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Banking Products – Different Types of Banking Products in Nepal | Management Notes

Banking Products

Traditionally, Nepalese banks offered mass banking products. Deposit products most commonly used were Savings Bank Accounts, Current Accounts, and Term Deposit Accounts. The only leading products were cash credit and term loans. Banks, according to the Central Bank of Nepal guidelines, have little to do other than accept deposits at prices fixed by the Central Bank of Nepal and lend money at rates determined by the Central Bank of Nepal. Lending products were benchmarked by the Pine Lending Rate (PLR). However, PLR was largely determined by Nepal’s Central Bank. Additionally, demand drafts, telegraphic transfers, bankers checks, and internal transfer of funds were the only remittance products available.

A major change has taken place in the entire banking products structure since the 1990s. The banking industry has become more competitive due to the economic reforms. The competition has been boosted by new players. Customers have been able to benefit from the IT revolution in terms of ease and flexibility in operations. In fact, rapid technological advances have reshaped the role and structure of Nepal’s banking system. Also, as a result of global trends exposed by the Internet, as well as the increased availability of products from banks, customers – both individual and corporate – are now demanding more services and products from their banks. The financial market has turned into a buyer’s market. Likewise, banks are becoming one-stop financial supermarkets as time passes. Increasingly, mass banking products are being replaced by class banking products with value-added and customized products.

Future banks must essentially be marketing organizations that also sell banking products. More and more banks are outsourcing services, such as disbursement and servicing of consumer loans, credit cards. Banks employ Direct Selling Agents (DSAS) to sell their products. During house calls, they fill out application forms and take passport-sized photos. Customers can order a draft or cash over the phone or internet and have it delivered to their homes. A number of banks have introduced debt cards, flexible deposits, ATM cards, personal loans, including consumer loans, housing loans, and vehicle loans.

As banks compete among themselves and offer a greater variety of products, corporate clients benefit greatly. In the secondary market, certificates of deposit, commercial papers, and non-convertible debts (CDs) are becoming more popular. In recent years, treasury advisory services have also experienced significant growth. In response to the introduction of rupees floating rates for deposits and advances, most authorized dealer banks now offer risk management products such as forward contracts, option contracts, and currency swaps. These products include interest rate swaps and forward rate agreements for foreign exchange.

The following are some of the major banking products in Nepal: 
  1. Deposit Products
  2. Remittance Products
  3. IT Products
  4. Loans Products

1) Deposit Products

Products that collect deposits from the public are called deposit products. The following are some of the most important deposits products:
  1. Saving Bank Account
  2. Current Account
  3. Demand Deposit
  4. Certificate of Deposit/CD
  5. Term Deposit/Time Deposit

Types of Deposit Products

a) Savings Bank Account:

Savings Bank Accounts encourage saving habits among citizens while allowing them to borrow money when needed. Saving bank accounts are known for their high liquidity and security. Additionally, Savings Bank Accounts earn reasonable interest. Nepal’s government decides and reviews the interest rate periodically.

b) Current Account:

In general, current accounts are intended for businessmen, firms, companies, and public enterprises. Accounts with cheques are not meant to earn interest nor to save money, but rather to facilitate business. Therefore, current accounts are not interest-bearing.

c)  Demand deposit:

Funds held in demand deposits can be legally withdrawn immediately upon demand (or ‘at call’) from the account. It is possible to convert the account balance into cash immediately or transfer it to another account with this type of bank account. The funds are not legally available to the depositor for immediate withdrawal as opposed to a time deposit (also known as a certificate of deposit or term deposit).

d) Certificate of Deposit/CD:

Credit unions, thrift institutions, and banks offer consumers certificates of deposit (CDs), a type of time deposit. The advantage of CDs is that they are insured and thus virtually riskless; they are like savings accounts. There are certain differences between CDs and savings accounts, namely, the term and interest rate of a CD are usually fixed (usually three months, six months, or one to five years). The CD is intended to be held until maturity, at which time you will be able to withdraw the money from it along with any interest earned.

e) Term Deposit/Time Deposit:

Fixed-term deposits held at financial institutions. A short-term loan is generally one of these. It can take anywhere from a month to a few years for the bond to mature. The lender (the customer) knows, when making a term deposit, that the money can only be withdrawn after the term is over or after a specified period of time. In addition to being extremely safe investments, term deposits are also very appealing to conservative, low-risk investors. The interest rate on a term deposit is higher than the interest rate on a demand deposit.

2) Remittance Products

Remittance is the process by which customers give funds to a bank at one place, and the bank makes the funds available to the customer or other specified parties at another location, either in the same country or abroad. Demand Drafts (DD), Mail Transfers (MT), Telegraphic Transfers (TT), Electronic Mail Transfers (EMT) through computer networking (or satellite channels), International Money Orders (IOM), etc., can be used for remittances.

Types of Remittance Products

a) Demand Draft:

Demand drafts are also called remote checks or telechecks. A demand draft is a written order for payment. Demand drafts are also known as DDs (Demand Drafts). People who make payments are called drawees, and people who receive payments are called payees. This service is provided by a bank called drawer.

There are two types of demand drafts: sight drafts and time drafts. A sight draft allows money transfers only when the proper documents are produced on sight. Money can be transferred after a specified time (a future date) with a time draft. In addition to being a negotiable instrument, a check instructs a bank to pay a specific amount from an account held by the maker/depositor. There is a difference between a check and a demand draft when it comes to transferring money.

b) Traveler’s Cheque:

A traveler’s check is a preprinted, fixed-amount check that allows the signer to pay unconditionally. If a traveler’s check is lost or stolen, it can usually be replaced. When people go on vacation, they often replace cash with them. Despite their importance, credit cards have become less important than they once were, fewer places accept them (especially international ones, such as MasterCard and Visa), but do accept traveler’s checks.

c) Mail Transfers or Mail Orders:

Transfers of Mail Orders can be used when customers want to transfer money from their accounts in Centre A to their own accounts in Centre B or to their friends and family. Customers need to fill out an application form similar to the one for DDs, sign a charge slip or give a check for the amount to be transferred plus exchange, and collect a receipt.

d) Telegraphic Transfer:

Telegraphic transfers, or Telex transfers, are commonly abbreviated as TT. Funds can be transferred electronically overseas using this method. Sending money involves a transfer charge. The term “TT” refers to a cable message that transfers money from one bank to another. TT does not involve hard money transfers. To make payment to a company or individual, an order to pay is wired to an institution’s cashier. TT is still the most convenient means of transferring funds, even though it is less commonly used these days.

e) Real Time Gross Settlement (RTGS):

In the RTGS system, money is transferred from one bank to another in real time and on a gross basis. Through the banking channel, this is the fastest way to transfer money. When a payment transaction is settled in ‘real time,’ there is no waiting period.

f) Electronic Mode:

Electronic transfer systems, cash management products, etc., are now available through more and more banks. With these methods, funds are remitted much more quickly and the transfer time is reduced to hours or even minutes.

g) National Electronic Fund Transfer (NEFT):

Customers can transfer funds between bank accounts in Nepal using NEFT, an application developed by the Nepali government. By using Structured Financial Messaging Solution (SFMS) as the backbone of the system, NEFT will facilitate efficient, secure, economical, reliable, and expedient fund transfers between banks in the banking sector.

h) Structured Financial Messaging System (SFMS):

In order to improve fund transfers’ efficiency and speed, SFMS will serve as a safe, secure transmission vehicle for both intra- and inter-bank messages.

3) IT Products

In this category are products aided by information technology or provided through the Internet. Some of the types of IT products offered by Banks are as follows:

  1. MICR/Magnetic Ink Character Recognition
  2. Channel Banking
  3. Online Banking/Internet Banking
  4. Debit Card
  5. Credit Card
  6. Automated Teller Machine (ATM)

a) Magnetic Ink Character Recognition (MICR):

With magnetic ink or toner, checks can be printed with a special font. It is possible to read checks through a check clearing system at very high speeds using the MICR line. The bank account and bank reference information of the originator is contained in this document.

Banks can control fraud with magnetic ink. Small MICR readers are used by many retailers and financial institutions. It detects checks with low magnetic strength or no MICR line and rejects them. In the same way, MICR lines altered with non-MICR ink are not detected. The banking industry uses MICR as a character recognition technology to facilitate the processing of checks.

b) Channel Baking:

Every digital telecommunication transmission begins with a channel bank. An aggregated group of channels is multiplexed into a digital channel with higher bit rates and de-multiplexed back into individual channels.Using a channel bank, voice and data signals are converted into digital formats. This type of processor is called a ‘bank’ because it can convert up to 24 channels to digital format and back to analog again. A T1 circuit consists of 24 channels. It is also possible to multiplex a group of channels into a higher bandwidth analog channel with the help of a channel bank.

c) Online Banking/Internet Banking:

A retail or virtual bank, credit union, or building society offers online banking (or Internet banking), which allows customers to conduct financial transactions via a secure website. The features and capabilities of online banking solutions are often similar, but there are also some that differ from application to application.

d) Debit Card:

Debit cards (also called bank cards or check cards) are plastic cards that are used to make purchases in place of cash. The funds are withdrawn directly from either the bank account or the remaining balance on the card, thereby functioning as an electronic check. In some cases, the cards are designed exclusively for used on the Internet, and so there is no physical card. Debit card transactions can currently be processed three ways: online debit (also called PIN debit), offline debit (also called signature debit), and electronic purse cards.

e) Credit Card:

As defined by the American Bankers Association, a credit card is a small plastic card that entitles its holder to buy goods and services on credit and to pay the issuer of the card via fixed intervals. With a credit card, a holder can purchase goods and services with the promise that they will be paid for. A credit line is granted to the consumer (or user) by the card issuer. The user can use the line to pay a merchant or to receive a cash advance.

f) ATM:

Automated teller machines (ATMs) are telecommunication devices that enable financial institutions’ customers to conduct financial transactions in public places. Bank tellers and clerks do not need to be present when a customer withdraws funds.

4) Loans Products

Banks give business loans to businesses to be repaid by a certain date with interest. Several variables determine the amount of a loan, interest rate, repayment date, qualification of the loan borrower, credit analysis, and number of lenders used to achieve the desired loan amount. In order to determine a business’s creditworthiness, credit analysis analyzes its records and financial affairs. Some of the loan products offered by banks include :

  • Business Loans
  • Education/Student Loan
  • Home Loans
  • Auto Loans

a) The Amount of Business Loans:

Borrowing money can be done for many reasons, including, making up a shortfall in operating capital, expanding an existing business, developing an area or new idea within an existing business, or starting a new company. It may be necessary to factor in additional money for his/her living expenses as part of a relocation package if you are developing a new location and plan to transfer your top manager to lead the effort. Alternatively, if you wish to create a new product or idea, you may also need to pay a patent attorney.

Project managers are often restricted in their vision of what constitutes significant costs, but loan officers see them as significant to their risk analysis and payback schedules. Each operational, financial, or developmental aspect of the business plan must be costed to determine the loan amount.

b) Education/Student Loan:

An education-related loan sent to students to pay for college tuition, room and board, textbooks, or other education-related expenses. Students can apply for many of these loans at a lower interest rate, including Perkins loans and Stafford loans. A grace period usually begins after a student finishes college, during which they are not required to repay these loans.

c) Home Loans:

You can get a home loan for the property you own, such as a house or apartment. Buying a house with these types of loans is very common among salaried employees. Financial strength will determine the eligibility limit for home loans. Due to the current economic crisis, all banks are imposing stricter loan restrictions. Taking out a home loan has one advantage: you can save on taxes.

d) Auto Loans:

The purpose of a personal car loan is to finance the purchase of a car in the name of its owner. It is not possible to use them for other purchases or expenses. Lenders use them as collateral to secure loans by spending them on a car. Repayments are made to the lender on a monthly basis, or at some other time agreed to by both parties. It is the individual who signed for the loan who is responsible for the loan, not the company or business that provided the loan.

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