Institute of micro-finance and cooperative development.

CSD Facilitates Dialogue between Nepal Rastra Bank Officials and Microfinance Practitioners

In view of the stir created by the new Monetary Policy of the Nepal Rastra Bank (NRB) among the Microfinance Institutions (MFIs), the Centre for Self-help Development (CSD) felt the need to plan an interface between NRB officials and microfinance practitioners. Towards this end, an interaction, namely, ‘Impact of Monetary Policy 2016 on the Microfinance Sector in Nepal’ between the representatives from the Nepal Rastra Bank and the microfinance practitioners was held in the capital on August 7, 2016 and had 43 participants.

The current Monetary Policy requires Microfinance Institutions (MFIs) to observe a 7 percent spread rate on their interest rate to cover all operational cost excluding fund cost, curbing the interest rate levied by MFIs on their loan products. As in many countries, interest rate of microfinance in Nepal has remained deregulated so far. Besides, the new policy entails that commercial banks should lend 2% of their deprived sector lending portfolio directly to the grass-root deprived families out of the 5% compulsory deprived sector lending provision. This provision comes as a jolt to the MFIs as it creates a crunch on the availability of loanable funds to them in the market.

Citing the need of the hour, a dialogue between the central bank officials and the microfinance stakeholders was found imperative to foster better understanding and relation between them and to allow the microfinance sector to continue to move forward unhindered.

Welcoming the dignitaries gathered on the occasion, the Executive Director of CSD, Mr. Shanker Nath Kapali highlighted that the objective behind CSD’s initiation in organizing the program was to build up harmony and understanding among the stakeholders.

The Deputy Governor of the Nepal Rastra Bank, Mr. Shiba Raj Shrestha, graced the program as the Chief Guest and formally inaugurated the interaction by lighting the traditional lamp - panas. The program was chaired by Mr. Shankar Man Shrestha, Chairman of CSD. The special guests of the program were Mr. Shiva Nath Pandey, Executive Director, Banks and Financial Institutions Regulation Department, NRB; Mr. Upendra Kumar Paudel, Executive Director (Acting), Microfinance Promotion & Supervision Department, NRB and Mr. Dharma Raj Pandey, Chairman of the Nepal Microfinance Bankers Association (NMBA), former Executive Director of NRB Dr. Binod Atreya and Dr. Narahari Dhakal, Executive Director of Centre for Empowerment and Development.

The Chief Guest, Mr. Shiba Raj Shrestha recognized the efforts of the MF sector in reducing poverty in the country as well as empowering women and the overall social up-liftment. However, he pointed out, “The MF sector has played a major role in social mobilization, financial literacy, entrepreneurship development and women empowerment. Now and then, policy interventions from NRB is required to regulate the sector. We must now focus on a more digital economy and a credit plus approach. More innovative products must be introduced to give continuity to this door-to-door program.”

Introducing the program, Mr. Shankar Man Shrestha, who chaired the session,urged the participants to first self-evaluate themselves and to acknowledge both, the right and the wrong decisions and to correct the shortcomings, if any. He questioned, “Are we truly engaged in responsible financing? Earlier our cost of fund was expensive that’s why an interest rate from 20 – 24% was justifiable. But with falling cost of fund, we need to revise our interest rates.” Mr. Shrestha further added, “Deprived sector lending is like artificial breathing. No other country has such a provision. During the initial years it was introduced to encourage and support the sector, however, we need to be independent of this.” He also remarked, “We have been concentrating on easy-to-reach people and areas. We must now penetrate into the far-flung areas deprived of financial access. Financial literacy programs must be given priority to educate our clients on the best utilization of loans and raise awareness regarding the consequences of loan misutilization.”

Various queries were put forth by the representatives from wholesale lending institutions, microfinance banks, cooperatives and FINGOs. During the interaction, Mr. Prakash Raj Sharma, CEO, Laxmi Laghubitta Bikas Bank Ltd. said, “Sustainability of MFIs must also be taken into consideration while levying the policies. As MFIs work in rural and far flung areas the operational cost tends to be higher than that of commercial banks. Instead we should have stricter regulation regarding opening new branches in already over-crowded areas.”

Another MF practitioner Mr. Ram Chandra Joshee, CEO of Chimmek Laghubitta Bikas Bank Ltd. pointed out, “NMBA had agreed to put an interest rate cap of 20% on loan products, but, our suggestion was not heeded. We carry out monitoring and supervision of loans and hence our operating expenses is higher. It is also the reason why the microfinance sector has a better repayment rate. With new innovations like e-mapping being introduced, MFIs making most profit should be encouraged to go to areas with limited financial access.”

The CEO of Rural Microfinance Development Centre Ltd., a wholesale lending organization, Mr. Jyoti Chandra Ojha said, “MFIs should self-evaluate themselves and rectify the mistakes made during the implementation of the program. We need to recognize the problems first to find the solution to a way forward.”

Voicing the uncertainty regarding the position of FINGOs, General Manager of Manushi, Ms. Shova Bhajracharya said, “It is unfair to not allow the mother institution to hold promoter shares of the MF bank that it promotes. Moreover, during the I.P.O., provision should be made to allow 30% of the total shares to be purchased by our MF members.” She concluded saying, “Microfinance should not be viewed as a noose around our members’ neck, but as a matter of pride like a garland of flowers.”

After the participants shared their experiences and challenges posed by the new policy, the esteemed guests on the dais put across their point of view.

Former Executive Director of NRB, Dr. Atreya highlighted the fact that 18% of the total population was totally cut off from any financial access and that the microfinance program is an effective tool to reach them. He further added, “As the cost of fund varies from MFI to MFI, this spread rate cap may further lead to vagaries in the interest rate. Hence, an upper ceiling on the interest rate would be the right option. Regulating the number of MFIs a client can borrow loans from will help curb the problem of multiple financing.”

“The provision of deprived sector lending is the greatest determinant to MF growth. We must self-evaluate ourselves and see if really our client selection is the target group people. It is suggested that MFIs should venture into newer technologies and digital financing in order to improve the efficiency and productivity of staff,” said Dr. Narahari Dhakal.

Mr. Dharma Raj Pandey stated that if policies become too restrictive and suffocating, then slowly the MF sector will die out. Mr. Upendra Kumar Paudel, Executive Director of NRB said that the central bank would take into consideration all the viewpoints that were discussed. Another Executive Director of NRB, Mr. Shiva Nath Pandey added, “Microfinance has proven that group guarantee is more powerful and effective than any collateral. Through e-mapping we will identify and locate areas with no access to finance and we will ask MFIs to provide their services to them. Ploughing back of profits for the development of staff and members is necessary on the part of the MFIs.”

Feedback from the participants indicate that the program was successful in strengthening ties and understanding between the NRB and the microfinance stakeholders.