Central bank’s prioritiesPromoting microfinancing and expanding access in rural areas is high on the agenda
Nepal Rastra Bank (NRB) has been promoting microfinancing and expanding financial access and inclusion to achieve its objectives of economic stability and sustainable development. In 1974, NRB introduced small sector lending as a directed credit. It was a special type of lending designed for the economic upliftment of the deprived sector and was later renamed priority sector lending. Some two decades after priority sector lending was launched, NRB issued a directive to banks to extend certain a percentage of credit to the deprived sector. Likewise, replicating the Grameen Credit Model, the government of Nepal established five Grameen Bikash Banks in partnership with NRB between 1990 and 1996. A wholesale lending microfinancing model was set up with the establishment of Rural Microfinance Development Centre in 1998.
The ratio of loans extended by commercial banks, development banks and finance companies to the deprived sector was maintained at a minimum of 5 percent, 4.5 percent and 4 percent respectively. From the fiscal year 2017-18, the ratio was raised to 5 percent. Banks and financial institutions (BFIs) are incentivised to go to remote areas outside the district headquarters without bank branches. Microfinance institutions are encouraged to expand their branches in the high hill and mountain regions. Special refinance facility has been continued for cottage and small industries, Dalits, differently-able individuals, disadvantaged and minority communities who run small businesses.
Arrangements have been made through specified counters of BFIs to provide banking services to senior citizens, differently-able people and illiterate individuals. Since project-led microfinancing proved to be effective in alleviating rural poverty, several project-based microfinancing activities are currently being implemented. The Rural Self-Reliance Fund, an NRB operated microfinancing project, has been running since 1991. It started with a seed capital of Rs10 million provided by the government which has now swelled 80-fold. The fund provides wholesale credit to cooperatives working in poverty-stricken rural areas. The cooperatives have been instructed to disburse retail credit amounting to a maximum of Rs125,000 each to their financially and socially deprived members.
BFIs have been expanding their working units in rural and remote areas as per NRB policy and local need. Commercial banks, development banks and finance companies currently maintain 2,919, 951 and 183 branches respectively. As many as 2,365 branch offices of 65 microfinance institutions are providing microfinance services in all 77 districts. As per NRB’s latest data, 162,088 centres are providing microfinance services to 535,458 groups consisting of 2,724,302 deprived people. Moreover, 1,780,210 individuals, almost all of them women, have benefitted from non-collateral group-guaranteed micro credit from these microfinance institutions.
Besides expanding microfinance activities to end financial deprivation, the Monetary Policy for the current fiscal year 2018-19 has announced several policy steps which will become effective after NRB issues new directives. As per the Monetary Policy, microfinance institutions are permitted to get credit even in foreign currencies up to 25 percent of their core capital. This provision will definitely help them to manage their resources and cost of funds.
The better option
Student loans against academic certificates, loans for deprived and marginalised students to pursue higher studies and loans for Dalits to run microenterprise will be categorised as deprived sector credit. This will help BFIs to maintain their deprived sector loan level besides expanding their services to non-banked or under-banked people. Likewise, the credit extended to women (under group guarantee) to run projects is also counted as deprived sector credit. Rural and microfinance institutions located in any village council can extend credit of up to Rs1 million to an individual to run small enterprises against acceptable collateral.
Microfinance institutions have been working with an extremely pitiable capital base. They have only two key alternatives to get out of this situation: Go for a merger or increase the capital, which is easier said than done. Merging is a better option for two reasons: They can become a resilient player in the market and also expand across the country as a national level microfinance institution. Rural and microfinance institutions are permitted to charge a maximum interest rate of 18 percent. According to the recently released Monetary Policy, NRB will issue a directive to rural and microfinance institutions to confine their maximum interest rate as a summation of the cost of funds (deposits and borrowings), a specified level of administrative costs and an additional 6 percentage points.
Following the relaxation in the cash reserve ratio and statutory liquidity ratio, the banking system obviously will be enriched with a little more liquidity. However, a high level of the credit to core capital plus deposit ratio may impede the availability of loanable funds. Even then it will have a positive impact on the base rate and ultimately on the borrowing cost of rural and microfinance institutions. NRB, therefore, should issue directives to rural and microfinance institutions to calculate their cost of funds using a weighted average basis to comply with the central bank directive.
Also, NRB should rethink the cap on the interest rate on group-based loans being extended by rural and microfinance institutions to deprived persons.
Pangeni is a director at Nepal Rastra Bank