Nepali MSEs over banks

“Who should get more support from the state and who less?” is a classic conundrum generations of public policy scholars have contemplated. Nepal government’s Covid-19 emergency response in the form of relief and stimulus packages has been channelled through different state entities, adding another layer of confusion at the recipients’ side. The Nepal Rastra Bank (NRB) has allotted NPR 200 billion in refinancing facility for this fiscal. Most of the allotted resources is to be distributed as per the recommendations of commercial banks and less on case-by-case basis. Only 10 percent of the total allocation is being distributed through microfinances as refinance facility. This makes us question the policy choices about the utilization of financial resources in the pandemic that has hit the poor people the hardest.

Most financial resources that were supposed to be distributed through microfinances are for micro and small enterprises (MSEs). These enterprises are at the bottom of the country’s business pyramid and they need support in these tough times. All the losses of the micro and small industry are directly slapped on low-income people who are without other financial cushions. As it is, the NRB has allocated 70 percent of the total refinancing amount to be distributed as per loan requests through commercial banks and another 20 percent on a case-by-case basis.

There are significantly more Nepali borrowers reliant on microfinances rather than on commercial banks for loans. If we look at the nature of the loans, most loans from microfinances are for subsistence whereas loans from commercial banks are for various higher-end purposes. Businesses running with loans from commercial banks certainly contribute more to the GDP. But should the NRB prioritize high-revenue businesses when millions of lives at the bottom of the economic ladder have been devastated? Take for instance the case of the struggling dairy industry. Around 500,000 households are engaged in the sector, investing around Rs 25 billion.

Micro and small enterprises play a critical role in creating job opportunities and are considered an effective vehicle for economic empowerment at the grassroots level. But government efforts are not focused on advancing the micro and small industry. But more support to this industry could save thousands of micro and small enterprises across the sub-sectors, particularly in agriculture. The sector alone employs around 70 percent of the country’s folks, and most of their jobs are linked to micro and small enterprises one way or the other.

Globally, the role of MSEs in the economy is increasing and they now represent about 90 percent of businesses and more than 50 percent of all employment. The importance of MSEs is much higher in developing countries like Nepal where one major hurdle they face is access to finance. Against this backdrop, the government decision to allocate only minimal amounts in their support in this crisis suggests the insensitivity of policymakers to the poorest and most vulnerable sections of the society.

This is just an example of how policies hurt poor people, those who do not have resources or capacity to lobby. Presumably, the central bank works more in favour of commercial banks as they are easier to control and bargain with. But it must revisit its modus operandi and listen to voices and concerns of small businesses and microfinances as well. Or it will be forfeiting its obligation to the poorest sections of the society towards which it should be the most responsible.