Tuesday, 7 February, 2023

Micro Finance And New Monetary Policy

Gokul Chandra Adhikari


Nepal Rastra Bank has recently issued a new monetary policy for the fiscal year 2077/ 78 which focuses on providing some rehabilitation to the national economy. The nationwide lockdown enforced to contain the spread of the COVID-19 pandemic has paralysed the economy over the past few months. Monetary policies are mainly the central bank’s own monetary programme. The central bank applies this policy and its objectives through banking activities.

Enhancing efficiency
Monetary policy for the fiscal year 2077/78 has aimed to make Micro Finance Institutions (MFI) and their activities more professional and respected. Through this policy, poor people can borrow loans with a low cost of fund from MFIs. In the places where there is a lack of financial services, this policy addresses to expanse the financial activities through MFI. The new monetary policy has addressed the MFI activities in eight different points. While these points are specifically addressed towards MFI, there are several other points in the policy which also applies to MFI as well.
Nepal Rastra Bank has postponed handing out licenses for new MFIs and has cancelled those who were currently in the process of receiving one. Earlier, the central bank used to issue license for new MFIs but encouraged old MFIs to merge together through indirect pressure at the same time. This led the central bank to face some criticisms as well. The new policy of withholding the license is now going to ease the process of merger policies in MFIs. A direct benefit from this policy is that now the MFIs should not pay more than 0.5 per cent service charge while borrowing money from different financial institutions. It enables the MFIs to collect resources with low cost of fund compared to the past.
It has also been announced that 10 per cent of the total refinance fund will be provided to MFIs by the central bank. As a result, the MFIs will receive a large amount at low interest rate through refinance. This will help to reduce the cost of funds of MFI significantly. The limit of mortgage loans has been expanded from Rs. 0.7 to Rs. 1.5 million for MFIs. Through this provision, MFIs may have an opportunity to widen their range of mortgage loans. However, the policy remains the same as earlier when it comes to limiting MFIs to flow only one third of their total loans for mortgage modality. Therefore, they still could not fully benefit from this provision.
Now, MFIs cannot charge more than 15 per cent interest rate and more than 1.5 per cent of service charge from their debtors. Hence this policy enables the debtors to find loans at low cost which will be beneficial for them. Due to this provision, income of MFIs is going to minimise significantly as the main source of income of these institutions is interest from debtors. Apart from the interests, the MFIs’ another source of income is the service charge on the loan, but due to this provision, this path of income has narrowed down, too.
Since there is more liquidity in the banking sector at the moment, MFIs can find sources in low cost of fund and therefore can sustain themselves despite the 15 per cent cap on the interest rate. The situation, however, is not going to remain the same forever. A slight change in any of the variables in the economy could change the current situation and could result in a high cost of fund for borrowing from the banking sector due to high interest rate in the money market.
Even though the regulation body will have no objection, it would be unethical and unfair to increase the rate of interest in loans for MFIs since they are considered to be a social bank and friend of the poor. If the MFIs were able to mobilise the savings from public, a huge amount of source could have been compensated from there which would result in a low cost of fund. Unlike international practices, MFIs in Nepal do not have permission to collect deposits from public. Therefore, they have to be dependent on financial institutions and wholesale credit providers for source of fund.
Besides long-term funds for a targeted objective, MFIs cannot park their money in any financial institute as a fixed deposit for more than three months as per this monetary policy. This provision has also resulted in minimisation of the income of MFIs. MFIs should take this provision as the central bank's message to benefit them by mobilising their resources instead of parking in financial institutions. It is mentioned in the policy that the interest rate system will be made more manageable by implementing the base rate calculation system. As a result of this, the interest rate declaration system will be more scientific and expected to benefit the MFIs.

Expansion of services
The policy has made an effort to financially strengthen the MFIs. Efforts have been made to expand the services of MFIs to locations where they have not stepped in. The central bank has also encouraged merging and therefore halted the process of handing out new licenses for the time being. As indicated by the monetary policy, if MFIs themselves become more aware about good governance and their professional capacity, they will be more systematic and dignified in their way of working.

(The author is a former deputy director of Nepal Rastra Bank. agokul24@gmail.com)