PART I

Introduction
1.1 Introduction of the Industry
The term bank is derived from the French word Banque and
Italian word Banco meaning the portable benches or counters
over which the money changer comes from. In the common
sense, an institution established by law that is involved in
monetary transaction is called "Bank". In other word we can
define bank as the financial intermediary between the depositors
and the entrepreneurs. A bank is a financial institution that
accepts varieties of deposits and make diversified loan. A bank
charges higher rate on loans and provide lower rate on deposits
and difference in the rates is the spread or profit to the bank.
Banks, in general, are business houses established to safeguard
peoples money, which is used to make loans and investments.
Money that is deposited in bank accounts earns additional
amounts for depositors in terms of interest. Banks provides many
services such as accepting various types of deposits, making
loans, providing means of payment, electronic banking and other
services such as travellers cheque and money orders.
Bank occupies quite important role in this modern business age
as the financial support for the needy people like: industries,
companies, and for individual people who need the money for
invest in productive sector. Along with this, Banks play vital role
in the economic development of nation and uplift the living
standard of the people of the country. Bank motivates people to
save their earnings and invest their savings in the productive
sectors. Integrated and speedy development of the nation is
possible only when competitive banking services reaches each
and every remote corner of the nation and people.

1.2 Concept and definition

Different economists have defined the term bank in different
ways. Some of the definitions have been mentioned here.
Simply, Bank can be defined as the institution which is legally
authorized to create money and credit. Many scholars have
defined bank with different terms but with more or less same
meaning. According to R. S. Sayers, " I believe in that fact the
banks are not purveyors of money, but also in an important
sense, manufacturers of money."
According to G. Crowther ,"A bank is an institution, which

collects money from those who have it spare or who are saving it
out of their income and lends this out to those who require it."
According to, Horace White defines bank as a manufacturer of
credit and machine for facilitating exchanges.
According to Professor R.P.Kinley, "Bank is an establishment,
which
makes to individuals such advance of money as may be required
safety made and to which individuals entrust money when not
required for use."
According to Nepal's Commercial Bank Act, 2031(1974 A.D.),
bank means a commercial bank established under this act.
While summarizing above bank definitions it can be said about
the nature of bank that bank is an artificial individual created by
state's law, it is financial intermediary, it works as an agent,
issues notes, accepts cheque, provides 4 merchant banking
services and it works as an advisor of the customer and nation. In
this meaning, the bank looks as partner of the nation which
collaborates its efforts with the government for the upliftment of
the economy of the country.

1.3 Functions of Bank

The commercial banks are important pillars for nations economy
and role of banks is not limited to banking, and includes:
Issue of banknotes (promissory note) issued by a banker and
payable to bearer on demand).
Processing of payments by way of telegraphic transfer or other
means
Issuing bank drafts and bank cheques.
Accepting money on term deposit.
Lending money by way of overdraft, installment loan or
otherwise
Providing documentary and standby LC, guarantees,
performance bonds, securities underwriting commitments and
other forms of off-balance sheet exposures
Safekeeping of documents and other items in safe deposit
boxes
Currency exchange
Acting as a 'financial supermarket' for the sale, distribution or
brokerage, with or without advice, of insurance, unit trusts and
similar financial products

1.4 Origin Commercial Banks in Nepal

In Nepalese context, Nepal Bank Ltd is the oldest but sufficiently
modernized commercial bank. After that different development

and commercial banks were established for development of

Nepalese economic sector by boosting up financial part. Now
there are more than 30 commercial banks within country
boundary. There are joint venture banks also. Speaking about
world banking history, many of todays banking services were
first practiced in ancient Lydia, Phoenicia, China, and Greece,
where trade and commerce flourished. The temples in Babylonia
made loans from their treasuries as early as 2000 BC. The
temples of ancient Greece served as safe-deposit vaults for the
valuables of worshipers. The Greeks also coined money and
developed a system of credit. The Roman Empire had a highly
developed banking system, and its bankers accepted deposits of
money, made loans, and purchased mortgages. Shortly after the
fall of Rome in AD 476, banking declined in Europe. The increase
of trade in 13th-century Italy prompted the revival of banking.
The moneychangers of the Italian states developed facilities for
exchanging local and foreign currency. Soon merchants
demanded other services, such as lending money, and gradually
bank services were expanded. The first bank to offer most of the
basic banking functions known today was the Bank of Barcelona
in Spain. Founded by merchants in 1401, this bank held deposits,
exchanged currency, and carried out lending operations. It also is
believed to have introduced the bank check. Three other early
banks,
each managed by a committee of city officials, were the Bank of
Amsterdam (1609), the Bank of Venice (1587), and the Bank of
Hamburg (1619). These institutions laid the foundation for
modern banks of deposit and transaction. For more than 300
years, banking on the European continent was in the hands of
powerful statesmen and wealthy private bankers, such as the
Medici family in Florence and the Fuggers in Germany. During the
19th century, members of the Rothschild family became the most
influential bankers in all Europe and probably in the world. This
international banking family was founded by German financier
Mayer Amschel Rothschild (1743-1812), but it soon spread to all
the major European financial capitals.
The Bank of France was organized in 1800 by Napoleon. The bank
had become the dominant financial institution in France by the
mid-1800s. In Germany, banking experienced a rapid
development about the middle of the19th century with the
establishment of several strong stock-issuing or publicly owned

banks.Banking in the British Isles originated with the London

goldsmiths of the16th century. These men made loans and held
valuables for safekeeping. By the 17th century English goldsmiths
created the model for todays modern fractional reserve banking
that is, the practice of keeping a fraction of depositors money
in reserve while extending the remainder to borrowers in the form
of loans. Customers deposited gold and silver with the goldsmiths
for safekeeping and were given deposit receipts verifying their
ownership of the gold deposited with the goldsmith. These
receipts could be used as money because they were backed by
gold. But the goldsmiths soon discovered that they could take a
chance and issue additional receipts against the gold to other
people who needed to borrow money. This worked as long as the
original depositors did not withdraw all their gold at one time.
Hence, the amount of receipts or claims on the gold frequently
exceeded the actual amount of the gold, and the idea that
bankers could create money was born.

5 Current Scenario of Banking

Currently the banking sector is evolving to be very competitive
and evolving to be very competitive and challenging. The banking
sector is flourishing and upgrading day by day. Banks are now
using various new technological advancements to provide timely,
fastest and economical services to customers. Banks with the
collaboration with other financial institutions, ITs and other
organizations they always try to attract the customers.
As of Mid July 2013, Commercial Bank group occupied 78.2% of
total assets/liabilities followed by Development Banks 13.0%,
Finance Companies 6.6% and Micro-finance Development Bank
2.2%.:Banking and Financial Statistics, Mid-July 2013, Issue No.
59, NRB]

1.6 Market share

Nepal has made a short of history of the modern banking
practices which started from the establishment of Nepal Bank
Limited as a first commercial bank in 1937. The establishment of
Nepal Rastra Bank in 1956 as a central bank gave new dimension
to Nepalese financial system. after its establisment Nepal
adopted financial sector liberalization process during 1980s. As a
result, many joint-venture and private banks entered into the
market. By the end of mid-July 2009, 26 commercial banks were
in operation in Nepal. Of the 26 commercial banks, 3 were stateowned and 23 were privately owned (17 domestic and 6 foreign

joint-ventures). Table 1 provides some selected statistics for

Nepalese banking industry. The group share of state, private and
foreign owned commercial banks in total assets of the banking
sector indicates decrease in the dominance of large state-owned
banks as a consequence of financial sector liberalization and
reformation (Nepal Rastra Bank, 2009). The relatively high value
for the ratio of total banking sector assets to real GDP signifies
the importance of banking system in Nepalese economy. Banks
are the major lenders to private sectors because Nepalese capital
market is at the initial state of development and bank financing is
important source of financing for firms (Nepal Rastra Bank,2009).