Litmus test of Dr. Poudel as NRB governor

KATHMANDU, MAY 21: After much hiccup and hitches, the government has finally appointed economist Dr. Bishwanath Paudel as the new Governor of Nepal Rastra Bank (NRB), the country’s central bank. The decision was made during yesterday's Cabinet meeting, with Dr. Paudel assuming a five-year term at the helm of the bank.

His appointment had been delayed for over a month and a half due to political disagreements between the ruling Nepali Congress and the CPN-UML. As a result of this impasse, the central bank had remained without leadership since April 7. 

Dr. Paudel is widely recognized as a leading figure in Nepal’s economic landscape, known for his deep understanding of macroeconomic policy and public finance. With stable external indicators but a sluggish domestic economy, he now faces the pressing challenge of revitalizing internal economic activity.

One of his immediate priorities will be addressing the deteriorating health of the banking sector, which is under stress due to a rise in non-performing loans (NPLs) and poor loan recovery. Ensuring a soft landing for the sector and restoring credit discipline will be key tests of his leadership.

Macroeconomic overview

According to the NRB’s latest report covering the first nine months of the current fiscal year, the country has recorded a balance of payments surplus of NPR 346.23 billion. Gross foreign exchange reserves have reached USD 17.63 billion, indicating a strong external sector.

During the review period, deposits in banks and financial institutions increased by 5.7%, while credit to the private sector rose by 7.1%. On a year-on-year basis, deposit growth reached 11.5% and private sector credit grew by 8.3%. Imports increased by 12.2%, while exports surged by 65.2%. Remittance inflows rose by 10% in Nepali rupees and by 7.3% in U.S. dollars.

Despite these positive trends, the overall credit expansion remains tepid. Currently, around NPR 650 billion in investable funds is sitting idle in the financial system, reflecting limited private sector demand for credit.

Ten key recommendations of the  High-Level Economic Advisory Commission 

To address the systemic weaknesses, the High-Level Economic Advisory Commission, established by the government, has submitted a set of ten key recommendations aimed at reforming the banking sector. The central bank is expected to take the lead in implementing several of these measures in coordination with relevant stakeholders.

Such recommendations are as follows:

1. Local Management of Concessional Loans:
   Concessional loans with interest subsidies should be administered by local governments rather than the federal government to ensure better targeting and accountability.

2. Mobilization Through Infrastructure and Energy Bonds:
   Given excess liquidity and low private sector demand, the government should issue high-yield infrastructure bonds. Additionally, the Nepal Electricity Authority (NEA) should issue energy bonds to finance hydropower projects.

3. Credit Information and Personal Scoring:
   The Credit Information Center should be strengthened, and legal provisions should be enacted to enable personal credit scoring. A unified credit information system covering all banks, financial institutions, and cooperatives should be developed and utilized effectively.

4. Fixed-Rate Credit for Productive Sectors:
   Loans with fixed interest rates for 3–5 years should be made available to productive sectors such as manufacturing, small and medium enterprises (SMEs), and exporters. Nepal Rastra Bank should establish the necessary regulatory frameworks to facilitate this.

5. Development of Specialized Financial Institutions:
   Banks should be encouraged to develop specialized financial arms tailored to the unique production cycles, cash flows, and risk profiles of different economic sectors. This will help distribute risk and promote diversified credit investment.

6. Entrepreneurship and Financial Literacy:
   Youth entrepreneurship should be promoted through collaborative efforts between banks, private businesses, and the government. Entrepreneurship and financial education should also be incorporated into the national school curriculum to cultivate a new generation of entrepreneurs and stimulate credit demand.

7. Deposit and Credit Guarantee Reform:
   The Deposit and Credit Guarantee Fund should enhance its risk-bearing capacity in line with the growing size of insured deposits and loans. The fund should adopt insurance principles, diversify its investments, and introduce reinsurance mechanisms.

8. Establishment of an Asset Management Company:
   In response to the rising volume of non-performing loans and non-banking assets, an asset management company should be established. Legal provisions for this entity should be included in the Bank and Financial Institutions Act (2016) or the Loan Recovery Act (2001).

9. eKYC Based on National ID:
   An electronic Know Your Customer (eKYC) system linked to the national identity card should be implemented across all financial institutions to streamline customer onboarding and enhance transparency.

10. Regulatory and Governance Reforms:
    Nepal’s banking regulations should be aligned with international standards to ensure institutional governance and systemic stability. Additionally, working capital loan guidelines should be revised to reflect the distinct nature of different economic sectors.

Conclusion

Dr. Paudel’s appointment, of course, comes at a critical time for Nepal’s economy. With mounting structural issues in the financial sector and constrained domestic demand, the implementation of bold and targeted reforms will be essential. The success of his tenure will rest not only on sound macroeconomic management but also on the ability to restore confidence in the banking system and foster long-term investment-led growth.