Nepal Rastra Bank in Fifty Years Part I -Resource Management and ...

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Transcript of Nepal Rastra Bank in Fifty Years Part I -Resource Management and ...

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“While expressing our unflinching faith in multi-party democracy, we would like to mention that economicand institutional reforms will continue. Efforts atreforms in the utilisation of public expenditure andpublic service delivery will be made more effective.Banking discipline will be restored. Measures will beadopted towards the effective implementation of thepoverty reduction strategy and the anti-corruption drive.Sustainable development is now our national agenda.”

– His Majesty King Gyanendra Bir Bikram Shah Dev

Front Cover Inside Page

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Nepal Rastra Bankin

Fifty Years

Nepal Rastra BankKathmandu, Nepal

July 2005

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© 2005 Nepal Rastra BankCentral OfficeBaluwatar, KathmanduNepalWebsite: http://www.nrb.org.np

All rights reserved.

The statements, findings, interpretations, opinions, and conclusions in the articles containedin this publication are those of the authors themselves and do not necessarily reflect thoseof the Nepal Rastra Bank.

Cover Design : Mr. Sundar ShresthaInterior Design : Mr. Amar Ratna BajracharyaEditorial Assistance : Mr. Sanu Bhai Maharjan

Printed at : Sajha Prakashan, Pulchowk, Lalitpur.

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His Majesty King Gyanendra Bir Bikram Shah Dev

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Her Majesty Queen Komal Rajya Laxmi Devi Shah

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Governor Bijaya Nath Bhattarai

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ForewordOn the auspicious occasion of the 59th birthday

celebrations of His Majesty King Gyanendra BirBikram Shah Dev and also to mark the GoldenJubilee Year of the establishment of the Nepal RastraBank (NRB), this publication, ‘Nepal Rastra Bank inFifty Years’, has been brought out incorporatingarticles outlining the accomplishments of the NRBover the past five decades as well as the underlyingissues and agenda for the future.

In the course of the past 50 years, since His LateMajesty King Mahendra inaugurated the Bank onApril 26, 1956, the institution has gone throughfundamental transformation in its objectives,functions and other organizational and managerialfeatures. Constantly remaining at the centre of theNepalese financial system, Nepal Rastra Bank by nowhas emerged as one of properly institutionalizedcentral banks of the South Asian region. During theearly period of the Bank’s establishment, its role hadbeen focused on increasing the circulation of theNepalese currency throughout the Kingdom,developing the domestic banking system andstabilizing the exchange rates of the Nepalesecurrency. Since then, the domestic financial systemhas broadened, deepened, diversified and witnessedqualitative changes in the product and servicedeliveries. From a single banking institution then, thesystem has now almost 200 institutions, with serviceslargely diversified and, at the same time, integratingour economy with the global one. Establishment ofthe banks with foreign participation, convertibilityof Nepalese currency in the current accounttransactions, initiation of the practice of theformulation and dissemination of the monetarypolicy on an annual basis, formulation andimplementation of intensive regulatory andsupervisory system and norms of the internationalstandards and Nepal’s accession to the World TradeOrganization are same of the tenets of the Bank toassimilate it with the global financial fraternity.

To capture this dynamic environment and ensuredomestic financial health and stability as a part of theongoing reform in the financial system, a new NRBAct, 2002 was enacted which has provided moreautonomy, authority and accountability to the corecentral banking functions. Since then, the supervisory,oversight and regulatory functions of the Bank havebeen enhanced considerably. The latest initiatives

towards qualitative improvement in the ongoingexpansion of the financial system based on market-oriented healthy competition have definitely added newmilestones in developing and nurturing a financialsystem that would surely contribute to the sustainablegrowth of the economy with overall macroeconomicstability. As the Bank celebrates its Golden Jubilee, apublication cursorily capturing its evolutionary processof the Bank itself and that of the domestic financialsystem is a timely and pertinent effort.

This compendium of comprehensive researcharticles is an endeavor to cater to the needs of bothacademic and general readers having interest in thecentral banking functions. This publicationincorporates important topics dealing with theoverall functions and responsibilities of the centralbank in the context of the evolving features andchallenges of the Nepalese financial system. I amconfident that these writings by the respective expertson the subjects would not only enlighten the readersabout the depth and breadth of the subject matterbut would also facilitate informed policy/decision-making for improving the health of the Nepalesefinancial system and accelerating the pace ofeconomic development in Nepal.

This publication would not have taken its presentform without the commendable efforts undertakenby Mr. Lekh Nath Bhusal, Deputy Governor andCoordinator, Nepal Rastra Bank Golden JubileeAnniversary 2005, Programme ImplementationCommittee, and Mr. Tula Raj Basyal, ExecutiveDirector and Coordinator, Publications Sub-Committee, along with the members of the Sub-Committee. I would like to thank all the contributorsfor the depth and diversity of the ideas and analysesreflected in the publication. I would also like toexpress my profound gratitude to all past and presentemployees of Nepal Rastra Bank for guiding theestablishment to this milestone.

I am particularly rejoiced to bring out this historicpublication on the auspicious occasion of HisMajesty’s 59th Birthday Celebrations, so happilycoinciding with the Bank’s Golden Jubilee AnnualEvents.

July 7, 2005 (Bijaya Nath Bhattarai)Governor

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ContentForeword xiContent xiiiAcronyms xv

PART I

RESOURCE MANAGEMENT AND ORGANIZATION DEVELOPMENT

Human Resource Management .................................................................................................... 1- Deputy Governor Lekh Nath Bhusal

Corporate Leadership ........................................................................................................................ 9- Bhola Ram Shrestha

Organizational Development and Corporate Planning .......................................................... 34- Lila Prakash Sitaula

NRB Reengineering ............................................................................................................................. 53- Dr. Binod Atreya

Financial Management ........................................................................................................................ 82- Radheshyam Shrestha and Bhuban Kadel

Information Technology .................................................................................................................... 98- Parbat Kumar Karki and Saurav Das Manandhar

PART II

FINANCIAL SYSTEM

Development Finance ........................................................................................................................ 113- Krishna Kumar Pradhan

Supervision Framework ..................................................................................................................... 137- Surendra Man Pradhan

Payments System ................................................................................................................................... 145- Sushil Ram Mathema

Financial Sector Development ............................................................................................................. 157- Dr. Dandapani Paudel

Legal Framework ................................................................................................................................... 167- Bhaskar Mani Gnawali

Financial System and Economic Development .......................................................................... 176- Narayan Prasad Poudel

Financial Sector Reform .................................................................................................................... 202- Bhishma Raj Dhungana

Financial Sector and Development Planning ............................................................................ 224- Dr. Bhubanesh Pant

Money, Foreign Exchange and Capital Markets ....................................................................... 251- Shree Prasad Paudel

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PART III

MACROECONOMYMonetary Policy ....................................................................................................................................... 279

- Dr. Yuba Raj Khatiwada

Economic Research .............................................................................................................................. 296- Deependra Bahadur Kshetry

Foreign Exchange ................................................................................................................................. 308- Ram Prasad Adhikary

Inflation ...................................................................................................................................................... 327- Ravindra Prasad Pandey

Currency Management ....................................................................................................................... 346- Vishnu Nepal

Domestic Debt Management ............................................................................................................. 363- Gokul Ram Thapa

International Relations ......................................................................................................................... 378- Rameswori Pant

Open Market Operations ...................................................................................................................... 399- Shiva Raj Shrestha

Interest Rate ............................................................................................................................................. 417- Nara Bahadur Thapa

International Trade and Payments ................................................................................................. 429- Shiba Devi Kafle

WTO and Financial Services Sector ............................................................................................. 453- Dr. Nephil Matangi Maskay

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AcronymsACS APRACA Consultancy ServicesACU Asian Clearing UnionADB Asian Development BankADB/N Agriculture Development Bank of

NepalADF Asian Development FundADF Augmented Dickey FullerALCO Asset-Liability Management

CommitteeAMC Assets Management CorporationAPRACA Asian Pacific Regional Agricultural

Credit AssociationAPROSC Agriculture Projects Services CentreATM Automated Teller MachineBAFIO Banks and Financial Institutions

OrdinanceBCBS Basel Committee on Banking

SupervisionBFI Banks and Financial InstitutionsBFIO Banks and Financial Institutions

OrdinanceBIMST-EC Bank of Bengal Initiative for Multi-

Sector Technical and EconomicCooperation

BIS Bank for International SettlementsBLUE Best Unbiased Linear EstimatesBOP Balance of PaymentsBOD Board of DirectorsBR Bank RateBTC Banker’s Training CenterCARD Credit Administration and Review

DivisionCAS Country Assistance StrategyCBPASS Commercial Banks Problem Analysis

and Strategy StudyCBS Central Bureau of StatisticsCBs Commercial BanksCC Credit CommitteeCDB Co-operative Development BankCFG Corporate and Financial GovernanceCIB Credit Information BureauCICTAB Centre for International Co-operation

and Training in Agricultural Banking

CIT Citizen Investment TrustCPC Corporate Planning CommitteeCPI Consumer Price IndexCRR Cash Reserve RatioCRRDB Central Regional Rural Development

BankCSI Cottage and Small Scale IndustriesCSP Country Strategy ProgrammeCST Co-ordination and Support TeamDER Dual Exchange RateDFID Department for International

Development, UKDFIs Development Finance InstitutionsDICG Deposit Insurance and Credit

Guarantee CorporationDORT Directors of Research and TrainingDRT Debt Recovery TribunalDSCP Deprived Sector Credit ProgramDTT Deloitte Touché TohmatsuEDFI European Development Finance

InstitutionEPF Employees’ Provident FundEPU European Payments UnionEPZ Export Processing ZonesERRDB Eastern Regional Rural Development

BankESAF Enhanced Structural Adjustment

FacilityESC Economic Services CentreESCAP Economic and Social Commission

for Asia and the Pacific, UN

EXCO Executive Committee of the South-East Asian Voting Group

FAO Food and Agriculture OrganizationFCGO Financial Control General’s OfficeFEDAN Foreign Exchange Dealers

AssociationFICOOPs Financial CooperativesFINGOs Financial Non-Governmental

OrganizationsFSI Financial Stability InstituteFSRP Financial Sector Reform Program

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FSRSP Financial Sector Reform StrategyPaper

FSTA Financial Sector Technical AssistanceFSTAP Financial Sector Technical Assistance

ProjectGAB General Arrangements to BorrowGATS General Agreement on Trade in

ServicesGATT General Agreement on Tariffs and

TradeHBS Household Budget SurveyHMG His Majesty’s GovernmentHRM Human Resource ManagementIBIS Integrated Bank Information SystemIBRD International Bank for Reconstruction

and DevelopmentIC Indian CurrencyICCMT ICC Bank Management TeamICSID International Center for Settlement of

Investment DisputesICU International Clearing UnionIDA International Development

AssociationIFAD International Fund for Agriculture

DevelopmentIFC International Finance CorporationIMF International Monetary FundIOSCO International Organization of

Securities CommissionIRe Indian RupeeIRs Indian RupeesKMO Kathmandu Main OfficeL/C Letter of CreditLDCs Least Developed CountriesLFR Long Form ReportsM1 Narrow MoneyM2 Broad moneyMCSC Micro Credit Summit CampaignMDGs Millennium Development GoalsMFA Multi-Fiber ArrangementMFN Most Favoured NationMIGA Multilateral Investment Guarantee

AgencyMIS Management Information SystemMOF Ministry of FinanceMOLD Ministry of Local DevelopmentMR Mean RatioMST Monitoring and Surveillance TeamNARC National Agriculture Research Centre

NBL Nepal Bank LimitedNC Nepalese CurrencyNEFISCO Nepal Finance & Saving CompanyNEPSE Nepal Stock Exchange LimitedNIC National Insurance CorporationNIDC Nepal Industrial Development

CorporationNPA Non-Performing AssetsNPC National Planning CommissionNPEDC National Productivity and Economic

Development Centre LimitedNPL Non-performing LoanNRB Nepal Rastra BankNRe Nepalese RupeeNRs Nepalese RupeesOCR Ordinary Capital ResourcesOD Organization DevelopmentOGL Open General License SystemOLS Ordinary Least SquaresOMOs Open Market OperationsORC Organization Restructuring

CommitteePEs Public EnterprisesPRSP Poverty Reduction Strategy PaperPSC/L Priority Sector Credit/LendingRBB Rastriya Banijya BankRBI Reserve Bank of IndiaRepo Re-purchaseRMD Relation Management DivisionRMDC Rural Micro-Finance Development

CenterRNAC Royal Nepal Airlines CorporationRRDBs Regional Rural Development BanksRSRF Rural Self-Reliance FundSAACCOS Savings and Credit Co-operative

SocietiesSACCOPs Saving and Credit CooperativesSAEU South Asian Economic UnionSAF Structural Adjustment FacilitySAG Special Assets GroupSAL Structural Adjustment LendingSAP Structural Adjustment ProgramSDR Special Drawing RightsSEACEN South East Asian Central Banks

Research and Training CenterSEANZA South East Asia, New Zealand and

Australia Central Banks’ AssociationSEBO Securities BoardSER Single Exchange Rate

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SFDB Small Farmers’ Development BankSFDP Small Farmer’s Development ProjectSHGs Self-help GroupsSKBB Sana Kisan Bikas BankSLR Statutory Liquidity RatioSMC Security Market CenterSME Small and Medium EnterpriseSOEs State-Owned EnterprisesSTI Second Tier InstitutionsTBs Treasury Bills

TLCC Top-level Co-ordination CommitteeTLDP Third Livestock Development

ProjectTOR Terms of ReferenceVRS Voluntary Retirement SchemeWB World BankWPI Wholesale Price IndexWRRDB Western Regional Rural Development

BankWTO World Trade Organization

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HUMAN RESOURCE MANAGEMENT 1

Part I

Resource Managementand

Organization Development

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HUMAN RESOURCE MANAGEMENT 3

Human Resource ManagementLekh Nath Bhusal

Deputy Governor

IntroductionPersonnel management or human

resource management is concerned withpeople in an organization and themanagement of human energy. Prior to1970s, the term Human ResourceManagement (HRM) was hardly used todescribe mainstream people management.The terminology - personnel managementand personnel administration - were usedin theory and organizational practices in the UK andthe USA domain respectively. Since these terms areseldom used today, one might draw the logicalinterference that ‘old style’ personnel managers arereplaced by new-style HRM managers.

In the early 1980’s, a debate was initiated in theUSA whether HRM was a new term for thesupposedly old concept of personnel or whether itembodied something substantially different. In thebeginning, many scholars were of the opinion thatHRM was no more than new wine in the oldpersonnel bottle. Subsequently, it was accepted thatthe concept of HRM reflected a paradigm shift, whichhas influenced over the last two and a half decades,both the way people were expected to act inorganizations and the employer-employeerelationships. This is not to say that the paradigmshift happened overnight; Shaun Tyson in 1995pointed out that we have not moved from one steady,state called personnel to another steady, state called‘HRM’. In 1989, Korean Legge in her article argued

that as organizations, most noticeably inthe USA and the UK, attempted to copewith new competitive pressures andenvironmental forces, the vocabulary formanaging their work forces tended tochange. As a consequence, PersonnelManagement was slowly to be replacedby the Human Resource Management asthe new terminology for theprofessionals.

The author does not want to make an in-depthdiscussion between the terminology, PersonnelManagement and Human Resource Management, butjust wants to draw a logical interference that theexternal and internal challenges force an organizationto change its style of management, not only theterminology. Having said this, the author would liketo make a short reference to the financial sector ofNepal as it has the direct bearing on the HRM of theNepal Rastra Bank (NRB).

The Nepal Bank Ltd., established in 1937, wasthe first bank in Nepal. Following this, theestablishment of the NRB, the central bank, in 1956,was a major feature in the evolution and regulationof the financial system. The objective with which thecentral bank was set up was clearly spelled out in thepreamble to the Nepal Rastra Bank Act 2012 B.S., asquoted below:

“Whereas it is expedient to ensure propermanagement of the issuance of the Nepalesecurrency notes, to make proper arrangement for the

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circulation of the Nepalese currency throughout theKingdom and to stabilize the exchange rates of theNepalese currency in order to maintain comfort andeconomic interest of the general public.”

The institutional network and volume ofoperations of the financial system expanded anddiversified, with the number of commercial banksincreasing from 2 in 1984 to 17 at the present. Thenumber of other financial institution has likewiseexperienced a quantum jump. These facts clearly raisethe need for the change in the human resourcecomposition qualitatively and quantitatively, both inthe NRB and other financial institutions.

Manpower Structure of NRB: YesterdayThe NRB staff strength at the time of its establishment

was 23. The Governor was assisted by the ChiefAccountant, who headed the manpower structure, whichcomprised 5 officers and 16 non-officer-level staff, withthe officer/non-officer ratio at 1:3.2. After 10 years ofestablishment, the number of staff reached 915, withthe annual increment at 4.26 times – for officers 2.31times and non-officers 5.40 times. The officer/non-officerratio at that time was 1:7.47. The staff capacity over theyears changed as follows:

1977-78 : Following a gap of next 10 years, thenumber of total staff reached 2135, the annualgrowth during this period being 13.3 percent. Thegrowth in officer and non-officer level staff was 7.9percent and 7.7 percent respectively, with the ratioof officer and non-officer staff at 1:10.1.

1987-88 : In the next 10 year, the number oftotal staff reached 2794, showing the annual growthof 3.1 percent, the growth of officer and non-officerlevel staff being 4.8 percent and 3.6 percentrespectively. The ratio of officer and non-officerstaff was 1:8.77.

1997-98 : It is surprising to observe that thenumber of these two categories of staff in the next10 years showed a mixed trend – both a reductionand an increase in the numbers. In the year 1997, thenumber of staff was 2783, showing a marginaldecline of 0.4 percent during the decade. An increaseof 13.6 percent was recorded in officer level while adecline of 12.5 percent was recorded in the non-officer level staff during the decade, the ratio betweenthe officer and the non-officer level staff being 1:7.47.

2005/06 : After a gap of eight years, thenumber of total staff is now 1664, with a decline of

4.9 percent annually, recording an increase of 3.1percent in officer level and a decline of 5.8 percentin non-officer level. The ratio of officer and non-officer level staff is 1:3.10.

An analysis of the manpower structure revealsthe following interesting facts:• Between 1967/68 and 1977/78, there was a

continuous yearly increase in officer level staffwhile, in the non-office level staff, a marginaldecline had been recorded in the year 1976/77and 1977/78.

• Between 1977/78 and 1987/88, an increasingtrend was recorded both in the officer and thenon-officer level up to 1986/87 while there wasa marginal decline in 1987/88.

• The maximum number of staff was recordedin the year 1987/86, at 3227.

• Between 1987/88 and 1997/98, an increasingtrend was observed in officer level up to 1993/94 while, in non-officer level, the increasing trendwas observed up to 1994/95.

• In the year 1997/98, the number of both theofficer and the non-officer level staff increasedagain.

• Between 1997/98 and 2005/06, the increasingtrend in officer level and the decreasing trend innon-officer level staff was noted, with theexception in 1999/00 and 2001/02.The above facts indicate that up to 1997/98, the

human resource policy was not consistent while thereduction in the number of the non-officer level staffin a way reflects the focus on the professional staffrequired as per the ongoing organizational stages ofmechanization and modernization.

Organizational StructureAt the time of the establishment, the

organizational structure of the NRB was very simple.The structure was classified into 3 areas, viz., CentralOffice, Banking and Issue. In the Central Office, therewere Accounts, Administration, Foreign and ResearchSections. The structure was amended in the year 2015B.S. The Sections were upgraded as Departments, asfollows:1. Administrative Department2. Accounts Department3. Foreign Agency, Exchange and Investment

Department4. Research and Statistics Department

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HUMAN RESOURCE MANAGEMENT 5

5. Supervision and Inspection Department (newDepartment)

6. Kathmandu Banking Office7. Issue Department

The first branch office was established in the year1956 in Biratnagar. Up to the year 1965, NRBcontinuously expanded its structure, with the numberof its offices outside the Kathmandu Valley reaching24. There were 2 branches, 10 co-branches, 4 sub-branches and 6 depot level offices. After theestablishment of Rastriya Banijya Bank (RBB) in 1966,NRB handed over a number of its exchangecounters, depots, sub-branches, and co-branches toRBB.

In the beginning, the offices outside theKathmandu Valley carried out the banking functions,Government transactions, foreign exchange and fundtransfers as these function were the need of theperiod. As the development process of the countrytook its pace, Biratnagar, Birgunj, Siddharthanagarand some other cities developed as commercialcenters and industrial towns. With the emergingnetwork to collect economic statistics, the expansionof the commercial bank branch network and theneed for faster economic growth, the Central Bankgave significant attention in collecting economic andfinancial statistics from the major cities and prominentagro-product areas of the country. The regularinformation feedback requirement was not possiblethrough the Research and Statistical Department ofthe Centre alone. As a result, Regional ResearchCentres were established in the major branches ofthe NRB. In the year 1984, one additional unit namedas Banking Development and Credit Unit wasestablished which was later merged with the RegionalResearch Unit and was renamed as Research andBanking Unit.

The organization structure of the NRB has beenamended a number of times. The Bank, whichstarted with 3 Departments, has 17 Departmentsnow. The creation and merger of Departments hasalso become the major highlight of the differentamendments. Today, the organizational structure ofthe NRB is classified into 4 functional areas while thenomenclature of the Departments has been changedin accordance with the need of the period. Thechange in the organizational structure was an attemptto adapt to the change in external and internalenvironment. The change in the organization structure

also reflected the need to change the manpowerstructure.

The NRB, right from the beginning, has givendue consideration to the human resourcemanagement front. It may be recalled that NRB’shuman resource policy was then guided by thephilosophy “Skill development is the majorinstrument for enhancing productivity”. Thus, the firstthrust of human resource policy was to recruit qualitymanpower and enhance their skill for optimumoutput. Some evidences can be traced to justify theaforesaid fact. In the year 1956, 2 staff were sent toNepal Bank Limited (NBL) for the accounts training.Three staff were sent for foreign exchange trainingto India in the same year. In 1957, two senior officerswere sent for SEANZA Central Banking Course andNote Issue and Banking Course in Australia and Indiarespectively.

NRB’s Human Resource Management:Today

Since the establishment of the NRB, the financialsector as well as the overall economy of the countryshowed a continuous development. External andinternal environment changed. The last decade ofthe 20th century and start of the beginning of the21st century observed tremendous growth infinancial sector both in quantitative and qualitativefronts. Globalization and open market policyprompted the need for change in central bankfunctioning authority and responsibility.

Henceforth, the Nepal Rastra Bank Act 2012 B.S.was replaced by the Nepal Rastra Bank Act 2058B.S. The Preamble to the new Act states:“Whereas it is expedient to establish a Nepal RastraBank to function as the central bank to formulatenecessary monetary and foreign exchange policies,to maintain price stability, to consolidate the balanceof payments for sustainable development of theeconomy of the Kingdom Nepal and to develop asecure, healthy and efficient system of payments; toappropriately regulate, inspect and supervise in orderto maintain the stability and healthy development ofthe banking and financial system and for theenhancement of public credibility towards the entirebanking and financial system of the country.”

If we compare the preamble of the previousand the present Acts, the need for appropriate changein human resource policy in NRB would be quite

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evident. The need for the change in the humanresource policy was felt strongly and it was initiatedmainly following the Royal Assent to the new NepalRastra Bank Act 2058 B.S. This process of changereceived pace and intensity from the year 2002, asdescribed below:

Quantitative AnalysisThere were 2338 staff members in the year

2001. Out of this, 84.3 percent staff comprisedthe non-officer level while only 15.7 percent wereofficers. The officer/non-officer ratio was 1:5.37.A decline of 7.7 percent in the number of staffwas recorded in the year 2002 in comparison tothat of the preceding year 2001. There was amarginal increase in the relative number of theofficer level staff.

As a result, there was marginal improvement inofficer/non-officer ratio in the year 2002 incomparison to the year 2001. The ratio stood at1:4.32. There was a marginal growth of 0.4 percentin the total number of staff due to the increase inthe officer level staff.• In the year 2003, in comparison to the year 2002,

a decline of 16.8 percent was noted in the totalnumber of staff. The decline in non-officer levelwas 20.3 percent, resulting in further improvementin the officer/non-officer level ratio at 1:3.2.

• In the year 2004, there was further reduction inthe total number of staff. The decline was of10.5 percent, with the number of staff at 1664.The officer/non-officer ratio stood at 1:3.1.

• The introduction of the first Volunteer Retirementscheme (VRS) in the year 2001 marked 180 staffopting for the scheme.

• Due to extension of the VRS scheme up to July2002, additional 101 staff opted for the scheme.

• Reintroduction of the VRS scheme in 2003 withadditional benefits package resulted in 371 staffopting for the retirement.

• The third VRS scheme led 102 staff opting forthe scheme in 2004.The above-stated facts clearly reveal that the

Bank’s human resource policy is guided by theprinciple of ‘optimum productivity by minimumpossible level of staff ’. Further decline in the non-officer level staff and improvement in the officer/non-officer level ratio indicates that the Bank isattracting more professional staff in its folds.

Service Period AnalysisIt would also be useful to analyze the longevity

of the service and its impact on productivity.Above 30 years

Of the total staff, 5.3 percent belongs to thiscategory. In officer level, the maximum number ofthis category is in the officer class 2 and in assistantlevel, the maximum number is in the assistant class 1.26 to 30 years

7.8 percent staff falls under this category. Officerclass 3 occupies the highest portion of this category.21 to 25 years

14.6 percent staff falls under this category. Aninteresting observation of this category is that theassistant level staff predominates this category.16 to 20 years

36.2 percent staff falls under this category,considered as the most productive one.11 to 15 years

11.1 percent staff falls under this category.6 to 10 years

16.0 percent staff falls under this category.0 to 5 years

10.0 percent staff falls under this categoryFrom the above-stated observations, it could be

observed that following the implementation of thecorrective action, viz., VRS, the manpower structureof NRB today is comparatively young and energetic.

Qualitative Analysis• Special class officer : 6.3 percent, that is 1 person, is

with Ph.D. degree while the rest are postgraduates.• 1st class officers : 6.7 percent, that is 3 officers, are

with Ph.D. degrees, while 77.8 percent and 15.6percent officers are post graduates and graduatesrespectively.

• 2nd class officer : 2.7 percent officers are having Ph.D.degrees, 55.5 percent are postgraduates, 32.7percent are graduates and 3.6 percents are under-graduates.

• 3rd class officer : 46.3 percent officers arepostgraduate, 33.5 percent are graduates, 10.2percent are intermediates and 1.8 percent are SLCgraduates.Special class officers are having strong line up in

case of experience and qualification whereas amongfirst class officers 15.6 percent, among second classofficers 36.4 percent and among third class officers12.8 percent are having qualifications less than the

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HUMAN RESOURCE MANAGEMENT 7

required. This is one of the most serious concernsfor human resource development aspect of the NRB.

Skill Development and Training PolicyThe Bank has adopted a policy of providing

higher education inside and outside the country forthe employees in different levels. The following criteriahave been fixed for implementing this policy:• An employee who has completed 3 years of

service and gets admission in any reputeduniversity in approved subject could avail theeducation leave facility.

• Employees completing 3 years of service andtheir age not exceeding 45 years are eligible toappear in written examination conducted by theBank for higher study. Bank sends the successfulcandidates to the reputed university and shouldersall the cost.

• 20 employees have availed of this facility duringthe last 5 years.

• As a provision of providing facility inprofessional degree studies such as CA, ACCAand CPA, the Bank provides study leave for theemployees who have completed 3 years of serviceand are willing to study these courses. A total of10 employees have availed of this facility duringthe last 5 years.

Recruitment, Placement and TransferPolicy

As human resource development is associatedwith the recruitment and retention of high qualitypeople who are best fitted to fulfill the organization’sgoal, human resource management policy of NRBis directed towards recruiting and inducting highquality manpower and deploying them effectively.Following policy level steps have been undertaken inthis direction:• Curriculum for open written competition has

been amended.• Policy of inducting university toppers in business

and economics and Ph.Ds has been implemented.Placement• The successful candidates inducted through open

competition are placed in different departmentson the base of merit list. The candidates whoappear in upper merit list are posted in coredepartments such as Research, Bank and FinancialInstitutions Regulation, Supervision, etc., onpriority basis.

• The employees who are promoted to officer levelare placed in departments in accordance with theirqualification and in consultation with theconcerned department chiefs.

Transfer PolicyThe Bank has implemented the following transfer

policy. For transfer, it is expected to spend:• Minimum 7 years’ tenure in specialized

departments such as Research, Regulation,Supervision, etc.

• 2 years’ tenure in the department renderingsupportive functions.

• 2 years’ tenure in the offices outside theKathmandu Valley. Transfer is done on the basisof seniority based on the tenure in the KathmanduValley offices only.Some of the other major steps taken in human

resource management of the Bank are as follows:

Out-SourcingNon-core functions are gradually outsourced such

as cleaning, gardening, and running the canteen. TheBank has already taken the policy decision tooutsource the Banker’s Club, Dispensary, and Banker’sTraining Centre.

Enhancing the Level of ProductivityTo pursue the Bank’s objective of ‘optimum

productivity from minimum possible level ofmanpower’, the following facts are worthy ofconsideration:• The number of note bundles for counting and

sorting has been raised by 25 percent.• No new appointment to the assistant level for

the last 4 years though there is significant reductionin the assistant level staff due to VRS.

• Work simplification and merger of sections indepartments has enhanced the productivity withsignificantly less manpower, especially in theassistant level.

• Induction of professional manpower.

Policy of MechanizationHuman Resource Management Department has

computerized the personnel data and is movingtoward E-Human Resource Information System.

Retention• Change in salary and allowances structure.• Change in insurance bonus payment.

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ConclusionNRB’s Human Resource Management has

traveled a long journey from the PersonnelManagement of yesterday’s to HRM of today.Though more needs to be done to enhance theproductivity, induct more qualified and professionalmanpower, develop the skill and knowledge ofexisting staff, retain the good employees and adoptsound separation policy, the progress to-date seemssatisfactory.

The HRM Model of the NRB in a nut-shell couldbe described through following diagram:

Organization Goal Achievement Productivity Employee

Commitment Profile

People asHuman Resource

Acquision Development Utilization Maintenance

Means Focus Goal

The Means-–Focus–Goal, a well-defined HRMmodel, is in its initial phase of implementation. Thechallenges and opportunities will be dealt strongly,and it is hoped that the NRB will develop itself into amodel institution of Nepal in not too a distant future.

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CORPORATE LEADERSHIP 9

Corporate LeadershipBhola Ram Shrestha

Act. Executive Director, Financial Management Department

IntroductionAn organization, a new entity or a

running one, needs leadership to helpachieve its stipulated and desired goals.To get things done properly and to runthe organization without a hitch, thepersons working at leadership level shouldpossess several characteristics and qualities.John G. Glover has rightly definedleadership as “ …that outstanding aspect of managementwhich manifests ability, creativeness, initiative and inventiveness,and which gains the confidence, cooperation and willingness ofthe people to work by organizing and building employee morale.1In a business entity, leaders are necessary to provideguidance in the right direction. In this connectionC.B. Mamoria observes the role of leadership as“…the successful performance of the leadership role is essentialto the survival of the business enterprise. Goods and servicesare to be provided, products and customers need to be unitedand the worker efforts require integration and coordination.The leader guides the actions of others in accomplishing thesetasks.2 As said earlier, leadership is vital for anyorganization. However, the role of leadership ismore so in resolving a problem that has emerged.C.B. Mamoria has shed light on the urgency ofleadership to cope with a particular problem. Onesuch instance is related to the problem of the GreatEconomic Depression for which the “American peopleneeded someone to restore their confidence and to provide amethod of combating the economic crises they were facing.Franklin D. Roosevelt became a leader to accomplish these

tasks.” In the context of Nepal RastraBank’s evolutionary period after the mid-fifties, the Bank also required pioneeringleadership to tackle the then existingchallenges and accomplish the objectivesset by its charter. It was a very difficulttask to lead a newly established centralBank having numerous challenges.However, looking back at the operations

and achievements of the Bank for the past fivedecades, there is sufficient reason to take pride of itscorporate leadership.

The Board of Directors as the Apex PolicyMaking Body

Corporate leadership of Nepal Rastra Bank(NRB) refers to its Board of Directors (BOD), whichis the supreme policy making body. The Boardconsists of the Governor, two Deputy Governorsand four Directors. As the Bank’s Chief Executive,the Governor is responsible for driving the Banktowards achieving desired goal as provided in theNRB Act, 2002 as well as attaining its mission andvision. In this paper, the term ‘corporate leadership’mainly foucusses on the functions and responsibilitiesof the Governor who acts as the ex-officioChairman of the Board.

The operations and activities of NRB aregoverned by the Nepal Rastra Bank Act, 2002, whichwas enacted by replacing the erstwhile Act of l955.The Act has, to a great extent, addressed the issues in

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relation to corporate governance such as autonomy,accountability and transparency. There is cleardemarcation of the functions, duties and powers ofboth the Board and the Governor.

The Bank’s activities are carried out by the BOD,which is responsible formulating rules, regulations,ligislation and overall management of the Bank. TheGovenor’s office disseminates the informationregarding the execution and implementations ofdecisions taken by the BOD and the top management.The Bank’s regular affairs are executed by the DeputyGovernors. The compulsion of convening the Boardmeeting at least once a month facilitates the leadershipto monitor the activities and execution of strategicplans of the Bank on regular basis.

The BOD comprises of seven members. Apartfrom the Governor as its ex-officio Chairman, theBOD includes the Finance Secretary, two DeputyGovernors and three persons renowned in the fieldsof Economics, Monetary, Banking, Finance andCommercial Laws. The Finance Secretary and twoDeputy Governors are also ex-officio Boardmembers. The present structure of the BOD ispresented in Annexure A.

In the erstwhile Act, out of the four directors tobe nominated by HMG, the Finance Secretary hadbeen represented in the BOD traditionally from thevery beginning, although its was not an ex-officioposition. On the other hand, it was a unique situationwhere the status of the Deputy Governors as ex-officiomembers, having no voting rights, used to attend theBoard meetings as observers.

The Board has been empowered specifically torun the Bank’s operations efficiently and smoothly.Accordingly, the functions, duties and power vestedto the Board can be listed as follows:

Board: Functions, Duties and Powers3

• Frame monetary and foreign exchange policies;• Take necessary decisions with regard to the

denominations of bank notes and coins andframe appropriate policies for issuance;

• Frame policies on inspection and supervision ofbanks and financial institutions; Approve rules andbye-laws and frame policies for operation andmanagement of the Bank;

• Frame personnel policies;• Approve annual program, budget of the Bank

and annual auditing of accounts and submitreport to HMG;

• Approve the annual report on the activities ofthe Bank;

• Frame policy for issuance and revocation oflicense of banks and financial institutions;

• Approve the limit of the loan to be provided toHMG;

• Fix the amount, limit and terms and conditionsof the loan and refinance to be provided to banksand financial institutions;

• Make decision regarding Bank’s membership tointernational organizations, associations;

• Frame policy for the mobilization of Bank’sfinancial resources and investment;

• Submit proposal to HMG on amending this Act;• Take decision on all other matters excluding the

matters which are within the authority ofGovernor under this Act, and

• Delegate the powers vested on the Board to theGovernor or the sub-committee constituted bythe Board.

Management Committee/Audit CommitteeThe Bank’s Act has laid down the provision of

two Committees under the Board: theManagement Committee and the AuditCommittee. The main responsibility of theManagement Committee is to evaluate thecountry’s monetary and financial conditionsperiodically and report to the Board at least oncea month. Such a report may be in relation to theoperation of monetary and other regulatedpolicies, the soundness of the banking system,condition of money, capital and foreign exchangemarket, implementation of these policies and theirimpact. Thus the provision of the ManagementCommittee has facilitated broad oversight overmonetary and financial position of the country.The Governor is the ex-officio Chairman of thisCommittee. Other members include: two DeputyGovernors, member-secretary and other invitedsenior officers. This Committee can be treated as areplacement of the Monetary ManagementCommittee as provisioned in the Bank’s previous Act.

Similarly, the Audit Committee is aimed atmaintaining financial and operational discipline in theBank. It has a non-executive director as its convenerwhile the Chief of Internal Audit Department andone senior officer designated by the Board asmember. The functions, duties and powers of theAudit Committee are as follows:

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Audit Committee: Functions, Duties andPowers4

• Submit report and recommendation to the Board(through the Governor) on accounts, budget andauditing procedures and control system;

• Ascertain whether or not the auditing andpreparation of periodic balance sheet and otherdocuments of the Bank have been carried outproperly;

• Supervise the implementation of the appropriaterisk management adopted by the Bank;

• Audit managerial and performance of works ofthe Bank in order to be assured that the prevailinglaws applicable to the Bank have been fullycomplied with;

• Frame bye-law for auditing of the Bank inaccordance with the prevailing laws andinternational auditing standard and to submit itto the Board for approval.

Strengthening of Corporate LeadershipThrough Legal Framework

The Act has made transparent provision forappointing the Governor, Deputy Governor andDirectors. These are the people who drive the Bankto achieve the stipulated objectives as well as meetingits vision and mission. The Governor is appointedby the Council of Ministers from among thecandidates recommended by a RecommendationCommittee, to be chaired by the Finance Minister.Other members include: one person from amongthe former Governors and one from among thepersons renowned in the fields of Economics,Monetary, Banking, Finance and Commercial Laws.In connection with the Governor’s appointment, theCommittee recommends three candidates renownedin the field of Economics, Monetary, Banking,Finance, Commerce, Management, Commercial Lawand from among the Deputy Governors. It isnoteworthy that the previous Act was not specificon the qualifications of the Board members includingthe Governor.

The Governor and the members of the Boardare required to take oath of secrecy from the ChiefJustice or a Justice designated by him prior toassuming the respective responsibility. This provisionsignifies the depth of responsibility to be assumedas their respective office bearers and represents ahighly prestigious and supreme institution.

To assist the Governor in his day-to-day work,two Deputy Governors are appointed on theformer’s recommendation. The Deputy Governorsare selected from among the Bank’s special classofficers on the basis of performance and capability.

All the Board members are appointed by HMGfor a term of five years. HMG may reappoint theGovernor for one more term. Other members ofthe BOD can be reappointed for any term.

The provision of making public notification ofthe Governor’s appointment normally one monthprior to the vacancy of the post is also a remarkableaspect of the Act.

The Bank’s Act has stipulated qualifications forthe office bearers at the leadership level, i.e., theGovernor, Deputy Governor and Directors. Apartfrom being a Nepalese citizen, the incumbent shouldpossess a high moral character. The workingexperience and academic qualification needed are alsoclearly stated in the Act.

Similar ly, the grounds under which thecandidatures for the above positions are disqualifiedare also specified as follows:• Membership or affiliation to a political party,• Blacklisted by a commercial bank or financial

institution,• Engagement in bank or financial institution• Holding 5 percent or more shares or voting right

in a commercial bank or financial institution• Being rendered bankrupt due to inability to pay

debts to creditors, and• Convicted by a court in an offence involving

moral turpitudeObviously, the above provisions are made with a

view to make the persons at the leadership level freefrom political influence, efficient, professional andethical so as to enable them to discharge their dutiesand official responsibility in a smooth manner.

Apart from determining the aforementionedqualifications, the Act has clearly laid down certain normsto prohibit vested personal interest, including code ofconduct on the part of Board members as follows:• Matters of personal interest cannot be discussed

in the Board meeting. The Governor, DeputyGovernors or Directors are required to discloseany such matter prior to the meeting in case mattershaving personal interest are to be discussed andabstain from taking part in the same.

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NEPAL RASTRA BANK IN FIFTY YEARS12

• Till one year after retiring from his office, theGovernor or Deputy Governor shall not beallowed to work in a commercial bank andfinancial institution.

• Within one month from the date of appointmentand retirement, the Governor and DeputyGovernor shall make it public the details ofproperty held in the name of his family members.

• The Governor and Deputy Governors shall fullydevote their professional service to the Bank.

• The Governor, Deputy Governor or Director,including employees, advisor, auditor, agent orBank’s representative shall not breachconfidentiality of the Bank.In short, the Nepal Rastra Bank Act, 2002 aims

at operating the Bank’s activities in a highly transparentand accountable manner adhering simultaneously tostrict financial discipline and corporate governance.The provision of making public of the monetarypolicy before the next fiscal year, publishing financialstatements and reporting to HMG have given moreimpetus to transparency of the Bank’s activities.

An important feature of the Act is the clearprovisions for removal of persons working at theleadership level of the Bank. This eliminated thediscretionary power of the government. Some ofthese grounds include: lack of capability to carry outthe Bank’s functions, causing loss and damage to thebanking and financial system, dishonesty or mala-fide intension and so on. For removal from thesepositions, an Inquiry Committee is constituted andthe concerned office bearer is charge-sheeted. HMGcan take action on the concerned authority only onthe basis of the Committee. The Committeeconstitutes of the person designated by HMG fromamongst the retired Justices of the Supreme Courtas the Chairperson, while two persons designatedby HMG from amongst renowned persons asmembers. In the case of the Deputy Governor andother directors, the action relating to removal isundertaken on the recommendation of the BOD.

The present legal provision on removal of theBoard members including the Governor hasenhanced the stability and autonomy of its leadership.In the absence of such provision sudden removalof the Governor took place in different periods. Itcreated instability in the Bank’s leadership. There areinstances when some Governors were either

removed or made (forced) to resign from their postprior to completing their tenure. Furthermore, in thepast, the previous Act had even the provision ofdiscretionary “dismissal” of the Governor. Theterminology was later on amended as “removal”. Itis noteworthy that Mr. Kalyana Bikram Adhikary, theseventh Governor, was “dismissed” just six monthsafter his reappointment. Political changes also led tothe instability in the Bank’s leadership. The tenthGovernor, Mr. Satyendra Pyara Shrestha’s tenure washighly turbulent because of the frequent changes ingovernments between l995 and 2000. It has beenacknowledged that the stability in the tenure of theindividuals working at the leadership is directly linkedwith the effective execution of stability in plans andpolicies of the Bank. The new Act has rightlyaddressed this crucial issue. However, even beforethe new Act was enacted, there has been an instancewhere the Court has rejected the government’sdecision about the dismissal of the Governor. Thiscan be evidenced with the reinstatment of Dr. TilakRawal to his position as Governor on the verdict ofthe Court. Dr. Rawal was suddenly removed fromthe post in less than one year of his appointment.However, Dr. Rawal challenged the decision in theCourt, which instructed the government to reinstatehim in his position. Thus, the Supreme Court of theKingdom of Nepal made a pioneering decisionaimed at ensuring central banking independencethrough maintaining stability in the Bank’s leadership.

The Governor as the Bank’s ChiefExecutive

The Governor has a dual responsibility as theChairman of the Board and the Bank’s ChiefExecutive who is responsible for executing thepolicies formulated by the BOD as well as runningthe overall administration of the Bank. As theChairman of the Board, the Governor has a crucialrole to play in directing the activities of the Bank.Similarly, in the capacity of the Bank’s ChiefExecutive, he executes the policies formulated bythe Board. He has been vested with the powers tobe exercised in accordance with international practicewhich may be delegated to the Deputy Governoror other employees of the Bank, in order to conductthe business of the Bank in a smooth manner.

The Governor’s functions, duties and powers areclearly spelt out in the Bank’s Act as follows:

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CORPORATE LEADERSHIP 13

Governor: Functions, Duties and Powers5

• Implement Board decisions;• Operate and manage the Bank;• Systematize the functions to be carried out by the

Bank;• Represent or cause to represent on behalf of the

Bank in international organizations andassociations;

• Implement and cause to implement the policiesrelating to monetary and foreign exchangematters;

• Formulate necessary policy on rates of interestfor deposits and loan with banks and financialinstitutions;

• Formulate necessary policies on the rates ofinterest to be paid by banks and financialinstitutions on deposit and loan or the rate ofinterest to be charged by them on deposits andloan;

• Formulate necessary policies relating to liquidityto be maintained by banks and financialinstitutions;

• Make necessary arrangement with regard to thebasis, amount, methods, conditions and durationof compulsory cash reserve to be maintained bybanks and financial institutions and its use;

• Fix the terms and conditions relating to adequacyof the capital fund of banks and financialinstitutions;

• Take decisions with regard to the procedures andterms and conditions to be followed whilepurchasing and selling gold and other preciousmetals;

• Fix the charge on the services to be provided bythe Bank;

• Take decisions for opening and closing branchoffices and other offices of the bank as may benecessary;

• Establish and close agency of the bank;• Make necessary arrangement for development

and operation of information system of the Bank;• Make necessary arrangement for supervision of

banks and financial institutions;• Take decision with regard to revocation of the

license provided to banks and financial institutions;• Take decisions on any other matters subject to

the powers delegated by the BOD.Apart from the responsibility as the Bank’s Chief

Executive, the Governor represents the Bank in

prominent institutions at national level. The Governoris also an ex-officio member National DevelopmentCouncil which is chaired by His Majesty the King.

The Governor is also the ex-officio Governorto the IMF on behalf of Nepal. Hence he representsthe Bank in the Annual Meetings of the IMF andWorld Bank. Similarly, NRB is the founder memberof regional and bilateral institutions of central bankssuch as the South East Asian Central Bank Governors(SEACEN), South East Asia, Australia and NewZealand (SEANZA) and Asian Clearing Union(ACU). As such these institutions are also representedby the Governor.

Leadership of NRB in Fifty Years

A Review at the AchievementsNepal Rastra Bank has so far been led by thirteen

Governors during the five decades of its inception.Looking back to the country’s economic andmonetary position of those days, one can easilyimagine the hardships and challenges faced by thepersons at the leadership level. Before elaboratingthe highlights of the achievement during the past fivedecades, it is worthwhile to go back to the economicand financial scenario of the country prior to theBank’s establishment since it helps the readers to havean idea about the prevailing challenges that have hadto be faced by the Bank’s leadership.

The Nepalese economy in the mid-fifties wascharacterized by virtual absence of infrastructure.Being predominantly an agricultural country, theexports consisted of primary products while theimport items constituted mainly of daily necessitieslike cloth, kerosene, sugar, petrol, salt, medicines,machinery and consumer goods. Trade was mostlyconcentrated with India. There was absence ofentrepreneurs and technical know-how. Since thetransport and communication were underdeveloped,the national economy was not integrated. There wereonly a couple of large and medium-scale industriesproducing jute, match, sugar, cotton, rice, flour, oil,and so on.

At that time the Nepalese economy was uniquelycharacterized by a dual currency system. BothNepalese and Indian currencies were in circulationwithout any restriction. Indian currency had freeconvertibility and a great influence over the Nepaleseeconomy. There was no authority to issue license orauthorization for conducting foreign exchange

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NEPAL RASTRA BANK IN FIFTY YEARS14

transaction. In other words, there was no controlover foreign exchange business. Except in some hillyregions and Kathmandu valley, Indian currencydominated the Nepalese currency. Surprisingly, raisingof government revenues and salary payment ofgovernment employees used to take place in Indiancurrency. Even saving of public deposits anddisbursement of credit from Nepal Bank Ltd (NBL)was made in Indian currency. This can be evidencedby the fact that out of the total loan disbursementand saving kept in NBL as at April l958, the portionof Indian currency consisted of 72.9 percent and81.8 percent respectively6. This reflected the influenceand demand of the Indian currency in monetarytransaction in those days.

On the other hand, the exchange rate of Nepalesecurrency vis-à-vis the Indian currency fluctuatedfrequently. This encouraged speculating activities.The local money changers in Kathmandu used to fixdiscretionary exchange rate although Nepal Bank wasofficial bank for determining the exchange rates. Thecountry’s foreign exchange reserve was kept inReserve Bank of India. Nepal’s long open borderwith India, over concentration of trading activitieswith that country was the major factors that led tothe dominance of Indian currency in the economy.

The Nepalese currency was also dominated bycoins. Although the Sadar Mulukikhana used to issuecurrency notes, they were not in sufficient quantity.The use of coins comprised of more than fiftypercent of the total transaction in day-to-daytransaction. Transactions were made in sack-loadsor even truck-loads of coins. This obviously causedmuch inconvenience and difficulty to banks,government offices, business firms and general publicwhile transacting in cash.

It was very difficult to estimate the total moneysupply since there was no record of the volume ofIndian currency circulating in the country. Thus itwas felt that the dual currency system and theuncertainty of exchange rate between the Nepalesecurrency and the Indian currency threatened theeconomic stability of the country.

The only commercial bank (NBL) had 13branches which were concentrated mostly in urbanareas despite operating for nearly two decades. Hencedue to lack of banking facilities, people had to dependon local landlords, merchants, traders and goldsmithswho charged exorbitant rate of interest. There wasno organized money market in the country.

All banking transactions of the government werecarried out by NBL which also determined theexchange rate after due study and evaluation of dailytrends in the market.7 The credit creation wasnegligible since people lacked banking habit. As atApril l2, l957 the total deposits and cash at hand ofthe bank were Rs 35 million and Rs l3 millionrespectively.8

Broadly, the background of the Nepaleseeconomy in those days as observed by the founderGovernor of Nepal Rastra Bank, Mr. HimalayaShumsher J.B. Rana is very relevant. He recollectsthe economic scenario in the background before thecentral bank came into existence. His recollections9

are quoted below:“The background to the establishment of the Bank should

be recorded first. The Nepalese economy was rather differentthen. No jet aeroplanes flew into Kathmandu. Bullock carts,horses and shank’s mare were the means of travel in most partsof the country. It was a must or in most cases more convenientto go via India to reach the southern parts of the country in theEast or West from Kathmandu. Barter at periodic fairs was asignificant feature of internal trade. Almost all imports werefrom India. Exports of goods were almost exclusively to Indiaand comprised timber and agricultural products.”

Only one commercial/industrial bank served Kathmanduand some districts. Other than the Indian rupees, foreignexchange or US dollar was scarce as diamond. Nepalesecoins were issued by the Mint and currency notes byMulukikhana (Govt. Treasury). There was no requirementof gold or foreign exchange reserve for issuance of currencynotes. The budget of His Majesty’s Government was of themagnitude of Nepalese rupees 120 million.”

From the prevailing scenario of the country asmentioned above, it was evident that a lot of reformswere to be made in economic and banking sector.There was an urgent need to enforce the Nepalesecurrency as the legal tender of the country and stabilizethe exchange rate of the Nepalese currency vis-a-visthe Indian currency. In the wake of these challenges,Nepal Rastra Bank was established as the country’scentral bank on April 26, l956. Interestingly, a studyteam of Reserve Bank of India headed by its DeputyGovernor Ram Nath had reported the Nepalesegovernment that there was no need to establish acentral bank in Nepal for the time being on theground that the economic activities of the countryare insufficient and that there is lack ofinfrastructure for performing traditional centralbanking functions. However, Sardar Gunja Man

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Singh, who looked after the Finance ministry hadpresented the recommendation to set up the centralbank in Nepal to His Majesty the King.10 Timehas proved such decision to be very relevant, timelyand visionary.

The Nepal Rastra Bank Act, 1955 clearly andadequately addressed the prevailing economicscenario of the country. The broad objectives ofthe Bank had been clearly spelt out in the Preambleof the Act as:

“Whereas it is expedient to ensure proper management ofthe issuance of Nepalese currency notes, to make properarrangement for the circulation of Nepalese currency throughoutthe Kingdom and to stabilize the exchange rates of Nepalesecurrency in order to maintain comfort and economic interestsof the general public.”

“To mobilize capital for development and encourage trade andindustry in the Kingdom, and whereas a National Bank hasbecome very essential also to develop the banking system of Nepal.”

The following expression made by KingMahendra on the occasion of the inauguration ofthe Bank on 26 April l956 is very much relevant:

“It is our belief that the establishment of this Bank will,by the proper management of our currency, promote the growthof banking industry and commerce, and rejuvenate the economiclife of the country.”

It is obvious that the prevailing socio-economicconditions characterized by absence of monetaryauthority, limited banking services, demonetizedeconomy and non-existence of industrial concernswere the factors that led to the establishment of theBank. It also coincided with the country’s First FiveYear Plan (l956-61). Therefore, the Bank shoulderedthe additional responsibility of building financialinfrastructure as envisaged by the Plan, apart frominitiating the central banking functions.

As is evident, there were a number of areas inwhich the central bank’s leadership had to address inorder to achieve the stipulated objectives. It was notan easy task to translate the objectives reflected in theAct into reality. There is no magic stick that can rectifythe anomalies prevalent in the economy at once. TheBank needed capable leadership to cope with thenumerous challenges. However, the Bank is fortunateenough to have the leadership of dedicated andcapable personalities right from its establishment. Theuntiring efforts and dedication of the Governors whoprovided dynamic leadership have contributedtowards shaping today’s Nepal Rastra Bank. The Bank

has been able to acquire the prestigious stature of todaywith the dynamic leadership skills demonstrated fromthe very beginning. Additionally, the continuous efforttowards building efficient and highly professionalmanpower on the part of the top management hascontributed to achieving the objectives set by the Bank’sAct.

NRB during the last five decades had passedthrough various changes in the economy in thefinancial system of the country. Accordingly, theBank’s leadership had tackled problems and facedchallenges of varied nature. The Nepalese economyand the banking system have immensely benefitedfrom the rich experience, expertise andprofessionalism of successive Governors while thecountry has witnessed continuous refinements ofpolicies relating to monetary, banking anddevelopment finance.

The first decade (l956-66) was an evolutionaryperiod when the Bank was set up. The newly set upcentral bank, was able to achieve the primaryobjective of eliminating dual currency system andstabilizing the exchange rate between the Nepalesecurrency and Indian currency.

During the second decade (l966-76), the Bankintroduced various monetary instruments. The Bankalso focused its attention in formulating and executingappropriate monetary policies, apart from initiationof banking development. This broadened itsresponsibilities.

The third decade (l976-86) was marked by furtherexpansion of banking system and the central bank’sactive role in development financing.

During the fourth decade (l986-96) the Bank wentthrough the process of financial liberalization,restructuring and economic stabilization.

Similarly, the beginning of the fifth decade (l996)was the period of financial sector reform at massivescale that is ongoing.

In the following paragraphs, an effort has beenmade to highlight few of the important policiesregarding monetary and financial sector issues, apartfrom organizational reforms executed during thetenure of respective Governors. Additionally, thepersonalities who assumed the responsibility asDeputy Governors and Directors from the Bank’sinception are presented in Annexure B and AnnexureC respectively.

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Mr. Himalaya Shumsher J.B. Rana, theFounder Governor

Tenure: April 26, 1956 – February 7, 1961)Mr. Himalaya Shumsher J.B. Rana is the founder

Governor of the Bank. Prior to establishment ofthe Bank, he was entrusted with the task of draftingthe Bank’s charter as Officer-on-special duty. Forthis Mr. Rana had worked in coordination with SardarHansa Man Singh, the Principal Royal Advisor. Uponenactment of the NRB Act, 1955, the Nepal RastraBank was established as the central Bank of theKingdom of Nepal. It was indeed an importantevent in the history of Nepalese financial system.

Upon his assumption of office as Governor,Mr. Rana immediately started his campaign toaddress the problems faced by the Nepaleseeconomy. The foremost challenge of that time, asexplained earlier, was to increase the circulation ofNepalese currency all over the Kingdom. In thiscontext, the Act to Increase Nepalese Currency Circulation,1957 declaring the Nepalese currency as the onlylegal tender of the country, was promulgated onJuly 12, 1957. The Act was initially enacted inKathmandu valley, eastern regions (includingDhankutta) and western regions (including Baglung,Salyan and Dailekh districts) from May 9, l960.Accordingly, people in these areas were required totransact in Nepalese currency only.

In order to supplement the Act, NRB, for thefirst time, issued its own currency notes fromFebruary 19, 1959 (Democracy Day). In thisconnection the currency notes of Rs 1, Rs 5, Rs 10and Rs 100 denominations, were issued. The Bankalso took the unissued notes printed by thegovernment (Sadar Mulukikhana) worth Rs. 15.2million, along with the assets and liabilities previouslymaintained as security reserves. The government, onthe request of NRB, gradually decreased theproduction of coins. The gradual replacement ofmetallic money by paper money greatly facilitatedmonetary transaction

Another anomaly, as explained earlier, that existedin the Nepalese economy was the prevalence of widecirculation of Indian currency and the uncertainty ofits exchange rate with the Nepalese currency. Theabsence of any regulatory authority for officialintervention in exchange rate fixed by local moneychangers led to speculative activities. Hence to address

this situation, two distinct steps were taken. Firstly,on the basis of an in-depth study, the exchange ratewas fixed at Rs 160 for Indian Rs 100 on 13 April1960. Secondly, the Foreign Exchange Control Act, 1960was promulgated in May 23, 1960. The Actestablished NRB as the sole custodian of foreignexchange in the Kingdom of Nepal. This Act wasinitially operationalized in Kathmandu valley onOctober l7, l960 and gradually expanded to otherparts of the Kingdom. Accordingly, those whodesired to transact (buy/sell) in foreign currency wererequired to obtain license from the Nepal Rastra Bank.Transaction in the official rate fixed by the Bankbecame mandatory. Supportive regulatoryarrangements were also made. Thus transacting inforeign exchange without license and determiningdiscretionary exchange rate, became illegal. Collectinggovernment revenues in Indian currency was alsoprohibited. The deposits previously kept in NRBand NBL in Indian currency were converted intoNepalese currency.

Thus the issuance of currency notes and theenactments of the Act to Increase Currency Circulationsignificantly helped towards increasing circulation ofNepalese currency. It brought about significant changein the transaction pattern of the general public andthe commercial Bank. At the same time, the ForeignExchange Control Act helped in regularizing foreignexchange transaction. The restriction in rampantforeign exchange transaction also encouraged thepeople to transact in Nepalese currency. The provisionfor unlimited exchange of both currencies and thefixation of official exchange rate stabilized theexchange rate between the two currencies therebyeliminating speculative activities.

The above steps alone were not sufficient toincrease the circulation of Nepalese currency in theabsence of sufficient outlets. Hence the Bankembarked upon opening offices in different partsof the Kingdom. Exchange/mobile counters wereoperated at places to facilitate the exchange ofcurrency. These exchange counters facilitatedunlimited exchange of both Indian and Nepalesecurrency by providing dawn to dusk service.Arrangement for chests in both the Nepalese andIndian currency was also made in different placesfor this purpose.

Thus the stabilization of the exchange rate betweenthe Nepalese and Indian currency and the enactment

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of the two Acts during the tenure of Governor Ranaproved to be a milestone in enhancing the publicconfidence towards the national currency andeliminating the dual currency period. These stepssignificantly increased the monetization of theeconomy in the preceding years.

With a view to smoothen and facilitate foreignexchange transactions, accounts were opened withcentral and commercial banks abroad. Accordingly,accounts were maintained with the central banksof India and England as well as the commercialbanks of USA and Japan. Previously, foreign fundswere to be channelised through Reserve Bank ofIndia only. From November 1, l960 onwards, i.e.after the Trade and Transit Treat with India, theforeign exchange earnings of Nepal were kept withNRB.

Apart from reform in monetization, remarkableendeavor was made for the management of financialresources for the development of agricultural sectorand cooperative institutions. A study was produced inthis respect and a report was presented to HMG.Additionally, the necessity of agriculture credit was feltin the context of a least developed country like Nepal.In the absence of any institutions disbursing such typeof loan, the Bank created the Agriculture Credit Fund byearmarking certain portion of its profit annually.Meanwhile, the Nepal Industrial DevelopmentCorporation was set up on May 27, l959 by HMGwith the objective of disbursing loan as well as providingtechnical support to the private sector.

As per legal provision of that time, the NRBcould disburse direct credit to industries. Accordingly,the Bank had disbursed credit to a jute mill.However, an idea as to channelise financial resourcesby the central bank through an industrial bank likeNIDC, instead of direct financing, was conceived.It was indeed the concept of refinance, which waslater on materialized. Similarly, the conception ofshare participation in the industrial bank by the NRBfor the development of industries was later on putinto practice.

Significant amendments were made in the Bank’sAct. The first amendment fixed the tenure of thedirectors of the BOD, while the second amendmentfacilited issuance of currency note as per circulationand demand. This amendment was made in viewof the demand of Nepalese currency resulting fromits increased circulation. Provision was also made asto maintaining securities for issued notes.

Since Mr. Rana’s Governorship marked thebeginning of the central Bank, organizationalarrangements for the bank’s smooth operation werealso initiated. In the context of the existing situationof the economy, the Bank had adopted the policyof expanding its offices, rather than encouraging theexpansion of commercial bank branches.

The NRB started its operations initially with 23staff including the Governor and a Chief Accountant.With the expansion of offices, the number of staffalso increased gradually. The Bank had 9 offices withstaff strength of 73 as of mid-July l956. The officesconstituted of branch, sub-branch, depot andexchange counters. Apart from the central and Bankingoffices, l branch (Biratnagar), 1 sub-branch (Bhadrapur)and 13 depot offices (Rajbiraj, Sirha, Jaleshwar,Malangawa, Kalaiya, Gaur, Birgunj, Parasi, Bhairahawa,Taulihawa, Shivraj, Nepalgunj and Kailali) were set upby July 15, l957. With the gradual expansion ofBanking services in both Terai and hilly regions, thenumber of offices as at mid-July l960 reached 18,while the number of staff grew to the tune of 368.

As it was the Bank’s evolutionary period, obviouslythere was shortage of banking manpower. Someof the staffs were picked up from NBL. Staff wasimparted training on relevant fields like modernaccounting system, foreign investment, centralbanking, economic planning, statistics andadministration both at home and abroad. Some ofthe trained personnel were also deputed togovernment offices. With the increase in volume ofwork, sections like Administration, Accounts, ForeignExchange and Research were upgraded intodepartmental levels, along with introduction of a newidentity. Other administrative reforms during thetenure of the founder Governor include: arrangementas to set up separate sections to look after AgricultureCredit and Public Debt; implementation of new payscale and revision thereon; enactment of NRBEmployees Regulations and Regulations oncompensation of old, soiled notes.

In short, founder Governor Rana had a highlysuccessful tenure in achieving the goals set by the Actto a very remarkable extent. The initiation of variouspolicies during the evolutionary period, also pavedthe way for smoothening the Bank’s responsibilitiesfor his successors in the days ahead. His contributionin both monetizing the economy and developing theorganizational structure of the Bank during the verycrucial and difficult times, is really commendable.

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Mr. Rana, after retirement from the Governorshipin l961, had been affiliated with the United Nationsservice in the capacity of Deputy ResidentRepresentative and Resident Representatives in variouscountries. He is still actively contributing his expertisein the financial sector.Mr. Laxmi Nath GautamTenure: February 8, l961 – June 17, l965

Prior to his appointment as the second Governor,Mr. Laxmi Nath Gautam, had served as a memberof the Bank’s BOD in l958-59.

As the Bank was passing through the evolutionaryperiod, efforts on monetization of economy werecontinued. The ‘Nepalese Currency Circulation Act’ wasenacted in Ilam, Baitadi, and Doti districts in thesecond phase. Expansion of offices and exchangecounters also took place to boost up the circulationof Nepalese currency. As a result, the volume ofcurrency and commercial transactions grewsubstantially. The country’s foreign exchange reservereached Rs. 178 million within a period of nine years,as compared to Rs. 9.4 million in April l956.11 In thiscontext, the Foreign Exchange Control Act was replacedby Foreign Exchange (Regulation) Act, 1962 with effectfrom August 1, l962. The relevant regulations underthe Act were also enforced in October l962.

Some amendments in the Bank’s Act were alsomade. The 3rd amendment made provision forpublication of the Bank’s accounts and activities tobe presented to the government, while the 4th

amendment dealt with the qualifications of theGovernor and Directors of the BOD.

The establishment of the Cooperative Bank,which started its operations from September l963,was a significant step towards management of ruralcredit. In the process of its establishment, the financialresources amounting to Rs 8,00,000 accumulated atthe Agriculture Credit Fund maintained by NRB washanded over to the government. This showed theBank’s initiative towards institutional development inthe field of agriculture credit.

Efforts were also initiated to set up anothercommercial Bank in Nepal. By July l961 the numberof NBL’s branches was only 23. By geographicallocation, the number of branches was l5 in Terai,one in inner Terai, 4 in Kathmandu and 3 in hillyregions. As such, there was only one Bank branch toserve 4,00,000 people. It was indeed a slow growthof branch network. Hence, the necessity of anothercommercial Bank was strongly felt. Therefore, the

Commercial Bank Act, 1964 was promulgated withthe objective of facilitating opening of commercialBanks. However, no attempts were made by theprivate sector in this direction

As the economic advisor of the government, theBank presented a report on price situation of thecountry at the request of the Ministry. The Bank alsocoordinated in setting up a national insurancecompany in Nepal.

Nepal became the member of IMF and WorldBank in September 6, l961. With this Nepal had theopportunity for exposure in the international arena.

By mid-July l965 the number of offices reached30 while the number of staff stood at 637. Uponcompletion of his tenure, Gautam was reappointedas Governor in February 9, l963. He resigned onJune l7, l965.

Mr. Pradyuma Lal RajbhandariTenure: June l8, l965 – August 13, l966

Mr. Pradyumna Lal Rajbhandari was appointedas the third Governor of the Bank after the secondGovernor resigned. Prior to that, Mr. Rajbhandarihad served as the Bank’s Board member and asSecretary to His Majesty’s Government

Like his predecessor, Mr. Rajbhandari continuedthe policy of increasing the circulation of Nepalesecurrency, eliminating the dual currency system,regulating the exchange rate and managing the foreignexchange reserve. The Act to increase Circulation ofNepalese Currency was implemented in rest of thekingdom with effect from December l6, l965.Emphasis was given to monetary stability witheconomic growth. As a result of these steps, themoney supply as at July l966 reached Rs 521 millionas compared to Rs. 91 million in July l957.12

The Nepalese currency was revaluated with Indiancurrency in June l966 as a result of the devaluation ofthe later by the Indian government. Accordingly, theexchange rate of Indian currency with Nepalesecurrency was fixed at Rs. 101.25 from Rs 160. Thiscaused substantial decrease in the reserve of the Indiancurrency affecting the economy. Hence a committeewas constituted under the chairmanship of theGovernor to study its impact and measures to be taken.

A substantial achievement during this period wasthe establishment of the Rastriya Banijya Bank (RBB)in January 23, l966. The banking service rendered bythe then only commercial Bank (NBL) with only 36branches, was felt not sufficient. The private sector

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was not willing to set up a Bank despite thepromulgation of the Commercial Bank Act. Hence,the RBB was established as a fully public sector bankwith the advice of the NRB. The new bank was alsoassigned to act as an agent of NRB. A policy was alsoformulated to gradually handover the NRB’s depot,sub-offices and sub-branches to this Bank and retainonly a few branches at important centres.13 Theexpansion of commercial bank branches took placein the preceding years with the central bank’s initiatives.

With a view to contribute the development ofindustrial sector, NRB created an Industrial Credit Fundwith an initial fund of Rs 2 million in 1965. Similarly,the Agricultural Credit Fund was reinstated with a fundof Rs 2 million the same year. Later on these twofunds were merged to create a “Development Fund”along with a sum of Rs 6 million earmarked out ofthe Bank’s net profit. Thus the Fund having financialresources of Rs l0 million was aimed at providingsupport to financial institutions. Again a sum of Rs.2.5 million was earmarked for the ‘Banking DevelopmentFund’ which aimed at supporting banking services.14

These visionary steps had far reaching effect in thedevelopment of industrial and agricultural sector.

The number of offices during Mr. Rajbhandari’stenure remained 30 (branch-5, sub-branch-5, Depot-12, Exchange Depot-5 and Exchange counters 3)with the staff strength increased to 738.

After his tenure as Governor that lasted for about 14months, Mr. Rajbhadari resumed his services with thegovernment in various capacities, including Chief Secretary,Chairman of Pay Commission and Public ServiceCommission and as Election Commissioner. He alsoserved as Royal Nepalese Ambassador to Germany.

Dr. Bhekh Bahadur ThapaTenure: August 14, l966 – July 26, l967

Dr. Bhekh Bahadur Thapa, before appointed asGovernor, was member-secretary at National PlanningCommission. He was also attached to the FinancialAffairs Ministry. He took over as the Bank’s fourthGovernor to succeed Mr. Pradyumna Lal Rajbhadari.

The abolition of dual currency system can beregarded as a major achievement of the Bank duringDr. Thapa’s tenure which marked the first decadeof the Bank’s establishment. The Foreign Exchange(Regulation) Act was enacted in additional six zones(Bagmati, Narayani, Janakpur, Sagarmatha, Koshiand Mechi) from September l7, l966 and in rest ofthe eight zones in October l966. With this the dual

currency system prevailed for a long time was fullyscrapped all over the country. The Nepalese currencybecame the only legal tender of Nepal in true sense.Accordingly, the license issued to private sectormoney changers for foreign exchange transaction wasrevoked gradually. Provision as to making disclosureupon purchase of Indian currency exceeding 500Rupees was made.

During Dr. Thapa’s tenure, directives on monetary,credit and other general policies to commercial bankswere issued. Credit control regulations forcommercial banks were also introduced inSeptember l9, l966. The provision of maintainingcash reserve ratio (CRR) at 8 percent of the depositliabilities was made for the first time in September,l966. The interest rate policy was adopted as one ofthe important instruments of the monetary policy.Commercial banks were directed to increase interestrate in saving and fixed deposits, while margin ratefor import trade was determined. Similarly, a detailedpolicy on refinance was also formulated. Initiallythe ceiling for such refinance was fixed as Rs l0 million.

The Bank also diverted its attention towardsexpanding the banking services throughout theKingdom. In this context, the Banking OperationDepartment was set up in November 20, l966 witha view to look after this matter. The number ofstaff as at mid-July l967 reached 9l5.

Upon completion of his tenure as Governor, Dr.Thapa worked in key positions in the governmentincluding Minister of Finance. Apart from hisaffiliation in international organizations like UNDPand IDRC, Dr. Thapa had assumed diplomaticresponsibilities in the capacity of Royal NepaleseAmbassador to the USA and India for a long time.

Dr. Puskar Nath Pant, who was one of the Boardmembers of the Bank, served NRB as its ActingGovernor from July 27, l967 until April 23, l968.During this period, the Agricultural Development Bankwas established by dissolving the Cooperative Bank.This step was taken with a view to address the necessityof a more effective and specialized institution tofinance the agriculture sector as well as the cooperativesocieties. The central bank also invested share capitalin the Agricultural Development Bank.

Dr. Yadav Prasad PantTenure: April 24, l968 – April 28, l973

Prior to his assuming the office as Governor, Dr.Yadav Prasad Pant was affiliated with the Bank as a

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NEPAL RASTRA BANK IN FIFTY YEARS20

Board member. Apart from this, he held keypositions in civil service and Planning Commission.

Dr. Pant’s tenure was marked by the formulationof policies relating to banking system. It was thesecond decade of the Bank’s inception when itinitiated efforts towards expanding banking servicesall over the country, including rural and remote areas.In this connection, the ‘Banking Development Fund’ wasmobilized to encourage the commercial Banks toopen branches in rural areas. Provision, apart frominterest free loans, was made to compensate the lossincurred in branches opened in rural areas. The Fundaimed at setting up at least a branch in each district.Remarkably, there were only 9 branches of NBLoperating mostly in urban areas before the evolutionof NRB. Even after the establishment of secondcommercial Bank (RBB) the branch expansion couldnot take place for a long time. It can be evidencedby the fact that there were only 61 branches, out ofwhich 42 branches belong to NBL, while 19 branchesbelonged to RBB15. Appropriate changes were madein the provision of the Fund in later years. From Julyl970, the Fund also covered the branches ofAgricultural Development Bank which wereoperating in areas that were not serviced by thecommercial banks. The provision made by the Fundencouraged the commercial banks to open branchesin rural areas. As a result, there was rapid expansionof banking services in the country in the forthcomingyears.

With the expansion of the RBB, the central banktransferred some of its offices to the latter inaccordance with a policy in this regard. Accordingly,some staff of the Bank were also handed over alongwith the offices to the RBB.

The setting up of the ‘Banking Promotion Board’ onMay 20, l968 was yet another step geared towardsthe development of the banking system. The Boardaimed at developing banking habit among the generalpublic as well as expanding Banking activities all overthe Kingdom. For this purpose, provision as torepresentation of various sectors (banking, industry,commerce) in the Board was made.

The establishment of ‘Bankers Training Centre’(BTC) as a specialized institution greatly contributedtowards fulfilling the shortage of skilled manpowerin the field of banking and finance. The BTC formedunder the Chairmanship of the Deputy Governor,has trained thousands of bankers through tailor-made

programs. Besides, the ‘Bankers Club’ was set up witha view to enhance mutual understanding andcooperation among bankers. The Club also aims atmental and physical well being of its members.

Dr. Pant’s tenure also marked the launching ofAgriculture Credit Survey (1969/70) in 32 districtscovering 52 village Panchayats, with a view to ascertainthe actual position of agriculture. The survey resultshowed, among others, that only l8 percent of therural population had access to institutional credit, whilethe rest of the population depended upon informalsource of credit. Hence the flow of rural credit wasfound to be inadequate. The concept of micro-financewas also brought forward in the recommendationsof the Survey. It also prompted the Bank to formulateappropriate credit policies in the days ahead.

Interest rate policy was also revised. In thiscontext, NRB constituted a high level committeeunder the chairmanship of a Deputy Governor inMarch l970, with a view to study and review theprevailing interest rate structure. It comprised ofrepresentatives from banks and financial institutions,line ministries of HMG, commercial and industrialorganizations. The Committee presented its reporton July l970. Based on the recommendation ofthe report, appropriate changes in interest ratestructure, margin and refinance rate were made.

The issuance of currency notes of highdenominations during Dr. Pant’s tenure can beregarded as a step taken for the convenience of thegeneral public. Currency notes of Rs. 500 and Rs.1000 denominations were issued for the first time.

Legal provision was also made for theappointment of two Deputy Governors to facilitatethe day to day work of the Governor. Till then, theChief Accountant played the de facto role of theBank’s Deputy Governor. Accordingly, Mr. DhirBikram Shaha, who was taking the responsibility asthe Chief Accountant and Mr. Kumar Das Shresthawere appointed as Deputy Governors of the Bank.The number of the Bank’s staff reached 1695 in Julyl973.

After completing Governor’s tenure, Dr. Pantassumed key positions in HMG such as the Ministerof Finance. Dr. Pant also took diplomaticresponsibility as the Royal Nepalese Ambassador toJapan. He was also the Chairman of EconomicCommission in l979. He is still actively contributingthe country in the field of banking and finance.

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Mr. Kul Shekhar SharmaTenure: April 29, l973 – December 12, l978

Before joining the Bank as its sixth Governor,Mr. Kul Shekar Sharma was Royal NepaleseAmbassador to the USA. Prior to that, he hadassumed key positions including that of the ChiefSecretary in the Government.

The tenure of Mr. Kul Shekar Sharma wasmarked by a number of reforms in monetary andexternal sector that have had a long-term impact inthe economy of Nepal.

As a step towards reforming legal framework,the prevailing two Acts for carrying out similaractivities were unified. In order to avoid duplicationof functions and put the NBL and RBB as well asthe commercial Banks that would come in futureinto a single legal framework, the Commercial BankAct, l974 was enforced. Accordingly, the CommercialBank Act, l963 and the Rastriya Banijya Bank Act,l965 were scrapped. The new Act widened thecommercial banking functions by making provisionfor disbursing medium and long-term credit foragriculture and cottage industries as well as otherproductive sector. The Act also brought thecommercial banks into the mainstream of thecountry’s economic development. More amendmentsin the Act took place in subsequent years so as tomake the Banking system more developmentoriented. Similarly, the amendment in NRB Actfacilitated the Bank to issue license to new banks andfinancial institutions. Provision for controlling,regulating and giving directives to the commercialbanks was also made.

Significant reforms were made in monetary front.Substantial change in interest rate was made with aview to address the anomalies emerged in financialsector due to imbalance in the flow of deposits anddemand of credit. Margin rates for commercialbanks and development banks were alsoimplemented. Substantial changes in cash reserve ratioand liquidity to be maintained by the commercialbanks were made. The objective of this policy wasto increase saving mobilization, flow of credit toproductive sector and maintain money supply at adesired level. Credit ceiling was imposed on NBLand RBB to prevent excessive credit flow to privatesector. Refinancing policy on agricultural sector wasalso revised

The introduction of small sector lending as thedirected credit, implemented in April l974 can be

regarded as a milestone in the history of micro-lending. It was a special type of lending targeted forthe social and economic upliftment of the deprivedsector living in the rural areas. Accordingly, thecommercial banks were directed to invest at least 5percent of their outstanding deposit liabilities inagriculture, small scale industry and service sector.Failure to comply with this directive resulted in thepenalization of the respective bank. In 1977/78 itwas renamed as Priority Sector Lending and theportion of minimum investment was raised to 7percent.

Mr. Kul Shekar Sharma’s governorship is alsoremarkable in terms of institutional development inthe country. The promotion of development-oriented institutions like the Credit GuaranteeCorporation (now Credit Guarantee & DepositInsurance Corporation), Agriculture Projects ServicesCentre (APROSC), Security Exchange Centre (nowNepal Stock Exchange) and Industrial Service Centre(now National Productivity & EconomicDevelopment Centre) on the direct initiative andexcessive share participation by the bank hascontributed towards the development of varioussectors. Among these institutions, the CreditGuarantee Corporation was set up to compensatethe Banks on loss incurred on credit disbursed forpriority sector. This scheme encouraged thecommercial banks to operate in risk-freeenvironment. The APROSC was meant forformulating project proposals and preparingfeasibility reports on various schemes related topriority sector. Similarly, the Security ExchangeCorporation and the Industrial Service Centre wereset up with a view to develop securities market andindustry respectively.

The bonus voucher system (also known asexporters’ exchange entitlement scheme) prevailingsince February l962 created adverse impact in theeconomy. Hence it was scrapped and replaced bythe dual exchange rate system by HMG effectiveApril l978.

The second Agriculture Credit Review Survey(l976/77) was also completed during that time. Itwas conducted to review some of the importantaspects of previous Survey. According to the findingsof the Survey, 24 percent of the rural family receivedinstitutional credit as against l8 percent in l969/70.This showed that the flow of credit as required bythe economy was not satisfactory. A number of other

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NEPAL RASTRA BANK IN FIFTY YEARS22

studies were also conducted. A few of themincluded: (a) quality of banking services, bankingstatistics and investment by commercial banks in smallsector; (b) BOP and foreign exchange; and (c) Sajhainstitutions.

As a result of the branch expansion policy, thenumber of commercial bank branches reached 216by July l977 covering all the 75 districts of thecountry. Out of the total branches, 127 branchesbelong to NBL while 89 branches belonged to RBB.Thus the objective of providing banking access foreach district as envisaged by the ‘Banking DevelopmentPlan’ was achieved.

The Bank received expert services from both theIMF and UNDP in the field of economic researchand banking procedure & system, apart from feebased consultancy services. At this time, the IMFstarted to provide the services of an advisor to theBank with Senior Economist Mr. Howard P.G.Handy.

NRB organized important regional meetings inNepal. In this connection, the Bank hosted the 7th

SEA Voting Group Meeting and the13th SEACENGovernors’ Conference. The Bank became thefounder member of Asian Clearing Union (ACU),based in Tehran, Iran in l975. It also hosted the 6thMeeting of ACU Board of Directors in Nepal.

In view of the importance of agriculture sectoras envisaged by the above mentioned Survey results,the Agriculture Credit Department was created inthe Bank. The department aimed at makinginstitutional arrangements for financial resources inagricultural sector as well as supervising the financialinstitutions dealing with agriculture. At a later stagethis department was merged with the BankingDevelopment. Separate sections on BOP andindustrial credit were also set up.

The Bank set up “Reputed Chair” in theTribhuwan University to support the study ofEconomics. Accordingly, provision of financialresources was made for the study and developmentof Economics.

During this period currency note of Rs 50denomination was issued for the first time. A MoneyMuseum was also set up at the premises of IssueDepartment on November l978. The No. of staffreached 2035 as at July l978.

Mr. Kul Shekhar Sharma was reappointed asGovernor for next term on February 9, l976.

However, he resigned from the post in Decemberl979. After his retirement, Mr. Sharma assumedimportant responsibilities as the Vice-Chairman ofNational Population Commission and Chairman ofthe Administration Reforms Monitoring Committee.

Upon Mr. Kul Shekhar Sharma’s retirement,Deputy Governor Mr. Udhir Shumsher Thapa tookcharge as the Acting Governor for nearly six months.

Mr. Kalyana Bikram AdhikaryTenure: June 13, l979 – December 8, l984

Mr. Kalyana Bikram Adhikary was the seventhGovernor of the Bank. Prior to that Mr. Adhikarywas Alternate Executive Director of the AsianDevelopment Bank in Manila. He had also beenattached to the civil service for a long time. Apartfrom this, Mr. Adhikary also assumed theresponsibility of Principal Secretary to His Majestythe King at the Royal Palace. His tenure also coincidedthe silver jubilee celebrations of the Bank in Aprill981. King Birendra graced the historic celebrationson the occasion.

One of the significant achievements duringAdhikary’s tenure was the introduction of jointventure banking system in Nepal. In this context,the Nepal Arab Bank Ltd (now Nabil Bank) was setup in June l984, as the first joint venture bank ofNepal. The policy of allowing joint venture withreputed foreign banks was aimed at modernizingNepalese banking system as well as bringing aboutdynamism and competitive environment to enhancethe quality of services. Prior to the evolution of thejoint venture Banking system, only two commercialBanks (NBL and RBB) were operating in Nepal.

The formulation of a national policy for availingthe access of banking services of at least onecommercial Bank for each 30,000 population by theSixth Development Plan period was also animportant policy decision during Adhikary’s tenure.This provision was made in the government’s annualbudget of FY 1980/81. The position of bankingservices was for having one Bank branch forapproximately 57,000 population as at July l981.Accordingly, additional 293 branches were to beopened by July l985.16 Hence the execution of thispolicy was undertaken as a campaign.

Some reforms were made in foreign exchangeregime. In this context, the dual exchange rate regimebeing followed by the Bank for the past few years,was replaced by a single rate exchange system in

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September l981. Similarly, the method ofdetermining exchange rate of foreign currency wasamended by adopting the currency basket systemwith effect from June l983. With this, NRB starteddetermining the exchange rate of foreign currenciesincluding US dollar as per exchange rate changes ininternational money market. The US dollar wastreated as medium currency for this purpose.Similarly, the forward exchange rate was adopted toeliminate exchange rate risk involved in export importbusiness. An Export Development Fund was alsoset up in November l983. The main objective ofthe Fund was to encourage exporters in the formcash subsidy as per the nine point programme ofthe government.

With a view to execute the Priority Sector lendingmore effectively, the Intensive Banking Programme(IBP) was launched in October l981. The programmewas aimed at upgrading the standard of living ofthe people living in economically backward areas andfree them from the economic exploitation of thelocal landlords. The IBP was based on areadevelopment approach where the participating bankswere directed to invest certain portion of their totalloan portfolio. Later on the Program was extendedto 75 districts by 357 branches belonging to NBLand RBB. A unique program on EducatedUnemployed under the IBP was also implementedin January l984.

Further, as a component of the priority sectorlending, the Cottage and Small Scale Industries (CSI)Project was launched in 1982 with the financial andtechnical assistance of US$ 6.5 million from WorldBank (IDA). Provision for refinance andguaranteeing of loan disbursed by the participatingbanks was made to implement the Project.

A Family Budget Survey was likewise conductedon nationwide basis to ascertain the position of costof living, income, employment and consumptionpattern of the people in February l984.

New currency notes of Rs 20 and Rs 2denominations were issued. The Mint Departmentpreviously operated by HMG, was transferred toNepal Rastra Bank in December l983. Thus the Bankalso took the full responsibility of issuing metalliccoins along with the currency notes.

The South East Asian Central Banks (SEACEN)Research & Training Centre, a regional institution ofcentral Banks received legal status in l982. Mr.Adhikary was one of the signatories of the agreement

on the establishment of the Centre during the l7thGovernors’ Conference held in Bangkok.

The number of staff as at July l984 was 2763.Though Mr. Adhikary was reappointed on June

l0, l984 for the second term, he could not completeit. After retirement from the position of Governor,he was nominated member of the NationalDevelopment Council by His Majesty the King.Afterwards, he was appointed the Royal NepaleseAmbassador to France. Reknown as soft spokenand kind hearted, Adhikary died of heart attack inLondon while he was the Ambassador of France.Mr. Ganesh Bahadur ThapaTenure: March 25, l985 – May 22, l990

Mr. Ganesh Bahadur Thapa, the eighth Governorstarted his career in the Bank from its very inception.Before his appointment as Governor, Mr. Thapawas affiliated with the UNIDO/UNDP TechnicalAssistance Project based in Indonesia. Prior to that,he was Deputy Governor at the Bank.

Mr. Thapa’s tenure was marked by a number ofreforms in financial sector. The interest ratederegulation in May l986 allowed the commercialbanks to fix interest rates on deposits and lending attheir own. It was a major breakthrough in liberalizedinterest rate regime. Prior to that, the interest ratewas controlled by the central bank.

A liberal policy on establishing banks and financialinstitutions was also formulated and implemented.Accordingly, the setting up of banks in joint venturewith reputed foreign Banks and in private sectorgained momentum. In this connection, NepalGrindlays Bank (now Nepal Standard CharteredBank) and Nepal Indo-suez Bank (now NepalInvestment Bank) were set up.

The Agricultural Development Bank was alsopermitted to conduct banking transactions with aview to make it financially self-sufficient as well as tochannelise the resources from urban sector to ruralsector. Apart from this, the Finance Company Act,1986 was enacted to facilitate the establishment offinance companies as the new players in the financialsystem.

Commercial banks were directed to invest at least25 percent of their total loan outstanding inproductive sector, including 8 percent in prioritysector from FY l984/85. In the later years, theproportion of loan to be invested in productive sectorwas raised to 40 percent. The ratio of investment inpriority sector was again raised to l2 percent in 2047

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(l990/91). As a component of priority sector lending,the deprived sector credit was also introduced.Similarly, the Lead Bank Scheme was implementedin 21 districts. The execution, monitoring andsupervision of this scheme were vested upon NRB.

The second phase of CSI Project wasimplemented with the assistance of US$ 10 millionfrom IDA with effect from July 31, l987. The projectextended to 27 districts, was a follow-up operationto the CSI Project conducted since 1982.

The country went through the process of financialsector reform under the Structural AdjustmentProgram (SAP) during Mr. Thapa’s Governorship.In this connection, various monetary and Bankingmeasures were initiated as per the suggestions ofboth the IMF and World Bank. Some of theminclude: fixation of minimum capital fund ratio,provision of single borrower limit, change in formatof annual accounts of Banks, provision of loan loss,loan classification, issue of government bondsthrough auction (open market operations), recoveryof old loans and setting of Credit InformationBureau (CIB). Amendments in Acts relating tocommercial Banks and other financial institutionswere also made to supplement the reform programs.

The devaluation of Nepalese currency with Indiancurrency and other currencies by l4.7 percent,determination of exchange rate of Indian Currencyby including it in the currency basket, the provisionof maintaining account in foreign exchange,management of Indian currency and setting up ofNepal Bankers Association are some of theimportant policy decisions during Mr. Thapa’s tenure.

The Bank hosted the 22nd Conference of theGovernors of SEACEN in Kathmandu.. Similarly,the 6th General Assembly of Asian Pacific RegionalAgricultural Credit Association (APRACA)nominated Governor Thapa as the Chairman of itsExecutive Committee for l988/89. Thus GovernorThapa concurrently served as the Chairman of theExecutive Committee of APRACA of which NepalRastra Bank is a founder member.

The staff strength of the Bank as at July l990 was2,950.

Upon completion of his first tenure, Mr. Thapawas reappointed in June l0, 1989 for another termof five years. However, he second tenure endedpre-maturely. Since then Mr. Thapa had been attachedwith various national and international associations

such as Foundation for Development Cooperation,based in Australia and international aid agencies likeGTZ, IFAD and Micro Credit Project of the WorldBank. Mr. Thapa is also contributing his expertise inthe field of Banking and finance.

Mr. Hari Shankar TripathiTenure: August 10, l990 – January 17, l995

Mr. Hari Shankar Tripathi, like his predecessorMr. Ganesh Bahadur Thapa, had been associated withthe central bank from its establishment. Prior to hisappointment as Governor, Mr. Tripathi held theposition of Deputy Governor. He had also workedin the IMF as special appointee apart from being aconsultant with the FAO in Somalia.

Mr. Tripathi’s tenure witnessed thecommencement of financial liberalization policyadopted by the government. Hence the monetaryand banking policies executed during this period werein conformity with these policies. The Nepalesecurrency, after passing through partial convertibility,was made fully convertible in current account witheffect from March 14, 1993. Nepal’s acceptance ofArticle eighth of IMF on May 30, 1994 reflected thecountry’s its commitment towards liberalizationpolicy. Foreign exchange transaction, including Indiancurrency, was simplified. The exchange rate ofNepalese currency vis-à-vis the Indian currency wasfixed at Rs. 160 from Rs l65 with effect from Marchl993.

After a gap of six years, four more commercialbanks in joint venture with reputed foreign banksstarted operations. They include: Himalayan Bank,Nepal SBI Ltd., Nepal Bangladesh Bank and EverestBank. A policy on branch expansion as per thefeasibility and profitability was also formulated.

The establishment of various financial institutionsapart from the commercial banks took place. Itincluded finance companies, rural banks, cooperativesocieties and money changers. Even though theFinance Company Act was enacted about five yearsago, no effort to open such companies was made tillthen. After a minor amendment in the Act, NepalHousing Finance Development Company was setup as the first company in public sector. It wasfollowed by a private sector finance company, NepalFinance & Saving Company (NEFISCO).Afterwards, the private sector showed keen intereston opening such companies. As per the provisionof Cooperative Act, 1992, the Bank started issuing

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license to saving and credit cooperatives to transactlimited banking transactions. The money exchangebusiness previously monopolized by the commercialbanks, was also entrusted to the private sector with aview to provide more efficient services to the generalpublic as well as to the tourists.

A special study on the two public sector banks,NBL and RBB was carried out under the financialassistance of UNDP, by a foreign consulting firmof Booz Allen and Hamilton (Singapore), in viewof their deteriorating financial position. The studywas conducted in two phases, and is known asCBPASS (Commercial Banks Problems andStrategy Analysis Study). The recommendations ofthe study were implemented on phasewise basis.Various reforms including increase in capital in thetwo banks were made as per the recommendationsof the study.

The Rural Credit Review Survey (l991/92) wasconducted with the technical assistance of ADB. TheSurvey, which is third of its type, revealed that theflow of institutional credit in the rural sector, despitegrowth of financial institutions, was not adequate.It also showed that the Agricultural DevelopmentBank and rural branches of commercial banks werethe major source of institutional credit. Hence theSurvey pointed out the necessity of managing morerural credit in the economy.

The concept of rural banking was also put intopractice. Accordingly, two regional ruraldevelopment banks were set up in eastern and farwestern development region. The main objective ofthese banks, operated as Grameen Banking modelof Bangladesh, is to uplift the social and economiclife of the rural population. These banks disbursemicro-credit to the economically backward womenon the basis of group guarantee without collateral.Besides, these Banks operate community basedservices like literacy and social activities for itsmembers.

More efforts were diverted towards providingmicro-finance services for the economically weakpeople. In this context, the Rural Self-Reliance Fund(RSRF) having a corpse fund of Rs. 20 million, wasset up by the government with Nepal Rastra Bank asthe executing agency. This Fund is aimed at providingsmall loans to the target group through thecooperatives, non-government organizations and self-help groups (SHGs) in rural areas.

The CSI Project which was ongoing since l982was discontinued three years prior to the closingperiod due to various reasons. It was indeed a setbackto the implementation of the priority sector lending.However, the significance of this Project cannot beundermined in view of its contribution in creatingawareness and favorable environment for thedevelopment of cottage and small scale industries inNepal.

Upon completion of his tenure as Governor, Mr.Tripathi was appointed as the member of NationalPlanning Commission. Mr. Tripathi is still activelyinvolved in the field of Banking and finance.

Mr. Satyendra Pyara ShresthaTenure: January l8, l995 – January l7, 2000

Mr. Satyendra Pyara Shrerstha, like his twopredecessors had long working experience with thecentral Bank. After serving two years as the Bank’sDeputy Governor, he was appointed Governor ofthe Bank. He had also worked as Senior Economistof the Economic Commission and as the EconomicAdvisor at the Ministry of Finance. Apart from thatMr. Shrestha had worked as an Advisor in theExecutive Director’s office at the IMF from l988 tol990.

The financial system of Nepal saw rapiddevelopment of Banks and financial institutionsduring Governor Shrestha’s tenure. In the contextof increasing number of applications for setting upcommercial banks, a study was made to ascertainthe appropriate number of banks in Nepal so as tocreate healthy competition and increase economicactivities. Based on the recommendations of thestudy, important amendments were made in thepolicy framework of establishing banks and financialinstitutions in relation to issues like requirement ofminimum capital as per geographical location,shareholding pattern, branch expansion and the like.

During Governor Shrestha’s tenure, four morecommercial banks were added in the banking system.They are Bank of Kathmandu, Nepal Bank of Ceylon(now NCC Bank), Lumbini Bank and NepalIndustrial & Commerce Bank.

The concept of development bank wasintroduced in the financial system with the enactmentof Development Bank Act, 1996. Relevant directiveson regulation of such banks were issued. The centralbank encouraged the private sector to set updevelopment banks by investing certain amount of

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capital in view of the laxity shown by private sectorto open development banks. Apart from this, theRural Micro-finance Development Centre (RMDC)was promoted as a wholesale micro-financedevelopment Bank, with the Bank’s excessive shareparticipation. Apart from this, three more regionalrural development Banks were set up in western, mid-western and central development regions. Thus theservices of rural banks were expanded in all fivedevelopment regions.

In the context of growing complexities in theregulation and supervision of the banking system,the related mechanisms of the central Bank werestrengthened by bringing out appropriate change inthe Bank’s organizational structure.

Mr. Shrestha’s tenure also coincided with HisMajesty the King’s 25th years of accession to thethrone. To mark this occasion, commemorativecurrency notes of Rs 250 were issued along withcurrency notes of Rs. 25 denomination.Improvements were made in the high denominationnotes by enhancing their security features.

Dr. Tilak Bahadur RawalTenure: January l8, 2000 - January l7, 2005

The tenure of Dr. Tilak Rawal, as the llthGovernor was marked by the implementation ofcomprehensive reform program on financial sector,apart from execution of various monetary policies.

The Financial Sector Reform Program (FSRP)was undertaken with the loan assistance of WorldBank and grant assistance of Department forInternational Development (DFID). It constitutes ofthree components: (a) re-engineering of NRB, (b)Restructuring of NBL and RBB, and (c) capacitybuilding of the financial sector. Under the componentdealing with re-engineering of NRB, an Americanconsulting firm, IOS Partners worked towardsvarious aspects such as improvement in supervisionmanual, reform in organizational structure,implementation of voluntary retirement scheme(VRS) and so on. As explained earlier, the enactmentof Nepal Rastra Bank, 2002 by replacing the erstwhileAct of l955 has significantly enhanced the autonomyof the central Bank. This Act addresses the challengesbrought by the evolving finanical sector and focussedthe bank’s role in effective monetary managementfor domestic finaical sector stability.

Similarly, the management of NBL and RBB hasbeen undertaken by ICC Consulting, Bank of

Scotland (Ireland) for the prior and a foreign teamof consultants for the later. The restructuring at thesebanks are aimed at decreasing the excessive rate ofnon-performing loans (NPL), increasing profitability,increasing capital fund, updating audit, improvinghuman resource management and adopting advancedtechnology in operation. Under the capacity buildingof financial sector, amendments in prudentialregulations have been issued. Most importantly, theBanks and Financial Institutions Ordinance (BAFIO)was promulgated as an umbrella Act for all the banksand financial institutions. As per this Ordinance, Banksand financial institutions are categorized as A, B, Cand D on the basis of paid capital and area ofoperation. With this, the various Acts relating tocommercial bank, development bank and financecompany were scrapped. Relevant amendmentshave also been effected in the NRB Act, 2002 andthe BAFIO. The process of formulating Acts relatingto asset management company, money laundering,bankruptcy and secured transaction has been started.The process of setting up a second-tier institution(STI) had also been initiated to look after theregulation and supervision of saving and creditcooperatives.

A new policy on opening of commercial bankshas been implemented with effect from May l6, 2002.Accordingly, for setting up a national levelcommercial bank, the minimum paid-up capitalrequired has been fixed at Rs. 1 billion. Regulationsas to the shareholding pattern have also been made.Similarly, regulation of development banks andfinance companies has been revised.

The financial system has been further widenedby setting up of more banks and financial institutions.In this context, another five commercial banks:Lumbini Bank, Machhapuchhre Bank, Kumari Bank,Laxmi Bank and Siddhartha Bank were established.Thus the total number of commercial Banks reachedl7. Similarly, the number of development Banks andfinance companies increased to 34 and 59respectively, while the number of cooperatives andnon-government institutions working as financialintermediaries rose to 20 and 47 respectively. Thusthe total number of Banks and financial institutionsreached 160. The number of commercial Bankbranches as at mid-July 2004 stands at 423 (including44 branches of Agricultural Development Bankperforming commercial banking activities). It is also

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noteworthy that the number of branch of NBL andRBB has declined as compared to the past due to theclosure of a number of offices owing to prevailingsecurity reasons. With the increase in the number ofthese institutions, the volume of transaction also rosesubstantially. As at mid-July 2004 the total deposits withthe financial system reached Rs 2,85,009.5 million, whilethe loans and advances soared to Rs 1,93,610.3 millionwhich was 57% and 39% respectively of GDP.17

With a view to operate the banks on commercialprinciples, a policy on gradual phasing out the PrioritySector Lending (PSL) has been implemented fromF.Y. 2002/03, while retaining the deprived sectorlending. Accordingly, the compulsion on investmentin PSL by the commercial banks will be completelyscrapped by FY 2008/09. A policy of earmarking5 percent of the commercial bank’s profit annuallyfor the Rural Self-Reliance Fund (RSRF) was alsoexecuted by the government. This provision wasmade with a view to make the funds available forthe rural sector in the context of the phasing out ofthe PSL in the future.

The Vision and Mission statement of the Bankwas published for the first time which is laterexplained. The Bank’s activities are guided by such astatement. The process of publishing the Bank’smonetary policy annually for public disseminationand maintaining the accounting and internal auditingstandard at par with international standard, have alsobeen initiated.

Polymer notes of Rs. 10 denomination have beenintroduced and issued for the first time in Nepal.Security features have also been enhanced in thecurrency notes of high denomination to checkcounterfeiting.

Mr. Deependra Purush DhakalTenure: August 29, 2000 – April 27, 2001

Mr. Deependra Purush Dhakal, the twelfthGovernor, had a long career in the civil service ofHMG, including in Finance and Tourism Ministries.Prior to his appointment as the Governor, Mr.Dhakal had been one of the Board members of theBank. His tenure at the Bank lasted only for sevenmonths as Dr. Tilak Rawal, who was earlier removedby HMG, was reinstated as the Governor with theverdict of the Supreme Court. During this periodthe process of financial sector reform was continued.In this connection, the process of contracting outthe management of NBL and RBB was initiated.

Prudential regulations for banks and financialinstitutions were revised. Some organizationalreforms also took place.

Mr. Bijaya Nath BhattaraiTenure: January 31, 2005 –

The present Governor, Mr. Bijaya Nath Bhattaraiis the thirteenth Governor of the Bank succeedingDr. Tilak Rawal. Mr. Bhattarai is a seasoned centralBanker as he has been associated with the Bank formore than three decades in different capacities, mostlyin the Research Department, including the DeputyGovernor of the Bank. Mr. Bhattarai is the firstGovernor to be appointed following the enactmentof the Nepal Rastra Bank Act, 2002, wherein theposition is appointed on the basis of therecommendation of a RecommendationCommittee.

The beginning of Governor Bhattarai’s tenurecoincides with the Bank’s Golden Jubilee year 2005.A number of events and programs have beenorganized throughout the year to mark the GoldenJubilee celebrations.

While continuing the financial sector reformprograms, which aims at improving the efficiencyand effectiveness of the domestic finanical sector.,the new Governor has the responsibility ofmaintaining banking discipline for the overall stabilityof the financial sector. As is evident, the financialsystem of the country over the years has been movingto be highly competitive and innovative, particularlydue to the increasing number of financial players andthe complexities therein. The recovery of bad loanof the two big commercial Banks, NBL and RBBwhich cover a large portion of the total volume ofthe banking transactions, has been a hindrance to theeffective implementation of the FSRP. Tackling withwillful defaulters has also been a burning issue. Forthis, a high-level committee chaired by the Vice-Chairman, National Planning Commission, haspresented its report to the government. Theimplementation of the recommendations of thestudy is equally challenging.

The challenge of establishing the NRB as amodern, dynamic, credible and effective central bank,as envisaged by the Bank’s vision, apart from theobjectives set by the Nepal Rastra Bank Act, 2002,has to be duly addressed by the Bank’s new leadership.

Apart from these, the Bank’s present leadershiphas to face the challenges of implementing variousissues related to the monetary policy as explained in

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the forthcoming paragraphs. With his long associationwith the central Bank in various capacities, it isexpected that the new Governor will undoubtedlybe able to skillfully and professionally lead the Bankin overcoming these challenges in a dynamic manner.

Problems and ChallengesThe leadership of Nepal Rastra Bank has been

facing problems and challenges of varied nature rightfrom its establishment. The Bank’s objectives set inthe Act of l955 were in fact the challenges for thecorporate leadership in those days. However, thecapable, devoted and dynamic leadership had tackledsuch challenges efficiently. The Bank has beensuccessfully performing its traditional functions whileplaying a developmental, promotional and thestabilization role in the Kingdom of Nepal.

The success story of the Nepal Rastra Bank isattributed to the people working at the leadership level,who left no stone unturned in their endeavor to achievethe stipulated objectives. As the leadership has matured,more problems and challenges have also tended toemerge. This is in fact a never ending process,particularly in the context of liberalization, privatizationand globalization. The current challenges of the Bankin particular, relate to the implementation of themonetary policy and widening of financial system.

The banks and financial institutions are the meansof implementing the monetary policies. For efficientmonetary management, the financial health of theBanks and financial institutions should be sound.However, the effectiveness of such policies has beenthreatened due to the financial position of NBL andRBB which presently covers about 40 percent ofthe total transaction of the banking sector. Althoughthe management of these commercial banks has beencontracted out, their financial health has not improvedto a satisfactory level. This has posed challenge tothe effective monetary management.

The alarming proportion of nonperforming loan(NPL) in commercial banks, including private sectorBanks owing to, among others, the slowdown ofeconomic activities and industrial sickness has adverseeffect on the implementation of monetary policy.The lack of loan recycling tend to discourage theprivate sector investment. The central bank’sleadership should properly address this problem.

The financial system has grown to be highlyintegrated, innovative and competitive in the contextof liberalization; it is not desirable to intervene the

operations of the banks and financial institutions.They are supposed to operate in healthy competitionand offer better service to the clients. However, attimes these expectations are not materialized. Onesuch instance can be taken in relation to interest ratespread which is considered to be the cost of financialintermediation. The central bank had earlier scrappedthe ceiling on interest rate spread mechanism with aview to foster healthy competition among the Banksand thereby benefit both the borrowers and thedepositors. However, the banks tend to increase thespread rate causing higher rate of interest in lendingwhile lowering the rate for deposits which have hadan adverse effect on the overall investment. It hasposed a threat for attaining the objectives of themonetary policy.

Financial liberalization has resulted in increasingnumber of Banks and financial institutions in privatesector as well as in joint venture with foreign banks.While this has fostered greater competition among theBanks, this has also created complexities in the financialsystem. It calls for more effective mechanism ofregulation and supervision for protecting the depositors’interest, particularly after Nepal’s membership with theWorld Trade Organization (WTO) there is increasingprobability that foreign Banks will open their offices inNepal. It will enhance more competition in the bankingsector. As the host country supervisor more challengesin this field are forthcoming.

Legal reforms in the financial sector are to beaccomplished in time so as to develop legalfundamentals. This will boost the effectiveness ofthe monetary policy.

Likewise, the circulation of Indian currency incounterfeit notes is still prevalent in many areasparticularly in Terai and hilly regions. It is a verydifficult task to do away with these problems.Despite development of the financial system ascompared to the past, cash transaction is still popularin the Nepalese economy. Steps are yet to be takentowards encouraging the non-cash transaction fromthe viewpoint of security and simplicity.

Central banks in most of the countries do notinvolve themselves in managing micro-finance.However, in the context of Nepal, the Bank has toinvolve itself in this sector particularly due to thenecessity to manage fund for the people living inextreme poverty in the country. One section ofpeople are not in favor of the central bank’s

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involvement in micro-credit, while another sectionemphasize that the Bank should take a lead role inthe context of a less developed country like ours.As commercial Banks tend to operate in strictcommercial principles, it is likely that the flow ofmicro-finance services to the economically backwardsector may be affected. Despite the developmentof financial system, the access of rural credit is verylimited as revealed by the surveys relating toagricultural credit review. This is further deterioratedby the threat posed by the existing situation of securityin the country resulting in discontinuation of bankingservices in many places. It can be evidenced by thedecreased number of Bank branches as comparedto the past. Thus people living at the rural sectorhave been deprived of banking facility. It is a greatsetback to the financial system. The leadership ofthe central bank has to frame appropriate policiesand regulations to address the above challenges.

ConclusionCorporate leadership of the Nepal Rastra Bank is

linked with its evolution. In fact, the leadership at theevolutionary period of the Bank in the mid-fifties hadfaced unique challenges of a dual currency period andunstable exchange rate of the Nepalese currency vis-à-vis the Indian currency. The banking system wasprimitive and underdeveloped. There was only onecommercial Bank with few branches serving in urbanareas. There was virtual absence of infrastructure fordevelopment. Lack of industries led tooverdependence on import from India. However, theBank was able to achieve success in meeting all thesechallenges over the years. By the end of the first decadeof the Bank’s establishment, the dual currency systemwas abolished and the exchange rate between theNepalese and Indian currency was stabilized. In thelater decades, the Bank diverted its attention todeveloping the banking system in the country.Accordingly, various monetary and banking policieswere introduced. Since the mid-eighties the Bank hasembarked upon executing appropriate policiesconducive to the changing economic and financialscenario. All these success stories can be attributed tothe Bank’s capable and dynamic leadership over aperiod of five decades. In this respect, the Bank’sGovernors as the leading persons had efficientlydemonstrated the leadership skills. The Nepaleseeconomy and the banking system have been immenselybenefited from the rich experience, expertise andprofessionalism of the Governors. The country has

witnessed continuous refinements of policies relatingto monetary, banking and development finance overthe years. The tireless efforts and dedication of theGovernors who provided dynamic leadership havecontributed towards shaping today’s Nepal RastraBank as a prestigious institution. The expression madeby Mr. Pierre-Paul Schweitger, the past ManagingDirector of IMF (1963-1993), during his visit to Nepalmore than three decades ago, on NRB as “one of thebest managed central Banks in the world” can be takenas a testimony of the Bank’s image.

The legal framework as provisioned in the NepalRastra Bank Act, 2002 has laid down transparentprovisions that emphasize appointment of qualified andcapable leadership having high morale and ethics so asto enable them to perform their responsibilitiesefficiently. The Act has also stabilized the tenure of thepeople at leadership level by setting out clear-cut groundsfor their removal. A significant aspect of the Act is theelimination of discretionary power vested with thegovernment to remove the leadership. In the absenceof this provision many Governors in the past wereeither dismissed by the government or forced to resign.

There is no doubt that the corporate leadershipof Nepal Rastra Bank has been dynamic from thevery beginning. However, as time passes by, thechallenges for leadership go on increasing. Time hascome to bring in more vision and far-sightedness tocope with the challenges. In view of the openeconomy and Nepal’s affiliation with WTO, morechallenges are forthcoming in the economy. As thefinancial system is widened, the magnitude ofproblems and complexities are also obviouslyexpected to be in rise. For maintaining properfinancial discipline and stability in the overall financialsystem, the regulation and supervision of banks andfinancial institutions have to be further strengthenedat par with international standard.

Leading a central bank has always been a crucialissue. Therefore, the leadership should have thoroughinsight into all the contemporary issues. Participativemanagement approach may be required to achievethe vision and the mission of the Bank. C.B. Mamoriahas rightly pointed out the necessity of qualities of aleader to cope with the emerging problems andchallenges. He opines, “…a good leader should possessqualities like energy, emotional maturity and stability,knowledge of human relations, objectivity, empathy, personalmotivation, technical competence, integrity, conceptual skill,flexibility of mind …”18 These are equally relevant inthe case of the Bank’s corporate leadership.

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While the Nepal Rastra Bank Act, 2002, hasenhanced autonomy, the people taking the lead shouldbe able to preserve it and put into practice. It shouldalways strive for maintaining money supply at desiredlevel and increasing economic activities in the countrythrough implementation of appropriate monetarypolicies. It should concentrate on the vital decisionmaking process rather than involving in administrativematters. For this purpose, it is felt necessary forhaving proper delegation of authority.

Annexure ABoard of Directors(As at mid-April 2005)

Chairman1. Mr. Bijaya Nath Bhattarai, GovernorMembers2. Mr. Bhanu Prasad Acharya, Secretary, Ministry of Finance3. Dr. Parasar Koirala, Dean, Tribhuwan University4. Mr. Pradeep Kumar Shrestha5. Dr. Bishwa Keshar Maskay, Professor, Tribhuwan University6. Mr. Lekh Nath Bhushal, Deputy Governor7. Mr. Krishna Bahadur Manandhar, Deputy Governor

Annexure BDeputy Governors of the Bank

Tenure

1. Mr. Dhir Bikram Shah 1969 - 19742. Mr. Kumar Das Shrestha 1969 - 19743. Mr. Yudhir Shumsher Thapa 1974 - 19814. Mr. Ganesh Bahadur Thapa 1974 - 19785. Mr. Ishwari Raj Pandey 1979 - 19826. Mr. Laba Raj Sharma 1982 - 19877. Mr. Hari Shankar Tripathi 1985 - 19908. Mr. Hiranya Lal Bajracharya 1987 - 19929. Mr. Achyut Prasad Poudyal 1991 - 199210. Dr. Harihar Dev Pant 1992 - 199511. Mr. Satyendra Pyara Shrestha 1992 - 199512. Dr. Puspa Raj Rajkarnikar 1995 - 199513. Dr. Prafulla Kumar Kafle l995 - 200014. Mr. Bharat Krishna Sharma l995 - 200015. Mr. Ram Babu Pant 2000 – 200516. Mr. Bijaya Nath Bhattarai 2000 - 2005Current Deputy Governors17. Mr. Lekh Nath Bhusal 2005 -18. Mr. Krishna Bahadur Manandhar 2005 -

With the inclusion of the broad objectives in theNepal Rastra Bank Act 2002, apart from the extendedfinancial system followed by globalization, the centralBank’s role has also been changing over the years. Itcalls for putting more efforts on having a financialsystem which is healthy, safe and sound for ensuringoverall financial stability. Hence more dynamism,enthusiasm and devotion on the part of the corporateleadership is vitally essential to achieve the mission andvision that can lead to develop the Nepal Rastra Bankas the central bank of the twenty-first century.

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Annexure C Directors of the Bank

Tenure

Mr. Nara Pratap Thapa 1956 - 1960Mr. Krishna B.Mugali Thapa 1956 - 1959Mr. Hiranya Dhoj Joshi 1956 - 1960Mr. Gaya Prasad Shah 1956 - 1957Mr. Parikshit Narsingh Rana 1958 - 1959Mr. Laxmi Nath Gautam 1958 - 1959Mr. Ram Prasad Joshi 1959 - 1960Dr. Yadav Prasad Pant 1960 - 1965, 1966-1967Mr. Harihar Jung Thapa 1960,1971-1972Mr. Puskar Nath Pant 1960,1965-1966, 1969Mr. Sri Jung Shah 1961 - 1963Mr. Sumer Mal Dugad 1961 - 1963Mr. Pradyumna Lal Rajbhandari 1961 - 1963Mr. Krishna Bam Malla 1963 - 1965Mr. Naresh Man Singh 1963 - 1967Mr. Lila Prasad Lohani 1963 - 1967, 1969-1975Mr. Shiva Narayan Das 1965 - 1966Mr. Kumar Mani Acharya Dikshit 1966 - 1967, 1967-1969Dr. Bhekh Bahadur Thapa 1967 - 1971Mr. Kalyana Bikram Adhikary 1967 - 1969Mr. Mani Harsha Jyoti 1967 - 1973Mr. Bishnu Prasad Dhital 1969Mr. Bharat Bahadur Pradhan 1972 - 1976Mr. Pashupati Shumsher J.B.R. 1973 - 1975Dr. Mohan Man Sainju 1975 - 1979Mr. Hari Prasad Giri 1975 - 1978Mr. Devendra Raj Upadhyay 1975 - 1976Mr. Nara Kant Adhikary 1976 - 1978Mr. P.B.Bista 1976 - 1977Mr. Ishwari Lal Shrestha 1977 - 1978, 1982-1986Mr. Dirgha Raj Koirala 1978 - 1979Dr. Devendra Raj Pandey 1978 - 1979Mr. Indra Bhakta Shrestha 1978 - 1979

Tenure

Prof. Khelendra Prasad Pandey 1979 - 1980Mr. Bhuban Man Singh 1979 - 1983Mr. Ram Prasad Sharma 1979Mr. Surya Prasad Shrestha 1980 - 1982Mr. Gorakshya B.Nhuchhe Pradhan 1980 - 1981Dr. Parthibeshwar P. Timilsina 1980 - 1983Mr. Jitendra Lal Maskey 1981Mr. Karna Dhoj Adhikary 1981 - 1985Mr. Shankar Krishna Malla 1981 - 1983Dr. Mahesh Banskota 1983 - 1987Mr. Janak Bahadur Shaha 1984 - 1987Mr. Lok Bahadur Shrestha 1985 - 1989Mr. Radha Raman Upadhyay 1986 - 1989Dr. Badri Prasad Shrestha 1987 - 1991Mr. Madhukar Shumsher J.B.R. 1987 - 1990Dr. Shashi Narayan Shah 1989 - 1992Mr. Bhuwaneshwar Khatri 1989 - 1990Dr. Guna Nidhi Sharma 1990 - 1991Mr. Ganapat Lal Rajbhandari 1991Dr. Narsingh Narayan Singh 1991 - 1992Mr. Prithvi Raj Ligal 1991 - 1994Dr. Thakur Nath Pant 1992 - 1994Mr. Punya Prasad Dahal 1992 - 1995Dr. Dilli Raj Khanal 1995 -Mr. Ram Binod Bhattarai 1994 - 2000Dr. Bhola Nath Chalise 1995 - 1999Dr. Rabindra Kumar Shakya 1995 – 1999Mr. Rajeswar Acharya 1996 – 1998Dr. Shankar Prasad Sharma 1999 – 2002Dr. Bimal Prasad Koirala 2001 –Current Board MembersDr. Parasar Koirala l998 –Mr. Pradeep Kumar Shrestha 2001 –Mr. Bhanu Prasad Acharya 2002 –Dr. Biswa Keshar Maskey 2002 –

ReferencesForty Years of Nepal Rastra Bank (1956-1966), April,

l996.Nepal Rastra Bank Pachchis Barsha 2013-2038

(Twenty-five Years of Nepal Rastra Bank: inNepali), April, l981.

Samjhana ka Kshanharu (Moments of Recollection:in Nepali), Nepal Rastra Bank, April, 2005.

Annual Reports of Nepal Rastra Bank l956/57-2002/03.

Banking & Financial Satistics, Mid-July 2004, NepalRastra Bank.

Governors’ Statement on the occasion of Bank’sAnniversary (various issues).

Mission and Vision of NRB: Institutional PlanningDept., NRB.

Nepal Rastra Bank Act, 2002.The Act to Increase Nepalese Currency Circulation,

1957.

Foreign Exchange (Regulation) Act, 1962.Banks and Financial Institutions Ordinance, 2003.Nepalma Banking Gatibidhi, (Banking Activities in

Nepal: in Nepali) Nepal Rastra Bank, BankingOperation Department, April l988.

Nepal Rastra Bank, An Introduction, April 26, l966.Shrestha, Bhola Ram, “First Two Decades of NRB:

Efforts to Monetization of Economy andDevelopment of Banking System” TheKathmandu Post, April 27, 2000.

Shrestha, Bhola Ram, “Financial System of Nepal:an Overview”, The Kathmandu Post, April 26,l997.

Glover, John G., Fundamentals of ProfessionalManagement, Simmons Broadman PublishingCorporation, New York, l958, p. 148

Mamoria, C.B., Personnel Management, HimalayaPublishing House, Bombay Delhi Nagpur, l992.

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Historical Perspective: Golden Jubilee Year (l937-1987), Nepal Bank Ltd, l987.

Report on Monetary Policy for FY 2003/04 and2004/05, Nepal Rastra Bank.

Endnotes1 Glover, John G., Fundamentals of Professional

Management, Simmons Broadman PublishingCorporation, New York, l958, p. 148

2 Mamoria, C.B., Personnel Management,Himalaya Publishing House, Bombay Delhi Nagpur,l992, p.768

3 Nepal Rastra Bank Act, 2002, Section 294 Nepal Rastra Bank Act, 2002, Section 345 Nepal Rastra Bank Act, 2002, Section 30.6 Nepalma Banking Gatibidhi, Nepal Rastra Bank,

Banking Operation Dept., April l988.7 Historical Perspective, Nepal Bank Ltd., Golden

Jubilee Year (l937-l987), Nepal Bank Ltd, l987.8 Annual Report, NRB, July l957.9 Forty Years of Nepal Rastra Bank (1956-1996),

April l996.

10 Samjhanaka Kshanaharu, Himalaya ShumsherRana, NRB, April, 200).

11 Annual Report, Nepal Rastra Bank, 1961/62-l964/65

12 Twenty-five Years of Nepal Rastra Bank,p. 32.

13 Nepal Rastra Bank, An Introduction, April26, l966.

14 Nepal Rastra Bank, Annual Report, 1965/6615 Nepalma Banking Gatibidhi, Nepal Rastra

Bank, April l988.16 Nepalma Banking Gatibidhi, Nepal Rastra

Bank, Banking Operation Department, April l988.17 Banking and Financial Satistics, Vol. 43, Nepal

Rastra Bank, Bank & Financial InstitutionsRegulations Dept., Mid-July 2004.

18 Mamoria, C.B., Personnel Management,Himalayan Publishing House, Bombay, Delhi,Nagpur, l992

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ORGANIZATTIONAL DEVELOPMENT AND CORPORATE PLANNING 33

Organizational Development and Corporate PlanningLila Prakash Sitaula

Director, Banks and Financial Institutions Regulation Department

IntroductionIn Today’s world, management

principle is not only going to be breathingof corporate life has become aninseparable and unavoidable part ofsocial life. Management and organizationsare complementary and synonymouswhich in most of the cases signifies thesimilar fragrance in the literary world.Organization Development (OD) is anew integrated approach of the social systemsoriginated in the 1950s and 1960s, in which peopleare strongly influenced by the organizational culture.In the initial days, it was more focused on trainingand skill development but these days it seeks to changebeliefs, attitudes, values, strategies, structures andpractices, so that the organization can better adaptto competitive actions, technological advancements,and to the fast pace of other changes in theenvironment. For the practical purpose, we dogenerally accept OD in broader concept of system,process and art that could acknowledge theorganizational culture and change. This article doesnot emphasize on theoretical aspects such ascharacteristic and approaches to change, and models,processes, underlying assumptions of the subjectmatter rather focus laid to portrayed how NepalRastra Bank, stood sound and strong on the test oftheoretical background of organizationaldevelopment and what kinds of challenges it hasfaced for the last forty-nine years of its inception in

the context of discharging duties andresponsibilities. Further, an attempt hasbeen made to analyze about the endeavorof the Bank to develop the corporateplanning culture to nurture and realize theobjectives as enshrined in the preambleof the Act in different time series. Thisarticle also deals with the organizationalrestructuring process followed by to caterthe needs of changing situation in financial

world and some suggestions have also beenpresented to galvanize and substantiate theorganizational worth in the society.

Meaning and DefinitionOD transforms the organizational culture

combined with the shared beliefs, values andbehaviors by working with social and technicalsystems such as culture, work processes,communication and rewards. The method in theprocess is using planned change based on researchto increase motivation, remove obstacles and makechange process easier. Satisfying external stakeholdersis another key consideration of promulgating themotto of cultural change. According to WebsterCollegiate Dictionary, OD is “the act or process oforganizing or of being organized, the condition ormanner of being organized or an “association orsociety or administrative and functional structure alsothe personnel of such structure.” Stoner, Freeman& Gilbert defines organization as “two or more

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people who work together in a structured way toachieve a specific goal or set of goals” andOrganizational Development as “a top management-supported, long-range effort to improve anorganization’s problem-solving and renewal process,particularly through a more effective andcollaborative diagnosis and management oforganization culture- with special emphasis on formalwork team, temporary team and intergroup culture-with assistance of consultant-facilitator and the useof the theory and the technology of appliedbehavioral science, including action research”. JohnW. Newstorm & K.Davis defines OD as “thesystemic application of behavioral science knowledgeat various levels like group, intergroup and totalorganization to bring about planned change with theobjectives of a higher quality of work life,productivity, adaptability and effectiveness”. The mostpotent tool, therefore, for improvement is culturalchange. The overall goal of the organizationaldevelopment is to enhance and sustain the long-termhealth and achievement of the organization bycultural change and new innovation which can bereflected in enriching and motivating the humanresource within the organization. It is felt that manyof the approaches to planned change are appropriatefor solving immediate and specific problems. ODin contrast is a longer-term, more encompassing,more complex and costly approach to change thataims to move the entire organization to a higher levelof functioning while greatly improving its members’performance and satisfaction. Although ODfrequently includes structural and technologicalchanges, its primary focus is on changing people andthe nature and quality of their working relationships.

In organization, internal stakeholders mainlyemployees, management and unions are controllablethat can be managed within the managerialframework by using the charismatic art ofmanagement whereas it is somehow complex andcomplicated to deal and satisfy the externalstakeholders, like government, local community,shareholder, suppliers, customers etc. - this is becauseof the nature of structure in stakeholders’ mix. Todaymedia people are more sensitive in gauging the qualityof delivery of goods and services. Beside this, internalcontent factors including business strategy,management conditions, task technology and externalcontent factors such as laws, societal values, labor

market, technological change etc, are also pivotaldeterminants of the performance of theorganization. Organizations are not limited to attainthe objective of wealth maximization and societalorientation but also emphasizes organizational cultureof change and development, which eventuallyinfluences the way people work. In this process, aregular and continue efforts of consolidation,mobilization and innovation of existing and potentialhuman resources are absolutely necessary tounderstand the organizational developmentphilosophy.

Organization and management also contribute topresent quality of life by making available of a widerange of goods and services. It creates desirablefutures and help individuals do the same by keepingthe past and present in mind. Organization andmanagement help connect people to their past onmutuality and human relation which is created by thepeople. In a nutshell, OD should be observed fromthree basic perspectives such as (a) problem-solvingprocesses, refers to the organization’s method ofdealing with the threats and opportunities in itsenvironment, (b) the renewal process, refers to theway managers adapt their problem-solving processesto the environment and (c) collaborativemanagement, refers to the sharing of managementpower and subordinate participation, the oppositeof hierarchical imposition of authority.

Fundamentals of Organization andStructure

In any organization, people are the soul while thegoals are the essence. Team spirit or group dynamicsis essential for any successful organization. Further,an organization is always based on structure, thuseach and every organization has proper structure tojustify their survival. The vision, mission and theobjectives of the organization are prime factors tooutline the structure of the organization. Besides,nature, size, scope and significance are additionalelements, which also could play vital role indetermining the organizational structure. Achievementor performance is the ultimate conclusion of theorganization and proper evaluation only could bedone in results. If the desired output achieved andaddress the marketing mix, the said stakeholders andcustomers segment could be satisfied. Efficiency, theability to minimize the use of resources in achieving

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organizational objectives that is ‘doing things right’and effectiveness, the ability to determine appropriateobjectives, that is ‘doing the right thing’ measures theperformance or ‘how well organization achievesappropriate objectives’. Performance enhancementand healthy growth of the organization is only possiblethrough the mutual efforts that should be reflectedin structure. J. Walton says, “Organizations do not‘do’ anything, they do not ‘act’ or possess a ‘businessbrain’ that enables them to choose. They are no morethan frameworks, contrivances, which enablenumbers of people to do things and achieveoutcomes which individually would not have beenpossible”. Whatever is the form of structures, verticalor horizontal, flat or tall; it should represent and caterthe needs of the organization. Inappropriate structureinvites unnecessary cost of production, jeopardizeefficiency and productivity, cannot address thechallenges and also unable to fulfill the organizationalneeds. It is, therefore essential to frame an idealstructure that helps to achieve the ultimate objectivesof the organization, and also strengthen the processand the system of organizational development.

Importance of Organization DevelopmentOrganizational development helps all types of

organization such as banks, companies, businessenterprises and governments by- Empowering management leaders and individualemployees,- Creating an environment by concentrating theminds of human resource to work,- Providing top management more control overresults, and employees more control over how theydischarge their duties and responsibilities,- Increasing motivation, job satisfaction, teamwork,quality of work and overall productivity,- Developing a culture of continuousimprovements, refinements and configuration aroundvision, mission and shared goals,- Making change simple, easier and faster so as tofoster the group dynamics,- Enhancing the quality and speed of decision-making at all levels,- Ensuring stakeholders a constructive conflict

management that could fence the possiblesituation of tension between/among employeesand management.

Benefits of Organizational DevelopmentThe consequences of organizational development

may comprise enhancements in:- Overall profitability for profit-making

organization and long-term sustainability even fornon-profit making organization,

- Continuous innovation, research anddevelopment,

- High customer satisfaction as well as job, work,and life satisfaction of employees,

- Organizational suppleness in developmentprocess,

- Individual feelings of effectiveness andcommitments,

- Quality product and service and maximum costeffectiveness.

Scope of Organizational DevelopmentAs stated above, OD is a continuous process and

meaningful to all kinds of organization whether it isprivate sector or public sector or it is profit –makingor non-profit making entity especially in thoseorganizations, where the following organizationalvariables are taking into high consideration:- Employees and functional areas have the same

goals.- Free and valid flow of information at all levels,

laterally and vertically, and all relevant facts andfeelings are shared. Learning process can be takenas common character and people can learn frompast experience.

- Wide involvement and well integrated throughlinking processes; people make decisions with themost relevant and best of knowledge.

- Economic rewards based on justifiablecompensation system developed through genuineparticipation especially from the trade unions.

- High degree of mutual trust and confidence toresolve the conflict constructively - where it is usedfor innovation, not suppressed or allowed tointerfere with productivity.

- People are key factors that determine thecomplete achievement and they should berewarded for their success.

- Customers’ orientation is prime consideration.Customers’ needs are always known andperceived about by employees and management.

- People should not be punished for failure ofinnovation or creativity, so innovation is high.

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- Developed processes and organizational structuresare based on present needs rather than past needsor facts, so they are efficient and help people.

Limitations of Organizational DevelopmentThere are some problems and limitations of OD

to which dynamic management has to identify andassess before making attempts to translate it intopractice:- It is time consuming and less cost effective.- The possible benefits have a delayed payoff, and

an organization may not be able to wait that longperiod of time for potential benefits.

- There may be high possibility of failure ofimplementing the principles due to its complextheoretical methods and conceptual ambiguity.

- The methods are questionable on the ground thatthere is the possibility of invasion of privacy andpsychological harm.

- It emphasizes merely on group processes ratherthan performance.

Corporate PlanningPlanning is an essential component of overall

management process. Any organization desires toachieve its goal through the best decision that usuallyinvites the time dimension. The result or the impactof present decision will be felt in immediate or longrange future. Planning is therefore a decision rule butit does not mean that all decisions are planning. PeterDrukker describes planning as the futurity ofdecisions. The concept of corporate planning is asold as the science of management itself. Henri Fayolbelonging to the classical school spoke about planningas early as in 1916. The usage of this field ofmanagement originated in the 1950s and thepublication in 1958 of Long Range Planning forManagement edited by David W. Ewing furtherreinforced the subject as a distinct area of research.Le Breton and Henning further provided theoreticaland conceptual framework for the development ofthe subject in their book ‘Planning Theory’ in1961.Since then there has been phenomenal explosionof interest as the increasing uncertainty andcomplexity in the corporate environment providedan impetus for the study and research in planning.Now the literature on the subject has been so muchdeveloped that there are abundant reference materialsavailable on different aspects of corporate planningissues. In the same manner the use of corporate

planning process becoming a sine qua non in allcorporate sector organizations to achieve the ultimateobjectives.

In the words of R.L. Ackoff, “planning is thedesign of desired future and effective ways ofbringing it about”. So, designing of a desired futureof an organization mainly is the function of the topmanagement. Survival and satisfactory performanceresulted from the skill of the top management is tobe ref lected in systematic planning process.Appraising the glimpse of change and takingadvantage of new opportunities by adopting amodified demand conditions is basically possible bythe strategic planning. In the corporate planningcontext, today’s environment is completely differentfrom the various perspective and dynamics.Globalization, multi-national collaboration,competitive advantage, technological advancementare some of those environments, which havecontributed tremendously to built up differentorganization culture of strategic planning. That is why;it is pervasively used today as a management tool tohelp an organization to do better performance andto ensure that all members of the organization aretrying their best to achieve the same goal. It is adisciplined effort to produce fundamental decisionsand actions that shape and guide what an organizationis, what it does it and why it does it with a focus inthe future. Strategic planning itself is a processbecause it involves intentionally setting goals and alsopreparing the best way to respond to thecircumstances of the organization’s environmentwhether or not those circumstances are known inadvance. Growing complexities and proliferating sizeof the organization, complex and unpredictableenvironmental constraints, severe competitivecondition in the market have created a lot ofuncertainties. That is why it is almost impossible tothe management of modern organization to frameand handle the overall corporate planning strategicallywithout broad participation of the people. But theleader, who is normally to be appointed for a fixedperiod of time, has to visualize the future path andalso perceive the best series of actions that leadorganization to attain the vision and mission. It ismore important to the organization like Central bank.Strategic Planning has thus developed as a separatespecialized function to support the top managementto realize its vision and mission by organizational

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decisions and actions through organizing, leading andcontrolling activities but active participation andcommitment of the chief executive is still thefundamental prerequisite for the successful corporateplanning process.

Corporate Planning as a management functionis necessary at least for deriving tasks for variousfunctions in the organization in line with visionand mission even though it can be complex,challenging and even messy. If it is taken as aculture of work and commitment to preserve theorganizational value, planning drives theorganization towards the desired direction offostering functional objectives. Planning enhanceand establish the culture of right anticipating andsynchronizes the various elements of action in thepresent. Coordinated effort and extensiveparticipation to maximize collective effectivenessis the essence of corporate planning. Plannershould understand that corporate planning, as atool alone does not do anything without properresponse by the people. That is why it should betaken as inclusive process. If it is taken as creativeprocess, corporate planning could be indispensableand inevitable practice without making itmechanical exercises in a successful organization.

In the planning process, various approaches areput in place and some are feasible and some aresimply for intellectual exercise. However, Ackoffidentifies three basic approaches to corporateplanning. A simplistic approach would be towardssatisfying the planning by setting objectives andstrategies that are believed to be both feasible anddesirable. Mutuality, participation, and generalacceptance are the prime concern for any successfulapproach. The usual bottom-up approach leads toan aggregate plan. Where as Top-down approachagain tend to arrive at an autocratic plan. Therefore,an ideal process would be somewhere in betweenthe two as the both the processes are desirable tosome extent. Whatever the approach is identified,planning should support the strategic thinking thatrequires and leads to strategic management, which isthe basis for effective organization. Strategic thinkingis related to the question as “are we doing the rightthings” and strategic management basically denotesthe application of strategic thinking which addressesthree basic elements such as (a) formulation of theorganization’s future mission in light of changing

external factors such as regulation, competition,technology and customers, (b) development of acompetitive strategy to achieve the mission and(c) creation of an organizational structure which willdeploy resources to successfully carry out itscompetitive strategy. But the important thing iswhether the organization is marching towardsframing the corporate planning that would employa comprehensive statement of actions and also ensurethe identification, prioritization and accomplishmentof goals.

Sometime corporate planning or long-rangeplanning and strategic planning can be seeninterchangeably used, but the earlier differs from thelater on the assumption of predictability of the future,meaning current knowledge and information aboutthe future is perfect and complete. The organization,therefore presumes that the plans are adequate foraccomplishing the set of goals over the period oftime. Whereas strategic planning assumes theunpredictability of ever changing environments andorganization must be responsive to dynamicchanging environmental circumstances. Merelyconsidering the periodicity of or time span coveredin a planning exercise, which is generally determinedby technological changes (its growth curve), natureof business and business cycle, distinction can bedrawn between:

(a) Long-term Perspective Plan where efforts aregenerally made to develop a long-term, usually overten years, perspective plans and programs on theassumptions that current knowledge about the futurecondition is sufficiently reliable to enable todevelopment of these plans. This type of planning isnot feasible and practicable in those organizationswhere the review in actions and strategies becomes afrequent phenomenon.

(b) Medium-term strategic plan whereformulation of corporate vision, mission andobjectives and selection of alternative means to attainthem are developed and conducted. The majorassumption in strategic planning is that an organizationmust be responsive to dynamic and changingenvironmental constraints.

(c) Short term tactical plans which concern onlywith selecting alternative means to attain the specifiedgoals because in the short run, there are very fewchances of mobilizing potential resources due to thefixed nature of periodicity to the large extent.

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Steps in Corporate PlanningConceptually, the steps of corporate planning

would involve the top management to reassess itscurrent strategies in the light of its objectives bylooking for opportunities and threats in theenvironment as external variables and by analyzingthe company’s strength and weaknesses as internalvariables. The management then will draw up severalalternative strategies keeping values and goals intomind and appraise them against the long-termobjectives of the organization. However, there is nosuch hard-nosed approach to follow the steps forformulating perfect corporate planning. Dependingupon the nature, size, scope and available resourcesof the organization, followings are the majordifferent steps that are to be taken with greatervigilance while designing the good corporate plan:• Initial preparation: In the beginning, anorganization should be prepared with all apparatuswithin the structure to get ready for corporateplanning. Here, an organization assesses itself whetherit is ready or not from the involvement, inclusionand commitment point of view. As we explainedabove, planning need devotion, determination andcreativity. An organization that is indeed ready tobegin corporate planning, must perform at least fivetasks such as identifying specific issues, clarifying theroles and responsibility of individuals, departmentsand units in the process, forming a formal structurethat might be Corporate Planning Committee (CPC),develop an organizational profile and identifyingsources of information to pave the way for anorganized and systematic process.• Articulating vision-mission statement: This isanother important step where vision presents theimage of what success will look organization’s workand mission statement signifies the existence oforganization. Some highly reputed organizations alsopresent their value that provides guiding principleand beliefs to their all members of the organizationto move to pursue the vision and mission• Assessment of environment: The nextimportant component is assessment of situation thatorganization should always be aware ofenvironmental constraints and circumstances. Internalenvironments such as strength and weaknesses andexternal variables such as threats and opportunitieshave always been playing pivotal role in planningprocess. A list of critical issues that demand a response

from the organization and a database of qualityinformation that can be used for decision-makingare most fundamentals for effective planning process.• Identifying strategies: This step is basicallyrelated to the future strategic direction. After havingvision –mission statement and identifying its criticalissues it is important to figure out the strategies to betaken and the general goals and specific objectives tobe sought with sufficient discussion and interactionin all level and layers within the organization’sstructure. An adequate time is to be given to draftthe strategies and repetitive attempts to be made inCorporate Planning Committee.

Salient Features of Corporate PlanningThere is no any hard and fast rule for what

characteristics should have to embody in a planninghowever, it is said that any good corporate planningshould have at least the following features:• Creative process: corporate planning is a creativeprocess that involves intentionally setting goals thatsignifies the selection of desired future and developingan approach to achieving those goals.• Strategic process: It is always strategic becauseof the assumption of unpredictability of futuredynamics. The process, therefore, involves preparingthe best way to respond to the circumstances of theorganization’s environment whether or not itsenvironmental constraints are well understood inadvance.• Managerial tool: Any well corporate plan shouldbe an effective tool that helps to planner to examinethe past experiences, test the possible assumptions,gather, incorporate and analyze data and anticipatethe hostile environmental constraints in which theorganization will be working in the future.• Pervasive discipline: Organization basicallyrequires the prioritization of actions to achieve theobjectives but merely prioritizing the plan, it doesnot extract the desired output. Therefore, the plannersshould pay due attention to put series of actions intocertain order and special pattern so that the actionsof priorities would get more focus and can be mademore productive. However it is always considerablethat it does not move and flow in similar pattern in aconsistent way at all the time and could be changedas per the future mode of requirement.• Series of actions and decisions: Corporateplanning is fundamentally no more and no less thana set of actions and decisions about what to do, why

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to do and how to do it. It is general principle that itis impossible to do everything that needs to be donein this world that is why choices among alternativesin order to have best decision is the ultimatedestination of the human capability.

Benefits of Corporate PlanningFor all types of organizations, planning needs a

great deal of scare resources and a valuablecommodity. It is dynamic process that eventuallydefines the desired direction and activities in theorganization. As discussed above, it is a tool that helpsthe leader and all level of decision makers of theinstitution to realize the vision and mission within agiven period of time. Planning process, therefore,should outline theirs duties and responsibilities to bedischarged in an effective and efficient manner evenin case of crisis. We can summarize some of theimportant benefits as follows:• It provides a clear framework and precisely

defined direction that guides and supports themanagement of the organization.

• It prescribes a uniform vision and Missionstatement that has to be shared in all tires oforganizational structure.

• It helps to generate and deliver quality servicesfor all stakeholders and also provides an effectivemeans for gauging the quality of deliveredservices.

• It is the planning that leads to all units and humanresource with firm commitment to the directionof pursuing ultimate goals of the organization.

• It energizes the organization for the optimumutilization of the available resources, and motivatesto inoculate the future potentialities.

• It not only creates an ability to arrange the prioritiesand to match existing resources to opportunitiesbut also to deal with possible risks from externalenvironments.

Prerequisites of Corporate PlanningCorporate planning process should not be

regarded as a simple formality. If it is taken as ritual,it does not produce any satisfactory result. Therefore,planner should start up planning process withcomplete preparation and readiness with vividpurpose. Before proceeding to the planning process,concerned authority should be ensured that thefollowing elements are properly addressed:

• A determination of committed and involvedleadership throughout the whole planning process.

• A wide resolution of major problems that mayintervene with the planning, commitment andparticipation.

• An integrated and coordinated approach betweenand among the board of the directors,departments/units and employees.

• Concerned parties especially the board and staffunderstand the purpose of the corporate planningand broad consensus of aspirations.

• A projection and commitment of resources tofinance the prioritized plans and programs.

• A readiness to judge the prevailing situation inrealistic fashion and to visualize the new pragmaticapproaches to performing and evaluating theoverall operation of the organization.

Practice of Corporate Planning in NepalRastra Bank

Corporate planning in Nepal is at an emtrymeticstage, mainly to limited annual budgeting. In fact,comprehensive corporate planning is almost non-existent in all public enterprises. However, NepalRastra Bank, established in April 25, 1956, as an apex,resourceful and prestigious organization has beenadopting a culture of planning although the initiallevel was, small and medium merely confined in thecourse of actions and decisions. As stated, the firstthree decades of the Bank was spending on banking,foreign exchange and development finance functions.In following and the fourth decade, the Bank hasattempted for licensing the numbers of joint ventureand private sector commercial banks. Liberalizedfinancial policies and growing number of banks andother financial institutions have urged the bank furtherstrengthening regulatory and supervisory role andresponsibility. As such, the whole attention of thebank was diverted in those functions up to the early1990. Since 1992, it is felt that the bank has envisagedthe core function of monetary policy and the plansand decisions were made accordingly.

The initiation of corporate planning in the Bank,can be righted in the first annual managementsymposium in May 1979 organized by the thenOrganization and Methodology Division (O&M) –this is considered as the milestone of formal planningculture. Since then the annual meeting of head of alldepartments and branch offices with annual plans

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and programs and proposed budget for comingfiscal year, has become a regular phenomena in thebank in the consecutive years till 1990. For the firsttime, the bank has started the systematic annualplanning with clear departmental mission as “Missionof the Year” in 1991. It continued till 2001 andchanged the system of articulating the mission ofindividual departments into “Goal of the Year” aftersetting up new Policy Planning Department. Thisdepartment has issued directives regarding theformulation, prioritization, monitoring and evaluationof the ‘goal oriented’ annual planning. The Bank hasformed Organization Restructuring Committee(ORC) in January 9, 2003 and made it responsible tooverall planning process. Nevertheless, the Bank hasstarted the corporate planning process in real senseafter changing the nomenclature of ‘Policy PlanningDepartment’ into ‘Corporate Planning Department’in December 24, 2003 and the budget functionsbrought in from ‘Financial Management Department’with the objective of establishing good congruencebetween planning and resource management. Sincethen the department has started its function offormulating strategic plan by collecting and analyzingenvironmental and financial information, andsynthesizing option and consequences fororganizational and program strategies. In this context,to formulate the long-term strategic plan, takingvision-mission statement into consideration, the Bankhas formed a twelve-members Corporate PlanningCommittee (CPC) with the coordination ofCorporate Planning Department in which Executive-Directors of core-functions oriented departmentsare included as ex-officio members of thecommittee.

In the corporate planning process, the Board ofthe Directors of the Bank, for the first timeannounced its “Vision Mission Statement” in January2, 2003 as follows:

Vision “A modern, dynamic, credible andeffective Central Bank”.

Mission “To maintain macro-economic stabilitythrough sound and effective monetary, foreignexchange and financial sector policies”.

Objectives “Formulate necessary monetary andforeign exchange policies in order to maintain theprice stability and balance of payment for sustainabledevelopment of the economy and manage it;promote stability and ensure liquidity required by the

banking and financial sector; develop a secure, healthyand efficient payments system; regulate, inspect,supervise and monitor the banking and financialsystem; and promote and develop the overall bankingand financial system and enhance its public credibility”.

Strategies “ Develop long-term strategic plan;formulation and implementation of sound andeffective monetary, foreign exchange and financialsector policies; formulation and implementation ofsound, efficient and effective regulatory andsupervisory system to make financial system effective;reengineer the organizational structure of the bank;formulate and implement strategic human resourceplanning and development; develop and implementManagement Information System (MIS); automateand modernize payment and settlement system”.

Procedures of Corporate Planning in NepalRastra Bank

Corporate Planning Department has followed theunderlined procedures of formulating,implementing, monitoring and evaluating thecorporate plan:• Formation of Corporate Planning Committee• Initial Discussion on formulating Corporate Plan

by Corporate Planning Committee• Drafting Corporate Planning• Discussion on initial draft on Corporate Planning

Committee• Dissemination of draft Corporate Plan to

concerned departments/offices• Discussion between/among the officials of

department/offices and Corporate PlanningDepartment

• Presentation of Corporate Plan to departments/offices through seminar/workshop

• Discussion on Consolidated Corporate Plan byCorporate Planning Committee

• Finalization of Corporate Plan by CorporatePlanning Committee Submission to the DeputyGovernor-Governor

• Submission to the Board of Directors fornecessary approval

• Dissemination of approved Corporate Plan toconcerned departments/offices

• Preparation of departmental/office-level plan• Collection of departmental plans• Discussion on departmental Plan by Corporate

Planning Committee

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• Consolidation of departmental plans• Implementation of Corporate Plan• Monitoring /follow-up/evaluation of the

implementation• Quarterly/Half-yearly/Annual evaluation• Changes and modification as per the need of the

bankOrganizational Change and Development:Past and Present

As explained above, the bank has begun itsfunction according to the urgency of instant needsand the areas of operation were also limited at thatperiod of time. The size of the Bank in inceptionperiod was small in terms of depar tmentalarrangements and manpower structure. Very fewstaffs were working within the limited departmentalarrangement. With the rising need of expansion,adequate attention was given to establish branches,sub-branches, sub-offices, exchange counters anddepots. The expansion and downsizing the Bank inthese last forty-nine springs will be deserted asfollows:

Attempts for expansion of Organizationalstructure

In the primary days of the bank inception, thetotal number of the staff was 23 includingGovernor, chief accountant, five officers and sixteenother employees and the number reached 73 at theend of that fiscal year. With the expanding officenetwork and organizational structure, it doubled inthe next year and reached 168. Initially, the numberof yearly increment of staff was more than 100percent and the number reached 738 within onedecade. It was the expansionary period due to thenecessity of enlarging the monetary and financialsector. Actually, looking at the figures of annualincrement of staff recruitment it seems that the Bankhad adopted a need-based approach of humanresource planning at this particular phase. Because,increasing number of departments, branches, sub-branches, sub-offices, exchange counters and depotswere to be needed more employees to run thebanking business.

At the end of the F/Y 1966/67, the total staffsnumbers reached 915, whereas the special class officerwas 1 and the number of 1st class, 2nd class and 3rd

class officer was 10,24,73 respectively and remaining607 were in assistant level. In F/Y 1970/71 the

number crossed 1000 and jumped up to 1152 in1971/72. In F/Y 1972/73, the total numbers reached1695 and the employees in assistant leveltremendously increased by 1548 that constituted ratioof 1:10.53 between officer and non-officer, whichis the highest ratio ever recorded in the NRB history.Up to F/Y 1975/76, the total positions and workingstaffs was same at 1934, which means whatever thepositions were to be created, those were to be fulfilledwithin that fiscal year. In the F/Y 1976/77, totalpositions were 1989, the working number was 1837,among them 175 and 1662 were in officer andassistant level that accounted 1:9.5 officer-non-officerratio approximately. The increasing trend ofmanpower has become a regular phenomenon inthe successive decade due to expansion in supportservice as well as regulatory and supervisory areas.During the F/Y 1973/74 to F/Y 1982/83, the Bankhas heavily increased the mint and currency chestmanagement. Besides, development finance especiallyin priority sector and banking operation was enlargedin that particular period of time. In the same fashion,internal employees welfare-related volume of workshas increased by introducing different welfare facilitiessuch as house loan, medical insurance, maintenanceand repairing loan etc and contributed to increasethe overall structure of manpower. In 1983/84, thetotal position and working force was same as 2763and the number of officer and non-officer was 304and 2459 and ratio was 1:8. Interestingly the numberof peon alone reached 851 in F/Y1984/85, whichis the highest number in the Bank’s history. In the F/Y1998/99, the number of peon alone was 807, whichis the second highest number in this level.

As we see the empirical data of human resourcestock, these appemitik no reasonable basis in theincrease and decrease staff ’s number. There is a bigvariance between the total number of positions tobe created and the vacancy to be filled. The ever-highest number of positions and working numberthat are 3227 and 3410 recorded in 1984/85 and1991/92 respectively. The gradual declining trendbegins from F/Y2000/01 as an attempt ofdownsizing the organization although a big chunkwas retrenched in 1993/94 due to compulsoryretirement provision of minimum service period of30 years or maximum age limit of 58 years. If welook at the rank-wise classification and compositionof the manpower structure, the lowest and highest

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positions in special class that is 1 and 24 in F/Y1966/67 and F/Y1985/86. Similarly the highest numberin 1st class reached to 50 in F/Y2000/01 and in 2nd

class, it went up to 422 in F/Y2001/02, whereas thelowest number in respective classes was 9 in F/Y1970/71 and 24 in F/Y 1966/67. In F/Y 2000/01,the total numbers of positions and working staffswas brought down to 2940 and 2402 from 3320and 2737 and in next two successive years thepositions and working force were cut down by 405and 543. With the beginning of Financial SectorReform Program (FSRP), the Bank has been tryingto match her manpower structure in line with theobjective of reengineering of the central bank itself.In this regard, the Bank has been attempting toestablish healthy ratio between white-collar and blue-collar, as a result the positive outcome has started toappear by declining ratio from 1: 6 in terms of totalpositions in 2000/01 to 1:4.40 in terms of numberof working staffs in F/Y 2003/04.

In the beginning, the Bank conducted itsoperations with limited organizational structure.Although, the management had attempted to establishan ideal ‘Building Block” and run the entire businessby focusing into the major components asdepartmentalization, division of work, hierarchy andcoordination. In the first decade of expansionaryphase, some 27 offices including branches, sub-branches, sub-ofices and depots have been establishedin the main centers of the kingdom in addition toKathmandu. Initially, the number of full-fledgeddepartments was 5 and other two divisions were inoperation. Research job was to be conducted by smallEconomic Research unit and separate departmentswere established for the management of currencyand banking function as per the then objective ofthe Bank. Inspection and Check Department, today’sInternal Audit Department was established in 1956and Administration Department (today’s HumanResource Management Department) and AccountDepartment (today’s Financial ManagementDepartment) were set up in 1957. Foreign ExchangeDepartment, the then Foreign Agency and InvestmentDepartment, established in 1958, was more active inrespect of controlling foreign exchange rate as wellas managing foreign exchange reserve and foreigntrade transactions. In this connection, ForeignExchange (Regulating) Act, 1962 introduced andcompletely enacted in all over the country in 1966.

In the same manner Public Debt Department wasestablished in 1962 in view of resource mobilizationon government behalf. In that expansionary phase,focus was given to outside the valley by setting upbranches, sub-branches and sub-offices. Besides,exchange counters, permanent as well as temporarydepots were opened up to carry out the basic functionof circulation of NC throughout the kingdom.Beginning from 1956 to 1965 as the expansionaryperiod, the total numbers of such offices outsideKathmandu were 8 and increased to 27 includingfour branches, 5 sub-branches and 10 sub-offices inF/Y 1963/64 and alongside, the maximum numberof exchange counters picked-up to 83 in F/Y 1967/68.

At that time interval of 1956 to 1968, focus wasgiven to play the role even in hill areas aiming tocirculation of Nepalese currency. A separatedepartment named Banking Operation andDevelopment (today’s Banking and FinancialInstitutions Regulation Department) was created in1967 for effective regulation of the banking sector.Previous Legal Unit under AdministrationDepartment converted into full-fledged departmentin 1968 as Legal Department. In the 2nd decade, agreat deal of attempts had been made fororganizational reform to shape healthy and soundstructural framework. In this period, General ServiceDepartment, Budget Unit, Banking OperationDivision, Agriculture Credit Department were setup. Besides, Organization and Methodology Unitunder Personnel Administration Department wasestablished with a view to regular study and researchfor organizational development. Bankers TrainingCenter was established in 1970 as a milestone fordeveloping and upgrading the human resource ofthe Bank as well as the other commercial banks. The3rd and 4th decade of the Bank, attempts has beenmade regarding organizational reform have justconfined in downgrading, upgrading and changingnomenclature of different layers of organizationalarrangements. Whatever the change took place, it wassaid that those are mainly guided by the pervasiveprinciple of management, which includes hierarchy,chain of command and span of control. As we seeat the end of 4th decade, further departmentalexpansion took place in when Regulation Departmentwas renamed as from the previous BankingOperation Department and Supervision Department

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were bifurcated into Bank and Non-Bank Regulationand Supervision in 2000. Policy Planning Departmentwas set up by merging Organization andMethodology division in December 13,2001 withthe objective of policy formulation regarding humanresource, special study and research for organizationalrestructuring. Besides this, responsibility ofcoordination of the offices outside Kathmandu(Branch offices, nomenclature changed in October24, 2002) is also assigned to this department. Lateron, the name was changed to Corporate PlanningDepartment and the assigned job of formulatinghuman resource policy being transferred to HumanResource Department and budget functiontraditionally carrying on by Financial ManagementDepartment to Corporate Planning Department inDecember 15, 2003. Upgrading and downgradingof the departments such as Public debt, GeneralService, Legal Department and the offices outsidekathmandu such as Dhangadi, Janakpur, Pokhara etcwere common in the past. Besides, creating additionalpositions in Governor’s Office based on subjectivejudgment of the executive felt as a regularphenomenon.

Endeavours for DownsizingAs explained earlier, organization structure is

basically determined by the various factors such asfundamental legal establishments, objectives, need oftime, urgency of the situation, culture, etc. Over theyears, the Bank has attempted many times todownsize the organization. If we see the gradualdevelopment of organization of the Bank, theprocess of downsizing started from 1965 when 19offices out of 27 was handed-over to Rastriya BanijyaBank (RBB) after coming into its existence. Altogether12 departments excluding Governors office inKathmandu and 11 offices in outside (4 branches-Biratnagar, Birgunj, Bhairahawa and Nepalgunj; 3 sub-branches-Janakpur, Pokhara and Dhangadi; 1 sub-offices –Ilam and 3 depots-Bhadarapur, Malangwaand Tawalihawa) have been set up in the organizationstructure. In F/Y1967/68, some 14 counters wereclosed down and sized down 66 out of total 80counters. Closing down process of exchangecounters have further sparked up after following thenew regime of moneychanger in those places wherecounters were to be operated by the Bank and endedin 2003 by phasing out all remaining counters underJanakpur Office. Bhadrapur Office and, Ilam sub-

branch merged in Biratnagar office in 2003 and 2004respectively. In the same fashion, both bank and non-bank Regulation Departments were merged into onein November 22, 2002 and total numbers ofdepartments including Kathmandu Banking Office,however, reached to 20. In the mean time, change innomenclature and departmental grouping underfunctional classification of the departments wasintroduced in December 15, 2003 to ensure effectivechain of command and span of management control.

On the employees’ front, for the first time in 1988,out of 300 temporary staffs in assistant level, 100were made permanent after following a process ofopen competition and remaining 200 retrenched out.In 1990, after restoration of multi-party democraticpolity, a scheme of compulsory retirement limitingthe total service period of 30 years or maximumage limit of 58 years whichever earlier, wasintroduced in civil service which was replicated inthe Bank also. Despite laying-off of many staffs inall level, the total numbers of staffs remainedunchanged due to the liberal entry policy. As a resulttotal vacant positions filed up in different level andtotal positions reached 3400 in 1999. At that time, aliberal attitude was shown in recruiting junior levelstaffs especially drivers and peons on contract basis.As a result, the numbers of non-officers reached 807and officers – non-officers ratio went up to 1:7.38.Taking into account the unhealthy manpowerstructure, employees rules of 2000, has attemptedto address to downsize staffs numbers by VoluntaryRetirement Scheme Under Employees’ Rulesproviding benefits of advance pension of 10 years,upgrading assistant to officer level of 15 years serviceperiod, additional increment of time-scale etc. Bythis, some 101 staffs in different level have took theadvantage of such provision. Following this, the Bankhas announced formal Voluntary Retirement Scheme(VRS) in March 26, 2003 for the first time and beingretired 371 employees. Out of this, 65 were officersand remaining 306 were non-officers. The Bank hadfurther attempted to decompress the officer-non-officer ratio by second round VRS in March 25, 2004and altogether 104 (51 officers and 53 officers) haveleft out the Bank under the scheme.

Organizational reform process actually has startedafter initiation of broad Financial Sector ReformProgram (FSRP) by HMG. Reengineering of thecentral bank was crucial agenda of FSRP that

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included strengthening monetary, regulatory andsupervisory capacity together with organizationalrestructuring of the bank. In this broad spectrum,the reform process has to cover the human resourcemanagement aspect. In this greater cause of NRBreengineering, the legislative reform by enunciatingthe new Act has facilitated the greater autonomy andassured the Bank sufficient authority in carrying outcentral bank’s duties and responsibilities. Tomaterialize the goals that underlie the new legislationon central banking, it is essential that the NRB shouldstart from new paradigm in terms of enhancementof competency, capability and efficiency. Thefundamental instrument of such capacityenhancement strategy is to downsize the organizationmanpower structure so that a healthy, smart and soundcentral bank could be established. To do so,organizational redesigning by grouping of functionalareas and framing a new organizational chart has putinto practice. In this particular front, outsourcing ofsupport services like couriers, cleaning and gardening,implementation of VRS, departmental/office-levelmerger, elimination of counter operated underoffices outside Kathmandu, downgrading ofDhangadi office are some of the instances.

Board of Directors and the New RoleIn organizational development context, the

composition and functioning of the Board ofDirectors plays crucial role in discharging the overallduties and responsibilities of the Bank. In the earlydays of NRB Act 1955, Board of Directorsconsisted of five members and majority of themwere from the government bureaucracy. The systemof containing five members in BOD remained until1966, which was governed by the Act itself. NRBAct, 1955 was amended in 1959 for the first timeand the provision of formation of BOD was beingchanged accordingly. 1966 onwards, the compositionof BOD changed and board members were raisedto seven and the sectors representing remainedunchanged. However, the following three years from1970 to 1973, there were 6 members representingthe Board. Thus, the NRB Act, 2002 section 14 hasclearly mentioned the provision of the Board of theDirectors consisting seven members includingGovernor as chairman, secretary of ministry ofFinance, two Deputy Governors, and three directorsappointed by Government from amongst thepersons renowned in the fields of economic,

monetary, banking, finance and commercial laws asthe supreme policy formulation body.

While describing the organizational frameworkof the bank, we should observe into the provisionsin NRB Act of 1955 and 2002. Fundamentally, onecould find vast differences between the previous andpresent Acts not only in terms of composition ofthe BOD, appointment and dismissal procedure ofthe governor, appointment and voting rights ofDeputy Governor and the provision regarding toform a quorum to preside over the board meetingbut also in objective, duties, responsibilities andaccountabilities, power and autonomy. However,both Acts have promulgated the same philosophyof an autonomous body having perpetual succession.As per the provision made in the previous Act, theentire responsibility including the management of thebank and performance of all functions to be executedby the bank was lied on the BOD, the supreme policymaking body and the Governor would exercise allthe powers vested in the board under the supervisionof the Board of Directors. The Governor coulddelegate his power to the Deputy Governors andother employees to carry out the functions of theBank smoothly. Despite legal provision, previous Actwas merely limited in the paper as the Governorcould be dismissed anytime without presenting anyreason. There was no voting right of the DeputyGovernors and anybody could be appointed, evenfrom outside the bank. Further, the Presence ofFinance Secretary was compulsory to fulfill therequired quorum and even to conduct the boardmeeting. The areas to be selected for directors werealigned to the government bureaucracy basicallyfrom the ministries. To get rid of those sorts ofanomalies, the new Act has brought up arevolutionary change in terms of autonomy in a realsense by designing a structural framework of power,responsibility and accountability. Besides, exercisingand delegating power by the Governor, there areseveral provisions in the new Act that have helped tobuild on an independent and autonomous CentralBank. As per the provisions made in the section 15and 23 of the Act regarding appointment anddismissal, it is clearly mentioned that HMG shall formthree members recommendation committee underthe chairmanship of finance minister in which othertwo include one from among former governors andanother from renowned intellectuals in the related

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fields. The committee recommends three names forthe appointment and the HMG will appoint oneperson out of the three to the office of the governor.In the same manner, an inquiry committee under thechairmanship of retired chief justice of the SupremeCourt has to be formed for the dismissal and theinquiry committee is liable to make adequate inquirywith the concerned before making anyrecommendations within one months. Besides,provision of Audit Committee to ensure accountingstandard, resources utilization and financial disciplineand Management Committee to conduct the Bank’sbusiness efficiently is major break-trough inconducting bank’s operation in an effective fashion.Framing broad objectives, pronouncing corefunctions, legal empowerment to carry centralbanking functions, delegating legal power to Boardof Directors to frame employees’ rules and bye-laws,delineating professional code of conduct and officialresponsibilities of authorities to bind into the moralboundary are some other important characteristicsof the new NRB Act, 2002.

Since the Board of Directors as the policy makingbody, the Governor could call the meeting as perthe requirement but it should meet at least once in amonth as per the new Act. If we look at the historyin the primary days it is to be found that only fewmeetings were presided over. In 1956, the totalnumbers of meetings held was 13 and up to 2002/03 it was 34 as the highest numbers in F/Y2000/01.The least board’s meeting were held on that is 6 in1984/85 and more interestingly no board meetingswere recorded in F/Y 1992/93.The above scenariohas not only proved the level of independence, buthas directed the Bank towards the realization of thesense of greater responsibility and accountability.

Legal Development and TransparencyLegal apparatus especially in Central Bank

becomes vital which determines the degree ofautonomy. As regards the precondition of autonomylegal and operational framework may be the firstand top precondition of an independent central bank,whereas transparency is another prerequisite for thecentral bank that all concerned stakeholders includinggovernment, financial communities and general publicshould continuously be informed of the monetarypolicy program followed by the central bank. Onthis front the New NRB Act, 2002, section 94 hasclearly made provision of compulsory

announcement of annual monetary policies andprograms in the beginning of each fiscal year. Sideby side, strong and efficient organizational frameworkis also devised by new legal arrangements. In the lastforty-nine years, there have been many ups and downsin the legal side of the bank. The old NRB Act, 1955was revised six times until 1975 and reached 10th

time up to demise of it. To cater wide-spreadingneeds, emerging globalization, competition and multi-national collaboration, NRB had to stand asautonomous Central Bank of the 21st century. Forthis, certain amendments and changes were notabundant. Considering this fact, a new NRB Act,2002 was promulgated that has attempted to establisha perfect combination between authority and duties/responsibilities and accountabilities. Furthermore, tovindicate more legal rights, to activate forenforcement and to empower to act against thebreach of prudential norms and standards set bythe Bank, basic amendment has been made in section86 by NRB Ordinance, 2004. Foreign Exchange(Regulative) Act, 1958 and Public Debt Act, 1960replaced by Foreign Exchange Regulation, 1960 andPublic Debt Act, 2002 respectively. Bank AndFinancial Institution Orinance, 2003 (BAFIO) hascome into existence as an Umbrella Act afteramalgamating NIDC Act, 1960, ADB/N Act, 1967,Commercial Bank Act, 1975, Development Bank Act1987, and Finance Company Act, 1986. This issignificant milestone in respect of legal reform infinancial sector of the country. NRB is always aheadto constitute a legal framework in financial sector ofthe country. An effort to preparing Anti-moneyLaundering Act, Offshore Banking Act, AssetsManagement Company Act, is the evidence of itsfirm commitment towards good governance infinancial system. Debt Recovery Act, 2004 is alreadyplaced in operation.

To strengthening internal legal capacity, the Bankhas formulated and implemented many rules,regulation, directives and manuals. Directives–2001,tocommercial banks, Directives–2002 to developmentBanks and finance companies, and Directives-2003to micro credit institutions, cooperatives and NGOswho are licensed for limited banking transaction aresome of the examples. Besides, manuals relating toinspection and supervision, auction, expenditure,budget, planning, mint, currency, etc. have been issuedfor the disciplined and legitimate functioning of the

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Bank. The first Employees Regulation was issued onApril 8, 1959 for the first time and issued on newshape as Employees Rules, 1992, which has beenamended seventh times in 2001. Amendment madein 1992 has got special significance from theprofessional development point of view such astransparent provisions regarding promotion andperformance evaluation criteria, lateral entry inofficer’s level, fixation of service tenure of Specialclass and 1st class officer were the major characteristicsof the new rules. The subsequent amendment in 2001has had add further new dimension in an institutionaldevelopment by imposing prohibition in recruitmentof temporary staffs in contractual basis in any level.Advance pension of ten years in lump sum forretirement, debenture scheme for retirees, rewardsand punishment provision, selection of excellentemployees of the year and service security ofemployees are some important features of the seventhamendment of Employees’ Rules, 2001.

Human Resource Development andMotivation

Human resource is the spirit of the organizationthat makes the organizational framework live anddynamic. All efforts and endeavors becomemeaningless unless management pays serious attentiontowards developing an ideal and motivated humanresource stock. Someone may seek to pursue andconceptualize the process of organizationaldevelopment, and build up a complete system forthe organization including corporate planning withvision, mission, strategies and all types resources butit does not work without well-motivated and capableemployees. Although it is very difficult to say as towhat are the driving factors that could motivate thepeople in the organization. Prof. A. H. Maslow haspropounded an evergreen model of needs hierarchythat person can drive for quality performance bysatisfying all hierarchies of needs from physiologicalto social to esteem to self-actualization. David C.McClelland has categorized motivation forachievement, affiliation, power and competence thatdrives human resource to overcome challenges andobstacles in the pursuit of organizational goals. Mostof the behavioral scientists have emphasized onexpectancy model, as the motivation is the productof valance, expectancy and instrumentality. If moneyis to act as a strong motivator, then an employeemust want more of it (valence), must believe that

effort will be successful (expectancy), and must trustthat the monetary reward will follow betterperformance (instrumentality). To be an effective andlive organization it should have a good humanresource policy and planning that could lead anorganization to the path of achieving ultimate goal.It is also equally important to think that framing aneffective and prudent policy regarding humanresource development and motivating staffs is neithera casual business nor a ritual. It is a continuous process,which starts right from the beginning of humanresources development process like recruitment,selection, placement, promotion and training. A goodand enough compensation packages normallymotivate people in the work. But it does notnecessarily mean that monistic motivators such as ahandsome salary package and other fringe benefitscould always motivate people and drives towardsbetter performance. However, the Bank has beenattempting to provide a better motivators in termsof monistic and non-monistic valence; nevertheless,it is always challenging task for management tointegrate these into one for securing better results inthe organization.

NRB has been revising pay scale and allowancestime to time to motivate staffs. Facilities like medical,house loan, vehicle and computer loan, and telephoneare important that have contributed a lot to motivatepeople. In the social security front, pension, gratuity,provident fund, welfare fund, staffs insurance are tobe considered as the valuable motivators for the staffs.In organizational development context, a clear careerpath, and the possibilities of status enhancement ofindividual plays a significant role because it haspsychological and social meaning. For this, a scientificand systematic performance evaluation system andcareer development plan is desirable that adhere atrust-worthy working environment in theorganization. Fixed remuneration practice couldincrease a lot of anomalies. Although, NRB is stillfar behind in developing a culture of incentive bydeveloping a performance-based pay structure thatprovide several potentials for better employees’development and also could be advantageous forthe organization.

Training and development have been becomingan integral part in the Bank. Bankers Training Center(BTC) has been established and conducted variouscore-function related contemporary training

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programs. Keeping increased environmentalcomplexity and official responsibility in view;behavioral courses are organized to refresh the humanvalues and to create an atmosphere of idealorganizational environment. Growing complexitiesand challenges in domestic and international financialmarkets has created both opportunities and threatsfor the bank in discharging legally entrusted dutiesand responsibilities. The Bank, therefore, has comeup with the policy to equip best knowledge andinternational exposures. After developing a generousrelationship with international and regional financialorganizations, a lot of incumbents are being able tograb international exposures in the banking field. Inthis particular front, IMF has been including asignificant contribution through organizing trainingsand seminars in several relevant issues and invitingeligible candidates by which NRB has been able todevelop its efficient and professional employeescadre. Likewise SEACEN, APRACA, BIS, SEANZAare other institutions which are contributingtremendously in human resource development front.Central Banks of many countries have been givingtheir hands of cooperation, which is reallyappreciable, with theirs, Federal Reserve being in theforefront. Central banks of different countries likeChina, Sri-lanka, Philippines, Japan, Canada, Australia,Sweden, Norway, South Korea; and Malaysia aresome of the major partners to have the opportunitiesof exchanging international experience withorganizing seminars, symposium, trainings and otherinteraction program for the senior officials of theBank.

Problems and Challenges of NRB in thecontext of organizational Development andCorporate PlanningNepal Rastra Bank is experiencing it greatestchallenge. As a Central Bank of 21st century, the Bankhas been facing various difficulties and problems;fortunately they are all domestic and internal,especially in regulation and supervision side. And ithas also not encountered with external shocks thathave impact to greater extent in our monetary andfinancial system. In fully, this weakness andinefficiency is witnessed in the functioning of thecentral bank and has been criticized by the differentsegments of the society for not properly dischargingthe regulatory, supervisory, and macro-economic

functions. Furthermore, monetary policy is notbeyond the public criticism on the ground that itcould not help to vitalize and boost the economyaccording to the aspiration of the people. In thisparticular situation, NRB has to more forward andface the challenges with the dual threats of ensuringhealthy and reliable financial system to the generalpublic on one hand, and formulating appropriatemonetary policy for the economic stability on theother. NRB has, therefore, to prepare for tacklingany problems and uncertainties that would arise inthe future by strengthening and restructuring theorganizational arrangements by developing healthyand sound organizational and corporate planningculture. The burning problems and challenges canbe summarized as follows:• Human resource management and development

aspect have somewhere been missing in the pastwhere manpower is key economic resource,which eventually leads the bank to the goal. As anapex and specialized institution, strategicmanpower planning and development is sine-qua-non in the context of organizational developmentfor pursuing better performance. Without changeand innovation, the Bank could not marchforward to the right path of achievingorganizational goal. Problem in manpowerstructure in terms of size, ratio in different levelsand distribution are acute problems, which havebeen existed in the bank since long. Least priorityfor organizational strength, capability andefficiency, unsound and haphazard organizationalplanning and short-term considerations at the costof long-term vision and mission have beenbecoming common characteristics of the Bank.Mismatches between job requirement andcompetencies of incumbents, intense shortage ofmanpower in core areas, inappropriatedistribution of manpower in auxiliary services,unhealthy proportion between officers and non-officers, lack of study of work process, volumeand elements are some of the chronic problemsin human resource side. The HRM process rightfrom the planning, including recruitment, selection,training and development, socialization,performance evaluation, promotions, separationsetc could not get much attention by the Bank.That is why the Bank has failed to attract andretain the talented and professional individual. The

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Bank has still to prepare for successor planningto run the bank in an effective and efficient mannerin future.

• An environment of creation and realization ofhuman relation and behavior are always importantin the process of organizational development.Motivators, monistic such as compensation as wellas non-monistic like evaluation, careerdevelopment and recognition have been absent.Inconsistent compensation structure in differentlevels within the bank, lack of attractive salarycompared to other public enterprises and timelyreview and revision in relation with price indexare constant problems. Many undesirablehappenings relating to compensationmanagement have been seen and recorded simplybecause of lacking proper application of rewardsand punishment system in the Bank.

• A fair practice of delegation of responsibility andauthority has always been missing since theestablishment of the Bank. The chain ofcommand in the hierarchy and the span of controlis not properly established; that is why there islack of good reporting path and coordinationamong the layers including senior management.Despite having a great deal of resources, the Banklacks proper infrastructure and sufficient logisticsto carry out central banking business in an effectiveand efficient manner. Dispersed office location,dilapidated and old building, unorganizeddepartmental layout, odd electrification andwiring, unmanageable accumulation of physicalassets etc are common problems which havedirectly been hindering the modernization processof the bank.

• In the last forty-nine years, Nepal Rastra Bankhas been crawling with the difficult path ofdeveloping and promoting sound, healthy trust-worthy financial system in the country. Whateverthe Bank did, it was not in planned and systematicmanner rather the instant need and urgency hasdetermined the direction of functionalperformance. Lack of corporate planning culturealways remained as felt pitfall during the courseof four and half decade. When formulation ofannual plan started, it was just incomplete andnonsystematic. NRB has now began the cultureof corporate plan by announcing the VisionMission Statement however, it has still to cross

many uphill to realize it into practice byimplementing the plans and programs for betteroutput.

• Prioritization of core functions, which are basisfor realizing the vision and mission, ever laggedbehind from the attention of the concernedauthority. Priority has given to auxiliary servicesand bulk of resources has been invested in suchareas. The Bank is still handling governmenttransaction; whereas other central bank ofdeveloped countries have outsourced evensupervisory function from the central bank’spreview. Instead of regulating micro finance, it isstill stands in functional area and handling long-term project is becoming regular business of theBank.

• Overall performance of the financial system isdeteriorating due to the heavy amount of non-performing assets in the banking sector. About30 percent of the total credit has been convertedinto bad loans, which accounted nearly 40 billionof Rs in fiscal year 2003/04 and comes around 8percent of GDP. It implies that every citizen hasto shoulder Rs. 1200/- of debt on his or herhead. Loan under black listing has reached 17billion together with interest of Rs. 8 billion.Furthermore, two giant commercial banks ofgovernment ownership that cover almost 50percent of total deposits in the banking sector,have been going under serious threats of existencewith having negative net worth of more than 32billion and poses major risk for overall financialstability. This kind of alarming situation in thebanking sector has threatened the performanceand integrity of the central bank.

• The initiatives taken by the government withregards to financial sector reform in the countrywith collaboration of international financialagencies including IMF and World Bank are notsatisfactory enough. The broad FSRP is still faraway to achieve the desired goal of reducing nonperforming assets and improving financialperformance of RBB and NBL. In spite of heavyinvestment in international consultants and theirreforms initiatives, positive results are not foundthat could prove the rationality of hugeexpenditure made by the government.

• Despite issuing directives from the NRB, thereare many bottlenecks in complying with the

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prudential norms and standards by thecommercial banks and financial institutions. Thereare a lot of discrepancies in loan classification andloan loss provisioning, rescheduling, auditing andfurnishing disclosures and are not complying tothe directives, which have frequently beenmisleading the true and fair status of banks andother financial institutions. The Bank is still farbehind in applying core principles with respectto risk management in line with the Baselrecommendations except capital adequacy. It is agreat challenge for the Bank to meet itscommitment of upgrading the financial disciplinein the financial sector.

• The predominance of the informal financial sectorthat is almost 75 percent of the Nepalese ruralfinancial structure is another challenge for thecentral Bank. The process of broadening theformal financial system is hindered due to thevarious reasons including economic, social andpolitical fairly. After adopting liberalized policyin financial sector, many foreign joint venture andprivate sector banks and finance companies havebeen established in the country, but access ofbanking services in the rural sector is still a distantdream.

• There is a grave deficiency in legal part with respectto handling central banking apparatus. Sometimes,judicial decisions and political interventions doaffect the central bank’s policy decisions in theissues belated to attain the broader objective offinancial stability and commanding public trust.The newly Banks and Financial InstitutionsOrdinance, 2004 (BAFIO) is being criticized bythe concerned stakeholders. NRB itself is not ableto exercise its autonomy delineated in the Act. Alarge number of cooperatives are beyond theregulatory framework of the central bank thathas been mobilizing a big chunk of deposits fromthe general public.

• In the five decades of central bank’s existence,country is still facing the dual currency problemespecially in hill areas and parallel foreign exchangeand credit market in most of the parts of theTerai region. It may partially because of absenceof banking network but also due to the lack ofpublic confidence in Nepali rupees permanentlypegged with Indian currency might be another

reason that has helped to promote the usage ofIndian currency openly.

• The role of central bank becomes quite paramountin a sound political and social environment.Today’s discouraging domestic politicalenvironment due to the insurgency has affectedthe adverse impact in the overall economicsituation of the country. The banks and financialinstitutions are not functioning in proper andprudential manner. Banking sector is not beingable to capitalize the investments and savingsopportunities. All economic entities are becomingnearly paralyzed and destabilized. The regularbusiness activities have been disturbed includingthe Central Bank of the country. Hence, onecannot expect the better usage of the monetarypolicy instruments useful in such unhealthy andunpredictable environment.

Suggestions and RecommendationsNRB has set the vision to be modern, dynamic

and credible. Maintaining macro-economic stabilitythrough ensuring sound and effective monetary,foreign exchange and financial sector policies is themission of the Bank. To create a conduciveenvironment and to build up public confidence inthe financial sector is the prime concern at this pointof time. NRB would not be able to prove itsimportance by rather discharging the duties andresponsibilities entrusted by the new Act. For this,change and development should be ongoing motifsso that the Bank could march in an equal footingwith other central banks of the region to cope withthe challenges emerging in international financialworld. Asian crisis has learned us much about thesensitivity of banking practices and urgency of timelypolicy intervention. A great deal of attempts has beenmade in the past, however they are not adequate andcomplete. Continued vigilance and farsightedness,ongoing development approach and strongmonetary, regulatory and supervisory role are alwaysdesirable to achieve the fundamental objectives. Somesuggestions are listed below:• The utmost priority of the bank is to concentrate

in core functional areas. Resources should beutilized to perform fundamental core functions;which are monetary policy, foreign exchangemanagement and regulatory and supervisory roleof the bank. For this, the central bank should

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revamp its overall organizational and manpowerstructure by adopting the due process ofsystematic and scientific study of work volumeand manpower requirement so that the Bankcould be able to discharge its duties andresponsibilities as delineated in the Act.

• To address today’s burning problem of unwantedsize of the bank in terms organizationalarrangement and large size of employees,downsizing its present structure by outsourcingall functions under support service categories andprioritizing the core functional areas are inevitable.Besides, departmental arrangement bydowngrading or upgrading should be placed,taking the level of use of information technologyinto consideration, accordingly.

• The proportionate distribution of manpower inaccordance with the functional classification ofthe activities is urgent need to promote a soundworking culture in the organization. The Bankshould immediately initiate to bring down existingofficer-non officer ratio at least to 1:3 that willhelp to mobilizing all kinds of resourceseconomically and making bank operationally costeffective for the betterment of the institution.

• The overall performance of the central bankdepends on motivated and committed workforce. Human resource in real sense becomesresource when it dedicates his or her effortswholeheartedly to the institutions and useprofessional expertise for the betterment of theinstitution. The Bank needs to develop a cultureof ‘reward for work and work for reward’ thatleads organization eventually not only to a newhorizon of employees’ outlook but also enhancedthe level of overall productivity. To attract andretain competent talent in the bank is importantchallenge in the present situation. The Bank,therefore, should formulate progressive humanresource policy enabling to address these severeproblems. At the same time, timely review inexisting compensation package is most for thebetter performance.

• The Bank has recently initiated the culture ofsystematic and formal corporate planning inrecent. To begin with, Vision Mission Statementis already announced with objectives andstrategies. To realize this, NRB should frame and

continue a realistic long-term strategic plan byfocusing its whole attention to the core functions.

• Proper physical layout and necessary infrastructureis essential element to conduct the business ofthe Bank efficiently and effectively. Productivityand efficiency lies on systematic arrangement anddistribution of resources along with the humanresource. The modern Central Bank cannot rununder the old and dilapidated building, where theinstallment and arrangement of logistics includingproper IT networking is not possible in such poorphysical infrastructure. It is, therefore, a modernand new building should be constructedimmediately so that a high-quality workingatmosphere could be created for the betterperformance of the Bank.

• Without financial stability, overall macro economicstability could not be achieved. The objective ofmacro economic stability as envisaged by thepreamble of the new Act is only achieved if thebank strengthens its regulatory and supervisorycapability. Applying and ensuring internationalbanking prudential, core principles and bestpractices adopted by the Bank for InternationalSettlement (BIS), Basel would be the basis fornurturing a sound culture in financial system. Thehigh NPA, low financial performance, unhealthycorporate governance and weak managementcharacterize the present banking sector. NRB as aregulator and supervisor, should come up withsufficient instructions and regulations to overcomethese existing problems in the banking andfinancial system that could prove an environmentof feeling of responsibility and accountability bythe Bank to the depositors and concernedstakeholders. It would also foster the corporateculture in the financial sector so that possibledisaster could timely be checked up. Furthermore,merely issuing new regulation and conductingperiodical supervision could not serve the basicpurpose until and unless enforcement becomesobligatory or mandatory. Therefore, the Bankneeds to review the legal provision ofenforcement of policy decisions and directives.

• Monetary instruments of the central bank shouldbe used to maintain monetary stability by notforbidding development goal. Increasing liquidityand decreasing deposits rates does not signal theadequate exercise of monetary measures although

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it is temporary phenomena due to the unusualsituation of insurgency. However, the Bankshould always come in front to ensure to generalpublic that adequate policy interventions are putin place to create an environment of reliablefinancial system in the country.

• Foreign exchange policy should be consistent withopen market policy and exchange ratedetermination should be based on purely marketmechanism. NRB should initiate to make adequatelegal provision for promoting derivative marketsand managing associated risk in this regard.Besides, foreign exchange reserve managementis the core issue for the bank paying considerationinto increasing volatility in international moneymarket especially in major currency markets. It isadvisable to manage accumulated foreignexchange reserve in higher rate of return atminimum risk in accordance with the norms ofcentral bank.

• A rigorous attempt should be made in respectof strengthening the existing payment systemconsidering the linkage between banking andcapital market. Without adopting CDS and linkingit by modern IT system, money and capital marketcould not expand. Therefore, it is going to belate to develop a sound payment system that couldbe RTGS (Real Time Gross Settlement) wherethe Bank eventually has to select as the future pathto go.

• As a banker of the government, NRB has beenhandling the government’s transaction paying ahigh rate of commission to operating commercialbanks. Increasing trend of budget size of HMGin each fiscal year obviously increases totalcommission to pay to transacting governmentowned commercial banks, which is neither feasiblenor sustainable in long-term rather it is increasingfinancial burden for the Bank. Hence, the Bankshould undertake a policy option to handoverthe government transaction to those interestedprivate sector banks who deliver this servicewithout any commission or free of cost so thatthe Bank could reduce her cost substantially.

ConclusionThe central bank of 21st century, as a monetary

authority of the country, cannot simply confiningwithin the domain of domestic monetary affairs forthe purpose of formulating and implementing an

effective monetary policy. Expandinginternationalization of the domestic economy andthe emerging issues in financial world has createdseveral new challenges in different dimensions ofeconomic development. Increasing share and inputof banking and financial services in the total GDPhas not only proved its significance but also attractthe attention of policy makers towards framing theprudent financial policies and monetary measures. Itis almost impossible to ensure a stable and conducivemonetary and financial environment withoutdeveloping a capability of anticipation and analysisof future environments and critical issues such aseconomic, political, demographic, technological, etc.Nepal Rastra Bank as an apex institution and the leaderof the whole almost financial system should play anexemplary role to establish a culture of continuouschange and development within the organization sothat it could overcome the potential challenges andprovide unduly to other organizations in public andprivate sector. Organization as a physical structuredoes not carry any meaning unless it has equippedwith skilled and professional human resource. Anideal and focused organization structure with healthycombination of manpower mix is always desirablein the organization. Discipline, commitment andpersonal integrity of cadres are highly valued for asuccessful organization, which basically comes fromthe individual perception and behavior. It is alwaysexpected an environment of rewards and punishment,performance evaluation, clear career path from alllayers of the organization especially from the topleader and senior management. Successor planningand training management are such elements, whichare correlated with the human resource planning anddevelopment aspect. Such arrangement only couldaccelerate the pace of change, innovation in theprocess of organizational development and planning.Apart from this, a conducive working environmentwith perfect physical layout, adequate infrastructurein terms of computer-based information technologyand mechanization, attractive compensation packagesand motivated staffs and appropriate policyinterventions are such variables that could beacquainted to realize the pragmatic approach oforganization development. Corporate planningculture becomes imperative attain the goals in plannedand systematic manner. Inclusive and participatoryapproach of policy formulation and implementation

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can be considered an effective device to translate theorganizational objectives and strategies into realpractice. In this regard, past attempts, experiences,trends, historical facts and data in the context oforganizational development and corporate planningmade by the Bank indicate the path for accomplishingthe fundamental objectives as enshrined in NRB Act,2002 - achieving the newly announced vision andmission of the Bank. However, it has to move furtherwith all endeavours to cope the future opportunities.Keeping all these facts into consideration, the NRB,as a central Bank of new millennium, celebrating her50 glorious Golden Jubilee years should come upwith the firm determination and commitment ofpursuing and preserving a sound organizationalculture that would eventually lead the organizationto a new horizon of change and modernization.

ReferencesStonier, James A.F, Freeman, R. Edward & Daniel

R. Gilbert JR., Management, Sixth edition,Prentice-Hall, June 1997.

Walton, J, Strategic Human Resource Management,Financial Times Prentice-Hall, 2001.

Newstorm, John W. & K.Davis, OrganizationalBehavior, Human Behavior at Work, Ninthedition, Tata McGraw-Hill Edition.

Human Behavior at Work, Ninth Edition, TataMcGraw Hill Edition.

Management Tasks-Responsibilities-Practices, PeterDruker, Harper & Row.

Management Research, Edited By G. S. Batra,Anamol Publication, 1995.

Management and organizational Development thepath from xa to yb –Chris Argyris, McGraw-Hill, Inc.

Globalization an overview, Dr Hiru Bijlani,Heinemann Asia, 1994.

Strategic Management of Public Enterprises inDeveloping Countries, S. Ramnaraya and I.M.Pandey, Vikash Publishing House, 1997.

Organization, Ernest Dale, D.B. Taraporevala sons& co, 1975.

Management Development and Training Handbook,edited by B. Taylor and G.L.Lippit, McGraw-Hill.

Government Performance and Results Act, StrategicPlanning Document, 2001-05, A report by theBoard of the Federal Reserve System.

Twenty-five years of the Nepal Rastra Bank, 1956 –1981, April 1981.

Forty Years of the Nepal Rastra Bank, 1956 – 1996,April 1996.

Annual Reports from 1956 to 2003, Nepal RastraBank, Research Department.

Vollan, B, Report of the NRB Re-engineeringCommittee, March 1, 2002.

www.managementhelp.org/plan_dec/gen_plan/gen_plan.htm.

The Free Management Library, http://www.mapnp.org/library/plan dec/strplan.

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NRB ReengineeringDr. Binod Atreya

Chief Manager, NRB, Siddharthanagar

IntroductionThe world witnessed the expansionary

role of government until the 1970s.Probably, the dramatic events of WorldWar I, the Great Depression of 1930s,and the destruction caused by World WarII, among others, led to a believe that theState role is important for the nationaldevelopment. State domination in allsectors of the economy was thought agood model for development at that time. It wasbelieved that the surplus generated in the economywould eventually trickle down to other sectors ofthe economy. Although the concept of Welfare Statedominated the world until the 1970s, many problemsemerged from this state dominated economy. Thefailure of trickle down theory, increased costs of thestate dominated economy, the failure of centrallyplanned economies, increased public debt, poorservice, and the failure to provide service as expectedby the citizens resulted the shift in the role ofgovernment in the 1980s. The OECD (1995) arguedthat the state dominated economy has becomeinadequate because: unchanged governance structuresand classic responses of ‘more of the same’ areinadequate for maximizing economic performanceand ensuring social cohesion; highly centralized, rule-bound and inflexible organizations emphasize processrather than results impeding good performance;extensive and unwieldy government regulationsrestrict the flexibility needed in an increasingly

competitive international markets; largegovernment debts and fiscal imbalancesof the welfare regime warrantgovernments to be more cost-effective inthe allocation and use of resources; andthe demographic changes, economic andsocial developments enabled citizens toask for a greater say in what governmentsdo and how they do it. In short, thegovernment remained weak to satisfy the

emerging needs of the general public.The private sector saw a drastic change in their

business environment due to globalization,commercialization, and development in thecommunications and information technology.Competition, quality service, costs effectiveness, valuefor money, customer satisfaction, etc., becameimportant ingredients for the success of any businessorganization. Organizations that could not cope withthis global shift started disappearing from the globalmarket. This new wave of change pressured theprivate sector organizations to find out innovativeways of doing business. They were required to goout of the box to find out solutions to problemscreated by the factors such as competition,globalization, commercialization and increaseddemand from customers. After 1980s, various newtechniques, such as, Total Quality Management(TQM) (Deming, 1982), Balanced Score Card(Kaplan and Norton, 1992) New PublicManagement (NPM) (Hood, 1991) Business Process

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Reengineering (BPR) (Hammer and Champy, (1993),Organizational Learning (March and Argyris, 1977),Benchmarking (Xeros, 1979) were invented for doingbusiness in a better way than before. Theories forthese new inventions came from economics, such aspublic choice theory, institutional economics and fromthe managerial practices of best-run companies.

The term ‘Business Process Reengineering’ (BEP)became popular since the 1990s. It was thought tobe a panacea for all problems faced by theorganizations, such as those of system inefficiency,low productivity, high costs, global competition, andlow motivation of employees, etc. It has been seenas a radical departure from the traditionalmanagement, i.e., ‘fixes’ of the past to a solution oforganizational problems through ‘starting over’ fromthe scratches. This ‘business process reengineering’ isoften referred to as ‘reengineering’ in short. Althoughthe origin of reengineering came from the privatesector, its importance is also realized in the publicsector. Various nomenclatures were used, such asCivil Service Reform Program (CSRP), Public SectorReform Program (PSRP), Structural AdjustmentProgram (SAP), and Financial Sector ReformProgram (FSRP) - all meant to improve theperformance of public sector organizations. Nowthe word ‘reengineering’ is used to make the publicsector organizations efficient, effective, and cost –effective. The Nepal Rastra Bank (NRB) has alsoused the term ‘reengineering’, as a reform measureto reinvent the organizational systems.

The basic objectives of this paper are to explorethe reengineering activities implemented by NRB,make an analytical assessment as to the success ofreengineering program and suggest recommendationsfor future course of actions. In an effort to achievingthis broad objective, this paper highlights on thetheoretical aspects of reengineering, makes anassessment of the reengineering (reform) programsimplemented by NRB and suggestsrecommendations for future reform. The paper isdivided into three parts. The first part deals with theliterature review on reengineering, its objectives,process, problems and suggested measures to makeit successful. This literature search shall become abenchmark to evaluate the achievements made byNRB in its reengineering process. Part Two explainsthe reengineering programs implemented by NRB.The first phase and second phase of reengineering

program implemented under the support from theWorld Bank and other donor allies is discussed. Theachievements made from this reengineering projectare also elaborated. Part three makes an independentassessment of the results achieved from thereengineering program and suggestsrecommendations for turning the Nepal Rastra Bank,a dynamic institution, competent and efficient toperform its roles in the 21st century.

PART ONEThis section discusses the theoretical aspects of

reengineering. It includes the definition ofreengineering, its objectives, processes, and successand failure factors of reengineering.

Definition of ReengineeringThe origin of Business Process Reengineering

(BPR) can be traced in the publications by Hammer(1990) and Davenport and Short (1990). Companies,such as Ford Motor Co. and Wal-Mart have claimedsubstantial benefits from implementing thefundamental concepts of BPR. According toHammer and Champy (1993) reengineering means‘tossing aside old systems and starting over. It involvesgoing back to the beginning and inventing a betterway of doing work’. Reengineering is ‘thefundamental rethinking and radical redesign ofbusiness processes to achieve dramatic improvementsin critical, contemporary measures of performances’.These authors postulated that reengineering couldachieve incredible ‘quantum leaps’ in processimprovement. Hammer (1990) puts it moresuccinctly: “Reengineering is rethinking work”. It canbe argued that it is a widely used approach to themanagement of change for yielding potential benefitssuch as increased productivity through reducedprocess time and cost, improved quality, and greatercustomer and employees satisfaction.

It reveals that reengineering attempt to bring‘radical change fast’ to business processes. It is totransform the existing business environment to attaindesired results. It is often used for an organizationalchange characterized by dramatic processtransformation that demonstrates breakthrough toachieve the desired results. Reengineering meanssomething achieving beyond the imagination. It isnot meant for ‘quick hits’ and ‘incremental reforms’,but it meant for dramatic change and significantimprovements in terms of results.

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Objectives of ReengineeringThe ultimate objective of BPR is to improve

performance and achieve results. Results for anyorganization could be saving costs, improving systemsand processes, achieving efficiency and effectiveness,and employees’ satisfaction. Reengineering- a changemanagement program, aims at bringing substantialchanges within organizational processes, structures,culture, and politics and power. Organizationalprocess is like a black box that effects atransformation, taking in certain inputs and turningthem into outputs of greater value. The structuralchange could include changes in organizationalfunctions, coordination and control withindepartments, the decision systems, horizontal andvertical relationships and human resourcemanagement. The cultural change means adjustmentsin feelings, values, beliefs and human behavior thatdirect the action of an employee towardsorganization. Changes in organizational politics andpower refer to distribution of power within theorganization to manage the organizational issues.

Why Reengineering ?In the last two decades there have been substantial

changes in the global business environment. Someimportant factors contributing to this massive changein the global business market are: customers needsand perception; changes in technology andcommunications system; cut-throat competition andmultiple choices for customers; concern for qualityof product and value for money; and changes ingovernment policies, economic trends, and demandsfrom stakeholders. To cope with these changes needreengineering. These principles apply to public sectororganizations as well.

The public sector organizations are also influencedby external and internal environmental factors. Theexternal factors could be global competition,government policies, national and international politicsand environmental cultures. The internal factors couldbe: modification in the organizational objectives,strategy, structure and systems, organizationalworkforce (age, education, ethical background, sex),introduction of new equipment, changes inemployee’s attitude (absenteeism, job dissatisfaction,low morale), and in the functions, activities andproduct, etc. All these external and internal factorsdemand change within the organization. Meeting theemployees’ values and expectations by amending

rules and regulations, improving technology orautomating its business activities, improving efficiencyby changing systems and processes, reducing costsby downsizing, contracting out services, eliminatingnon-core functions, and making organization morefocused towards its core functions are some of theactivities exerted by the environmental factors.

Therefore, organizations need to redefine theirstrategic focus to attain the most from limitedresources in this global market. Reengineering is ameans towards that end. It is not meant to be aseparate activity but to be a synonymous activity withother reform programs implemented in theorganization. It is a powerful tool for organizationalimprovements provided it is logically developed andimplemented.

Process of ReengineeringReengineering is not a free-type exercise. It should

follow a systematic process in order to achieve thedesired results. There are various models suggestedfor initiating reengineering. For our understanding,the following six steps BPR model (Table 1) isdiscussed.

PreparationWhether there is a true need for reengineering?

Whether an incremental change process would beappropriate for a given problem? Is this problemcould be solved by other improvement models suchas TQM or NPM? First, it is important to decidethat the reengineering is the best option to solve thegiven problem.

Once a decision is made to use the reengineeringprocess, then the objectives of reengineering mustbe specified. Goals and targets (such as thatdownsizing, merger, restructuring, training, wages andbenefits, eliminating duplications, etc.) are determinedand risks measured. Scope of reengineering is defined.Executives are required to understand the obstaclesor barriers (such as costs, time, skills) that couldrestrain the reengineering process. This phase couldalso be stated as ‘understanding’ or ‘energizing’,because the main objective of phase one is torecognize the need for change and determine thatBPR is the best intervention to pursue with. This isthe planning phase and activities such as setting vision,objectives, project plan, performance indicators,information system, reporting mechanisms areestablished.

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Table 1Reenginering Process

Preparation

Assessment

Solution

Implementation

Recognize the need for reengineering process Clarify vision and objectives Define scope/project document Select project team Establish reporting mechanisms

Analyze 'as-is' environment Gather data, analyze in terms of cost, value and

effectiveness Define problematic areas and identify areas for

improvement, and establish benchmark of future improvements. Document planned change

Identify radically different intervention strategies Establish benchmarks for improvements Identify breakthrough opportunities Invent new processes and procedures Provide visualization as to how organization

functions in a redesigned organization Propose radical approaches after benchmarking with

other best fun organizations

Share vision of change Communicate to stakeholders Organize meetings, seminars and discuss radical

approaches with senior management Get approval and implement

Measure performance objectives against targets established Redesign and modify, as necessary Make amendments/corrections Submit, get approval and implement

Evaluation andFeedback

AssessmentThe main aim of this stage is to identify the root

problems and get detailed understanding of theorganizational environment before suggestingpossible course of action. This is to analyze the “as-is” environment of the organization. The project teamis required to assess the existing situation, collect data,test the data and decide the possible course of actions.In short, this step would include the identification ofproblems, its causes, major intervention areas,possible remedies, time framework for completingexpected outputs for each activity suggested - allincluded in a report. This report must be a solid

document, which should be reviewed by the topexecutives and other stakeholders.

SolutionThe main goal of this phase is to document

breakthrough opportunities and design new ways ofdoing work that will transform the workenvironment and show substantial gain in costs, valueand efficiency. Words such as benchmarking,inventing, and formulating solutions could be usedto describe this phase of reengineering. Thereengineering team should move forward from the‘as-is situation’ by uncovering bottlenecks and

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preparing measures for improvements. One way ofsuggesting breakthrough opportunities is throughbenchmarking the similar situation with other best-run organizations. It is important to visualize howorganization looks like after implementing theproposed recommendations.

ImplementationThe main objective of this phase is to seek

approval from the concerned authorities andimplement the proposed change variables. It wouldbe part of the reengineering team to share theirrecommendations to the senior executives, and gettheir approval for implementation. It is the primeresponsibility of the reengineering team to convincethe management of that organization that proposedmodel of change is good and will bring radicalimprovements to the existing systems and procedures.Consultants should hold meetings, run seminars andconferences on the proposed reengineering programto ensure that the proposed changes are appropriatefor the organization. Once the proposed changeprogram is approved, it should be implemented.Implementation could be in a small scale orintroduced as a pilot project. This allows fine-tuningof the proposed change and a realistic estimation ofthe organizational change, benefits and resourcerequired.

Evaluation and FeedbackThe final phase of reengineering process involves

evaluating the success of reengineering efforts againstthe objectives established at stage one. Evaluation isimportant to understand whether the objectives setforth have been accomplished; whether there is aneed to make corrections and amendments to theproposed plans and programs; whether it is cost-effective and what further actions should be takento make the reengineering efforts more successful.Feedback is important to provide information tothe related officials and secure sustainability of thereengineering programs.

The reengineering process explained above is oneway of implementing BPR successfully. Themotivation for making change, ownership ofreengineering, top management support to thereform program, transformational leadership and aclear direction and vision for change are prerequisitesfor implementing reengineering program.

Success and Failure Factors ofReengineering

Although reengineering is thought a cure for manydiseases in the organizations, the truth is that not allreengineering projects become successful. For areengineering project to be successful, the topmanagement should ensure that the success factorsare built-in in the organizational system. These successfactors could be grouped into four main dimensions– (a) change management, (b) managementcompetency and support, (c) organizational structure,(d) project planning and management, includinginformation technology infrastructure (Table Two).Change Management

Many authors have argued that reengineeringprogram becomes successful if the organizationalculture and top management encourage changes inthe organization. Change management includes allhuman, social and cultural factors needed to facilitatethe implementation of BPR. Positive attitude of theemployees towards reengineering program,acceptance of new ideas and structures, a learningculture in the organization, acceptance of somedegree of mistakes and the preparation ofcontingency plans to deal with resistance to changeare some important factors for reengineeringprogram to be successful. To make an organizationreceptive to change requires a satisfactory rewardmechanism, effective communication,empowerment and human involvement, training andeducation, trust, teamwork, cooperation andcoordination, flexibility, and motivation of employees.Promoting innovation, people-focused management,reward system based on merit, an open and healthyenvironment, transparency in information, etc. aresome practices used by management to promoteorganizational culture that create an openenvironment for stimulating change in theorganization.

Management Competency and SupportThe success of reengineering program depends

upon the championship of management team tomanage such a project. Sound management systemsand procedures, top management support andcommitment, leadership and management of risksare some important points for the success ofreengineering programs (Al-Mashari and Zairi, 1999).

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Leaders translate the creative thinking andunderstanding into a clear vision and set the pathtowards that direction. Leaders build vision, andcommunicate it to wide range of employees andcreate commitment for its effective implementation.It is often argued that change process must beginfrom the top, and should escalate down through anintegrative mechanism to all levels of management.Sound organizational systems and processes help tomake it transparent in the organization. To deal withresistance to change, the top management support isvital. Barriers may arise from the stakeholders. Thetop leaders and the project team must involvethemselves in persuading those stakeholders who areagainst the reengineering program.

Management of risks is another importantmanagerial competence required for the success ofreengineering program. Reengineering meant a drasticmove away from the existing systems and procedures.Therefore, risks of failure, risks of resistance fromall stakeholders, blame for non-achieving results, non-acceptance of change by the employees, and planneddelay in implementing change are some factorscreating risks. Assessing the degree of risks andpreparing contingency plans are importantdimensions for the success of any reengineeringprogram.

Structural FactorsA clear structural alignment needs to be created

so that it supports the engineering activities. Amongthe important elements are: defining duties andresponsibilities of all departments and units,establishing cross-functional teams, encouraginginnovation and risk-taking behavior and ensuringflexibility so that the structural mechanism is adaptiveto change. Human resources and the cross functionalteams should be skillful competent, credible, creativeand skilled to handle the unforeseen challenges thatemerge in an uncertain environment of change.

Factors Associated with Project ManagementThe success of reengineering program is largely

dependent upon the effectiveness of the projectmanagement team. The integration of thereengineering strategy with the corporate strategy,planning and programming of project activities,developing project timetable and performanceindicators, project management techniques, adequateresources, effective use of external and internal

consultants, integration of reengineering activitieswith other regular reform activities are importantelements for the effective implementation ofreengineering programs.

It is important that action plan should beprepared with deadlines to be completed.Performance measures for each activity need to beestablished. If the reengineering program is underthe aegis of donor agencies, there is a need to definethe roles and responsibilities of donor agencies. It isoften the case that external consultants are hired. Theirservice is required because they bring new knowledgeand specialized skills, neutrality and impartiality wherelocal consultants could be biased, and tactfulevaluation and judgment of situation based on theirworking experience in a similar situation. The recipientcountry should make proper assessment as to theservice required by a reengineering project. A well-designed institutional mechanism to implement theproject is a backbone for the success of reengineeringproject.

The success factors explained above are criticalfor any reengineering program to be successful. Itoften happens that the management fails to give equalimportance to these factors, and as a result, many ofthe reengineering programs fail. The following aresome factors that contribute to the failure ofreengineering programs.

Reengineering Failure FactorsReengineering failure factors can also be attributed

to (a) change management (b) managementcompetency and support (c) organizational structure,and (d) project management (Table three). The pointsin brief are explained below:

Change of Management Systems and CultureOrganizational resistance due to fear of being

unsuccessful, lack of optimism, skepticism about theresults of the reengineering program, loss of jobs,lack of innovative behavior and preference to statusquo, and the fear of loss of control and power aresome factors creating resistance to any reengineeringprogram. It happens that the proposed change couldbe a win situation for some employees, and a losssituation to someone else. Therefore, those who areaffected negatively by the reengineering program posethreats to any change process in the organization.Another important factor of failure is the lack oforganizational readiness for change. Particularly with

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the public sector organization, where donors play animportant catalyst to change process, the nationalcounterparts keep themselves isolated from thechange process as they are not ready to accept change.Ownership of reengineering program is foundlacking. In many cases, management does not feelthe need for change, and lacks skills and determinationfor initiating radical change. Lack of understandingby the external consultants about the local culture,working pattern and practices, and organizationalpolitics often provide setback to the project becauseemployees in the organization may not cooperatewith the project team.Management SupportIt is often found that lack of top managementcommitment and support, loss of interest bychampions involved in the management of project,transfer of key people critical to the success of a

project, inability of the top leader to deal withunforeseen situation and inflexibility or delays in takingcorrective measures are some elements resulting tothe failure of a project.

Organizational FactorsWrong composition of project management

team, lack of training and team spirit, centralizeddecision-making authority, rigidity, cumbersomeworking system and procedures, unclear roles andresponsibilities are some important structural factorsresponsible for the failure of a reengineeringprogram.

Project ManagementIt is often the case that reengineering project fails

to capture the problems and its solutions, oftenmaking the reengineering program a routine activityto satisfy the donor agencies. Another problem arises

OrganizationalStructure Factors

1. Revision of Motivations and Rewards System2. Effective Communication3. Empowerment4. People Involvement5. Training and Education6. Creating an Effective Culture for Organizational Change

1. Commited and Strong Leadership2. Championship and Sponsorship3. Management of Risk

1. Adequate Job Integration Approach2. Effective BPR Teams3. Appropriate Jobs, Definition and Responsibilities Allocation

1. Alignment of BPR Strategy with Corporate Strategy2. Effective Planning and Use of Project ManagementTechniques3. Setting Performance Goals and Measures4. Adequate Resources5. Appropriate Use of Methodology6. External Orientation and Learning7. Effective Use of Consultants8. Building a BPR Vision9. Effective Process Redesign10. Integratin BPR with Other Improvement Approaches11. Adequate Identification of BPR Values

Mngt. CompetenceFactors

Table 2Reengineering Success Factors

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when the identified intervention strategy may nolonger be useful because of the development thatmight have taken place after the project has beenprepared. Therefore, many of the agendas of change,which was thought critical becomes non-importantor irrelevant at the time of project implementation.Infrastructure (office space, resources) required tosupport the reengineering project is also very critical.

The Part One has described the theoretical aspectsof reengineering. It explained that reengineeringmeans a dramatic improvement and radical changein the organization. The need for reengineering inthe private sector emerged due to globalization andinternationalization of markets, competition,development in information technology, and the needfor them to excel in this competitive world.Reengineering emerged as a reform model in thepublic sector organizations. Reengineering programmust be planned carefully. It should follow asystematic process in order to achieve the best resultsfrom it. Defaults in proper sequencing and planningcould make reengineering program a futile exercise.

Organizations should ensure that the success factorsare taken into consideration before implementing thereengineering program. Similarly, the champion ofthe reengineering program should acknowledgefactors that may kill the most important reengineeringprogram. Analyzing all these points is crucial for thesuccess of reengineering activity in any organization.

PART TWO

This section describes the reengineering effortsundertaken by NRB. First, this paper explains thereasons for implementing the reengineering programin NRB. Then, efforts have been made to explainthe reengineering activities initiated and implementedby NRB. In explaining the reengineering events,activities are grouped into five major headings. Theyare: (a) Improvement Initiatives by NRB prior to2000 (b) NRB Reengineering Committee and itsachievements (c) the government initiatives tostrengthen the financial sector reform programincluding NRB (d) First Phase of Reengineering, and(e) Second Phase of Reengineering.

OrganizationalStructure Factors

Change of Mgt.Sys. & Culture

1. Problem in Communication2. Organizational Resistance3. Lack of Organizational Readiness for Change4. Problems Related to Creating a Culture for Change5. Lack of Training and Education

1. Inefffective BPR Teams2. Problems Related to Integration Mechanism, Jobs Definition, and Responsibilities Allocation

1. Problems Related to Planning and Project Management2. Problems Related to Goals and Measures3. Inadequate Focus and Objectives4. Ineffective Process Redesign5. Problems Related to BPR Resources6. Unrealistic Expectations7. Ineffective Use of Consultants8. Miscellaneous Problems

1. Problems Related to Commitment, Support and Leadership2. Problems Related to Championship and Sponsorship

Table 3Reengineering Falure Factors

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Why Reengineering at NRB?There are six reasons that call for implementing

reengineering program in NRB. First one is the growingcomplexity in the financial system. The open and liberalpolicy adopted by the government since the late1980s has created an environment for the growthof private sector in the country. As a result, financialsector blossomed in the last two decades. As atOctober, 2004, the financial system is composed of17 commercial banks, 25 development banks, 58finance companies, 44 non-governmental microcredit institutions, 22 non-governmental cooperativesocieties authorized to do limited banking activities.All these institutions are under the regulatoryframework of NRB. Beside these institutions, thefinancial system is composed of 117 postal banks,15 insurance companies, Employee Provident Fund,Citizen Investment Trust, Deposit Insurance andCredit Guarantee Corporation, Security Board, andNepal Stock Exchange.

The rapid proliferation of financial players in theeconomy, globalization and internationalization offinancial markets, cross-boarder competitions andNepal’s membership to World Trade Organization(WTO), have created the financial system morecomplex and competitive than before. Similarly, thedeteriorating financial health of the banking sector,lack of accountability and transparency, poorgovernance, the domination by the government inthe banking sector through equity participation,corruption in the system, inadequate regulatoryframework, unskilled staff and poor banking cultureare some of the reasons that are responsible formaking the banking sector problematic and fragile.

NRB is responsible for creating conduciveenvironment, where the banking sector can grow andflourish. The effectiveness of NRB contributes tothe soundness of financial system. Being an apexinstitution in the financial sector, it must be equippedwith all weapons (such as prudent regulation,supervisory efficiency, skilled staff, strong researchwing, etc.) and must be able to show good examplesto other financial institutions to follow. In order toplay its roles effectively in this complex financialenvironment, NRB requires overhaul restructuring.

Second, the unprecedented event of financial crisis inASEAN economy in 1997 led to believe that regulatoryauthority must be strong and effective. It was argued thatweaknesses in the regulatory framework and poor

monitoring and supervision were among the reasonsfor the outbreak of crisis in the ASEAN countries in1997. Moreover the regulatory authorities in thesecountries failed to anticipate the possible consequencesand take corrective measures to overcome such crisis.The lessons learned from that event was the needfor a strong regulatory authority that can provide asound legal framework for the growth of financialsector in the country.

Third, the central bank should play an effective role tocontrol the capital markets in the country. The countrywitnessed a volatile capital markets in 1999 and 2000/2001, in which the share price of some commercialbanks worth Rs.100 skyrocketed to over Rs. 3000 inthe market. During this period, number of listedcompanies increased to 115 in 2001 from 66 in 1994;paid up capital reached to 8165 million in 2001 from2962 million, market capitalization of listedcompanies reached Rs. 46.3 billion in 2001 fromRs.14.4 billion in 1994, and NEPSE index movedup to 360.7 million in July 2000 from 195.5 billion in1995. Poor accounting and auditing standards,inadequate financial disclosure, lack of properinformation to the general public about the financialpositions of listed companies, and speculations ofgeneral public rather than having a broaderknowledge about the share markets are some factorsattributed to the sharp rise of share prices in themarket. This event helped to realize the need for astrong central bank that can control and monitor thefinancial systems efficiently and effectively.

Fourth, it is argued that the weaknesses on the part ofthe central bank is also one of the causes for the poorperformance of two state owned banks, i.e., Nepal BankLimited (NBL) and Rastriya Banijya Bank Ltd (RBB). Astudy carried out by KPMG revealed that both theinstitutions are technically insolvent and reportednegative net worth of about US$ 85-140 million incase of NBL and about US$ 200 – 260 million incase of RBB. Serious shortfalls in the areas ofcorporate governance, corruption in lending, pooraccounting and auditing practices, absence of strategicplanning and weak human resources were responsiblefor the poor performance of these two banks. Itwas argued that NRB’s direct involvement inmanagement decisions through its representation inthe Board of Directors (BOD), poor supervisionand monitoring, and lack of international regulatoryframework caused these banks to deteriorate theirfinancial positions.

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Fifth, reengineering is a must for NRB to be capable ofperforming the new role stated in the NRB Act 2002. WhenNRB was established in April 1956, the main functionswere to ensuring proper management of the issuanceof Nepalese currency notes; making properarrangements for the circulation of Nepalesecurrency throughout the country; stabilizing theexchange rates of the Nepalese currency; mobilizingcapital for development and developing bankingsystem in Nepal. The NRB Act 1955 was designedto control the state-dominated financial sector. ThisAct did not provide NRB the sufficient power tocontrol the financial sector. The Act imposedconstraints for effectively managing monetary policy,improving the financial infrastructure, strengtheningand improving financial markets and their supervision,and facilitating the growth of the financial sector. Inthe 21st century, the financial systems changedconsiderably and these functions are no longer apriority for the bank now. New challenges emergedin the banking sector as we moved along with theglobal community in this era of change. NRB has tobe effective in controlling the financial sector whereopen and liberal policies do exist and the marketsplay a significant role in the process of nationaldevelopment.

Taking into account the open and liberal economicpolicies adopted by the government and the changesvisualized in the financial sector, there was a need toamend the NRB Act 1955. Accordingly, the new NRBAct 2002 came into effect in January 2002. This newAct has given autonomy to the central bank inexercising monetary and foreign exchange policies,and has set new objectives of achieving price andBOP stability, banking and financial sector stability,establishing sound payment systems, regulating andsupervising banking and financial systems,safeguarding entire banking and financial system andenhancing public confidence. In this changed context,NRB need to reinvent its working systems andprocedures to effectuate change from ‘owner’ to the‘facilitator’ of the financial sector. NRB requiresupgrading the skills of employees, changing theworking habits and attitudes, and modernizing thesystem to ensure that the new role is performedeffectively.

Sixth, to overcome the weaknesses inherent in NRB,restructuring is a must. There are weaknesses inherentin NRB at all levels and all sectors. According to

World Bank “while the government has dominatedthe financial system as an owner and operator, it(central bank) has failed to perform adequately as asupervisor and regulator of the system. Poorsupervision by the central bank is in part to blamefor the severe problems of the two largestcommercial banks and for the general deteriorationin the system. However, the central bank is in noposition to adequately discharge its responsibilities.It is handicapped by a lack of autonomy, aninadequate and outdated legal framework, anexcessive number of poorly trained and unproductivestaff – as well as being in need of radicalrestructuring. Moreover, its direct participation in thefinancial sector through representation on bankboards and ownership of development banks hasadded to its diffuse responsibilities created conflictsof interest and undermined its credibility”.Overstaffing, poor incentive mechanisms, a severelycompressed salary structure, unskilled humanresources, inadequate training and developmentopportunities, cumbersome rules and regulationsposing constraint to develop, attract and retainprofessional workforce, inadequate regulatory andsupervisory framework, absence of accounting andauditing practices based on international standards,poor computerization and networking facilities, lowmotivation and poor organizational culture are someof the problems that requires attention throughrestructuring to convert NRB into a modern ,dynamic, credible and effective central bank in Nepal.

Improvement Initiatives by NRB Priorto 2000

It can be argued that the improvement initiativesin the financial sector began in the 1980s when thegovernment introduced liberal economic policy inresponse to the forces of globalization andinternationalization of financial markets across theglobe. The result of this open and liberal economicpolicy was the establishment of joint venture banksin Nepal. Foreign banks were allowed to take part inequity participation in establishing banks in Nepal.The establishment of Nepal Arab Bank Limited in1984, Nepal Indosuez Bank Limited in 1985 andNepal Grindlays Bank Limited (currently StandardChartered Bank Limited) in 1987 led to a beginningof new era in the banking development in Nepal.Nepalese financial sector witnessed the foreign

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investment, modern banking practices, competitivebanking environment, and innovative ways of doingbanking business with the coming of these banks inNepal.

Another important development in the financialsector was a progressive shift in the role of the centralbank from a ‘direct controller’ to ‘indirect controller’.In the previous case NRB used to direct deposit andlending rates, margin rates, refinance rates, etc. In thelater case, NRB deregulated and allowed thecommercial banks to fix interest rates above theminimum levels prescribed by NRB. The StructuralAdjustment Program implemented under the aegisof the World Bank and the International MonetaryFund further helped to liberalize the financial sector.Some of the important measures adopted duringthe post liberalization period were: Allowing ADB/N and NIDC to issue debentures (1985); commercialbanks were allowed to accept current and fixeddeposits in foreign currencies (US$ and StarlingPound) (1985); deregulation of interest rates (1986);departure from direct monetary control toderegulation and indirect methods of control in thefinancial system (1987); establishment of CreditInformation Bureau (1989); a detailed study, knownas Commercial Banks Problem Analysis and StrategyStudy (CBPASS) was conducted to rehabilitate thetwo state owned banks in 1990. Similarly, tostrengthen the regulatory and supervisory framework,NRB increased capital adequacy ratio from 2.5percent to 3.4 percent in 1991 and to 4 percent in1992; amended Finance Companies Act, 1985 in1992; enacted Development Bank Act in 1996 andissued directives on refinancing and reserverequirements, asset classification, provisioning andliquidity requirements during that period. NRBfurther liberalized the financial system by abolishingStatutory Liquidity Ratio (SLR) requirement in 1993;issued operating licenses to financial cooperatives andNGOs to conduct the limited banking transactionsin 1993 and 1994 respectively; and introduced currentaccount convertibility in 1994.

NRB also went on strengthening the manpowerand organizational structure during that period. Thetotal number of position decreased from 2950 inBS 2047 to 1731 in BS 2061 (Table Four). In orderto attract and retain the competent staff in the bank,NRB first began to hire Chartered Accountant asOfficer First Class1. NRB also hired MBAs in 1984.

In 1985, NRB also hired Agricultural Experts in orderto provide support service in the expansion ofagricultural credits to the rural poor. Ph.D holderswere recruited directly from the market as OfficerSecond Class. The system of hiring non-technical staffon temporary basis, both in junior and officer levelswas stopped. NRB also established a system of hiringMasters’ Degree University topper in Economics andManagement through interview. NRB implementeda policy that if any employee gets enrolled in higherstudy abroad, the bank would fund the entire costsof the study. This policy was later modified. NowNRB is sending employees aboard for higher studiesselected on the basis of written examination.

Table 4Manpower Structure of NRB

Permanent Temporary TotalYear Employees Employees Employees

BS 2047 2810 140 2950BS 2048 2851 131 2982BS 2049 2826 106 2932BS 2050 2687 102 2789BS 2051 2355 134 2489BS 2052 2326 171 2497BS 2053 2308 210 2518BS 2054 2486 267 2753BS 2055 2501 66 2567BS 2056 2400 374 2774BS 2057 2369 368 2727BS 2058 2336 66 2402BS 2059 2149 77 2226BS 2060 1811 63 1874BS 2061(Poush) 1661 70 1731

Source: Human Resource Management Department,Nepal Rastra Bank

Branch offices in Biratnagar, Birgung andBhairahawa were upgraded in BS 2043, and theSpecial Class Officer was made responsible for themanagement of branches. When the research andsupervisory functions of NRB was centralized toHead Office, these branch offices were brought backagain to the leadership of First Class Officer. AnExecutive Director position, above the Special ClassOfficer, was created in BS 2041 with a view to releasethe top management from operational responsibilities.However, this could not be functional because it onlyadded a layer between Special Class Officer and the

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Deputy Governor, and later on this practice wasabandoned. NRB purchased note-counting machinesto modernize and speed up the note counting work.Functions such as doctor’s service, gardening,cleaning, canteen, photocopy were outsourced. Therewere many job titles in the officer levels, creatingproblems for career planning. Now, in the officerlevel, there are only four titles – Assistant Director(Officer Third Class), Deputy Director (OfficerSecond Class), Director (Officer First Class) andExecutive Director (Officer Special Class). The namesof departments were changed on BS 2059/8/9 tohelp reflect the actual functions performed by thedepartments.

It can be argued that despite the initiatives tostrengthen the organization and human resourcemanagement in the bank, NRB was like a traditionalorganization, with no direction and vision; bureaucraticin nature and behavior; overstaffed, with de-motivatedand unskilled staff; employing the traditional meansand methods of operations; and calling for an urgentneed for transformation in its systems, processes,structure and human resource management.

Establishment of NRB ReengineeringCommittee

Although improvements in the areas of humanresources, systems and procedures, organizationalstructure were on-going; the momentum ofreengineering was accelerated with the establishmentof a Reengineering Committee on August 2001, withthe task of designing an appropriate and up-to-dateorganizational structure as per the new NRB Act.This Re-engineering Committee included fivemembers chaired by the Executive Director ofHuman Resource Management Department. Asenior Policy Advisor from the International MonetaryFund (IMF) provided technical support to thisCommittee. This Committee submitted its report onMarch 2002. In the report, the Committee (a)identified major problem areas (b) establishedprinciples for structural changes and (c) forwardedproposed organizational structure. These points areexplained below.

Major Problems• There is an overstaffing problem, particularly at

lower ranks.• Qualifications and skills are insufficient in several

areas.

• The compensation is inadequate, contributing tolow staff productivity and motivation.

• The strategic direction of the institution seems tobe unclear to staff and management.

• Decisions are delegated upwards in theorganization, leading to delays, uncertainty andinconsistency in the decision-making process.

• The technical infrastructure is inadequatelydeveloped.

• The NRB is not regarded as an independent andautonomous institution in carrying out itsfunctions.

• There is considerable degree of overlap ofresponsibilities and duplication of work in thepresent organizational structure.

• The top management is overburdened withdecisions related to the day-to-day operations.In order to solve these problems, the Committee

noted the need for an overhaul change in the existingorganizational structure. The structure of NRB hasto be forward looking taking into account thestructures of the economy and the financial system,and overall monetary policy objectives. It shouldmeet the response from the His Majesty’sGovernment (HMG), Parliament and the public atlarge, being the key stakeholders to measure theperformance of the NRB. Therefore, the followingprinciples were taken into account while proposingthe organizational structure of NRB.

Principles of Reorganization• The organizational structure must be so arranged

that responsibility, authority and accountability forall major functions are clearly defined.

• Activities that are closely related should be locatedwithin the same unit/department and activitiesthat serve different objectives should be separated.

• Departmental status should only be given to unitswhen warranted by the importance of functions,the reporting needs of the unit to higher levelsand the management responsibility of the headof the unit.

• Distinction should be made between policymaking and policy implementation.

• Potential overlaps between units/departmentsshould be avoided. Communication lines shouldbe short and efficient to ensure that managementand staff are informed of important matters ona timely basis.

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• Activities that are closely related should, as far aspossible, be coordinated along vertical reportingand communication lines.

• Functions/tasks that can be terminated, reducedor outsourced should be identified.

• Organizational structure should be flexible so thatit can easily be adapted to the changes in centralbank priorities over time.The Committee noted the need for grouping

the duties and responsibilities into major functionalareas, and proposed the organizational structureas follows.

Proposed Organizational StructureAccordingly, four important functional areas were

identified. They are: (a) Monetary and ForeignExchange Policy (b) Regulation and Supervision (c)Banking Operations, and (d) Administration/SupportServices. It was envisaged that NRB’s duties andresponsibilities relating to economic research andanalysis, monetary policy formulation andimplementation, monetary operations, foreignexchange reserve management and statistics shall begrouped under the functional area of monetary andforeign exchange policy group. Likewise, bank andnon-bank regulation and supervision, exchangeregulation and control and micro finance monitoringwere parts of regulation and supervision group.Currency management and operations, branchmanagement, payment systems, banking operations,accounting and budgeting were included underBanking Operation Group. Functions relating tohuman resource development, personneladministration, information technology administrationand general services, security and other facilities, mostlystaff functions of the bank were grouped underAdministration and Support Services Group.

The Committee then proposed an organizationalstructure (appendix 1) by introducing a new layerabove the Executive Director, making that postresponsible for the management of each functionalgroup. The logic for creating a new layer above theExecutive Director seemed to reduce the workloadof Deputy Governors and Governor, and releasethem from the operational tasks. The proposedstructure was different from the existing one and itsfeatures were as follows:• Similar functional areas were grouped together

and proposed to be supervised by a positionhigher than the Executive Director. This was a

shift from the inherent belief that the similarfunctions should be looked at by separate Headsto ensure check and balance of activities. Forexample, one Deputy Governor should notsupervise bank regulation department and banksupervision department as this may increase thechances of manipulation and other fraudulentactivities.

• The proposed structure was aligned to achievingnew objectives established in the NRB Act 2002.It aimed at achieving the activities mentioned inthe Act.

• With the introduction of one layer above theExecutive Director, it was envisaged that topmanagement would be able to concentrate moreon policy issues of the bank.

• In line with the principle of agency theory, it wasrecommended to separate the policy with thatof operational functions. For example, PolicyPlanning Department was given responsibility toformulate and maintain corporate policies relatingto Human Resources Development, includingpersonnel policy whereas the proposed PersonnelAdministration Department was to implementthe NRB’s policy relating to personneladministration. Another example was to createthe Market Operations Department, making theForeign Exchange Management Department asa policy-making department.

• Outsourcing of canteen, gardening, cleaning,repairs and maintenance and house-keeping;strengthening branches through making BankingOffice a coordinating agency instead of branchesreporting to multiple departments at Head Office;creating a separate Payment Division forstrengthening the payment systems andestablishing Statistics Division to ensure centraldata management system were some otherrecommendations in the proposed structure.In addition to these major changes proposed

in the report, the Committee highlighted that NRBshould look forward through corporate planning.The corporate strategic plan consisting of 3-5 yearsshould be established along with the one-yearrolling plan that is in practice. The main objectiveof this corporate planning is to understand thestrategic direction of the NRB as a whole and makeit transparent to all employees to enable them tomove forward in the same direction.

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Other important areas of intervention were toreview the HRD measures – right sizing, formulatingtraining policy, reviewing compensation packages sothat NRB could attract, retain, and motivate qualifiedemployees at all levels of responsibility.

Implementation of NRB ReengineeringCommittee’s Report

Many of the recommendations forwarded bythe Committee were given high importance, as theywere quite relevant to modernize the NRB. However,the implementation of these recommendations wasconstrained due to following observations.1. The proposed Chief Executive Director position,

a level above the Executive Director, wasopposed on the ground that it adds a level andexpands the span of control in the organization.This indeed diminishes the value of the existingExecutive Director because the ExecutiveDirectors are eligible for a Deputy Governor post.

2. It was viewed that the Deputy Governors candelegate authority to Executive Directors if theywish to release some of their operationalresponsibilities. Therefore there is no need forcreating a position above the Executive Director.

3. Separation of policy from the operations wasfelt practically difficult. This, in the context ofNepal, may add more expenses to theorganization.

4. The need for creating a Statistic Division wasaccepted but it requires the reporting systems tobe computerized. If reporting system iscomputerized and departments can accessinformation through network facilities, in such acase centralized data management system wouldbe meaningful.Policy Planning Department was made

responsible to review and implement thesuggestions forwarded by the ReengineeringCommittee. Recommendations, such asoutsourcing of some of the support servicefunctions were implemented. In sum, thesignificance of this Committee was felt due to thefollowing reasons.1. It proved a groundwork study for the subsequent

reengineering activities in NRB. Somerecommendations submitted by the Committeewas acknowledged and implemented (NRBstructure and changes in the names of the

departments) during the first phase ofreengineering.

2. This report was the first to open the eyes of ourexecutives toward organizational responsibilitiesas mentioned in the Act. The report identifiedthe weaknesses inherent in the organization andthe approach NRB should take to accomplishthe objectives set forth in the new NRB Act.

3. It stimulated the spirit of reengineering in theorganization. Employees were aware of the needfor change in the organization. It helped to builda positive environment for the reform to takeplace. A journey with new destination andapproaches begun, which must be regarded as aremarkable achievement.

4. Series of discussions were held, ideas exploredand these discussions proved to be meaningful inmaking other improvements in the organizations.In conclusion, it could be argued that the report

submitted by the NRB Reengineering Committeeproved to be a foundation for the subsequentreforms in NRB. It showed the direction and waysfor achievement.

Government Strategy to Strengthen theNRB

The government published a Financial SectorStrategy Statement in December 2000 that specifiedthe role, challenges and importance of NRB in theprocess of financial sector development in Nepal.It was highlighted that the liberal and open policiesadopted by the government in the financial sectorsince the mid 1980s has contributed to the growthof financial institutions substantially, and thisdemand the banks to be prudent and havecommercial orientation. NRB’s new role is to ensurethat banking sector follow the prudent rules andregulations, conduct the banking business oncommercial orientation and principles, all financialplayers realize their responsibility and accountability,ensure good corporate governance system, establishinternationally accepted standards and practices,transparency and adequate disclosure of financialinformation and so on. NRB is required to enforcethe internationally accepted standards of loanclassification and provisioning requirements, liquidityand reserve requirement, capital adequacyrequirement, exposure limits, single obligor limit,etc.

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Realizing the fact that Rastriya Banijya Bank (RBB)and Nepal Bank Limited (NBL) are in problems dueto high levels of non-performing loans and otherweaknesses in their operations, and that the twodevelopment banks, i.e., Agricultural DevelopmentBank (ADB/N) and Nepal Industrial Developmentcorporation (NIDC) are having similar problems;the government felt to addressed these problemsurgently. Therefore, the government of Nepalintroduced the banking sector reform strategy thatwould:• Initiate a strong corporate governance by ensuring

that banks are owned and managed by privateinvestors and professionals through theprogressive withdrawal of HMG/N from theownership of all financial institutions and alsorefraining from promoting financial institutionsprimarily with the equity participation of thegovernment or government owned institutions;

• Enhance the authority and the ability of the NepalRastra Bank for effective supervision of banksand non-bank financial institutions and enforceregulations as well as move towards increasedautonomy of the central bank;

• Improve the existing legal and judicial processesfor enforcing financial contracts;

• Improving auditing and accountancy standardswithin the banking sector; and

• Promote financial discipline through adequatedisclosure and competition.The Nepal Rastra Bank had to take a lead role

in implementing the following reform measures.1. Reform in the Financial Sector Legislation2. Strengthening Bank Supervision and Inspection3. Restructuring and Privatization of NBL and RBB4. Enhance Competition in the Banking Sector5. Reform on Auditing and Accounting Capabilities6. Broad-based Banking7. Streamlining Ownership Structure8. Establishment of Banker’s Training Institute9. Restructuring of Credit Information Bureau10. Establishment of Assets Reconstruction Company11. Revamping Research and Financial Monitoring

Strength of the Central Bank12. Broadening and Deepening the Financial System

in Nepal13. Meeting Sectoral Financing Requirements14. Establishment of Development Bank at Regional

Level

15. Strengthening of Rural Development Banks16. Establishment of Credit Rating Agency17. Restructure of ADB/N and NIDC

All these reform measures are expected to assistin creating a sound, prudently managed and well-supervised financial sector, that is competitive,dynamic and capable of contributing towardsmacro-economic stability and more rapid andsustained economic growth in Nepal.

Realizing the necessity of reform in the bankingsector, the government entered into an agreementwith the donor agencies to implement the financialsector reform program, including reengineering ofNRB. NRB reengineering is a component of broaderfinancial sector reform program. The followingsection describes the reengineering activities carriedout by NRB.

First Phase of ReengineeringThe first phase of financial sector reform

program was launched with the financial assistanceof the International Development Association (IDA)of the World Bank group. The cost of the project isUS$30.1 million (IDA credit-$16 million; DFIDgrant $10 million; and HMG/N grant $4.1 million).This Financial Sector Reform Program included threemajor components: (1) Reengineering of NepalRastra Bank; (2) Restructuring of Nepal Bank Limitedand Rastriya Banijya Bank; and (3) Capacity buildingof financial sector.

IOS Partners, Inc., an American consulting agencywas selected for the reengineering work of NRB.IOS Partners started work from March 2003. TheNRB reengineering team included four internationalconsultants and two national consultants. The teamcomposed of one Human Resource Advisor, oneFinancial Management Consultant and two localconsultants to strengthen the financial managementsystems of NRB, one Onsite /Off-site InspectionAdvisor and one Bank Restructuring Advisor. Thenumber of professional staff months for HRAdvisor was 15 months, Accounting and Auditingteam: 18 months; On-site and Off-site Advisor: 12months; and Bank Restructuring Advisor: 2 years.

A Reengineering Steering Committee wasestablished on BS 2060/2/23 under thechairmanship of the Executive Director of Bankand Financial Institutions Regulation Department toanalyze and review the suggestions forwarded by

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the IOS Partners and recommend to the bankmanagement for implementation. This Committeewas composed of Executive Directors fromFinancial Management Department, Internal AuditDepartment, Bank Supervision Department, HumanResources Management Department, FinancialInstitution Supervision Department, and this authorbeing the Coordinator of reengineering program.The first phase of reengineering was completed in2004.

The reengineering program included areas of (a)Organizational development and human resourcemanagement; (b) Improvements in the auditing andfinancial management systems; and (c) Improvementsin the regulatory and supervisory functions of NRB.The major reform objectives and progress made ineach of these areas are explained below.

Organizational Development and HumanResources Management

The major areas of reform were to streamlinethe organizational structure of NRB; developprofessionalism within the bank by reducing thenumber of staff and downsizing the organizationalstructure; decompress the salary structure to retainand motivate professional staff; design master trainingplan for the NRB staff; review roles andresponsibilities of each department and eliminateoverlap between departments; establish jobdescription for all positions; and design new HRpolices (recruitment, promotion, careerdevelopment, disciplinary measures, appraisal,remuneration, training and retirement policies) ofinternational standards.

It was thought that the existing eighteendepartments and seven branch offices were morethan required and the functional departments areinadequate to achieve the roles of NRB envisaged inthe new Act. Professionalism was lacking due tooverstaffing and low skills and morale of theemployees. Problem with the salary structures wasthat the ratio of highest grade (Executive Director)to lowest grade was about 2.35, demanding salarydecompression urgently. A total of 2100 plusemployees with 16 percent at officer levels and 84percent at non-officer levels clearly indicatedoverstaffing at the lower levels. Further, staff strengthof 2100 plus employees was thought high comparedto other central banks in the region. HR policies

encouraged the seniority rather than merit andcompetencies.

In order to rectify these problems, the consultantsubmitted the following recommendations:• Functional departments must be grouped by the

nature of their job and Deputy Governors shouldsupervise the related departments. In connectionwith this, interim (2 years) and long-term structureswas submitted (appendix 2).

• Foreign exchange reserve functions of ForeignExchange Management Department could bemoved to Banking Office, Thapathali.

• Merge Mint Department with Issue Departmentand outsource the production of all coins.

• Outsource canteen, housekeeping, transportation,gardening, dispensary functions presently carriedout by NRB.

• Install more counting machine, use randomsampling for checking notes and use the non-destructive methods of bundling notes.

• Banking Office is suggested to be a coordinatingagency for branch operations instead of branchesreporting to many departments at the HeadOffice.

• Convert Bankers Training Centre into anindependent regional training institute.

• Create a separate career and transfer paths forrelated departments. It was recommended tocreate functional groups (banking regulation andsupervision, accounting and finance, bankingoperation, HRM and administration, legal,information and technology, currencymanagement, economics, and others) and transferand promote employees within the group only.

• Adhere strictly the five-year transfer policy fromone department to another department.

• Rename the Policy Planning Department (PPD)as Corporate Planning Department.

• Move budgetary functions from FinancialManagement Department to Corporate PlanningDepartment to ensure good coordinationbetween plans and budgets.

• Decentralize recruitment policy to departmentallevel and involve the Executive Director in therecruitment process of departmental staff.The consultant, after reviewing the salary structure

of the existing financial institutions in Nepal, suggesteda new set of salary structure, including allowances tobe paid to the staff. Job descriptions for officer level

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positions were prepared. A total of 1485 staff wasproposed for the bank. A new Voluntary RetirementScheme was prepared. Training needs were identified.Suggestions to introduce international acceptedpractices in HRM policy were forwarded.

NRB implemented many of the suggestionsforwarded by the reengineering team. An interimstructure was implemented in December 2003. PolicyPlanning Department was renamed as CorporatePlanning Department and budgetary functions wasgiven to that department. Voluntary retirement schemewas implemented twice, first on BS 2059/12/17 andsecond in March 2004; in which a total of 472employees opted for retirement. Overlappingfunctions were eliminated. There was no increase inthe basic salary scale however, increase in allowanceswas approved and implemented in November 2003.

Although some of these recommendations wereimplemented, it is still felt that the staff strength ishigh compared to other central banks in the region.Recommendations such as decentralizing therecruitment process to the departmental level andcreating separate career and transfer paths fordepartments need careful scrutiny and consultationsand amendments in the existing Employees Manual/Policies. Although Training Master Plan was prepared,trainings were not conducted during the first phaseof reengineering program. Job descriptions, althoughare prepared, the organizational systems, processesand culture makes it difficult to make employees workas per the job description. The implementation ofthese uncompleted tasks forms the major thrust inthe second phase of reengineering.

Improvements in the Auditing and FinancialManagement Systems

The main objective of reengineering in this areawas to assist NRB in establishing accounting andauditing practices in conformity with internationalstandards. Major areas of reform included reviewof the planning, budgeting, accounting, managementinformation, internal and external auditing systems,and suggest improvements in these areas. The aimwas to review and recommend the accountingsystems in conformity with International AccountingStandards (IAS). It was also to implement principlesof International Standards on Auditing (ISA). Oneinternational consultant and two local consultantsprovided their technical service in this area ofreengineering. The major outputs were as follows:

• NRB should develop a long-term strategic planfor its operations. Like in other countries, NRBmust operate with mission and vision statementsto show direction and gear all staff towardsachieving the long-term goal of the organization.

• NRB’s Accounting Manual should be revised inconformity with IAS and the Chart of Accountsmust be improved.

• NRB prepares two balance sheets, one by theFinancial Management Department and anotherfrom the Issue Department. Instead of thispractice, it would be appropriate to consolidatetwo balance sheets and come up with one balancesheet.

• There is an urgent need to upgrade the softwareused to record the accounting transactions. Theexisting software is out-of-date and not capableto produce outputs required. It must be linkedelectronically.

• The inter-branch transactions must be improvedby adopting tripartite accounting sub-system torecord inter-branch transactions.

• Consultants reviewed the internal audit manualand recommendations for improvements wereforwarded.

• Training needs for accounting and auditing staffwere also identified.

• Four workshops were conducted on IAS andNRB directives for external auditors of banksand financial institutions to help them understandthe requirements under IAS and NRB regulations.NRB acknowledged the need for developing a

five-year strategic plan. The NRB Board inSeptember 2003 approved the vision of NRB as“ a modern, dynamic, credible and effective centralbank”, and mission as “ maintain macro-economicstability through sound, and effective monetary,foreign exchange and financial sector policies”.Long-term objectives and strategies were adopted.The preparation of five-year plan is underway.

NRB has realized the need for improving theAccounting Manual in conformity with IAS.However, this task is yet to be completed. IOSPartners argued that they would have no time to dothe extraneous task of revising and updating theManual. Other suggestions, such as elimination ofInterest Suspense and Branch Adjustment Accountsfrom the balance sheets to help show actual financialpositions; recording of depreciation of fixed assets

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at the end of each month; and the need for bettersoftware were implementable only when the NRB’saccounting system is fully computerized and linkedelectronically. Although the Chart of Accounts wasprepared, the Department felt it needs furtherimprovement. The training areas identified foraccounting and auditing staff were relevant. Sometraining programs were also organized, and more tofollow during the second phase of reengineering.

In sum, it could be argued that except than somecourses offered to external auditors and NRB internalauditors, recommendations suggested by IOSPartners were only implementable uponcomputerization of the accounting systems, and somewere thought not relevant to our practices. Forexample, preparation of two balance sheets wasthought not a problem for NRB as it showstransparency and detail information. However, thestudy completed in the first phase of reengineeringwould be a solid foundation for implementing thesecond phase reform program.

Improvements in the Regulatory andSupervisory Functions

Basically there were three important measures forstrengthening the regulatory and supervisoryframework in Nepal. First was the strengthening oflegal framework for the effective operation ofbanking in Nepal. Second was to introduce theworld-class regulatory measures for the operationsof banking in Nepal. And the third was to enhancethe capability of NRB staff to carry out regulatoryand supervisory functions effectively.

Improvements in the Legal FrameworkNRB felt that many Acts govern the Nepalese

financial system and strengthening the legalframework is vital for developing a sound financialsystem. First of all, there was a necessity to amendthe NRB Act 1955 so that sufficient autonomy in theconduct of inspection and supervision of banks andfinancial institutions, monetary policy and licensingof banks and financial institutions could beascertained. NRB Act 1955 was therefore replacedwith a new NRB Act 2002, which providedautonomy in the conduct of monetary policy,inspection and supervision and in the exercise ofadministrative power by the central bank. The newAct 2002 changed the objectives of NRB taking intoaccount the new roles of a healthy central bank in a

globalized economy. Therefore, the new NRB Act2002 in its Preamble spelled out that, maintainingand achieving price stability through exercisingmonetary and foreign exchange policies; promotingstability in the banking and financial sector throughestablishing regulations, inspections and supervisions;developing a secure, healthy and efficient paymentsystems; and promoting trust and credibility towardsthe financial systems, are new objectives of NRB.

In addition to the amendment of NRB Act, therewas also a need to consolidate the other Acts thatgovern the financial system. For example, theCommercial Bank Act (1974), the NRB Act 2002and the Companies Act govern the commercialbanks. ADB/N and NIDC are governed by theirspecific-institution-based legislations. TheDevelopment Bank Act of 1974 governs otherdevelopment banks. Similarly, micro-finance anddeposit-taking institutions are governed by multipleActs – NRB Act 2002, Society Registration Act 1978,Cooperative Act 1959, the Social Welfare Act 1991and the Financial Intermediary Act 1998. Moreover,there are inherent weaknesses in some of these Acts.Multiple legal frameworks have created problems inthe conduct of effective regulations, inspection andsupervision. With a view to strengthen the legalframework and consolidate the financial sector, anumbrella Act - Banks and Financial Institutions (BFI)Act 2060 (amended in 2061), has been promulgated.This Act has repealed the Commercial Bank Act,Development Bank Act, two separate institution-based Acts governing the ADB/N and NIDC andFinance Companies Act. In addition to the enactmentof BFI Act 2060, the government has approved theDebt Recovery Act. Promulgation of BankruptcyAct, and Merger and Acquisition Act is in progress.With all these exercises, there have been considerableimprovements in the banking legal environment inNepal.

Improvements in the Regulatory FrameworkWith a view to strengthen the regulatory

framework for the effective conduct of bankingbusiness in Nepal, some of the important regulatorymeasures introduced by NRB are as follows:(i) The paid up capital for opening a bank at the

national level has been raised to one billion from500 million.

(ii) Investors can only open a commercial bank atthe national level if they have joint venture

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relationships with foreign banks or a technicalservice agreement for three year with a foreignbank or financial institution(s).

(iii) The share capital participation in a national levelbank for foreign banks has been increased to 67percent from 50 percent. The monetary policyof 2060/61 had further liberalized the provisionof 67 percent share participation and given anindication that NRB may allow foreignparticipation for more than 67 percent if thesituation warrants.

(iv) NRB has determined the minimum qualificationsrequirements for promoters interested in openingbanks and financial institutions.

(v) NRB issued directives that commercial banksshould maintain capital funds based on their risk-weighted asset, which will consist of 10 percentof capital fund, of which 5 percent should befrom the core capital. In the fiscal year 2003/2004, the percentage of capital fund wouldincrease to 12 percent, of which 6 percent shallbe from the core capital.

(vi) Loans and advances are being categorized as pass(overdue loans up to three months), sub-standard(overdue loans for 3-6 months), doubtful(overdue loans for 6 to one year) and loss(overdue loans for more than a year), and thecommercial banks are required to maintain loanloss provisioning of one percent of pass loans;25 percent of sub-standard loans; 50 percent ofdoubtful loans and 100 percent of loss loans.

(vii) With a view to minimize risks of overconcentration to a single party, firm or a company,NRB issued directives that commercial banks areallowed to provide credit to a total of 25 percentof core capital on fund based items and 50percent of core capital on non-fund based itemsto a single borrower.

(viii) In an effort to improve the accountingpractices and ensure transparency of financialinformation to the shareholders, depositors andthe general public, Nepal Rastra Bank formulatedstatutory forms based on International AccountingStandards and issued directives to follow theapproved format in maintaining statements ofaccounts by the commercial banks and that suchstatements should be audited by the approvedAuditor and published in their annual report andin major national newspapers. Nepal Rastra Bank

further informed commercial banks that theyshould prepare their accounting policy, includinginvestment policy and so on.

(ix) Nepal Rastra Bank established Codes of Conductfor Governing Boards of commercial banks,defined the duties and responsibilities of Boardof Directors, established qualifications for theappointment of Chief Executive Officer, definedthe Codes of Conduct for employees, instructedto establish a Accounting Committee to providesupport to the bank management on financialmatters and defined the duties and responsibilitiesof that Accounting Committee, and restricted toprovide credits to the member of Board ofDirectors and the promoter shareholders and theirimmediate family members.

(x) Regulatory directives are enforced strictly. In acase of non-compliance of NRB regulations anddirectives, NRB can execute penalty provisions,including the ultimate provision of cancellationof operating license, suspension of Board ofDirectors and control over the management. Thishas helped to make commercial banks moreaccountable to their work and submit report tothe central bank on time.

(xi) In an effort to reduce NRB’s involvement inbanks and financial institutions, NRB haswithdrawn its members from the Board ofDirectors of commercial banks.

(xii)NRB implemented Blacklisting Regulations, bywhich defaulters are publicly recognized and anadditional loan is not permitted.The enactment of new NRB Act 2002,

introduction of regulatory framework based oninternational standards, withdrawal of NRB officialsfrom the Board of Directors of commercial banks,and the enforcement of inspection and supervisionmanual based on the recommendation of the BaselCommittee are some important achievements.However, there are still many reform measures tobe completed to make the NRB effective to governthe financial system. Strengthening of the CreditBureau Centre, establishment of Asset ManagementCompany and Credit Rating Agency, strengtheningof rural development banks by means ofprivatization or divesting government shares to theprivate parties, strengthening of Bankers TrainingCentre and enhancing competition in the bankingsector are some of the activities required for making

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financial system healthy, effective and competitive.Rules for governing the Credit Bureau Centre hasalready been approved. A draft legislation to establishthe Asset Management Company has been finalizedand submitted to the government for approval. Asenior level committee has been established to directand monitor the progress of Regional RuralDevelopment Banks. The second phase is expectedto carry forward the remaining activities.

Developing Capability of NRB StaffDeveloping capability of NRB staff was an

important component of reengineering program.This project sought capability development in theareas of inspection and supervision, regulation,strategic planning, accounting and auditing.Accordingly, training requirements for the staff ofthese departments were identified.

NRB achieved some satisfactory results in theseareas. NRB hired Chartered Accountants in an effortto bring fresh qualified people in the bank. BankSupervision Department introduced new On-siteInspection manual. Similarly the Financial InstitutionSupervision Department also introduced Off-SiteInspection manual. Trainings were provided to thestaff of Bank Supervision Department and FinancialInstitutions Supervision Department in the areas ofinspections and supervisions. Laptop computers wereprovided to the staff of these two departments toenable them prepare inspection report at site andreduce the time taken in writing report. Training needsfor the staff of supervision departments have beenidentified. It is expected that the second phase ofreengineering program would continue developingcapability of NRB staff.

Second Phase of Reengineering (FinancialSector Reform)

It was realized that substantial progress was madeduring the first phase of financial sector reformprogram, including NRB reengineering. However, aperiod of two years was thought not enough fortransforming the NRB. It was felt that reengineeringexercise should be continued for another term sothat the suggestions forwarded by the consultantscould be implemented. The World Bank missionreviewed the progress made in the first phase ofreengineering and in consultation with the NRBofficials, agreed to implement the second phase ofreengineering. The second phase financial sector

reform program was agreed on June 2004 with atotal cost of US$ 75.5 million. This fund comes fromIDA credit (US$68.5 million) and grant (US$7.0million). NRB reengineering, being a component ofFSRP, includes the following activities in its secondphase.

Human Resource ReengineeringIt was realized that human resource reengineering

is the heart of institutional reform required in NRB.With the new ‘interim’ structure implemented, thereare possibilities to implement the long-term structureas proposed by consultants. The main aim of humanresource reengineering is to implement the suggestionsprovided by the consultants of the first phase reform.At the heart of its problem is the overstaffing.Although significant numbers of employees haveopted the Voluntary Retirement Scheme (VRS), it wasthought that the staff strength of NRB should bebrought down to less than 1000 positions once fullcomputerization is in effect. Introducing voluntaryretirement scheme, or compulsory retirement scheme,outsourcing the currently performed non-corefunctions of the bank and automation were thoughtpossible means to reduce the staff strength.

Once the staff strength is reduced to the expectedlevels, this helps to make a strong case for thedecompression of salary scales in NRB.Decompression of salaries is considered essential tothe professionalization of the institution, and also toattract and retain qualified professionals within theNRB. The first phase of reengineering established adecompression target of 5.6 time compared topresent 2.4 times. It is expected that reduction in thesize of staff would only make a case for thedecompression of salaries.

Another important area of intervention is tointroduce new HR policies and procedures. HRpolices must be merit based rather than senioritybased - as it is now. The international HRM bestpractices and standards must be followed. Goodperformance needs to be rewarded whereas the poorperformers must be punished. Staff placementpolices need to be established because quick transferof employees often create obstacles to thestrengthening of departments.

Delegation of authority is important to relievethe top management from routine duties. It is believedthat many unimportant issues are forwarded to theattention of the Deputy Governors and Governor.

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This bound to involve top management in small andnon-strategic matters taking their precious time awayfrom the policy matters. This could be an argumentfor the NRB lacking the strategic direction. Delegationor devolution of authority is important to motivateand empower the lower levels employees. In essence,there is a need to change the working culture andhabits within NRB. New cultural norms thatencourage innovation and team spirit, participation,sense of belongingness and the result-orientedbehavior need to be established. Power center has tobe broken by changing the existing rules of the game.All these measures expected to be performed duringthe second phase aims at making NRB a professionalinstitution.

Reforms in human resources, i.e., slimorganization, new HR policies, decompressed salarystructure, decentralized and entrepreneurial institutionwith new vision and direction, can be achieved withqualified and professional staff. Staff developmentis another component of second phase program.

No doubt, changing the culture of anorganization is a challenging task. Moreover,introducing new HR polices and procedures – aninnovation to the existing procedures would notbe easy either. This is all about thinking out of thebox, beyond the boundary of operation- but tothe right direction. No doubt, achievements in thatdirection will make NRB a competent andprofessional organization.

Strengthening the Accounting SystemThe second phase also aims at strengthening the

accounting and auditing functions in line with theInternational Accounting Standards (IAS). NRB Act2002 requires ISA in the central bank and the IMF’sSafeguards Assessment and subsequent Fundconditionality require the audit of the bank’s accountsto IAS by an international accounting firm. Audit ofthe accounts of NRB by an international firm wouldresult in enhancing internal controls, transparency, andin improving monetary policy statistics.

There are deficiencies such as (i) not operatingon an accrual basis; (ii) the non-recording ofdepreciation on a regular monthly basis; (iii) the non-revaluation of gold holdings for many years; (iv) andthe lack of reconciliation of inter branch accounts –thereby inflating overall balances are seriousinfringements, which require attention. There is alsoneed to revise the Accounting Manual to reflect IAS.

In view of these problems, it is planned that twoqualified national accountants would assist theFinancial Management Department to enable thecentral banking accounts meet the requirements ofIAS. Emphasis is also placed on accounting training.

Strengthening Banking Supervision andRegulation

Since many of the commercial banks, includingNBL and RBB, are not operating satisfactorily, itbecomes important that NRB’s inspection andregulatory departments be strengthened. The lessonsfrom the Asian crisis in 1997-98 suggest thatregulatory and supervisory departments play a keyrole in strengthening the financial system of a country.Strengthening on-site and off-site inspections, analysisand examination of financial data, production ofquality examination reports, reinforcing the regulatoryframework in accordance with Basle CommitteeGuidelines, training to examiners are some of theactivities to be performed in the second phase reform.A team of one international expert and seven nationalexaminers is expected to provide service tostrengthen the regulatory and supervisory functions.These experts would include bank examiners, non-bank examiners, off-site examiner – to assist in datareview and financial analysis so as to provide adequateearly warning to potential banking problems, andbanking regulator. The phase II envisages thecomputerization of regulatory and supervisorydepartments with 50 desktops and 25 lap topcomputers, so that the time taken in the preparationand submission of final examination report couldbe reduced.

Upgrading Information TechnologyUpgrading information technology is an

important component of second phase reform. Ifthe vision of making the central bank competent,effective and run with professional staff is to beachieved; computerization is a pre-requisite. Reducingthe number of employees to less than 1000 is alsopossible if the bank’s transactions are computerized.The first and foremost need is to design the IT MasterPlan and the specifications of the requisiteequipments, the areas of networking andcomputerization. If NRB has to be a moderninstitution at par with other central banks in the Asianregion, activities such as upgrading the computerizedGeneral Ledger (Banking and accounting);

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automation of clearing house functions; securitysystems to ensure movement of electronicinformation; appropriate software for statisticalanalysis; establishment of adequate ancillary hardwarefor controlling the entire computerization within thebank; training to staff; installation of VSAT forcommunication systems between the branches ofNRB; contingency plans and support of local ITexperts to solve problems that may arise duringcomputerization process, are required to beperformed. Upgrading information technologymeans changing the working culture in the bank.Better and swifter communications, less paper work,greater access to information, improvement in themanagement information systems, increasedaccountability and transparency of information aresome of the outputs envisaged from the secondphase reform.

To summarize the discussions made in part two,it can be argued that reengineering in NRB is theemergence of changes in the national and internationalbanking environment. NRB was receptive to theseforces. The results achieved is due to coordinativeefforts from the government, donor agencies andcommitment from the NRB. It could be argued thatafter the second phase reform, Nepalese financialsystem would be healthy, effective and competitivethan now.

PART THREEPart three includes an independent assessment of

the reengineering program implemented by NRB. Isthere any material changes visualized in themanagement of bank, in its systems and proceduresor in values and thoughts of employees? It thendiscusses the challenges ahead for NRB to overcome.Finally some suggestions are forwarded.

Assessment of NRB ReengineeringProgram

Basically, there are five important reasons for anindependent assessment as to the success ofreengineering program. It is clear that significantamount has been incurred in implementing financialsector reform program, including NRBreengineering. This, indeed, has increased loan burdento the citizens. It is therefore important that citizensknow the returns and benefits from such a reformproject. The second issue is the appropriateness ofreengineering program or activities. It is often felt

that donor agencies, through their conditions to loanpackage exert pressures to recipient countries toimplement principles and philosophies which weresuccessful in their home countries in spite of non-readiness to take over those polices and principlesby the recipient countries. The third argument is theimpact or reactions to the reengineering programfrom those affected by it. Are they happy or satisfiedwith the reform program? Fourth is the resultsachieved. Instruments for measuring results could beincreased savings, improved processes, improvedefficiency and effectiveness and enhanced capabilityof the staff. The last argument for assessment is toprovide feedback on the success or failure ofreengineering program so that the policy plannerscould take appropriate policy decisions or anycorrective measures to lead the reengineeringprogram in the right direction.

Evaluating the success of a reengineeringprogram is quite a difficult task since multi-facetelements are involved in it. It is also hard to findempirical data to support the argument. Consultantsengaged in reengineering project may show a positivepicture when they complete each activity mentionedin their Terms of Reference (TOR). On the otherhand, users or organization may find hard to justifythe results of reengineering in the absence of identifiedbenefits from such changes. Changes for the sake ofchange do not mean any progress or success. Again,various stakeholders may interpret the term ‘success’in various ways. In many cases, reengineering activitybecomes a rhetoric event far from success. Therefore,assessment of any reengineering project has to bebased on subjective judgment in the absence of hardempirical data.

Let us make an attempt to evaluate the successof reengineering program based on the indicatorsestablished above. No doubt, NRB has taken variouscost cutting measures. Elimination of unnecessaryworking committees, withdrawal of allowances paidto committee members, mandatory arrangementsfor employees to travel on discounted air tickets ineconomy class instead of full fare economy class,reduction of staff through VRS, nomination of rightnumber of staff for abroad training and seminars,curtailing unnecessary expenses, reduction in theconduct of training and seminars which are notcritical for the functioning of departments, etc., aresome measures adopted by NRB for costs saving.

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In the last two-three years, the fundamental shift hasbeen that employees at all levels have become cost-conscious.

The implementation of ‘interim structure’ thatcluster all departments into four functional areas;harmonization of budget and planning functionsunder one department; outsourcing of some supportfunctions, such as cleaning, photocopying andgardening; implementation of on-site and off-siteinspection and supervision manuals; implementationof regulatory directives of international standardsand so on are some measures that might haveimproved the process and systems in the bank.

It could also be argued that efficiency, which ismeasured by the ratio of work done to the resourcesused in producing and delivering services, might haveincreased as the number of staff in NRB hasdecreased than before. The man-hour utilized atwork might have increased resulting to higher outputs.Elements such as, contracting and improvedprocesses might have contributed to achievingefficiency levels in NRB.

Capability of NRB staff might have improvedfrom the courses conducted. Their ability might haveincreased when the off-site and on-site manuals wereprepared and implemented. These issues explainedabove do indeed show that the first phase ofreengineering was successful to a certain level.

On the other hand, there could be lots ofarguments to conclude that the reengineeringprogram could not prove itself successful. Costssavings could be just rhetoric since savings generatedmight have been offset by the additional benefits paidto employees opted for VRS, hiring of newemployees in NRB, additional allowance offered tothe employees, etc. It is likely that savings in onedimension might have been offset by increase inexpenses in other areas. Many employees and citizensat large may claim that local professionals could havebeen involved in the reengineering of NRB insteadof bringing highly paid consultants from outside.

It could be argued that the activities outlined inthe project do not justify hiring of professionalconsultants from aboard and that these work couldhave done through local professionals. Therefore, theappropriateness of reengineering project itself couldbe a subject of argument. From the results point ofview, it could be argued that very little change hastaken place in the organization and that whatever have

been achieved do not justify the costs incurred in theproject. Employees may claim that the reengineeringprogram did not bring any substantial impacts in theorganization. All these could be parts of argumentto conclude that the first phase of reengineering couldnot be treated as ‘successful’.

What conclusions can be drawn then? This authoris of the opinion that we have moved a step forwardin our mission of making NRB healthy and effective.The process has begun to modernize the NRB.Reform is a continuous process, and that the firstphase and the second phase of reengineering willnot solve all our problems. They may add value tothe process of modernization. It would be ourmistakes to depend on others to do things that weare capable of doing it. Employees of NRB musttake responsibility for making the organizationeffective. Changes and improvements must be built-in in our systems and processes. Employees musttake ownership for making the organization a bestplace to work. Our experience with the reengineeringprogram has helped to draw the following learninglessons.• First, the vision of reengineering program should

be clear. The program has to be a felt need bythe employees of NRB. It must be expressed ingoals and objectives and be transparent to allemployees. The benefits of such program mustbe articulated in all departments, and that as faras possible key officials of the organization mustbe involved in designing any reengineeringprogram.

• The supply driven reforms are bound to be lesssuccessful. The need for reform should have originat the national level and must be driven by thelocal officials.

• Third, any reengineering program must be builton local and national circumstances, taking intoaccount country’s social, political, administrativeand cultural situations. Cultural conflicts oftenappear during the course of implementation.Suggestions that are administratively or culturallydivergent are difficult to be implemented althoughthese suggestions might have worked in developedcountries.

• One critical factor for the success of reengineeringprogram is the composition of team membersresponsible for its implementation. They are thedrivers of reform, and therefore must be

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knowledgeable, committed and determined. Thepositive attitude towards achieving the desiredvision and goals by the project team members isnecessary for the success of reform.

• Fifth, the success of reengineering programdepends upon the leadership of the organization.There may be ‘winner’ and ‘loser’ from anyreengineering program. To effectuate changerequires decisions, and any change may have wideimplications. Therefore, the leaders must have aclear direction and firm commitment to pursuethe reengineering program.

• It has to be recognized that reengineering has tobe a continuous process and must be built-in intoorganizational systems and processes. It shouldbe a regular phenomenon to repair if any partof the organization does not work properly. NRBshould not try to fix all problems at once. Thefailure or the reform fatigue may kill the mostsuccessful reform efforts. Therefore, reformprograms must be logically sequenced andincrementally carried out so that it generates interestto all concerned.

• Seventh, progress achieved through reengineeringprogram must be made public. Many timescriticisms for reengineering comes because theemployees and general public are not aware ofthe reengineering programs, its objectives, aim anddirections, and achievements. Therefore,transparency of information is vital to gain thetrust, and build a positive environment for thesustainability of the reengineering program.

• Last but not the least, any reengineering programmust have evaluation mechanisms established, asit helps to recognize the problems andachievements and provide feedback to the policyplanners. It is also important to rectify theproblems seen in the process of implementation.

Problems, Challenges and Re-commendations

The liberalization and globalization of financialmarket, Nepal’s membership to World TradeOrganization (WTO) and opening of banking to theworld community by 2010, the growing tradeinterdependence and rapid expansions in the capitalflows, cross-border competition, and fundamentalshifts towards market-based policy regimes, etc., havecreated opportunities as well as risks to the financial

sector in the country. The Nepal Rastra Bank, beingan apex institution in the banking sector, shouldunderstand the global pressures in order to createthe financial sector sound, healthy and competitive.The following are some important challenges andrecommendations to transform the NRB and helpplay a catalyst role in the 21st century.

Making Financial Sector Reform Program(FSRP) Successful

The banking sector plays an important role inthe economic development through facilitating theintermediary functions between capital surplus anddeficit units. Banks mobilize funds to generateincome and help raise the economic standard ofgeneral public. The inefficiency in the banking sectorcreates serious problems to the national economy.Realizing that the two big banks (Nepal BankLimited and Rastriya Banijya Bank) are in seriousproblems due to their high levels of non-performing loans, the government has launchedFinancial Sector Reform Project under the loanassistance from the World Bank. The total cost offirst phase FSRP is about US$ 30.1 million (inclusivegrant), and US$ 75.5 million (inclusive grant) forthe second phase. The Nepal Rastra Bank is thepioneer institution, entrusted by the government,to implement this FSRP. Failure to bear thischallenging responsibility will destabilize the wholefinancial system. The citizens will question theefficiency of NRB if in case reform does not yieldresults as anticipated. Therefore, NRB must givetop priority to manage this project by establishinga core team of committed experts to handle thisproject, so that FSRP could be successful.

The task is not that easy. To make the FSRPsuccessful, a coordinative and integrative effort fromall concerned is required. NRB must ensure that banksfollow good management practices, improvefinancial information system, reinvent the humanresource management system, and computerize andmodernize their activities. Moreover, NRB incoordination and consultation with the governmentshould come up with ways and means to compelthe defaulters to pay back their loans. NRB shouldalso play a key role in the establishment of AssetsManagement Company and strengthening the CreditInformation Centre, and bringing other legislationsthat are critical to the success of FSRP.

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Creating an Environment Where FinancialSector can Flourish and Prosper

Although the Nepalese financial sector has grownrapidly in numbers in the last two decades, it stilllacks the competitive behavior and strong legal base.The overwhelming dominance of the governmentin equity participation in major financial institutionsand absence of some important legislation to governthe financial sector are among others, obstacles forthe financial sector to grow and flourish. Someimprovements, such as, the enactment of new NRBAct, 2002, Debt Recovery Act, 2002 and By-Laws,Bank and Financial Institution Ordinance 2004,establishment of Debt Recovery Tribunal in 2003,have been made in this front. But there are lots moreto do. Other important legislation such as SecuredTransaction Ordinance, Insolvency Ordinance, AMCOrdinance, Anti-Money Laundering Ordinance,Trusty Act, Securitization Act, Merger and AcquisitionAct, are yet to be enacted. There is also a need forMicro Finance Act in order to consolidate theoperations of micro finance activities in Nepal. Atpresent various Acts govern the micro finance businessin Nepal. The time has come for NRB to revisit itspolicy to regulate and supervise the micro financeinstitutions in Nepal. There are emerging thoughts thata second tier institution, an apex body, should beestablished to regulate and supervise the micro financeactivities in Nepal. These are some challenges for NRBin the days to come. Enactment of these Acts willhelp to strengthen the legal framework and will createa sound environment for the financial system to growand flourish in the country.

Developing a Strategic Direction for NRBDeveloping long term planning is a new concept

for NRB. What NRB would look like (for example)after 10 years? What are the strategic directions forNRB to achieve in the next 10 years? What are theactivities that should be performed to reach thatdesired destination? All these questions must beanswered. The corporate plan must cascade downto the departmental levels and be linked to individualperformance. NRB at this stage is not clear as tohow it should look like after 10 years.

NRB has moved a step forward in this directionwith the approval of vision, mission, objectives andstrategies by its Board on September 2003. The long-term vision and mission established are to be achievedthrough formulating necessary monetary and foreign

exchange polices in order to maintain the pricestability and balance of payment for sustainabledevelopment of the economy and manage it;promoting stability and ensuring liquidity requiredby the banking and financial sector; developing asecure, healthy and efficient payments system;regulating, inspecting, supervising, an monitoring thebanking and financial system, and promoting anddeveloping the overall banking and financial systemand enhancing its public credibility. Realizing theimportance of long term planning, a CorporatePlanning Department has been established. With thisa journey has begun but the skills, motivation,commitment, importance, and priority for long termplanning are yet to be build up in the bank.

NRB would require reinventing itself in order tobe a modern, dynamic and credible central bank.First, each departmental plan must focus on attainingthe mission and vision of the organization. Employeesin the organization should be aware of theirperformance linkage to the mission and vision ofthe bank. A five-year plan with measurableperformance standards clearly linked to the overallvision of the organization should be established.Second, to be a ‘modern bank’, NRB would requireimprovements in the organizational and physicalfacilities, computerized and electronically linked toall departments. To be a ‘dynamic bank’, NRB wouldrequire improvements in the working systems andprocesses so that services could be rendered on time,efficiently and effectively; mechanisms must beestablished to ensure flexibility in systems andprocesses when work does not turn out as planned.And to become a credible bank, NRB muststrengthen its character, conviction, courage,competence and care to its stakeholders.

Building Positive Work Culture in NRBCulture means a system of shared meaning that

determine, in large degree how employees act in theorganization. Culture is comprised of theassumptions, values, norms, and tangible signs(artifacts) of organization members and theirbehaviors. Since the employees’ basic assumptions,values and norms drive practices and behaviors inthe organization, building a positive work culture isa challenging task for NRB. It guides how employeesthink, act and feel. Therefore, the success and failureof any organization is attributed to organizationalwork culture.

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Looking at the work culture in NRB, there appearweaknesses in its systems and procedures thatencourage positive work culture. Examples are:centralization of power, absence of teamwork andspirit, absence of mechanisms to reward employeesfor their innovative work, absence of performanceindicators and measures for employees to work with,etc. It seems that individual interest dominates overthe institutional interest. Employees’ sense ofattachment with the organization is lacking. To revertthis passive organizational culture, it is important thatthe policy place the highest possible emphasis on thedevelopment and satisfaction of employees. Themanagement practices should be performance–centered, i.e., performance should determine therewards and punishments. Employees are goaloriented and are geared towards achieving thatdirection. Organization supports and stimulates forinnovation, creativity, flexibility and diversity.Customer satisfaction is given greatest consideration.Efforts are made to maximize outputs by eliminatingwastage and retaining quality in the services.

Strengthening Research and Policy-makingCapability in NRB

It is a basic requirement for a modern centralbank to have well-developed research and policy-making capabilities. The formulation andimplementation of monetary, foreign exchange andbanking policies depend on the staff capabilities. Ifpolicy wing becomes poor, NRB may be failing inperforming its core functions effectively. Althoughthe new NRB Act 2002 has established a ManagementCommittee to discuss and approve major policydecisions; support to this Committee is essential fromthe research and policy making departments. Financialdata are important inputs for the formulation ofpolicies. At present, the statistical function of NRB ispoorly organized. Departments need to run aroundto find appropriate data for research, planning andreporting purposes. Data are not available on line.Therefore, if the NRB has to perform its corefunctions effectively, research and policy-makingcapabilities, including strengthening the statisticalfunctions are of great importance.

Empowerment of EmployeesOf all the resources, human resources are the

most important for the success of any organization.Their commitment, satisfaction, determination,interest and motivation are vital for any organization.

The global trend is that organization is getting lean,structured horizontally, and managed by a diversifiedteam of people. Employees believe on their ownexpertise and relationships to get work done ratherthan the power given to them by the job and feelsatisfied if they find opportunities to work hard andgain portable career assets- skills and reputation forthem to apply in another work place. Newmotivational tools are giving employees a sense ofpurpose and pride in their work, control over thejobs, the learning opportunities, a sense of ownershipover the jobs, and an opportunity to gain reputationby performing the task. All these activities empowerthe employees at work.

In case of human resource management in NRB,it could be argued that there is an urgent need toempower the employees. Employees are confusedabout their duties and responsibilities. Authority ismostly centralized at the top. The high performersdo not get opportunity of progression due topriority given to seniority in HR management. Rarelydistinction is made between high performers andtimeservers in terms of rewards and punishments.Salary and wages given to NRB staff are not at parwith other financial institutions in the Nepalesemarket. This has demoralized the NRB staff.

Creating an environment where employees aresatisfied and feel pride of being the staff of NRB isa great challenge for NRB in the days to come. Adelegation of authority table has to be established sothat authority vested at the top could be shared downin the hierarchy. A system should be established tomake a proper distinction between the performersand timeservers. Performance indicators are to beestablished to make proper evaluation of performingand non-performing staff. Reward and punishmentshould be performance based. Merit shoulddetermine the career progression than seniority.Management should encourage those staff that areinnovative in doing work. Employees should be givenfreedom at their work with proper checks andbalances so that they are satisfied. Duties andresponsibilities must be made clear to all employees.Reinventing the organizational culture in line withmodernization process is of utmost importance.

Computerization and ModernizationThe current status of IT development in NRB

could be argued as poor. Although PCs are available,they are used for typing and storing personal data

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only. Departments do not have access to informationof other department electronically. Although emailfacility has been established, the working culture isstill paper based.

Computerization is an essential component inorder to make NRB a modern, dynamic, credibleand effective central bank. Changing the workingculture in NRB with access to communications andbetter information systems through the means ofnetworked computers is the desired direction for allof us. This would, enhance the image of NRB; helpestablish and promote the systems of payments,clearing and settlement; eliminate the paper work andwastage; and provide swifter managementinformation system. In this respect, computerizationof ledgers, establishing strengthening on line networksystem with branch offices, establishing and securitysystems to ensure safety in the movement ofelectronic information, training to employeesinvolved in IT functions are some of the activitiesthat should be pursued for making a modern centralbank.

Strengthening Regulatory and SupervisoryFunctions

Despite the regulatory framework ofinternational standards (capital adequacy, loanclassification and loan loss provision, creditconcentration and single obligor limits, accountingpolicies, directives on good governance, transparencyand accountability, reporting requirements, regulationson the transfer of shares, etc.,) are being implementedby NRB, the health of the financial sector is still weak.Effective implementation of these regulatorymeasures in the financial system is still a great problemfor NRB. The principles and practices of BASEL IIexpected to be implemented by 2007 poses furtherchallenges to NRB. Effectively implementing the on-site and off-site manual and procedures, effectiveimplementation of supervision reports andcorrective actions to be taken thereon, upgrading theregulatory and supervisory skills, establishingfoundation to implement Basel-II by 2007 andestablishing and strengthening the institutionalframework for creating a sound, effective and healthyfinancial sector are some challenges for NRB.

Improving the Quality of ServiceThe Nepal Rastra Bank faces many challenges

from its stakeholders. Its performance is to bemeasured by the banks and financial institutions,

government agencies, international donor agencies(World Bank and IMF), the general public and soon. In order to create a good image of the institution,NRB should improve its service delivery systems. Itis true that our stakeholders like prompt service,professionalism in dealings, clear information andthe value of money paid for procuring the services.They also like to be respected and dealt courteously.They want established mechanism to redress theirgrievances and complaints. Therefore, NRB shouldtake an innovative approach in improving the deliveryof its services. NRB should providing informationthat is clear, timely, accurate, and available at all pointsof contacts, and meet the needs of people. Rules,regulation, forms, information leaflets and proceduresshould be simple and understandable to a laymanperson. Wherever possible, NRB should try toprovide them choice in service delivery includingpayment methods, location of contact points,opening hours and delivery times. In order to redressthe complaints, NRB should create a well publicized,accessible, transparent and simple to use system ofdealing with complaints about the quality of serviceprovided. The office premises should be clean withfacilities of privacy, connected with all means ofcommunications. Stakeholders should find easy waysto contact the person needed. Detail address of NRBincluding names, room numbers, and telephonenumbers should be displayed to help the clientcontact and complete the transactions. Employeesmust be trained so that they could deliver serviceswith courtesy and minimum delay, fostering a climateof mutual respect with customer. Citizen’s charterand service standards must be established.

ConclusionsReengineering is a process of instituting change

within the organization. Change is inevitable for thesurvival and growth of NRB. The globalization andinternationalization of financial market, the complexfinancial systems within the country and the emergingneeds for better and quality service require NRB tobe innovative, dynamic and effective. Reengineeringhas to be a continuous process built-in in our regularorganization systems and processes.

Reengineering program implemented under theaegis of donor agencies is only a piece-meal efforttowards making NRB effective. The first phasereengineering program established the groundworkfor the second phase to begin with. The second phase

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of reengineering will try to address some of thechallenges that are being visualized. But, there aremany challenges that NRB Reengineering Programwill not address. Donor support could be a short-term phenomenon. Instead of commenting on thesuccess or failure of donor supported reengineeringprogram, it would be appropriate for us to take theownership of reform and sit on the driver seat. Ithas to be understood that dependency on others killsour innovative skills, courage and ability to do ourbest. NRB must take reengineering as a continuousprocess built-in into its systems and processes, in itsstructure and people. Efforts should be made increating an environment whereby all departmentsmove forward in improving the systems andprocesses that do not work or becomes obsolete.

It is to be recognized that change is a difficulttask. Our culture so far is to maintain status quo andavoid risks. There is a fear of failure when initiatingany change program. There are obstacles created bythe looser of reform program. The personal interesttends to offset the organizational interest. The futureis uncertain with no certaining that the new policiesand procedures will bring best results. Thereforeuncertainties always prevail when doing anyreengineering program.

Despite the threats prevailing in everyreengineering program, the clear vision of theprogram, transparency of information, employeesparticipation in the reengineering process, training andskill development and commitment from allconcerned are bound to take the NRB to the heightof its expectation. This could be only done, not byothers, but by NRB employees. A realization of thisfact could only make NRB a modern, credible andeffective central bank in Nepal.

ReferencesAl-Mashari, M and Zairi, M. (1999) ‘BPR

implementation Process: an analysis of key successand failure factors’, Business Process Management,vol.5, No.1, 1999.

Atreya, B. (2002) ‘The Applicability of New PublicManagement to Developing Countries: A Case fromNepal’, Unpublished Ph.D Thesis, VictoriaUniversity of Technology, Melbourne, Australia.

Atreya, B. (2004) ‘New Public Management:Evaluating the Success of Public ManagementReforms’, CAMAD (a Journal of Administration,

Management and Development), vol.7, No.1,Issue, 13, 2004

Atreya, B. (2004) ‘The Progress of RestructuringProgram in Nepal Rastra Bank’ (in Nepali),Himalaya Times, April 26, 2004

Attaran, M. (2000) ‘Why does reengineering fail? Apractical guide for successful implementation’,Journal of Management Development, Vol.19,No.9,2000.

Cao, G., Clarke, S. and Lehaney, B. (2001) ‘A critiqueof BPR from a holistic perspective’, Business ProcessManagement Journal, Vol.7, No.4, 2001.

Davenport, T. and Short, J. (1990) ‘The new industrialengineering: information technology and businessprocess redesign’ Sloan Management Review, vol.31,No.4, 1990.

Deming, W.E. (1982) Out of the Crisis: Quality,Productivity and Competitive Position, CambridgeUniversity Press, Cambridge, M.A.

Hammer, M and Champy, J. (1993) Reengineering theCorporation: A Manifesto for Business Revolution,Nicholas Brearley Publishing, London.

Hammer, M. (1990) ‘Reengineering work: don’tautomate, obliterate’, Harvard Business Review, July-August, 1990.

Hood, C. (1991) ‘A Public Management for allSeasons’, Public Administration, Vol.69, No.1, 1991.

Kaplan, R.S. and Norton, D.P. (1992) ‘The balancedscorecard – measures that drive performance’,Harvard Business Review, Vol.70, No.1, 1992.

March and Argyris, C. (1997) ‘OrganizationalLearning and Management Information System’,Accounting, Organization and Society, Vol.2, no.2 1977.

Motwani,J., Kumar, A., and Jiang, J. (1998) ‘Businessprocess reengineering: A theoretical frameworkand an integrated model’, International Journal ofOperations & Production Management, Vol.18, No.9/10, 1998.

Nepal Rastra Bank (2002) Report of the NRBReengineering Committee, 2002.

Nepal Rastra Bank (2003) Contract for Consultants’Service, Bank and Financial Institutions RegulationDepartment, Nepal Rastra Bank.

Nonaka, I. and Takeuchi, H. (1995) The KnowledgeCreating Company, Oxford University Press, NewYork, NY, 1995.

NRB Reengineering Project, (2004) Various reportssubmitted by Consultants, Nepal Rastra Bank.

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OECD (1995) Governance in Transition: PublicManagement Reform in OECD Countries, OECD,Paris, 1995.

Rawal, T. (2003) Corporate Governance and FinancialSector Reform in Nepal, a paper presented on 23rd

May 2003 at a gathering organized by Society forInternational Development, Nepal Chapter, 2003.

Paudel, S. (2003) ‘Organizational reform of NRB:Voluntary Retirement Scheme, A paper presented in

an interaction program organized by NRBUnion, 2060.

The World Bank (2002) Financial Sector Study, PrivateSector Finance division, SASFP, South AsiaRegion, Report No.24959-NEP, 2002

Xeros (1979) Benchmarking, Internal publication,London.

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Financial ManagementRadheshyam Shrestha, Director & Bhuban Kandel, Deputy Director

Financial Management Department

Mr. Shrestha Mr. Kandel

Definition and ObjectiveFinancial management

refers to those managerialfunctions, which are relatedwith deciding on alternativefinancial resources and itseffective utilization. It isconcerned with planning,acquiring, administering andcontrolling of the firm’sfinancial resources. Effectiveutilization of the fund with a view to maximizingshareholders’ wealth is core matter of this subject.

The financial resources are lifeblood of aninstitution. The slightest mismanagement of theseresources may cost heavy to the firm. As both over/under liquidation situation is harmful to theorganization, special care must be taken while managingthe financial resources. Considering all these aspects,this subject has gained enormous importance in recentdays and has been developed as specialized faculty.

As a convention, the core objectives of financialmanagement revolve around following three basicquestions?

Whether to raise funds and in what amount?Whether to invest funds and in what amount?How much to pay as dividends?The first question of whether to raise a fund or

not and if yes in what amount, could be termed astraditional approach of financial management. Underthis approach the importance of managing the raisedfund is completely ignored. Gradually and steadily,

the focus was shifted fromrising of funds to efficientand effective utilization offunds. These concepts kepton developing and arrived tothe modern day approach,where both sides ofacquisition and utilization offund are given equalimportance so that value ofshareholders’ wealth could be

maximized. Various economic and environmentalfactors, continuous globalization of business and everincreasing use of computer based electronictechnology has changed the concept of financialmanagement to the modern approach.

There are a number of other related areas wherethe scope of financial management is expandedsector. Managerial decisions are taken withcoordinated efforts of all concerned branches ofthe organization. Some of the elements of financialobligations would be present in almost all decisions.In these context, the above said core objectives offinancial management may further be subdivided intofollowing additional questions:

What should be the expansion strategy?What should be the composition of its liabilities?In what form should it hold its assets?What would be the appropriate time for divesting

its investment portfolio?When should the debt be recalled? etc.

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Key Functions of Financial ManagementEstablishing Assets-Management Policies

Nowadays, it is popularly known as ALCOpolicy, where maturities of each component of assetsand liabilities are monitored by preparing ‘maturityprofile’. In other words, by establishing assets-management policies, it is determined that how muchcash will be tied up with particular item of assetsand liabilities and for how long. The formation ofsound and consistent asset-management policies isan indispensable pre-requisite to successful financialmanagement.

Determining the Allocation of Net ProfitsAfter arriving at financial net profit after tax for

the year, it has always been a great challenge to financialmanagers to determine as how much to retain andhow much to distribute. The distribution may eitherbe to the shareholders as dividend or to theemployees as benefits. Whether to pay to outsidersor retain depends upon numbers of factors such asdividend policy of the particular institution, pasttrends, market conditions, expectations fromshareholders etc. One of the key functions of thefinancial management is therefore to appropriatelydecide on how the available profit should beallocated.

Estimating and Controlling Cash Flows andRequirements

Maintenance of liquidity is another essential functionof financial management. There are a number of cases,where the big firms with volumes of book profitfacing cash crunch because of mismanagement of cashflows. The financial manager should act on to matchthe inflow of cash to its outflow so that, there wouldbe no idle cash balance. This situation is also known as‘synchronized cash flows’, where cash inflows coincidewith cash outflows, thereby permitting a firm to holdminimum possible transaction balance of cash.Working under this function, the financial manager mayface the dilemma of liquidity vs. profitability, becausewhenever company maintains comfortable liquidity,there would be opportunity loss because of the idlecash.

Deciding Upon Needs and Sources of NewOutside Financing

Yet another crucial function of financialmanagement is to decide on the appropriate need

of the additional funds to supplement the cashflowing from regular business operations. In the samecourse of decisions, the financial manager will furtherdecide on when such funds will be needed, how longthey will be needed, how best they can be raised,and from what sources they will be repaid.

Checking upon Financial PerformanceThe analysis of financial results is of great value

to financial managers. There must be the system toconduct periodical analysis by preparing comparativecharts and by applying various managerial tools e.g.ratio analysis, break even charts etc. Analysis of whathas happened, how it has happened, what could havebeen better etc is of utmost importance in improvingthe standards, techniques and procedures of financialcontrol.

Key Financial Tools Used in FinancialManagement

Ratio AnalysisA ratio is a statistical yardstick that provides a

measure of the relationship between variables orfigures. Ratio analysis is the process of determiningand interpreting numerical relationships based onfinancial statements. It is one of the key financialratios, where the financial ratios are used for assessingthe financial performance and financial position ofthe company by means of various ratios that relateto the liquidity, turnover, profitability etc of acompany. The major ratios used under this analysisare current ratios, turnover ratios, profitability ratiosand debt management ratios.

Breakeven AnalysisBreakeven analysis shows the relationship between

sales volume and operating profitability. It is themethod of determining the point at which sales willjust cover the operating costs. It further shows themagnitude of the firm’s operating profits or lossesif sales exceed or fall beyond certain given point.

Leverage AnalysisLeverage analysis is the technique used by business

firms to quantify risk return relationship of differentalternative capital structures. In financial analysis leveragerepresents the influence of one financial variable oversome other related financial variables, which may becosts, output, sales revenue, earnings before interestand taxes (EBIT), earnings per share (EPS) etc.

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Risk and Return AnalysisRisk is a chance of losses. In the financial context,

when an investor bears the chance of receiving anactual return other than expected, it may be called asrisk associated with that investment. In other words,it is the variability in the returns or outcomes fromthe investment. If there is greater variability of thepossible outcomes from the investment, it would betreated as more risky investment.

Return is the weighted average of the outcomes,and the weights used are the probabilities of thatcondition. In other words, return is expectedrealization from an investment and can be calculatedas the mean value of the probability distribution ofpossible results. Risk can be measured with the helpof Standard Deviation, Variance or Coefficient ofvariation etc and can be managed by applyingconcept of portfolio management, analysis of betacoefficient and Security Market Line etc.

Capital Budgeting TechniquesEfficient allocation of capital is one of the most

important functions of financial management. Thisfunction involves the firm’s decision to commit itsfunds in long-term assets and other profitableactivities. Capital budgeting decision may be definedas the firm’s decision to invest its current funds mostefficiently in long term activities (beyond the one yearperiod) its anticipation of an expected flow of futurebenefits over a series of years. Capital budgetingdecision will include addition, disposition,modification and replacement of long term or fixedassets. Since capital budgeting decisions are amongthe most crucial and critical business decisions, specialcare should be taken in their treatment

The important steps involved in the capitalbudgeting process are: (i) project generation (ii)project evaluation (iii) project selection and (iv)project implementation. The most widely acceptedinvestment techniques for evaluating financial aspectsunder capital budgeting could be grouped into thefollowing two categories:

Traditional or non-discounted cash f lowtechniques:• Payback period• Accounting rate of return

Discounted cash flow techniques:• Net present value• Internal rate of return• Profitability index.

Working Capital ManagementWorking capital management is the functional area

of finance that covers all the current accounts of thefirm. Working capital refers to the funds invested incurrent assets, i.e. investment in stock, sundry debtors,cash and other current assets. Conceptually, workingcapital may be gross as well as net. Total investmentin all current assets is the gross working capital,whereas net working capital refers to the excess oftotal current assets over current liabilities. From thepoint of view of time, the term working capital canbe permanent, which is hard-core working capitaland temporary, required by a business over and abovepermanent working capital.

Capital StructureIt refers to taking decision on composition of

sources for the long-term funds required in a businessi.e., the proportion of equity share capital, preferenceshare capital, debentures and other sources of longterm funds in the total amount of capital which anorganization may raise for establishing its business.The capital structure is said to be optimum when thefirm has selected such a combination of equity anddebt so that the wealth of the firm is maximum. Atthis level, cost of capital is minimum and the marketprice per share is maximum. Profitability, flexibility,conservation, solvency and control are some of thefeatures of the appropriate capital structure. Similarly,risks, cost and control are the factors, whichdetermine the capital structure of a particular businessundertaking at a given point of time.

Cost of CapitalThe cost of capital is significant factor in designing

the capital structure of an undertaking. The basicreason behind running a business undertaking is toearn a return at least equal to its cost of capital. Basicdefinitions of cost of capital of each source offinance are as follows:• Cost of debt: The explicit cost of debt is theinterest rate as per contract adjusted for tax and thecost of raising the debt.• Cost of preference share: In the case ofpreference shares, the dividend rate can be taken asits cost since it is this amount which company intendsto pay against preference shares.• Cost of ordinary or equity shares: There aremany approaches regarding calculation of cost ofequity shares. The four main approaches are (i)

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Dividend/price ratio (ii) Earning/price ratio(iii) Dividend/price + growth ratio and (iv) Realizedyield approach.

Dividend PolicyThe term dividend refers to that portion of profit

(after tax), which is distributed among the owners/shareholders of the firm and the profit that is notdistributed, is known as retained earning. Thedividend policy of the company should aim atachieving the objective of the company to maximizeshareholders wealth. Legal considerations, stability ofearnings, opportunities for reinvestment and growth,cash flow, level of inflation in the economy, effectson market prices and tax considerations are someof the factors, which determine the dividend policy.

Portfolio ManagementPortfolio management refers to the selection of

securities and their continuous shifting in the portfolioto optimize returns to suit the objectives of aninvestor.

Security/safety of principal, stability of income,capital growth, marketability, liquidity, diversificationand favorable tax status are the objectives of portfoliomanagement. Following three major activities areinvolved in an efficient portfolio management.• Identification of assets or securities, allocation of

investment and identifying asset classes.• Deciding about major weights/ proportion of

different assets/ securities in the portfolio.• Security selection within the asset classes as

identified earlier.

International Financial Management,Foreign Exchange Exposure and RiskManagement

The essence of financial management is to raiseand utilize the funds effectively. This also holds goodfor the procurement of funds in the internationalcapital markets, for a multi-national organization.There are various avenues for a multi-nationalorganization to raise funds either through internal orexternal sources. Internal funds comprise sharecapital, loans from parent company and retainedearnings. In the present globalize scenario, externalfunds can be raised from number of sources. Suchoutside sources may be commercial banks,development banks and financial institutions,discounting of trade bills, international agencies,international capital markets etc.

During the recent years, there has beentremendous growth in international investmentsthrough various intermediaries especially off-shorecountry funds, mutual funds, individuals andinstitutions like IMF, World Bank, this may not bethe name of any institution and a host of otherinternational agencies. The rapid industrialization,advancement of technology and communicationfacilities, the availability of rapid means oftransportation has all contributed towards theglobalization of business across the frontiers ofcountries.

Due to the globalization of business, the capitalraising from the international capital markets hasassumed significant proportion during the recentyears. The volume of finance raised from internationalcapital market is steady increasing over a period ofyears, across the national boundaries. There have beennew innovations in the product developmentsincluding derivatives. Every day new institutions areemerging on the international financial scenario andintroducing new derivative financial instruments tocater to the needs of multinational organizations andthe foreign investors.

Multinational organizations are inclined to investin/ borrow from abroad for managing risk,obtaining higher returns and tax benefits. However,risk on foreign exchange fluctuation is the basicproblem in international financial management.Generally risks, which an investor faces, have beencategorized as (i) foreign exchange rate risk (ii) interestrate risk (iii) credit risk (iv) legal risk (v) liquidity risk,and (vi) settlement risk. There are, however, variousways through which a company may protect itselffrom possible losses arising out of risk.

Financial Management in NRBFinancial management is considered to be a vital

and integral part of overall management of NepalRastra Bank (the NRB/the Bank). NRB has to takevarious investment and financing decisions as acentral bank of kingdom of Nepal. Broadly, thefinance function of the Bank may be enumerated byexplaining first the each individual component offinancial statement comprising assets, liabilities andequity.

The balance sheet or the statement of financialposition is one of the most significant financialstatements. It indicates the financial condition or thestate of affairs of an enterprise at a particular moment

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of time. Categorically speaking, the balance sheetcontains information about the resources andobligations of a business entity at a particular pointof time. It communicates and discloses informationabout the assets, liabilities and owners’ equity fundof an institution as on specific date.

Balance SheetAssets

Assets are the valuable possessions owned by theBank. These possessions should be capable of beingmeasured in monetary terms. Assets are futurebenefits and represent economic strength. In thecontext of Nepal Rastra Bank, assets are classified asfollows:

Foreign Currency Financial Assets(i) Currency in hand and with bank: This

comprises foreign currency cash in hand includingIndian Rupees kept in IC Chest and balances withbanks abroad in demand deposits and time deposits.

(ii)Investments in treasury bills: A specifiedportion of foreign currency has been invested in USGovernment treasury bills and Indian governmenttreasury bills, which are shown in this head.

(iii) SDR holdings: This is the IMF monetaryunit and country quota released by IMF held in thisaccount.

(iv) Other receivables: This item mostly includesof interest accrued on investment of foreign currencyfinancial assets.

Local Currency Financial Assets(i) Cash in hand: Nepalese currency notes and

coins in hand and held at vault other than balance innote chest is shown in this head.

(ii)Investment in government securities:These include primary and secondary marketinvestments in treasury bills, saving certificates;securities purchased under resale agreement, otherbonds and securities and IMF bonds. IMF bondsrepresent the non-interest bearing bonds issued byHMG/N in favor of Nepal Rastra Bank for thedischarge of HMG/N obligation to the IMF, whichhas been recognized by the Bank. The investmentsunder this heading is regulated by the provision ofthe NRB Act, 2002, which has restricted to hold theinvestment in HMG securities up to ten percent ofprevious year’s government revenue.

(iii) Investment in financial and otherinstitutions: The Bank has invested in the shares of

all five Rural Development Banks, Rastriya BeemaSansthan, APROSC, Deposit Insurance and CreditGuarantee Corporation, Citizen Investment Trust,Nepal Stock Exchange Limited, NationalProductivity and Economic Development Center,Rural Micro-finance Development Center, CSIDevelopment Bank, NIDC, Nepal DevelopmentBank and Agriculture Development Bank. It has alsoinvested in Rural Self Reliance Fund as seed capital.

Section 7 of Nepal Rastra Bank Act, 2002 doesnot allow holding investment in shares of anyenterprise more than ten percent of their share capital.Accordingly, the Bank has initiated necessaryprocedure to offload those investments in excess oflimit prescribed by the Act.

Provision for diminution in value of investmentin shares have been made on the basis of financialsof invested institutions and appropriate estimationmade by the management as at the close of the year.

(iv) Other Investments: These are investmentof employees’ funds and development related equityfunds in government bonds and fixed deposits withcommercial banks.

(v) Refinance and loans: Employees relatedloans and refinances to banks as well as financialinstitutions are included under this head. Provisionfor possible losses in respect of loans and advanceshave been made on the basis of financials ofborrower and appropriate estimation made by themanagement.

(vi) Other receivables: This comprises interestaccrued net of provision, deposits, advancesrecoverable and bill purchased etc.

(vii) Gold and silver reserves: These preciousmetals are held by Currency ManagementDepartment to support the liabilities arising out ofcurrency in circulation. Gold reserve also includesgold invested in banks abroad, account of whichhad been maintained by Foreign ExchangeManagement Department. Currency in circulationrepresents notes issued by Nepal Rastra Bank, whichis a sole currency issuing authority in Nepal.

Gold and silver reserves (including goldreceivable) are stated at the revalued amounts of thegold and silver content. Any appreciation onrevaluation is taken to ‘Gold and Silver EqualizationFund’. However no such revaluation subsequent tothe exercise carried out in 1986 has been done. Gain/loss on disposal of gold and silver reserves istransferred to the profit and loss account.

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Other AssetsGold and silver stock and other inventories:

These include gold and silver, security note stock,numismatic and medallion coins, other metalstocks, stationery and other sundry items. Stocksother than security notes, stationery and othersundry items are held by Mint Department formanufacturing and trading purpose. These arecarried at cost or net realizable value whichever isless. Cost is determined under First in First out(FIFO) method.

Property plant and equipment: These longterm assets are classified into land, building,furniture and fixture, office equipment, vehicles,machinery equipment, computer equipment, capitalwork in progress and other miscellaneous long-term items. Freehold land as well as capital work inprogress is stated at cost. Other fixed assets includingproperty plant and equipment are stated at cost lessaccumulated depreciation. Depreciation is calculatedusing the straight-line method over their expecteduseful life without taking into account any residualvalue.

Depreciation on addition is charged for the wholeyear, if the assets are put to use within first nine monthsof the accounting year. No depreciation is chargedon the assets purchased and/or put to use in the laterthree months of the year. Similarly, no depreciation ischarged in the year in which assets are deleted. Normalrepairs and maintenance are charged to the profit andloss account as and when incurred. Major renewalsand improvements are capitalized. Gain and loss onthe disposal of fixed assets are included in the currentyear’s income statement. The Bank has adopted a policyto charge to profit and loss account by the cost of thefixed assets, if the value of such assets per unit is Rs.one thousand or less.

Grants or donation received on account of capitalexpenditure are recorded as grant assets andcorresponding grant assets reserve are created ascapital reserve. These are amortized over the usefullife of the relevant assets.Liabilities

Liabilities are debts payable in future by the Bankto its depositors, creditors etc. They representeconomic obligation to pay cash or provide goodsor services in some future period. Generally,accepting deposits, borrowing money or purchasinggoods and services on credit creates liabilities.

Foreign Currency Financial Liabilities(i) Deposits from banks and other agencies:

These foreign currency deposits are amountsdeposited by banks and financial institutions, foreigndiplomatic missions and other agencies.

(ii)IMF related liabilities: These include SDRallocation and loan under Poverty Reduction GrowthFacilities (PRGF). SDR allocation is the facilityavailable under IMF quota for the country. Contraentry of this account is SDR holding.

(iii) Other liabilities: These represent thedeposits remaining outstanding in KFW accountand accrued interest payable to ACU and IMFtowards the loan obligations. HMG/N under theeconomic assistance agreement with Germangovernment has undertaken to maintain the KFWaccount. The obligation of the implementation ofagreement under the said loan is of HMG/N andKFW.

Local Currency Financial Liabilities(i) Deposit and other balances: Nepal Rastra

Bank is a banker to the government, banks andfinancial institutions. Deposits and other balancesunder this head consist of balances of HMG/N,deposits from banks and financial institutions, balancesof other institutions, IMF account no 1 and 2, earnestmoney, money changer deposits, margin against LCetc. Deposit liabilities include the amounts depositedby banks and financial institutions to maintain theircash reserve ratio. These deposits are non-interestbearing.

(ii)Bills payable: The Bank carries out thefunction of repayment of government securities andinterest thereon on behalf of the HMG/N. Billpayable primarily represents the unadjusted amountof payments received from HMG/N in respect ofinterest/repayment liabilities of such securities.

(iii) Staff liabilities: The Bank operatescontributory retirement funds for all permanentemployees in which equivalent amount arecontributed by the staff, and other staff retirementfunds and benefit schemes. They are:• Gratuity scheme for employees who worked forfive years or more but less than twenty years;• Staff welfare provident fund scheme;• Staff life insurance scheme;• Staff medical scheme;• Pension scheme for permanent employees having

service period of 20 years or more.

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In order to cover the obligations arising underthese schemes, provisions are made on actual basis,in case of staff welfare and staff medical scheme, &on the basis of reasonable estimate in case of gratuity,pension and staff life insurance scheme. In order tocomply with the International Accounting Standardthe Bank is in the process of determining pensionand gratuity liabilities on the basis of actuarialvaluation.

(iv) Other payables: This heading mostlyincludes excess of insurance premium collected fromstaff relating to house loan, staff loan and vehicleloan for insurance schemes on behalf of staff.

Other Liabilities(i) Currency in circulation: Section 52 (1) of

Nepal Rastra Bank Act, 2002 provides monopolyright to issue bank notes and coins in the kingdomof Nepal, which shall be legal tender in the kingdomof Nepal. Further as per Section 52 (2) “the Bankshall issue notes pursuant to sub-section (1), onlyagainst the security, and the liability of such issuednotes shall be equal to the value of property kept assecurity.” At least 50 percent of the property to bekept as security shall be one or more of gold, silver,foreign currency, foreign securities, foreign bills ofexchange and the remaining percentage shall be oneor more of the coins, government bond.Accordingly, more than ninety percent of theseliabilities are supported by gold, silver, foreigncurrency balance held abroad and foreign securities.And for the remaining, back up has been made bygovernment bonds held by the Bank.

(ii)Sundry liabilities: Sundry liabilities includeexcess of assets over liabilities of projects run byMicro Finance Department, excess of bills lodgedover bills collection, sundry creditors, unclaimed,pension payable, NRB general account etc. NRBgeneral account represents NRB inter officetransactions, and the year-end balances underreconciliation.

(iii) Surplus payable to HMG/N: This is theappropriation of profit to be transferred to HMG/N revenue account, remained after appropriating thestatutory reserve and other reserve as decided bythe board of directors.

EquityThe financial interest of owners is called owners’

equity. The owners’ interest is residual in nature,

reflecting the excess of the firm’s assets over itsliabilities. From the operational result point of view,owners’ equity will increase when the firm makesearnings and whole or part of it is retained in thefirm. If the firm incurs losses, owners claim will godown.

(i) Capital: Nepal Rastra Bank was establishedon April 26, 1956 under the NRB Act, 1955 with thecapital of Rs.10,000 thousand, wholly owned byHMG/N, to discharge the central bankingresponsibilities. During the FY 2001/02 Rs. 2.99billion was capitalized from general reserve and sincethen capital of the Bank has been increased to Rs. 3billion.

(ii)Reserve: Reserve comprises the following:• Statutory reserves (general reserve and monetary

liability reserve)• Capital reserve (gold and silver equalization fund)• Exchange equalization fund• Other reserves and funds (such as development

fund, banking development fund, developmentfinance project mobilization fund, mechanizationfund, scholarship fund, mint development fund,employees’ welfare fund, rural self reliance fund).Reserve funds other than capital reserve (gold

and silver equalization fund) represent appropriationout of the profit, which are statutory as well as specificin nature. All the specific funds are created with theapproval of the board.

The purpose of creating above reserve and fundsare summarized below:

(a) Gold and silver equalization fund: Thisfund is created to comply with the provisionmentioned in Section 41(1) (d) of Nepal Rastra BankAct, 2002.

(b)General reserve: It is a statutory reservecreated and maintained as per the NRB Act, 2002.Section 41(1) (b) of the Act requires that not lessthan ten percent of the net profit should betransferred to this reserve every year. This reservemay be used only to cover the loss sustained by theBank. Further contribution is made to this reserve,where additional budgets for fixed assets, loans andadvances to the staffs are decided.

(c) Monetary liability reserve: It is also astatutory reserve created and maintained as per theNRB Act, 2002. Section 41(1) (a) of the Act requiresthat unless five percent of the total monetary liability(Rs.68.150 billion for the year ended 15 July 2004)

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FINANCIAL MANAGEMENT 89

of the Bank shown in the balance sheet is met, anamount equal to five percent of the net profit shouldbe transferred to this reserve every year. The amountdeposited in the monetary liability fund is used onlyfor the purpose of fulfilling the financial liability ofthe Bank.

(d)Exchange equalization fund: This fundrepresents opening balance of exchange gains orlosses as increased/decreased by appropriation ofnet exchange gains/losses made during the year.

(e) Development fund: This is the specific fundcreated in order to provide support for loans andrefinances to banks and financial institutions as wellas to make investment in the shares and debenturesof these institutions.

(f) Banking Development fund: This fund iscreated to meet the expenses relating to feasibilitysurvey for opening new banks in the priority sector,to provide interest free loans to such banks, tocompensate the losses incurred by those banks forspecified period and expenses relating to bankingpromotion, workshop and seminars etc.

(g)Development finance projectmobilization fund: This fund is created as a cushionto meet the probable loss on project loan. An amountequivalent to the projects’ profit are appropriatedand transferred to this fund.

(h)Mechanization fund: The purpose of thisfund is to meet the amount required for developmentand installation of modern technology, computersoftware, hardware and allied mechanization system.

(i) Scholarship fund: This fund is created as acushion to meet amount required to develop skilledmanpower by way of providing training and higherstudies to the employees of the Bank.

(j) Mint development fund: This fund is createdto meet the heavy capital expenditure required forconstruction of factory building and installation ofmachinery for minting activities.

(k)Employees’ welfare fund: This fund iscreated on FY 1958/59 for the welfare of theemployees who have suffered financial and otherlosses due to unprecedented events and any otherreasons.

(l) Rural self-reliance fund: This fund is createdas per the NRB Monetary policy to meet the fundrequired for long term refinancing in tea, cardamomplantation and production as well as construction ofcold storage etc. to be disbursed through GrameenSwabalamban Kosh.

Grameen Swabalamban Kosh (Rural self reliancefund different from above) was established as aseparate entity on 1st March 1991 to be operated byMicro Finance Department of Nepal Rastra Bank.On 14th March 1991 a Board was formed by cabinetdecision under the chairmanship of DeputyGovernor of the Bank, assigning all the duties,authorities and responsibilities to the board.Accordingly guidelines in this respect were preparedand issued. On the basis of guidelines so issued allthe activities of the GS Kosh (RSRF) has beenoperating by Micro Finance Department.

Contingent LiabilitiesContingent liabilities in respect of letter of credit

(LC) are determined on the basis of LCs remainingun-expired at the balance sheet date after adjustingthere from the margin retained by the Bank. Likewiseclaims not acknowledged as debt consist of legaland other claims pending against the Bank as at closeof the year. No provision is made against such claimsas the Bank is of the opinion that there will be noclaim accruing over the issue and no significantliabilities in respect to these will arise. Counterguarantees are guarantees issued on the basis ofguarantees received from corresponding banks.

Income StatementIncome

1. Income from foreign currency financialassets: This comprises interest income frominvestments in US and Indian government treasurybills; deposits held abroad, SDR holding andcommission received on account of currencyexchange.

2. Income from local currency financialassets: The major sources under this head are interestincome from: - investment in government securitiesincluding secondary market transactions, investmentin financial and other institutions, overdraft togovernment, loans and refinances to banks andfinancial institutions; commission income fromgovernment and other services.

3. Other operating income: The sources ofincome other than above-mentioned income areshown under this head. Income from mint, gain fromsale of precious coins, fine/penalty received, profitfrom sale of investments, dividend income, projectincome, written back of some provisions andliabilities no longer required and miscellaneous income

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NEPAL RASTRA BANK IN FIFTY YEARS90

are the items considered to be the other operatingincome.

Expenses1. Expenses on foreign currency financial

liabilities: This comprises interest expenses towardsSDR allocation, PRGF loan and others, commissionexpenses and service charges.

2. Expenses on local currency financialliabilities: This represents the interest expenses onsecondary market operations and others; commissionpaid and payable to commercial banks for theoperation of government account transactions andothers.

3. Other operating expenses: This includes:staff costs, administrative costs, depreciation,directors’ fees and expenses, note printing charges,mint expenses, security charges, remittance charges,provision on loans, advances and investments,exchange loss and miscellaneous expenses etc.

Staff costs also include some of the funds createdfor the welfare of the staffs, some of which are ofthe nature of retirement fund. They are summarizedas follows:• Provident fund contribution: Provident fundwas created from the very beginning of theestablishment of the Bank. This consists of individualaccounts of each staffs. Ten percent of the salary ofthe staffs is deducted and transferred to this fund.The Bank also contributes a sum of equivalentamount to this fund.• Staff welfare provident fund: This fund alsocontains individual accounts of each staff. Every year12 percent of the salary of each staff along withincentive from profit is transferred to this fund. Theamount accumulated in this fund is again transferredto Retirement Fund for the purpose of obtainingtax benefit as per Income Tax Act, 2002. This fundwas created since FY 1978/79.• Pension and gratuity fund: This fund wascreated on FY 1978/79, to meet the liability towardspension and gratuity payable to the retired staffs.Every year provision is made to this fund on thebasis of reasonable estimate. Effective from FY2004/05 the Bank is in the process to provide theamount on the basis of actuarial valuation to complywith the International Accounting Standard and tomake sure that adequate provision has been made.• Staff life insurance fund: This fund wascreated on FY 1993/94 as retirement fund to be

operated under self-insurance scheme. Every yearnecessary provision is made on the basis ofreasonable estimate considering net present value(NPV) factor. Under the scheme of this fund,the retiring staff, who has completed thirty yearsof continued service, will be entitled to receiveequivalent to five years’ current drawn salary.If his year of service is less than 30 years thenhe wi l l rece ive the reduced amountproportionately.• Staff medical fund: The NRB permanent staffsare entitled to receive a specified amount as medicalbenefit. The Bank has maintained individual accountsof all the staffs and every year the amount sospecified is transferred to this fund.

Foreign exchange gains/(losses): Exchangedifferences are accounted under this heading. Anamount equivalent to the net exchange gain/lossduring the year is transferred to /from exchangeequalization fund.

Prior period adjustments: This primarilyrepresents the impact of accounting adjustmentsmade during the year to record certain entries relatingto prior year period.

Comprehensive Analysis and Interpretationof NRB Financial Statements

Since inception of the bank on 26 April 1956under the NRB Act, 1955 there has been significantimprovement and enhancement in its financialperformance and financial position.

For the purpose of analyzing the activities ofNepal Rastra Bank during last fifty years, total periodunder review has been broken down into five distinctdecades.

First Decade (1956/57- 1965/66)Profit

In the year of establishment in FY 1956/57, totalincome and expenditure of NRB recorded at Rs.326thousand and Rs.321 thousand respectively generatingnet profit of Rs.5 thousand, which was transferredto HMG/N revenue account by way ofappropriation.

At the end of first decade of establishment ofNepal Rastra Bank on FY 1965/66 total income andexpenditure increased significantly, which stood atRs.19,789 thousand and Rs. 4,465 thousandrespectively resulting a net profit of Rs.15,324thousand.

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FINANCIAL MANAGEMENT 91

During the first decade, cumulative total incomeand expenditure amounted to Rs.63,200 thousandand Rs.20,936 thousand respectively generatingcumulative net profit of Rs.42,264 thousand. Of thetotal profit, Rs. 15,000 thousand were transferred toGeneral reserve, Rs.12,500 thousand to developmentfund, Rs. 5,824 thousand to other funds such asagricultural credit and industrial credit fund andbalance Rs.8,940 thousand had been transferred toHMG/N revenue account. Annual average income,expenditure, net profit were recorded at Rs. 6320thousand, Rs. 2094 thousand and 4226 thousandrespectively. Similarly, annual average of profitappropriation to General reserve, development fund,other fund and transferred to HMG/N were Rs.1500 thousand (35 percent), Rs. 1250 thousand (30percent), Rs. 582 thousand (14 percent) and Rs.894thousand (21 percent) respectively.

Total Assets, Liabilities and EquityTotal assets and liabilities of NRB as at mid-July

1957 amounted to Rs. 105,500 thousand. Of the totalassets the share of foreign assets and domestic assetswere Rs.30,700 thousand (29 percent) and Rs. 74,800thousand (71 percent) respectively. Of the totalliabilities, notes in circulation occupied largest shareof Rs. 54,900 thousand (52 percent), deposits andother banking liabilities occupied Rs. 40,600 thousand(38 percent) and equity (capital and reserve fund)occupied Rs. 10,000 thousand (10 percent).

At the end of first decade as at mid-July 1966total assets and liabilities increased significantly by 470percent, which amounted to Rs. 601,123 thousand.Of the total assets of NRB the share of foreignassets, including gold and silver, foreign currency,foreign bank balances, foreign securities, and foreignbills were 63 percent. Similarly, the shares of domesticassets, which represent cash balances, loans andadvances, investments and other assets were 37percent. Of the total liabilities the shares of notes incirculation was 58 percent, deposits, bills payable andother liabilities 36 percent and equity 6 percent.

Second Decade (1966/67- 1975/76)Profit

Cumulative total income and expenditure duringthe period of second decade amounted to Rs.670,089 thousand and Rs.186,795 thousandrespectively generating cumulative net profit of Rs.483,294 thousand. The annual average of income,

expenditure and net profit were Rs. 67009 thousand,Rs. 18680 thousand and 48329 thousand respectively.Compared to the preceding decade, income,expenditure and net profit were increased significantlyby 960 percent, 792 percent, and 1035 percentrespectively in this decade.

The main sources of income were interest income,commission, discount and miscellaneous. On theexpenditure side, salaries and allowances, security,note-printing expenditure, agency expenditure wasthe major heading. In this second decade, Rs.320,505thousand (66 percent of cumulative net profitRs.483,294 thousand) was allocated as dividend toHMG/N. Similarly, during the decade, profitappropriation to general reserve, development fundsand other funds were Rs.29,789 thousand (6 percent),Rs.123,900 thousand (26 percent) and 9100 thousand(2 percent) respectively.

Total Assets, Liabilities and EquityAt the end of second decade as at mid-July 1976

total assets and liabilities increased significantly by 303percent, which amounted to Rs. 2,422,882 thousand.Of the total assets of NRB the share of foreignassets (including gold and silver), foreign currency,foreign bank balances, foreign securities, and foreignbills were Rs. 1,276,760 thousand (53 percent).Similarly, the shares of local currency assets, whichrepresent cash balances, loans and advances,investments and other assets, were Rs.1,146,122thousand (47 percent). Of the total liabilities theshares of notes in circulation was Rs. 1,000,000thousand (41 percent), deposits, bills payable andother liabilities Rs. 1,044,892 thousand (43 percent)and equity Rs.377,990 thousand (16 percent).

Third Decade (1976/77- 1985/86)Profit

Cumulative total income and expenditure duringthe third decade amounted to Rs.2,745,752 thousandand Rs.1,003,696 thousand respectively generating netprofit of Rs1,742,056 thousand. Annual average ofwhich were Rs. 274,575 thousand, Rs. 100,370thousand and 174,205 thousand respectively.Compared to the preceding decade, income,expenditure and net profit were increased significantlyby 310 percent, 437 percent, and 260 percentrespectively in the review decade.

The main sources of income were interest income,commission, discount and miscellaneous. On the

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NEPAL RASTRA BANK IN FIFTY YEARS92

expenditure side, salaries and allowances, security,note-printing expenditure, agency expenditure wasthe major heading. During this third decade, total ofRs.856,750 thousand (49 percent of cumulative netprofit Rs.1,742,056 thousand) was allocated asdividend to HMG/N. Similarly, during the decade,profit appropriation to general reserve, developmentfunds and other funds were Rs.142,500 thousand (8percent), Rs.669,356 thousand (39 percent) andRs.73,450 thousand (4 percent) respectively.

Total Assets, Liabilities and EquityAt the end of the third decade as at mid-July 1986

total assets and liabilities increased significantly by 367percent, which amounted to Rs. 11,324,205 thousand.Of the total assets, the share of foreign assets (includinggold and silver), foreign currency, foreign bank balances,foreign securities, and foreign bills were Rs. 3,780,844thousand (33 percent). Similarly, In the case of localcurrency assets, which represent cash balances, loansand advances, investments and other assets, the sharepercentage was Rs.7,543,361 thousand (67 percent).Of the total liabilities the shares of notes in circulationwas Rs. 5,180,000 thousand (46 percent), deposits, billspayable and other liabilities Rs. 3,496,588 thousand(31 percent) and equity Rs.2,647,617 thousand (23percent).

Fourth Decade (1986/87- 1995/96)Profit

Cumulative total income and expenditure duringthe fourth decade amounted to Rs.16,626,524thousand and Rs.4,628,299 thousand respectivelygenerating cumulative net profit of Rs 11,998,225thousand. Annual average of income, expenditureand net profit for the decade were Rs. 1,662,652thousand, Rs. 462,830 thousand and 1,199,823thousand respectively. Compared to the precedingdecade, income, expenditure and net profit wereincreased significantly by 506 percent, 361 percent,and 589 percent respectively in this fourth decade.

The main sources of income for this decade alsowere interest income, commission, discount andmiscellaneous and the main headings of expenditureswere salaries and allowances, security, note-printingexpenditure, agency expenditure. during this decade,Rs.6,438,025 thousand (54 percent of cumulative netprofit of Rs.11,998,225 thousand) was allocated asdividend to HMG/N. Similarly, during the decade,profit appropriation to general reserve, development

funds and other funds were Rs.1,302,500 thousand(11 percent), Rs.3,346,500 thousand (28 percent) andRs.911,200 thousand (7 percent) respectively. Otherfunds represent mainly the staff welfare providentfund and pension and gratuity fund.

Total Assets, Liabilities and EquityAt the end of the fourth decade as at mid-July

1996 total assets and liabilities increased significantlyby 450 percent and total amounted to Rs. 62,289,963thousand. Out of the total assets, the share of foreignassets (including gold and silver), foreign currency,foreign bank balances, foreign securities, and foreignbills were Rs. 34,699,707 thousand (56 percent).Similarly, the shares of local currency assets, whichrepresent cash balances, loans and advances,investments and other assets, were Rs.27,590,256thousand (44 percent). Of the total liabilities theshares of notes in circulation was Rs. 27,457,210thousand (44 percent), deposits, bills payable andother liabilities Rs. 18,904,067 thousand (30 percent)and equity Rs.15,928,686 thousand (26 percent).

Fifth Decade (1996/97- 2003/04Currently, Nepal Rastra Bank is celebrating its

Golden Jubilee Year on the historic occasion of 50years of its establishment.

ProfitCumulative total income and expenditure during

the fifth decade (for the last eight years) amountedto Rs.35,100,167 thousand and Rs.14,078,361thousand respectively generating cumulative net profitof Rs 21,021,806 thousand. Annual average ofincome, expenditure and net profit for the above-mentioned period were Rs. 4,387,521 thousand, Rs.1,759,795 thousand and 2,627,726 thousandrespectively. Compared to the preceding decade,income, expenditure and net profit were increasedmaterially by 111 percent, 204 percent, and 75 percentrespectively during last eight years. Accountingtreatment for exchange differences (gains or losses)is changed during the FY 2003/04 as such differencesduring the year are taken to the income statementand an equivalent amount so taken in the incomestatement is transferred to exchange equalization fundinstead of previous practice of effecting exchangeequalization fund directly. Due to this treatmentincome has been increased by Rs.1,378,644 thousandduring the FY 2003/04 compared to the previousFY 2002/03.

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FINANCIAL MANAGEMENT 93

The main sources of income for the period areinterest income, commission, discount andmiscellaneous and on expenditure side, salaries andallowances, security, note-printing expenditure, agencyexpenditure. In the review decade Rs.12,920,027thousand (61 percent of cumulative net profit ofRs.21,021,806 thousand) was allocated as dividendto HMG/N. Similarly, during the decade, profitappropriation to general reserve, development fundsand other funds were Rs.2,947,400 thousand (14percent), Rs.2,552,534 thousand (13 percent) andRs.2,601,845 thousand (12 percent) respectively. Otherfunds represent mainly the staff welfare providentfund and pension and gratuity fund.

Total Assets, Liabilities and EquityCompared to mid July 1996, total assets and

liabilities as at mid-July 2004 increased significantly by218 percent, which amounted to Rs. 142,388,993

thousand. Of the total assets, the share of foreignassets, including gold and silver reserve, foreigncurrency, foreign bank balances, foreign securities, andforeign bills were Rs. 109,539,559 thousand (77percent). Similarly, the shares of local currency assets,which represent cash balances, loans and advances,investments and other assets, were Rs. 34,140,501thousand (23 percent). Out of the total liabilities theshares of notes in circulation was Rs. 68150000thousand (48 percent), deposits, bills payable and otherliabilities Rs. 42,245,025 thousand (30 percent) andequity Rs.31,993,968 thousand (22 percent).

Sources and Application of FinancialResources of the Bank

(For Last Two audited Years)Major sources and utilization of funds of the bank

for last two audited years is as follows:

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Foreign Currency Fin. Assets 108,248,492 76.02 87,077,475 69.70

Local Currency Fin. Assets 31,829,969 22.35 35,242,413 28.21

Other Assets 2,310,532 1.62 2,617,211 2.09

Total 142,388,993 100.00 124,937,099 100.0

Liabilities 2060/61 % 2059/60 %

Foreign Currency Fin. Liabilities 2,068,181 1.45 1,596,089 1.28

Local Currency Fin. Liabilities 38,324,179 26.92 29,221,655 23.39

Other Liabilities 70,002,665 49.16 63,875,902 51.13

Equity 31,993,968 22.47 30,243,451 24.21

Total 142,388,993 100.00 124,937,097 100.00

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NEPAL RASTRA BANK IN FIFTY YEARS94

During the last two audited years, the totalmobilization of fund has been increased by 13.96%and the total figure has reached to Rs142.39 billion.Major contribution for the resource side is from‘Other Liabilities’ and ‘Local Currency FinancialLiabilities and major application of the fund is to‘Foreign Currency Financial Assets’ and to ‘LocalCurrency Financial Assets’. The percentage share ofinvestment in foreign currency financial assets hasincreased in the last year (FY 2060/61) comparingto previous year (FY 2059/ 60).

Appropriation of Net Income(For last two audited years)

Rs ‘000

Appropriation 2060/61 % 2059/60 %

General Reserve 178,400 11.35 149,500 10.52Monetary Liability Reserve 78,600 5.00 74,800 5.26Development Fund 27,100 1.72 11,543 0.81Dev. Fin. projects Mob. Fund 9,173 0.58 10,300 0.72Gramin Swabalamban Kosh 78,600 5.00 74,800 5.26Balanced Trans. to HMG/N 1,200,027 76.34 1,100,000 77.41

Total 1,571,900 100.00 1,420,943 100.00

Out of the total fund of Rs1,571,900 thousandavailable for appropriation in the FY 2060/ 61, bankhas appropriated Rs1,200,027 thousand to thegovernment, which comes to be 76.34% of the totalavailable figure. In the previous year, the totalcontribution to the government was Rs. 1,100,000thousand (77.41%)

Key Financial Ratios(For Last Two Audited Years)Some of the major analytical tools for financialstatement have indicated following situation of thebank:Liquidity:

Current Assets (Assets bearingmaturity of up to 1 year)

Current Liabilities (Liabilities havingmaturity of up to 1 year)

FY 2059/60 FY2060/61N/A 1.20

Brief IndicationBank is in comfortable position to meet

obligation arising out of liabilities having maturityof 1 year or less.

Asset ManagementTotal Assets Turnover = Gross Income/Total

AssetsFY 2059/60 FY2060/61

0.0358 0.0312

Brief IndicationThe ratio between gross income and total assets

is fairly low mainly because of heavy amount oftotal assets portfolio.

Debt Managemen Total Interest Bearing Liabilities

Total Assets

FY 2059/60 FY2060/61N/A 0.0257

Brief IndicationThe percentage total of total interest bearing

liabilities in comparison to total assets is almostnegligible.Profitability

Net Profit for the YearTotal Assets

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FINANCIAL MANAGEMENT 95

FY 2059/60 FY2060/611.14% 1.10%

Brief IndicationThough the volume of total net profit has gone

up 10.63%, lesser percentage of net profit has beenaccounted for the last year.

Return on Equity (ROE) = Appropriation madeto General Reserve plus the balance amounttransferred to Government/Equity Fund

FY 2059/60 FY2060/614.13% 4.31%

Brief IndicationThe stakeholder has received increased percentage

of return of 4.31% during last audited year.

Major Problems and ChallengesFrom the financial, accounting and related

operational perspective, Nepal Rastra Bank is facingthe following problems:• System: In most of the areas, such as in MIS

system, internal control, internal audit andcorporate governance the proper system has notyet been developed.

• People: Although most of the employees havelong service record, yet professional and technicalexpertise is not up to international standard.

• Equipment: Information systems, hardware andsoftware are not in tune with strenuousrequirements of a Central Bank.

• Concept: Certain conceptual issues relating to-accrual accounting, measurement, valuation ofassets and liabilities, account reconciliation, taxationmatters etc have not been carried out.Some of the major issues identified in respect of

NRB financial management have been categorizedas follows:• Presentation and disclosure: More transparent

presentation and disclosure in financial statementis required in the area of compliance withaccounting standards, quality of assets,classification of assets and liabilities and incomeand expenditure, composition of foreign currencyassets and liabilities, local currency assets andliabilities, maturity profile of assets and liabilitiesetc.

• Recognition and measurement: Thecompliance requirement of InternationalAccounting Standards (IAS) in respect of

recognition of income, expenses, assets andliabilities, provisioning based on objectiveassessment are still outstanding as major issues.

• Valuation and estimation: Some of the issuesto be systematically carried out in this area are: -year-end adjustments, accruals, estimation ofliabilities, actuarial valuation of retirement benefitsscheme, fair valuation of financial assets andfinancial liabilities etc.

• Systems, control, procedures, records anddetails: completeness, correctness, existence andquality of relevant transactions; documentationwith respect to physical verification of variousassets evidencing the existence and quality ofassets, procedural weaknesses in the operationsare some of the issues to be handled.

• Compliances: Some of the provisions of theNRB Act, 2002 have not yet been fully consideredand therefore, remained to be a major issue.In the exclusive context of Nepal Rastra Bank,

the above-mentioned problems and challenges mayfurther be stated as below:

Compliance with International AccountingStandards/IFRS

Nepal Rastra Bank is continually striving to adhereand comply the requirements of IAS. The NRB Actitself has also provided that the bank will follow theinternational accounting practices. Though lots ofissues are already addressed in this regard, but stillmany more are to be covered. Consultants fromabroad and international auditors have also pointedout this focal area specially. There are certain areaswhere the requirement could not be fulfilled becauseof the legal or technical ground. It is now decidedthat a special task force will be formed to look intothese requirement issues.

Need of Integrated and IndependentAccounting Package

Financial Management Department (FMD) hasbeen preparing financial statements based on generalprogram as available in computer. Thecomputerization process in the department is notcomplete. Information is available through networking but they are further processed on separatespreadsheet. Even minor modification etc needs togo through Information Technology Department(ITD). Consequently, FMD is dependent to otherdepartment for its own exclusive job. There is urgent

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need of complete and integrated accounting packagefor the department.

Continuos Up-gradation of Accounting ManualThe present accounting manual, which the

department has, was prepared around 4 years ago.So many changes in the practical field have sincebeen taken place and it is felt necessary now thatthere should be continuous revision and updatingin this manual. It is noticed that some of theaccounting heads are just become redundant andsome new accounting heads are urgently required.The process of updating of manual requiresinvolvement of expert individuals and also requiresadjustments on IT networking. This particular issueis also therefore needs special attention to be takencare of.

Lack of Trained ManpowerAccounting is specialized issue and needs special

expertise and professional knowledge. Continuousorientation and training in this particular professionis utmost required. Some professional staff arerecently places at the FMD. However, most of theother staffs are to be given extensive and suitabletraining. The more exposure there is, the moreadvantageous it would be for the department andthereby for the organization. Perfect coordinationwith other concerned departments is required tolaunch extensive training program.

Co-Operation from Other Accounting CentersThe final preparation of financial statements

requires supply of information from variousdesignated locations. Non-availability of informationeven from one of the accounting centers hinders thecomplete process of compilation of accountingfigures. On other hand, such financial statements areto be prepared in time bound manner. People eitherdo not understand the urgency or simply underminethe situation. Some of other people do comply withtiming requirements but the information supplied isfound to be incomplete or incorrect. All suchcircumstances have led to late preparation of financialstatements and thus have affected overall efficiencyof the department.

Corrective Actions to manage theChallenges

The department has initiated following correctiveactions to manage the challenges being faced by it:

• Recommendations from internationalexperts: Frequent visits are being made by expertsand special auditors in the department inconnection with compliance of accountingstandards. Department will seriously endeavor toincorporate the suggestions received from suchinternational experts and auditors.

• Coordination with IT Department: Forimplementing an integrated accounting package,continuous coordination and consultation with ITDepartment will be carried out. Being a highlytechnical issue, there will be a special teamrepresenting all concerned departments along withexperts as and when necessary.

• Upgrading of accounting manual: Upgradingaccounting manual is a continuous process. Itrequires high level of expertise and commitments.It is already decided that this special function willbe carried out through special task force formedwithin department and few other experts withinthe bank. Department will also welcome theoutside expertise on the subject.

• Help of Expert Committee: Department hasgot privilege of having expert advice from teamof expert professionals within and outside thedepartment of the bank. The team is available asand when department has requested for adviceon the conflicting and complicated issues. Theexpert advice from the committee would be ofgreat help to resolve any upcoming challenges.

• Orientation tour to concerned accountingcenters/offices: Visiting of accounting centers/offices would always be of great advantageousto understand the real problems being faced onthe ground level. It will also help to clear confusionon the spot itself and instantly too. Consideringthese facts, the department has incorporatedprogram of visiting to related offices at least oncein the year and interact with the concerned staffsfor instant solution of the accounting problem.

• Developing follow up measures for timelycompilation of accounting records: It isnoticed that all accounting centers remainextremely busy at the time of financial closing.They have to prepare and timely submit loads offinancial and other information at around sametime. To avoid the jamming situation at the financialclosing and get all required data on timely basis,the department has arranged for the regular follow

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up and monitoring system. Department will issuereminder notice on regular basis to all concernedand will have timely preparation of financialstatements.

Future AgendaThe financial management of Nepal Rastra Bank

has always remained a great challenge to allconcerned. Huge amount of responsibility is attachedwith the management of financial resources of thebank. Whereas compliance and transparency is to bemaintained in the preparation and presentation ofthe financial statements, practical difficulties andtechnical reasons also need to be addressed.Considering all core aspects of the subject, the overallfuture agenda of the bank is founded upon the mainobjective of ensuring effective, efficient and modernfinancial management system in the bank. To attainsuch comprehensive goal, major strategies likeadhering prudent policies and practices onmanagement of financial resources, ensuringcompliance with International Financial ReportingStandards (IFRS), developing integrated andindependent accounting package, ensuringtransparent and accountable financial discipline etcare ahead to consider.

ConclusionManagement of financial resources of an

institution is comprehensive issue. Almost allmanagerial decisions do have financial impact and inthat sense constructive involvement and positivesupport of all concerned is indispensable formanaging the financial resources successfully.Efficient, effective, disciplined and transparentfinancial system is prerequisite for organizationalhealth and growth. Smooth functioning of anorganization could be guaranteed only with properand working financial system in place.

Financially, Nepal Rastra Bank has come long waysince its inception 50 years ago. Financial figures have

grown up tremendously and the capital base includingof reserves have reached almost Rs 32 billions. Itstotal asset base is running around hundreds of billionsof Rupees. Being a central bank of the country andbanker to the government, it is entrusted with thegovernment treasury and in the recent years, it hasalso been able to contribute to government exchequerbillions of Rupees annually. Substantial amount isbeing allocated for the welfare and development ofhuman resources in the organization.Problems and challenges for effectiveimplementation of proper financial system willalways be there. Basic vision and mission ofmanagerial issue of financial resources should notbe blurred by those problems. In fact, many of thosechallenges could just be translated into opportunities.Bank has already initiated some preliminary exercisesand adopted rectifying measures for bringing the issueon the track. On the happy and auspicious occasionof 50 years of establishment, it can be reasonably beexpected that there will be a desired level of financialsystem in place.

ReferencesThe Essential Managerial Finance Eleventh Edition,

1996The Dryden Press,301 Commerce StreetFortWorthTX76102 J Fred Weston, Universityof CaliforniaScott Besley, University of SouthFloridaEugene F Brigham, University ofFlorida

Financial ManagementTenth Edition, 1988ChaitanyaPublishing House, Allahabad,211002 S CKuchhalIndian Institute ofManagementAllahabad

Financial ManagementFourth Edition, 1984VikasPublishing House Pvt LtdNew Delhi, 110002 IM PandeyIndian Institute ofManagementAllahabad

Nepal Rastra Bank Act 2002Audited Financial Statements of Nepal Rastra

Bank(1956 to 2004)

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Information TechnologyParbat K. Karki, Deputy Director

Saurabh D. Manandhar, Computer EngineerIT Department

IntroductionInformation technology (IT)

may be defined as theautomation of processes,controls, and informationproduction using computers,telecommunications, software,and ancillary equipments. In otherwords, IT is a term that coversall forms of technology used tocreate, store, transmit, interpret,and manipulate information in its various forms. Today,the rapid developments in Communication Technologyand its wide spread acceptance in IT sector has madecommunication technology an integral part of IT, thusgiving rise to the concept of Information andCommunication Technology (ICT). ICT products andservices have enabled firms, organizations, and individualsto conduct their business transactions more efficiently andmore rapidly.

ICT is one of the fastest growing fields in the worldand has found its place in almost all fields. Therefore, ithas become a way of life for everybody and, in effect,has taken deep roots in the society. Not only ICTinfrastructure has changed rapidly over the past decade,but also its cost of ownership has decreased very fast.

Banking industry is one of the foremost users ofIT. Technological innovation in general, and ITapplications in particular, have had a major effect inbanking. IT has helped banks to enhance operationalefficiency, intensify business and provide better

customer service withreduced cost of operations.With the advances in IT, thenature of banking has alsochanged and banks are ableto serve customers outsidethe bank’s hall. Furthermore,electronic banking isbecoming more popular dayby day.

Information Technologygives value benefits to central banks. It provides onlineaccess to data on financial markets and sophisticatedmechanism to analyze information for decision andpolicymaking. It enables coordinated action acrossbanks and financial institutions being supervised. Itcan also facilitate improvement of currencymanagement function, monitoring effectiveness ofmonetary policy initiatives, effective open marketoperations and better banking service to thegovernment.

Nepalese banking industry, in general, is a lateadopter of modern IT infrastructure. Although thenew private and joint venture banks are reasonablyusing IT to enhance their businesses since theirinception, the two oldest commercial banks ofNepal, which still holds major share of bankingbusiness, are lagging far behind in applying IT.Similarly, Nepal Rastra Bank (NRB) has also not beenable to reap the full benefits of IT compared tocentral banks in other parts of the globe.

Mr. Karki Mr. Manandhar

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This article discusses the development of IT andits adoption in banking industry from an historicalperspective. As electronic banking is becoming morepopular today, various products and services ofelectronic banking that are very common in the marketplace are also briefly described in this article. Moreover,the article reviews the existing IT infrastructure at NepalRastra Bank and points out future needs. Finally, thisarticle depicts anticipated major outputs of ongoingIT reengineering project in the Bank.

Historical Development of InformationTechnology1

Whether we knew it as computers or not,computing devices were known to mankind sincethe prehistoric era. The Greeks used pebbles andstones for counting and simple arithmetic severalcenturies before Christ. The Babylonians had inventedabacus in 3000 BC, and the Chinese were known touse them extensively. But, more obvious computingdevice did not appear before complex mathematicaloperations were defined. One of the first computingdevice was the Napier Bones, devised by John Napierin 1612, to aid in the calculation of logarithm andmultiplication. The first known design of a mechanicalcalculator is attritubed to Prof. Wilhelm Schickard in1623. Because no proof exists that it was built, thePascaline, built by Blaisé Pascal in 1642 is consideredthe first automatic adding machine.

In 1822, Charles Babbage built his famousDifference Engine which was operated by punchedcards similar to the ones developed by Joseph-MarieJacquard for programmable looms, and printed theresults in paper. Later in 1834, Babbage designed acompletely different machine with faster performanceand more possibilities than the Difference Engine andcalled it the Analytical Engine. It was one of the firstdesigns that had four basic units: the Input Unit, theArithmetic and Logic Unit (ALU), the Centralcontroller and the Output Unit. All of these units arestill used in modern computers. Though Babbage nevercompleted his Analytical Engine, he laid foundationto modern day general purpose digital computers andhence earned the title “Father of Computers”. LadyAda Augusta Lovelace, working with Babbage,described the future possibilities of a computer alongwith a program to calculate Bernoulli numbers amathematical irregular sequence used mostly tocalculate the sum of squares of whole numbers, andthus she is regarded as the first computer programmer.

Simultaneous to development of computers,telecommunications also saw a lot of research. Trans-Atlantic telegraph was already operational by 1856.Alexander Graham Bell patented telephone in 1876.Telephone communication became so popular thatwithin a decade, AT&T started its own privatetelephone service and by 1896, automatic switchingequipments and dial telephones were operational.

To crack the code of the German encipheringand deciphering machine called Enigma, British SecretService hired a team of scientists to build a machinein 1939. Upon completion in 1943, it was christenedCOLOSSUS . But because the project was classifieduntil recently, the first electronic computer wasconsidered to be ENIAC (Electronic NumericalIntegrator and Computer). It was developed in 1946for the US Army to compute the trajectory tablesfor their guns and used vacuum tube technology thatwas invented and patented in 1904.

At AT&T Bell labs, the transistor was inventedby Walter Brattain, William Shockley and JohnBardeen in 1947, for which earned them their NobelPrize in 1956. Development of the transistor led toinvention of Integrated Circuits (IC). Thisdevelopment resulted in very rapid growth in theInformation and Communication Sector. AdvancedResearch Projects Agency (ARPA) of USDepartment of Defense understood the importanceof communication during wartime, and financed anexperimental Wide Area Network (WAN) setupcalled ARPAnet in 1966. This network was designedto survive a nuclear attack and provide un-interrupted communication lines, even if part ofnetwork went down. The initial ARPAnet setup wascompleted in 1969 consisted of four computersystems in University of California in Santa Barbara,University of California in Los Angeles, Universityof Utah in Salt Lake City, and Stanford ResearchInstitute. For next 20 years a host of experimentswent on this network, primarily by universities andresearch organizations, but was not available to thepublic. Many of these research resulted in high valueproducts like E-mail (developed in 1972). To fulfillARPAnet’s design goal of having many systems withmutually incompatible architecture talking with oneanother, work started on Transmission ControlProtocol (TCP), to ensure flawless communicationswithout the use of any Intermediary MessageProcessors (IMP). In 1978, Xerox Corporation

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implemented the Internet Protocol (IP). Since then,the protocol suite has been known as TCP/IP,although many other protocols also run on the samenetwork.

Ted Codd, at International Business Machines(IBM), described the Theory of Relational DatabaseManagement System (RDBMS) in 1970. But the firstcomputer based Database Management System(DBMS) was Integrated Data Store (IDS), developedby General Electric (GE) in 1959 that became thebasis for Network Data Model. Likewise IBM hadInformation Management System (IMS) which wasthe basis for Hierarchical Database Model. AfterCodd’s work, several query languages started toappear, notable among them are SQUARE, SEQUEL(SQL), QBE and QUEL. In the 1980’s, commercialRDBMS like Oracle, DB2, Sybase, Informix etc. andDBMS for personal computers like Dbase andParadox started emerced. The 1990’s saw first ObjectOriented DBMS, as well as possibility of usingMassively Parallel Processing systems.

In 1971, Intel released 4004 processor and was soonreplaced by Intel 8008 microprocessor. By 1974, IBMhad introduced 8080. It could address 64 KB memoryaddresses and had 6000 transistors. The following year,Intel introduced 8088 processor. It was very similar to8086, except that it had a 32 bit internal data bus width.An entirely new 32 bit processor in the form of Intel80386 was announced in 1985. Later in 1993, Intelintroduced the first of its Pentium class processor: theIntel Pentium processor. This processor was succeededby Pentium II, Pentium III and Pentium IV processorsfor Desktop and Pentium Pro, Pentium II Xeon, PentiumIII Xeon and Xeon processor for Servers.

The year 1975 saw the foundation of MicrosoftIncorporated by Bill Gates and Paul Allen. This waslater renamed as Microsoft Corporation, it hadbought QDOS and released it as Microsoft DiskOperating System (MSDOS). In 1985, it releasedWindows 1.0. Windows 3.0, released in 1990, wasthe first Operating System (OS) from Microsoft, towork on both Intel 80286 and 80386 processor. In1995, Microsoft released a completely new operatingsystem – Microsoft Windows 95. With this OS,Microsoft left the line of text-based OS to andmoved graphical OS. This family of OS continuedwith MS Windows 98 and Windows ME. Around2001, Microsoft released Windows 2000 that wasbased on Windows NT, and later replaced by

Windows XP. Apart from OS, Microsoft has a rangeof software including Office packages, Programmingtools and System tools among other software.

In 1981, IBM released IBM PC with 4.77 MHz 8bit 8088 processor, 64 KB RAM, 40 KB ROM andone 5.25 inch Floppy disk with 160 KB capacity. In1976 Seymour Cray released Cray 1, the first commercialsupercomputer to break 1 MIPS. IBM later createdDeep Blue, the first supercomputer to defeat a chessGrand Master.

After ARPA and National Science Foundation (NSF)successfully developed a crash proof network namedNSFNET in 1989 and all ARPA sites of ARPAnet weretransferred to NSFNET, ARPAnet was reinvented asInternet. It’s primarily use was for scientific researchand communication between the scientists andprofessors. One of those scientists, Tim Berners Lee,of CERN, the high energy physics lab in Switzerland,developed hypertext markup language (HTML) to helpwith the distributed nature of this information. Thislanguage enabled non-linear document navigation andensured ease of retrieval. A year later, World Wide Web(WWW) was officially announced. .

One of the milestones in the development ofthis network is the release in 1991 of a free operatingsystem conforming to UNIX standards called Linuxby Linus Torvalds. His little personal project gainedglobal momentum and with contributions by manyacross the globe, it became one of the most successfulOperating System.

The last decade of 20th century saw an explosivegrowth in the usage of computing devices. The cut-throat competition between PC manufacturers,reduction in size and cost, the Internet boom etc.contributed to high penetration of PC’s. Many aspectsof life were digitized. This development intechnology and price-war has certainly helped theconsumer, with ever more powerful devices releasedat ever cheaper price.

Most of the computing technologies in late 1990’swere direct derivative of technology of the 1970’sand 1980’s. Because of the technological and financialrestriction, the computers of those days stored onlythe last two digits of year. As the year 2000 arrived,people started worrying that computers would transitfrom 31 December 1999, 23:59 to 1 January 1900,00:00. All calculations involving time would be offby a century and there was a high probability that thewhole economy could go down. This became

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famous as the Millennium Bug or the Y2K bug. Butbecause companies and governments took adequatemeasures, no serious accidents occurred.Information Technology in BankingIndustry: a historical review2

Banking has come a long way from the time ofledger cards to today’s electronic systems whichhandle their daily tasks of information retrieval,storage and processing. Computer has been anestablished tool for achieving a competitive edge andoptimal resource allocation for banks. This sectionof the article summarizes the IT-based innovationsin banking industry from a historical perspective andhighlights on electronic banking.

The adoption of technology in the bankingindustry had begun with the introduction oftelecommunications into banking market in 1846when the telegraph reduced stock price differentialsbetween New York and regional stock markets. Butthe methods of conducting transactions betweencustomers and bank remained largely the same.

During the late 1930s, the tabulating and punch-hole‘accounting’ machines started to be used. However,the potential of these machines as mechanisms forrecording and updating transactions were not fullyexploited until after the late 1940s and early 1950s.

In the late 1950s to the late 1960s, banks startedto introduce computers, mostly IBM, Xerox andBurroughs (later Univac and Unisys) machines, tokeep up with the growth in business volume and toautomate existing practices of specific departments.Manufacturers responded quickly to the demand forhardware but failed to make much concession tousers’ software requirements and forced userorganizations to develop their own system until high-level programming languages emerged.

The typical financial sector computer installationof the time consisted of a central mainframededicated to sequential batch processing of computerreadable instructions dealing with separate processes.Computer applications were therefore concentratedon back-office operations. During this period, thefirst IT applications in the bank-client transactionswere introduced. Enhanced computer powerallowed banks to process the growing volume ofpaper-based transactions in central locations.

During 1965 to 1980, advances in ICT madebanks one of the world’s dominant customers for

computer hardware and software. The firstAutomated Teller Machine (ATM) was introducedby Barclays Bank (UK) in 1967, while IBMintroduced the magnetic stripe plastic cards in 1969.Together, these innovations marked the birth ofelectronic banking.

Management Information Systems (MIS) was alsointroduced during this period. These systems initiallyaimed to use the computational power oftransaction-processing capabilities to provide regularreports and analyses of business activity. MIS offeredmanagers of banks the possibility to increase thescope for monitoring, controlling and planning ofoperational procedures.

The period from 1980 onwards can be taken asthe diffusion period of the information revolution inbanking industry. This period saw the spread, withinorganized markets, of new and powerful applicationswhich developed to handle the security required byhigh-volume payments. IT-related change becamecritical to support unprecedented increase in the speed,quantity and quality of information about cross-bordertransactions in organized markets. During the diffusionperiod, the information revolution in commercialbanking saw the spread of IT to all aspects of banks’internal organization and market relationships due tothe introduction of personal computers (PCs) in clericaland managerial roles. During this period, consumer-oriented innovations were widespread as IT providedsupport to all transactions between customers andbanks. PCs offered a flexible way of providing andenhancing electronic resources for a wide range ofapplications while packaged software reduced in-house resources required for the development ofgeneral application systems.

The technical innovations on banks have greatlyhelped enhance distribution capabilities. Branchnetwork has been reduced due to point-of-sale andATMs for financial services, facilitated by the adventof digital communications technologies. Cardtechnology evolved to provide individual customerswith borderless services. Moreover, many newelectronic distribution channels allowed banks tosupply more services at lower cost. IT developmentsnow have augmented the range of financial servicesand product availability.

Today, IT is considered as an imperative toolfor banking industry, irrespective of the initialinvestment and subsequent recurrent costs. Banks

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are required to handle huge amount of informationon a daily basis. On the customer’s side, cash iswithdrawn or deposited, cheques are deposited orcleared, statement of accounts are produced, etc.At the same time, banks need up-to-dateinformation on accounts, credit facilities, interest,deposits, charges, income, profitability indices andother financial control information. IT in general,and computers in particular, can help meet thisinformation need. Furthermore, IT could help toenhance operational efficiency, provide improvedcustomer service, achieve accurate and timelybookkeeping and institute improved controls andaccountability. The introduction of computer basedMIS minimizes staffing requirements. Financialanalysis and statistical research, including modelingof portfolios and securities, formulation ofinvestment approaches, and market trend analysis,can be undertaken with much greater efficiency andspeed through the usage of IT.

The effectiveness of IT is dependent upon properinvestment and effective management of ITinfrastructure such as hardware, software,networking etc. Banking software can also bedescribed as the heart and soul of a bank’s ITinfrastructure. Nevertheless, having a good bankingsoftware may be of little value if hardware isinadequate to meet needs. Likewise, networking isalso equally important.

This article does not attempt to describe the finest ITinfrastructure (various hardware, software, networking,communications solutions) suited for the effectiveautomation of banking business. However, realizing thefact that electronic banking, today, is fundamentallychanging the banking industry worldwide, an attempt ismade here to elucidate electronic banking briefly.

Electronic BankingElectronic banking (E-banking) means providing

banking products and services through electronic deliverychannel. E-banking, also known as Electronic FundTransfer (EFT), uses computer and electronic technologyas a substitute for cheques and other paper transactions.E-banking enables a dramatic lowering of transactioncosts, and creation of new types of banking opportunitiesthat address the barriers of time and distance.

E-banking encompasses a broad range ofestablished and emerging technologies. Some are“front end’’ products and services that consumersopt for; others are ‘‘back end’’ technologies used by

financial institutions, merchants, and other serviceproviders to process transactions.

E-banking has become a necessary survival tool forbanks snce the banking industry now exists in a globalvillage. No country today has a choice whether toimplement e-banking or not, given the global andcompetitive nature of the economy. The banks,therefore, must strive to provide local and global bankingservices using the infrastructure of the global village.

There are a large variety of e-banking productsand services available in the marketplace. E-bankingtechnologies are continuing to evolve and arebecoming ever more popular today. The mostcommon such products and services are describedbelow.

Consumer Electronic BankingAutomated Teller Machine (ATM): ATM is an

electronic terminal provided by financial institutionsthat permits consumers to withdraw cash from theirbank accounts, make deposits, check balances, andtransfer funds. Consumers use ATMs not only at theirlocal banks, but also at other locations in theirneighborhoods and throughout the world.

EFTPOS (Electronic Funds Transfer at thePoint of Sale): This refers to the use of paymentcards at point of sale where money is transferredinstantaneously from customer’s bank account to theretailer’s account.

Telephone banking: The main methods used intelephone banking are voice response, voicerecognition and programmable telephone. The facilitiesavailable in telephone banking generally include accountinquiry, payment of bills, funds management, messageservice and transfer of funds etc.

Computer banking: Using computer banking,consumers can access their bank accounts to transferfunds, pay bills, check account balances, review accountstatements, and conduct other banking business, suchas ordering checks and issuing stop payment orders.Early forms of computer banking involved dial-upconnections directly with a bank’s computer; now nearlyall computer banking is based on Internet connections.Consumers may be able to make electronic fundtransfers from either their bank’s computer bankingprogram or their financial service’s web site.Corporate Electronic Banking

Financial EDI: Electronic Data Interchange(EDI) enables entities to transmit data in a standardformat, relating to a number of message categories,

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such as orders, invoices, customs documents,remittance advices and payments. Any movementof funds initiated by EDI is reflected in paymentinstructions flowing through the banking system. Anexample of EDI is Netting Arrangements in whichonly net settlements are made, typically once a day.To, illustrate, if Company A owes Company B $100 thousand whereas B owes A say $ 200 thousand,then the net flow is $ 100 thousand from B to A.

Interbank Electronic BankingSWIFT: Based in Belgium, Society for Worldwide

Interbank Financial Telecommunication (SWIFT) isa cooperative organization created and owned bybanks that operates the network and facilitates theexchange of payment and other financial messagesbetween financial institutions throughout the world.Though it was initially created for banks, the networkis now available to approved categories of non-bankinstitutions (securities brokers and dealers, clearingand depository institutions and recognized exchangesfor securities) as well.

Products (Plastic Cards)Smart card: A type of stored-value card in which

microprocessors chips, embedded in the card, storedata and perform limited calculations and processing(to validate personal identification numbers, authorizepurchases, verify account balances, and store personalrecords). The chip physically stores records, such asvalue of funds remaining on the card.

Contact Smart Cards are swiped through a point-of-sale equipment while contact-less Smart Cardcommunicate through RF signals. The main areas inwhich Smart Cards are used as debit/credit cardsare electronic purse, electronic cheques etc.

Credit/Debit card: A card that enables the holderto make purchases and/or withdraw cash up to aprearranged ceiling; the credit granted can be settled infull by the end of a specified period or can be settled inpart, with the balance taken as extended credit. Interestis charged on the amount of any extended credit andthe holder is sometimes charged an annual fee. A debitcard is very similar to a credit card except that debitcards do not extend any credit and all expenses throughdebit card is debited from bank account.

Stored-value card: A card on which monetaryvalue is stored, through either prepayment by aconsumer or deposit by some entity. For a single-purpose stored value card, card issuer and acceptor

are generally the same, and funds on the card representprepayment for specific goods and services (forexample, a phone card) and is generally restricted towell identified points of sale within a given location(for example, vending machines at a university, etc.).A multi-purpose card can be used at several serviceproviders for a wide range of purposes; it may carrylogo of interbank network.

Amongst e-banking products and services some aretied to consumer bank accounts (e.g. ATM or debit card)and others have stored monetary value (e.g. prepaid cards,payroll cards, college and military cards etc.).

Like other banking businesses, e-banking is not arisk free business. Money laundering, an age-oldcriminal activity, has been greatly facilitated by e-banking because of the anonymity it affords. Thereliance on new technology for services makessecurity and system availability the central operationalrisk of e-banking. Security threats like breach ofprivacy, alteration of data and other IT frauds cancome from inside or outside the system. Therefore,banking regulators and supervisors need to ensurethat banks have appropriate practices in place toguarantee the confidentiality of data, as well as theintegrity of the system.

The advances in information and communicationtechnologies (ICT) in the past have had a big impacton the nature of banking. IT has facilitated the bankingsector to enhance operational efficiency and offerwide range of financial products and services.Nevertheless, Nepalese-banking industry, in general,is lagging in effective adoption of modern ITapplications in its business.

IT adoptions in Nepal Rastra BankThere is unavailability of authentic documentation

that confirms when computer first entered into Nepal.Reportedly, the first computer to enter the Kingdomof Nepal was an IBM 1401 computer system whichwas installed at the Central Bureau of Statistics ofHis Majesty’s Government of Nepal (HMG/N) toprocess data of National Population Census, 1970.The computer remained instrumental in expeditiouslycompleting the data processing job of the census.Realizing the importance of having such a computer,Nepal Rastra Bank (NRB) requested the Bureau touse their computer to assist in processing the data ofthe First Family Budget Survey (1973-75). In 1982,the Bank introduced its own mini computer – OHIOSCIENTIFIC, which allowed upto sixteen people

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to work simultaneously. Initially, this computer was placedat the Bank’s Research Department. In 1985, the Bankestablished Computer Section under the ResearchDepartment primarily for processing statistical data andof Second Family Budget Survey (March 1984 - February1985). In September 1992 the computer section wasupgraded to a division under the Personnel AdministrationDepartment. Since then the computerization process ofthe Bank commenced in a systematic manner and PCsbecame more common. In June 1999, the ComputerDivision was upgraded to departmental level and namedthe Information Technology Department (ITD). Sincethen, ITD has been actively involved in developing newsoftware applications, supporting existing applications,maintaining and repairing computers and relatedequipments, managing Local Area Network (LAN),Internet/Intranet, addressing connectivity issues betweendistrict offices and central office, designing and updatingbank’s official website and reviewing and improving ITsystems of the bank. Admittedly, the pace of timelyupgrade of computer system (particularly the applicationssoftware) in the Bank is very slow due to some inherentproblems.

The existing IT infrastructures at the Bank aredescribed below.

Existing Software SystemsAll the software applications currently used by

the Bank are in-house developed. At the moment,30 stand-alone software applications are used withadditional software in the process of beingdeveloped. Most of these software are developedin dBase IV, with a few being in Visual Basic 6.0 andVisual Basic.NET

The existing software systems can be categorizedinto: (i) Central Bank operations and StatisticalSystems; (ii) Internal Management Systems andFinancial Institutions Compliance; (iii) andPerformance Monitoring Systems Groups. A shortdescription of each system is presented below.

Central Bank Operations and StatisticalSystems

Banking System for Kahmandu BankingOffice and Banking systems for district offices:This system takes care of banking functions in theBank offices. For the purpose of signatureverification, ‘SIGNAT’ system is used.

Clearing House System: This system isdeveloped for settling the cheques produced bydifferent commercial banks.

Central Accounting System: This systemcompiles HMG/N’s revenues and expenses datacollected from both NRB offices and the designatedcommercial banks, and generate reports.

LC System: This system keeps a record of LCsopened by importers in the different commercialbanks. The data related to the LCs is collected andcompiled by the ITD with a copy being sent to theDepartment of Commerce of HMG/N.

Balance of Payment (BOP) Trade (TradeStatistics System): The export and import statistics basedon data received from custom offices are maintained inthis system. It calculates trade surplus or deficit position(current situation and trend analysis) of the country. It alsoshows the direction of trade in form of export/importboth to/from India and other countries.

BOP System: This system keeps account andgenerates reports of Indian and other foreigncurrency transactions, in Nepali Rupees equivalent,of financial institutions.

Urban Consumer Price Index System: Thedistrict offices use data collection module to entercollected price data and send them to the PriceDivision of the Research Department. The PriceDivision uses computation module to compute theNational Urban Consumer Price Index and theNational Urban Wholesale price Index.

System for Foreign Currency Exchanged byNepalese Students: This system maintains recordof students applying for foreign currency exchange.

Public Debt Management System: Thissystem keeps records of all the individuals buyingissued bonds along with interest they receive. PublicDebt Management Department, through an initiativewith the Asian Development Bank (ADB), has alsoembarked on a separate initiative to use a newCOTS (Commercial Off The Shelf) softwareapplication called CSDRMS (CommonwealthSecurities Data Reporting Management System),which is an Oracle based system.

Currency Management System: This system isused for daily management of all the accountsrepresenting the stock of bank notes in vault, accountsof transaction of notes, accounts of notes in circulationand accounts of defective or old notes being burned.

Internal Management SystemPayroll System: This system keeps information

of monthly remuneration of all the employees ofNRB, as well as preparation of the pay-slips, pay-

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charts and deduction list etc. The system is linked toAccounting and Banking systems.

Pension System: This system keeps informationof pensioners of NRB. It generates eligible pensionerlist every month along with their pension amounts.

Staff Provident Fund System & Staff WelfareProvident Fund System: These systems weredesigned to keep records and generate statementsregarding staff provident fund and staff welfareprovident fund and have been assimilated to a singlesystem called the Retirement Fund System.

Insured Loan Recording System: This systemkeeps track of the insured loan statistics of the NRBemployees and generates various reports.

Accounting System for Central Office: Thissystem is the default General Ledger and InternalManagement Information System for NRB and keepstrack of about 120 ledgers organized into ten differentgroups. The Balance Sheet Section of the FinancialManagement Department uses this system to generatedaily trial balances and supplementary statements.

Balance Sheet System: This system produces amerged balance sheet of NRB. The Balance Sheetsection of the Financial Management Departmentof the Central Office and all the district offices, usethis system to prepare the merged balance sheet fromall the individual balances received.

Stock Inventory System: This system is usedto keep records of non-consumable goods (withtheir depreciated value) in all the Bank offices.

Dispensary Inventory Control & BillingSystem: This system keeps the inventory ofdispensary items of Central Office and KathmanduBanking Office, Thapathali and records dispensaryrelated transactions by current and retired staff. Italso generates bills, reports and inventory ofdispensary items in different formats.

Pay Order Reconciliation System: This systemhelps Reconciliation Section of Financial ManagementDepartment in settling pay order process. It checks theconsistency of issue statement against payment statement.

Personnel Record System: This system storespersonal and official information about employeesof NRB and generates different formats of officialreports indicating official status, achievements andother records of employees.

Compliance and Performance MonitoringSystem

NRB Reporting System: This system receivesfinancial information (13 forms designed under

Directive No. 9) from commercial banks. Thesefinancial information have been required by the Bank,to be disclosed on a weekly, monthly or quarterly basis.

Ongoing Software Development ActivitiesIn addition to above mentioned software

applications, other new software are underdevelopment and implementation. These include:(i) software for Micro Finance Department to keepaccounts of Rural Self Reliance Fund operations;(ii) software for Legal Division to stores informationregarding “Ghar Marmat Sapati” and “Ghar JaggaSapati” of NRB staff including their respective“tamasuk”; (iii) software for Financial InstitutionsSupervision Department for receiving informationfrom various financial institutions in electronic formatand process these information as per need of thedepartment; (iv) software for Mint Department tokeep inventory of metals; and (v) software forBanking Office to maintain denomination wiseaccounts of cash (Local and foreign), coins,commemorative coins etc.

As said earlier, most of the above softwareapplications are developed utilizing dBase IV. dBaseIV has many inherent shortcomings which areultimately reflected in major problems in the system;some examples are: (i). report reconciliation problem;(ii) duplication of work (multiple data entry need);(iii) lack of complete functionality; (iv) lack of audittrail features; (v) lack of scalability; (vi) lack of security.Because of these problems, NRB is moving towardsa modern software solution under World Bankfunded Technical Assistance Project.

Hardware, Networking and CommunicationInfrastructure

NRB currently operates around 500 computers(networked and standalone). These range from oneswith Intel 80286 processors to those based on IntelPentium 4 processors. Most of these machines arelocally assembled; consequently, they are not verifiedagainst any national or international standard. Thereis, however, a corporate standard which each of thesemachines must satisfy during procurement. Thisstandard is constantly updated as new productsbecome available in the market.

Printing solutions are based on all availabletechnologies. However, most of the reporting isdone in dot matrix printers. Administrative printingincluding various letters to offices and limited

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reporting is done with laser printers. A small numberof inkjet printers are used for low volume printing.

Each office has a Local Area Networks (LAN) ofits own, with the exception of Mint Department andCurrency Management Department. LAN in the Bank’sCentral office is the most comprehensive linking about250 computers, while the one in Thapathali Office issecond with around 40 workstations. Each branch officehas a network of about 12 workstations. These networkshave not yet been interconnected, and data transfer fromthese networks to central data server is mainly throughzip-disks and CD-RW’s. Limited connectivity withbranch offices and commercial banks has been organizedthrough e-mail or dial-up direct communication.

All of the LAN are based on 10/100-Base-TEthernet star topology with cat 5/5e UTP cabling,except for the Central office. The backbone of centraloffice network is 10-Base-T Coaxial cable in Ethernetbus architecture, and distribution is with 10-Base-Tor 10/100-Base-T Ethernet star topology with cat5/5e UTP cabling. All these networks were designedwith hubs as distribution points, but these hubs arebeing replaced with switches as and where required.At the time of writing, upgrading the central office’snetwork backbone with Gigabit Ethernet Networkbased on Gigabit Fibre Optic cables is under progress.

On the server front, each of the offices except forMint Department and Currency ManagementDepartment has at least one server. These servers areall Dell or HP-Compaq server machines, with dualprocessors ranging from Intel Pentium III to Intel Xeon.Central office has two of these machines for its datarepository, and a third one for mail server. Proxy serveris on Intel Pentium III based HP desktop. Internet accessin central office is based on a leased line of 256kbps,Cisco 2521XM router and a leased line modemprovided by Nepal Telecom. Monitored Internet accesshas been given to all NRB users connected to the LANat central office. The website of NRB is hosted on aserver in the United States. Apart from the Central office,no other office of NRB has dedicated access to Internet.Every office does have email, which is the primary toolto transfer reasonably sized files. Other offices generallyhave dial up Internet package that is available to theManager. Not many staff outside the central office haveeasy access to Internet.

The data servers operate on Novell Netware 4.xwith 100 user license. The mail server runs on RedHatLinux 7.2 while the proxy server runs a Fedora Core1based Linux. Most workstations run on Microsoft

Windows 98 while a very few run on other versionsof Microsoft Windows. Many workstations haveMicrosoft Office 2000 installed along with SymantecAntivirus and other relevant in-house software.

Some of the major shortcomings of existinghardware, network and communicationsinfrastructure are as follows.• Many of these workstations have limitedcomputing power for hosting the applications ofmodern software.• There is limited bandwidth available (through a

single NTC leased line) at the central office. Thereare no network connectivity linkages between thecentral office, banking office at Thapathali andthe district offices.

• Storage of data (data backups) is done periodicallybut not real-time. No data archiving or datawarehouse facility is available. In addition, thereis no disaster recovery (DR) site.

• There is a shortage of common productivityenhancement hardware such as Image Scanners,Digital Cameras, Check Scanners, Bar Codescanners or Radio-Frequency Identification Data(RFID) systems.

• There is limited protection of the network frommalicious-ware such as viruses, spy-ware, ad-wareand trojans.

Future ICT Needs of NRBAs of now, there is no comprehensive IT policy

in the Bank. It is felt that there should be a standardIT policy which defines hardware requirements,copyright issues on software, security and privacyissues and code of conduct. Further, this policyshould define the level of access to a person and theresponsibility of the person, to secure and preventits misuse in any form.

Since computers are becoming vital in day to dayactivity of the Bank, its need will grow in the future.Many machines in the Bank are already out of date.Some other old ones won’t work efficiently withnew software. These situations will eventually leadto procurement of additional hardware system.

As mentioned earlier NRB’s present softwaresystems have many shortcomings. The presentnecessity for the Bank is to upgrade them to a newsystem which conforms to modern standards. Forthis upgrade, the Bank could opt for Oracle, DB2or Microsoft SQL Server as backend platform. In

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this context as well, there will be additionalrequirements on hardware front.

To move towards a paperless office, an effectivecomputer network will have to be establishedconnecting all the machines in all the offices througha giant inter-office network. For the inter-officeconnection, the Bank will have choices of satellitebased, radio based VPN or leased line based WAN.

Intel based servers are not considered good foranything bigger than a small office. So there will be aneed of middle-end server, preferably a RISC basedmachines. UNIX is a very stable and secure operatingsystem, and RISC and UNIX work together verywell. But, the Bank could go for Microsoft WindowsServer 2003 as well.

The Bank needs to emphasize on the quality ofICT equipments which is important in the contextof the plan to upgrade existing stand-alone softwareto new integrated software that covers majority ofthe Bank’s functions.

There are two potential problems that could arisein the system: security issues and machine dependencyof users. A user may work in such a way that thenetwork becomes open to security vulnerabilities,with or without knowledge of user. Virus risk is verycommon, which may result in data loss. The datamay even be stolen or changed. Good securityinfrastructure like firewalls must be deployed toaddress such security issues.

In the present context, a user’s data is stored locallyin his machine and is generally not available in anyother machines. Furthermore, with 40 GB hard disksbecoming common, a user does not need full harddisk space to store locally generated data. There is aneed for a system to distribute data more efficientlythroughout the network so that the user can access itregardless of the machine.

One of the lesser known problems is the users’knowledge of system. In the present context, manypeople are very comfortable with the interface thatthey have been using. In the context of switching ofthe system it is essential that every user get skills upgradetraining; the users need to know how to get thingsdone the new way; and support personnel shouldknow the system in order to care it effectively. Somepeople will need to be trained before the switchinghappens. They should know what kind of system theBank will get and prepare for the arrival of the system.Such training is more important to support personnel.

Others should be trained along with implementationprocess. These people will learn about the operationof system and make it work once the system comeson online. Since not all people can be trained at once,some users have to be trained after implementationof the system. They will essentially get same trainingas the second group, but will also learn about changesand additions if any. Furthermore, these people willalready have seen the system, and hence be able torelate problems and solutions.

IT Re-engineering Program of the Bank3

A comprehensive financial sector reformprogram has been started in Nepal since 2002 withthe financial assistance of World Bank and DFID.One of the components of this reform program isreengineering of NRB. An important task under thereengineering of NRB is development of a centralbank IT system. To develop such a system, an ITconsultant has been working in the Bank. Theobjective of this project is to introduce a modernintegrated financial and operation managementinformation system in accordance with internationalstandards and central banks best practices. Theanticipated outcomes of this project are as follows.

Software Front• A new centralized software system the “Nepal

Integrated Financial Management InformationSystem” (NIFMIS) will be designed, procuredand implemented. NIFMIS will assist the variousdepartments regarding both current functionalityas well as future needs.

• NIFMIS will meet industry best managementpractices regarding scalability (supportingincreasing numbers of users), interoperability(interfacing with other modern IT systems),robustness (reliability), security (from hackers ormalicious software agents) and usability (User-friendly features that encourage technologyadoption).

• From a functionality perspective NIFMIS willsupport a “Single Data Entry” oriented datamodel, in-built audit control logs (audit trailfeatures), in-built User Access Administrationtools and other features associated with modernAccounting, Financial Management and MISsystems.

• NIFMIS will be based on web based or client-server architecture. In either case, NIFMIS will

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be capable of creating and publishing reports forauthorized agencies (through web interfaces).

Hardware, Networking and CommunicationFront• Additional quality assured servers, workstations

and other supporting equipments will beprocured.

• Better broadband access and networkinfrastructure linkage for NRB Central Office, andother offices will be established.

• To protect data and the network from malicious-ware such as Viruses, Spy-ware, Ad-ware andTrojans, better firewall and Network Monitoring/Management systems will be established.

• One of the NRB district offices will be designatedas the Disaster Recovery site and will store abackup version of the most recent data.

Training• Prior to the procurement of new system, related

staff will receive training in the key areas such asbusiness system analysis, business processmapping, project management etc.

• During implementation of the new system,various types of trainings that cover technical aswell as system management areas will be given todifferent levels of staff throughout the bank.It is expected that NRB employees will we well

exposed to new technology from these trainingswhich will facilitate the smooth adoption of newtechnology in the Bank.

ConclusionFrom the pebbles that just facilitated simple

additions and subtractions to IBM BlueGene/Lprocessing at a whooping 70.72 teraflops,computers have developed enormously. Thetechnological developments that reduced the sizeof processors have enabled people to work aroundtheir PDA, or try out wearable computersembedded into the garments they wear, and stay intouch throughout the globe, and even to otherworlds. The trans-Atlantic telegraph has beenreplaced by round-the-world fibre optic networkand communication satellites. The Internet Boomhas revolutionized sharing of information in anorganization, or between organizations. All thisdevelopment has resulted in a dramatic change forinformation collection, storage, transmission andusages, thereby increasing the efficiency of an

organization in many folds. It has enabled financialindustry to enhance professional efficiency andprovide new products and services. Theseinstitutions have also realized that technology alonecould enable them to trim costs, achieve efficiencyand intensify businesses.

The ICT development has brought a great impact inthe financial sector as well as real sector. As such, centralbank should have a full awareness about the implicationsof ICT on both financial and real sector in order toassure monetary and financial stability in the country.Moreover, NRB, being a regulator and supervisor offinancial system, needs to be aware of the ICT beingused by banks and financial institutions to regulate andsupervise them properly and effectively.

As highlighted in the article, NRB has beenapplying IT in its various functional areas for morethan a decade. But the Bank is still relying on oldstand alone software system. There are somefunctional areas yet to be brought into the IT systemviz. the need to develop an efficient and securepayment system, need to complete automation ofclearing house, integrate technology considerationsinto supervisory process of banks and financialinstitutions and the need to computerize variousdepartmental functions that demand automation etc.

At present, LAN and WAN infrastructure at thebank is limited and does not address DRrequirements. Corporate email facility is available onlyat the head office, and Internet bandwidth is notsufficient. To supplement the Bank’s plan to switchto a new software system addressing most of thefunctional requirements of the Bank, quality hardwareand communication infrastructure as well as a goodDR strategy with efficient disaster managementstrategy will be required. Similarly, a robustcommunication infrastructure to interconnect all theoffices, addressing the lack of facilities like corporatee-mail and reliable inter-office communication willalso be required.

Skilled manpower is important for developmentof the Bank. Training of all the bank staff isimportant to help them work efficiently with the newsystem.

In these circumstances, the Bank must speed upthe pace of investment in IT to enable NRB to movetowards a fully electronic or paperless office, andreap the full benefits of modern technology.

NRB has started IT reengineering program underthe technical assistance of World Bank. At this point

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in time, future of ICT improvements at the Bank isdependant upon how successful this optimistic projectwill be. The success of this project will bring a wholenew set of possibilities for future improvements. Ifthe project can not achieve the set objectives at adesired level, the Bank will have to reinitiate newprograms for upgrading ICT, which will cost moretime and money in the modernization process.

To sum up, the rapid development of ICT hasresulted with uncertainties to its users regarding whichtechnology to adopt and the cost to replace existingtechnology with newer one in very short span oftime. In spite of these uncertainties, we should acceptICT as an opportunity, and not a threat.

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Footnotes1 Based on [3], [4], [6], [7], [9], [15], [17] and

[18]2 Based on [2], [5] and [19]3 Partly based on [12]