Financial Institution:

Financial institution are those organizations which are established in an economic system to help to borrow and grant loans, act as intermediary between the saver and the borrower.A financial institution is a banking or non-banking institution established under the certain act to contribute for the economic development by collecting the funds and investing in various productive sectors. It acts as a mediator between savers and users of money. It collects funds from individuals and organization by offering various deposits schemes and invests it into various profitable sectors.

Types of Financial Institutions:

Financial institutions can be classified into banking and non-banking institutions. They are as follows:

• Bank
• Insurance Company
• Employees’ Provident Fund
• Citizen Investment Trust
• Financial Cooperative Society

The word bank is derived from the Italian word ‘Banco’ which means a place for keeping, lending and exchanging money. The bank is a financial institution that accepts deposits from individual, organization and pubilc and creates credit It is the manufacturer as well as a trader of money. It collects spare money. Providers’ security invests into productive sectors and forms additional capital. It promotes industrial, agricultural as well as commercial sectors of the economy. It is the signal of economic prosperity and civilized society. It plays the role of agent, which performs all monetary transactions on behalf of its clients. It is the connecting link between business houses, which helps in settling accounts. It is a means for promoting foreign trade.

“Bank refers to a corporate body which has been established and got permission to perform financial transactions.” – Bank and Financial Institute Ordinance 2060

Importance of Bank

It plays an important role in the economic development of the country by performing various functions. The main importance of the bank can be highlighted as follows: -

1. Capital formation
   The bank accepts deposits of spare money from its customers. The deposits are utilized for formation of capital in the productive sectors like industry, trade and service areas of the country.
   
   

2. Granting loan
   The bank grants loan to individual as well as an organization against the security placed. It grants the loan in productive sectors like industry, trade and service areas, which enhances the economic development of the country.
   
   

3. Encouraging saving
   The bank provides full security for the money deposited and allows interest on such deposits. It thus, encourages people to save as much as possible which supports capital formation.
   
   

4. Issuing notes
   The bank issues coins and paper notes which help for exchanging goods and services. Such coins and notes make easier for measuring the value of goods and services.
   
   

5. Exchanging foreign currencies
   The bank exchanges foreign currency as per the direction of the central bank. It fulfills the requirement of foreign currencies, which promotes foreign trade.
   
   

6. Promoting trade and industry
   The bank provides different types of financial as well as technical services to the trader and manufacturer, which encourage and improve the quality of industry and trade. It supports the development and expansion of industrial and trading activities.
   
   

7. Assisting the government
   The bank provides necessary financial data and information to the government, which facilitate for preparing monetary, tax and fiscal policies of the country.

Types of Bank

There are different types of banks emerged in the banking sectors specializing the different functional areas like industrial, commercial, agricultural and rural development. The following are the different types of bank: -

1. Central Bank

2. Commercial Bank

3. Development Bank

1. Central Bank 

The central bank is the apex bank in a country. The central bank is established for controlling all the financial sectors, commercial banks and implementing the economic policies of the government. The central bank is owned and managed by the government. The banking system of a country without a central bank is like a human body without head. It is the central arch of the monetary and fiscal frameworks in every country and its activities are essential for the proper functioning of economy and fiscal operations of the government. Reserve Bank of India, Nepal Rastra Bank, Bank of England, The Federal Reserve System of America, The Bank of France are the examples of central bank.

The central bank performs the functions like developing banking system, issue of paper notes and coins, controlling of credit, exchanging of foreign currency, and acts as the bank of the government. The history of central banking began with the establishment of the Riks Bank of Sweden. In England, Bank of England was established in 1694 as central bank. The Nepal Rastra Bank is the Central Bank of Nepal which was established on 14th Baisakh, 2013 in accordance with provisions of the Nepal Rastra Bank Act, 2012. A central bank is different from commercial banks and does not engage in ordinary banking activities.

Functions of Central Bank 

  The main functions of central bank are as follows:

i) Issue of currency notes:- Issue of the currency notes of a country is one of the most fundamental functions of the central bank. The central bank is empowered by law to issue currency notes. Nepal Rastra Bank, the Central Bank of Ne the only authorized bank to issue notes. The central bank issues notes w permission of the government. The central bank is required by law to keep gold, silver, foreign currency, foreign securities, foreign bill of exchange, and Nepali coins of at least 50% of the total amount of notes to be issued as reserve. If the issued notes circulated are not accepted in the market, the government will responsible.

ii) Bank of government:- Central bank acts as a fiscal agent, banker and advisor on all important financial matters to the government. As a banker on the government, it keeps the deposits of the government and makes the payments Oh bertall or government. It buys and sells foreign currencies on behalf of the government. It keeps the stock of gold of the government. Thus, it is the custodian of government money and property. It provides required loan to the government. It also advises the government on economic and money matters such as controlling of inflation, devaluation and revaluation of currency, deficit financing, balance of payments etc.

iii) Bank of banks:- Other banks are established with prior permission of the central bank. Determining the requirements of types of banks, controlling the banks is the sole authority of central bank. While determining the rate of interest, collecting deposits from people and providing banking services to the people, the other banks have to follow the orders and suggestions of the central bank. The central bank acts as the custodian of the cash reserves of commercial banks.

iv) Management and control of foreign currency:- It is the only bank which performs the functions of management and control of foreign currencies. It performs the functions of exchanging local currency with foreign currency at the rate determined by the government. It authorizes the commercial banks to perform the exchange functions of foreign currency.

v) Development of banking system:- The main task of the central bank in underdeveloped countries is to bring about rapid expansion of banking facilities. It helps other banks by granting loans and control them by increasing the reserve ratio. In order to develop the banking system, it gives necessary instructions to other banks to open branches in different places of the country. It inspects the other banks from time to time and guides them. It helps other banks by giving technical advices.

vi) Mobilization of saving and capital:- The central bank has the full authority to mobilize the accumulated capital in different productive and profitable sectors of the country. It gives necessary instructions to commercial banks to accept deposits from the public and invest in developmental projects. It also sells government securities bonds and treasury bills.

vii) Creation of credit and control:- The central bank formulates and administers monetary policy and regulates the volume and flow of the credit created by the commercial banks. It operates general credit control measures through changing the bank rate or through open market. The central bank keeps a close watch of the money market and adopts method to expand or contrast the volume of credit according to the requirements of trade.

viii) Other functions:- Besides the above functions, it performs other functions like giving loan to other banks against securities, opening bank accounts with the foreign banks, becoming the member of IMF, giving training for the development banking system, providing overdraft facility to other banks and transferring government funds from one place to another etc.

2. Development Bank

The banks established for developing certain special sector of economic infrastructure such as agriculture, industry, mines, commerce, transport, communication and electricity are called development banks. Development Banks are established under special act to provide necessary financial, technical and administrative assistance to industry, agriculture and other sectors which play an important role in uplifting of economic condition of the country. These banks provide long term, medium term and short term loans. Nepal Industrial Development Corporation (NIDC), Agriculture Development Bank (ADB), Village Development Bank are some of the development banks established in Nepal.

Development functions of development banks are: 

i) Provide necessary assistance in establishing new industries. The development bank helps the industries in providing efficient management projecting plans and policy making, producing or providing raw-materials, survey of markets, credit investigation and promotion of private foreign investment.

ii) Perform research and feasibility study for establishing new industries and programes. The development bank helps in developing necessary infrastructure for establishing new industries by providing different technologies. It helps in market analysis and makes necessary arrangement for techniques of management and administration. It helps in collecting capital of the industry.

iii) Launches necessary technical training programmes and provides training to industrialists. It gives necessary advices to industrialists and government regarding the industrial opportunities.

vi) The development bank creates a favourable environment to national and international investors by providing them investment security and confidentiality in investment.

3. Commercial Bank

The concept of bank was evolved with the commercial idea. A bank which deals with commercial functions is commercial bank. Bank acts as an intermediary between those who have surplus money and those who need it. Thus receiving money in the form of deposits and lending money in the form of loan are the two main functions of all commercial banks. Banks borrow money in the form of deposits and lend in various forms. Commercial banks are the backbone of economic development of a country. Commercial banks provide required working capital to commerce and industry. The commercial banks perform different functions like accepting deposits, giving loan, allowing an overdraft, discounting bills, remitting funds, keeping valuables under safe custody, acting as an agent. Nepal Bank Limited is the first commercial bank of Nepal which was established in 1994 B.S. The 2nd commercial bank Rastriya Banijya Bank was established in 2022 B.S. The other commercial banks established in private sector are Nabil Bank Ltd., Nepal Investment Bank Ltd., Standard Chartered Bank, Himalayan Bank Ltd., Nepal SBI Bank Ltd., Nepal Bangladesh Bank Ltd., Century Commercial Bank, Everest Bank Ltd., NIC Asia Bank Ltd., Bank of Kathmandu Ltd. etc.

Functions of Commercial Bank 

:-  The following are some of the important functions of a modern commercial bank:

a) Accepting deposits:- This is the most fundamental function of a commercial bank. The commercial bank accepts three kinds of deposit from its customers:

(i) current deposit

(ii) saving bank deposits, and

(iii) fixed deposits.

i) Current deposits:- This type of deposit is suitable for businessmen and offices only. The amount deposited under this deposit can be withdrawn at any number of times by issuing cheques on the bank. Usually the bank does not give interest on such deposits.

ii) Saving bank deposits:- These deposits are not as freely withdrawable as current accounts. The amount withdrawable from such deposit accounts is fixed up to a certain limit as per the rules set by the bank. Interest is paid on such deposits by the bank to the depositors. This type of deposit encourages the low income group of people to make a habit of depositing their surplus incomes.

iii) Fixed deposit:- These deposits are made for a fixed period and cannot be withdrawn before the expiry of the term. Bank allows higher rate of interest on these deposits. The rate of interest varies with the length of the period and the amount of deposit made. One can take loan against the security of fixed deposit papers, but he has to pay 2% more interest than he gets.

b) Providing loan:- The next function of commercial bank is to advance loan to commerce, industry and needy persons. The bank lends money to different traders, industrialists and other common people against the security of gold, silver, diamond, land, shares etc. on short term and long term basis. The bank charges interest on loans given. Commercial banks grant loans to the borrowers in three ways: (a) cash credit (b) over draft (c) discounting of bills.

c) Transfer of money:- Banks transfer money for their customers through bank draft and telegraphic transfer from one place to another. This is the cheapest and safest way of sending money.

d) Agency service:- Banks work as agent for their clients. They collect dividend on shares, interests on investment and pay insurance premium, club membership fee and other payments on behalf of the customer as per instruction. They also buy and sell stocks and shares for their customers.

e) Exchange of foreign currency:- The commercial bank also performs the functions of exchanging of foreign currency. It also transacts other foreign exchange and buys and sells foreign currency.

f) Opening of letter of credit:- The commercial bank also provides the facility for opening of letter of credit for export and import trade.

g) Safety locker:- Ornaments and valuable documents such as gold, silver, jewellery and agreement papers can be kept in safe custody with the bank in strong locker on payment of a nominal charge.

h) Help in issue of shares:- This bank helps to issue shares and debentures of companies, corporations and other organizations on their request and stands as financial guarantor. For the services it charges commission. So this bank underwrites the shares and debentures of the companies and helps in collection of funds from public.

i) Other miscellaneous functions:- It issues various forms of credit instruments such as cheques, drafts, travellers’ cheques etc. which facilitate transactions. It provides various commercial statistical informations to the people and the government. It buys and sells bills of exchange, provides overdraft facility to its customers.