Nepalese Banking System: Introduction

Professor R.P. Kent has defined the Bank as an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure. A bank can be an individual, a company or a firm, with a structure of business, and must be involved in credit creation.

Bank and Financial Institution Act (BAFIA), 2073 Section 3 has defined the Bank as a corporate body incorporated to carry on financial transactions as referred to in sub-section 1 of section 4. This section includes the functions of ‘A’ class licensed institutions.

BAFIA, 2073 has categorised Nepalese Financial Institutions into four groups

  1. ‘Ka’ or Class ‘A’ Commercial Banks
  2. ‘Kha’ or Class ‘B’ Development Banks
  3. ‘Ga’ or Class ‘C’ Finance Companies
  4. ‘Gha’ or Class ‘D’ Micro Finance

The basis of categorization and classification is the minimum paid up capital required as prescribed by Nepal Rastra Bank. The following is the summary on numbers of financial institutions operating as of  mid July 2018:

ClassNumber of Institutions
‘Ka’ or Class ‘A’ Commercial Banks27
‘Kha’ or Class ‘B’ Development Banks33
‘Ga’ or Class ‘C’ Finance Companies25
‘Gha’ or Class ‘D’ Micro Finance Companies72

Banking Development in Nepal

We can trace the evidence of ancient banking practice in Nepal from 879-80 A.D. when Gunakamadeva borrowed money to reconstruct ‘Kantipur’ , now Kathmandu. But the modern banking system in Nepal started after the establishment of Nepal Bank Limited on November 15, 1937 (Kartik 30, 1994 B.S.) 

Before the establishment of Nepal Bank Limited, there was Tejarath Adda in 1877 A.D., during Rana Rule, for distribution of loan to people against security deposit of gold and other valuables. There was no provision of deposits during this stage.

Nepal Bank Limited was established with the authorized capital of Rs 10 billion with an objective to expand the banking operation across the country. The major function of Nepal Bank Limited back then was to manage the government transactions. There was low credit creation and less public had access to the service. Nepal Bank had the monopoly in the market and services were exclusive.

On April 26, 1956 (Baishak 14, 2013), Nepal Rastra Bank which is the central bank of Nepal was established under Nepal Rastra Bank Act, 1955 (2012 B.S.) Nepal Rastra Bank played a crucial role in the development of Banking and Financial Institution in Nepal. Different banks such as Rastriya Banijya Bank and Agriculture Development Bank were established to escalate the banking system in Nepal.

Next wave of banking development was seen after 2040 B.S. This was the time of liberalisation in the banking sector. During this phase, various banks were established, excessive licenses were given for the establishment of banking and financial institutions. Many joint ventures banks also started their operation. Due to this, there was a cut-throat competition in the market and credit creation was high.

In 2068 B.S. (2011 A.D.), Nepal Rastra Bank, the Central Bank of Nepal, came up with merger bylaws and many banks were encouraged for mergers and acquisitions. This phase helped to bring down the number of financial institutions in Nepal to foster higher capital banks and competition in the market. During this time, minimum capital requirements for banking and other financial institutions were increased to force such institutions to go for merger or acquisition. Since 2068, the focus is one financial consolidation and overall development of financial institutions.

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