CONCEPT AND FORMS OF MONEY

This is the blog written to explore the knowledge about money.

In very simple language, 

Money is the coin and paper note that is circulated and accepted as a medium of consideration in the society.

However, the concept of money is not limited to this. In ancient years beside the use of metallic coins -cattle, tobacco and grains were also used as money. So, is it appropriate to call all of these items as money?

A ) Traditional Function-Based Views: 

Under this view, anything that performs the functions of money is considered as money. The economists had a consensus-ad-idem as to the concept of money. They believed that, any commodity that functions as money can be said to be money. 

In the words of Hartley Withers, “Money is what Money does.” 

So, this definition has made the concept bit complex …isn’t it?

To simplify it, the economist mentioned that, in order to be qualified as a money, it must have to satisfy following four important functions:

1. It must be used as a medium of exchange .

2. It must have measure of value .

3. It must be used as a standard of deferred payment .

4. It must have store of value.

The economist like: Crowther, R.P.Kent, walker and other modern economist were the supporters of this views.

However, an economist named Conlberston had argued that, money should not be defined upon its characteristics. It is a concept that is based on a function of good, on a particular use to which it is put.

B ) Generally Accepted Views: 

Under this view, whatever the society accepts as money becomes money. The economist like: Marshall, Benham, Seligman, Robertson and other neo-classical economists gave their definitions on the basis of general acceptability. This is the reason, cheques, bills, drafts, Letter of Credit are considered as money. 

According to Benham : 

“Money is defined as generally acceptable purchasing power or something which everybody is prepared to accept in exchange of goods and services. “

According to Seligman :

“Money is one thing that possesses general acceptability.”

C) Legal Views: 

Under this view, anything that is declared money by the central banks of the country is called money.

According to Hawtery :

“Money has two sides: first it is a unit of account, second it is legal tender “

According to Nepal Rastra Bank Act, 2002 :

"'Money' means all types of currency notes, postal orders, postal notes, money orders, cheques, drafts, traveler's cheques, letters of credit, bills of exchange, promissory notes and credit cards and this term also includes similar types of monetary instruments as the Bank may prescribe, as per the requirement, through the publication and transmission of public notice. "

(-as amended on 14th November 2016) 

The economist argued that, these definitions has neglected the rule of “general acceptability”. Money can’t be called as money, if the people do not accept it as money.

For eg. During the situation of hyperinflation in Germany, people adopted U.S dollar as the money, and rejected the government money.

D ) Modern functional View: 

It is an extension of traditional functional view with some degree of expansion over it. Under this view the function of money is classified as follows:

1 ) Primary Function

• Money works as a medium of exchange 
• Money serves as common measure of value 
• Money serves as a unit of account 

2 ) Secondary Function/Derived Function:

• Money serves as the basis of standard of deferred Payment.
• Money serves as a store of value .
• Money serves as the transfer of value (purchasing power) .

3 ) Contingent Function:

As discussed by prof. Kinley:

• Money serves as a basis of credit .

• Money serves as a distribution basis of social income .

• Money works as a general form of capital .

• Money is the source of deriving maximum satisfaction and maximum benefits. 

Forms of Money: 

Money can be of following forms:

A) Commodity money

If commodity is used as money, it is called commodity money. For e.g. Animal leathers, bones, grains, cattle and so on.

B) Metallic money/ Standard Money

If metals is used as money, it is called metallic money. For e.g. Coins made from iron, copper, brass, gold, silver and so on. This money were able to be used for long period of time. Therefore, metallic money were termed as standard money. The metallic money took any one of the following two forms:

1 ) Standard coins:

If the intrinsic value of money is greater or equal to the face value of money, it is called standard coins. Generally, the metals used are gold and silver (either in bimetallism form or mono-metallic form) with definite weight and purity. These money are also called “full-bodied coins”.

2 ) Token coins:

If the intrinsic value of money is less than its face value of money, it is called token coins. Generally, the metals used are made up of – aluminum, copper, brass, iron. Nobody is bound to accept more than a particular quantity of it. Therefore, they are called “subsidiary money”.

C) Paper money:

A money made up of paper is called paper money. It is generally issued by central bank. The intrinsic value of money is very less than its face value. It is legal tender money accepted by all. China is sourced to be first country to use paper money. It can be :

1 ) Representative money:

Such money that represents other form of money, it is called representative money. For eg. Golds are not circulated in large amount from one place to other. So, it is kept in reserves. One the behalf of it, a certificate of ownership is provided. Such paper do act as money that represents the quantity of gold. Therefore, it is called “representative money” and “convertible money” .

2 ) Fiat money:

If gold is not kept at its full value in the reserve, then such money is called fiat money. Its face value is very much high than its intrinsic value. It derives value only by the order of government. There is no provision to get it converted into gold or silver. It is called “in-convertible money”.

D) Plastic Money:

Money made from plastics are called plastic money. Nepal Rastra Bank had issued Nepalese ten rupee as plastic money. It is also a legal tender.

E) Bank money:

The cheques drawn on demand or current deposits of bank are called bank money. There is a strong debate, whether cheques drawn upon saving deposits (also called near money) will be called bank money or not. Bank money also includes: drafts, travelers cheque, bill of exchange, promissory cards and other banking cards. Since these money are not a legal tender, it is also termed as “optional money”. This kind of money is also called “credit money”.

F) Digital Money:
The money that is in electronic form (digitally stored) are called digital money. They are also called “cryptocurrency” or “Digital Currency”. They are not legal tender, however has more acceptability by the general public across the world. For eg. Flooz, Beenz, Bitcoins.

(For details regarding currency of nepal and its related rules in relation to money, bank notes and coins click on above link)







pic. credit :www.history.com

CURRENCY OF NEPAL AND THE RELATED RULES

MONEY, BANKNOTE AND COINS

Money is the underlying basis upon which whole economy of the entire nation depends upon. The small poke can make the revolutionary change in the economy of country. So, the exclusive power relating to money is given to the central bank of the country.

People often thinks that "The government can issue as much money as it wants". 

Do you have the same level of perceptions ?.

Today, i am writing the blog to make you aware about how the money, banknotes and coins operates in Nepal. I have tried to easily explain the concepts.

The central bank of Nepal is Nepal Rastra Bank. 

(For more detail about the central bank, objectives, function, duties and powers of Nepal Rastra Bank- please refer to the above link )


First lets have an overview about monetary unit, banknotes and coins. 

Monetary Unit: 

The 'Rupee' also prounced as 'Rupaiyaan' - is the monetary unit of Nepal. It is a legal tender made within the Nepal. The Government of Nepal provides guarantee for such Rupee.

Banknotes and Coins: 

The Nepal Rastra Bank has monopoly over the issue of banknotes and coins in the country. Such notes and coins is legal tenders made within the Nepal.

Unlike other central banks, Nepal Rastra Bank issues notes, only against:

• The security and 

• The liability 

- of such issued notes . This issue shall be equal to the value of property kept as security.

Practically, 

At least 50% of the property is kept as security which shall be in the form of following:

• Gold 

• Silver 

• Foreign currency 

• Foreign securities 

• Foreign bills of exchange 

However, the remaining percentage is in the form of following:

• Coins 

• Debt Bond (issued by Government of Nepal) 

• Promissory note (payable in Nepal) 

• Bills of exchange (payable in Nepal) 

Such Promissiory Note or Bill of Exchange is payable within specified period (not exceeding 18 months) from the date of repayment by bank.
However, 

with the permission taken by the goverment of Nepal, the ratio of property kept as a security must be at least 40% of the property in the form of following: 

• Gold 

• Silver 

• Foreign currency 

• Foreign securities 

• Foreign bills of exchange 

Similarly, the remaining percentage is in the form of following:

• Coins 

• Debt Bond (issued by Government of Nepal) 

• Promissory note (payable in Nepal) 

• Bills of exchange (payable in Nepal) 

Such Promissiory Note or Bill of Exchange is payable within specified period (not exceeding 18 months) from the date of repayment by bank.


NOTE:

For this purpose, the valuation of property is done in the following manner mentioned as follows:-

• The price of Gold - at the rate fixed by Government of Nepal, on the recommendation of the Board. 

• The price of Silver - at the rate deemed appropriate by the Board. 

• The price of Foreign Currencies - at the exchange rate fixed by the Bank. 

• The price of Debt Bond issued by Government of Nepal - at the rate deemed appropriate by the Board on the basis of market rates. 

• The price of Foreign Securities -at the rate deemed appropriate by the Board on the basis of market rates. 

• The price of Bills of Exchange - at the rate deemed appropriate by the Board on the basis of market rates. 

• The price of Coins - at the rate of face value. 

The Present highest currency denomination of paper money in Nepal is Rupee of thousand and the present highest currency denomination of coin in Nepal is Rupee of ten.

However, the central bank of Nepal has the authority of issuing the bank notes of various denominations whenever it thinks fit. While issuing banknotes in this way, the figures appearing in the notes, size and denominations shall be as approved by Government of Nepal. 

The Board of the Nepal Rastra Bank decides about the -

• Figures 

• Internal security arrangements 

• Materials to be used for printing banknotes and other materials. 

Similarly, the government of Nepal consults the Board of the bank in order to declare that - banknote of any denomination will cease to be legal tender in any place other than, the prescribed place or office having published a notification in the Nepal Gazette.


NOTE:

It is to be noted that the Nepal Rastra Bank don't reissue the notes, which are :

• Torn 

• Defaced or 

• Excessively soiled. 

Similarly, with the approval of Government of Nepal, the bank can do following activities:

• Mint and bring into circulation the coins of whatever metal or mixture of metals . 

• Bring into circulation having minted them in Mint on specials occasions. 

• If it deems appropriate, then get such coins minted in any foreign Mint. 

However, if the coins gets minted once with the approval of the government and the same is to be re-minted again , in such case no approval is required again. Similarly, the Bank may, with the approval of Government of Nepal, mint the coins which are sent for minting by a foreign government.

Following points are to be generally understood that :

Banknotes and Coins are Acceptable to all:


The banknotes and coins are acceptable to all up to the extent of the amount of face value for repayment of all types of public or private debts within the Kingdom of Nepal.

Measurement, Weights and Size of Coins:
The face value, measurement, weight, size and other features of the coins is issued by Nepal Rastra Bank under the Nepal Rastra Bank Act which is prescribed by the Board.

Issuance of Currency and Security:

All the matters relating to:

• Printing of banknotes 

• Minting coins 

• Providing security to the notes issued banknotes and coins. 

• Keeping them in appropriate manner 

• The matter of safe keeping or destroying the old banknotes or coins which are not in circulation 

• Plate and dies 

- are done as per the rules prescribed by the Nepal Rastra Bank.

Exchange of Currency:

The Nepal Rastra Bank without any fee or charge - changes a banknote or coin with legal tender in Nepal. This is done with the banknotes or coins of same denomination or of different denominations of the equal value.

SOILED OR COUNTERFEIT CURRENCY :

It is a general fact that most of the people should be aware about the currency they use in the country.


The common question running into most of mind is -

'What do the central bank do with the soiled and counterfeit currency? '
So, in order to help you to get out this doubted general queries, i have made a sincere effort to make you clear regarding this. I have taken the Nepal Rastra Bank (central bank ) as a core basis for understanding.

First of all the meaning of counterfeit coin must be understood.

 Actually, 'Counterfeit coin' means:

• Duplicate coin minted copying the coin issued by the Bank or 

• Counterfeit coin or 

• The Coin prepared by melting or manipulating or 

• The coin prepared by cutting and breaking into two or more places or 

• The coin whose figures, letters and signs have been defaced. 

The central bank

• Withdraws or

• Destroys or 

• Replaces 

- the soiled currency with other banknote or coin.


It is to be understood that, 

the central bank has the power to deny in replacement of the banknote or coin,
The design of which has been deleted, or

which is:

• Torn or

• Defaced or 

• destroyed more than 50% of its portion 

Such withdrawal or destruction of banknotes can be done with or without compensating to the owner of the banknotes or coins.


No owner of the lost or stolen banknotes or coins is reimbursed from the Bank. The Bank can forfeit without any compensation for- the coins or notes, the outer appearance of which is changed, or which is counterfeit coins or fake note.

Provisions Relating to Currency Inventory and Issuance of Currency: 

The Nepal Rastra Bank carries out all the function which is related to currency inventory and issue of currency. The bank regularly supplies the banknotes or coins in order to meet the demand of currency.


Account of Issued Currency:


The Bank maintains the account of the entire banknotes and coins in circulation showing them separately as monetary liability. It must be noted that, such liability don't includes the bank notes and coins in stock or not in circulation.

Currency Recall:

The central bank of Nepal can recall the bank notes and coins which are in circulation within Nepal. This is done through exchange of other bank notes and coins in equivalent amount. 

Similarly, the bank publishes and transmits pubic notice by :

• Clearly specifying the period during which the bank notes or coins must be presented for exchange 

• Where they are to be so presented. 

It must be noted that, when the prescribed time limit given by Nepal Rastra Bank is expired then the bank notes and coins which are to be exchanged will cease to be a legal tender.

For the banknotes and coins which are withdrawn from circulation,and for the currency with defect, the central bank has power to :

• Cut 

• Break 

• Demolish

• Destroy 

- in any manner as prescribed.

Reproduction and Counterfeiting of Currency:

It must be kept into our mind that following activities should not be committed by any persons:-

• To forge, counterfeit or alter banknotes and coin which are in circulation as legal tender in the Nepal. 

• To forge, counterfeit or alter any cheques. 

• To forge, counterfeit or alter any payment card. 

• To possess, transport or issue any banknote or coin or cheque or payment card with the knowledge that such banknote or coin, cheque or payment card was falsely made, forged, counterfeited or altered. 

• To possess, transport any sheet of metal, stone, paper, die or any other material or substance with the knowledge that it was done to be used in - falsely making, forging, counterfeiting or altering any banknote or coin, cheque or payment card. 

• To assist (help) in any of the above activities in any manner. 

NOTE:

Unless a prior written authorization is taken by Nepal Rastra Bank following things should not be done :

• Reproduction of any banknotes, coins, cheques, securities or payment cards, denominated in Rupee 

• Creation of any objects that simply imitate any such banknote, coin, check, security or payment card by their design. 

However, Nepal Rastra Bank strictly takes appropriate legal actions in order to prevent the issue of fake notes or counterfeit currency or duplicate cheque or payment. The Bank keeps upon issuing of necessary order, directives or notices regarding such actions.








Picture Credit: buzzle.com

MONETARY POLICY

   
  Among several functions of central bank, monetary policy is regarded as one of the important function. Monetary policy is a policy that helps to maintain the price and interest rate at the desired level - through the management of supply of money in the economy. The level of money is managed by increasing or decreasing the supply of money by the monetary authority (i.e. central bank).

Definition and views:

According to Harry G. John:

“Monetary policy is the policy employing the central bank’s control on the supply of money as an instrument for achieving the objectives of general economic policy.”

According to G.K. Shaw:

“Monetary policy is any conscious action undertaken by central monetary authority.”

According to Edward Shapiro:

“Monetary policy is the central bank’s control over the money supply as an instrument for achieving the objectives of general economic policy.”

So, in order to achieve the macro-economic goals, the central bank formulates the monetary policy aligned with the fiscal policy of the government. In other words, the monetary policy is designed by considering the existing situation and outlook of the economy along with priorities, policies and programs of the government’s budget.

Objectives of monetary policy:

The basic objectives of monetary policy are as follows:

• To make Price level stable

• To achieve full employment

• To make interest rate stable

• To make the Exchange rate stable

• To achieve rapid economic growth

• To Correct the adverse BOP

• To Induce savings

• To Invest the savings

• To Create and expand Financial Institution

• To reduce economic inequality

Types of Monetary Policy:

Generally, monetary policy is divided into following two types:

1. Expansionary/ Cheap monetary policy

2. Contractionary/tight/ restrictive monetary policy

Instruments of Monetary Policy:

Instruments of monetary policy represents a tool through which the central banks controls the supply of money and regulates credit creation in the nation. The main instruments of monetary policy are as follows:

A)   Quantitative / General /indirect instruments of Monetary Policy :

• OMO (Open Market Operation)

• Reserve Requirement/ Variation of cash reserves

• Bank Rate /Discount Rate

B)   Qualitative / selective/ Direct instruments of Monetary Policy

• Regulation of Margin requirement

• Regulation of consumer credit

• Moral suasion

• Credit rationing

• Publicity

• Direct action

• Interest Rate ceiling

• Differential re-discounting rates

• Differential CRR for different deposits

• Portfolio Regulations

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal Rastra Bank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. 

In the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank frames the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Bloggers Note: For more details keep on visiting the blog

Situational Correspondence Writing - ATM Complaint Letter

# You went to withdraw cash from the ATM of Standard Chartered Bank. When you inserted your debit card, the money was not dispensed. However, your total balance was deducted. So, write a complaint letter to your bank for refund of the money.

Date : 31 April, 2017

Robert Willinson
Branch Manager
Pulchock Branch, Standard Chartered Bank
Pulchock, Kathmandu, Nepal

Sub : Amount debited by the bank but money was not dispensed

Dear Sir,

     My debit card (number 001569765223 ) had been inserted into the ATM machine of your pulchock branch at 5.19 PM in normal manner. The withdrawal of rupees fifteen thousand was requested but the money was not dispensed by the machine. However, the amount was deducted from my account number 15223676900067. The transaction ID number is 0143. Can you credit my account by 15 May, 2017 ?

     I told my problem to the on-duty security staff of the ATM along with my ATM slip. He suggested me to wait for at least 24 hours and even if the matter do not get resolved, then contact the branch manager for the inconvenience.

     In early days, i had encountered similar problem but the matter was resolved within 24 hours. My tuition fee is due. So, please credit my account not latter than 15 May, 2017. Let me know, for any further details through mail or telephone. I look forward to hearing you soon.

Sincerely,

....................................

( Niraj Kumar Jha )

Rajbiraj-05, Saptari, Nepal

Account Number : XXXXXXXXXXXXXX

Contact Number : 00977-XXXXXXXXX

Email : nirajkumar.rajbiraj[@]gmail.com

Enclosure : ATM Slip




Note :

Letter Writing is an Art. It is developed through constant effort. The correspondence must be simple, precise, clear, to the point, free from ambiguity, formal, subject-focused, and positive.


The commonly accepted correspondence writing includes following three-steps-writing process (Plan - Write - Complete ).


Tips for writing the body of correspondence :

• In the first paragraph you must be clear of - what are you writing ? why are you writing it ? and draft the correspondence accordingly. 

• In second paragraph - mention the reason for backup or justification of the first paragraph. 

• Finally, in last paragraph - Maintain goodwill, Mention why date is important, emphasize the space and invite further communication. 

The number of paragraph may vary, but the relevant subject-matter should not be missed.

Picture Credit : templatelab.com

Understanding Financial Literacy and Customer Protection Situations of Nepalese Banks and Financial Institutions.

In today's globalized era, it is utmost important to understand the financial literacy environments of Nepalese banks and financial Institutions (BFIs).

Financial literacy makes the behavioral changes _ through better financial decision making. It is the understanding of various financial areas (like money, investments, personal finance) that helps to use their financial resources wisely. This helps an individual to know about his earnings, savings and investments.

Customer protection is the way through which the customers gets shield in relation to unfavorable situations. Financial literacy helps the customer to get protected.

As per the data provided by Nepal Rastra Bank, the number of branches of BFIs stood at 6,418 in mid-June 2018. These include 2,919 branches of commercial banks, 951 of development banks, 183 of finance companies and 2,365 of micro-finance institutions.

On an average, population served by per branch of BFIs stood at 4490 in mid-June 2018 compared to 5,809 a year ago. Of the total 753 local levels formed in the process of implementing federalism, commercial banks have shown their presence in 556 as of 8 July 2018. A research has also said that, more than 40 % of the people are out of the banking channel. This is due to lack of financial knowledge among the Nepalese people.

Poor financial literacy may lead to poor investment decisions, victim of higher interest rates, poor credit facilities, high opportunity costs and even bankruptcy.Therefore, financial customer protection and financial literacy has become the today’s necessity.

Nepal Rastra Bank has directed through its directive number 21 of its Unified Directive- 2075  to all its licensed banks and financial institutions to protect financial customer and enhance financial literacy.

Some of the arrangements that are made for Nepalese BFIs in relation to Financial Literacy and customer protection are as follows :

A ) Transparency related arrangements for Nepalese banks :

All the banking and financial institutions has to disclose all the necessary information regarding the nature of service provided, the charges charged under several names (fees, commission, brokerages, interest, fines, penalties), the procedures that is to be adopted and other kinds of conditions imposed for providing the services.

For this they generally do following activities:

a ) The banks and financial institutions makes necessary arrangements to their customers about
 -the services provided, types of accounts with different names offered, types of loans offered, financial services provided through electronic devices 
– through pamphlets, brouchers, diaries or through booklets to their customers.

b) The Nepalese banks clearly communicates the following details in precise, clear, free from ambiguity, topics orderly arranged and in simple language about following:

• Different types of accounts in operation (like saving account, fixed deposit account, current account, karmachari account, chuna muna account and so on).

• The details regarding fees charged to their customers for availing different types of services and facilities.

• The process to close the account.

• The methods of computing interest.

• The Advance payment fees.

• The actions to be taken on making default in payments of interest on time.

• Late fees charges

• Penalties fees

• The process of operating different types of electronic cards and their procedures.

• Details of possible banking offences and

• The details regarding the necessary safety measures that the customers has to comply .

c) All the Nepalese banks are required to send their details regarding different cost, interest related details as per the direction given by Nepal Rastra Bank, in specified format.

d) These details are also hosted on the website of the respective banks.

B ) Language related arrangements for Nepalese banks:

The BFIs are required to use easy and understandable language while providing financial services to its customer. The documents used for operating there clients are to be prepared as follows:


a) For Nepalese customer- in Nepalese language 

b) For Internal and International transaction purpose- in English languages

C ) Information related arrangements for Nepalese banks:

The BFIs are required to use easy, understandable and free from ambiguity
language while providing financial services to its customer.

D ) Simple banking related arrangements for Nepalese banks:

All the Nepalese banks has to make special, preferential and simplified arrangements regarding :

• Senior citizen

• Differently able citizen

They should be served through easily accessible counters and help whenever required while operation of banking transaction.

E ) Amended Fees related arrangements for Nepalese banks:

Any charges in contrary to the previous contracts is disclosed to the respective sections of customer. For the public interest, this changes in new structure of interest rates are also to be published in national daily newspaper (for nationally operated banks), regional/ district newspaper (for district operated banks ).

F ) Accounts related arrangements for Nepalese banks:

Nepalese banks are not allowed to take any charges in any name in providing following services:

• Opening deposits account

• Issuing cheques

• Operating accounts

• Closing accounts after 6 month of opening accounts.

• Providing the statements

• Providing loan to natural person up to Nepalese Rs.2, 00,000 through any branch banking services.

• When dormant accounts are made active.

However, they are free to charge fee, if any customer constantly demands the statements for same period more than once.

On issuing the card in Nepalese currency, No banks are allowed to charge any charge - for providing electronic cards except issue cost and renewal charges (on expiry of the card ).

G ) Cheques related arrangements for Nepalese banks:

For depositing the money on self-account through any kind of instruments like:

• Cheque

• Bills

• Pay order

- The banks has to deposit all the money mentioned in the aforesaid instruments in full in the account of customer. 

However, any commission that is to be charged for such services should be separately taken and separately accounted in the vouchers. 

H ) Interest related arrangements for Nepalese banks:

The difference between the two saving accounts of different names are not allowed to be more than 2%. While making any changes regarding the interest rates scheme of saving accounts, the bank must incorporate the changes in such a way that, all the saving accounts have proportionate impact by the degree of changes made.

The difference between the yearly penal provisions of lending fund as per agreement should not be more than 2%. However, while computing the yearly penal provision of lending fund, no banks are allowed to demand excess sum of money than its assured principal or interest for the amount due.

Interest on deposit will be provided even if the deposit account of customer is dormant.

The publication of interest rate is published as yearly interest rate.

I ) Service Fee related arrangements for Nepalese banks:

A ) Service fee related :

The cost of service charged by bank should not exceed the cost to the banks.

For example:

While getting the credit information of customer or Black listing the customer,

Then, the Fees charged by bank on removal from such black listed group- should not be more than the cost to the banks (i.e. fee charged by the credit information department).

Similarly, while providing ATM service, card services, charges for evaluating financial securities, insurance service charge and like, should not be charged more than its cost.

No charges is to be charged by any banks for clearance of cheque of less than Nepalese RS. 2, 00,000, through electronic mode.

b) Administrative fee and guarantee fee related:

Banks are allowed to charge administrative fee for passing loan. But, the administrative fee should be immediately reimbursed on refusal.

All fees are incorporated while computing the interest rate on loans - except administrative fees and guarantee fees.

For passing the loans under same categories, the deviations of administrative cost and guarantee cost should not exceed 0.25 %.

J ) Advance payment related arrangements for Nepalese banks:

• On providing loans the banks has to clearly state advance payment fees for loan transactions. Not to charge any kind of fees by the banks, if the loan holder wants to settle the debts in advance.

• If anyone wants to settle the loans and advances (up to Nepalese rupee 50 lakh or to the excess of its limit ) as an advance payment, due to the change in prior arrangements (related to interest or other agreements ), then, in such a case - no fee is to be charged by the bank. 

• If project loans and advances is taken by the debtor and the bank has changed the agreements (related to interest and other), without consulting the debtor, in such a case , if a debtor wants to settle the loans and advances as an advance payment - then no fee is to be charged by the bank.

K ) Grievance related arrangements for Nepalese banks:

All the Banks has to establish ‘Grievance Handling Desk’ and inform their customers for such facility in order to handle any uncomfortable and problems of their customers. Nepalese banks has established hotlines and online grievance handling portals for managing their customers.

L ) Financial Literacy related arrangements for Nepalese banks:

All the Nepalese banks are compulsorily required to incorporate financial literacy program in its strategic plan. They are required to provide financial information and financial inclusion programs for their customers.

M ) Confidentiality related arrangements for Nepalese banks:

All the banks has to keep the business related details (like, books of accounts, records, financial statements) of their customers secret except required by law.

Note:

Any bank and financial institution acting in contravention to the above is punished as per section 100 of Nepal Rastra bank Act, 2002. 

CAPITAL FLIGHT

It is simply, moving out the large sum of money from the nation. 

In other words, it is moving out large amount of capital from your home country to foreign country. 


The reasons could be :

• Political instability 

• Currency devaluation 

• Defective system of capital control

• Legal instability

• Type of exchange rate system adopted by the country for international trade.

• The rise of digital money

• Increased Money Laundering activities 

• Fear of increased Capital Gains Tax (CGT) 

• Fear of decreasing the strength resource of the Nation for which it is recognized. 

Capital flight can be legal or illegal. If the government, through its stringent rules that discourages the movement of capital from their country- then the capital flight could be said to be legal. However, if foreign investors tries to create a situation of capital blocks through restrictions of trade activities it would be called as illegal capital flight. 

Generally, illegal capital flight is increased if the governmental laws, rules and controls- are more stringent and rigid in nature. If we analyze the situation of 1970-1980 of India capital flight, we can find that, there were billions of dollar currency moving out of the country. The researchers found that, the main reason behind it was stringent rules in relation to currency controls. 

Similarly, Due to high inflation and devalued currency - Argentina has faced a huge capital flight for years. 

The deep rooted economic and political difficulties have given the birth to the situation of capital flight. The situation of civil war has encouraged the capital flight in Pakistan, Nigeria and others.

When we talk about the exchange rate system in international trade, we can find three exchange rate system.They are :

• Floating Exchange Rate System

• Fixed Exchange Rate System

• Controlled Exchange Rate System 

Nepal has adopted Pegged Exchange Rate System. This has also been one of the reason of capital flight for the country. Researchers has agreed that,  pegging with Nepalese currency has led to the appreciation of currency in line with Indian currency. On contrary, it has also increased trade deficit as well as Forex currency reserve of Nepal. 

Most of the commercial banks in Nepal provides interest from 3-5 % to their depositors whereas, India provides 8-9% interest to their savers. This has encouraged Nepalese depositors (both households and business persons) to swift their deposits to India. Similarly, textiles, automobiles, agriculture or electronics- the imports based economy has placed a burden of capital flight for Nepal.


In order to control the situation of capital flight, most of the nations has made a currency control laws as to - utmost currency amount that could be taken out of the country. Different countries has also made laws to encourage Foreign Direct Investment rather than Foreign Portfolio Investment. 

In conclusion,

Capital Flight not only decreases the purchasing power of the country but also makes imports and foreign facilities expensive.

Pic.Credit :www.canstockphoto.com

PROJECT MANAGER AND LINE MANAGER

The concept of project manager and line manager is mostly misunderstood by most of us. So, i wrote this blog and tried my best to make these concept simple.

As we know that, most of the organization or companies have following six resources:

• Money

• Manpower 

• Machine 

• Material

• Facilities 

• Information technology

Actually, the project manager does not control any of these resources directly, except money (that is the budget of the project).

The resources are generally controlled by the line manager or functional manager or resource manager. So, project manager must negotiate with line manager for all other resources of the project.

When we say that, project manager controls project resources, we really mean that, they control these resources through line manager. The effectiveness and successful of project management is totally dependent upon following two factors :

Good work culture between project manager and line manager and
The ability of functional employees to report: vertically to line manager and horizontally to project manager at the same time.

Project manager and line manager interface refers to the working relationships between project manager and line manager in order to get the project work done. The key areas of project manager and line manager interface are:

• Allocation of Resources 

• Work Packages 

• Reporting 

• Negotiations 

• Co-ordination 

• Problem Solving

This can be briefly explained as follows :

Allocation of Resources :

 
Project manager must interface with line manager to get the resources allocated for the project.

Work Packages : 

A project consists of work packages cutting through several functional lines. So, project managers and line managers must get interfaced with each other.

Reporting: 

Project manager and line manager both have dual responsibilities for reporting progress and performances.

Negotiations : 

The project manager has to negotiate with various parties in relation to the project work. During such negotiations he needs to interface with line manager.

Co-ordination: 

The project manager has to interface with line manager to achieve harmonization between the project works and line department works.

Problem Solving : 

Projects faces a lot of problems. So, project manager must cope with the line manager to solve such problems.


Therefore, project manager and line manager requires good working relationships. Both should unite when problem arises and reconcile it for the projects so that, it gets completed within the limitation of time, cost and quality.

DIFFERENCES BETWEEN PROJECT MANAGER AND LINE MANAGER

The above two terms are used interchangeably in day to day activities.

Although both are under the same hierarchical line, i have made some decent effort to make the differences quite easy and understandable.

The differences between project manager and line manager are as follows:

• Project manager determines objectives. He answers - what task is to be done?. Whereas, line manager determines task. He answers - How will the task be done? .

• Project manager determines schedule. He answers - when will the task be done?. Whereas, line manager determines the location. He answers- where will the task be done ? 

• Project manager determines customer needs. He answers- why will the task be done?. Whereas, line managers determines people. He answers- who will do the task ? 

• Project manager determines budget. He answers-How much resources are available to do the task?. Whereas, line managers determines coordination. He answers- How well the resources are mobilized. 

• Project manager deals with the result of the project. He answers- How well has the overall objectives been achieved?. On the other hand, line manager deals with organization objectives. He answers - How well has the line departments objectives been achieved?. 

• A project manager manages the single project work whereas line managers manages the line of project works. 

• Project managers generally pays only for what is needed for the project. However, line managers has to cover complete operational costs. 

There is always constant hustle between the project manager and line manager in terms of organizational resources. for example money, machine, materials, manpower and technology.

The success or failure of projects keenly depends upon strong relationship bonding between both of them.





picture credit :completewellbeing.com 

FINANCIAL DERIVATIVE

 

# Concept of financial derivative:

 

In simple, the word “derivative” means “derived or whose value is dependent upon something”. Derivatives are the financial instruments that are traded in financial market whose values are derived from underlying assets. The underlying asset may be commodity, financial asset, interest rate, stock index and so on. The value of underlying assets depends upon the market conditions (i.e. micro and macro-economic variables).

The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates and market indexes . The corporations or government do not issue derivative like securities.

Derivatives are the financial contract between two parties to purchase or sell the underlying asset, a group of assets, or a benchmark, at particular price at particular future date.

 Derivative Market:

 The market whereby derivatives are traded is called derivative market. The market may be:

Organized exchange or OTC Market.

 ·       OTC market (for securities not listed or delisted or in process of getting listed in national stock exchange (- In Nepal, NEPSE i.e Nepal Stock Exchange).

·       Stock Exchange Market (for securities listed in national stock exchange (- In Nepal, securities exchange board of Nepal (SEBON))

 Derivative markets are “cash market or spot market “because although credit arrangements are made in few cases.

#Features/Characteristics of financial derivative:

1.      Derivative is a contract (bilateral and not multilateral contract) : Derivatives are the financial contract between two parties to purchase or sell the underlying asset at particular price at particular future date.

2.      It has two party i.e. buyer and seller

3.      The value of derivative depends upon the value of underlying assets.

Oppositely related payoff (i.e. gain to one party = loss to another party). Gain and loss of payoff from both the party if summed up than it the result is always zero. Therefore, derivatives are also called “zero-sum game”.

4.      Right and Obligation: derivatives gives right and obligation to exercise the contract.

Right to one party and obligation to another or 

Right and obligation to both the parties (buyer and seller)

For e.g.:

·       futures, forwards, swap – gives right and obligation to both buyer and seller.

     Option contract – gives right to holder or buyer but not obligation to purchase or sell at later date, at a price agreed upon today.  However, there is obligation to the option writer / option seller to execute the contract. To get this right, the buyer pays “option Premium” to the option writer or seller.

o   Call option gives buyer the right to buy whereas,

o   Put option gives right to sell the option contract. 

5 . Agreement for Future: Derivatives are the financial contract between two parties to purchase or sell the underlying asset at particular price at particular future date at a price agreed upon today

6.    Means of Management of Risk:

As we know, higher risk higher the profits. Risk arises due to changes in micro and macro-economic variables.  Derivatives instruments are used as a means to manage risk through:

·       Hedging (reducing risk),

·       Speculating (bear extra risk) and

·       Arbitrage (gain from price advantage from two market).

# Types of financial derivative:

 Assets can be of two types: financial assets and real assets

 Financial assets can be of two types: primary financial assets (common stock, preference stock, bond, debentures) and derived financial assets also known as derivatives.

 Derivatives can be of following types:

• 1.      Options (call or put)
• 2.      Futures
• 3.      Forwards
• 4.      Swap
• 5.      Warrant
• 6.      Others- options on futures, swaption (option on swap), hybrids (having mix of features of different derivatives)

 

# Uses / Applications of financial derivative:

The uses or application of financial derivatives are as follows:

• 1         Lock in prices (prices of future are locked today)
• 2         Hedge against risk (protection against minimum price risk) :

Hedging is a risk management strategy employed to offset (protect against) losses in investments by taking an opposite position in a related asset. Hedging requires one to pay money for the protection it provides, known as the premium. Investors hedge one investment by making a trade in another. Like: insurance but something vague.

Eg.

If we have a lot of shares of NIFRA and worried of prices down, you can sell futures of NIFRA to hedge the risk. If this materializes, the value of stock will go down but the value of hedge (short position) will go high. So, this hedge will protect you against huge loss.

Or , You can buy options – put option same case, the value of stock will go down but value of put option goes high, giving some relief against losses.

MNCs uses foreign currency options and currency swaps are used to hedge against currency risk

Interest rate swap and interest rate forwards are used to hedge against interest rate risk.

Under hedging activities, gain on investment counterbalances the loss on another.

 An individual who enters into hedging trades are called hedgers.

 

• 3         Providing leverage facilities (derivatives are contracts and requires a small amount of margin, these assets provides high leverage. So, there is possibility of getting high profit with small investment.)
• 4      Providing Arbitrage facilities:

Arbitrage is trading that involves buying a product and selling it immediately in another market for a higher price; thus, making small but steady profits.  Hence, derivatives are used to capture the profit from disequilibrium (i.e difference between over and underpricing of derivatives).

 

For e.g. The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE), while, at the same moment, it is trading for $20.05 on the London Stock Exchange (LSE). A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share.)

• 5         Portfolio diversification (there is a famous saying “don’t put all your eggs in a single basket”. A portfolio is a collection of financial investments. Diversification tries to reduce risk by allocating investments among various financial instruments, industries, and other categories. Derivatives helps to diversify the risk associated with investment (mix of long term and short term investments, mix of derivatives (options, swap, futures, forwards) in various commodity instruments.
• 6         Speculation and generating profits (speculation is focused on short-term trading and profiting from market fluctuations.)
• 7         Change the nature of investment (or liabilities): Derivative instruments provides means to change the nature of investment (or liabilities). For e.g. Floating rate investment (or liabilities) can be converted into fixed rate investments (or liabilities) and vice versa.
• 8         Creating new /hybrid securities: The process of creating new securities is called financial engineering. Using derivatives, traders can change --the level of risk, return, swap with options, combination of different derivative feature with derivative instrument and therefore, create an innovative instrument.

 

#Participants of financial derivative:

 The participants in the derivatives market can be broadly categorized into the following groups:

1. ·       Dealers: They are called market makers. Dealers are the financial institutions or firms ready to take risk from buy/sell of securities on their accounts.
2. ·       Brokers: They are intermediaries. They are the agents who facilitates to buy/sell securities for investors by charging brokerage commission. They do not take the risk to buy on their account.
3. ·       Hedgers: An individual who enters into hedging trades are called hedgers. Hedging is a risk management strategy employed to offset (protect against) losses in investments by taking an opposite position in a related asset. Hedging requires one to pay money for the protection it provides, known as the premium. Under hedging activities, gain on investment counterbalances the loss on another.
4. ·       Speculators: they are the one who engages in speculative transactions. Speculators can gain profit from both up and down trend of the market.  Speculation is focused on short-term trading and profiting from market fluctuations.
5.      Arbitrageurs:  an individual engaged in arbitrage is called arbitrageurs. Arbitrage is trading that involves buying a product and selling it immediately in another market for a higher price; thus, making small but steady profits.  Hence, derivatives are used to capture the profit from disequilibrium (i.e difference between over and underpricing of derivatives).
6. ·       Margin traders: Margin traders are individuals or entities who engage in margin trading. Margin trading is a financial strategy where traders borrow funds from a broker or exchange to increase their buying power beyond their available capital. By leveraging these borrowed funds, traders can control larger positions in the market than they could with their own money alone.

 

# Function of financial derivative:

The major functions of derivatives markets in an economy include:

• 1.      Risk Management:

One of the primary functions of derivatives markets is to effectively manage risks. Businesses face multiple risks in day-to-day operations, including currency fluctuations, interest rate changes, and commodity price volatility. Derivative contracts help companies hedge against these risks, drive profitability and ensure stable operations. 

• 2.      Price Discovery

Derivatives offer a platform for traders and investors to express their views on future asset prices. These price signals are critical for investors, as they help assess market sentiment and make informed investment decisions. They also enable efficient allocation of resources by providing real-time insights about market expectations.

• 3.      Liquidity Enhancement

Derivatives markets significantly enhance market liquidity - the ease with which an asset can be bought or sold without causing a sharp rise/decline in prices. This liquidity benefits both hedgers and speculators. Hedgers can easily find counterparties to take the other side of their trades, while speculators can execute their strategies efficiently. 

• 4.      Providing leverage facilities:

Derivatives are contracts and requires a small amount of margin, these assets provide high leverage. So, there is possibility of getting high profit with small investment.

• 5.      Providing Arbitrage facilities:

Arbitrage is trading that involves buying a product and selling it immediately in another market for a higher price; thus, making small but steady profits.  Hence, derivatives are used to capture the profit from disequilibrium (i.e difference between over and underpricing of derivatives).

For e.g. The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE), while, at the same moment, it is trading for $20.05 on the London Stock Exchange (LSE). A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share.)

• 6.      Low transaction cost:

Derivative act as risk management tool, the cost of trading in derivatives is low.

• 7.      Risk Transfer:

Derivatives markets facilitate risk transfer from those who are less capable of withstanding risk to those who are more risk-tolerant. For instance, an insurance company may use derivatives to transfer the risk of catastrophic events, such as natural disasters or financial market crashes to the broader financial market. This risk transfer mechanism helps mitigate systemic risk, distributing it among a broader pool of market participants.

• 8.      Speculation and generating profits : Speculation  is focused on short-term trading and profiting from market fluctuations. Therefore, speculation and generation of profit is the function of derivatives.

 

# Danger of financial derivative: # Disadvantages of Derivatives:

 

The derivatives market also comes attached with a set of its own disadvantages. Following are the drawbacks of the derivative market:

• ·        High Leverage Risks

Due to the leveraged nature of financial derivatives, even small price movements in the underlying asset can result in substantial financial losses. 

• ·       Overpriced Options (Hard to value)

The derivatives are not easy to value as they are derived from other securities. Besides, the derivatives market is not as liquid as the stock market and there are not many “players” as well. Hence, there is much larger bidding which results in price increment.

• ·       Time Restrictions

The prime reason for the derivatives market to be risky for the investors is that they have a specified contract life. After their life expires, the contract becomes of no use.

• ·       Complexity and Lack of transparency

Most people are not aware about the complexity of the derivatives market. Hence, it fosters the scam actors to utilize this weakness and use the derivatives to take advantage by the investors. The lack of transparency in the market for derivatives can create uncertainties and increase risks for participants.

• ·       Legalized Gambling

Due to the nature of trading in financial markets, derivatives are criticized for being a type of legalized form of gambling as it is very much similar to the other types of gambling activities.

• ·       Counterparty risks (if OTC):

Derivatives trading also entails counterparty risk, which refers to the risk of default by the other party involved in a derivative contract. In over-the-counter (OTC) derivatives, where contracts are privately negotiated, there is a reliance on the financial strength and integrity of the counterparty. Counterparty risk can be mitigated using central clearinghouses or exchanges, but it remains a potential downside of derivatives trading.

 

In conclusion, are derivatives really at fault? Is electricity to be faulted if someone with little knowledge mishandles it? So, using derivatives in inappropriate situation is dangerous.

 

#Myths / controversies about Financial Derivatives:

Derivatives may be differently perceived by different people and can be misinterpreted that may not stand to be true. An economist and policy advisor, Thomas F.Siems , authored a paper published by Cato Institute in September 1997 entitled “10 Myths About Financial Derivatives” .

 

Considering the views of an economist Thomas F.Siems, following are the myths and realities of financial derivatives 

• Derivatives are new and complex
• Derivatives are high Tec financial products created by Wall Streets rocket scientist
• Derivatives are purely speculative
•  Derivatives are highly leveraged instruments
• Only large multinational corporations and large banks have purpose of using derivatives
•  Financial derivatives takes money out of productive process
•  Only risk seeking organization should use derivatives
• The risk associated with financial derivatives are new and unknown.
• Derivatives are latest risk management fad
• The large (enormous) size of the financial derivatives markets dwarfs bank capital (i.e. make the banks’ capital small), making it an unsafe and unsound banking practices.

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