Robin Paudel
Kathmandu: A taskforce formed to recommend reforms in the banking sector has submitted a comprehensive 123-page report to Nepal Rastra Bank, outlining what the central bank should do over the next five years.
The taskforce was led by Rewat Bahadur Karki, former chairman of the Securities Board of Nepal and a former executive director at the central bank. The taskforce submitted the final report to Governor Prof. Dr. Bishwanath Prasad Paudel within a month of its formation.
After assuming office, Governor Paudel formed the taskforce to gather suggestions on how to adopt more liberal policies in the banking sector. The taskforce included former Nepal Bankers Association president Bhuvan Kumar Dahal as a member, and Executive Director of the Bank and Financial Institution Regulation Department at Nepal Rastra Bank (NRB), Guru Prasad Paudel, as the member secretary. While a preliminary report was submitted earlier on 8 July, the final report has now been handed over.
The report includes recommendations for overall reform and strengthening of the banking sector. It offers detailed suggestions on how to implement liberal yet prudent and risk-based effective supervision policies and foster customer-friendly banking services.
It also highlights the banking sector’s role in reviving economic activity, the need to increase lending in rural areas, address post-merger challenges, and suggests how the banking system can help remove Nepal from the Financial Action Task Force’s (FATF) grey list.
The report also discusses the central bank’s coordinating role in capital market development. According to sources, the report serves as a roadmap for how the Governor could steer NRB over the next five years.
Governor Paudel, who is considered relatively less experienced in central banking regulation, had envisioned this report as a guiding document for his term. Being inclined towards liberal policies, he expected suggestions on how to apply such approaches in banking.
Accordingly, he formed a team comprising a market-oriented economist (Karki), a compliance-based practitioner of prudent banking, and the liberal-leaning head of the central bank’s regulation department.
The report emphasizes how to reduce regulation and enhance effective supervision of banks. A source said, “As soon as he took office, the Governor declared a policy of less regulation and more supervision. His first monetary policy appeared liberal from the perspective of the business community and banks. The policy shift and regulatory amendments were in line with the taskforce’s initial report. The final report includes these themes and adds structural reform proposals.”
One key recommendation is to avoid imposing identical regulations on all banks. Instead, high-performing banks should be encouraged toward self-regulation, held accountable for the effectiveness and productive use of loans, and punished strictly for non-compliance.
“If a bank has excellent compliance, poses minimal risk in the central bank’s view, hasn’t violated any provisions, and operates an advanced banking system—what’s the point of subjecting it to the same rigid regulations as weaker banks?” a source asked.
The report suggests classifying banks into ‘very good’, ‘good’, and ‘less good’, and crafting differentiated unified directives for each group to promote self-regulation.
The taskforce recommends revising unified directives as needed. It supports the notion that if the central bank is to regulate, then competition in the open market must also remain open and unrestricted. To achieve this, strict rules must be made more liberal. Bank classifications should be based on CAMELS ratings, regulatory charges, enforcement actions, and the central bank should internally categorize banks accordingly.
Furthermore, the report proposes sector-specific classifications of banks based on their expertise. For example, Agricultural Development Bank could be defined as an agriculture-focused bank, while NMB Bank could be categorized for renewable energy financing.
Regarding directed lending, the report recommends restructuring existing mandates to encourage—not force—banks to invest in productive sectors. “Mandated lending became a burden for banks and failed to promote the productive sectors. Instead, it led to higher non-performing loans and penalties,” the source said. Therefore, it suggests refining these sectors based on banks’ operational realities.
A major focus of the report is to tie well-performing, compliant banks to self-regulation and let them define their own operating norms. This would help excellent banks further strengthen their performance.
The report also highlights the need for broad structural reforms in both Nepal Rastra Bank and the overall banking system. It recommends that central bank board members should not be politically inclined and that the board should not be treated like a retirement club. When commercial bank representatives are included in various committees formed by NRB, their concerns are better addressed, and accountability increases.
Additionally, the taskforce recommends that there should be only one employee union within the central bank, and if multiple exist, only the official union should be recognized. If the central bank adopts this practice, other banks are likely to follow.
The report includes a list of steps required for Nepal to exit the FATF grey list. It suggests facilitating the entry of foreign banks either as joint ventures or through branch offices in Nepal. This would push local banks to enhance service quality and learn cost-saving strategies.
International practices in loan classification and loss provisioning were also considered. The report recommends initiatives to develop agriculture as a driving sector of the economy.
Based on the taskforce’s suggestions, several measures have been reflected in recent monetary policies, including changing the base rate calculation method for banks and financial institutions, reviewing provisioning policies, allowing banks to assess and accept agricultural land and farm infrastructure as collateral for loans up to Rs. 1 million, providing cheap credit to businesses located near highways, including such directed loans (up to Rs. 30 million) within the mandatory lending quota, allowing banks to increase capital with NRB approval, amending the regulation on Prompt Corrective Action (PCA), and reviewing the loan-to-deposit ratio (CD ratio) after effectively implementing LCR and NSFR requirements.
In this way, the taskforce has provided a comprehensive set of recommendations for Governor Paudel’s five-year term, intended to serve as a strategic roadmap for running Nepal Rastra Bank.
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