Nepal Rastra Bank Ko Chhata – Monetary Policy, Reserves, Capital Rules and the Fight Against Money Laundering

Banking Taiyari Nepal: From Zero to Expert

Banking Taiyari Nepal, Part 4 of 5

A plain-language guide for Nepal banking job preparation. Every term comes with its meaning and the reason banks use it. Figures and limits change often, so confirm current numbers on the NRB website.

The Day Sita's Bank Got a Letter

One morning, Sita's bank manager looks worried. A circular has arrived from Nepal Rastra Bank. It says that banks must keep a larger part of their deposits as reserves, and that lending rates must follow a new formula. The manager explains to his staff in two lines. "NRB has tightened liquidity. We must lend carefully for a few months."

Sita notices that her loan rate moves a little. She does not know it, but a decision taken in a single NRB meeting has just touched her momo business.

This is the power of the central bank. If banks are the shops of money, NRB is the one who controls how much money is in the market, at what price, and who is allowed to run a shop. To work in a Nepali bank, you must understand this control tower. This post is the one that separates ordinary candidates from strong ones.

What Does a Central Bank Actually Do?

NRB's main jobs can be remembered as six verbs:

Issue the currency (Nepali rupee notes and coins).
Control money supply and credit through monetary policy.
Regulate and supervise banks and financial institutions.
Manage foreign exchange reserves and the exchange rate system.
Act as banker to the government and to commercial banks.
Protect financial stability and promote payment systems.

As banker to banks, NRB holds the accounts of commercial banks. When Bank A pays Bank B, the final settlement happens by moving balances in their accounts at NRB. It also acts as lender of last resort: if a sound bank faces a sudden cash shortage, it can borrow from NRB, so a small problem does not become a panic.

Why is the central bank independent? If the government could print money whenever it wanted, prices would shoot up. So central banks keep some independence to protect the value of money.

Monetary Policy: The Steering Wheel of the Economy

Every year, NRB announces its Monetary Policy at the start of the new fiscal year. In Nepal, the fiscal year runs from Shrawan 1 to the end of Ashadh (roughly mid-July to mid-July). This policy document tells banks how NRB will steer the economy that year, with targets for inflation, economic growth, credit expansion, reserves and interest rates.

Main aims of monetary policy:

Price stability: Keep inflation under control.
Support growth and employment: Make credit available for productive sectors.
Keep external balance: Maintain adequate foreign exchange reserves.
Financial stability: Avoid banking crises.

It is easy to confuse monetary policy with fiscal policy. Remember this:

Monetary policy is by the central bank (NRB): money, credit, interest rates.
Fiscal policy is by the government (Ministry of Finance): taxes, spending and borrowing, announced in the annual budget.

The Toolbox: How NRB Squeezes or Loosens Money

Think of NRB's tools as taps and valves.

1. Cash Reserve Ratio (CRR)
Banks must keep a certain percentage of their deposits as cash balance at NRB, earning little or no return. Why? It controls how much banks can lend and gives a safety layer. When NRB raises CRR, banks have less money to lend, and credit tightens. When it lowers CRR, banks get more to lend. (The actual percentage is revised often; always check the latest.)

2. Statutory Liquidity Ratio (SLR)
Banks must also hold a percentage of deposits in liquid assets such as cash, balances at NRB and government securities. Why? To ensure the bank can meet withdrawals and to create a market for government bonds. Think of SLR as a safety net of easily saleable assets.

CRR vs SLR (a classic exam trap):

Point	CRR	SLR
What is held	Cash at NRB	Cash plus approved liquid assets such as government securities
Return	Very low or none	Some return (on securities)
Main purpose	Control credit and liquidity	Ensure bank's own liquidity safety

3. Policy Rate and Interest Rate Corridor
NRB sets a policy rate, the benchmark for short-term interest rates. Around it, NRB builds an interest rate corridor: an upper limit and a lower limit for the interbank market.

Standing Liquidity Facility (SLF): Banks can borrow from NRB overnight against government securities at a higher rate (the ceiling).
Deposit Collection Rate: NRB takes excess deposits from banks at a lower rate (the floor).

Why a corridor? So that interbank rates stay within a predictable range. Banks do not need to pay crazy rates when they are short of cash, and they do not lose everything when they have extra.

4. Open Market Operations (OMO)
NRB buys or sells securities in the market.

Repo (repurchase): NRB gives money to banks against securities for a short period. This injects liquidity.
Reverse repo: NRB takes money from banks, giving securities. This absorbs liquidity.
Outright sale / purchase: NRB sells or buys securities permanently.

5. Bank Rate
The rate at which NRB lends to commercial banks. It signals the direction of interest rates.

6. Credit controls and sector limits
NRB can set limits like the CCD ratio, margin loan limits, and requirements for priority sector lending.

7. Moral suasion
Just a polite push. The Governor can call bank CEOs and request them to lower rates or avoid a certain practice. Because banks depend on NRB's goodwill, they often follow.

Tight vs loose (a simple story):

Economy overheating, prices rising: NRB tightens by raising CRR, raising the policy rate and absorbing liquidity. Loans become costly. People borrow and spend less. Inflation cools.
Economy slow, businesses struggling: NRB loosens by reducing the rates and injecting liquidity. Loans become cheaper. People borrow and spend more. Growth improves.

Exchange Rate and Foreign Reserves

Nepal follows a pegged exchange rate with the Indian rupee. For many years, the rate has been fixed at Nepali Rs 160 = Indian Rs 100 (that is, 1 INR = 1.60 NPR). Rates against the US dollar and other currencies float according to how the Indian rupee moves against them.

Why peg to India? Nepal's trade, travel and people-to-people ties with India are huge, and most imports come through India. A peg gives stability for traders. The trade-off: Nepal gives up some independence in monetary policy, because it must protect the peg.

Foreign exchange reserves are Nepal's stock of foreign currency held by NRB. They pay for imports. Experts check how many months of imports the reserves can cover. Remittance is the major source that keeps reserves healthy.

Balance of Payments (BoP) records all foreign transactions of a country: trade in goods and services, income, transfers (including remittance) and capital flows. A surplus adds to reserves; a deficit reduces them.

Capital Adequacy: The Cushion Rule

In Post 1, we said capital is the cushion. Here is how NRB measures it.

Capital Adequacy Ratio (CAR) = Eligible Capital ÷ Risk Weighted Assets (RWA)

Eligible capital has two layers: Tier 1 (core capital) such as paid-up capital, reserves and retained earnings; and Tier 2 (supplementary capital) such as general loan-loss provisions and certain subordinated debt.
Risk Weighted Assets (RWA): Not all assets are equally risky. A government bond is very safe (low weight). A loan to an unrated private business is riskier (higher weight). Banks multiply each asset by its risk weight and add them up.

Why RWA? Because it forces banks to hold more capital when they take more risk. A bank with the same capital but riskier loans looks weaker.

NRB follows the Basel framework, the international standard created by the Basel Committee on Banking Supervision. Nepal has moved towards Basel III, which asks for higher quality capital and extra buffers. In recent NRB frameworks, commercial banks have needed a total CAR of around 11% and a core (Tier 1) CAR of around 8.5%, including buffers. Always verify the current figures.

Basel's three pillars (easy memory):

Pillar 1 – Minimum capital for credit, market and operational risk.
Pillar 2 – Supervisory review: The bank must assess its own risks (often called ICAAP) and NRB reviews it.
Pillar 3 – Market discipline: Banks must disclose information so the public can judge them.

Liquidity ratios. Basel III also introduced liquidity measures such as the Liquidity Coverage Ratio (LCR) (can the bank survive a 30-day stress with high-quality liquid assets?) and the Net Stable Funding Ratio (NSFR) (is long-term lending funded by stable sources?). NRB has been bringing in such measures in its own form.

Types of Risk Every Banker Should Know

Credit risk: Borrower does not repay. The biggest risk in Nepali banks.
Market risk: Losses from changes in interest rates, exchange rates or prices of securities.
Liquidity risk: The bank cannot meet payments when due.
Operational risk: Loss from people, process, system failure or fraud.
Interest rate risk: Profit hurt when deposit and loan rates move differently.
Compliance / legal risk: Penalty or loss from breaking rules.
Reputational risk: Trust is damaged by scandal or poor service.
Cyber risk: Hacking, data theft or system attack.

Three Lines of Defence (a favourite modern phrase):

First line: Business and operations staff own and manage risk daily.
Second line: Risk management and compliance teams set rules and monitor.
Third line: Internal audit independently checks the whole system and reports to the Board's audit committee.

Why three? Because the one who earns profit should not be the only one who judges risk.

How NRB Supervises: Eyes on Every Bank

NRB supervises banks in two ways:

Off-site supervision: Banks send regular reports (loans, deposits, capital, NPLs). NRB analyses them from its office.
On-site inspection: NRB's inspectors visit banks, look at files and test the controls.

If a bank slips, NRB can use a graded set of actions often called Prompt Corrective Action (PCA). The idea is: act early when a bank shows warning signs such as falling capital, rising NPLs or liquidity trouble. Actions can start with restrictions on dividend payment or branch expansion and go all the way to changing management or, in extreme cases, taking control or resolving the bank. Why early action? A small illness is easier to treat than a collapse.

Banks that break rules may face fines, directives, bans on new business or removal of directors and officers. The legal base is the NRB Act and the Bank and Financial Institutions Act (BAFIA). NRB issues a Unified Directive (ekikrit nirdeshan) that gathers rules for banks. For exam preparation, reading how this directive is organised is very valuable.

Anti-Money Laundering: The Fight Behind Every Form

Now let us return to the KYC form Sita filled in Post 2. Why is the whole system so serious about it?

Money laundering is the process of making illegally earned money look legal. Imagine a corrupt official with a suitcase of cash. He cannot spend it openly. So he tries to push it into the financial system through accounts, property, businesses or transfers, so that it looks like clean income. Banks sit at the doorway of this system, so they must act as guards.

Three classic stages:

Placement: Dirty cash enters the system (for example, many small deposits).
Layering: The money is moved around through many accounts and transfers to hide the trail.
Integration: The money returns looking legitimate, for example as property or business income.

Terror financing (CFT) is different: the money may even be clean, but it is meant to fund violence. That is why we say AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism).

Nepal's legal and institutional frame:

The Assets (Money) Laundering Prevention Act, 2008 is the core law.
The Financial Information Unit (FIU-Nepal), based in NRB, receives and analyses suspicious reports and shares findings with investigating bodies.
Banks must have a Compliance Officer and written AML/CFT policies.
Nepal also follows international standards from the Financial Action Task Force (FATF), and takes part in the Asia/Pacific Group on Money Laundering. In 2025, Nepal was placed on the FATF's "increased monitoring" list (often called the grey list). This means the country committed to fix weaknesses in its AML/CFT system. Check the latest status, because it can change.

What bank staff must actually do:

Know the customer (KYC/CDD) and apply EDD to high-risk ones.
Monitor transactions for unusual patterns (sudden large cash, many small deposits just under a limit, rapid in-and-out transfers, activity not matching the customer's profile).
File a Suspicious Transaction Report (STR) with the FIU when there is reasonable ground for suspicion.
File Threshold Transaction Reports (TTR) for cash transactions above the set limit (historically Rs 10 lakh, but verify the current threshold).
Screen against sanction lists so that the bank does not serve blacklisted persons or entities.
Keep records for the required number of years.
Never tip off: A staff member must not tell the customer that an STR is being filed. Why? It would destroy the investigation.

Structuring / smurfing: Splitting a big amount into many small ones to stay below the reporting threshold. Staff are trained to spot this.

Shell company: A company that exists on paper but has no real business, often used to hide money.

Why this matters for your job: AML/CFT is the area where banks have the strictest penalties, and compliance roles are growing fast. Even if you plan to work in credit or operations, interviewers expect you to know AML basics.

Deposit Protection and Financial Stability

Bank failures hurt ordinary people. To protect small depositors, the Deposit and Credit Guarantee Fund insures deposits up to a limit if a BFI fails. The limit is revised from time to time, so check the current figure.

NRB also publishes a Financial Stability Report and does stress testing: imagining bad scenarios (property price crash, large borrower default, sudden withdrawals) to see whether banks can survive.

Term Box: Post 4 Glossary

Monetary policy – NRB's plan for money, credit and interest rates. Why yearly: The economy changes, so the plan is updated.
Fiscal policy – Government's taxes and spending. Why separate: Different institution, different tools.
CRR – Cash reserve ratio: cash banks must keep at NRB. Why: Controls credit and gives safety.
SLR – Statutory liquidity ratio: liquid assets banks must hold. Why: Ensures withdrawals can be met.
Policy rate – Benchmark short-term rate. Why: Signals NRB's stance.
Interest rate corridor – Band between floor and ceiling rates. Why: Keeps interbank rates stable.
SLF – Standing liquidity facility: overnight borrowing from NRB. Why: A safety valve for liquidity shortages.
Repo / Reverse repo – Short-term lending / absorbing against securities. Why: Fine-tuning liquidity.
OMO – Open market operations. Why: A market-based tool to steer liquidity.
Lender of last resort – NRB lends to a sound bank in crisis. Why: Prevents panic.
Peg – Fixed exchange rate with India. Why: Stability in trade with India.
Forex reserves – NRB's foreign currency holdings. Why: Pay for imports and defend the peg.
BoP – Balance of payments. Why: Shows external strength.
CAR – Capital adequacy ratio. Why: Measures the cushion against risk.
RWA – Risk weighted assets. Why: More risk needs more capital.
Tier 1 / Tier 2 – Core and supplementary capital. Why: Quality of loss-absorbing capital differs.
Basel III – International banking standard. Why: Global lessons from the 2008 financial crisis.
LCR / NSFR – Short-term and long-term liquidity ratios. Why: Banks should survive stress.
PCA – Prompt corrective action. Why: Fix weak banks early.
AML / CFT – Anti-money laundering / combating terror financing. Why: Keeps the system clean.
STR / TTR – Suspicious / threshold transaction report. Why: Early warning for investigators.
FIU – Financial Information Unit. Why: Central point to analyse reports.
FATF – International AML standard setter. Why: Country credibility and cross-border banking depend on it.
Tipping off – Warning a suspect about a report. Why forbidden: It kills investigations.

Taiyari Tip: How to Read Like a Topper

Read the latest Monetary Policy summary from NRB. Note five numbers: CRR, SLR, policy rate, CAR minimum, and the growth/inflation targets.
Read the Financial Stability Report headline pages. Note trends in NPL and capital.
Build a one-page tools chart: each tool, what it does, and its effect on loans.
Learn the three stages of money laundering with an example you invent.
Create a table of NRB, FIU, SEBON, Insurance Authority, NCHL and their jobs.
Follow banking news in Nepali and English newspapers for one month. Interviewers often ask about the latest monetary decisions.

Interview Corner

Q1. What is the role of NRB in the economy?
Model answer: "NRB issues currency, runs monetary policy to keep prices and the financial system stable, regulates and supervises banks, manages foreign reserves and acts as banker to the government and to banks."

Q2. Explain CRR and SLR and the difference.
Model answer: "CRR is the share of deposits banks keep as cash at NRB, mainly to control credit. SLR is the share of deposits that banks keep in liquid assets such as government securities, mainly for liquidity safety."

Q3. If inflation is rising fast, what can NRB do?
Model answer: "It can tighten policy by raising the policy rate or CRR, absorbing liquidity through reverse repo, and discouraging excess lending. This reduces money supply and cools demand."

Q4. Why does Nepal peg its rupee to the Indian rupee?
Model answer: "Because most of Nepal's trade and economic links are with India, a peg gives price stability and lowers exchange risk for traders. The cost is that NRB must hold enough reserves to defend the peg and has less independence in monetary policy."

Q5. What is the Capital Adequacy Ratio?
Model answer: "It is eligible capital divided by risk weighted assets. It shows whether a bank has enough cushion to absorb losses from the risks it takes. Regulators set minimum levels, and Basel III raised the quality and quantity of capital."

Q6. What are the three stages of money laundering?
Model answer: "Placement, layering and integration. First the dirty money enters the system, then it is moved around to hide the trail, and finally it returns looking clean."

Q7. A customer deposits many amounts just below the reporting threshold. What do you do?
Model answer: "This looks like structuring. I would not alert the customer. I would record the facts, follow the bank's procedure and report it to the compliance officer, who can decide on filing a suspicious transaction report with the FIU."

Quick Recap of Post 4

NRB controls money and credit through CRR, SLR, policy rate, corridor, OMO and other tools, and supervises banks through on-site and off-site checks.
Monetary policy is NRB's; fiscal policy is the government's.
The Nepali rupee is pegged to the Indian rupee, and remittance supports reserves.
CAR = eligible capital ÷ risk weighted assets; Basel III adds quality and liquidity rules.
Risks: credit, market, liquidity, operational, compliance, reputational and cyber, managed through three lines of defence.
AML/CFT depends on KYC, monitoring, STR/TTR reporting and never tipping off.

Sita's business now exports frozen momo to a shop in Doha, and she needs to receive money in dollars and send goods across borders. In the final post, Post 5, we move to the expert level: trade finance, forex, treasury, bank ratios, and your complete job-preparation plan.

Next in the series: Post 5, Expert Level: Trade Finance, Forex, Treasury, Bank Ratios and Your Banking Job Taiyari Plan

BankTalk