DEVELOPMENT OF BANKING IN NEPAL:

A bank is an institution, which deals with money and credit. It accepts

deposits from the public and mobilized the fund to productive sectors. It
also provides remittance facility to transfer money from one place to
another. Generally, bank accepts deposits from business institutions and
individuals, which is mobilized into productive sectors mainly business and
consumer lending. So, bank is known as a dealer of money. At present
context, bank is not only confined to accepting deposits and disbursing
loan. In addition to this, a bank may be engaged in different types of
functions such as remittance, exchange currency, joint venture,
underwriting, bank guarantee, discounting bills etc. In this present context,
bank is going to electronic banking system in Nepal. Most of banks of
Nepal are featuring electronic banking system. They offer e-banking in
Nepal, internet banking in Nepal, phone banking in Nepal, and mobile
Although it is said that development of banking system in Nepal was
started in the reign of “Ranodip Singh” in the year 1933 B.S. He had
established an office name “TejarathAdda” in Kathmandu. It used to
provide loans to the government officials and people against deposit of gold
and silver. It has also extended its branches outside Kathmandu valley but
this office has no right to accept deposit of public and it had no
characteristics of modern bank.

The modern banking system in Nepal was started after the establishment
of Nepal bank limited on 30th Kartik 1994 B.S. This step in banking sector
is another major steps of development of banking system in Nepal. It was
established under Nepal Bank Act 1994. It is first bank established in
Nepal. However, this bank was established but maximum use of Indian
currencies was not stopped in Nepal. This bank was given authority and
responsibility of central bank of that time but within the change in time, of
needed a separate central bank was seen. So, under Nepal Rastra Bank
act 2012, Nepal Rastra Bank was established as central bank in Nepal on
14th Baishakh 2013. This bank was established with many objectives but
mainly to stop maximum use of Indian currencies in Nepal and to increase
the uses of Nepalese notes. Therefore, it first issued Nepali notes on 7th
Falgun 2016. Its other functions were to stop dual monetary system, to
keep stability in exchange rate of Nepalese currencies to encourage
national industry by mobilizing the capital for development and to develop
the all banking system in Nepal. This is the bank of government and bank
of all other banks. In the course of time, according to recommendation of
the Nepal Rastra bank, another commercial bank RastriyaBaniya Bank was
established in the year 2022 under Banijya Bank Act 2021. In the same
way, under the agriculture development bank act 2024, the agricultural
development bank was established on 7th Magh 2024. This bank was
established with the objective of increasing the life standard of the people
who are involved in agriculture. The development of banking system was
not satisfactory up to year 2040 B.S. No new bank was established during
this period except the extension of branches of already established bank
inside the country.

Nepal Arab Bank Limited was as first joint venture bank in the year 2041
B.S. under commercial bank act 2031 and company act 2021. This is
another major phase of development of banking system in Nepal. Today
this bank is popular by the name Nabil Bank limited. The second joint
venture bank to be established in Nepal was Nepal Indosuez Bank in 2041.
Today this bank is Nepal Investment bank limited. Similarly, in the year
2043, the Grindlays Bank limited was established as next bank and it is
known today’s Standard Chartered Bank Nepal limited. In this phase,
several other banks were established as Himalayan Bank limited in 2049
B.S. Nepal SBI bank limited in 2050, Nepal Bangladesh Bank in 2051 and
Everest Bank Limited, Bank of Kathmandu limited in the same year. Now a
days, there banks are known as leading financial institutions in Nepal.
Today, there are four kinds of financial institutions established in
categorized as “A’, “B”, “C” and “D”. Commercial Banks come on under
Class “A” category, development banks come on under class “B” category.
Similarly, finance companies come in class “C” category and micro finance
development banks comes under class “D” category. There are many
financial institutions established under different category and it is in the
process of increasing. A part from these financial institutions there are rural
development banks established in Nepal. In recent year Nepal Rastra Bank
had opted merger, acquisition policy and financial institutions have merged
and become one from two, and even one from three and many of financial
institutions are in pipeline of mergingbanking system in Nepal.
Although, banks and financial institutions occupies more than 60% in
Nepalese economy but the development of banking sector in Nepal is not
said as satisfactory because these financial sector have target cities and
populated areas only and not in rural areas. This is how modern banking
system is running in Nepal.

A History of Banking System in Nepal

Nepal bank Ltd. is the first modern bank of Nepal. It is taken as the
milestone of modern banking of the country. Nepal bank marks the
beginning of a new era in the history of the modern banking in Nepal. This
was established in 1937 A.D. Nepal Bank has been inaugurated by King
TribhuvanBir Bikram Shah Dev on 30th Kartik 1994 B.S. Nepal bank was
established as a semi government bank with the authorized capital of
Rs.10 million and the paid-up capital of Rs. 892 thousand. Until mid-1940s,
only metallic coins were used as medium of exchange. So, the Nepal
Government (His Majesty Government erstwhile) felt the need of separate
institution or body to issue national currencies and promote financial
organization in the country.
Nepal Bank Ltd. remained the only financial institution of the country until
the foundation of Nepal Rastra Bank is 1956 A.D. Due to the absence of
the central bank, Nepal Bank has to play the role of central bank and
operate the function of central bank. Hence, the Nepal Rastra Bank Act
1955 was formulated, which was approved by Nepal Government
accordingly, the Nepal Rastra Bank was established in 1956 A.D. as the
central bank of Nepal. Nepal Rastra Bank makes various guidelines for the
banking sector of the country.
A sound banking system is important for smooth development of banking
system. It can play a key role in the economy. It gathers savings from all
over the country and provides liquidity for industry and trade. In 1957 A.D.
Industrial Development Bank was established to promote the
industrialization in Nepal, which was later converted into Nepal Industrial
Development Corporation (NIDC) in 1959 A.D.
RastriyaBanijya Bank was established in 1965 A.D. as the second
commercial bank of Nepal. The financial shapes for these two commercial
banks have a tremendous impact on the economy. That is the reason why
these banks still exist in spite of their bad position.
As the agriculture is the basic occupation of major Nepalese, the
development of this sector plays in the prime role in the economy. So,
separate Agricultural Development Bank was established in 1968 A.D. This
is the first institution in agricultural financing.

For more than two decades, no more banks have been established in the
country. After declaring free economy and privatization policy, the
government of Nepal encouraged the foreign banks for joint venture in
Nepal.

Today, the banking sector is more liberalized and modernized and

systematic managed. There are various types of bank working in modern
banking system in Nepal. It includes central, development, commercial,
financial, co-operative and Micro Credit (Grameen) banks. Technology is
changing day by day. And changed technology affects the traditional
method of the service of bank.