51 Approved by CDC, Nepal Trade d. Documents Used in Foreign Trade Documents are the proof which helps to settle any kinds of disputes and can be used as a evidence in the future. The following documents are used in foreign trade: i. Inquiry letter ii. Reply to the inquiry or quotation letter iii. Follow-up letter iv. Order letter v. Letter of acknowledgement vi. Invoice viii. Adjustment of complaint, etc. Differences Between Foreign Trade and Home Trade Basis Home Trade Foreign Trade Meaning It is the act of buying and selling of goods between the traders of same county. It is the act of buying and selling of goods between the traders of two different countries. Parties involved Buyer and seller are the parties involved in home trade. Importer and exporter are the parties involved in foreign trade. Types It has two types i.e. wholesale and retail trade. It has three types, i.e. import, export and entreport. Copies of invoice Generally, three copies of invoice are prepared. Generally, four copies of invoice are prepared. Currency used National currency is used for payment. Foreign currency is used for payment. Transportation cost The transportation cost is lower than foreign trade. The transportation cost is higher than the home trade. Letter of Credit Letter of credit (LC) is not compulsory to open in the home trade. Letter of credit (LC) is compulsory to open in the foreign trade. Modes of transport Generally, land transportation is used to carry the goods. Generally, the air, water and land transportation is used to carry the goods. 3. Modes and Means of Payment Modes and means of payment refer to the tools and devices through which the payment of the value of trade is made. Transactions may be performed in cash or on credit but the payments are made through the most reliable and common means and devices for the sake of security of the payment. All the cash transactions are paid immediately after the receipt of the goods. But in case of credit transactions, payment is made before or at the due date. Banking services are available all over the world to promote business and trade through which a number of means and methods are used as the facility to the parties. Cash, money order, postal order, bankdraft, cheque, bill of exchange, credit card, LC, hundi, etc. are the means of payment. The following are some of the common modes and means of payment:
52 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal i. Cheque A cheque is a written order made by an account holder to a specified banker to pay a certain sum of money to the person ordered or the bearer of the instrument. Since the payment of cash is not safe and reliable, the cash dealings are made through banks in the form of cheques. Commonly cheque is used for the payment of internal trade. But in these days, foreign payments can also be made through banks as they can deal with the converted foreign currency services. Key Point Cheque is an order slip issued by account holder to specified banker to pay a certain sum of money to the particular person or bearer of the instrument. ii. Bank Draft It is a written order issued by a bank in the name of another bank for making the payment of a certain amount to the specified person. This is a common and more reliable means of remitting money through a bank. In this method, a person sending money requests his banker along with the amount to be remitted, for issuing an order to a certain bank of the receiver’s place forthe payment of that certain amount. After getting the money, the bank issues an order to the person requesting the bank. Then the person dispatches the order to the seller through the most reliable medium, mostly through post offices by registering or insuring it. When the seller gets that order, he goes to the concerned bank and collects the money in his account. If the specified person does not get the order, the money in the bank remains safe and the payment cannot be made to anybody else. In this way, it is a more reliable instrument of payment in both types of trade. Key Point Bank draft is written order issued by a bank in the name of another bank for making the payment of a certain amount to the specified person. iii. Letter of Credit (LC) A letter of credit is a kind of guarantee given by the importer’s bank to the foreign exporter for the remittance of the value of trade after getting the goods imported. This guarantee is given before the dispatch of goods because the exporters dispatch the goods only against the LC of a reputed bank. It is used mostly in foreign trade. Under this method, the importer requests his banker along with the necessary documents and the marginal money in the local currency, to provide him a bank guarantee for the payment to the trade value. After the verification of all the documents, the bank opens LC in the name of the local importer and provides LC number to him. When the importer obtains the LC Cheque Cheque
53 Approved by CDC, Nepal Trade number, he sends it to the foreign exporter by post along with the purchase order i.e. the order of the goods then, after receiving the goods so imported, he pays the rest of the money to his bank and the bank issues TT or draft to the exporter’s bank for the payment of the specified money to the party concerned. In this way, the remittance of money is made through this means. Key Point Letter of Credit is a guarantee letter issued by the importer’s bank to the foreign exporter for the remittance of the value of trade after getting the goods imported. iv. ATM Card (Automated Teller Machine) It is an electronic device depositor to withdraw money immediately at any time without the use of cheque. It is a computerized device which provides the financial services to the customers without the involvement of human clerk. Different banks have installed ATM in different public places like hospitals, university, hotels, airports, departmental stores, etc. The ATM card holder is given a Personal Identification Number (PIN) by the bank which should be used for withdrawing money from the ATM. The debit card is the most common ATM card in these days. Some other card used as means of withdraw and payment are; Master Card, credit card, VISA card, SCT card, etc. Key Point ATM card is a plastic coated magnetic card which provides withdrawal facility to the customer using modern computerized device through personal identification number. v. Electronic Transfers Banks, other financial institutions and money transfer agents transfer money from one place to another through special net based transfer system by using special numeric code. Electronic transfer is done by computer. Transferring foreign currency from one country to another is done by the Society for World Wide International Financial Transaction (SWIFT). SWIFT is an international organization. The member banks of SWIFT can inter transfer foreign currency, e.g. for transferring sterling pound from the bank at Japan to the bank at Singapore, one should use the PIN code of Chartered Bank of England and with the help of SWIFT, the amount can be transferred. In case of transferring money from one place to another place of the same country, the order is given by a bank to the another bank to transfer the amount through fax. Automated Teller Machine (ATM) Bank Wire Transfer Swift logo
54 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Then, bank informs the concerned person about the electronic transfer of amount and concerned person receives the amount showing the identity card or proof of the right person of that amount. Key Point Electronic transfer is computer based modern means of payment that provides facility to make the payment in safer, faster, economical and convenient way. vi. Hundi Hundi is an informal way of remitting money through the network of money brokers. While remitting money through hundi, customer should contact the hundi broker of his city and give a sum of money to be transferred to a recipient of another city. The hundi broker gives written order contacting name and address of the recipient to pay the sum of money to the concerned recipient. The broker charges small amount of commission. Hundi is used both in home and foreign trade. Hundi is of two types, viz. Fixed Hundi and Darsani Hundi. In case of Fixed Hundi, the recipient receives the amount after certain period of time but in case of Darsani Hundi the recipient receives the amount immediately. Key Point Hundi is a written order issued by a business firm or an individual to another directing to pay the amount. vii. Money Order Money order is an order made by a post office to pay a certain sum of money to the person specified. Underthis method, the buyerrequests his local post office along with the necessary amount to make the payment to the person specified. After receiving the necessary amount, the post office issues telegraphic order to the post office of the seller’s place for paying that amount to the seller. The second post office calls the seller by a notice and remits the money. viii. Telegraphic Transfer (TT) It is a telegraphic order of the buyer’s bank to the bank in the seller’s place to pay a certain sum of money to the person specified. In this method, the person who wants to pay the money requests the bank along with the necessary amount to be remitted and the TT charges for making telegraphic order to pay the money to the seller as specified. After getting the amount of money with the necessary charges, the bank issues an order in the name of the bank in another place through telegram. After receiving the telegram, bank informs the person concerned to come and collect the money. The person with his identification comes in the bank and collects his money. Hundi slip Money order
55 Approved by CDC, Nepal Trade ix. Gold, Cash or Silver The payment of the trade transactions, specially of smaller value are made in hard cash, gold or silver. It is possible if there is a personal dealing and again the seller/exporter accepts it. Gold and silver are internationally recognized money. Points to Remember i. Cheque ii. Bank draft iii. Electronic transfers iii. Cost and freight invoice vi. ATM Card (Automated Teller Machine) vi. Hundi vii. Money order viii. Telegraphic transfer (TT) ix. Gold, Cash or Silver Invoice 4. Introduction Invoice is a very important document in trade. Invoice is a bill drawn by a seller/ exporter to the name of buyer/ importer including therein, a description of goods, modes and means of transport, price, discount and other expenses, means of payment, if any, etc. It is prepared in necessary copies but generally in three copies of which the first is sent to the buyer/importer, second to the transport company and the last copy is kept by the seller/exporter himself. An invoice may include the following particulars; i. Heading of the seller/exporter. ii. Name and address of the buyer/importer (inside name and address) iii. Invoice number iv. Date of dispatch of the goods v. Order number vi. Expenses incurred in the way vii. Quantity and rate and price of the goods viii. Discount rates and credit terms, etc. ix. Mode and means of transport x. Net payable amount and means of payment (if any) After the invoice is received, the buyer/importer of his authorised agent goes to the said station or port to receive the goods. When the goods arrive, he verifies them with the invoice and takes the delivery from the carrier. But if the goods are not according to his order or not as per the invoice, he may reject taking delivery of some or all of the goods and then return to them the seller/exporter on the risk and expenses of the seller/exporter. Key Point A bill drawn by seller/exporter to the buyer/importer including price of goods as well as expenses and terms and conditions of the trade is known as invoice. Invoice
56 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 5. Importance of Invoice An invoice is an essential document in trade. It includes not only the price and expenses of the goods but also, the other terms and conditions of the trade. It has certain importance, which are mentioned below: i. It gives information to the importer and exporter about the amount of goods to be paid or received. ii. It provides the detail information like name, quality, quantity and rate of goods. iii. It provides information of the last date of payment. iv. It provides the basis for determining the selling price of the goods. v. It helps to confirm whether the goods are as per the order placed or not. vi. It helps to settle disputes and misunderstandings as a proof. vii. It helps to determine the commission and discount to the consignee or importer. viii. It helps to know the receivable and payable amount clearly. 6. Types of Invoice In addition to the description of the goods, their price and discount, the invoice also mentions a number of carriage expenses. As the agreement between the seller and the buyer or exporter and importer about the price and expenses of the goods, it may differ with each other. Thus, there are different types of invoices. The most common and popular types of invoices are briefly discussed below: i. Loco Invoice The word ‘loco’ is derived from the word local. The invoice which is prepared with the local price of the seller’s or exporter’s godown is known as loco invoice. Since no other expenses except the price of the goods or cost of goods are included in it, the buyer/ importer should bear all the expenses in the carriage of goods up to his godown. Loco invoice = Local cost of goods ii. Free on Board Invoice (FOB Invoice) The invoice which includes all the charges and expenses made during the carriage of goods from the seller’s godown up to the ship board is known as FOB invoice. It includes all other charges and expenses for the carriage of goods from the factory to ship with the price of the goods. And such other expenses should be paid by the buyer/importer himself. Hence, FOB price = cost of goods + all expenses till the goods are loaded on board of the ship. iii. Cost and Freight Invoice (C and F Invoice) Cost and freight invoice is that which mentions the cost freight, export duty, packing charges, etc. except insurance premium made by the seller/exporter is known as cost and freight invoice. Thus, the total of such expenses along with the price of the goods
57 Approved by CDC, Nepal Trade are payable by the customer. The insurance premium is free to the importer under this condition. C & F price = cost of goods + expenses incurred till the goods are loaded on board of the ship + freight of the ship. iv. Cost, Insurance and Freight Invoice (CIF Invoice) It is a cost, insurance and freight invoice. It is prepared by adding the marine insurance to the C & F price. CIF invoice is that invoice, which includes all the cost and expenses incurred in the carriage of goods along with their value. No exemption is given to the customer in regard to expenses. CIF price. = cost of goods + expenses incurred till the goods are loaded on board of the ship + freight of the ship + insurance charge of marine. v. Franco Invoice Franco means free, and hence it is free of cost invoice. No item of expenses except the price of the goods is mentioned in this invoice. It means all the expenses like freight, insurance, tax, etc. which the supplier in the carriage of the goods has incurred while delivering the goods from the exporter godown to importer godown are included in the invoice. Franco invoice = cost of goods + expenses incurred till the goods are loaded on board of the ship + freight of the ship + insurance charge of marine + other expenses incurred till the goods are placed in the godown of the importer Example Name of invoice Expenses Price which is mentioned in the invoice Local price of goods Transportation charge upto ship Freight Insurance Others LOCO 500 500 FOB 500 20 520 C& F 500 20 30 550 CIF 500 20 30 10 560 Franco 500 20 30 10 20 580 Points to Remember i. Loco invoice ii. Free on board invoice (FOB invoice) iii. Cost and freight invoice vi. Cost, insurance and freight invoice v. Franco invoice
58 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal World Trade Organization (WTO) WTO is an international organization which helps in trade between the nations. It is established to operate international trade in a systematic and simple way. It is a main control mechanism of multinational trading system. It manages, regulates and simplifies the international business through maintaining trade discipline, reducing tariffs and setting standards. WTO has adopted liberal trade policy. Any sovereign country and regional trade organisation can be the members of the WTO. It is a forum of governments of different countries to negotiable trade agreements and to settle the trade disputes. WTO is the successor to the GATT (General Agreement on Tariffs and Trade). WTO was established on 1st January, 1995. Any sovereign country and regional trade organization can be the members of the WTO. Nepal got the membership of WTO as the 147th member on 23 April, 2004 A.D. (2060 B.S.). Nowadays, more than 50% foreign trade is performed based on the principle of WTO. The headquarter of WTO is in Geneva of Switzerland. Functions of WTO i. To administer and implement the trade agreements related with WTO. ii. To provide forum for further negotiations on the multi-lateral trade agreements. iii. To settle trade disputes and misunderstanding between the member countries. iv. To monitor and evaluate the trade policies adopted by its member countries. v. To provide technical help and training to the developing countries. vi. To cooperate with other international institutions involved in global economic policy making. vii. To act as a watchdog of international trade by examining the trade rules of member countries. viii. To act as a management consultant for international trade. ix. To maintain trade related date base. South Asian Free Trade Area (SAFTA) SAFTA is an agreement made between the South Asian Countries (SAARC) for the development of trade and industry of its member countries. Free Trade Area is agreement among the member countries to remove all tariffs among them. The 7th SAARC summit of 1993 held in Dhaka, Bangladesh formally adopted SAPTA (South Asian Preferential Trade Agreement) to uplift the living standard of the people WTO Building SAFTA/SAARC Building Brief Information about WTO Formation : 1st January, 1995 Headquarters : Geneva, Switzerland Membership : 153 member countries Official languages : English, French, Spanish Website : www.wto.int
59 Approved by CDC, Nepal Trade of SAARC countries strengthening the economy of the member nations. The main aim of SAPTA is to increase trade through increasing investment and production. SAPTA was first of all endorsed by Nepal on 20th Ashwin, 2050 and last endorsement was trade by Bangladesh on 5th Nov., 1995. The concept of free trade area started in 9th SAARC summit held at Male, Maldives changed SAPTA into SAFTA. The main aim of SAFTA is to reduce the custom duty, increase investment and employment to improve the economy of member nations. 11th summit held in Kathmandu on 2003 decided to make SAARC nations as free trade area. This concept was endorsed on 6th January, 2004 at the 12th SAARC summit held at Islamabad, Pakistan and implemented since 1st Jan., 2006. Functions of SAFTA i. To reduce imbalance of trade in South Asia. ii. To provide compensation for the losses of revenue to the least developed member countries due to elimination of tariffs. iii. To provide technical support to the least developed member countries to promote export. iv. To encourage member countries to extend trade within the SAARC countries for improving their economy. v. To settle trade disputes and misunderstanding through discussion and negotiations. vi. To review the effectiveness of the implementation of the agreement. vii. To develop strong mechanism for ensuring the smooth implementation ofthe agreement. viii. To allow the member countries to prepare a list of products which are to be restricted to import for the protection of national interest. Glossary Invoice : bill Tariffs : duty/import export tax Remittance : transferring money from other country Publicity : advertisement Complaints : protest/find fault Freight : shipment/cargo Merchant : businessman Bulk : huge/large Exercise A. Answer the following questions in one sentence. 1. What is trade? 2. Write the full form of WTO. 2070, 2074 (NPABSON) 3. Write the full form of SAFTA. 4. What is the full form of SAPTA? 2070, 2072, 2074 (PABSON) 5. What is the full form of GATT? 2070 (S), 2073 6. What is the full form of ATM/SWIFT? 2074 (R) 7. What is hundi or Letter of Credit (LC)? 8. Who sends the Quotation Letter? 2069 (S)
60 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 9. What is Franco Invoice? 10. Write any one similarity between foreign trade and home trade. 11. What is the full form of LC? 2067 (SOS) 12. What is home trade and foreign trade? 13. What are the types of foreign trade? 14. When was WTO established? 15. When did Nepal become the member of WTO? 16. Who prepares invoice? 17. What is LOCO invoice? 18. What is the full form of FOB invoice? 2071 19. Write the full form of CIF invoice. 2065 (Sup), 2068 (PABSON) 20. Write any two means of payment. B. Give short answers to the following questions: 21. What is home trade? Explain any four procedures of home trade? 2074 22. What are the terms and conditions of home trade? Explain. 23. What is foreign trade? Explain any four procedures of foreign trade? 2073, 070 24. Describe the terms and conditions of foreign trade. 25. What is placement of order? Describe the kinds of dispatching placement of order in foreign trade. 26. What is invoice? What are the items included in an invoice? Mention. 27. Write the importance of invoice. 2074 (NPABSON) 28. Explain the development and role of SAFTA. Mention its functions. 29. What is World Trade Organization? Write any four functions of WTO. 30. Write any five differences between World Trade Organization (WTO) and South Asian Free Trade Area (SAFTA). C. S.L.C/SEE Examination Questions. 37. Why is home trade necessary? Describe its any four procedures, orderly. 2072 38. Write any five modes of payments used in modern trade with examples. 2067 39. Why is foreign trade necessary? Explain any three documents used in both home trade and foreign trade. 2071 (R) 40. Why is invoice used in trade? Discuss any four types of invoice in brief. 2066 43. Mention any two similarities and three dissimilarities between home trade and foreign trade. 2070 44. Explain any three merits of export and any two demerits of import. 2067 SOS 45. What is invoice? What are its main types? Discuss. 2072 Project Work a. Draft a report about the different means of payment and way of using them by visiting any bank nearby and asking with the staff of the bank. b. Collect the bills/invoice used by an organization and find out the differences between them.
61 Approved by CDC, Nepal Financial Institutions Trade Unit 4 Financial Institutions CDC Syllabus 4.1 Introduction 4.2 Types of financial institutions 4.3 Bank- Introduction, types and functions Cheque- Introduction, types and its rules Payment of cheque using computer system 4.4 Insurance- Introduction, types and functions 4.5 Employees’ Provident FundIntroduction and functions 4.6 Citizen Investment FundIntroduction and functions 4.7 Cooperative Finance- Introduction and functions 15 Periods After studying this unit, students will be able to : define the term of financial institution and mention its types, define bank and explain its importance and functions, define various types of bank and its functions, define cheque and explain its types, define insurance and explain its functions and importance, describe the types of life and non-life insurance, define provident fund, citizen investment trust and finance co-operatives with its functions. Learning Objectives
62 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 1. Introduction Generally, financial institutions refer to such institutions, which involve in some sort of financial activities by collecting the saving of the people and mobilising it for the productive purposes. In this sense, financial institutions may be categorised as banking and non-banking financial institutions. Financial institutions accept savings of the public and firms as deposit or premium and mobilise it in the form of capital or lending money to the entrepreneurs and organizations against securities of no guarantee of its members. According to NR Bank Act, 2012, “The financial institution in Nepal refers to any institution established with the objective of providing loan to agriculture, cooperative, industry or any other specific economic sectors or of accepting deposit from the general public. The term also refers to any other institution called financial institutions by the Government of Nepal by publishing a notice in Nepal Gazette.” According to A.T.K. Ukrant, ‘Financial institutions are investment intermediaries linking the savers and users of capital.’ Thus, financial institutions are those which accept deposit and grant loan to the person or organisation. The financial institutions are the investment intermediaries between the savers and users of capital. Key Point Financial institution is an institution involved in financial activities as the investment intermediaries between the savers and the users of capital. 2. Types of Financial Institutions Financial institutions are of different types in terms of the nature and scope of work. Mainly the financial institutions can be categorised as banking and non-banking financial institutions. The different financial institutions in Nepal are as follows: Banking Financial Institution Bank Finance Company Finance Cooperative Employees Provident Fund Citizen Investment Trust Insurance Company Non-banking Financial Institution Types of Financial Institution BANK 3. Introduction Most of the human beings are busy in either type of occupations i.e. employment, profession or business. Generally, they earn some amount of income and make necessary expenses in a regular course. Some of the persons may have some portion of their income after satisfying their necessities. It is known as surplus income. They want due security of their surplus income from fire, theft, unnecessary spending, etc. on one hand and some amount of risk free return i.e. interest on it, on the other. This has led to the development of the concept of bank.
63 Approved by CDC, Nepal Financial Institutions There are different views about the origin of bank. According to one view, the word ‘bank’ is derived from the Italian word ‘Banco’ which means a bench. In the early days, monetary/banking activities were done by sitting on a bench by Italian goldsmith. Then, banco became bank. The first bank called the “Bank of Venice” as established in Venice, Italy in 1157 AD. It was established to finance the monarch in his wars. The modern commercial banking institutions have been developed after the enactment of Banking Act in 1833 AD, which provided freedom for the establishment of commercial banks. A bank simply is a financial institution, which deals with the monetary activities by accepting deposits, lending to the various parties against securities and performing agency services to its client/customer. According to the Oxford Advanced Learner’s Dictionary, “The term ‘bank’ means an establishment for keeping money and valuables safely, the money being paid out on the customer’s order or cheques.” Similarly, in the words of Kent, “A bank is an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.” “Banks are financial institutions that fund in the form of deposit repayable in demand or in short notice”. World Bank. According to dictionary of Banking and Finance, “Business which holds money for its clients which leads money at interest and trades generally in money.” In the modern day business world, the scope of bank has become so wide that it covers all the financial activities from the issue of money to the performance of agency services to its clients/customers. In this sense, a bank may be defined as a financial institution, which accepts the deposit for the purpose of lending or investment from the public, repayable on demand through cheques, drafts or otherwise and also performs a number of agency services to its clients on instruction. The central bank of a country issues the paper notes as its basic function. A bank draws surplus money from the public who are not using it at the time, and lends to those who are in a position to use it for productive purposes. Thus, a bank lends what it has borrowed from others. The bank pays interest at certain rate on the money it has borrowed, and charges interest at certain rate on the money lent. The rate of interest on the money lent is always greater than that on deposits. The difference between the two rates is the bank’s margin of income. Moreover, the commission charged from the clients against the agency services is the other source of income to the banks. In the banking history of Nepal, Nepal Bank Ltd. was established in 1994 B.S. as the first bank and then Nepal Rastra Bank in 2013 B.S. as the Central Bank of the country. Then other banks were established with the passage of time. Key Point A bank is a financial institution, which accepts money as deposit from individuals and organisations and lends it to those who need it against their security deposit. First World Bank
64 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 4. Functions of Bank Accepting deposits and granting loan are the traditional functions of a bank. The modern banks undertake a wide variety of functions from the issue of paper money to rendering of utility services. As the difference in bank itself i.e. commercial, development, and central bank, etc., the functions are also different, to some extent. But, commonly the important functions of banks may be mentioned as below: i. The central bank of a country issues money throughout the country. ii. The central bank manages and controls the total banking system of the country for its rapid economic development. iii. Commercial banks accept deposits of money from the different persons and organizations in different accounts, i.e. current A/c, saving A/c and fixed deposit A/c and provide security and interest to them on such deposit. iv. Commercial banks also grant loan to the persons and organizations against security of patents, shares, debentures, gold, silver and other fixed properties. v. Commercial banks provide agency services to their clients by collecting cheques/ amountfortrade values,interest, commission,dividend, etc. andpaying subscription, insurance premiums, trade values and other expenditures on behalf of the clients, on outstanding instructions. vi. Commercial banks issue various credit instruments like cheque, bank draft, letter of credit, credit card, etc. which enable fast and safe remittance of money from one place/person to another in distant places. vii. Commercial banks purchase and sell shares and securities on behalf of their clients/ customers. viii. Commercial banks provide necessary foreign currency to the persons requiring it, on the permission of the central bank. ix. The development banks viz. Agricultural Development Bank and Industrial Bank provide financial, technical and administrative assistance for the development of the agricultural and industrial sectors respectively. 5. Importance of Bank A bank is important for all the parties i.e. general public, business organization and the government. It is rather important for the business organizations. A bank provides finance, which is the foundation of every business activity. It is thus, regarded as an indispensable tool of the wheel of commerce. It acts as a middleman or agent between the savers and borrowers of money. The importance of a bank is highlighted in terms of the following points: i. The central bank of a country issues coins and paper notes, which facilitate in the transfer of properties. ii. Commercial banks collect capital in terms of the deposit of the general public and organizations and mobilize to the productive fields to activate the entire economic sectors. iii. Banks provide security to the deposits of the general public and organizations, on one hand and pay interest on such deposits on the other and encourage saving.
65 Approved by CDC, Nepal Financial Institutions iv. Commercial banks issue various creditinstruments like cheque, bankdraft,traveller’s cheque, credit cards, letter of credit, etc. that assure fast and safe remittance of money and personal expenses in a reliable manner. v. Banks provide a number of agency services to their clients/customers, like receipt of income and payment of expenses, etc. vi. Banks provide financial, technical and administrative assistance to the persons and institutions for the development of agricultural, industrial and commercial sectors. vii. Banks take responsibilities for underwriting i.e. buying and selling the shares, debentures and other securities issued by the government or public limited companies. viii. Banks grant loan to persons and organizations against the security of shares, debentures, gold, silver and other fixed properties. ix. Banks provide necessary data, statistics and other economic information to the government on monetary and fiscal matters for the formulation of a sound monetary and fiscal policy. x. Directly and indirectly bank provides employment opportunities in a country. xi. The bank issues coins, paper notes and credit card which help for exchanging goods and services which makes easier for measuring the value of goods and services. 6. Types of Banks in Nepal The banks may be categorised into various types according to their functional area, rights and authorities. In Nepal, the banks are generally divided into the following category: 1. Central Bank 2. Commercial Bank 3. Development Bank 4. Micro-finance Bittya Sanstha Ltd. Central Bank 7. Introduction Central bank is the bank of a country which occupies central position in the monetary and banking sectors of a country. It is fully owned and managed by government. So, the central bank is known as the government’s bank. The central bank formulates the monetary and fiscal policy and solely regulates the entire banking sector by issuing notes and determining their values with the foreign currencies, managing cash and credit policy to strengthen national economy. Thus, the central bank may be defined as that bank, which holds the topmost position in the banking sectors and solely exercises the rights of issuing notes, managing cash and credit system, controlling foreign exchange and formulating banking policy for the development of banking sectors in the interest and welfare of the public. It is always aimed towards strengthening the national economy by making economic infrastructure in the country. There is just a single central bank in a country. Nepal Rastra Bank is the Nepal Rastra Bank
66 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal central bank of Nepal. It was established in 14th Baisakh, 2013 B.S. under Nepal Rastra Bank Act, 2012 with one crore of authorised capital. According to Dr. D. Kock, “Bank which constitutes the apex of the monetary and banking structure of its country is called a central bank.” Same as Dictionary of Banking and Finance, “Main government controlled bank in a country which controls the financial affairs of the country by fixing main interest rates, issuing currencies, supervising the commercial bank and controlling the foreign exchange rate.” The distinguished characteristics of the central bank are that, it is fully owned and managed by government and there is only one central bank in a country. ‘Reek bank of Sweden’ is the first central bank in the world which was established in 1656 AD. ‘Bank of England’ (1694 A.D) is the central bank of England, ‘Reserve Bank of India’ is the central bank of India, ‘State Bank of Pakistan’, ‘Federal Reserve Bank’ and ‘Central Bank of China’ are the central banks of Pakistan, USA and China respectively. Key Point Central bank refers to the government bank which holds top most position in the monetary and banking sectors of a country. 8. Functions of Central Bank Central Bank performs the following functions: i. Issues of Notes and Currencies Central bank has got right to issue notes under the permission of the government. It issues coins and paper notes. At least 50% security of gold, silver, dollar and other government security should be deposited in World Bank while issuing notes in the country. The first paper note were issued in 1st Aswin, 2002 B.S. in Nepal but Nepal Rastra Bank started to issue the notes since 2016 B.S. The pictures used in notes are taken from various sectors and designed by the note design committee and finally it is decided by the Government of Nepal. Central bank has issued notes of 1, 2, 5, 10, 20, 25, 50, 100, 250, 500, and 1000 values till the date. ii. Working as the Government’s Bank Central bank is the bank of the government. It accepts the government deposit and disburses payments. It also, transfers the government’s money from one place/office to another as the instruction of the government. It also performs the functions of purchases and sales of gold, silver and other securities on behalf of the government. iii. Working as the Banker of Other Banks Central bank has the sole right to give permission to establish banks in the country. The other banks conduct their activities within the framework of the banking policy formulated by Central Bank. In this sense, it is the father of other banks, which gives birth to them. It gives instructions for the acceptance of deposit, granting loan and credit, paying or charging interest, etc. It gives permission to other banks to conduct their activities by keeping security deposit from them, providing credit facilities and financial and administrative assistance as per the rules and regulations. Thus, Central Bank acts as the banker of other banks.
67 Approved by CDC, Nepal Financial Institutions iv. To Create and Control of Credit Capital is basic source for the business and industries. Central Bank avails capital in terms of credit through the commercial and development banks. But when excess credit facilities are granted, inflationary problems may arise. So, it again contracts credit by instructing the banks to draw back the money from the organizations in time, limiting credit grants and even taking actions against the banks not following the rules and regulations strictly. Sometimes, it can also frame special acts for the creation and control of credit. v. Management of Foreign Currency Central bank has the sole right to manage and exchange foreign currency. It determines the value of national currency with that of the foreign currencies at the instruction of the government. It is the custodian and manager of the country’s reserves of the foreign currencies. Commercial banks exchange foreign currency on the permission of Nepal Rastra Bank in Nepal. vi. Developing Banking System Central bank encourages the individuals and institutions for the establishment of banking institutions. It keeps certain deposit as per the rules and instructs the bankers to operate their activities for the upliftment of backwarded society so that, the national economy can be strengthened by activating all the economic sectors. It also provides financial and administrative help for their growth and development. For this, it suggests the government to frame the liberal economic policy. vii. Mobilization of Capital and Management of Public Debt Central bank manages the public debt for different development and administrative works. It collects such debt from general public and different organisations by issuing treasury bills and development bonds. It helps to raise short term and long term capital and mobilize in the development work. viii. Makes Monetary Policies Central bank makes monetary policy for the nation. It collects and analyses the various kinds of monetary information and formulates monetary policies. ix. Lender of Last Resort Central bank is the apex body of financial institutions. If other banks and financial institutions are in financial crisis, the central bank provides loan to them as lender of last resort. It fulfils the financial demands of banks and financial institutions at the time of emergency. Central bank grants loan to other banks and charges interest. x. Other Functions Besides the above functions, central bank acts as the custodian of the cash reserve of other banks, provides loan to them against securities, purchases and sells of government security,openingLetterofCredit(LC)onbehalfofthegovernmentandotherbanks,dealing with foreign banks, transferring money for other banks, standing as representative of the country in the functions of International Monetary Fund (IMF), control and supervise
68 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal financial institutions, working as the last lender of the banks, publishing monetary position of the company, conduct central clearance of the bank and financial companies through the adjustment of their accounts, work as the last lender and gives necessary information to the government about the monetary position of the country and so on. Points to Remember i. Issue of notes ii. Working as the government’s bank iii. Working as the banker of other banks iv. To create and control of credit v. Management of foreign currency vi. Developing banking system vii. Mobilization of capital and management of public debt viii. Makes monetary policies ix. Lender of last resort x. Other functions Commercial Bank 9. Introduction Generally, the word bank refers to the commercial bank. The concept of bank was evolved from the development of commercial activities. A commercial bank refers to that bank which accepts deposits of the public and organizations, grants loan to them against securities providing financial and technical assistance to the traders and commercial parties and rendering agency services to the clients/customers as requested. Nepal Bank Ltd. was established as the first commercial bank and the first bank of Nepal in 1994. B.S. Then Rastriya Banijya Bank was established in 2022 B.S. under Rastriya Banijya Bank Act, 2021. Again Agriculture Development Bank, which was established in 2024, has also been allowed to serve commercial functions from 2041 B.S. Other commercial banks established in Nepal are Himalayan Bank Ltd., Nabil Bank Ltd., Mega Bank Ltd., Agricultural Development Bank Ltd., Standard Chartered Bank Ltd., etc. As per the NRB requirement, commercial banks need to meet revised paid-up capital requirement of Rs. eight billion (8,000,000,000). This type of commercial bank is categorized as ‘A’ class financial institution (bank) of Nepal. According to the dictionary of Banking and Finance, “Bank which offers banking service to public is commercial bank”. According to Bank and Financial Institution ACT 2063 BS., “A bank is an organized institution established to perform financial transactions.” According to Jeannie Adams, “A business that receives deposits from and provides loans to customers.” According to M.L. Seth, “A bank is an institution which deals in money and credit.” Rastriya Banijya Bank
69 Approved by CDC, Nepal Financial Institutions According to the Commercial Bank Act, 2031, “Commercial banks are those banks which are established under this Act to perform commercial functions except those which are established for specific purposes like development bank, cooperatives or other.” In conclusion, commercial bank accepts the deposits from the customers, grants loan and provides other banking services to the ordinary people for earning profit or profit motive. It is established for the development of trade industry and commerce. Commercial bank grants loans to the individuals and corporations and charges interest. Key Point Commercial bank refers to the bank which accepts deposits of the public and organisations and grants loan to them against securities and provides financial services such as agency service, transfer of money, exchanging foreign currency, issuing capital, etc. 10. Functions of Commercial Bank The following are the important functions of the commercial banks: i. Accepting Deposits Commercial banks accept deposits of money made by different persons and institutions mainly under three accounts viz. current account, saving account and fixed deposit account. Each of them is described below: a. Current Account A current account is a running account between a customer and his banker. A customer can deposit and withdraw money to or from a current account whenever he likes. There are no restrictions to the number of withdrawal subject to the minimum credit balance to be kept as per the rules of the bank. There is no provision of interest under this account. This only provides security for the money. b Saving Account It is such an account, which provides limited withdrawal facility and carries a moderate of interest on such deposits. Interest is allowed on this account on the lowest credit balance remained in particular month. Since, it is meant to encourage savings of the people, some restrictions are made on withdrawals. c. Fixed Deposit Account A fixed deposit account is the one, in which a customer deposits his/her money in the bank for certain fixed period of time and, thus, cannot be withdrawn before the expiry of the specified period. Banks offer a high rate of interest on this account because the deposit or fund is kept for a specified period. If the depositor is in need of money before the expiry of the period, he/she can borrow 75% or as the rules of bank of the deposit from the bank at 2% higher rate of interest than the one allowed on his/her deposit.
70 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal ii. Providing Loan A commercial bank provides loan to persons and institutions for certain productive purposes against the security of patents, shares, debenture, gold, silver and other fixed properties. It provides short-term, mid-term and long-term loan for which it charges interest at a certain rate greater than that given on the clients’ deposit. It also provides overdraft facility to the distinguished/reputed clients. iii. Serving with Agency Functions A commercial bank performs a number of agency services like payment to the creditors, water and electricity bills, subscriptions, insurance premium, etc. and collection from debtors receiving dividends, interest and commission, etc. on behalf of the clients as per outstanding instructions. It charges a certain commission for serving with such agency functions. iv. Exchanging Foreign Currencies Various businessmen frequently demand foreign currencies to conduct their foreign trade. General individuals may also need foreign currencies for their foreign tour and study programmes. A commercial bank provides the necessary foreign currencies on the permission of Nepal Rastra Bank. Commercial banks can also quote open market exchange rate of foreign currencies as the prevailing system within the framework of the central bank’s policy, v. Transfer of Money Commercial banks transfer money from one place/person to another in a fast and safe way by means of different instruments of payment. Telegraphic transfer, traveller’s cheque, credit cards, bank drafts, electronic transfer, etc. are the different instruments used by the banks to transfer money. This helps to settle the accounts of the customers and the suppliers from time to time. They take certain charges for transferring money between places and persons. So, a bank is the most reliable means of payment/transfer of money. vi. Opens Letter of Credit (L.C.) Commercial banks provide Letter of Credit (LC) facility to their clients. LC is a kind of guarantee given to the supplier or exporter by the purchaser or importer’s bank on behalf of the purchaser/importer as deposit to provide such a guarantee letter. This promotes the foreign trade dealing. Similarly, banks issue credit cards to their clients at theirrequest and assure the sellers for the payment of what is purchased by the customers. vii. Issuing Capital Commercial banks also help trading and industrial companies by issuing or providing capital through the sale of shares, debentures, etc. by motivating the investors. They also provide finance or capital in terms of investment or lending, which is the base for companies to conduct their activities smoothly onward and adding new programmes and projects.
71 Approved by CDC, Nepal Financial Institutions viii. Provides Locker Facilities If we keep valuable good properties like gold, ornaments, diamonds, silver, documents like share certificate, land certificate, etc. at home, it is risky. Commercial bank provides locker facilities to its clients to preserve the valuable assets by paying service charge to the bank. ix. Purchases and Sells Securities The commercial bank purchases and sells securities, shares and debentures on behalf of its customers through stock exchange and capital markets. It helps to promote trade and industries. x. Creates Credit Credit creation is a unique function of commercial bank. Commercial banks supply money as loan to traders and industrialists. Bank deposits are regarded as money. When bank grants loan to its customer, it does not pay cash. It simply credits the account of the borrower. The borrower can withdraw the amount by cheques whenever required. In this situation, the commercial bank creates deposit without receiving cash. xi. Other Functions Commercial banks manage to keep gold, silver and other valuable property safely, avail money by purchasing/accepting bills (specially of 90 days terms) and provide commercial services like financing for transportation carriage, storage, etc. These banks also activate all the economic sectors by collecting savings and mobilising capital for strengthening national economy. Points to Remember i. Accepting deposits ii. Providing loan iii. Serving with agency functions iv. Exchanging foreign currencies v. Transfer of money vi Opens letter of credit vii. Issuing capital viii. Provides locker facilities ix. Purchases and sells securities x. Creates credit xi. Other functions Differences Between Central Bank and Commercial Bank Central Bank Commercial Bank 1. Central bank is the main bank of the country. 1. Commercial banks are established with the permission of the central bank. 2. It is fully owned and managed by the government. 2. They are either owned and managed by government or by general public. 3. It has monopoly right to issue note. 3. They do not have right to issue notes. 4. It controls credit. 4. They create credit.
72 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 5. It is the banker of the banks and government. 5. They are the bankers of individuals and organizations. 6. It manages foreign currency by fixing the exchange rate. 6. They exchange foreign currency only. 7. There is only one central bank in a country. 7. They exchange with many commercial banks in a country. 8. It is established under the special Central Bank Act. 8. They are established under the certain Commercial Bank Act. 9. It grants loans to the government and commercial banks. 9. It grants loans to the individuals and organizations. Development Bank 11. Introduction A development bank is the one, which is established under a special Act for the upliftment of a certain economic sector by providing special financial, technical and administrative assistance under simple and easy terms and condition. Such a bank is established as the important aspect of national economy, mostly in industrial and agricultural sectors. In Nepal, development banks are established under the provision of Development Bank Act, 2052 A.D. Nepal Industrial Development Corporation (NIDC: 2016 B.S.) and other private development banks have already been established in Nepal under this Act. Development bank provides short term, mid term and long term loan to the industries and it provides capital, technical assistance, managerial and administrative suggestions to the development of industrial, agricultural, rural and other specific sectors of the country. It also creates proper environment in the country for the development of concerned sectors. The first development bank of world was ‘Societe Generale de Beljique’, Belgium 1822 A.D. According to Bank and Financial Institutions ACT, 2063 BS, development banks in Nepal fall under class ‘B’ financial institutions, which perform their activities for the development of specific sectors. According to D.M. Mithani, “A development may be defined financial institution concerned with providing all types of financial assistance (medium as well as long term) to business units, in the form of loans, under writing, investment and guarantee operation and development in general and industrial.” From the above definitions, it can be concluded that it is a financial institution which is established for the development of special sectors like, industry, transportation, agriculture, commerce, etc. The requirement for national-level development banks is Rs 2.5 billion, development banks working in four to 10 districts should have paid-up capital of Rs 1.2 billion, and
73 Approved by CDC, Nepal Financial Institutions development banks working in one to three districts should have such capital of Rs 500 million. Key Point A development bank is the bank which provides capital and technical assistance for the development of certain sectors such as industrial, agricultural, rural sectors of the country. 12. Types of Development Bank There are different types of development banks in Nepal. They are as follows: Agricultural Development Bank Industrial Development Bank Rural Development Bank Private Development Bank Types of Development Bank a. Agricultural Development Bank The bank, which is established for the development of agricultural sector of the country, is called Agriculture Development Bank. Agriculture Development Bank Ltd. was established in 7th Magh, 2024 B.S. with the authorized capital of 5 crore under the provision of Nepal Agricultural Development Bank Act 2024. It provides loans to the farmers to purchase agricultural tools and equipment, fertilizers, seeds, etc. to increase agricultural outputs. It also provides loans for the promotion and development of agro-based industries. Further, it provides financial and technical assistance for farm development. At present, it provides banking functions as well. It is converted into commercial bank from development bank since 2nd Chaitra, 2062. It accepts deposits from individuals and organizations grant loans to the needy organization and individual. b. Industrial Development Bank The bank which is established to develop the industrial sector of the country is known as industrial development bank. It provides financial and technical assistance for the promotion and development of the industrial sector of the country. It provides mid term as well as long term loans to industrial organizations for constructing administrative as well as factory buildings and installing plant machinery and equipment. In Nepal, Nepal Industrial and Development Corporation (NIDC) was established in 2016 B.S. under NIDC Act 2016 as industrial development bank. It had got authorised capital of Rs. 25 crores at the time of establishment. On January 27, 2017 AD, the government has decided to merge the NIDC Development Bank with the Rastriya Banijya Bank (RBB). Agricultural Development Bank
74 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal c. Rural Development Bank Banks which are established to promote the rural people for generating income in rural areas by providing training and loan on the guarantee of group is known as Rural Development Bank. In Nepal, such banks are established under the provision of Development Bank Act 2052 B.S. This bank has already been established and functioning in the eastern, western, far-western and mid-western regions of Nepal. Bangladesh generated the concept of Rural Development Bank at first. List of Rural Development Banks in Nepal S.N. Name of Bank Location Date of Establishment 1. Easter Region Rural Development Bank Biratnagar 2049/11/17 2. Far-Western Region Rural Development Bank Dhangadi 2049/11/15 3. Western Region Rural Development Bank Butwal 2051/12/18 4. Mid-western Region Rural Development Bank Nepalgunj 2051/12/18 5. Central Region Rural Development Bank Janakpur 2053/03/24 d. Private Development Bank Banks which are established to develop special sector of the country with the investment and management of private sector are known as Private Development Banks. The private development bank mobilize their resources for the promotion and development of industrial, agricultural and tourism areas. Kailash Bikas Bank, Kamana Sewa Bikas Bank, Jyoti Development Bank Ltd., etc. are the examples of these types of banks. All private development banks are established under the “Development Bank Act 2052”. Points to Remember i. Agricultural Development Bank ii. Industrial Development Bank iv. Rural Development Bank v. Private Development Bank 13. Functions of Development Bank The functions performed by the development banks are divided into the following two groups: Rural Development Bank Private Development Bank
75 Approved by CDC, Nepal Financial Institutions i. Development Functions a. Establishment of Industries, Promotion and Research of Technology It searches the technology required for the new industries, analyses the market and identifies the priority sector and provides managerial and administrative skill and knowledge. It helps in collecting capital and establishing such new industries in the feasible locations. b. Helps Industrial Organizations Development Bank helps the industries directly or indirectly for preparation of plans and policies and implementing. It also helps to manage capital items such as land, building, furniture, vehicle, machineries, etc. as well as raw materials required for the smooth running of the industries. c. Identifies Priority Sector The bank identifies and selects the priority sector of the country. After selecting them, it provides the necessary resources to carry out the selected development works. d. Maintains Proper Environment for Investment Development Bank encourages and attracts national and international investors. For this, it maintains proper environment for investment and gives the guarantee of security for their investment. e. Analysis of Product Development Bank analyses the possible market in the agricultural and industrial sectors before launching the product. It analyses the product considering the availability of resources, labours, market, condition, product demand, transportation, etc. After these analyses, it provides factual information to the public. ii. Banking Functions a. Grants Loan It provides short term, mid term, long term loans in agricultural and industrial sectors against the security deposit. It grants loan to purchase improved seeds, fertilizers, agricultural tools, machinery and equipment as well as to expand and develop industries. b. Accepts Deposit It accepts scattered savings from the public under Current A/c, Saving A/c and Fixed deposit A/c. It also provides withdrawal facility to its depositors. Account operation of development bank is similar to commercial bank. c. Purchases and Sales of Shares and Debentures It purchases and sells shares, debentures, bill of exchange, etc. issued by different industries. In case of bill of exchange, the concerned party should pay its value within 3 months.
76 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal d. Serving with Agency Functions A commercial bank performs a number of agency services like payment to the creditors, water and electricity bills, subscriptions, insurance premium, etc. and collection from debtors receiving dividends, interest and commission, etc. on behalf of the clients as per outstanding instructions. It charges a certain commission for serving with such agency functions. e. Remits Money Remittance of money is another important function of development bank. It issues bank draft, letter of credit, telegraphic transfer (TT), credit cards, etc. remittance of money from one place to another place. Points to Remember Development Function Banking functions i. Establishment of industries, promotion and research of technology i. Grants loan ii. Helps industrial organizations ii. Accepts Deposit iii. Identifies priority sector iii. Purchases and sales of shares and debentures iv. Maintains proper environment for investment vi. Serving with agency functions v. Analysis of product v. Remits money Micro-finance Bittya Sanstha Ltd. Micro-finance is termed as the financial services rendered to the deprived groups of the people and small entrepreneurs in savings, credit, remittance, rural insurance, etc. to help them in developing selfemployment opportunities and various income generating activities.Small size of loan, group savings, small-scale entrepreneurs, diversified utilization and simple and flexible terms and conditions on credit (without collateral) are the determining characteristics of its definition. Based on institutions involved, micro- finance sector can be classified into two groups: i. formal (Government and NRB) and ii. semi-formal. Nepal has an experience of about four decades in micro-finance. Although many programmes have been implemented for poverty alleviation in Nepal, only micro- finance programmes are seen as pro-poor and rural based. The modern Micro-finance movement started from 1995 AD in Nepal. Micro-finance has been particularly recognized as an effective development intervention for basic three reasons: The services provided through micro-finance can be targeted specifically to the poor and poorest of the poor, These services can make a significant contribution to the socio-economic status of the targeted community, and Micro-finance Bittya Sanstha Ltd.
77 Approved by CDC, Nepal Financial Institutions The institutions that deliver these services can develop within few years, into sustainable organizations with steady growing outreach. Modalities of Nepalese Micro-finance Bittya Sanstha Ltd. Micro-finance programmes are established and promoted in Nepal with diversified methods and modalities. Some of the successfully operated models are as follows: Grameen (Rural) Banking Model Deprived Sector Lending Model Rural Self Reliance Fund Model Small Farmers’ Cooperatives Model Financial Non-government Organizations Model Savings and Credit Cooperatives Model Project Based Micro-credit Model Wholesale Lending Model The prudentialregulation for Micro-finance Bittya Sanstha Ltd. came into existence in 2003 A.D. This regulation became effective from January 2004 A.D. with some amendments. Micro-finance Bittya Sanstha Ltd. are classified as “D” class financial institutions underthe Banks and Financial Institutions Act, 2006 A.D. Some of the major regulatory provisions issued to Micro-finance Bittya Sanstha Ltd. are as follows: i. To open Micro-finance Bittya Sanstha Ltd. at national level, a minimum paid-up capital of Rs. 100 million is needed. This kind of banks is supposed to be operated at regional level excluding Kathmandu valley requires Rs. 60 million as its minimum paid-up capital. Four to 10 districts excluding Kathmandu valley requires Rs. 20 million as its minimum paid-up capital and to operate in 3 districts excluding Kathmandu valley require up to Rs. 10 million paid-up capital. ii. Minimum of 7 promoters are needed to establish a proposed Micro-finance Bittya Sanstha Ltd.. The promoters can hold up to 70 percent stake. At least 30 percent of the total share capital should be floated to the general public. Functions of Micro-finance Bittya Sanstha Ltd. Following are the functions of Micro-finance Bittya Sanstha Ltd.: 1. It helps to reduce poverty and to facilitate micro-credit to the targeted groups. 2. It also assists in capacity building of participating financial institutions. 3. It helps to improve the socio-economic status of rural women by accessing them to institutional loan for their productivity. 4. It helps to increase the economic status of the rural and urban women by providing micro-credit for their micro business. 5. It helps to increase the income, savings and employment of the rural poor by engaging them in livestock management and productivity. 6. It helps to increase participation of the deprived poor for their socio-economic upliftment. 7. It helps to increase the agriculture productivity by providing the irrigation facilities to the deprived community’s farmers.
78 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Cheque 14. Introduction A bank accepts deposits of persons and institutions for the purpose of lending loan or investing in terms of capital. The persons and organizations deposit their temporarily idle money into various banks and withdraw it frequently through a formal and valid instrument. A cheque is one of the popularly used instruments used in withdrawing money from the bank. Since the money deposited into a bank is the depositor’s own money, he/she can at any time place an order in written form to his/her bank to pay certain amount of money. Such an order is known as cheque. A cheque does not mention any condition and must not mention it in the order. The bank is liable to pay money whenever it is demanded. Thus, a cheque may be defined as an unconditional order made by the depositor or client to a specified banker to pay on demand a certain sum of money mentioned in it to the ordered person or to the bearer of the instrument. Only the holder of A/c in the bank can make it. In order to enforce the drawers for making the orders in an identical form and format, the bank provides printed pad of blank cheques to the depositor at the time of opening account with the bank for withdrawing their money as and when needed. Each pad or book of cheque contains some sheets of paper along with an application form at the last. After cheque book is finished, one should submit an application by filling up the form to get a next cheque book or pad of cheque. From the study of the above definitions, a cheque may contain the following essentials: i. A cheque is an unconditional order. The mentioning of condition creates the problem of proving the condition, which is not possible. ii. It must be drawn upon a specified banker. If one draws cheque of Nepal Bank Ltd. upon Rastriya Banijya Bank, it does not become valid and will not be accepted. iii. It must be signed by the drawer i.e. the cheque writer or the depositor, otherwise it cannot be authentic and valid to get the payment. ‘ iv. It must clearly mention a definite sum of money and that must be equal or less than the balance remained in the drawer’s A/c. v. The amount mentioned in the cheque is payable only on demand. It means that the amount is payable only, if the cheque is presented to the bank counter. vi. The cheque is made payable either to the drawer himself or to his ordered person or to its bearer. Key Point A cheque is defined as an unconditional order drawn by a person or firm to a specified bank for the payment of a certain amount of money to the person specified in it or to the holder of this instrument. 15. Parties Involved in a Cheque There are mainly three parties involved in the total performance of a cheque.
79 Approved by CDC, Nepal Office And Office Personnel Financial Institutions i. Drawer A drawer is the person who signs on the cheque. He/she is also known as the depositor or cheque maker. A person holding A/c with a bank is the drawer. ii. Drawee A drawee is the party on whom the cheque is drawn. Thus, a drawee refers to the bank, which encashes the cheque when it is valid and authentic. iii. Payee If a payee is the receiver of the amount mentioned in the cheque, sometimes, the drawer himself may be the payee. If he writes his own name or the word `self’ in the cheque and presents it in the bank counter, otherwise the order of a person or the bearer of the cheque can be the payee. Points to Remember i. Drawer ii. Drawee iii. Payee 16. Rulings of a Cheque There are certain rules to fill up a cheque. If the drawer fails to follow any of these rules, the bank may dishonour the cheque i.e. may not encash the cheque. i. Date The date, on which the cheque is drawn, should be clearly mentioned. The mentioning of future date makes a cheque invalid. ii. Name The name of the person to whom the cheque’s amount is to be paid should be clearly mentioned. Otherwise, the cheque may be invalid. If the drawer himself wants to receive the amount, he writes his name or the word ‘self’ in the name blank in the cheque, otherwise he writes the name of his order. iii. Amount The amount for which the cheque is drawn should be clearly mentioned in words as well as in numerals. The amount mentioned in the cheque must not be more than the deposit balance remained with the bank in that A/c. iv. Account Number Each depositor will have a separate account number for his/her deposit. Sometimes if a depositor has different accounts within the same bank and the account number will be different regarding the accounts. The respective and relevant account number should be mentioned in the cheque. Payee Drawee Drawer
80 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal v. Signature The drawer should give his/her signature on the right hand side bottom of the cheque. It must tally with the sample signature provided to the bank. A bank keeps the signature specimen card of each depositor and verifies one’s signature of the cheque, whenever it comes in the bank to demand money. vi. Cleanliness and Neatness A cheque should be clean and neat in writing and in outlook. The rubbing and crossing the words and figures, overwriting of words and figures, unnecessarily folding of the cheque should be avoided. The drawer with his signature should approve a slight crossing or addition of words and figures. Points to Remember i. Date ii. Name iii. Amount iv. Account number v. Signature vi. Cleanliness and neatness 17. Dishonour of a Cheque Sometimes, the bank does not pay the amount demanded by a cheque. The condition of a cheque not being paid by the bank is known as dishonour of a cheque. The following can be the causes of dishonouring a cheque: i. If the date in a cheque is not mentioned or wrongly mentioned. The mentioning of the past date expiring six months period or the future date causes dishonour of a cheque. ii. If the name of the payee is not mentioned in the cheque. iii. When the amount is not mentioned, or mentioned in excess of the deposit with the bank or the amount mentioned in words and figures do not tally with each other or even, if not clearly mentioned. iv. If the account number is not mentioned or wrongly mentioned. v. If any condition is mentioned in the cheque like paying Rs. 1000 to my brother Ram Babu to buy a new shirt for him, etc. vi. If the signature of the drawer does not tally with the specimen signature and if there is no signature in the places of rubbing and crossing. vii. When the drawer due to some reasons stops the payment. viii. In case of endorsement if it is not appropriate and usual. ix. If the bank doubts over the payee, specially in case of large sum of money. x. In case of overdraft when there is no sufficient assets available for the recovery of the overdraft. xi. When the bank has learnt of the insolvency, madness or death of the drawer. xii. When a court issues an order to stop payment from the account of a certain drawer. xiii. If the drawer has closed his account before presenting the cheque.
81 Approved by CDC, Nepal Financial Institutions 18. Kinds/Types of Cheque A cheque may be of various types as the nature and purpose. The main types of cheque are discussed below: i. Bearer Cheque A bearer cheque is the one, whose money is made payable to the person who presents it into the bank counter. It is thus, written as “Pay to Sunita or bearer”. The serious limitation of this sort of cheque is that any person can get the payment from the bank by just presenting it into the counter. The bank cannot be made liable for the payment to the wrong person. This is also, termed as an open cheque. From the security point of view, it is not safe. The specimen of an order as well as a bearer cheque is drawn below. ii. Order Cheque An order cheque is the one, which is made payable to a certain person or order of the drawer. When the order is given to the bank to make payment only to the person specified, it is called an order cheque. Sometimes the ordered person may be busy, so he can endorse the cheque and send to anybody else for encashment. The act of doing signature by the ordered person in the cheque is known as endorsement of cheque. Generally, endorsement of cheque is done at the back of cheque. After the endorsement of cheque, it can be negotiable or transferable to others for the encashment. iii. Cross Cheque / Crossed Cheque The bearer or order cheque has a serious limitation/demerit that there’s no security of the payment, as it can be paid to anybody else who presents it into the bank counter. In order to overcome this demerit and create reliability in banking dealing, cheques began to be crossed. Crossing of cheque is done by drawing two diagonal parallel lines on one corner, specially the top left corner of the cheque. The effect of this is that, the cheque will not be paid across the counter. As soon as the cheque is received, the payee should first of all deposit it into his own account; then the bank collects the amount from the drawee bank and then he can withdraw the amount from this bank by issuing his own cheque i.e. the order or bearer cheque. If the payee has no account in the bank, he can deposit it in the name of anyone having account in this bank. There are many types of crossing. But these are commonly categorised as simple crossing and special crossing. The following ways and terms are used in crossed cheque. A/c Payee Only & Co. Mega Bank Ltd. Prime Bank Ltd. A/c Payee Only Nepal Bank Ltd. Not Negotiable Bearer cheque Order cheque
82 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal a. Simple Crossing A simple crossing, also called general crossing, is the one, in which the crossing is made across the face of the cheque with or without the words `& Co.’, `A/c Payee Only’, etc. but does not mention the name of the collecting bank. In the above example, the first three crossings are simple crossing. b. Special Crossing The special crossing is the one in which the name of the collecting bank is mentioned in between the two parallel lines with or without the words ‘& Co.’, ‘A/c Payee only’, ‘Not Negotiable’, etc. In such a case, the drawee bank should pay the amount only to the bank mentioned in the crossing and not to any other banks. Generally, the payee bank asks the drawer to mention the name of his bank in the crossing. In the above figure, the second four crossings are the special crossing. Points to Remember i. Bearer cheque ii. Order cheque iii. Cross cheque a. Simple crossing b. Special crossing 19. Computerised Payment System of Bank Computerised System has brought the revolution in the banking system. Nowadays, most of the banking transactions are performed through computerised system. A customer can deposit and withdraw amount from any branch of the bank. Bank collects all the information, maintains the account of different branches with the help of the computerised network system. There is computerised network between different banks as well. This helps the customers to withdraw money by using ATM card of a bank from the ATM of branch or another bank. For example, by using ATM card of Himalayan Bank one can get amount from the ATM of Nabil Bank. Similarly, the customer of Standard Chartered Bank Nepal, Chitwan can deposit his amount at its Kathmandu branch or any other branches. To increase efficiency and to remove delay in all the joint venture as well as government banks, they should adopt computerised payment system instead of using manual on cheque payment system. Hence, the computerised payment system can provide satisfaction to the customers. Simple cross cheque Order cheque
83 Approved by CDC, Nepal Financial Institutions Insurance 20. Introduction Human beings are exposed to different kinds ofrisks, such as loss of property by fire, theft, accident, untimely death of persons, etc. Such types of risks may cause large financial losses in future and such a loss blocks the progress of a firm or company. It is not possible to eliminate the risks or chances of happening the unfavourable events but the financial loss resulting from such uncertainties and risks can be reduced and recovered. It is insurance, which does so and protects the persons and firms from such a great financial loss. The concept of insurance can clearly be understood with the help of the following example. Suppose that, in a village, there are 100 houses having an average price of Rs. 1,00,000. Past experience shows that, average 2 houses catch into fire each year causing a loss of about Rs. 100,000 around. It is not certain that the particular houses will catch into fire. So, everybody is exposed to this risk and every family is likely to suffer from a loss of around Rs. 50,000 each year, which is a big burden for a single family. Therefore, all the villagers may raise a common fund by collecting Rs. 2000 from each family each year so that, the two householders who fall under fire can be financially compensated. Thus, insurance may also be understood as a process of transferring the risks of individual entities to an association of a large number of people or to a company to compensate or reduce the financial loss caused by such uncertain and unfavourable happening against a regular payment of a certain fees called premium. Insurance is a method of transferring one’s risk to others, who ensure the recovery of a certain financial loss in consideration to the payment of a certain periodical premium. Nowadays, insurance has become a business in which the party, doing the business known as insurance company, promises to indemnify the financial losses caused by certain risk to a person, who has proposed to insure himself or his property in consideration to certain premium. According Encyclopaedia Britannica, “Insurance may be described as a social device whereby a large number of group of individuals through a system of equitable contributions may reduce or eliminate certain measurable risks of economic loss common to all members of the group.” According toEdwin W. Peterson, “Insurance is a contract by which one party for a compensation called the premium assumes particular risks of the other party and promises to pay him or his nominee a certain or ascertainable sum of money on a specified contingency.” According to Insurance Business Act, 2042, “Insurance can be defined as a contract made by a person paying certain amount based on estimated life and he or his representative gets the amount after his death or expiry or policy period.” Rastriya Beema Sansthan
84 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal According to Prof. R.S. Sharma, “Insurance is a cooperating device to spread loss caused by a particular risk over a number of persons who are exposed to it, who agree to insure themselves against that risk.” According to Insurance Act 2049 B.S., “Insurance business means life insurance and non-life insurance business which also refers to the re-insurance too.” In conclusion, it is the system to protect against the loss of life and property. The insurance does not reduce the change of accident or damage of property. However, it protects against the loss that arises due to unanticipated events. In Nepal, insurance company are established and operated according to Insurance Act 2049 B.S. Key Point Insurance is defined as a contract by which the insurer undertakes to compensate the insured, a fixed sum of money on the expiry of the specified period or the reasonable recovery of the pre-decided financial loss in consideration of a certain premium, paid periodically. Some Important Terminologies of Insurance In orderto understand the concept of insurance, one should be familiar with the important technical terms, which are introduced below: i. Insured The person or party who seeks protection against a particular risk is known as insured. He/she should pay a certain premium on periodical basis for the assurance of the recovery to the financial loss. ii. Insurer The party who undertakes to protect the insured from the specified risk and the loss so caused is known as the insurer. An insurance company is the insurer which is subject to get the periodical premium paid by the insured. iii. Premium It is the fees paid by the insured to the insurer as the consideration of the insurance contract for the assurance of the recovery of financial loss. iv. Insured Amount It is the agreed financial value of the future loss caused by certain accident or other risky factors. Insurance is done for the recovery of this value. v. Insurance Policy It is the contract or written agreement between the insured and the insurer containing the details of the terms and conditions of certain insurance. 21. Functions of Insurance The functions of insurance vary with its nature and types. It means the functions of life insurance may differ from that of fire or marine insurance. But the following may be studied as the common functions of insurance. There are mainly two functions of insurance: A. Primary function B. Secondary function
85 Approved by CDC, Nepal Financial Institutions A. Primary Function i. Providing Assurance for Compensation It is a very important function of insurance to assure for the compensation of predecided but accidental loss. The person or party pays certain specified fees, known as premium to the insurer, periodically, to such assurance of compensation of the probable losses. Thus, insurance gives a feeling of security against a probable loss caused by risk and uncertainty. ii. Distribution of Risk Human beings are exposed to different kinds of risk which may cause financial losses. It is not possible to eliminate risk and uncertainty completely but insurance can reduce the risk by sharing the losses caused by such a risk to a group of persons who have agreed to join the common pool. They cooperate each other to compensate the losses in monetary terms from out of the fund of that common pool. Thus, by sharing the risk of an individual entity to a number of persons in the common pool reduces risks of an individual. iii. Financial Security Insurance provides financial security to an insured. It guarantees protection against uncertain and large losses in return of small premium. There are different types of insurance to give economic protection in different sectors. Insurance provides certainty of compensation in case of accidental loss. Thus, it gives a feeling of financial security against the possible losses caused by the uncertain events. B. Secondary Functions i. Mobilisation of Capital It accumulates fund in terms of insurance premium from the persons willing to get secured from the financial risks and uses this fund to compensate the insured that are actually suffered from the pre-decided but accidental losses. It does not pay the compensation to all who do not suffer from losses. So, it mobilises such unused fund as short term, mid term and long term investment in productive sectors. ii. Promotes Other Business Business sectors are more risky. The chances of fire in the godown or production unit, loss by accident or theft, sea perils and the explosion in the aviation, etc. are more frequent in the business sectors. Insurance takes away these risks and promotes and develops business sectors. Thus, it helps to expand business activities in and outside a country. iii. Reduction of Risk Insurance company does researches and investigations to forecast the future loss. It organizes different seminars and workshops to make their customers aware of different risks or events, which help to reduce loss.
86 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal iv. Maintains Economic Stability Risk and uncertainty push the business sectors towards a fear, which declines the performance efficiency, and ultimately it leads the entire business sectors towards instability. An insurance company tries to maintain economic stability by compensating the financial losses of the businessmen and entrepreneurs who propose to ensure their property and also encourage the others to do so by motivating them duly. Insurance assures the compensation of every sort of economic loss, and saves them from economic crises due to such losses and maintains economic stability. v. Encourages Saving Habit In life insurance, insured person or customer has to pay compulsory premium amount to the insurance company. Insurance company compensates the amount against the risk and uncertainty for which insured have to pay premium. That premium will be returned after the completion of certain period with bonus. For the payment of premium, insurance company encourages the saving habit. vi. Helps in Foreign Trade In foreign trade, goods are transported through waterway and airways. While transporting, there are various risks an goods in transit. The insurance helps in minimizing all such risks of financial losses assuring him to make financial compensation in consideration of insurance premium. It makes the import and export trade riskless and convenient which enhances foreign trade. Points to Remember A. Primary Functions i. Providing assurance for compensation ii. Distribution of risk iii. Financial security B. Secondary Functions i. Mobilisation of capital ii. Promotes other business iii. Reduction of risk iv. Maintains economic stability v. Encourages saving habit vi. Helps in foreign trade 22. Importance of Insurance Insurance has become a business in the present day world and thus many companies are established for conducting insurance business. The development of insurance business in the world has proved its importance. Insurance provides benefits to an individual, family businessman as well as society. The important advantages of insurance are discussed below: i. Financial Security Insurance provides financial security to an insured. It guarantees protection against uncertain and large losses in return of small premium. There are different types of insurance to give economic protection in different sectors. Insurance provides certainty of compensation in case of accidental loss. Thus, it gives a feeling of financial security against the possible losses caused by the uncertain events.
87 Approved by CDC, Nepal Financial Institutions ii. Reduction of Risk Human beings are exposed to different kinds of risks which may cause financial losses. It is not possible to eliminate risk and uncertainty completely but insurance can reduce the risk by sharing the losses caused by such a risk to a group of persons who have agreed to join the common pool. They co-operate each other to compensate the losses in monetary turns from out of the fund of that common pool. Thus, by sharing the risk of an individual entity to a number of persons in the common pool. It reduces risks of an individual. iii. Encouragement to Saving The insured has to pay a certain regular premium to the insurer in return of the compensation of the probable future loss of life or property. It is, thus, a method of collecting saving by assuring their protection against certain losses, it encourages their persons and firms to make regular saving even in small extents. iv. Basis of Credits An insured can get loan easily by pledging insurance policy as a security. Besides, financial institutions easily grant credit facilities on the pledge of those properties which are being insured. v. Promotes Other Business Business is more risky. The chances of fire in the godown or production unit, loss by accident or theft, sea perils and the explosion in the aviation, etc. are more frequent in the business sectors. Insurance takes away these risks and promotes and develops business sectors. Thus, it helps to expend business activities in and outside a country. vi. Maintains Economic Stability Risk and uncertainty push the business sectors toward a fear which declines the performance efficiency and ultimately it leads the entire business sectors towards instability. Insurance company tries to maintain economic stability by compensating the financial losses of the businessman and entrepreneurs who propose to ensure their property. vii. Providing employment opportunity Hundreds of entrepreneurs are engaged in insurance business. In the present day business world, it is developed as a business organization in the form of company to satisfy the requirements of the persons and firms engaged in different occupations. Thus, by establishing and developing insurance business companies, it provides employment opportunities to the country people. 23. Disadvantages of Insurance In spite of a number of benefits, insurance has also some limitations or drawbacks. The notable limitations of insurance are mentioned below: i. Insurance leads to negligence as the insured feels that he/she can be compensated for any losses or damages.
88 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal ii. Insurance companies do not make the compensation promptly on maturity of the policy or for the financial losses as compared to the attitude of the insured. iii. It leads to crimes in the society as the beneficiaries of the insurance policy may be tempted to commit the crimes to receive the amount insured. iv. In case of long term policies, the accumulated fund of the premium would be more than the policy amount receivable at maturity. Moreover, compensation is not receivable if no loss is incurred even though the premium is paid regularly. v. It doesn’t compensate all types of loss and damage. vi. Sometimes total amount of premium might be higher than the insured amount after the expiry of policy period, etc. Although insurance encourages saving, it does not provide all the facilities provided by a bank. So, people may think to deposit their saving in a bank rather than taking an insurance policy. 24. Types of Insurance There are various types of insurance as the difference in nature of financial risks and losses. Since the financial losses may be caused from a number of risks and uncertainties, the insurance may be made against a number of such causes. For example, some persons may make personal accident insurance, property insurance, theft and burglary insurance and so on and so forth. Generally, there are three types of insurance, viz. marine insurance, life insurance and fire insurance. The other types of insurance may be studied under the miscellaneous insurance. In this chapter, we will discuss by categorising them into two types, as shown in chart below: Life insurance General/Non-life insurance Insurance Endowment life insurance Whole life insurance Children education and marriage endowment life insurance Term life insurance Anticipated endowment life insurance Marine Insurance Fire insurance Miscellaneous insurance Motor insurance Employers’ liability insurance Fidelity guarantee insurance Aviation Insurance Life Insurance Life insurance came into existence after the evolution of the marine insurance. The first life insurers were the marine insurers, who started issuing life policies on the life of the merchants, ship captain and the crew of the ship sailing along with the goods. In case of the capturing of the ship, the insurer should have to pay the ransom needed to secure their release.
89 Approved by CDC, Nepal Financial Institutions Every human being wants the financial security of his/ her life and/or the security of his dependent family after his death. So, it is a contract to recover even to some extent the financial uncertainty of the human life. It is not a contract of indemnity like other insurance as the life of a person cannot be valued in financial terms. But it is a kind of contract, in which insurer undertakes to pay a fixed amount of money on the happening of the event which may be the death of the insured or expiry of a certain period against the regular payment of a certain money, called premium by the insured. The life insurance contains the element of security as well as investment. Life insurance is the most important and popular type of insurance in the present day business world as it has occupied around 70 to 80 percent of the total insurance business done in the world. According to M.N. Mishra, “Life insurance contract may be defined as the contract whereby the insurer in consideration of a premium undertakes to pay a certain sum of money either on the death of the insured or expiry of the fixed period.” According to Insurance Act, 2049, “Since life insurance is a contract in which a particular sum of money is paid in installment on the basis of age for insuring of the person, with the condition that the nominee or his dependent will receive a particular sum of amount at death or receives himself after fixed period expires.” From the above definition, it deals that life insurance is the contract about life of person between insurance company and insured, which provides financial protections to the insured or his/her nominee. It contains the element of investment as well as protection. Key Point Life insurance is a contract whereby the insurer agrees to pay a certain sum of money to the insured on the maturity of the policy in consideration of premium paid by insured to him or to his nominee if the insured dies. Types of Life Insurance i. Endowment Life Insurance Endowment policy is issued for a fixed period of time like 15 years, 20 years, etc. In this policy, the insured has to pay certain agreed premium upto that specified period and the sum insured is receivable to the insured on the maturity of the period or to his nominee or dependent on his/her death, whichever is earlier. It is very popular because it has the provisions for the economic security for the livelihood of the insured in the old age or to the family after his/her death. The endowment policy can also be made for the education or marriage or for both, for one’s children for a fixed period of time. ii. Whole Life Insurance In this type of policy, the insured has to pay the premium throughout his life. The policy holder cannot get the insured amount in his/her life time. The insurer pays the specified amount of money to the nominee or dependent of the insured on his death. This Happy family
90 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal policy is intended to protect the family of the insured after his death. The rate of premium in this policy is comparatively lower than the other policies. iii. Children Education and Marriage Endowment Life Insurance The cost of children education and marriage is financial burden to their parents. To minimize that burden, parents can do children’s education and marriage endowment life insurance policy. Under this policy, the parent should pay the amount of premium for the certain specified period on regular basis. On the maturity of the policy, the insurer pays insured amount which can be used for their children marriage and higher education. iv. Term Life Insurance Term policy is issued for a short period of time ranging from 3 months to 7 years. This type of policy is made just to give security to the creditors or lenders for the payment of loan by the expiry of the term of that loan/debt, to which it was insured. It is thus, made for the guarantee of the recovery of loan or debt before or at the due date. The premium of such a policy is very much nominal. v. Anticipated Endowment Life Insurance It is a type of endowment policy under which certain part of the sum of insured amount is paid at certain intervals during the endowment period and the balance amount is paid at the maturity ofthe policy.In case of death ofthe policy holder before the maturity period, the whole insured amount with bonus is payable to the nominee irrespective of the installment already paid. This policy is generally issued for 15, 20 and 25 years. If it is issued for 20 years, 25% of insured amount is paid after 10 years, 25% is paid after 15 years, and balance 50% is paid along with bonus after 20 years. Points to Remember i. Endowment Insurance ii. Whole life Insurance iii. Children Education and Marriage Endowment Life Insurance iv. Term Life Insurance v. Anticipated Endowment Life Insurance Non-Life/General Insurance General insurance is the insurance other than life insurance. The insurance of goods, materials, things and properties is known as non-life insurance. Some of the types of general insurance are discussed below. i. Marine Insurance It is believed that the marine insurance was the first developed form of insurance. In the ancient time, international trade used to be done mainly through sea routes. The sea routes were subject to various risks caused by perils in the sea such as collision with rock or another ship, attack by enemies, fire, hijack and capture by pirates, etc. The risks were attached to both the ship and cargo. At the time the traders entered into agreement among themselves, under which the loss caused by such a risk to any trader could be
91 Approved by CDC, Nepal Financial Institutions compensated by dividing the loss among them. Thus, marine insurance is believed to be the oldest form of insurance. It may be defined as an agreement between the insured and the insurer. The insurer undertakes to indemnify the insured, in the manner and to the extent they have agreed, the financial loss caused by sea perils in consideration to a certain premium paid periodically or in lump sum. It covers a large number of sea risks such as sinking or burning of the ship, collision with rock or another ship, barratry, piracy, dacoities, sea storms, cargo losses and other many perils of the sea as agreed between the insured and the insurer. The following are some of important definition of marine insurance. According to Indian Marine Insurance Act: 1963, “Marine insurance is a contract whereby the insurer undertakes to indemnify the insured in a manner and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine adventures.” According to M.N. Mishra, “Marine insurance has be defined as a contract between insurer and insured whereby the insurer undertakes to identify the insured in a manner and to the interest thereby agreed, against marine losses incident to marine adventure.” There are mainly three components of marine insurance viz. cargo insurance, hull insurance and freight insurance. Cargo insurance is the marine insurance of the goods loaded on the ship for transportation purpose. Hull insurance refers to the marine insurance of the full body of the ship against any sea perils during a particular journey or for a specified period of time. The charge receivable by a ship for transporting the cargo is known as freight. Generally, the shipping freight is payable at the destination after the delivery of the goods. The shipping company may not be able to receive the freight, if the goods cannot reach up to the destination. The shipping company makes the insurance of freight for the security and guarantee of its freight. Thus, freight insurance is the one, which provides the protection from any loss of freight due to the sea perils during the shipping of the goods. Key Point Marine insurance is the contract between the insurer and insured in which the insurer promises to identify the insured against the loss or damage due to sea perils against consideration of a certain amount of premium paid by the insured. ii. Fire Insurance Fire insurance is a measure which provides security against the risks of fire. The necessity of fire insurance was felt for the first time in England in 1666 A.D. when London was caught by fire and devastated. Fire insurance is a contract, in which the insurer promises to pay a certain sum of money for the loss of property causedbyfireduringthe stipulatedtime inconsideration Ship accident Building on fire
92 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal to a certain periodical premium paid by the insured. Even though it cannot prevent the fire, it assures the compensation of financial loss. The owners of cinema houses, godown, business premises, residential houses, etc. make the fire insurance so that, they can get compensation if there’s any loss to them due to fire. The insured must prove that the loss is caused by fire and by an accidental case for getting financial compensation. Otherwise the compensation cannot be obtained. The following are some of the important definitions of fire insurance: According to M.N. Mishra,“Fire insurance is a device to compensate for the loss consequent upon destruction by fire.” According to Bill Weipers,“The basic intention of the fire policy is to provide compensation to the insured person in the event of the being damage to the property insured.” In conclusion, fire insurance may be defined as a contract between the insured and insurer, under which the insurer agrees to indemnify the financial loss caused by fire to the insured in consideration of a certain periodical payment called premium. Key Point Fire insurance is an agreement between the insurer and insured under which the insurer agrees to indemnify the losses caused by fire. iii. Miscellaneous Insurance There are other many types of insurance for different economic sectors. Some of them are introduced below: a. Vehicle Insurance The insurance which is made to compensate the predecided and accidental loss of motor or other vehicles, which may be caused by theft, accident, or other losses is known as motor insurance. The insurance provides financial security of vehicles, loaded goods, passengers and third party. Such insurance is compulsory in Nepal. Key Point The insurance which compensated the financial loss of vehicles or motors due to accident, theft and other similar causes is called as vehicle insurance. b. Employers’ Liability Insurance There is risk of happening accident in the organization due to which the employee may be unable to generate income or even die. So, to protect the dependent of the workers, employment liability insurance is done. To get the compensation in this policy, employer is liable to pay the premium regularly. This insurance helps to motivate the workers and increase their efficiency. Key Point The insurance which is done by the employer to provide financial compensation to the employees in care of their accident, disability, injury or death at the time of working is known as employer’s liability insurance. Bus crash
93 Approved by CDC, Nepal Financial Institutions c. Fidelity Guarantee Insurance Employees or workers make mistake knowingly or unknowingly which causes loss to the organization. Sometimes the employees may do frauds, embezzlement and theft in the organization. So, to compensate the loss of organization, a policy is issued known as Fidelity Guarantee Insurance. Key Point The insurance which compensates the financial loss caused to the organization due to embezzlement,, theft frauds or dishonesty committed by an employee is known as fidelity guarantee insurance. d. Aviation Insurance The insurance, which is made to compensate the loss incurred by aviation risks and accidents, is known as aviation insurance. The insurance provides financial security to the body of aircraft cargo, passengers as well as third party. Key Point The insurance which covers the risk of aviation and provides financial compensation in care of loss of aircraft, cargo and death of passenger is known as aviation insurance. Differences Between Life Insurance and Non-life Insurance Basis Life Insurance Non-life Insurance a. Meaning The insurance of human being is called life insurance. The insurance of physical properties is called non-life insurance. b. Subject matter A life is the subject matter for the insurance. Properties or goods are the subject matter of insurance. c. Policy period Generally, life insurance is a long tern contract like 10 years, 15 years, 20 years and so on. It is a short term contract which is taken normally for one year and can be renewed. d. Expense Generally, the premium of life insurance is personal expense and is paid by an individual. Generally, the premium of non-life insurance is paid by the business organization. e. Compensation holder Insurance company pays the predetermined sum of money to the insured on the expiry of the policy or to the nominee after the death of the insured. The sum of money is to be compensated to the owner of goods or properties against the losses of properties. f. Indemnity It is not the contract of indemnity because the life of human being can not be indemnified in money’s worth. It is the contract of indemnity under which the loss of properties is indemnified in money’s worth. Aeroplane crash
94 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Employees’ Provident Fund (Karmachari Sanchaya Kosh) The employees’ provident fund is a type of financial institution, which collects the amount of 10% compulsory deduction of the salary of the permanent government employees as well as voluntary deduction of employees of some corporate bodies and organizations and provides compound interest on such deposit. The concerned office adds cent percent of the deducted amount and deposit in the Employee Provident Fund in the account of concern employees. At first, in 1991 B.S. to collect only the amount of army called ‘Sainik Drabya Kosh’ was established with objective of providing financial help after their retirement. Department of Civil Servant Provident Fund was established in 2001 B.S. Employees’ Provident Fund was established in 2017 B.S. as Karmachari Sanchaya Kosh Bibhag. On 3st Bhadra, 2019, Provident Fund Act was introduced and employee provident fund was established under this Act in 2019 B.S. as the perpetual and autonomous organization. Key Point Employee’s provident fund is the fund collect from the employees’ salary of the government offices, non-government offices and private offices as the compulsory deduction according to the rule of government and the organizations: Functions of Employees’ Provident Fund i. It collects the deposit of the deducted amount and contribution made by the employees and keeps the records under the different individual accounts. ii. It pays the deposited amount along with the interest and bonus to the employee after the retirement. iii. It provides loan to employees/depositor (home loan, education loan, special loan) at the time of necessity as well as financial support. It charges lower rate of interest. iv. It provides information to the employees about the different services and facilities providing through it. v. It invests the collected amount in different productive sectors and generate income for the additional benefit for the employees. vi. It also provides loan to the government as per the requirement. Karmachari Sanchaya Kosh building EPF logo
95 Approved by CDC, Nepal Financial Institutions Citizen Investment Trust (Nagarik Lagani Kosh) Citizen Investment Trust is an institution established under the provision of Citizen Investment Trust Act 2047 on 4th Chaitra, 2047 B.S. Its main objective is to provide investment opportunities to the general public and developing capital market. It is basically a saving and investment institution. The employees/citizens voluntarily deposit certain amount of their saving which is invested in different sectors for strengthening the national economy. Key Point Citizen Investment Trust is a financial institution which encourages the general people to save a part of their earnings for the formation of capital and expand the investment in various sectors. Functions of Citizen Investment Fund i. Mobilization of Saving a. Operation of various natures and types of unit schemes and mutual fund scheme. b. Operation of different retirement plan like; gratuity fund, insurance fund, subsidy fund. c. Operation of investors accounting plan. ii. Financial Assistant and Investment a. Investing in the shares and debentures and government securities. b. Providing term loan and bridge loan to corporate bodies. c. Providing loan for purchasing shares and debentures. iii. Capital Market Service a. Provides underwriting services for the issue of share and debenture. b. Providesconsultancyservicesintheareaofcapitalmarketaboutthepricedetermination, time of issue, amalgamation, absorption and purchase of corporate bodies. c. Provides broker and market maker service in the stock exchange. d. Provides security services. Financial Cooperatives Cooperative refers to living together and working together for the fulfilment of common interest. Economically weak people voluntarily organized to uplift their economic condition which is known as cooperatives. As such cooperative organization is a voluntary organization formed by economically weak people for the fulfilment of the social, economical and cultural expectations on the basis of equality with joint effort. The cooperative organization started after the establishment of ‘Rochdale Society of Equitable Pioneers on 24th October, 1944 AD, in England by Robert Owen with the main objective of saving poor people from the economic exploitation, to eliminate the middlemen and to make the ideal society. After that, such cooperative organizations are Nagarik Lagani Kosh building CIT logo NEFSCUN logo
96 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal established in Germany, Italy, France and Japan. To save the farmers from exploitation of the money lenders, in 1850 AD, Suji established the first cooperative organization in Germany and Refisen established loan cooperative into the rural areas of Germany to provide loan to the farmers at lower rate of interest. A Cooperative Bank was established in 1866 with the active participation of Lujati and a Rural Development Bank was established in 1883 AD with the active participation of Olemberg in Italy. As a result, in 1895, International Cooperative Alliance was established in England. According to Prof. Heney Calvert, “Cooperative is form of organization wherein persons voluntarily associate together as human being on the basis of equality for the promotion of economic interests of themselves.” According to Talmaki, “A cooperative is an association of the weak who gather together for a common economic need and try to lift themselves from weakness into strength through business organizations.” Cooperative organizations are involved in financial activities. These organizations are called financial cooperatives. They collect savings of their members and provide loan at lower rate of interest. As Nepal is developing country and most of the parts do not have access to bank, so financial cooperative is very popular in Nepal. Many such financial cooperatives have been established in Nepal and National Cooperative Bank is established in the centre. Key Point Financial co-operatives are the financial institutions established for the economic and social development of general people having low financial conditions. Functions of Financial Cooperatives i. It collects deposit from members daily, weekly, monthly basis or any time and provides certain interest on such deposits. ii. It provides loan to the members for income generating activities to uplift their economic condition at lower rate of interest and reasonable terms. iii, It develops good relation among the members. iv. It performs banking activities with the permission of Central Bank. v. It encourages saving habits of the members. vi. It provides cooperative education to the members. vii. It performs various social reform activities. viii. It encourages the local people to become members of the society. ix. It promotes small scale industry, cottage industry and agriculture sector for rural areas with financial and technical assistance for its members. Glossary Securities : shares, debentures, bonds, etc. Underlying : act of selling securities of a corporate body Risk : threat/danger Credit control : controlling over and underflow of currency Credit creation : providing loan by the banks to their customers Bearer : holder/carrier Marine : sea/ocean
97 Approved by CDC, Nepal Financial Institutions Exercise A. Answer the following questions in one sentence. 1. What is Financial Institution? 2. Mention different types of the financial institution. 2071(R) 3. What is bank? 4. Name any four commercial bank. 5. What is central bank? 6. In which country central bank was established at first? 2072(R) 7. Who appoints the governor of Nepal Rastra Bank? 2073(R) 8. When was Nepal Rastra Bank established? 9. Which bank performs the functions of creating and controlling of credit? 10. What is commercial bank? 11. Which is the first bank of Nepal? 12. What is central bank? In what kind of account one cannot get any interest? 13. What is development bank? 14. Define cheque. 15. What is a bearer cheque? 16. Write the names of parties involved in a cheque. 17. How can we draw money from cross cheque? 18. What is an order cheque? 19. Mention any two differences between bearer cheque and cross cheque. 20. What is insurance? 21. What do you mean by employment liabilities insurance? 22. What is insurance premium? 23. Who are the parties involved in insurance contract? 24. When was Citizen Investment Trust established? 2073(S), 2074(R), 2071(S) 25. What is Citizen Investment Trust? 26. What is dishonour of cheque? 2068 (R) 27. How many types of insurance are there? 2067 (Sup) 28. Write any two primary functions of insurance? 2067 (R) 29. What is the endowment life insurance? 2066 (Sup) 30. When was the Nepal Central Bank or Nepal Rastra Bank, established? 2066 (R) 31. Mention any one function of provident Fund. 2065 (Sup) 32. What is an order cheque? 2065 (R) 33. Write the name of the first bank of Nepal. 2072(S) 34. What is crossed cheque? 2068 (N PAB.) 35. When was Nepal Bank Ltd. established? 2067 (505) 36. What is meant by financial company? 37. Whichis thefirst cooperative organizationofthe worldand whenit was established? 38. In what kind of account we can’t get any interest?
98 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal B. Give short answers to the following questions. 39. Describe any two financial institutions. 40. What is central bank? Explain any four functions of the Central Bank. 41. What are the different types of development banks? Describe them briefly. 42. Explain the ruling of cheque. 43. Introduce bank and write any four points of importance of bank. C. Give long answers to the following questions. 44. What is Central Bank? Describe any eight functions of Nepal Rastra Bank. 45. “Commercial Bank is the bank of trade.” Justify this statement by explaining any eight functions of commercial bank. 46. What is development bank? Explain any eight functions. 2066 (Sup) 47. What is insurance? Explain any eight functions. 2070(S) 48. What are different types of life insurance? Explain. 49. Introduce cheque and write any eight points to be considered while tendering payment by cheque. Explain the types of cheque. D. S.L.C. / SEE Examination Questions 50. Write down the twelve conditions regarding cheque dishonour. 2057(S) 51. “Commercial Bank is a main base of trade.” Justify it by explaining any four functions of commercial bank. 2059(R) 52. What is Bank? Explain any six functions of commercial bank. 2073(S) 53. Mention any six considerations for encashment of cheque by the bank. 2061(S) 54. Why do we do life insurance? Give any two reasons and describe its kind in brief. 2060R) 55. What is life insurance? Describe its kinds in brief. 2069(S) 56. Introduce insurance and describe its six functions. 2073(R) 57. What is financial cooperative? Explain any six functions of financial cooperative. 58. Introduce commercial bank and describe any six functions of commercial bank. 2071(S) 59. Introduce financial institution and explain its types with examples. 2067 (Sup) 60. What is central bank? Describe any six functions of central bank. 2074, 2072(R) 61. What is life insurance? Write its types and explain any two. 2067 (R) 62. What is central bank? Describe and six major functions. 2066 (R) 53. Give an introduction of life insurance and describe its five types. 2065 (Sup) 64. What is central bank? Explain any six monopoly functions and two general functions of central bank. 2068 (N PAB.) Project Work a. Prepare a list of benefits of insurance by asking the person in your society who has done insurance. b. Visit a bank and prepare a list of services which are provided by the bank to the customer.
99 Approved by CDC, Nepal Financial Institutions Trial Balance Unit 5 Trial Balance CDC Syllabus 4.1 Introduction 4.2 Types of financial institute 4.3 Bank- Introduction, types and functions Cheque- Introduction, types and its rules Payment of cheque using computer system 4.4 Insurance- Introduction, types and functions 4.5 Employees’ Provident FundIntroduction and functions 4.6 Citizen Investment FundIntroduction and functions 4.7 Cooperative Finance- Introduction and functions 10 Periods After studying this unit, students will be able to : know the meaning of trial balance, explain the objectives and advantages of trial balance, understand the methods of preparing a trial balance, identify the errors disclosed or not disclosed by a trial balance, know the suspense account and it’s use, solve the numerical problems of trial balance. Learning Objectives
100 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 1. Introduction The duality concept is one of the fundamentals of accounting theory. According to double entry system, the total of debit and the total of credit should be equal. So, at the end of month, quarter, half year and year, a statement is prepared with the help of ledger balances to find out/see whether or not the two totals are equal, such a statement is called trial balance. A trial balance is a list of the ledger accounts prepared at a specified date showing their debit or credit balances and thus, to see the sum totals of debit side and credit side respectively. It should be noted that this list of ledger balances can only be prepared when they are completed. It is the way of checking arithmetical accuracy of the books of accounts. In the words of M.S. Gosav, “Trial balance is a statement containing the balances of all the ledger accounts as at any given date arranged in the form of debit and credit columns, placed side by side and prepared with the object of checking the arithmetical accuracy of the ledger posting.” In the words of Dr. A. N. Agrawal, “A trial balance is a statement of the debit and credit balances of the various ledger accounts, which is prepared to check their arithmetic accuracy.” In the words of J.R. Batliboi, “A trial balance is a statement prepared with the debit and credit balances of ledger accounts to test arithmetical accuracy of books.” From the above meaning and definitions, it is learnt that a trial balance possesses the following essentials: i. It is the list of all the ledger balances of a business house during a certain period. ii. It is prepared on a specified date. iii. It is prepared to check the arithmetical accuracy of the books of account. iv. Debit and credit totals must be equal. If it is not equal, there may be mistakes. In conclusion, a trial balance may be defined as a statement of the ledger accounts of a businessman on a certain specified period by mentioning their debit and credit balances separately in order to check the arithmetic accuracy of the books of account and their ledger posting. It may also be prepared by mentioning the debit and credit totals of every ledger accounts. When the totals of the two sides of this statement are equal, the books of accounts are supposed to be accurate arithmetically. It is not the conclusive tool for measuring the entire accuracy of the books of account in the sense that some sort of errors/ mistakes like errors of principle and compensating errors, etc. cannot be checked by it. Key Point Trial balance may be defined as a statement of the ledger accounts of a business in terms of their balances on a certain specified period to check the arithmetic accuracy of the books of account. 2. Objectives of Trial Balance A trial balance is an important tool in checking the arithmetical accuracy of the subsidiary and principal books of account of a businessman. It is also important in facilitating the preparation of final accounts. It is a statement or list of the ledger accounts