The central bank has rolled out the Payment System Inspection and Supervision Bylaw 2021 in order to formalise inspection and supervision of payment system operators and payment service providers.

The operation committee of Nepal Rastra Bank has approved the Payment System Inspection and Supervision Bylaw for digital payment, officials said.

“We only have a payment system bylaw and on the basis of the bylaw, the central bank started issuing certain circulars related to the payment system,” said Dev Kumar Dhakal, spokesperson for Nepal Rastra Bank.

"With the establishment of payment system operators (PSOs) and payment service providers (PSPs), their transactions needed to be inspected and supervised, and the bylaw was implemented to formalise the work," he said.

According to him, the payment system of banks and financial institutions too comes under the purview of the bylaw as they are also payment service providers and operators. Banks use SWIFT and conduct payment related transactions.

The bylaw allows the central bank to check that the transactions of payment system operators and providers are transparent, and that they have been adhering to the regulations and organisational governance, Dhakal said.

A payment system recommendation committee has been formed under the related deputy governor that will form, amend and issue policy-level provisions for the development, expansion and security of the payment system.

There will be a separate oversight unit under the Payment Systems Department to manage the inspection and supervision work done by the department, as per the bylaw.

Amit Agrawal, co-founder and director of e-wallet service provider Khalti, said that as digital payment was growing as an industry, such provisions would increase the use of digital payment and people's trust in it.

As the bylaw has provisioned merger and acquisition as an improvement process for payment system operators and providers in case of incapability to perform their functions, this will help to expand the industry and build trust among customers, he said.

"Sooner or later, people will have to adopt digital payment service, and it is essential that they build trust in it. Nepal Rastra Bank has been playing an important role to make this happen," Agrawal said.

"The public and government officials also need to understand that digital payment service providers are not only for providing mobile recharge service, but a medium for providing digital financial service," he added

In order to make the payment system secure, healthy and capable, inspection and supervision under the existing laws and other policy-level provisions requires analysing the financial situation of banks, and the management of their security system.

The payment department needs to prepare an annual work plan related to inspection and supervision designed to increase public confidence in digital transactions.

In addition to field visits, inspection and supervision will also involve collecting details, holding discussions with management, and obtaining regular information. The department can conduct field inspection, non-field supervision, special supervision and inspection supervision, as per the bylaw.

Banks are required to submit through electronic means information to the central bank such as the number of their customers, total wallet numbers and stock (e-money), the stock in settlement accounts, details of fraud and conflict cases, and incidents of service interruption and security.

As per the bylaw, field visits should be made at least once every two years, and the department needs to form a team for field visit supervision.

Before conducting supervision, the department will normally ask for a list of the necessary documents and work environment seven days in advance. But for special supervision, the department might provide pre-preparation time.

The central bank can conduct a thorough inspection and supervision of payment system operators and providers. The bylaw also contains the code of conduct, roles, responsibility and security of supervision.

After completing the supervision work, the team is required to prepare a field supervision report.

On the basis of this report, the central bank will move ahead with the improvement process if the banks and financial institutions are found not to be in a condition to provide service related to payment or cannot operate the system, or are found to have done anything against the interest of shareholders, owners or the public.

The improvement process includes adding capital in the banks, submitting short- and long-term work plans for improvement to the central bank, and adopting national and international practices for the improvement of banks.

The central bank can give instructions for acquisition if it seems necessary for the improvement process of the banks and financial institutions.

The department will prepare inspection and supervision related annual reports and publish them within six months of the end of every fiscal year.