Nepal’s central bank has introduced a new framework for identifying Systemically Important Payment Systems (SIPS), a move aimed at strengthening oversight of the country’s payment ecosystem and ensuring that it meets international best practices while contributing to financial stability and economic growth.

According to the framework issued on Monday, designating certain payment systems as SIPS and reinforcing regulatory supervision will help enhance the resilience of Nepal’s payment infrastructure. This, the central bank says, will enable the systems to withstand potential disruptions while at the same time promoting innovation, financial inclusion, and sustainable development.

The framework has been designed to safeguard financial stability by identifying payment systems whose disruption could generate and spread risks across the wider financial sector. It seeks to ensure the resilience and continuity of critical payment systems during periods of financial stress or operational disturbances.

By focusing on risk identification, assessment, and mitigation, the framework aims to better understand how vulnerabilities arise and are transmitted within the system. It then proposes mechanisms for monitoring, managing, and controlling those risks effectively.

Kiran Pandit, spokesperson for Nepal Rastra Bank, said that through the framework, the central bank intends to identify the most widely used payment tools by studying their features and usage patterns, and then formulate regulations to make them more resilient.

“For instance, if we find that the quick response (QR) code-based payment system has become systemically important due to its high usage, then we will prepare regulations to make it more robust so that problems do not arise,” said Pandit. “This is also an international practice.”

As part of the process, the central bank will conduct market assessments of payment tools introduced by payment service providers and system operators. The evaluation will be based on factors such as usage, market size, market share, and interconnectedness. This assessment will help determine which systems qualify as designated payment systems.

The framework also provisions specific responsibilities for these designated systems, and additional regulations will be developed if required, Pandit added.

Globally, central banks designate SIPS because deficiencies or failures in such systems can trigger widespread disruptions among participants, or even systemic interruptions across the entire financial sector. In Nepal, these designated systems may be state-owned or privately operated.

The purpose of designating SIPS is to manage the contagion of risks associated with the operation of critical payment systems. According to the central bank, systems that mainly handle time-critical and large-value transactions are considered systemically important. Likewise, the sole or dominant payment system in the country that underpins the financial market infrastructure is also recognised as systemically important.

Other systems may also qualify. For example, a payment system that accounts for the largest aggregate value of payments, or that holds more than a third of the retail market in terms of transaction value, or two thirds in terms of transaction volume, will also be considered systemically important.

The framework outlines clear criteria for identifying SIPS and defines the responsibilities of designated systems. It applies both to payment systems operated directly by the central bank and to those operated by licensed financial institutions.

SIPS are critical components of the financial system as they handle large-value and time-sensitive transactions. Any disruption in their operation could cause systemic shocks with far-reaching consequences for financial stability. Poorly designed systems can amplify risks, disrupt markets, and erode confidence in the economy. Ensuring their safety, efficiency, and resilience is therefore essential for the stability of Nepal’s financial ecosystem.

Under the Payment and Settlement Act, 2019, Nepal Rastra Bank is mandated to oversee, regulate, and develop the country’s payment systems. The act requires that Nepal’s frameworks align with international standards such as the Principles for Financial Market Infrastructures (PFMIs).

The PFMIs, developed by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions, provide a globally accepted framework to enhance the safety, efficiency, and resilience of financial market infrastructures. These principles cover governance, risk management, settlement finality, operational resilience, and transparency.

In Nepal, adopting PFMIs creates an opportunity to strengthen payment systems, reduce systemic risks, and ensure the efficient functioning of both large-value and retail systems. Large-value platforms include the real-time gross settlement (RTGS) system, while retail systems include mobile banking and QR-based payments, which are becoming increasingly popular.

Broadly, Nepal’s payment systems are categorised into two groups: large-value and retail. Large-value systems process, clear, or settle high-value transactions, whereas retail systems handle financial transactions between consumers, banks, financial institutions, payment service providers, and merchants.

The central bank says that with the new framework, Nepal can safeguard its financial stability and support innovation and inclusivity in the payment ecosystem, making it more resilient to domestic and global economic shocks.