Nepal Bankers' Association to Nepal Rastra Bank: Here Is What Needs to Change

When an industry association submits a 22-point recommendation to a central bank ahead of monetary policy, it is worth reading carefully — not just as a wish list, but as a diagnosis. The Nepal Bankers' Association has done exactly that, presenting Nepal Rastra Bank with a detailed set of proposals for the upcoming monetary policy of fiscal year 2083/84. Taken together, the recommendations reveal a banking sector under genuine stress, straining against regulatory constraints that were designed for different economic conditions and struggling to find its footing in a sluggish economy where excess liquidity sits idle while credit demand remains weak.

The starting point for understanding the NBA's recommendations is the current condition of the banking system. Liquidity has been piling up in the system for months, yet that liquidity is not flowing into productive lending. Non-performing loans are rising as borrowers who took on debt during better times struggle to service it. Banks that acquired collateral through loan defaults now hold property they cannot sell in a market where buyers are scarce. And the broader economy is growing far below its potential, making it harder for new borrowers to generate the cash flows needed to justify taking on credit. This is the context in which the NBA's 22 points need to be read.

The most structurally significant recommendation concerns the establishment of a proper secondary market for government securities. Currently, when a bank invests in treasury bills or government bonds, that investment is essentially locked in until maturity. If a bank needs liquidity in the meantime, it has limited options. The NBA wants Nepal Rastra Bank to create a functioning secondary market where banks can buy and sell government securities freely, converting their fixed-income holdings into cash whenever liquidity demands it. This is standard practice in developed financial systems and its absence in Nepal represents a meaningful gap in the architecture of the money market. A liquid secondary market for government securities would not just help individual banks manage their balance sheets — it would give the central bank a more effective tool for conducting open market operations and managing system-wide liquidity.

The problem of non-banking assets — properties acquired through foreclosure that banks cannot sell — is one of the most tangible signs of stress in the current environment. Nepal's real estate market has slowed considerably, and banks that took land and buildings as collateral during the lending boom now find themselves holding assets they cannot offload. The NBA has proposed amending the Banks and Financial Institutions Act to allow these properties to be leased or rented out rather than sitting idle on bank balance sheets. This is a pragmatic solution to a practical problem, though it raises questions about how long banks should be permitted to function as property managers before more fundamental resolution mechanisms are required.

The recommendation to convert promoter shares of banks that have operated for ten or more years into ordinary shares addresses a different but related concern. Nepal's banking sector has long been characterized by concentrated ownership, with promoter shareholders holding stakes that are not freely tradable in the market. Converting these shares to ordinary shares over time would broaden the investor base, deepen the capital market, and give existing promoter shareholders a cleaner exit pathway if they choose to divest. The NBA frames this as a measure to enhance capital market liquidity, and that framing is accurate — but it is also a reform that would shift the ownership dynamics of the banking sector in ways that some current shareholders may resist.

On loan classification and provisioning, the NBA has raised a complaint that bankers have been voicing for some time. Under current rules, a loan that has been brought back to regular status must remain in the same risk classification for three months before it can be upgraded. The NBA argues this does not reflect international best practice and creates an unnecessarily conservative provisioning burden for banks that have successfully recovered problem loans. The proposal to align Nepal's provisioning norms more closely with international standards is reasonable in principle, though any relaxation of provisioning requirements needs to be carefully calibrated to avoid undermining the sector's overall resilience to credit risk.

The base rate calculation issue is more technical but equally important. Nepal's banks are required to set their minimum lending rates based on a formula that, according to the NBA, does not fully capture actual operating costs. The association wants operating expenses, debenture issuance costs, and deposit insurance premiums to be included in the calculation — which would result in higher base rates and, theoretically, more realistic pricing of credit. The counterargument is that higher base rates translate to higher borrowing costs for businesses and consumers at a time when the economy needs cheaper credit, not more expensive credit. This tension between accurate cost reflection and economic stimulus does not have an easy resolution.

The proposal to reduce the mandatory deprived sector lending requirement from 5 percent to 3 percent of total loans is the most politically sensitive recommendation in the package. Directed lending requirements exist to ensure that credit reaches underserved populations who would otherwise be excluded from formal financial services. Reducing that requirement frees up capital for banks to deploy where they see better risk-adjusted returns, but it also risks pulling resources away from the borrowers who most need institutional credit. The NBA's argument is presumably that the quality of deprived sector lending matters more than the quantity, and that forcing banks to meet an artificially high target leads to poor-quality lending that ultimately hurts both lenders and borrowers. That argument has merit, but any reduction in the requirement should be accompanied by stronger monitoring of whether the remaining deprived sector lending is actually reaching genuine beneficiaries.

The recommendation to include health and education in the list of priority sectors for mandatory lending is constructive and overdue. These are sectors with clear social returns and demonstrated ability to generate sustainable economic activity, yet they have not received the same regulatory encouragement as agriculture and hydropower. Bringing them into the priority sector framework would direct capital toward institutions and services that have a multiplier effect on human capital development.

Risk-based pricing — the ability to charge different interest rate premiums to different borrowers based on their individual risk profiles — is a reform that would make Nepal's credit market more efficient and more equitable. Currently, relatively safe borrowers effectively subsidize riskier ones because banks cannot differentiate meaningfully in their pricing. Allowing risk-based pricing would enable banks to extend credit to a broader range of borrowers, including those currently deemed too risky under a flat-pricing system, while charging appropriately for the additional risk. The NBA's push for this reform aligns with how modern banking systems around the world operate.

On the digital banking front, the NBA's recommendations reflect the friction that has built up as digital financial services have expanded faster than the regulatory framework governing them. The mandatory SMS notification for every digital transaction, for example, was designed to protect customers from unauthorized transactions at a time when mobile banking was new and customers were unfamiliar with the risks. Today, when many customers use sophisticated mobile banking applications with real-time in-app notifications, push notifications, and transaction alerts, requiring a separate SMS for every transaction adds cost without adding meaningful protection. The NBA wants in-app notifications to be recognized as equivalent to SMS notifications — a sensible modernization that most regulators in comparable markets have already made.

The call for full QR interoperability across all payment operators addresses one of the more visible irritants in Nepal's digital payments landscape. Different payment systems currently operate their own QR ecosystems, meaning a merchant may need to display multiple QR codes to accept payments from different apps. Full interoperability — where any QR code works with any compliant payment app — would simplify merchant acceptance, reduce infrastructure costs, and accelerate digital payment adoption. The technology exists; what has been missing is the regulatory mandate to implement it universally.

The proposal to build a shared information platform between banks and the Nepal Police for combating digital fraud reflects a genuine and growing problem. Digital fraud cases are increasing in Nepal as more financial activity moves online, and the current information barriers between financial institutions and law enforcement slow the response time significantly. A shared platform would allow banks to flag suspicious transactions to police more quickly and would give investigators access to financial intelligence that is currently difficult to obtain through formal channels.

The centralized KYC system recommendation is perhaps the most straightforwardly beneficial proposal in the entire package. Under the current arrangement, customers must submit identity verification documents to every financial institution they deal with separately — a process that is redundant, time-consuming, and potentially inconsistent in its quality. A centralized KYC database, where a customer's identity is verified once and the verified record is made available to all licensed institutions, would dramatically reduce the compliance burden on customers while potentially improving the overall quality of identity verification across the system.

Taken as a whole, the NBA's 22-point submission is a serious and substantive document. It addresses real problems with practical proposals, draws on international experience, and reflects genuine understanding of where Nepal's banking sector needs to evolve. The NBA has framed the entire package as supportive of the government's 7 percent growth target for the coming fiscal year — and that framing is not unreasonable. A banking sector that can manage its liquidity more effectively, resolve its non-performing assets more cleanly, price credit more accurately, and deliver digital services more efficiently is a banking sector that is better positioned to support the economic activity the government is trying to generate. Whether Nepal Rastra Bank incorporates these recommendations into the upcoming monetary policy will be a meaningful test of the central bank's appetite for reform in a year when the economy needs every advantage it can get.