I. Introduction

Nepal Clearing House Ltd. (NCHL) is a public limited company established on 23rd December 2008 (9th Mangsir 2065) under the leadership and guidance of Nepal Rastra Bank (The Central Bank of Nepal). It has the equity participation from Nepal Rastra Bank, commercial banks, development banks, finance companies and Smart Choice Technologies (SCT), a private card switch operator. NCHL recognizes banking & financial technology oriented services as one of the key ingredients for the Banks/FIs to improve their efficiency, productivity and also provide innovative financial solutions to their customers. And NCHL intends to help them realize these by providing various technology based payment related services without having to invest heavily into infrastructures by the Banks/FIs.

NCHL has initially implemented and operated NCHL-ECC System in Nepal offering banks and financial institutions with an electronic medium of cheque clearing and will later establish a national payments gateway to facilitate electronic payments & financial transactions across banks and financial institutions within the country. Electronic Cheque Clearing (NCHL-ECC) System provides means to electronically transfer cheque images through a secure medium thus completely replacing the traditional physical routine of moving paper-cheques among the banks and clearing house, which has resulted in significant reduction of tedious and time consuming manual process of cheque clearing, both for the banks and for the customers.

Individual banks and financial institutions are enrolled within NCHL as participating members and are responsible for their clearing operations through the NCHL-ECC System.Nepal Clearing House Ltd. (NCHL) currently has 131 equity holders including Nepal Rastra Bank, Commercial Banks, Development Banks, Finance Companies and Smart Choice Technologies P Ltd.

II. Financial StructureNCHL was incorporated on 23rd December 2008 as a public company as per the Companies Act 2063, under the leadership and guidance of Nepal Rastra Bank (the Central Bank of Nepal) and Nepal Bankers Association. It has an Authorised Capital of NPR 250,000,000 and Issued Capital of NPR 128,570,000 out of which 70% from the promotor shareholders amounting to NPR 89,999,000 is full paid. 30% of the Issued Capital will be raised later by issuing shares to general public. NCHL currently has 27 institutional promotor shareholders including Nepal Rastra Bank, 23 Commercial Banks, 2 Development Banks and Smart Choice Technology P. Ltd. (an ATM switch provider).

During the year under review the company has made net profit of NPR 24,081,561.39 as against net loss of NPR 8,431,189.06 in the last fiscal year. Cumulative profit till the end of the fiscal year stands at NPR 8,972,631.27.

III. Vision, Mission & Values

Vision: To be a leading provider of electronic payment and settlement services.

Mission Establish and operate national systems for clearing, paymentsand settlements; Facilitate the development of secure & trusted new payment methods and technologies in Nepal; Protect and increase shareholders values; Establish as an organization of choice for the employees.Values: NCHL values the highest standards of ethics, integrity and teamwork. NCHL is committed towards its members, shareholders, partners and employees.

IV. ObjectivesModernizing the Banking sector in Nepal is an essential strategic objective that Nepal Rastra Bank seeks to realize by implementing an advanced cheque clearing solution that manages the daily cheque clearing cycle electronically. The major objective of NCHL is to cut-off the overhead cost, effort and time that were spent to complete a cheque clearing cycle and to eliminate physical cheques movement. It is intended also to accelerate the production cycle and to contribute in the economic growth on a nation-wide scale. But regarding to the other general objective of NCHL, it concentrated on To provide the faster access to funds for both individuals and corporations, reduce payments overhead costs, minimize associated risks, and promote efficiency in terms of speed and security of payments. Operating nationwide electronic cheque clearing system (NCHL-ECC) and becoming a financially stable company Aims in the growth and operational excellence so as to transform NCHL into a valuable institution To convince even smaller regional BFIs to join NCHL, as it will add value to them by means of their cheque acceptability across the country Focus in encouraging existing member BFIs to extend NCHL-ECC service from all their branches.

V. FunctionClearing house can be defined as entity which is different from the exchange, although it works closely with the exchange so that day to day operations of the exchange can run smoothly. Clearing house gives guarantee for all the transaction and acts as counterparty for all the transactions it will never have open position in the market. It ensures that all parties adhere to the system and procedures so that various parties in the market can do trading smoothly. It also ensures a proper risk management system and finally it ensures that delivery of the underlying assets is consistent in terms of quality, quantity, size etc. Following are the function of Nepal Clearing Housea. Members Registration: The Clearing House obtain a copy of the official NRB approval before registering any new direct member, indirect member, or any new special member. Moreover, the new members must satisfy the eligibility criteria mentioned in Members Eligibility section 7.2 and all members have similar working procedures in order to manage and control the cheque clearing cycle from their side.

b. Member Management: One of the major function of NCHL is member management where it workout on activities like member suspension (full authority to suspend a member from the system for any reason it deems appropriate), Member Resumption,Member Termination (authority to terminate any member from ECC for any reason it deems appropriate), Member Withdrawal, Member Notification (notify electronically all members of any members suspension, termination, withdrawal or resumption) and Identification (a unique identification member number (ID) provided by NRB).

c. Member connectivity: The Clearing House operates in Application Service Provider (ASP) model for providing its services to the members. All application systems and database components of all members are centrally installed in the Clearing House data centres. The ECC central node application systems are fully web-enabled. Members are required to access the centralized servers using the web browser, for performing ECC functions and accessing information of their own ECC databases.

All members shall set up and maintain a member platform which comprises workstations, cheque scanners and printers for connecting to the ASP model.

d. System Operation: NCHL major function is taken as system operation i.e daily operation to clearing session and its final clearing session settlement. It manages the daily operations 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. NRB has the full authority to approve or reject the extension and the NCHL will notify all members with the session extension period. It has the full authority to terminate a session for any reason it deems appropriate. NCHL notify all members in case the session termination action has been taken. In this situation, all pending cheques in the terminated session will be rejected due to the session terminated return reason.

e. Dispute Resolution: In the event of dispute or differences arising between the members and the parties are unable to resolve amicably, the matter is referred to Clearing House that is responsible to set up an independent Arbitration Committee. Again not only concerning with dispute resolution between the members it also functions to resolve the dispute between Clearing House and Members.

VI. Major activities of NCHLThe Clearing House main activities can be summarized as the following: Receiving cheques from presenting members for outward clearing, and assuring the presented cheques validity. Transmitting cheques to respective Paying members for inward clearing Receiving replied cheques and rejected cheques from Paying members Transmitting replied cheques and returned cheques to Presenting members. Ending the clearing session of the current business day. Generating the Net Clearing Position (NCP) and submitting the file to NRB for settlement through the direct members accounts. Starting a new clearing session.

VII. Clearing Sessions ECC daily clearing sessions have the following parameters: 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. 1. Currency: Defines the cheques currency that can be presented and cleared within the clearing session. 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). First Cut-off Time (Presentment Cut-off time): The time when all cheques within the clearing session must be submitted by the Presenting members. Second Cut-off Time (Reply Cut-off Time): The time when all cheques must be replied by the Paying members. 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.

a) Regular Clearing Sessions Any presented cheque under a Regular clearing session must be replied before the end of the Regular Clearing Session (before the reply cut-off time); otherwise it will be auto- accepted. The session configuration for the regular clearing session has the following settings for a particular business day (T): Starts from the previous business day (T-1) at 14:00. First Cut-off Time (End of Presentment) takes place at 14:00 on the current business day (T). Cheques presented after that time will be assigned automatically to the clearing session of the next business day. Second Cut-off Time (End of Reply) takes place at 15:00 on the current business day.

b) Express Clearing Sessions The Express Clearing session must be started and completed before the end of the first cut-off time of the regular clearing session. Any presented cheque under Express Clearing must be replied within 30 minutes; otherwise it will be auto- rejected by the system with a "time out" reason. The determination of presenting a cheque with Express Clearing urgency shall be governed by the following: Express Clearing should be used for timely-based critical cheques. The determination of cheques for Express Clearing is the responsibility of the Presenting member, based on a request from their customers. 2. The ECC shall also determine the cheque amount limits for express clearing based on the thresholds defined by NRB. Express Clearing Sessions shall have the following schedules (Sunday to Thursday) that specify the starting time, presentment durations and cut-off times for each Express Clearing Session:

1. First Session: Starts at 10:00 First Cut-off Time (End of Presentment) is at 11:00 Second Cut-off Time (End of Reply) is at 11:30 2. Second Session: Starts at 11:00 First Cut-off Time (End of Presentment) is at 12:00 Second Cut-off Time (End of Reply) is at 12:30

3. Third Session: Starts at 12:00 First Cut-off Time (End of Presentment) is at 13:00 Second Cut-off Time (End of Reply) is at 13:30

c) Friday Session Special Regular Clearing Sessions shall have the following schedules for Friday that specifies the starting time, presentment durations and cut-off times for each Regular Clearing Session: 1. Session: Starts at 10:00 First Cut-off Time (End of Presentment) is at 11:00 Second Cut-off Time (End of Reply) is at 11:30

d) Cheque Clearing Flow 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). The Cheque Clearing Flow can be summarized in the following main point:

The Cheque Clearing Flow starts with the outward clearing at the Presenting member. The Clearing House routes the presented cheques from the Presenting member to the Paying member. The Inward Clearing starts at the Paying member. The Reply is sent from the Paying member to the Presenting member through ECC to accept /reject the payment of the cheque. The Clearing Cycle ends when ECC submits the NCP for the replied cheques to the NRB for settlement amongst all Presenting and Paying members.

VIII. Risk Management

NCHL being a systemically critical financial market infrastructure, it should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a range of options for recovery. And it should regularly review the material risks it bears from and poses to other entities as a result of interdependencies and develop appropriate risk-management tools to address such risks. NCHL has continued to update and upgrade its risk management system in a continuous basis.

Business RiskThe main business risk faced by NCHL as the national service provider for clearing & settlements is the risk of not having sufficient banks and financial institutions enrolled as its members and thus significant reduction in the cheque transaction volume. And this is of a major concern given the current trend of merger of many of the banks & financial institutions.

Operation RiskThe operational risk management at NCHL is focused at establishing itself as an efficient and effective electronic cheque clearing service provider. In order to accomplish this, risks need to be mitigated in the areas of processes, people and technology. Appropriate policies and procedures required for the operation have been formulated and implemented. Its IT Policies are closely aligned with COBIT standards in order to mitigate the risks associated with information security and to follow best practices.

Systematic RiskRisks arising due to interdependencies and possibility of transmitting disruptions beyond NCHL and one/few participants are the systemic risks. This may be due to an inability of one or more of the participants to perform as expected which could cause other participants to be unable to meet their obligations when due. NCHL works very closely with the settlement bank (Nepal Rastra Bank) and with the participating members there by reducing the overall impact of such risk.

Liquidity RiskThough NCHL is expected to be profitable in a long run, there is a high probability of liquidity risk in a short run. The liquidity risk includes the inability of the company to handle the short and medium term financial liabilities. In order to manage the liquidity risk, the Board and the management regularly monitor and analyze the cash flow forecasts. Company financials are also analyzed and monitored in a regular basis.

Interest Rate RiskConsiderable portion of the expenses was in the form of finance cost against the loan obtained to bridge the funding required for participating member banks software. As of today, we have already paid all the outstanding loans but downward interest rate in coming year may affect adversely in the interest income in view of our anticipated cash inflows.

Foreign Exchange RiskA significant proportion of the software and maintenance services are sourced from the international vendor and the payment is made in US Dollars. In order to avoid the upside risk due to the fluctuations of the Rupee against the Dollar, NCHL managed to enter into US dollar forward contract with a local bank and hence was able to manage the foreign exchange risk at manageable levels.

IX. Strategic Plan:NCHL was established to implement and operate various national payment & settlement systems and ultimately establish a national payment gateway that can facilitate electronic transactions in Nepal. In medium to long term, NCHL will be working towards providing various products/ services in line with the Nepal National Payment System Strategy as envisioned by NRB. NCHL has already initiated to implement an interbank payment system (NCHL-IPS) which after coming into operation will be yet another milestone in the banking sector of Nepal after NCHL- ECC. NCHL-IPS is a system for clearing low-value large volume financial transactions that provides a mechanism for the participating banks & financial institutions to safely and efficiently transfer funds on behalf of their customers as well as for their own trading purposes. It facilitates nationwide fund transfer between the accounts held at different banks. Further Future strategic plan of the Company for the coming year are listed as below: Extend membership to regional BFIs with target of additional 15 members along with the reduction of 15-18 members due to merger. Promote and encourage member BFIs to introduce outward clearing from majority of their branches. Introduce 2nd and 3rd Express Clearing Sessions. Upgrade/ Enhance NCHL-ECC System and infrastructure to handle higher cheque volume. Assist member BFIs for introducing standard MICR cheques. Strengthen risk management and implement ISO 27001 based information security management system (ISMS). Organize continuous training for the participating member Banks/FIs and for the NCHL staff. Start implementation of interbank payment system (NCHL-IPS) and Introduction of REAL TIME GROSS SETTELMENT SYSTEM (RTGS).

X. PRODUCTS & SERVICES NCHL has been in the vanguard of adopting technology based services for making the payment, settlement and clearing systems in the country efficient, modern and robust. Its first national payment & clearing system in the area of electronic cheque clearing (NCHL-ECC), is already in operation. After replacing manual cheque clearing at Janakpur region with electronic cheque clearing from 26th Chaitra 2070 (9th April 2014), NCHL has completed nationwide rollout of NCHL-ECC by successfully replacing manual chequeclearing all across the country.NCHL-ECC service is an image-based nationwide MICR cheque processing & settlement solution where an original paper cheque is converted into an image for electronic processing and is transferred through a secured medium between participating member BFIs. The physical movement of the cheques are truncated or stopped at the level of the presenting bank resulting in a faster and easier processing of the cheque transactions. The product and service of NCHL are listed as below:

a. NPR Electronic Cheque ClearingThis is an electronic cheque clearing service for NPR denominated cheques. Participating members need to have settlement account in Nepali currency at Nepal Rastra Bank to avail this service. It is available for both standard (MICR based) and non-standard (non-MICR based) cheques.

b. FCY Electronic Cheque ClearingThis is an electronic cheque clearing services for USD, GBP and EUR currency denominated cheques. Participating members need to have settlement account in the respective foreign currency at Nepal Rastra Bank to avail this service. It is available for both standard (MICR based) and non-standard (non-MICR based) cheques.

c. Express Cheque ClearingExpress NCHL-ECC service is a special arrangement of short duration for cheque presentment, response and settlement allowing the BFIs and their customers to present and realize their cheques faster. Currently one express cheque clearing session is available for all four currencies NPR, USD, GBP and EUR. However, NCHL will soon extend this service by introducing 2nd and 3rd express sessions to facilitate member BFIs and their customers.

d. National Cheque ArchiveNational Cheque Archive is an additional service provided to the member Banks/FIs to have an access to the historical cheques and transaction details. All the cheque transactions older than three months are moved from the NCHL-ECC System to National Cheque Archive system to store the cheques for up to 7 years and will be made available to the member BFIs on request.

XI. Organization Structure

System ManagerFinance & Admin OfficerOperations ManagerTechnology& Infrastructure ManagerNetwork Engineer/ Helpdesk In-chargeChief Executive OfficerBoard of Directors

The above chart shows the organizational structure of NCHL. The Board of Directors is at the top of the hierarchy with the CEO reporting to them. The organization is restricted to a three tier hierarchy with the Board of Directors at the top, CEO at in middle and line manager as in the last tier. The overall executive structure comprises of The CEO with direct reporting lines of various functions.

XII. Economic contributionNCHL was established with an initial objective of operating cheque clearing as the first national payment system later to implement multiple payment and settlement systems in Nepal. It has successfully rolled out NCHL-ECC system across the nation and have now completely replaced manual cheque clearing in Nepal. This system has become cost effective, time saving with quality clearing processing. NCHL has made huge contribution to the economy. Some of the economic contributions of NCHL are described below. Fast cash flowSame day clearing and settlement at Nepal Rastra Bank (NRB) with minimum settlement time of (T+0) and maximum of (T+1) irrespective of the geographic location of the bank/branch increases in operational efficiency. NCHL e-clearing services provides fast cash flow in the banking and financial institutions.

Risk aversion It may however be noted that the use of non-standard cheque increases the processing time both at presenting and paying banks manually. There is no need to physically move the cheques from the branches to NRB for clearing, NCHL reduces operational risk of cheque losses and cheque related frauds by securing the transmission route.

Improve liquidity positionIn manual cheque clearing system there was delaying in converting cheque to cash whereas in electronic clearing system cheque could be converted into cash immediately which helps to increase the liquidity position of bank and financial institutions.

AccessibilityClearing service by NCHL can be extended to the entire country with no geographical dependency. For example:-In the Far-western region of Nepal, where there is limited access to financial services, it takes days for a single cheque to clear. People living in these areas have a hard time dealing with this situation, as opposed to the people living in the first tier and second tier cities, where banks are present at every turn. Through the agreement between SAFAL project, Nepal Clearing House, Banks and Financial Institutions it is expected that NCHL-ECC systems will be accessible to locals in these deprived districts and will be able to gain immediate access to their finances, opening doors for them to participate in economic activities.

Company Shareholders

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