NRB Governor tells MFIs to exercise caution in lending

KATHMANDU, AUG 30 -

Nepal Rastra Bank ( NRB ) Governor Yuba Raj Khatiwada on Thursday warned the micro-finance institutions (MFIs) that political parties could use them as scapegoat to influence the voters in their favour which would distort the market mechanism of the MFIs.

“The government has intervened in MFIs’ business from time to time,” he said, indicating to loan waiver measures in the past. “Such measures may affect the repayment and operation of the MFIs.”

Former Prime Minister Baburam Bhattarai’s assurance to waive loans taken from rural development banks during his tenure as Finance Minister in 2009 has been blamed for the current woes of the rural development banks.

Following Bhattarai’s loan waiver assurance, like he did for loans taken from other government-owned banks and financial institutions, many borrowers of the rural banks have stopped repaying their loans. According to the NRB , Sudur Panchimanchal Grameen Bikas Bank was the hardest hit among such banks.

Addressing the launching of the Risk Management toolkit for MFI, organised by Standard Chartered Bank Nepal and MicroSave, an Indian consulting firm, Khatiwada said such ‘political risk’ should be avoided amid the election environment.

He also suggested the insurance of credit could further help minimise the risk.

He, however, expressed readiness to open door for deposit collection from non-members provided the deposits were insured.

He also stressed on the need for decreasing interest rate on loans to encourage borrowings from the formal channel. “We will help facilitate for low cost fund,” he said.

On the occasion, those involved in the micro-finance business pointed out a number of  practices in the MFIs that have increased the risk in the sector, including multiple-banking lending to over-indebting the clients, corporate governance, high-spread rate of interest, overcrowding in the same place, increased activities of politically trained employee unions.

CEO of Rural Micro-Finance Development Centre (RMDC) Shankar Man Shrestha said although the institutional growth and massive outreach of MFIs were good, multiple lending and borrowing and misuse of funds were appearing as a major threat to the MFIs.

Later at an interaction session, officials representing other MFIs said credit information agencies like Credit Information Bureau (CIB) is a must to stop multiple banking cultures in the MFIs. There is no one to look after if certain borrower has taken loan from other MFIs.

The NRB directed them to share information about borrowers from peer MFIs, banks, branches of banks and financial institutions located in the same area before approving a loan above Rs 50,000.

Himalayan Bank CEO Ashoke Rana suggested that the CIB itself could function as the agency to provide credit information to the MFIs as it has expertise and infrastructure on the matter.

Currently, the CIB provides credit information of A, B and C class financial institutions.

Director of Micro-Save Manoj Sharma suggested reducing the number of branches and clients, like in Bangladesh, could be an option to address the risk of MFIs getting overcrowded in one locality.

Praising Nepal for introducing regulation on MFIs for the first

time in South Asia, Sharma said the government and central bank should be much concerned about reducing the risk in the MFIs as many people get involved in their operation.

During the interaction sessions, the MFI officials asked for more cooperation for MFIs during their intial years.  

Ram Chandra Joshi, the CEO of Chhimek Laghubitta Bikas Bank, said cheap resources are available at latter years whereas the MFIs need such funds in the initial years.

CEO of Standard Chartered Joseph Silvanus said risk mitigation at MFI was important as it may arise anytime in the current economic scenario of the country.

Source: The Kathmandu Post