Issuing a circular to the micro credit development banks on Tuesday, the central bank said 'D' class micro credit development banks should frame a working procedure and take approval from the NRB to operate the fund.
According to the circular, micro finance development banks should allocate one percent of their net profit to the fund. Likewise, microfinance development banks proposing dividend above 20 percent will be required to allocate 25 percent of the dividend to the fund.
Microfinance development bankers have hailed the decision, saying that such requirement will help to empower the borrowers so that they do not default on their loans. "Micro finance development banks are supposed to set up such fund for the empowerment and other welfare of the borrowers. However, most of the institutions were not doing that as they would like to spend that fund to distribute dividend to the shareholders. This circular will be binding for the micro finance institutions to set up fund for the benefit of not only clients but the institutions themselves," said Rajendra Bahadur Pradhan, treasurer of Micro Finance Association of Nepal (Mifan). "With this fund, the institutions should educate, inform and empower clients about their business and products. This will help them to enhance their business they do with the borrowed money which in turn will make them less likely to default on their loans. Even if they become default, the fund will securitize their loans and help them to rehabilitate in their business."
Observers, however, said that the new requirement will cap the dividend of the microfinance development banks. Since 25 percent of the proposed dividend (above 20 percent) will now be transferred to this fund, they will offer less returns to the shareholders. Microfinance development banks have been distributing higher dividend to their shareholders in recent years. Lured by the lucrative dividend, investors are putting their money into the stocks of the microfinance development banks in recent months. As a result, share prices of most of the micro finance institutions have gone up.
"The fund should be utilized in the collective interest of the borrowers, securitization of the firms of the problematic borrowers and their rehabilitation, and for their education and capacity development," Shivanatha Pandey, executive director of NRB, said. According to the central bank, microfinance development banks can calculate this fund in their supplementary capital.
There are a total of 39 'D' class microfinance development institutions in the country, according to NRB.
Meanwhile, NRB has also said that revenue collection counters and branch offices of bank and finance institutions in custom points will remained opened even during Tihar and Chhath holidays.
Related story
NRB makes stricter rules for microfinance loans
