Number of microfinance banks surges in six years

KATHMANDU:

The number of microfinance development banks has grown three-fold in the last six years, thriving on the wholesale lending provided by the banks’ easy source of funds.

At present, there are 36 microfinance development banks, including the recently launched Samudayik Mahila Microfinance Bank, licensed by Nepal Rastra Bank (NRB) with a dozen more in the pipeline. However, only five years ago, there were only 12 such class ‘D’ financial institutions in operation.

Microfinance institutions seem to have thrived after the central bank’s decision to stop issuing licence to new commercial banks, development banks and finance companies from August, 2009. At present, apart from class ‘D’ banks, NRB issues new operating licence only to merged or upgraded financial institutions and to development banks operating in less than three districts.

“The central bank at present is processing more than 50 applications for the permission to start a microfinance bank,” informed Deputy Governor of NRB, Maha Prasad Adhikari.

NRB’s decree for non-government organisations working in financial intermediation to become class ‘D’ financial institutions by mid-July 2015 seems to have caused the sudden surge in the number of aspiring microfinance development banks. At present, there are 30 such financial NGOs, while five have already obtained the licence of microfinance bank.

However, the number of microfinance institutions was already on the rise before the provision was announced in July 2013. The attractive profit being made by microfinance development banks has drawn a large number of people to invest in these micro lenders. These institutions have earned Rs 104 million on an average as profit till mid-January 2014.

“The business model of microfinance institutions seem very profitable and as there is still a large section of the country in need of micro credit we have better scope of expanding our business in the longer period,” pointed out one of the promoters of a microfinance bank that was awarded operating licence a few months ago.

Mostly, microfinance banks borrow from commercial banks and other financial institutions and provide credit to micro borrowers. They make a lot of money from the margin between the rate at which they borrow and lend to the end consumers. The borrowing rate stands at less than 10 per cent while they lend at higher than 15 per cent.

“The central bank is concerned that grassroots level borrowers do not get exploited by any institution that wants to earn higher profits, hence we are mulling over introducing some mechanism to keep that in check,” informed Adhikari.

Moreover, the emergence of microfinance institutions has also helped other financial institutions to fulfil their deprived sector lending requirement. Commercial banks are required to lend 4.5 per cent of their total lending to designated deprived sectors. Likewise, development banks and finance companies need to lend four per cent and 3.5 per cent, respectively, to such deprived sectors.

The struggles of financial institutions to meet the regulatory requirement has become easier as the central bank allows them to carry out deprived sector lending through class ‘D’ institutions.

Microfinance institutions are considered to be an important tool for the central bank to increase financial inclusion. Since these are operating outside urban areas, and are involved in lending less than Rs 400,000, their customers are mostly poor people that are overlooked by the relatively urban centric financial institutions.

“We at NRB are making sure that new microfinance banks help improve financial access so we only grant permission to those that want to operate in remote areas with minimal presence of financial institutions,” pointed out NRB deputy governor Adhikari.

At present, microfinance institutions are catering to the savings and lending needs of some 1.5 million people across Nepal, according to NRB statistics till mid-January. However, they have been able to provide services in only 65 districts — failing to reach 10 districts

entirely — being concentrated over certain areas only.

“There is still a huge scope for microfinance institutions to expand services as more than 75 per cent of the country’s population do not have access to formal financial services yet,” said Ram Chandra Joshi, vice president of Nepal Microfinance Bankers Association.

“However, the regulator needs to be mindful of the manner that microfinance banks are providing services and whether they are overcrowding a certain area while not venturing into more needy ones,” said Joshi.

Source: THT