Greater Emphasis on Supervision than Regulation

Kathmandu – “Most sectors have licenses with a fixed validity period, but a bank’s license seems to last indefinitely. We are not allowing new banks to enter either. In such a situation, what is the real meaning of a banking license?”

This recent remark by Dr. Bishwanath Paudel, Governor of Nepal Rastra Bank (NRB), made during a meeting of the parliamentary Finance Committee following the Gen-Z movement and dissolution of Parliament, sent ripples through Nepal’s banking sector. His statement sparked a fundamental debate: Are banking licenses meant to be perpetual, or is it time to revisit the regulatory framework?

Soon after assuming office, Governor Paudel’s comments drew sharp reactions. Citing examples from hydropower and telecommunications where licenses are granted for a fixed period he argued that the banking sector should also be viewed differently. While some critics labeled the idea risky and unsettling for the investment climate, others welcomed it as a timely and courageous challenge to a banking system increasingly accused of cartelization.

Beyond the debate, one thing is clear: Governor Paudel is not inclined to maintain the status quo in the banking sector.

Prioritizing Supervision over Regulation

Since taking office, Governor Paudel has been actively focused on correcting irregularities within banks and financial institutions. From the outset, he signaled a clear shift in approach placing greater emphasis on supervision rather than excessive regulation. He has repeatedly stressed that policies alone cannot reform the banking system unless institutional behavior, risk management, and implementation are closely monitored.

Rethinking the Classification of Banks

Governor Paudel has also pushed for a review of the existing classification of banks and financial institutions. He has pointed out that although commercial banks and development banks are meant to serve different objectives, in practice they perform almost identical functions. Aside from limited differences such as authority over letters of credit (LCs) and bank guarantees the distinction has become largely symbolic. This, he argues, calls for a reassessment of whether the current classification system is still necessary.

In line with this thinking, several previously tight regulatory measures have been gradually relaxed in recent months. According to the governor, overregulation often traps banks in paperwork and diverts attention from real financial risks. Effective supervision, rather than policy overload, is key to systemic reform.

This philosophy is also reflected in the Monetary Policy for FY 2082/83, where Governor Paudel emphasized the need for policy, structural, and operational reforms to improve citizens’ access to quality financial services, channel resources into capital formation, and strengthen the overall financial system. The policy explicitly calls for a review of the classification and operational scope of banks and financial institutions.

Addressing Structural Problems in Banking

Governor Paudel’s first major reform initiative was the formation of a High-Level Task Force on Banking Sector Reforms, led by former Securities Board Chairman Dr. Rewat Bahadur Karki. The task force recommended adopting a liberal yet prudent, risk-based supervisory framework and developing more customer-friendly banking services.

The task force also highlighted alarming trends in credit defaults. According to the Credit Information Center, the number of blacklisted borrowers rose from 2,537 in mid-2019 to 94,477 by mid-2024, and further to 132,000 by mid-2025. Of these cases, 25 percent were due to loan defaults and 75 percent due to cheque dishonor. The task force recommended immediate removal of borrowers from blacklists once loans are settled and the development of an international-standard credit scoring system.

Strengthening Ties with the Private Sector

Governor Paudel has made active efforts to rebuild trust with the private sector, particularly in the aftermath of the Gen-Z movement. Despite personal losses including arson attacks on his homes in Lalitpur and Chitwan he prioritized addressing the problems faced by businesses affected by the unrest, introducing flexible loan repayment measures.

Flexible Policy on Branch Mergers

With digital transactions rapidly increasing, banks are increasingly operating through digital channels. Recognizing this shift, NRB has allowed banks to merge branches within metropolitan areas without prior approval, a move expected to reduce operational costs and improve efficiency.

Removal of Share-Backed Loan Limits

Governor Paudel also relaxed policies introduced by his predecessor regarding share-backed loans. Initially capped at NPR 4–12 crore and later raised, the limit was first set at NPR 25 crore per borrower under Paudel’s leadership. More recently, the cap was completely removed to better manage excess liquidity in the banking system.

However, despite the removal of limits, stock market investment has not picked up significantly. Market analysts argue that weak investor confidence and uncertain returns rather than loan limits alone are responsible for the subdued market.

Active Stance Against Banking Corruption

Governor Paudel has taken a firm stand against corruption, stating publicly that forcing the sale of someone else’s collateral for personal gain constitutes corruption. He has warned that such practices especially in private banks will not be tolerated. In line with this, NRB is preparing to implement Anti-Bribery and Corruption Policies to enhance transparency, accountability, and good governance across banks.

Studying the ‘Money Mule’ Risk

With the rise in online payments and digital fraud, NRB has begun studying the growing threat of “money mule” networks where inactive or misused bank accounts are exploited for illegal transactions. The central bank plans to reduce inactive accounts and tighten monitoring mechanisms.

Regulating AI Use in Banking

NRB is also preparing to regulate the increasing use of Artificial Intelligence (AI) in the financial sector. Governor Paudel has emphasized identifying AI-related risks while ensuring its optimal use. NRB has already issued initial guidelines on AI governance in banking.

Facilitating Overseas Expansion of IT Companies

In a bid to attract foreign investment and promote exports, NRB has eased rules allowing IT companies to open branches abroad. Exporting firms can now invest up to USD 1 million overseas, while non-exporting firms are permitted investments of up to USD 20,000. Additionally, foreign investors are no longer required to seek NRB approval to repatriate profits, a move expected to have long-term positive impacts on investment inflows.

Governor Paudel noted that recent reforms such as easing company registration, revising FDI thresholds, and stabilizing tax rates have already contributed to a rise in foreign-invested IT companies, signaling a more open and forward-looking financial policy direction for Nepal.