The government has initiated the process of amending the Nepal Rastra Bank Act with the aim of further strengthening the autonomy, regulation, and supervision of the central bank of Nepal. A few years ago, the Nepal Rastra Bank had sent the amendment bill of the act to the Ministry of Finance.

The Ministry of Finance and the Nepal Rastra Bank had jointly made further amendments to the bill. The Ministry of Finance had sought suggestions from all stakeholders on the bill. 

A week-long deadline was given for suggestions. The deadline expired on Friday. Mahesh Acharya, Head of the Financial Sector Management and Institutional Coordination Division of the Ministry of Finance, said that some suggestions were received during this period and they will be studied and incorporated. ‘Since the deadline for suggestions has expired, the bill amendment process will be moved forward after studying the suggestions received,’ he said. ‘About a dozen suggestions have been received. Those suggestions have not been studied.’

The Ministry of Finance has stated that the act is being amended to align the objectives and functions of the central bank with the internationally accepted concept regarding the role of the central bank. The ministry said that the draft was made public as it is necessary to provide more autonomy to the central bank's performance, to make the supervisory and regulatory work of Nepal Rastra Bank more effective, and to make timely amendments and revisions to the Nepal Rastra Bank Act as mentioned in the budget statement for the fiscal year 2082/83, the fourth strategic plan of Nepal Rastra Bank (2022-2026) and the monetary policy. 

Nepal Rastra Bank spokesperson Guru Prasad Poudel said that the bank was made modern, autonomous and stronger through the amendment of the Act in 2058. 'Modern means digital banks, digital currencies, digital payments, transactions, etc.,' Poudel said, 'There is an attempt to increase the number of members of the board of directors of the Rastra Bank by adding two independent directors to nine. An attempt is made to make the objectives and functions of the bank more clear and effective.' 

The main reason why the Ministry of Finance is now moving forward with the bill is the commitment made with the International Monetary Fund (IMF). Because four years ago, when Nepal took an Extended Credit Facility (ECF) from the Fund, it had committed to amending the National Bank Act to make the National Bank autonomous and powerful. An IMF team had come to Nepal last week for an on-site assessment for the final installment of the ECF. Sources claim that the Ministry of Finance has taken up the process of the Act Amendment Bill in this context. 

The bill proposes to increase the Board of Directors of the National Bank from the current 7 members to 9. Currently, there is a provision for three independent directors. It has been proposed to increase it to 5. Provisions have been made that at least two of the five independent directors proposed in this way should be present for any decision. All three of the current independent directors of the National Bank are former employees of the same bank. That is why there are allegations that the Board of Directors of the National Bank is like a club of employees of the National Bank and is not effective. 

To prevent such a situation from happening, the bill provides that the directors appointed by the government should be experts in their fields and independent. For this, it has been proposed to prohibit officials and employees of the Government of Nepal and public institutions, except for the Secretary of the Ministry of Finance, from becoming directors of the National Bank. In the case of directors other than the Governor and Deputy Governor, it has also been proposed to provide that employees working in the bank cannot become directors until the period of retirement of three years has been completed.

The bill provides for the establishment of a general reserve fund by the Rastra Bank and the use of such fund to bear the net losses of the bank and increase capital. It has been proposed to establish a revaluation reserve fund to account for revaluation profits or losses on financial instruments, foreign exchange, gold and other assets in which the Rastra Bank has invested through an amendment to the act.

The bill provides for the establishment of a financial development fund not exceeding five percent of the total monetary liabilities for the stability of the financial sector, increasing financial access, strengthening the financial system and the development of the overall financial sector. As per the decision of the Board of Directors, the Rastra Bank may establish a special reserve fund not exceeding two percent of the total monetary liabilities for special purposes. There is a provision that the operation and use of the financial development fund and the special reserve fund will be as determined by the Board of Directors.

The government has proposed to define digital banks, digital currencies and financial holding companies in the Nepal Rastra Bank Act. Although the government has included the issue of licensing digital banks through the budget, this proposal has been made because there is no provision for digital banks in the Nepal Rastra Bank Act. 

The bill also includes financial holding companies and digital banks in the definition of financial institutions, and digital currency is also defined as the official currency.

Defining a financial holding company, a commercial bank or financial institution that has at least one subsidiary, joint venture or similar structural ownership established in Nepal has been defined as a financial holding company. 

The bill proposes to change the objectives of the central bank. The first objective of the Rastra Bank is to maintain price stability, the second is to maintain banking and financial sector and external sector stability in a way that does not adversely affect the objective of maintaining price stability, and the third is to support the implementation of the economic policy of the Government of Nepal in a way that does not adversely affect the stability of banking and external sector along with prices.

The bill proposes to increase the general public's access to banking and financial services, enhance the general public's confidence in the banking and financial system, act as a macroprudential regulator, and take control of or resolve troubled banks or financial institutions in accordance with the prevailing law.

The bill also provides for the National Bank to produce, sell and distribute banknotes, coins or Asraf, buy and sell foreign currency and invest in it, buy and sell and invest in gold, and acquire or purchase assets necessary for the bank to conduct its business and management. The bill also proposes to provide loans not exceeding 10 percent of the total capital of the institution to organizations that perform specified tasks that the National Bank will support in achieving its objectives, or to acquire ownership in the shares of such organizations. The bill also proposes to invest up to 10 percent in an asset management company to be established to manage the non-performing loans of banks.

The bill also provides for the National Bank to evaluate, operate and protect the collateral of commercial banks or financial institutions, restructure and transfer the collateral of commercial banks or financial institutions, evaluate credit, and exchange credit information.