Central bank bars MFIs from multiple lending

NEPAL Rastra Bank (NRB) has banned microfinance institutions (MFIs) from lending to multiple loanees against single collateral. The central bank has directed MFIs to take credit information of loanees from their peers, but the absence of an institutional mechanism like Credit Information Bureau on credit history sharing has worsened the situation. “This has raised the chances of multiple lending and has increased credit risks,” said an NRB official. The central bank has adopted a policy of discouraging multiple lending in all types of banks and financial institutions in the new monetary policy. The unified directive issued by the central bank has allowed transfer of loans among members of the same family. This provision was adopted after recovery problems were created due to the loanees’ departure for foreign employment, according to the official. “After the loanees move abroad, it creates problems in loan recovery,” said the official. The NRB has reduced the penalty on MFIs failing to meet the cash reserve ratio (CRR) requirement. If the CRR is inadequate for the first time, an MFI will be charged a fine equivalent to the bank rate on the CRR deficit amount. If the situation repeats for the second time, the fine will be one and half times of the deficit amount. The fine will be double the deficit amount in the third time. Earlier, the penalty provision was same for the first CRR deficit, but the fine would be double the deficit amount in the second time and triple the deficit amount in the third time. MFIs which do not collect deposits from the general public have to maintain 0.5 percent of their deposits as CRR, while those collecting public deposits have to maintain 2 percent CRR. The central bank has allowed MFIs to expand branch to one district for every increment of Rs 2.5 million in their paid-up capital. After fulfilling certain criteria, MFIs can open new branches in their working areas. The criteria include the working area should offer business potential, the MFI concerned should not have more than 5 percent non-performing loans, and they should have maintained adequate paid-up capital and capital adequacy ratio. MFIs have also been allowed to issue public shares within three years of establishment. Given those receiving loans from MFIs in rural areas may be unaware about the installment payment dates, the MFIs have been told to make available the repayment schedule to the loanees. The central bank has banned subsidiary MFIs of A, B and C class financial institutions from maintaining deposit accounts in parent BFIs for interest earning purpose. The central bank has allowed professors and lecturers of collages to sit on MFI board.