The CEO of CYC Nepal Laghubitta Financial Institution, Dolendra Prasad Sharma, has put forward an extensive 17-point reform proposal to the Banking Sector Reform Taskforce, targeting a sustainable answer to the critical crisis currently plaguing Nepal’s microfinance sector. Sharma had a one-on-one meeting with the taskforce chair, Rewat Bahadur Karki, and executive director, Guru Prasad Paudel, at Nepal Rastra Bank earlier this week to present his recommendations.
The proposal underscores the necessity for a structured three-year reform framework for the microfinance sector, emphasizing that temporary solutions will not adequately tackle the industry’s issues. It advocates for interest rate governance through the establishment of a Microfinance Annual Percentage Rate (MAPR), institutional consolidations to alleviate fragmentation, borrower education initiatives, and a reevaluation of rural financial models to guarantee sustainability and social upliftment.
Sharma pointed out that while microfinance institutions were originally created to enhance financial access for low-income populations, many are now encountering significant financial troubles. This predicament has led to frustration and mistrust among borrowers, staff, and investors, threatening the overall stability of the financial ecosystem.
Highlighted recommendations in the proposal include enacting clear strategies for loan restructuring, introducing partial loan forgiveness schemes tailored for vulnerable borrowers, and simplifying loan settlement processes by providing concessions on outstanding amounts. It also promotes the creation of specialized “Risk Asset Management Units” within microfinance entities to supervise recovery and restructuring efforts.
Community-oriented dispute resolution strategies are suggested to alleviate recovery pressures, and financial literacy initiatives aim to inform borrowers about managing their loans. The plan proposes increasing loan ceilings — including unsecured loans — to accommodate rising customer demands and permitting microfinance institutions to engage in credit purchasing and selling activities to bolster liquidity.
To fundamentally strengthen the sector, the proposal urges policy adjustments, such as capping the number of microfinance institutions through obligatory mergers, aiming to bring their total below 20 within a year. Supporting Community-owned Microfinance Institutions (COMFI) is favored as a sustainable approach well-suited to the social dynamics of rural Nepal.
Additionally, the proposal calls on the government to connect poverty reduction programs with microfinance institutions, ensuring minimum support prices for products offered by microfinance members. It also suggests relaxing capital adequacy regulations by adopting Basel II standards instead of Basel III for the sector, which would enable increased lending capacity.
Advancing credit information systems with effective blacklisting of defaulters, incorporating innovative financial products with adjustable interest rates, and optimizing funds management through overdrafts and long-term deposit schemes are also part of the initiative.
In tackling operational challenges, the proposal advocates for streamlining loan protection fund and insurance processes, reducing income tax on microfinance earnings to 10%, and mandating that remaining taxes be invested for social benefits and member welfare. Ultimately, it emphasizes the importance of enhancing the regulatory body by recruiting qualified personnel and developing a stable supervisory atmosphere.
CYC Nepal Laghubitta looks forward to Nepal Rastra Bank seriously considering these thorough recommendations to restore financial equilibrium, transparency, and social accountability in Nepal’s microfinance arena.
