rights and duties of both parties are complementary to each other.

b. Trustee – Beneficiary: Trustee (Gutiyar) refers to individuals who operate or manage a trust (Guthi). It denotes a person who has the right to run a public or private trust, or an heir who receives the remaining assets of the trust, or the caretaker and priest who manage the trust's yearly rituals. Beneficiary (Hitgrahi) refers to the party or person who receives direct benefits or inherits the property upon someone's death.

c. Agent – Principal: Agent (Abhikarta) refers to a representative appointed to carry out financial or commercial tasks on behalf of any merchant, business firm, or the state. Principal (Malik) refers to the person who holds ownership or rights over a property or business. The ultimate control and authority during transactions remain with the Principal, and when such owners cannot be physically present to handle all tasks, they appoint various agents to work on their behalf.

d. Debtors – Creditor:  A person or institution purchasing goods on credit becomes the Debtor (Asami/Rini). In other words, a party taking a credit loan from a lender is called a debtor. The process of buying and selling goods, or providing services and goods to be paid for in the future, is called a credit transaction. Liabilities differ depending on the accounts of the Creditor (Dahitta).

Types of Customer

Based on their specific values and the nature of their transactions, banks classify customers into special, medium, and ordinary categories to provide services. Bank customers can be classified as follows:

1. Individual (Natural Person): Two or more individuals can jointly operate accounts and conduct business in a bank. Similarly, a single individual can also operate a business account alone for their trade. Transactions can be carried out based on mutual understanding between the bank and the individual. On behalf of a minor, others like a guardian, protector, or parents can conduct transactions. This arrangement is necessary because transactions carried out by a minor under 16 years of age do not have legal recognition. However, once the minor becomes a major (adult), they can handle the transactions themselves.

2. Legal Persons: This refers to sole proprietorship businesses, partnership firms, private and public limited companies, associations, institutions, and various bodies established under any law. In the business sector, these include proprietorship firms, partnership firms, private limited and public limited companies, etc., as well as cooperatives, associations, and institutions established under the Cooperatives Act and special Acts.

Types and Mobilization of Deposits

Collecting deposits is the primary function of any bank and financial institution. Without deposits, a bank and financial institution (business) cannot be operated.

While the safe mobilization of collected capital is a national necessity for a dynamic economy, small and large investors appear confused because the state has not been able to instill full confidence. Investors need peace and security, banks and financial institutions need a stable environment, the state needs proper regulation, and customers require cheap, liquid, and reliable goods and services.

Types of Deposits:
Based on the demand, choice, and needs of the customers, banks and financial institutions offer various types of deposit accounts.

a)     Demand Deposit and Current Account: Since the depositor can withdraw money through checks as many times a day as they want from a current account, this type of deposit is called a demand deposit. A current account is an account where the depositor is provided the facility to withdraw the deposited amount upon demand whenever they want from banks and financial institutions.

b)     Saving Deposit and Account: In this type of account, banks and financial institutions must pay interest at a certain percentage to the depositor. This account is generally found to be heavily used by civil servants, regular income earners from other sectors, employees, teachers, and students. In this type of savings account, banks and financial institutions also bring out various schemes and operate many variants of accounts.

c)     Term Deposit and Account (Fixed Deposit): A term deposit account is an account where the depositor places a specific amount of money for a fixed duration of time. In this account, banks and financial institutions provide interest on a monthly, quarterly, or semi-annual basis. Because this type of deposit is expensive for banks and financial institutions, it is highly utilized during times when there is a shortage of liquidity (funds).

d)     Call Deposit: The popularity of this type of deposit has been increasing recently. In this account, banks and financial institutions accept call deposits by keeping the customer's demand and choice in mind, offering a facility similar to a current account but providing a minimum interest rate.

e)     Other Deposit: Banks and financial institutions accept various other types of deposits based on customer demand. Other deposits include pension deposits, educational deposits, child deposits, women's deposits, as well as old-age deposits.

Pass book

A book issued by a bank and financial institution to keep a record of the depositor's deposits, withdrawn amounts, interest, etc., is called a passbook. This book is specially issued to savings account holders. The passbook maintains records of the account holder's name, account number, deposited and withdrawn amounts, etc.

 

Unit 5: Duties of Banker

Responsibilities of a Banker

In any administrative organization or management, an important element is the workforce. Proper workforce management enables an organization to achieve its goals. Similarly, in a bank, the behavior of bank employees toward customers upholds the bank's reputation. The competence of the employees working in a bank is connected to the bank's daily operations, and if good corporate governance can be brought into the organization, an environment is created where everyone can work comfortably. While customers visit the bank frequently regarding their work, the bank holds crucial and sensitive information about them. Keeping these matters confidential falls under the duties and responsibilities of the bank and the banker.

Dishonour of Cheque

Refusing to make payment on a check presented to the bank is called dishonor or non-payment of a check. A bank does not accept or process a check payment due to the following reasons:

a)      If the bank receives information about the death of the customer,

b)      If the customer becomes bankrupt or goes insolvent,

c)      If the validity period of the check has expired (stale check),

d)      If a court order is received restricting the payment of the check (garnishee order),

e)      If the concerned party gives full prior notice to the bank instructing not to pay the check (stop payment notice).

 

Unit 6: Bank Lending and Securities

Lending & Its Principles

Loan investment is the primary function of a bank. Banks and financial institutions channel the funds created from accepted deposits and capital invested by investors into various individuals, firms, and companies in the form of credit capital. By supplying indispensable capital required for any business or trade through loans, banks provide highly critical support for the smooth operation of businesses.

Classification of Loan

(A) Funded Loan: This refers to transactions where the bank directly disburses cash as a loan for the capital or working capital expenses of a project that the customer intends to operate, develop, or establish for their industry or business.

(B) Non-funded Loan: This refers to facilities such as bank guarantees and letters of credit (LC), where the bank does not make a direct cash investment but assumes a financial liability that may fall upon the bank if the customer fails to fulfill their responsibility or liability while enjoying bank facilities.

Principles of Lending

1. Principle based on Cash Flow
2. Principle of Adequate Collateral
3. Principle of Safety
4. Principle of Liquidity
5. Principle of Purpose
6. Principle of Profitability
7. Principle of National Interest
8. Principle of Diversification in loan disbursement
9. Principle of Income Tax Facility

Loan Classification & Loan Loss Provision

Loans and advances must be classified based on the expiration of the deadline for principal or interest payments of the credit/advance disbursed by the licensed institution, as follows:

a.      Good (Pass): Loans/advances that are not past due or are past due by up to 3 months.

b.     Watch List: Loans/advances that fall under the 'Good' category but exhibit the specific conditions mentioned below in point number 1.1.

c.      Sub-standard: Loans/advances that are past due for more than 3 months up to a maximum of 6 months.

d.     Doubtful: Loans/advances that are past due for more than 6 months up to a maximum of 1 year.

e.      Loss: Loans/advances that are past due for a period exceeding 1 year.

Types of Loans

Banks and financial institutions disburse various types of loans depending on their operational capacity. The primary types of loans are as follows:

1.     Overdraft: An overdraft is a source of short-term working capital that is approved for a fixed period. It is reviewed periodically based on the borrower's performance level.

2.     Collateral Loan: Loans taken by pledging property as security are called collateral mortgage loans. If the customer fails to repay the loan, the bank can take ownership of the pledged asset.

3.     Hypothecation: A loan provided to purchase floating assets like commercial inventory to act as collateral for working capital is called a hypothecation loan. The ownership of the pledged assets remains with the customer, and they stay in the customer's possession until the repayment period.

4.     Trust Receipt Loan (TR): A TR loan is credit provided to an importer for a fixed short period up to a maximum of 60 to 90 percent of the Letter of Credit (LC) value based on specified terms.

5.     Advance on Credit (AOC): Credit facilities provided in the context of import Letter of Credit transactions are called Advance on Credit loans.

6.     Project Loan: Loans provided by a bank to construct or operate a new project, or to expand the scope of work of an existing project, are called project loans.

7.     Term Loan: Loans provided for a specific fixed duration are called term loans. Generally, these loans are provided to purchase fixed assets.

8.     Bridge Gap: Short-duration loans provided to customers to solve immediate, short-term funding shortfalls are called bridge gap loans.

9.     Deprived Sector Loan: Banks must invest in priority sectors specified and directed by the central bank.

10.  Deprived Sector Loan: Banks must invest in deprived sectors in accordance with the directives issued by the central bank.

General Concept of Share, Debenture, and Bonds

Meaning of Share

A share is a document or certificate given to an investor by a company to show that their invested money equals a certain amount of ownership in that company. Thus, a share is a document that expresses an investor's interest or ownership in a company, and it secures the right to participate in future profits in the same proportion.

(A) Ordinary Share (Equity Shares):
Securities issued by a company that receive a dividend distribution from the remaining net profit only after dividends are distributed to preference shareholders at a specified rate are called ordinary shares. They hold the ultimate claim on the returns of the company.

(B) Preference Share (Preference Shares):
Shares issued by a company that distribute dividends at a fixed rate from the profits earned by the company are called preference shares. Because preference shareholders have a prior right over ordinary shareholders regarding the dividends distributed by the company, they are called preference shares.

Types of Preference Shares:

1. Cumulative
2. Non-cumulative
3. Redeemable
4. Irredeemable
5. Convertible
6. Non-convertible

Difference Between Ordinary Share and Preference Share:

Basis	Ordinary Share	Preference Share
Dividend	Ordinary shares receive dividends only after dividends are distributed to preference shareholders.	Preference shares receive dividends before dividends are distributed to ordinary shareholders.
Dividend Rate	The dividend rate of ordinary shares is not fixed.	The dividend rate of preference shares is fixed.

Bonus Share

An additional share distributed as a dividend to existing shareholders by converting a company's savings or undistributed profits into capital, equivalent to that capital amount, is called a bonus share.

Blue Chip Share

The share of a company that has been earning profits for a long period, consistently providing dividends to investors, being accountable to investors, and successfully winning their trust, is called a blue chip share.

Debenture

A debenture is a documentary certificate of a loan raised by a company through a public issuance. This is a part of loan capital. An investor or owner who invests in a debenture is called a debenture holder. Debenture holders are the creditors of the company, and they remain claimants for periodic interest.

Difference Between Shares and Debenture:

Basis	Share	Debenture
Status	A shareholder holds the status of an owner of the company.	A debenture holder holds the status of a creditor of the company.
Return	Dividends are paid out of profits based on the recommendation of the board of directors.	Interest is paid at a fixed rate.

Money Market

A market where securities with a maturity period of less than one year are bought and sold is called a money market. Because the securities traded in the money market have a short maturity period, they carry lower risk, offer higher liquidity, and are easy to buy and sell. The securities traded in the money market include Treasury bills issued by the nation's government or the central bank, Commercial paper, Banker's Acceptances provided by commercial banks in import-export trade, and Certificates of deposit issued by commercial banks and financial institutions, etc.

Bond

Financial instruments with a fixed interest rate and a fixed maturity date issued by the government or businesses to the general public are called bonds. Bonds issued by the government to the general public are called Treasury Bonds, and bonds issued by businesses to the general public are called Commercial bonds. Investing in a Treasury Bond is risk-free, whereas investing in a Commercial bond involves financial risk.

a)     Face value

b)     Fixed interest rate

c)     Fixed maturity date

d)     Payback arrangement (Redemption provision)

e)     Marketability

Meaning and Definition of Stock Exchange Securities

Stock Exchange Securities generally refer to various securities, such as shares and debentures, that are bought and sold in the stock market or securities market. While commercial banks and commercial institutions generally provide loans against the collateral of movable and immovable property, they can also provide credit against the collateral of securities traded in the stock market. In this way, when loans are provided based on valuable instruments like shares, bonds, and debentures traded in the stock market, such security or collateral is called Stock Exchange Securities.

Guarantee

Banks and financial institutions disburse loans against various types of guarantees, such as government, institutional, personal, group, or other guarantees. Such guarantees must be acceptable to the respective bank and financial institution. In these guarantees, the amount, duration, and terms must be clearly mentioned. A guarantee refers to an agreement presented as security. According to Section 4 of the Statute of Frauds, 1677 of Britain, a guarantee means a promise made to be accountable for another person's fault or debt.

Section 523(1) of Nepal's Civil Code (Muluki Dewani Samhita) Act, 2074 has also defined a contract of guarantee. If a contract is made stating that if a person fails to repay a loan taken or fulfill an obligation undertaken, a third party will clear or fulfill it, it is considered a contract related to a guarantee. Based on the above definition, a guarantee is an agreement made with a second party to fulfill a liability oneself if a third party fails to fulfill their required liability.

Bank Guarantee

A promise made on behalf of a bank stating that if any person or institution fails to fulfill a debt to be repaid or a liability to be completed, or fails to make a payment, the bank will fulfill or pay it on their behalf, is called a Bank Guarantee. A guarantee made in this manner must be in written form to gain legal recognition.

Unit 7: Procedure of Recall and Recovery of Bank Loans

Another highly important aspect of loan investment is loan recovery. Loan recovery is the purpose for which credit is disbursed. When disbursed loans are recovered on time along with principal and interest, it increases the capital of the bank and financial institution, and their capacity to disburse more credit increases as well. Once a loan is invested by any bank and financial institution, it must be recovered on time. Otherwise, it can cast a negative impact on the bank and hurt its reputation. Therefore, banks and financial institutions must pay special attention to ensure that loans are recovered on time after being disbursed.

Unit 8: Trade Finance

Demand Guarantee

A guarantee issued based on the demand made by any person or institution is called a demand guarantee. A guarantee issued in this manner must be in written form. Only then does it assume a legal liability. Once a demand guarantee is issued in this manner, it serves as a guarantee for the beneficiary's demand. After making such a guarantee, the obligation to fulfill its liability remains on both parties. In such a guarantee, there must be at least two parties. This is a final bond or contractual liability.

Letter of Credit (LC)

A letter of credit refers to a written document issued by a bank or financial institution addressed to another bank or financial institution, requesting them to accept checks, drafts, hundi, or bills of exchange up to a specified amount of money for a specific person. This is a fundamental instrument used in trade transactions. Through this letter of credit, a buyer provides a medium to send funds to an exporter subject to specified terms and conditions. In other words, a letter of credit is a document issued by the respective banks of both nations on behalf of their customers regarding the import and export of goods and services between an importer and an exporter of two different countries.

A Letter of Credit is an assurance provided by bankers. It is a certificate issued to confirm that the buyer is financially capable of purchasing the goods from the seller. Under this arrangement, the bank assumes the obligation to make the payment. This is an instrument of exchange that creates credit, gives relief to business operations by generating a transferable credit facility with the applicant's consent, and facilitates international trade. To facilitate international trade transactions and minimize potential risks, its usage has become extensive globally. Banks provide Letter of Credit (LC) services as part of their various service offerings.

Types of Letter of Credit (LC)

There are many types of letters of credit used in import and export trade within international business. These letters of credit can be classified based on various criteria. Based on the nature and activities of the trade business, these letters of credit are classified as follows:

 

a.      Confirmed Letter of Credit

b.     Unconfirmed letter of credit

c.      Fixed letter of Credit

d.     Revolving Letter of Credit

e.      Instalment Letter of Credit

f.      Transferable letter of Credit

g.     Red Clause Letter of Credit

h.     Green Clause Letter of Credit

i.       Reimbursement letter of credit

j.       Back to Back Letter of Credit

k.     Sight Letter of Credit

l.       Usance Letter of Credit

m.   Deferred Payment of Credit

Unit 9: Law Relating to Negotiable Instruments

Meaning and Essential Characteristics of Negotiable Instruments

According to Section 2(झ) of Nepal's Negotiable Instruments Act, 2034, the definition of a negotiable instrument is given as follows: "A negotiable instrument means a promissory note and a bill of exchange." Negotiable instruments are of the following 3 types:

·        Bill of Exchange (Vinimay Patra)

·        Promissory Note (Pratigya Patra), and

·        Cheque (Cheque)

In the field of commercial law, the term negotiable instrument is understood a bit differently. Today, in business transactions and monetary dealings, it is not always possible to pay cash immediately. Therefore, a debtor prepares a document in writing for a credit purchase stating, "I will pay the value in the future." Such documents are called negotiable instruments.

Promissory Note (Pratigya Patra)

A promissory note is a written agreement without conditions made by one party to another party promising to pay a specified amount of money on a specified date, or after a specific duration, or upon demand, to a specific person written in that document, or to an ordered person, or to the bearer of that document. It is written that a promissory note means "a document signed and given by a person promising to unconditionally pay a specified amount of money on a specified date, or after a specific duration, or upon demand, to a specific person, or to an ordered person, or to the bearer of that document."

Characteristics of a Promissory Note:

       i.          A promissory note refers to a written promise made by someone to pay a specific amount upon demand or after a specified duration to a certain person.

     ii.          In a promissory note, there are only two parties in total: the one giving the order and the one receiving the payment.

   iii.          A promise to pay is given in this instrument.

   iv.          The person writing the promissory note cannot be the one receiving the payment.

     v.          A promissory note is made in only one copy.

Cheque (Cheque)

In a general sense, an order letter given to the respective bank by an account holder instructing them to pay a specified amount of money to a specified person or to themselves is called a check. This is one of the most important credit instruments among prevailing credit documents. A check is a document given by a bank to its customers in the form of a voucher, allowing them to withdraw money according to their needs without being limited to the exact cash they deposited.

Types of Cheque:

(1) Bearer Cheque

(2) Ordered Cheque

(3) Crossed Cheque

(A) General Crossed Cheque

(B) Special Crossed Cheque

(C) Account Payee Cheque

Bill of Exchange (Vinimay Patra)

Buying and selling transactions are done in two ways: cash transactions and credit transactions. In cash transactions, money is handed over immediately at the time of purchase and sale. However, in this competitive era, all goods cannot be sold in cash. Therefore, a document prepared between a seller and a buyer is called a bill of exchange. A bill of exchange indicates a negotiable instrument where the person writing (drawing) or creating it instructs a second party to pay a specified amount of money to a third party after a specified duration based on that order.

Bank Draft

A bank draft is a medium used to securely transfer cash from one place to another through a bank. When carrying a large amount of cash from one location to another, there is a risk of theft or loss. Therefore, a bank draft is considered a secure medium. The sender deposits the cash into a nearby bank and fills out a bank draft form. The bank then prepares the bank draft stating that the specified person will be paid from the designated bank branch. Once this bank draft is prepared and presented to the designated bank, the amount mentioned in the draft is paid. While all bank drafts are bills of exchange similar to checks, not all bills of exchange are bank drafts. Based on the method of payment, bank drafts can be divided into 3 types:

·       Bearer Bank Draft

·       Order Bank Draft

·       Account Payee Bank Draft

 

Unit 10: Law Relating to Foreign Exchange Management

Nepali Law Relating to Foreign Exchange

Foreign exchange refers to the process adopted to settle and clear payments for transactions taking place between any two nations. To operate this, the Foreign Exchange Regulation Act, 2019 is currently in effect in Nepal. Utilizing the authority granted by this Act, the Nepal Rastra Bank issues necessary directives regarding foreign exchange, formulates policies, and grants licenses for trading in foreign currency. It also grants the Department of Revenue Investigation the authority to conduct investigations, inquiries, and file lawsuits regarding foreign exchange irregularities.

The Nepal Rastra Bank manages the country's foreign currency reserves. Although Nepal initially adopted a structured policy regarding foreign currency, after the year 2048 BS (1991/1992 AD), arrangements were made allowing commercial banks to determine exchange rates themselves, facilitate import-export trade, take foreign currency loans upon fulfilling specified conditions, and even invest in various instruments abroad.

 

Unit 11: Banking Offence and Punishment

In a general sense, a banking offence refers to fraud, irregularities, or unauthorized acts depending on the nature of the matter, which includes doing things prohibited by prevailing laws, bank policies, rules, or central bank directives, or failing to do required procedures during the daily operations and management of a bank. Such acts are punishable by law and cause loss or damage to institutions and individuals.

The Banking Offence and Punishment Act, 2064 makes legal provisions regarding these matters. The restricted acts are as follows:

• Do not open an unauthorized account or demand cash payments unlawfully.
• Do not withdraw unauthorized cash or make unauthorized payments.
• Do not accept or make payments by misusing electronic mediums or through unauthorized use.
• Do not take or provide unauthorized loans.
• Do not misuse credit/loans.
• Do not misuse banking resources, means, and assets.
• Do not allow borrowers to withdraw funds or acquire assets through fraudulent claims.
• Do not halt loans or facilities with the intent to harm the borrower's running project.
• Do not cause loss or damage by altering, falsifying, or forging documents or accounting ledgers.
• Do not conduct business or transactions with the intent to deceive a bank, financial institution, or cooperative society.
• Do not prepare false financial statements or carry out inflated, understated, or false valuations.
• Do not cause or facilitate irregular financial and banking transactions.
• Do not conduct Dhukuti (informal lottery/rotating credit) transactions.
• Do not conduct banking transactions illegally.