After micro-finance institutions (MFIs) complained that they can no longer operate at 7 percent interest rate spread as provisioned in the monetary policy, Nepal Rastra Bank (NRB) is considering relaxing the provision to a certain extent.

Amid complaints about high interest rates charged by MFIs, the central bank took two measures to curb such a practice—imposing a spread rate limit and directing commercial banks to directly lend 2 percent of their deprived sector lending to poor and rural populations.

MFI share prices have nosedived after the central bank’s decision on July 14, with the top loser being Mithila LaghuBitta Bikas Bank Ltd—down Rs1,010 in the last two weeks. Stock investors have switched to stocks of other companies from MFIs, according to stockbrokers.

Even commercial banks have expressed concerns about the provisions in the monetary policy. They have said they do not have the expertise to directly lend to the deprived sector. So far, banks have been making deprived sector lending through MFIs.

According to NRB officials, it is considering allowing MFIs to add a certain portion of their operating costs to their cost of fund, which is expected to make it easier for maintaining 7 percent interest rate spread.

“No decision has been taken yet. But discussions are underway on allowing MFIs to add a certain portion of operating costs to their cost of fund so that they could maintain a maximum interest rate of 17-18 percent,” said NRB Deputy Governor Chintamani Siwakoti.

According to Nepal Micro-Finance Bankers’ Association (NMFBA), MFIs charge interests between 12 percent 20 percent, based on the types of credits. “When we issue a circular, chances are some of the concerns of MFIs will be addressed,” said Siwakoti.

According to the NRB, MFIs’ cost of fund stands at 5 percent, while the NMFBA says their average operating cost stands at 8 percent, with a maximum of 11 percent. This means, operating MFIs under the new provisions will be tougher.

Following MFIs’ complaints, the central bank has asked the NMFBA to study the spread rate and existing interest rate and submit a report. NMFBA President Dharma Raj Pandey said the study’s findings would be helpful for the central bank to take a logical decision on the issue.

He said high lending cost of MFIs id the main reason why they cannot charge lower interest rates compared to A, B and C class banks and financial institutions (BFIs). “We provide credit to borrowers at their doorsteps. So MFIs cannot be treated like other financial institutions,” he said.

NMFBA has also demanded that MFIs be allowed to collect public deposits given commercial banks will be investing 2 percent of their 5 percent mandatory deprived sector lending directly.

MFIs are heavily dependent on commercial banks, development banks and finance companies for funds, while they also collect a limited amount of deposits from their members. “We have sought the permission from the central bank to collect deposits up to a certain amount,” said Pandey.