Chapter 3 Solutions: Bank, Insurance, and Financial Institutions
Answers to the Chapter 3 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, and five marks’ worth of explained points, tables or working for 5 marks.
Group A: Very Short Answer Questions (1 Mark Each)
1. When was Nepal Rastra Bank established?
Nepal Rastra Bank, the central bank of Nepal, was established on 2013 Baishakh 14 B.S. (1956 April 26 A.D.) under the Nepal Rastra Bank Act, 2012.
2. Which is the first bank of Nepal and when was it established?
Nepal Bank Limited is the first bank of Nepal; it was established on 1994 Kartik 30 B.S. (1937 November 15 A.D.).
3. Which regulatory body regulates insurance companies in Nepal?
Insurance companies in Nepal are regulated by the Nepal Insurance Authority (NIA) under the Insurance Act, 2079; it was formerly known as the Beema Samiti (Insurance Board).
4. Write the full form of SWIFT and ATM.
SWIFT: Society for Worldwide Interbank Financial Telecommunication. ATM: Automated Teller Machine.
5. What percentage of basic salary is deducted for the Employees Provident Fund (EPF)?
10% of the employee’s basic salary is deducted for the EPF, and the employer adds an equal 10% as a matching contribution, making a total of 20%.
Group B: Short Answer Questions (5 Marks Each)
1. Explain any five major functions of the Central Bank (Nepal Rastra Bank).
Nepal Rastra Bank (NRB) is the central bank of Nepal, established on 2013 Baishakh 14 B.S. under the Nepal Rastra Bank Act, 2012 and now governed by the NRB Act, 2058. As the supreme monetary and regulatory authority of the country, it guides and controls the whole banking and financial system. Five of its major functions are:
- Monopoly of note and coin issue: NRB alone has the right to issue Nepalese currency notes and coins. It keeps reserves of gold, silver, foreign exchange and government securities against the currency it issues, which maintains public confidence in the rupee and uniformity in the currency system.
- Banker, advisor and financial agent to the government: NRB maintains the government’s treasury accounts (TSA) and manages public debt and treasury bills on its behalf. It also advises the Ministry of Finance on economic and fiscal policy.
- Banker’s bank and lender of last resort: NRB grants licenses to Class A, B, C and D institutions, holds their Cash Reserve Ratio (CRR) deposits and conducts clearinghouse operations. When banks face a financial crisis, NRB provides them emergency liquidity loans, which is why it is called the lender of last resort.
- Formulation and implementation of monetary policy: NRB formulates the annual Monetary Policy to control inflation, regulate interest rates and maintain price and balance-of-payments stability. It then carries out this policy through the banks and financial institutions it regulates.
- Control of credit: NRB expands or contracts the supply of credit using quantitative and qualitative tools such as the Bank Rate, the CRR, the Statutory Liquidity Ratio (SLR) and Open Market Operations. Credit is expanded to encourage investment and contracted when prices rise too fast.
The sixth function in the chapter is management and custody of foreign exchange: NRB determines exchange rates, including the pegged rate with Indian currency, and safeguards the national foreign exchange reserves.
2. What is a cheque? Explain the three types of cheques used in banking transactions.
A Cheque is an unconditional written order drawn by an account holder directing their bank to pay a specified sum of money on demand to the person named in it or to the bearer. Every cheque has three parties: the Drawer, the account holder who writes and signs it; the Drawee, the bank on which it is drawn; and the Payee, the person or institution who receives the money.
The three types of cheques used in banking transactions are:
- Bearer Cheque: A bearer cheque is payable over the counter to anyone who presents it at the bank, because the words “or bearer” on it are not struck out. The bank does not need to check who the holder is, so it is risky: if the cheque is lost or stolen, the finder can encash it.
- Order Cheque: An order cheque is payable only to the person named on it, or to someone to whom that person has endorsed it on the back. The bank verifies the identity of the person before paying, so it is safer than a bearer cheque.
- Crossed Cheque: A crossed cheque has two parallel transverse lines drawn on its top-left corner, with or without the words “A/C Payee Only”. It cannot be encashed over the counter and must be deposited into a bank account, so the payment can always be traced. This makes it the safest type of cheque.
3. Differentiate between Life Insurance and Non-Life (General) Insurance in five points.
Life Insurance covers the risk to a person’s life, such as whole life, endowment, term and children’s education policies. Non-Life or General Insurance covers financial loss to property, goods, vehicles and liabilities, such as fire, marine, motor, agriculture and health insurance. Both are regulated in Nepal by the Nepal Insurance Authority. They differ as follows:
| Basis of Difference | Life Insurance | Non-Life / General Insurance |
|---|---|---|
| Subject matter | The life of a person | Property, goods, vehicles and liabilities, such as buildings, stock, cargo and motor vehicles |
| Certainty of payment | The sum assured is paid either on maturity or on death, so a payment is certain (except under term insurance, which pays only on death within the term) | The insured event, such as fire, accident or theft, may never happen; the insurer pays only if a loss actually occurs |
| Principle of indemnity | Does not apply, because a human life cannot be valued in money; the fixed sum assured (plus bonus) is paid | Applies; the insurer pays only the actual financial loss, up to the sum insured, so the insured cannot profit from a disaster |
| Period of contract | Long-term, such as 15 or 20 years or the whole of life | Usually short-term, commonly one year, renewed when it expires |
| Element of saving | Endowment policies combine protection with saving: the sum assured plus bonus is returned on maturity | Pure protection with no saving element: the premium is not returned if no loss occurs |
4. Introduce Employees Provident Fund (EPF) and Citizen Investment Trust (CIT) and state their major functions.
(a) Employees Provident Fund (EPF): The EPF was established under the Employees Provident Fund Act, 2019 B.S. (1962 A.D.) to build up compulsory retirement savings for government and institutional employees. Its major functions are:
- Collecting provident fund contributions: It deducts 10% of the basic salary of each employee and adds an equal 10% matching contribution from the employer, so 20% of basic salary is saved in the employee’s account. The accumulated amount is paid to the employee on retirement.
- Managing social security benefits: It runs social security schemes for its contributors, such as medical, accident, maternity and funeral grants.
- Lending to employees: It provides loans to its contributors out of the funds it holds, which helps them meet needs such as housing or education.
- Financing infrastructure: It invests its large pool of savings in national infrastructure projects, which supports the country’s development.
(b) Citizen Investment Trust (CIT): The CIT was established under the Citizen Investment Trust Act, 2047 B.S. (1991 A.D.) to encourage citizens to save and to put those savings to productive use through the capital market. Its major functions are:
- Operating voluntary retirement funds: It runs the Employee Growth Retirement Fund and the Gratuity Fund, in which employees and employers can save voluntarily for retirement.
- Running savings schemes for the public: Through the Investor Account Scheme and the Citizen Unit Scheme, it collects savings from the general public and invests them on their behalf.
- Mobilizing capital market investment: It invests the funds it collects in shares and other securities, which channels small savings into the capital market.
- Acting as an issue manager: It manages the issue of shares for companies that offer them to the public.