Interest to open microfinance institutions growing
KATHMANDU, May 1: Applications to open new microfinance institutions have started piling up at Nepal Rastra Bank (NRB) following policy changes made by the central bank and the government in establishment of new banks, financial institutions and cooperatives.
So far, 45 institutions have applied to operate microfinance development banks in the country, NRB Spokesperson Bhaskar Mani Gyawali said, which shows growing investor interest in the sector.
One of the reasons for this is restriction put on by the central bank in issuance of new operating licenses to category ´A´, ´B´ and ´C´ financial institutions. “And since there is shortage of safe investment avenues in the country, microfinance sector has emerged as one of the lucrative areas to put the money in,” an NRB official told Republica on condition of anonymity.
Along with this, the government has also made the process of opening new cooperatives cumbersome. This has also drawn people´s interest toward microfinance institution.
As per the provision introduced by the Department of Cooperatives a year ago, new cooperatives can be formed only if 80 percent of members are permanent residents of a single village development committee (VDC) or ward. In the past, those wanting to open a new cooperative could have gathered this number from up to five VDCs or wards.
“Because of this provision many of the potential investors are now mulling over opening a microfinance institution rather than making investment in cooperatives,” the source said.
Currently, 23 microfinance development banks are operating in the country. Two of them -- Laxmi Microfinance Financial Institution and Womi Microfinance Financial Institution - started operation recently.
Among these, 20 are conducting retail businesses, meaning they create their own network to extend loans and collect deposits. The remaining - RMDC, Sana Kisan Bikash Bank and First Microfinance - offer wholesale credit to other microfinance institutions.
Together, these institutions extended Rs 77.36 million in loans to over 640,000 people as of the end of last fiscal year, of which Rs 62.51 million has been repaid.
“The low default rate - which, in fact, is almost zero - is also another reason why many are drawn toward microfinance institutions,” the source said.
Microfinance is a concept under which micro loans of up to Rs 80,000 can be extended to each individual of a group. Since the group provides guarantee for the loan extended to every other individual, many microfinance institutions do not seek collateral from borrowers. But if the borrower fails to return the amount, other members of the group will have to repay it on behalf of the defaulter.
“But this rarely happens, which is the beauty of microfinance,” the source said.