I.

Introduction
Nepal Clearing House Ltd. (NCHL) is a public limited company established on 23 rd
December 2008 (9th Mangsir 2065) under the leadership and guidance of Nepal Rastra Bank
(The Central Bank of Nepal). It has the equity participation from Nepal Rastra Bank,
commercial banks, development banks, finance companies and Smart Choice Technologies
(SCT), a private card switch operator. NCHL recognizes banking & financial technology
oriented services as one of the key ingredients for the Banks/FIs to improve their efficiency,
productivity and also provide innovative financial solutions to their customers. And NCHL
intends to help them realize these by providing various technology based payment related
services without having to invest heavily into infrastructures by the Banks/FIs.
NCHL has initially implemented and operated NCHL-ECC System in Nepal offering banks
and financial institutions with an electronic medium of cheque clearing and will later
establish a national payments gateway to facilitate electronic payments & financial
transactions across banks and financial institutions within the country. Electronic Cheque
Clearing (NCHL-ECC) System provides means to electronically transfer cheque images
through a secure medium thus completely replacing the traditional physical routine of moving
paper-cheques among the banks and clearing house, which has resulted in significant
reduction of tedious and time consuming manual process of cheque clearing, both for the
banks and for the customers.
Individual banks and financial institutions are enrolled within NCHL as participating
members and are responsible for their clearing operations through the NCHL-ECC System.
Nepal Clearing House Ltd. (NCHL) currently has 131 equity holders including Nepal Rastra
Bank, Commercial Banks, Development Banks, Finance Companies and Smart Choice
Technologies P Ltd.
II. Financial Structure
NCHL was incorporated on 23rd December 2008 as a public company as per the Companies
Act 2063, under the leadership and guidance of Nepal Rastra Bank (the Central Bank of
Nepal) and Nepal Bankers Association. It has an Authorised Capital of NPR 250,000,000 and
Issued Capital of NPR 128,570,000 out of which 70% from the promotor shareholders
amounting to NPR 89,999,000 is full paid. 30% of the Issued Capital will be raised later by
issuing shares to general public. NCHL currently has 27 institutional promotor shareholders
including Nepal Rastra Bank, 23 Commercial Banks, 2 Development Banks and Smart
Choice Technology P. Ltd. (an ATM switch provider).

During the year under review the company has made net profit of NPR 24,081,561.39 as
against net loss of NPR 8,431,189.06 in the last fiscal year. Cumulative profit till the end of
the fiscal year stands at NPR 8,972,631.27.
III. Vision, Mission & Values
Vision: To be a leading provider of electronic payment and settlement services.
Mission

Establish and operate national systems for clearing, payments and settlements;
Facilitate the development of secure & trusted new payment methods and
technologies in Nepal;
Protect and increase shareholders values;
Establish as an organization of choice for the employees.

Values: NCHL values the highest standards of ethics, integrity and teamwork. NCHL is
committed towards its members, shareholders, partners and employees.
IV. Objectives
Modernizing the Banking sector in Nepal is an essential strategic objective that Nepal Rastra
Bank seeks to realize by implementing an advanced cheque clearing solution that manages
the daily cheque clearing cycle electronically. The major objective of NCHL is to cut-off the
overhead cost, effort and time that were spent to complete a cheque clearing cycle and to
eliminate physical cheques movement. It is intended also to accelerate the production cycle
and to contribute in the economic growth on a nation-wide scale. But regarding to the other
general objective of NCHL, it concentrated on

To provide the faster access to funds for both individuals and corporations, reduce
payments overhead costs, minimize associated risks, and promote efficiency in terms
of speed and security of payments.
Operating nationwide electronic cheque clearing system (NCHL-ECC) and becoming
a financially stable company
Aims in the growth and operational excellence so as to transform NCHL into a
valuable institution
To convince even smaller regional BFIs to join NCHL, as it will add value to them by
means of their cheque acceptability across the country
Focus in encouraging existing member BFIs to extend NCHL-ECC service from all
their branches.

V. Function
Clearing house can be defined as entity which is different from the exchange, although it
works closely with the exchange so that day to day operations of the exchange can run
smoothly. Clearing house gives guarantee for all the transaction and acts as counterparty for
all the transactions it will never have open position in the market. It ensures that all parties
adhere to the system and procedures so that various parties in the market can do trading
smoothly. It also ensures a proper risk management system and finally it ensures that delivery
of the underlying assets is consistent in terms of quality, quantity, size etc.
Following are the function of Nepal Clearing House
a. Members Registration: The Clearing House obtain a copy of the official NRB
approval before registering any new direct member, indirect member, or any new
special member. Moreover, the new members must satisfy the eligibility criteria
mentioned in Members Eligibility section 7.2 and all members have similar
working procedures in order to manage and control the cheque clearing cycle from
their side.
b. Member Management: One of the major function of NCHL is member management
where it workout on activities like member suspension (full authority to suspend a
member from the system for any reason it deems appropriate), Member
Resumption,Member Termination (authority to terminate any member from ECC for
any reason it deems appropriate), Member Withdrawal, Member Notification (notify
electronically all members of any members suspension, termination, withdrawal or
resumption) and Identification (a unique identification member number (ID) provided
by NRB).
c. Member connectivity: The Clearing House operates in Application Service Provider
(ASP) model for providing its services to the members. All application systems and
database components of all members are centrally installed in the Clearing House data
centres. The ECC central node application systems are fully web-enabled. Members
are required to access the centralized servers using the web browser, for performing
ECC functions and accessing information of their own ECC databases.

All members shall set up and maintain a member platform which comprises
workstations, cheque scanners and printers for connecting to the ASP model.
d. System Operation: NCHL major function is taken as system operation i.e daily
operation to clearing session and its final clearing session settlement. It manages the
daily operations by configuring the daily clearing sessions timing, validating
automatically the presented/replied cheque, overseeing the overall clearing cycle and
guaranteeing a mature closure and submission of the Net Clearing Position (NCP) of
clearing sessions to NRB.
NRB has the full authority to approve or reject the extension and the NCHL will
notify all members with the session extension period. It has the full authority to
terminate a session for any reason it deems appropriate. NCHL notify all members in
case the session termination action has been taken. In this situation, all pending
cheques in the terminated session will be rejected due to the session terminated
return reason.
e. Dispute Resolution: In the event of dispute or differences arising between the
members and the parties are unable to resolve amicably, the matter is referred to
Clearing House that is responsible to set up an independent Arbitration Committee.
Again not only concerning with dispute resolution between the members it also
functions to resolve the dispute between Clearing House and Members.

VI. Major activities of NCHL

The Clearing House main activities can be summarized as the following:
Receiving cheques from presenting members for outward clearing, and assuring
the presented cheques validity.
Transmitting cheques to respective Paying members for inward clearing
Receiving replied cheques and rejected cheques from Paying members
Transmitting replied cheques and returned cheques to Presenting members.
Ending the clearing session of the current business day.
Generating the Net Clearing Position (NCP) and submitting the file to NRB for
settlement through the direct members accounts.
Starting a new clearing session.

VII. Clearing Sessions

ECC daily clearing sessions have the following parameters:
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Clearing Date (T): The date on which the cheque shall move from the Presenting
Member to the Paying Member to be cleared. In other words; it is the date on
which the customer account will be credited in the Presenting Member. 1.
Currency: Defines the cheques currency that can be presented and cleared within
the clearing session.
Session Start: The time that the Presenting members can start presenting cheques.
3. Session End: The ending time of the clearing session within a business day (T).
First Cut-off Time (Presentment Cut-off time): The time when all cheques within
the clearing session must be submitted by the Presenting members.
Second Cut-off Time (Reply Cut-off Time): The time when all cheques must be
replied by the Paying members.
Urgency level: ECC shall support the following urgency levels:
Regular Clearing: For regular cheques clearing
Express Clearing: Critical timely-based cheque clearing which requires
immediate reply from the Paying Member.

a) Regular Clearing Sessions

Any presented cheque under a Regular clearing session must be replied before the end of the
Regular Clearing Session (before the reply cut-off time); otherwise it will be auto- accepted.
The session configuration for the regular clearing session has the following settings for a
particular business day (T):
Starts from the previous business day (T-1) at 14:00.
First Cut-off Time (End of Presentment) takes place at 14:00 on the current business
day (T). Cheques presented after that time will be assigned automatically to the
clearing session of the next business day.
Second Cut-off Time (End of Reply) takes place at 15:00 on the current business day.

b) Express Clearing Sessions

The Express Clearing session must be started and completed before the end of the first cut-off
time of the regular clearing session. Any presented cheque under Express Clearing must be
replied within 30 minutes; otherwise it will be auto- rejected by the system with a "time out"
reason. The determination of presenting a cheque with Express Clearing urgency shall be
governed by the following:
Express Clearing should be used for timely-based critical cheques. The determination of
cheques for Express Clearing is the responsibility of the Presenting member, based on a
request from their customers. 2. The ECC shall also determine the cheque amount limits for
express clearing based on the thresholds defined by NRB. Express Clearing Sessions shall
have the following schedules (Sunday to Thursday)
that specify the starting time,
presentment durations and cut-off times for each Express Clearing Session:

1. First Session:
Starts at 10:00
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First Cut-off Time (End of Presentment) is at 11:00

Second Cut-off Time (End of Reply) is at 11:30

2. Second Session:
Starts at 11:00
First Cut-off Time (End of Presentment) is at 12:00
Second Cut-off Time (End of Reply) is at 12:30
3. Third Session:
Starts at 12:00
First Cut-off Time (End of Presentment) is at 13:00
Second Cut-off Time (End of Reply) is at 13:30

c) Friday Session
Special Regular Clearing Sessions shall have the following schedules for Friday that specifies
the starting time, presentment durations and cut-off times for each Regular Clearing Session:
1. Session:
Starts at 10:00
First Cut-off Time (End of Presentment) is at 11:00
Second Cut-off Time (End of Reply) is at 11:30

d) Cheque Clearing Flow

The Cheque Clearing Flow is based on transferring the electronic cheques images within the
defined daily clearing sessions durations for presenting and receiving cheques. The
complete clearing cycle from the beginning till the end takes place within the same business
day (T+0). And any cheque presented after the first cut-off time shall be cleared on the next
business day (T+1). The Cheque Clearing Flow can be summarized in the following main
point:

The Cheque Clearing Flow starts with the outward clearing at the Presenting
member.
The Clearing House routes the presented cheques from the Presenting member to
the Paying member.
The Inward Clearing starts at the Paying member.
The Reply is sent from the Paying member to the Presenting member through
ECC to accept /reject the payment of the cheque.
The Clearing Cycle ends when ECC submits the NCP for the replied cheques to
the NRB for settlement amongst all Presenting and Paying members.

VIII. Risk Management

NCHL being a systemically critical financial market infrastructure, it should identify

scenarios that may potentially prevent it from being able to provide its critical operations and
services as a going concern and assess the effectiveness of a range of options for recovery.
And it should regularly review the material risks it bears from and poses to other entities as a
result of interdependencies and develop appropriate risk-management tools to address such
risks. NCHL has continued to update and upgrade its risk management system in a
continuous basis.

Business Risk
The main business risk faced by NCHL as the national service provider for clearing &
settlements is the risk of not having sufficient banks and financial institutions enrolled as
its members and thus significant reduction in the cheque transaction volume. And this is
of a major concern given the current trend of merger of many of the banks & financial
institutions.

Operation Risk
The operational risk management at NCHL is focused at establishing itself as an efficient
and effective electronic cheque clearing service provider. In order to accomplish this,
risks need to be mitigated in the areas of processes, people and technology. Appropriate
policies and procedures required for the operation have been formulated and
implemented. Its IT Policies are closely aligned with COBIT standards in order to
mitigate the risks associated with information security and to follow best practices.

Systematic Risk
Risks arising due to interdependencies and possibility of transmitting disruptions beyond
NCHL and one/few participants are the systemic risks. This may be due to an inability of
one or more of the participants to perform as expected which could cause other
participants to be unable to meet their obligations when due. NCHL works very closely
with the settlement bank (Nepal Rastra Bank) and with the participating members there
by reducing the overall impact of such risk.

Liquidity Risk
Though NCHL is expected to be profitable in a long run, there is a high probability of
liquidity risk in a short run. The liquidity risk includes the inability of the company to
handle the short and medium term financial liabilities. In order to manage the liquidity
risk, the Board and the management regularly monitor and analyze the cash flow
forecasts. Company financials are also analyzed and monitored in a regular basis.

Interest Rate Risk

Considerable portion of the expenses was in the form of finance cost against the loan
obtained to bridge the funding required for participating member banks software.

As of today, we have already paid all the outstanding loans but downward interest rate in
coming year may affect adversely in the interest income in view of our anticipated cash
inflows.

Foreign Exchange Risk

A significant proportion of the software and maintenance services are sourced from the
international vendor and the payment is made in US Dollars. In order to avoid the upside
risk due to the fluctuations of the Rupee against the Dollar, NCHL managed to enter into
US dollar forward contract with a local bank and hence was able to manage the foreign
exchange risk at manageable levels.

IX. Strategic Plan:

NCHL was established to implement and operate various national payment & settlement
systems and ultimately establish a national payment gateway that can facilitate electronic
transactions in Nepal. In medium to long term, NCHL will be working towards providing
various products/ services in line with the Nepal National Payment System Strategy as
envisioned by NRB.
NCHL has already initiated to implement an interbank payment system (NCHL-IPS) which
after coming into operation will be yet another milestone in the banking sector of Nepal after
NCHL- ECC. NCHL-IPS is a system for clearing low-value large volume financial
transactions that provides a mechanism for the participating banks & financial institutions to
safely and efficiently transfer funds on behalf of their customers as well as for their own
trading purposes. It facilitates nationwide fund transfer between the accounts held at different
banks. Further Future strategic plan of the Company for the coming year are listed as below:

Extend membership to regional BFIs with target of additional 15 members along with
the reduction of 15-18 members due to merger.
Promote and encourage member BFIs to introduce outward clearing from majority of
their branches.
Introduce 2nd and 3rd Express Clearing Sessions.
Upgrade/ Enhance NCHL-ECC System and infrastructure to handle higher cheque
volume.
Assist member BFIs for introducing standard MICR cheques.
Strengthen risk management and implement ISO 27001 based information security
management system (ISMS).
Organize continuous training for the participating member Banks/FIs and for the
NCHL staff.
Start implementation of interbank payment system (NCHL-IPS) and
Introduction of REAL TIME GROSS SETTELMENT SYSTEM (RTGS).

X. PRODUCTS & SERVICES

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NCHL has been in the vanguard of adopting technology based services for making the
payment, settlement and clearing systems in the country efficient, modern and robust. Its first
national payment & clearing system in the area of electronic cheque clearing (NCHL-ECC),
is already in operation. After replacing manual cheque clearing at Janakpur region with
electronic cheque clearing from 26th Chaitra 2070 (9th April 2014), NCHL has completed
nationwide rollout of NCHL-ECC by successfully replacing manual chequeclearing all across
the country.
NCHL-ECC service is an image-based nationwide MICR cheque processing & settlement
solution where an original paper cheque is converted into an image for electronic processing
and is transferred through a secured medium between participating member BFIs. The
physical movement of the cheques are truncated or stopped at the level of the presenting bank
resulting in a faster and easier processing of the cheque transactions. The product and service
of NCHL are listed as below:
a. NPR Electronic Cheque Clearing
This is an electronic cheque clearing service for NPR denominated cheques.
Participating members need to have settlement account in Nepali currency at Nepal
Rastra Bank to avail this service. It is available for both standard (MICR based) and
non-standard (non-MICR based) cheques.
b. FCY Electronic Cheque Clearing
This is an electronic cheque clearing services for USD, GBP and EUR currency
denominated cheques. Participating members need to have settlement account in the
respective foreign currency at Nepal Rastra Bank to avail this service. It is available
for both standard (MICR based) and non-standard (non-MICR based) cheques.
c. Express Cheque Clearing
Express NCHL-ECC service is a special arrangement of short duration for cheque
presentment, response and settlement allowing the BFIs and their customers to present
and realize their cheques faster. Currently one express cheque clearing session is
available for all four currencies NPR, USD, GBP and EUR. However, NCHL will
soon extend this service by introducing 2nd and 3rd express sessions to facilitate
member BFIs and their customers.
d. National Cheque Archive
National Cheque Archive is an additional service provided to the member Banks/FIs
to have an access to the historical cheques and transaction details. All the cheque
transactions older than three months are moved from the NCHL-ECC System to
National Cheque Archive system to store the cheques for up to 7 years and will be
made available to the member BFIs on request.
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XI. Organization Structure

Board of Directors

Chief Executive Officer

Operations Manager
Technology& Infrastructure
Manager
Network
Engineer/ Helpdesk In

System Manager

Finance & Admin Officer

The above chart shows the organizational structure of NCHL. The Board of Directors is at the
top of the hierarchy with the CEO reporting to them. The organization is restricted to a three
tier hierarchy with the Board of Directors at the top, CEO at in middle and line manager as in
the last tier. The overall executive structure comprises of The CEO with direct reporting lines
of various functions.

XII. Economic contribution

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NCHL was established with an initial objective of operating cheque clearing as the first
national payment system later to implement multiple payment and settlement systems in
Nepal. It has successfully rolled out NCHL-ECC system across the nation and have now
completely replaced manual cheque clearing in Nepal. This system has become cost effective,
time saving with quality clearing processing. NCHL has made huge contribution to the
economy. Some of the economic contributions of NCHL are described below.

Fast cash flow

Same day clearing and settlement at Nepal Rastra Bank (NRB) with minimum settlement
time of (T+0) and maximum of (T+1) irrespective of the geographic location of the
bank/branch increases in operational efficiency. NCHL e-clearing services provides fast
cash flow in the banking and financial institutions.

Risk aversion
It may however be noted that the use of non-standard cheque increases the processing
time both at presenting and paying banks manually. There is no need to physically move
the cheques from the branches to NRB for clearing, NCHL reduces operational risk of
cheque losses and cheque related frauds by securing the transmission route.

Improve liquidity position

In manual cheque clearing system there was delaying in converting cheque to cash
whereas in electronic clearing system cheque could be converted into cash immediately
which helps to increase the liquidity position of bank and financial institutions.

Accessibility
Clearing service by NCHL can be extended to the entire country with no geographical
dependency. For example:-In the Far-western region of Nepal, where there is limited
access to financial services, it takes days for a single cheque to clear. People living in
these areas have a hard time dealing with this situation, as opposed to the people living in
the first tier and second tier cities, where banks are present at every turn. Through the
agreement between SAFAL project, Nepal Clearing House, Banks and Financial
Institutions it is expected that NCHL-ECC systems will be accessible to locals in these
deprived districts and will be able to gain immediate access to their finances, opening
doors for them to participate in economic activities.

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Company Shareholders

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