Payment Systems in Nepal

Payment Systems in Nepal        

                    

Payment and Payment Systems

The action or process of paying someone in lieu of something is known as payment. It is one of the crucial functions executed by banks and financial institutions. Smooth operation of the payment functions not only helps the bank and financial institutions to ensure their swift operation but also that of the counterparties.

Besides accepting deposit, payment has been one of the crucial function that the banks and financial institutions have been carrying out since time immemorial. In the modern era, use of IT has been integral to simplify the complex mechanism of payment. As such the infusion of IT in Payment to make the whole process simple and swift is known as Payment Systems. More technically, a payment system is defined as an arrangement which allows transfer of funds between the payee and payer. It comprises of the institutions, instruments, people, rules, procedures, and technologies that enables the funds to move from accounts maintained in one financial institutions to another.

Rationale of Effective payment system

Payment systems is an integral part of every country’s financial system. The status of the payment system of the country can be taken as an indicator of the health/status of the economy of the country. 

A modern payment systems will not only reduce the cost of commerce but also help to improve the government budget balance by increasing tax revenue collection. As such there is an enormous role of payment system to ensure the smooth functioning of the economy. A modern payment system is beneficial for all concerned because of the following reasons:  

1.      An effective payment system ensures the soundness of monetary policy implementation and capital market development.

2.      It ensures that the cost of transfer of fund from one party to the other is minimized, thus reducing the cost of business transactions.

3.      It ensures quick realization of revenue by business firms and the government.

4.      A well developed and regulated payment system ensures transparency and also helps mitigate the money laundering process.

5.      Enhanced payments system also saves the users from risk of loss and theft.

6.      It also saves the central bank from the great deal of expenses required for circulating of the physical cash to various parts of the country, etc.

Current status of Payment Systems in Nepal

Payments institutions and mechanisms are integral component of payments landscape. The Payment System of Nepal is dominated by the banks and financial institutions However to develop and strengthen payment systems in Nepal, Nepal Rastra Bank established a Payment Systems Department on 2^nd July 2015, in accordance with the spirit of NRB Act and entrusted the department with the sole authority of regulation, supervision and oversight of the entire payment system in the country, including the non-bank financial institutions also.

In Nepalese context payments tools like cards, internet banking, mobile banking, e-wallets etc. are popular tools for the payment of retail value amount. Similarly, the users are availing Electronic Cheque Clearance (ECC), Interbank Payment System (IPS), SWIFT (Society for Worldwide Interbank Financial Telecommunication), etc for the payment of transactions of large value.

Though it has been quite some period of time that Nepal has been using the modern means of payment systems, the volume of such use isn’t in significant number. However, though slow, the number of such users is increasing.

One key player in the payment systems domain of Nepal is NCHL (Nepal Clearing House Limited) that was established under the leadership of NRB in 2008 to enable electronic cheque clearing thus eliminating the need of physical routine of paper cheques. NCHL as of now has been offering services such as Electronic Cheque Clearance (ECC), which earlier was being manually handled by NRB. The number of cheques being processed via NCHL has been increasing. It cleared 96,86,277 cheques in the FY 2074/75, with daily cheques of 40,756 being processed and the average value of such cheques being Rs 26.6 billion. NCHL has also been offering services such as IPS (Inter Bank Payment) and now with Connect IPS which acts as a single platform for the users to initiate their payment transactions via their bank accounts.

Nabil Bank introduced Credit Card for the first time in Nepal in 2044 BS. Similarly Automated Tailor Machine (ATM) was introduced by Himalayan Bank in the year 2047 BS. Likewise Internet Banking was introduced in Nepal by Kumari Bank in 2047 BS, and it was Laxmi Bank that started SMS Banking in the year 2061 BS.

The use of mobile banking service offered by banks and financial institutions has been increasing. Such services allows the customers to conduct financial transactions remotely using a mobile device such as smartphone or tablet. Similarly users are also availing internet banking, also known as online banking or simply e-banking, which is electronic payment that enables the customer of banks and financial institutions to conduct a range of financial transactions through the website of the service providers. Likewise there has also been significant increase in the number of users of the debit cards. The increase in the outlets of ATM (2791 as of FY 2074/75) terminals along with the convenience to use them in Point of Sales (POS) machine has increased the popularity of the use of debit cards. The graph below depict the recent status of users of mobile/internet banking and debit card users.

    

Existing Legal Framework

Development of a robust Payment System has been one of the key priority of both the Government of Nepal and the Central bank of the country, Nepal Rastra Bank.  For example, the NRB’s second strategic plan of 2012—2016 included payment systems and mechanisms as one of its seven strategic pillars. Continuity to the second strategic plan, third strategic plan 2017-2021 has focused on pillar as “Sound and Effective Payment System".

The role of NRB has been directed towards the developing financial market infrastructures and promoting electronic payment systems.  As one of the primary functions of the Central bank as per NRB Act, 2002 is “to develop a secure healthy and efficient systems of payments”, NRB has been performing in the same spirit.

In this connection, NRB has established a separate Department on 2072/3/17 in the name of Payment Systems Department. This department is the revamping of the earlier known as Payment and Settlement Department, with power to regulate, inspect, and supervise payment, clearing and settlement arrangement related activities in Nepal. 

Nepal Rastra Bank as of now has formulated and implemented Banks and Financial Institution Act, 2073, National Payment System Development Strategy 2014, Licensing policy for Payment Related Institutions 2073, Payment Systems Oversight Framework 2018, Payment and Settlement Bylaw 2072, Payment and Settlement Act is under review in Federal Parliament, and it has also issued 7 different directives to guide and direct payment systems related activities in Nepal.

Way forward

The overall ambience is much conducive for igniting a take-off phase of payment systems in Nepal. The internet penetration is 63% of total population as per date of October 2017, an increase of 15.60% than that of the last year. Similarly the number of mobile phone users in the country is 34% higher than the total estimated population of the country as per data furnished by NTA on Ashad, 2075. Likewise the development of Payment Systems has been on topmost priority of both Government of Nepal and the Nepal Rastra Bank.

As development of an efficient and robust payment systems is in top priority of the central bank of Nepal, and also that of Government of Nepal, NRB together with stakeholders has been introducing and implementing various alternatives for promotion of the same.

NRB has been focusing on the licensing of the institutions that intend to provide payment related services. It has been providing license in two categories as PSP (Payment Service Providers) and PSO (Payment Service Operators). As of date it has provided license to 41 Banks and Financial institutions, and to 5 non-Banks and Financial institutions, and has provided Letter of Intent to 25 institutions. The number of such service providers is likely to increase in the days to come.

NRB has proposed a module of National Payment System which consists integrated RTGS and CSD. Such a system encompasses RTGS linked to the Ministry of Finance (MOF), Customs, and Inland Revenue Department (IRD) via core banking.  Similarly it has placed a full-fledged regulatory framework and Payment System ACT is under review in the federal parliament. NRB has also focused on the interoperability of payment systems and tools so as to reduce the cost of using such tools and also to facilitate convenience. As such the future is optimistic regarding moving towards a cash less economy.

(The writer is Assistant Director in Nepal Rastra Bank and the view presented in this article is his personal one and doesn’t represent the view/opinion of the organization to which he is related to)

Reference:

·         Sixty Years of Nepal Rastra Bank, NRB Baluwatar, 2018

·         nrb.org,np

·         Nepal Clearing House Limited. Overview. Nepal Clearing House limited website(online), 2011

·         NRB 2011 Second Strategic Plan (2012-2016)

Published in "LakshyaYatra", an annual publication of Rastriya Banijya Bank Ltd, Employee Union, December-2018