Banking Reform Task Force Releases 49-Point Report, Calls for Structural Reset of Financial Sector
Author
NEPSE TRADING
A high-level banking reform task force formed to address persistent credit stagnation, a rapid rise in non-performing loans, sluggish economic activity, and growing regulatory complexity has made public a detailed 49-point reform report. The report concludes that Nepal’s banking sector problems are no longer cyclical but structural in nature, requiring deep and coordinated reforms rather than short-term policy adjustments.
The task force was formed on Jestha 30 by Nepal Rastra Bank under the leadership of former Securities Board chairperson Dr. Rewat Bahadur Karki, after credit expansion stalled and bad loans began rising at an abnormal pace. The three-member committee studied the overall condition of the banking system and identified key weaknesses affecting credit flow and economic recovery.
Six Core Areas, 49 Reform Measures
The report identifies six priority areas for reform and presents recommendations across:
Banking policy and supervision
Promotion of economic activity
Credit flow to rural areas
Mergers and acquisitions
Measures to exit the AML grey list
The central bank’s role in capital market development
According to the task force, reform across all six areas is necessary to restore confidence in the financial system and reconnect banks with the real economy.
Liberal but Prudent Regulation
The report calls for a shift toward “liberal but prudent” banking regulation, with risk-based supervision as the core principle. It recommends implementing a “basic regulation, more supervision” approach and classifying banks and financial institutions into three tiers, each governed by separate directives. Institutions in the top tier should be rewarded with greater autonomy and limited self-regulatory authority.
To reduce conflicts of interest, the task force suggests reviewing board structures where bankers and large business owners overlap. It also recommends simplifying branch expansion rules, requiring banks to inform—not seek approval from—the central bank when opening, relocating, or closing branches.
The report notes that directed lending concentrated in a few sectors has contributed to rising bad loans. It calls for a reassessment of priority lending to include education, health, transport, and green sectors under a formal green taxonomy. The task force also proposes developing an official currency symbol for the Nepali rupee.
In a significant institutional recommendation, the report suggests transferring responsibility for compiling the Consumer Price Index (CPI) from the central bank to the National Statistics Office, arguing this would strengthen policy credibility.
Reviving Economic Activity Through Credit
To lift the economy out of stagnation, the task force recommends policy relaxation without compromising depositors’ interests. It urges the immediate resumption of concessional lending programs by addressing pending government subsidies and expanding credit to businesses that closed or downsized after Covid-19.
Loan restructuring and rescheduling should be allowed in a controlled manner, the report says, while making business loans of up to NPR 500,000 in rural areas and NPR 1 million in urban areas more accessible. It also recommends expanding group-based microfinance loans, increasing collateral-based enterprise lending limits, and offering targeted incentives for youth-led IT and startup businesses. A review of blacklisting regulations is also advised.
“NRB in Rural Areas” Initiative
To strengthen rural credit delivery, the task force proposes launching a “NRB in Rural Areas” program. Under this initiative, the NRB governor would visit rural regions across the mountains, hills, and plains each month to engage directly with local stakeholders. The report also suggests deploying financial mentor teams—including entrepreneurs, bankers, and non-resident Nepalis—in interested local governments.
Each local unit should host at least one annual financial literacy and entrepreneurship program, the report says, while banks should prioritize cash-flow–based lending over traditional land and property collateral in rural areas.
Warning Against Rushed Mergers
The task force issues a strong caution against rushed large-scale mergers, describing recent “big mergers” as hasty decisions with mixed outcomes. It finds that many non-merged institutions are currently performing better than merged ones, largely due to weak integration of systems, software, products, and human resources.
The report recommends taking sufficient time before mergers, appointing new leadership after mergers based on careful assessment, harmonizing staff remuneration within a defined timeframe, and allowing institutions full authority over swap ratios and merger decisions. Institutions with cross-holdings should be encouraged to merge, it adds.
Grey List Exit Requires Central Bank Leadership
On anti–money laundering concerns, the report states that removing Nepal from the international grey list requires an active and leading role by the central bank. It calls for effective enforcement of laws to ensure the independence of the Financial Intelligence Unit, prioritizing payment system reforms, and adopting a time-bound plan to exit the grey list within two years.
Redefining the Central Bank’s Role in Capital Markets
The task force recommends redefining the central bank’s involvement in the capital market, suggesting the withdrawal of NRB’s board representation at NEPSE due to potential conflicts of interest. It proposes channeling margin lending through brokers, allowing banks flexibility once exposure limits are set, and easing tax and foreign exchange rules to attract non-resident Nepalis to the secondary market.
Other recommendations include aligning capital gains tax for NRNs at 7.5 percent, converting promoter shares into ordinary shares within 10 years, advancing the IPO of Rastriya Banijya Bank, developing the bond market including green bonds, and strengthening investor financial literacy.
Overall, the report delivers a clear message: Nepal’s banking sector challenges stem from structural and policy distortions rather than liquidity shortages alone. Without coordinated reforms led by the central bank and supported by the government, the task force warns, idle liquidity will continue to coexist with weak credit growth and a sluggish economy.
