Merge in a month, MFIs told

Lalitpur, June 14

Governor of the Nepal Rastra Bank (NRB) Dr. Chiranjibi Nepal has directed the microfinance banks to prepare for merger within a month before the end of the current fiscal 2018/19.

"Be ready for the merger, it’s the demand of time," he directed the MFIs while speaking at an interaction on 'Microfinance merger and challenges' organised by the IBN Media and Research.

"I urge you to make some positive development in terms of merger before the end of this fiscal year and announcement of the monetary policy of the next fiscal year. Don't create situation where the central bank sets requirements for the merger of the microfinance banks, opt for self-righteousness, and set an example for international markets," said the governor.

He also made clear that the central bank would not hear any excuses in terms of merger.

Governor Dr. Nepal said that the Monetary Policy of the next fiscal year 2019/20 will have policy provision for the merger of the microfinance institutions (MFIs).

According to him, the NRB didn't listen to the demand of the banks and financial institutions (BFIs) not to increase the paid-up capital about three years ago when the central bank directed them to increase the paid-up capital to Rs. 8 billion from Rs. 2 billion.

"I had been summoned for about 50 times by the parliamentary committees, but the NRB did not deviate from its decision. The firm stand of the regulator resulted in the decreased number of BFIs. In the last three years, 167 BFIs went for merger," said. Dr. Nepal. "You talk about your interest and your business, but the regulator has to consider the development of overall financial sector."

He also said that the NRB still thought that the access to BFIs was not satisfactory.

Only the risky villages and where there is very low chances of economic activities and unavailability of technology are without banking services, so we are thinking about alternative modalities to motivate the banks and the financial institutions in those areas as well, stated the governor.

President of the Nepal Microfinance Bankers Association (NMBA) Ram Chandra Joshee said that if the central bank did not make some concrete steps towards the merger of the MFIs, the sector might meet an accident.

"NMBA fully supports the merger of microfinance banks. But the central bank must consult with us before making such strategic decision. We have been neglected by the regulator on many issues," he said.

Executive Director of the NRB Prakash Shrestha said that though there had been no research, microfinance had contributed to poverty alleviation.

 He said that the central bank would be promoting the merger, but it would not be forceful.

"The MFIs must not be dependant on the central bank for the provision of funds, they must be innovative in finding resources for themselves. Do not always demand intervention from the regulator," he said.

Economist Bharat Thapa said that there was a need of a separate agency to facilitate merger in technical and financial aspects.

He recommended implementing the merger in three to five years in a phase-wise manner.

"The central bank and government should create programme to support microfinance activities as well as their merger," he said.

He also suggested that alternative source of business like deposit mobilisation, insurance, leasing balancing entrepreneurial finance and household finance should be made available to the MFIs.

He warned that the merger might have negative impact on return on equity. The higher profit margin that MFIs are yielding now is due to low paid-up capital.

According to him, competition within the MFIs, among the MFIs, and other banks and financial institutions, multiple borrowing, over indebtedness, lack of innovation in product and services, inadequate monitoring of client activities, diversion of fund in the unproductive areas, and poor financial literacy and regulatory capacity are major challenges to the merger of MFIs.

Vice-President of the NMBA Prakash Raj Sharma asked the central banks to apply sensitive approach since the merger of the FMIs was not a commercial merger but a human and cultural merger.

"The country does not have the market for 114 or 130 MFIs, we need about two dozens companies," he said.

Likewise, Bhagwati Chaudhary said that the central bank must stop issuing license if it wanted to promote merger of the MFIs. "Issuing licenses and asking for merger is contradictory," she said.

Published in The Rising Nepal daily on 15 June 2019.