Establishment, Objectives, Functions and Powers of Nepal Rastra Bank

                                                1. Historical Background

Central banking is a recent phenomenon mainly related to 19th and 20th centuries, although certain central banking functions were performed by certain institutions in the olden days. The growth of central banks has been very slow. The Riks Bank of Sweden is the earliest bank established in 1656. The bank of England, though founded in 1694, started functioning as the central bank with the passing of the Bank Charter Act, 1882. Other major countries which established central banks in the 19th century are France (1800), Netherlands (1814), Russia (1860), Germany (1875), Japan (1882), etc. The movement of central banking started in the 20th century, particularly after the International Financial Conference meeting at Brussels in 1920 which suggested the opening of central banks in all countries. It gained the momentum after the establishment of International Monetary Fund in 1947. The Federal Reserve System in the USA was established in 1913 and the Reserve Bank of India in 1935. Today, there is hardly any country which does not have a central bank.

 

The basis for establishment of Nepal Rastra Bank, the Central Bank of the Federal Democratic Republic of Nepal, was rooted in the 1950s in an environment of dual currency in circulation - both Nepalese and Indian currencies circulating side by side as the legal tender. The exchange rate between these two currencies was highly unstable and volatile. At that time there was only one commercial bank in operation. The economy was least monetized and there was a very low level of development of the domestic financial sector. Likewise, Nepal had insignificant interaction with the outside world other than India and China. In this rudimentary domestic financial and monetary system, Sadar Muluki Khana (SMK), which managed the Government Accounts and had also issued first Nepalese currency notes in 1945, had virtually no role in development and oversight of the Nepalese financial sector. This factor largely propelled the need for a modern central bank in the country.




 

2. Establishment of the Central Bank

 Nepal Rastra Bank (NRB) was established under NRB act 2012 on 2013 Baisakh 14. At that time the act was of 39 sections only later it was extended on 2002 to 112 sections. This act was formulated to establish and smoothly operate NRB as central bank of Nepal.

 The major 12 chapters of NRB Act 2002 are listed below.

 ·         Preliminary

·         Establishment, Objectives and Functions, Duties and Powers

·         Formation of Board and Functions, Duties and Powers

·         Financial Provisions

·         Monetary Functions and Operation of Open Market

·         Monetary Unit, Banknote and Coins

·         Foreign Exchange Policy, Regulation and Reserve

·         Relations with Government of Nepal

·         Regulations, Inspection and Supervision of the Banks

·         Balance Sheet, Auditing and Report

·         Offences, Punishment and Proceedings

·         Miscellaneous

 

3. Objectives of the Central Bank

 According to section 4 of NRB Act 2002, the objectives of the central bank are listed below.

 

·         To formulate necessary monetary and foreign exchange policies in order to maintain the stability of price and balance of payment for economic stability and sustainable development of economy, and manage it.

·         To increase the access of the financial service and increase the public confidence towards the banking and financial system by maintaining stability of the banking and financial sectors.

·         To develop a secure, healthy and efficient system of payment.

  

4. Functions, Duties and Power of the Central Bank

 

In order to achieve the objectives referred to in Section 4, the functions, duties and powers of the central bank are listed following as per section 5 of NRB act 2002.

·         To issue bank notes and coins.

·         To formulate necessary monetary policies in order to maintain price stability and to implement or cause to implement them.

·         To formulate foreign exchange policies and to implement or cause to implement them.

·         To determine the system of foreign exchange rate.

·         To manage and operate foreign exchange reserve.

·         To issue license to commercial banks and financial institutions to carry on banking and financial business and to regulate, inspect, supervise and monitor such transactions.

·         To act as a banker, advisor and financial agent of Government of Nepal.

·         To act as the banker of commercial banks and financial institutions and to function as the lender of the last resort.

·         To establish and promote the system of payment, clearing and settlement and to regulate these activities.

·          To operate open market transaction through necessary instruments for liquidity management.

·         To implement or cause to implement any other necessary functions which the Bank has to carry out in order to achieve the objectives of the Bank under this Act.

 

5. Prior Right of the Central Bank

According to section 6 of NRB Act 2002, for the purpose of recovering any loan; which the Central Bank has given to any borrower or any other type of claim of the Central Bank against any borrower, the Central Bank shall have prior right of security over cash deposited in an account in the name of such borrower at the Bank or in any commercial bank or financial institution.

6. Functions not to be carried out by the Central Bank

According to section 7 of NRB Act 2002, the central bank shall not carry out the following functions.

·         Providing any loan, accepting any type of deposit or making any type of financial gift

·         Purchasing shares of any BFI's, public corporation

·         Carrying out any type of business

·         Acquiring right over movable and immovable property

 

7. Privileges and Facilities to the Central Bank

 

According to section 8 of NRB Act 2002, the central bank shall be entitled to the following privileges and facilities.

 

·         Exemption from all types of taxes, fees and charges on the incomes, capital transactions, houses, land, assets etc.

·         No requirement for the payment of registration fee for registration of the deeds of loan or refinance to be given by the Bank

·         No requirement of revenue stamps on any of the documents relating to the Bank

·         There would be no tax, fee, charge, duty on the export and import of bank notes, coins, gold, silver and the paper, metal, chemicals, and other materials to be used for printing bank notes and minting coins. 

 

8. Coordination with Government of Nepal, public bodies and International institutions

 

According to section 9, 10, 11 of NRB Act 2002, the central bank must coordinate as following.

·         Any contact by Government of Nepal (GON) with the Central Bank and by the Central Bank with Government of Nepal under this Act, shall be made through the Ministry of Finance (MOF).

·         The central bank may provide necessary information on the balance of payment, banking, economic and financial matters to the public bodies' institutions.

·         The central bank shall represent Nepal in international organizations and associations on the matters within the jurisdiction of working areas of the Bank such as monetary policy, foreign exchange policy, and the balance of payment, bank supervision and other related matters. And also the central bank shall take part in international organizations or associations working for the financial and economic stability through international monetary cooperation.

 

Conclusion,

In short, the central bank functions as the supreme monetary institution in the country by acting as a banker to the government and to the commercial banks; a controller of the monetary system of the country; and a promoter of economic growth with stability . It performs these functions without any profit motive and in the interest of the general public.

 

References

Paul, R. (1992). Monetary Economics. New Delhi: Kalyani Publishers

 

Online References

Nepal Rastra Bank                                          www.nrb.org.np

Nepal Law Commission                                  www.lawcommission.gov.np

 

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