Kathmandu, July 21

A provision in the draft constitution that proposes keeping banks and financial institutions (BFIs) under the jurisdiction of provinces has irked the central bank.

Schedule 4 of the draft constitution says the central bank, financial policy, currency and banking, and monetary policy will be under the purview of the central government.

However, Schedule 5 of the draft constitution says BFIs and cooperatives will be under the jurisdiction of provincial governments.

“We cannot allow provinces to control BFIs. They should be under the jurisdiction of the central bank,” Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal told an interaction organised jointly by Nepal Bankers’ Association, National Banking Institute and Society of Economic Journalists, Nepal today, adding, “Systemic risks would rise if provinces are allowed to issue operating licences to BFIs and regulate them.”

He further said: “It appears the provision was incorporated in the draft constitution without understanding the gravity of the situation.”

There are countries in this world that have allowed bodies, other than the central bank, to regulate BFIs. Also, there are instances of delegating power to federal states to regulate BFIs.

Proponents of the provision that paves the way for provinces to issue operating licences and regulate BFIs say such a system would eventually increase people’s access to finance, helping various local economies to grow simultaneously.

But those against it say such a system will create conflict between the central and provincial regulatory bodies and put depositors’ interest at stake.

“The draft constitution must have incorporated the provision to ensure financial inclusion and increase people’s access to finance in rural areas because the main objective of the federal structure is to promote financial and economic inclusion,” said former finance secretary Rameshwor Khanal, expressing hope that the new provision ‘would increase people’s access to capital, which would help reduce the level of poverty and promote inclusiveness’.

BFIs have long been criticised for focusing too much in urban centres, especially Kathmandu Valley.

It is said over 60 per cent of deposits are collected from Kathmandu Valley, and most of the deposits collected outside the Valley eventually find their way to Kathmandu, where they are converted into loans.

“In this regard, transfer of some of the banking responsibilities to provinces will not do much harm. This would increase people’s access to finance, which could help the country achieve job-centric economic growth and ensure social justice,” former NRB governor Yubaraj Khatiwada said, adding, “Social empowerment comes through economic empowerment.”

He also said it would not do much harm if regulatory and supervisory works are devolved.

“But devolution of power may result in regulatory arbitrage and create problems during enforcement of laws and regulations,” Khatiwada said. “Because of this and also because of the financial crisis of 2007-08, many countries have started speaking in favour of consolidation of regulatory works.”

He, however, added: “Even if the country decides to allot regulatory powers to provinces, financial institutions that collect deposits should be kept under the jurisdiction of the centre.

Investment companies and financial institutions that do not collect deposits and cooperatives could be regulated by provinces.”