Money & Banking

Learning Objective: Explain the banking system and functions of Nepal Rastra Bank

Before money existed, people used the barter system -- exchanging goods for goods. A farmer in ancient Nepal might trade rice for cloth. But what if the cloth seller did not want rice? This "double coincidence of wants" problem led to the invention of money, which transformed trade and commerce forever. Today, Nepal's banking system, led by Nepal Rastra Bank (NRB), manages the country's entire monetary framework.

Functions of Money

Money serves four key functions:

1. Medium of Exchange: Money eliminates barter by serving as a universally accepted medium. You pay Rs. 50 for a cup of tea -- simple and efficient.
2. Unit of Account: Money provides a standard measure of value. We can compare the value of a motorcycle (Rs. 2,50,000) with a bicycle (Rs. 15,000) using the same unit -- Nepali Rupees (NPR).
3. Store of Value: Money can be saved and used later. You can deposit Rs. 10,000 in a bank today and use it next month.
4. Standard of Deferred Payment: Money allows for credit transactions -- you can buy a phone on installment and pay later.

Commercial Banks in Nepal

Commercial banks accept deposits from the public and provide loans. Major commercial banks in Nepal include:

• Nabil Bank (first private bank, established 1984)
• Nepal Bank Limited (oldest bank, established 1937)
• NIC Asia Bank, Global IME Bank, Himalayan Bank

Key functions of commercial banks:

• Accepting deposits (savings, current, fixed accounts)
• Granting loans and advances
• Remittance transfers (crucial for receiving money from Nepali workers abroad)
• Issuing debit cards, credit cards, and mobile banking services
• Providing lockers and safe deposit services

Nepal Rastra Bank (NRB) -- The Central Bank

Established in 1956, Nepal Rastra Bank is the central bank of Nepal. It does not deal directly with the public but oversees and regulates the entire banking system.

Functions of NRB:

1. Issue of Currency: NRB is the sole authority to print and issue Nepali Rupee notes and coins.
2. Banker to the Government: It manages the government's accounts and handles public debt.
3. Banker's Bank: Commercial banks maintain accounts with NRB and can borrow from it in emergencies.
4. Monetary Policy: NRB controls money supply, interest rates, and inflation through tools like the bank rate, cash reserve ratio (CRR), and open market operations.
5. Foreign Exchange Management: NRB manages Nepal's foreign currency reserves and regulates the exchange rate (the NPR is pegged to the Indian Rupee at 1.6 NPR = 1 INR).
6. Regulation and Supervision: NRB licenses, monitors, and regulates all financial institutions.

Money Supply

Money supply is the total amount of money in circulation in the economy. NRB controls it through:

• Cash Reserve Ratio (CRR): The percentage of deposits banks must keep with NRB
• Bank Rate: The interest rate at which NRB lends to commercial banks
• Open Market Operations: Buying/selling government securities to inject or absorb money

Key Term: Monetary Policy refers to the actions taken by Nepal Rastra Bank to control money supply and interest rates to achieve economic stability.

Summary

• Money serves as a medium of exchange, unit of account, store of value, and standard of deferred payment.
• Commercial banks like Nabil Bank and NIC Asia accept deposits, grant loans, and provide financial services.
• Nepal Rastra Bank is the central bank that issues currency, regulates banks, and manages monetary policy.
• NRB uses tools like CRR, bank rate, and open market operations to control money supply.