December 4: The rate of return of microfinance companies has started to decline.

The slump in economic activities due to the effects of the Covid-19 epidemic and Russia-Ukraine war among others have resulted in the decline in the profit of microfinance companies.

Nepal Rastra Bank's decision to set the ceiling on interest rates, service charges, etc has also reduced the income of microfinance companies. In recent times, the return on equity (ROE) of microfinance companies has been decreasing due to the increase in bad loans.

According to Nepal Rastra Bank, the average ROE of microfinance institutions was 61.8 percent in the fiscal year (FY) 2071/72. By March 2079/80, it decreased to 5.20 percent. The rate of return on equity decreased in 2076/77 due to the impact of Covid-19, but then it increased. However, last year, the return of investment decreased due to the decrease in economic activity and the rise in bad loans.

The committee formed to study the problems of microfinance companies has also pointed out that investors are attracted towards microfinance due to high profits but the rate of return has been decreasing of late. According to the committee, the return on equity of commercial banks remained at an average of 10.30 percent from 2072 to 2080, while that of microfinance was above 30 percent. Investors were more enthusiastic about microfinance due to this return.

The return on equity of 20 institutions turned negative as of March 2079, indicating that the financial condition of the microfinance institutions has been deteriorating, the committee mentioned in the report.

Microfinance companies were established to provide financial services to the underprivileged groups who are out the reach of banks and financial institutions. With the increase in complaints of high interest rates from these institutions, the central bank has started fixing ceiling on interest rates since 2076. Initially, microfinance companies were not allowed to charge more than 18 percent but that was lowered to 15 percent since 2078.

The central bank has also set a limit of 1.5 percent on the service fee charged by them.

The microfinance operators are demanding a system under which they can determine the interest rate by adding a certain percentage premium to the base rate. The study committee has also recommended to implement the base rate as in case of banks and financial institutions.

The number of microfinance institutions that have obtained permission from the NRB reached the peak in 2075 when there were 91 such institutions. With the central bank's emphasis on merger and acquisition, the number of microfinance institutions fell to 63 in 2079. From the year 2070/71 to 2078/79, the non-performing loan of microfinance was less than 3 percent of the total loan, but after March 2079, it reached 7.43 percent.

The study committee has suggested that the microfinance companies cannot be sustainable if the rate of return is weak. It has suggested setting a limit of 15 percent on dividend distribution and removing the limit on the interest rate and applying the spread rate.