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2. BRIEF INTRODUCTION OF INDUSTRY

2.1 The Context

Bank can be defined as a financial institution which provides financial services that may be in
the form of accepting deposits, accepting loan, providing technical advices, dealing over foreign
currencies, remitting funds, etc.

In simple words, Bank is an institution which deals with money and credit. It collects deposits
from general public, corporate bodies and private organizations by providing them certain
percent of interest, mobilizes the fund to productive sectors and distributes the accumulated fund
to others, who are in need of money by charging certain percent of interest. Bank is therefore;
known as a dealer of money that bridges the gap between the savers of fund and users of fund.
To know the precise meaning of bank, some definition given by prominent writers, scholars and
acts of different nations are as given:

“Banks are financial institutions that fund in the form of deposits repayable on demand or in
short notice.”

 World Bank

“A Bank is an establishment for the custody of money received from or on behalf of its customer
essential duty is to pay their draft on is profit areas from its use of the money left unemployed by
them.”

 Oxford English Dictionary

“Bank is an institution which collects money from those who have it to spare and who are saving
it out of their income and lends this money out to those who require it.”

 Crowther

From the above definitions, it is clear that the bank is a financial institution, which accepts
deposits from the public in different accounts and grants loans to individual and corporations
against their securities. In these days, it performs a wide variety of functions. It does lot more
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than deposit and credit, remitting of money, letter of credit, guarantee and others for the service
and benefit of individuals, corporations and general public. It is an agent of its clients, which
remits money, provides services like 7 LC, guarantee etc. and collects incomes, commissions and
pays expenses on the behalf of them.

The evolution of banking industry had started a long time back, during ancient times. There was
reference to the activities of the money messengers in the temple of Jerusalem in the New
Testament. In ancient Greece the famous temples of Delphi and Olympia serve as the great
depositors for people’s surplus funds and these were the centre of the money lending transaction.
The history of banking is nearly as old as civilization. In the ancient Rome and Greece, the
practice of storing precious metals and coins at safe places and loaning out money for public and
private purpose on interest was prevalent.

The history of modern banks starts from the establishment of the bank of Venice, established in
Venice, Italy in 1157 AD. Subsequently, Bank of Barcelona (1401) and Bank of Geneva (1407),
Bank of Amsterdam (1607) and the bank of Hamburg (1619) were established. The ‘Bank of
England’, first English bank, was established in 1964 A.D. The bank of Hindustan established in
1770 A.D. is regarded as the first bank in India. But these banks were not established according
to the law. In 1833 A.D., Banking Act-1833 was introduced in the United Kingdom which
allowed opening Joint stock company banks. With the expansion of the commercial activities in
the northern Europe, there sprang a number of private banking houses in Europe and slowly
spread throughout the world. In 1838 A.D., New York adopted the Free Banking Act, which
allowed anyone to engage in banking business as long as they met certain legal specifications.

These modern banks gradually replaced the merchants, goldsmith and money lenders. In 1960’s,
banking was introduced to the world because of increase in their worldwide operations and
increase in multinational companies. Nowadays, banks are referred to as lifeblood for business
houses as they offer many facilities like travellers cheque, insurance services, pension services
and other investments.

Through the study of the historical evidence, it is found that the existence of banking practices
started in the eight century. The banking history in Nepal is relatively new even though the
numbers of banks can be found operating in Nepal. In the Nepalese context, it is very difficult to
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trace the correct chronological history of the traditional banking system due to lack of historical
records of banking. In respect of formulation 8 of the financial institution in Nepal, simple
lending and borrowing functions existed during “The Lichhabi Period” by King Gunakamdav in
780 B.S. during the tenure of Rana Prime Minister Randeep Singh was the first step towards
institutional development banking of Nepal. But their functions were limited only to granting the
loan. “Sainik Dravya Kash” was established in 1993 B.S. specially established for the future
welfare government staffs and Sainik only. Since 2019 B.S., Karmachari Shanchaya Kosh has
been performing more functions than Sainik Dravya Kosh to give facilities not only to the staff
of the government but also to the staff corporations.

In Nepal, banking in the true sense of term started with the inception of Nepal Bank Limited. His
Majesty king Tribhuvan inaugurated Nepal Bank Limited on Kartik 30, 1994 B.S. This marked
the beginning of an era of formal banking in Nepal. Until then all monetary transactions were
carried out by private dealers, private moneylenders, and trading centre. It function was to meet
the need for the development of banking sector and also to formulate monetary policies. Nepal
Rastra Bank (NRB) was established on 14th Baisakh 2031 B.S. under NRB act 2012 since then it
has been functioning as Government’s bank. The government established Rastra Banijya Bank
(RBB) in 2022 B.S. as fully government owned commercial bank. As the name suggests
commercial banks had to carry out commercial transactions. But commercial banks had to carry
out the functions of all types of financial institutions. So, the industrial development corporation
(IDC) was set up in 2013 BS. The agriculture development bank (ADB) was established to
provide finance for agricultural producers so that introducing modern agricultural productivity.

After the restoration of democracy in Nepal there has been tremendous development in banking
sector. The economic and financial reform policies undertaken by the government have increased
both number of banks and the types of services offered. For the purpose of regulation and
control, after 2041 B.S, Nepal government allowed joint venture banks to operate in the country,
which gave a new horizon to the financial sector. Nepal Arab Bank Limited later renamed as
Nabil Bank Limited established in B.S. 2041 as a first joint venture bank proved to be a
milestone in the history of banking which gave hope to the sluggish financial sector. Thereafter,
two foreign joint venture banks, Nepal Indosuez Bank Ltd. (now called as Nepal Investment
Bank) and Nepal Grind lay’s Bank Ltd (now called as Standard Chartered 9 Bank Nepal Ltd.)
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was established in 1986 and 1987 respectively. Then after, several commercial banks have been
established in the recent years.

Types of Banks

NRB have divided the depository financial institutions into four classes on the basis of minimum
paid up capital requirement and functions. This classification is unique feature of Nepalese
banking industry only and there is no such classification globally. The Nepalese version of
classification of depository financial institutions according to the Nepal Rastra Bank, the central
bank of Nepal is shown in table.

Figure no:- 1 Types of bank in Nepal

Nepal Rastra
Bank

Commercial Developments Finance Micro-credit

Banks Banks Companies Institutions

Table no: 1 Categorization of Financial Institution in Nepal

Financial institutions Class Numbers Paid-up Capital

Commercials Banks A 27 2 Billion

Development Banks B 20 640 Million

Finance Companies C 22 300 Million(Leasing)

200 Million

Micro-credit Development Banks D 85 10 Million

Saving and credit CO-operatives

Non-Government Organization
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From the above tabular representation, we can see that there are currently 154 financial
institutions under NRB under different classes as categorized by the Nepal Rastra Bank.

In the present era, the Banking sector has an immense role in the economy in financial
intermediation, credit creation, fun/money transfer, facilitating trade, safe keeping of valuables
and providing employment opportunities. With the recent trend of the world moving towards
globalization and the emergence of the world as a global village, the scope for banking has
increased even more to expand their activities to various locations within and outside the
boundaries of their country origin.

2.2 Present Situation

Banks are gradually starting to realize that, in today’s competitive banking environment,
exemplary customer service is one of the distinguishing characteristics that banks can exploit to
establish a competitive edge. Since most banks offer comparable products and services, they
should continually search for a competitive advantage that will attract new customers and help
retain existing ones. Banks are therefore, looking to develop innovative products and services to
maintain superior customer services levels while at the same time remaining profitable. With the
number of market players in the rise, the competition has been obviously growing in the banking
industry. The most obvious effect of the rising competition can be seen in the interest rates
offered by the banks.

Banks are gradually shifting towards the IT- based solution to enhance service delivery in order
to address customer concerns. Most banks are embracing E-Banking and provisions of ATMs to
reduce long queue in the banking hall. In addition, some banks have launched mobile phone
banking services which facilitates several account query tools, including account balances,
thereby minimizing the need for customers to visit banks. This drive towards the IT-based
solution will continue to gather momentum in the future as banks will find it very difficult to
survive in the ever growing competition without some form of competitive advantages.

Another trend observed nowadays is large corporate houses explore the shift towards multiple
banking relationships. In order to remain competitive, banks are seen to be increasingly
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encouraging business houses to transact with them. This has led to a creation of the large volume
of unutilized limits with the bank and in order to get a large piece of the pie banks are
increasingly accepting risks, which they otherwise would not have taken. The unyielding
competition has also led the banks to accept collaterals that are more risky and unsecured. The
volume of loan against the 11 hypothecation of stock, receivable and other assets are on the rise.
In the absence of hypothecation in the current assets, the risk of over financing is eminent and
banks are exposed to a higher degree of risk.

2.3 Challenges and Opportunities;

Banking institutions are continuously facing some structural challenges. There are relatively
large number of banks, some of which are sub-optimal in size and scale of operations. The new
international capital norms require a high level of sophistication in risk management, information
systems, and technology which would pose a challenge for many participants in the banking
sector. The biggest challenge for banking industry is to serve the mass and huge market.
Companies have become customer centric than product centric. The better we understand our
customers, the more successful we will be in meeting their needs. Improving the worsening
liquidity crisis that is directly affecting the operation of banks is the major challenge for the
banking sector in the current scenario.

The biggest opportunity for the banking institutions today is the consumer. Demographic shifts
in terms of income levels and cultural shifts in terms of lifestyle aspirations are changing the
profile of the consumer. Revolution of information Technology is also an opportunity for
banking sector. Technology is the key to servicing all customer segments – offering convenience
to the retail customer and operating efficiencies to corporate and government clients. The
increasing sophistication, flexibility, and complexity of product and servicing offerings makes
the effective use of technology critical for managing the risks associated with the business
technologies and products to the banking industry by the research institutions could benefit the
banking.
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Conclusion

In order to mitigate above mentioned challenges banks must cut their cost of their services.
Another aspect to encounter the challenges is product differentiation. Apart from traditional
banking services, Nepalese banks must adopt some product innovation so that they can compete
in gamut of competition. Technology up gradation is an inevitable aspect to face challenges. The
level of consumer awareness is significantly higher as compared to previous years.