Nepal’s Economy at a Crossroads: Can the New Governor Unlock Confidence in the Banking Sector, Lenders and Credit?

Nepal’s economy is navigating a delicate moment. Growth remains sombre, credit is stiff and the public mood, though hopeful, is cautious. At the heart of this economic nuts and bolts lies the banking sector, strained, yet central to any recovery story.

With the appointment of Dr. Biswo Nath Poudel as the new Governor of Nepal Rastra Bank (NRB), expectations are surging. Dr. Poudel brings to the table not just policy intellect but also political savvy and a liberal economic character. These qualities if translated into decisive action that revives bank confidence could turn today’s stagnation into tomorrow’s momentum.

The Drag of Credit: Banks in a Dilemma

At first glance, Nepal’s macroeconomic indicators have shown some promise. Foreign reserves stood at Rs. 2,409.25 billion as of mid-March 2025, capable of covering over 17 months of imports. The country recorded a Balance of Payments surplus of Rs. 284.41 billion, and remittances surged.

But beneath the surface, banks are struggling.

Non-performing assets (NPAs) have risen across many institutions. The required provisioning has tightened capital adequacy ratios, constraining lending. Liquidity may appear comfortable on paper, yet banks remain reluctant to lend due to skepticism among lenders which is worryingly low and heightened risk aversion. Unless banks feel confident, credit will not flow. And unless credit flows, the economy cannot gain traction. The Governor must focus on unlocking confidence within banks first, only then will the broader economy begin to believe.

Else, The result? A slow trickle of credit. And a correspondingly slow recovery.

It’s Time for an Asset Management Company

Like we have seen and heard multiple times previously about establishment of an Asset Management Company. Immediate policy intervention to employ an AMC could be a game changing policy tool. But, that shouldn’t take ages to be implemented. After the last monetary policy itself where NRB announced to submit draft on AMC to the government, it is still waiting to close; hence it’s legislation, structure or authority remain in question. Almost 65% of our loan portfolio are backed by collateral, that is why an AMC shall be incorporated immediately. Nepal doesn’t need to wait.

A centralized AMC would allow banks to offload their stressed assets, clean up their balance sheets, and re-ignite the flow of credit. For Nepal, this move could be a game changer liberating capital locked under unresolved band loans.

This isn’t about bank bailouts, it’s about freeing up lending so businesses can operate, jobs can return and public optimism can follow.

Bank Supervision and Regulation

Another essential step is recalibrating the regulatory environment. In recent years, overregulation has created a climate of fear and caution in the banking sector. Micro-level rules, compliance burdens, and delayed approvals have made financial institutions risk-averse. NRB doesn’t need to loosen its guard. But it must move toward smart supervision as already advocated by the chief himself prioritizing transparency, risk-based audits, and responsive regulation over bureaucratic policing. The Governor himself has acknowledged this need in recent comments. Now is the time to act. Confidence is not built through rules, it’s built through clarity and partnership and like the Governor said, ”There shall be no surprises in the economy” which is totally true and coming this from the newly appointed chief is very commendable and responsible.

Grey List: From Burden to Bargaining Table

Nepal remains under the FATF’s grey list, limiting global confidence in its financial system. But this challenge also presents an opportunity.

Dr. Poudel, by virtue of his diplomatic approach and liberal worldview, is uniquely positioned to lead this charge. With credible policy reforms and transparent frameworks, Nepal can negotiate its way off the list not just with compliance, but with vision which I believe Mr. Poudel will do better.

Such a step would open the door to international investor confidence, better correspondent banking relationships, and a reputational lift.

Show It in the Monetary Policy

The Governor’s first Monetary Policy will be closely watched. But even before then, early signals can go a long way.

A clear roadmap on bad asset resolution, recalibrated regulations, and a proactive FATF engagement strategy will inject confidence into banks, businesses, and the broader public. Nepal doesn’t need miracle growth; it needs clarity, direction, and momentum.

And right now, it all starts at Baluwatar.
 

About the Author:
Sujit Nepal is a senior banker currently deployed as a Branch Manager in Garima Bikas Bank and economic observer with over a decade of leadership experience in Nepal’s banking sector. Passionate about financial reform, he writes on monetary policy, risk, and economic transformation.

Views are personal and does not represent organization he’s associated with.