The current situation in Nepal’s banking sector reflects the sentiment expressed in poet Bhumi Sherchan’s verse: “This is a country of rumors.” The latest example of this is the widespread speculation that banks are on the verge of collapse. However, there is no truth to these rumors. Such misinformation is not only creating panic among depositors but also affecting those engaged in the banking sector.

The issue intensified when some locals protested against Global IME Bank due to a dispute between IME Group and local stakeholders regarding the construction of a cable car in Pathibhara. Some individuals went as far as launching a campaign to shut down Global IME Bank branches. Social media posts, videos, and news reports further fueled the fear. Some media outlets, without verifying the facts, began publishing and broadcasting speculative reports, affecting depositors who lack an in-depth understanding of the banking sector. As a result, a state of tension has arisen in the entire banking industry.

In response, banks have been struggling to reassure the public that they are financially stable, regularly publishing financial statements, and being closely monitored by the central bank. However, it has become challenging to convince the public that all banks and financial institutions are secure.

Interview with NRB Executive Director on Banking Sector Concerns

To address these issues, Banking News interviewed Guru Prasad Paudel, Executive Director of the Bank and Financial Institutions Regulation Department at Nepal Rastra Bank (NRB). Below is an excerpt from the conversation:

Karnali Development Bank’s Case and Its Impact

Karnali Development Bank faced operational issues, leading to the central bank’s intervention. How did this happen?

Financial institutions operate by accepting public deposits and lending them as loans. This process involves multiple stakeholders, including the banks themselves and the borrowers who must responsibly utilize loans. When financial institutions face difficulties, it is usually due to three main factors:

1. Negligence by banks in loan management.
2. Irresponsible borrowers who misuse credit.
3. Economic fluctuations that impact loan repayment.

In Karnali Development Bank’s case, poor corporate governance played a significant role. The institution failed to provide loans to suitable borrowers and did not conduct proper monitoring. Additionally, it ignored NRB’s guidelines. Due to these factors, as per the Nepal Rastra Bank Act 2058, NRB suspended the bank’s executive board and took control, appointing three officials to manage its operations.

However, this does not mean that all banks face the same fate. The central bank’s message here is clear: If a financial institution faces serious issues, NRB has the authority to take action, including dismissing the board and taking control of the institution.

Viral Social Media List of ‘Troubled Banks’ – What’s the Truth?

Recently, a list of nine banks claimed to be in financial trouble has been circulating on social media. What is NRB’s stance on this?

The central bank is transparent. If any financial institution faces difficulties, NRB officially informs depositors and stakeholders. Therefore, any information outside NRB’s official announcements should not be trusted.

NRB has been actively communicating financial updates, and if any institution encounters trouble, corrective measures are immediately taken and publicly disclosed. The public should not rely on unofficial rumors but instead trust NRB’s official statements.

Comparing Past and Present Banking Challenges

In the past, NRB established a dedicated unit to handle problematic banks. Have the current challenges surpassed those of the past?

NRB continuously monitors and regulates financial institutions through both on-site and off-site supervision. Based on financial reports, we assess the health of banks. In the past, when multiple institutions faced difficulties, NRB set up a specialized division to handle their recovery.

Today, banks fall into four categories:

• Class ‘A’ – Commercial Banks
• Class ‘B’ – Development Banks
• Class ‘C’ – Finance Companies
• Class ‘D’ – Microfinance Institutions

Each category is supervised by dedicated NRB divisions, ensuring constant oversight. Although NRB does not currently operate a separate crisis management unit, individual supervision teams actively monitor financial institutions and take necessary actions.

Why Was Karnali’s Fraud Only Discovered Later?

Why did it take so long to detect issues like falsified documents and Photoshop-ed records in Karnali Development Bank?

NRB does not permanently station employees at financial institutions but conducts periodic inspections. If an institution deliberately hides fraud, it may go undetected for some time. However, financial irregularities cannot remain concealed indefinitely.

NRB, along with internal and external auditors, conducts inspections at least once a year. When fraudulent activities occur, they eventually come to light, leading to legal consequences for those involved.

What Happens If a Bank Actually Fails?

If banks were to collapse, what would be the consequences for investors, depositors, and the economy?

While we cannot say with certainty that no bank will ever face problems, NRB has robust mechanisms to safeguard depositors’ funds.

• NRB closely monitors capital adequacy, reserves, and primary capital levels to ensure financial stability.
• If a bank faces trouble, loans are categorized as performing or non-performing (good, substandard, doubtful, or bad loans).
• A rise in bad loans impacts a bank’s capital base, and NRB intervenes before risks escalate.

Deposit Insurance: NRB ensures that deposits up to NPR 500,000 are insured, meaning depositors are guaranteed this amount even if a bank fails. Additionally, in extreme cases, NRB can take over a troubled institution and systematically return depositors’ funds by recovering outstanding loans. If an institution stabilizes, NRB may even return management to the original stakeholders.

Legal Action Against Spreading False Banking Rumors

What legal measures exist to counter individuals spreading false rumors about bank failures?

NRB advises depositors and the public to rely only on official NRB statements. Banking institutions are highly sensitive, and even strong financial institutions can suffer if public trust is lost.

Misinformation can have widespread economic consequences, so NRB urges people not to engage in speculation or panic.

While Nepal’s legal framework does not currently have a specific Banking Offense Act for such cases, other legal entities, including the Central Investigation Bureau (CIB), are closely monitoring and investigating misleading rumors. Until NRB issues an official statement, all banks and financial institutions should be considered stable and operational. If a financial institution faces genuine trouble, NRB will make an official announcement.