Nepal: Worried of Fund Crunch, MFIs Seek Permission to Mobilize Deposits

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Oct 2016
Nepal , October, 24 2016 - Microfinance institutions (MFIs) have sought permission to mobilize deposit from public after their traditional source of fund is likely to dry up following the new requirement for commercial banks to extend 2 percent of their total loans to deprived sector.

Though two microfinance institutions -- Chhimek Laghubitta Bikas Bank Ltd and Nirdhan Utthan Bank Limited -- have got permission to collect deposits, other microfinance institutions can only extend micro credits in rural areas.

Microfinance institutions largely rely on commercial banks and development banks, which are required to float 5 percent of their loans to the deprived sector, for funding to lend small borrowers.

Apart from deprived sector lending, they can also borrow more money from the commercial banks and development banks. They also get some subsidized fund from the central bank if they open branches in certain areas.

Microfinance institutions say that they have long been demanding for permission to mobilize deposits from public. They say that it would be difficult to stay in business after the central bank made it mandatory for the commercial banks to extend 2 percent of their loans to the deprived sector themselves.

“Around 40 percent of our fund will dry up once commercial banks are required to make direct sector lending by themselves. Such provision has reinforced our demand that the microfinance institutions should also be allowed to mobilize deposit," Ramchandra Joshee, vice chairperson of Nepal Microfinance Bankers Association, said. “Many microfinance institutions will soon face funding crunch as the commercial banks and development banks are tightening flow of fund.

Permission to mobilize deposit from public will allow us to experience deposit collection as well as reduce dependency with commercial banks and development banks for the funding.

Through the Monetary Policy for Fiscal Year 2016/17, NRB has made it mandatory for the commercial banks to make 2 percentage points of their 5 percent deprived sector lending themselves. While microfinance institutions have been complaining about the possible fund crunch due to such requirement, commercial banks have also expressed reservation toward the central bank's directive. Executives of commercial banks say that they do not have expertise, mechanism and profit margin in going to the rural areas to float micro credits. Such provision, according to the bankers, will also undermine the roles of microfinance institutions that specialize in such lending.

Earlier, banks used to float five percent of their loans to the deprived sector as required by the NRB through microfinance institutions.

However, NRB has not been much receptive toward the idea of deposit mobilization floated by the microfinance institutions. "Microfinance institutions are licensed to extend small scale loans in the rural areas. They are not legally allowed to mobilize deposits from public,” a senior official of the central bank said. “There is no immediate possibility of allowing them to mobilize deposit from the public."



Source : My República
 

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