NRB's Study Recommends Removal of 15% Microfinance Interest Cap, Suggests Spread-Based Rate Determination

Nepal Rastra Bank (NRB) has released a study report suggesting improvements to the microfinance sector by proposing the removal of the 15% interest rate cap on microfinance institutions. This initiative follows the "Issues and Solutions for Microfinance Institutions" report, wherein the NRB aims to enable the adjustment of interest rates by adding a spread to the cost of funds.

The report provides several key recommendations. The study recommends limiting the interest rates of commercial banks to a maximum of 1.75 times the base rate of commercial banks. Also, institutions can set their interest rates by adding an additional 8% to the cost of funds while capping the distribution of dividends at 15%.

The report introduces a provision to waive 2% interest for actual loans, contingent on the overall inactive loan ratio, and specifically focuses on cases where the non-performing loan ratio doesn’t exceed 5%. In such scenarios, microfinance institutions are encouraged to open new branches. The report also suggests that commercial banks, using a 5% non-performing loan ratio as a measure, adjust the provision, making it possible to borrow up to 10%.

NRB has also mandated a 15% capital adequacy ratio for microfinance institutions. However, considering international practices and the risk status in the financial sector, the report proposes an increase in the capital adequacy ratio by 15%. To support capital growth, the report recommends offering facilities such as mergers and acquisitions and providing up to 25% rights shares.

Moreover, the report has outlined a five-year transition period for establishing the capital adequacy ratio. According to the schedule, microfinance institutions are expected to maintain a 10% capital adequacy ratio by the fiscal year 2082, increasing to 12% by 2083, 13% by 2084, and ultimately reaching 15% by 2085.