Announcement of Digital Bank and ‘Bad Bank’ in the Policy and Programme: Government’s Serious Step Towards Financial Sector Transformation

Government of Nepal has announced plans to establish a Digital Bank and a Bad Bank as part of its annual policy and programme for the fiscal year 2082/83 (2025/26). The policy, presented by President Ramchandra Paudel in the Federal Parliament, signals the government’s intent to modernize and stabilize the banking system through technological innovation and financial discipline.

The announcement of a Digital Bank marks Nepal’s formal entry into branchless, technology-driven banking. The proposed Digital Bank will operate entirely through digital platforms without the need for physical branches. Services such as account opening, savings, loans, payments, insurance, and investment will be provided via mobile apps, websites, chatbots, and artificial intelligence tools. The government aims to enhance financial inclusion, particularly in rural and remote areas, by offering fast, affordable, and user-friendly banking services through this digital infrastructure. Analysts believe this move will encourage competition in the banking sector, improve service delivery, and reduce operational costs.

Equally significant is the government's decision to introduce the concept of a Bad Bank in Nepal — a first for the country. A Bad Bank is a financial institution specifically designed to acquire and manage non-performing assets (NPAs) from commercial banks and financial institutions. Over the years, many banks in Nepal have struggled with high volumes of unrecoverable loans, leading to declining profits, reduced credit capacity, and risks to overall economic stability. The establishment of a Bad Bank will allow troubled loans to be transferred from traditional banks to a centralized entity tasked with recovery, restructuring, or asset liquidation.

This initiative is expected to clean up balance sheets of commercial banks, enabling them to focus on new and productive lending. It will also improve financial transparency, strengthen risk management, and restore confidence in the banking system. The move aligns with international practices used in countries like India, the US, and several EU nations to resolve large-scale loan defaults and banking crises.

The introduction of a Digital Bank and a Bad Bank demonstrates the government’s dual focus: preparing for the future while correcting past financial challenges. While the Digital Bank aims to shape a technology-driven, inclusive financial ecosystem, the Bad Bank is designed to resolve legacy issues that have constrained growth in the sector.

Together, these measures signify a bold reform agenda and a clear commitment by the government to steer Nepal’s financial sector toward innovation, stability, and sustainable development.