March 1: Microfinance institutions were established to provide financial services to the underprivileged people by forming groups of people who do not have access to financial services. Of late, microfinance institutions have emphasized on disbursing loans with collateral in order to secure their investment. The move also stems from the problems in recovery of loans and unhealthy competition among the microfinance institutions.

According to the data of Nepal Rastra Bank, microfinance institutions disbursed 19.79 percent of the loans against collateral as of mid-January in the current fiscal year.

By mid-January of the previous fiscal year, only 19.19 percent of such loans were based on mortgages. Such loans have increased by 0.60 percentage point in one year.

Analyzing the data of the last five years, it seems that the microfinance institutions have been attracted towards mortgage loans instead of the groups’ collective guarantee without collateral. However, experts in the field of microfinance say that this is against the principle and essence of microfinance.

Shankarman Shrestha, president of Swavalamban Development Center, said that it is not appropriate to give loans against collateral as microfinance services were started for the underprivileged who could not offer collateral.

"The job of microfinance is to give collateral-free loans," he said, "Increasing mortgage loans is a deviation from the core principles of microfinance." He said that the deviation has increased after the central bank increased the loan limit issued by microfinance institutions and allowed them to give up to Rs 1.5 million per person.

Executive Director of Nepal Rastra Bank Revati Prasad Nepal also says that the essence of microfinance is providing collateral-free loans. He said that microfinance institutions should work to uplift the poor by investing collateral-free loans under collective guarantee. Admitting that there were some deviations in the past, he claimed that the central bank is working to improve the microfinance sector.

After public protests against the exploitation by microfinance companies, the central bank issued a directive in February last year and reduced the loan limit to Rs 700,000. Besides, the NRB also introduced a provision under which an individual could take loans from only one microfinance institution and those who take loans from microfinance could take loans from banks and financial institutions. Prior to this, microfinance institutions were allowed to give loans up to Rs 700,000 without collateral and up to Rs 1.5 million with collateral. Meanwhile, Nepal Rastra Bank officials claim that they have studied the problems related to microfinance institutions and have already started reforms according to the suggestions of the study reports.