September 8: Nepal Rastra Bank (NRB) has indicated that it will tighten the screws on loans provided by microfinance companies. Microfinance companies are the institutions that have been opened to provide financial services to the poor and underprivileged who do not have access to banks and financial institutions (BFIs). The central bank has announced to crack down on the misuse of microfinance loans stating that the credit invested by such companies have not yielded any returns.

Dr Revati Prasad Nepal, executive director of Microfinance Supervision Department of Nepal Rastra Bank, said that although there has been an increase in investment due to the increase in credit limit, there has not been expected returns and therefore the central bank has decided to review such loan provisions.

"We have increased the credit limit that can be given to one customer by microfinance to Rs 150,000," he said, "This has led to a gradual increase in loans, but the central Bbank has realized that there has been no return." He said that it has caused problems to this sector.

Microfinance companies has been providing collateral-free loans through collective deposits by creating groups of poor and needy people. However, microfinance companies are being criticized for providing more loans without analyzing the needs and utilization, while the borrowers are unable to repay the principal and interest.

The central bank had formed a task force under the coordination of the Executive Director of the Economic Research Department of NRB, Dr Prakash Kumar Shrestha in the month of Shrawn (mid-July to mid-August) after the members of microfinance companies protested saying that they were suffering from the operators of microfinance companies. Although the task force has submitted a preliminary report, it is working with a deadline extension till mid-September.

Based on the recommendations of the task force, the central bank is preparing to make policy arrangements for microfinance companies. Similarly, the central bank had issued an instruction on February 22, reducing the credit limit to Rs 700,000 lakh, and had also made an arrangement that the loan can be taken from only one institution and those who have taken a loan from microfinance company cannot take it from banks or financial institutions.

According to Nepal Rastra Bank, 63 microfinance companies in operation as of March this year have made credit investments of Rs 441 billion. Out of 5.9 million members in microfinance companies, the number of borrowers is 3.16 million.