The history of central bank in Nepal has a gradual continuous process of growth. Nepal Rastra Bank was established as the National Central Bank under the Nepal Rastra Act, 1955 on April 26, 1956 with objectives of supervising, promoting and directing the functions of commercial banking activities. Nepal Rastra Bank is a non-profit organization fully owned by the government.
As the national central bank, this Bank has the sole right to issue currency notes and coins and is responsible to manage the country's foreign exchange reserves. Nepal Rastra Bank started issuing currency only in 1959.
The role of central bank lies in balancing of the monetary system in the economy. It is very crucial and predominant in the balancing of the monetary system in the economy. It serves in different capacities in co-ordinationg the plans, policies and strategies of money supply and its creation. The central decides how much money to supply in accordance with the needs of the business and industries. In every country, the role of the central bank lies in providing valuable guidelines and directives in regulating the economy so that all the vital indicators like control of inflation, money supply, price level and other related variables are determined. NRB has formulated and implemented five annual monetary policies so far to ensure its role bringing price control, external correction and financial sector stability. Consumer price based on average annual inflation was maintained at 5.5 percent. Balance of payment shows surplus of about Rs.12 billion. There is restructuring of two local commercial banks, seizing passport of willful defaulters, correcting the negative net worth of non-performing banks, encouraging competition to bring down spread, begging exchange rate, liquidity management through open market operations, etc. So, to be specific, the role of central bank can be highlighted in the following pages;
Measuring leading economic variables
The central bank is an integral part of the economy as it develops and measures the various leading economic indicators of economic development. In number of cases, the central bank performs important role to develop macroeconomic variables to keep intact for economic growth from the promotions of various sectors of economy.
Money supply and creation
The central bank has a role to play in the money supply creations and its control according to the needs of economy. If the economy needs more funds, the central bank buys the securities through open market operations in providing funds to stimulate economic growth. But it controls supply of money to minimize the adverse consequences of inflation by raising the bank rate and there by commercial banks to generate money supply in economy.
Foreign currency management
The central bank has a role to play in managing the foreign currencies. It controls the supply of foreign currency in the economy in order to maintain the exchange rate without giving adverse impact on the local currency.
Effective dabt management
The central bank helps in the debt management policies of the government. It pools the funds to finance government in times of need to meet the government budget deficits as well as taking the funds from government whenever it has surplus. It is done through the issue of various of short-term and the long-term debt instruments.
Valuable advise to the government
The central bank has professional exposure with outstanding world and it can advise the government in policy matters to link the monetary policy with the fiscal policy of the government. In various matters and issues, the central bank can advise the government to formulate the development plans and policies with appropriate strategies.
Control and the supervisions of financial institutions
The role of central of the bank lies in encouraging healthy growth of banks and financial institutions through competitions to enhance their efficient operations to stimulate economic growth. They help the banks in times of crises and control them it they go with policies beyond the economic development. They don't allow banks to provide unproductive credit not beneficial from economic prospective.
Managing the credit policy
The central bank has a role to control credit policy through expansions and contractions of money supply to avoid adverse consequences in the economy. They use various weapons of credit control to the economy in right order without creating any trouble in the overall economic development.
The central bank has a coordinating role to play in bringing various sectors of economy to prosper without constraints and bottlenecks. They create linkage with the government at the policy level and cooperate with banks and financial institutions as well as maintain good public relationship with other sectors of the economy. Even at the international level, they have good connections and contact to mobilize funds from global world.
Objectives of Nepal Rastra Bank
Most of these objectives of Nepal Rastra bank specified in Nepal Rastra bank Act are briefly highlighted below:
- To formulate necessary monetary and foreign exchange policies in order to maintain the stability of price and balance of payment for sustainable development of the economy.
- To promote economic stability and liquidity required in banking and financial sector.
- To develop a secured, healthy and efficient system of payment.
- To inspect, regulate, monitor and supervise the financial and banking system
- To promote financial and banking system of Nepal and to flurorish its public credibility.
Functions of Nepal Rastra Bank
Most of these function of Nepal Rastra bank specified in Nepal Rastra bank Act, are briefly highlighted below;
- To manage note issue and money in circulation in the economy
- To formulate necessary monetary policies in order to maintain price stability and to implement these policies.
- To formulate foreign exchange policies for the benefit of the country.
- 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 activities and transactions as well as to regulate, inspect, supervise and monitor them.
- To act as a banker, as adviser and a financial agent of His Majesty's government.
- 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 and
- 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.