Class 10 Account

Financial institutions are intermediary bodies that collect idle small savings dispersed across society in the form of deposits and channel those funds — as loans — to productive sectors that need capital. Key functions of financial institutions:

• 1. Channelling Funds: Collecting money from savers and making it available to entrepreneurs and individuals who need loans.
• 2. Risk Minimisation: Reducing risk by diversifying investments across various profitable projects rather than concentrating in a single sector.
• 3. Providing Payment Mechanisms: Offering fast and reliable payment services through ATMs, mobile banking, debit/credit cards, and similar technologies.
• 4. Cost Reduction: Since they mobilise resources in large volumes, they can reduce the cost of gathering and analysing information, offering services to customers at a lower cost.

A bank is a legally recognised institution that safeguards the public’s money, provides loans when required, and offers various monetary and agency services. According to Nepal’s law, banks and financial institutions are classified into the following four categories:

• Commercial Banks (Class ‘A’): The primary banks that accept deposits and provide short- and long-term loans to promote trade and industry.
• Development Banks (Class ‘B’): Banks aimed at supporting the development of the agriculture, industrial, and infrastructure sectors.
• Finance Companies (Class ‘C’): Companies engaged in consumer loans, hire-purchase, and merchant banking activities.
• Microfinance Institutions (Class ‘D’): Institutions that target the poor and marginalised by providing small, collateral-free loans.

The Central Bank (Nepal Rastra Bank) is the supreme bank of the country. Its main objectives are:

• To maintain price stability in the economy and keep inflation (rising prices) under control.
• To develop a safe, healthy, and efficient payment system within the country.
• To expand access to financial services and maintain public trust in the overall banking and financial system.
• To formulate and implement appropriate monetary and foreign exchange policies in support of the government’s economic policy.

Development Banks make medium- and long-term financial resources available for the promotion of agriculture, industry, and trade. Their main transactions are:

• Collecting deposits from the general public and institutional depositors through various types of accounts.
• Providing loans and overdrafts for agriculture, trade, and infrastructure development within the rules of Nepal Rastra Bank.
• Conducting foreign exchange transactions and providing remittance services.
• Carrying out merchant banking activities such as managing the issuance of shares and debentures.

A Finance Company is a Class ‘C’ financial institution established primarily to provide consumer loans, hire-purchase, leasing, and mortgage loans to consumers, small businesses, and individuals. Differences:

• Scope and Capital: Commercial Banks have a broad scope and a minimum paid-up capital of Rs. 8 billion. Finance Companies have a limited scope and require Rs. 800 million (national level) capital.
• Purpose: The main purpose of a Commercial Bank is the overall development of industry and commerce, whereas a Finance Company aims to earn profit through consumer-oriented loans and merchant banking.
• Functions: A Commercial Bank can conduct foreign exchange and government transactions, which a Finance Company cannot do on the same full scale.

A Class ‘D’ financial institution established to target the poor, marginalised, and those without access to banking is called Microfinance. These institutions go into villages, form groups of women and disadvantaged people, instil the habit of saving small amounts, and provide collateral-free loans on group guarantee for income-generating activities (such as poultry farming, tailoring, and agriculture). Microfinance plays a major role in poverty alleviation by bringing financial services to those who have been excluded from the formal banking system.

An agreement between an insurer (company) and an insured (person) — made to financially reduce the uncertain risks that may befall a person’s life or property in the future — is called Insurance. In exchange, the insured pays a fixed premium. Principles of Insurance:

• 1. Principle of Utmost Good Faith: Both parties must truthfully disclose all material facts about the subject matter of the insurance. Insurance obtained through concealment is not valid.
• 2. Principle of Insurable Interest: The person taking out insurance must have a direct financial interest in the subject matter being insured.
• 3. Principle of Indemnity: Insurance only compensates for the actual loss suffered — one cannot make a profit from insurance (note: this does not apply to Life Insurance).
• 4. Principle of Proximate Cause: The insurance company pays compensation only when the loss is caused by the reason explicitly stated in the policy document.

In addition to its primary function of risk transfer, insurance performs the following auxiliary functions that support the economy:

• 1. Capital Formation: By pooling the small premiums collected from millions of policyholders, insurance companies build up a vast amount of capital.
• 2. Investment in Economic Development: This accumulated capital is invested in large industries, factories, and infrastructure — boosting the country’s economic growth.
• 3. Creating Awareness: Insurance companies spread public awareness about how to prevent potential accidents, fires, and diseases.
• 4. Employment Generation: Insurance companies directly provide employment to office staff and indirectly provide income opportunities to thousands of insurance agents.

The Employees Provident Fund was established to ensure that employees working in government and organised institutions do not face financial hardship after retirement — making their post-service life comfortable. Its main functions:

• Compulsorily deducting a fixed percentage of each employee’s monthly salary and saving it in the fund.
• Investing the accumulated funds in safe and profitable sectors.
• Providing contributors with concessional-rate loans for housing, education, and other needs when required.
• Returning the full principal, interest, and bonus to contributors in a lump sum upon their retirement.

The Citizen Investment Trust (CIT) is a special type of financial institution established on 4 Chaitra 2047 B.S. Its main objective is to develop the habit of saving among the general public and organised-sector employees, and to collect their idle capital and invest it in the productive sectors of the nation. It operates various types of retirement plans, pension schemes, and unit schemes. It is a trustworthy institution that provides a safe and profitable avenue for ordinary Nepali citizens to invest their savings.

A Financial Cooperative (savings and credit cooperative) — opened by members collectively for mutual benefit — performs the following functions:

• 1. Regularly collecting savings from members and providing better interest rates than conventional banks.
• 2. Investing the collected capital in members’ income-generating and business activities at concessional rates.
• 3. Providing equal financial opportunities to all members without any social, caste, or economic discrimination.
• 4. Fostering a spirit of mutual assistance among members and distributing profits equally.

Three main parties are involved in a cheque transaction: the Drawer (the person who writes the cheque), the Drawee (the bank that makes the payment), and the Payee (the person who receives the cheque amount). Rules of a Cheque:

• The date must be clearly written. A cheque without a date, or one that is more than 6 months old (expired), will not be honoured by the bank.
• The amount to be withdrawn must be written clearly and identically in both figures and words.
• The drawer’s signature must match exactly with the signature on record at the bank.
• Overwriting (corrections) on a cheque is not allowed; if unavoidable, the correction must be countersigned clearly.

A Letter of Credit (L/C) is a banking instrument used primarily in international trade. In this arrangement, the importer’s bank sends a written guarantee — an “order” — to the exporter’s bank. The letter guarantees: “If the exporter ships the agreed goods and presents the required documents, we will pay the equivalent amount.” Since one bank is issuing a guaranteed order to another bank to make payment once specified conditions are fulfilled, a Letter of Credit is called a Bank Order.

• Mobile Banking: The service that allows a customer to check their account, transfer money, and pay bills by downloading their bank’s application (App) on a smartphone or using SMS — is called Mobile Banking. It is extremely convenient — like having a bank in the palm of your hand.
• E-Banking (Internet Banking): Electronic banking transactions carried out by logging into a bank’s official web portal from an internet-connected computer or laptop is called E-Banking. It is convenient for large fund transfers and accessing detailed account statements.

The legal transfer of money from one place to another, or from one country to another, through banks, financial institutions, or money transfer agencies is called Remittance. Types of Remittance:

• 1. Domestic Remittance: Sending money from one city or village to another within the same country. (Example: Sending money from Kathmandu to Pokhara via bank or money transfer.)
• 2. Foreign Remittance: Sending money earned in one country back to another country through employment or trade. (Example: A Nepali working in Qatar sending money to their bank account in Nepal.) This is a primary source of foreign currency for the country.

Introduction to the Central Bank: The supreme institution at the heart of a country’s monetary system — the bank of banks — established to maintain a balanced overall financial position in the country, is called the Central Bank. It does not operate with the aim of making a profit; instead, it formulates the country’s monetary policy and regulates financial institutions. In the context of Nepal, the Central Bank is Nepal Rastra Bank, which was established in 2013 B.S.

Main Functions of the Central Bank:

• 1. Currency Issue: The exclusive right to print paper notes and mint coins that circulate in the country, and to release them into the market, belongs only to the Central Bank.
• 2. Government’s Bank: It acts as the financial advisor and agent of the government — operating government accounts and helping the government raise loans.
• 3. Banker’s Bank: It licenses, regulates, and supervises all commercial banks and financial institutions operating in the country — and acts as a lender of last resort in times of crisis.
• 4. Credit Control: To prevent excessive money supply from causing inflation, or to prevent a shortage of money, it regulates credit by changing interest rates and bank rates.
• 5. Foreign Exchange Control: It determines the exchange rate for foreign currencies and safeguards the country’s foreign currency reserves.

Introduction to Commercial Banks: A profit-oriented financial institution licensed by Nepal Rastra Bank under Class ‘A’ to provide short- and medium-term business loans is called a Commercial Bank. Its primary role is to accept public deposits and invest in trade and business. Nepal’s first commercial bank was Nepal Bank Limited.

Functions of Commercial Banks:

• 1. Accepting Deposits: Collecting deposits (money) from individuals and institutions through current, savings, and fixed deposit accounts — this is its primary function.
• 2. Providing Loans: Lending the collected deposits to agriculture, industry, trade, and individuals in various forms of credit (such as home loans, business loans, and overdrafts).
• 3. Credit Creation: Using a small amount of primary deposits as a reserve and lending out the rest — thereby creating far more credit (money) in the banking system than the original deposit.
• 4. Fund Transfer and Payment: Providing the facility to send a customer’s money from one place to another, and make payments, through ATMs, cheques, drafts, and electronic banking.
• 5. Agency Functions: Collecting dividends, trading securities, and paying insurance premiums on behalf of and under the instructions of the customer.

Reason for Taking Out Insurance: At every step of human life and business, uncertainty and risk are hidden. Events such as fire, accidents, illness, or death can cause enormous financial loss. Insurance is taken out to transfer the financial burden of such potential risks to an insurance company — thereby keeping oneself financially secure.

Main Types of Insurance:

• 1. Life Insurance: Insurance related to a person’s life span or health. The policyholder pays premiums for a fixed period or for their entire life. If the policyholder survives the insurance period, they receive the insured amount plus bonus; if they die, their dependent family receives it. Life Insurance serves the dual purpose of protection and savings.
• 2. Non-life Insurance: Insurance taken to protect physical property and liabilities other than human life. It compensates only for losses caused by accidents, theft, or fire affecting a vehicle, building, factory, or goods. If no loss occurs, the premium is not refunded.
• 3. Reinsurance: When one insurance company cannot bear — on its own — the very large risk it has taken on, it transfers a percentage of that risk to another, larger insurance company. This is called Reinsurance. It prevents the original insurance company itself from going bankrupt in the event of a massive claim.

Means used to make banking transactions convenient, secure, and fast are called Banking Instruments. Five main banking instruments:

• 1. Cheque: A printed order form used by a bank account holder to withdraw cash or make payment to someone else from their own account.
• 2. Bank Draft: A secure, cheque-like instrument issued by one bank to its own branch or another bank to pay a specified amount to a named person. It can never bounce.
• 3. Letter of Credit (L/C): A guarantee letter issued by the importer’s bank to the exporter in international trade — assuring payment upon shipment of agreed goods.
• 4. ATM / Debit Card: A plastic magnetic card that allows the account holder to withdraw cash or make payments at any time from a machine without visiting the bank.
• 5. E-Banking / Mobile Banking: A software tool that allows a person to send money and view transactions from home using the internet or a mobile app.

Necessity of These Instruments:

• To eliminate the risk of theft or robbery that comes with carrying large amounts of cash.
• To make business payments immediately and reliably.
• To save time and effort by eliminating the need to visit a bank branch.
• To create an environment of trust between traders in two different countries in international commerce.

Introduction to Insurance: Financial institutions established to reduce the economic loss that may arise from uncertain risks and accidents affecting human life and physical property are called Insurance Companies. People pay a fixed amount (premium) to transfer their potential risk to the insurance company, and the company guarantees compensation in return.

Functions of Insurance — six functions divided into Primary and Auxiliary:
Primary Functions:

• 1. Risk Transfer: An individual or institution transfers large risks that they cannot bear alone to an insurance company — keeping themselves financially protected.
• 2. Creation of a Common Pool: Premiums collected from many people are pooled together into a common fund, and those who suffer a loss receive relief from that very fund.
• 3. Providing Certainty: Even if an accident cannot be prevented, insurance provides the certainty that the resulting financial loss will be compensated — giving people peace of mind.

Auxiliary Functions:

• 4. Capital Formation and Mobilisation: The vast capital built up from millions of small premiums is invested in the country’s productive sectors — driving economic growth.
• 5. Creating Awareness: Insurance companies spread public awareness on how to avoid potential accidents, fires, and diseases and how to minimise loss.
• 6. Employment Generation: The insurance sector directly employs office staff and indirectly provides income to thousands of insurance agents across the country.

Meaning of Life Insurance: An agreement made between an insurance company and an individual concerning the risk related to a person’s life span or health is called Life Insurance. The policyholder pays premiums for a fixed period. If the policyholder survives the entire period, they receive the sum assured plus bonuses; if they die before the period ends, their family receives the amount.

Types of Life Insurance: Main types include Whole Life Insurance, Term Life Insurance, Universal Life Insurance, and Endowment Life Insurance. Two of these are explained below:

• 1. Whole Life Insurance: In this plan, the policyholder pays premiums for a specified period but does not receive the money back during their own lifetime. Only after the policyholder’s death do their family or nominated beneficiaries receive the lump sum. This insurance is taken primarily to ensure financial security for the family after the policyholder’s death.
• 2. Endowment Life Insurance: This is the most popular type of insurance, with a fixed term (e.g., 15 or 20 years). The policyholder pays instalments for the specified term. Upon completion of the term, the policyholder themselves receives the sum assured plus bonuses. If death occurs before the term ends, the family receives the amount. It serves the dual purpose of post-death protection and savings while alive.

• 1. Letter of Credit (L/C): This instrument is used in international trade to establish trust between the importer and the exporter. At the importer’s request, a bank issues a guarantee letter to the exporter stating: “If you ship the specified goods, you will receive payment.” This is the Letter of Credit.
• 2. Electronic Cards: Plastic cards issued by banks to free customers from the hassle of carrying cash and to facilitate electronic payments. A Debit Card — used to withdraw money up to the amount in one’s own account — and a Credit Card — used to spend up to a bank-approved credit limit — are the main examples.
• 3. Electronic Transfer: The process of sending money quickly, securely, and reliably from one bank account to another using information technology (such as E-banking, mobile banking, SWIFT, and ABBS) is called Electronic Transfer.
• 4. Remittance: The legal transfer of money earned abroad back to one’s home country — through any authorised medium such as a bank or money transfer agency — is called Remittance. It is one of the primary means of bringing foreign currency into the country.

Introduction to Capital Market: The market where long-term financial instruments (such as ordinary shares and debentures) with a maturity of more than one year are bought and sold — to raise long-term capital for agriculture, industry, trade, and the government — is called the Capital Market.

Differences from Money Market:

• 1. Duration: The Money Market trades short-term instruments (maturity of less than one year), while the Capital Market trades long-term instruments (maturity of more than one year).
• 2. Risk: Money Market investments can be quickly converted back to cash and are more secure, so risk is low. Capital Market investments require a longer commitment and market prices fluctuate, so both risk and potential return are higher.
• 3. Regulation: The Money Market is regulated by the Central Bank (Nepal Rastra Bank), while the Capital Market is regulated by the Securities Board of Nepal (SEBON).
• 4. Instruments: Treasury bills, banker’s acceptances, and commercial paper are Money Market instruments, while ordinary shares, preference shares, and debentures are Capital Market instruments.