Nepal’s Banking Reform Moment: New report calls for smart supervision, credit revival—and clear crypto strategy

KATHMANDU — Nepal’s financial system is confronting a convergence of old vulnerabilities and new-age risks. While traditional challenges such as non-performing loans, weak credit transmission, and governance failures continue to weigh on banks, emerging threats—from crypto-linked illicit transactions to cyber vulnerabilities—are rapidly reshaping the risk landscape.

Against this backdrop, the Banking Sector Reforms Recommendations Committee Report, 2082, submitted to Nepal Rastra Bank (NRB), arrives as a decisive intervention. The report does not merely diagnose banking-sector weaknesses; it presents a forward-looking blueprint that redefines how regulation, supervision, financial stability, and innovation must coexist in Nepal’s evolving economy.

Crucially, the report acknowledges a reality regulators can no longer ignore: digital finance risks, including crypto-related transactions and suspicious cross-border flows, now pose systemic implications, particularly for a country under heightened international scrutiny for anti–money laundering compliance.

From Regulatory Overload to Risk-Based Supervision

A central theme of the report is the need to shift from rule-heavy regulation to intelligence-led supervision. Nepal’s banking system, the committee notes, has accumulated layers of directives over decades, yet weaknesses in asset quality, governance, and risk management persist.

The committee recommends adopting a “Basic Regulation, More Supervision” model—one that prioritizes risk-based oversight, early warning systems, and supervisory judgment over procedural rigidity. Banks and financial institutions would be categorized into tiers based on size, systemic importance, and risk exposure, allowing NRB to focus resources where threats are greatest.

This approach becomes particularly relevant in monitoring non-traditional risks, including:

• Unusual transaction patterns
• Digital payment abuse
• Informal crypto exposure through payment gateways or proxy accounts
• Cross-border fund movements inconsistent with declared economic activity

Credit Paralysis Amid Liquidity Abundance

Despite excess liquidity in the banking system, credit growth has remained subdued. The report attributes this contradiction to fear-driven lending behavior, regulatory uncertainty, and weak post-pandemic demand recovery.

Rather than pushing blanket credit expansion, the committee proposes targeted revival of productive lending, supported by:

• Flexible restructuring of viable loans
• Improved secured lending frameworks
• Reassessment of priority-sector lending distortions
• Incentives for lending to IT, startups, education, health, logistics, and value-added agriculture

The committee cautions that prolonged credit stagnation risks pushing economic activity into informal and unregulated channels, including digital and crypto-linked mechanisms that fall outside the banking perimeter—further weakening monetary transmission and financial transparency.

Crypto, Suspicious Transactions, and Financial Integrity Risks

One of the report’s most consequential observations relates to the sharp rise in suspicious banking transactions and illicit financial activity, with explicit reference to crypto-related dealings.

While cryptocurrency trading remains illegal in Nepal, the committee notes that:

• Suspicious transaction reports (STRs) have surged in recent years
• Digital platforms, shell accounts, and informal intermediaries are increasingly used to bypass banking scrutiny
• Crypto assets, though officially banned, are indirectly linked to cross-border fund movements, fraud, and capital flight

The report highlights data showing a steep increase in suspicious banking transactions since 2018, alongside growing concerns raised by the Central Investigation Bureau regarding illegal crypto dealings and underground payment systems.

Rather than framing crypto solely as a law-enforcement issue, the committee treats it as a systemic financial integrity risk, warning that weak monitoring could:

• Undermine Nepal’s AML/CFT commitments
• Increase correspondent banking risks
• Prolong Nepal’s presence on international grey lists
• Raise transaction costs for remittances and trade finance

Grey List Pressure and the Cost of Delay

The report is unambiguous: financial-sector reform and AML compliance are inseparable.

Nepal’s placement under enhanced international monitoring has already increased compliance costs for banks and remittance companies. The committee warns that failure to address weaknesses in transaction monitoring—particularly related to digital assets, payment gateways, and informal crypto exposure—could further isolate Nepal from global financial networks.

The report calls on NRB to:

• Strengthen coordination with financial intelligence units
• Upgrade transaction monitoring systems
• Enforce stricter scrutiny of unusual digital payment flows
• Accelerate corrective actions tied to AML/CFT benchmarks

Importantly, it stresses that crypto-related risks must be addressed through supervisory capacity, not just prohibitions.

Cybersecurity and Digital Payments: A New Supervisory Frontier

Beyond crypto, the report situates Nepal’s banking future firmly in the digital domain. Rapid growth in mobile banking, QR payments, online transfers, and real-time settlement systems has expanded financial access—but also exposed banks to cybersecurity vulnerabilities.

The committee recommends:

• Mandatory strengthening of IT governance at banks
• Regular cyber stress testing
• Centralized reporting of cyber incidents
• Enhanced supervisory expertise in digital forensics and payment systems

These measures, the report argues, are essential not only for consumer protection, but also for preventing digital platforms from becoming conduits for illegal financial activity, including crypto-linked laundering.

Microfinance, Informality, and Risk Spillovers

The report also connects digital and crypto risks to structural informality in Nepal’s economy. Weak oversight of microfinance institutions, cooperatives, and informal credit networks has created parallel financial ecosystems where funds circulate with limited traceability.

The committee recommends a separate regulatory framework for microfinance, noting that misaligned supervision increases vulnerability to misuse, over-indebtedness, and illicit fund flows.

Until such a framework is established, NRB is urged to apply stricter oversight to prevent spillovers from informal finance into the regulated banking system.

Rural Credit and Preventing Digital Exclusion

A forward-looking section of the report focuses on rural financial inclusion, warning that lack of access to formal credit often pushes households and small businesses toward informal digital mechanisms—sometimes unknowingly linked to illegal platforms.

Initiatives such as “NRB in the Village”, local financial facilitation teams, and municipality-level entrepreneurship programs are proposed to ensure rural economies remain anchored in the formal financial system.

The message is clear: financial inclusion is also a tool for financial integrity.

Mergers, Governance, and Post-Consolidation Risks

Nepal’s banking consolidation drive has reduced institutional numbers but increased complexity. Larger banks, the report notes, face heightened operational, governance, and technological risks—especially when post-merger integration is poorly managed.

The committee stresses that weak governance at large institutions amplifies systemic exposure, including vulnerability to sophisticated financial crimes and digital exploitation.

Stronger board oversight, clearer accountability, and enhanced supervisory engagement are recommended to ensure consolidation translates into stability rather than fragility.

Capital Markets, Innovation, and Regulatory Balance

While acknowledging risks, the report does not advocate stifling innovation. Instead, it calls for coordinated development of banking and capital markets, including green bonds, diversified debt instruments, and improved margin lending frameworks.

The committee emphasizes that financial innovation must be channeled through regulated structures, warning that regulatory vacuums—especially in digital finance—create fertile ground for illicit activity.

A Narrow Window for Reform

The Banking Sector Reforms Recommendations Committee Report, 2082, presents Nepal with a narrow but critical opportunity. It recognizes that the banking sector’s challenges are no longer confined to balance sheets—they now intersect with digital finance, crypto risks, international compliance, and economic credibility.

If implemented decisively, the reforms could:

• Restore credit flow to productive sectors
• Strengthen financial stability
• Improve Nepal’s standing in global finance
• Contain crypto-linked and digital financial risks without stifling innovation

If ignored or diluted, the costs will compound—through weaker growth, higher compliance burdens, and deeper informalization of finance.

For policymakers, regulators, banks, and investors alike, the signal from the report is unmistakable: Nepal’s banking reform agenda must now move as fast as the risks it seeks to contain.