LAW5802 Banking and Negotiable Instruments — Unit 2: Central Bank

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Unit 2: Central Bank

2.1 Role of Central Bank as Banker to Other Banks/Financial Institutions and Government

The central bank keeps the accounts of the government and of the banks. As banker to government it receives revenues, makes payments, manages public debt, and holds government deposits. As banker to banks it keeps the banks’ reserve accounts, settles inter-bank clearing balances, and lends to them in stress — the lender of last resort function. Nepal Rastra Bank (NRB) performs both roles.

2.2 Legal Regime for Central Bank

2.2.1 Status of Central Bank

Nepal Rastra Bank was established in 1956 under the Nepal Rastra Bank Act, 1955 (2012 B.S.), and now operates under the Nepal Rastra Bank Act, 2058 (2002). It is a corporate body with perpetual succession. Its primary objective under the Act is price stability, while maintaining balance of payments stability, financial stability, and development of the banking and financial system. It enjoys operational autonomy in the exercise of its powers, subject to the Act’s framework.

2.2.2 Formation and Composition of Central Bank

A Board of Directors headed by the Governor (the chairperson), with deputy governors and directors nominated under the Act from the government, and the secretary of the Finance Ministry or a representative in the board’s deliberations.
The Governor and deputy governors are appointed by the Government of Nepal under the Act’s procedure, for a fixed tenure.
Head office in Kathmandu, with offices across the country.

2.2.3 Regulatory Power of Central Bank

NRB licenses banks and financial institutions, issues directives and prudential requirements (capital, provisioning, liquidity), inspects them, imposes corrective measures, and can recommend or direct mergers and actions including intervention and liquidation initiation under the banking laws. Its directives bind the institutions it supervises.

2.3 Role and Function of Central Bank

2.3.1 Regulation, Inspection and Supervision of Banks and Financial Institutions

NRB supervises through on-site inspection and off-site monitoring of returns. It enforces capital adequacy, asset classification, and provisioning standards aligned with international norms. Supervisory responses range from instructions, to penalties, to management takeover in the last resort.

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