The Nepal Rastra Bank’s (NRB) decision to cap the number of microfinance institutions (MFIs) from which an individual can take loans has caused a significant drop in both membership and the number of borrowers
Following the central bank's move to limit loans to just one MFI in November 2022, the sector saw an immediate impact. The NRB introduced this policy to address growing issues within microfinance, barring borrowers from accessing loans from both MFIs and commercial banks simultaneously.
By July 2024, the NRB eased the restriction slightly, allowing individuals to borrow from up to two MFIs. Despite this adjustment, membership numbers continued to decline. According to NRB data, total membership in MFIs fell from 6.02 million in June 2023 to 5.99 million by June 2024. The number of borrowers also dropped from 2.98 million to 2.96 million during the same period.
Initially, the NRB adopted a policy to reduce loans to one MFI, but a revised directive now allows loans from two MFIs. This shift resulted in a 0.34% reduction in members and a sharper 10.75% decline in borrowers. NRB highlighted cases where some individuals had taken loans from more than two dozen MFIs, borrowing from one to pay off another, which led to excessive debt burdens.
Chol Raj Sharma Joshi, CEO of NIC Asia Microfinance, pointed out that limiting transactions to two MFIs has increased inactive memberships, creating operational difficulties.
An NRB committee, led by Dr. Prakash Kumar Shrestha, uncovered that certain borrowers were juggling loans from over 24 institutions. This led to a cycle of debt that trapped many borrowers, forcing NRB to impose stricter limits. As debt levels escalated, there were calls for loan forgiveness, sparking protests in the sector.
MFIs are authorized to lend up to Rs 500,000 under group guarantees and up to Rs 700,000 with collateral, down from a previous Rs 1.5 million cap. The NRB directive also allows family-guaranteed loans of up to Rs 25,000.
Microfinance in Nepal was initially designed to provide financial services to poor and marginalized groups without access to traditional banks. However, MFIs have increasingly faced criticism for prioritizing profits over their mission.
Following the identification of irregularities, NRB formed a study committee in April 2023, which submitted a report in August 2023, recommending stronger regulations. To reduce excessive competition, NRB has been encouraging mergers among MFIs. As a result, the number of such institutions has dropped from around 100 to 52 by June 2024, including 49 retail MFIs and three wholesale lenders.