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The Annapurna Express’s recent coverage (June 11 & 15, 2025) outlines Nepal Rastra Bank’s (NRB) paradigm shift toward inclusive policy making alongside pointed critiques of financial sector oligopolies under Governor Biswo Poudel’s stewardship. While these dual initiatives ostensibly represent a break from traditional monetary governance paradigms, their transformative potential remains circumscribed by institutional implementation constraints. The Governor’s grassroots consultations with entrepreneurs signal a welcome democratization of policy formulation, particularly regarding climate-adaptive financing and (small and medium-sized enterprise) SME sector needs. Parallel criticisms of credit concentration among privileged business houses and individuals during parliamentary debates on financial sector reform legislation reveal acute awareness of systemic inequities. However, mere articulation of these concerns proves insufficient. There is a need for technically sophisticated policy instruments, rigorous monitoring mechanisms and enforceable regulatory safeguards. The fundamental challenge confronting NRB transcends rhetorical commitments, residing instead in its institutional capacity to convert participatory inputs and diagnostic critiques into measurable policy outcomes. Without such operational competence, these ostensibly progressive measures risk remaining performative gestures rather than effecting substantive financial sector transformation. The central bank’s ability to institutionalize technical implementation frameworks will ultimately determine whether this reorientation represents genuine reform or merely cosmetic governance adjustments.

Advisory mechanism and institutional redundancy

Governor Poudel’s recruitment of a three-member advisory committee underscores structural inefficiencies within NRB governance. Despite NRB’s existing cadre of internationally trained professionals, reliance on this external back door entrants raises concerns about internal confidence and the potential for political patronage. Advisory bodies often serve symbolic rather than substantive roles, diluting accountability and diverting attention from rigorous and data-driven analysis. The sidelining of internal technical expertise in favor of ceremonial consultations undermines efforts to implement advanced financial modeling and scientific risk assessments. To move forward, NRB must strengthen in-house analytical capacity and deploy modern surveillance technologies, transitioning from a bureaucratic institution to a knowledge-driven central bank.

 Implementation vs. preparation

Governor Poudel’s technocratic background and field engagement are commendable, yet policy effectiveness hinges on implementation. With inflation at 6.05 percent in mid-December 2024 and productive sector lending stagnant at 15.2 percent of total credit, Nepal faces the challenge of balancing price stability with growth imperatives. The NRB's inflation target of 6.5 percent needs to be harmonized with the pressing requirement for funding climate-smart infrastructure and support for SMEs. However, the central bank’s autonomy remains fragile, persistently challenged by fiscal dominance and political interference. Cross-country evidence underscores that monetary policy effectiveness depends on institutional independence, a standard NRB struggles to consistently meet.

 Monetary policy’s developmental role

Monetary policy in Nepal serves a critical dual function: stabilizing the macroeconomy and enabling structural transformation through resource allocation. Yet, its impact is limited by an underdeveloped financial sector and the predominance of informal credit markets and remittance inflows, which distort price signals. Contractual savings institutions such as the Employment Fund, Social Security Fund, and Citizen Investment Trust, including police and army funds, manage significant public savings. But they operate with minimal regulatory oversight. This gap fosters risky lending practices and threatens financial stability. NRB must integrate these entities into a comprehensive regulatory framework, aligning their operations with macroeconomic objectives. Furthermore, NRB should enhance oversight of primary and secondary capital markets, where rooted rent seeking interest groups undermine market integrity. Transparent regulation can bolster SME financing and investor confidence. Public-private credit risk-sharing models, SME financing and fintech platforms offer promising avenues to expand investment opportunities and financial inclusion.

Risks in financial innovation

While securitization offers liquidity and risk diversification, in weak financial systems it can amplify systemic vulnerabilities. Instruments like collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs) often misallocate risk and encourage moral hazard. In Nepal’s nascent capital markets, such products risk heightening financial instability rather than mitigating it. The NRB should enforce risk-retention mandates, strengthen disclosure protocols, and develop sector-specific risk models to ensure financial innovation reinforces rather than undermines systemic resilience.

 Structural deficiencies in financial architecture

Three critical deficiencies weaken Nepal’s financial system. First, inflation measurement relies on outdated commodity baskets, failing to capture actual household expenditures in key sectors. Updating consumption weightings is vital for credible policymaking. Second, credit allocation failures, especially in state-owned banks, lead to mispriced risk and inefficient capital flow, evident in speculative hydropower lending and trade finance manipulation. Implementing risk-based lending and strengthening governance are urgent. Third, financial exclusion persists due to legacy banking practices that marginalize SMEs, pushing them toward informal credit markets. Hybrid credit models and dedicated SME facilities could help bridge this financing gap.

 Curbing NPLs and strengthening risk oversight

Nepal’s escalating non-performing loans (NPLs) underscore systemic vulnerabilities in credit underwriting and risk management. According to the NRB’s Financial Stability Report (2024), the aggregate NPL-to-total-loan ratio surged to 3.86 percent, marking a 3.4 percent year-on-year increase, with total distressed assets reaching Rs 199.66bn. Alarmingly, over 56 percent of these NPLs are classified as “loss” assets, reflecting severe deterioration in asset quality. Sectoral analysis reveals acute stress in construction (7.28 percent), followed by fisheries (6.65 percent), agriculture (6.22 percent), and metal production (6.09 percent). The banking sector’s NPL composition has worsened, with loss-category loans now dominating at 56.66 percent. Despite their limited GDP contribution, loan portfolios remain disproportionately concentrated in consumption and retail sectors, exposing financial institutions to unproductive risk. The absence of granular, sector-specific risk assessments particularly in high-exposure sectors like hydropower heightens systemic fragility. To preempt further instability, the NRB must transition from reactive oversight to predictive risk analytics, implementing rigorous stress-testing frameworks and Likert-scale credit scoring models tailored to individual BFIs and each sector. Current reliance on narrative-based advisory mechanisms, devoid of empirical validation, perpetuates cyclical vulnerabilities. Without institutionalizing data-driven risk analysis and surveillance, Nepal’s financial sector risks replicating crises, necessitating urgent reforms in supervisory methodologies to align credit allocation with sustainable economic priorities.

 Takeaway

The NRB’s recent policy shift toward inclusivity and evidence-based decision-making reflects a theoretically progressive stance, recognizing the need for broader economic and investment equity. However, rooted structural weaknesses such as institutional inefficiencies, outdated metrics, and governance gaps undermine substantive reform, risking purely symbolic change. The disproportionate focus on price stability over equitable growth highlights a misalignment with Nepal’s developmental needs, necessitating integrated strategies prioritizing investment in micro, small, and medium enterprises, rural finance, financial inclusion, and sectoral productivity. Effective implementation hinges on preserving technocratic autonomy, as NRB independence is foundational to credible governance. The upcoming monetary policy will test the NRB’s capacity to convert rhetoric into data-driven action, balancing investment expansion with regulatory rigor against politically connected elite businesses capture. As the NRB transitions from macroeconomic stabilizer to proactive architect of Nepal’s economic future, Governor Poudel’s leadership must be judged by tangible outcomes, policy coherence, execution efficacy, and measurable progress across socioeconomic strata. This demands both analytical sophistication and institutional resilience.