The Nepal Rastra Bank (NRB), Nepal’s central banking authority, recently announced new regulations for microfinance institutions (MFIs) that aim to increase the financial inclusion of unbanked districts in the country. Despite the reported recent growth of MFIs in 65 districts of Nepal, there are ten districts that receive no MFI services at all. As a result, NRB declared for the 2013-2014 fiscal year that all financial non-governmental organizations (FNGOs) that have been licensed by NRB for financial intermediation must become class ‘D’ financial institutions, which are more directly supervised by NRB than FNGOs and are generally allowed to undertake larger quantities and sizes of banking transactions [1,2]. NRB estimates that the new rule will help to add 33 more class ‘D’ banks operating in the country. As of July 2013, there are 33 FNGOs and 32 class ‘D’ financial institutions in Nepal. By increasing regulations and deal flow, NRB hopes that the new act will enable MFIs to reach more underserved districts. Additionally, NRB announced that class ‘D’ banks will be licensed based on geographical location to encourage financial access in undeserved areas [1].
However, not everyone agrees with the new regulations. Mr Bhagwati Chaudhary, chairman of the Nepal-based financial services organization Forward Community Microfinance Development Bank, cautioned that while MFIs should place additional focus on unbanked districts, “it is not easy for [an FNGO] that is operating under the laws…and regulatory framework of NRB” to become class ‘D.’” In other words, the new regulations could potentially and counter-productively reduce the number of MFIs operating in the country, thus increasing the number of unbanked regions. Additionally, Dr Harihar Dev Pant, CEO of the Nepal-based financial services organization Nirdhan Utthan Bank, warned that NRB should “encourage existing [MFIs] to reach out to these remote areas devoid of financial services” rather than incentivize the creation and licensing of entirely new MFIs that have fewer resources and less experience. NRB will provide interest-free loans of up to NPR 2 million (USD 20,400) for class D banks to start branches in designated ‘unbanked’ districts [1].
Lastly, NRB decided to expand the limit on collateral-less microloans available to individuals to NPR 150,000 (USD 1,500). Based on the collateral, a microfinance group member is entitled to borrow up to NPR 400,000 (USD 4,100), up from the previous limit of NPR 300,000 (USD 3,100). However, Dr Pant argues that a higher “volume of loans” is more important than “increasing the loan ceiling,” as stipulated in this regulation, in reaching the “more deprived people in the rural areas.” He also adds that “NRB failed to define whether individuals who are not affiliated with [a] microcredit group should be eligible for the collateral-based microloan of up to NPR 400,000 (USD 4,100) – these are the ones that are in need of micro enterprise loans [1].”
For the year 2011, NRB reported total assets of NPR 299 billion (USD 3.67 billion).
By Michael Averell, Research Associate
About Nepal Rastra Bank (NRB)
Established in 1956, NRB is Nepal’s central bank. NRB formulates and monitors the nation’s monetary and fiscal policy and regulates the nation’s banking and financial sectors. For the year 2011, NRB reported total assets of NPR 299 billion (USD 3.67 billion).
Sources and Additional Resources
[1] The Himalayan Times: “MFIs to flood financial sector,” http://www.thehimalayantimes.com/fullNews.php?headline=MFIs+to+flood+financial+sector&NewsID=385079
[2] South Asian Microfinance Network (SAMN): “Microfinance in Nepal,” http://www.samn.eu/?q=nepal
MicroCapital story, July 15, 2013, “MICROCAPITAL BRIEF: Nepal’s Microfinance Institutions (MFIs) See 21% Growth in Profit During 2013-2014 Amidst Concerns Over High Interest Rates Charged to Borrowers,” https://www.microcapital.org/microcapital-brief-nepals-microfinance-institutions-mfis-see-21-growth-in-profit-during-2013-2014-amidst-concerns-over-high-interest-rates-charged-to-borrowers/
MicroCapital story, February 28, 2013, “MICROCAPITAL BRIEF: Nepal Rastra Bank, Rural Microfinance Development Center, Center for Microfinance Nepal Urge Microlenders to Lower Interest Rates, Focus on “Deprived” Sectors,” https://www.microcapital.org/microcapital-brief-nepal-rastra-bank-rural-microfinance-development-center-center-for-microfinance-nepal-urge-microlenders-to-lower-interest-rates-focus-on-deprived-sectors/
MicroCapital story, January 5, 2013, “MICROCAPITAL BRIEF: Representatives of Nepal’s Rural Microfinance Development Center (RMDC), Nepal Rastra Bank (NRB) Express Cautious Optimism About Microfinance Reducing Poverty While Conceding There are High Interest Rates, Mission Drift,” https://www.microcapital.org/microcapital-brief-representatives-of-nepals-rural-microfinance-development-center-rmdc-nepal-rastra-bank-nrb-express-cautious-optimism-about-microfinance-reducing-poverty-while-concedi/
MicroCapital Universe Profile: Nepal Rastra Bank (NRB) https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Nepal+Rastra+Bank+%28NRB%29
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