Banks giving investors raw deal in contrast to microfinance firms

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Kathmandu, May 13

In January 2017, the central bank barred all microfinance institutions from charging interest rate of over 18 per cent on loans. The threshold was created following widespread complaints that microfinance institutions were fleecing borrowers by charging interest as high as 30 per cent per annum.

Microfinance institutions are finance companies that provide micro-credit ranging from Rs 100,000 to Rs 200,000 in general. Since the administrative cost of disbursing small loan is almost the same as that of bigger loans, it is natural for microfinance institutions to charge more. Yet they have managed to provide credit at the rate fixed by the central bank, whereas commercial banks are charging interest as high as 24.7 per cent.

Go through the websites of banks and you will see at least 12 of them charging lending rates of over 18 per cent. This has raised questions over their loan pricing strategy.

Commercial banks are generally known for their efficiency. This enables them to deliver services at affordable costs. But this principle has not been followed here. This has left borrowers, especially small and medium enterprises, resentful.

“It is difficult to fix this problem as the central bank has barred commercial banks from disbursing loans at below the base rate,” says Suman Joshi, former CEO of Laxmi Bank.

Base rate is the minimum rate at which loans should be offered. It is derived by adding expenses incurred while collecting deposits, 80 per cent of the bank’s overhead expenses, and up to 0.75 per cent profit. “This formula of the central bank inadvertently micromanages loan pricing. Unless this system is dismantled, banks cannot offer loans at affordable rates,” says Joshi, founder and managing partner of True North Associates. “But if this system cannot be withdrawn, the central bank could allow financial institutions to disburse credit at below the base rate. This can reduce lending rates due to competition among lenders.”

Banks are imposing high interest on loans stating ‘higher cost of deposit mobilisation’. Deposit has become expensive because of decelerated remittance inflow and the government’s slow capital spending. To prevent deposit rates from rising, banks have collectively decided not to offer over eight per cent interest on savings deposit and over 11 per cent interest on fixed deposit. Yet lending rates are still very high. This has hit owners of SMEs, who need cheaper credit to keep debt servicing and operation costs low.

Lately, many small and medium businesses are planning to expand or diversify production, riding the tide of higher economic growth. Nepal’s economy grew by over two-decade high of 7.4 per cent (at basic prices) in the last fiscal and is expected to expand by 5.9 per cent in the current fiscal. This marks a turnaround in the Nepali economy, which had seen average annual growth rate of around four per cent in the last one-and-a-half decades.

“Lots of SMEs want to reap benefit from this economic recovery as it indicates higher demand for goods and services. But many don’t have capital and bank loans are too expensive,” says Shyam Prasad Giri, president of the Federation of Nepal Cottage and Small Industries. SMEs, according to Giri, are currently subject to lending rate of around 16 per cent, “whereas interest on auto and home loans is lower”.

If SMEs, which employ 1.75 million people and account for 22 per cent of the GDP, can gain access to credit
at affordable rates, thousands of enterprises that folded up during the Maoist insurgency from 1996 to 2006 would resume operation, generating jobs and reducing the country’s high dependency on imports. This will support the country’s economic growth.

“The central bank is closely monitoring the situation. But we cannot promise anything to reduce lending rate, because we only oversee compliance of interest spread (or difference between average lending and deposit rates, which currently stands at five per cent),” says Narayan Prasad Paudel, spokesperson for Nepal Rastra Bank.


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Written by Sureis
This news first appeared on under the title “Banks giving investors raw deal in contrast to microfinance firms”. Bolchha Nepal is not responsible or affiliated towards the opinion expressed in this news article.