The government has initiated the process to amend the Nepal Rastra Bank Act 2058 in a bid to modernize the country’s central banking system. The Ministry of Finance has prepared a draft bill and invited suggestions from stakeholders and the general public, allowing one week for feedback.
According to Ministry spokesperson Tank Prasad Pandey, the draft will be revised based on the feedback received before being presented to the Cabinet. The amendment process has been accelerated to provide legislative business to the newly formed Parliament and is also included in the ministry’s annual work plan.
The proposed bill introduces key provisions related to the operation and regulation of the central bank, as well as the appointment of its officials. It includes measures ranging from the establishment of digital banks to the issuance of digital currency. The draft also proposes mechanisms to manage troubled banks and financial institutions and to tighten controls on government borrowing from the central bank.
Opening the Door to Digital Currency and Digital Banking
The bill broadens the definition of “currency.” Previously limited to paper notes and coins, the proposed amendment now includes digital currency within its scope. Once passed, it will provide legal grounds for the Nepal Rastra Bank to issue a Central Bank Digital Currency (CBDC) in the future.
As central banks around the world experiment with digital currencies as an alternative or complement to physical cash, Nepal has begun preparing the necessary legal framework. The amendment would also create a legal basis for establishing fully digital banks, commonly known as “neo-banks.”
Provision for Bridge Banks to Handle Crisis-Hit Institutions
The draft bill introduces international best practices for resolving troubled banks and financial institutions. Under the existing law, the process of declaring an institution problematic and liquidating it has been lengthy and complicated, often creating uncertainty for depositors.
The proposed legislation empowers Nepal Rastra Bank to establish a bridge institution or “bridge bank” to manage the assets and liabilities of a failing bank instead of immediately liquidating it. This mechanism would allow operations to continue until assets are sold or restructured.
‘Clawback’ Provision to Curb Banking Irregularities
To combat banking misconduct, the bill introduces a “clawback” provision. If a bank or financial institution is declared problematic, authorities can nullify and recover assets transferred or gifted over the past five years by directors, officials, or their relatives if such transactions harmed the institution.
Similarly, transactions made within the past three years involving the sale or transfer of assets to third parties at undervalued or zero cost may also be reversed. If assets are found to have been concealed with malicious intent, authorities will have the right to recover them from the responsible individuals.
In the event of liquidation, small depositors will be given priority in repayment. Under Section 85 (Jh) of the proposed bill, deposits covered by insurance—up to Rs 500,000—will receive first priority during distribution of proceeds from asset sales.
Stricter Rules on Board Restructuring and Governor Appointments
The bill proposes changes to the structure and appointment process of the central bank’s board. The number of non-executive independent directors will increase from three to five.
It also tightens eligibility criteria for deputy governor appointments. Executive directors will only be eligible for recommendation if they have at least one month remaining before mandatory retirement.
Additionally, the shareholding threshold for board eligibility will be reduced. Individuals holding more than one percent of shares in any bank or financial institution will be disqualified from serving as directors of Nepal Rastra Bank, down from the current five percent limit.
Tighter Limits on Government Borrowing
The draft revises limits on government borrowing from the central bank. Previously, the government could obtain overdraft loans up to five percent of the previous year’s revenue. The amendment proposes limiting borrowing to five percent of the average revenue of the past three years.
Such loans must be repaid within 180 days. If repayment is not possible, the amount must be converted into marketable securities and sold in the market. The interest rate on government borrowing will be aligned with market rates to maintain balance between monetary and fiscal policy.
Clearer Lender-of-Last-Resort Facility
To address extreme liquidity shortages that could threaten the banking system, the bill formally establishes a lender-of-last-resort provision. If a financial institution poses systemic risk and liquidity cannot be managed through interbank transactions or other mechanisms, Nepal Rastra Bank may extend emergency loans for up to 180 days.
Banks seeking such support must pledge performing loans or other assets as collateral. Previously governed by regulations, this authority will now be explicitly granted by law.
Changes to Removal Process of Governor and Officials
The bill amends procedures for dismissing the Governor, Deputy Governors, and board members. The investigation committee overseeing such cases will now be chaired by a retired Chief Judge of a High Court, rather than a retired Supreme Court Justice.
The government will be required to make a decision within one month of receiving the committee’s report—a timeline that did not previously exist and was seen as allowing indefinite delays.
Strengthening Autonomy and Legal Protection
The amendment seeks to reinforce the central bank’s autonomy and provide stronger legal protection to its officials and staff. Under the proposed changes to Section 107, governors, directors, employees, or special administrators will not be held personally liable for actions taken in good faith. Legal expenses arising from such cases will be borne by the bank. However, actions taken with malicious intent will still carry personal liability.
Capital Enhancement and Creation of New Funds
To strengthen the central bank’s financial position, the bill proposes amendments related to capital and reserve funds. It includes provisions for establishing a Revaluation Reserve Fund, a Financial Development Fund, and a Special Reserve Fund.
The Financial Development Fund—capped at five percent of total monetary liabilities—will support financial literacy, inclusion, and system strengthening initiatives.
Coordination Across All Levels of Government
In line with Nepal’s federal structure, the bill allows Nepal Rastra Bank to coordinate with federal, provincial, and local governments. Terminology in the Act has been revised to reflect this broader scope.
The central bank’s regulatory authority will also expand to include financial holding companies and subsidiaries of banks. It will be authorized to sign agreements with international regulatory bodies for information exchange and to supervise overseas branches or liaison offices.
What Do Experts Say?
A similar amendment bill had previously been tabled in the dissolved House of Representatives but became inactive after Parliament was dissolved. The new bill will now be presented to the newly formed Parliament.
Former Governor Chiranjibi Nepal has stated that the amendment is timely, given the expanding scope of the central bank’s responsibilities. However, he emphasized the need to restore full autonomy to Nepal Rastra Bank, particularly by revisiting provisions added in 2017 that allow the government to issue directives to the central bank.
He also suggested that alongside increasing the number of directors, an additional Deputy Governor should be appointed, considering the expanding responsibilities of the institution.
Ministry spokesperson Pandey clarified that the bill reflects recommendations from the central bank and market needs. “What we submit is a proposal,” he said. “Parliament will decide what to include or exclude. This is not final and may undergo further amendments during the legislative process.”
