Financial System in Nepal

Financial System in Nepal

The Nepali financial system consists of banking and non banking sector. Banking sect sector or cons consis ists ts of Nepa Nepall Rast Rastra ra Bank Bank (NRB (NRB)) as the the Cent Centra rall Bank Bank and and the the Commercial Banks. The non banking sector includes, financial institutions licensed  by NRB like Deelopment Deelopment Banks, !inance Companies, Companies, "icrofinance Deelopment Banks, Coop !inancial #nstitutions, N$%s undertaking banking actiities and those under different &cts like #nsurance Companies, Citi'ens #nestment Trust, ostal ai aing ngss %ff %ffices ices,, *mpl *mploy oyee eess ro roid iden entt !und !und,, Nepa Nepall toc tock k *+ch *+chan ange ge and and Commodity "arkets. History

The origin of the modern Nepali !inancial ystem can be traced to the establishing of Nepal Bank td as the first commercial bank of the country. #t -as established under Nepal Bank &ct, //0 B.. The $oernment of Nepal o-ned 123 and general public 043. #t started the banking system in the country and also public  priate partnership in financial sector. #n addition to commercial banking operations, it -as also permitted to function as banker to the $oernment. *stabl *stablish ishme ment nt of Nepal Nepal Rastra Rastra Bank Bank under under the NRB &ct 252 252 -as another  another  important milestone for the deelopment of banking system in Nepal.  Nepal #ndustrial Deelopment Corporation -as established in 256 B.. and it  brought in the concept of deelopment banking in the country. country. #ts ob7ecties -ere to proide technical and financial assistance to industries. Though it -as licensed to undertake banking transactions, its actiities are subdued.

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Thereafter Cooperatie Bank -as established, -hich commenced the compulsory saings scheme for farmers. ater, this -as merged -ith &gricultural Deelopment Bank td. The latter -as primarily for Deelopment of &gricultural ector. #t has -ide reach in both urban and rural areas and in addition to deelopment banking is actiely inoled in Commercial Banking also. Rastriya Bani7ya Bank -as established as a fully goernment o-ned entity in 2522 B.. for Deelopment of Commercial Banking &ctiities. #t has a -ide branch net-ork all oer the country. & saings institution established as a fully goernment o-ned entity in 2522 B.. for Deelopment of Commercial Banking actiities and has a -ide branch net-ork all oer the country. #n the aftermath of liberali'ation of economy, Nepal &rab Bank (presently N&B# Bank) -as established in 250 B. as a first foreign 7oint enture bank. This -as follo-ed by other banks like Nepal #ndosue', Nepal $rindlays etc. & number of Commercial Banks -ere also established by Nepali #nestors leading to an emergence of a gro-ing and competitie commercial banking sector in the country. #n the last decade there -as phenomenal gro-th of !inancial erice #ndustry and the present position of arious participants including their share of business is indicated belo-8  Number

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hare of Business

Commercial Banks 24 Deelopment 4;

45.43 4.53

Banks !inance

;/

/.63

Companies "icro !inance 2

.63

Deelopment Banks aings

and 6

Credits Cooperaties  N$%s Rural

operation. #t  proides training, technical assistance and consultancy serice for microfinance sector. #ts mission is to promote and strengthen "icrofinance erices through capacity building, training, kno-ledge management, research, policy lobbying, consultancy and net-orking -ith mutual trust and co operation among serice receiers, practitioners and stakeholders. #n addition to the aforementioned institutions the follo-ing institutions hae helped in formulating standards and ensuring compliance of the member  institutions8 i) Nepal Bankers= &ssociation ii) "icrofinance Bankers= &ssociation of Nepal iii) "icrofinance #nstitutions= &ssociation of Nepal i) Nepali !ederation of aings and Credit cooperaties 9nion td. ) #nsurance Board> the regulator for #nsurance industry 5

i) *B%N ii) Deelopment Bankers &ssociation iii) Nepal !inance Companies &ssociation !urther, National Banking Training #nstitute functions as an ape+ training institute for the entire financial sector. Financial Sector Reforms

 Nepal=s inflation rate has been hoering around 53 for the last three years@ the food inflation has been higher than non food inflation. Aistorically, its inflation had correlation -ith inflation in #ndia due to a fi+ed peg of Nepali Rupee to the #ndian Rupee, the trend has changed to the lag in pass through of international oil prices and increase in real interest rate. !inancial ector Reforms (!R) initiated from 2552 on-ards has tackled the follo-ing main issues8 a) trengthening the autonomy of Nepal Rastra Bank and improing its superisory capability. This has been achieed by passing of ne- Nepal Rastra Bank &ct and diesting of o-nership of NRB in institutions -here it has superisory responsibility.  b) #mproing the goernance of Commercial Banks and !inancial #nstitutions8 Banks and !inancial #nstitutions &ct and Debt Recoery &ct -ere passed to gie a legal frame-ork for improing &ssets :uality and $oernance issues. c) Restructuring the roblem Banks in the ublic ector@ recapitali'ing and  bringing professionalism in Nepal Bank and Rastriya Bani7ya Bank action initiated.  Monetary Policy

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The frame-ork of the monetary policy of the country and the instruments of the  policy are gien in the follo-ing table8 Instrument

peratin!

Cash Resere Ratio

"ar!et hort

olicy Rates

#nterest Rate "onetary Base

Direct

Control *+cess

Intermediate "ar!et Term "onetary

&ggregates #nterest Rate

resere *+change Rate

#oals

rice tability *conomic $ro-th *mployment

(interest setting and of Commercial credit control) Banks %pen "arket Domestic Credit #nflation

*+change

%perations "oral uasion

tability B% urplus

Rate

The monetary policy is administered by Nepal Rastra Bank through the aboe instruments. The position is reie-ed periodically at least once in a year and the necessary actions to achiee the goals, including course corrections are taken. Capital Market

The history of ecurities market began in Nepal -ith the issue of shares by Biratnagar ?ute "ills and Nepal Bank td. in /