CENTRE FOR SELF-HELP DEVELOPMENT

Institute of micro-finance and cooperative development.

Check Mail
  • Home
  • News & Events

Role of Wholesale Lending Organizations Should not be Marginalized

A webinar talk on Vitality and Vulnerability of Wholesale Lending Organizations in the Present Niche Market of Microfinance was organized by the Centre for Self-help Development (CSD) on May 3, 2021. The webinar talk dealt with the rationality of wholesale lending microfinance institutions which cater funding needs of retail microfinance institutions (MFIs) and provides backstopping support in areas such as capacity development and monitoring and supervision of their partner institutions. As currently, the roles and responsibilities of the wholesale lending organizations have been confined to loan operations only, the have to lobby for broadening their scope of activities in areas such as monitoring &supervision, overseeing the regulatory compliances and governance of MFIs.

Mr. Jyoti Chandra Ojha, Chief Executive Officer of RMDC Laghubitta Bittiya Sanstha Ltd was the key speaker of the program which was moderated by Dr. Bhesha Prasad Dhamala, Chairman of Nerude Laghubitta Bittiya Sanstha Ltd.

Highlighting the current status of the microfinance sector, Mr. Ojha said, “As of mid-December 2020, there are currently 76 microfinance financial institutions out of which 4 are wholesale lenders to microfinance institutions (MFIs) and cooperatives. The MFIs have a total of 4,128 branches, 19,788 staff and are providing microfinance services to 4.9 million of their members. In aggregate total loan outstanding is Rs. 281.47 billion, borrowing Rs. 141.06 billion and saving is Rs. 120.06 billion. ” He added, “The MFIs generate 42.65% of their total fund through savings mobilization of their members, 6.91% through their paid-up-capital and 50.12% through borrowing from commercial banks, wholesale microfinance institutions and other sources.” He further added, “Although the scope of wholesale microfinance institutions is vast, the commercial banks have been financing directly to the retail MFIs that has narrowed down the market of the wholesale lending organizations.”

Speaking on the rationale of the establishment of RMDC, Mr. Ojha said, “More than two decades back microfinance sector was in an infant stage and did not have adequate policy and regulatory framework. The investors had no confidence in the viability and sustainability of the MFIs which lent to the poor without collateral security. The few MFIs which had just began lacked financial resource to expand their services. The general public also thought that investment in MFIs was a risky venture.   The commercial banks numbering a few also were reluctant to lend them. In the meantime the Government and the Central Bank, Nepal Rastra Bank, realized the necessity of an apex institution to work as catalyst for microfinance development. RMDC was established with the mandate of wholesale lending, capacity development and monitoring &supervision catering the microfinance sector. Sana Kisan Bikas Bank Limited (SKBBL), First Microfinance Development Bank Limited (FMDB) and RSDC Laghubitta Bittya Sanstha Ltd were established subsequently as wholesale lenders.”

While speaking on the vulnerability of the wholesale lending organizations, Mr. Ojha said, “The sources of fund for the wholesale lending organizations comprise 84% borrowing from commercial banks and the remaining 16% through their own capitals and reserves. Currently, the commercial banks have the same lending rate to both the wholesale and the retailers. This has badly constrained the operations of the wholesale lending organizations. In the total supply of wholesale loans to the retail MFIs, only 7% is channelized through RMDC and three other organizations. The retail MFIs are currently opting commercial banks for funding as their rates are cheaper and they do not require tomeet prudential norms. There is now total lack of monitoring and supervision of the retail MFIs.   This has led to oversupply of fund on the market resulting in multiple financing to their clients. There are rampant violations of financial norms. Their sole objective has been maximizing profits by making bigger loans to the clients.

Speaking on the issues of wholesale lending, Dr. Bhesha Prasad Dhamala, said, “Since the commercial banks are making direct loans to the retail MFIs, the roles and responsibilities of wholesale lenders have constricted. They have become too much dependent on the commercial banks for their resources. To minimize this dependency, they should also lobby to the government for soft loans and subsidies.” On this Mr. Ojha said, “Deprived sector lending and agriculture loans should be channelized through wholesale lending MFIs to increase the quality of retail loans and to get better results. Wholesale lenders should advocate and lobby to multinational donors like IFC and ADB as well as Ministry of Finance for long term loans. The short term borrowings are hampered by erratic interest rate changes and this has also created problem for capital budgeting.” Mr. Ojha was against subsidy for individual borrowers and said, “Subsidy without commercial viability will hamper sustainability, degrade banking habit and it breaks banking norms and ultimately create breeding ground for delinquency.”

In context of microfinance and its overarching goal of poverty alleviation, Dr. Dhamala said, “The role of microfinance for poverty alleviation cannot be ignored. MFIs should promote entrepreneurship, develop market access and minimize the role of middlemen in market linkage. Wholesale organizations should play a proactive role on this issue.” Mr. Ojha on the role of microfinance for poverty alleviation said, “The MFIs have evolved strong financially but the economic condition of the clients have not been uplifted simultaneously. They are focused more on loan disbursement and repayment. They should also concentrate on entrepreneurship development of their clients in developing access to market linkage that ensures fair price to their products. Currently there is undue pressure on CEOs from their shareholders and board to increase profit. This has led to disbursing bigger size loans to their clients resulting in over-indebtedness.”

Dr. Dhamala also raised the issue of COVID-19 on microfinance institutions and its effects on loan disbursement and on loan delinquency. In response to this Mr. Ojha said, “Before COVID-19 the situation of Nepal was satisfactory in comparison to other countries in South Asia. COVID-19 has largely affected loan disbursement of MFIs repayment due to the shut down of the economic activities of the clients.”

Mr. Shankar Man Shrestha, Chairman of CSD, who was also present in the occasion said,” There are changes in the priorities of MFIs from its earlier days. MFIs should stick to the mission of ‘poverty free community’.  Currently there is a huge gap between the rich and the poor in Nepal. The rich are getting richer and the poor are getting poorer. To address this issue RMDC should develop a special program for the hardcore poor. Currently in terai regions there is reported number of cases where the poor people have been the victims of loan sharks who not only charge exorbitant interest rate but are also taking possession of their meager land and houses throwing them out to the street by false means. RMDC’s programs should focus on identifying the suppressed groups and help them to get out of poverty. Similarly, it should also launch programs for self-employment programs for the youth. A large number of youths have returned from abroad during the corona pandemic and it is right time to develop and groom them so that they can initiate micro-enterprise in their own homesteads. RMDC should work through its partner organizations for this endeavor. ”

One of the participants, Mr. Mani Kumar Arjyal, Chairman of Nepal Rural Development Society Centre (NRDSC) said, “Since commercial banks have aggressively disbursed loans to retail MFIs the role of wholesale organizations have shrunk. Commercial banks provide loans to wholesale and retail MFIs at same interest rate. He advised that the wholesale lenders should lobby government and NRB so that commercial banks are liable to provide loans to wholesale lenders at the base rate. Similarly, they should also focus more on conducting training and workshops for the staff and capacity development of clients.”

Dr. Pursottam Shrestha, Executive Director of the Centre for Rural Technology/Nepal said,” Various studies show that there is positive correlation between skill development training and profit in enterprises. MFIs should provide skill development training to their clients.”

 

 

News

Announcements