Book 10 Account Final for 2077_new

transportation, land transportation or air transportation. Generally, the cheapest, fastest and safest means of transportation should be used. h. Means of payment The buyer/importer and the seller/exporter must have agreement regarding the means of payment to be used for settlement of trade. In case of home trade, payment can be made in local currency. But in case of foreign trade, payment should be made in the currency of exporter’s country. The popular means of payment are cheque, draft, telegraphic transfer, ATM card, letter of credit etc. Generally, the payment of foreign trade is made through letter of credit. Invoice An invoice is a bill or document prepared by the seller or the exporter and sent to the buyer or importer along with the goods dispatched. It contains the valuable information of goods like quantity, price, discount, net amount payable, expenses incurred etc. It is prepared after collection of goods for dispatching. Invoice is considered as a forwarding document in foreign trade sent along with the goods delivered. The seller or the importer is liable to make the payment equal to the amount mentioned in the invoice. The invoice sent by the seller or exporter is called outward invoice and the invoice received by the buyer/importer is called inward invoice. Invoice is a written document prepared by the seller or exporter mentioning the details of goods and sent to the buyer or importer along with the goods delivered. Following is the specimen of invoice: Readmore Publishers & Distributors Kathmandu, Nepal Tel: Fax No: E-mail: Invoice No: Order No: Date: To, Janata Pustak Bhandar Baglung Credit terms: 10% cash discount if paid within 30 days, credit period 45 days Particulars Quantity Rate Amount Totals Remarks  Errors and Omissions Expected.  Please quote invoice number while making payment.  Goods once sold are not returnable and exchangeable. .............................. (Signature) For Readmore Publishers & Distributors Trade 51

Items included in invoice The items to be included in an invoice may differ from one to another. It depends upon the necessity, nature, condition and type of invoice. However, the following are the common items to be included in all types of invoice:  Name and address of the seller or exporter  Name and address of the buyer or importer  Date of dispatching goods  Invoice number  Order number or reference number  Quantity, per unit price and total amount of goods  Types and rate of discount allowed to the buyer or importer  Any expenses incurred on behalf of the buyer or importer  Net amount payable by the buyer or importer  Types of packing and instruction in package  The last date for making the payment  Means and mode of carriage  Signature of the seller or exporter or his authorized agent  Remarks for any other information Importance of invoice Following are the main importance of invoice:  It provides the details of goods like quantity, quality, brand name, rate and total amount to the buyer or importer.  It provides information of discount allowed and net amount payable by the buyer or importer.  It helps to know about the last date of payment for the value of goods.  It acts as a written evidence for settling disputes and misunderstanding between the parties.  It helps the transport company and the importer for physical verification of goods.  It helps to settle the payment through bank in case of foreign trade.  It helps to determine the amount of commission and receivables in consignment trade. Types of invoice The invoice is an important document used in foreign trade. It can be prepared differently according to the items of expenses and charges included in it. Thus, the different invoices 52 Office Management and Accountancy

quote different prices for the same goods delivered to the importer. It is due to difference in inclusion of different charges in the invoice. Thus, according to the items of payment included in invoice, it can be classified into the following five types: a. Loco invoice Memory Tips The word Loco means local cost. It is a type of invoice  Loco invoice that includes only the cost price of the goods and  Free on board (F.O.B.) invoice the profit margin required to the exporter. It means  Cost and freight (C & F) invoice loco invoice includes only the cost of production  Cost, insurance and freight (C.I.F.) invoice and profit margin. It does not include any other  Franco invoice expenses in the price of product which are incurred for carriage of goods from the place of exporter to the place of importer. The importer should bear all the expenses and charges incurred in the transit for carriage of goods to his destination. If the exporter has incurred such expenses on behalf of importer, they can be shown in the invoice separately. The invoice which is prepared by including only the cost price of the goods and profit margin required for the exporter is called loco invoice. b. Free on board (F.O.B.) invoice Free on board invoice is a type of invoice which is prepared by including the cost of goods and expenses incurred from the exporter’s godown to the shipboard. It includes cost of goods plus desired profit, packing charge, carriage upto the importer’s shipboard, export duty, expenses incurred for the carriage of goods till the loading to the shipboard. The expenses to be incurred after the goods loaded on shipboard are free to the importer and thus not included in the invoice. The invoice which is prepared by including the cost of goods and all the expenses incurred till the loading of goods on shipboard is called free on board invoice. c. Cost and freight (C & F) invoice The invoice which is prepared by including the cost and freight of the goods is known as cost and freight invoice. It includes all the expenses incurred in carriage of goods from the factory of exporter to the importer except insurance charge. Thus, cost and freight invoice includes cost of goods, profit margin, loading and unloading charges, freights etc which are borne till the delivery of goods. This invoice does not include the insurance premium as it is free to the importer. The invoice which is prepared by including the cost of goods and all the expenses incurred in the carriage of goods except insurance premium is called cost and freight invoice. Trade 53

d. Cost, insurance and freight (C.I.F.) invoice It is a type of invoice that includes the cost of goods and all the expenses incurred till the delivery of goods to the importer along with insurance premium. In this type of invoice, no expenses are free to the importer. Thus, it includes cost of goods, export duty, loading and unloading charges, freight charge, insurance premium etc. The invoice which is prepared by mentioning all the expenses including freight and insurance premium is called cost, insurance and freight invoice. e. Franco invoice The invoice which is drawn including all the expenses incurred for delivery of goods in the cost price is known as franco invoice. The word ‘Franco’ means free. Thus, this invoice shows only the cost of goods without disclosing other items separately. It means all the expenses like freight, export duty, loading and unloading charge, insurance etc are paid by the exporter but not shown separately in invoice. The importer makes the payment of bill in lumpsum and thus seems everything like free to him except the price of goods. The invoice which is prepared by including all the expenses like loading and unloading charges, export duty, insurance etc. in the cost price of the goods is known as franco invoice. The price to be written in different types of invoice is shown below: Name Local Transportation Freight on Insurance Others Invoice of price of upto shipboard shipboard price invoice goods LOCO 100 20 25 15 10 100 FOB 100 20 35 15 10 120 C&F 100 20 25 15 10 145 CIF 100 20 25 15 10 160 Franco 100 20 25 15 10 170 Means of payment Means of payment refer to the mediums or instruments which are used to pay and receive the amount in trade or other purpose. In both types of trade i.e. home trade and foreign trade, any means of payment should be used for making the payment for value of goods. Some of the widely used means of payment are described below: 54 Office Management and Accountancy

a. Cheque Cheque is a written order issued by an Memory Tips accountholder or depositor of the bank for making payment to the person or party. It is provided  Cheque by the bank to its account holder to facilitate the  Bank draft withdrawal and payment of amount from his/her  Letter of credit deposit. Thus, a buyer may issue cheque in the  ATM card name of seller and payment can be collected by  Electronic transfer  Hundi presenting it into the bank. For encashment of cheque, the certain conditions have to be fulfilled. Otherwise, it will be dishonoured. It is suitable and popular means of payment to be used in home trade to pay a large sum of money. It can be a bearer or order or even crossed considering its safety. Cheque is an unconditional order issued by a depositor upon a specified banker to pay on demand a certain sum of money to the particular person or the bearer of the instrument. b. Bank draft Bank draft is a written order issued by a bank to its branch for payment of amount mentioned on it. Thus, it is drawn by one bank to another. Under this means of payment, the person who wants to pay the value of goods has to go to the bank of his place and fill up a form. He also requires to mention the details along with the submission of amount to be paid to another place with some charges. The bank then prepares a draft and provides to the sender. The buyer has to send that draft using postal service. After receiving the draft, the seller or exporter submits it into the bank and receives the payment. Actually, it is a cheque drawn by one bank to another bank directing to pay the amount at far distant place. In case of loss of bank draft, the buyer himself should be liable. It is considered as popular and economical means of remitting money from one place to another. Bank draft may be general, crossed or account payee. The payment of general bank draft is made immediately. The amount of crossed bank draft should be deposited into account and it can be withdrawn by issuing new cheque. On the other hand, account payee bank draft can be withdrawn by depositing into the account of concerned person only. Bank draft is a written order issued by a bank to its branch or another bank directing to pay a certain sum of money to the person mentioned in it. Trade 55

c. Letter of credit Letter of credit is used in foreign trade to make payment to the exporter for the value of goods. It is a document containing an order made by a bank of importer to the bank of exporter to honour the cheque of a person mentioned there in upto the stated limit. In other words, it is the act of giving guarantee by the bank of local party to the foreign party to pay the value of goods. While importing goods and making payment through it, the importer has to open the letter of credit into the local bank depositing marginal amount, L.C charges and other necessary documents. The bank examines all the documents and provides L.C. number to the importer. The importer sends the same L.C number to the exporter. The exporter from the next side dispatches goods to the importer after receiving the same number. After receiving the goods, the importer has to pay the balance amount to the bank. Finally, the exporter collects the amount of goods in foreign currency by submitting the documents to his banker. Letter of credit is a guarantee letter issued by a bank of the importer giving guarantee to the exporter for the payment of the value of goods to be imported. d. ATM card The full form of ATM is Automated Teller Machine. It is a modern computerised device that provides modern financial services to the customers instantly without involvement of manpower. ATM card is a rapid means of payment for withdrawal of money under modern banking system. Using ATM card, a depositor can withdraw money immediately at any time without use of cheque. Under this means of payment, one has to get the ATM card by opening an account into the bank having this facility. While using it, the card holder should insert the card into machine and enter the PIN (Personal Identification Number). Then the machine examines the originality of the card and provides various options to the customers. The customer can withdraw money at any time as specified by the bank. Nowadays, most of the joint venture banks have provided 24 hours ATM facility. ATM cards are also of two types i.e. debit card and credit card. The debit card is used to withdraw the amount that has been already deposited into the bank. It allows the individual to withdraw the amount keeping minimum balance. On the other hand, credit card is used even by non-accountholder to withdraw the certain amount from bank as loan. Such amount should be repaid to the bank along with the interest. This facility is provided by the bank only to trusted persons. 56 Office Management and Accountancy

ATM card is a plastic coated magnetic card which provides withdrawal facility to the customer using modern computerized device through personal identification number. e. Electronic transfer Electronic transfer is a computer based process of transferring money from one place to another. It is a specialised web based money transfer business like Western Union Money Transfer, IME, Prabhu Money Exchange, Sewa Money Transfer etc. The financial institutions like bank and other money transfer agents are engaged in remitting money. Under this means of payment, a safe communication net working is built and operated through computer. It requires to take help of an international institution called SWIFT to transfer currency from one bank of a country to another bank of next country. The full form of SWIFT is Society for Worldwide Interbank Financial Tele-communication. In order to make payment using it, the different banks are interrelated to perform the work of currency of different countries. Those banks are called the member bank of SWIFT. Under this means, a special numeric code is given to the individual to transfer the amount. Then, he sends that code number to the receiver of amount through telephone or any medium. The receiver of the amount has to fill up a form stating the code number obtained from the sender. He also has to mention the particulars like his and sender’s name and amount expected. After identification of right payee, the amount is paid in cash at the counter or transferred to the bank account. However, it does not require any bank account. Electronic transfer is a computer based modern means of payment that provides facility to make the payment in safer, faster, economical and convenient way. f. Hundi Hundi is a written order issued by one individual or business to another directing to pay the amount mentioned in it. It contains information like name, address and the signature of the person receiving hundi. Though it has not been legally accepted, it is widely used means of payment. It can be used in home trade and foreign trade. The hundi are of two types i.e. fixed deposit hundi and darshani hundi. Under fixed deposit hundi, amount can be paid after a certain period and under darsani hundi, amount should be paid immediately after receiving it. Hundi is a written order issued by one individual or business firm to another directing to pay the amount mentioned in it. Trade 57

World Trade Organization (WTO) Today, due to globalization, the world has become a single village. The trading activities are also not limited to the national boundary. Due to technological advancement and free movement of resources, variety of goods and services are exchanged between or among the countries. However, many difficulties and challenges exist in international trade. Thus, to conduct the international trade in systematic manner, maintain trade discipline and solve the trade problems among the countries, a worldwide trading organization has been established on 1st January 1995 AD which is known as World Trade Organization. It aims to manage, regulate and facilitate the international business by simplifying problems, reducing tariffs and maintaining standard. It is the revised form of General Agreement on Trade and Tariffs (GATT). The GATT was established in 1947 AD with the aim of simplifying world trade and to preserve patent right on intellectual property. It could not deal with the various issues like privatisation, liberalization, expansion of multilateral cooperation etc. In order to deal with these issues effectively, several international conferences among GATT members were held to establish an international trade organization. The concept of WTO was introduced first in Uruguay Round in 1986 AD and finally accepted in 1994 April 15 by the ministerial conference held at Marrakesh, Morakko. The conference declared to establish world trade organization since 1st January 1995. It is an institutional foundation of the multilateral trading system. It is a permanent organization established under international treaty approved by the government and legislature of member states. Nepal got the membership of WTO as the 147th member on 23rd April 2004 AD. Till 29 July 2016 AD, 164 countries have got the membership of this organization. It deals with trade in goods, services and intellectual property. The headquarter of WTO is at Geneva of Switzerland. WTO is an international level organization established to manage, regulate and facilitate the international business by maintaining trade discipline, developing trade rules, extending trade relations and solving trade problems among the member countries. Functions of World Trade Organization Following are the main functions of world trade organization:  To manage and implement the multi-trade agreements relating to an organization.  To remove and settle the trade barriers and disputes among the member countries.  To provide multilateral platform for international discussion and conferences on trade. 58 Office Management and Accountancy

 To monitor and evaluate the national trade policies of its member countries.  To conduct the training and provide technical assistance to the developing countries.  To extend the cooperation among other international institutions in trading matters. South Asian Free Trade Area (SAFTA) South Asian Free Trade Area is the largest regional free trade area in the world. It is established by the government of the SAARC member countries (Nepal, India, Pakistan, Bangladesh, Bhutan, Maldives, Sri Lanka and Afghanistan). It is a permanent and long-term agreement made for the development of trade and industry of the member countries located in South Asia. The concept of SAPTA (South Asian Preferential Trade Agreement) was formally adopted after the 7th SAARC summit held in Dhaka, Bangladesh on 11th April 1993 AD. It aimed to uplift the living standard of the poor people of SAARC countries strengthening the economy of the member nations. The major objective of SAPTA was to increase trade by increasing investment and production. SAPTA at first was endorsed by Nepal on 12th Aswin 2050 B.S. and finally endorsed by Bangladesh on 5th November 1995. The concept of free trade area was emerged on 9th SAARC summit held in 1997 A.D. at Maley, Maldives to change the SAPTA into SAFTA. In 1998 A.D., the 10th SAARC summit held on Columbo, Srilanka made the decision for the formation of expert committee to prepare draft for the free trade area within SAARC countries. Again, the 11th SAARC summit held in Kathmandu on 2002 A.D. decided to make SAARC nations as free trade area. It also decided to prepare the structure for the SAFTA .The final agreement for its implementation was made and signed by all the member countries during 12th SAARC summit held in Islamabad, Pakistan on 6th January 2004 A.D. Finally the SAFTA came into effect since 1st January 2006 which replaced the earlier SAPTA. The main aim of SAFTA is to reduce the custom duty, increase investment and employment to improve the economy of member countries. Thus, the free trade area is an agreement which defines the free flow of goods and services among member countries without barriers. SAFTA is the mutual agreement of the SAARC countries to promote and enhance the mutual trade and economic cooperation and ensure the free flow of goods and services among the member countries without barriers. Trade 59

Functions or importance of SAFTA The major functions or importance of SAFTA are as follows:  To eliminate the trade barriers and facilitate the flow of goods and services among the member countries in South Asia.  To promote the fair competition in the free trade area and ensure equitable benefits to the member countries as per their level and pattern of economic development.  To establish an effective mechanism for the implementation and application of agreement among the member countries.  To create a framework for further regional cooperation to expand and enhance the mutual benefits of an agreement.  To provide technical support to the least developed member countries to promote the level of competitiveness. Key Terms Acknowledgement – a letter informing the acceptance of something. Bank draft – an order issued by a bank to another bank or its branch to pay a certain amount to a particular person. Bill of lading – a document given by the exporter to the shipping company with the package of goods. Consignment trade – act of sending goods on commission basis and at the risk of sender. Dispatch – to deliver, send. Electronic transfer – modern technology based means of payment for transferring money from one place to another. Enquiry – formal request for information about something. Hundi – written order issued by one person or businessman to another directing to pay the amount. Invoice – trade document prepared and sent by the seller to the buyer along with the goods delivered. Letter of credit – a letter issued by a bank to an exporter giving guarantee for the payment of the value of goods. Trade – act of buying and selling of goods for earning profit. 60 Office Management and Accountancy

A. Very short answer questions 1. Define the term trade. 2. Mention the types of home trade. 3. Write any two procedures of home trade. 4. Mention the types of foreign trade. 5. What do you mean by invoice? 6. Mention any two types of invoice. 7. Write the full form of F.O.B. 8. What is the full form of C.I.F.? 9. Give the meaning of loco invoice. 10. What is meant by bill of lading? 11. State any two means of payment used in trade. 12. Write the full form of L.C. 13. What is meant by letter of credit? 14. Give the meaning of franco invoice. 15. Write the full form of ATM. 16. What is meant by debit card and credit card? 17. Write the extended form of SWIFT. 18. Write the full form of WTO. 19. When was World Trade Organization established? 20. What is WTO aimed at? 21. When did Nepal get the membership of WTO ? 22. When and where was the concept of WTO introduced at first? 23. When was WTO finally ratified? 24. How many countries have got the membership of WTO till 29 July 2016 AD? 25. Write the full form of GATT. 26. What is the full form of SAPTA and SAFTA? 27. Who endorsed SAPTA at first and at last? 28. Give the meaning of hundi. 29. What is meant by electronic transfer? 30. Write the full form of SAARC. Trade 61

B. Short answer questions 1. Give the meaning of trade and describe its types. 2. What is invoice? State the importance of invoice in trade. 3. What are means of payment? Explain any four means of payment in brief. 4. What is meant by WTO? Mention its functions. 5. What is SAFTA? State the major functions of it. 6. Write any two similarities and three dissimilarities between home trade and foreign trade. 7. Introduce WTO and write any four differences between WTO and SAFTA. C. Long answer questions 1. Define trade and describe briefly the procedures of home trade. 2. Define foreign trade and describe its procedures. 3. Explain briefly the terms and condition of foreign trade. 4. What is an invoice? Why is it prepared? Explain the types of invoice clearly. 5. Describe in brief about the various means of payment which can be used in trade.  62 Office Management and Accountancy

4 FINANCIAL Chapter INSTITUTIONS Learning Objectives After studying this chapter, the readers will be able to :  define financial institution and mention its types,  define bank and explain its importance,  mention the types of bank and describe their functions,  write the meaning of cheque and explain its types,  define insurance and describe the types of life and non-life insurance,  introduce employee provident fund and state its functions,  introduce citizen investment trust and state its functions,  introduce financial cooperatives and state its functions. Introduction Financial institutions are the organized banking and non-banking institutions established in the country. They accept the scattered money from general people and organizations and form capital for economic development. They avail capital into various productive sectors. Financial institutions grant loan to the needy people for various purposes. Financial institutions are established as per Bank and Financial Institutions Act 2063 in Nepal. The insurance company, employee provident fund, citizen investment trust, cooperative society, finance company capital market, micro finance company etc. are the types of financial institutions currently operating in Nepal. All types of financial institutions perform the financial activities as per the rules and regulations and support for economic development of the country. Financial Institutions 63

Concept and definition Financial institution refers to the institution involved in some financial activities. Financial activities include the collection of saving, granting loan and mobilization of such saving in productive sectors. Thus, the financial institution deals with monetary transactions. It accepts the scattered money from individuals and organizations as deposits. Similarly, it grants loan to agricultural, industrial, cooperative and other sectors against security deposit or on the guarantee of group. Financial institution provides interest on the money of depositors and again charges interest on the loan granted. It also provides other various services to the public and institutions against some charges and commission. Thus, the financial institution plays the role of mediator between the savers and users of money. It creates an organized market for mobilization of capital and assist in economic development of the country. Traditionally, financial institutions used to refer the institutions other than bank such as finance companies, capital market, cooperative credit societies etc. However, at present, financial institutions include both banking and non-banking institutions. Followings are the definitions of financial institution: “The financial institutions in Nepal refer to any institution established under the prevailing laws with the objective of providing loan for agriculture, cooperatives, industry or any other specific economic purpose of collecting deposits from the general public. The term also denotes as institutions prescribed as financial institution by GON publishing notice in Nepal Gazette”. Nepal Rastra Bank Act 2058 “Financial institutions are investment intermediaries linking the savers and users of capital.” ATK Ukrant Financial institutions are the banking and non-banking institutions established under certain act which play the role of mediator between savers and users of money for the economic development of a nation. Short Notes to Remember (SNR 4.1)  Financial institution refers to both the banking and non-banking institutions.  It plays the role of intermediary between the savers and users of money.  It performs the functions like accepting deposits, granting loan to needy persons and organizations and mobilizing an unused capital in productive sectors.  Financial institutions grant loan against the collateral or even on the guarantee of the group.  All the banking financial institutions are monitored, supervised and controlled by Nepal Rastra Bank in Nepal. Types of financial institutions All the institutions involved in financial dealing of accepting deposits and granting loan are called financial institutions. Nepal Rastra Bank as central bank has also clearly specified about the classification of financial institutions. Thus, the financial institutions are of different types. However, some of the financial institutions operating in Nepal are listed below: 64 Office Management and Accountancy

a) Bank b) Insurance company d) Citizen investment trust c) Employee provident fund e) Financial cooperatives BANK Concept and definition The word ‘bank’ is originated from the Italian language ‘Banco’ which means a bench. Traditionally, Italian goldsmiths used to perform the monetary transactions by sitting on a bench. So, the word ‘banco’ was used to denote the bench to perform monetary transactions. Thus, the same word banco was later pronounced as bank. Gradually, a single bench and limited place could not be sufficient for performing increasing number of monetary transactions. The people felt the necessity of establishing an organized institution. As a result, it gave birth to an institution called bank. In Nepal, Nepal Bank Limited was established in 1994/07/30 B.S. as the first bank and modern banking started since its establishment. A bank is an institution that accepts the deposits from the public and grants loan to the individuals and organizations. It avails loan to the various sectors such as agriculture, industry and commercial sectors. A bank is a medium of financial transactions. It performs the variety of functions relating to individual, corporation or government. A bank may be established with government or private investment. It may provide loan to the individuals or corporations with or without collateral security. Finally, a bank as a financial institution contributes the nation for economic development. Following are some popular definitions of bank: “Bank is the one who in the ordinary course of his business receives money which he pays by honouring cheque of persons from whom or whose accounts receives.” Dr. H.L. Hart “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.”Kent “Bank is an institution which collects money from those who have it to spare or who are saving it out of their incomes and lends this money to those who require it.” Crowther “Banks are financial institutions that fund in the form of deposits repayable on demand or in short notice.” World bank Bank is a financial institution which is involved in financial transactions of accepting deposit, granting loan, performing agency function, transferring money etc. for the economic development of a nation. Financial Institutions 65

Importance of bank The bank plays an important role in economic development of the country. It performs the wide variety of functions. It is regarded as the wheel and back bone for the rapid development of financial sector of a nation. On the other hand, the establishment, promotion and development of the industries largely depend upon the establishment and development of the bank in the country. Furthermore, we cannot imagine our modern lifestyle without linking to banking activities. Thus, the main importance of a bank can be described as follows: a. Capital formation The bank collects deposits from individuals M emory Tips and organizations. It can be mobilised in various sectors like industry, trade and other  Capital formation service oriented areas of the country. A bank  Mobilization of capital introduces various saving schemes for the  Granting loan public to attract saving and accumulates  Issuing notes and coins huge capital. Thus, it collects the idle money  Encouraging for saving of the public by providing attractive rate of  Creating and controlling credit interest. So, the bank is a mediator and main  Exchanging foreign currency source of capital formation for the economic  Transferring money development.  Helping the government  Promoting trade, industry and b. Mobilization of capital othersectors  Working as an agent The bank plays an important role in mobilisation of capital. It identifies the productive and profitable sectors for investment and mobilises the collected deposits into such sectors. In this connection, a bank acts as a mediator as it accepts deposits from public and institutions and again transfers it into trade, commerce, industry, agriculture and service sectors. c. Granting loan The bank provides loan to the individuals, traders, industrialists and investors for various purposes. It provides such loan on short term, mid-term and long-term basis against the collateral securities of the properties or even on the guarantee of the group. It charges interest at certain rate to the borrowers on such loan. The act of granting loan helps for establishment, development and modernization of institutions and fulfilment of individual needs. d. Issuing notes and coins In order to deal with goods or services, the bank issues notes and coins under certain provisions. Specially, the central bank of any country performs the function of issuing notes and coins for exchange purpose. In Nepal, Nepal Rastra Bank performs this function and circulates notes and coins throughout the country. 66 Office Management and Accountancy

e. Encouraging for saving The bank always encourages the public and institutions for regular saving. It launches the various saving schemes to encourage them to deposit their surplus money. The bank ensures the full security of deposit, provides attractive rate of interest and makes insurance of depositor. Due to all these facilities, individuals and institutions are encouraged for saving. It finally supports for formation of capital. f. Creating and controlling credit The bank provides loan to the individuals and organizations for various purposes. It creates credit by providing much more loan than the deposit it has collected on a certain period. It provides loan by keeping smaller amount of deposit as reserve to meet day to day transactions. The credit created by commercial bank is controlled by central bank. Creation of credit is necessary at the time of economic depression and it should be controlled when the price is highly increased due to overflow of loan. g. Exchanging foreign currency The bank also exchanges the foreign currencies as per the instruction and direction of central bank. It facilitates and promotes the foreign trade. Thus, it fulfils the requirement of the importer and the exporter for exchanging foreign currencies. It also helps to increase national revenue. h. Transferring money The bank plays an important role in transferring money from one place to another which is called remittance facility. It issues various credit instruments like cheque, bank draft, letter of credit, telegraphic transfer, traveller’s cheque, credit card etc for remittance of money. Such instruments provide easy, safe, fast and reliable remittance of funds from one place to another. i. Helping the government The government of every country requires the details of economic condition for formulation and implementation of various plans and policies. The bank provides necessary financial data, statistics and information to the government. It facilitates the government for preparation of fiscal policy, monetary policy and tax policy required for the nation. j. Promoting trade, industry and other sectors The bank at first helps to establish the new company and industry by providing technical and financial assistance. It supports to manage the capital by purchasing and selling shares and deb entures of existing and newly established companies. It also supports the trading, industrial and other sectors for establishment, operation and promotion of its activities. Financial Institutions 67

k. Working as an agent The bank also functions as agent. It plays the role of agent for its customers, traders, industrialists, government and other institutions. It collects the various incomes such as dividend, interest, cheques, bills etc on behalf of its customers. Similarly, it makes payment of subscription, life insurance premium, rent, electricity bill, telephone bill, interest and income tax on behalf of its customers. It also performs the function of underwriting shares or debentures on behalf of its clients. Short Notes to Remember (SNR 4.2)  The first bank of the world is “Bank of Venice” which was established in Venice, Italy in 1157 A.D.  Afterwards, the “Bank of Barcelona” and the “Bank of Genoa” were established in 1401 A.D. and 1407 A.D. respectively.  In 1694 A.D. “Bank of England” was established in England which was greater development in the banking history of the world.  In Nepal, an organized banking system was started only after the establishment of Nepal Bank Limited in 1994 B.S.  Bank is an important financial institution because it accumulates and mobilises capital, grants loan, issues notes and coins, encourages for regular saving, creates and controls credit, exchanges foreign currencies, helps the government, promotes the industrial sector and works as an agent of customers. Types of bank According to the functions, banks can be classified into different groups. Some banks operate their activities in industrial and commercial sector; some extend their services in agricultural sectors whereas others contribute for the rural area. Thus, the following are the main types of bank presently operating in Nepal: Figure: 4.1 Types of bank Bank Central bank Commercial bank Development bank Short Notes to Remember (SNR 4.3) According to Bank and Financial Institutions Act 2063, bank and financial institutions have been categorized by Nepal Rastra Bank as follows: Class A Financial institution (Commercial banks) Paid up capital Rs 2 billion Class B Financial institution (Development banks) Paid up capital Rs 640 million Class C Financial institution (Finance companies) Paid up capitalRs 200 million Class D Financial institutions (Financial cooprtatives) Paid up capital Rs 100 million 68 Office Management and Accountancy

Central bank In every country, in order to control the monetary system and banking structure as well as monitor the financial activities of all the financial institutions, a head bank is established which is known as central bank. central bank of all the countries is fulley owned by the government. It is the supreme bank of a nation, which holds the topmost position in the banking structure of the country. It exercises the special rights like issuing notes and coins, controlling foreign exchange, controlling credit and acting as the representative of the government. It gives permission to establish other banks and control their financial activities. It collects deposits from commercial banks and other banks and provides loan in financial crisis. The central bank also provides technical and financial support to other financial institutions whenever required. It collects all the revenues of the government and makes payment of expenditure on behalf of the government. Thus, the central bank is regarded as the apex financial institution in the country. It is also called bank of other banks. Finally, it acts as the lender of the last resort to other banking institutions. The central bank of Nepal is Nepal Rastra Bank which was established on 14th Baishakh 2013 B.S. under Nepal Rastra Bank Act 2012. The governer of Nepal Rastra Bank is appointed by the government of Nepal, Council of Ministers on the basis of recommendation of recomendation committee led by Finance Minister. Some important definitions of central bank are presented below: “Central bank may be defined as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of the public welfare.”Prof. R.P. Kent “The central bank is the organ of the government that under takes the major financial operations of the government and by its conduct of these operations and by other means it fences the behaviour of financial institutions so as to support the economic policy of the government.” R.S. Sayers “The central bank stands to the apex of the monetary and banking structure of its country is called a central bank.” Dr. D. Kock Short Notes to Remember (SNR4.4)  The head office of Nepal Rastra bank i.e. central office is located at Baluwatar, Kathmandu.  Central bank is fully owned, managed and controlled by the government.  It is established with the aim of rendering banking services to the government and public rather than earning profit.  The first central bank in the world is “Reek Bank of Sweden” which was established in 1656 A.D.  “Bank of England” is the central bank of England and “Reserve bank of India” is the central bank of India.  “The National Bank of Denmark” is the central bank of Denmark, “Federal Reserve Bank” is the central bank of USA and “Central Bank of China” is the central bank of China. Financial Institutions 69

Functions of central bank The central bank performs a number of functions M emory Tips as described below:  Issuing notes and coins a. Issuing notes and coins  Working as the agent bank of The central bank issues notes and coins as per government the necessity of the country. It is the major  Working as the banker of banks function of central bank. It has monopoly to  Controlling credit issue notes and coins. Under this this system,  Controlling foreign exchange the central bank should maintain at least 50%  Developing banking system  Clearing house function  Working as the lender of last resort  Other functions security of gold, silver and valuable coins and remaining 50% security of foreign currencies in world bank to issue notes in the country. In Nepal, Nepal Rastra Bank makes the arrangement of issuing notes and coins and brings into use. It started to issue notes since 2016 B.S. b. Working as the agent bank of government The central bank is the bank of government. It is owned, managed and controlled by the government. It functions as the representative of the government. Thus, it acts as a banker, adviser and agent of the government. It provides banking facilities to the governmental bodies i.e. ministries, departments and other offices. As a representative bank, it collects the governmental revenues and makes expenditures on behalf of the government. It maintains and operates the accounts of government offices for various programs and projects. It also provides loan to the government whenever required. It can purchase and sell government securities and foreign currencies and also handles the government bonds. c. Working as the banker of banks The central bank is the supreme bank of the country. It gives permission to establish other banks and financial institutions in the country. It controls, advises and assists other banks and financial institutions to create sound financial system in the country. It gives order to other banks for maintaining certain percentage of their deposits as cash reserve. It also provides loan to other banks in economic crisis as the lender of the last resort. All the banks should obey the instructions provided by the central bank for determining interest rate, accepting deposits and performing other banking activities. Thus, the central bank acts as a guardian bank of all banks and financial institutions established in the country. 70 Office Management and Accountancy

d. Controlling credit Credit control is one of the major functions of central bank. The commercial banks and other banks create credit by providing much more loan to the individuals and organizations. The central bank is the controller of credit created by other banks in the country. The overflow and underflow of loan both are harmful to the economy. Creation of credit is essential for expansion and growth of capital for various sectors. Too much creation of credit results into overflow of currency and thus invites inflation. Thus, the central bank controls credit according to the direction of the government by implementing various methods. It adopts the methods like change in proportion of cash reserve, fixation of credit quota, buying and selling securities through capital market, change in interest rate etc to control the credit. e. Controlling foreign exchange The central bank has sole right to regulate and control the foreign exchange. It formulates exchange policy and fixes the exchange rate of foreign currency. It also gives permission to other commercial banks to perform the function of exchanging foreign currency. It provides advice and suggestions to the government in implementing rules and regulations for controlling foreign exchange. The central bank handles foreign currencies to maintain stability in the value of domestic currency. Controlling over foreign exchange helps to promote foreign trade and attract the foreign investors in the country. f. Developing banking system The central bank is the guardian bank of other banks. It plays an important role to raise the living standard of people through economic development. It gives permission to establish other banks in the country and encourages them to open their branches in rural area for providing banking facilities to the poor people. It encourages the public to make link with bank and take advantage of taking interest free loan for conducting various income generating programs. It provides some incentives to the commercial bank and development bank. Thus, the central bank gives emphasis for the overall development of banking system in the country. g. Clearing house function The central bank acts as a clearing house for transfer and settlement of mutual claims of other banks and financial institutions. In the banking system, every commercial bank should maintain cash reserve at certain rate in the central bank. It facilitates to clear inter-bank transactions. It transfers funds from one bank to Financial Institutions 71

another to facilitate the clearance of cheque and other outstanding bills. For this purpose, central bank adjusts the accounts of commercial banks by passing debit and credit entries in their respective accounts. h. Working as the lender of last resort The central bank acts as the lender of last resort to other banks. It provides loan to other banks in economic crisis by charging interest. It provides financial assistance to other banks to fulfil their financial demand in emergency period. As the depositors demand their deposits at any time, the bank may not be able to pay their amount due to lack of liquidity. The other banks ask the central bank for loan and meet their responsibility. Thus, the central bank always works as the lender to all other banks and creates economic stability in the country. i. Other functions Besides the functions mentioned above, central bank performs other various functions. Some of them are given below:  Mobilizing capital and managing debt  Protecting cash fund  Transferring money  Issuing letter of credit  Purchasing and selling gold, silver and other securities  Dealing with foreign banks  Conducting economic survey, research and training programme  Formulating fiscal and monetary policy etc. Commercial bank Generally, a bank refers to commercial bank. Commercial bank is a financial institution which is established to promote the trading, commercial and industrial sectors of the country. It performs the commercial functions such as accepting deposits, granting loan and other agency functions. Commercial bank accepts the deposit from public under various accounts and grants loan under short term, mid term and long-term basis. It avails loan to the individuals, traders, and industrialists against the collateral security. The commercial bank is fully profit oriented banking institution. Such bank provides modern facilities to its customers and earns profit. Commercial bank allows its accountholders to withdraw the amount through cheque against the deposits. It also performs a number of agency functions by charging commission from its client. Thus, a commercial bank assists the trade, commerce and industry and emphasizes 72 Office Management and Accountancy

for economic development of a nation. In the banking history of Nepal, Nepal Bank Ltd. is the first commercial bank which was established in 1994 B.S. Another commercial bank named “Rastriya Banijya Bank” was established in 2022 B.S. After the restoration of democracy in Nepal, the government has adopted the economic liberalisation policy. As a result, a number of commercial banks are established and operating in Nepal. Following are the definitions of commercial bank: “Commercial banks are those banks which are established under this act to perform commercial functions except those which are established for specific purpose like development banks, cooperatives etc.” Commercial bank act 2031 “A bank is an establishment which makes to individuals such advances of money as may be required and safety makes and to which individuals entrust money when not required by them for use.” Prof Kinley Commercial bank is a profit oriented financial institution of the country established to promote the trading, commercial and industrial sector by performing various commercial functions like accepting deposits, granting loans and dealing with foreign currencies. Functions of commercial bank The major functions of commercial bank are described below: a. Accepting deposits M T The major function of commercial bank is to  emory ips accept deposit from the general people and organizations. It accepts an idle and scattered  Accepting deposits saving of the public under different accounts. It  Granting loan offers deposit on fixed deposit account, saving  Transferring money account and current account having distinct  Creating credit  Exchanging foreign currency  Performing agency functions features. Under fixed deposit account, the  Issuing letter of credit account holder cannot withdraw the deposited  Collecting and issuing credit amount before expiry of the specified time. instruments Under saving account, depositors can deposit  Performing other functions their amount frequently but with limited withdrawal facility. Under current account, the depositor can deposit and withdraw money at any time as per the requirement. But, the depositor must maintain the minimum balance at bank. b. Granting loan Another major function of commercial bank is to grant loans to the various users. The users of loan may be traders, businessmen, industrialists and others. It provides Financial Institutions 73

loan for specific purpose and specific time period. It gives loan for short term, mid- term and long term period. The commercial bank grants loans to the borrower against the collateral security of valuable properties. The borrower may show gold, silver, precious stones, land and building, warehouse, shares and debentures etc. as collateral security. Commercial bank also provides overdraft facility to its current accountholder in case of having insufficient balance in their accounts. c. Transferring money The commercial bank also performs the function of transferring money from one place to another. This function is also called remittance of money in and outside the country. It issues different means of payment like bank draft, mail transfer, telegraphic transfer, letter of credit, credit card etc. for fast, safe and reliable remittance of money. It takes some commission or charges from its clients for such transfer services. d. Creating credit Credit creation is one of the important functions of commercial bank. It creates credit by granting much loan at the time of economic depression than the deposits it has collected in a given period of time. It helps to fulfil the need of capital in different sectors. e. Exchanging foreign currency The commercial bank also deals in foreign exchange by taking permission from central bank. It exchanges foreign currencies to fulfil the requirement of foreign traders which helps to promote the foreign trade. f. Performing agency functions The commercial bank acts as an agent for its customers. It performs a number of agency functions on behalf of its clients. It collects income from different sources and makes payment through different means of payment on behalf of customers. It purchases and sells the securities on the request of clients. It also collects and accepts the credit instruments and provides ATM facility to its clients. Thus, it receives dividend, interest and similarly pays insurance premium, rent, income tax etc on behalf of its customers. The commercial bank takes some charges for doing all these agency functions. g. Issuing letter of credit A letter of credit is the act of giving guarantee to the exporter on behalf of the local trader or importer to pay the value of goods imported. The commercial bank helps the importer to import goods from foreign countries by issuing letter of credit. It supports to promote the foreign trade and earn foreign currency. h. Collecting and issuing credit instruments Credit instruments refer to the means of payment which facilitates the customers to make payments and settle accounts. The commercial bank accepts the credit 74 Office Management and Accountancy

instruments such as cheque, bank draft and bill of exchange of its customers. Similarly, it also issues the credit instruments such as letter of credit, traveller’s cheque, bank draft, ATM card, demand draft etc for the purpose of easy and safe payment. i. Performing other functions Besides the above mentioned functions, the commercial bank performs other miscellaneous functions. It provides locker facility to the customers for safeguarding the valuable goods or properties. It collects and provides financial information. It also Issues gift cheque and vouchers. It also helps on issue of shares and debenture for newly established companies. Short Notes to Remember (SNR4.5)  The account which is maintained to accept the deposit for a fixed period of time by providing higher rate of interest is known as fixed deposit account.  The account which is maintained to give facility of both the regular saving and withdrawal of amount to a certain limit is called saving account.  The maximum limit of amount that can be withdrawn from saving account depends on the volume of amount, rules of bank and other conditions.  The account which has no limitation for withdrawal and deposit of money is called current account.  Generally, no interest is allowed in current account. Differences between central bank and commercial bank Following are the major differences between central bank and commercial bank: Basis of difference Central bank Commercial bank 1.  Incorporation It is established under It is established under act central bank act. commercial bank act. 2.   Ownership Its ownership and Its ownership and management andmanagement management belongs to the belongs either to the government government. or to public. 3. Objective Its main objective is to Its main objective is to earn 4. Position render services to the profit by providing qualitative government and public. services to the public. It holds the supreme It holds the middle position position in the financial in the financial sector of the sector of the country. country. Financial Institutions 75

5. Creation and It is the controller of credit It is the creator of credit among control of created by commercial the individuals and institutions. credit banks. 6. Acceptance of It does not collect the It accepts the deposit directly deposit deposit directly from public from public and institutions and institutions. under different accounts. 7. Issue of notes It has sole authority to issue It does not have right to issue notes and coins. notes but circulates the notes issued by central bank. 8. Relationship It is the banker of It is the banker of public and 9. Number government and other institutions. banks. It may be established in many It is single in a country. number in a country. Development bank The banking institution which is established to develop the basic infrastructure of the country by providing technical and financial assistance is known as development bank. Development bank provides mid-term and long-term loan to the different sectors such as trade, industry, transport, communication, hydro-electricity, agriculture etc. The main objective of such bank is to develop the specific sector of the country by providing long term capital. Besides, technical and financial assistance, development bank also provides administrative and managerial assistance. In Nepal, development banks are established under Bank and Financial Institutions Act 2063. Before enactment of this act, Nepal Industrial Development Corporation (NIDC), Agriculture Development Bank (ADB) and Rural Development Banks were established according to the legal framework of the country. Development bank is a financial institution established to develop the basic infrastructure in the country by providing financial, technical and administrative assistance to the concerned sector. Short Notes to Remember (SNR 4.6) The first development bank of the world is Societe Generale De Beljique which was established in 1822 AD. Functions of development bank The development bank performs a number of functions for the economic development of the country. Such functions can be classified into developmental functions and banking functions. These both types of function are described below: 76 Office Management and Accountancy

1. Developmental functions Following are the main developmental functions of development bank: a. Identification and selection of priority sector The development bank identifies the priority sectors of the country for development. It considers the various factors such as availability of natural resources, geographical condition, transportation, availability of raw materials, labour etc for selection of developmental needs. A paper factory may be a developmental need of mountain region whereas sugar industry may be a developmental need of terai region. Thus, before providing financial and technical assistance, the development bank identifies and selects the priority sectors which need to be developed. b. Research of technology for new industries M emory Tips After identification and selection of Developmental functions c. priority sectors for development, the  Identification and selection of priority development bank performs study and research on technology for new sector industries. The same kind of technology  Research of technology for new is not suitable for all types of industry. The different industries require different industries technologies. Thus, the development  Help in establishment and promotion of bank provides technical advice to the newly established industries according to industries their nature.  Analysis of market and product  Support in planning and Help in establishment and promotion of industries implementation  Creating favourable environment for investment Banking functions  Accepting deposits  Granting loan  Performing agency function The development bank helps for the establishment of new industries. It conducts the survey for suitable location, analyses the market and provides capital required for the establishment of industries. After the establishment of such industries , development bank provides financial and administrative assistance frequently for the promotion of such industries. d. Analysis of market and product The development bank analyses the market and goods produced by agricultural and industrial units. It evaluates the possible market in the agriculture and industrial sector before launching any product. In order to establish and promote different sectors, the development bank performs study on availability of raw materials, supply of labour, managerial aspect, market condition, product demand etc and makes conclusion for public knowledge. Financial Institutions 77

e. Support in planning and implementation The development bank assists for the establishment of industrial units and facilitates for their promotion and development. It directly or indirectly involves in formulation of plan and its implementation towards industrial activities. It formulates different plans relating to the management of raw materials and capital items such as plant and machinery, land and building, furniture, vehicles etc. It ensures the regular flow of production. It also formulates the plan for effective and efficient utilization of various resources to ensure the higher productivity at minimum cost. f. Creating favourable environment for investment The development bank encourages the domestic and foreign investors for investment in the country. It assures them regarding the security of their investment. Thus, the development bank encourages and attracts the domestic and foreign investors to invest in the development oriented industrial enterprises. 2. Banking functions Following are the major banking functions of development bank: a. Accepting deposits The development bank accepts the deposits from public under current, saving and fixed deposit account. It provides certain interest on the deposit according to the types of account. It also provides withdrawal facility to its depositors from their accounts. The procedures of operating the accounts of development bank are similar to the procedures of the commercial bank. b. Granting loan According to the type and nature of development bank, it grants loan to the agriculture and industrial sectors. The development bank provides short term, mid-term and long term loans against the collateral security of assets or on the guarantee of group. It grants loan for purchase of machinery, land etc. for establishment and promotion of industries. It also grants loan for various agricultural and industrial purposes which ensures the sustainable economic development in the country. c) Performing agency function The development bank also acts as an agent for its customers. It performs a number of agency functions on behalf of its clients. It receives dividend and interest on investment etc. on behalf of customers and makes payment under various heads. It also purchases and sells the securities like shares and debentures on behalf of its customers. 78 Office Management and Accountancy

Cheque When a person or institution opens an account in any bank or financial institution, it provides a document to withdraw the deposited amount which is known as cheque. In simple words, a cheque is a written document provided by the banker to its account holder to give facility of withdrawing money from his/her account. It is a written instruction made by the depositor to the particular bank having deposit in it. It is a printed form issued by the bank to the account holders so that they can demand to pay a certain sum of money stated in it. After opening an account by fulfiling certain procedures, he/she is provided a cheque book consisting many pages. The cheque book is provided by the bank only to the current and saving account holder. It is used to make the payment of large sum of money to the creditor, exporter or any other parties. A cheque can be drawn either in the name of drawer/depositor or in the name of other parties. It has been a popular as well as safe means of payment in the modern business world. cheque is an unconditional order drawn upon the specified banker signed by the account holder to pay on demand a certain sum of money to the person mentioned in it or the bearer. Parties involved in a cheque Following are the parties involved in a cheque: a. Drawer M emory Tips The person or party who draws, writes, or issues the cheque upon the specified banker is  Drawer known as drawer. The drawer is the depositor  Drawee or account holder who issues the cheque giving  Payee instruction to the bank for payment of money to the certain person or his order or the bearer. Actually, the drawer is the account holder and maker of the cheque. For example, if Miss Reshma has opened account in Himalayan Bank and she issues the cheque to make the payment to her friend Sushma, Miss Reshma becomes the drawer of the cheque. b. Drawee The institution or party who receives the order from the drawer to pay the amount of cheque is known as drawee. In other words, drawee is the party upon whom the cheque is drawn or issued. Generally, the bank itself becomes drawee in all types of cheque. In above example, Himalayan Bank is drawee. The drawee is liable to make the payment of cheque to the certain person or his order or the bearer. Financial Institutions 79

c. Payee The person or party who receives the payment by presenting the cheque into the bank is known as payee. The payee may be the ordered person or the bearer of the cheque. In above example, Miss Sushma becomes a payee. If the cheque is issued by the drawer in his/her own name, the drawer and payee becomes same. Types of cheque A common cheque may be a bearer, order or crossed. Thus, on the basis of payment procedure and safety, cheque can be classified into following three types: a. Bearer cheque Bearer means the person who carries the cheque and presents into the bank. Thus, the cheque which can be presented into the bank to receive payment by any person irrespective of the name mentioned in it is known as bearer cheque. In other M emory Tips words, the cheque which is issued by making the provision for receipt of amount by any  Bearer cheque person who presents it into the bank is called  Order cheque bearer cheque. In this type of cheque, the  Crossed cheque bank should encash the amount of cheque to the bearer immediately whenever it is presented at the counter. The banker does not require to make enquiry to ensure whether the bearer is right payee or not. Though it is easy to get payment, it is not safe type of cheque because any person who finds it and presents into the bank can get the payment. The bank cannot be made liable in case of receiving payment by a wrong person. It is also known as open cheque and does not require endorsement for its transfer. Following is the specimen of bearer cheque: Shushila Kumari Khadka 28112074 Rupees one lakh only. Rs. 1,00,000/- b. Order cheque The cheque in which the payment can be made only to the person or party whose name is mentioned in it is known as order cheque. In this type of cheque, the bank makes payment only after making proper enquiry to the person to know whether he is right payee or not. In fact, an order cheque is issued to the bank to pay the 80 Office Management and Accountancy

specified sum only to the person mentioned therein. The bank can be made liable if the payment is received by the wrong person. In order to avoid confusion, the drawee normally verifies the signature of the payee. An order cheque can be transferred to the third party after proper endorsement. This cheque is comparatively safer than the bearer one for making payment. Following is the specimen of order cheque: Shushila Kumari Khadka 28112074 Rupees one lakh only. Rs. 1,00,000/- c. Crossed cheque The cheque in which two diagonal parallel lines are drawn on top left corner across its face is called crossed cheque. Crossing on cheque may be made with or without having special instruction like ...... & Company, Not Negotiable, A/C payee only etc. In this type of cheque, the bank does not make the payment directly to the payee. The amount of such cheque should be deposited first in the account of payee and again the payee should issue his/her own cheque to withdraw money from the bank. The crossed cheque avoids the disadvantage of bearer and order cheque. It is a safe and useful means for transferring money from one place to another. Crossed cheque may of following two types: i. General crossed cheque The crossed cheque in which two parallel lines are drawn without specifying the name of collecting bank is called general crossing of cheque. Such type of crossed cheque can be deposited in any bank where there is the account of payee. The effect of general crossing is that any bank can collect the amount of cheque. Shushila Kumari Khadka 28112074 Rupees one lakh only. Rs. 1,00,000/- Financial Institutions 81

ii. Special crossed cheque The cheque in which two parallel lines are drawn with special instruction on its face is called special crossing of cheque. Under special crossing of cheque, different instructions can be given such as “Not Negotiable” or “Not over Rs. ...........” or “A/C Payee only” or “.................Bank or Branch only” etc. It is the safe way of payment as the amount of cheque can be deposited only in the bank account of the payee which is mentioned in the parallel lines. In other words, if the name of the particular bank or branch is mentioned inside the parallel lines, only the bank mentioned in the crossing can collect the amount of cheque. The duty of the drawee bank is to pay the amount of cheque only to the bank mentioned in the crossing. A/C Payee Shushila Kumari Khadka 28112074 Rupees one lakh only. Rs. 1,00,000/- Rules for issuing a cheque When a cheque is presented at the bank counter, the concerned authority must pay the amount of cheque as soon as possible without any condition. If the drawer does not make the cheque properly, the bank rejects for the payment. Thus, the following rules should be followed by the drawer for proper encashment of cheque:  The cheque should be written in official language.  The date of issuing cheque should not be expired or future dated.  The amount of cheque mentioned in words and figures must be matched.  The signature of account holder or drawer should be matched with the specimen signature provided to the bank.  The name of the payee should be mentioned clearly.  There should be sufficient balance at bank in the name of account holder.  The account number should be mentioned correctly.  There should not be crossing, rubbing or overwriting on the cheque. If any, the drawer should make the signature in such place.  The cheque should not be torn, wetted or spotted.  The endorsement of order cheque and crossed cheque should be done properly. Short Notes to Remember (SNR 4.7)  The points to be considered for issue of cheque are official language, date, amount of cheque, signature, name of the payee, balance at bank, account number, crossing and rubbing, condition of the cheque and endorsement. 82 Office Management and Accountancy

Dishonour of cheque Dishonour of cheque means the refusal made by the bank to make the payment of cheque to the payee stating any cause. A cheque is refused or dishonoured by the bank in case of following conditions or causes:  If the date of issue is not mentioned or mentioned wrongly.  If the date is expired or pre-date is mentioned.  If the drawer has not signed in the cheque.  If the account number is not written or written wrongly.  If the amount written in words and figures are different.  If the signature of drawer does not match with the specimen signature.  If there is no sufficient balance in the account to make the payment.  If the cheque is crossed, rubbed, overwritten or made unclear due to any reason.  If the name of payee is not written in the cheque or written unclearly.  If the bank has got order from the drawer to stop the payment of cheque.  If the payee asks the amount directly from the crossed cheque.  If the drawee has closed his account before presenting the cheque into bank.  If the bank has received information about the death or insolvency or lunacy of the drawer or accountholder. Computerised system of bank for deposit and encashment of cheque Nowadays, most of the banking transactions are performed through computerised system. A bank may establish different branches over the country and operate the banking activities with the help of computer networking system. For this, all the banking information are collected in a small card having code number and transmitted in all the computers installed at branches. A customer can deposit and withdraw the amount from any branch of the bank operated in different parts of the country with the help of this code number. For example, a customer of Rastriya Banijya Bank, Pokhara can withdraw money from Rastriya Banijya Bank of Kathmandu under this networking system. Similarly, the customer of Himalayan Bank Limited, Bhairahawa can deposit money at its Kathmandu branch or any other branches. Such facility is known as Any Branch Banking Service (ABBS). In Nepal, almost all the joint venture banks have installed computer networking system to provide instant and safe banking services to customers. Banks take nominal charge for providing such services. Due to this modern system, joint venture banks have gained more popularity among the customers. Financial Institutions 83

Short Notes to Remember (SNR 4.9)  Joint venture banks are those banks which are established with the joint investment of domestic and foreign investors.  Endorsement of cheque is the process of transferring the ownership of a cheque from one person to another by writing the name and signing at the back of the cheque.  The person who endorses the cheque is called endorser and the person to whom the cheque is endorsed is called endorsee.  A bearer cheque does not require endorsement, an order cheque can be endorsed properly and account payee cheque cannot be endorsed to others.  Nowadays, a bank provides card to its customer as a means of payment which is known as an ATM card. The full form of ATM is Automated Teller Machine. INSURANCE Concept and definition Human beings have to face various kinds of risks and uncertainties in life. The risk refers to the state of uncertainty of loss of life or damage and loss of other physical properties causing huge financial loss. It may happen due to unexpected and uncertain events such as setting of fire, theft, accident, earthquake, robbery etc. All these unexpected events can not be controlled and eliminated. However, a person can reduce such kind of financial loss with the help of a kind of cooperative scheme, which is termed as insurance. It is the way of reducing the financial losses arising from a number of unexpected risks and uncertainties. It is the way that provides security to the human and his/ her property against the risks. It only provides the financial compensation against the death of a person or loss and damage of the physical properties. Thus, insurance is a cooperative means of transferring risk to the insurer in consideration of payment of certain periodical amount called premium. Insurance can be studied from two view points i.e. functional view point and legal view point. According to the functional view point, insurance is a cooperative device to spread the risks over a number of individuals who are exposed to it and who agree to insure themselves against that risk. On the other hand, according to the legal view point, insurance is a contract between two parties, in which one party agrees to provide the financial compensation against the loss of human life or loss or damage of physical properties and another party promises to pay the certain amount as premium in order to get the financial protection in case such events take place. In conclusion, insurance is cooperative scheme or contract which transfers the risks from the individuals to the insurer and ensures the financial protection to the insured in case of death of a person or loss and damage of the properties due to uncertain events. 84 Office Management and Accountancy

Some of the popular definitions of insurance are given below: “Insurance is a contract by which are party for a compensation called the premium assumes particular risks of the other party and promises to pay to him or nominee a certain or ascertainable sum of money on a specified contingency.” Edwin W. Peterson “Insurance is a cooperative device to spend loss caused by a particular risk over a number of persons who are exposed to it and agree to insure themselves against that risk.” Prof. R.S. Sharma “Insurance business means life insurance business and non-life insurance business which also refers to the reinsurance.” Insurance Act 2049 Insurance is a contract between two parties in which insurer promises to pay financial compensation to the insured in case of loss of human life or physical properties and insured agrees to pay the premium to the insurer. Short Notes to Remember (SNR 4.10)  Insurance is a cooperative scheme of distributing the risks to a large number of persons who are exposed to it and feel themselves secured against such risk by paying certain amount as premium.  Insurance is a method of compensating financial loss occurred due to a particular risk.  There are two parties involved in the insurance i.e. insurer and insured.  The party which takes the responsibility or promises to pay financial compensation against the loss is known as insurer and the party which agrees to shift the loss to the company by paying certain amount is called insured.  The periodical payment of money made by the insured to the insurer is known as insurance premium. It can be paid weekly, monthly, quarterly, semiannually or annually. Functions of insurance Insurance performs a number of functions which can be described as follows: Primary functions The primary functions of insurance relate to the act of evaluating the risk, minimizing financial risk and using remedial measures to protect from possible losses. Some of the primary functions of insurance are described as follows: a. Providing certainty There are a large number of risks and uncertainties. The date of occuring risk and its exact amount of loss connot be predicted. Insurance provides certainty against such uncertainties that may cause huge loss of the property and even life. It promises to compensate the loss of insured property against the amount paid in the form of premium. Thus, to provide certainty against risk and uncertainty is one of the primary functions of insurance. b. Distributing risk Insurance is a cooperative device of distributing risk among a large number of persons who are exposed to it. It works under the cooperative concept and collects the small amount of premium for distribution of such risk. Financial Institutions 85

c. Providing protection M emory Tips Individuals and their properties Primary functions are surrounded by greater risk and  Providing certainty uncertainties. They may be suffered from losses  Distributing risk due to such risk and uncertainties. Insurance  Providing protection cannot eliminate the risk but can reduce by Secondary functions way of cooperative device. It only provides  Formation of capital protection against such risk and uncertainties.  Promoting trade It promises to pay a certain amount in case of  Maintaining financial stability happening of event i.e. death of a person or loss  Increasing business efficiency of property. Thus, it takes the responsibility  Creating awareness to prevent losses of providing protection against the death of  Providing employment opportunities insured or loss of properties. Secondary functions Insurance performs the following secondary functions: a. Formation of capital Insurance company collects the huge amount as premium from the large number of insured persons and forms huge capital. The whole amount collected as premium may not be compensated at a time. The remaining amount in fund can be mobilized in the productive and profitable sectors. Thus, the insurance company invests the unused capital as short-term, mid-term and long-term investment in various industrial and commercial sectors. As a result, it supports for the economic development of the country. b. Promoting trade Insurance plays an important role in promotion of internal and external trade. While carrying goods from one place to another, there are a large number of risks like accident, theft, robbery etc. If the trader has to bear huge loss due to such unexpected events, he/she will be discouraged to carry out the trading activities. The insurance helps to minimize all risks of financial losses assuring the trader to provide financial compensation in consideration of insurance premium. Thus, the insurance facilitates the trader to perform the trading activities conveniently. c. Maintaining financial stability Insurance helps to create favourable environment in financial and business world ensuring to compensate the financial losses that may arise due to unexpected events. It avails capital, provides assurance and financial protection to the entrepreneurs. It also provides financial compensation to the insured person or enterprise in case of financial loss due to any unexpected event. All these things help to maintain financial stability in the country. 86 Office Management and Accountancy

d. Increasing business efficiency Insurance provides security against the financial losses due to risks and uncertainties. The people who have insured their life and properties feel secured, active and become free from mental tension. The feeling of security and activeness makes the people more devoted towards their job, profession and business. As a result, they can freely work and get an achievement from the job. Thus, the insurance increases the business efficiency and makes them more enthusiastic. e. Creating awareness to prevent losses The insurance cannot avoid whole losses. But, it helps to minimize such losses. It makes the people involved in various research and investigation program. It helps to forecast the future and find out the scientific method for minimizing the risk. Thus, due to insurance, people learn to be secured and protect their physical properties. f. Providing employment opportunities Insurance is a kind of business. It requires the different types of human resources to conduct business activities. It provides various employment opportunities to the educated people. Furthermore, it provides a certain amount as financial compensation in case of the event. It helps to perform some productive works in the society. Thus, the insurance helps to create employment opportunities directly and indirectly. Types of insurance Insurance can be done for human life and their physical properties. Thus, it can be classified as follows: Figure: 4.2 Types of insurance Insurance Life insurance Non-life insurance Life insurance People may die due to various reasons such as illness, accident, old age or others. Sometimes, they may suffer from long illness or old age and may not be able to afford medical treatment. On the other hand, due to early death of a parent or earner, his/ her dependent will be badly affected. They cannot survive conveniently in the society. Thus, in order to get the financial security on such situation, insurance can be done for Financial Institutions 87

his/her life which is known as life insurance. It is one of the popular types of insurance in which the insurer promises to compensate a certain sum to the insured or his/ her dependant in case of untimely death, illness or old age etc. Under life insurance, the insurance company agrees to compensate a fixed amount to the insured or his/ her nominee in case of the event i.e. early death or expiry of fixed period. It can be considered as contingent contract because the loss of life cannot be compensated and only a specified amount is paid if the policy holder dies or policy expires whichever is earlier. Life insurance involves both elements i.e. investment and protection. It is considered as investment because insured gets the policy amount with bonus on the expiry of policy period. It is considered as protection because the nominee will get the financial compensation in case of early death of the insured person. It is estimated that life insurance comprises eight percent of the total insurance business in the world. It was commenced from England and other European countries in the sixteenth century. The life insurance in modern kind was developed in the eighteenth century. Following are the definitions of life insurance: ‘Life insurance business means the business relating to a contract in which a particular sum of amount is paid in instalment on the basis of age for insuring of the person with the condition that his nominee or dependent will receive a particular sum of amount at death or receives himself after expiry of fixed period.” Insurance Act 2049 “Life insurance contract may be defined as the contract where by the insurer in consideration of a premium under takes to pay a certain sum of money either on the death of the insured or on the expiry of the fixed period.” M.N. Mishra Life insurance is a contract done between insurer and insured to provide compensation to the insured in case of the event within specified period in return of premium paid by him or her. Types of life insurance On the basis of period and terms and condition, life insurance can be classified as follows: a. Endowment life insurance Endowment life insurance is a type of insurance policy which is issued for a fixed period of time. It is generally issued for 15 years, 20 years, 25 years etc. Under this policy, the insured or policy holder has to pay the insurance premium till the endowment period only. Then, the sum assured is payable to the policy holder on the expiry of period along with bonus. But in case of death of the insured or policy holder before expiry of the maturity period, the sum assured is payable to 88 Office Management and Accountancy

his/her nominee or dependent. Endowment life insurance is done with a view to provide financial security to the family as well as to accumulate funds in old age or disability. b. Anticipated endowment life insurance Anticipated endowment life insurance is a policy which is issued for a fixed period M T  emory ips providing a withdrawal facility of certain  Endowment life insurance amount at certain intervals during endowment  Anticipated endowment life insurance  Whole life insurance period. Under this policy, a part of sum assured  Term life insurance  Endowment life insurance with double is paid at intervals during endowment period accident benefit and balance of the assured amount is paid at  Children’s education and marriage the maturity. If the policy holder dies before  endowment life insurance maturity of policy period, the whole assured amount is payable to the nominee with bonus at once. This policy is also issued for certain duration like in endowment life insurance. For payment of partial amount at certain intervals, it makes the certain provision. For example, if policy is taken for 15 years, 25% is paid after 5 years, next 25% is paid after 10 years and the balance is paid with bonus after 15 years or expiry of the policy period. c. Whole life insurance Whole life insurance is a type of policy in which the policy holder has to pay the insurance premium regularly for the agreed period during the life time. Under this policy, the insurer pays the sum assured only after the death of the insured or policyholder. The policyholder cannot get the sum assured during his/her survival. After the death of the policyholder the nominee or dependent does not have to pay the further premium. The main purpose of this type of life insurance is to give financial protection to the dependent financially after the death of policy holder. d. Term life insurance Term life insurance is a policy issued for the security of loan amount granted by the creditor. It is issued for short term period. Under this policy, the sum assured is payable on the death of policyholder before repayment of borrowed amount. If the policyholder or borrower survives till the maturity of the policy period, nothing is payable. He himself is liable to repay the loan amount borrowed from the creditor. This policy helps to recover the amount of debt from the insurance company in case of death of the borrower or debtor. Thus, it is generally purchased by the debtor to give protection to the amount of creditor. It provides complete financial Financial Institutions 89

security to the creditor against the risk of recovery of amount due to sudden death of the borrower or debtor. e. Endowment life insurance with double accident benefit This insurance policy is similar to an endowment life insurance. It is different in the case that some additional premium is received by the insurer from the insured to provide accident insurance facility. Under this policy, if the insured dies before maturity of the period due to accident, his/her nominee will get the double of assured amount. However in case of survival of the insured till the policy period, the insured will be paid only the sum assured amount with the bonus. It is beneficial when one desires to transfer the risk that may happen due to accident. f. Children’s education and marriage endowment life insurance Under this type of life insurance, the concerned parents have to take a policy for a certain period like in endowment life insurance. The parents should pay the amount of premium regularly for the fixed period of time. A child becomes the nominee or representative of the policyholder. After the maturity of the policy, the insurer pays the sum assured to the policyholder that facilitates to manage for higher education and perform marriage function of the nominee. In case of death of the policyholder before maturity of the policy period, the sum assured will be paid to the nominee. Non-life insurance Non-life insurance refers to the insurance done for others than human life. It is the insurance of goods and physical properties. It is done for short term period generally for one year and can be renewed every year. Non-life insurance policy is taken to compensate the loss of goods and other properties that may occur due to specified cause mentioned in the contract. Under this policy, the insured has to pay the amount of premium annually in advance. In conclusion, non-life insurance policy is taken as a means of providing financial protection for furniture, vehicle, building, machinery and equipment and merchandise items against the risk of fire, theft, robbery, accident, earthquake etc. Types of non-life insurance Non-life insurance can be classified as follows: a. Fire insurance The physical properties and merchandise items of an individual and institutions are in greater risk of fire. The setting of fire may destroy or damage the properties that causes huge financial loss to the individual and businessman. Sometimes, goods in the warehouse, plant and machinery in the factory or other properties may be destroyed by the sudden setting of fire. Thus, in order to get the financial compensation over such loss, insurance can be done by the owner of goods and properties which is known as fire insurance. 90 Office Management and Accountancy

Thus, fire insurance is a measure that provides security against the risk of fire. It covers the risk of M emory Tips fire only. It is a contract of indemnity under which the insured cannot claim anything more than the  Fire insurance value of goods lost by fire or the amount insured  Marine insurance whichever is less. It is also a cooperative effort  Miscellaneous insurance to reduce the financial loss caused by fire among i. Motor insurance insured persons. The necessity of fire insurance ii. Employer’s liability insurance iii. Fidelity guarantee insurance iv. Aviation insurance was felt for the first time in England in 1666 AD when one third of the London was destroyed by fire. Generally, the residential building, store and warehouses, plant and machineries, business premises, cinema halls etc can be insured against the risk of fire. Fire insurance is the contract done between the insurer and insured to compensate the insured against the loss or damage caused to a specified property in consideration of premium paid by him/her in annual basis. Short Notes to Remember (SNR 4.11)  In order to get financial compensation, the insured must have to prove that the loss is really occured due to fire. It is accepted mainly in two conditions i.e. there must be actual fire and fire must be accidental. b. Marine insurance In course of sea journey, there may be a number of marine risks like collision of ship with rock or another ship, attack from enemies, setting of fire, hijacking, standing of the ship, explosion, capture by pirates, jettison, barratry etc. Thus, in order to get the financial compensation over the loss caused due to such marine risks, insurance can be done which is called marine insurance. It provides the financial protection against such primary risks. It covers the risks of ship, cargo and passengers as per the policy included. Under this insurance, the insured has to pay a certain amount of premium according to the volume of risk to be covered by the insurance company. The insurance company in return agrees to pay the sum to insured in case of loss caused due to marine risks. Marine insurance is the contract done between the insurer and insured to indemnify the insured against the loss or damage due to sea perils against consideration of a certain amount of premium paid him/her. c. Miscellaneous insurance Following are some common types of miscellaneous insurance: Financial Institutions 91

i. Motor insurance While using land transportation, the vehicle may be damaged due to accident or lost due to theft or other similar type of events. In such case, the financial compensation can be received from insurance company if that has been insured. Thus, the insurance done to get financial protection against the risk of damage to a motor car or vehicle due to accident, theft or other similar causes is known as motor insurance. It covers the risk of all types of vehicles, loaded goods and passenger within the fixed period. Motor insurance is compulsory in Nepal The insurance which compensates the financial loss of motor car or vehicles due to accident, theft and other similar causes is known as motor insurance. ii. Employer’s liability insurance A number of workers are engaged in the factory or in other institutions. There may be injury, accident, death or disability of any worker while remaining at work. It badly affects the survival of their family members or even for their own life. Thus, in order to get the compensation in case of accident, death or disability, insurance can be done which is known as employer’s liability insurance. Under this insurance policy, the employer or factory owner has to pay the insurance premium regularly to the insurance company to claim over such loss. Nowadays, many institutions insure their employees by taking the policy from insurance company. It helps to motivate the workers to increase the productivity of their institution. The insurance which is done by the employer to provide financial compensation to the employees in case of their injury, accident, disability or death at the time of working is known as employer’s liability insurance. iii. Fidelity guarantee insurance Sometimes in an organization, loss may occur due to mistake or dishonesty of the staff. Moreover, the staffs may commit frauds, embezzlement and theft in an institution. Thus, to compensate the loss caused to organization due to such bad intention or inefficiency of the staff, insurance can be done which is known as fidelity guarantee insurance. Thus, it is issued to cover the loss to the employer due to mistakes or dishonesty of employees knowingly or unknowingly. The insurance which compensates the financial loss of motor car or vehicles due to accident, theft and other similar causes is known as motor insurance. iv. Aviation insurance Air transportation is one of the popular and fastest means of transportation. It has a number of risks in its journey. Sometimes, while carrying the passenger from one place to another, accident may take place due to bad weather or some 92 Office Management and Accountancy

mechanical problem. If the accident occurs, its losses are unbearable. So to cover the risk relating to aircraft or aviation, insurance is done which is known as aviation insurance. It provides the financial security to the body of aircraft, cargo, passengers and third party. The insurance which covers the risk of aviation and provides financial compensation in case of loss of aircraft, cargo and death of passengers is known as aviation insurance. Differences between life insurance and non-life insurance Following are the differences between life insurance and non-life insurance: Basis of difference Life insurance Non-life insurance 1.   Meaning The insurance which is The insurance which is done for done for human life is goods or physical properties is known as life insurance. known as non-life insurance. 2.   Duration It is done for a longer It is done for a short period i.e. period of time i.e. 10, 15, generally one year and can be 20, 25, years and so on. renewed again. 3.   Payment of The insured can pay The insured has to pay the insurance the premium on certain premium once a year in advance premium periodical basis like basis. weekly, monthly, semi- annually or annually. 4.   Financial The insurer provides The insurer provides the compensation the certain sum to the compensation to the insured insured on expiry of only in case of loss of goods or 5.   Nature of policy or to the nominee properties within the stipulated insurance in case of early death of time. the insured. It is a kind of business expenses It is a kind of saving because compensation will not be scheme because the fixed provided in case does not happen amount will be refunded the event as mentioned in policy. to the insured or his nominee in both the situations i.e. early death or expiry of policy. Financial Institutions 93

Employee provident fund Employee provident fund is a non-banking financial institution which is established under Provident Fund Act 2019. it axxepts 10% amount deducted from the basic monthly salary of the employees working in the government offices, companies, corporations and other organized institutions. It collects compulsony deducted amount of permanent sfaffs of government offices, corporations, constitutional bodies etc. and voluntany deduction of private personnel. An equal amount is contributed by the government and deposited into one office which is called provident fund office. Employee provident fund office accumulates the huge amount as provident fund and utilizes for the welfare and economic benefits of the employees. It is one of the largest non-banking financial institutions working in the social security sector. Under the saving scheme of this institution, whole amount of deposits as provident fund will be refunded after their retirement with interest and bonus. The provident fund office invests and mobilises the funds into different productive and profitable sectors. It fulfils the requirement of funds for capital market. It was originally begun as Sainik Drabya Kosh (Army Provident Fund) in 1991 B.S. to provide financial benefit to the army people after their retirement. Again in 2001 B.S., Nijamati Karmachari Sanchaya Kosh Bibhag (Civil Servants Provident Fund Department) was established to serve the civil servants working in Kathmandu. In 2005 B.S., the scheme covered the entire civil servants of Nepal. In 2015 B.S. employee provident fund department was established under Ministry of Finance and it merged the Sainik Drabya Kosh and Nijamati Sanchaya Kosh both. It also covered the police personnel. In 2019 B.S., employee provident fund act was passed. Its head office is located at Pulchowk, Lalitpur. The present Karmachari Sanchaya Kosh was established as a perpetual, independent and autonomous organization under this act. As per the provision of rules under this act, all the government staffs and organized institution having more than ten employees can manage the fund and provide facilities to their employees. It is beneficial to the employees of the government and private sectors both. Employee provident fund is a non- banking financial institution established under provident fund act 2019 with the main aim of providing future financial security to the employees with the joint contribution of employer and employees. Functions of employee provident fund The main functions of employee provident fund as per the Provident Fund Act 2019 are as follows: 94 Office Management and Accountancy

 Collecting provident fund deducted from the employees’ monthly basic salary and equal amount contributed by their employers.  Providing regular interest on the fund of all provident funds account holders.  Providing employee welfare schemes to the civil and security employees.  Providing financial compensation to the employee against accident and in case of death paying amount to the legal heir or the nominee.  Providing various kinds of loans such as housing loan, educational loan and other specific loans to the accountholders.  Granting funeral allowance to the nominee or legal heir in case of death of employee while in service.  Refunding the deposited amount to the concerned employee with interest and bonus after their retirement.  Managing the funds and mobilizing it in different productive and profitable sectors.  Maintaining the upto date record of collection, mobilisation and refund of provident fund amount.  Informing the accountholders about the services and facilities provided by the provident fund office. Short Notes to Remember (SNR 4.12)  Employee provident fund deducts provident fund equal to 10% of the monthly basic salary of employees.  It provides interest on the fund of all the provident fund accountholders.  It provides certain percentage of the total deposit as an additional benefit to the retired civil servants as an incentive for their financial security.  It provides loan to the members upto 90% of the accumulated deposit.  It provides housing loans to the employees which is repayable within 20 years.  The main sectors of provident fund for investment are: a) Time deposit and cash certificate of other financial institutions. b) Providing loans to corporations and industrial enterprises against collateral. c) Purchase and sale of shares and debentures of different companies. d) Conducting different housing schemes. Citizen investment trust Citizen investment trust is a non-banking financial institution registered and operated under Citizen Investment Trust Act 2047. It was established on 4th Chaitra 2047 B.S (March 18, 1991 AD). Formally it operated its activities since 1st Magh 2048 B.S. (15th January 1992 AD). It is basically established to provide and expand investment opportunities to the general public and encourage them for saving. It accepts the amount deducted from monthly salary of employees working in government offices, Financial Institutions 95

corporation and other organizations. It is a voluntary deduction and can be collected at certain rate i.e. 5% or 10% or more than that as per the wish of the employee and organization. The amount collected by way of voluntary deduction is accumulated and invested in productive sectors. The employees saving under this scheme will be provided a sum of money after their retirement from the job or expiry of certain period. Employees are allowed to invest individually or institutionally as per the suitability. There will be a board of at least nine members to run and manage all the activities of this financial institution. It is commonly called Nagarik Lagani Kosh in Nepali. Citizen investment trust is a non-banking financial institution incorporated with the main objective of increasing investment opportunity to the people by encouraging for saving and bringing dynamism in the capital market. Functions of citizen investment trust The functions of citizen investment trust are broadly classified and mentioned into the following groups a. Mobilization of saving M emory Tips The citizen investment trust performs the  Mobilization of saving following functions related to the mobilization  Financial assistance and investment of saving:  Capital market service  Operating various units scheme and mutual fund scheme to both domestic and foreign investors.  Operating various kinds of retirement schemes like pension fund, gratuity, subsidy fund and insurance fund.  Operating investors account scheme. b. Financial assistance and investment The citizen investment trust performs the following functions relating to financial assistance and investment:  Investing the accumulated funds in share and debenture of organized institutions and governmental bond and securities.  Providing term loan and bridge financing to the organized institutions.  Providing credit facilities to the investors for purchase and sale of securities of different corporations.  Providing credit for purchase or construction of housing building. 96 Office Management and Accountancy

c. Capital market service Following are the functions of citizen investment trust relating to capital market service:  Managing for the issue and sale of different securities of corporations.  Providing service as a broker and market maker in stock exchange market.  Providing efficient counselling in market for capital structure, price determination, issue time and merge, amalgamation, purchase and privatization of organized institutions. Short Notes to Remember (SNR 4.13)  The shareholders of citizen investment trust are government of Nepal, Nepal Rastra Bank, Security Exchange Centre, other bank and financial institutions and Nepalese citizens.  Its head office is located at Kathmandu and other branches can be established in other geographical places. Financial co-operatives Financial co-operative is another type of non-banking financial institution. It is established with the investment of people having low level of income to fulfill their social, economic and cultural expectations. The co-operative institutions are voluntary associations of individuals having common interest and desires. The main objective of such institution is to encourage the poor people for regular saving and contribute for the economic development of the society. It accepts the small saving from their members and grants loan at reasonable rate of interest. The group of financially weaker will be highly benefitted from such institution. It is owned, managed and controlled by its members. It is run under the concept of self help and mutual cooperation. In Nepal, co-operative institutions are established under Co-operative Act 2048. The co-operative societies have gained much popularity in Nepal because other banks and financial institutions have no access in all the rural communities of the country. In order to organize all these activities, a national co- operative bank has also been established in the contribution of financial cooperatives. Financial co-operative is the voluntary association of economically poor people of the society established and run with a view to meet social, economic and cultural expectations of the members. Functions of financial co-operatives Financial cooperative performs a number of functions considering their principles and objectives. As per the provision of Cooperative Act 2048, it performs the following functions: Financial Institutions 97

 Making the poor people a member of cooperatives and encouraging for regular saving.  Collecting regular deposit from the members under different schemes.  Providing interest at certain rate on deposits of members.  Granting loan to the members for specific purposes at the cheaper rate of interest.  Extending mutual relationship among the members by organizing various programmes.  Conducting cooperative education programme to its members for educational awareness.  Managing the funds by investing in different income generating activities to improve the economic status of the members.  Maintaining books of account for collection of deposits and its mobilization among members.  Performing other various functions for the social welfare and benefits.  Performing banking functions by taking permission from Nepal Rastra Bank. Short Notes to Remember (SNR 4.14)  The concept of co-operative was started in the world with the establishment of a consumer co-operative called ''Rochdale Society of Equitable Pioneers'' on 24th October 1844 A.D. by the British Industrialist, Robert Owen.  Financial co-operative is also known as saving and credit co-operative. Key Terms Bank – financial institution established under the certain act to perform monetary and credit transactions. Barratry – wrongful or willful act of theft setting fire to the ship and Cheque fraudlent selling of the cargo by the captain or crew of the ship. Contingent – legal document prepared by the bank and issued by an account Contract holder to withdraw money from account. Debenture – dependent on something that may or may not happen. Financial – written agreement between two parties. Financial institutions – an authorized official document issued by the company to show Fire insurance the borrowing of money from a person. – related with monetary matter. – the institution which deals with financial activities i.e. accepting deposits and granting loan. – insurance which is done for getting compensation of financial loss arising due to uncertain events. 98 Office Management and Accountancy

Insurance – legal contract between the insurer and insured for the compensation of financial loss and happening of events. Insurance premium – an amount which is paid to the insurance company in Insurer consideration of transferring the financial risk. Jettison – a party which promises to pay the financial compensation in case of life and non-life insurance. Joint venture Life insurance – the voluntary act of throwing away the goods by the crew to Marine insurance protect the ship from sinking or other happening. Negotiable Remittance – a project or business activity that is conducted by two or more parties. – insurance related to life of human beings. Risk – insurance that covers the risk against the perils incurred in the sea. – transferable. Securities – act of sending money to somebody in order to pay or something that can be done through cheque or credit card. – probability of occurring unexpected events like death of person or loss of physical properties. – valuable items that one agrees to keep with somebody for receiving loan or document that proves the ownership of share or debenture. A. Very short answer questions 1. What is meant by financial institution? 2. Which is the first bank of Nepal and when was it established? 3. Write the name of central bank of Nepal. 4. Write the name of any two financial institutions. 5. Write any two major functions of central bank. 6. Which is the first central bank in the world and when was it established? 7. Which bank specially performs the function of accepting deposit and granting loan? 8. Name the types of account under which the commercial bank accepts the deposit of general people? 9. Under what basis does the central bank issue notes and coins? 10. Which bank is known as the lender of the last resort? 11. Which is the first development bank in the world? 12. Write the full form of NIDC. 13. When was Agriculture Development Bank established? 14. Mention the parties of a cheque. 15. What is a bearer cheque? 16. Define crossed cheque. 17. State any two non-banking financial institutions operating in Nepal. Financial Institutions 99

18. Write any two primary functions of insurance. 19. When and where was life insurance started first time in the world? 20. When was employee provident fund act enacted in Nepal? 21. Write the full establishment date of citizen investement trust. 22. What is the main difference between endowment life insurance and anticipated endowment life insurance? 23. Name any two types of non-life insurance. B. Short answer questions 1. Define bank and describe its importance in brief. 2. What is cheque? Explain the parties involved in a cheque. 3. Describe briefly the types of cheque. 4. What do you mean by crossing of cheque? Explain the types of crossed cheque. 5. Differentiate between central bank and commercial bank. 6. Mention the rules for encashment of cheque by the banker. 7. What is meant by dishonour of cheque ? Mention the causes of dishonouring a cheque. 8. What is insurance? Explain its primary functions. 9. Differentiate between life insurance and non-life insurance. 10. Write in brief about employee provident fund with its major functions. 11. What is citizen investment trust? State its functions. 12. Introduce financial co-operatives and state its functions. C. Long answer questions 1. Define central bank and explain its any eight functions. 2. What is commercial bank? Describe its major functions in brief. 3. What is development bank? Describe its major functions in brief. 4. Why do we do life insurance? State any two reasons and describe the types of life insurance. 5. What is meant by non-life insurance? Describe its types in brief. 6. Introduce financial institutions and describe any five types of financial institutions in brief.  100 Office Management and Accountancy