Government Moves to Bring Cooperatives Under Central Bank Oversight, Raises Questions Over Capacity and Reform Effectiveness

Kathmandu — The government is preparing to bring Nepal’s vast cooperative sector under the regulatory framework of Nepal Rastra Bank, signaling a major policy shift aimed at addressing long-standing governance failures and financial risks. The move comes in response to growing concerns over weak supervision, rising defaults, and increasing public distrust in savings and credit cooperatives.

The proposed policy envisions placing cooperatives and microfinance institutions under a stronger, centralized supervision mechanism led by the central bank. A draft strategy outlines the creation of a dedicated supervisory structure to replace what the government describes as “fragmented and ineffective regulation” in the non-banking financial sector. This includes integrating cooperatives into the credit information system to enable better monitoring of lending practices and borrower exposure.

However, the proposal has triggered critical questions about implementation capacity. Nepal Rastra Bank has struggled in the past to effectively supervise even the formal banking and microfinance sectors, which consist of fewer than 120 institutions combined. Extending oversight to more than 33,000 cooperatives presents a scale challenge that analysts say could overwhelm the existing regulatory infrastructure unless significant institutional expansion and technological upgrades are undertaken.

The government’s move is largely driven by the conclusion that lax regulation has been a key factor behind the recurring crises in the cooperative sector. In recent years, multiple cooperatives have collapsed or faced liquidity shortages, leaving depositors unable to access their savings. These incidents have exposed systemic weaknesses in governance, risk management, and transparency within the sector.

Under the new framework, cooperatives will be required to align lending practices with their actual financial capacity. The draft policy emphasizes prioritizing productive sectors, unsecured group-based lending, and locally driven entrepreneurship. This marks a shift away from speculative or loosely monitored lending, which has contributed to rising non-performing loans in recent years.

The policy also introduces a plan to establish a unified savings protection fund, aimed at safeguarding depositors in distressed cooperatives. This mechanism is expected to function as a financial safety net, ensuring timely compensation for affected members and restoring confidence in the system. Such a measure is particularly significant given the cooperative sector’s deep reach among lower- and middle-income populations.

Despite these reform efforts, structural challenges remain deeply rooted. Nepal’s cooperative sector is currently regulated across three tiers of government—federal, provincial, and local—creating overlaps and inconsistencies in supervision. According to official data, out of approximately 32,965 cooperatives in operation, only 147 fall under federal jurisdiction, while the majority are managed at provincial and local levels. This fragmented regulatory environment has made it difficult to maintain unified data systems and enforce consistent standards.

The scale of the sector itself underscores both its importance and its vulnerability. Cooperatives account for the participation of around 37.4 percent of the population, with over 10.9 million members. Women make up more than half of the membership base, reflecting the sector’s role in financial inclusion. At the same time, cooperatives collectively hold over Rs 11.25 trillion in savings and Rs 143 billion in share capital, making them a critical component of Nepal’s informal financial ecosystem.

Economic slowdown has further exacerbated existing weaknesses. Loan recovery rates have declined in recent months, as borrowers face income constraints and reduced economic activity. Government assessments have pointed to poor adherence to cooperative principles, influence from vested interest groups, and weak internal management as key drivers of the sector’s deteriorating health. Additionally, underreporting of bad loans and inadequate provisioning have increased financial risks.

The government’s reform agenda includes amending the Cooperative Act, 2017, establishing a National Cooperative Regulatory Authority, and developing an integrated digital monitoring system. Plans are also in place to modernize the sector through digitalization, branding, quality certification, and expansion into e-commerce, with a focus on improving market access both domestically and internationally.

Furthermore, the policy aims to strengthen employment generation through cooperatives, particularly targeting youth, women, and marginalized communities. By linking cooperatives to broader economic development goals, the government is attempting to reposition the sector as a driver of inclusive growth rather than merely a savings and credit mechanism.

Yet, skepticism persists regarding execution. Nepal has previously formed multiple institutions—including the Cooperative Ministry, Cooperative Department, Cooperative Board, and high-level reform commissions—but tangible improvements have remained limited. Critics argue that policy announcements often outpace implementation, leading to recurring cycles of reform without structural change.

In conclusion, the proposal to bring cooperatives under central bank oversight represents a bold attempt to overhaul a troubled yet vital sector. While the policy direction addresses many of the core issues—fragmentation, weak supervision, and financial opacity—its success will depend on the government’s ability to translate plans into effective action. Without substantial investment in regulatory capacity, technology, and coordination, the risk remains that even well-intentioned reforms may struggle to deliver lasting results.