Nepal Rastra Bank is mulling to take microfinance institutions into forced merger saying there are too many of them in the country.

Microfinance institutions receive loans from commercial banks under a government provision that requires banks to lend to the deprived sector at subsidised interest rates. These institutions use the money to issue loans to individuals who cannot put up collateral but want to start microenterprises.

Nepal Rastra Bank has asked commercial banks, development banks and finance companies to allocate 5 percent of their total loan portfolio to the deprived sector. Banks that fail to do so face a cash penalty.

According to the central bank, there are 91 microfinance companies currently operating in the country while another 18 are in the process of receiving licences.

Nepal Rastra Bank has started to focus on the unification of microfinance companies. Chintamani Shiwakoti, deputy governor of Nepal Rastra Bank, said they would start the process of mergers after addressing the issue of microfinance companies that are in the pipeline.

According to Shiwakoti, these institutions received the green signal in 2016 before the central bank stopped issuing licences. “Among them, only 11 companies have submitted letters of intent so far,” said Shiwakoti.

He said the central bank would issue a 30-day deadline to microfinance institutions that are in the process of receiving their permits. He said there would be more than 100 microfinance institutions after all the companies that have received letters of intent come online.

“In this regard, there is no alternative but to merge microfinance companies for their sustainability as the market will be overcrowded with an excessive number of these institutions,” said Shiwakoti.

To encourage mergers of microfinance companies, the central bank has offered a number of incentives to potential partners through this year's monetary policy. The central bank has increased the maximum loan amount such institutions can give from Rs1 million to Rs1.5 million. The central bank will also extend the deadline for these institutions to maintain the minimum capital adequacy ratio.

Moreover, microfinance companies will not need to follow the central bank’s cooling off period rule under which executives who retire are barred from joining a similar institution for six months.

Operators of microfinance institutions said they were also on the side of consolidating their organisations. “We ourselves have been planning to go for merger if the central bank increases the incentives,” said Ram Chandra Joshee, chief executive officer of Chhimek Laghubitta Bittiya Sanstha.

Nepal Rastra Bank has capped microfinance lending at 20 percent per annum including 2 percent service charge. It has also ordered these institutions to submit information about their borrowers to the Credit Information Bureau to check possible multiple borrowing, which is one of the major challenges in the microfinance sector.

The government recently imposed a cap on cooperative lending at 16 percent per annum. “In this context, microfinances will have a tough time competing with cooperatives,” said Shiwakoti.

Denying that microfinance companies will face competition from cooperatives, Joshee said cooperatives were mainly based on their members. “As we focus on providing collateral-free loans to borrowers from deprived communities, many people who do not want to join a group depend on microfinance lending to meet their financial requirements,” he said.

According to central bank policy, microfinance companies have to issue most of their loans without collateral. Joshee said they can issue only up to 33 percent of their investment portfolio by accepting collateral. 

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