What Banks Need to Become: Part II

This is a sequel to an op ed I did in 2017. Back then, I argued that banks needed to become digitally oriented institutions that serve customers with greater efficiency. Eight years on, much has changed. But Nepali banks have not changed nearly enough. We are still designing for yesterday’s problems, still mistaking compliance for strategy and risk avoidance for prudence. 

Now is the time for a reset.  

Deeply Digital 

It is encouraging to note that Nepal’s digital payment system has evolved significantly since the pandemic and is now world class. But today, ‘digital’ is table stakes. What matters now is how deeply and seamlessly banks integrate into the lives and transactions of their customers.

While traditional banks are still redesigning their mobile apps, non-bank fintech entities are already reshaping the market. Nepal does not yet have licensed digital banks, but once regulatory space opens up, as it will, banks that have not reimagined themselves as digital platforms will lose relevance rapidly. Banks must embrace open banking, fintech partnerships, and platforms that allow continuous innovations on top of banking rails.  

Ecosystem and Inclusion 

Nepali banks continue to rely heavily on collateralised lending and regulatory arbitrage while productive capital remains inaccessible to SMEs, startups, and underserved sectors. In recent years, we have seen how patient, risk-tolerant private equity can unlock new possibilities. Banks should acknowledge this shift and discover ways of working alongside, in order to improve their own portfolio risk. They must participate effectively in building ecosystems for entrepreneurship and value creation.  

Financial inclusion is often equated to opening bank accounts of previously unbanked. But have we addressed structural exclusion with products that are contextually relevant and viable? It is time banks started catering to the informal economy in a more meaningful way. Today’s SMEs are tomorrow’s large borrowers. Banks must, as such, understand SMEs better. This means designing products and services that work for businesses with fluctuating cash flows, thin margins and informal practices.  

From Collateral to Cash Flow 

One of the key bottlenecks in allocation of loans today is banks’ obsession with secondary collateral in the form of real estate. In a country where most enterprises are asset-poor but ambition-rich, collateral-based lending either creates distortions or leaves a large chunk of businesses out of the equation.  

Banks are in the business of managing risks, not avoiding them. Predominantly collateral based lending is risk avoidance disguised as prudence. The current episode of rising non-banking assets is a clear lesson. A shift toward cash flow-based lending is overdue. It is now practical and possible to derive creditworthiness from digital records, tax filings, mobile money flows, payment data, etc. 

This shift however requires a change in mindset, tools, and incentives from both bankers and regulators.  

Capable Board 

We have seen some improvement in the structure of bank boards through inclusion of independent and female directors. However, traditional boardroom experience is no longer sufficient. Banks must improve overall capability of the boards to comprehend complexity and guide institutions in volatile conditions. Banks need people on their boards who understand digital ecosystems, venture dynamics, AI, cyber risk, sustainability and ESG aspects, among others.  

The practice of key shareholders retaining control over bank boards through appointed proxies, who do not have knowledge or skills (which are different from academic degrees) for effective oversight and guidance to the management, must discontinue.   

Further Consolidation and Scale 

Here is a hard pill to swallow: the illusion of banking strength in Nepal has often rested on regulatory forbearance. Is this resilience or fragility masked by excellent branding? 

Nepal experimented with a liberal licensing regime for decades. The result? Over 20 Class A banks that look remarkably alike. Relative to the size of our economy, the number of banks should perhaps be 10 or less. More importantly, they must be stronger and more capable. We need banks that can invest in innovation, withstand economic shocks, and scale responsibly to meet future demands. Consolidation done strategically can and should be a lever for strength, not just size. But this requires courage, vision, and clarity from bankers and regulators alike. 

Nepal’s banking sector now has a long enough history and rich enough experience to think bigger. In a digital global context, growth can be achieved also by scaling expertise beyond national boundaries. Banks can learn from the hospitality sector: Soaltee Hotel has begun exporting technical and management services to foreign countries. Nepal Clearing House Limited has clearly built strong capacities in payment processing. Nepali banks are in a position to export technical services like credit models, compliance systems, training programmes, etc to frontier markets. 

HR Quality  

We have seen a worrying decline in the quality and depth of human capital across the banking industry. Bankers today are fluent in collateral registration, but uncomfortable with credit risk assessment. Product innovation is rare. Regulatory compliance dominates internal conversations. 

It is possible that the central bank’s oversight of HR policy of each bank has resulted in standardisation of people management processes and governance to the point that most banks look and feel alike in what they deliver? Regulation should ensure soundness, not sameness. Rebuilding capacity requires empowered leadership and differentiated cultures. 

Misguided and retrospective legal cases against bankers are becoming more frequent, often years after credit decisions were made in good faith with proper process. This breeds fear. When professionals worry about being prosecuted for judgement calls, they default to inaction. Criminal liability should be pursued for malafide actions but not for legitimate participation in a loan underwriting process. We need legal protection for professional decisions made under documented policies and systems of the day. If we want capable bankers who can make tough calls, we must stop turning them into scapegoats for systemic shortcomings. 

A banking job is increasingly used as a stepping stone by many young professionals. It offers just enough prestige to secure visas, but rarely enough incentive to stay. When top talents exit early, institutional memory and leadership pipeline weakens. 

If we don’t fix the people problem and the policies that created it, every other progress will remain superficial. 

The Choices 

The banking industry in Nepal stands at a fork. One path leads to a future where banks are central to building inclusive prosperity. The other leads to managed decline in trust and returns. To walk the first path, banks must be in a position to ask ‘what do our customers need and how can we better serve them?’  instead of ‘what do regulators allow?’