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

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

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

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.

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

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

2. Major Findings 41

Section V: Conclusion and Recommendation 42

Part Four

REFLECTION OF INTERNSHIP 43 REFERENCES 44 APPENDIXES

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

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

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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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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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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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

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20000

40000

60000

80000

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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