The central bank of Nepal is the Nepal Rastra Bank (NRB), established under the NRB Act of 1955, which, effective 31 January 2002, was replaced by a new NRB Act designed to give the central bank more autonomy in setting monetary policy and more supervisory authority. The new legislation outlines the procedures for appointing and dismissing the NRB Governor, Deputy Governor and board, as well as procedures for intervening with insolvent financial institutions. Further reforms are expected with the implementation of the Banking and Financial Institutions Act of 2003 which aims, inter alia, to reduce the government's role as owner and strengthen its role as regulator. Nepal's financial sector has historically been weak and non-transparent, characterized by politically-motivated interference, insider trading, weak management, disruptive unions, an inadequate financial information system, and a deeply entrenched culture of non-payment of loans.
A World Bank report found that as of November 2002 Nepal had 15 commercial banks. The two largest, the Rastriya Banijya Bank (RBB), Nepal's largest bank with an estimated 27% of total banking assets, and the Nepal Bank Ltd. (NBL), Nepal's oldest commercial bank, founded in 1937, account for over 50% of banking assets. The RBB is wholly owned by the government (but slated for privatization), whereas the NBL, though founded with 51% government ownership, has sold shares to the public sufficient to reduce the government's share to 41%. There are also nine smaller joint venture banks (JVB's) with mixed public-private ownership, and four local commercial bank. The banking sector also includes two large development banks, the Agriculture Development Bank of Nepal (ADB/P) and the Nepal Industrial Development Corporation (NIDC), the second and third largest banks. The ADB/N maintains a micro-financing window, as does the NRB, the RBB, the NBL, and the regional development banks. According to the World Bank, as of November 2002, Nepal also had 48 finance corporations, 13 insurance companies, numerous finance institutions, 7 Grameen Replicator Banks, 35 financial cooperatives, and 25 financial NGOs.
Both of the largest commercial banks, the RBB and the NBL, are in precarious financial condition. According to a 2000 study by the World Bank, the most recent available, in 1998 the RBB and NBL together had a losses of $146 million, equivalent to 8.6 % of Nepal's GDP or 46% of the government's budget. The condition of both banks has doubtless deteriorated since then. In 2001 government authorities, in conjuction with the IMF and the World Bank, concluded that external managers, selected by the World Bank and the United Kingdom, were needed to reform the RBB and the NBL. Opposition to these proposals came from all sides: the boards of directors, the employees' unions and the borrowers. In Janurary 2002, the NRB invoked the provisions of the new NRB Act and suspended the board of the NBL, effective 15 March 2002. For the RBB, the government entered into a contract on 31 January, 2002 with the American firm Deloite Touch Tomatsu (DTT) for that company to take over management of the RBB. DTT, however, soon pulled out of the agreement, citing ambiguities in the contract and security concerns as the Maoist insurgency in Nepal became increasingly violent. In July 2002, a professional managment team was installed at NBL, and in late 2002, a new CEO was appointed. The RBB is slated to be privatized in 2003.
Demand for new credit in Nepal was weak in 2001 and 2002, but the demand for credit to refinance from troubled debtors was substantial. Credit expanded in 2001 by about 10%, creating liquidity shortages at some commercial banks. In response, the NRB lowered lowered Cash Reserve Requirements (CRR's) in January 2002 by 1.2% to around 9% (with a 3% of deposits required to be cash-in-vault). Also, refinancing rates were lowered 100-200 basis points to 2% to 5% in January 2002. In February 2002, the NRB set up a special refinancing facility at 3% interest to encourage commercial banks to make concessional loans to ailing businesses, particularly those in the garment and hotel enterprises hit by sharp declines in export demand and tourism.
At the end of FY 2000/01, in July 2001, net foreign assets held by monetary authorities in Nepal totaled $1 bil., and broad money supply totaled about $2.87 bil. The broad money supply grew by 21% in 1999, 21.7% in 2000, and 15% in 2001, considerably ahead of inflation rates for those years, mostly due to expansion of paper currency resulting from the progressive monetization of the Nepalese economy. However, for FY 2001/02, the IMF estimates that broad money growth slowed to 6% beacuse of the weakened economy and stagnant bank deposits due to the voluntary disclosure of income scheme (VDIS) and other asset verification efforts by the tax authorities. Inflation as reflected in consumer prices has been substantially moderated since October 1997 when Nepal shifted its exchange regime to one pegged only to the Indian rupee, instead of to a composite of currencies. Earlier, in February 1993, Nepal had ended its dual currency system where by both the Indian and Nepalese rupee were allowed to circulate freely. In 2001, weak domestic demand and stable Indian prices combined to produce a subdued inflation rate of 3%. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $962.8 million. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $2.9 billion. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 6.5%.
The NIDC, along with the NRB, controlled the Security Exchange Center (SEC), set up in 1981, which was subsequently converted into the Nepal Stock Exchange (NEPSE) in 1984. In January 2003, there were 55 companies listed on the NEPSE, virtually all actively traded.