When Relief Meets Responsibility: NRB’s Challenge of Sustaining Financial Stability
Nepal Rastra Bank has considered and introduced restructuring and rescheduling measures to provide relief to businesses that are viable but currently stressed, with the goal of maintaining financial stability. Such facilities are designed to prevent large-scale loan defaults, protect employment and sustain overall economic activity. However, while these measures offer crucial short-term relief, they also carry potential medium to long-term consequences for financial stability, credit discipline and resource allocation.
Dr Neelam Dhungana Timsina, Deputy Governor of Nepal Rastra Bank, has a distinguished career at the central bank spanning 23 years before her appointment to the current role by the government in March 2021. Her five-year tenure is set to conclude in March 2026.
Business 360 recently interviewed Dr Timsina to gain insight into how Nepal Rastra Bank - the nation’s central regulatory and monetary authority - has been managing the recent economic headwinds. This included both navigating the prolonged effects of the global economic slowdown post-Covid 19 pandemic and addressing multiple simultaneous shocks within the domestic economy, and the advice the bank is providing to the government to overcome these challenges. Excerpts:
How would you assess the current status of Nepal’s economy?
Over the past six years, growth performance has shown mixed results. Consistent with global trends, our economy experienced negative growth in FY 2019/20 due to Covid 19. A modest recovery followed in the next two years, but the economy faced a recession in 2022/23 with growth falling to approximately 2%. Key sectors, including manufacturing, construction and wholesale, registered negative growth during this period. Just as recovery was beginning, as evidenced by growth performance in the past two years, an unexpected event occurred on September 8-9 this year which has created an environment of short-term uncertainty. Beyond the tragic loss of life and destruction of public and private property caused by the protests of September 8-9, the fallout will negatively affect this year’s growth and may trigger a deep-rooted impact on private sector sentiment.
On the government front, while public finances show an improvement in revenue collection, rising public debt, now at about 43%–44% of GDP, has constrained fiscal space. Financial-sector and banking conditions are generally stable, with the banking system’s non-performing assets gradually normalising in recent months. Externally, the sustained high level of foreign currency reserves, largely driven by remittance inflows, offers an opportunity to utilise this liquidity for employment-generating activities at a lower cost.
The present government, which came to power following youth-led protests that despite being violent at times clearly reflected a widespread demand for reform and accountability, has a primary mandate to conduct elections and restore political and constitutional normalcy. With comfortably high foreign exchange reserves and expectations of improved governance, confidence is likely to strengthen, empowering the private sector to revive investment and growth momentum. As a result, Nepal is well-positioned to regain its desired economic growth trajectory in the period ahead.
Nepal’s foreign exchange reserves remain high, and banks and financial institutions are flush with liquidity. How can the country effectively utilise these abundant resources at a time when the investment climate is deteriorating?
A high level of foreign currency reserve presents several positive opportunities. It helps maintain the confidence of external creditors, provides a shield against currency risk sentiment, allows both the government and private sector to access funds at low interest rates, and aids in maintaining exchange rate stability even during unexpected import surges. This reserve stock is the main contributor to the increasing liquidity within the banking sector.
However, effectively channelling this liquidity into productive, investment and employment-generating activities requires both entrepreneurship development in the private sector and improved capital expenditure by the government. It is crucial to recognise that monetary policy is merely one pillar of the nation’s overall economic policy framework; fiscal policy is the other essential component. In this context, the government must take the leading role in creating a conducive investment climate to properly utilise the abundant liquidity.
Despite lending rates remaining in the single digits for nearly two years, private sector credit growth has been sluggish and new infrastructure projects have not materialised as anticipated. I believe the time has come to seriously investigate the root causes of these issues - they could stem from legal, operational, policy-level or even behavioural factors that are suppressing the environment for entrepreneurship development. As long as this situation continues, the only use for the foreign currency reserve is for the central bank, as the custodian of foreign exchange reserves, to earn interest from its safer placement, which ultimately does not contribute to domestic growth and employment.
Deposit interest rates are currently at rock bottom. How can the central bank safeguard the interests of depositors in such a scenario?
The central bank primarily safeguards depositors’ interests by maintaining financial stability which assures them of the safety of their deposited amount. Interest rates are dynamic variables and subject to change. In an open economy like ours, market interest rates - including deposit rates - are the outcome of numerous economic factors. Globally, central banks aim to maintain positive real interest rates in the long run, particularly when economic growth is at full employment and inflation is aligned with its target level. However, when a central bank identifies room to be accommodative with inflation well below the target and under-performing growth, it is global practice to lower interest rates to support growth, even if this temporarily results in a negative real interest rate for depositors.
Looking at Nepal’s inflation in recent months, the year-on-year inflation for the first two months of the current fiscal year has remained well below 2%, with food inflation being negative in both months. Under the current monetary policy, households are receiving a minimum of 2.75% on savings deposits, which is comfortably above the recent inflation rate of below 2%. Therefore, we remain vigilant regarding the overall economy and our role will be to maintain positive real interest rates in the long run while actively seeking opportunities to support growth without compromising our core mandate of maintaining external, financial and price stability.
Nepal Rastra Bank reduced the cash withdrawal limit from ATMs recently signalling a shift towards digital transactions. Do you foresee digital payments becoming mandatory in the future to curb the informal economy?
Digital payments inherently create a transaction trail and promote transparency. This makes it significantly harder for businesses and individuals to evade taxes or engage in illicit financial activities, practices that are hallmarks of the informal sector. While making digital payments fully mandatory for all transactions does not seem quite possible or practical in the very near future, and has not been widely adopted by most countries, this reluctance is due to concerns about financial inclusion, technological barriers (especially in rural areas), digital financial literacy, privacy and the level of acceptance. Instead of an outright mandate, this should be a gradual development involving measures like setting lower cash limits, incentivising digital payments or establishing digital-only options as the primary method for essential services and government payments. This approach will increase digital payment adoption without mandating it across the board. Continuous collaborative efforts are necessary to expedite the process of curbing cash transactions and the informal economy.
How can NRB, in collaboration with stakeholders, enhance preparedness for wider digital payment adoption and ensure robust data security?
NRB has actively promoted the adoption of digital payments by utilising legal and regulatory frameworks, encouraging the establishment of payment infrastructure, facilitating regulator-stakeholder interactions, and coordinating with government agencies. The National Payment Board itself is composed of multiple stakeholders who continuously discuss policy measures to ensure a safer and more robust payment ecosystem.
We have been consistently formulating necessary policies and issuing frameworks to ensure safer and smoother systems. I am confident that the central bank will continue to advance digital payment adoption through improvements in payment infrastructure, reforms in legal and regulatory frameworks, increasing use cases, and promoting innovation via collaboration among stakeholders. Furthermore, NRB will collaborate with stakeholders for the implementation of robust data security standards, fraud risk management frameworks, and initiatives for awareness and capacity building.
As digital payments have surged in recent years, has the central bank identified any gaps in the regulation and supervision of Payment System Operators and Payment Service Providers?
NRB, as the overseer of payment systems, continuously monitors developments within this ecosystem. We promptly issue necessary policies, frameworks and circulars to address any emerging gaps. I currently believe that the full implementation of the National Payment Switch (NPS), which aims to promote interoperability and ensure a robust settlement mechanism, has yet to be achieved. To move this forward, NRB has already released a consultative document outlining the framework for the NPS. We will engage in discussions with stakeholders to finalise and implement it in the days to come.
Given the recent discovery of large cash stashes in political leaders’ homes following the Gen Z protests, and the central bank’s flagging of Politically Exposed Persons in money laundering prevention supervision, there is a renewed debate on demonetisation to combat black money and corruption. In the context of India’s widely criticised demonetisation drive, what are the key lessons Nepal can learn, and do you believe demonetisation would be an effective solution in Nepal’s current context?
As you mentioned, I have also heard people advocating for the demonetisation of Rs 500 and Rs 1,000 denomination Nepali rupees to seize funds acquired from illegal sources, including corruption and tax evasion. These calls have grown louder since a similar move by the Indian government in 2016. However, the outcome of India’s demonetisation regarding the seizure of illicit money did not appear to be fully effective, as the Reserve Bank of India reported that about 99% of the demonetised INR 500 and INR 1,000 notes returned to the banking system. This suggests that illicit funds in the Indian context managed to find various channels to be reported as legally owned money. Nonetheless, it did result in the positive, though unintended, outcomes of boosting tax compliance behaviour and accelerating the adoption of digital payments among the populace.
Conversely, demonetisation in India was widely reported to have caused major disruption to small businesses, informal workers and consumption behaviour, inflicting unintended economic pain across various sectors. Furthermore, India was said to have experienced serious liquidity constraints following the announcement. A significant amount of people’s time was consumed in surrendering the old currency, which had negative consequences for economic growth. Given that Nepali society exhibits closely similar behaviour to India’s, I personally doubt whether demonetisation would achieve the desirable outcome in Nepal either. However, the decision to demonetise is a political one and the NRB’s role in such a decision is purely suggestive.
Should it be considered, what conditions are needed for a successful demonetisation initiative?
If the objective of demonetisation is to seize illicit money, I believe sufficient time must be given for people to surrender the currency which is crucial to prevent panic among the general public and genuine citizens. Doing so cultivates an environment of public trust in the government concerning this initiative. Since saving and credit cooperatives are less regulated, they could become a highly favourable channel for depositing illicit money into the banking system. Therefore, the cash held in the vaults of such cooperatives is expected to increase surprisingly following a demonetisation announcement. To prevent this, the cash held in the vaults of cooperatives would need to be deposited into the banking system on the very day of the demonetisation announcement and within a specified timeframe, with no further such cash deposits permitted afterwards. Finally, a proof document would need to be submitted to banks for any cash deposit exceeding a threshold amount in a particular account.
In addition to these measures, the government must demonstrate a strong commitment to the initiative. NRB should ensure an adequate supply of new currency to effectively replace the demonetised notes, and banks and financial institutions should facilitate smooth, quick and hassle-free deposit services for customers, all while uncompromisingly collecting information on the source for large cash deposits.
However, a fundamental question remains: Do we truly need to undertake demonetisation? If the answer is yes, then how can we achieve the desired outcome that India failed to attain in its 2016 action?
What progress has been made toward introducing a Central Bank Digital Currency in Nepal and how do you envision the CBDC transforming the country’s existing banking landscape?
Several countries, currency unions and central banks have recently accelerated their research and development efforts concerning Central Bank Digital Currencies (CBDCs). Nepal Rastra Bank has likewise conducted its own study on CBDC, culminating in the publication of a concept paper titled ‘Central Bank Digital Currency: Identifying Appropriate Policy Goals and Design for Nepal’ on its website for public consultation in Shrawan 2079 (August 2022). Based on the findings of this report, NRB initiated focused activities for CBDC research and development in Nepal.
NRB has integrated CBDC-related activities and plans into its monetary policies for the fiscal years 2078/79, 2080/81, and 2081/2082. CBDC is also included in the NRB’s 4th Strategic Plan, with the specific goal of piloting a CBDC by 2026. A dedicated division has been established to advance research and development efforts, which have included several studies and the creation of a CBDC Base Prototype Version 0.1.0. The central bank is continuing these activities, maintaining continuous engagement with national and international stakeholders to formulate the necessary legal and regulatory framework for CBDC introduction.
I believe CBDC has the potential to introduce disruptive innovation to Nepal’s banking landscape. A key opportunity is to develop the CBDC as Digital Public Infrastructure (DPI) for the Nepali financial system. A CBDC can alleviate several interbank payment and settlement pain points by reducing payment and settlement risks and by offering a platform that operates 24/7 to facilitate interbank transactions. The CBDC can also serve as a platform for a secure and efficient interbank money market. Further, it can enable the development of more innovative financial products and services. Over the long term, given its broader applicability, CBDC has the capacity to transform the entire payment and financial ecosystem, making it more resilient, secure and dynamic.
The financial sector, particularly the banking industry, is currently grappling with recovery challenges and a rising trend of Non-Performing Loans. Your thoughts.
The central bank is fully aware of the recent stress in the banking sector, as reflected in the growing trend of Non-Performing Loans (NPLs) and sluggish credit recovery. Nepal’s financial sector, particularly its banking industry, is currently grappling with challenges stemming from a rising volume of NPLs and weakening credit recovery. As of Ashadh-end 2082 (mid-July 2025), the NPL ratio for banks and financial institutions stands at 4.62%, which is down from 5.24% in the previous quarter but up significantly from 3.86% a year earlier and 3.02% the year before that. This rise in NPLs can be attributed to a combination of factors like post-pandemic economic pressures, weak private sector performance, natural calamities, project delays due to external factors, and, in certain cases, disruptions caused by interest groups.
The increase in NPLs poses a clear risk to financial stability, profitability and credit flow within the economy. Given the central bank’s mandate to maintain stability and ensure the soundness of the financial system, Nepal Rastra Bank is committed to adopting a comprehensive, multi-pronged approach to tackle this issue. Addressing this challenge requires a combined strategy encompassing policy, supervision and structural reforms. The central bank aims to preserve asset quality through a blend of strengthened regulation, improved risk management, and governance reforms, ensuring the banking sector remains resilient, efficient and supportive of sustainable economic growth. Some of the strategic interventions that have been, and could be, implemented are:
Strengthening Credit Risk Management: We will strengthen regulatory oversight by enforcing stricter compliance with NRB’s directives, mandating robust credit risk assessment and stress testing, promoting data-driven early warning systems, and conducting targeted supervision of high-risk loan portfolios. The Monetary Policy for FY 2025–26 (Point 76) also necessitates a review of existing loan classification and provisioning practices to ensure they align with evolving risk dynamics.
Enhancing Recovery and Restructuring Mechanisms: This involves implementing transparent, time-bound restructuring for viable borrowers, enhancing loan write-off and recovery mechanisms, supporting in-house recovery units, and strengthening collaboration with the Credit Information Bureau to improve borrower credit tracking and accountability. NRB has already issued multiple circulars (such as Circular 2, 2082 to facilitate housing developers, and Circular 6, 2082 to facilitate borrowers affected by the Gen Z protest) to expedite restructuring measures aimed at supporting borrowers facing economic difficulties and natural calamities.
Supervisory and Regulatory Measures: NRB is currently implementing risk-based supervision with close monitoring of asset quality trends and regularly conducting portfolio reviews to manage concentration risk. The Directive on Single Obligor Limit is already in place to prevent concentration risk. Going forward, key steps include establishing an Early Intervention Framework for timely corrective actions and promoting the adoption of IFRS 9 and Expected Credit Loss (ECL) methodologies for more forward-looking provisioning practices. NRB has issued clear guidelines mandating the implementation of the ECL model under Nepal Financial Reporting Standards (NFRS) 9.
Strengthening Inter-agency Coordination: This is an equally crucial element, requiring collaboration with the Judiciary, Ministry of Finance, and Debt Recovery Tribunal to accelerate loan recoveries. It also involves reviewing key financial laws (BAFIA, Secured Transaction Act, 2063) to enhance collateral enforcement and establishing a Central Recovery Coordination Mechanism to address systemic challenges.
These initiatives, taken together, will reinforce financial discipline, support credit recovery and preserve the overall health of Nepal’s financial system. In addition, strengthening offsite monitoring to track progress and quarterly updates, and the incorporation of NPL indicators into the Macro-prudential Supervision Framework, will be vital for effective NPL management moving forward.
NRB is considering restructuring and rescheduling facilities for borrowers. What potential consequences do you foresee, given that the economy has faced repeated shocks?
Nepal’s economy has recently endured a series of shocks, including the Covid 19 pandemic, natural calamities (earthquake, floods and landslides), protests leading to physical destruction, global commodity price volatility, an uncertain liquidity situation, and slowdowns in key sectors such as construction, retail and wholesale trade, real estate and tourism. These repeated disruptions have collectively impaired borrowers’ repayment capacity and significantly contributed to the recent rise in Non-Performing Loans (NPLs).
In response, Nepal Rastra Bank has considered and introduced restructuring and rescheduling measures to provide relief to businesses that are viable but currently stressed, with the goal of maintaining financial stability. Such facilities are designed to prevent large-scale loan defaults, protect employment and sustain overall economic activity. However, while these measures offer crucial short-term relief, they also carry potential medium- to long-term consequences for financial stability, credit discipline and resource allocation.
The Potential Consequences can be summarised as follows:
Positive and Stabilising Effects: Loan restructuring provides short-term relief by preventing immediate defaults and easing pressure on banks, which allows viable businesses to continue operating. It also helps stabilise the financial system by cushioning the broader impact of economic shocks and maintaining market confidence.
Potential Negative Consequences:
Risk of Ever-greening and Asset Quality Deterioration: Restructuring can be misused to conceal the true asset quality, leading to NPLs being understated.
Weakening of Credit Discipline: Excessive or overly lenient restructuring can foster moral hazard, allowing defaulters to exploit the system and ultimately weakening the overall repayment culture.
Increased Long-Term Credit Risk: Postponing repayment obligations without thorough risk assessment may merely delay eventual defaults, resulting in larger losses for banks later on.
Capital Adequacy and Profitability Pressure: If restructured loans eventually default, banks may face increased provisioning needs, impacting profitability and capital. Moreover, prolonged forbearance could threaten the solvency of weaker institutions.
Supervisory and Transparency Challenges: Excessive restructuring can undermine financial transparency, making it difficult for supervisors to distinguish genuinely viable loans from deferred losses.
Regarding mitigation measures for these consequences, NRB is cautious, striving to maintain prudential soundness while offering relief. This is achieved by enforcing strict eligibility criteria, limiting restructuring only to borrowers with proven viability and temporary distress, supported by detailed cash flow assessments. In these cases, borrowers are required to settle at least a certain percentage of interest dues to become eligible for the restructure. Banks are mandated to disclose restructured loans transparently and treat such measures as time-bound exceptions rather than routine practices. Furthermore, banks must maintain adequate provisioning and conduct post-restructuring reviews to accurately reflect the actual risk, complemented by enhanced supervisory monitoring using early warning indicators.
The establishment of an Asset Management Company is under consideration. Does the central bank envision a clear and undisputed operational modality in the proposed Bill?
The FY 2025–26 Budget (Point 323) mandates the implementation of the Second Stage Financial Sector Reform Strategy, which includes the crucial step of establishing an Asset Management Company (AMC). This company’s purpose is to manage the Non-Performing Loans and non-banking assets (NBAs) held by banks and financial institutions. Furthermore, the Monetary Policy 2025–26 (Point 97) specifies that a draft law and associated regulations will be prepared and submitted to the government for the AMC’s formal establishment.
The AMC’s intended role is to acquire the NPAs and NBAs from BFIs based on mutually agreed terms, thereby facilitating debt recovery, improving the health of institutional balance sheets, and enabling banks to concentrate on their core banking operations. While the operational framework of the AMC is still in the final stages, the central bank is committed to ensuring that its eventual structure and functioning will be clear, transparent and unambiguous.
What impact would Nepal’s inclusion in the FATF grey list have on the economy?
Following the adoption of its Mutual Evaluation Report (MER) at the Asia/Pacific Group on Money Laundering (APG)’s 2023 Annual Meeting, Nepal was placed under observation for one year. Subsequently, in February 2025, Nepal was added to the FATF’s (Financial Action Task Force) Jurisdictions under Increased Monitoring list (Grey List) due to strategic deficiencies in the country’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT regime). While the FATF itself does not recommend sanctions or enhanced due diligence as a direct result of grey listing, other countries may perceive the listing as an increase in risk when conducting transactions with Nepal. This heightened risk perception could lead to higher costs and longer processing times for transactions related to remittances and trade finance. The negative perception of weak AML/CFT controls could also deter foreign investors. For instance, a study by a Pakistani think-tank estimated that Pakistan lost $3.6 billion in Foreign Direct Investment between 2008 and 2019 because of its grey listing. Furthermore, grey listing may restrict access to international financial assistance as it can erode the trust and confidence of donors in the country’s governance structure. A prolonged grey listing could negatively affect the country’s economic growth and stability. Hence, exiting the list as soon as possible is paramount.
Nepal has made a political commitment to strengthen its AML/CFT regime. Based on the MER feedback, Nepal amended several Acts in April 2024, with major changes being made to the Assets (Money) Laundering Prevention Act (ALPA). The country has since received upgrades in the ratings of technical compliance in nine FATF recommendations previously rated as Non-compliant or Partially Compliant. Nepal aims to exit the grey list within two years and has prepared a National Strategy and Action Plan, along with detailed action items and prompt corrective measures for implementation. Nepal has already initiated the third National Risk Assessment (NRA) and has formed subcommittees to complete the assessment. Furthermore, Nepal has demonstrated improvement in addressing deficiencies in its Targeted Financial Sanctions (TFS) regime for Terrorist Financing (TF) and Proliferation Financing (PF).
At Nepal Rastra Bank, we are strengthening the risk-based approach in our AML/CFT supervision. We are enhancing the Money Laundering Prevention Supervision Division (MLPSD) through capacity building programmes and are planning to further expand the division. We also intend to support and assist the National Cooperative Regulatory Authority (NCRA) and the Department of Cooperative (DeoC) in implementing AML/CFT supervision in high-risk cooperatives. Nepal is communicating regularly with the APG/ICRG (Asia Pacific Group/International Cooperation Review Group) Joint Group and providing updates on the country’s progress.
As your tenure is set to conclude in March 2026, could you some reflections on your 28 years of service at the central bank?
At the conclusion of this conversation, I would like to convey a brief message to all the readers of Business 360 magazine. Maintaining financial stability and promoting the overall macroeconomic well-being of our country requires our collaborative efforts. This is not the sole responsibility of Nepal Rastra Bank or the Government of Nepal alone. Every individual and institution involved in the financial sector has a crucial role to play. We must all work together, with a sense of accountability and cooperation, to ensure that our financial system remains sound, resilient and supportive of sustainable economic development. I truly believe I have spent my golden times at Nepal Rastra Bank. I have had the distinct opportunity to serve and enhance capacity within this esteemed institution and I have given my time, skills and expertise in return. In fact, I feel deeply honoured to be a part of this institution. Right now, I have not given any thought to retirement plans. However, I might contribute in the domain of my expertise and experience in the future.
''Demonetisation in India was widely reported to have caused major disruption to small businesses, informal workers and consumption behaviour, inflicting unintended economic pain across various sectors. Furthermore, India was said to have experienced serious liquidity constraints following the announcement. A significant amount of people’s time was consumed in surrendering the old currency, which had negative consequences for economic growth. Given that Nepali society exhibits closely similar behaviour to India’s, I personally doubt whether demonetisation would achieve the desirable outcome in Nepal either. However, the decision to demonetise is a political one and the NRB’s role in such a decision is purely suggestive.''
