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Rapid Rise in Loan Delinquency: A Matter of Serious Concern for MFIs

A webinar was organized by the Centre for Self-help Development (CSD) on March 30, 2021 to apprise microfinance practitioners and other stakeholders on problems and effects caused by alarming rise in loan delinquency in the microfinance sector in Nepal. Loan delinquency is an important indicator of the health of any financial institution. Currently the problem has been cumulating in Nepal and if not addressed diligently it may ruin the microfinance industry as a whole. This issue has become more serious now with the advent of COVID-19 and consequence of lockdown.

Mr. Mani Kumar Arjyal, Chairman of Nepal Rural Development Society Centre (NRDSC) and founding Executive Director and current board member of Nerude Laghubitta Bittiya Sanstha Ltd moderated the program and introduced Dr. Gopal Dahit, Chief Executive Officer of Unique Nepal Laghubitta Bittiya Sanstha Ltd who was the speaker of the program. Mr. Arjyal said that loan delinquency has been rapidly rising and the issue is aggravated further by COVID-19 and lockdown.

Dr. Gopal Dahit, in his presentation, said that loan delinquency was 2% in mid-October, 2019 which increased to 12.47% in mid-April, 2020 and to 17.14% on mid-July, 2020. He said, “Due to the severity of COVID-19,  the government imposed lockdown on March 24, 2020 and in mid-April, 2020 delinquency increased to 12.47%, a precipitous rise from 2% from mid-October,2019 “. He further added, “The condition of delinquency was rampant from the month of March, 2020 when the government imposed lockdown to counteract the effects of COVID-19 although 2% delinquency in mid-October, 2019 was still much higher than the industry standard .”

On the issue of precipitous rise in loan delinquency, he said, “The delinquency in microfinance had deteriorated even before COVID-19 mainly due to the reasons such as wrong targeting of members, selecting members without assessing their socioeconomic benchmark, staff providing loans without appraising the needs and capacities of members and without checking their background and involvement with other MFIs.” Besides, he said, “Due to the erosion on sincerity and dedication of staff, the situation of client duplication and proxy borrowing has worsened. “

With regard to the remedial measures, Dr. Dahit said, “The field assistant should visit borrowers and encourage them to repay their overdue amount. They should be given target so that s/he will visit a number of borrowers with overdue amount in a given timeframe. Experience has shown that regular and timely tracking and convincing the borrowers the advantage of timely repayment helped recover large chunk of unpaid loans. Those loans that could not be recovered by field assistants should be dealt by branch managers directly and similarly those that could not be recovered by branch managers should be handled by area office and ultimate by head office.”  He added, “Preventive measures like regular monitoring and supervision of borrowers at their doorsteps by field assistants and cross checks by branch managers and other staff members from area office and head office should be made on time. Other than that, maintaining a good rapport with borrowers is vital to discipline the members.” He further added, “MFIs should also stop multiple financing as well as over financing the clients beyond the needs and capacities of the clients.”

Mr. Khadananda Acharya, Branch Manager from Koteshwor of Mahila Sahayogi Bachat Tatha Rin Sakari Sanstha Ltd shared,” NRB has given leeway to different MFIs to open up branches in his locality. My branch will have various targets like members and borrowers formation and loan disbursement. The staff are hapless in discouraging loan duplication although they know that this practices increase loan delinquency.”

Mr. Shankar Man Shrestha, Chairman of CSD, in his remarks said, “The problems faced by MFIs including loan delinquency have been the result of short sightedness of CEOs focusing on short term gain to raise profit, pressuring the staff to increase more and more number of clients and disbursing bigger loan irrespective of clients’ need and capacity. They should not accuse their staff, the government and NRB for not having strict policies and rules on loan collection.”   He further said, “Competition in branches to increase borrowers and loan size is due to the pressure of CEOs. The Board Members are also profit motivated and pressurize the CEOs for profit maximization and impact on share price but CEOs should convince them not to be overly profit motivated or else the institution would crash due to bad loans. CEOs should also abide by the basic tenets of microfinance and not indulge in compromising with borrowers and loan quality. The kingpin of any MFI is the CEO and it is his responsibility to act as per the tenets of microfinance and ensure quality of operations. Staff will follow what the CEO directs and CEO should be a role model. He should not have apathy for the well-being of the clients. “He further added, “The current trend of loan delinquency will affect the viability and sustainability of microfinance if MFIs continue to be profit motivated only. “ He also gave an example of Bangladesh where there are over 1000 MFIs but they are not indulging in undue multiple lending to clients leading them to over indebtedness.

Moderator of the webinar, Mr. Mani Kumar Arjyal added, “Senior Managers should be capacitated and updated on the policy formulated by NRB as well as concerned organizations. Similarly, MFIs should also update and upgrade Information Technology (IT) so that they will have regular and timely information like payment pattern, types of enterprises and other vital information that may be beaconing of earlier financial catastrophes. Use of IT may safeguard against loan delinquency”

Mr. Shanker Nath Kapali, former Executive Chief of CSD, said that loan delinquency is not only due to the advent of COVID-19 as the annual trend on loan delinquency has been increasing even before the lockdown.

During the discussion, Dr. Pursottam Shrestha, Executive Director of Centre for Rural Technology/Nepal, shared that loan delinquency in microfinance can be minimized though periodic monitoring and supervision by concerned MFIs.

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