Nepal Tightens Grip on Cooperatives: New Ordinance Targets Fraud, Protects Depositors

Nepal has introduced sweeping reforms in the cooperative sector through the “Cooperative (First Amendment) Ordinance,” aiming to restore trust and address long-standing irregularities that have shaken public confidence. The ordinance, issued by Ram Chandra Paudel, represents a decisive policy shift toward stricter accountability, tighter supervision, and stronger depositor protection in a sector that has faced repeated crises involving misuse of public funds.

At the core of the reform is a clear attempt to bring savings and credit cooperatives under disciplined regulatory oversight. The government has prioritized institutions handling public deposits, particularly those with significant financial exposure. By defining cooperatives with more than 50 percent of their balance sheet tied to savings or loans—and exceeding Rs. 250 million in transactions—as high-risk entities, the ordinance creates a targeted framework for monitoring institutions that pose systemic risks. This reflects an effort to move away from blanket regulation toward risk-based supervision.

One of the most significant provisions is the establishment of a “Revolving Relief Fund” to ensure immediate repayment to depositors of troubled cooperatives. This mechanism introduces a state-backed safety net, allowing victims to recover funds without waiting for lengthy legal proceedings. The government will later recover the disbursed amounts by auctioning assets of the responsible institutions and their operators. This approach not only addresses liquidity concerns but also signals a stronger commitment to depositor protection—an area where past responses were often criticized as slow and ineffective.

The ordinance also imposes strict conditions on cooperative operators, particularly targeting practices of hiding assets through family networks. By significantly expanding the legal definition of “family” and “relatives,” authorities can now investigate and freeze assets held not only by immediate family members but also extended relatives, including in-laws and distant kin. This is a critical step in closing loopholes that previously allowed fraudulent operators to shield illicit wealth from legal action. The inclusion of employees within the definition of related parties further strengthens oversight by addressing internal collusion risks.

Another notable reform is the restriction on excessive interest rates. The ordinance clearly states that total interest charged on loans cannot exceed the principal amount, effectively curbing exploitative lending practices often compared to usury. Additionally, the cap on dividends has been reduced from 18 percent to 15 percent, signaling a shift toward financial sustainability over aggressive profit distribution. These measures collectively aim to stabilize cooperative operations while protecting members from financial exploitation.

In a move that underscores enforcement seriousness, the ordinance introduces provisions to prevent operators of problematic cooperatives from fleeing the country. Authorities can now suspend passports of individuals found responsible for mismanagement or fraud, ensuring accountability within Nepal’s jurisdiction. This reflects lessons learned from past cases where key figures escaped legal consequences by leaving the country.

The ordinance also empowers depositors themselves. If cooperative management fails to return savings, at least 15 percent of affected members can form a “Savings Refund Committee.” With regulatory approval, this committee can take control of the institution’s assets and operations to initiate repayment प्रक्रियाहरू independently. This provision introduces a rare element of participatory enforcement, giving victims a direct role in recovery efforts and reducing dependence on slow administrative processes.

Institutionally, the creation of the “National Cooperative Regulatory Authority” marks a major structural reform. This centralized body will oversee licensing, monitoring, and enforcement for savings and credit cooperatives. Mandatory licensing, annual renewals, and strict penalties—including fines ranging from Rs. 500,000 to Rs. 1.5 million—are expected to improve compliance. The authority’s ability to coordinate with Nepal Rastra Bank and other agencies further enhances its regulatory capacity.

The ordinance also introduces structural changes by restricting cooperative unions from engaging directly in savings and credit operations. Existing entities have been given a three-year transition period to exit such activities, reflecting a policy intent to separate advocacy roles from financial intermediation. This could reduce conflicts of interest and improve sectoral governance in the long term.

From an economic perspective, the ordinance represents both an opportunity and a challenge. While stricter regulations may initially create operational pressure for cooperatives, they are likely to improve transparency and rebuild trust among depositors. The success of these reforms, however, will depend heavily on enforcement effectiveness, institutional coordination, and the government’s ability to manage the transition without disrupting financial access for communities that rely heavily on cooperatives.

Overall, the ordinance signals a decisive move toward cleaning up Nepal’s cooperative sector. If implemented effectively, it could mark a turning point—transforming cooperatives from a source of financial risk into a more reliable pillar of inclusive economic growth.