The prolonged political row over governor of the Nepal Rastra Bank (NRB) has ended after the appointment of Bijaya Nath Bhattarai, a deputy governor, to the post. Being the central bank, the NRB exerts a considerable impact on the economy in general and on the vital financial and monetary sectors in particular. At a time when the country’s financial and economic reforms are in progress and new challenges are arising from globalisation and a new international trade regime, the central bank needs to be run with a high degree of efficiency, competence and foresight to help make the economy perform better. The new governor will be judged by the size of his contribution in this direction. The NRB has to show good results in a number of areas, including managing the cash reserve ratio, mandated spreads on bank deposits and lending rates, adopting a more representative market interest rate, building a good market infrastructure, maintaining a better market surveillance and making effective market interventions.

Bhattarai has singled out the recovery of loans as the principal problem of the financial sector, indicating that he would adopt tougher measures towards this end. The Nepal Bank Ltd. and the Rastriya Banijya Bank (RBB), the two premier banks, are still burdened with huge bad loans (accounting for about 60 per cent of the total), despite their having been under foreign management as part of the financial reform programme implemented with advice from the multilateral donors, such as the IMF and the World Bank. These overdue loans run to billions of rupees. According to the new governor, the government and the central bank should work together and adopt tough legal measures against the wilful defaulters. He has pointed out that though the new managment teams of the two banks have shown an operating profit, they cannot be considered fully successful in recovering bad loans.

Though the management teams may have their faults, in such matters as recovering huge bad and doubtful debts, the central bank and the government should provide the full legal and administrative support. The large defaulters are mostly powerful people. It is now time for the new government and the new NRB leadership to make the defaulters pay up. The people will judge those in authority for their performance rather than for their sweet promises. The NRB has to show that it can exercise the powers under the amended law fully to make monetary decisions more or less independently rather than as something like a unit of the finance ministry. The effectiveness of the central bank largely depends on separating its functioning from political expediency. Half-hearted measures have achieved little in the past.