The central bank’s move to limit the interest rate spread for Micro-Finance Institutions (MFIs) has sent MFI shares plunging.

In the monetary policy unveiled last Thursday, the Neal Rastra Bank (NRB) capped the spread rate for MFIs at 7 percent—a move that could affect MFIs’ profitability.

The share prices, which had been rising for quite some time fuelled by MFIs’ handsome dividend distribution and investors’ expectations of a hike in the paid-up capital requirements. But the monetary policy hiked the capital requirement only for MFIs involved in wholesale lending. It also halted the issuance of new MFI licences.

On the other hand, the NRB has directed commercial banks to directly invest 2 percent of their total loan portfolio to the deprived sector, which may result in resources crunch for MFIs. With the commercial banks required to invest 5 percent of their total lending to the sector—which they currently do through the MFIs—the new directive means they can invest only 3 percent through the MFIs.

On Sunday, the first trading day in the secondary market after the unveiling of the monetary policy, 13 out of 15 MFIs saw their share prices fall. The prices plunged in the range of Rs67 to Rs440 per unit.

Anjan Raj Poudel, managing director of Thrive Brokerage House, said the impact of the monetary policy was visible. “Investors had been hoping for a hike in paid-up capital requirement for MFIs, but it did not happen,” he said. “The capital requirement was hiked only for wholesale lenders such as Rural Micro-Finance Development Centre.”

Praksah Raj Sharma, chief executive officer of Laxmi Laghubitta Bittiya Sanstha, said the central bank’s policy would have a disastrous impact on the MFIs.

Sharma said the MFIs cannot survive with 7 percent interest rate spread given their high operating costs compared to commercial banks. They also depend on A-, B- and C-class financial institutions for funds. “They need at least 10 percent spread rate to survive as well as give dividends to shareholders,” he said.