The full text of the study report, which includes suggestions to make banking policies and regulations more liberal and prudent, amend the current directives on directed lending, and classify banks and financial institutions based on capital, performance, and other factors, and regulate and supervise them accordingly, was made public on Tuesday.

The Banking Sector Reform Suggestions Task Force, formed under the coordination of Rewat Bahadur Karki, submitted its report to Governor Bishwanath Poudel on Ashad 16. The same report was made public by the Rastra Bank on its website on Tuesday. The members of the task force included former banker Bhuvan Dahal and Rastra Bank Executive Director Guru Prasad Poudel. The Rastra Bank had given the task force a six-point mandate for the study. The task force, which is within the same scope, has made various suggestions. 

The task force's report has suggested making the guidelines related to working capital loans more flexible, adopting a risk-based supervision system, and loosening the existing system related to bad loans. The source said that the task force has suggested extensive revisions to the current policies, rules and directives of the banking sector to make the slogan 'healthy regulation, healthy banks with customer-friendly banking' meaningful. The report also suggests making risk-based supervision effective and classifying banks based on performance.

It has suggested reforms to be carried out in three phases for financial sector reform: immediate (short-term), medium-term and long-term. Currently, banks and financial institutions have been giving directed loans to agriculture, energy, and small and medium-sized sectors as priority sectors. However, the report of the Banking Sector Reform Suggestions Task Force has suggested reviewing the areas of directed loans.

‘It is good to hear about the problems and solutions of directed sector loans, but directed sector loans are relatively risky if they are not properly managed,’ the report says. ‘The results of decisions made on emotions are not good. Even if the actual demand is low, there is a risk that more directed loans will be issued than required due to fear of penalties, which will increase non-performing loans and harm the economy in the long run.’

Not only loans to the poor, but also loans by providing knowledge and skills and arranging mentors can make them rich. The report states that currently, there is more non-performing loans in agricultural and small loans, which are required to be provided mandatorily, than in other loans. Although agricultural credit has been increasing continuously, the contribution of agriculture to GDP is continuously decreasing.

‘Since agriculture, which employs almost 60 percent of the population, contributes less than 25 percent to GDP, further study is needed to determine which sectors can contribute around 60 percent by encouraging that large population,’ the report says. ‘Although non-performing loans have been low in the energy sector so far, the introduction of the take-and-pay concept due to increasing energy production and the lack of a clear framework to purchase all energy from the Nepal Electricity Authority indicates the future risk of this sector.’

Therefore, the task force suggests that a study should be conducted with the involvement of good individuals/institutions outside the Nepal Rastra Bank to determine which sectors of Nepal are priority sectors and how much credit is needed in that sector.

A country cannot be rich without good health, education (including management, science, information technology) and transportation. However, these sectors are not currently covered by the Rastra Bank’s directed loans. The report also suggests that a study should be conducted on whether such sectors, tourism and smart cities should be included in the priority sectors.

The task force has also said that it is not mandatory to increase additional credit in the sector until the conclusion of the study is reached and that if the amount invested in the sector has not decreased since mid-Ashar 2082, then no penalty should be imposed.

Since large borrowers generally have large business plans, connecting small investors with them will be fair in terms of income generation, the report suggests that if an institution borrowing above a certain amount issues at least 30 percent of its shares to the public, there will be risk management and risk burden. The task force has suggested that the central bank should play a stronger role in removing Nepal from the 'grey list'. The task force emphasizes that even though the Rastra Bank is playing a role now, it should be strengthened further. 

‘The fifth amendment to the Prevention of Money Laundering Act seeks to develop the Financial Intelligence Unit under this bank as a separate independent unit,’ the report says. ‘Accordingly, although the responsibility of Nepal Rastra Bank is generally somewhat outside of this, it will have to play a more powerful and special role to remove Nepal from the grey list.’