Uttam Maharjan

In a poor country like Nepal, where rural areas outnumber urban areas and where the majority of poor people live in rural areas, the importance of microfinance cannot be overemphasised. The broad thrust of microfinance institutions is to reduce poverty by embarking upon various programmes such as financial, skill development, health and education programmes for the uplift of the standard of living of the poor. Microfinance institutions play a pivotal role in generating income for the poor by creating gainful employment opportunities by providing them with small loans and savings facilities. They also serve as a tool for empowerment of the underprivileged.
There are now 87 microfinance institutions in Nepal. Out of these, 30 are national-level entities. In order to strengthen microfinance institutions and ensure that their services are better utilised by the underprivileged, Nepal Rastra Bank has introduced some new provisions through the monetary policy. In the first place, the cap on interest on loans has been fixed at not more than 15 per cent. The loan limit has been increased from Rs. one million to Rs. 1.5 million for members of groups or individuals living in rural areas to operate micro-enterprises. In like manner, microfinance institutions have been barred from levying not more than a 1.5 per cent service charge on borrowers.
Previously, the interest on loans was up to 18 per cent with a service charge at 2 to 2.5 per cent. Furthermore, no service charge can be levied on depositors in the course of the operation of their accounts. These provisions are a respite for both borrowers and depositors, who happen to belong to the underprivileged class. It may be of relevance to note that cooperatives can levy not more than 16 per cent interest on loans. Both cooperatives and microfinance institutions belong to the 'D' category of banks and financial institutions.

Fund mobilisation
Microfinance institutions operate their business by mobilising funds from banks and depositors. They have invested around Rs. 260 billion in loans, out of which Rs. 165 billion is from loans from banks and Rs. 95 billion is from deposits. They used to take loans from banks at 11 per cent. As the interest to be levied on loans has been limited to 15 per cent, they are expecting a lower interest rate from banks, too. Otherwise, they may face a survival crisis. As banks are lowering interest both on deposits and on loans due to excessive liquidity in the market and a sluggish demand for loans, the interest on loans to microfinance institutions may hopefully come down.
Nepal Rastra Bank has also restricted the distribution of a dividend. As per the new provision, only 30 per cent of the net distributable profit can be distributed as a cash dividend. If such a profit is less than five per cent of the total paid-up capital, no cash dividend can be distributed save for tax purposes.
Now, microfinance institutions have to choose their areas of operation: whether they want to operate in a state or throughout the nation. If a microfinance institution is operating in more than one state, it has to choose only one state to operate in. Alternatively, such an institution may jack up its capital to the required level and upgrade itself to a national-level entity. Microfinance institutions will have to do the needful in this regard by Asadh-end of 2078.
The merger and acquisition process has been going on for the last few years. Nepal Rastra Bank has not rowed back on the process; rather, the central regulatory authority is encouraging banks and financial institutions to adopt the merger and acquisition process. Nepal Rastra Bank thinks that 30 or 35 microfinance institutions are enough for the country on the basis of the population and the size of the market. So the central regulator has directed cross-holding microfinance institutions to merge and intends that microfinance institutions directly or indirectly owned and controlled by the same family or business group and those having established business relations be merged.
Nepal Rastra Bank has offered various incentives, including those as stipulated in the Merger and Acquisition of Banks and Financial Institutions Regulation 2073, to microfinance institutions that merge. For example, for those merged microfinance institutions conducting joint operations by Asadh-end of 2078, the deadline for regularizing loans crossing the single obligor limit will be extended, the deadline for fulfilling the capital fund ratio will be extended and the six-month cooling period for directors, CEOs and deputy CEOs for joining other institutions licenced by Nepal Rastra Bank will be waived.
Nepal Rastra Bank has also introduced a relief package for borrowers. Due to the COVID-19 pandemic, the borrowers of microfinance institutions have also found it difficult to repay their loans. So the deadline for repayment of loans not realized in Asadh will have to be extended within Aswin by six months, i.e. up to Chait-end of this year, by analysing the nature of business, the extent of the COVID-19 impact, the time required for restoring business and the requirements of borrowers, among others.

Fixed deposit
Nepal Rastra Bank has also debarred microfinance institutions from opening fixed deposits in banks for more than three months. Such fixed deposits cannot be renewed, either after maturity. The rationale behind this step is to encourage microfinance institutions to mobilise their funds for the targeted groups rather than hoard them in banks. In a nutshell, the recent steps taken by Nepal Rastra Bank are designed to beef up microfinance institutions, enhance their capacity building and enable the underprivileged to enjoy microfinance services for the betterment of their livelihoods and their community.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)