Kathmandu – Guru Prasad Paudel, Executive Director of the Bank and Financial Institutions Regulation Department at Nepal Rastra Bank, has stated that banks have developed a stronger mechanism for identifying individuals than the state. He emphasized that banks can determine identities based on payment activities and financial transactions conducted by individuals.

Speaking on Global IME Bank’s podcast, Paudel mentioned that banks might have already developed such a system. Below are the key points from his discussion:

Current Status of the Payment System Department

Paudel, who has held responsibilities across various departments of Nepal Rastra Bank, highlighted the unique role of the Payment System Department. He noted that while traditional departments existed since the bank’s inception, the Payment System Department was established in 2016 to facilitate digitalization in the payment system.

He pointed out that the COVID-19 pandemic accelerated the shift to online transactions, promoting digitalization. However, he acknowledged that despite progress in digital payments, financial services still need to reach the lower-income population effectively.

Need for Digital Public Infrastructure (DPI)

Paudel stressed the importance of developing Digital Public Infrastructure (DPI), citing India’s success as an example. He emphasized that Nepal should adopt a similar approach, starting with a digital legal framework, as existing laws are outdated and do not fully integrate technological advancements.

To build a strong digital ecosystem, Nepal needs:

1. A legal framework that supports digital transactions
2. A robust digital identification system
3. Expanded internet and financial infrastructure

Although Nepal’s Credit Information Center has begun implementing credit scoring, progress is still limited. Paudel suggested leveraging digital transformation for financial inclusion, ensuring even those without formal documentation or credit history can access financial services.

Banks’ Role in Identity Verification

Paudel highlighted that banks possess extensive financial data that could help in identity verification, surpassing the state’s capabilities. He explained that banks can assess individuals’ financial behaviors through their transactions, much like India’s Aadhaar-linked credit system, which enables financial institutions to offer loans based on digital identity verification.

Nepal’s Progress on Central Bank Digital Currency (CBDC)

Nepal Rastra Bank has initiated work on Central Bank Digital Currency (CBDC), establishing a dedicated division to explore its implementation. The bank aims to introduce a concrete CBDC framework by 2026, with technical support from the International Monetary Fund (IMF).

Paudel explained that CBDC could be issued in two forms:

1. Wholesale CBDC – Used by banks and financial institutions for interbank transactions.
2. Retail CBDC – Available for use by the general public.

Artificial Intelligence (AI) in Banking

With the increasing adoption of Artificial Intelligence (AI) in the financial sector, Nepal Rastra Bank has included AI-related studies in its current Monetary Policy and has formed a dedicated AI research group. The Nepal government has also introduced a concept note on AI, which includes its potential use in the financial sector.

Paudel emphasized that AI integration in banking needs proper guidance and regulations to ensure its safe and effective implementation.

Conclusion

Banks are rapidly advancing in digital financial services, developing mechanisms that not only enhance financial inclusion but also improve identity verification processes. With ongoing initiatives in DPI, CBDC, and AI, Nepal is gradually moving toward a more digital and financially inclusive economy. However, sustained efforts in legal reforms, infrastructure development, and policy implementation are crucial for long-term success.