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Kathmandu Wednesday January 23, 2002 Magh 10, 2058.
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Central bank: Putting it on
track
By JAYA SHANKAR MAHARJAN
Developing a sound financial system, properly
regulating that system, preventing probable crisis situations in it and bringing about
macroeconomic stability have become the fundamental responsibilities of a central bank.
Absence of autonomy and professionalism in the discharge of central banking functions
coupled with inadequacy of the regulatory environment could lead to uncertainties and even
crises in the financial system of a country as well as in the related economies of the
economic region, if not the whole continent or the globe. This was clearly witnessed in
the recent financial crisis, popularly known as the Asian crisis of 1997-98, which
directly and seriously affected the financial system and economy stability of the ASEAN
region. For a central bank, avoiding such crises is a fundamental responsibility as it is
commonly believed that one of the critical factors behind the crisis was the absence of
adequate central banking autonomy. This substantially reduced the efficiency and
effectiveness of central banking functions and responsibilities.
Although established in 1950, Nepal Rastra Bank
(NRB), the central bank of Nepal, has yet to modernise its operations, enhance its
capability, and become a true leader in the monetary, regulatory, and supervisory
functions that are the traditional trademarks of an effective central bank. Before 1984,
there were only two commercial banks and two development banks working under the ownership
and control of the government. Only during the eighties and nineties emerged a significant
growth of commercial banking and other financial institutions in Nepal. However, the
central bank’s capability and institutional improvements have not kept pace with the
evolving regulatory and supervisory responsibilities that are in great need in Nepal at
present. This situation needs to be corrected if the Nepalese financial environment is to
be properly regulated and prudently directed. The new NRB Act has increased functional
autonomy, objective responsibilities, organisational scope and institutional strength. So
central banking functions should be discharged in a more sophisticated and sound manner.
Accordingly, Nepal has done significant homework
to build a strong foundation for the financial system and also avoid the type of crisis
that the Asian region encountered. Regarding recent development in the financial and
banking sector, a new Nepal Rastra Bank Draft has already been passed by Parliament and is
in the process of receiving the royal seal. The bill should provide more autonomy to the
central bank in the spheres of monetary and financial sector policy formulation and
effective implementation. The supervisory and oversight function of the central bank is
then expected to be strengthened substantially. The Deposit-Taking Institutions Draft Act,
which will encompass the regulation for all deposit-taking institutions like commercial
banks, development banks and finance companies, is under formulation. Legislative reforms
for improving the securities and capital markets are under way. In order to make loan
recovery effective and reduce the share of Non-Performance Assets (NPA) in the banking
system, the Debt Recovery Draft Act has also been passed by Parliament. Likewise, the
International Financial Transactions Centre Act is regarded as an important beginning to
make Nepal a hub of international financial activities. The directives issued to
commercial banks and finance companies by NRB should help promote the institutional
strengthening and financial consolidation of these institutions. The recent focus on
indirect monetary instruments and prudential regulations and supervision in place of
direct monetary controls is aimed at raising efficiency and prudence by the financial
sector. Similarly, the flexible monetary policy stance recently adopted by the central
bank is seen as a sound framework developed for promoting economic growth and expansion
without disturbing the existing macroeconomic stability and financial intermediation
achievements.
It may be noted that there are still many
problems, challenges and structural shortcomings in the Nepalese financial sphere,
rendering the financial intermediation process as well as the financial service delivery
system inefficient, unproductive and least comprehensive. The central bank is criticized
for its inadequate ability to improve the quality and sphere of monetary policy and to
properly supervise and monitor the financial system. The large spread between deposit and
lending rates, huge NPA level, inefficient working of government-owned banks and financial
institutions, and the general weaknesses that characterized the central banking function
require that the central banking capability and functional effectiveness be significantly
enhanced.
For promoting the economic development and
prosperity of Nepal, there is thus an urgent need for further developing the financial
sector and making the financial regulatory environment effective. It is important that
appropriate arrangements and systems are put into sound implementation in order to
efficiently discharge the central banking responsibilities and make the financial system
most efficient. There is need for promoting expertise and professionalism in the working
of the central bank for developing and sustaining a financial and monetary system towards
addressing the development problems of Nepal.
Nepal’s past experience has shown that the
plans, policies and programmes, though very attractive in their contents, are mostly
under-implemented. One of the basic reasons for underachievement in the areas of
socio-economic development in general and financial sector development and reform progress
in particular is the least amount of attention accorded to the development of necessary
strategies and policies for the effective implementation of stated plans and visions. In
the light of this experience also, it has become essential that appropriate implementation
arrangements be put into effect so as to transform the financial sector reform initiatives
into concrete achievements. In the absence of such arrangements, howsoever fine the
enactments, directives and regulations are the actual achievement against the expected
goal and make the financial sector the development and regulatory system work as per
expectation. It is important that the policies and programmes for implementing the central
banking visions be properly selected and implemented so as to address, on a sustainable
basis, the opportunities and challenges that the Nepalese financial system and central
banking responsibilities currently entail.
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