Central bank policy to hit credit expansion to deprived sector

Kathmandu, February 22

Nepal Rastra Bank (NRB)’s announcement that commercial banks do not have to mandatorily fulfil the two per cent direct lending provision to the deprived sector in this fiscal year will affect credit flow to the rural areas. The central bank, through the mid-term review of Monetary Policy 2016-17, had made this announcement but overlooked the credit demand to the deprived sector.

Annual credit growth to the deprived sector has been growing by 50 per cent on an average since the last three years, which has been fulfilled as class ‘A’, class ‘B’ and class ‘C’ financial institutions were instructed to lend five per cent, 4.5 per cent and four per cent of total loan portfolio to deprived sector.

Due to lack of expertise and high cost of funds required to mobilise such loans, commercial banks had long been working with microfinance institutions (MFIs) — class ‘D’ financial institutions — to disburse these loans. However, NRB had through the Monetary Policy 2016-17 introduced a provision that commercial banks would have to themselves lend two per cent directly to the deprived sector. The central bank has now relaxed this provision for commercial banks without ensuring any mechanism to channelise required resources for deprived sector lending.

Altogether, 52 MFIs had floated Rs 77.22 billion to the deprived sector till the end of last fiscal. As lending to the deprived sector has been growing at an average of 50 per cent annually since the last three years, loans worth Rs 115.83 billion will be required to address the credit demand by the end of this fiscal.

Since the central bank lowered the fund that MFIs were obtaining from commercial banks from five per cent of the total loan portfolio to three per cent from this fiscal, this provision has not only affected the lending capacity of MFIs but will also now affect credit flow to the deprived sector as direct lending provision has been relaxed during the mid-term review of the Monetary Policy, according to Janardan Dev Pant, chief executive officer of Nirdhan Utthan Bank Ltd, a prominent microfinance institution of the country.

“Demand for credit always rises in the rural areas because borrowers of MFIs have expectations of obtaining additional loans to expand agriculture or livestock farming or other businesses.” Pant further said that as there is a huge unbanked population in the rural areas, MFIs have been expanding access to finance to the rural areas for people who are in need of credit to come out from the vicious cycle of poverty.

According to Pant, MFIs will be mobilising Rs 77.76 billion — Rs 36 billion from their deposits and around Rs 41.76 billion from commercial banks — credit in this fiscal out of the total demand of Rs 115.83 billion to the deprived sector based on the estimate of the average annual loan growth of 50 per cent to the deprived sector.

“The central bank should keep the five per cent deprived sector lending of the total loan portfolio provision for commercial banks intact to serve credit demand in rural areas,” said Pant, adding, “If commercial banks cannot meet target of two per cent direct lending the shortfall could be mobilised through MFIs in this fiscal.”

Microfinance summit on March 15-17

KATHMANDU: The Centre for Microfinance (CMF) Nepal in association with various government and non-government organisations is going to organise the ‘National Microfinance Summit, 2017’ from March 15 to 17 in Kathmandu to share knowledge, skills, technologies and success stories among microfinance practitioners.

Policy makers, service seekers, bankers, microfinance banks, financial intermediaries, cooperatives and experts will participate in the summit that will discuss on ways to enhance access to finance through use of technology, effective delivery of services, reducing poverty, entrepreneurship development, value chain development, effective transmission of financial literacy to the needy people, among others. This is the third edition of the microfinance summit, according to CMF Nepal.