financial sector in nepal a compile to one who are preparing for competitive exams in Nepal

1.  By RoshanPant (RBB khanikhola)
Financial Sector Reforms In Nepal
 Financial sector reforms are the activities or the initiatives taken by the government and
Central Bank in order to make the financial sector more efficient, inclusive and risk
resilient. So it comprises of a broad policy components to promote financial outreach
competitive and stable financial sector.
 Financial sector Reform is a continuous process implemented in order to improve the
quality of financial services and the functioning of the financial system as a whole. The
Reform or liberalization of financial sector is an ongoing process which takes several
years to finish the proceeding of financial Reform the financial sector reforms of Nepal
was initiated in mid 1980 and it is still being pursued.
 Financial sector reform is an integral component of macroeconomic reforms
accompanied by legal reforms that improve the growth prospects of a country. It is the
readjusting or reassuring the sound financial system that enhance efficiency and
allocation of opportunities and resources. It is the movement toward privatization and
liberalization where market forces lead the economy. Financial sector reform means
gradual liberalization of financial market and its players and opening of all types of
depository institutions and other non-depository financial institutions to the private
sector.
 Financial sector reform also means competition, transparency, financial discipline and
governance.
 Nepal Rastra Bank through Monetary policy is implementing financial sector reforms
initiative every year. The monetary policy itself has identified and implemented financial
sector reforms to make this sector more inclusive broad-based, efficient and stable..
Objectives of FSRP in Nepal
 To cope up with the threats of global competitiveness in carrying out the financial
services.
 To increase the qualitative and quantitative performance levels of the BFIS
 To establish and improve internal management system, risk analysis practices, and
governance levels within the banks and financial institutions
 To reform and address the legal shortfall associated with reguation;
 To provide a wider range of financial services at lower costs while minimizing financial
risks to a large number of customers
 to induce investment, increase employment opportunities and productivity, achieve
growth targets and attain overall macro-economic development.

2. FSRP in Nepal
The financial sector reform Program of Nepal was initiated in mid-1980s and it is still being
continued. The financial sector reform process in Nepal has been analyzed in four phases, which
are as follows:
Phase I (1984-1990): The major reforms under this phases are :
 GON first opened up the banking sector to foreign investors. In 1984, the Nepal Arab
Bank Limited was established
 In July 1985, commercial banks were allowed, for the first time, to accept current and
fixed deposits on foreign currencies
 On May 26, 1986, NRB deregulated the interest rate regime and authorized commercial
banks to fix interest rates at any level above its minimum prescribed levels.
 Under the Structural Adjustment Program of the IMF, the financial sector was further
liberalized in 1987.
 The Agriculture Development Bank of Nepal (ADB/N) and the Nepal Industrial
development Corporation (NIDC) were allowed to issue debentures to increase their
financial resources.
 The Finance Company Act was enacted in 1986 to increase competition in financial
markets
 The Credit Information Bureau was established in 1989
 There was a new development on the capital market opened its floor for corporate share
trading in November 1994.
Major achievement under Phase I reforms
 Banking sector was opened to foreign investor (Establishment of joint venchor banks)
 Deregulation of interest rate
 Auction mechanism was introduced for sale of T-bill
 Debenture and bond issued as new financial instrument
 Bank were allowed to accept current and fixed deposit on foreign currency
Phase II (1991- 2000) : The major reforms under this phases are :
 The commitments of GoN in the financial sector liberalization gave the needed boost in
the confidence of the private sector for the establishment of commercial banks in the
private sector. The no of Banks,finance,rural and development society groomed
 The separate act for development banks was felt necessary and it was enacted in 1996.
 NRB further liberalized the restrictive measures for providing banking and non-banking
financial institutions and especially development banks and finance companies more
freedom in their business operations.

3.  The credit ceiling was removed in 1991 except for government and nonfinancial
government enterprises under the policy of indirect monetary control and Nepal entered
into the Enhanced Structural Adjustment Facility (ESAF) in October 1992. NRB laid
more emphasis on open market operations as main monetary policy instrument.
 For fully addressing operational weaknesses of NBL and RBB and to make them healthy
and effective banking institutions. NRB sought the financial and technical help of the
UNDP and the study team presented the Commercial Banking Problem Analysis and
Strategy Study (CBPASS) reports. The CBPASS I recommended GoN to address the
following critical areas: 1. Full repayment of Government guaranteed loans to state-
owned enterprises and removal of lending obligations. 2. Partial re-capitalization of NBL
and RBB. 3. Establishment of a new Rural Finance Institution to assume priority sector
lending of NBL and RBB. The CBPASS II report identified four critical areas where
RBB and NBL had to make necessary improvements. 1. Loan Recovery 2. Credit 3.
Personnel 4. Branch Operations and MIS
 Both the CBPASS I and CBPASS II reports were implemented half-heartedly by
concerned authorities.
Major achievement under Phase II reforms
 Open and liberal economic policy
 Many joint venture banks, commercial banks,development banks, finance company,
insurance company were allowed to operate
 Rural development bank were established in five development region to provide
financial service to poor people
 Insurance act was enacted in 1992 to regulate and develop insurance business
 Current account convertibility system was introduced
Phase III (2000-2010) : The major reforms under this phases are :
 Serious problems remained with two largest commercial banks (RBB and NBL) and two
largest development banks (ADB/N and NIDC). The World Bank, the IMF and the Asian
Development Bank (ADB) found some weaknesses in NRB’s regulatory and supervisory
capacity to effectively and efficiently regulate and supervise banking and other financial
institutions.
 Taking into account these serious problems in the financial sector, GoN adopted the
Financial Sector Strategy Statement in December 2000. It has clearly mentioned about
the needs for the strengthening and autonomy of NRB so that it can regulate and
supervise commercial banks and financial institutions.
 As per the commitment of GoN to reform RBB and NBL, the Nepal Banking Reform
Project was started by GoN and NRB with funding assistance from the World Bank
(IDA) and DFID (UK). The KPMG Barents Group, the international expert team

4. associated with the Banking Reform Project, started the reform project since 15
November 1999.
 The governance and management of RBB and NBL took politically driven decisions.
They had negative net worth and insufficient capital adequacy. Their human resource
management was found extremely weak in all areas. Their situation was clearly worse
than in 1992 when the CBPASS report revealed their financial, managerial and
organizational problems and weaknesses.
Major achievement under Phase III reforms
 Introduce financial sector reform program, 2000 to make financial system
efficient and effective
 Restructuring of NBL and RBB
 Reengineering of NRB
 Enacted and implemented as well as various banking sector act and regulations.
i.e. NRB act, 2002, BAFIA, 2006
 Formulation of monetary policy, 2002
 Open license policy
Phase IV (From 2010 onwards ) : The major reforms under this phases are :
 Encourage Merger and Acquisition for financial stability
 Adopted NFRS for uniform accounting system of BFIs
 Financial sector strategy implementation, 2016/17-2020/21
 Risk based supervision has been introduced
 BASEL III implementation
 Capital base of BFIs (8 arba) and insurance company
 Macro prudential policy has been implemented
 Enacted BAFIA, 2073
 Amendment of NRB Act, 2058
 Payment and settlement bylaws, 2015 BS amended
 Modernization of payment system- promote digital banking
 Establishment of infrastructure development bank
 Introduce go-AML system
FSRP Areas In the days to come for Nepal
 Reforming the financial sector laws and regulations (including ITrelated risk)
 Implementing international accounting standard to the fullest
 Establishment of Bankers training institute
 Restructuring of credit Information Bureau

5.  Revamping research and financial monitoring system of NRB
 Broadening and deepening of financial system in Nepal
Major challenges in the financial sector reforms Success:
 Lack of commitment by the Government to change its basic mindset towards the state-
owned banks, including a much stronger emphasis on commercial orientation and on
preparation for eventual privatization;
 Absence of an Action Programme to introduce drastic changes in the managerial culture
to ensure that managers were professionals with autonomy and accountability
 Financial accounting is in implementation phase and not fully according to international
standards
 Management information systems and record keeping are very basic
 Governance and management are highly politically driven and lacking a commercial
focus
Lessons from the Reforms
The finance sector reform program started in 2002 made tangible achievements in developing
legal and regulatory frameworks and establishing or effecting finance sector auxiliary
institutions. The reform also enhanced the role of the private sector and reduced the dominance
of state-owned banks. But the reform failed to alter the fundamental weakness of the state-owned
banks—weak governance and management, inadequate risk management, deficient staff skills
and redundancy, and highly politicized employee unions. Lessons learnt from the FSRP are:
 Financial distress happens in state-owned banks when the government intervenes for
political purposes. To avoid the banks reverting back to pre-reform distressed conditions,
it is necessary to continue efforts to fully privatize the state-owned banks with the
participation of strategic investors.
 International development agencies are the driver of finance sector reform and their
continued engagement is necessary
 NRB strengthening is key for successful finance sector reform and efforts to improve its
capacity and autonomy shall be continued.
 Restructuring, if left only to external management, is ineffective. Rather, strong
coordination between the government and donors is necessary.

6. Suggestion for Betterment of FSRP
For better outcome of the reforms, a few actions can be recommended:
 International development agencies should continuously engage the government
and policy makers in dialogues on the future course of the finance sector.
 The government should maintain sound finance sector policies and develop a
cadre of finance sector experts within the Ministry of Finance.
 There should be continuous support for strengthening the capacity and
independence of the central bank.
Extra Reading : Work of IMF and World bank in FSRP and Re-
Engineering areas of NRB