'To attract FDI, it is important to establish investor-friendly policies, offer tax incentives, and streamline regulatory frameworks'

Neelesh Man Singh Pradhan is the founding CEO of Nepal Clearing House Ltd (NCHL), institutionalising the national clearing house, which is one of the flagship projects of the country’s payments market infrastructure. He has over 20 years of proven experience in the area of strategy development and implementation, public company management with profit and loss responsibility, financial management, banking and financial technology, project management, and IT service management in various jurisdictions.

Pradhan has assisted the central bank, government and semi-government institutions, capital market stakeholders, large fund managers, and other large institutions in an advisory role to adopt digital payments, including the development of the regulatory frameworks.

In this issue of Business 360, we spoke to Pradhan about the adoption of technology in the country’s financial sector and also regarding the cross-border digital payment agreement signed between Nepal and India recently. Excerpts:

How do you view the development of the IT sector in the country? How have we performed in technology adoption?

I view the development of the IT sector in our country, Nepal, as extremely promising. It holds a significant position as one of the largest contributing service sectors with immense potential to contribute to our national economy through investment, export and employment generation. The government has recognised this potential and included IT services, IT-Enabled Services (ITES), and Business Process Outsourcing (BPO) as two of the top five priority export potential services.

We have established an environment that encourages investment by allowing up to 100% foreign direct investment (FDI) in the IT services sector. Additionally, there are corporate tax waivers for companies employing a certain number of employees, further incentivising growth in the sector. The numbers speak for themselves, as evidenced by the data from Nepal Rastra Bank, which shows an impressive increase of over 17% in the contribution of IT services to our total exports in fiscal year 2020-21.

What excites me the most about the IT sector in Nepal is the abundance of tech-savvy youths and the large pool of engineering and IT graduates. They are the driving force behind a promising future for the IT industry and technocrats in our country. Their skills, knowledge, and innovative ideas are shaping the industry and propelling it forward.

The Digital Nepal Framework is a critical policy direction that aims to drive Nepal towards digital services, with the IT sector as its foundation. We have already witnessed positive changes resulting from this framework. The adoption and usage of technology and digital services by various government entities, regulators, corporate houses and the general public have been steadily increasing.

Over the past three to four years, we have observed a remarkable surge in digital transactions, particularly in the realm of payments. This upward trend has been further accelerated by the Covid 19 pandemic which has highlighted the importance of digital solutions. However, I must acknowledge that the level of technology adoption is not entirely satisfactory. We still face challenges such as the integration of technology with service delivery and business processes as well as the need to address the widespread digital disconnection beyond Kathmandu. Overall, while we have made notable strides in the IT sector and technology adoption, there is still work to be done. We must continue to focus on integrating technology across various sectors and addressing the barriers to widespread adoption to fully harness its potential for the benefit of our nation and its people.

Could you specify what stands in the way of exploiting the IT sector’s true potential for Nepal?

When it comes to exploiting the true potential of the IT sector in Nepal, there are a few significant factors that stand in our way. Firstly, it’s essential to consider the global landscape of the IT industry. Gartner, a renowned research and advisory firm, has projected the market size of the global IT industry to be around $1.36 trillion for 2023 (growth of 9.1% over 2022) and has forecasted 10.2% growth in 2024. IT services are considered highly lucrative and are seen as a key industry by many countries worldwide. As a result, investments in the IT sector tend to flow towards countries with low-cost skilled manpower and a favourable business environment in terms of investment mobilisation and returns.

In Nepal, the estimated size of the ICT market is around Rs 80 billion (approximately $0.6 billion). Despite having significant potential, we have yet to fully benefit from the IT sector. One of the challenges lies in the legal framework surrounding IT services, which has been primarily formulated in line with traditional sectors. This lack of flexibility hampers the ability to cater to new-generation businesses. Technology-based companies require a business environment that provides flexibility for starting and operating their ventures. Additionally, many of the current laws in Nepal do not even recognise companies or resources such as freelancers working in the IT sector. Another crucial challenge is the scarcity of skilled IT resources and the difficulty in retaining them. Skilled IT professionals today have the capability to work from anywhere in the world for any company. However, Nepal faces a shortage of skilled resources and struggles to retain them within the country. This poses a significant hurdle for the growth of the IT sector.

Furthermore, from a usage perspective, the availability and quality of digital connectivity beyond Kathmandu present challenges for the sector. To fully exploit the true potential of the IT sector it is vital to address these issues and improve the quality and accessibility of digital connectivity across the country.

In light of these challenges, it is crucial for policymakers to consider treating IT companies as true global entities. This means formulating policies that recognise and support the global nature of IT service companies, including startups and freelancers. Additionally, a focus on IT skill-based education can help increase the supply of skilled resources in the long run. Lastly, improving the quality of connectivity infrastructure is paramount to enable the IT sector to thrive and reach its true potential in Nepal.

If you had to point to one policy change/challenge that could set us in the right direction, what would it be?

If I had to point to one policy change or challenge that could set Nepal in the right direction for the IT sector, it would be the formulation of an implementation strategy for the Digital Nepal Framework. This strategy should focus on addressing outdated laws that pertain to the digital economy, making it easier to start and exit a company. By modernising the legal framework, we can create a more conducive environment for IT businesses to thrive.

Additionally, this strategy should prioritise the development of skilled manpower within the country. By investing in IT education and training programmes, we can nurture a talented pool of professionals who can contribute to the growth of the sector. This will not only create opportunities for the local workforce but also make Nepal an attractive destination for both domestic and foreign investments in the IT sector.

Overall, by formulating and implementing an effective strategy for the Digital Nepal Framework, we can overcome policy barriers and create an environment that fosters innovation, attracts investments, and positions Nepal on the right path for IT sector development.

Do you think Nepal is prepared to become a digital economy in the true sense? What are the implications if we fail to create robust mechanisms on time?

I believe Nepal has the potential to truly become a digital economy, but it is essential that we take concerted efforts and act in a timely manner. Failing to create robust mechanisms for digital transformation could have significant implications for our country. First and foremost, not embracing digital transformation would mean missing out on opportunities for economic growth. In today’s interconnected world, digital technologies play a crucial role in driving innovation, productivity, and competitiveness. By failing to seize these opportunities, Nepal could lag behind other economies and face challenges in keeping up with the rapidly evolving global landscape.

Moreover, without robust mechanisms for digital transformation, we risk increasing disparities within our society. Access to digital technologies and digital literacy are vital for inclusive growth and ensuring that all segments of the population can benefit from the digital economy. If we fail to create an environment that fosters digital inclusion, there is a risk of widening the digital divide, leaving certain groups and regions behind. To successfully transition into a digital economy, we must invest in developing a strong digital infrastructure. This includes reliable internet connectivity, secure digital platforms, and advanced technological capabilities. Additionally, promoting digital literacy among the population is crucial to ensure that individuals have the skills and knowledge to participate in the digital economy.

Furthermore, a key aspect is the supply of skilled manpower that can drive the digital economy forward. We need to invest in education and training programmes that equip our workforce with the necessary digital skills and knowledge. This will not only support the growth of the IT sector but also enhance our overall competitiveness in the global digital landscape. Lastly, creating a secure and trusted digital ecosystem is essential. This requires implementing robust cybersecurity measures, data protection policies, and privacy regulations. By fostering trust in the digital space, we can encourage the general public to embrace digital means and utilise digital services confidently.

In conclusion, it is crucial for Nepal to prioritise digital transformation and develop robust mechanisms to support it. By doing so, we can harness the full potential of the digital economy, drive economic growth, bridge societal disparities, and position ourselves as a competitive player in the global digital landscape.

How does the national budget or the government agenda reflect a commitment to DigitALL Nepal?

In the FY 2080/81 budget, the government has demonstrated its commitment to DigitALL Nepal by prioritising the digital economy. The allocation of resources for the development of digital infrastructure, expansion of internet connectivity and promotion of digital literacy programmes reflect the government’s agenda to foster a digitally empowered nation.

In addition to policy-level interventions, it is crucial for the government to lead by example and become a significant adopter of digital services. In recent years, the government has made remarkable progress in fully adopting digital payments. With over 90% of its expenses being digital, directly deposited into the bank accounts of beneficiaries, the government has set a strong precedent in the adoption of digital payments. This covers various domains, including Government-to-Business (G2B), Government-to-Person (G2P), and Government-to-Government (G2G) transactions. Furthermore, close to 30% of revenue collection has also transitioned to digital means. The ongoing infrastructure implementation for the National Payment Switch (NPS) further reinforces the government’s commitment to building shared infrastructure for retail payments, including cards.

However, it is important for the government to consider the much-needed policy changes and facilitation to fully embrace the digital economy. By doing so, the government can send a strong message to the world that Nepal is open for business in the IT sector and is fully committed to large-scale adoption of digital transformation. This includes creating an enabling environment for IT businesses, providing necessary support for startups and innovation, and fostering a digitally inclusive society. Such policy changes and facilitation will position Nepal as an attractive destination for investments in the IT sector and help accelerate the journey towards a DigitALL Nepal.

How do you view Nepal-India cross-border digital payment agreement? Does Nepal Rastra Bank have the capacity to facilitate the complexities and the associated risks?

I view the Nepal-India cross-border digital payment agreement as a significant step towards enhancing financial transactions between our two countries. This agreement aims to establish seamless connectivity for retail financial transactions, facilitating fund transfers and merchant payments for the general public. The integration of real-time retail payment systems of Nepal (RPS/NPI) and India (UPI) will enable real-time cross-border payments, fostering greater convenience and efficiency.

Nepal Rastra Bank (NRB) and the Reserve Bank of India (RBI) as the central regulatory authorities play a crucial role in regulating, overseeing, and facilitating these cross-border digital payments. Given that this integration will be the first of its kind in the region, it is essential to approach its implementation in a phased and controlled manner to mitigate possible risks. The collaboration between NRB, NCHL, RBI and NPCI is vital for implementing the necessary systems and controls required for enabling cross-border payments between Nepal and India.

Considering that the UPI system is one of the most scalable and advanced payment infrastructure, the integration is expected to support Nepal in enhancing its own payment systems. While challenges may exist in this initiative, close collaboration and coordination between the respective authorities will help overcome these challenges and ensure the successful implementation of the cross-border digital payment agreement. It is important to emphasise that Nepal Rastra Bank, in partnership with NCHL and in collaboration with the Reserve Bank of India and NPCI, is actively working towards implementing the required systems and controls. By doing so, we aim to facilitate seamless cross-border payments, reduce transactional complexities, and foster greater financial connectivity between Nepal and India.

As more commerce moves to the digital world, how do you view Nepal’s preparedness and commitment to financial education n inclusion?

I believe that Nepal’s preparedness and commitment to financial education and inclusion in the digital world are crucial for sustainable development and the successful adoption of the digital economy. Various stakeholders, including the government, NRB, BFIs and the private sector are actively involved in collective efforts to enhance financial and digital literacy, promote digital payment systems, and extend financial services to underserved populations.

NRB has taken important steps by formulating the Financial Literacy Framework 2022, which incorporates provisions for digital financial literacy, financial consumer protection, and the development of financial literacy training programmes. These initiatives are aimed at equipping individuals with the knowledge and skills needed to navigate the digital financial landscape effectively.

While digital infrastructure is being built, it is equally important to re-engineer existing procedures to align them with digital processes. It is vital to keep end-users informed and aware of these digital services. Many stakeholders have already made substantial investments and efforts to increase digital financial education and awareness. However, there is still work to be done in terms of expanding access to financial education, ensuring consumer protection, and addressing barriers to financial inclusion, particularly in rural sectors and among marginalised demographics.

To truly empower individuals in the digital world, we need to continue expanding financial education initiatives, designing user-friendly digital platforms, and ensuring that consumer protection measures are in place. It is crucial to bridge the digital divide and create an inclusive financial ecosystem where all segments of society can benefit from the advantages of the digital economy. By nurturing financial literacy, promoting digital payment systems, and removing barriers to financial inclusion, Nepal can enhance its preparedness and commitment to building a resilient and inclusive digital economy.

Data leaks and cyber security are big concerns. Does the national budget reflect adequate attention to research and development of the IT sector?

With the increasing use of digital services, data leaks and cybersecurity have become significant concerns and pose inherent risks in the digital economy. As we witness a rise in digital transactions and a shift towards a digital economy, incidents of data leaks and security breaches may also increase. While the percentage of such incidents may be relatively low, the actual numbers can still grow, potentially impacting the trust of the general public on the digital economy if not appropriately addressed. Addressing data leaks and cybersecurity is a collective responsibility that involves all stakeholders in the sector. Continuous investment in security infrastructure, keeping them up-to-date according to international security standards, is essential. Additionally, educating end-users to safely use digital systems and promoting cybersecurity awareness is crucial to mitigate risks and enhance overall security.

While the government has prioritised digital adoption, it is important to note that policy direction for safeguarding against data leaks, addressing cyber threats, standardising IT infrastructure or integrations, and investing in IT-based research and development are not adequately covered in the national budget. These areas require more attention and resources to ensure the robustness and security of our digital ecosystem. To build a resilient digital economy, it is crucial to allocate sufficient resources and focus on research and development in the IT sector. This includes promoting research and innovation in cybersecurity, supporting the development of secure IT infrastructure, and fostering collaborations between academia, industry, and government agencies. By doing so, we can enhance our capabilities to detect, prevent, and mitigate cyber threats while fostering an environment of trust and confidence in the digital economy.

In conclusion, while the government has emphasised digital adoption, there is a need to allocate more attention and resources in the national budget towards research and development initiatives in the IT sector, specifically addressing data leaks, cybersecurity, IT infrastructure standardisation, and promoting IT-based research and innovation. By doing so, we can better safeguard our digital ecosystem and ensure the long-term sustainability and security of our digital economy.

What could be possible opportunities to accelerate FDI into the digital sector of the country?

In order to accelerate foreign direct investment (FDI) in Nepal’s digital sector, it is crucial to create a favourable business environment that attracts companies and employees. Nepal already allows 100% FDI in export-based IT service companies and domestic IT companies employing a certain number of employees receive tax waivers. However, there are further opportunities to capitalise on. To attract FDI, it is important to establish investor-friendly policies, offer tax incentives, and streamline regulatory frameworks. Creating specialised technology zones with multi-year tax holidays or subsidised tax rates can be an effective approach. Encouraging collaboration between local and foreign companies can also foster innovation and attract investment.

Additionally, it is vital to showcase Nepal’s success stories in the IT sector internationally. Highlighting the achievements of Nepali companies and services can capture the attention of potential investors and generate interest in the country. Allowing Nepali companies to expand beyond borders and supporting their international growth can play a significant role in attracting FDI. Moreover, strengthening digital connectivity infrastructure is crucial.

By improving internet connectivity and expanding coverage, Nepal can position itself as a competitive destination for digital investments. Additionally, ensuring a robust supply of skilled human resources in the sector is essential. Investing in IT education and training programmes will not only meet the demands of the industry but also enhance Nepal’s appeal for FDI. Also, by creating a favourable business environment, showcasing success stories, improving digital connectivity, and investing in skilled resources, Nepal can accelerate FDI in its digital sector. This will not only drive economic growth but also foster innovation and further establish Nepal as a hub for digital transformation.

How does NCHL ensure the security and integrity of cross-border digital payments between Nepal and India, particularly with regards to protecting user information and financial transactions?

When it comes to ensuring the security and integrity of cross-border digital payments between Nepal and India, NCHL (Nepal Clearing House Ltd) follows a robust approach. As these transactions involve two jurisdictions, it is crucial to adhere to legal and compliance requirements set forth by both countries. The legal basis and compliance for such cross-border transactions are appropriately regulated to meet the necessary standards. Compliance related to Know Your Customer (KYC), Anti-Money Laundering (AML), Counter Financing of Terrorism (CFT), and controls for capital flow are essential aspects that must be addressed. To fulfil these requirements, certain information of the initiator and beneficiary needs to be shared for risk checking and the implementation of necessary controls on a requirement basis.

However, it is important to note that the non-financial information and payment-related information transferred during these transactions are handled in a highly secure manner. The utmost care is taken to maintain the integrity and confidentiality of such cross-border payments. This involves adhering to standard protocols that are compliant with relevant data protection laws and regulations. NCHL recognises the importance of digital security and the protection of user information. It ensures that all measures are taken to safeguard the data exchanged during cross-border digital payments. By following industry best practices and complying with data protection regulations, NCHL maintains a secure and trusted environment for these transactions.

In conclusion, NCHL is committed to upholding the security and integrity of cross-border digital payments between Nepal and India. By adhering to legal and compliance requirements, implementing necessary controls, and following standard protocols for digital security, NCHL ensures the protection of user information and the overall reliability of these transactions.

Could you explain the collaborative efforts between NCHL and the government of Nepal in advancing the goals of digital payments and financial technology services? How does NCHL work closely with the government to align its initiatives with the national agenda and regulatory frameworks?

At NCHL, we operate under the guidance and leadership of Nepal Rastra Bank (NRB) and collaborate closely with the government to advance the goals of digital payments and financial technology services. Our primary objective is to establish and operate multiple payment, settlement, and clearing systems in the country, and we currently operate various national payment systems, including Electronic Cheque Clearing (NCHL-ECC), Interbank Payment System (NCHL-IPS), Retail Payment Switch (RPS), connectIPS e-payment system, CORPORATEPAY, connectRTGS, National Payment Interface (NPI), and NEPALPAY QR.

While our initial focus was to provide shared infrastructure to banks and financial institutions, we have expanded our scope to serve the larger objective of the digital economy within the financial sector. As a result, we have opened our infrastructure to government entities and other non-bank entities. These entities become indirect or technical members of NCHL, enrolling with one of the direct member BFIs as settlement banks. By integrating their internal systems with NPI of NCHL, they gain access to NCHL-IPS and RPS for their real-time and non-real-time payment transactions.

NCHL works closely with the government’s EFT system, which handles outgoing expense transactions, and the RMIS system, responsible for revenue collection. Integration with NCHL’s NPI occurs through the government’s expense and revenue handling BFIs. This integration enables the initiation of payout transactions from any of the DTCOs within the Central Government Account System (CGAS) through EFT to NCHL’s NPI. In the fiscal year 2079-80, over 90% of central government expenses were digitised, and the government has initiated the digitisation of payments for 753 local governments as well. Furthermore, the general public can make government revenue payments (tax and non-tax) through various channels such as payment gateways, mobile wallets, mobile banking, connectIPS, CORPORATEPAY, or bank branches. The revenue payment through these channels has reached close to 30% in fiscal year 2079/80.

Since 2016, NCHL has been working closely with the government to enable digital payments. We not only provide payment systems but also assist in process reengineering to facilitate the adoption of digital payments. Our strategic direction aligns with the objectives of the government and the policy direction of NRB regarding the development of national payment systems. As a principle, we reinvest in establishing payment systems and facilitating key stakeholders such as the government. By collaborating with the government and following a shared vision, NCHL aims to contribute to the growth of digital payments in Nepal, fostering a more efficient, secure and inclusive financial ecosystem.

In the context of cross-border digital payments, what specific measures and protocols has NCHL implemented to comply with the regulatory requirements set by the government of Nepal? How does NCHL ensure transparency and accountability while facilitating seamless cross-border transactions?

We are currently in the initial phase of implementing cross-border digital payments between Nepal and India. We have entered into an understanding with NPCI International Payments Limited (NIPL) to establish technical integration, develop the legal and compliance structure, and consider the necessary business aspects during the implementation phase. Regarding regulatory requirements, we are committed to complying with the mandates and directives set by the government. Our technical integration will ensure the implementation of the required standards for the cross-border payment system. Additionally, we will establish regulatory mandates and/or directives to implement risk controls and prevent misuse of the cross-border payment channel. These measures are vital for ensuring transparency, security, and accountability throughout the cross-border transactions.

Throughout the implementation process, we actively engage with various stakeholders, including banks and financial institutions, to gather necessary feedback and ensure industry-wide adoption. This collaborative approach ensures that the cross-border digital payments are implemented as an industry project, taking into account the perspectives and expertise of all relevant stakeholders. By diligently adhering to regulatory requirements, establishing technical integration, and fostering collaboration with industry partners, we aim to facilitate seamless cross-border transactions while upholding transparency and accountability. Our goal is to provide a reliable and secure platform for cross-border digital payments, strengthening financial connectivity between Nepal and India in a manner that aligns with the regulatory framework and regulatory requirements of the government of Nepal.