After more than a month’s delay, Nepal Rastra Bank finally unveiled its Monetary Policy for the fiscal year 2019-20 on Wednesday. This is the 18th in the series of annual plans through which the central bank presents its policies for the upcoming fiscal year. Given Nepal Rastra Bank’s role as both guardian of macroeconomic stability and regulatory agency for the banking sector, this annual presentation goes beyond monetary policy instruments and also focuses on directions and suggestions aimed at banks and financial institutions. The entire economy obtains guidelines for the next fiscal year from the plans contained in the Monetary Policy. So, when the central bank changes its plans at the last moment, especially well-received ones, questions have to be raised as to why it did so.

Barely two weeks ago, Nepal Rastra Bank Governor Chiranjibi Nepal had stated that the central bank would focus on breaking the industrialist-bank nexus so that conflicts of interest are avoided. Now, following the announcement of the Monetary Policy, it seems that the central bank has dropped all plans to do so. The governor intriguingly did not mention this policy direction even once when releasing the Monetary Policy. Why has the central bank backtracked on its plans to implement this important and overdue regulation? It is not as if this opportunity is only used for monetary policy announcements, because the governor did address Nepal Rastra Bank’s policy encouraging bank mergers.

The banking sector has been riddled with bad practices that have allowed directors and influential promoters to siphon off depositors’ money for funding loans for businesses they also control. This conflict of interest has been ongoing even though laws—under the Bank and Financial Institution Act—clearly state that bank promoters and directors cannot take loans from banks in which they have shares. Promoters may circumvent these laws by having pliable family members take loans in their stead. Other forms of vested interest may also occur. For instance, directors can influence the bank’s purchase of assets—assets that they personally own—as happened in the case of Gorkha Development Bank. Such a move would make anyone question whether the assets have been priced fairly.

The regulation changes proposed by Governor Nepal are not new. Finance Minister Yuba Raj Khatiwada had initially proposed them six years ago when he was the central bank governor. And, in the fiscal year 2015-16, these were included in the amendments to the Bank and Financial Institution Act. However, the House Finance Committee then had mysteriously opted to remove this provision from the final amendments that were passed in 2017. But what is more surprising now is Chiranjibi Nepal’s statement supporting tougher regulations in the run-up to the release of the Monetary Policy 2019-20, but which did not make it into the document itself.

Nepal Rastra Bank needs to reassess where its priorities lie. It cannot continue to support weak regulations that allow for vested interests in the banker-business nexus. Though the Monetary Policy failed to guide stricter rules against conflicts of interest, there is yet time to remedy this. Lawmakers can make amendments to the Bank and Financial Institution Act so that bank directors are not allowed to simultaneously hold controlling shares in other businesses. Moreover, to negate further loopholes, the law must apply to second-tier familial relationships as well.

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