Nepalese Public Administration: Evolution, Structures, and Reforms

Basel Core Principles (BCP) and bank management

The Basel Core Principles for Effective Banking Supervision (Basel Committee, revised 2012) are 29 principles that form the international minimum standard for regulating and supervising banks. Central banks such as Nepal Rastra Bank use them as a benchmark for their directives. They help bank management in these ways:

1. Supervisory powers and licensing (Principles 1-13): These set out the supervisor's responsibilities, independence and powers, permissible activities, licensing criteria, approval of transfers of significant ownership and major acquisitions, supervisory approach and techniques, reporting, corrective powers, and consolidated and home-host supervision. This keeps unfit promoters out, and management knows weak performance will be corrected early.

2. Corporate governance and risk management (Principles 14-15): The board and senior management must have clear responsibilities, sound strategy, a risk culture and a comprehensive risk management process, so decisions are accountable and risks are identified, measured and controlled.

3. Capital and risk standards (Principles 16-25): These cover capital adequacy, credit risk, problem assets and provisioning, concentration and large exposures, related-party transactions, country risk, market risk, interest rate risk in the banking book, liquidity and operational risk. They give management numerical limits and a cushion against losses, so lending and investment are prudent rather than discretionary.

4. Control, reporting and disclosure (Principles 26-29): Internal control and audit, accurate financial reporting and external audit, disclosure and transparency, and prevention of abuse of financial services (money laundering, fraud). These improve reliability of information and let depositors and shareholders judge the bank's health.

Benefits in short: sound and safe operation, protection of depositors, early detection of problems, market discipline, and public confidence and financial-system stability.

Relationship of Financial System with Economic Development

A financial system consists of financial institutions (banks, insurance companies, capital market institutions), financial markets (money market and capital market), financial instruments, and regulatory bodies (NRB, SEBON, Beema Pradhikaran). It performs the core functions of mobilizing savings, allocating credit, facilitating payments, managing risk, and providing liquidity. These functions are directly linked to the economic development of a country in the following ways:

1. Mobilization of savings and capital formation. A well-developed financial system collects scattered small savings from households through banks and other institutions and channels them into productive investment. This raises the saving rate and the rate of capital formation, which is a basic determinant of economic growth. In Nepal, bank deposits have grown substantially and are the main source of investible funds for industry and infrastructure.

2. Efficient allocation of resources. Financial markets and institutions evaluate projects and direct funds to the most productive uses through interest rates and credit appraisal. This improves the productivity of capital and avoids its wastage in unproductive sectors. A sound capital market (NEPSE) enables firms to raise equity and debt at competitive cost.

3. Promotion of trade, industry and agriculture. Banks provide working capital, term loans, export-import financing, and microcredit. In Nepal, priority-sector lending to agriculture, small and medium enterprises, and deprived sectors supports employment and income generation, thereby reducing poverty.

4. Financial inclusion and poverty reduction. Expansion of branch networks, mobile banking, and microfinance brings the unbanked rural population into the formal financial net. Access to credit and insurance enables the poor to invest, smooth consumption, and absorb shocks, which reduces vulnerability and supports inclusive development.

5. Price stability and monetary management. The central bank uses monetary policy tools (CRR, bank rate, open market operations) through the financial system to control money supply and inflation. Stable prices create a favourable climate for saving and investment.

6. Infrastructure and long-term financing. Development banks, employee provident funds, insurance companies, and the Citizen Investment Trust supply long-term funds needed for infrastructure such as roads, hydropower, and irrigation, which raise productive capacity.

7. Attracting foreign capital and technology. A sound financial system with credible regulation attracts foreign direct investment, joint ventures, and remittances into formal channels. Remittances received through banks in Nepal have financed consumption, housing, and small enterprises.

8. Risk management and stability. Insurance, hedging instruments, and prudential regulation protect firms and households from risks. Financial stability prevents crises that can reverse development gains.

Conclusion. The financial system acts as the "blood circulation" of the economy. A deep, diversified, and well-regulated financial system accelerates capital formation, improves resource allocation, and promotes inclusive growth; a weak or poorly regulated system leads to capital flight, inflation, and crisis. Hence, strengthening the financial system through sound regulation, financial literacy, and institutional development is essential for the economic development of a country like Nepal.

Critical Examination of the Present Status of Corporate Governance in the Banking Sector of Nepal

Conceptual Note: Corporate governance in banking refers to the system by which banks are directed, controlled, and held accountable — covering the board of directors, management, shareholders, depositors, regulators, and other stakeholders. In banking, governance assumes special importance because banks handle public deposits, operate on high leverage, and their failure carries systemic risk.

Present Status of Corporate Governance in Nepali Banks

1. Legal and Institutional Framework (Positive Developments)

• Companies Act, 2063 (2006) and Bank and Financial Institutions Act (BAFIA), 2073 (2016) provide the basic legal architecture — board composition, duties of directors, audit committees, and disclosure obligations.
• Nepal Rastra Bank (NRB) has issued Corporate Governance Guidelines, 2074 (2018) for banks and financial institutions, covering board structure, independent directors, committees (Audit, Risk Management, Compensation), and fit-and-proper criteria.
• Securities Board of Nepal (SEBON) enforces the Code of Corporate Governance, 2074 for listed banks.
• Nepal has adopted Basel III norms, which indirectly strengthen governance through capital, liquidity, and disclosure requirements.
• Most banks now have independent directors, audit committees, and risk management committees as mandatory structures.

2. Persistent Weaknesses

• Board capture and political influence: Directors are often appointed on political or kinship considerations rather than competence. The "fit and proper" test is weakly enforced.
• Dominant promoter culture: Promoter groups frequently hold disproportionate control, and family/group interests override minority shareholder and depositor interests.
• Weak risk culture: Despite formal risk committees, risk management is often compliance-driven rather than embedded. This was exposed by the 2019–2020 liquidity crisis and the cooperative crisis (2022–23) that spilled into some banks.
• Related-party transactions: Connected lending and related-party dealings remain inadequately disclosed and weakly monitored.
• Ineffective internal audit and compliance: Internal audit functions often lack independence and resources; external auditors face conflicts of interest.
• Weak enforcement: NRB has occasionally used its powers (e.g., promoter share lock-in, removal of directors, restrictions on lending), but penalties are often seen as delayed and inconsistent.
• Concentration and merger-driven governance gaps: The post-2017 forced merger wave created large banks whose governance systems have not always kept pace with their size and complexity.
• Low shareholder activism: Minority shareholders rarely challenge board decisions; the AGM is often a formality.

3. Overall Assessment

Nepal has made substantial progress in form (laws, guidelines, mandatory committees) but lags in substance (implementation, enforcement, ethical culture). Corporate governance in Nepali banking is best described as "compliance-compliant but substance-weak."

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Role of the Central Bank (NRB) in Promoting Corporate Governance

1. Regulatory and Supervisory Role

• Strengthen the legal framework: Update the Corporate Governance Guidelines to align with international best practices (OECD Principles, Basel Committee guidance).
• Strict fit-and-proper screening: Rigorously vet directors and senior managers; disqualify those with conflicts of interest or weak track records.
• Risk-Based Supervision (RBS): Shift from transaction-based to risk-based supervision so governance failures are detected early.
• Enforce penalties: Impose timely and credible sanctions — fines, removal of directors, restrictions on business, and in extreme cases, license revocation.

2. Structural and Disclosure Role

• Mandate transparency: Require full disclosure of related-party transactions, promoter shareholdings, board remuneration, and risk exposures.
• Cap promoter control: Limit promoter representation on boards and enforce separation of ownership from management.
• Strengthen audit quality: Regulate external auditors, enforce rotation, and ensure audit committees are truly independent.

3. Capacity Building and Market Discipline Role

• Train directors: Conduct governance training and certification for bank directors.
• Promote shareholder activism: Encourage minority shareholder participation and protect their rights.
• Publish supervisory assessments: Use public disclosure (e.g., CAMELS ratings summaries) to harness market discipline.
• Coordinate with SEBON and other regulators: Ensure a unified governance regime for listed banks.

4. Developmental Role

• Institutionalize governance benchmarks: Introduce governance scorecards and link them to regulatory privileges (e.g., branch expansion, dividend approval).
• Lead by example: Maintain transparency and accountability within NRB itself.

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Conclusion

Corporate governance in Nepal's banking sector has strong legal foundations but weak practical enforcement. The central bank must move from being a rule-maker to a rigorous enforcer and market-discipline facilitator — combining strict supervision, credible penalties, transparency mandates, and capacity building. Only then can depositor confidence, financial stability, and sustainable banking growth be ensured.

Directives issued by Nepal Rastra Bank relating to digital payment systems: innovation versus risk management — a reasoned view

1. Context

Nepal Rastra Bank (NRB), under the Nepal Rastra Bank Act, 2058 and the Payment and Settlement Act, 2075, issues binding directives to payment service providers (PSPs), payment system operators (PSOs), banks and financial institutions, and, more recently, to payment service providers licensed under the Retail Payment Strategy (2065). The relevant instruments include the Directives on Payment Systems, the Digital Payment Guidelines, the QR Code Directives, the Mobile Banking and Internet Banking Directives, the Prepaid Payment Instrument (PPI) Directives, the Licensing Policy for Payment Service Providers and Payment System Operators, and circulars on interoperability, transaction limits, KYC, cybersecurity and grievance handling. The question is whether this body of rules is adequate to foster innovation or whether it is tilted towards risk management.

2. How the directives support innovation

• Legal recognition and licensing: The licensing framework for PSPs/PSOs gave formal legal space to fintech firms, wallet operators and payment aggregators, which earlier operated in a grey zone. Licensing itself is an innovation-enabling step because it allows firms to raise capital, partner with banks and scale.
• Interoperability: Mandatory interoperability of QR codes, wallets and mobile banking (Nepal QR, connect IPS, RTGS, connect RTGS) lowered entry barriers and expanded the addressable market. A small fintech can now reach customers of all banks without bilateral agreements.
• Retail Payment Strategy and Digital Nepal Framework: These set targets for digital transactions, financial inclusion and cashless payments, signalling policy direction and creating demand for new products.
• Sandbox and pilot provisions: NRB introduced a regulatory sandbox framework allowing limited live testing of innovative products (e.g., fintech lending, digital KYC, payment solutions) under supervision. This is a deliberate innovation instrument.
• Open and enabling rules: Permissions for mobile banking, internet banking, wallets, prepaid cards, QR payments, bill payments, remittance digitisation and, more recently, discussions on digital lending and open banking show a permissive stance within defined limits.
• Institutional support: NRB's Payment Systems Department, the Payment Council, and the Fintech Innovation Hub provide coordination, capacity building and a channel for industry consultation.

3. How the directives lean towards risk management

• Prescriptive limits: Caps on wallet balances, transaction ceilings, monthly limits, and restrictions on cash-out and fund transfers constrain product design and business models. Innovation often requires flexibility in limits and use cases.
• KYC and AML/CFT rigidity: Tiered KYC is permitted, but full KYC requirements, documentation and verification burdens raise customer acquisition costs and slow onboarding, especially in rural areas.
• Capital and licensing thresholds: Minimum paid-up capital, deposit requirements and licensing fees are high for early-stage startups, favouring established players and discouraging experimentation.
• Approval-based product launch: Many new products require prior approval or no-objection from NRB, which lengthens time-to-market and creates regulatory uncertainty.
• Cybersecurity and data localisation: Strict cybersecurity, incident reporting and data storage requirements, while necessary, add compliance costs that small innovators struggle to bear.
• Consumer protection and dispute rules: Mandatory grievance redressal, refund timelines and liability allocation increase operational costs.
• Slow pace of reform: Several promised reforms — full interoperability of all instruments, digital lending rules, open banking, crypto/blockchain regulation — remain pending or partial, which itself discourages long-horizon innovation.

4. Assessment: is it sufficient?

The directives are necessary but not sufficient for fostering innovation. They are sufficient in the sense that they create a safe, trusted and interoperable environment without which digital payments cannot scale — trust is the precondition for adoption. They are insufficient in the sense that the balance is tilted towards risk management: the framework is largely rule-based, prescriptive and approval-driven, with innovation treated as an exception to be permitted rather than the default to be enabled.

Evidence of the tilt:

• Innovation happens mostly in payment channels (QR, wallets, mobile banking) rather than in new financial products (digital credit, insurance, wealth tech, embedded finance).
• The sandbox is narrow in scope and slow in approving cohorts.
• Fintech firms face high compliance costs relative to revenue, pushing consolidation and dependence on bank partnerships.
• Nepal lags regional peers (India's UPI, Bangladesh's MFS) in product diversity despite similar starting points.

5. What a better balance would look like

• Principle-based regulation: Shift from prescriptive limits to outcome-based rules (e.g., risk-proportionate KYC, dynamic limits based on risk scoring).
• Expand the sandbox: Broader eligibility, faster approvals, clear exit and scaling pathways.
• Proportionate compliance: Tiered capital and reporting requirements for small PSPs; shared KYC/AML utilities to reduce cost.
• Enable open banking and APIs: Standardised APIs for account aggregation and payment initiation.
• Digital lending and crypto framework: Clear rules rather than ambiguity.
• Consultative rule-making: Formal fintech advisory group with industry, academia and consumer representatives.
• Supervisory technology (SupTech): Use data-driven supervision so risk is managed without stifling product design.

6. Conclusion

NRB's digital payment directives have been foundational and largely successful in building trust, interoperability and adoption, but they are not sufficient to foster innovation at the pace and breadth Nepal needs. The framework leans towards risk management through prescriptive limits, high compliance burdens and approval-based product launches. A shift towards principle-based, proportionate and sandbox-enabled regulation, with faster reform on open banking, digital lending and crypto, would better balance innovation and stability. In short, the directives are necessary for innovation but not sufficient for it; the next phase of regulation must actively enable experimentation within a strong risk framework rather than merely permit it.

Shadow Banking in Nepal: Risks, Challenges and Economic Impact

1. Concept

Shadow banking refers to credit intermediation carried out by entities and activities outside the regular banking system (FSB definition). Such entities perform bank-like functions — accepting deposits, extending credit, and transforming maturity — but are not licensed, supervised or backstopped as banks. They operate without access to central bank liquidity support and, in most cases, without deposit insurance.

2. Forms of Shadow Banking in Nepal

• Savings and credit cooperatives — over 30,000 cooperatives with millions of members, regulated only by the Department of Cooperatives under the Ministry of Land Management, Cooperatives and Poverty Alleviation, not by Nepal Rastra Bank (NRB).
• Unregistered moneylenders charging meter byaj (compound interest at 10–20% per month), often against land as collateral.
• Dhukuti / chit funds and ROSCAs — rotating savings and credit associations based on social trust.
• Hundi (hawala) — informal cross-border remittance and trade settlement, especially along the open Indian border.
• Unlicensed digital lending apps — NRB has repeatedly warned against these, as they charge exorbitant rates and use coercive recovery.
• MLM and pyramid schemes masquerading as "multi-level marketing" or "network business".

3. Major Risks and Challenges

(a) Regulatory arbitrage and supervisory gap. Cooperatives face dual and fragmented oversight with weak inspection capacity. There is no single regulator, no capital adequacy norm, no liquidity ratio and no prompt corrective action framework.

(b) Contagion and systemic risk. Shadow entities borrow from banks and financial institutions (BFIs) and on-lend to the same borrowers. When a large cooperative collapses, the bank loans it took turn non-performing, transmitting stress into the regulated sector. The 2019 Suryadarshan cooperative fraud in Kanchanpur (over Rs 1.6 billion) and the 2022 cooperative crisis in the far-west triggered depositor protests and eroded public confidence in the whole financial system.

(c) Leverage and maturity mismatch. These entities borrow short and lend long, with no lender-of-last-resort facility. A liquidity shock forces distress sales or outright default.

(d) Consumer protection failure. Poor disclosure, related-party lending, absence of audited accounts, and no effective grievance redressal. Depositors — mostly poor, women and elderly — lose savings with no legal remedy.

(e) Data and statistical gap. The size of informal credit is unknown. This blinds monetary policy, weakens macroprudential surveillance, and makes financial stability assessment unreliable.

(f) AML/CFT and external sector risk. Hundi channels are used for money laundering, terror financing and unrecorded capital flight. This damages Nepal's standing with FATF/APG and risks de-risking by foreign correspondent banks.

(g) Political patronage and moral hazard. Cooperatives are politically protected; rescue expectations encourage reckless lending. The government's cooperative stabilization fund effectively socializes private losses.

(h) Over-indebtedness. Multiple borrowing across cooperatives, microfinance and moneylenders creates debt traps, land grabbing and reported borrower suicides.

4. Positive Impacts on Nepal's Economy

• Financial inclusion. Cooperatives reach rural, remote and unbanked populations where BFI branch density is low, mobilizing small savings.
• Filling the credit gap. MSMEs, farmers and small traders without collateral or credit history obtain timely, flexible credit.
• Competitive pressure. Informal competition compels banks to improve service quality and moderate interest rates.
• Employment and empowerment. Local entrepreneurship, self-employment and women's participation in decision-making increase.
• Social capital and low transaction costs. Dhukuti and ROSCA rely on social sanction, giving cheap, disciplined savings mechanisms.
• Remittance intermediation. Informal channels quickly convert remittances into productive or consumption credit.

5. Negative Impacts on Nepal's Economy

• Weakened monetary transmission. NRB's liquidity management and credit control are diluted, complicating inflation targeting.
• Systemic instability and social unrest. Cooperative failures cause depositor losses, protests and political instability.
• Credit misallocation. Funds diverted to land, real estate and gold speculation create asset bubbles instead of productive investment.
• Usurious cost of credit. The poor pay far above regulated rates, deepening inequality and poverty.
• Revenue loss. Unrecorded transactions escape tax, shrinking the fiscal base.
• Moral hazard and fiscal burden. Bailouts and stabilization funds transfer losses to taxpayers.
• Erosion of institutional trust. Repeated scams damage confidence in formal finance and discourage saving.

6. Evaluation and Conclusion

Shadow banking in Nepal is less an innovative parallel system than a symptom of regulatory gaps and unmet credit demand. Its inclusion benefits are genuine, but the risks are disproportionate because supervision is weak, deposit insurance does not extend to cooperatives, and political protection prevents enforcement. The net effect on the economy is negative and destabilizing, though not wholly so.

The policy response should therefore be graduated formalization, not abrupt suppression: bring savings and credit cooperatives under a single regulator with NRB coordination; apply size-based tiered capital, liquidity and reporting norms; extend deposit insurance; mandate credit information bureau reporting to curb multiple borrowing; license and supervise digital lending; strengthen AML/CFT enforcement; and expand financial literacy. This would preserve the inclusion gains of shadow banking while containing its systemic risks.

Major Objectives of the Credit Recovery Manual of Agricultural Development Bank Limited (ADBL)

The Credit Recovery Manual of Agricultural Development Bank Limited is the internal policy document that guides the recovery of non-performing and overdue loans. Its major objectives are:

1. Minimise Non-Performing Loans (NPLs): To keep the level of overdue and non-performing loans within the regulatory and internal limits set by Nepal Rastra Bank, thereby protecting the quality of the loan portfolio.

2. Timely and Prompt Recovery: To ensure that instalments, interest and principal are collected as per the repayment schedule, so that overdue amounts do not accumulate and turn into bad debts.

3. Uniform and Systematic Recovery Procedure: To lay down a standard, step-by-step procedure (reminder, notice, restructuring, rescheduling, legal action, auction of collateral) so that all branches follow the same practice and recovery is not left to the discretion of individual staff.

4. Protection of Depositors' Money and Shareholders' Interest: To recover loans so that the bank can repay its depositors on demand and protect the capital contributed by shareholders.

5. Maintenance of Financial Health and Profitability: To reduce loan loss provisioning and write-offs, which directly improves the bank's profit, capital adequacy and net worth.

6. Preservation of Collateral and Legal Security: To ensure that collateral (land, building, livestock, machinery) is properly valued, insured, monitored and, where necessary, auctioned through a legally valid process so that the bank does not lose its security interest.

7. Classification and Follow-up of Borrowers: To classify borrowers into categories such as good, watch-list, sub-standard, doubtful and bad, and to apply the appropriate recovery strategy to each category.

8. Responsibility and Accountability of Staff: To fix the responsibility of branch managers, recovery officers and field staff for recovery targets, and to link their performance with the recovery results.

9. Compliance with Laws and Directives: To ensure recovery actions conform to the Bank and Financial Institutions Act, 2073, the Nepal Rastra Bank directives, the Debt Recovery Act and other applicable laws.

10. Reduction of Write-Offs: To minimise the amount of loans that ultimately have to be written off as irrecoverable, since written-off loans are a permanent loss to the bank.

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Necessity of a Systematic Recovery Process for the Bank's Sustainability

A systematic recovery process is not merely an administrative formality; it is the lifeline of a bank's sustainability. Its necessity can be clarified as follows:

1. Liquidity Management: A bank runs on public deposits, which are repayable on demand. If loans are not recovered on time, the bank faces a cash crunch and may be forced to borrow at high cost or default on depositors' withdrawals. A systematic process keeps cash inflows predictable.

2. Asset Quality and Capital Adequacy: Under Nepal Rastra Bank norms, overdue loans must be classified as pass, watch-list, sub-standard, doubtful or bad, and loan loss provisions must be made accordingly. The higher the NPL, the higher the provisioning, the lower the profit and the weaker the capital adequacy ratio. Systematic recovery keeps NPLs low and capital intact.

3. Profitability: Interest income is recognised only when it is actually collected. Unrecovered loans mean lost interest and lost principal. Since the bank's main income is interest spread, weak recovery directly erodes profitability and the ability to pay dividends.

4. Credibility and Public Confidence: Banking is based on trust. If depositors lose confidence that the bank cannot recover its loans, they may withdraw deposits in panic (a run on the bank). A disciplined recovery process signals sound management and preserves the bank's reputation.

5. Regulatory Compliance and Avoidance of Penalties: Nepal Rastra Bank, through its unified directives, prescribes recovery timelines, provisioning rates and reporting requirements. Failure to follow a systematic process invites regulatory action, fines, restrictions on new lending and even suspension of the licence.

6. Recycling of Funds: Money recovered from one borrower is lent to another. A systematic recovery process ensures continuous recycling of scarce capital, enabling the bank to serve more farmers and expand its rural outreach — the core mandate of ADBL.

7. Reduction of Litigation and Loss: Haphazard recovery leads to prolonged court cases, high legal costs and deterioration of collateral value. A systematic process uses early intervention (reminders, counselling, restructuring) so that disputes are settled before they reach the courts.

8. Institutional Discipline and Good Governance: A written manual fixes accountability, prevents favouritism and misuse of authority in waiving interest or rescheduling loans, and supports good corporate governance.

9. Long-Term Viability: Ultimately, a bank that cannot recover its loans cannot survive. Recovery is not an isolated activity but a continuous cycle of appraisal, disbursement, monitoring and collection. A systematic recovery process closes this cycle and ensures that ADBL remains a sustainable, self-reliant financial institution capable of supporting agricultural development in Nepal.

Conclusion: The Credit Recovery Manual provides the objectives, procedures and accountability framework for recovery, while a systematic recovery process ensures liquidity, profitability, capital adequacy, depositor confidence and regulatory compliance — all of which are indispensable for the long-term sustainability of Agricultural Development Bank Limited.

Non-funded products of Agricultural Development Bank Limited (ADBL)

Non-funded products are facilities in which the bank does not release its own money. It lends its name and credit standing to the customer and earns commission, so they are contingent liabilities shown off the balance sheet. ADBL's main ones are:

1. Letter of Credit (LC)

• Import LC: ADBL undertakes to pay the foreign supplier against compliant documents. It is used for fertilizer, seeds, machinery and agro-inputs.
• Export LC advising and negotiation: for agro-exporters of tea, cardamom, ginger, herbs and pulses.
• Features: payment only against conforming documents; margin deposit taken (depending on the customer's credit standing); commission and handling charges earned.

2. Bank Guarantee (BG)

• ADBL issues bid bonds, performance guarantees, advance payment guarantees and financial guarantees for customers to government bodies, projects and other parties.
• Features: bank pays if the customer defaults on its obligation; issued against cash margin and/or collateral; commission charged on the guaranteed amount.

3. Back-to-Back / Local LC

• Lets exporters or traders buy raw materials or goods locally on the security of a master (export) LC.
• Features: the master LC acts as security, so margin is lower; supports domestic trade and agro-processing.

4. Co-acceptance of Bills

• ADBL co-accepts bills of exchange drawn by the customer, assuring payment to the holder.
• Features: no cash outlay by the bank; the customer's credibility in the market rises; commission income for the bank.

Common features: fee-based income, contingent liability, risk covered by margin and collateral, and a funded loan arises only if the customer fails to settle. Funded items such as trust receipt loans and bill discounting are not non-funded products.

1. The Context

Agricultural Development Bank Limited (ADBL) is sitting on ample loanable funds, has a low base rate, and therefore offers comparatively cheap credit — yet credit demand remains weak. This is a classic case of a liquidity surplus with a demand-deficient credit market, where the constraint on lending is not the price or availability of funds but the willingness and ability of borrowers to borrow. In economic terms, the bank is pushing on a string: cheap money alone cannot create demand when the real sector is in a wait-and-watch mode.

2. Underlying Reasons for Weak Loan Demand

A. Macroeconomic and cyclical factors

1. Sluggish economic activity and low private sector confidence. After prolonged sluggishness in construction, manufacturing and trade, businesses are not expanding capacity, so they do not need working capital or term loans. Investment decisions are postponed when the demand outlook is uncertain.
2. Contractionary monetary and regulatory stance. High policy rates in earlier periods, tight margin lending rules, and caps on share-backed loans (e.g., the Rs 12 crore / 50% margin lending ceiling) sharply reduced demand for margin loans, which had earlier been a major driver of credit growth.
3. Depressed real estate and capital market. With land transactions and share prices subdued, demand for real estate loans, home loans and margin loans has fallen. Land has traditionally been the main collateral in Nepal; when its market is dull, both new lending and collateral-backed lending shrink.
4. Weak capital expenditure and remittance-driven consumption. Government capital spending is chronically slow to execute, so contractor and supplier credit demand does not materialise. Remittances are being used for consumption and repayment of old debt rather than for productive investment.
5. Post-COVID and post-earthquake balance sheet stress. Firms and households are still deleveraging — repaying or restructuring old loans instead of taking new ones. Demand for new credit is thus low even when nominal interest rates fall.

B. Borrower-side (demand) constraints

6. Lack of bankable projects and collateral. Most small and medium enterprises (SMEs) cannot meet documentation, collateral and project-viability requirements. The problem is not the interest rate but the absence of a fundable proposal.
7. Low financial literacy and risk aversion. Many potential borrowers, especially in agriculture and rural areas, fear debt, are unaware of subsidised and concessional schemes, or prefer informal sources (moneylenders, cooperatives) despite higher rates.
8. Weak repayment capacity. Low and volatile farm incomes, underemployment and stagnant real wages mean borrowers doubt their ability to service loans, so they self-select out of the market.
9. Crowding-out by subsidised and directed credit. Concessional agriculture loans, subsidised refinance and priority-sector quotas mean part of the demand that would have come to ADBL at market rates is already met at cheaper rates or through other channels.

C. Bank-side and structural factors

10. Risk aversion and rising NPLs. With non-performing loans rising in recent years, ADBL (like other banks) has tightened credit appraisal, raised collateral requirements and become selective. A low base rate does not translate into low effective cost when risk premiums, service charges and insurance are added.
11. Interest rate spread compression and profitability pressure. A low base rate with sticky deposit costs squeezes the spread, discouraging aggressive lending and prompting banks to park funds in risk-free government securities instead.
12. Excess liquidity chasing few borrowers. When the whole banking system is liquid (high CD ratio slack, large unutilised credit lines), competition for the same limited pool of creditworthy borrowers intensifies, and no single bank — including ADBL — can expand its loan book simply by cutting rates.
13. Structural gaps in ADBL's client base. Its traditional rural and agricultural clientele is seasonal, small-ticket and high-cost to serve; the segments with large credit appetite (large industry, infrastructure) are already served by commercial banks with stronger corporate banking capacity.
14. Regulatory and legal bottlenecks. Land acquisition, collateral valuation, foreclosure delays and compliance requirements raise transaction costs and discourage both lenders and borrowers.

3. Strategies the Bank Should Adopt

A. Stimulate demand rather than wait for it

1. Product innovation and customisation. Design seasonal crop loans, agri-value-chain financing, warehouse receipt loans, livestock and cold-chain loans, youth self-employment and startup loans, and women-entrepreneur products with flexible repayment schedules (monthly/quarterly/bullet) matched to cash flows.
2. Concessional and blended schemes. Actively channel government subsidised schemes (e.g., concessional agriculture credit at 5–6%, youth and women entrepreneurship funds) and donor/refinance lines to lower the effective cost for target groups.
3. Bundle credit with non-credit services. Offer credit plus technical assistance, market linkage, insurance and extension services so that a loan becomes a viable project, not just money. This directly addresses the "no bankable project" problem.
4. Group and cluster lending. Use joint liability groups, cooperatives and farmer clusters to substitute for individual collateral and reduce screening costs.

B. Widen and deepen the borrower base

5. Financial literacy and outreach campaigns. Run branch-level camps, mobile banking vans and digital awareness drives in rural and semi-urban areas to convert latent need into effective demand.
6. Sector and geography diversification. Rebalance toward SMEs, tourism, hydropower, remittance-linked enterprise and urban housing while retaining the agricultural core, so that the bank is not dependent on one seasonal segment.
7. Partnerships. Tie up with cooperatives, agri-cooperatives, input suppliers, commodity exchanges and fintechs to reach borrowers at low acquisition cost.

C. Manage risk and cost so that low rates remain profitable

8. Strengthen credit appraisal and monitoring. Use scoring models, cash-flow-based lending, digital KYC and early-warning systems to keep NPLs low; a low base rate is sustainable only with low credit losses.
9. Collateral innovation. Accept warehouse receipts, livestock, group guarantees, project cash flows and movable assets; use credit guarantee schemes to cover collateral gaps.
10. Cost efficiency. Expand digital lending, automate documentation and use branch-light models to cut operating cost per loan, protecting the spread even at low interest rates.
11. Prudent asset-liability management. Avoid over-parking in low-yield government securities; stagger maturities and price deposits competitively so that funds are deployed rather than idled.

D. Policy and institutional measures

12. Advocacy with regulators and government. Push for faster capital expenditure execution, streamlined collateral and foreclosure laws, and continued refinance support — since weak demand is partly a policy-created problem.
13. Targeted marketing and relationship banking. Segment customers, use data analytics to identify credit-ready clients, and offer pre-approved limits to reduce the friction that suppresses demand.
14. Monitor and review. Set branch-wise loan growth and disbursement targets, review them monthly, and reallocate resources to segments showing genuine demand.

4. Conclusion

ADBL's problem is not supply of funds but deficient effective demand for credit, rooted in sluggish economic activity, tight regulation, depressed real estate and capital markets, weak borrower capacity, and the bank's own risk aversion. Cutting the base rate further will not help much on its own. The bank should therefore shift from a supply-push to a demand-creation strategy — innovative and customised products, concessional schemes, group lending, financial literacy, partnerships, and cost-efficient digital delivery — while simultaneously strengthening credit risk management so that low interest rates remain commercially viable. In short, ADBL must create borrowers, not just cheap loans.

Answer (10 marks)

Meaning of Non-Performing Loan (NPL)

A non-performing loan is a loan on which the borrower has failed to pay the principal and/or interest due for a specified period (generally 90 days or more). In such a case, the loan ceases to generate income for the bank and is classified as non-performing. In the Nepali context, NRB classifies loans into Pass, Watchlist (1–3 months overdue), Substandard (3–6 months), Doubtful (6–12 months) and Bad (over 12 months); the last three categories are treated as non-performing.

Major Internal Factors

1. Weak credit appraisal: Loans sanctioned without proper analysis of repayment capacity, cash flow and collateral quality.
2. Poor monitoring and follow-up: Absence of regular supervision, weak early-warning systems and delayed recovery action.
3. Concentration of loans: Heavy exposure to a few borrowers, sectors or related parties (insider lending) increases default risk.
4. Defective documentation and security: Faulty legal papers, overvalued or illiquid collateral weaken recovery.
5. Weak corporate governance: Political interference in lending, lack of independent board oversight and poor internal audit.
6. Untrained staff and aggressive lending targets: Pressure to expand credit volume at the cost of quality.
7. Inadequate loan-loss provisioning and MIS: Poor data systems delay identification of stressed assets.

Major External Factors

1. Economic slowdown and recession: Falling demand and profits reduce borrowers' repayment capacity.
2. Political instability and policy uncertainty: Strikes, bandhs and unstable governments disrupt business activity.
3. Adverse sectoral shocks: Decline in real estate, share market, tourism, remittance inflows or export demand.
4. Natural disasters: Earthquakes, floods and pandemics (e.g., COVID-19) destroy income sources.
5. Regulatory and legal weaknesses: Slow court procedures, weak insolvency law and inadequate enforcement of security.
6. Global factors: Commodity price shocks, exchange-rate volatility and external debt stress.
7. Borrower-specific external causes: Diversion of funds, wilful default and over-borrowing from multiple banks.

Measures for Reduction of NPLs

1. Strengthen credit appraisal: Apply strict lending norms, cash-flow-based assessment and independent credit committees.
2. Effective monitoring and early warning: Periodic review of accounts, stress testing and prompt classification of overdue loans.
3. Diversify portfolio: Avoid sectoral and borrower concentration; set exposure limits as per NRB directives.
4. Robust recovery mechanism: Dedicated recovery cells, restructuring/rescheduling of viable loans, and legal action against wilful defaulters.
5. Improve governance and capacity: Independent boards, strong internal audit, and regular staff training on credit risk.
6. Adequate provisioning and capital: Maintain sufficient loan-loss reserves and capital buffers to absorb shocks.
7. Use of technology: Credit information bureaus, digital scoring and central data sharing to check multiple borrowing.
8. Cooperation with regulators: Follow NRB directives, adopt Basel norms and participate in credit information sharing.

Conclusion

NPLs arise from a mix of internal weaknesses in credit management and external economic and political shocks. A bank that combines sound appraisal, continuous monitoring, portfolio diversification and strong recovery practices, supported by effective regulation, can keep NPLs within the regulatory limit and protect its profitability and stability.

Answer (10 marks)

Introduction

E-commerce (buying and selling of goods and services over the internet) and e-banking (delivery of banking services through electronic channels such as mobile banking, internet banking, ATMs, cards and digital wallets) have expanded rapidly in Nepal after the expansion of mobile internet and the growth of fintech. Both are closely linked to financial inclusion — access to and use of affordable financial services by all sections of society — and to economic development. This answer critically examines their contribution, along with the constraints.

Role in promoting financial inclusion

1. Wider access at lower cost: Mobile banking and digital wallets (eSewa, Khalti, IME Pay, connectIPS) allow people in remote districts to open accounts, transfer money, pay bills and receive remittances without travelling to a bank branch. This reduces the "distance barrier" that kept rural households outside the formal financial system.
2. Branchless banking and agent networks: BFIs use branchless banking and banking correspondents to reach unbanked villages. By mid-2020s, the number of BFIs' branches and branchless outlets exceeds 5,000, and mobile banking users have crossed 20 million — evidence of mass adoption.
3. Cheaper remittance and payment channels: Digital remittance and QR-code payments reduce transaction costs and the dependence on cash. This benefits low-income households and small traders who earlier paid high informal transfer costs.
4. Formal credit and savings for the unbanked: Digital credit scoring, microfinance digitisation and government schemes (e.g., subsidised loans, direct benefit transfer to bank accounts) bring the poor into the formal credit and social-security net.
5. Women and disadvantaged groups: Mobile banking lowers the social and mobility barriers that restrict women's access to branch banking, though the gender digital divide still limits gains.

Role in economic development

1. Growth of MSMEs and jobs: E-commerce platforms (Daraz, SastoDeal, Hamrobazar, Foodmandu) give small producers and retailers a national market, raise sales, and create jobs in logistics, packaging, delivery and digital marketing.
2. Efficient payments and velocity of money: Digital payments speed up transactions, reduce cash-handling costs, improve tax traceability (VAT on digital transactions) and support formalisation of the informal economy.
3. Financial deepening and capital mobilisation: E-banking channels increase deposits, expand credit outreach and lower the cost of financial intermediation, supporting investment and GDP growth.
4. Inclusion of the unbanked into the digital economy: Linking digital wallets to bank accounts and government transfers (social security allowances, remittances) increases household consumption and reduces poverty.
5. Access to global markets: Cross-border e-commerce and digital payment gateways let Nepali handicrafts, tea, pashmina and tourism services reach foreign buyers, earning foreign exchange.

Critical examination (limitations and challenges)

1. Digital divide: Internet penetration and smartphone ownership are far lower in Karnali, Sudurpaschim and among the poor, elderly and women. E-services thus often benefit the already better-off, widening the urban–rural gap.
2. Low digital and financial literacy: Many users cannot operate apps safely, leading to dependence on intermediaries and risk of fraud.
3. Infrastructure constraints: Unreliable electricity, weak internet bandwidth and poor road/ logistics networks raise the cost of e-commerce deliveries outside major cities.
4. Trust, security and cybercrime: Online fraud, phishing, data breaches and weak consumer-protection laws discourage adoption; dispute settlement and refund mechanisms are weak.
5. Regulatory and policy gaps: E-commerce is only partly regulated; taxation of digital platforms, foreign platform dominance (e.g., international marketplaces) and capital outflow are unresolved issues. Nepal Rastra Bank's payment limits and KYC requirements, while necessary, can exclude the undocumented poor.
6. Shallow usage: Many accounts remain dormant or are used only for withdrawals — "inclusion without usage" — so the developmental impact is less than the headline numbers suggest.
7. Dependence on remittances: Much digital payment growth is driven by remittance inflows rather than by domestic productive activity, limiting structural transformation.

Conclusion

E-commerce and e-banking have clearly expanded access to finance and created new market and employment opportunities in Nepal, and they are powerful instruments for financial inclusion and economic development. However, their benefits are unevenly distributed because of the digital divide, weak infrastructure, low literacy and regulatory gaps. For inclusive and sustainable gains, Nepal needs: expansion of broadband and digital infrastructure to rural areas; financial and digital literacy campaigns; stronger consumer protection and cybersecurity laws; a clear legal framework for e-commerce and digital taxation; and interoperability of wallets with bank accounts. With such complementary policies, e-commerce and e-banking can move from being urban-centric conveniences to genuine drivers of inclusive growth.

Constitution of the Audit Committee (Companies Act, 2063, Section 164)

A public company that is listed, or whose paid-up capital meets the prescribed amount, must form an Audit Committee. The provisions are:

Functions, duties and powers

1. Financial reporting: review the annual and periodic financial statements before they go to the Board and the general meeting, and check that they follow accounting standards and the law.

2. Auditors: recommend the appointment, remuneration and removal of the auditor; review audit plans, the audit report and management's replies; follow up on implementation of audit observations.

3. Internal control and risk: assess the adequacy of the internal control system and internal audit; review risk management and the company's compliance with the Act, its rules, the memorandum and articles of association, and regulator directives.

4. Detecting irregularity: examine fraud, irregularities, misuse of assets and weak internal controls, and advise the Board on corrective action.

5. Reporting: submit its findings and recommendations to the Board and report in the annual report on its work.

Powers

• Call for any record, document or information from management and employees.
• Require the auditor, internal auditor or officers to attend its meetings.
• Examine books of account, assets and liabilities.
• Seek outside professional advice at company cost where needed.

Conclusion: the committee gives independent, board-level oversight of reporting, audit and control, and strengthens transparency and accountability in public companies.

Indicative institution

Under Section 2 of the Asset (Money) Laundering Prevention Act, 2064, an indicative institution is a person or body, other than a financial institution, that carries on a business or profession which the Government of Nepal designates by notification in the Nepal Gazette as being at risk of misuse for money laundering or terrorist financing. These are non-financial businesses and professions such as casinos, real estate dealers, dealers in gold and precious stones, auditors, accountants, notaries and lawyers.

Responsibilities under the Act

1. Customer identification (KYC/CDD): identify and verify customers and beneficial owners; no anonymous or fictitious dealings.
2. Record keeping: keep identification and transaction records for the prescribed period (at least five years) and produce them on request.
3. Suspicious transaction reporting: report suspicious transactions to the Financial Information Unit (FIU) promptly.
4. Threshold transaction reporting: report transactions above the limit set by the FIU.
5. Compliance officer: appoint an officer as contact point with the FIU.
6. Enhanced due diligence: apply it to high-risk customers, politically exposed persons and unusual transactions, with ongoing monitoring.
7. Internal policy and training: frame AML/CFT policies, train staff and review compliance.
8. Cooperation and tipping-off: assist the FIU and investigating authorities, and never tip off a customer about a report.
9. Directives: follow the directives of the regulator or FIU; failure attracts the penalties in the Act.