MFIs face shortage of funds after NRB move

  • monetary policy on deprived sector lending
- BIBEK SUBEDI, Kathmandu

Jul 19, 2016-

With the Nepal Rastra Bank (NRB) forcing the commercial banks to directly lend two percent of their total credit, micro-finance institutions (MFIs)—which have been getting wholesale lending from banks under the deprived sector lending—will face shortage of funds.

They usually take deposits from the commercial banks and other financial institutions 

and lend the amount to individual borrowers.

Commercial banks too were meeting their target of lending 5 percent of their total loan to the deprived sector by providing wholesale loan to the MFIs and investing in the stocks of such institutions. 

The MFIs are currently mobilising funds from the commercial banks totalling around Rs 75 billion—nearly 5 percent of the total lending by the commercial banks to the deprived sector. As the new NRB provision has put the limit on direct lending to the deprived sector to 2 percent of their total lending, the commercial banks are likely to pull out that amount from the microfinance institutions.  The new provision, the micro-finance operators fear, will decrease their business volume by a third. “Around Rs25 billion will be pulled out from our system. Not only will it seriously affect our operation and profitability, but also expose us to a systemic risk,” warns Dharma Raj Pandey, president of Nepal Micro-Finance Bankers’ Association. “This policy has come at the time when microfinance institutions were planning to increase the access to finance. This decision will instead minimise our outreach,” he added.  The central bank has also imposed a moratorium on MFI licencing. The association plans to request the NRB to reconsider its decision. “We will soon hold an executive committee meeting and make a formal request to the central bank,” said Pandey.  

According to the micro-finance institutions, the NRB move will shoot up their cost of funding amid competition to get funds from the banks. 

Bankers maintain that it would be “ almost impossible” to directly lend 2 percent of their total credit to the deprived sector as provisioned in the monetary policy for the fiscal year 2016-17. Directly lending 2 percent of the total portfolio to the deprived sector is the biggest challenge put forth by the monetary policy yet for the commercial banks, they said. 

“This is the sector where commercial banks does not have much expertise,” said Upendra Poudel, president of Nepal Bankers’ Association (NBA), at an interaction organised by the association on Sunday. According to Pandey, the average loan size of micro-finance institutions is around Rs 45,000. 

Administering small-sized loans to the deprived sector need a separate specialised institution, said the NBA, calling on the central bank to think over its decision.  The central bank, however, defended its move saying that the monetary policy made such a provision to curb the high interest rates charged by the MFIs to their borrowers. “At present, micro-finance institutions are charging extremely high interest rates,” said Shiba Raj Shrestha, deputy governor of the NRB. “Once, the commercial banks start lending directly the interest rates will come down.”

The micro-finance operators, however, suggested the NRB find an alternative if the regulator really wanted the commercial banks’ direct involvement in the deprived sector lending. “If NRB wants commercial bank to lend in the deprived sector directly, it can ask them to make additional lending apart from wholesale lending they are doing currently,” said Jyoti Chandra Ojha, CEO of Rural Microfinance Development Centre. The provision of 7 percent interest spread will further hit the profitability of the MFIs, they complained. Praksah Raj Sharma, CEO of Laxmi Laghubitta Bittiya Sanstha, told the Post on Sunday that the central bank’s policy would have a disastrous impact on the MFIs.

Published: 19-07-2016 11:04

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