With the coronavirus pandemic affecting his businesses Kamal Pun Magar, 28, a grocery shop owner at Ghartigaun, Rolpa has been struggling to pay the instalment on the Rs300,000 loan he has taken from a micro-finance institution.

Punmagar, who had taken the credit from Nepal Seva Laghubitta Sanstha, has just paid interest but has failed to repay the principal of the lockdown period although he has been paying instalment of the time after the lockdown enforced between March 24 to July 21.

“As the size of the instalment becomes bigger amid reduced sales due to coronavirus, I have not yet repaid principal of the lockdown period,” Magar told the Post over the telephone.

Although he is the local wholesaler, it has been difficult for him to generate enough cash flow as the other retailers have failed to pay the dues of as high as Rs1.3 million citing the impact of the pandemic. “I would have already paid all the instalments if I were able to recover the dues,” Magar said.

Magar is one of the hundreds of thousands of borrowers from micro-finance institutions who failed to repay the loans due to the impact of the Covid-19 pandemic.

According to a study ‘Impact of Covid-19 on Micro-Finance Institutions’ conducted by the Nepal Rastra Bank, the number of borrowers whose loans remained unpaid to the microfinance institutions increased substantially during the lockdown period.

There were just 167,964 borrowers whose loans remained overdue until mid-March 2020 but the number increased to 981,248 in mid-July. The amount of loans that remained overdue also increased to Rs45 billion in mid-July from Rs6.85 billion in mid-March.

With total lending of the 84 micro-finance institutions remaining at Rs262.73 billion as of mid-July, the total overdue amount stands at 17 percent of total outstanding lending.

Regulatory provision of maintaining loans classified as good in mid-January 2020 also to be considered good in mid-July 2020 helped microfinance institutions to lower the non-performing asset ratio.

“Otherwise, it would have gone more than that,” the central bank said in the report.

A financial institution needs to categorise the loans that are not repaid in time as non-performing assets. They need to make provision for such assets. This means setting aside a certain amount as directed by the central bank, which cannot be counted as profit.

Representatives of the micro-finance institutions also admit that the central bank relaxing the provision regarding the provisioning helped keep the ratio of non-performing assets low.

“Before the new central bank policy was introduced, we estimated that over 30 percent of our loans might have to be categorised as non-performing loans,” said Prakash Raj Sharma, chief executive officer of Laxmi Laghubitta Bittiya Sanstha. “Not only ours, over 30 percent loans of all the microfinance institutions might have to be categorised as non-performing assets on average.”

Due to regulatory adjustment of the central bank, non-performing asset ratio increased to 2.34 percent of total loans as of mid-July this year from 1.7 percent in mid-January, according to the central bank.

Loan recovery became complicated for micro-finance institutions as micro and small enterprises to which the microfinance institutions lend primarily were badly affected by the pandemic. According to central bank study, micro, small and medium enterprises with capital up to Rs150 million were among the most affected sectors.

According to a central bank survey, over 95 percent of small and cottage industries had responded saying that their business went down by over 73 percent during the lockdown. On average, 61 percent of the enterprises surveyed by the central bank were closed completely.

Over 80 percent of micro, small and medium enterprises suffered from a slump in sales amid the Covid-19 pandemic, a survey of the International Finance Corporation released in late September revealed.

“Due to the pandemic, our investment suffered badly in the last fiscal year,” said Sharma. “Our lending in fiscal year 2018-19 was around Rs5 billion which came down to around Rs4 billion in 2019-20.”

According to the representatives of micro-finance institutions, a large number of borrowers have requested a further postponement of payment deadlines. As per the central bank directives, the borrowers can pay their instalments of the lockdown period by mid-April next year.

“But, more borrowers are asking for the extension of this deadline beyond mid-April next year,” said Basanta Bahadur Shakya, chief executive officer of Nepal Seva Laghubitta Sanstha. “It is difficult for them to pay the existing instalments and overdue instalments at the same time.”

Meanwhile, the central bank study also found that 494 people lost their jobs at microfinance institutions as a result of the impact of lockdown imposed to prevent the spread of the Covid-19 pandemic.

There were 19,511 people employed at the micro-finance institutions as of mid-March which reduced to 19,017 in mid-July, according to the study.

However, representatives of the micro-finance institutions say that most of those who lost jobs could be those who were taken as trainees and it could also be due to merger of the micro-finance institutions.

“I haven’t received reports of micro-finance institutions laying off their regular staff. Many had hired staff as trainees who were told to go home as the institutions failed to run their businesses,” said Shakya.