CYC Nepal Laghubitta Submits 17-Point Reform Proposal to Address Microfinance Sector Crisis

CYC Nepal Laghubitta Financial Institution’s CEO Dolendra Prasad Sharma, has presented a detailed 17-point reform proposal to the Banking Sector Reform Taskforce, aiming to provide a long-term solution to the serious crisis currently gripping Nepal’s microfinance sector. Sharma personally met with the taskforce chairperson, Rewat Bahadur Karki, and executive director, Guru Prasad Paudel, at Nepal Rastra Bank on Sunday to submit the recommendations.

The proposal emphasizes the need for a structured three-year reform roadmap for the microfinance industry, underlining that quick fixes will not suffice to resolve the sector’s challenges. It calls for interest rate regulation through the introduction of a Microfinance Annual Percentage Rate (MAPR), institutional mergers to reduce fragmentation, borrower education programs, and a review of rural financial models to ensure sustainability and social empowerment.

Sharma highlighted that although microfinance institutions were initially established to expand financial access to low-income communities, many of these institutions now face severe financial difficulties. This crisis has triggered dissatisfaction and distrust among members, employees, and shareholders, posing risks to the stability of the entire financial system.

Key recommendations in the proposal include the establishment of clear guidelines for loan restructuring, partial loan forgiveness programs targeting vulnerable borrowers, and streamlined loan settlement arrangements offering concessions on outstanding debts. It also advocates forming dedicated “Risk Asset Management Units” within microfinance institutions to oversee loan recovery and restructuring efforts.

Community-based dispute resolution mechanisms are proposed to ease recovery pressures, while financial literacy campaigns aim to educate borrowers about loan management. The plan also suggests expanding loan limits — including unsecured loans — to meet growing customer needs and allowing microfinance institutions to participate in credit purchase and sale activities to improve liquidity.

To strengthen the sector structurally, the proposal calls for policy reforms such as limiting the number of microfinance institutions through mandatory mergers, aiming to reduce their number to under 20 within a year. Promotion of Community-owned Microfinance Institutions (COMFI) is recommended as a sustainable model suitable for Nepal’s rural social fabric.

The proposal further urges the government to link poverty alleviation programs with microfinance institutions, guaranteeing minimum support prices for products produced by microfinance members. It also recommends easing capital adequacy requirements by adopting Basel II norms instead of Basel III for the sector, enabling greater lending capacity.

Enhancing credit information systems with effective blacklisting of defaulting borrowers, introducing innovative financial instruments with variable interest rates, and facilitating funds management through overdraft facilities and long-term deposit schemes are also included in the plan.

Addressing operational challenges, the proposal calls for simplifying loan protection fund and insurance procedures, reducing income tax on microfinance profits to 10%, and ensuring the remaining tax is invested for social and member welfare. Finally, it stresses the need to strengthen the regulatory authority by recruiting experienced personnel and establishing a stable supervisory environment.

CYC Nepal Laghubitta expects Nepal Rastra Bank to seriously consider these comprehensive recommendations to restore financial stability, transparency, and social responsibility in Nepal’s microfinance sector.