TABLE CONCLUSION25 . REFRENCES25 LIST OF FIGURES
TABLE OF CONTENTS ACKNOWLEDGEMENT…………………………………………………………………………i ABSTRACT………………………………………………………………………………………ii TABLE OF CONTENTS1 LIST OF FIGURES3 1.
INTRODUCTION4 1. 1. Background4 1. 2. Objective4 1. 3. Methodology4 2.
LIBERALIZATION, PRIVATIZATION AND GLOBALIZATION4 2. 1. Liberalization4 2. 1. 1. Introduction4 2.
1. 2. Causes for Liberalization5 2. 1. 3.
Pros and Cons of Liberalization5 2. 2. Privatization6 2. 2. 1. Introduction6 2. 2.
2. Causes for Privatization7 2. 2. 3. Pros and Cons of Privatization7 2. 3.
Globalization8 2. 3. 1. Introduction8 2. 3. 2. Pros and Cons of Globalization8 2.
3. 3.Measures for Globalization9 3. BANK10 3. 1.
Introduction10 3. 2. Types11 3. 2. 1. Central Bank11 3. 2.
2. Development Bank11 3. 2. 3. Commercial Bank12 3. 3.
History of Banking Sector in Nepal13 4. REQUISTIE OF A BANK AND FINANCIAL INSTITUTIONS14 4. 1. The capital adequacy to be maintained14 4. 2. Classification of Capital Fund14 4. 3.
Total Risk-weight Assets17 4. 4. Description to be sent with regard to capital fund17 4.
5. Provision for Auditing18 4. 6. Actions may be taken in case Directives as to capital fund are not followed:18 4. 7. Repeal and Saving18 5.
TREND ANALYSIS OF BANKS IN NEPAL19 6. CONCLUSION25 . REFRENCES25 LIST OF FIGURES Figure 1 Showing the growth rate of real per capita GDP because of Globalization9 Figure 2 Chart showing the trends of financial institutions in Nepal19 Figure 3 Banking Operations: Public vs. Private19 Figure 4 Graph showing the Deposit/Credit of Commercial Banks (2001-2011)20 Figure 5 Graph showing the GDP (Rs. in million) from 2001 to 201121 Figure 6 Graph showing the number of bank branches. 21 Figure 7 Graph showing the population per bank branches22 Figure 8 Graph showing total deposits (Rs. in million ) from 2001 to 201123 Figure 9 Graph showing Total Credit (Rs.
n million) from 2001 to 201123 Figure 10 Graph showing the total investment (Rs. in million) from 2001 to 201124 INTRODUCTION 1 Background The banking sector is the most dominant sector of the financial system in any country and so is in Nepal. Significant progress has been made with respect to the banking sector in the post liberalization period. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, and asset quality and risk management.
Further, deregulation has opened new opportunities for banks to increase evenue by diversifying into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector 2 Objective • To be familiar with Liberalization, Privatization and Globalization. • To be acquainted with the history of banking sector in Nepal. • To know about the requisites of commercial bank, development bank as well as financial company. • To know about the present trend of banks in Nepal. 3 Methodology To fulfill the above stated objectives, we searched the internet, different books related to banking and different sites.We have taken the website of Nepal Rastra Bank as our main source of reference for the collection of our necessary information.
LIBERALIZATION, PRIVATIZATION AND GLOBALIZATION 1 Liberalization 1 Introduction Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a “bigger pie” for everybody.Thus, liberalization in short refers to “the removal of controls”, to encourage economic development.
1. It refers to relaxation of previous government restrictions usually in areas of social and economic policies. Thus, when government liberalizes trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and services between countries. 2 Causes for Liberalization • Liberalization offers the opportunity for the sector to compete internationally, contributing to GDP growth and generating foreign exchange. A country can become globally competitive as many companies can outsource certain administrative functions to countries where costs are lower. • Furthermore, if service providers in some developing economies are not competitive enough to succeed on world markets, overseas companies will be attracted to invest, bringing with them international best practices and better skills and technologies. 3 Pros and Cons of Liberalization • Pros ? It is now a well established proposition that by liberalizing trade and moving to capitalize on their respective areas of comparative advantage, countries can benefit economically.
Their use of resources – land, labor, physical and human capital – can be focused on what they can do best. ? Firms and consumers alike can benefit; among other advantages, liberalized trade can help to lower prices and broaden the range of quality goods and services available to consumers and can allow companies to diversify risks and channel resources to where returns are highest. When accompanied by appropriate domestic policies, openness also facilitates competition, investment and productivity increases and allows the realization of scale economies. Cons Liberalization also carries substantial risks that necessitate careful economic management through appropriate regulation by governments.
Some argue foreign providers crowd out domestic providers and instead of leading to investment and the transfer of skills, it allow foreign providers and shareholders to capture the profits for themselves, taking the money out of the country. Thus, it is often argued that protection is needed to allow domestic companies the chance to develop before they are exposed to international competition.Other potential risks resulting from liberalization, include: • Risks of financial sector instability resulting from global contagion • Risk of brain drain • Risk of environmental degradation However, researchers at thinks tanks such as the Overseas Development Institute argue the risks are outweighed by the benefits and that what is needed is careful regulation.
For instance, there is a risk that private providers will ‘skim off’ the most profitable clients and cease to serve certain unprofitable groups of consumers or geographical areas.Yet such concerns could be addressed through regulation and by universal service obligations in contracts, or in the licensing, to prevent such a situation from occurring. Of course, this bears the risk that this barrier to entry will dissuade international competitors from entering the market.
Examples of such an approach include South Africa’s Financial Sector Charter or Indian nurses who promoted the nursing profession within India itself, which has resulted in a rapid growth in demand for nursing education and a related supply response. 2 Privatization 1 IntroductionPrivatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations. The term is also used in a quite different sense, to mean government out-sourcing of services to private firms, e. g.
functions like revenue collection, law enforcement, and prison management. It refers to the transfer of assets or service functions from public to private ownership or control and the opening of the hitherto closed areas to private sector entry.Privatization can be achieved in many ways- franchising, leasing, contracting and divesture.
The term “privatization” also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company’s stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company. Privatization generally improves the output and efficiency of the organizations that are privatized.
2 Causes for Privatization Liberalization and de-regulation of the economy is an essential pre- requisite if privatization is to take off and help realize higher productivity and profits. • Capital markets should be sufficiently developed to be able to absorb the disinvested public sector shares. • Privatization will help reducing the burden on exchequer. • It will help the profit making public sector units to modernize and diversify their business.
• It will help in making public sector units more competitive. 3 Pros and Cons of Privatization • Pros ? It will help in improving the quality of decision-making of anagers because their decisions will be made without any political interference. ? Privatization may help in reviving sick units which have become a liability on the public sector. ? Without government financial backing, capital market and international market will force public sector to be efficient.
• Cons ? Privatization will encourage growth monopoly power in the hands of big business house. It will result in greater disparities in income and wealth. ? Private enterprise may not show any interest in buying shares of loss- making and sick enterprises.
Privatization may result in lop-sided development of industries in the country. ? The limited resources of the private individuals cannot meet some of the vital tasks which alter the very character of the economy. ? The private sector may not uphold the principles of social justice and public welfare. Privatization offers both opportunities and threats to the economy.
We have to privatize in such a manner that we make the maximum opportunities while at the same time minimizing the threats to the economy. 3 Globalization Introduction Globalization refers to the increasing unification of the world’s economic order through reduction of such barriers to international trade as tariffs, export fees, and import quotas. The goal is to increase material wealth, goods, and services through an international division of labor by efficiencies catalyzed by international relations, specialization and competition.
It describes the process by which regional economies, societies, and cultures have become integrated through communication, transportation, and trade.The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence. It also means integrating the domestic economy with the world economy.
It is a process which draws countries out of their insulation and makes them join rest of the world in its march towards a new world economic order. 2 Pros and Cons of Globalization • Pros It is argues that Globalization of under developed countries will improve the allocative efficiency of resource, reduce the capital output ratio and increase labor productivity, help to develop the export spheres and export culture, increase the inflow of capital, updated technology that gives a boost to the average growth rate of the economy. ? It will help to restructure the production and trade pattern in a capital scarce, labor abundant economy in favor of labor- intensive goods and techniques. ? Foreign capital will be attracted and with its entry, updated technology will also enter the country. With the entry of foreign competition and the removal of import tariff barriers, domestic industry will be subject to price and quality improving effects in the domestic economy. ? It is also believed that the efficiency of banking and financial sectors will improve, as there will be competition from foreign capital and foreign banks. • Cons ? The globalization process is in essence a tremendous redistribution of economic power at the world level which will increasingly translate into a redistribution of political power.
One study reveals that in the globalizing world the economics of the world are ironically moving away from one another more than coming together. ? With the lightening speed at which globalization is taking place, it is increasing the pressure on economies for structural and conceptual readjustments to a breaking point. ? It is becoming hard for the countries to ask their public to go through the pains and uncertainties of structural adjustment of the sake of benefits yet to come. 3 Measures for Globalization • Convertibility of Rupee: To make the currency fully convertible i.
e. allow it to determine its own exchange rate in the international market without any official intervention. • Import Liberalization: As per the recommendation of the World Bank, free trade of all items except negative list of imports and exports has been allowed. • Opening the economy to foreign capital: The government has taken a number of measures to encourage foreign capital in India. Many facilities and incentives have been offered to the foreign investors and non-resident Indians in the new economic policy. pic Figure 1 Showing the growth rate of real per capita GDP because of Globalization BANK 1 IntroductionA bank is an institution, usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business. The economic functions of banks include: • Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer’s order.
These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economies on reserves held for settlement of payments, since inward and outward payments offset each other.
It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. • Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. • Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers.The improvement comes from diversification of the bank’s assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
• Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e. g. ccepting deposits and issuing banknotes) and redemptions (e.
g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e. g. wholesale cash markets and securities markets). • Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created. 2 Types 1 Central Bank A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country.
Central banks often also oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation’s legal tender. The Nepal Rastra Bank (NRB), established in 1956, is the central bank of Nepal. It has seven offices, located at Biratnagar, Janakpur, Birgunj, Pokhara, Siddharthanagar, Nepalgunj, and Dhangadhi.
It supervises the commercial banks in Nepal and guides monetary policy. Nepal Rastra Bank also oversees foreign exchange rates and the country’s foreign exchange reserves. The bank is one of the principal owners of the Nepal Stock Exchange.To reflect this dynamic environment, the functions and objectives of the Bank have been recast by the new NRB Act of 2002, the preamble of which lays down the primary functions of the Bank as: • To formulate necessary monetary and foreign exchange policies to maintain the stability in price and consolidate the balance of payments for sustainable development of the economy of Nepal; • To develop a secure, healthy and efficient system of payments; • To make appropriate supervision of the banking and financial system in order to maintain its stability and foster its healthy development; and • To further enhance the public confidence in Nepal’s entire banking and financial system. Development Bank Development bank is a special kind of financial institution established to develop a particular sector of the economy.
It is established to provide capital and technical assistance for the development of agriculture, industries, commerce, transportation, communication, electricity and other infrastructure of the economy of a country. Generally, it provides long term and mid tern loan for productive work. It also supports for development of agriculture, cottage and small scale industries by providing loan, technical assistance and management support. Functions of a development bank: • Development functions ? Selection of Priority Sector Creates proper environment for investment ? Establishment of industries ? Promotion of industries ? Product analysis ? Information for planning and policy making • Banking functions ? Operating accounts ? Granting loan ? Purchasing and selling securities ? Agency functions ? Bank overdraft service etc. In Nepal, development banks are established under “Development Bank Act 2052”. Nepal Industrial Development Corporation, Nepal Agricultural Development Bank Ltd. , Rural Development Banks are some examples of development banks in Nepal.
Agricultural Development Bank Limited (ADBL) is an autonomous organization largely owned by Government of Nepal.The bank has been working as a premier rural credit institution since the last three decades, contributing a more than 67 percent of institutional credit supply in the country. Hence, rural finance is the principal operational area of ADBL. Besides, it has also been executing Small Farmer Development Program (SFDP), the major poverty alleviation program launched in the country.
Furthermore, the bank has converted into commercial bank since 2062/12/02. 3 Commercial Bank Commercial bank is common and popular type of bank to general people. It is established in order to support commercial sector.
It promotes industries, trade and service business etc. The major function of commercial bank is to accept deposit and grant loan.Besides it performs various agency functions such as remitting money, collecting income and paying expenditure, exchanging foreign currencies etc. Commercial bank is established by a group of people or institutions with a view to earn profit by providing banking service in the form of Joint Stock Company. According to commercial bank Act, 2031, Commercial banks are those banks which are established for specific purpose like Agriculture, Industries, Co-operative development banks etc. Nepal Bank limited (1994 B. S.
) is the first commercial bank established under public sector where as Nabil Bank Ltd. (2041B. S.
) is the first commercial bank from private sector. Functions of a commercial bank: • Accepts deposit • Grants loan • Remits money • Exchanges foreign currency • Creates credit Dealing of securities • Dealing of credit instruments • Performs agency function • Locker facility etc. 3 History of Banking Sector in Nepal His Majesty King Tribhuvan inaugurated Nepal Bank Limited on Kartik 30,1994 Bikram Sambat. This marked the beginning of an era of formal banking in Nepal. Until then all monetary tractions were carried out by private dealers and trading center.
Then Prime Minister Maharaja Juddha Shumsher J. B. R. speaking on the occasion with the kind permission of His Majesty the King stated this work which is being done in the larger interest of the nation is a great moment for him. Until today a bank could not be opened in Nepal.
Therefore this bank, which is being established under the name of Nepal Bank Limited to fill that, need and to be inaugurated by His Majesty the King, is a moment of great joy and happiness. The Bank’s objectives to render service to the people whether rich or poor and to contribute to the nation’s development will also need the support and best wishes of all, which he was confident, will be forthcoming. In that era, very few understood or had confidence in this new concept of formal banking.
Rising equity shares were not easy and mobilization of deposits even more difficult. This was evident when the bank floated equity shares worth NRs. 2,500,000, but was successful only in raising NRs. 842,000. In the absence of any bank in Nepal the economic progress of the country was being hampered and causing inconvenience to the people and therefore with the objective of fulfilling that need by providing service to the people and for the betterment of the country, this law in hereby promulgated for the establishment of the Bank and its operation” The total deposits for the first year was NRs.
17,02,025 where current deposits was about NRs. 12,98,898 fixed was about NRs. 3,88,964 and saving was NRs.
14,163. Loan disbursed and outstanding at the end of the first year was NRs. 1,985,000. From the very conception and its creation, Nepal Bank Ltd, was as joint venture between the government and the private sector. Out of 2500 equity shares of NRs. 100 face value, 40% was subscribed by the government and the balanced i. e. 60% was offered for the sale to private sector. There were only 10 shareholders when the bank first started. REQUISTIE OF A BANK AND FINANCIAL INSTITUTIONSThe Banks and Financial Institutions Regulation Department of Nepal Rastra bank has given the following Directives with regard to the capital adequacy ratio to be maintained by a licensed institution according to the Nepal Rastra Bank Act, 2002. 1 The capital adequacy to be maintained Based on its risk-weight assets, a licensed institution shall have to maintain the following capital adequacy ratio: – |Institution |Minimum Capital fund to be maintained based on the risk-weight assets (percent) | | |Core capital |Capital fund | |“A” Class |6. 0 |10. 0 | |“B” and “C” Class |5. |11. 0 | |“D” Class |4. 0 |8. 0 | 2 Classification of Capital Fund For the purpose of calculation of capital fund, the capital fund of a licensed institution shall have to be classified in two categories as follows:- 1. Core capital 1. The amount in the following heads shall be included/calculated in the core capital:- ? Paid up capital (ordinary share) ? Proposed bonus share ? Share premium ? Irredeemable preference shares ? General Reserve Fund ? Accumulated Profit/loss Capital Redemption Reserve ? Capital Adjustment Fund ? Calls in advance ? Other free reserves 2. The amounts in the following heads shall be deducted while calculating core capital: ? Goodwill ? Amount invested in shares and securities of corporate bodies exceeding the limit imposed by this Bank. ? All amount of investment made in shares and securities of the corporate bodies having own financial interests. ? Fictitious assets For this purpose, fictitious assets mean the fictitious expenses other than the expenses in research, development and computer software. ? Credit and facilities made available to persons and groups prohibited by the prevailing laws.Provided that in case the prevailing law has not prohibited to providing loan and facilities to such person or groups at the time of making available loans and facilities, this provision shall not be applicable until one year of such prohibition or expiry of the date of repayment of the loan, whichever is earlier. ? The amount of purchasing of land and houses for self purposes not abiding by Directives of this Bank. ? The amount invested in residence, buildings construction and land development exceeding the limit. ? The share underwriting not could be sold within the prescribed time-limit. 2. Supplementary Capital With a condition of not allowing including more than core capital, the amount under the following heads shall be included in the supplementary capital: a. Provisions for general loan loss Only the amount provisioned for pass loan has to be included under this heading.In case more loan loss provision has been made than the ratio specified by this Bank for pass and other loans, the amount of such additional loan loss provision may be included in the additional loan loss provision. Provided that the total amount under such heads shall not be allowed to be included in the supplementary capital so that it would exceed 1. 25 percent of the total risk-weight assets. b. Assets Revaluation Fund While calculating supplementary capital, it shall be allowed to be calculated only up to 2 percent of the total supplementary capital including the amount for assets revaluation fund. Only the amount remaining in this fund or 2 percent of the total supplementary capital, whichever is lesser, shall be included in this fund. c. Hybrid capital instruments The following instruments shall be included under this head:- ) The issued securities which are unsecured, fully paid up and subordinated to the priority order of payment of depositors and creditors and available to absorb loses as well as liable or not liable to be changed in general capital; (2) Instruments issued on the condition that they are not redeemable at the option of the holder except with the approval of Nepal Rastra Bank. Provided that no other licensed institution shall be allowed to hold (purchase) the hybrid capital instruments issued by one licensed institution. d. Unsecured Subordinated term loan: The debt instruments having the maturity period of more than five years and issued without any collateral security with a condition of getting payment after the depositors and the redeemable preference shares having limited maturity period shall be included under this class.In order to reflect the diminishing value of these instruments, the licensed institution shall have to apply the discount (amortization) factor of these instruments at the rate of 20 percent for the last five years. In case any bank or financial institution has issued such instruments with a condition of converting them into ordinary shares in the long run or in various phases or of redeeming them having fulfilled the prescribed terms and conditions, then the amount converted in ordinary shares may be calculated as supplementary capital and the amount not converted into shares may be calculated as supplementary capital by placing under this head.Provided that while issuing such instruments, the amount more than fifty percent of the core capital shall not be raised. e. Exchange Equalization Fund The amount of the exchange equalization fund maintained by a licensed institution engaged in the transaction of foreign exchange may be calculated for the purpose of supplementary capital. 3 Total Risk-weight Assets For the purpose of calculating capital fund, the total risk-weight assets have been classified in the following two categories: (1) On-balance-sheet risk-weight assets (2) Off-balance-sheet risk-weight transactions 4 Description to be sent with regard to capital fund The licensed banks/financial institution shall have to all the times maintained the prescribed ratio of capital adequacy.The class “A” licensed institution shall have to prepare statement as to capital fund as stated in schedule 1. 1 of the Capital Adequacy Framework, 2007 (as updated in July 2008) and classes “B”, “C” and “D” licensed institution shall have to prepare statements as to capital fund as referred to in Directive Form Nos. 1. 1 and 1. 2 on the basis of the financial statements at the last day of every month. Those statements shall have to be sent to the Banks and Financial Institutions Regulation Department and Concerned Supervision Department of this Bank within one month from the date of completion of every month getting them authenticated by the internal auditors.In the rare event of failure to send getting them audited on monthly basis, the same shall have to be mentioned in the monthly statement. 5 Provision for Auditing In case this Bank deems it necessary, it may to conduct due diligence audit (DDA) to acquire information with regard to business condition of the Banks and financial institution having no adequate capital fund and the concerned institution has to bear the expenses to be incurred there for. 6 Actions may be taken in case Directives as to capital fund are not followed: 1. In case the licensed institution belonging to classes “A”, “B” and “C” do not follow the Directives relating to the capital fund, actions shall be taken according to the Prompt Corrective Actions Byelaws, 2007. 2.In case the licensed institution belonging to class “D” could not maintain the capital fund in the prescribed ratio, the Board of Directors shall have to show the reason for failing to maintain the capital fund and the capital plan or program for making the capital fund adequate within 35 days. With reference to the proposed plan or program submitted, the Bank may issue Directives to maintain the capital fund within the period prescribed by this Bank. In cases where the capital fund is inadequate, dividend and bonus shares shall not be distributed. 3. In case Banks and licensed institution failed to maintain the capital fund at a particular period within a fiscal year but it was able to maintain the capital fund at the end of the fiscal year, even then the cash dividend and bonus share shall not be allowed to be distributed.However, this clause does not cause hindrance in declaring/distributing bonus shares in case the capital adequacy in the ratio prescribed by the financial statement certified by an external auditor at the end of that fiscal year. 4. Though the capital adequacy has been maintained at the ratio prescribed by the financial statement certified by an external auditor at the end of any fiscal year, even then the licensed banks or financial institution shall not be allowed to declare/distribute dividend and bonus if prompt corrective actions are implemented during the time from the date of completion of the said fiscal year to the date of approval by the Annual General Meeting and the restriction for the same are not removed. 7 Repeal and Saving (1) The following Directives issued from this Bank heretofore have been repealed:Provisions relating to capital adequacy in the Unified Directives, 2009; the Directives issued from Directive No. 1/066 and all the circulars relating to this matter issued until the mid-July 2010. (2) The actions taken under the Directives repealed pursuant to sub-clause (1) shall be deemed to have been taken under these Directives. TREND ANALYSIS OF BANKS IN NEPAL There is a significant growth in the number of banks and financial institutions authorized by NRB in Nepal in the last three decades. At the beginning of the 1980s when the financial sector was not liberalized, there were only two commercial banks: Rastriya Banijya Bank and Nepal Bank Limited.After the liberalization and especially in the 1990s, financial sector has grown both in terms of the number of banks and financial institutions and their branches. This definitely has made a positive impact on the economic development of Nepal. pic Figure 2 Chart showing the trends of financial institutions in Nepal pic Figure 3 Banking Operations: Public vs. Private It has only been a couple of decades since the private banks and financial institutions came into existence in Nepal. But, their number has far outgrown the number of public banks and is still in growing trend. Despite the fact that private sector banks are growing in numbers, their access in nooks and corners of the country is very limited.But they have started expanding their branches in the head quarters and business hubs of different districts. The public sector banks are still the largest banks in all aspects from deposit and credit mobilization to the number of branches in operation. pic Figure 4 Graph showing the Deposit/Credit of Commercial Banks (2001-2011) From the graph above, we can see that the amount of Deposit as well as the Credit is in increasing trend every year. What we can say analyzing this graph are: • The increase in deposits means more money with the individual or any company or industry. • Because of more deposit, the banks can use the amount to give in credit for the needed one.Hence increase in deposit has led to increase in credit as well. • More credit given by the bank means more investments being done in the nation, which will ultimately be useful in the economic development of the overall nation. pic Figure 5 Graph showing the GDP (Rs. in million) from 2001 to 2011 From graph we can see that GDP is in increasing trend. pic Figure 6 Graph showing the number of bank branches. Number of bank branches has increased from 2001 to 2011. From 2008, there is rapid increase in the number of bank branches and this might be because of the end of the insurgent period. And this encouraged the banks to open its branches even in the remote areas as well. picFigure 7 Graph showing the population per bank branches Above graph shows that the population per bank branches is in decreasing trend as contrast to the increasing number of bank branches as shown in Figure 6. It may be because in rural areas though the bank branch is opened, people are not involved in the banking transaction. pic Figure 8 Graph showing total deposits (Rs. in million ) from 2001 to 2011 pic Figure 9 Graph showing Total Credit (Rs. in million) from 2001 to 2011 pic Figure 10 Graph showing the total investment (Rs. in million) from 2001 to 2011 Figure 8, 9, and 10 shows the total deposit, total credit and total investment (Rs. In million) and all are in increasing trend.But the total investment is found to be almost constant in 2010 and 2011. Banks are rapidly expanding their reach and new players are joining the market. However, skilled human resource is becoming a serious constraint. The aggressive expansion of the banking industry and lack of skilled managers are throwing up new challenges with operational risk is increasing day by day. The banking industry has been very successful in weathering the storm in the last decade and has proven to be one of the best success stories in Nepal. This sector now needs to be taken to a newer height through adopting the best international practices both on governance and risk management fronts.It also requires new technologies, products, services and distribution channels so that the people’s access to finance can increase considerably. CONCLUSION There is no doubt that the banking sector is important for both developed and developing economies. Developed economies already have a highly sophisticated financial market in place where as developing economies have no or only rudimentary institutions in place. Financial institutions play a key role in the development of a country. They are the intermediary link in facilitating the flow of fund from domestic savings into productive investment which ultimately help to lower the cost of capital to investors and accelerate economic growth of the country.Financial intermediation between borrowers and savers is done by commercial banks and other non bank entities. Now a day, the crucial importance of financial intermediation in economic development has come under the increasing scrutiny by both economists and policy makers in developing countries. However, financial development in many developing economies is still faced by a number of obstacles such as macroeconomic instability, the fragility of stock markets, the limitation of capital markets, and the inefficiency of development and specialized banks. Despite some of these limitations, banking systems in underdeveloped countries remain integral components of the general economic systems.And they can be seen as a key element in any development effort (Zeinab2006). Though Nepalese financial sector is reasonably diversified with financial institutions having institutional arrangement of varied nature, commercial banks are the major player in this system and they occupy substantial share in the structure of financial sector. The commercial banks are supervised by the bank supervision department of NRB while the rest of these institutions are supervised by Financial Institution Supervision. Safe and sound banking is of crucial importance to the financial stability and sustainable development of the country. REFRENCES Nepal Rastra Bank’s website: www. nrb. org. np