Functions of Nepalese Financial Institutions (A, B, C & D class)

What is financial institution?

A financial institution is an institution which collects funds from the public and places them in financial assets, such as deposits, loans, and bonds, rather than tangible property. It is an establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.  Financial institutions include banks, credit unions, asset management firms, building societies, and stock brokerages, among others. These institutions are responsible for distributing financial resources in a planned way to the potential users.

There are a number of institutions that collect and provide funds for the necessary sector or individual. On the other hand, there are several institutions that act as the middleman and join the deficit and surplus units. Investing money on behalf of the client is another of the variety of functions of financial institutions.

Financial institutions can be categorized as follows:

1.      Deposit Taking Institutions

2.      Finance and Insurance Institutions

3.      Investment Institutions

4.      Pension Providing Institutions

5.      Risk Management Institutions

At the same time, there are several governmental financial institutions assigned with regulatory and supervisory functions. These institutions have played a distinct role in fulfilling the financial and management needs of different industries, and have also shaped the national economic scene.

Functions of financial institutions:

The functions of financial institutions, such as stock exchanges, commodity markets, futures, currency, and options exchanges are very important for the economy. These institutions are involved in creating and providing ownership for financial claims. These institutions are also responsible for maintaining liquidity in the market and managing price change risks. As part of their various services, these institutions provide investment opportunities and help businesses to generate funds for various purposes.

The functions of financial institutions like investment banks are also vital and related to the investment sector. These companies are involved in a number of financial activities, such as underwriting securities, selling securities to investors, providing brokerage services, and fund raising advice.

Some of the functions of the financial institutions are briefly described below:

1.      Liability-Asset transformation

Financial institutions issue claims to their customers that have characteristics different from those of their own assets.

2.      Size-transformation

They provide large volumes of finance on the basis of small deposits or unit capital.

3.      Risk transformation

They distribute risk through diversification and thereby reduce it for savers as in the case of mutual funds.

4.      Maturity transformation

They offer savers alternate forms of deposits according to their liquidity preferences, and provide borrowers with loans of requisite maturities.

Functions of the ‘A’, ‘B’, ‘C’ and ‘D’ class financial institutions of Nepal

A.    The financial institution who get ‘A’ class licensed should carry following functions:

Ø  Accepting deposits with or without interest, and refund such deposits

Ø  Supplying credit as prescribed by the Rastra Bank

Ø  Dealing in foreign exchange, subject to the laws in force

Ø  Supplying credit for hire-purchase, hypothecation, leasing, housing and service business

Ø  Engaging in merchant banking business, subject to the directives of the Rastra Bank

Ø  Issuing guarantees on behalf of its customers, having such customers execute necessary bonds in consideration thereof, obtaining security, and acquire their movable or immovable assets as collateral or on mortgage, or the assets of third persons as collateral

Ø  Supplying credit against the guarantee provided by any native or foreign bank or financial institution

Ø  Issuing, accepting, paying, discounting or purchasing and selling letters of credit, bills of exchange, promissory notes, cheques, travelers cheques, drafts or other financial instruments

Ø  Issuing and accepting credit cards, debit cards, charge cards and other financial instruments, as well, and appointing agents to discharge functions relating thereto, subject to the directives issued by the Rastra Bank

Ø  Accepting, making payments and supplying credit through automated teller machines and cash dispensing machines

Ø  Providing overdraft to persons whom it trusts

Ø  Acting as an agent of the Rastra Bank on the conditions prescribed by the Rastra Bank, and carrying on governmental and other transactions on behalf of the Government of Nepal

Ø  Remitting or transmitting funds to different places within or outside the State of Nepal through bills of exchange, cheques or other financial instruments, purchasing and selling gold and silver bullion, shares, debentures, bonds, etc., and recovering dividends accruing on shares and interest on promissory notes, debentures, bonds, etc.

Ø  Purchasing, selling or accepting bonds issued by the Government of Nepal or the Rastra Bank

Ø  Arranging for safe deposit vaults

Ø  Supplying credits not exceeding the amount prescribed by the Rastra Bank, against individual or collective guarantee, for the economic upliftment of the destitute class, low-income families, victims of natural calamities and inhabitants in any area of the country

Ø  Mobilizing capital through shares, debentures, bonds, loan-bonds, saving-bonds or other financial instruments within the limit prescribed by the Rastra Bank.

B.     The financial institution who get ‘B’ class licensed should carry following functions:

Ø  Subject to the limit prescribed by the Rastra Bank, accepting deposits with or without interest, and refund such deposits

Ø  Supplying credit, other than hypothecation credit, as prescribed

Ø  Dealing in foreign exchange, subject to the laws in force and the directives given by the Rastra Bank

Ø  Supplying credit for hire-purchase, leasing, housing and service business

Ø  Supplying credits against the guarantee of any native bank or financial institution

Ø  Issuing guarantees on behalf of its customers, having such customers execute necessary bonds in consideration thereof, obtaining security, and acquiring their movable or immovable assets as collateral or on mortgage, or the assets of third persons as collateral

Ø  Issuing, accepting, paying, discounting or purchasing and selling bills of exchange, promissory notes, cheques, travelers cheques, drafts or hundies

Ø  Accepting deposits, making payments and supplying credit through automated teller machines and cash dispensing machines

Ø  To issue and accept letters of credit, subject to the conditions prescribed by the Rastra Bank

Ø  Transmitting funds within the State of Nepal through bills of exchange, cheques or other financial instruments, purchasing and selling shares, debentures, bonds, etc., and recovering dividends accruing on shares and interest on promissory notes, debentures, bonds, etc.

Ø  Purchasing, selling or accepting bonds issued by the Government of Nepal or the Rastra Bank

Ø  Supplying credits not exceeding the amount prescribed by

Ø  the Rastra Bank, against individual or collective guarantee, for the economic upliftment of the destitute class, low-income families, victims of natural calamities and inhabitants in any area of the country

Ø  Obtaining refinance credit from the Rastra Bank as per necessity, or obtaining or supplying credits to or from other licensed institutions

Ø  Supplying installment or hire-purchase credit to any person, firm, company or institution for motor vehicles, machinery, tools, equipment, durable household goods or similar other movable property

Ø  Operating projects such as purchase of lands and construction of buildings for land development and residential purposes, and selling and managing, or cause to be sold and managed, such lands and buildings

C.    The financial institution who get ‘C’ class licensed should carry following functions:

Ø  Subject to the limit prescribed by the Rastra Bank, accepting deposits with or without interest, and refund such deposits;

Ø  Supplying credit, other than hypothecation credit, as prescribed;

Ø  Supplying credit for hire-purchase, leasing, housing and service business;

Ø  Carrying on merchant banking business;

Ø  Writing off credit, subject to the bye-laws made by the Board;

Ø  Supplying credits jointly, on the basis of co-financing in collaboration with other licensed institutions in accordance with the mutual agreement entered into for the division of the collateral pari passu;

Ø  Supplying credits against the guarantee of any native bank or financial institution;

Ø  Obtaining credit against the security of its movable and immovable assets;

Ø  Supplying a fresh credit in lump sum or by installment against the security of the same movable or immovable property which has already been furnished with, it to the extent covered by the total value of such security or supplying a fresh credit in lump sum or by installment against the security of the same movable or immovable property which has already been furnished with any other licensed institution as security, to the extent covered by the total value of such security;

Ø  Making proper arrangements of its assets, sell or rent the same;

Ø  Issuing, accepting, paying, discounting or purchasing and selling bills of exchange, promissory notes, cheques, travelers cheques, drafts or other financial instruments;

Ø  Purchasing and selling the Indian rupees;

Ø  Supplying credits not exceeding the amount prescribed by the Rastra Bank, against individual or collective guarantee, for the economic upliftment of the destitute class, low-income families, victims of natural calamities and inhabitants in any area of the country;

Ø  Exchanging with the Rastra Bank or any other licensed institutions particulars of, information or notices on debtors or customers who have obtained credit or any kind of facility from it and other licensed institutions;

Ø  Supplying installment or hire-purchase credit to any person, firm, company or institution for motor vehicles, machinery, tools, equipment, durable household goods or similar other movable property;

Ø  Supplying credit to any person, firm, company or institution for purchasing a residential building or warehouse or purchasing land for constructing such residential building or warehouse;

Ø  Supplying credit (leasing finance) to any person, firm, company or institution for hiring a motor vehicle, machine, tools, equipment, durable household good or similar movable property, or renting such movable property;

Ø  Prescribing conditions, as required, in order to protect its interests while supplying credits to any persons or institutions or doing any transaction with them; 

Ø  Issuing guarantees on behalf of its customers, having such customers execute necessary bonds in consideration thereof, obtaining security, and acquiring their movable or immovable properties as collateral or on mortgage, or the assets of third persons as collateral;

Ø  Acting as a commission agent of its customers, taking custody of, and arranging for the sale or purchase of, shares, debentures or securities, and collecting interests, dividends, profits, etc. accruing from shares, debentures or securities;

Ø  Operating projects such as purchase of lands and construction of buildings for land development and residential purposes, and selling and managing, or causing to be sold and managed, such lands and buildings;

Ø  Performing such other functions as may be prescribed by the Rastra Bank.

D.    The financial institution who get ‘D’ class licensed should carry following functions:

      Supplying credit as prescribed;

      Supplying micro-credit, with or without any movable or immovable property as the collateral or security, for operating any micro-enterprise to any group or members thereof who have regularly saved for the period prescribed by the Rastra Bank and maintained the prescribed saving;

      Obtaining loans or grants from any licensed institution or native or foreign organization, and use such loans or grants for the supply of micro-credit or for making the same effective; Provided that approval of the Rastra Bank shall be obtained prior to obtaining loans or grants from any foreign organization.

      Prior to supplying micro-credits, evaluating the schemes for which micro-credits have been requested and determining whether they are feasible;

      Engaging in micro-enterprises of such type as may improve the economic condition of low-income persons;

      Holding symposia on micro-enterprises, providing assistance and training in the formulation of schemes, providing technical know-how and mobilizing technical assistance, as required;

      Providing necessary services to a group in respect of the mobilization of micro-credit;

      Taking necessary action towards the timely realization of micro-credits;

      Monitoring whether micro-credits have been properly utilized, and, if they are found not to have been properly utilized, issuing necessary directives;

      Subject to the limit prescribed by the Rastra Bank, accepting deposits with or without interest, and refund such deposits;

      Obtaining credits by pledging its movable and immovable assets as collateral, and properly managing the assets;

      Writing off credits, subject to the bye-laws framed by the Board;

      Exchanging with the Rastra Bank or any other licensed institutions particulars of, information or notices on debtors or customers who have obtained credit or any kind of facility from it and other licensed institutions;

      Performing such other functions as may be prescribed by the Rastra Bank.