Loans issued with soft financing: NRB to fix upper limit on interest rate

KATHMANDU, APR 16 -

Nepal Rastra Bank (NRB) is working to fix the maximum interest rate that cooperatives and non-government organisations (NGOs) can charge on loans issued with funds it has provided them as soft financing.

The central bank’s Rural Self-Reliance Fund (RSRF) has been making wholesale lending to cooperatives and NGOs at minimum interest in a bid to promote people’s access to finance.

The RSRF charges 8 percent interest on such lending. The rate of interest is reduced to 2 percent with the provision of 75 percent interest refunding if the cooperatives and NGOs make timely repayments.

However, it has not fixed the upper limit of the interest rates, which according to central bank officials, has led to some co-ops and NGOs charging their borrowers an interest rate of as high as 18-20 percent.

“That’s why we are working to fix the upper limit of the interest rate so that these lending institutions cannot not fix the interest rate arbitrarily,” said a senior NRB official. The central bank has fixed the upper limit of the interest rate on its refinancing to hydropower projects, sick enterprises and export-oriented and cottage industries.

The RSRF has lent Rs 806.68 million to 548 cooperatives and NGOs as of mid-January 2012. Loans amounting to Rs 431.3 million remain outstanding, according to NRB.

A total of 29,834 families have benefited from loans made through the RSRF, said the central bank. The poor and marginalised are the targets of such lending.

In order to receive soft financing from the RSRF, cooperatives and NGOs are required to issue 20 percent of the credit with their own resources. The RSRF will provide 80 percent of the amount of the loan. “We provide up to Rs 2 million to each cooperative or NGO initially and increase the amount to Rs 2.5 million later,” said the NRB official.

The recovery rate of the loans provided by NGOs and cooperatives stands at 92.46 percent.

According to a study made in 2007 by NRB on the impact of the RSRF, an overwhelming majority of clients (85 percent) felt an improvement in their overall socio-economic conditions after participating in the RSRF programme. The proportion reporting an improved condition was the highest in the hills (91.5 percent) and the lowest in the mountains (45.4 percent), with the Tarai in between (85.4 percent).

Source: Kantipur