Role of Central Bank of Nepal – Nepal Rastra Bank

Role of Central Bank of Nepal – Nepal Rastra Bank

This post is about Role of central bank of Nepal – Nepal Rastra Bank in the economic development of a country. The main objective of central bank is to maintain monetary stability. To fulfill such objective, Nepal Rastra Bank has been given related authority and responsibility to maintain monetary stability by the Nepal Rastra Bank  Act 2058.

Nepalese financial sector comprises the institutions like Banks and Financial Institutions, Insurance Companies, Capital Market, Employee Provident Fund, Citizen Investment Trust, Deposit and Credit Guarantee Corporation, Credit Information Center, Cooperatives and Financial Intermediary, Non-Government Organization etc. Nepal Rastra Bank (NRB) is the regulator of the banking system of Nepal. Since the banks and financial institutions are licensed by the NRB, they are regulated and supervised by NRB. Nepalese banks and financial institutions should be registered as a public limited company; the Office of Company Registrar (OCR) is also regulators of banks and financial institutions in the company related issues. Similarly, the banks and financial institutions issue securities like share, debenture, bonds; such securities are regulated by Securities Board of Nepal (SEBON). Tax related issues are regulated by the Government. In this book we discuss on the banking activities, therefore we discuss on banking regulation which is under the scope of NRB.

Nepal Rastra Bank, regulator and supervisor of the banking system, was established on April 25,1956. During the inception period, there was no well-developed formal money or capital markets; economy was highly non-monetized; very limited banking services; dual currency system of Nepalese currency (NC) as well as Indian currency (IC). As per the NRB Act, 1955 primary objectives of NRB were;

  • Issuance of Nepalese currency for facilitating the economic welfare of the people.
  • Circulation of the Nepalese currency throughout the country.
  • Maintaining the exchange rate stability of the Nepalese currency
  • Mobilization of the capital for the development, among others, the industrial sector of
    the economy; and
  • Development of the banking system (NRB Act, 1955)

After the financial liberalization initiated in mid 80s, some progress have been achieved in Nepalese financial sector and accordingly the number of banks and financial institutions increased significantly. Nepalese financial system consists of both depository financial institution and non-depository financial institutions. Depository financial institutions intermediates the primary savers and ultimate borrowers by mobilizing deposits in the form of loans and advances such as commercial banks, development banks, finance companies, NGOs, cooperatives etc. Non-depository financial institutions like insurance companies, employee provident fund etc do not directly involve in accepting deposit but they facilitates mobilization of financial resources as they receive regular payments under specified conditions and contingent claims.

The central bank, NRB, has the legal power as well as liability to promote financial institutions through proper regulation, inspection, supervision and monitoring. In the context of Nepal, only depository financial institutions are regulated and monitored by the centra] bank.

Nepal Rastra Bank (NRB) has played a prominent role in the establishment, extension and development, supervision, inspection and monitoring of financial institutions in Nepal. There are several acts, rules, guidelines, regulations and policies to regulate the banking system. The banks and financial institution are “required to perform their activities in compliance with these acts, directives, policies and guidelines. The operation, regulation, monitoring and supervision of banks and financial intuitions are governed by the following acts, policies, guidelines and directives:

  • NRB Act, 2058(B.S.)
  • Bank and Financial Institution Act (BAFIA),2063(B.S.)
  • Company Act, 2063(B.S.)
  • Licensing Policy, 2062(B.S.)
  • Unified Directives, 2062{B.S.)
  • Foreign Exchange Regulation Act
  • Other prevailing laws and regulations
  • International Best Practices and Basel Capital Accord I & II
  • International conventions, Policies, and Guidelines
  • Orders and correspondence of other regulatory authorities
  • Monetary Policy Statement

Government decisions


Hence, the main role and need of central bank may be summarized as follows:

Nepal Rastra Bank, foreign exchange rate

1. Role of Central Bank of Nepal – Nepal Rastra Bank : Monetary Market:

when the Nepal Rastra Bank was established, the development of monetary market in Nepal was far poor. Most of the transactions were carried out in Indian currency including the salary provided by the government. Only one bank i.e. Nepal Bank Limited was in operation. Therefore, to overcome such difficulties and for the appropriate development of monetary market, Nepal Rastra Bank was established.

See Also: NEPAL RASTRA BANK Forex NRB Foreign Exchange Rate in Nepal

2. Role of Central Bank of Nepal – Nepal Rastra Bank : Industrial Finance:

The economic development of the nation highly depends upon the development of industrial sectors. For the development of industries, they need facilitative and long-term financing for the capital requirement. To fulfill such requirement of financing, NIDC was established in 2016. Nepal Rastra Bank has been contributing to mobilize industrial finance by providing the facility of rediscount, re-credit, by purchasing debentures issued by NIDC etc. Similarly for the development of small and cottage industry, Nepal Rastra Bank NRB makes various arrangements with the help of Government of Nepal or with the assistance of foreign donor of institution or country. Nepal Rastra Bank NRB act has also provided provision of investment in priority sectors and investment in productive sector.

3. Role of Central Bank of Nepal – Nepal Rastra Bank : Rural finance

In Nepal, nearly 80% of the total population is in rural areas. Therefore, national economic development is not possible unless the rural area is developed. Similarly, the people in the rural area need to be participated in the economic activities for overall development. For such purpose i.e. to mobilize rural finance Nepal Rastra Bank makes various arrangements to make investment in agriculture, farming, small and cottage industries and to mobilize saving in that area. Still much of the population in rural area depends upon unorganized loan at high interest rate. To provide institutionalized loan, Nepal Rastra Bank NRB has made arrangements to launch projects like micro financing for women, poverty alleviation, rural finance project, small farmers development project etc.

4. Role of Central Bank of Nepal – Nepal Rastra Bank : Inflation

Generally, the increase in price level of aggregate of commodity during interval of time is called inflation. Inflation may be caused due to various elements like increase in production entrepreneur, increase in the supply of money, increase in the credit etc. Among these elements, Nepal Rastra Bank NRB can influence some elements like phenomenon of supply of money, credit creation and control etc. Nepal Rastra Bank NRB therefore needs to make positive influence to the expansion of monetary market by which the employment and economic growth can be increased.

5. Role of Central Bank of Nepal – Nepal Rastra Bank : Foreign Exchange:

The central bank also functions as the custodian of country’s foreign exchange reserves. This function helps the central bank to overcome the difficulties regarding balance of payments. The exchange rate can be stabilized with the help of this role or function. In order to maintain stability in the foreign exchange rate, the central bank buys foreign currencies in the market as the value of foreign currencies falls. This action decreases the supply of the foreign currencies in the market and thus the falling value of foreign currencies is controlled.

In case, the value of foreign currencies is increased suddenly. Such condition is not favourable for smooth economic development of a country. In this condition, central ban sells foreign currencies in market. When the supply of foreign currencies is increased, the value of such currencies will automatically be stabilized in the money market. In Nepal, Nepal Rastra bank play the role as the custodian of foreign exchange reserve. All types of public transactions of foreign currency are prohibited by act in Nepal. so foreign currencies can not be used as the manes of payment in local transactions. People having foreign currencies should exchange with Nepalese currencies to pay for local transaction.

Such foreign currencies are provided to those only, who have to make payment to foreign countries for import business, who are going abroad for tour, study, medical care or any other purposes. Such provision makes the Nepal Rastra bank more successful in controlling the rate of foreign exchange.

See Also: NEPAL RASTRA BANK Act 2058

Although the management of foreign currency is also a part of monetary policy, it has a substantial role for the national economy. For those countries like Nepal, which has high amount of trade deficit, it needs substantial amount of foreign currency reserve for such purpose. For the continuous supply of the foreign goods, foreign exchange, which is acceptable to the foreign exchange market, is necessary. Previously, Nepal Rastra Bank carried out the total arrangement about the foreign currency, but with the adoptment of liberal economic policy, Nepal Rastra Bank Nepal Rastra Bank NRB has allowed the commercial banks to make transactions of such foreign currency. In one way, Nepal Rastra Bank makes various arrangement for the proper utilization of foreign currency, and in another way it reserves such currency.

6. Other Role of Central Bank of Nepal – Nepal Rastra Bank :

There are some other role of central bank of Nepal are as follows:

  1. Issue of note
  2. Bankers to the government
  3. Control of credit
  4. Publication of indicators
  5. Training facilities

Author : Rajesh Nepali,

Old Baneshwor, Kathmandu