NRB Reform Report Flags Structural Weaknesses, Calls for Deep Banking Overhaul

Nepal Rastra Bank has made public the report of the Banking Sector Reform Task Force, outlining wide-ranging recommendations aimed at reviving economic activity and structurally reforming Nepal’s banking system. The task force, led by Dr. Rewat Bahadur Karki, includes former banker Bhuwan Dahal and NRB’s Executive Director of the Bank and Financial Institutions Regulation Department, Guru Prasad Paudel. The report presents a candid diagnosis of the banking sector’s problems, arguing that Nepal’s economic slowdown is rooted more in structural and policy failures than in liquidity shortages or interest rates alone.

At the core of the report is the assessment that Nepal’s banking challenges are systemic. Despite excess liquidity and declining interest rates, credit growth has remained weak and large volumes of funds have stayed idle. According to the task force, this reflects deeper structural rigidities within the banking system and a growing disconnect between financial institutions and the real economy. The report warns that such problems cannot be addressed through minor monetary policy adjustments alone.

Banking Policy and Regulation

The task force has recommended fundamental reforms in banking policy and supervision. It stresses the need for risk-based supervision, healthier regulatory practices, and the promotion of customer-friendly banking services. A key proposal is to strengthen the classification framework for banks and financial institutions and gradually allow greater self-regulatory authority, under close oversight, to encourage efficiency and accountability. The report suggests that excessive regulatory tightness has fostered risk aversion rather than prudent risk management.

Reviving Rural Credit Flow

To address persistent credit shortages outside urban centers, the report proposes launching a “NRB in Rural Areas” program. Under this initiative, the NRB governor would conduct regular field visits to rural regions to assess economic potential and credit demand, using those findings to shape policy. The task force also emphasizes entrepreneurship development and financial literacy programs at the local level, arguing that credit expansion without capacity-building would have limited impact.

Capital Market Development and Coordination

The report highlights the central bank’s coordinating role in capital market development. It recommends encouraging commercial banks to prioritize margin lending through licensed brokers to strengthen market depth and liquidity. One of the more significant proposals is to convert 30 percent of the fully government-owned Rastriya Banijya Bank into public shareholding, a move that could enhance governance, transparency, and market participation if implemented carefully.

Grey List Exit as a Strategic Priority

On international compliance, the report underscores the central bank’s decisive role in removing Nepal from the anti–money laundering grey list. It calls for faster and more effective implementation of the Anti–Money Laundering Act and related currency-laundering controls. Importantly, the task force urges the preparation of a time-bound roadmap to exit the grey list within the next two years, warning that prolonged grey-list status could undermine investor confidence and cross-border financial relations.

Rethinking Mergers and Acquisitions

The task force takes a critical view of Nepal’s merger-driven banking consolidation. It notes that many institutions that have not undergone mergers are currently performing better than merged entities. According to the report, rushed mergers without proper integration of human resources, software systems, and product lines have diluted expected benefits. It recommends allowing sufficient time for mergers and exercising caution in appointing new chairs and chief executive officers, supported by thorough institutional assessments.

Directed Lending and Sectoral Priorities

The report concludes that existing directed lending policies have been narrowly focused, leading to rising non-performing loans in a few sectors while neglecting others. It calls for expanding priority lending to education, health, transport, and green sectors, aligning bank credit with the economy’s real needs. Without such recalibration, the task force warns, credit risks could intensify rather than diminish.

Microfinance and Non-Bank Regulation

Another major concern raised is the weakening regulatory framework for microfinance institutions and large non-bank financial entities. The task force argues that microfinance institutions require a separate regulator, similar to the Bangladeshi model, given their distinct nature. It also cautions that rapidly expanding non-bank institutions—such as provident funds and social security funds—pose systemic risks if regulatory oversight remains inadequate.

Credit Revival as the Key to Economic Recovery

The report stresses that economic recovery will remain elusive unless credit activity is revived. While safeguarding depositors’ interests, it calls for loan restructuring, immediate resumption of concessional credit programs, and additional financing for businesses shut down or operating at minimal capacity since the Covid-19 pandemic. It proposes simplified business loans of up to NPR 500,000 in rural areas and NPR 1 million in urban areas, alongside targeted support for youth-led startups and IT enterprises.

Overall, the task force’s report presents a clear message: Nepal’s banking sector problems are structural, not cyclical. It argues that without coordinated reforms, policy flexibility, and stronger institutional leadership from the central bank, liquidity alone will not translate into growth. The recommendations, if implemented through collaboration between the NRB and the government, could mark a turning point in making Nepal’s banking system more resilient, inclusive, and aligned with the broader economy.