The government has formed a seven-member taskforce to study the interest rate structure of Micro-Finance Institutions (MFIs) amid complaints the MFIs have been charging exorbitant interest rates to borrowers.

A meeting headed by Chief Secretary Som Lal Subedi  on Tuesday formed the taskforce headed by Finance Ministry’s Joint Secretary Krishna Prasad Devkota.

Other members include Uttar Kumar Khatri from the Prime Minister’s Office (PMO), Bal Krishna Ghimire from the National Planning Commission, Resmi Raj Pandey from the Ministry of Federal Affairs and Local Development, Kashinath Marasini from the Ministry of Cooperative and Poverty Alleviation.

Nepal Rastra Bank (NRB) Executive Director Binod Atreya and Poverty Alleviation Fund Executive Director Nahakul KC are other members of the team.

The taskforce has been asked to recommend how to make micro-credit programme easier and what reforms are needed in the existing system, within the next 15 days, the PMO said in a statement.

Devkota said the team will mainly examine the interest rates imposed by MFIs and make recommendation on how to manage the rates properly.

With the MFIs distributing attractive dividends to shareholders—up to 60 percent—and their share prices above those of commercial banks, it is suspected the MFIs could have managed to make good profits by maintaining high interest rate spread.

However, the central bank and MFI officials say the interest rate structure of such institutions in Nepal is not higher compared to other South Asian countries. “The average interest rate of MFIs in Nepal is 18 percent which is lower than India and Bangladesh,” said Atreya, adding the average interest rate maintained by the MFIs in India and Bangladesh is around 25 percent.

According to the central bank, the MFIs have maintained an interest rate spread of 12 percent, and the share of administrative costs for reaching remote areas is high.

Although the central bank has directed commercial banks to maintain the interest rate spread 5 percent, it does not have any plan to enforce such a provision in the MFIs. MFIs do not collect deposits from the public, except from their members. Their cost of fund usually remains higher as they collect the funds from loans taken from Banks and Financial Institutions (BFIs). “So we are not enforcing the spread rate provision in MFIs,” said Atreya. 

According to the central bank, the average cost of fund for the MFIs stands at 6 percent. There are a total of 40 MFIs licensed by the central bank. A, B and C class financial institutions usually do not directly reach out to the remote parts of the country. They allocate the amount that they have to invest under the deprived sector lending programme to the MFIs, which then lend to the poor people, usually without collateral. 

Commercial banks have to allocate 5 percent of their total lending for deprived sector, while development banks have to allocate 4.5 percent and finance companies 4 percent. 

MFI officials say they are forced to keep the interest rate higher compared to A, B and C class FIs because they have to reach to remote areas, resulting in higher administrative costs.

“The cost of fund is higher for us as we cannot collect deposits from the public. The risk is also higher as we provide loans without collateral. These factors force us to the keep interest rate relatively higher,” said Dharma Raj Pandey, president of Nepal Micro-Finance Bankers’ Association. He claimed the interest rate they are imposing is among the lowest in Southeast Asian countries.