FINANCIAL SECTOR REFORM

BY Rishi Pandit
WHY FINANCIAL SECTOR REFORM??
 Focus to fair & competitive environment, transparency,
financial discipline and governance
 Enhancing contribution of financial system to economy

 Overcoming from existing weaknesses and problems of

the system
WHAT IS GOOD FINANCIAL SYSTEM?
 Financial sector is the backbone or engine of growth of any
economy. It mobilize and allocate the financial resources most
productively and efficiency. Similarly, financial sector mobilize
the fund from surplus sector to deficit sector.
 Financial sector promotes GDP, saving, investment,
employment, productivity and macro economic development.
 FSR focus to stable and competitive environment to BFIs
through the enchasing the efficiency and effectiveness in
service delivery.
 Financial sector includes bank and financial institution,
insurance, capital market and others. FSR focus to maintain
the good corporate governance practice with develop the
public confidence.
HISTORY
 Financial sector reform is the continuous process. It takes the
long period to complete the process of financial sector. FSR in
Nepal has been analyzed in four phases.
 Phase- I (1984-1990)
 Banking sector was opened to foreign investor
(Establishment of joint venchor banks)
 Deregulation of interest rate
 Auction mechanism was introduced for sale of T-bill
 Debenture and bond issued as new financial
instrument
 Bank were allowed to accept current and fixed
deposit on foreign currency
CONTD….
 Phase-II (1991-1999)
 Open and liberal economic policy
 Many joint venture banks, commercial banks,
development banks, finance company, insurance
company were allowed to operate
 Rural development bank were established in five
development region to provide financial service to poor
people
 Insurance act was enacted in 1992 to regulate and
develop insurance business
 Current account convertibility system was introduced
CONTD…
 Phase III (2000-2010)
 Introduce financial sector reform program, 2000 to
make financial system efficient and effective
 Restructuring of NBL and RBB

 Reengineering of NRB

 Enacted and implemented as well as various banking

sector act and regulations.
 i.e. NRB act, 2002

 BAFIA, 2006

 Formulation of monetary policy, 2002

 Open license policy

CONTD…
 Phase IV (2010 to onwards)
 Encourage Merger and Acquisition for financial stability
 Adopted NFRS for uniform accounting system of BFIs
 Financial sector strategy implementation, 2016/17-2020/21
 Risk based supervision has been introduced
 BASEL III implementation
 Capital base of BFIs (8 arba) and insurance company
 Macro prudential policy has been implemented
 Enacted BAFIA, 2073
 Amendment of NRB Act, 2058
 Payment and settlement bylaws, 2015 amended
 Modernization of payment system- promote digital banking
 Establishment of infrastructure development bank
 Introduce go-AML system
AREAS COVERED UNDER FSR
 Reducing governments direct and commercial role

 Enhancing NRB’s capability, roles and

responsibilities
 Reviewing legal framework and formulating
appropriate laws
 Creating environment for fair competition

 Strengthening accounting and auditing system

 Strengthening corporate governance

 Reducing level of non performing assets

 Establishing useful institutions

REDUCING GOVERNMENTS DIRECT AND COMMERCIAL ROLE
 Government has ownership (full/partial) on major
institutions i.e. RBB, NBL, ADBL, EPF, RBS, etc .
Problems:
 Non professional board and weak management

 Lack of professionalism in operation

 Very weak achievement and weak institutional status

 Great risk for the stability of the system

Achievement:
 Clarity in government policy

 Start up of privatization. Case of NBL, ADBL

 International assistance
ENHANCING NRB’S CAPABILITY, ROLES AND
RESPONSIBILITIES
Problems:
 Constrained supervision and control capacity due to role
of NRB as promoter and operator both
 Non existence of strong act and thus no clear cut
provisions relating to NRB’s role, operational autonomy,
accountabilities etc
 Weak institutional capability-Skill availability, IT
infrastructure, human resources etc
Achievement:
 NRB Act 2058- very clear and is of international
standard
 Reengineering of NRB

 Enhanced regulatory and monitoring capacity

REVIEWING LEGAL FRAMEWORK AND
FORMULATING APPROPRIATE LAWS
Problems:
 Non existence of sufficient, integrated, practical and
strong legal frame work
 Existence of multiple acts created supervisory difficulty
(commercial bank act 2034, Agriculture Development
Bank act 2024, NIDC Act 2019, Development Bank Act
2052, Finance companies act 2042)
Achievements:
 NRB Act , Banking and Financial institution ordinance ,
loan recovery Act, Credit Information Center Act,
Electronic Transaction Act, Anti-money laundering act,
credit rating Act, merger and acquisition act etc
 legal base for Asset management company, opening
foreign banks etc
CREATING ENVIRONMENT FOR FAIR COMPETITION
Problems:
 High intermediation cost

 No availability of innovative services and products

 Very weak service level

 Vested interest

 Weak management capability

Achievement:
 Specification of qualifications of directors and CEO

 Provisioning of submitting policies on various

operational areas by BFIs to NRB
 Enhanced foreign ownership up to 75%

 Provision of establishment of foreign bank branches

STRENGTHENING ACCOUNTING AND AUDITING
SYSTEM
Problems:
Low financial transparency due to weak accounting and
auditing system
Achievement:
Completion of long pending audit of government owned
BFIs
Provisions have been implemented like gradual
implementation of accounting and auditing standards,
specification of time for completion of auditing task,
making uniformity in accounting and auditing job etc
STRENGTHENING CORPORATE GOVERNANCE
Problems:
 Poor corporate governance status

Achievements:
 Separate direction on corporate governance by NRB

 Specification of jobs and responsibilities of board, audit

committee and management committee
 Strong control provisions

 Systematic arrangements for various functions

 No credit to parties having financial interest

 No credit to directors and staffs

 Submission of detail of involvement by directors

 Arrangement of professional director in board

REDUCING LEVEL OF NON PERFORMING ASSETS
Problems:
 Alarming level of NPAs due to weak credit management,
no credit analysis, no or low security, misuse of credit,
no recovery actions, unethical lending, no risk
classification, willful default, etc
Achievements:
 Arrangement of submission of credit policies guidelines
by BFIs to NRB
 Arrangement of risk management guideline

 Enhanced risk identification and mitigation capability

ESTABLISHING USEFUL INSTITUTIONS
Problems:
 Lack of required associated institutions

 Lack of specialized institutions

Achievements:
 Establishment of credit rating agency

 Establishment of NBTI

 Establishment of FIU

 Establishment of CDSC

 Existence of small institutions oriented to micro credit