Nepal Rastra Bank governor Bijaya Nath Bhattarai has urged the Nepali financial sector to gear up for international competition when its financial sector is thrown wide open after 2010 under its World Trade Organisation (WTO) obligations. As a WTO member, Nepal will have to open up a number of its other sectors, too, including education. There is no dispute that Nepal’s financial sector is “vulnerable and immature” compared to multinational corporations, as the governor said. Certainly, it will have to improve considerably in terms of strategic thinking, innovation, adoption of technology, efficient and effective use of its human and other resources. The proportion of the non-performing assets of its financial institutions has to be reduced further. In this respect, though the Nepal Bank Ltd. and the Rastriya Banijya Bank — the partly and wholly state-owned banks respectively — have come a considerable way under financial sector reform, yet they have miles to go. Even private banks leave much to be desired. The Nepal Bangladesh Bank is a case in point.

To sharpen the competitiveness of the financial sector, Bhattarai stressed the need for the “consolidation of small and vibrant units or acquisitions” and disclosed that the NRB was introducing some instruments to facilitate this process. The bankers’ bank has a central role to play in strengthening the performance of the financial institutions. Its functions are legally defined; the only thing for it is to discharge them in the best possible manner. He also said that the NRB stressed its facilitative function rather than its regulatory or supervisory ones. But all these measures hold their own importance; the trick lies in applying them in the right places and in the right doses, singly or in combination, as the circumstances may require. Over-emphasis on one and neglect of the others will only make it impossible for the central bank to attain its goal and objectives.

An utter neglect of regulatory and supervisory roles in the past brought the Nepali banking sector to a sorry pass, as represented by the NBL and the RBB, now requiring foreign loans and foreign management even to clean up the mess. Most recently, its supervisory indifference produced bad eggs, like the Nepal Bangladesh Bank. The general perception, not entirely unjustified, is that the central bank has tended to step in only when things become public and sufficient pressure for action builds up on it. On several occasions, it is reported to have shelved action against offenders because of pressure or persuasion from invisible quarters. It needs to do extra work to remove this general impression by acting against offenders without fear or favour and without loss of time. The NRB should do all it can to enable the financial sector to be stronger, more vibrant and more efficient. In this process, it should be as facilitative as possible to the extent it does not conflict with its raison d’etre. But in the case of Nepal’s central bank, the regulatory and supervisory role should receive no less, and perhaps even more, priority, as failure on this count has brought on deeper problems in the banking sector than its failure in facilitation.