While the central bank had introduced a policy of discouraging multiple banking five years ago, it could not be implemented effectively. The central bank had directed the MFIs that they should grant loans only after ensuring that borrowers have not taken loans from more than one institution. And, such loans should be within the limit as prescribed by the central bank.
MFIs can grant loans up to Rs 700,000 without collateral and Rs 1.5 million with collateral. Later, the central bank introduced a provision, whereby MFIs have to do 100 percent provisioning if the loans exceed the limit. However, the issue of taking loans from multiple MFIs continued. Nepal said that the central bank will introduce provisions immediately to discourage this trend. "The problems we have now are due to the micro-finances providing loans beyond the specified limits. We are now planning to tighten the credit flow," said Nepal. The central bank officials are of the view that there should be a cap on the dividends of the MFIs. "The basic principle of microfinance is to offer financial services in rural areas to financially vulnerable individuals and small businesses that don’t have access to traditional lending resources," said an NRB official, "However, with the surge in the number of microfinance companies, they have become more profit-oriented." As MFIs have deviated from their basic principle, the NRB is of the view that there is a need to limit their dividend distribution. However, NRB officials said the Banks and Financial Institution Act (Bafia) should be amended for this. "If there is a need for such intervention, the central bank will move toward this direction," he said. "The current mess in the microfinance sector is a result of micro-finance companies operating as commercial banks." Loan recovery became complicated for micro-finance institutions as their primary lenders—micro and small enterprises—were badly affected by the Covid-19 pandemic. There have been cases were borrowers either committing suicide or absconding from villages after failing to pay exorbitant interests of the MFIs, who have been charged of using coercive measures to recover their loans. According to microfinance expert Dr. Man BK, the microfinance sector landed in trouble as it operated beyond its principles. "The microfinance sector in Nepal was run under a corporate model when it should have been run under a community financing model," he said. BK argues that both commercial banks and microfinance institutions are being run under the same model. "The regulator has allowed MFIs to be listed in the stock market and also given free hand when it comes to dividend distribution," said BK.
