Positive Outlook for Digital Banking in Nepal

Positive Outlook for Digital Banking in Nepal

                                                                                                                        *Amish Dhungel        

The term bank is said to have been derived from the Italian word “banca”, meaning a bench, used by Italian merchants to make a deal to borrow and lend money. As such it is evident that the meaning of the bank has a connotation with the physical location/evidence. Making use of banking services meant that a customer should be present in the physical outlet of a bank to perform transactions. However, with the introduction of modern technology in the banking industry, the traditional notion of banking is changing. Customers can now avail banking services Any-Time, Any-Where without having to reach the physical branch location.

As Bill Gates announced in 2008, “banking is essential, banks are not”, the developments in the field of banking shows such directions. The use of computer and internet technology for offering banking services has changed the way traditional banking is done. And with digital banking/finance services offered via means of telephone, mobile phone, internet, etc. is popular the modus-operandi of banking evolving.

Nepalese banks and financial institutions followed the global band-wagon of introducing modern technology in the banking industry. It was as early as 1990 that Nepalese banks started to adopt means of digital banking. Then Nepal Arab Bank Limited introduced Credit Cards in 1990 AD. This was followed by Himalayan Bank Ltd by offering Tele-banking, Internet banking by Kumari Bank Limited in 2002, SMS banking by Laxmi Bank Limited in 2004 and so on.

The mediums of digital banking prevalent in Nepal are cards, internet banking, mobile banking, e-wallets(offered by non-bank institutions), Point of Sales (POS) machines, Point of Transactions (POT) machines, QR(Quick Response) Code, ATM (Automated Teller Machine), etc. Similarly Electronic Cheque Clearance (ECC), Interbank Payment System (IPS), SWIFT (Society for Worldwide Interbank Financial Telecommunication), etc are digital banking tools that have been used for executing transactions of large volumes.

Though it has been quite some time that Nepal has been using various modern means of payments, the volume of such usage hasn’t increased in a significant manner. In spite of the slow pace, the numbers are increasing. The following table shows an increase in the usage of various channels of digital banking in Nepal for two consecutive years.

Tools	2nd Quarter 74/75	2nd Quarter 75/76
No. of Mobile Banking Customers	35,30,227	63,94,916
No. of Internet Banking Customers	8,42,431	8,56,695
No. of ATMs	2,638	3,049
No. of Debit Cards	57,69,128	59,62,838
No. of Credit Cards	94,716	1,00,527

Source: Monthly Statistics, NRB

Popularity of digital banking services has been a global trend. Thanks to the ease in connection, low cost of product offerings, its role in ensuring financial inclusion, and poverty alleviation, etc. Increase in use of digital banking will reduce the demand of cash; meaning reduced expenses in printing cash, less circulation cost, higher durability, increased the transparency of transactions, higher revenue collection for government, etc. Having realized immense importance of digital banking, both Nepal Rastra Bank (NRB) and Government of Nepal (GoN) has felt the urge to promote Digital Banking in Nepal. Recent move by both, the body shows such direction.

To discourage cash is to promote digital banking. For this the central regulatory authority, NRB has established a Payment Systems Department on 2nd 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 systems(including digital ones) in the country, including the non-bank financial institutions. At present NRB has been providing a license to both banks and non-banking financial institution as Payment Service Provider (PSP) and Payment Systems Operator (PSO). As of Mid May 2019, the department has issued a license to 5 non-bank PSP’s and 4 non-bank PSO’s. It has also provided the license to 45 BFI’s to offer digital financial services. The number of market players is likely increasing in the day to come.

NRB has been working thoughtfully to develop a secure, healthy and efficient system of payments. It has formulated and implemented a National Payment System Development Strategy, Licensing policy for Payment Related Institutions 2073, Payment Systems Oversight Framework 2018, Payment and Settlement Bylaws 2072, and has also issued various directives and circulars to guide and direct payment systems related activities in Nepal. Recently it has made an upward revision of limit for digital transactions which addressed one of the suggestions by Digital Nepal Framework 2018 developed by Ministry of Communication and Information Technology aims to harness the benefit of technology to accelerate economic growth.  

NRB aims to move towards cash-less economy gradually by passing through less-cash economy. To discourage the use of cash NRB has reduced the limit of cash-based transactions to NPR 1 million from the erstwhile limit of NPR 3 million. This has lead to an increase in the volume of electronic transactions via NRB promoted Nepal Clearing House Limited (NCHL). For eg in 17/18 the average daily transaction volume and average settlement values in NCHL-IPS were 8,003 and NPR 3.03 Billion as against 2,413 and NPR 1.29 Billion in the previous year.

Similarly NRB is about to add a milestone to the Nepalese payment systems domain by installing the Real Time Gross Settlement (RTGS) system within September 2019. The system will cater to the need for urgent payments, large-value payments, securities-related payments, and government transactions. This will add to the credibility and efficiency of the existing payment systems. Upcoming endeavors of NRB include study for establishing National Payment Switch. The switch will increase the usage of digital financial services by reducing hassle and the cost of using digital finance. Similarly, the bank has entered into a cooperation with The World Bank to formulate a National Retail Payment Strategy. All these initiatives will develop a strong infrastructure to promote digital banking in the country.

Likewise GoN has also formulated Digital Nepal Framework 2018. The framework plans to promote Digital Finance Services to attain the aim of Digital Nepal. Similarly Budget 2076/77 presented recently has also put forth various creative ideas to promote digital transactions in Nepal. One of its interesting announcements is to rebate back the customer with 10% of 13% Value Added Tax that is paid during the online purchase of goods and services. It also prioritizes the use of electronic cards for fare payments in the transport industry. Similarly, it has also announced for collection of government revenue and payment of expenditure through the electronic system from next year. The budget has also provided to popularize mobile, internet and branch-less banking, establish National Payment Gateway, decrease cash-based transactions by use of secured cards and internet payment options, ensure a mechanism for payment of electricity and drinking water bills via an electronic medium, etc. All these initiatives if implemented properly will increase digital transactions and digital banking in manifold times.

The overall ambiance is optimistic for popularizing digital banking in Nepal. With mobile penetration rate greater than 100% out of which  more than 70% of mobile phones being smart, declining cost per unit of data, high-speed internet solutions and 63% of internet penetration rate, expansion of physical infrastructure, etc the environment is more encouraging for the establishment of a conducive ecosystem of digital banking. Government of Nepal and Nepal Rastra Bank have also issued promising plans and policies to promote digital banking in the country. A coordinated approach with various stakeholders should be ensured to achieve intended results of thoughtfully formulated policies.

*Dhungel is Assistant Director in Nepal Rastra Bank.

This article was published by Nepal Financial Institutions Employees Association  in Arthik Mimansha, on October, 2019.