Kathmandu. The Ministry of Finance has forwarded the process of amending the existing legal structure related to Nepal Rastra Bank. Unveiling the draft of the bill to amend the Nepal Rastra Bank Act-2058 BS on Friday, the Ministry sought suggestions and suggestions from stakeholders within seven days. The proposed amendment will be the 10th in the context of the NRB Act being amended nine times since it was promulgated.

According to the Finance Ministry, the amendment act is going to be made with the objective of maintaining the objectives, scope and structure of the central bank in line with the internationally accepted concept, strengthening corporate autonomy and making the supervisory and regulatory role more effective. According to the Ministry, the bill is being brought to update the legal basis to enhance transparency, accountability and professionalism in the decision making process of the central bank.

The draft also states that timely amendment to the Act is imperative to implement the budget statement of the current fiscal year 2082/83, the fourth strategic plan of the Nepal Rastra Bank (2022-2026) and the reform programmes mentioned in the monetary policy of the current fiscal year. The amendments have been proposed to provide a legal basis for the stability of the financial system, controlling inflation, expanding banking access and regulation of digital financial services.

The draft of the bill has given priority to strengthening autonomy of the central bank, providing more clarity on its objectives and working areas and updating the Act as per the current economic-financial context. Likewise, promotion of risk-based supervision system, strengthening of inflation control, adjustment of NRB’s role as per the federal setup and modernization of the balance sheet and report system as per the international accounting standards are the major objectives of the amendment. The draft has also included a proposal to bring clarity on the provisions related to the resolution of banks and financial institutions.

Along with the expansion of digital financial system, the draft bill proposes to give legal recognition to the concept of ‘digital bank’. As per the proposed provision, a digital bank will be defined as an institution licensed by the central bank to carry out financial transactions through digital means without a physical branch or network. This is expected to pave the way for financial institutions operating differently from traditional banking structures to be brought under the ambit of regulation.

Similarly, digital currency or virtual currency has also been proposed to be included in the definition of ‘currency’. This provision is expected to provide a clear legal basis for the central bank digital currency or other digital payment instrument that the central bank may issue in the future. The amendment has also been proposed to the provisions related to the functions, duties and rights of the NRB.

The current system of determining the exchange rate system has been amended to include the explicit authority to determine the exchange rate system of foreign currency and the exchange rate. This would make the central bank’s role in the foreign exchange market more clear and stronger.

It has also proposed to legally strengthen the obligation to enhance the public’s access and credibility to banking and financial services. In addition, the central bank will be given a clear role as a macroprudential body and the right to identify and manage systemic risks that may appear in the financial system. A clear provision has also been proposed to take the troubled banks and financial institutions under control or take them to the resolution process.

The meeting also proposed to increase the existing arrangement of three independent directors to five members in the NRB Board of Directors. The bill has a provision that there shall be five non-executive independent board members appointed by the Government of Nepal representing different sectors.

Significant amendments have also been proposed in the provision related to the appointment of deputy governors. The draft has proposed to appoint the incumbent deputy governor from among the officers who have already served as executive director of the bank at least one month before the vacancy of the post of deputy governor.

Similarly, amendment has been proposed in the provision related to the reappointment of the governor, deputy governor and director. According to the existing Act, the Governor and Deputy Governor can be re-appointed and the Director can be re-appointed for as many times as possible, but the draft has limited it to ‘the Government of Nepal can reappoint the Governor and Director whose term has expired only for one time if the Government of Nepal deems appropriate’.

Amendments have also been proposed in the works, duties and powers of the Management Committee under Section 33 of the Act and the Audit Committee under Section 34 of the Act. The draft states that the internal governance, risk management and auditing system would be modified in line with international practices. The draft also includes a proposal to establish various reserve funds for strengthening financial management.

A provision has been proposed to set up a ‘general reserve fund’ in the NRB and use it to bear the net loss and increase the capital of the bank. Likewise, a ‘revaluation reserve fund’ will be set up to account for the profit and loss arising out of the revaluation of financial instruments, foreign currency, gold and other assets.

Likewise, a proposal has been made to establish a ‘Financial Development Fund’ for the stability of the financial sector, enhancing financial access and strengthening the overall financial system. The draft has also included a provision for the establishment of a ‘special reserve fund’ of the total monetary liability of the country not exceeding two percent.

The Nepal Rastra Bank Act, 2058 BS was recently amended through the Act to amend some acts related to the prevention of money laundering and promotion of business environment, 2080 and some Nepal acts related to cooperatives amendment Act, 2081.