Page 1 : Chapter-6: Banking and Monetary policy, A class note by: Vidya Darshan Basnet(9841833081), , Sigma college, Kathmandu., , Bank:, , * A bank is an authorized financial institution which collects idle,, scattered savings from general people through different accounts,, manages fund and advances loans to the investors as their, requirements., , * Abank can play an important role in the economic development of, a country. Banks are indispensable in every walk of life. They are, considered as the nerve of trade, commerce and business of an, economy., , * According to Dr. Herbert L. Hart, “A bank is one who, in the ordinary, course of his business, honours cheques drawn upon him by persons, from and for whom he receives money on current account.”, , Role of Banking System in the Economy, 1. Capital Formation:, , Capital formation means investment in capital goods like machine,, equipment, building, etc. For the investment in capital goods, saving is, necessary. The banks collect idle money from general people through, different accounts and channelize to productive investments. Banking, sector works as a financial intermediaries between savers and investors.

Page 2 : 2. Monetization of Economy:, , Spread of bank branches helps to monetize the economic activities of, rural areas of the economy. This helps to implement government, monetary and fiscal policies effectively in the monetized area which in, turn helps to maintain price stability and promotes economic growth., , 3. Promotion of Employment:, , Unemployment is a serious problem of any country. It creates social,, economic and political problems in the country. In the developing, countries like Nepal , a large proportion of labour force are unemployed, and underemployed . The development of banking sector helps to solve, the problem of unemployment directly or indirectly. In one hand, banks, directly provides employment opportunity in banks and on the other, hand it provides credit for enterprise development, which in turn creates, employment opportunity in the nation., , 4. Poverty alleviation:, , Commercial banks have implemented various programs and projects, such as Small Farmers Development Project, Small Sector Development, Program, Small and Cottage Industries Project, Micro-credit Projects etc., to promote/increase living standard of the lower income group of the, country. Different banks like: ADB, micro-credit development banks are, providing loans to the lower income group without collateral., , 5. Promotion of Entrepreneurship:, , The role of private sector is crucial in accelerating the pace of economic, growth. The banks can help to increase the participation of the private, sector in economic development by providing loans easily on reasonable, rate of interest.

Page 3 : Classification/ Types of Banks, 1. Central Bank:, , Central bank is the guardian of banking system of any country. The, Central Bank stands as an apex body of the banking system of a country., In Nepal, Nepal Rastra Bank is the Central Bank. The Central Bank has the, monopoly of note issue. It controls the monetary system of a country., , 2. Commercial Bank:, , The bank which performs all kinds of banking business and generally, finances on trade and commerce is called commercial bank. Initially this, type of banks were established with the aim of providing short-term, loans to the traders but nowadays they have extended their area of, operation to medium-term and long-term finance., , 3. Development Banks:, , Development Banks are financial institutions of recent origin. Their main, object is to supply long-term loan for accelerating the process of rapid, industrialization in the underdeveloped countries. They also participate, in the starting of new industries by subscribing to their shares and, debentures and undertake certain promotional activities like marketing, and research, investigations and surveys, and techno-economic studies., Development banks are mainly of two types; (a) Industrial Banks and (b), Agricultural Bank., , 4. Micro Finance Banks:, , These banks are designed to address very poor and deprived groups of, the society, who do not have collateral. They provide loan to poor and, deprived group on the basis of group collateral rather than physical, collateral and help to develop banking habit on them.

Page 4 : 5. Exchange Banks:, , Commercial banks which specialize in financing foreign trade are called, exchange banks. Their main function is mostly to finance foreign trade of, a country. They accept and discount foreign bills of exchange, buy and, sell foreign currencies and convert home currency into any foreign, currency according to need., , 6. Saving Banks:, , These banks collect small savings of the people and thereby encourage, the habit of thrift among the people of small me, , Central Bank, , , , , , Central bank is the highest/apex institution of entire financial/monetary, sector of the nation having monopoly power of note issue. It is fully, owned by Government and also known central monetary authority of, the country. Nepal Rastra Bank is the central bank of Nepal.

Page 5 : = Functions of Central Bank:, A. Traditional Functions:, , 1. Monopoly power of Note Issue, 2. Government’s Bank, 3. Bankers’ Bank, 4, Lender of Last Resort, 5. Control of Credit, 6. Custodian of metallic Reserves and International Currency, , 7. Clearing House Function, , 1. Monopoly power of note issue:, , This is the most important and original function of central bank. It is the, only institution authorized to issue currency (notes and coin) of the, country. Only central bank has monopoly power to issue currency. No, other financial institution of any kind can issue notes and coin of the, country. The currency printed and issued by central bank becomes, unlimited legal tender throughout the country. It mean, notes and coin, issued by central bank are legally acceptable., , 2. Government's bank:, , Central bank is fully owned by the government and it works as the, banker, agent and advisor of the government. It provides all necessary, banking facilities to the government. It maintains the government, account. It accepts deposit of cash, cheques and drafts on the behalf of, government and undertakes collection of cheque and drafts. It also, transfer funds of the government from one account to other accounts.