Dr Chiranjibi Nepal, the new Governor of Nepal’s central bank, Nepal Rastra Bank (NRB), for next five years, has the twin responsibilities of clearing the mess created by his predecessor Dr Yubaraj Khatiwada and leading Nepal's financial sector to take it at par with its global peers. While Dr Khatiwada deserves praise for his two positive contributions viz. effectively controlling then potentially over-ballooned housing market bubble and consolidating some amount of capital by mergers and acquisitions of BFIs, he made NRB an anti free-market tool. His critics also say that he picked and chose market players to take actions who were politically different than the party of his loyalty, the CPN-UML. Within NRB, critics say, he exhibited high level of biasness to the employees who begged to differ from his views and modus operandi. Much against the expectation that he would devise some effective mechanism to mitigate the risks posed by unregulated mushrooming of saving and credit cooperatives to financial stability of country, he deliberately chose to turn blind eye to them just because the majority of these larger SACCOs are protected or operated by the UML bigwigs.
He promoted guided-lending against the free-market practices without any established rational. This neither could reduce the cost of funds for service providers like microfinance institutions, interest rate for the borrowers and thereby increase the access to finance to thus far unbanked population nor could encourage financing to agriculture and hydropower sectors. Regulatory swords were struck hard on those whom he thought were supporting the other contestants before he was appointed the Governor.
The new governor Dr. Nepal has the responsibility of correcting these anomalies, again not being victim of the designs and political vendetta of the NRB employees union affiliated to his party, Nepali Congress. He must be able to bring back the pro-market practices impatiently waited by the country's banking industry. He must show his guts to bring unregulated market players, big and small, under the regulatory and supervisory radar, or be able to create appropriate institution for the purpose.
But, this will not be enough. Nepal as a sovereign economy has already lagged behind in several important aspects of financial sector modernization as well as service standardization. While the world, including our immediate neighbours India and China to a great extent, has already entered into the age of completely cashless banking and e-tailor based consumer market, Nepal lacks even reliable and accessible ATM services. Our trade deficit has horrendously swelled which could be increasingly impossible to manage in very near future if we fail to sell our products online. One third of our population lives in foreign countries for work, studies and travel. But our bank-cards do not work anywhere in the world except for some limited transactions in India.
Nepal's whole financial and monetary architecture has not realised the need and importance of financial education at various levels, from increasing access to formal financial services to curbing deliberate practices of conflict of interest at various hierarchies of policy making and implementation. Formulating and implementing appropriate policies to cut the cost of funds and overhauling the deprived and priority sector lending edifice are long overdue in the reform agenda. Utter lack of coordination among other regulatory bodies of the financial system, like the Security Board of Nepal and Insurance Board has constricted the expansion and predictability of the capital markets. The real sector representation in the secondary market is so negligible that puts entire economy under the question mark with regard to its operational transparency. The new governor has the responsibility of giving space to 'complementary' regulators to increase their effectiveness.
As a well known advocate of free-market and private property rights, Dr Nepal should restart the reforms that have been stalled for the last one decade, to make Nepal's financial sector part of global system in all three terms of functionality, efficiency and governance. It goes without saying that his success depends largely on his ability to deliver 'goods'.