This is a sequel to an opinion piece I wrote in 2017. Back then, I argued that banks needed to become digitally oriented institutions that serve customers with greater efficiency. Eight years on, much has changed. But Nepali banks haven’t changed nearly enough. We are still designing for yesterday’s problems, still mistaking compliance for strategy, and risk avoidance for prudence.
Now is the time for a reset.
Deeply Digital
It is encouraging to note that Nepal’s digital payment system has evolved significantly since the pandemic and is now world-class. But today, “digital” is merely table stakes. What matters now is how deeply and seamlessly banks integrate into the lives and transactions of their customers.
While traditional banks are still redesigning their mobile apps, non-bank fintech entities are already reshaping the market. Nepal doesn’t yet have licensed digital banks, but once the regulatory space opens up—as it inevitably will—banks that haven’t reimagined themselves as digital platforms will quickly lose relevance. Banks must embrace open banking, fintech partnerships, and platforms that enable continuous innovation on top of banking rails.
Ecosystem and Inclusion
Nepali banks continue to rely heavily on collateralised lending and regulatory arbitrage, while productive capital remains inaccessible to SMEs, startups, and underserved sectors. In recent years, we’ve seen how patient, risk-tolerant private equity can unlock new possibilities. Banks should acknowledge this shift and find ways to work alongside it to improve their own portfolio risk. They must participate actively in building ecosystems for entrepreneurship and value creation.
Financial inclusion is often equated with opening bank accounts for the previously unbanked. But have we addressed structural exclusion with products that are contextually relevant and viable? It is time banks began serving the informal economy in a more meaningful way. Today’s SMEs are tomorrow’s large borrowers. Banks must, therefore, understand SMEs better. This means designing products and services that work for businesses with fluctuating cash flows, thin margins, and informal practices.
From Collateral to Cash Flow
One of the key bottlenecks in loan allocation today is banks’ obsession with secondary collateral, primarily real estate. In a country where most enterprises are asset-poor but ambition-rich, collateral-based lending either creates distortions or leaves a large portion of businesses out of the equation.
Banks are in the business of managing risks, not avoiding them. Predominantly collateral-based lending is risk avoidance disguised as prudence. The current episode of rising non-banking assets is a clear warning. A shift toward cash flow-based lending is long overdue. It is now both practical and possible to derive creditworthiness from digital records, tax filings, mobile money flows, payment data, and more.
This shift, however, requires a change in mindset, tools, and incentives—both among bankers and regulators.
Capable Boards
We have seen some improvement in the structure of bank boards through the inclusion of independent and female directors. However, traditional boardroom experience is no longer sufficient. Banks must enhance the overall capability of their boards to comprehend complexity and guide institutions through volatile conditions.
Banks need board members who understand digital ecosystems, venture dynamics, AI, cyber risk, sustainability, and ESG considerations, among other things.
The practice of key shareholders retaining control over bank boards through appointed proxies—who often lack the knowledge or skills (which are distinct from academic degrees) necessary for effective oversight and guidance—must come to an end.
Further Consolidation and Scale
Here is a hard pill to swallow: the illusion of banking strength in Nepal has often rested on regulatory forbearance. Is this resilience—or fragility masked by strong branding?
Nepal experimented with a liberal licensing regime for decades. The result? Over 20 Class A banks that look remarkably alike. Relative to the size of our economy, the number of banks should perhaps be 10 or fewer. More importantly, they must be stronger and more capable.
We need banks that can invest in innovation, withstand economic shocks, and scale responsibly to meet future demands. Consolidation, if done strategically, can and should be a lever for strength—not just size. But this requires courage, vision, and clarity from both bankers and regulators.
Nepal’s banking sector now has a long enough history and rich enough experience to think bigger. In today’s digital global context, growth can also be achieved by scaling expertise beyond national boundaries.
Banks can learn from the hospitality sector: Soaltee Hotel has begun exporting technical and management services to foreign countries. Nepal Clearing House Limited has clearly built strong capabilities in payment processing. Nepali banks are now in a position to export technical services such as credit models, compliance systems, and training programs to frontier markets.
HR Quality
We have seen a worrying decline in the quality and depth of human capital across the banking industry. Bankers today are fluent in collateral registration but uncomfortable with credit risk assessment. Product innovation is rare. Regulatory compliance dominates internal conversations.
It is possible that the central bank’s oversight of each bank’s HR policy has resulted in a standardization of people management and governance practices to the point that most banks now look and feel the same in terms of what they deliver. Regulation should ensure soundness—not sameness.
Rebuilding capacity requires empowered leadership and differentiated cultures.
Misguided and retrospective legal cases against bankers are becoming more frequent—often years after credit decisions were made in good faith and through proper processes. This breeds fear. When professionals worry about being prosecuted for judgment calls, they default to inaction. Criminal liability should be pursued for malafide actions, not for legitimate participation in loan underwriting processes.
We need legal protection for professional decisions made under the documented policies and systems of the time. If we want capable bankers who can make tough calls, we must stop turning them into scapegoats for systemic shortcomings.
A banking job is increasingly used as a stepping stone by many young professionals. It offers just enough prestige to secure visas, but rarely enough incentive to stay. When top talent exits early, institutional memory and leadership pipelines weaken.
If we don’t fix the people's problem—and the policies that created it—every other progress will remain superficial.
The Choices
Nepal’s banking industry stands at a crossroads. One path leads to a future where banks are central to building inclusive prosperity. The other leads to a managed decline in trust and returns.
To walk the first path, banks must be able to ask, “What do our customers need and how can we better serve them?” instead of, “What do regulators allow?”
The author, a former banker, is the founder and chair of True North Associates, a private equity firm.
Part 1 of this article is available here:
https://www.linkedin.com/pulse/what-banks-need-become-suman-joshi/