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Kathmandu University School of Management Kathmandu College of
Management
Internship Report Title of Project: A Study on Electronic Cheque
Clearing System of
Himalayan Bank Limited (HBL) As part of the requirement for BBA
Program
Internship Programme Code: RIS 402
Internship Employer
Name of the Organization: Himalayan Bank Ltd.
Work Supervisor: Mr. Shankar Joshi
Address: Thamel, Kathmandu
Intern
Sneha Pradhanang, KU Registration No: A010500-09
July 2013
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DECLARATION
I, Sneha Pradhanang declare that this report is a result of my
own study and research carried out in the year 2013. I assure the
University that this report has not been copied from any other
sources and is the result of my own work for the internship period
February 25th to April 25th, 2013. The organization has provided me
with complete freedom and guidance for which I have used contents
that is not subject to harm the organization and the
University.
Signature
_____________________
Sneha Pradhanang
BBA 2009-2013
Kathmandu College of Management
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ACKNOWLEDGEMENT
I would like to express my sincere gratitude to Himalayan Bank
Limited and the entire Himalayan Bank family for providing me with
the opportunity to work as an intern in their organization and
making this internship program a success. I would like to thank Mr.
Prabin Pradhan, Account Officer of HBL for his guidance and
suggestions throughout the internship duration.
I would also like to extend my deep appreciation to all the
members of Himalayan Bank Limited who were there to guide, support
and help me in the organization. Special thanks go to Bills and
Remittance department family for their cooperation and
encouragement for successful competition of this report.
Further, I would like to thank Mr. Bishnu Raj Adhikari,
Principal, KCM for his regular guidance during every part of BBA
course. My great appreciation goes to Mr. Lhakpa Gelu Sherpa, KCMs
internship coordinator for his assistance and encouragement in
writing this report. I would like to show my gratitude to my family
and friends who have directly or indirectly become part of this
report. Last but not the least; I would like to extend my gratitude
to KUSOM for structuring course that helps students to garner
working experience and also gives motivation to work. This kind of
program will certainly benefit the students.
Thank you all!
Sincerely,
Sneha Pradhanang
BBA: 2009-2013
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EXECUTIVE SUMMARY
Himalayan Bank Limited (HBL) is one of the largest and reputed
private sector commercial banks in Nepal. With the objective of
becoming the first choice bank, HBL was established in 6th
February, 1992 by a few eminent individuals of Nepal in partnership
with the Employees Provident Fund and Habib bank Limited of
Pakistan. The bank has been consistently growing over last 20
years, and stands as one of the biggest bank in the country. HBL
has its corporate (head) office at Kamladi, Kathmandu. HBL is known
for its professionalism, quality service delivery, experienced
human resources, innovation and technology.
As per our course requirement, I chose HBL for internship as it
is one of the leading commercial banks of Nepal and it also
provides great learning experience for interns. The departments
that HBL Thamel Branch consists are: Customer Service, Bills and
Remittance, Trade and Finance, Trade operation Center (TOC), Credit
Management and Administrative Department. During the internship I
got opportunity to work in the four departments which were Card
Center, Customer Service Department, Bills and Remittance and Trade
and Finance department. In each department I got to learn and
perform various tasks.
This report mainly focuses on transactions of cheques through
cheque clearing
system. The study is based on interviews and group discussions
with the employees, the bank manuals on ECC and Progress Soft Net
Clearing Report of HBL. As cheques are widely used as medium of
bills of exchange by individuals and companies, modernize the
banking sector and the payment systems involves efficient cheque
clear ECC provides faster access to funds for both individuals and
corporations, reduce payments overhead costs in the long run,
minimize associated risks, and promote efficiency in terms of speed
and security of payments, eliminating physical cheques
movement.
Working in HBL was a fruitful and highly valuable learning
experience. It proved to be one of the best experiences where I
could understand the working system of HBL. The electronic cheque
clearing system and transactions of cheques in HBL through ECC is
the main focus of this report.
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Declaration
Recommendation letter from employer
Recommendation letter from college supervisor
Acknowledgement
Executive Summary
Table of Contents
List of Tables
List of Figures
List of Acronyms
Table of Contents
Part One
INTRODUCTION
1. Background 1
2. Goals and Objective of internship 2 3. Roles and Job
performed in the internship 3 4. Roles and Job of Departmental Head
5
Part Two
INTRODUCTION OF INDUSTRY & COMPANY
1. Introduction of HBL 6
a. Mission, Vision, Objectives of HBL 7 b. Organization
Strategies 8 c. Major Products of the HBL 9
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d. Organizational Structure of HBL 10
2. Organizations general and competitive environment 11
a. SWOT analysis 12
b. PEST analysis 14
Part Three
PRESENTATION OF THE PROJECT
Project: A Study on Electronic Cheque Clearing System of HBL
Section I: Introduction 1. Introduction of the project 17 2.
Objectives of the project 18 3. Scope and limitation of the project
18
Section II: Conceptual Framework 1. Review of related literature
19
Section III: Methodology 1. Research Design 24
2. Study Approach 25 3. Analysis and Interpretation 26
4. Tools Used 27
Section IV: Presentation and Analysis of the Project 1.
Analytical Presentation of the project 28 A. Manual Cheque Clearing
29 B. Electronic Cheque Clearing System 32 C. Cost comparison of
ECC and manual clearing system of HBL 38 D. Effectiveness of
Electronic Cheque Clearing 39
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2. Major Findings 41
Section V: Conclusion and Recommendation 42
Part Four
REFLECTION OF INTERNSHIP 43 REFERENCES 44 APPENDIXES
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LIST OF TABLES
Table 1: Transaction Limits in ECC system
Table 2: Fee Structure of Manual Cheque Clearing for BFIs
Table 3: Transaction Cost for Manual Clearance in HBL
Table 4: Initial cost of Installation and Annual membership
charge for ECC
Table 5: Cheque Clearing Charge paid by presenting bank
Table 6: Indirect Cost per Transaction
Table 7: Total Cost of Cheque Transaction
Table 8: Comparison of Total cost of ECC and Manual Clearing in
HBL
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LIST OF FIGURES
Figure 1. Cheque Clearing Process
Figure 2. Composition of Inter- Bank Cheque Cleared by BFIs
Figure 3. Cheque Presented by HBL
Figure 4. Total Cost of Clearing in HBL with respect to Cheque
Categories
Figure 5. Cost and Transaction vs Cheque Categories for HBL
Figure 6. Comparison of ECC and Manual Cost for HBL
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LIST OF ACRONYMS
HBL Himalayan Bank Limited
ECC Electronic Cheque Clearing
ECCS Electronic Cheque Clearing System
ECCH Electronic Cheque Clearing House
ACH Automatic Clearing House
MICR Magnetic Ink Character Recognition
NCHL Nepal Clearing House Limited
NCP Net Clearing Position
NPA Non Performing Assets
L/C Letter of Credit
OD Overdraft
CSD Customer Service Department
NRB Nepal Rastra Bank
ATM Automatic Teller Machine
SWOT Strength Weakness Opportunity and Threat
POS Point of Sales
SMS Short Messaging Services
SCT Smart Choice Technology
RTGS Real Time Gross Settlement System
KYC Know Your Customers
FOREX Foreign Exchange Market
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PART ONE
INTRODUCTION
1. BACKGROUND An internship is an opportunity to gain hands on
work experience that students just cant get in the classroom. It
enables the students to transform the academic knowledge learnt
through the years into the practical real world environment,
combining theory with work experience. The internship programme
also provides platform to the undergraduate students to realize the
job requirements and develop skills.
This internship report has been prepared as a part of BBA course
to fulfill 3 credit hours conducted by Kathmandu College of
Management (KCM) under Kathmandu University School of Management
(KUSOM). Internship course is beneficial for undergraduate students
as it offers a chance to learn and discover about the organization
and decide whether it is the best career option to pursue.
Moreover, it helps the students to develop skills and knowledge
about various kinds of works that takes place in the
organization.
For the internship program I decided to work in a bank to gain
information about banking sector and learn how it actually
functions. As Himalayan Bank Limited (HBL) is one of the pioneer
commercial banks in the Nepalese banking industry, I chose HBL for
my internship course. For the first two weeks, I worked in Card
Center in the head office which is located at Kamladi, after that I
got an opportunity to work in the main branch, Thamel, Sanchayakosh
Bhawan. The internship program helped me to recall and review the
courses studied in BBA. Courses like Human Resource management,
Organizational Behavior, Commercial Banking Management, Service
Marketing were practically learned through this internship
programme. The bank provided me with the opportunity to work in
four different departments: Card Center at head office, CSD, Bills
and Remittance and Trade and Finance.HBL was established in 1993 in
joint venture with Habib Bank Limited of Pakistan. Through the
years, HBL has supported many with its flexible and customized
products to suit
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individual needs. For example Millionaire Deposit Scheme, Small
Business Enterprises Loan, International Travel Quota Credit Card,
Himal remit,
Consumer Finance through Credit Card and online TOEFL, SAT,
IELTS, etc. fee payment facility are some of the products and
services. HBL also has a dedicated offsite "Disaster Recovery
Management System".
HBL has very supportive and cooperative organizational culture
with every staff ready to help. It was a privilege to work in such
a prestigious institution with supportive staffs. This report is
based on personal experience gathered in HBL; information regarding
cheque clearing system in Nepal was collected from NRB and
NCHL.
2. GOALS AND OBJECTIVES OF INTERNSHIP As a business management
student, the primary goal of internship program was to gain
experience of how banking institution functions and are managed. I
took internship as a chance to develop knowledge and skills, such
as working with others, organizing, dealing with customers, time
management and many more. The goals and objectives set at the
beginning of my internship period at HBL were:
To gain insight of the working environment and culture of
HBL.
To learn about various departments of the bank, and be familiar
with the banking practices and the technical know how in the office
environment.
To learn about electronic cheque clearing process and find out
its effectiveness.
To incorporate the theoretical knowledge into practice.
To Develop inter- personal skills.
To learn various skills required by a banker that will enhance
qualification for job in near future.
To achieve the above goals, for the first two weeks of my
internship programme I worked in the head office at Kamladi, then
for remaining six weeks I worked as an intern in the main branch,
Thamel. This helped me to become familiar with banking environment
and participate in different departments. Hence, it was an
opportunity to learn from the employees and also to contribute from
my side.
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3. ROLES AND JOBS PERFORMED IN THE INTERNSHIP As an internee, I
got an opportunity to work in different departments of HBL. First
two weeks I worked in Card Center at head office, Kamladi. After
two weeks I worked in following departments: Customer Service
Department, Bills and Remittance department, Trade and finance
department at Thamel Branch. The jobs I performed during the time
span in these departments are as follows:
a. Card Center As an internee I cooperatively dealt with
customers regarding new card request, card replacement, release of
captured cards, and deposit for prepaid cards. To upgrade the
security system for debit cards, pin numbers were replaced of the
card holders in HBL; I assisted in making records for new card
requests, collected and distributed the cards. Verified the
signature and activated the card through T24 software and
distributed the card. Moreover, online fee payment facility is also
provided in this department, so my job was also to provide
customers information regarding the fee payment system for ACCA and
check the documents required to proceed with the fee payments.
b. Customer Service Department (CSD) CSD is where customers
comes first for inquiries, the department provides customers with
information and deals with any problems or complaints that they
have, it is also known as front desk. In HBL, CSD consists of
account opening and
closing section, providing balance statement and cheque book
issuance and distribution section. The jobs performed in these
sections are as follows: Account opening and closing section: As an
intern, my job was to deal with
customers who have come to open/close /transfer their account.
To make
customer aware about the requirement of documents to
open/close/transfer their account. Check and arrange the necessary
documents and give it to staff for further process. I assisted
customers in filling out forms (a/c opening/closing, customer
identification, KYC) Check and take a copy of the documents
(citizenship certificate, passport, utility bills). In the end of
the working hour maintained record for banks reference.
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Providing Balance Statement: The job of internee is to make the
customer fill the slip with their name, a/c number, the time
duration of statement of balance they want, and assist in
distribution of the statement.
Cheque book Issuance: Cheque book is distributed to the new
accountholder as soon as customer deposit their amount in the bank
and deposit slip is presented, and new cheque book of existing
account holder is prepared looking at filled cheque requisition
slip with valid signature and account number. So, I helped in issue
and distribution of cheque books.
c. Bills and Remittance Department As an internee I worked most
in cheque clearing section of Bill and Remittance Department. The
jobs performed are as follows: Assisted in the inward clearing and
outward clearing of cheques.
Accepted cheque deposits from customers.
Informed customers if there has been a transfer of payment in
their account.
Informed the customers if their cheques have been returned /
bounced due to various reasons like insufficient fund, amounts in
words and figures differ, Incorrect Date.
Verified cheques for their approval from the bank before payment
of cheque were made through ECC.
Checking of clients account and balance enquiry through
telephone by the use of T24 software.
d. Trade and Finance Trade and Finance Department of HBL offer
services to its clients in trade both domestic and international by
providing letters L/C, guarantees, import financing, performance
bond. The jobs I performed in this department are: Prepared account
movement advice, T.T, and letter of guarantee.
Helped in documentation of L/C files (import and export).
Assisted the staffs in maintaining records of transactions and get
them
approved from the branch manager.
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4. ROLES/JOBS OF DEPARTMENTAL HEAD Every department has a
departmental head whose major responsibility is to plan and mange
departmental functions. The roles of departmental head as a whole
are as follows:
Departmental heads define roles and give descriptions of job to
be performed by the staffs working in their departments.
Bring coordination among the staffs and motivate them to perform
job efficiently.
Supervise the work performed by the staffs and interns in the
department.
Assisting and correcting the work performed by the interns.
Roles played by departmental heads of CSD and Bills and Remittance
Department are as follows:
Customer Service Department Assisting the staff and approving
their worksheet.
Maintain systematic balance in the department and solving
problems of customers.
Make sure KYC, customer identification forms are filled up by
account holders.
Make arrangements for replacement of any staff if on leave or
currently
unavailable.
Bills and Remittance Department
Monitor whether the cheques have been presented and honored
within the time schedule.(Appendix. 3)
Distributing the task of honoring cheques to the staffs in
cheque inward section and approving of different types of cheque
payments.
Approving all the paper works done within the department. For
example drafts, telex transfer travelers cheques.
Providing clients with the information regarding the procedures
and documents required for transferring and receiving money through
Himal Remit.
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PART TWO
INTRODUCTION OF THE COMPANY
1. INTRODUCTION OF THE COMPANY Himalayan Bank was established
and promoted in 1993 by a group of prominent businessmen, bankers
and financial institutions with Habib Bank Limited of Pakistan, as
the joint-venture partner. Despite the cut-throat competition in
the Nepalese Banking sector, Himalayan Bank has been able to
maintain a lead in the primary banking activities. Legacy of
Himalayan lives on in an institution that's known for its
innovative approaches to merchandising and customer service.
Products such as Premium Savings Account, HBL Proprietary Card and
Millionaire Deposit Scheme and services such as ATMs and
Tele-banking were first introduced by HBL in Nepal.
All Branches of HBL are integrated into Globus (developed by
Temenos), the single Banking software where the Bank has made
substantial investments. This has helped the Bank provide services
like Any Branch Banking Facility, Internet Banking and SMS Banking.
Living up to the expectations and aspirations of the Customers and
other stakeholders of being innovative, HBL very recently
introduced several new products and services. Millionaire Deposit
Scheme, Small Business Enterprises Loan, Pre-paid Visa Card,
International Travel Quota Credit Card, Consumer Finance through
Credit Card and online TOEFL, SAT, IELTS, etc. fee payment facility
are some of the products and services. HBL also has a dedicated
offsite Disaster Recovery Management System.
Targeting the number of Nepalese workers abroad and their need
for formal money transfer channel; HBL has developed proprietary
online money transfer software- Himal Remit. By deputing their own
staff with technical tie-ups with local exchange houses and banks,
in the Middle East and Gulf region HBL is one of the biggest inward
remittancehandling banks in Nepal. HBL has been able to position
itself with innovative products in Nepalese Banking industry.
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a. Mission, Vision, Objectives and Motto of HBL The Banks
Vision:
Himalayan Bank Limited holds of a vision to become a Leading
Bank of the country by providing premium products and services to
the customers, thus ensuring attractive and substantial returns to
the stakeholders of the Bank.
The Banks Mission The Banks mission is to become preferred
provider of quality financial services in the country. There are
two components in the mission of the Bank- Preferred
Provider and Quality Financial Services; therefore HBL believes
that the mission will be accomplished only by satisfying these two
important components with the Customer at focus. HBL always strives
positioning itself in the hearts and minds of the customers.
The Banks Objective To become the Bank of first choice is the
main objective of the Bank.
The Banks Motto
The trust of its customers empowers its motto: The Power to
Lead
b. Organizational Strategies Organization strategy is concerned
with foreseeing a future business, creating value in the eyes of
customers, and building and sustaining a strong position in the
market place. Without organization strategy; organization cannot
exist in a
competitive world the organization needs to develop an effective
organization strategy. An effective organization strategy assures
that a company develops an organization capable of delivering its
strategy. The major organizational strategies of HBL are as
follows:
1. To limit NPA to 2.41 percent. 2. To establish 6 branches
within and outside the valley. 3. To expand and consolidate
remittance business to Asian, European, American
and Australian markets with a focus on sophisticated
services.
4. To introduce Loyalty Card for customers of Himal Remit. 5. To
install an additional 200 POS machines.
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6. To set up an additional 16 ATMs at various Places (Till now,
three ATMs already installedat Corporate Office and Nagarkot).
7. To introduce new deposit and credit products. 8. To give
continuity to recovery of written-off loans in an active manner. 9.
To make deposit and loan products more attractive as per the demand
of the
general public.
10. The Bank has already installed web-cameras at the Customer
Service Department of Thamel Branch for the convenience of new
account opening
customers. The service will be reviewed and Extended to other
branches.
11. To upgrade the Web-based T24version. 12. To make available
morning and evening counter services in all the branches of
the Bank. (Till date, 18 branches Thamel, New Road, Patan,
Maharajgunj, Bhaktapur, Pokhara, Bharatpur and Tandi are providing
extended counter services, whereas Chabahil, Teku, Nepalgunj,
Butwal, Bhairahawa, Parsa, Palpa, Itahari, Biratnagar and Dharan
are providing extended counter services).
13. To shift the ICT infrastructure to the new corporate Office
premises. 14. To make the ambience of various branches Convenient
and eco-friendly. 15. To introduce the Web-based system to monitor
and manage fixed assets. 16. To start credit card business with
Union Pay. (Implemented) 17. To take the initiative in having 10 %
of the total Loan & advances under the
SME portfolio (Source: HBL Annual Report 2011/2012)
In the past, primary focus of HBL had been trade finance and
corporate lending. However, now it has planned to diversify its
market to the population isolated from banking facilities which is
almost 50% of the total population.
Moreover, HBL aims to maintain its premier standing among other
banks in Nepal. As human resource is the most important resources
of all, HBL
continuously train its human resources and provide favorable
environment for them to increase productivity and meet its
strategic objectives.
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c. Major Products and Services of the Company The variety of
products and services Himalayan Bank offers to their customers are
as follows:
i) Deposit Products: HBL offers a choice of deposit products
that customers can choose from to suit their individual
requirements. The various deposit products includes: Fixed deposit
accounts, Current accounts, Call Deposits, Normal saving account,
Premium saving account, Super premium savings account, Himal
Saving
account(zero balance account), Himal Remit Savings Account,
Bishesh Savings Account (for minors, seniors citizens, the
physically handicapped and the illiterate) an Shareholders Saving
Account.
ii) Loans: The types of loan that the bank has been providing
can be classified into corporate loan (funded or non funded
corporate loan), Small and Medium Enterprise loan), Retail/consumer
loan.
iii) Trade Services: To assist its trading customers, HBL offers
L/C (Advising, Confirmation, Negotiation and Reimbursement) and
Guarantee (Bid Bond, Performance Bond Advance Payment and Counter
Guarantee) facilities; customers can place their L/C application in
any of HBL branches.
iv) Remittances: Himalayan bank provide various types of
services regarding the money transfer from the foreign country. HBL
provide Himal Remit service that has largest payment network
covering cities towns and villages of Nepal. The other services
under remittance that HBL provides are Money Gram, Travelex Money
Transfer, bank drafts etc.
v) Card Services: Himalayan Bank introduced the first Nepali
Credit Card for the domestic market. Currently, HBL offers various
card services:
HBL debit card (SCT, Visa, and Master): This card is avail to
any individual maintaining saving account at HBL.
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HBL Visa Credit card: HBL issues two types of credit cards to
its customers they are: Visa Gold International and Master Card
International This is an international card which can be issued
anywhere in the world except Nepal and India. Customers having
regular income source in foreign currency and maintaining a foreign
currency account with any of Himalayan bank branches are eligible
to apply for this card.
Domestic Credit Card Domestic card is used in Nepal and India
only. The two types of domestic credit card hat HBL offers are:
Visa Gold Domestic and Visa Classic Domestic
Prepaid Card Prepaid Card is an easy and safe mode of carrying
money. Individuals not having account at HBL can also apply for HBL
prepaid card. Two types of prepaid card HBL offers are
International and Domestic Prepaid card.
vi) Safe Deposit Locker: HBL offers safe deposit locker
facilities for the security of valuable belongings of customers.
The locker is of variable size and rate as per the need of
customer.
vii) E- Banking: SMS Banking: HBL offers the facility of SMS
banking through which customers can check their balance, their last
three transactions and FOREX rates with just few clicks.
Internet Banking: HBL has also started providing their customers
with online banking service like accessing the account holders own
account, check balance and transfer fund from one HBL account to
other HBL account, online payment of utility bills.
d. Organization Structure of the Company The formal arrangement
of jobs within HBL is simple and it has one of the most used
organization structure i.e. top-down hierarchal structure. The top
level management includes the CEO of the bank, followed by the
Senior General Manager and the General Manager. They are major
decision making authority
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whose decisions are abide by all the members of the
organization. The hierarchy is then followed by list of Executives
of Administration, Finance, Operations, Marketing, Human Resource
and Credit. They look after entire branches HBL and manage routine
activities for proper functioning of the organization. Under them
are the various departments of the bank with one person heading and
monitoring each department. These departments also have been
further departmentalized based on need. Quality Service Department
has been recently formed in corporate office of HBL, to maintain
and improve the quality of services it provides to its customers.
The management team of this department is dedicated in improving
the overall service quality provide by HBL.
HBL follows a centralized decision making system where the
decision made by the top management is followed by bottom level of
employees maintaining chain of command. But there are times when
this has not been successful and a temporary chain of command has
been implied. Not just Himalayan Bank but other commercial
competing banks mostly follow this chain of command. However, HBL
has very cooperative and supportive organizational culture where
everyone is supportive and ready to help for one another. The
overall organizational structure is shown in Appendix 1.
HBL is branch banking organization, it has 41 branches: 17 are
located inside Kathmandu valley and 27 branches are located outside
valley. The branch manager appointed in every branch, he/she is
responsible to maintain flow of communication between the head
office and the branch. Centralized operation takes place in a way
that all the important decisions taken in these branches must be
approved by head office before execution.
2. ORGANIZATIONS GENERAL AND COMPETITIVE ENVIRONMENT
Banking industry operates in competitive environment with cut
throat competition. In order to sustain in the market, bank has to
bring out innovative products and services to its customers.
Innovation is very important in order to gain competitive
advantage. It is important for a bank to attract customers and
capture the market share. These are the analysis of the factors
that influence the bank and its administration in long run.
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a. SWOT Analysis of HBL Strengths: HBL was established in 1993
and has still been able to maintain lead on primary banking
activities: loan and deposits. HBL is one of the most experienced
banks of Nepal with joint collaboration with Habib Bank, Pakistan.
Habib Bank constantly provides necessary guidance and support in
the field of Research and Development and management expertise.
HBL comprises team of dedicated and highly experienced manpower
at every levels of management from top level management to
operating level. Innovative
products and services such as: Millionaire Deposit Scheme, Small
Business Enterprises Loan, Prepaid Visa card, International Travel
Quota Credit card, Consumer Finance through Credit Card and online
TOEFL, SAT, IELTS etc fee payment facilities.
Easily accessible locations, HBL has recently built its
corporate head office in Kamladi which is major area of business
hub. While its head branch office is at Tridevimarg, Thamel which
is indeed attractive location for tourists which makes it
convenient for tourists to conduct banking transactions with
advanced banking facilities provided by HBL.
HBL makes constant effort to provide world class service to its
customers with latest technology. HBL uses Globus T24 software as
its banking software, which is regarded as one of the best banking
software. As per its commitment to introduce its latest banking
technology for its valued customers, HBL has recently adopted EMV
(chip-based) card acquiring business technology in its Point of
Sales (POS) terminals. HBL has become number one financial
institution in the country to apply this kind of latest
technology.
Weaknesses: HBL has centralized decision making system; where by
even small decision made in the bank has to get approval of the
higher level of authority. This makes it time consuming process.
The inter-departmental communication gap is certainly the biggest
weakness of the HBL.
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Like most of the organizations in Nepal the formation of
political unions is in
hinders the smooth operation of the bank. Various unions based
on the political parties have been established in the banks.
Opportunities: HBL has a good reputation in the banking industry
as it is one of the oldest commercial bank. It is a leading player
in the banking sector of Nepal for glorious reasons one being the
bank having the highest deposit base and loan portfolio amongst
private sector banks.
HBL operates as a joint venture with Habib Bank, Pakistan. So,
HBL has opportunity to capitalize on this international affiliation
to utilize the management
expertise and global reach. HBL should also conduct its
operation with other international banks so that it can access
large number of customers and build better image in the market. The
high increasing trend of inward remittance in Nepal can be a great
opportunity for Himal Remit. Himal Remit has already been the most
successful remit service provider of the nation focusing mostly on
gulf nations.
Threats:
The high competition in the market is the main threat for HBL.
It has many
established competitors like Standard Chartered Bank, Mega Bank,
Nabil Bank, Nepal Investment Bank, Everest bank etc. The rapidly
changing technology is another threat for HBL. The change in
banking software, online banking, and many more technology
advancement has made the existence of only those banks possible
which can go along with change. As there are many commercial banks
in Nepal and many are in process of entering in the field, the new
comers in market are threat to the existing ones. The new banks use
many innovative strategies to penetrate the market; however, HBL
has been aware about that and remained proactive. Some of the
competitive products that HBL came up to fight with the new banks
are:
i. Small and Medium Enterprise Loans: To help establishment,
growth and expansion of small and medium sized enterprises,
Himalayan Bank has
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developed a special loan package meant just to suit small and
medium sized enterprises.
ii. Bishesh Savings Account: Bishesh Savings Account is a
deposit product targeted to special section of society which
includes minors, senior citizens completing the age of 50 years,
physically challenged and illiterate individuals.
iii. Zero balance account: Customers can open an account for a
minimum balance of zero. HBL came up with this product to counter
other low balance accounts of banks.
iv. Internet Banking: HBL has recently come up with utility
payment facility
in internet banking services for its customers for which
customer has to fill up internet banking form.HBL helps doing many
banking transactions using the Internet. Today, most of the
commercial banks have internet banking, mobile banking facility for
the convenience of their client. HBL has remained up to date with
these innovations before it became threat to the organization
The policies and rules implemented by Central Bank can be
another threat for HBL. The change in policies and pressure to
maintain low capital base rate may hamper the strategic planning
the bank to be successful should be ready for the environmental
change with flexible strategies.
b. PEST Analysis of HBL In the process of conducting a
political-legal, economic, socio-cultural, and technological (PEST)
analysis for a bank, several environmental and regulatory factors
are considered. Some of the specific things that can affect a bank
include local regulations, citizens feelings about using banks, and
whether the economic climate can support a new financial
institution. The analysis can help a bank to determine how to
position itself strategically as it determines the best methods for
approaching marketing, opportunities, and the development of the
business. A PEST analysis for a bank may also be useful in helping
to determine whether it is advisable to enter a new market.
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15
Political Forces Political environment of the nation has a very
significant role in banking sector. There are very few
opportunities for any private sector to prosper because of the
nations political instability. The political parties and their
leader are concentrating more on political battle and political
power instead of developing strategy for the development of the
country. The emerging and never ending conflicts and flight for the
power has made the market vulnerable and more risky.
The government has levied the restrictions in the limitation of
loans to the housing and the real estate sectors of the country.
The bank and financial sectors face the dilemma of structuring
their long term strategies as the instability and the rapid
changing of the government policies. Though the government and its
employees are not being able to perform stable, there are
institutions that are trying to make the laws and regulations more
ease to the business houses. The rules and regulations for the
banks are established by the central bank.
Economic Forces Economic forces comprises of macroeconomic
variables that affect business performance. Economic factors like
economic growth, interest rates, exchange
rates GDP and the inflation rate affect every aspect of a banks
operation.
Nepalese economy system is very instable as the aftermath effect
of the government policies. The country has never been able to
prosper as per its capability. Due to various problems in the labor
and material shortages, there is downfall in the growth rate. There
is serious problem of brain drain in the country. The educated and
experienced people migrate from the country to other prominent
places where they get good salary and stable life. The banks play a
crucial role in economic system. The remittance services supports
in bringing in foreign currency earned by the people abroad.
Socio Cultural Forces Some of the major factors that affect the
socio-cultural environment are the major changes taking place in
the form of demography, education level, socio changes and other
various cultural environments. Due to these reasons people have
started
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preferring commercial banks to deposit their money for the
better security purpose.
Due to different lifestyle and busy schedule of the customer,
HBL tries to offer the quickest services of its customer. So HBL as
being the service provider is moving towards providing quick and
reliable service to its customer to gain competitive advantage over
their competitors.
Technological Forces Technology has been one of the major tools
for determining the overall success of any commercial banks.
Success and failure of any banks heavily rely on technological
advancement. Those banks with optimal technological advancement can
aim for higher growth. The use of technology can enhance the
customer
services. Investment in technology also makes the daily
operation of bank easier. For example use of ECCS has made the
cheque clearing process easier and faster.
Due to technological advancement, productivity of the worker in
HBL has increased tremendously. HBL has introduced many techno-
based services such as ATM, credit card, debit card, online
banking, online fee payment; mobile banking etc. Due to the
technological advancement, entire operation of HBL has been
effective and profitable.
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PART THREE
PRESENTATION OF MAJOR PROJECT UNDERTAKEN Project: A Study on
Electronic Cheque Clearing (ECC) System of Himalayan Bank
Section I: INTRODUCTION 1. Introduction of the project
The main focus of this research is electronic cheque clearing
system, how it differs from manual cheque clearing and its
effectiveness. From the ancient banking system cheques have been
used as an important negotiable instrument to make safe and
convenient payment. Today, the idea that a bank depositor can
transfer funds by cheque seems natural and obvious. Although usage
of cheques has partly fallen and replaced by alternative payment
systems such as credit cards, debit cards, and online payments,
however, cheques are still widely in use in Nepal. Around 8,000
cheques from different parts of Nepal are cleared everyday
(Sunday-Thursday).
Inter-bank cheque clearing in Nepal was a fully manual
paper-based operation till last year. The method was subject to
errors and the cheque clearing cycle would take 2 to 3 days. These
problems associated with the manual operations were addressed. To
modernize Nepalese banking sector NRB implemented an advanced
cheque clearing solution that manages the daily cheque clearing
cycle electronically. Clearing and settlements of cheques
electronically have replaced the traditional physical routine of
moving paper-cheques among the banks and clearing house. This
recent improvement in cheque clearing system in Nepal is major
focus of this project.
Today, the new method of cheque clearing system is used by all
commercial banks and most of the financial institutions in Nepal as
per the direction of NRB. NCHL was established in 2009 in
association with Nepal Bankers Association, Nepal Rastra Bank and
other financial institutions. BFIs have started electronically
clearing Nepali currency cheques from April 9, 2012, whereas it has
been clearing foreign currency cheques from February 3, 2012.
Therefore, the project is based in the research topic of
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Electronic Cheque Clearing of HBL. It is further emphasized on
the process and effectiveness of Electronic cheque clearing and
settlement solution.
1. Objectives of the project Cheque clearing and settlement are
indispensible part of every financial institutions especially
banks. The primary objectives of selecting this topic for research
are: To examine how ECC differs from traditional manual clearing
procedure.
To analyze the cost of clearing of different categories of
cheques in HBL using ECCS.
To study about the effectiveness of ECCS in HBL.
To explore the issues related to ECC in BFIs of Nepal.
3. Scope and Limitations of the project Scope The study attempts
to demonstrate the difference that incurred in Cheque clearing
procedure after online based system is used by Himalayan Bank ltd.
Every bank performs this function but difference lies in how
effectively it is performed. The recent advancement in this system
is the major reason for me to select electronic clearing as the
project topic. So this study will help us to understand the changes
and effectiveness that electronic cheque clearing system has
brought in clearing process.
As Nepal Clearing House is carrying out the electronic cheque
clearing with Nepal
Rastra Bank continuing to settle cheques after their clearance,
the project also involves roles of NRB, NCHL and members of NCHL in
the process. Since large numbers of cheques are cleared every day
the study is worthwhile.
Limitation
As the ECC system is new in Nepal, employees themselves were in
learning
process, so could not gather in-depth technical knowledge
regarding ECCS.
There was limitation while gathering information as the topic is
vast and new.
The research is based on interviews of employees from different
institutions (HBL, NCHL, and NRB), therefore opinions, ideas;
suggestions for qualitative method applied may vary from person to
person.
Quantitative data which could be used for further analysis were
confidential and could not be disclosed.
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Section II: CONCEPTUAL FRAMEWORK 1. Review of related
literature
The demands of new payments and clearing methods coupled with
regulatory changes in banking are forcing clearing operations to
move away from the traditional paper clearing stream to an
electronic data based and electronic image exchange based clearing
system for quicker clearing and resultant accelerated deposits and
returns. Purpose: to facilitate cheque truncation by authorizing
substitute cheques, to foster innovation in the cheque collection
system and to improve the overall efficiency of the Nations
payments system. (Shilby, 2011).
The cheque clearing process is shown in the figure below:
Figure1: Cheque Clearing Process
1. Customer Writes Cheque 2. Payee Receives Cheque (Drawee)
8. Customers a/c is debited 3. Payee deposits Cheque 9. Payees
a/c credited
6. Cheque is presented 5.Clearing 4. Cheque is processed for
payment to House/Agent 7.Payees bank is credited customers bank
As illustrated in the figure above, when the cheque is deposited
to by payee after receiving from drawee, the payees bank presents
the cheque to drawees bank for payment, this presentment of cheque
may occur by physically transporting the cheque to the clearing
house or through the use of electronic system. After the cheque
is
presented it is honored after verifying necessary information.
Then customers
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account is debited and payees account is credited with the
amount indicated in the cheque.
ECC System in Nepal: ECC (NRB, 2011) is the interbank cheque
clearing solution that has replaced the manual cheque clearing
solution in Nepal. It is an image-based, cost-effective, cheque
clearing and settlement solution, where the original paper cheques
are transferred to scanned images in order to be presented
electronically through the secured communication channels from the
member in which they are deposited to the member on which they are
drawn resulting in a faster access to funds, lower transportation
expenses and increased cheque trust. ECC calculates the
multilateral net clearing position and sends to the Settlement
System of Nepal Rastra Bank for settlement of the net clearing
position of the direct member. The Central System of the clearing
mechanism lies at Nepal Clearing House Limited
The physical movement of the cheques are truncated or stopped at
the presenting bank and the cheques images are electronically moved
between the presenting and paying banks resulting in a faster and
easier processing of the cheque transactions. Electronic Cheque
Clearing (ECC) NCHL-ECC is an image-based, cost-effective, MICR
cheque processing & settlement solution where an original paper
cheque is converted into an image for electronic processing of the
financial transactions between participating members Banks/FI. It
relies on cheque data sent by member banks through Progress Soft
Electronic Cheque Clearing System.
This same day clearing and settlement process will enable better
fund management and enhance the reliability and importance of the
system as well as increase credibility and trust of using checks as
a widely accepted payment instrument
Operation Procedures: Electronic Cheque clearing Procedure: In
ECC process the presenting Bank present a Cheque to the drawee
Bank. This process involves: presenting of Cheques to the Clearing
House; sorting; exchanging
of Cheques among participating Banks; balancing of the amounts
expressed in Cheques exchanged; and consequently deriving the net
clearing balances which are settled through the accounts of the
Banks maintained with the NRB.
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The Cheque Clearing Flow can be summarized in the following main
point: 1. The Cheque Clearing Flow starts with the outward clearing
at the Presenting
member. 2. The Clearing House routes the presented cheques from
the Presenting member
to the Paying member. 3. The Inward Clearing starts at the
Paying member. 4. The Reply is sent from the Paying member to the
Presenting member through
ECC to accept /reject the payment of the cheque. 5. The Clearing
Cycle ends when ECC submits the NCP for the replied cheques
to the NRB for settlement amongst all Presenting and Paying
members.
The Clearing House (NCHL) shall manage the daily operations of
the ECC central by configuring the daily clearing sessions timing,
validating automatically the presented/replied cheque, overseeing
the overall clearing cycle and guaranteeing a mature closure and
submission of the Net Clearing Position (NCP) of clearing sessions
to NRB. The Clearing House main activities can be summarized as the
following:
1. Receiving cheques from presenting members for outward
clearing, and assuring the Presented cheques validity.
2. Transmitting cheques to respective Paying members for inward
clearing 3. Receiving replied cheques and rejected cheques from
Paying members 4. Transmitting replied cheques and returned cheques
to Presenting members. 5. Ending the clearing session of the
current business day. 6. Generating the Net Clearing Position (NCP)
and submitting the file to NRB
for settlement through the direct members accounts. 7. Starting
a new clearing session.
Settlement Schedule: The System prepares the Net Clearing
Position (NCP) file for all members in a multilateral basis at the
end of each session (Regular and Express), and submits the NCP file
to the settlement system in NRB for settlement at pre-defined
intervals. Settlement Process: The System prepares the Net Clearing
Position (NCP) for all members at the end of each session at
pre-defined intervals, and submits the NCP to the settlement system
in NRB for settlement purposes. Fees, charges and penalties
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files are generated from the system at the closure of the
clearing session and sent to NRB to be settled. On the other hand,
the members can view and download their fees, charges and penalties
readable reports from the system at anytime and at their
convenience. When settlement of the Net Clearing Position (NCP) in
the NRB is completed successfully, all the cheques payments that
are included in the NCP file are deemed final. The Net Settlement
in the settlement system is irrevocable.
Clearing Sessions: ECC daily clearing sessions have the
following parameters: 1. Clearing Date (T): The date on which the
cheque shall move from the
Presenting Member to the Paying Member to be cleared. In other
words; it is the date on which the customer account will be
credited in the Presenting Member.
2. Session Start: The time that the Presenting members can start
presenting cheques.
3. Session End: The ending time of the clearing session within a
business day (T).
4. First Cut-off Time (Presentment Cut-off time): The time when
all cheques within the clearing session must be submitted by the
Presenting members.
5. Second Cut-off Time (Reply Cut-off Time): The time when all
cheques must be replied by the Paying members.
6. Urgency level: ECC shall support the following urgency
levels:
Regular Clearing: For regular cheques clearing
Express Clearing: Critical timely-based cheque clearing which
requires immediate reply from the Paying Member.
The Cheque Clearing Flow is based on transferring the electronic
cheques images within the defined daily clearing sessions durations
for presenting and receiving cheques. The complete clearing cycle
from the beginning till the end takes place within the same
business day (T+0). And any cheque presented after the first
cut-off time shall be cleared on the next business day (T+1).
Rules, Guidelines and Policies: (NRB, Electronic Cheque Clearing
Operating Rule, June 2011) (NRB, 2011) Nepal Rastra Bank stipulates
that operating an interbank clearing system constitutes a central
banking responsibility, to be undertaken by NCHL. As such, the
Regulation: Nepal Electronic Cheque Clearing Rule Book (June,
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2011) was issued to ensure smooth ECC operations among member
banks and financial institutions. This regulation specifies roles
and responsibilities of member banks, operational procedures and
other related operations. The regulation also stipulates that any
problem relating to the interpretation of the rules should be
resolved by NRB. The following are the cheque limits that is
defined by NRB: (NRB, 2067_ 68)
Table 2: Transaction Limits in ECC system
Amount Above or Equal Amount
Less Session Type
Rs 0.001 Rs 100,000,000 Regular
Rs 0.001 Rs 100,000,000 Express
Rs 100,000,001 and above Outside ECC (manually)
ECCS accepts all he cheques less than Rs 100,000,000 in Express
and Regular Session but above this amount the cheques are rejected.
The clearing is done manually for above Rs 100,000,000 in NRB,
Thapathali.
Return Processing In the morning of the next business day,
member banks would send information on returned cheques, including
reasons explaining why the cheques were returned, on line or
off-line to NCHL for return-round net clearing position calculation
and settlement via the system. The returned cheques are physically
delivered to the presenting bank. Presenting Member prints a
Returned Cheque Advice from ECC for each cheque that has been
replied with rejection by the Paying Member and stamped as
returned. The cheque which has been rejected or returned to the
Presenting Member from the ECC or the Paying Member shall be
returned to the customer attached with the printed Cheque Return
Advise from the ECC showing the return reason. In case of
re-presenting the cheque, the Presenting Member shall stamp another
presentment at the back side of the physical cheque. All members
have similar working procedures in order to manage and control the
cheque clearing cycle from their side. They are expected to
accommodate qualified staffs with experience in the cheque clearing
process in order to execute their daily operations in a safe and
sound manner and thus minimize any potential risk.
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Section III: METHODOLOGY
This section of the report deals with the methodology that was
adopted in the research process. In order to find out how
electronic cheque clearance in bank differs from manual cheque
clearing system, to compare the cost of past and present clearing
system and to find out how effective is the new system, the
methodology used are explained below:
1. Research Design The research mainly deals with comparison of
manual cheque clearing system with ECCS and its effectiveness. The
methodologies and approaches used for the study and preparation for
this report mostly exploratory research was used by reviewing
literature related to cheque clearing in Nepal as well as of
foreign countries to gain insight knowledge about the electronic
cheque clearing system and how it is conducted in banks and
financial institutions of Nepal. Most of the information of this
report is based on secondary data provided by HBL and also based on
both informal interviews with personnel of clearing section of
bills and remittance department of HBL and other experts related to
cheque clearing field from NRB and NCHL. The interview helped me to
come out with the basic required information for the study.
2. Study Approach The study necessary for the preparation of the
report was conducted in these three phases:
Phase1: Observational Research At the preliminary phase, with
the help of co-workers of HBL, I performed tasks assigned by
department head for cheque presentment and payment of inter-bank
cheques. Direct observation while performing assigned job in the
clearing section of HBL was one of the main tools which helped me
to garner information regarding my research topic. Details were
collected through observation while performing the tasks.
The software used for ECC at HBL, which is same for BFIs.
The process of presentment of cheques, through scanning (outward
clearing) and honoring/payment of cheques (inward clearing).
The scanning of cheques for the presentment through the use of
software in
outward clearing section was observed.
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The information treatment of returned cheques and re-presentment
of cheques were also observed.
Also the rush during approval and payment of cheque in inward
clearing section due to large number of cheques incoming for
payment from different banks.
Phase2: Exploratory Research
The primary research conducted was exploratory in nature. To
gain the background information about how and when Electronic
Cheque Clearing came into existence in Nepal, exploratory research
was conducted by reviewing available literatures, the Nepal
Electronic Cheque Clearing Rule book and Electronic Cheque Clearing
Operating book issued by NRB. Unstructured Interviews views of
experts related in the field were carried out; their ideas and
experiences have been used to guide this research.
Phase 3: Descriptive Research In this phase of research, the
focus was to compare ECC system with manual cheque clearing system,
how these two systems differ from one another in the process of
cheque clearing and cost of operation. The descriptive research
also aimed at finding the effectiveness of the new system in banks
of Nepal. This descriptive research mainly comprised of two
parts:
Qualitative research Quantitative research
Qualitative research The qualitative research comprised of both
primary and secondary sources: Secondary Sources: i) Review of
literatures Different books, literatures, articles were reviewed
and studied to have the in depth theoretical understanding of
cheque clearing system as a whole. Moreover, in order to learn more
about cheque clearing and settlement process, qualitative research
was performed by studying ECC manuals, articles and websites.
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Study of Rules and Regulations: The rules and regulations
governing the electronic cheque clearing system in the banking
environment were studied. This information was collected from the
NRB, HBL, journals magazines, NCHL and Worldwide web. The secondary
data is a major source of information in this report. It includes
both internal sources and external sources. The information used in
this research was collected from the manuals published by NRB, the
net clearing position report of HBL. Websites and physical reading
like newspaper articles were used. Manuals provided by HBL.
ii) In- depth interviews The qualitative analysis is based
mostly on interviews with employees of multiple parties involved
with cheque clearing process: Mr. Bhuwan Basnet (Deputy Director of
clearing department at NRB), Personnel of HBL in clearing
section
Mr. Bishnu Gautam (System manager at NCHL). The interviews
conducted with personnels from different organization helped me to
explore about the operation through new clearing system and the
future scope of development of the system.
Quantitative Research Quantitative research was done by studying
fee structure published by NRB, and NCHL. Cost of cheque clearing
in HBL for manual system and ECCS has been calculated with the data
provided by HBL during the internship period. Progress Soft net
clearing report of HBL, which includes the number along with amount
of cheque presentment and payment made by HBL with various BFIs, is
also studied to obtain the data regarding number and amount of
different cheque presentment by HBL.
3. Analysis and Interpretation of data: The indirect costs
incurred involved for the calculation of cost of cheque transaction
through ECC and manual cheqiue clearing in HBL have been analyzed
on the basis of annual cheque transactions and cost associated in
clearing. Annuity method has been used to convert capital
investment cost to annual cost.
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The CRF The annual cost is derived by using Capital Recovery
Factor (CRF).
The formula for CRF is ()
()
Where, n= time period in years i = interest rate (%) Interest
rate is taken as 5% and the annuities or life span (n) is taken as
5yrs for vehicle, 10 yrs for the software used in ECC, and 4 yrs
for cheque scanner. The result obtained from this has been used to
analyze cost incurred to HBL in clearing cheques using past manual
with ECCS. Effectiveness of ECC in terms of cost is analyzed with
this technique.
4. Tools Used: MS Excel has been used for calculation of data
provided by HBL and data collected from other secondary sources.
Statistical charts like bar diagrams and pie charts have been used
to represent the data and aid the presentation and analysis.MS Word
has been used to prepare and present the report.
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Section IV: PRESENTATION AND ANALYSIS OF THE PROJECT 1.
Analytical Presentation of the project
Cheques represent a significant segment of non-cash payment
instruments in Nepal,
as consumers and businesses remain confident and satisfied with
writing cheques. Today, on an average 8000 interbank cheques are
cleared and settled daily of which 70% consists of commercial
banks, 15% of Development Banks and 15% of other financial
companies. The development of cheque processing system makes a
fundamental relevance to banks and other financial institutions due
to this wide spread use of bank cheques in daily life. The
following figure shows the composition of cheque cleared by BFIs of
Nepal.
Figure2: Composition of Inter-bank Cheque cleared by BFIs (in
%)
From above pie chart it can be seen that most of the cheque
transactions are done by the commercial banks. It comprises of the
70% of the overall cheque cleared. Among the total of 8000
interbank cheque clearance 5,600 cheques consists of commercial
banks and 1200 each of development banks and other financial
institutions. Therefore, the development of interbank cheque
clearing process is more relevant for Commercial Banks, compared to
other BFIs.
Out of 5,600 cheques cleared by over all 32 commercial banks
around 1000 cheques are presented by HBL. The composition of cheque
presentment made by HBL with respect to other commercial banks of
Nepal is shown in figure below:
Commercial Banks:70%
Development Banks:15%
Other Financial
Institutions:15%
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Figure3: Cheque Presented by HBL (in %)
From the above pie chart we can see that among the 5600
interbank cheques cleared by commercial banks, 1000 cheques are
presented by HBL for payment which contributes to 17.86% of the
total. Since HBL is one of the biggest commercial bank of Nepal,
the number of cheque cleared per day is one of the highest figures
among other banks.
HBL has adopted ECCS for inter-bank cheque clearance replacing
the manual system. The over view of these two system in cheque
clearing are presented and analyzed.
A) Manual Cheque Clearing System:
Under Manual cheque clearing system, financial institutions
(presenting banks) used to collect cheques of other institutions
(paying banks) and physically take the cheques to NRB for clearing.
The clearing process used to take place in the main hall of NRB,
Thapathali, cheques had to be physically transported to the central
banks clearing office where tables were placed for every bank, the
staffs there used to clear the cheques then permit the banks to
make and receive transfers.
In inward cheque clearing, unauthorized cheques used to be
physically located, and the reasons for rejection were written on
the cheque, prior to the cheques being prepared for return to the
bank of deposit. Cheques had to be forwarded for a manual
HBL:17.86%
Others : 85.14%
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process of technical verification, signature verification and
posting verification. This manual cheque clearing took two to three
days for a cheque cycle. In the case of outward cheque clearing,
cheques had to be collected from branches; all cheques were
manually separated by the teller; all items had to be manually
posted on the claim sheet.
In HBL, inward cheque clearing was handled by three branches:
New Road branch, Patan branch and Maharajgunj branch, where as
outward cheque clearing performed by all branches of HBL. All the
Cheques were taken to NRB at 11:00 am for clearance. The earlier
days cheques from different bank which came for clearing at HBL
were distributed to other banks accordingly as per cheques
indication. Dishonored cheques were returned and the relative
amount deducted from NRBs advice report. The advice of NRs and
foreign currencies from NRB were taken and the debited amount of
respective banks was matched with the credit amount of NRB.
HBL cheques were detached and differentiated according to HBL
branch cheques and advice was provided to HBL branch and one copy
submitted to NRB representing HBL name and date of clearance. Paper
work and manual effort were highly involved in this system of
clearing.
Fee Structure for Manual Cheque Clearing: BFIs had to pay
membership charge and annual renewal charge to NRB for clearing and
settlement of interbank cheques .The membership charges and renewal
charges for each category of BFIS is shown in the following
table:
Table 3: Fee Structure of Manual Cheque Clearing for BFIs
Financial Institute Initial Membership fee Annual renewal
fee
Commercial Banks 1,000,000 20,000
Development banks 50,000 10,000
Finance Companies 25,000 5,000
Source: (Basnet, 2012) We can see from the table that the
membership fee and annual renewal fee for commercial bank is the
highest among other BFIs. The difference in fee charged by
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31
NRB is due to difference in capital structure and operation.
Apart from these fees, the other costs incurred by BFIs are cost of
vehicle, operation and running cost.
Transaction cost for HBL:
The transaction cost for a commercial bank like HBL includes the
initial membership fee, annual renewal fee and other costs like
vehicle and operation cost. The annual total cost for 280,000
cheques cleared for HBL is presented in the table below:
Table 4: Transaction Cost for Manual Clearance in HBL
Description Fees/Cost (Rs) Annual Fee (Rs) Annual Fee 20,000
20,000.00
Membership Charge 1,000,000 129,504.57
Vehicle 1,200,000 277,169.76
Operating and Running Cost 50000/month 600,000.00
Total Cost 1,026,674.33
Cost per Transaction 3.67
The above table indicates that the total cost for manual cheque
clearance for HBL is Rs. 1,026,674.33. The annual fee and
membership fee is as per the regulation by NRB as mentioned
previously (Table: 2). The initial vehicle charge is Rs. 1,200,000
and the annual charge is Rs. 277,169.76 which is obtained by using
CRF. The annual operating and running cost is Rs. 600,000. Hence
the total cost is obtained. Further, the cost per transaction is
also calculated which amounts to Rs. 3.67 per transaction.
Weakness of Manual Cheque Clearing: As cheques had to be taken
to NRB, transportation cost incurred in manual clearing system is
major drawback. On the other hand it consumed more time and
difficulty to customers as they had to wait for long periods of
time for transactions to show up in their account balance. Once
cheque is deposited the cash would get transferred into the
depositors account after two to three days inside the valley, in
the case of cheque issued from remote places it would take weeks,
sometimes a month, leading to high number of unsatisfied customers.
Moreover, this method was subject to errors and chance of misplace
of cheques due to insecure physical transportation of cheque. In
order to have an
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32
effective and efficient system, it is essential that
participants can handle transactions easily with minimum cost with
the use of new technology.
B) Electronic Cheque Clearing System:
Replacing the manual cheque clearing system and stopping the
physical movement of paper cheques among the BFIs, today cheques
are cleared electronically in Nepal. As per the direction of NRB,
BFIs switched to electronic means to clear cheques and followed
electronic cheque clearing system via NCHL. According to the
Operating Rules based on the Rule Book issued by the NRB
(Electronic Cheque Clearing Operating Rules published on June 2011)
the Members of NCHL perform their daily cheque clearing operation
using ECC. Moreover, briefing was provided regarding the use of
software to the members at national banking Training institute
training hall on 4th April 2012.
The software used by BFIs for the online cheque clearing is
based on Jordan software developing company ProgresSoft
Corporation. The software was developed for Cheque Truncation
System (CTS) in Nepal as per agreement with NCHL. NCHL and the BFIs
have installed the software to carry out ECC. NCHL is responsible
for managing the software, for which it charges certain amount of
fees. However, NRB
continues to settle the cheques after the clearance, as all the
BFIs have their accounts
in NRB. NRB will debit or credit the accounts of concerned banks
electronically.
Initial cost of Installation and Annual membership charge: The
cost of software (ProgreesSoft Software) installation of ECC
differs according to the type of financial institutions. The
difference is due to the different capital structure of each bank.
Commercial banks must pay the highest software cost as it has
comparatively large capital base. The second highest cost is bear
by the development banks and the finance companies bear the lowest.
Similarly, yearly membership renewal fee also differs for these
three financial institutions.
The following table shows the software cost and yearly
membership renewal fee for commercial banks, development banks and
finance companies.
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Table 5: Initial cost of Installation and Annual membership
charge for ECC
Members Software cost Annual renewal fee
Commercial Banks 14.47 lakhs 2.50 lakhs
Development Banks 12.03 lakhs 2 lakhs
Finance Companies 9.04 lakhs 1 lakhs
Source: (Basnet, 2012) From the above table, we can see that the
commercial banks bear the highest software cost which is Rs. 14.47
lakhs. Development banks have to pay Rs. 12.03 lakhs and finance
companies must pay Rs. 9.04 lakhs. Similarly, among the three
financial institutions, commercial banks need to pay the highest
renewal fee of Rs. 2.50 lakhs whereas development banks pays 2
lakhs and finance companies pay 1 lakhs. Along with the software
installation and annual membership fee the presenting bank will
have to bear the service charge for clearing.
The service charges are divided according to 6 categories of
cheques. NCHl has fixed the charge amount accordingly and is same
for all types of BFIs. The following table shows the charges for
different categories by NCHL.
Table 6: Cheque Clearing Charge paid by Presenting Bank
Rupees Per cheque Transaction charge
Up to Rs 500 Free
Rs 500 to 5,000 Rs 5
Rs 5,000 to 10 corers Rs 10
Foreign Currency Rs 15
Express Session Rs 100
Cheque Return Rs 100
The costs for cheque presentment through NCHL-ECCS for different
ranges and types of cheques for inter-bank payment are mentioned
above. Cheques amounting up to Rs. 500 are not charged whereas
cheque amounting more than Rs. 500 is charged according to the
range of charges fixed by NCHL. For foreign currency cheques Rs 15
is charged, similarly for express session cheques and Returned
Cheques Rs 100 is charged.
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Therefore, the total costs that banks and financial institutions
have to bear while operating ECC includes: initial fee to obtain
membership from the clearing house; software installation cost,
login fee (user fee 3000 per user), annual renewal fee and
transaction cost as per categories.
ECC in HBL HBL started its ECC operation from April 2012. After
the replacement of manual cheque with electronic, the inward cheque
clearing of HBL is centralized to the main branch situated at
Thamel. The cheques presentment and payment are made online by the
four users and the timing for presenting and payments of regular
and express cheques are different as shown in Appendix 3. With the
ECC system the cheque clearing cycle has reduced but number of
cheque transaction has not shown a significant change which is 1000
cheques on an average per day. The analysis of the cost of ECC in
HBL is done by taking 280,000 cheques presented by HBL on an
average in its 280 business days.
Indirect Cost per transaction The indirect cost of ECC for HBL
includes the cost of software, user cost, scanner cost and
operation and maintenance cost. The cost is calculated in the
following table:
Table 7: Indirect Cost per Transaction
S.No Cost Description Initial Cost Annual Cost Remark
1 Cost Of Software
1450,000 187,782 CRF = 0.129
2 Users cost 4 users @ Rs 3000/each
12,000
3 Scanner Cost 4 scanners @ Rs35000/each 140,000 39,482 CRF =
0.282
4 Operation and Maintenance cost
30% of above
71,779
5 Total 280000 transactions
311,042
6 Cost per Transaction
1.11
In the above table, the annual indirect cost incurred to HBL
using ECCS is presented. The indirect cost includes: Cost of
installing Progress Soft software, user cost, scanner cost and
operation and maintenance cost. Cost per user (login fee) is Rs3000
per user
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and cost per scanner is Rs 35,000, as clearing is performed with
4 user accounts and 4 scanners are used, each is multiplied by 4.
Annual operation and maintenance cost which is 30% of software,
user and scanner cost is Rs 71,779. Therefore total indirect cost
for 280,000 cheques cleared annually is Rs 311,042 and transaction
cost per cheque is Rs 1.11 approximately.
Total cost per Transaction The total cost per transaction
includes the indirect costs and direct cost of ECC. The indirect
cost is derived from Table: 6, whereas the direct cost is derived
from Table: 5.The total Cost of transaction according to the
categories of cheques for HBL is shown in the table as follow:
Table 8: Total Cost of Cheque Transaction
Categ Items Charge (a)
No. of Transacti-on (b)
Direct Cost (c=a*b)
Indirect cost
(d)
Total Cost (e=c+d)
T.C per cheque (f=e/b)
1 Up to Rs 500
Free 112,000 0
124,417
124,417 1.11
2 Rs 500 - 5000 5 53,200 266,000
59,098
325,098 6.11
3 Rs5000 -10 corers 10 89,040 890,400
98,911
989,311 11.11
4 Foreign Currency 15 16,800 252,000
18,663
270,663 16.11
5 Express Session 100 5,600 560,000
6,221
566,221 101.11
6 Cheque Return 100 3,360 336,000
3,733
339,733 101.11
Total 280,000 2304,400
311,042
2,615,442
9.34
The Table: 7 illustrate that cost of transaction for six
categories of cheques using ECCS. The direct cost (c) of each is
calculated by multiplying the charge amount (a) of each item with
its no. of transactions (b). The indirect cost of each item has
been calculated by multiplying the no of transactions with the
indirect cost per transaction Rs. 1.11 (approx). Further, the total
cost (e) is the addition of direct cost and indirect cost. The
transaction cost per cheque is the result of dividing the total
cost by no of transaction.
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We can see that the highest cost per transaction is for express
session and cheque return which is Rs.101.11 per cheque. The lowest
cost per transaction is for cheque
amount upto 500 which is Rs. 1.11 per cheque. The cost per
transaction for the total 280000 cheque is Rs. 9.34.
The following figure illustrates the total cost of transacting
the six categories of
cheques in HBL.
Figure4: Total Cost of clearing in HBL with respect to Cheque
Categories
From the above bar diagram, we can see that Category 3 (Rs.5000
to Rs 10 corer) has maximum cost Rs 989,311 i.e. 38 % of total cost
followed by Category 5 (Express session) i.e.21.5%. The minimum
cost per transaction is for Category 1 which is Rs. 124,497 (4.76
%).
We can further compare the number of transaction and the cost of
each category to find out the categories that is costly to the
bank. The following figure helps in the analysis.
Figure 5: Cost and Transactions vs. Cheque Categories for
HBL
124,417
325,098
989,311
270,663
566,221
339,733
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Up to 500 500 to
5000
5000 to 10
corers
Foreign
Currency
Express Cheque
Return
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From the above figure, it can be illustrated that although the
number of transaction of cheques for category 1 (up to Rs 500) is
highest in HBL with 112000 transactions; the cost incurred is Rs
124417 which is lowest among other categories. In the other hand,
the total cost of category 5 (Express Session) is the highest among
others amounting to Rs. 566221 with the lowest no. of transactions
of 5600 cheques.
Similarly, category 6 (Cheque return) has the second highest
cost of Rs. 330733 with the lowest no of transaction of 3600
cheques. We can clearly see through the figure that category 1 and
2 i.e. cheques amounting up to Rs500 and cheques of Rs500 Rs 5000
respectively cost effective whereas the category 5 and 6 i.e.
Express cheque and Cheque return respectively is the most costly
categories for HBL.
C) Cost Comparison of ECC and Manual Clearing of HBL:
1 2 3 4 5 6Total Cost (NPR) 124417 325098 989311 270663 566221
339733No Transaction 112000 53200 89040 16800 5600 3360
0
20000
40000
60000
80000
100000
120000
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
Tra
nsa
ctio
ns
(N
0s)
Categories
Tota
l Co
st
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One of the methods for comparing the two payment system is
through its cost incurred in transacting through these two systems.
The total number of cheques presented in a year for both manual and
ECC is taken as 280,000. The total cost of manual clearing for HBL
amount to Rs. 1,026,674.33 as per Table: 3, whereas the cost of ECC
for HBL is Rs. 2,615,442.28. The same can be seen in a table and
figure:
Table 9: Comparison of total cost of ECC and Manual Clearing in
HBL
Cost for Transaction Description Manual ECC
Total Transaction Cost 1,026,674.33 2,615,442.28
Cost per Transaction 3.67 9.34
Figure 6: Comparison of ECC and Manual cost for HBL (Cost in
thousands)
The above table and figure clearly illustrates that the cost of
ECC is much higher than that of manual payment system. The cost of
ECC is 2.55 times greater than manual payment system. The cost of
ECC is high as in the installation charge of software and
membership fee is high. Moreover, cost of cheque return and
presentment of express cheque is high for ECC. As ECC is in its
early stage, the cheque clearing using this
system is costlier; however apart from cost perspective there
are other benefits in earnings of ECC. For the cheque return and
express cheques bank can charge Rs 100 and Rs 250 respectively.
Although these two categories of cheques consists small
1,026.67
2,615.44
- 500.00 1,000.00 1,500.00 2,000.00 2,500.00 3,000.00
Manual
ECC
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proportion of overall cheque categories if number of express
session and foreign cheques increases banks can earn after payning
to NCHL for providing with ECC software.
Issues Related to Cost of ECC:
As the cost of using ECC is much higher than manual cheque
clearing, the financial institutions with lower capital base and
fewer transactions of cheques had debate upon whether to return
back to manual clearing. Software cost and other charges were too
expensive, so in the beginning only few commercial banks were ready
to become NCHLs member.
After the implementation of ECC, commercial banks like HBL
joined the membership. But finance companies and development banks
had expressed serious reservation over other costs such as
membership fee, software procurement, network connectivity, renewal
fee, annual maintenance fee and login fee. The associations of
finance companies and development banks agreed that the system up
gradation is very important, but the cost associated was beyond
their affordability. This is one of the reasons financial
institutions merge with larger commercial banks. As per the rule,
customers are not charged in normal cheque transactions hence the
organization themselves must cover the expenses.
D) Effectiveness of Electronic Cheque Clearing:
Although the cost of software and operation cost using the new
technology was a major issue in the beginning, realizing the long
term benefit of in terms of efficiency, customer satisfaction,
accuracy, security and easiness banks and financial institutions of
Nepal are adapting to this system.
Even though the cost per transaction using ECCS is higher than
manual clearing system, benefits of the electronic medium for
cheque clearance will be directly felt by the end customers, as
well as banks and the economy as a whole; customers get their cash
on the same day, or even within two hours, from the time of
depositing their cheques. Meanwhile, Banks will achieve customer
satisfaction due to faster clearing
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cycle, while enjoying lower operational costs, improved
efficiency, and lower risks associated with cheque payments.
With NCHLs online system sending cheques from one bank to
another by scanning cheques consisting of NRs, USD, Sterling Pound
or Euro made the clearing process easier and faster. The entire
process is completed in real time i.e. payment transaction is not
subjected to any waiting period. The transactions are settled as
soon as they are processed. Once processed, payments are final and
irrevocable. According to the type of session, in scheduled time
(Sunday to Friday) Outward and Inward Cheques are verified and the
status of cheques are send to associated institution on time.
Efficiency in terms of security: Daily transaction of debit and
credit amount summary (net clearing position) is send by NCHL to
NRB. This summary through Networking Center NRB sent email to
financial institutions about final settlement position daily. This
helps to maintain record in system itself, no need to keep record
in books. NCHL only performs inward and outward of cheque through
its system (Progress Soft Electronic Cheque Clearing System). The
calculation in NCHL is automatic therefore the end balance or final
settlement of banks is not known to staff of NCHL as well.
Therefore confidentiality regarding the net balance is maintained.
Cheque images are transferred securely between the banks and NCHL
by the use of the Public Key Infrastructure (PKI), which ensures
security in system.
Moreover, using the system cheque returned are also informed in
the same day with the reason, hence the institution can react
quickly and minimize loss, and most importantly, financial
institutions can increase productivity of employee freeing them
from manual tasks, and making their work smooth and systematic
through the use of technology.
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2. Major Findings
The ECC system with the main emphasis on reducing the manual
efforts made the cheque clearing process of banking and financial
institutions smoother than the previous one. The major findings
from the analysis are:
Cheques are still used as popular mode of non cash payment in
Nepal, 70% of cheque transaction is done commercial banks. HBL
holds 14.3 % transaction of the total 5600 cheque transaction
maintained by commercial banks.
With the electronic cheque clearing system, beneficiarys account
gets credited the same day on which the paying account gets
debited, resulting faster clearing cycle. It has enhanced the
better customer service. ECC extended to the entire country, out of
valley cheque also cleared on same day.
With NCHLs online system sending cheques from one bank to
another by scanning cheques made the clearing process easier and
faster. The entire process is completed in real time i.e. payment
transaction is not subjected to any waiting period.
Unlike manual cheque, clearing ECC eliminate trips to the bank
to make interbank cheque deposits, it saves transportation cost and
avoid chances of loss of cheque on the way. Increased accuracy of
scanning also saves time of fixing errors as well. Moreover, the
records of every transaction through cheques are stored in the
system itself. Hence, documentation in books is minimized.
In HBL, cheque ranging up to Rs. 500, which are usually dividend
cheque cost the least for the bank as it has the highest
transaction. It contributes only 4.8% of the total cost. Highest
cost is incurred by category 3 cheque (Rs 5000 to 10 corer), the
cost incurred in this category is 37.8% of the total cost in cheque
presentment and number of transaction for this category is 31.8 %
of the total.
In HBL, cost per cheque transaction through ECC is 2.55 times
more than manual clearing system. But ECC is effective in terms of
real time gross payment and settlement, elimination of
transportation cost and centralized inward clearing.
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Section V: CONCLUSIONS AND RECOMMENDATIONS
From the analysis and the major findings of the research
project, the conclusion can be drawn that commercial banks are
benefited more by the advancement in cheque clearing system than
financial and development banks, so they are charged less by NCHL.
The Progress Soft software cost is higher than overall capital of
many financial institutions, encouraging them to merge with big
banks after NRB made ECCS mandatory to all BFIs.
With same day clearing system and RTGS the interest earned in
holding cheque is reduced while interest earned in cheque
presentment increases. The analysis presented regarding cost per
transaction of different ranges of cheque presented by HBL, can be
used by policy makers to come up with cost benefit analysis and
structure charges for foreign and express session cheques. As per
the rule of NRB for regular cheque clearing customers should not be
charged.
The use of new technologies in daily operation of banking
transaction is essential to increase efficiency and meet up the
international standard. The transactions of cheques before and
after the use of electronic clearing have not shown much
difference; as ECC is in its early stage, only the cheque clearing
cycle has reduced. In future with the use of MICR cheque the work
load of the staffs in clearing will reduce, moreover error that
occurs in presenting cheques will also reduce.
Moreover, the cutoff time and settlement time is just single
time a day for regular cheques which creates rush; if it is done
twice a day then there will be low pressure in cheque clearing
section.
The electronic cheque clearing system here in Nepal is not
completely automated like in other developed countries so it is
termed as electronic cheque clearing system instead of automated
cheque clearing system.
The world is moving on the technological advancement, and
Nepalese banks and financial institutions lack this, and therefore
the bank should take an opportunity for prosperity and development.
HBL with other financial institutions with the involvement of NRB
should adapt to these changes to modernize the banking sector. The
use of innovative technology can make the work of bank and
financial institutions more effective and efficient.
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PART FOUR
REFLECTION OF INTERNSHIP
As my main objective of internship was to gain insight knowledge
of the organization culture and