Banking News – Nepal’s development banks, originally established to expand financial access across the country, have gradually shifted their focus toward maintaining financial stability as the country’s banking sector and regulatory framework have evolved, according to Bishrut Thapa, Executive Director of Nepal Rastra Bank (NRB).

Speaking during the third session of the Banking Discourse on “Sustainability of Development Banks: Contribution, Competition and Policy,” Thapa said the original vision under which development banks were established in 1995/96 has changed significantly over the past three decades.

Focus Has Shifted from Financial Inclusion to Stability

Thapa explained that when development banks were introduced in the mid-1990s, Nepal’s priority was expanding access to banking services during the country’s economic liberalization. However, following amendments to the Nepal Rastra Bank Act in 2016, the regulator’s primary objective has shifted toward safeguarding financial stability.

According to him, financial inclusion has already reached around 60 percent, reducing the need for expansion-focused policies.

Limited Operational Differences Between Commercial and Development Banks

Thapa noted that under the Bank and Financial Institutions Act (BAFIA), there are now few substantive differences between commercial banks and Class B (development banks) and Class C (finance companies).

He said development banks are now equally capable of offering consumer finance and a wide range of modern banking services.

Previously, Class B and Class C institutions faced restrictions on resource mobilization, but Nepal Rastra Bank has removed those limits, allowing institutions to manage greater levels of risk based on their capital strength.

Some development banks, he added, have become large enough to compete directly with commercial banks. The only major restriction that remains is that certain services, such as issuing letters of credit (LCs), remain exclusive to commercial banks.

Fintech Brings Opportunities Alongside New Risks

Discussing financial technology, Thapa said fintech has significantly improved efficiency across the financial sector but has simultaneously introduced new challenges.

“As financial services become more digital and convenient, cyber risks also continue to increase,” he observed.

He emphasized that regulators must remain prepared to address emerging technological threats while encouraging innovation.

Regional Development Banks Continue to Enjoy Strong Local Trust

Thapa highlighted that regional development banks possess an important competitive advantage through their close geographic connection with local communities.

Because of these long-standing relationships, depositors often remain loyal to regional institutions instead of shifting their savings to commercial banks.

Nepal currently has eight national-level development banks, most of which emerged through mergers and acquisitions, alongside several regional development banks.

He said these institutions remain financially stable and do not currently face significant sustainability concerns.

Sector-Specific Investment Could Be Considered

Looking ahead, Thapa suggested that policymakers could consider allowing development banks to specialize in particular sectors, such as infrastructure or hydropower financing, consistent with the developmental role for which they were originally established.

However, he cautioned that such changes cannot be introduced abruptly, given the existing loan portfolios of development banks.

Uniform Regulation Reflects Similar Banking Functions

Thapa explained that Nepal Rastra Bank issues a unified regulatory directive covering commercial banks, development banks, and finance companies because all three categories now perform broadly similar banking functions.

Although some industry participants question whether finance companies with capital of NPR 800 million, development banks with around NPR 2.5 billion, and commercial banks with NPR 8 billion should be regulated under the same framework, the central bank believes there should not be major differences in prudential regulation.

Strong Deposits Reflect Public Confidence

Thapa noted that development banks currently hold approximately NPR 643 billion in deposits and NPR 541 billion in outstanding loans, demonstrating strong public confidence in the sector.

While he believes development banks remain an important component of Nepal’s financial system, he acknowledged that predicting the industry’s structure over the next five to ten years is difficult given the rapid evolution of fintech and digital banking.

Regulators Must Also Adapt to Artificial Intelligence

Thapa stressed that regulators themselves must improve their understanding of artificial intelligence and other emerging technologies.

“If regulators fail to keep pace with the changing mindset and innovations being introduced by younger generations, we will struggle to remain relevant,” he said.

He concluded that Nepal’s development banks remain financially stable, with regional institutions particularly benefiting from strong community ties. While policy adjustments may be considered in the future, he does not currently see the need for a separate regulatory framework specifically for development banks.