Speaking at a House of Representatives Finance Committee meeting, Governor Poudel emphasized that the current multi-layered regulatory framework causes ambiguities that delay critical decision-making. To safeguard the financial system and protect depositors, he argued, the central bank requires a firm legal basis to act overnight when a crisis hits.
Major Legal and Policy Overhauls Underway
Governor Poudel highlighted a wave of ongoing legislative reforms aimed at strengthening the financial sector:
- In Parliament: Draft amendments to the Bank and Financial Institutions Act (BAFIA) and the Nepal Rastra Bank Act have already been registered.
- In the Finance Ministry: Drafts for six crucial laws—including the Banking Offences and Punishment Act, Financial Customer Protection Act, and Payment and Settlement Act—have been submitted for review.
- Under Board Review: The NRB Board of Directors is currently reviewing four additional proposals concerning the Exchange Rights Act, financial asset restructuring, and unclaimed deposits.
US Interest Rate Shifts Hit Nepal’s Reserves
Nepal’s foreign exchange reserves currently stand at a robust $22 billion, with roughly 60% invested in safe assets like US Treasuries. However, Governor Poudel warned that this heavy reliance leaves Nepal highly vulnerable to international rate fluctuations.
"Even if the US Federal Reserve cuts its interest rate by just 1%, the central bank is likely to lose out on returns worth approximately Rs 30 to Rs 35 billion," Poudel noted.
To mitigate this risk and diversify returns, he proposed that the government and parliament explore establishing a sovereign wealth fund to invest in secure global mutual funds.
Agriculture Loans Surge to Rs 710 Billion
Addressing lawmakers' queries on credit distribution, the Governor clarified that agricultural lending has grown significantly over the last decade, climbing from Rs 250 billion in fiscal year 2019 to Rs 710 billion today.
However, he stressed the need for strict monitoring to ensure these loans are being utilized productively. On the topic of missed lending targets, Poudel advocated for structural economic support over punitive actions.
"You can't build entrepreneurs by locking them up, blacklisting them, or putting them in jail," Poudel remarked. "You need an entire economic ecosystem that works for them."
Distinguishing NRB from Singha Durbar
Governor Poudel drew a sharp line between the functions of the central bank and the government (Singha Durbar). While the government focuses on revenue collection and public spending, the NRB's primary mandate is maintaining monetary stability and securing public deposits—balancing the conflicting demands of depositors wanting high interest rates and borrowers seeking cheap loans.
He also noted that Nepal's strong external sector has allowed the NRB to ease restrictions on the Information Technology (IT) sector, now permitting foreign investment up to $1 million, which is already yielding positive results.
Fiscal and Monetary Coordination
Acknowledging past liquidity crunches caused by heavy government internal borrowing (up to Rs 300 billion annually), Finance Minister Khatiwada assured the committee that the upcoming monetary policy will be tightly aligned with the government's budget and fiscal objectives. Both leaders concluded that close coordination between fiscal and monetary policy remains paramount to achieving the nation's economic goals.
