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BNK 208

Fundamentals of Banking

TU BBA-F · Semester 7 · BBA-F curriculum (2021 Common Core)

Requirement
elective
Credits
3
Study Guide
8 units available

Chapter notes

Authoritative study guide across 8 syllabus units

Open a unit to read its study notes.

Unit 1: An Overview of Financial and Banking System· 5 LHs· ~6 marks

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An Overview of Financial and Banking System

Nepal Banking Structure
Nepal Banking Structure

Financial Intermediation and the Macroeconomic Role of Banking

Financial Intermediation

The process where financial institutions channel surplus funds from depositors/savers to deficit economic units (investors/borrowers) reducing transaction costs and information asymmetry.

Financial System

A network of financial markets, institutions, instruments, services, and regulatory bodies facilitating monetary mobilization and capital formation.

Depository Institutions

Financial entities licensed under BAFIA 2073 (Class A, B, C) that mobilize public deposits and provide commercial credit.

Structural Architecture of Nepalese Banking under BAFIA 2073

Nepalese Banking Structure

Comprehensive Architecture of Nepalese Banking

Under Bank and Financial Institutions Act (BAFIA) 2073, BFIs in Nepal are classified into 4 distinct statutory tiers:

  1. Class ‘A’ Commercial Banks:
    • Minimum paid-up capital: Rs. 8 Billion.
    • Functions: Full retail and corporate banking, checking accounts, foreign exchange dealing, syndicated loans, letters of credit (L/C), and treasury operations.
  2. Class ‘B’ Development Banks:
    • Minimum paid-up capital: Rs. 2.5 Billion (national level) or Rs. 1.20 Billion (regional level).
    • Functions: Medium and long-term credit for agricultural, industrial, and infrastructure development; SME lending; limited foreign exchange.
  3. Class ‘C’ Finance Companies:
    • Minimum paid-up capital: Rs. 800 Million (national level) or Rs. 500 Million (regional level).
    • Functions: Hire purchase, consumer installment financing, equipment leasing, housing finance, and term deposits.
  4. Class ‘D’ Microfinance Financial Institutions (MFIs):
    • Minimum paid-up capital: Rs. 100 Million to Rs. 1 Billion.
    • Functions: Collateral-free group lending to low-income rural households, micro-enterprises, and deprived sectors under NRB social banking mandates.

Comparative Classification of BFIs in Nepal

Feature Class ‘A’ Commercial Banks Class ‘B’ Development Banks Class ‘D’ Microfinance Institutions
Minimum Paid-up Capital Rs. 8 Billion Rs. 2.5 Billion (National) Rs. 100 Million (Retail)
Current Account Facility Permitted (Issue Cheques) Permitted (Issue Cheques) Not permitted
Foreign Exchange Operations Full FX & Trade Finance (L/C) Limited FX (NRB approval) Strictly prohibited
Primary Target Market Corporate, trade & urban retail Semi-urban SMEs & industry Rural low-income & deprived groups
Collateral Requirement Mortgage / formal pledge Real estate / asset hypothecation Group guarantee / Peer monitoring

Financial Intermediation Efficiency and Net Interest Margin (NIM) Analysis

Applied Computational Problem: Financial Intermediation Efficiency

A commercial bank mobilizes Rs. 1,000,000 in fixed deposits at an interest rate of 6.5%6.5\% and deploys 85%85\% into commercial loans at 11.0%11.0\%. The bank incurs operating expenses of Rs. 15,000.

  1. Compute Net Interest Income (NII).
  2. Calculate Net Interest Margin (NIM) assuming earning assets equal loans disbursed.

Solution:

Total Deposits=Rs. 1,000,000\text{Total Deposits} = \text{Rs. } 1,000,000
Interest Expense=1,000,000×0.065=Rs. 65,000\text{Interest Expense} = 1,000,000 \times 0.065 = \text{Rs. } 65,000
Loans Disbursed (Earning Assets)=1,000,000×0.85=Rs. 850,000\text{Loans Disbursed (Earning Assets)} = 1,000,000 \times 0.85 = \text{Rs. } 850,000
Interest Income=850,000×0.11=Rs. 93,500\text{Interest Income} = 850,000 \times 0.11 = \text{Rs. } 93,500

Net Interest Income (NII)=Interest Income−Interest Expense=93,500−65,000=Rs. 28,500\text{Net Interest Income (NII)} = \text{Interest Income} - \text{Interest Expense} = 93,500 - 65,000 = \text{Rs. } 28,500
Net Interest Margin (NIM)=NIIEarning Assets=28,500850,000=3.35%\text{Net Interest Margin (NIM)} = \frac{\text{NII}}{\text{Earning Assets}} = \frac{28,500}{850,000} = 3.35\%

A common analytical mistake is confusing the regulatory classification under BAFIA 2073, forgetting that Class D microfinance institutions cannot operate current accounts or issue trade letters of credit.