Account 10

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 It is the act of buying and selling of goods
goods between the traders of same between the traders of two different
county. countries.

Parties Buyer and seller are the parties Importer and exporter are the parties
involved involved in home trade. involved in foreign trade.
Types It has two types i.e. wholesale and It has three types, i.e. import, export and
retail trade. entreport.
Copies of Generally, three copies of invoice are Generally, four copies of invoice are
invoice prepared. prepared.
Currency used National currency is used for Foreign currency is used for payment.
payment.
Transportation The transportation cost is lower than The transportation cost is higher than the
cost foreign trade. home trade.

Letter of Credit Letter of credit (LC) is not compulsory Letter of credit (LC) is compulsory to open
to open in the home trade. in the foreign trade.

Modes of Generally, land transportation is used Generally, the air, water and land
transport to carry the goods. 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:





50 Aakar’s Office Practice and Accountancy - 10 Trade 51

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 Cheque
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 for the 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

52 Aakar’s Office Practice and Accountancy - 10 Trade 53

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 Automated Teller Machine (ATM)
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 Bank Wire
one place to another through special net based
transfer system by using special numeric Transfer
code. Electronic transfer is done by computer.
Transferring foreign currency from one Swift logo
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.



52 Aakar’s Office Practice and Accountancy - 10 Trade 53

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 Hundi slip
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. Under this method, the buyer requests 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 Money order
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.



54 Aakar’s Office Practice and Accountancy - 10 Trade 55

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 Invoice
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.



54 Aakar’s Office Practice and Accountancy - 10 Trade 55

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




56 Aakar’s Office Practice and Accountancy - 10 Trade 57

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

Expenses Price which
Name of
invoice Local price Transportation Freight Insurance Others is mentioned
of goods charge upto ship in the invoice
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





56 Aakar’s Office Practice and Accountancy - 10 Trade 57

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 WTO Building
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 Brief Information about WTO
Tariffs and Trade). WTO was Formation : 1 January, 1995
st
established on 1 January, 1995. Headquarters : Geneva, Switzerland
st
Any sovereign country and
regional trade organization can Membership : 153 member countries
be the members of the WTO. Official languages : English, French, Spanish
Nepal got the membership of Website : www.wto.int
WTO as the 147 member on 23
th
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. SAFTA/SAARC Building
The 7 SAARC summit of 1993 held in Dhaka, Bangladesh formally adopted SAPTA
th
(South Asian Preferential Trade Agreement) to uplift the living standard of the people


58 Aakar’s Office Practice and Accountancy - 10 Trade 59

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 20 Ashwin, 2050 and last endorsement was trade by
th
Bangladesh on 5 Nov., 1995.
th
The concept of free trade area started in 9 SAARC summit held at Male, Maldives
th
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.
11 summit held in Kathmandu on 2003 decided to make SAARC nations as free trade
th
area. This concept was endorsed on 6 January, 2004 at the 12 SAARC summit held at
th
th
Islamabad, Pakistan and implemented since 1 Jan., 2006.
st
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 of the 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)


58 Aakar’s Office Practice and Accountancy - 10 Trade 59

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.




rade
T
Aakar’s Office Practice and Accountancy - 10
60 60 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 61 61

4 Financial
Unit
Institutions






CDC Syllabus 15 Periods

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 Learning
computer system Objectives
4.4 Insurance- Introduction, types and After studying this unit, students will
functions be able to :
4.5 Employees’ Provident Fund- define the term of financial institution
Introduction and functions and mention its types,
4.6 Citizen Investment Fund-
Introduction and functions define bank and explain its importance
and functions,
4.7 Cooperative Finance- Introduction
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.



















T
rade
Aakar’s Office Practice and Accountancy - 10
60 60 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 61 61

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:
Types of Financial Institution



Banking Financial Institution Non-banking Financial Institution


Bank Finance Finance Employees Citizen Insurance
Company Cooperative Provident Fund Investment Trust Company

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.


62 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 63

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. First World Bank
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.



62 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 63

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/
amount for trade values, interest, commission, dividend, etc. and paying 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.




64 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 65

iv. Commercial banks issue various credit instruments like cheque, bank draft, 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 Nepal Rastra 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



64 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 65

central bank of Nepal. It was established in 14 Baisakh, 2013 B.S. under Nepal Rastra
th
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 1 Aswin, 2002 B.S. in Nepal but Nepal Rastra
st
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.



66 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 67

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, opening Letter of Credit (LC) on behalf of the government and other banks, 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



66 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 67

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 Rastriya Banijya 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.”





68 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 69

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.








68 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 69

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 their request
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.





70 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 71

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 1. Commercial banks are established with the
country. permission of the central bank.
2. It is fully owned and managed by the 2. They are either owned and managed by
government. 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.





70 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 71

5. It is the banker of the banks and 5. They are the bankers of individuals and
government. organizations.

6. It manages foreign currency by fixing 6. They exchange foreign currency only.
the exchange rate.
7. There is only one central bank in a 7. They exchange with many commercial banks
country. in a country.
8. It is established under the special 8. They are established under the certain
Central Bank Act. Commercial Bank Act.
9. It grants loans to the government and 9. It grants loans to the individuals and
commercial banks. 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




72 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 73

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:
Types of Development Bank


Agricultural Industrial Rural Development Private
Development Bank Development Bank Bank 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 7 Magh, 2024 B.S. with the
th
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, Agricultural Development Bank
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 2 Chaitra, 2062. It accepts deposits from individuals and organizations grant loans
nd
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).





72 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 73

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 Rural Development Bank
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 Private Development Bank
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:





74 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 75

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.






74 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 75

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 i. Grants loan
research of technology
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 self-
employment 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 Micro-finance Bittya Sanstha Ltd.
(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



76 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 77

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 prudential regulation 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 under the
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.




76 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 77

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.




Aakar’s Office Practice and Accountancy - 10
78 78 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 79

i. Drawer Payee
A drawer is the person who signs on the
cheque. He/she is also known as the depositor Drawee
or cheque maker. A person holding A/c with a
bank is the drawer.
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.


Financial Institutions
78 Aakar’s Office Practice and Accountancy - 10 Office And Office Personnel 79 79

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.







80 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 81

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 Bearer cheque
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 Order cheque
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. Nepal Bank Ltd.
Not Negotiable
A/c Payee Only





80 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 81

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 Simple cross cheque
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 Order cheque
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.









82 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 83

Insurance


20. Introduction
Human beings are exposed to different
kinds of risks, 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 Rastriya Beema Sansthan
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 to Edwin 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.”



82 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 83

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 order to 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



84 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 85

A. Primary Function

i. Providing Assurance for Compensation
It is a very important function of insurance to assure for the compensation of pre-
decided 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.






84 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 85

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.



86 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 87

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.



86 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 87

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:

Insurance


Life insurance General/Non-life insurance
Endowment life insurance Marine Insurance

Whole life insurance Fire insurance
Children education and marriage Miscellaneous insurance
endowment life insurance
Motor insurance
Term life insurance
Employers’ liability insurance
Anticipated endowment life 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.


88 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 89

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 Happy family
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


88 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 89

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 of the policy. In case of death of the 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



90 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 91

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 Ship accident
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
caused by fire during the stipulated time in consideration Building on fire



90 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 91

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 pre-
decided 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. Bus crash

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.



92 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 93

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. Aeroplane crash

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 The insurance of physical properties is
called life insurance. called non-life insurance.
b. Subject matter A life is the subject matter for the Properties or goods are the subject
insurance. matter of insurance.
c. Policy period Generally, life insurance is a long It is a short term contract which is
tern contract like 10 years, 15 taken normally for one year and can be
years, 20 years and so on. renewed.
d. Expense Generally, the premium of life Generally, the premium of non-life
insurance is personal expense and insurance is paid by the business
is paid by an individual. organization.
e. Compensation Insurance company pays the The sum of money is to be compensated
holder predetermined sum of money to the to the owner of goods or properties
insured on the expiry of the policy or against the losses of properties.
to the nominee after the death of the
insured.
f. Indemnity It is not the contract of indemnity It is the contract of indemnity under
because the life of human being can which the loss of properties is
not be indemnified in money’s worth. indemnified in money’s worth.



92 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 93

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 Karmachari Sanchaya Kosh building
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 3 Bhadra, 2019,
st
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 EPF logo
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.




94 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 95

Citizen Investment Trust (Nagarik Lagani Kosh)

Citizen Investment Trust is an institution established under the
provision of Citizen Investment Trust Act 2047 on 4 Chaitra, 2047
th
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. CIT logo


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 Nagarik Lagani Kosh building
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. Provides consultancy services in the area of capital market about the price determination,
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 NEFSCUN logo
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 24 October, 1944 AD, in England by Robert Owen with the
th
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


94 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 95

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

96 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 97

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. Which is the first cooperative organization of the world and when it was established?
38. In what kind of account we can’t get any interest?




96 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 97

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.



Trial Balance
Aakar’s Office Practice and Accountancy - 10
98 98 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 99 99

5 Trial Balance
Unit








CDC Syllabus 10 Periods

4.1 Introduction
4.2 Types of financial institute
4.3 Bank- Introduction, types and
functions
Cheque- Introduction, types and Learning
its rules Objectives
Payment of cheque using After studying this unit, students will
computer system be able to :
4.4 Insurance- Introduction, types and
functions know the meaning of trial balance,
4.5 Employees’ Provident Fund- explain the objectives and advantages
Introduction and functions of trial balance,
4.6 Citizen Investment Fund- understand the methods of preparing
Introduction and functions a trial balance,
4.7 Cooperative Finance- Introduction identify the errors disclosed or not
and functions disclosed by a trial balance,
know the suspense account and it’s
use,
solve the numerical problems of trial
balance.


























Aakar’s Office Practice and Accountancy - 10
Trial Balance
98 98 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 99 99

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




100 Aakar’s Office Practice and Accountancy - 10 Trial Balance 101