Banking and its Types
A bank is a financial institution that deals with money and credit. It accepts deposits of money from the public in different accounts and provides loans the needy persons. The bank plays a role in the pool which fills the gap between surplus and deficit amounts of money. It is the manufacturers well as well as a trader of money. Banks provide different facilities to the public and earn profit through the management of savings and credits. Banks perform both lending and acceptance functions.
Roles/Importance of Banking:
1. Mobilization of Savings:
The banks collect saving from the general public and mobilize them in the productive sectors.
2. Formation of Capital:
The bank helps in the capital formation of a country or nation. Capital formation begins with savings. The public keeps their savings in the bank, the business sector borrowed loans from the bank to purchase their capital equipment in order to produce goods and services.
3. Creation of Employment Opportunities:
The establishment of banks and other financial institutions creates more job opportunities. They need more skilled manpower to run their daily activities. Due to this more people will be employed. It also helps in the reduction of unemployment problems.
4. Managing foreign trade and payment:
Free trade enables the free movement of goods and services from one country to another. Financial transactions related to the import and export of goods and services are managed through banks.
5. Remittance of Money:
The development of financial institutions like banks helps for the remittance of money. People send and receive money from different parts of the world through banks. Banks are the only source for sending money from one country to another country.
Classification of Banks:
1. Central Bank:
There is only one central bank in each country. The central bank is the supreme bank of a country. The central bank of Nepal is Nepal Rastra Bank which was established on 14 Baisakh 2013 B.S.
2. Commercial Banks:
Commercial banks are established to earn profit. The oldest commercial bank of Nepal is Nepal Bank Ltd.
3. Development Banks:
Development banks mostly invest in long-term development activities. By the end of 2016, there are 64 development banks in Nepal.
4. Saving Banks:
Saving banks like Postal saving bank in Nepal are established to facilitate deposits in remote areas.
5. Exchange Bank:
Exchange banks are established to operate a foreign exchange in the country. There are no such banks in Nepal.
6. Rural Development Bank:
The rural development bank is established in order to uplift the living standard of miserable or poor people who are engaged in agriculture. These banks provide loans to deprived rural women at a very low rate of interest.
The central bank is the supreme bank of a country. It is the monetary authority that regulates, guides, and develops the banking system in the country. In every nation, a central bank is established in order to arrange for the circulation of currency throughout the country, develop the financial sector, and stabilize the exchange rate. Nepal Rastra Bank is the central bank of Nepal, which was established on 14 Baisakh 2013 B.S.
The central bank performs its regular and development functions. Each type of function are discussed below;
1. Monopoly of note issue:
The primary function of the central bank is to issue notes in the country. It has the monopoly rights of issuing banknotes subject to certain safeguards imposed by law.
2. Bank of all banks or Bankers Banks:
Central bank keeps the cash reserves of commercial banks. All the commercial banks and other banks have their accounts in the central bank. So, the central bank performs as a banker’s bank.
3. Lender of the last resort:
The central bank acts as the lender of the last resort by providing loans in the form of re-discounts and collateral advances to commercial banks and financial institutions.
4. Control of Credit:
One of the most important functions of the central bank is to control credit in the economy, in order to achieve a healthy financial system and economic progress.
5. Foreign Exchange Control:
The central bank of any country holds the absolute right to regulate and control foreign exchange operations. The central bank can manage its exchange rate in case of any economic problem.
6. Custodian of the Foreign Currency and Metallic Reserves:
The central bank is the custodian of the national reserves of foreign currencies. It purchases and sells foreign exchange on behalf of the Government. The central bank maintains the stability of the foreign exchange rate.
- The central bank collects data related to money, banking, and even real sectors of the economy.
- Helps to develop money market and capital market by providing guidelines, regulations, supervision, and monitoring.
- Promotion of agriculture sector by enlarging agriculture development bank, rural development bank, micro-finance, etc.
- To achieve high and sustainable economic growth by making suitable monetary policy.
- Promoting individual sectors by formulating provisions for safe loans.
- Develop human resources by providing training, workshop, etc.
- Maintain the relation with international financial institutions like World Bank, Asian Development Bank, International Monetary Fund, etc.
- Helps to reduce poverty by financing poverty reduction programs.
Commercial banks are the financial institutions established in order to earn a profit doing their banking business. It accepts deposits of money from the general public and advances loans for commercial purposes to businessmen, traders, producers, individuals, etc. It fills the gap between savers and investors or surplus and deficit amounts. In Nepal, the oldest commercial bank is Nepal Bank Limited, which was established in 1994 B.S, before the establishment of Nepal Rastra Bank.
Functions of Commercial Banks:
Functions of commercial banks are categorized into primary functions, secondary functions, and contingent functions which are discussed below.
Under primary functions, the commercial banks perform the following activities;
1. Accepting Deposits:
A commercial bank accepts three types of deposits on three different accounts;
a) Current Account: In this type of account, the depositors can withdraw their deposits without any prior information to the bank. The bank does not pay any interest to the depositors.
b) Saving Account: In this account, the bank provides a certain percentage of interest, and also the depositors can withdraw their deposits in case of need. Small investors invest their savings in such accounts for both dual purposes.
c) Fixed Deposit Account: Under this account, the depositors deposit their money for a fixed period of time. The banks pay a slightly higher percentage of interest and the depositors are obliged to keep their deposit for the mentioned time period.
2. Providing Loans:
Commercial banks offer short-term, medium-term, and long-term loans. The major loans provided by commercial banks are given below;
a) Cash Credit: Cash deposit is provided by keeping collateral or security deposits. Bank issues loans in the form of cash money.
b) Overdraft: Commercial banks provide a facility for withdrawing excess money which is more than the deposited amount in one’s account, which is called overdraft.
c) Discounting Bills of Exchange: Under this scheme, the bill holder may use the bill as collateral to get the loan in case of financial problems. Different types of bills are fixed deposit certificates, share certificates, and so on.
d)Call Loans: If a person is looking for a very short period of time, he deposits collateral and commercial banks provide loans by charging a certain rate of interest.
1. Collection and Payments of Credit Instruments:
Commercial banks collect different types of credit instruments like cheques, drafts, etc, and make the payment for them. Such instruments include the bill of exchange and promissory notes as well.
2. Remittance of Money:
One of the major businesses of today’s commercial banks is sending and receiving money from one place to another place or from one nation to another nation.
3. Income Receiving and Payments:
Commercial banks receive the income of their customers like dividends, rent, etc. Also, these banks make payment of bills of the account holders like insurance premium, income tax, electricity bill, etc.
4. Purchase and Sale of Securities:
Commercial banks may purchase and sell securities like shares, debentures, bonds, etc, at the request of their customers.
The following are the contingent functions of a commercial bank;
5. Safety of Valuable Goods:
Commercial banks provide safety lockers for valuable items like gold, silver, etc.
6. Issues Credit Instrument:
Commercial banks perform the function of issuing various credit instruments like drafts, letters of credit, credit cards, traveler’s cheques, and so on.
7. Foreign Exchange Operation:
Commercial banks deal with foreign currency exchange operations under the direction of the central bank. Commercial banks purchase and sell foreign currencies following the rules and regulations of the central bank of the country.
Commercial banks publish their information on daily, monthly, and yearly bulletins to show their financial status to the central bank, their customers, and the general public.
Economics II – Buddha Publication Pvt Ltd
Economics II – Asmita Publication Pvt Ltd