NRB Tightens Scrutiny as Finance Company, Development Banks Face Regulatory Action

KATHMANDU — Nepal Rastra Bank (NRB) has taken regulatory action against a finance company and officials of two development banks after detecting shortcomings ranging from failure to maintain mandatory cash reserves to excessive lending exposure and weaknesses in internal controls. The actions were taken during the fourth quarter of fiscal year 2082/83.

According to details made public by NRB’s Financial Institutions Supervision Department, Reliance Finance was fined Rs 2,924.48 for failing to maintain the mandatory Cash Reserve Ratio (CRR) between Falgun 10, 2082 and Baisakh 5, 2083. Although the monetary penalty is relatively small, the action indicates the central bank’s insistence that financial institutions comply with liquidity requirements irrespective of the size of the violation.

The CRR is the portion of deposits that banks and financial institutions are required to keep as cash reserves under the central bank’s regulatory framework. Maintaining the prescribed reserve is important because it provides institutions with a minimum liquidity buffer and forms part of NRB’s broader mechanism for maintaining stability in the financial system. Reliance Finance’s penalty therefore reflects a regulatory compliance failure rather than simply a financial loss represented by the amount of the fine.

NRB has also cautioned Bishnu Regmi, former chief executive officer of Narayani Development Bank, over lending that exceeded a regulatory exposure ceiling. When Narayani Development Bank was removed from the list of troubled financial institutions, it was allowed to extend credit to a single borrower, firm, company or group of related borrowers only up to 10 per cent of its primary capital.

The central bank found that the development bank crossed the prescribed limit while extending loans during fiscal year 2081/82. As Regmi was serving as chief executive during the period concerned, NRB issued a warning to him under Section 100(2)(a) of the Nepal Rastra Bank Act, 2058.

The case is significant because restrictions on lending to a single borrower or interconnected group are designed to prevent excessive concentration of credit risk. When a large share of a bank’s capital is exposed to one borrower or related group, problems faced by that borrower can have a disproportionate impact on the bank itself. The restriction imposed on Narayani was particularly important because the institution had previously been classified as troubled and was operating under conditions set by the regulator.

More serious governance and control concerns emerged at Saptakoshi Development Bank. NRB cautioned chief executive officer Dinesh Kumar Pokharel following an on-site inspection based on the bank’s unaudited financial position as of the end of Asoj 2082. The inspection identified alleged misappropriation of cash kept in the bank’s vault, unauthorised access by employees to customer accounts and significant weaknesses in the institution’s internal control system.

NRB’s concern was not limited to the occurrence of the irregularities themselves. According to the regulator, the bank failed to conduct an adequate investigation after the incidents became known and did not take sufficient action against those responsible. It also failed to identify weaknesses in its internal control framework and make the necessary changes to policies and operating procedures to prevent similar incidents.

Pokharel was therefore cautioned under Section 100(2)(a) of the Nepal Rastra Bank Act, 2058. The regulatory action suggests that NRB considers senior management accountable not only for financial performance but also for establishing controls capable of protecting cash, customer accounts and the integrity of banking operations.

The central bank extended the action to Saptakoshi Development Bank’s board, cautioning its chairman and all directors under the same legal provision. NRB concluded that the board had failed to ensure an effective internal control system and had not introduced adequate reforms to prevent a recurrence of such incidents.

The action against the entire board highlights the distinction between an isolated operational failure and a broader governance problem. While employees may be directly involved in individual irregularities, responsibility for establishing oversight mechanisms, approving policies and ensuring that management addresses identified risks ultimately rests with senior management and the board.

Taken together, the three cases show that NRB’s fourth-quarter enforcement covered three different areas of financial-sector supervision: liquidity compliance at Reliance Finance, credit concentration at Narayani Development Bank and governance and operational controls at Saptakoshi Development Bank.

Among the three, the Saptakoshi case raises the widest institutional concerns because it involves customer-account access, vault cash and the effectiveness of internal controls. The Narayani case, meanwhile, highlights the risk of exceeding lending limits at an institution that had previously operated under a troubled status, while the Reliance Finance case demonstrates that even relatively small reserve-related breaches can trigger regulatory penalties.

The actions also send a broader message to banks and financial institutions that regulatory compliance is expected at several levels—from maintaining prescribed reserves and observing lending limits to ensuring that boards and chief executives respond effectively when internal irregularities are detected. Rather than focusing solely on balance-sheet indicators, NRB’s enforcement shows increasing attention to management accountability, governance and operational risk within financial institutions.