General Organizational Structure of Grameen Bank Replicators

Organizational Structure of Small Farmers Cooperatives

Main Committee                                                          SFs
– Management of the organization                                                  – Credit demand & repayment
– Monitoring & Follow-up                                                            – Savings deposit
– Co-ordination with the line agencies                                            – Be an active members
– Resources collection & mobilization 
Inter-Group                                                                              Group
– Credit recommedations                                                             – Identification of group activities
– Saving collection & mobilization                                                  – Saving collection
– Playing an intermediatory role between main                               – Credit recommendation
– committee & the groups
– Implementing social & community activities

Problems of Rural & Micro Credit Operations

The problems of Rural and Micro Credit operations in Nepal can be summarized as below:

• Presence of a number & variety of rural & micro financial institutions;
• Lack of co-ordination between various rural & micro financing institutions & programmes;
• Duplication & overlapping;
• Micro-Credit is costlier activities ( operating cost is relatively high);
• Limited outreach (about 20 percent of the total rural & micro credit demand is supplied by the    formal       sector);
• Heavy concentration in the Tarai (plain) region;
• Difficulties in extending the micro credit service in the hilly & mountainous region (About 68 % of the total land is covered by the region);
• Lack of Proper regulation & supervision;
• Legal  hindrance; etc.
• Security aspect due to the Maoist activities is seems to be a serious problem.     

Rural Financing Programs

Various rural & micro - financial activities and programs, which are being implemented through different types of financial institution, are briefly mentioned below. 

(a) Priority Sector /Deprived Sector Credit

In the year 1974, the NRB introduced the concept of directed lending. Commercial banks were required to extend credit of at least 5 percent of their total deposit liabilities to the small sector comprising agriculture, cottage industry and services. The small sector program was redefined in 1976 and renamed as the priority sector-lending program. The ratio was then increased from 5 to 7 percent of the total deposits. In 1981, the lending ratio was set at 10 percent and the program started under the " Intensive Banking Program (IBP)". The program is based on the " Area Development Approach" and provides credit to all the beneficiaries within a specific geographical area on the merit of project viability and relies on the regular supervision of the credit projects. It also provides credit on group guarantee basis to the poor who cannot offer collateral.

The directed lending has been tied up with the total loans since 1984 and the commercial banks are directed to extend at least 8 percent of their total loans to the priority sector. In 1990, it was increased to 12 percent. Since 1991/92, the commercial banks have been directed to extend a certain percent of their total loans to the deprived sector.

The deprived sector-lending program was launched with the objective of uplifting the socio-economic status of poor deprived people of the society. A loan amount up to a limit of Rs. 30 thousand per borrower granted by the commercial banks for productive purpose qualifies for the deprived sector lending. As for such, commercial banks are required to lend a minimum of 0.25 to 3.0 percent of their total loans to the deprived sector. Failure to comply such provision causes them to be penalized in monetary terms.

The IBP programme has extended credit to more than 500 thousands borrowers out of which almost 300 thousands rural clients received the priority sector and deprived sector credits. The IBP has disbursed more than Rs.10 billion and out of the total amount almost Rs.4 billion has been disbursed to rural borrowers. 

(b) Production Credit for Rural Women

Production Credit of Rural Women (PCRW) was introduced in 1982 by Women's Development Division (WDD) of the Ministry of Local Development, with financial support from UNICEF. The NRB has been mobilizing the funds through three participating banks namely Rastriya Banijya Bank, Nepal Bank Limited and Agricultural Development Bank. The basic objective of the program is to raise the socio economic status of rural women by providing access to institutional credit for employment and income generating activities. Since 1988, the program has been financed by IFAD.

The program has covered 67 districts and has disbursed loan amounting to Rs. 754.5 million to 81,000 clients by mid-July 1999. It has been implemented through 163 branch and sub-branches of commercial banks (IBP) and SFDP units of ADB/N. 

(c) Rural Self Reliance Fund

Nepal Rastra Bank has been managing and administering the Rural Self Reliance Fund (RSRF) created by the His Majesty's Government of Nepal with a corpus fund of Rs. 10 million in 1991. The amount had been raised to 20 million in 1992. The fund has been set up for purpose of providing loan to NGOs and Saving and Credit Cooperatives ( SACCOs) for lending to the rural poor. The main objective of the fund is to encourage NGOs and Sefl-help groups in rural areas for productive purpose and develop financial intermediation between the fund and local beneficiaries.

The RSRF provides credit to the SACCOs and NGOs on the basis of total regular savings/or share capital. The ceiling of credit to the SACCOs and NGOs is 10 times of their total savings/ or share capital or a maximum of Rs.750 thousands, whichever is lower. The Fund provides a small loan of up to Rs. 30,000 per borrower. The interest charged to the credit is just 8 percent.  It is noteworthy they will get back 75 percent of the interest in case of timely repayment of installment of their loans. The credit approved is disbursed for up to 3 years in installment basis. During the course of disbursement of the credit, the fund keenly observe whether the loan is properly utilized. It is after the confirmation, the concerned local financial institutions can get the remaining installment from the fund.

From the inception of the Fund to mid-July 2002, a total of Rs.52.4 million has extended to 7595 beneficiaries family through 129 SACCOs and 48 NGOs, spread over 42 districts of the country. During the period Rs.36.8 million has recovered and as a result the outstanding credit stood at Rs. 15.5 million. The recovery rate of the Fund is 92 percent.

(d) Micro Credit Project for Women

Micro Credit Project for Women (MCPW) was launched in 1994 with financial assistance from Asian Development Bank to supplement the PCRW program. The program is jointly implemented by Women's Development Division (WDD) of the Ministry of Local Development and Nepal Rastra Bank. BRB is responsible for credit component whereas WDD and NGOs are responsible for non-credit activities. The participating banks in the program are Nepal Bank Limited and Rastiya Banijya Bank. As of mid-July 1999, the service of this project has been extended to 15 districts of the kingdom. The 46 branches of the participating banks have disbursed loan amounting to Rs. 233.7 million to at least 17 thousand women.         

(e) Banking with the Poor (BWTP)             

Banking with the poor program was initiated by Austrian NGO named Foundation for Development Corporation (FDC) in 1991. The vision of the program consists access of credit to the rural poor on a sound commercial basis. RBB is executing the program through 31 branches to 18 districts of the country. The program is designed exclusively for the rural poor women. Credit is disbursed to a member up to the limit of Rs. 30,000. The first credit size is Rs. 10,000 and then increased by Rs. 5,000 in every consecutive year. The Bank is charged 14 percent interest to its borrowers. As of mid-July 1999, this program has extended Rs. 80 million credit nearly 9000 poor families through NGOs and self help groups. The credit is given to poor women under the group guarantee basis in this program. 

(f) Agricultural Development Bank ( ADB/N) 

Agricultural Development Bank ( ADB/N) has been remaining the foremost financial institution for providing micro-financial services in Nepal. The ADB/N is one of the pioneering financial institutions in Asia which initiated the first group-based micro-credit program in 1975 which is known as Small Farmer Development Program (SFDP). Under SFDP, the ADB/N has availed credit to more than 200 thousand micro-borrowers out of which around 25 percent being the female borrowers. There are 357 SFDP sub-project offices (SPOs) covering 650 village development committees (VDCs) of Nepal. The ADB/N, through its SFDP offices, has participated in the IFAD-Funded Production Credit for Rural Women Project ( PCRW Project). Beginning from FY 1993/94, the ADB /N has initiated another innovative approach of developing self-help organizations at grass-root level, i.e., Small Farmer Cooperative Limited (SFCL) with the technical assistance of GTZ. Under this approach, the ADB/N has banded over 85 SPOs of SFDP as SFCLs  which is owned, managed and controlled by small farmers themselves. They play the role of financial intermediaries between the ADB/N and small farmers. 

(g) Grameen  Bank Financial System 

The Grammen Bank Financial System was introduced in Nepal in 1992. Nirdhan, an NGO was the pioneering organization in this regard. Nepal Rastra Bank played an instrumental role in the establishment of rural development banks. There are altogether five rural development banks established on a regional basis. NRB holds about two third of the total shares of these banks. All these banks adopted the outreach model of Grameen  Bank, Bangladesh. It is worth mentioning that Nepal is the largest replicator of Grameen Banking Financial System outside Bangladesh. The main objective of all of these kinds of institution is to improve the socio-economic status of rural poor women by promoting the formation of self-help groups and facilitating their access to formal credit.             

As of mid-July 2002, the bank has disbursed of Rs. 6812.4 million to the economic upliftment of 150 thousands poor rural women. The banks have extended the services in 42 districts of the country. Out of the total amount disbursed, Rs.5626.5 million has recovered and the total outstanding credit has remained at Rs. 1185.9 million.The credit recovery performance is outstanding with nearly 100 percent and they have proved that the poor are bankable and trustworthy. Nirdhan and Centre for Self Development (CSD), NGO, is also involving in this system since 1993 and 1994 respectively. 

(h) Saving and Credit Co-operatives

Saving and Credit Co-operatives (SACCOs) are member owned, controlled and capitalized organizations. They provide financial services to their own members. As of mid -July 1999, there are 1,138 SACCOs registered with the Co-operative Department in Nepal, out of which 322 SACCOs are members of the National Federation of Saving and Credit Union of Nepal (NEFSCUN). There are altogether 64944 members in the SACCOs. Out of these, 27,507 are female members and the rest 37,447 are male members. The total share capital of these SACCOs is Rs. 45,686,657. 

(i) Besides above, His Majesty's Government of Nepal has recently introduced some programs namely "Gareeb Sanga Bishweshwar" Bishweshwar Among the Poor), " Mahila Jagritee" (Women Awakening) and "Ganeshman Singh Peace Campaign" aimed at facilitating the rural development and reducing poverty. In addition "Third Livestock Development Project", " Poverty Alleviation Programme for Pashim Tarai" & " Community Groundwater Sector Irregation Project" are in operation in an organizational framework of Nepal Rastra Bank. 

A central level program execution committee and district level coordination and monitoring committee have been formed in 75 districts for implementation of Bishweshwar Among the Poor program. A manual for this program has been prepared and put into practice. ADB/N will carryout district level implementation of this program.

Recruitment and training of social mobilizers for their placement in 205 election  constituencies of the kingdom have been completed by the end of the fiscal year 2000/01. 

Mahila Jagritee Program has been launched by forming Central Guidance Committee and District Co-ordination Committees in 75 districts to benefit 6540 rural deprived women of 940 village Development Committees ( VDCs). A Mahila Jagritee and income Generation Guidelines (Manual) 1999, has been prepared and put in practice for the implementation of this program. Another Manual has also been prepared to carryout rehabilitation under the Ganeshman Singh Peace Campaign Program.

Micro-Finance Policies in Nepal

Nepal Rastra Bank Act, 2002 has empowered the NRB to inspect and supervise all financial institutions including Rural Micro-Financial Institutions and issue directives. So, NRB has played a key role in policy formation and execution to the financial institutions. The major policies issued for the Micro-Financial institutions are as follows: 

1. Commercial banks are required to extend 12 percent of their outstanding loans and advances as priority sector credit, of which 0.25 to 3.00 percent should be extended to deprived sector.  
2. The central bank provides refinance facilities to commercial banks against the credit documents of   the priority sector credit. 
3. In order to open an urban branch, commercial banks need to open one branch in semi-urban and one in rural area compulsory.  
4. Micro credit is normally based on group guarantee and it is actually collateralless lending. 
5. Financial Intermediary Act, 1998 has been enacted to enhance the Financial Intermediaries ( FINGOs) for wholesale lending
6.  "Poverty Alleviation Fund " has been created for the growth of rural financial markets. The fund will be utilized for conducting training programs and extending micro-financing services. 
7. Rural Micro-Finance Development Centre (RMDC) Ltd. has been established for wholesale lending to Micro Financial Institutions to enhance rural micro-credit.  
8. Single borrower limit of micro credit (deprived sector) has been fixed up to Rs.30, 000.
9. Commercial bank can also provide credit to the ADB/N, RDBs, SACCOs, and FINGOs as priority sector credit.  
10. Nepal Rastra Bank is carrying out the " Restructuring Programme "in Grameen Bikash Banks due to the heavy losses.
11. Priority Sector Credit Programme extended by the commercial banks will be phasedout within next five years but deprived sector landing will remain valid. 

Institutional Arrangements on Micro-Credit Operations in Nepal

Background of the Country

Nepal is one of the least developed countries in the world having US$ 220.00 per capita income. The Nepalese economy is predominantly an agricultural economy. About 81 percent of the  population is engaged in the agriculture sector whereas about 86 percent of the population lives in the rural sector of the country. Agricultural sector contributes 40 percent to Gross Domestic Product (GDP) of the country. According to the National Living Standard Survey 1996, about 42 percent of the population were found to be living below poverty line but at the end of the Ninth Plan 2001, the figure has comedown to 38 percent.

Nepal has been witnessing planned development efforts since the last four and a half decades. The Ninth Five Year Plan has just completed in 2001. The objectives envisaged in most of the plans aim at reducing poverty. However, the intensity of poverty in the country calls for massive and genuine efforts. 

An Overview of Financial System

The history of modern financial system of Nepal was begun in 1937 with the establishment of the Nepal Bank Ltd. (NBL) as the first commercial bank of Nepal with the joint ownership of government and general public. As mentioned above, Nepal Rastra Bank (NRB) was established after 19 years since the establishment of the first commercial bank ( i.e.,NBL). After the establishment of NRB, Nepal witnessed a systematic development of the financial system. After the restoration of democracy in 1991, Nepal has clearly been following a liberalized economic policy and witnessing diversification in financial system. As a result, various banking and non-banking financial institutions have come into existence. As of mid-July 2002, there are 16 Commercial Banks, 16 Development Banks, 5 Regional Rural Development Banks, 54 Finance Companies, 34 Saving and Credit Cooperatives and 25 Non Governmental Organizations (NGOs) operating in the country. These financial institutions are under the regulation and supervision of the NRB. Besides these institutions, there are more than 1500 registered saving and credit cooperatives operating in the different part of the country and there are many NGOs involves in this sector. 

Evolution of Institutional Micro Credit Activities

The banking system in Nepal was introduced with the establishment of Nepal Bank Ltd. (NBL) in 1937. However, the activities of the bank was confined to accepting deposits & providing loans only to the commercial sector in Kathmandu and other limited urban areas. The country's central bank- Nepal Rastra Bank ( NRB) was established in 1956. In the initial years of operation, the NRB had been focusing towards monetization of the economy by circulating Nepalese currency all over the country. After achieving some progress, it started taking initiation towards institutional development. Consequently, Nepal Industrial Development Corporation  (NIDC), Agricultural Development Bank (ADB/N) and Rastriya Banijya Bank       (RBB) had been established.

The establishment of ADB/N was a landmark in the development of rural financial market in Nepal. However, it would be worth mentioning that the institutionalization of rural credit was actually begun in 1956, when cooperatives were established in Chitwan with a view to providing credit support to the resettlers. In the year 1974, the NRB introduced the concept of directed lending so that a said proportion of the commercial bank's sources could be utilized for the development of rural and agricultural sectors. The concept of directed lending was also considered to be a  ground breaking initiative in the development of small sector comprising agriculture, cottage industry and services. 

In order to support the national goal of poverty reduction, Nepal Rastra Bank has been carrying out a number of developmental functions along with its core function of central banking. For the development of rural financial system in particular, the NRB has initiated institutional development programs as well as various rural financing programs aimed at raising the standard of living of the people living in abject poverty below the poverty line and reduce the regional disparities. At the same time, it also encourages private sectors to take part in the rural financial system. 

Deposit Mobilization of Commercial Banks increased by Rs. 19.8b

The deposits mobilization of commercial banks in the first four months of 2009/10 increased by Rs.19.8 billion (3.6 percent) amounting to Rs.569.7 billion.

The total deposits had increased by Rs.27.2 billion (6.5 percent) in the corresponding period of the previous year. Similarly, credit to the private sector expanded by 10.1 percent (Rs.41.0 billion) in the review period compared to an increase of 9.2 Percent (Rs.30.2 billion) in the corresponding period of the previous year, the NRB report said.

Of the private sector credit, credit to the production sector witnessed a lower rate of growth in the review period. The credit to that sector increased by 4.1 percent (Rs.3.6 billion) in the review period compared to a growth of 8.3 percent (Rs.6.3 billion) in the same period of the previous year.

In the review period, the credit to wholesale and retail business as well as finance, insurance and fixed assets increased by 14.9 percent (Rs.10.3 billion) and 21.8 percent (Rs.8.5 billion) respectively.

The credit to these sectors during the corresponding period in the previous year had increased by 4.1 percent (Rs.2.8 billion) and 6.9 percent (Rs.5.1 billion) respectively.

Likewise, the credit to the service sector registered a growth of 10.4 percent compared to a growth of 8.7 percent in the same period last year. Although the growth of the credit to real estate sector decelerated, the volume of such credit flow marginally increased in the review period than that in the same period of the previous year.

The credit to such sector stood at Rs.5.5 billion in the first four months of 2009/10 compared to Rs.5.5 billion in the same period a year ago.

Liquidity position of commercial banks

The liquid assets of the commercial banks declined significantly in the review period.

In the first four months of 2009/10, such assets declined by 10.6 percent to Rs.167.8 billion against a growth of 2.5 percent amounting to Rs.154.9 billion in the same period of the previous year.

Of the components of liquid assets, liquid fund declined by 19.5 percent in the review period. Similarly, balance held abroad by commercial banks declined by 9.9 percent to Rs.48.1 billion, while the investments on government securities increased by 3.9 percent in the review period.

The higher growth of loans and advances relative to deposit mobilization mainly attributed to the tightening of liquidity position of the banks.

In the review period, the loans and advances of the banksincreased by 8.7 percent (Rs.45.0 billion). As a result, the credit deposit ratio increased to 85.8 percent as at mid November 2009 from 81.2 percent in mid-July 2009 while the liquidity deposit ratio declined to 29.5 percent from 34.1 percent in mid-July 2009.

Concept of Deposit

The excess of income over consumption requirement is saved. Such savings are deposited in commercial banks, even amounts to be spent for consumption purposes are deposited in commercial banks. Payment for goods and services is made in cheques drawn on banks. Banking habit is growing faster. People deposit their earnings in commercial banks because banks vaults are safer than home coffers and they pay interest according to the kind of deposits.

It is important that the commercial bank’s deposit policy is the most essential policy for its existence. The growth of banks depends primarily upon the growth of its deposits. The volume of funds that management will use for creating income through loans and investment is determined largely by the bank’s policy governing deposits. In other words, when the policy is restrictive, the growth of bank is restated or accelerated with the liberalization in the deposit policy. In banking business, the volume of credit extension much depends upon the deposit base of a bank. The deposit creating powers of commercial banks forces to raise the assets along with the liabilities side of the balance sheet. In other words, assets give rise to liabilities. Traditionally, the deposit structure of a commercial bank was thought to be determined by the depositors and not by bank management. There are regular changes in this view in the modern banking industry. Thus banks have evolved from relatively passive acceptors of depositors to achieve bidders for funds. Depositors are one of the aspects of the bank liabilities that management has been influencing through deliberate action (Vaidya, 1999:68).

Thus, bank deposit is subject to various form of classification. The deposits are generally classified based on ownership, security and the availability of funds. There are two types of deposit which are as follows.

a) Interest Bearing Deposit

Deposit in which banks are required to pay interest is known as interests bearing deposit. Saving, Term (Fixed), Call and Recurring deposit are interest bearing deposit.

(i) Saving Deposit

A saving deposit is one in which middle class people and general server open a limited amount of money that can be withdrawn and low level of interest will be provided by bank. This is a very common and general deposit account, which is suitable for those classes of people who want to save some portion of their earnings or the money left after the consumption. Initial deposit as decided by the bank must be made to open the Saving Accounts. There are some restrictions in withdrawing money at the same time the limitation depends as per nature of the economy and from one country to the other country or every one bank to the other.

(ii) Fixed Deposit of Time Deposit

This is a kind of deposit in which banks offers fixed interest rate on the deposit and repays principal together with interest at fixed maturity or pays interest on regular interval. So the money deposited in this account can be utilized by banks for medium or long term credit freely being confident that the depositors will not come to claim until the time lapses. Normally higher interest rate is offered for long term deposit and lower interest rate for short term deposit. The time deposit is the main source of commercial banks for their credit operation. Investment in medium term and long purposes is possible only through this type of deposit. However, the depositor can take loan under security. In this context of Nepal, fixed deposit has been classified according to the following durations: -

• Quarterly

• Semi-annually

• Annually

• Annually and above

(iii) Call Deposit

Call deposit incorporates the characteristics of current and saving deposit in the sense deposit is withdrawn able at ‘call’ and savings in as dense the deposit earns ‘interest’. The companies not entitled to open savings account can open the call accounts. Interest rate on call deposit is negotiable between the bank and the depositors and hence, is normally not published in public. Interest rate is applied on daily average balance. Withdrawal restriction is not imposed on call deposit but the balance should not go below an agreed level (Dahal, and Dahal, 1990:30).

(iv) Recurring Deposit

Concept of recurring deposit was developed to encourage the thrift among people of fixed regular earning. In recurring deposit scheme, the depositor is required to deposit the fixed amount in each instalment and is repaid fixed amount at maturity.

b) Non-Interest Bearing Deposit

It is the deposit in which the banks need to pay interest for the customer of their savings. It is because in this types of deposit customers can withdraw the money at any time or can withdraw daily and the bank could not employ the amount in profitable projects that’s why it does not pay any interest in this type of account. Current and margin deposit are non interest bearing deposit.

(i) Current Deposit

The current deposit account generally opened by the business persons. They are allowed to withdraw and deposit the money according to their needs. There is no limitation of withdrawing the money. Therefore, these types of deposits are for those people who may need money at uncertain times.

(ii) Margin Deposit

Banks issue letter of credit, guarantee and indemnity etc. on behalf of the customer for a specified sum of money. These amounts have to be paid to the beneficiaries of aforesaid instruments provided they claim as per the terms and conditions agreed upon. Thus, banks are exposed to contingent liability. To reduce the liability banks ask customer to deposit a certain amount as the margin deposit.

Banks open the fictitious margin account in the name of the borrower to put such amount and interest is not paid in such deposit. Margin deposit is required to the customer if the case of claim, the amount is utilized to honor the claim. The customer is asked to cover the shortfall if any (Dahal, and Dahal, 1999:32).

Features of Sound Lending and Fund Mobilization Policy

Income and profit of the financial institutions like commercial banks and financial institutions depend upon its lending procedure, lending policy and mobilizing collected fund through investing in different securities. The greater the credit created by the bank the higher will be the profitability. Some required features of sound lending policy and fund mobilization is explained as under:

a) Safety and Security

Financial institutions should inlets their deposit in profitable and secured sectors. They should not invest their fund in securities of those companies whose securities are too much depreciated and fluctuated because of risk of loss factors. They should accept those securities, which are marketable, durable, profitable and high market price as well as stable. In this case MAST should be applied for the investment.

Where,

M = Marketability

A = Ascertain ability

S = Stability

T = Transferability

b) Legality

Each and every financial institution follow the rules and regulation of the company, government and various directions supplied by Nepal Rastra Bank, Ministry of Finance and on while issuing securities and mobilizing their fund. Illegal securities will bring out any problems to the investors. Lastly, the reputation and goodwill of the firm may be lost.

c) Liquidity

Liquidity is the position of the firm to meet current or short-term obligations. General public or customers deposit their savings at the banks in different accounts having full confidence of repayment by the banks whenever they require. To show a good current position and maintain the confidence, every firm must keep proper cash balance with them while investing in different securities and granting loan for excess fund.

d) Profitability

To maximize the return on investment and lending position, financial institutions must invest their collected fund in proper sectors. Finally they can maximize their volume of wealth. Their return depends upon the interest rate, volume of loan its time period and nature of investment on different securities and sectors.

e) Tangibility

A commercial bank should prefer tangible security to an intangible one. Though it may be considered that tangible properly doesn’t yield an income apart from intangible securities, which have lost their value due to price level inflation.

f)Purpose of Loan

Banks and other financial institutions must examine why loan is required to the customer. If customers do not use their borrowings, they can never repay and the financial institutions will have heavy bad debts. So, they should collect detailed information about the plan and scheme of the borrowing.

g) Diversification

A firm can invest its deposit collection in various securities to minimize the risk. So, all the firms must diversify their fund or make portfolio investment. Diversification helps to earn a good return and minimize the risks and uncertainty. So, the firms are making portfolio investment with different securities of different companies.

Mobilization of Funds

Banks utilize its funds in suitable area and right sector. Banks cannot achieve its goals until and unless it mobilizes its deposits in right sectors and by performing different activities. Much kind of activities and other thing can origin for the purpose of receiving invest from the bank. But bank should separate the useful and profitable sector for mobilization its deposits. Banker being only a financial intermediary, we will not be able to make any profit unless he has to pay interest on deposits, meet establishment expenses, meet liquidity of cash balance, and yet allow him some balance from out of which he can build reserve and pay dividend to the shareholder. As commercial bank they are expected to make profit. If there is no profit, there will be adverse criticism against public sector banking, both in and outside the parliament when these banks are asked to open new branches in areas which do not allow profits for years, or asked to grant loan to the priority sectors such as small industries and agriculture with a high incidence of bad debts, there is need for counter balancing profit from elsewhere. Therefore, these banks will have to show an ascending order of profits in order to ensure growth with stability. For this purpose the bank will have to allocate land able resources to different segments in such a manner these banks can ensure adequate profitability while at the same time responding to policies laid down in accordance with national objectives.

 

Therefore, banks should mobilize its deposits in suitable and profitable banking activities and right sector. Generally bank has mobilized its deposits in the following activities.

 

a. Liquid Funds

A bank has kept a volume of amount in liquid funds. The funds have so many responsibilities in banking activities liquid funds has covered following transactions.

•  Cash in hand
•  Balance with NRB
•  Balance with domestic bank
•  Call money

b. Investment

Bank invests its fund in different banking activities and different fields. Many types of fields are shown in market for investment. But banks invest its funds in profitable and safety activities. Bank invests its fund in the following titles:

•  Share and debenture
•  Government securities
•  Joint-venture

c. Loan and Advances

Banks mobilize its funds or deposits by providing different types of loan and advances to customers, by charging fixed interest. Different types of loan and advances are

• To government enterprises
• To provide enterprises

 

Bank manages the different types of loans i.e. providing loan, business loan, and traditional loan to priority area.

 

d. Fixed Assets

Land and buildings are essential for the establishment of bank. Bank’s funds are used in buying of furniture, vehicle, computer, and other concerned instrument, which are related to banking activities. Bank cannot take direct gain from these assets, but bank should buy it. A bank has a need of fund to purchase fixed assets for the new branches of the bank.

 

e. Administrative and Miscellaneous Expenses

Bank should manage funds for administrative and other miscellaneous expenses. The administrative expenses are:

• Salary of Employee
• Allowances
• Pension
• Advertisement
• Stationery
• Provident Fund
• Rent
• Income tax
• Donation
• Insurance
• Tour expenses
• Commission

 

The miscellaneous expenses are

•  To distribute the dividend to shareholders
•  To bear the loss on sale and purchase of banking assets
•  Maintenance expenses
•  To pay the interest on borrowed amount
•  Reserve fund

In this way, bank mobilizes its deposits by performing different activities to achieve its desired goals i.e. earning profit. Banks are able to earn sufficient profit by mobilizing its deposits in proper way into the different profitable sector. It can utilize its collected deposits as well as own funds in all banking activities by performing effective deposit mobilization procedure.

 

Policy Guidelines on the Establishment of the Commercial Banks

Receiving applications for the establishment of commercial banks has been stopped since 1995. Visualizing that such an administrative restriction is not in conformity with the liberal financial policy, the following new policy guidelines have been made public on 16th May 2003:

1) Paid up Capital

To establish a commercial bank of national level having its office in Kathmandu, joint investment with foreign bank and financial institution or a management contract at least for 3 years with such institutions is required. The paid up capital of such bank must be at Rs. 1000 million. To establish the commercial banks in all the places in the Kingdom other than in the Kathmandu Valley, the paid up capital must be Rs. 250 million.

2) Share Capital

In general, the share of commercial banks will be available for the promoters (70 percent) and general public (30 percent). The foreign banks and financial institutions could have a maximum of 67 % share in investment on the commercial banks of national level. In order to provide adequate opportunity for investment to the Nepali promoters in national level banks, only 20 % of total share capital will be made available to general public on the condition that the foreign bank and financial institutions are going to acquire 50% of the total share. In case of commercial banks to be established outside Kathmandu Valley, share investment of promoters and general public should stand at 70% and 30% respectively.

3) Legal Procedure

Banks to be established with foreign promoters, participation have also to be registered fulfilling all the legal processes prescribed by the prevalent Nepal laws.

4) Banks Already in Operation

Banks that is already in operation and those who have already acquired letter of intent before the enforcement of these provisions have to bring their capital level within seven years, i.e. by 16 July 2009, as per the recently declared provision. Such increase in the capital should be at a rate of 10 percent should be at the minimum.

5) Concerning up Gradation

Banks to be established outside Kathmandu Valley could be allowed to operate throughout the Kingdom including Kathmandu Valley only on the condition that they have brought their paid up capital level to Rs. 1000 million and also fulfilled other prescribed conditions. Until and unless such banks do not get license to operate throughout the kingdom, they will not be allowed to open any office in Kathmandu Valley.

6) Promoters Share Payment Procedure

Of the total committed share capital, the promoters has to deposit in NRB an amount equal to 20% along with the application and another 30% at the time of receiving the letter of intent on a interest free basis. The bank should put into operation within one year of receiving the letter of intent. The promoters have to pay fully the remaining balance of committed total share capital before the bank comes into operation. Normally, within 4 months from the date of filling the application, NRB should give its decision for the establishment of the bank whether it is in favor or against it. If it declines to issue license, it has to inform in writing with reasons to the concerned body.

7) Promoters Qualification and Experience

Action on the application from promoters will not be initiated if it is proved that their collateral has been put on auction by the bank and financial institutions as a result of non-payment of loans in the past, who have not cleared such loans or those in the black list of the Credit Information Bureau and 5 years have not elapsed from the date of the removal of their name from such list. The application will be deemed automatically cancelled irrespective of it being on any stage of process for license issuance if the above events are proved. Of the total promoters, one-third should be its chartered accountant or at least a graduate of Tribhuvan University or recognized institutions with major in economics or accountancy, finance, law, banking or statistics. Likewise, one-fourth promoters should have the work experience of bank or financial institution or similar nature.

8) Promoters Share

Promoter Group’s share can be disposed or transferred only on the condition that the bank has been brought in operation; the share allotted to the general public has been floated in the market and after completion of 3 years from the date it has been registered in the Stock Exchange. But before the disposal of such shares it is mandatory to get approval from NRB. The share allotted to general public has to be issued and sold within 3 years from the date the bank cannot issue bonus shares or declare and distribute dividends, shareholders of the promoters group and their family members cannot have access to loans or facilities from the same institution.

9) Branch Expansion

The commercial banks established in national level will initially be authorized to open a main branch office in Kathmandu Valley. They will be authorized to open one more branch in Kathmandu Valley only after they have opened two branches outside the Kathmandu Valley.

10) Disqualify from Becoming Director

An individual who is already serving as a director in one of the bank or financial institutions licensed by NRB cannot be considered eligible to become the director in other banks or financial institutions. Also, stock brokers, market makers and also an individual and institution involved as an auditor of the bank and institutions carrying on financial transactions cannot be a director.

List of Licensed Commercial Banks

List of Licensed Commercial Banks

1.  Nepal Bank Limited
2. Rastriya Banijya Bank
3. Agriculture Development Bank Ltd.
4. NABIL Bank Limited
5. Nepal Investment Bank Ltd.
6. Standard Chartered Bank Nepal Ltd.
7. Himalayan Bank Ltd.
8. Nepal SBI Bank Ltd.
9. Nepal Bangladesh Bank Ltd.
10. Everest Bank Ltd.
11. Bank of Kathmandu Ltd.
12. Nepal Credit and Commerce Bank Ltd.
13. Lumbini Bank Ltd.
14. Nepal Industrial & Commercial Bank Ltd.
15. Machhapuchhre Bank Ltd.
16. Kumari Bank Ltd.
17. Laxmi Bank Ltd.
18. Siddhartha Bank Ltd.
19. Global Bank Ltd.
20. Citizens Bank International Ltd.
21. Prime Commercial Bank Ltd
22. Sunrise Bank Ltd.
23. Bank of Asia Nepal Ltd.
24. Development Credit Bank Ltd.
25. NMB Bank Ltd.
26. Kist Bank Ltd.
27. Janata Bank Nepal Ltd.

Concept of Commercial Bank

Commercial banks are those banks, which perform all kinds of banking functions as accepting deposits, advancing credits, credits creation and agency functions etc. They provide short-term credit, medium-term credit and long term credit for trade and industry. They also operate off-balance sheet functions such as issuing guarantee, bonds, letter of credit etc.

In every country, outset of economic development is quite different but there is no debate about the significant role of banking sector for the economic development of the countries as they are considered as the main source of finance. Without the development of sound commercial banking, under developed countries cannot hope to join the ranks of advanced countries. If industrial development requires the use of capital, the use of capital equipment will not be possible without the necessary capital. Industrial development will be impossible without the existence of markets of the goods produced. On the other hand, the services of the commercial Banks will help to extend the market. The commercial banks play an important role as follows:

a. Help in business expansion

b. Encouragement for the right type of industries.

c. Necessary for trade and industry.

d. Transfer of surplus funds to needy

e. Promotion of capital formation.

Commerce is the financial transactions related to selling and buying activities of goods and services. Therefore, commercial banks are those banks, which work form commercial viewpoint. They perform all kinds of banking functions as accepting deposits, agency function. They provide short-term credit, medium term credit and long term credit to trade and industry. They also operate off balance sheet functions such as issuing guarantee bonds, letter of credit etc.

Commercial bank acts as an intermediately; accepting deposits and providing credits to the needy area. The main source of the commercial bank is current deposit, so they give more importance to the liquidity of investment and as such they specialize in satisfying the short-term credit needs of business other than the long-term commercial banks are restricted to invest their funds in corporate securities. Their business is confined to financing the short-term needs of trade and industry such as working capital financing. They cannot finance in fixed assets. They grant credits in the form of cash credits and overdrafts. Apart from financing, they also render services like collection of bills and cheques, safe keeping of valuables, financial advising etc to their customers.

This chapter highlights the literature that is available in concerned subject; fund mobilization of two joint venture banks (Himalayan Bank Limited and Everest Bank Limited).

Joint venture banks are the commercial banks firmed by joining the two or more enterprises. They are the mode of trading to achieve mutual exchange of goods and services for sharing comparative advantage by performing joint investment scheme between Nepalese their parent banks, which have been experiencing highly mechanized and efficient modern banking management skill and international of banking institutions. Joint venture banks are established by joining two difference forces and with ability to achieve common goal with each of the partners. They are more efficient and effective monetary institution in modern banking fields then other old types of bank in Nepalese context. The primary objective of the joint venture banks is always to earn profit by investing or granting the loans and advances to the people associate with trade, business, industry etc. That means they are required to mobilize their resources properly to acquired profit.

Joint venture is a joining of force between two or more enterprises for the purpose of carrying out a specific operation (Industrial and commercial investment production or trade (Gupta, 1994).

All the Nepalese JVBs are established and operated under the rules regulation and guidance of Nepal Rastra Bank. Nepal Bank had issued a certain directive to those banks, regarding the mandatory credit accusation to the priority sector, the Nepal Rastra Bank has directed to the government owned banks to invest 3% and the JVBs to invest 0.05% of the total outstanding credit to the priority sector (Economic Report: 1997/98:4).

“HMG’s deliberate policy of allowing foreign JVBs to operate in Nepal in basically targeted to enhance, encourage local traditionally run commercial bank to enhance their bankable capacity through competition efficiency modernization and mechanization via computerization and prompt customer service" (Shrestha, 2047:45).

Now a day there is very much competition in banking market but less opportunity to new opportunities, so that they can survive in the competitive market and earn profit. But investment is very risking job for a purposeful, safe and profitable investment bank must follow sound investment and fund mobilizing policy.

Nowadays there are 27commercial banks operating in Nepali financial market along with 9 joint venture with foreign investors.

. Historical Background of Bank

History shows the requirements of economic development of any country heavily realize upon the banking system of the country (Scott, 1992). During its industrial development period, U.K used bank credit to fulfil its working capital need. In 19th century, during the industrialization process of France and Germany, banks played an important role in industrial finance and growth of the nation. In general meaning, bank is an institution that deals with money. A bank performs several financial, monetary and economic activities, which are vital for economy development of a country. It is a monetary institutional vehicle for domestic resource mobilization of the country that accepts deposits from various sources and invests such accumulated resources in the fields of agriculture, trade, commerce etc. Generally, the term “Bank” refers commercial Banks. Commercial banks are the foundation of the national economy. They transfer monetary sources from savers to users. They involve in various functions like money creation, creation, credit facilitating, foreign trade facilitating safe keeping of the various etc. Commercial banks have its own role and contribution in the economic development. It is a source of economic development and it maintains economic confidence of various segments and extends credits to the people. Thus activities of commercial banks are to eliminate poverty, reduce unemployment problems and increase economic growth.

Modern commercial banks can be identify by different names, such as business banks, retail banks, clearing banks, joint venture banks and merchant banks etc. Regardless of the name we give to banks, they all perform the same basic function i.e. they provide a link between lenders those who have surplus money and do not wish to spend immediately with borrowers, there who do not have surplus money but wish to borrow for investment in productive purpose. Basically, by charging a rate of interest to borrowers slightly higher than they pay to lenders, the bank makes their profit. This is known as financial intermediaries. Commercial banks provide the following major products and services:

• Acceptance of deposits

• Granting of advances

• Remittance collection and distribution

• Cash management

• Issuance of letters of credit and guarantee

• Merchant banking business

• Credit cards

• Technology based services-internet banking services

• Loan distribution

• Automatic teller machines (ATM)

• Handling government business

• Safe keeping services/lockers

The first public bank “The Bank of Venice” was established in Italy in 1157 A.D. Different countries in the world followed the footsteps of this bank to incorporate banking institutions in their countries. The evolution of “The Bank of England” in the Kingdom of England in 1694 A.D. brought remarkable changes in the process of establishing banking institution in the world. The establishment of this bank was a big milestone in the history of banking development. It is believed that the idea of commercial banks rapidly spread all over the world only after the inception of this bank.

In Nepal, development of banking is relatively recent. The history of banking system in Nepal in the form of money lending can traced back in the reigning period of Gunakamdev; The King of Kathmandu” (NBL, 2037).

Tankadhari ‘a special class of people’ was established to deal with the lending activities of money towards the end of fourteen century at the ruling period of King

Jayasthiti Malla (NBL, 2011).

During the Prime Ministerial period of Rannodip Singh’ one financial institution we established to give loan facilities to the government staff and loan facilities to the public in general in the term of 5% interest but ‘Tejarath’ did not accept money from public (NBL, 2040).

On the 30th Kartik, 1994, Nepal Bank Limited was established for the first time to provide modern and organized banking facilities. Up to B.S. 2012, only NBL provided services to the public as an organized bank. Later, NRB act 2012 was made to establish NRB as a central bank to manage, control and develop monetary system in Nepal. NRB was formally established on 14th Baisakh, 2013 and its capital at the starting time was 1 Crore. Similarly, Rastriya Banijya Bank was set up in B.S. 2022 to fulfil the growing needs of the country. The birth of this bank brought a new landmark in the history of banking facility in Nepal. Like other developed countries, Nepal also took the policy to open economy and liberal, to develop good competition in the banking field. Hence, the joint venture banking policy is taken. Today 26 commercial banks are operating to provide modern banking services and facilities to boost the economic condition of country.

The financial sector reform was initiated in mid-1980 under the liberal economic policy of HMG/N under this policy; HMG/N first opened the banking sectors to foreign investors. In July 1985, commercial banks were allowed, for the first time to accept current and fixed deposits on foreign currency (U.S dollar and sterling pound). On May 26, 1986, NRB deregulated the commercial banks to fix interest rate at any level above its minimum prescribed levels.