Financial Institutions & Banking System Overview

A set of question-and-answer flashcards covering the functions, types, classifications, capital requirements, and comparative roles of financial institutions, central banks, commercial banks, and development banks in Nepal.

What is the primary function of financial institutions with respect to surplus units?

To obtain funds (savings) from surplus economic units and channel them to deficit units.

Name any four key functions of financial institutions besides obtaining funds from surplus units.

Lending funds, risk reduction, capital formation, reducing the cost of information searching, providing payment mechanisms, and transforming financial assets.

Into which two broad categories are financial institutions divided?

Depository (banking) financial institutions and non-depository (non-banking) financial institutions.

Give three examples of depository (banking) financial institutions in Nepal.

Commercial banks, development banks, finance companies, microfinance institutions, savings & credit cooperatives, and micro-finance self-help groups (any three).

Give two examples of non-depository (non-banking) financial institutions in Nepal.

Insurance companies, Employee Provident Fund, Citizen Investment Trust (CIT), and Social Security Fund (SSF) (any two).

Under BAFIA 2073, what is the minimum paid-up capital requirement for a Class A commercial bank?

Rs. 8 billion.

What is the paid-up capital requirement for a national-level Class B development bank?

Rs. 2.5 billion.

How much paid-up capital must a finance company have to operate at the national level or in 4–10 districts?

Rs. 800 million.

What is the minimum paid-up capital for a national-level Class D microfinance institution?

Rs. 100 million.

Which institution issues notes and acts as custodian of a country’s exchange reserves?

The central bank.

List any four major functions of a central bank.

Issuance of currency notes, custodian of foreign exchange reserves, banker to the government and other banks, control of credit, economic development promotion, licensing/regulation/supervision, development of the banking system, and formulation of monetary policies (any four).

What are the three primary types of deposit accounts offered by commercial banks?

Savings accounts, current (checking) accounts, and fixed deposit accounts.

Name three primary (core) functions of commercial banks.

Accepting deposits, advancing loans/investment, creation of credit, financing foreign trade, and remittance & foreign exchange dealings (any three).

What is one secondary (agency) function performed by commercial banks?

Providing agency services such as collecting cheques/dividends, paying bills, or acting as a trustee or executor.

Who serves as the regulatory authority over banks and financial institutions within a country?

The central bank.

Who must follow the directives periodically issued by the central bank?

Commercial banks and other financial institutions.

State one key difference in objective between a central bank and a commercial bank.

The central bank aims to maintain monetary stability and regulate the banking system, whereas a commercial bank aims to provide banking services and earn profit by serving individuals and businesses.

What is the primary developmental objective of a development bank?

To contribute to specific sectors, promote entrepreneurial activities, and fill financing gaps in the economy.

Name two banking functions of development banks besides their development role.

Accepting deposits, granting loans, dealing in bills of exchange, issuing letters of credit, and making investments (any two).

In Nepal’s classification, which class does a development bank fall under?

Class B financial institution.

What type of loans do commercial banks primarily provide compared to development banks?

Commercial banks mainly extend short-term and medium-term loans, whereas development banks focus on long-term developmental project financing.

Which financial institution is referred to as the "bank of the banks"?

The central bank.

Which financial institutions typically handle remittance of funds and foreign exchange dealings?

Commercial banks.

What type of financial institution acts as a ‘gap filler’ for sectors not adequately funded by traditional banks?

Development banks.

Which institution supervises, licenses, and regulates other banks in Nepal?

The Nepal Rastra Bank (central bank).