NRB Directive Enhances Client Protection Fund, Allows Individuals to Borrow from Two MFIs, and Updates Blacklisting Regulations

Nepal Rastra Bank (NRB) has revised the Integrated Directive 2079, providing significant relief to microfinance institutions (MFIs). One major amendment now allows an MFI to lend to up to two borrowers instead of just one. Previously, loans to more than one borrower had to be counted as non-performing loans (NPL). This change enables MFIs to write back provisioned loans, adding the recovered amounts to their income and increasing their earnings.

Additionally, NRB has increased the Client Protection Fund allocation from 1 percent to 1.5 percent by the end of Ashad 2082 B.S., with further increases to 2 percent by the end of Ashad 2083 B.S. and 3 percent by the end of Ashad 2084 B.S. The service fee for loan approvals has been reduced from 1.50 percent to 1.35 percent. Despite this reduction, the impact on MFIs will be minimal due to lower overall borrowing costs.

Previously, the cost of funds for MFIs was around 12-13 percent. This has now dropped to 7-8 percent, allowing MFIs to lend at 15 percent, resulting in a substantial profit margin. This reduction in the cost of funds significantly enhances the profitability of MFIs.

Additionally, NRB has revised the regulations related to blacklisting. If an MFI believes that a borrower, who has been blacklisted for defaulting on a loan, can repay the loan within a short period given some time, the MFI can remove the borrower from the blacklist for six months. However, if the borrower fails to repay the loan within this six-month period, the MFI must recommend that the borrower be reinstated on the blacklist.

MFIs are now allowed to lend to borrowers from up to two institutions, provided they stay within the borrowing limits. However, borrowers who have taken loans from banks or financial institutions are not eligible to borrow from MFIs. Additionally, MFIs can provide family-guaranteed loans of up to Rs. 25,000. Currently, low-income individuals can receive group-guaranteed loans for business or enterprise purposes, with a maximum limit of Rs. 500,000 per group member, which increases to Rs. 700,000 for members who have maintained a good credit record for two years.

NRB has also allowed microloans of up to Rs. 300,000 for renewable energy technologies, such as solar home systems or biogas, and for low-cost housing. The service fee for loan approvals has been reduced from 1.5 percent to 1.3 percent. For loans disbursed for less than one year, the service fee should not exceed an annual rate of 1.3 percent, calculated on a pro-rata basis based on the loan duration. Moreover, loans of up to Rs. 100,000 will not necessarily result in the borrower being blacklisted if they fail to repay due to unavoidable circumstances.