The ordinance concerning financial institutions has received royal assent. It is an umbrella law that regulates the financial sector and seeks to do away with the unnecessary duplication between various laws. Separate laws have tended to conflict with each other in certain respects, lacked clarity in others, led to overlapping of functions and jurisdictions as well as to excessive discretionary powers which have resulted in their abuse, thus contributing to overall confusion within finacial institutions and even among those whose job it has been to supervise those institutions. Titled as the Bank and Financial Institutions Integration and Amendment Act 2003, the ordinance puts all those institutions in new categories — A, B, C, and D — on the basis of their volume of capital as well as their performance. The Nepal Rastra Bank which drafted it is entrusted with the responsibility of categorising them and making necessary regulations.

The ordinance is indeed a welcome step. It will end all the categories prevalent so far, like commercial banks, development banks, finance companies and cooperatives. From now on, they will all be called financial institutions and, subject to certain criteria, they may be promoted or demoted from one cateogry to another. And within two years, the five laws governing the various financial institutions will have to be scrapped. This ordinance has vested the central bank with wider monitoring powers, now bringing within its fold the Agricultural Development Bank and the Nepal Industrial Development Corporation, hitherto supervised by the finance ministry. This can thus be expected to lead to better supervision and speedier resolution of practical problems.

By introducing the ordinance, the central bank and the government expect to boost public confidence in financial institutions. Among other features of the new law are the fixing of the numbers and qualifications of boards of directors as well as the qualifications of their chief executive officers and allowing foreigners to open their contact office in the country in order to expand their financial services. It also provides for penalties for failure to comply with its provisions. But history says that the finance ministry and the central bank have themselves become less than competent to perform their supervisory roles properly. This dereliction of duty has encouraged unscrupulous managers, businessmen, and even the high officials of the supervising institutions, to indulge in illegal and unethical practices at the cost of those institutions, their depositors and the public at large. All this has been possible mainly because those in authority were hardly ever held to account. The same yardstick will apply to an evaluation of the effectiveness of the law in question.