Alternative Delivery Channels (ADCs)

Alternative Delivery Channels (ADCs) are banking service delivery mechanisms that do not require the customer to visit a traditional bank branch counter. They use electronic, digital or agent-based means to deliver banking services. In the Nepali context, ADCs mainly include:

• ATM (Automated Teller Machine) and CRVM (Cash Recycler Vending Machine)
• Debit/Credit cards and Point of Sale (POS) terminals
• Mobile banking and SMS banking
• Internet/online banking
• Branchless banking through agents (agent banking)
• QR code payments, wallets and connect IPS (interbank payment system)
• Kiosk banking and banking correspondents

ADCs are recognised by Nepal Rastra Bank (NRB) as a key instrument for financial inclusion, especially under its "one branch per local level" and branchless banking policies.

How ADCs Have Helped Access to Banking Services in Rural Areas of Nepal

1. Branchless banking through local agents: Banks appoint local merchants, cooperatives or individuals as agents equipped with micro-ATMs/POS devices. Villagers can deposit, withdraw small amounts, pay bills and receive remittances without travelling to the district headquarters. This has brought banking to wards where no branch exists.

2. Reduced travel cost and time: Earlier, a rural household had to travel hours or even a day to reach a bank branch. ATMs, micro-ATMs and mobile banking now save transport fare, wage loss and time, benefiting farmers, daily wage earners and the elderly.

3. Direct Benefit Transfer (DBT) of government payments: Social security allowances (old age, single woman, disability), scholarships and subsidies are transferred directly to bank accounts. Beneficiaries withdraw through ATMs or agents near their village, reducing leakage and middlemen.

4. Remittance receipt at the doorstep: Large numbers of rural households depend on remittances. Mobile banking and agent networks allow family members to receive money instantly in the village instead of going to a bank branch or an urban money transfer counter.

5. Promotion of savings and micro-credit: Easy access encourages rural people, including women's groups and small entrepreneurs, to open accounts and save. Small loans, microfinance and agri-loans can be disbursed and repaid through ADCs.

6. Digital payments for daily needs: Mobile wallets and QR payments are increasingly used for buying fertiliser, paying electricity/water bills, school fees and shop purchases, reducing dependence on cash.

7. Support during crises: During COVID-19 and natural disasters (earthquakes, floods), ADCs helped disburse relief and allowances while branches were closed or inaccessible.

8. Financial literacy and inclusion of women/Janajati communities: Agent banking points often double as financial literacy centres, encouraging account ownership among women, Dalits and marginalized groups.

Conclusion: ADCs have significantly expanded banking outreach in rural Nepal by lowering cost and distance barriers. However, challenges like limited digital literacy, weak internet connectivity, security risks and low transaction limits still need to be addressed for full financial inclusion.

Corporate Governance and Its Importance in Nepal's Banking Sector

1. Concept of Corporate Governance

Corporate governance is the system of rules, practices and processes by which a company is directed, administered and controlled. It defines the relationship among a company's board of directors, management, shareholders and other stakeholders, and specifies how authority and accountability are distributed among them. In essence, it is the mechanism through which the objectives of the company are set, the means of attaining them are determined, and performance is monitored.

The OECD defines corporate governance as the system by which business corporations are directed and controlled, involving the structure through which objectives are set and performance monitored. Its core principles are:

• Accountability — the board is answerable to shareholders and regulators.
• Transparency — timely and accurate disclosure of financial and non-financial information.
• Fairness — equitable treatment of all shareholders, including minorities.
• Responsibility — ethical conduct towards society and stakeholders.
• Independence — independent directors and auditors free from management influence.

In Nepal, corporate governance in banks is governed mainly by the Companies Act, 2063, the Bank and Financial Institutions Act (BAFIA), 2073, and the directives of Nepal Rastra Bank (NRB) — notably the Corporate Governance Guidelines, 2074, which prescribe board composition, independent directors, audit and risk committees, and fit-and-proper criteria for directors and senior managers. The Securities Board of Nepal (SEBON) also enforces governance norms for listed institutions.

2. Importance for the Banking Sector in Nepal

Banks are not ordinary companies — they accept public deposits, create credit, and operate on a high degree of leverage. Their failure imposes costs on depositors and the whole economy. Hence corporate governance matters in the following ways:

1. Protection of depositors' funds — Banks handle the savings of millions of Nepali households. Sound governance ensures these funds are not misused through insider lending or related-party transactions. The collapse of several cooperatives and the crisis at certain BFIs in recent years illustrate what weak governance can do.

2. Financial stability — Sound governance reduces excessive risk-taking. The 1988 crisis of the Jyoti Bikas Bank and the 2011 liquidity crunch in Nepal were partly traced to weak board oversight. Good governance strengthens the banking system and prevents systemic shocks.

3. Confidence of investors and depositors — Transparent disclosure and credible boards attract both domestic and foreign investment. This is vital as Nepal seeks to raise capital for infrastructure and to meet the paid-up capital requirements set by NRB.

4. Effective regulation and supervision — NRB cannot supervise every transaction. A well-governed bank's internal audit, risk management and compliance functions act as the first line of defence, complementing NRB's off-site and on-site supervision.

5. Reduction of non-performing loans (NPLs) — Weak boards allow politically influenced and insider lending, which raises NPLs. Strong governance enforces credit discipline, proper appraisal and recovery mechanisms, keeping NPLs within the regulatory limit.

6. Prevention of fraud and money laundering — Governance structures such as the audit committee, whistle-blower policy and compliance officer help detect and deter fraud, misappropriation and money laundering, which damage the bank's reputation and invite regulatory penalties.

7. Investor protection and capital market development — Most Nepali banks are listed on the NEPSE. Good governance protects minority shareholders, improves share value and deepens the capital market.

8. Alignment with international standards — As Nepal integrates with the global economy and aims to graduate from LDC status, adherence to Basel III and OECD governance principles becomes necessary for credibility with international lenders and rating agencies.

3. Conclusion

Corporate governance is thus not merely a legal formality but the foundation of sound banking. For Nepal's banking sector — characterised by high leverage, public trust and systemic importance — it ensures accountability, transparency and stability. Strengthening board independence, enforcing NRB directives strictly, and promoting a culture of ethics are essential for a resilient and credible banking system that can support national development.

Money Market

The money market is the market for short-term funds, where instruments with a maturity of one year or less are bought and sold. It deals in highly liquid, low-risk instruments such as Treasury bills, commercial bills, inter-bank deposits, certificates of deposit and commercial paper. Its main participants are commercial banks, Nepal Rastra Bank, financial institutions and the government. It serves to meet short-term liquidity needs and provides a means for the central bank to conduct monetary policy.

Capital Market

The capital market is the market for long-term funds, where instruments with a maturity of more than one year are traded. It deals in shares, debentures, bonds, government development bonds and other long-term securities. Its main participants are issuers (companies and the government), investors (individuals and institutions), and intermediaries such as merchant banks, brokers, underwriters and stock exchanges. In Nepal, the Nepal Stock Exchange (NEPSE) and the Securities Board of Nepal (SEBON) are the principal institutions of the capital market. It serves to mobilise long-term savings for investment in industry and infrastructure.

Interrelationship between Money Market and Capital Market in Nepal

The money market and the capital market are not independent; they are two segments of a single financial system and are closely interrelated in the following ways:

1. Complementary sources of funds: The money market supplies short-term working capital while the capital market supplies long-term fixed capital. A firm needs both, so the two markets complement each other.

2. Liquidity and investment linkage: Financial institutions such as commercial banks and development banks collect short-term deposits in the money market and invest a part of these funds in long-term securities in the capital market. In this way, money market funds flow into the capital market.

3. Interest rate linkage: Interest rates in the money market influence the cost of funds and hence the demand for and supply of capital market securities. A rise in money market rates generally pulls up yields on long-term instruments and vice versa. Nepal Rastra Bank's monetary policy, through bank rate, open market operations and CRR, affects money market rates, which then transmit to the capital market.

4. Institutional overlap: The same institutions operate in both markets. Commercial banks are key players in the money market and are also major investors and lenders in the capital market. NEPSE, SEBON, BFIs and brokers link the two markets.

5. Government borrowing: The government raises short-term funds through Treasury bills in the money market and long-term funds through development bonds in the capital market. Both are managed through the same debt-management framework.

6. Price and liquidity stability: A developed money market provides liquidity and a reference rate (such as the Treasury bill rate) that helps in the pricing of capital market instruments. A stable money market therefore supports a stable capital market.

7. Savings mobilisation and economic development: Short-term savings mobilised in the money market are converted into long-term investment through the capital market, promoting capital formation and economic growth in Nepal.

Conclusion

The money market and capital market are interdependent pillars of Nepal's financial system. The money market provides short-term liquidity and a benchmark rate, while the capital market channels long-term savings into productive investment. For a healthy financial system in Nepal, both markets must develop in a balanced and coordinated manner.

Analysis of Collateral-Based Lending in Nepali Banks

Part 1: Has collateral truly minimized risk? (4 marks)

Largely no — it has transferred and deferred risk rather than minimised it. The reasons:

1. Collateral is a secondary, not primary, source of repayment. Loan repayment should come from the borrower's cash flow; collateral is only a fallback. Treating land/building as the main security inverts this principle.

2. Overvaluation and inflated collateral. Land and building values in Nepal are often assessed at market or even speculative rates. During booms (e.g., Kathmandu Valley land before 2015 and around 2020–21), collateral values were inflated, so loans appeared "fully secured" when they were not.

3. Illiquidity and slow realisation. Foreclosing and auctioning land/building is legally time-consuming (court process, Lalpurja verification, resettlement issues). By the time recovery occurs, value may have fallen sharply.

4. Concentration and systemic risk. Since most banks hold the same asset class as collateral, a real-estate price shock hits all banks simultaneously — as seen in the 2015 earthquake and periodic land-price corrections. This is correlated risk, not diversified risk.

5. Moral hazard. Both borrower and banker become complacent: the borrower over-borrows, the banker relaxes appraisal standards, because "the collateral will cover it."

6. Legal and title risks. Disputed titles, guthi land, ailani land, and multiple mortgages weaken the enforceability of collateral.

Conclusion: Collateral provides comfort, not safety. It reduces loss-given-default only if it is correctly valued, legally clean, and quickly realisable — conditions rarely fully met in Nepal. True risk minimisation requires cash-flow-based credit assessment.

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Part 2: Has collateral barred true cash-flow-based risk analysis? (6 marks)

Yes — to a significant extent. The heavy reliance on collateral has weakened, and in many cases substituted for, genuine cash-flow analysis. The mechanisms:

1. Substitution effect in credit appraisal When a loan is fully covered by land/building, the credit officer's incentive to rigorously examine the borrower's income, repayment capacity, and business viability declines. The appraisal becomes "security-driven" rather than "capacity-driven." The classic 5 Cs of credit — Character, Capacity, Capital, Collateral, Conditions — get reduced to Collateral alone.

2. Weak cash-flow and ratio analysis Practices commonly observed:

• Reliance on rough estimates of turnover rather than audited financial statements.
• Inadequate use of Debt Service Coverage Ratio (DSCR), Interest Coverage Ratio, and projected cash flow statements.
• For SMEs and retail borrowers, income is often "assessed" rather than verified, because the collateral is considered sufficient.

2. Distorted risk pricing If the bank believes collateral eliminates loss, it may under-price risk (lower interest spread) and over-lend relative to the borrower's debt-servicing ability. This creates hidden NPLs that surface only when collateral values fall.

3. Sectoral misallocation of credit Collateral-based lending favours those who own land rather than those with viable projects. Productive but landless entrepreneurs (tenants, small traders, startups) are excluded — a financial inclusion failure and an efficiency loss.

4. Pro-cyclicality Because collateral value rises in booms and falls in recessions, lending expands exactly when it should be cautious and contracts when borrowers most need liquidity. This amplifies the credit cycle — a regulatory concern under NRB's macroprudential framework.

5. Regulatory and supervisory gap NRB directives do require cash-flow-based assessment (e.g., DSCR norms for term loans, project financing guidelines), but enforcement is weak where collateral coverage is high. Supervisory focus has historically been on security coverage ratio rather than repayment capacity.

6. Consequences for banks

• Understated credit risk in good times, sudden NPL spikes in downturns.
• Concentration risk in real estate and land.
• Weak monitoring, as collateral is treated as a substitute for follow-up.
• Difficulty in restructuring genuinely viable but temporarily stressed borrowers.

Counter-argument (balance): Collateral is not inherently harmful. In an environment of weak credit information, weak accounting standards, and weak contract enforcement — all features of the Nepali market — collateral is a rational second-best tool. It disciplines borrowers and protects depositors. The problem is not collateral itself but its excessive weight relative to cash-flow analysis.

Way forward:

• Mandatory DSCR and cash-flow-based appraisal even for fully secured loans.
• Strengthen credit information bureaus and financial statement audits.
• Develop movable collateral and warehouse receipt systems (secured transactions law).
• Risk-based supervision focusing on capacity, not just coverage.
• Capacity building of credit officers in cash-flow modelling.

Conclusion: Collateral in Nepali banking has not truly minimised risk; it has deferred and concentrated it. By dominating credit appraisal, it has crowded out cash-flow-based risk analysis, leading to mispricing, misallocation, and pro-cyclicality. The correct approach is to treat collateral as a supplement to — never a substitute for — rigorous cash-flow assessment.

In reference to banks, what is risk? [2 marks]

Risk in banking refers to the possibility of loss, or of an adverse deviation from the expected financial result, arising from uncertainty in the bank's operations. It is the chance that an event — such as a borrower defaulting, interest rates moving adversely, or fraud occurring — will reduce the bank's earnings, erode its capital, or damage its solvency and reputation. Since banks operate mainly on other people's money (deposits) and earn through maturity transformation, risk is inherent in banking; it cannot be eliminated, only identified, measured, monitored and kept within acceptable limits.

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Policy-related provisions of Nepal Rastra Bank for managing risks in the banking sector [8 marks]

Nepal Rastra Bank (NRB), as the central bank and regulator under the Nepal Rastra Bank Act, 2058 and the Bank and Financial Institutions Act (BAFIA), 2073, has issued a set of policy, prudential and directive-level provisions for managing the major risks prevailing in banks. These are as follows:

1. Credit risk

• Loan classification and loan loss provisioning: Loans and advances must be classified into Pass, Watchlist, Substandard, Doubtful and Bad on the basis of overdue period, and corresponding general and specific loan loss provisions must be maintained (e.g. Pass — 1%, Substandard — 25%, Doubtful — 50%, Bad — 100%).
• Single borrower and sectoral exposure limits: A bank cannot lend more than a fixed percentage of its core capital to a single borrower/group (generally 25% of core capital, with additional limits for real estate and other sectors), and directed lending (deprived sector lending) is prescribed to spread credit risk.
• Credit risk grading and stress testing: Banks must operate an internal credit risk grading system and conduct regular stress testing on their loan portfolio.
• Collateral and consortium lending norms: Valuation norms for collateral, margin requirements, and consortium/multiple banking guidelines reduce concentration and under-collateralisation.

2. Liquidity risk

• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): Banks must maintain a prescribed percentage of deposits as cash balance with NRB (CRR) and as liquid assets (SLR), ensuring a buffer for deposit withdrawals.
• Liquidity ratios: Minimum ratios such as the net liquid assets to total deposits and the liquidity coverage requirement are prescribed, along with limits on the use of short-term funds for long-term lending.
• Deposit and borrowing limits: Limits on interbank borrowing and on the share of wholesale/bulk deposits control over-dependence on volatile funds.
• Lender of last resort: NRB provides emergency liquidity support to solvent but temporarily illiquid banks.

3. Capital adequacy risk (solvency)

• Basel framework: Banks must maintain a minimum capital adequacy ratio (10% of risk-weighted assets under Basel III, with a capital conservation buffer), a minimum core capital ratio, and a leverage ratio.
• Capital fund composition: Paid-up capital, reserves and eligible debentures are defined, and minimum paid-up capital requirements are fixed (e.g. Rs 2 billion for commercial banks).
• Prompt corrective action: NRB can restrict dividends, branch expansion or lending of banks falling below capital thresholds.

4. Market risk (interest rate and foreign exchange risk)

• Interest rate risk: Limits on the interest rate spread, restrictions on fixed-rate lending funded by volatile deposits, and periodic reporting of asset-liability mismatches through the Asset-Liability Management (ALM) framework.
• Foreign exchange risk: Net open position limits (both single currency and aggregate) for banks dealing in foreign exchange, and reporting requirements on open positions.
• Investment norms: Limits on investment in shares, subsidiaries and non-banking assets, and mark-to-market valuation of securities.

5. Operational risk

• Internal control and risk management guidelines: Banks must have a Board-level Risk Management Committee, an independent risk management function, and a compliance unit.
• Know Your Customer (KYC), AML/CFT: Customer identification, record keeping and suspicious transaction reporting requirements to control fraud, money laundering and terrorist financing risk.
• Business continuity and IT risk: Requirements for disaster recovery, business continuity plans, information security and outsourcing risk management.
• Fraud and internal audit: Mandatory internal audit, external audit and reporting of fraud cases to NRB.

6. Systemic and concentration risk

• Licensing and merger policy: NRB controls entry through licensing and encourages mergers/acquisitions to create stronger institutions, reducing systemic risk.
• Exposure limits and large exposure reporting: Large exposures must be reported and kept within limits to avoid contagion.
• Supervision: Off-site surveillance, on-site inspection, and risk-based supervision under the Supervisory Information System identify emerging risks early.

7. Governance and disclosure-related provisions

• Fit and proper criteria for directors and senior managers, and limits on directors' borrowing.
• Disclosure requirements: Banks must publish financial statements, capital adequacy, non-performing loans and other risk indicators periodically, promoting market discipline.
• Deposit insurance: Deposits are insured through the Deposit and Credit Guarantee Fund, protecting small depositors and reducing the risk of bank runs.

Conclusion

Thus, NRB manages banking risk through a combination of quantitative prudential norms (CRR, SLR, capital adequacy, exposure limits, provisioning) and qualitative governance requirements (risk management committees, KYC/AML, internal control, disclosure). These provisions, aligned with the Basel III framework, aim to keep banks safe, sound and capable of absorbing shocks without threatening depositors' interests or overall financial stability.

Roles of a Bank in the AML/CFT System and Effectiveness in Agricultural Development Bank Limited

1. Major Roles of a Bank in the AML/CFT System (5 marks)

Banks are the primary gatekeepers of the financial system and the first line of defence against money laundering (ML) and terrorist financing (TF). In Nepal the framework rests on the Prevention of Money Laundering and Promotion of Good Governance Act, 2064 (2008), the NRB AML/CFT Directives, and the Financial Information Unit Nepal (FIU-Nepal). The major roles are:

(a) Customer Due Diligence (CDD) / KYC. Identify every customer, verify identity through authentic documents, ascertain the beneficial owner of accounts opened by companies, trusts and NGOs, and apply Enhanced Due Diligence (EDD) for Politically Exposed Persons (PEPs), high-risk customers and correspondent banking relationships. No anonymous or fictitious accounts may be opened.

(b) Risk identification and classification. Conduct an Institutional Risk Assessment (IRA) and classify customers, products, delivery channels and geographies as low, medium or high risk, so that scarce compliance resources are directed where risk is greatest (risk-based approach).

(c) Ongoing transaction monitoring. Operate automated systems to detect unusual patterns — structuring, rapid pass-through of funds, transactions inconsistent with the customer's profile — and to trigger internal Suspicious Transaction Reports (STRs).

(d) Reporting to FIU-Nepal. File STRs within 3 working days of forming a suspicion and Threshold Transaction Reports (TTRs) within 15 days for cash or other transactions of Rs 10 lakh or above (and for prescribed foreign exchange transactions). Reporting is mandatory, and failure attracts penalties.

(e) Record keeping. Maintain KYC documents and transaction records for at least five years after the transaction or the end of the business relationship, so that regulators and law-enforcement agencies can reconstruct the audit trail.

(f) Screening and freezing. Screen customers and transactions against UN Security Council sanctions lists and Nepal's designated-person list, and freeze assets without delay when a match is found, reporting the action to the authorities.

(g) Compliance governance. Put in place a board-approved AML/CFT policy, appoint a designated AML compliance officer, conduct independent internal audit and employee screening, and maintain a "no tipping-off" and whistleblower-protection culture.

(h) Training and awareness. Impart induction and refresher training to all staff, particularly branch-level tellers and relationship managers, who are the actual point of contact with customers.

(i) Cooperation. Share information with NRB, FIU-Nepal, the Department of Money Laundering Investigation and other banks (within legal limits) to support national and international cooperation.

2. Effectiveness in Agricultural Development Bank Limited (ADBL) (5 marks)

Strengths

ADBL, established in 2024 BS and with the Government of Nepal as majority shareholder, has put in place the basic AML/CFT architecture required by the NRB Directives: a board-approved AML/CFT policy, a compliance/AML division headed by a designated officer, KYC norms at account opening, screening of customers against sanctions lists, filing of STRs and TTRs to FIU-Nepal, and periodic staff training. Its wide rural branch network and its role in channelling subsidised agricultural credit make it an important instrument for financial inclusion and for tracing the movement of public funds.

Weaknesses and gaps

1. High cash intensity and small-ticket transactions. ADBL's clientele is largely rural, unbanked and cash-based. Millions of small transactions make it difficult to distinguish genuine agricultural activity from structuring designed to stay below the Rs 10 lakh TTR threshold.
2. Weak beneficial ownership identification. Many borrowers are small farmers' groups, cooperatives and NGOs whose real controllers are hard to trace; verification in remote areas is weak.
3. Technology and data gaps. Core banking and transaction-monitoring systems are not fully integrated; much monitoring remains rule-based and manual, producing either "false positives" or missed red flags. STR quality and timeliness suffer.
4. Staff capacity and turnover. Branch staff in rural areas have limited exposure to typologies of ML/TF; training is often one-off and compliance is treated as a formality rather than a risk function.
5. Low customer awareness. Poor financial literacy among rural clients means customers cannot recognise or resist being used as "money mules".
6. Governance and independence. As a government-owned institution, ADBL faces political and lending-pressure influences that can weaken the independence of the compliance function and delay action on high-risk or influential customers.
7. Supervisory findings. In successive NRB inspections and in the APG mutual evaluation process, banks of ADBL's size and outreach have typically been found weak on risk-based supervision, EDD and suspicious-transaction reporting — indicating that formal compliance exists more on paper than in practice.

Suggestions for improvement

1. Strengthen the risk-based approach: update the IRA periodically, link customer risk rating to monitoring intensity, and document EDD decisions.
2. Invest in technology: integrate AML transaction-monitoring software with the core banking system, adopt digital/biometric KYC, and use data analytics to flag structuring and unusual cash flows.
3. Improve beneficial ownership transparency: maintain a register of beneficial owners for all corporate, cooperative and NGO accounts and verify it against the company registry.
4. Continuous, role-specific training: mandatory annual refresher courses, certification of branch compliance champions, and testing of knowledge.
5. Independent compliance and audit: give the AML compliance officer direct reporting access to the Board Audit Committee, free from lending-side pressure, and conduct regular independent AML audits.
6. Timely and quality reporting: set internal deadlines well ahead of the statutory 3-day/15-day limits and review STR quality centrally.
7. Customer and community awareness: run financial-literacy campaigns in branch areas, especially on money-mule risks and reporting channels.
8. Institutional cooperation: share typologies and red-flag information with FIU-Nepal, NRB and peer banks, and participate actively in national AML/CFT coordination.

Conclusion

ADBL performs the basic statutory roles of a bank in the AML/CFT system — KYC, monitoring, record keeping and reporting — but its effectiveness is constrained by cash-intensive rural operations, weak beneficial ownership verification, inadequate technology and training, and governance pressures. Moving from formal compliance to a genuine risk-based culture, backed by technology, independent oversight and customer awareness, is essential for ADBL to become an effective gatekeeper of Nepal's financial system.

1. Electronic Record (3 marks)

Legal definition: Section 2(a) of the Electronic Transactions Act (ETA), 2063 defines an electronic record (विद्युतीय अभिलेख) as any type of information, document, data, image, sound or other matter that is stored, generated, received or transmitted in electronic, digital, magnetic, optical, biometric or similar form. The term also includes information stored or transmitted in a computer system, computer memory or any other electronic means.

Key features:

• It is an intangible, machine-readable record — it has no paper existence and can be read only through an electronic device.
• It can be created, processed, stored, retrieved, copied and transmitted at high speed and across distances.
• The Act gives it legal recognition (Section 3): an electronic record shall not be denied legal effect, validity or enforceability merely because it is in electronic form.
• It is admissible as evidence in courts and quasi-judicial bodies, subject to authentication (digital signature) under the Act.
• Examples: e-mails, SMS, digital documents, scanned records, database entries, digital photographs, audio/video files, web pages and cloud-stored data.

2. Punishment for Publishing Illegal Contents in Electronic Form (3 marks)

Section 47 of the ETA, 2063 deals with this offence. If any person publishes, displays or causes to be published or displayed through computer, internet or other electronic means any material which —

• is prohibited by the prevailing law to publish or display, or
• may cause hatred, jealousy, enmity or disrespect among the general public, or
• may disturb public peace and order, or
• is obscene, or
• may cause defamation of any person,

then such person shall be punished with imprisonment for a term not exceeding five years and a fine not exceeding Rs 100,000.

The Act also makes the person who causes such publication or display equally liable, and provides for removal of the illegal content from the electronic means. Further, under Sections 53 and 54, abetment and attempt of this offence attract half the punishment prescribed for the principal offence.

3. Points for Improvement in the Electronic Transactions Act, 2063 (4 marks)

1. Outdated definitions: The definitions of electronic record, digital signature and computer do not cover modern technologies such as cloud computing, blockchain, artificial intelligence, IoT and social media platforms; these need to be updated.
2. Absence of data protection and privacy provisions: The Act is silent on protection of personal data, consent, data breach notification and cross-border data transfer; a comprehensive data protection framework is required.
3. Inadequate coverage of new cybercrimes: Offences such as ransomware, phishing, identity theft, cyber stalking, online harassment, deepfake and financial fraud through digital wallets are not specifically addressed.
4. Low and non-deterrent penalties: Fines of Rs 100,000 and short imprisonment terms are too low compared to the damage caused; penalties should be revised upward and made proportionate to the offence.
5. Unclear intermediary liability: There is no clear "safe harbour" provision defining the duties and exemptions of ISPs, social media platforms and online service providers.
6. Jurisdictional and international cooperation gaps: Cross-border cybercrime requires clear extraterritorial jurisdiction, mutual legal assistance and alignment with international instruments such as the Budapest Convention.
7. Weak institutional and procedural framework: There is a need for a dedicated cyber security authority, specialised cyber courts/bench, mandatory cyber incident reporting and time-bound investigation and prosecution.
8. Inadequate e-commerce and consumer protection: Rules on electronic contracts, electronic payment security, consumer rights, refund/return and online dispute resolution are insufficient.
9. Electronic evidence and forensic standards: The Act lacks detailed provisions on collection, preservation, chain of custody and forensic examination of electronic evidence.
10. Limited digital signature regime: Only a single certifying authority structure is recognised; provision should be made for multiple licensed certifying authorities and recognition of foreign digital signatures.
11. No periodic review mechanism: The Act should provide for mandatory periodic review and amendment to keep pace with rapidly changing technology.

Credit products of Agricultural Development Bank Limited (ADBL)

ADBL offers a range of products, mainly built around agriculture and rural livelihoods:

• Small farmer and group-based loans (small farmer development, micro and deprived-sector lending)
• Production and crop loans for seasonal farming inputs
• Livestock, fishery, poultry and dairy loans
• Commercial agriculture and agro-enterprise loans (processing, cold storage, warehouses, agro-machinery)
• Very Long Term Agricultural (VLTA) loan
• Women and youth entrepreneurship loans, including government-subsidised concessional loans
• SME and cottage industry loans
• Hire purchase, vehicle, home and education loans
• Refinance-linked loans for priority and productive sectors

Key features of the VLTA loan

• Purpose: long-gestation agricultural investments such as orchards and plantations, tea, coffee, cardamom, commercial livestock and agro-processing.
• Tenure: long repayment period, much longer than ordinary term loans, to match the slow return of such projects.
• Grace period: a moratorium at the start, during which the borrower pays only interest (or nothing) until the project begins to earn.
• Interest: concessional rate in line with the bank's policy for the priority agriculture sector.
• Repayment: instalments after the grace period, scheduled to the project's cash flow.
• Security: mortgage of land or project assets, with guarantee or hypothecation where needed.
• Eligibility: individual farmers, groups, cooperatives and agro-firms with a viable project.
• Disbursement: in stages linked to project progress, with technical support and monitoring from the bank.

Customer Relationship Management (CRM)

Customer Relationship Management (CRM) is a management approach and set of practices, supported by technology, through which an organisation builds, maintains and strengthens long-term, mutually beneficial relationships with its customers. It involves systematically collecting and using customer information to understand their needs, deliver value, and secure their loyalty. In the context of public service delivery, CRM means treating citizens as valued customers and managing their interactions with the government in a responsive, courteous and efficient manner.

Major techniques for effective CRM

1. Customer segmentation — Grouping customers on the basis of needs, value, behaviour or demographics so that services and communication can be tailored to each group.
2. Customer database and information management — Maintaining accurate, updated records of customer profiles, transactions and preferences, and using this data for informed decision-making.
3. Multi-channel service delivery — Providing access through counters, telephone, website, mobile apps and social media so customers can interact through the channel of their choice.
4. Customer feedback and complaint handling — Systematically collecting feedback through surveys, suggestion boxes and help desks, and resolving grievances promptly to build trust.
5. Personalisation and customisation — Adapting products, services and communication to individual customer needs and preferences.
6. Customer loyalty and retention programmes — Offering rewards, priority services or follow-up support to retain valuable customers and encourage repeat engagement.
7. Employee training and customer-centric culture — Equipping staff with communication and service skills and instilling a service-oriented attitude throughout the organisation.
8. Use of CRM technology — Deploying software tools for data analysis, automation of routine tasks, tracking of customer interactions and generating management reports.
9. Relationship marketing and regular communication — Maintaining continuous contact through updates, reminders and information sharing to keep the relationship alive.
10. Performance measurement — Monitoring indicators such as customer satisfaction, retention rate and complaint resolution time to continuously improve CRM practices.

Agricultural Development Bank Limited (ADBL): Strengths, Weaknesses, Opportunities and Challenges

1. Strengths of ADBL

1. Strong government backing and ownership: The Government of Nepal holds majority ownership (about 51%), which gives ADBL high credibility, sovereign support and easy access to refinance and policy backing.
2. Wide rural network: ADBL has one of the largest branch networks in Nepal (around 300+ branches and many branchless banking points), concentrated in rural and semi-urban areas where commercial banks have limited presence.
3. Clear mandate for agriculture: As the only bank established with a specific mandate to finance agriculture (under the Agricultural Development Bank Act, 2022 BS), it enjoys priority sector status, subsidised agricultural loan schemes and concessional refinance from Nepal Rastra Bank.
4. Large deposit base and low cost of funds: Its extensive rural presence gives it a stable, low-cost retail deposit base, especially small savings and fixed deposits from rural households.
5. Experienced manpower in rural finance: Staff have long experience in small farmer lending, group lending and microfinance-type products.
6. Diversified banking services: Besides agricultural credit, it provides commercial banking, remittance, insurance (through subsidiary), and microfinance services through its subsidiary.

2. Weaknesses of ADBL

1. High non-performing loans (NPLs): Agricultural lending is inherently risky (weather, price fluctuation, small landholdings), and ADBL's NPL ratio has historically been higher than the industry average.
2. Low profitability and high operating cost: Large branch network in remote areas means high operating expenses and low per-branch productivity compared to private commercial banks.
3. Weak capital base: Despite government support, its paid-up capital and capital adequacy have lagged behind large commercial banks, limiting its lending capacity.
4. Political interference and governance issues: Frequent changes in leadership, board-level political appointments and weak corporate governance have affected decision-making and recovery of bad loans.
5. Outdated technology and low digital penetration: Compared to private banks, its digital banking, mobile banking and fintech adoption is slower, which weakens competitiveness in urban markets.
6. Dependence on subsidised and directed lending: Heavy reliance on government/NRB subsidised programmes reduces commercial flexibility and margins.

3. Future Opportunities

1. Growing agricultural commercialisation: Nepal's shift toward commercial farming, agro-processing, cold chains and export-oriented agriculture creates demand for structured agricultural credit.
2. Government priority and policy support: Federalism, provincial agricultural programmes, the Agriculture Development Strategy and subsidised loan schemes give ADBL a natural advantage.
3. Rural financial inclusion: Large unbanked rural population and remittance-receiving households offer scope for deposit mobilisation and micro-lending.
4. Digital banking expansion: Branchless banking, mobile wallets and agent banking can reduce cost while extending reach.
5. Value chain and SME financing: Financing agro-value chains (input supply, processing, marketing) and rural SMEs can diversify its portfolio.
6. Partnerships and refinance: Collaboration with NRB, donor agencies (ADB, World Bank) and cooperatives for blended and concessional finance.

4. Challenges in the Current Context of Low Credit Expansion

1. Weak credit demand: In the present situation of low credit expansion in the banking sector (excess liquidity with low loan uptake), ADBL faces difficulty in expanding its loan book and deploying funds profitably.
2. Falling interest spread: Excess liquidity and competitive pressure push lending rates down while deposit rates remain sticky, squeezing net interest margin.
3. Rising NPLs and provisioning burden: Economic slowdown, low demand and repayment stress increase NPLs, forcing higher loan-loss provisioning and reducing profit.
4. Competition from private banks: Private commercial banks are aggressively entering rural and agricultural finance with better technology and lower operating costs.
5. Climate and market risks: Drought, flood, pest attack and price volatility directly hit borrower repayment capacity.
6. Regulatory pressure: NRB's directives on capital adequacy, loan classification, priority sector lending and digital compliance require continuous investment.
7. Governance and political risk: Continued political appointments and interference may hamper reform and recovery efforts.
8. Limited collateral and financial literacy: Small farmers lack acceptable collateral and financial awareness, raising transaction costs and default risk.

Conclusion

ADBL's core strength lies in its rural network, agricultural mandate and government backing, while its main weaknesses are high NPLs, low profitability and weak governance. In the current low credit expansion environment, the bank should focus on digital transformation, diversified rural products, strong recovery of bad loans and improved corporate governance to convert its opportunities into sustainable growth and meet its development mandate.

ADBL and Modern Banking Service Delivery

Part A — Extent of Agreement with the Statement (5 marks)

I partially agree with the statement. ADBL has improved considerably, but it still lags behind the leading commercial banks in delivering service through modern banking instruments. The reasons are:

1. Late and incomplete digitalisation. ADBL operated for decades as a development bank with a branch-and-ledger culture. Core banking, mobile banking, internet banking and QR payments were introduced much later than in peer "A" class banks such as Nabil, NIC Asia and Global IME. Even today its digital channels offer fewer features and poorer user experience.

2. Weak alternative delivery channels. Its ATM, POS and card network is thin relative to its large branch network, especially in rural areas. Customers in many rural municipalities still depend on branch visits for withdrawals, deposits and remittances, so "modern instrument" service is not actually available at the doorstep.

3. Branch-centric, subsidised-lending mindset. ADBL's mandate is small farmer and priority-sector credit at subsidised rates. Staff and systems are oriented to paperwork-heavy agricultural lending rather than to digital product design, straight-through processing and self-service banking.

4. Low digital literacy of the client base. A large share of its customers are small farmers, cooperatives and rural households with limited smartphone and internet access. Even where digital services exist, adoption is low, so the bank appears "non-modern" in practice.

5. Legacy financial and governance problems. High non-performing loans from directed and subsidised lending, weak recovery, and frequent changes of board and management in a government-owned bank have diverted attention and resources away from technology investment and long-term digital strategy.

6. Slow product innovation. Few digital loan products, limited fintech partnerships, weak API/open-banking capability and slow adoption of digital KYC, compared with private banks that launch new digital services continuously.

However, the statement is not wholly true: ADBL has introduced mobile banking, internet banking, SMS banking, connectIPS integration, remittance services, branchless banking and a wide rural network. Its strength is reach, not digital sophistication — hence partial agreement.

Part B — Measures to Make ADBL One of the Best Banks (5 marks)

1. Digital-first strategy and core system upgrade. Replace/extend the core banking system with a modern, API-based, cloud-ready platform; adopt open banking so that fintechs and wallets can plug in. This is the foundation of all modern service delivery.

2. Strengthen alternative delivery channels. Expand interoperable ATMs, POS and QR acceptance; introduce USSD and lightweight mobile banking for feature phones; appoint banking agents/correspondents in every rural municipality and ward so that basic banking reaches the unbanked.

3. Innovate in agricultural finance. Use digital tools for its core strength — satellite/weather-indexed crop assessment, digital credit scoring for small farmers, warehouse receipt financing, value-chain financing, and linkage with crop and livestock insurance. This converts its "old" mandate into a modern competitive advantage.

4. Partnerships and fintech collaboration. Tie up with fintechs, telecoms, cooperatives and remittance companies; set up an innovation unit or sandbox to pilot digital products quickly. Interoperability with eSewa, Khalti, IME Pay and connectIPS widens the customer base at low cost.

5. Financial strengthening and risk control. Raise paid-up capital to NRB norms, reduce NPLs through rigorous appraisal, use of the Credit Information Bureau and digital monitoring, and create a loan-loss buffer. A strong balance sheet is what funds technology.

6. Governance and human resource reform. Ensure a professionally constituted board free from political interference, stable top management, performance-based HR, and continuous staff retraining from "cashier" to "relationship manager and digital adviser".

7. Customer service and financial literacy. Set service standards (turnaround time, grievance redressal, mystery shopping), simplify KYC and documentation, and run rural financial-literacy and digital-ambassador programmes to raise adoption.

8. Cybersecurity and data protection. Invest in cyber-security, fraud-detection systems and data-privacy compliance — public trust is the real currency of digital banking.

Conclusion. ADBL's problem is not lack of network but lack of modern delivery on that network. By upgrading its core system, expanding digital and agent channels, innovating in agri-finance, and reforming governance and capital, ADBL can realistically become one of the best banks in Nepal's banking system.

Overdue Loans in Agricultural Development Bank Limited (ADBL)

Causes of Increasing Overdue Loans

1. Weak credit appraisal and monitoring – Loans are sanctioned on the basis of inadequate financial analysis, poor project evaluation and insufficient collateral verification. Post-disbursement supervision (inspection of the borrower's activity, end-use verification) is irregular, so diversion of loan funds goes undetected.

2. Political and external pressure in lending – ADBL, being a government-owned bank with a rural and agricultural mandate, faces pressure from political leaders, local bodies and influential persons to sanction loans to unqualified or ineligible borrowers, which later turn into overdue loans.

3. Lending to a risky client base – A large share of ADBL's portfolio is in agriculture and small rural enterprises, which are exposed to monsoon failure, drought, flood, pest attack and price fluctuation. When farm income falls, repayment capacity collapses.

4. Inadequate technical and extension support – Borrowers are given credit but not the required technical know-how, quality inputs, market linkage or insurance cover. Poorly planned projects fail, and the loan becomes overdue.

5. Weak recovery mechanism and staff accountability – Recovery follow-up is not time-bound; there is little accountability for recovery performance, insufficient use of legal remedies (court action, auction of collateral) and inadequate manpower for field-level recovery.

6. Poor borrower discipline and wilful default – The general tendency to treat bank loans as government grants, expectation of waiver (as in past debt-relief programmes), and wilful default by capable borrowers worsen the situation.

7. Weak Management Information System and lack of early warning – Delayed identification of non-performing loans, poor classification and inadequate provisioning allow the problem to accumulate.

8. Inadequate use of collateral and guarantee – Under-valuation of collateral, weak legal enforceability of guarantees and delay in the auction process reduce the deterrent effect.

Strategies to Control Overdue Loans

1. Strengthen credit appraisal and credit risk management – Introduce a rigorous, standardized credit appraisal system (cash-flow based, capacity-to-pay analysis), independent credit risk review, and strict compliance with the Credit Policy and Nepal Rastra Bank directives on loan classification and provisioning.

2. Effective post-disbursement supervision – Make periodic field inspection, end-use verification and follow-up visits mandatory; use a risk-based supervision approach so that high-value and high-risk loans receive closer monitoring.

3. Time-bound recovery drive and one-loan-one-file system – Fix recovery targets at branch level, link staff performance appraisal and incentives to recovery, form recovery teams for hard-core overdue loans, and use legal tools (court action, collateral auction, blacklisting) promptly.

4. Rescheduling and restructuring on a case-by-case basis – For genuine borrowers affected by natural calamity or temporary cash-flow problems, allow rescheduling/restructuring with proper justification, while denying it to wilful defaulters.

5. Promote agricultural insurance and credit guarantee – Encourage crop/livestock insurance and use the Deposit and Credit Guarantee Fund so that risk is shared and repayment capacity is protected.

6. Improve financial literacy and borrower counselling – Educate borrowers on the importance of credit discipline, repayment schedules and the consequences of default; provide technical and market support through extension services.

7. Use of technology and strong MIS – Adopt core banking with an early-warning system, automated due-date reminders (SMS/phone), and a centralized database of defaulters to prevent fresh lending to defaulting borrowers.

8. Institutional reform and good governance – Reduce political interference in credit decisions, make the Board and management accountable for portfolio quality, and introduce a strong internal audit and whistle-blower mechanism.

9. Incentive and penalty structure – Reward branches/staff with low overdue ratios and impose penalties or transfer for poor recovery performance; link promotion to recovery results.

10. Legal and procedural reform – Expedite the debt recovery tribunal/court process, simplify collateral auction procedures and strengthen the legal framework for enforcing guarantees.

Conclusion: Overdue loans in ADBL arise from a mix of weak appraisal, political interference, a risky rural client base and weak recovery follow-up. A combination of strict credit discipline, effective supervision, technology-enabled monitoring, risk-sharing tools and accountability at branch level is essential to bring overdue loans under control and maintain a healthy loan portfolio.

(a) Definition of Shadow Banking

Shadow banking refers to credit intermediation carried out by non-bank financial institutions and activities that perform banking-like functions — maturity transformation, credit creation and liquidity provision — but operate outside the regular banking system and are therefore not subject to full prudential regulation, deposit insurance or central bank safety nets. The Financial Stability Board (FSB) defines it as "credit intermediation involving entities and activities outside the regular banking system." Typical entities include finance companies, hire-purchase companies, microfinance institutions, investment funds, money market funds, hedge funds, peer-to-peer lenders, and in some contexts unregulated chit-fund or dhukuti-type savings schemes. Its key features are: no deposit insurance, light or no regulation, reliance on short-term wholesale funding, and high leverage with limited transparency.

(b) Impacts of Shadow Banking in the Nepali Banking Sector (5 marks)

1. Regulatory arbitrage and uneven playing field. In Nepal, finance companies, development banks and microfinance institutions are regulated by Nepal Rastra Bank (NRB) but under a lighter framework than commercial banks (Class 'A'). They can thus offer higher deposit rates and lower lending rates, drawing deposits away from commercial banks. This "deposit flight" pressures commercial banks' funding base and forces them to compete on rates rather than on safety.

2. Systemic risk through interconnectedness. Shadow entities borrow from commercial banks through interbank lending, wholesale deposits and loan participation. If a large finance company or microfinance institution fails (as happened with several cooperatives and finance companies in recent years), the loss is transmitted to commercial banks, creating contagion and threatening financial stability.

3. Weak consumer protection and information asymmetry. Unregulated or semi-regulated entities often lack transparent disclosure of interest rates, fees and risk. Depositors, attracted by high returns, are exposed to fraud and sudden loss — the cooperative crisis in Nepal (e.g., the problems of many savings and credit cooperatives) is a clear example. This erodes public confidence in the whole financial system, including commercial banks.

4. Credit diversion and asset bubbles. Shadow lenders often finance speculative sectors — real estate, share loans (margin lending), and unproductive consumption — rather than productive sectors. This diverts credit from priority sectors identified by NRB and can inflate asset price bubbles (as seen in the share market and real estate booms), whose bursting damages bank balance sheets.

5. Monetary policy transmission and regulatory challenges. Since shadow entities are outside the direct reach of NRB's monetary instruments (CRR, SLR, bank rate, open market operations), they weaken the effectiveness of monetary policy. NRB cannot fully control total credit growth, making inflation and external sector management more difficult. It also complicates supervision, as NRB must stretch limited supervisory resources across many small entities.

6. Positive aspects (balanced view). Shadow banking also fills gaps: it serves small borrowers, rural clients and SMEs that commercial banks may neglect, promotes competition, and improves financial inclusion. However, in Nepal the risks currently outweigh these benefits because supervision and disclosure remain weak.

Conclusion. Shadow banking in Nepal is expanding faster than the regulatory framework. NRB should bring all credit intermediaries under a unified regulatory umbrella, enforce strict disclosure and capital norms, limit bank exposure to shadow entities, and strengthen coordination among regulators to protect depositors and preserve financial stability.

BASEL III and the Strengthening and Efficiency of Banks and Financial Institutions

BASEL III is a global regulatory framework issued by the Basel Committee on Banking Supervision (BCBS) in 2010–11 in response to the 2007–08 global financial crisis. It aims to make banks more resilient to financial and economic shocks. Its role in strengthening and enhancing the efficiency of banks and financial institutions (BFIs) can be explained as follows:

1. Stronger capital base (quality and quantity of capital): BASEL III raises the minimum Common Equity Tier 1 (CET1) to 4.5% and Tier 1 capital to 6% of risk-weighted assets, plus a Capital Conservation Buffer of 2.5% and a Countercyclical Buffer of 0–2.5%. This ensures BFIs hold high-quality, loss-absorbing capital, reducing the risk of insolvency and taxpayer-funded bailouts.

2. Better risk coverage: It strengthens the treatment of counterparty credit risk, securitisation exposures, and market risk, and introduces a leverage ratio (minimum 3%) as a non-risk-based backstop. This prevents excessive leverage and understatement of risk that existed under BASEL II.

3. Liquidity standards: The Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets to survive a 30-day stress period, and the Net Stable Funding Ratio (NSFR) promotes stable, long-term funding. This reduces liquidity mismatch and panic-driven failure.

4. Systemic risk reduction: Additional loss-absorbency requirements for Global Systemically Important Banks (G-SIBs) and domestic SIBs curb "too-big-to-fail" problems and interconnectedness.

5. Enhanced efficiency and stability: By forcing better risk management, capital planning, and disclosure (Pillar 3), BASEL III improves market discipline, lowers funding costs for sound banks, reduces pro-cyclicality, and promotes public confidence — thereby enhancing the operational efficiency and long-term sustainability of BFIs.

Conclusion: BASEL III strengthens BFIs through higher, better-quality capital, improved risk coverage, and liquidity buffers, while enhancing their efficiency through better governance, transparency, and stability. In Nepal, NRB has adopted BASEL III norms for commercial banks, contributing to a safer and sounder banking system.

Major Risks Faced by the Nepal Banking Sector

Nepal's banking sector, dominated by commercial banks (Class "A") and regulated by Nepal Rastra Bank (NRB), faces the following major risks:

1. Credit Risk The risk that borrowers fail to repay principal and interest. This is the dominant risk in Nepal, reflected in high non-performing loans (NPLs) during economic stress. Concentration risk is acute — lending is heavily concentrated in a few sectors (real estate, shares/margin lending, hydroelectricity) and a few large borrowers. Weak credit appraisal, poor follow-up, and inadequate collateral valuation worsen it.

2. Liquidity Risk The risk of being unable to meet short-term obligations (deposit withdrawals, loan disbursements) without incurring unacceptable losses. Nepal's banks face structural liquidity mismatches — short-term deposits funding long-term loans — and seasonal stress during festivals, tax payment periods, and capital expenditure cycles of the government.

3. Market Risk Losses from adverse movements in market variables:

• Interest rate risk — mismatch between rate-sensitive assets and liabilities; heavy dependence on fixed-rate lending while deposits reprice quickly.
• Foreign exchange risk — exposure to USD, INR, and other currencies, especially for banks financing imports and remittances.
• Equity price risk — losses on share investments and margin lending portfolios.

4. Operational Risk Losses from failed internal processes, people, systems, or external events — fraud, embezzlement, cyberattacks, IT failures, weak internal control, and errors in branch operations. Nepal has seen several high-profile fraud cases in recent years.

5. Concentration and Sectoral Risk Overexposure to real estate, construction, and share-backed lending. A downturn in one sector (e.g., real estate or hydropower) can trigger large defaults.

6. Reputation Risk Loss of public confidence due to fraud, poor service, or regulatory action — capable of triggering deposit runs.

7. Strategic and Capital Risk Risks from poor business decisions, overexpansion of branches, and inadequate capital to absorb losses. Basel III capital requirements and NRB's minimum capital directives make capital adequacy a continuing concern.

8. Country and Regulatory Risk Political instability, policy changes, remittance dependency, and exposure to Indian economy shocks affect the whole sector.

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Liquidity Risk Management Policies under NRB's Unified Directives

NRB's Unified Directives (issued under the Nepal Rastra Bank Act, 2058 and BAFIA, 2073) prescribe the following liquidity risk management framework:

1. Liquidity Ratio Requirements

• Cash Reserve Ratio (CRR): Banks must maintain a minimum percentage of their total domestic deposit liabilities as cash balance with NRB. (Currently 4% for commercial banks, subject to revision.)
• Statutory Liquidity Ratio (SLR): Banks must hold a minimum percentage of their total domestic deposit liabilities in liquid assets — cash, gold, NRB securities, and unencumbered government securities. (Currently 12% for commercial banks.)

2. Liquidity Coverage Ratio (LCR) Under Basel III, commercial banks must maintain High Quality Liquid Assets (HQLA) sufficient to cover net cash outflows over a 30-day stress period. LCR must be at least 100%, phased in as per NRB's schedule. HQLA includes cash, balances with NRB, and government securities.

3. Net Stable Funding Ratio (NSFR) Banks must maintain stable funding relative to the liquidity profile of their assets over a one-year horizon. NSFR must be at least 100%, discouraging excessive reliance on short-term wholesale funding for long-term lending.

4. Asset-Liability Management (ALM) Banks must maintain a formal ALM policy approved by the Board, covering:

• Maturity gap analysis across time buckets (1–7 days, 8–14 days, 15–30 days, 1–3 months, 3–6 months, 6–12 months, over 1 year).
• Limits on cumulative and incremental gaps.
• Interest rate sensitivity analysis.

5. Liquidity Risk Management Framework Banks must have a Board-approved liquidity risk management policy, an Asset-Liability Management Committee (ALCO) that meets at least monthly, and a designated senior officer responsible for liquidity management. The policy must set prudential limits, early warning indicators, and contingency funding plans.

6. Stress Testing Banks must conduct regular liquidity stress tests under various scenarios (bank-specific, market-wide, and combined) and report results to the Board and NRB. Stress tests cover deposit runs, remittance shocks, and credit line withdrawals.

7. Contingency Funding Plan (CFP) Banks must prepare a CFP identifying alternative funding sources, trigger points, and responsibilities during a liquidity crisis. The plan must be tested periodically.

8. Reporting and Monitoring Banks must submit periodic liquidity statements (daily/weekly/monthly as prescribed) to NRB, including CRR, SLR, LCR, and NSFR positions. NRB monitors through off-site surveillance and on-site inspection and can impose penalties for non-compliance.

9. Restrictions on Interbank and Wholesale Borrowing NRB limits reliance on interbank borrowing and sets ceilings on borrowing relative to capital. Excessive dependence on a few large depositors or wholesale funds is discouraged.

10. Foreign Currency Liquidity Management Banks dealing in foreign exchange must maintain separate FCY liquidity ratios and manage currency-wise mismatches as prescribed by NRB.

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Conclusion: Nepal's banking sector faces credit, liquidity, market, operational, and concentration risks. NRB's Unified Directives address liquidity risk through CRR, SLR, LCR, NSFR, ALM, stress testing, contingency funding plans, and strict reporting — ensuring banks remain resilient against liquidity shocks.

Impact of Nepal Being Placed on the FATF Grey List, and Roles for Timely Removal

1. Impact of Nepal's Placement on the FATF Grey List (4 marks)

In February 2025, the Financial Action Task Force (FATF) placed Nepal on its "Grey List" (Jurisdictions Under Increased Monitoring) after the country was found deficient in its anti-money laundering and counter-financing of terrorism (AML/CFT) regime. The major impacts are:

(a) Damage to international financial reputation: Nepal is now bracketed with weak AML/CFT jurisdictions. This erodes the credibility that Nepal had built over years of reform and affects the country's image as a safe destination for investment.

(b) Enhanced due diligence on Nepali transactions: Foreign banks, correspondent banks and financial institutions must now apply "enhanced due diligence" on transactions involving Nepal. This means more paperwork, longer processing time, more queries and greater scrutiny of every remittance, trade payment and letter of credit.

(c) Higher cost and reduced flow of remittance and foreign investment: Remittance is about one-fourth of Nepal's GDP. Delays, rejections and de-risking by foreign banks raise transaction costs, slow down inward remittance and discourage foreign direct investment. Some correspondent banking relationships may even be curtailed.

(d) Difficulty in external borrowing and trade financing: International lenders and development partners become cautious. Sovereign and corporate borrowing, trade credit and project financing may become costlier or harder to obtain.

(e) Risk of being escalated to the "Black List": If Nepal fails to complete its action plan within the stipulated time, it risks being moved to the "Call for Action" (Black List), which would invite countermeasures and near-isolation from the global financial system.

(f) Pressure on banks, businesses and the general public: Banks face higher compliance costs and possible penalties; exporters, importers and migrant workers face inconvenience; and the flow of illicit money through informal channels (hundi) may increase.

2. Roles to Be Played for Timely Removal from the Grey List (6 marks)

Nepal must complete the FATF action plan within the agreed timeline. The following roles are required:

(a) Government of Nepal:

• Give high political commitment and ownership at the highest level; constitute a high-level monitoring committee under the Prime Minister or Finance Minister to review progress periodically.
• Enact/amend necessary laws promptly — especially on beneficial ownership, mutual legal assistance, asset recovery, and criminalization of AML/CFT offences in line with FATF standards.
• Ensure adequate budget, manpower and technology for AML/CFT institutions.
• Ratify and implement international conventions (UN Convention against Corruption, Palermo Convention, Terrorist Financing Convention) and UN Security Council resolutions on targeted financial sanctions.
• Coordinate among ministries, the Financial Intelligence Unit, regulators and enforcement agencies so that the action plan deliverables are met on time.

(b) Regulatory Agencies (NRB, SEBON, Insurance Authority, etc.):

• Issue and enforce risk-based AML/CFT directives to banks, financial institutions, remittance companies, cooperatives, casinos and other reporting entities.
• Conduct effective risk-based supervision, on-site and off-site, and impose credible sanctions for non-compliance.
• Maintain an up-to-date national risk assessment and ensure that high-risk sectors (real estate, precious metals, casinos, NGOs) are properly regulated.
• Strengthen customer due diligence (CDD), record-keeping and suspicious transaction reporting (STR) practices in reporting entities.

(c) Enforcement Agencies (Police, CIB, Department of Money Laundering Investigation, courts, etc.):

• Investigate and prosecute money laundering and terrorist financing cases promptly and effectively, and secure convictions to demonstrate enforcement credibility.
• Ensure timely freezing, seizure, confiscation and management of proceeds of crime and terrorist assets.
• Develop specialised skills (financial investigation, forensic accounting, cyber investigation) and inter-agency coordination.
• Cooperate with foreign counterparts through mutual legal assistance and extradition.

(d) Financial Intelligence Unit (FIU) and other supporting bodies:

• Receive, analyse and disseminate STRs and other financial intelligence promptly and use them for investigation.
• Maintain accurate and timely statistics on STRs, investigations, prosecutions and convictions, as FATF assessors verify these figures.
• Conduct outreach and training for reporting entities and law enforcement.

(e) Private Sector and Civil Society:

• Banks and businesses must comply with AML/CFT obligations, report suspicious transactions and maintain proper records.
• Media and civil society should create awareness and support anti-corruption and anti-money laundering efforts.

(f) Overall strategy:

• Prepare a clear, time-bound action plan with measurable milestones; assign responsibility to specific agencies; and review progress monthly.
• Engage FATF/APG and donor partners for technical assistance and follow their recommendations.
• Demonstrate tangible results — not just legal amendments — in investigations, prosecutions, convictions and asset recovery, since FATF evaluates effectiveness, not only technical compliance.

Conclusion: Grey listing is a serious warning but also an opportunity. With strong political will, coordinated action by the government, regulators and enforcement agencies, and demonstrated enforcement results, Nepal can complete its action plan and secure removal from the Grey List within the stipulated time, thereby protecting its remittance-dependent economy and international financial reputation.

Interrelationship between Money Market and Capital Market

The money market is the market for short-term funds (up to one year) — instruments such as Treasury bills, commercial papers, certificates of deposit and interbank call money. The capital market is the market for long-term funds (over one year) — instruments such as shares, debentures, government bonds and corporate bonds. Though distinct in maturity, instruments and institutions, the two markets are closely interrelated:

1. Complementary parts of one financial system. Both channel savings into investment; the money market supplies short-term liquidity while the capital market supplies long-term investible funds. Together they form the financial market of an economy.

2. Flow of funds between them. Surplus short-term funds in the money market are invested in long-term securities when yields are attractive, and idle long-term funds are parked in money market instruments to earn returns. Thus funds move from one market to the other according to interest rate differentials.

3. Interest rate linkage. Money market rates (T-bill rate, bank rate, call money rate) serve as the benchmark for pricing capital market instruments. A rise in short-term rates raises the cost of funds and tends to depress share and bond prices; a fall has the opposite effect.

4. Liquidity support to the capital market. A developed money market provides liquidity to banks, brokers and underwriters, enabling them to subscribe to new issues and to hold securities. Without money market liquidity, the capital market cannot function smoothly.

5. Institutional overlap. Commercial banks, finance companies and merchant banks operate in both markets — banks use money market funds to underwrite and invest in securities, and securities firms use money market instruments for short-term financing.

6. Central bank transmission. Monetary policy operates first in the money market; changes in liquidity and short-term rates are then transmitted to long-term investment and capital formation. Hence the money market is the transmission channel for influencing the capital market.

7. Development interdependence. A developed money market stabilises short-term rates and reduces uncertainty, encouraging long-term saving and capital market growth; conversely, a vibrant capital market reduces over-dependence on short-term bank finance and eases pressure on the money market.

Role of the Regulator in the Development of the Capital Market in Nepal

The principal regulator is the Securities Board of Nepal (SEBON), established in 1993 under the Securities Act, 2063, with the Nepal Rastra Bank and the Ministry of Finance playing supporting roles. Its developmental roles are:

1. Legal and regulatory framework. SEBON formulates and enforces rules, regulations and directives on issue, listing, trading and disclosure, providing the legal certainty investors need. The Securities Act, 2063 and its regulations are the base of this framework.

2. Investor protection. Through disclosure requirements, prospectus approval, surveillance of trading, investigation of malpractice and action against insider trading and price manipulation, SEBON builds investor confidence — the precondition for a deep market.

3. Market infrastructure development. SEBON has supported the establishment and modernisation of the Nepal Stock Exchange (NEPSE), the CDS and Clearing Limited (dematerialisation), and online/automated trading systems, reducing settlement risk and transaction cost.

4. Institutional strengthening. It licenses and regulates stock brokers, merchant bankers, issue managers, mutual funds, credit rating agencies and depository participants, and prescribes capital, conduct and reporting standards for them.

5. Product and market expansion. SEBON promotes new instruments and segments — mutual funds, corporate debentures, preference shares, and the growth of the primary market — thereby widening the investor base beyond a few listed companies.

6. Financial literacy and awareness. Through investor education programmes, publications and awareness campaigns, SEBON expands retail participation and reduces the dominance of a small group of institutional and insider investors.

7. Corporate governance and transparency. By requiring timely financial reporting, annual reports, and disclosure of price-sensitive information, SEBON improves the quality of listed companies and reduces information asymmetry.

8. Coordination with other bodies. SEBON coordinates with NRB, the Ministry of Finance, the Company Registrar's Office and the Insurance Board to remove regulatory gaps and overlaps.

Conclusion. The money market and capital market are complementary and mutually reinforcing segments of the financial system. In Nepal, SEBON's dual role as regulator and developer — through law, supervision, infrastructure, product diversification and investor education — is central to deepening the capital market, though constraints of institutional capacity, limited listing base and weak enforcement still need to be addressed.

Status and progress of Agricultural Development Bank Limited (ADBL)

Background. ADBL was established in 2024 BS (1967 AD) under the Agricultural Development Bank Act, 2024 to provide institutional credit for agricultural development. It is now a national-level "A" class commercial bank licensed by Nepal Rastra Bank and operating under the Bank and Financial Institutions Act, 2073. The Government of Nepal is the largest shareholder, and its shares are listed on the Nepal Stock Exchange.

Present status

• It has the widest branch network of any bank in Nepal, reaching rural and remote districts where few other banks operate.
• Its main business is agriculture and rural lending, together with deposit mobilisation, remittance, and SME and retail loans.
• It remains the main channel for government-subsidised and concessional agricultural loans.
• It is regulated through Nepal Rastra Bank's capital adequacy, liquidity and provisioning norms.

Progress

• Growth in deposits, loans and branch coverage, which has widened financial access for farmers.
• Adoption of core banking, mobile and internet banking, ATM and QR/connect IPS services.
• Regular public notices on financial results, dividend and AGM, share matters, staff recruitment, loan recovery auctions and procurement.
• Greater attention to non-performing loan recovery, governance and compliance.

Note on "the latest notice". The exact figures (profit, NPL ratio, dividend, dates) change with every notice. In the exam, quote the figures from the most recent notice published by the bank.

Main provisions of the ADBL Transfer Manual, 2081

The manual sets out the rules under which the bank moves its staff between offices. Its main provisions are as follows.

• Objectives: to make transfers fair, transparent and need-based, to spread experience across offices and to meet staffing needs of the bank, including remote branches.
• Coverage: applies to all permanent staff at officer, assistant and other levels, with limited exceptions set by the manual.
• Transfer cycle and tenure: staff normally serve a fixed period in one office, with a longer or shorter period for hard, remote or difficult stations and for the central office, and a regular annual transfer cycle.
• Basis of transfer: length of service at the present office, performance, administrative need, and rotation between accessible and remote areas.
• Special consideration: relief or postponement in cases such as serious illness, pregnancy and child care, couples working in the bank, and staff with disabilities.
• Disciplinary and administrative transfers: allowed for misconduct, conflict of interest, or institutional need, outside the normal cycle.
• Procedure: the Human Resource Department prepares a list, a transfer committee reviews it, and the competent authority (CEO or delegated authority) approves it. Staff are told in writing and must report within the given time after release.
• Request transfer: staff may apply for transfer on stated grounds, subject to approval and vacancy.
• Grievance: an affected employee may submit a representation to the competent authority within a prescribed time.
• Prohibitions: no transfer for political reasons, and no staff may refuse or delay a lawful transfer order.

Strategic Reforms for Developing Project Financing Expertise in Agricultural Development Bank Limited (ADBL)

Context: ADBL is Nepal's leading development bank with a mandate to finance agriculture and rural development. Project financing — lending against the cash flow and assets of a specific project, with limited or no recourse to the promoter — demands skills in feasibility appraisal, risk allocation, financial modelling, and monitoring that a traditional collateral-based lending culture does not build. The following reforms and framework address that gap.

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A. Strategic Reforms Needed

1. Institutional restructuring: Create a dedicated Project Financing Department (or a separate Project Finance Cell under the Credit Division) with its own mandate, reporting line to the CEO, and ring-fenced accountability, so that project lending is not treated as routine working-capital lending.

2. Specialised human resource policy: Introduce a Project Finance Cadre with defined entry qualifications (finance/economics/agri-economics/engineering), a separate promotion track, and retention incentives (allowances, deputation to multilateral projects) to stop trained staff from leaving after gaining expertise.

3. Capacity building: Structured training in project appraisal (technical, financial, economic, environmental, social), cash-flow modelling, DSCR/IRR/NPV analysis, risk mitigation instruments (guarantees, insurance, escrow), and syndication. Partner with IFC, ADB, other development finance institutions and the Nepal Bankers' Association for exposure visits and certification.

4. Product and process innovation: Introduce tailored project finance products — long-tenure loans (7–15 years), moratorium-linked repayment, structured finance for agri-value chains (cold chains, warehouses, processing plants), renewable energy, and PPP projects — with a simplified but rigorous appraisal manual.

5. Risk management architecture: Adopt a project-specific risk framework: independent technical appraisal, sensitivity/scenario analysis, covenant structuring (DSCR ≥ 1.2, escrow of receivables), and a separate project finance NPL monitoring cell.

6. Governance and policy reform: Board-approved Project Finance Policy, delegated lending authority matrix, credit committee with external technical experts, and alignment with NRB directives on large exposure, consortium lending, and project finance classification.

7. Digital and MIS reform: Project finance module in the core banking system for cash-flow tracking, milestone-based disbursement, and real-time monitoring dashboards.

8. Partnership and syndication: MoUs with IFC/ADB/Domestic banks for co-financing, credit guarantee schemes (e.g., the Deposit and Credit Guarantee Fund, DCGF), and blended finance to share risk and learn international appraisal standards.

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B. Strategic Framework for Project Financing

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C. Enabling Pillars (Cross-cutting)

• People: cadre, training, retention.
• Process: standard appraisal manual, delegated authority, EWS.
• Technology: CBS project module, MIS dashboards.
• Partnership: syndication, guarantee, blended finance.
• Policy & Governance: board policy, NRB compliance, independent review.

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Conclusion: ADBL's transition from collateral-based lending to project financing requires simultaneous reform in structure, skills, process, technology, and partnerships. Anchored in a board-approved strategic framework covering the full project cycle from origination to exit, these reforms will build durable in-house expertise and position ADBL as a lead institution in Nepal's agri-project finance market.

Major issues in ADBL's credit recovery management

Internal (bank-side) issues — 4 marks

1. Weak appraisal and lending decisions. Loans are often sanctioned on the basis of security and personal/political recommendation rather than on repayment capacity, cropping pattern, market linkage and cash-flow analysis. Once a weak loan enters the books, recovery becomes difficult from day one.
2. Deficient loan risk monitoring. Post-disbursement supervision is largely ritualistic — inspection visits are irregular, end-use of funds is not verified, and early warning signals (overdue instalments, diversion of working capital, declining yield) are not acted upon in time. Loans are thus classified only after they turn non-performing.
3. Weak Management Information System and follow-up. Poor MIS, manual records in branches and lack of a centralised early-warning/credit-rating system delay identification of stressed accounts and dilute follow-up.
4. Inadequate recovery machinery and staff capacity. Dedicated recovery units are understaffed, recovery staff lack legal and negotiation skills, and recovery targets are not linked to a clear accountability and incentive system. Transfer of staff with pending recovery cases further weakens continuity.
5. Weak collateral enforcement and legal follow-up. Delay in valuation, auction and execution of collateral, and slow filing of cases, makes the threat of legal action non-credible.
6. Restructuring used as evergreening. Repeated rescheduling without fresh cash-flow assessment merely postpones recognition of loss and inflates the performing portfolio.
7. Governance and political interference. Pressure to lend under directed/priority-sector programmes, and interference in write-off and settlement decisions, undermines merit-based recovery.

Borrower-side constraints — part of the 4 marks

1. Low repayment capacity and income volatility. Small and marginal farmers face monsoon dependence, crop failure, pest attack and price fluctuation, so income is irregular while instalments are fixed.
2. Diversion of loan to non-productive use — consumption, dowry, repayment of other loans — leaving no income-generating asset to recover from.
3. Lack of market linkage and infrastructure. Absence of irrigation, roads, storage and assured buyers in rural areas depresses returns, so even willing borrowers cannot repay.
4. Multiple borrowing and over-indebtedness. Borrowing from cooperatives, MFIs and moneylenders simultaneously, with ADBL unaware of total exposure.
5. Weak financial literacy and wilful default. Some borrowers treat subsidised agricultural credit as a grant, and default deliberately where they expect a waiver or political protection.
6. Inadequate and low-value collateral, often land without clear title or with disputed ownership, making enforcement difficult.

Systemic roots — 3 marks

1. Political interference and directed lending. Populist schemes, debt-waiver announcements and pressure to meet priority-sector targets distort credit decisions and create an expectation of forgiveness, which destroys repayment discipline.
2. Regulatory and supervisory gaps. Although NRB prescribes classification, provisioning and recovery norms, enforcement is uneven; there is no strong framework for prompt corrective action, and the regulator's capacity to supervise a large rural branch network is limited.
3. Weak legal and judicial system. Debt Recovery Tribunal procedures are slow and costly; foreclosure and auction of agricultural land face legal, social and political obstacles.
4. Structural nature of agricultural lending. Seasonality, covariate (weather-wide) risk and absence of effective crop/livestock insurance mean that a single bad season turns a whole branch's portfolio non-performing.
5. Limited rural infrastructure and market access, as noted in the question, reduce the profitability of the very projects being financed.
6. Institutional legacy. ADBL carries a historical burden of directed lending and a large, dispersed branch network with thin supervision, which sustains a weak credit culture.

Proposed approach to address the issues — 3 marks

A three-pronged, sequenced strategy is required — preventive, corrective and systemic.

1. Preventive: fix lending and monitoring at source.

   • Introduce a credit-scoring and cash-flow based appraisal format for agricultural loans, with mandatory assessment of cropping plan, market linkage and household cash flow.
   • Strengthen the MIS with a central early-warning system that flags accounts on the first overdue and grades branches by portfolio quality.
   • Make branch inspection risk-based: high-risk branches and large exposures supervised more frequently, with end-use verification.

2. Corrective: strengthen recovery and accountability.

   • Create a professional, ring-fenced recovery unit with trained staff, legal experts and performance-linked incentives; avoid frequent transfer of recovery staff.
   • Adopt a graded recovery strategy — reminder, restructuring with fresh cash-flow assessment, compromise settlement within NRB norms, and legal action — with strict time limits at each stage.
   • Ban evergreening; require independent credit committee approval for any restructuring.
   • Publish branch-wise and staff-wise recovery performance to build accountability.

3. Systemic and structural reform.

   • Reduce political interference through a clear, published lending policy, board-level independence and transparent criteria for write-offs and settlements.
   • Strengthen the legal framework — fast-track Debt Recovery Tribunal benches, simplified foreclosure of agricultural collateral, and a credit information bureau covering cooperatives and MFIs to control multiple borrowing.
   • Expand crop and livestock insurance, warehouse receipt financing and warehouse infrastructure to reduce weather and price risk.
   • Invest in rural roads, irrigation and market centres, and in borrower financial literacy, so that credit creates repayable income rather than distress.
   • Improve regulatory enforcement — risk-based supervision, prompt corrective action and strict provisioning discipline.

Conclusion. ADBL's recovery problem is not merely a collection problem; it is the outcome of weak appraisal and monitoring within the bank, fragile borrower incomes and infrastructure outside it, and political-regulatory-legal weaknesses above it. Therefore recovery cannot be fixed by recovery drives alone — it needs simultaneous reform of credit appraisal, monitoring technology, recovery professionalism, legal speed and rural infrastructure, supported by genuine board independence. Such a combined preventive-corrective-systemic approach would convert ADBL's agricultural lending from a source of bad debt into a sustainable, repayable portfolio.

Non-Fund Based Business of a Bank

Non-fund based business refers to those banking services in which the bank does not part with its own funds immediately, but instead provides a guarantee, commitment or acceptance on behalf of its customer. The bank earns commission, fee and charges without blocking its funds. The bank's liability arises only if the customer fails to honour the commitment. Such business is also called off-balance sheet business because it does not appear as an asset or deposit on the balance sheet at the time of issue.

Main types:

• Letter of Credit (LC)
• Bank Guarantee (BG)
• Acceptance of bills of exchange
• Letter of comfort
• Performance bond, bid bond, advance payment guarantee

Importance: It earns fee income without using funds, strengthens customer relationship, supports trade and commerce, and diversifies bank income.

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Difference between Letter of Credit and Bank Guarantee

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Process of Issuing a Letter of Credit

Step 1 — Application: The importer (applicant) submits an LC application to the bank along with the proforma invoice, import licence, and other documents as required.

Step 2 — Assessment and Approval: The bank assesses the applicant's creditworthiness, margin requirement, and exposure limit. It obtains approval from the competent authority and takes cash margin or security as per policy.

Step 2 — Agreement: The bank obtains a signed LC agreement from the applicant, agreeing to the terms and conditions, charges and reimbursement obligation.

Step 3 — Issuance: The issuing bank prepares the LC as per UCPDC 600, incorporating terms such as amount, validity, shipment date, description of goods, and list of required documents. The LC is then issued and transmitted to the beneficiary's bank.

Step 4 — Advising: The advising bank in the exporter's country verifies the authenticity of the LC and advises it to the beneficiary (exporter).

Step 5 — Shipment and Document Presentation: The exporter ships the goods and presents the documents to the negotiating bank within the validity period.

Step 6 — Examination and Negotiation: The negotiating bank examines the documents for compliance with LC terms and forwards them to the issuing bank, making payment to the exporter as per arrangement.

Step 7 — Payment and Retirement: The issuing bank checks the documents; if compliant, it makes payment to the negotiating bank and retires the documents against payment from the importer, adjusting the margin.

Step 8 — Record and Closure: The bank records the transaction in its books, collects charges/commission, and closes the LC file after full settlement.

(a) Legal provisions on loan disbursement and recovery (5 marks)

Disbursement

• The Bank and Financial Institutions Act (BAFIA), 2073 allows licensed institutions to lend within the limits set by Nepal Rastra Bank (NRB). It bars lending against the institution's own shares and restricts loans to directors, their relatives and related firms.
• NRB's Unified Directives fix the single-obligor limit, sector limits, loan-to-value and margin rules, and require loan classification (pass, watchlist, substandard, doubtful, loss) with loan loss provisioning.
• A loan is a contract under the Muluki Civil Code, 2074, so it needs a proper agreement, promissory note, collateral papers and guarantees.
• The Assets (Money) Laundering Prevention Act, 2064 requires customer due diligence before lending.

Recovery

• The institution may realise its security through the Security Transaction Act (the Secured Transactions Act), 2063, including enforcement and auction of the collateral after notice.
• Recovery through the Debt Recovery Tribunal, which hears claims of banks and financial institutions against defaulters.
• Civil suits, blacklisting of defaulters through the Credit Information Bureau, and insolvency proceedings under the Insolvency Act, 2063.
• NRB directives require banks to monitor NPLs, form recovery units and report recovery progress.

(b) Regulatory actions against banks and financial institutions (5 marks)

NRB, as regulator under BAFIA and the NRB Act, 2058, may take progressive action:

1. Warning and directive to correct a breach within a fixed time.
2. Fine or penalty for violating the law, directives or prudential norms.
3. Restrictions on dividend, new loans, branch expansion, or specific business.
4. Special inspection and closer supervision.
5. Removal of directors or chief executive who are unfit or at fault.
6. Appointment of an administrator or takeover of management, where the institution is in difficulty.
7. Merger, acquisition or capital increase to rescue a weak institution.
8. Cancellation of licence and liquidation as the last resort, to protect depositors.

Introduction (3 marks)

The Financial Intelligence Unit (FIU) Nepal is the national agency for receiving, analysing and sharing financial information on money laundering and terrorist financing. It was established in 2008 AD (2065 BS) under the Assets (Money) Laundering Prevention Act, 2064 and works within Nepal Rastra Bank, led by its Head. It is a member of the Egmont Group of FIUs and works with the Department of Money Laundering Investigation, Nepal Police, the CIAA and other agencies.

Functions, duties and powers (7 marks)

Functions

• Receive Suspicious Transaction Reports (STR), Threshold Transaction Reports (TTR) and other reports from reporting entities such as banks, financial institutions, insurers, cooperatives, securities and remittance businesses, casinos and others.
• Analyse the reports to identify links with money laundering, terrorist financing and predicate offences.
• Disseminate analysis to investigating agencies when there are grounds for suspicion.

Duties

• Keep the information confidential and use it only for the lawful purpose.
• Issue guidelines and feedback to reporting entities on reporting.
• Maintain a database, publish trend and typology reports, and raise awareness and train staff of reporting entities.
• Cooperate with domestic regulators and with foreign FIUs under the Egmont Group and bilateral MoUs.
• Assist in Nepal's national risk assessment and international AML/CFT assessments.

Powers

• Seek additional information and records from reporting entities and government bodies.
• Inspect and supervise reporting entities' compliance with reporting duties, and recommend action against those who default.
• Direct a reporting entity to postpone or hold a suspicious transaction, as provided by law.
• Sign agreements and exchange information with foreign FIUs.