Development Finance Institutions commit increment in investments in Nepal

The Second Development Finance Institutions (DFI) Mission, that started on Tuesday in Nepal, concluded today with a commitment to explore investment opportunities in Class B Banks, Micro-Finance Institutions (MFIs), and Digital Financial Service Providers, following productive deal facilitation sessions held during the three-day mission.

During a meeting with finance minister Barsha Man Pun yesterday, DFI representatives received assurance of the government’s commitment to facilitating foreign investments. In this regard, the finance minister highlighted several amendments made earlier this week to laws aimed at simplifying foreign investments.

“The agendas linked to challenges to ease investments by Development Finance Institutions are gradually being addressed by the government, which is a positive sign to mobilise local saving and attract foreign investments," chairman of the Board of the Swiss Investment Fund for Emerging Markets (SIFEM) Jörg Frieden said, adding that the recognition of DFIs as development and economic growth partners by the government is very encouraging for our investments.

The DFI Mission, organised by Invest for Impact Nepal (IIN), was attended by 14 Development Finance Institutions and Impact Investors from the United States, Europe, and the United Kingdom and Multilateral Agencies such as the IFC.

The mission’s primary focus was on accelerating DFI investments in Nepal's financial service industry beyond Class A Banks. During the mission, DFIs delegates also had meetings with the finance secretary Madhu Kumar Marasini and Nepal Rastra Bank’s governor Maha Prasad Adhikari and the deputy governor Bam Bahadur Mishra, to discuss on the execution of the Memorandum of Understanding (MoU) between the Nepal Government and Development Finance Institutions signed in October 2023 and the issues related to easing entry and exits for DFI investments, respectively.

Representatives of the Nepal Bankers’ Association (NBA) and DFIs also explored opportunities to scale up Nepal’s Financial Service Industry and the role of DFIs to promote sustainable financing.

The First Development Finance Institutions (DFI) Mission in Nepal was held in April 2023.

The Government of Nepal, Finance Ministry and Development Finance Institutions (DFIs) signed a Memorandum of Understanding on October 31, 2023.

The MoU outlines an agreement to enhance the inflow of private capital investment from DFIs into Nepal, the need for transformative investments to achieve UN SDG goals, to foster favourable investment climate, and transfer of technical know-how and knowledge to enhance Nepal’s competitiveness.

Nepal Rastra Bank in its amendment to the Foreign Investment and Foreign Loan Management Bylaws -2080 (February 2024), has recognised DFIs as a category of investors (government/inter-government owned institutions).

The DFI Investments in Nepal from 2008-2023 has amounted to $1.1 billion with the financial sector comprising for 59 per cent of the total.

Remarkably, between 2021 and 2023, the financial sector attracted $629.9 million investments from DFIs.

Attendees of the second DFI Mission included Asian Development Bank (ADB), British International Investment plc (BII), Société Belge d’Investissement pour les Pays en Developpement (BIO), Nederlandse Financierings Maatschappij voor Ontwikkelingslanden nv (FMO), Swiss Investment Fund for Emerging Markets (SIFEM), Deutsche Investitions- und Entwicklungsgesellschaft (DEG), Finnish Fund for Industrial Cooperation (FINNFUND), International Finance Corporation (IFC), US International Development Finance Corporation (DFC), Japan International Cooperation Agency (JICA), MicroVest, DAI Capital, responsibility and Symbiotics, according to a press note issued by the IIN.

Fraud increasing in microfinance institutions

Fraud has increased in microfinance institutions due to weak monitoring and internal control, according to a senior microfinance expert.
Fraud has increased in microfinance institutions due to weak monitoring and internal control, said chair of the CSD Shankar Man Shrestha during the inaugural session of ‘Symposium on Fraud Control and Management’ organised by Centre for Self-help Development (CSD) here today.
“Fraud was unheard in microfinance till a couple of years back but risen to epidemic level in recent years,” he said, adding that the MFIs leader should be vigilant and make regular interaction with the client and field staff.
CSD – one of the pioneer institutions to launch microfinance in Nepal – organised the symposium, which saw various speakers in the panel session. In the panel discussions, experienced and senior chief executives of microfinance institutions focused on the steps to tackle fraud in microfinance. The panelist outlined that monitoring and supervision is a key towards eradicating fraud. The CEO’s should have both KYC of clients and staff. They further said that CEO’s should be aware of the lifestyle of their staff to prevent the fraud in microfinance.
An expert Shyam Khatri presented on legal remedies to tackle the problems endemic in microfinance sector. He mentioned that the bank and financial institutions can themselves formulate bylaws in conjunction with relevant acts of the government to tackle banking fraud in their particular organisation and such bylaws will have legal repercussions.
Discussion was also carried out on concept of internal control and good practices seen in different organisations. Traits and qualities of good management styles were also shared among the participants. There was consensus among the staff that the MFI’s should enact preventive measures such as right and well-motivated human resources and devising strong audit control practice in the organisation.

Central bank broadens sources of loans in foreign currency

The central bank has broadened credit sources of microfinance companies.
Issuing a circular on Monday, the central bank has allowed them to take loans in foreign currency from pension funds, hedge funds and other authorised organisations abroad too to ease pressure on shrinking foreign currency reserves.
Earlier, they were permitted to borrow only from foreign banks.
According to the central bank, microfinance companies can borrow up to 25 per cent of their primary capital from foreign financial sectors. “Microfinance companies can lend the money only in specified sectors – including tourism, agriculture, micro enterprise, micro hydro and renewable energy, income generating activities and self-employment and poverty alleviation – that contribute to the country's foreign exchange earnings.
The central bank has revised the provision to bring more foreign currency and improve the liquidity position. The central bank has turned its focus on microfinance companies that operate with little capital and have limited access in the international arena at a time when even the commercial banks are also struggling to get foreign currency loans.
However, most microfinance companies are unlikely to obtain loans in foreign currency as only a few of these companies have a primary capital of more than Rs 1 billion, the amount of money they can bring into the country will also be small.
According to the central bank, the foreign currency reserve has shrunk to $9.50 billion as of mid-July, down from $10.08 billion in the same period of last fiscal year. Though, it’s not a huge fall, the drop in foreign currency reserve is yet another signal for the government to be serious on time.
The central bank has been encouraging commercial banks to get loans from foreign companies to ease the liquidity crunch too. Though, most of the banks are facing the loanable fund crunch, they have not expressed interest to obtain loans in foreign currency, also despite the introduction of a lenient policy last year.
As of now, only two banks have taken loans in foreign currency including NMB Bank – that has taken a Rs16 billion project loan, the largest so far, from the Netherlands Development Finance Company, a Dutch development bank and NIC Asia Bank that has started the process to obtain a loan from International Finance Corporation (IFC), a member of the World Bank Group.
Foreign institutions were reluctant to offer loans to Nepali banks due to the failure to enforce a hedging solution effectively. Under a revised provision, the central bank has increased the maximum interest rate microfinance companies can pay on loans obtained from foreign sources to 6 month Libor (London Interbank Offered Rate) plus 4 per cent.
“The interest rate on such foreign currency borrowing should not exceed 6 month Libor plus 4 per cent that includes all applicable fees,” Nepal Rastra Bank (NRB) directive reads. “Earlier, the maximum interest rate was fixed at 3 per cent.”
The central bank has also told microfinance institutions that their total capital mobilisation should not exceed 30 times their core (tier 1) capital.
Currently, there are 91 microfinance companies in operation in the country.

Central bank mulls forced merger of microfinance institutions

The central bank is mulling to send microfinance institutions (MFIs) into forced merger to consolidate the number of class D financial institutions.
The wholesale borrowers lend the individuals without collateral for small enterprises. They can issue only up to 33 per cent of their investment portfolio by accepting collateral, according to the central bank. Likewise, the central bank has made the banks and financial institutions mandatory to lend 5 per cent of their total loan portfolio to the deprived sector but those which cannot lend directly due to lack of reach and capacity, lend the microfinance institutions to avoid the fine. Banks and financial institutions that fail to lend 5 per cent of their total loan portfolio to the deprived sector faces cash penalty, according to the central bank.
There are 91 microfinance companies currently operating in the country whereas some 18 are in line to receive licences. Though, he could not give any logic why the central bank wants to reduce the number of microfinance institutions, deputy governor of Nepal Rastra Bank (NRB) Chintamani Shiwakoti said that they have started to focus on the unification of microfinance companies. “The central bank has stopped issuing licences to the class D financial institutions – or popularly known as microfinance companies – in 2016 but only 11 companies have submitted letters of intent so far,” he said, adding that the central bank will issue a 30-day deadline to those that are in the process of receiving their permits. “There will be more than 100 microfinance institutions after all the companies that have received letters of intent start operation.”
He also attributed the size of market and sustainability of the microfinance companies for the forced merger. “As the market will be overcrowded with an excessive number of microfinance institutions soon, there will be unfair competition to survive, and reducing the number is the only remedy for the financial stability o,” Siwakoti added.
The central bank – to encourage mergers of microfinance companies – has also offered a number of incentives to potential partners through this year's monetary policy. The central bank has increased the maximum loan amount – like institutions can give from Rs 1 million to Rs 1.5 million – and the central bank will also extend the deadline for these institutions to maintain the minimum capital adequacy ratio (CAR).
Recently, the central bank has also capped microfinance lending at 20 per cent per annum including 2 per cent service charge. It has also ordered them to submit information about their borrowers to the Credit Information Bureau (CIB) to check possible multiple borrowing, which is one of the major challenges in the microfinance sector.

Nepal, German sign financial accord

Finance Secretary Rajan Khanal and German Ambassador to Nepal Roland Schäfer today signed a financial cooperation agreement of Euro 24.3 million (equivalent to Rs 3.2 billion) on behalf of their respective governments. The total volume of bilateral technical and financial cooperation from Germany since cooperation began in 1959 amounts to around Euro 979.6 million of grant assistance, according to a press release issued by the German Embassy today.
The grant assistance committed by the Federal Government of Germany in September 2018 will be used for the promotion of solar energy in rural areas, improvement of mother and child care in urban areas and sustainable economic development in rural and semi-urban areas, the release reads.
Under these programmes, German Development Bank KfW, on behalf of the German Federal Ministry for Economic Cooperation and Development, is implementing promotion of solar energy in rural areas to support solar energy technologies such as solar pumping systems for drinking water and for irrigation, solar systems for public institutions like schools, health centres and government offices.
The bank is also implementing a project related to ‘improvement of mother and child care in urban areas including in Kathmandu-based Paropakar Maternity and Women’s Hospital. The project will construct and rehabilitate the extension of health facilities for up to four satellite centres. These satellite centres will provide both in-patient and out-patient services to women and children closer to their residencies.
Sustainable economic development project in rural and semi-urban areas is the continuation of earlier support to improve access to target-group oriented loans, predominantly in rural and semi-urban Nepal and in particular for loan sizes which go beyond microfinance but remain below traditional corporate finance.
Both governments expressed their commitments to ensuring a successful and timely implementation of these key projects, according to the press release.

The projects:
Improvement of Mother-Child Care in Urban Areas – Paropakar Maternity and Women’s Hospital, Kathmandu – Support in terms of construction and rehabilitation of health facilities to up to four satellite centers for
• Promotion of Solar Energy in Rural Areas – Support for Nepal’s solar energy technologies such as solar pumping systems for drinking water/irrigation, solar systems for public institutions – health centers, government offices and schools
• Sustainable Economic Development in Rural and Semi-Urban-Areas-MSME Finance/Phase 2 – Support in terms of improving access to sustainable and target-group oriented loans mainly in rural and semi-urban areas of Nepal. This support also includes loan sizes beyond microfinance but remain below traditional corporate finance.

MFIs to get licence of digital payment service provider

The central bank has allowed microfinance institutions (MFIs) to provide payment service through electronic means, payment cards and mobile wallet digital payment service, if they have atlest 20 branches, and safe system. With the new circular, all class – from ‘A’, ‘B’, ‘C’ to ‘D’ – financial institutions can work as payment service provider.
According to a circular issued today by Nepal Rastra Bank (NRB), the paid-up capital of class ‘D’ financial institutions must be Rs 100 million, must have worked with no less than 20,000 borrowers and depositors through at least 20 branches to be eligible for the licence.
However, the information technology used by them must be reliable and should have been using online system to submit required data to the central bank, the circular reads, adding that the MFIs must submit the minutes of the decision of its board of directors along with IT policy. "MFIs must also submit product manual and user manual with applications to obtain the licence of payment service provider."
The MFIs wishing to work as digital payment service provider should have identified risks like market and system risks, the central bank adds. "It also should have an agreement with a telecommunication service provider for the digital payment."
The circular also reads that they can get the license for becoming payment service providers (PSP), if they have online network connectivity between head office and the branches, which is a must. The MFIs must have short message system (SMS) facility for clients, for which they have to get approval from the central bank.
The payment service providers are those institutions that carry out domestic money transfer business or pay bills of both goods and services or provide payment related services or provide payment activities through electronic means.
Of the total 65 microfinance development banks in the country, only Nirdhan Utthan Laghubitta Bittiya Sanstha and Chhimek Laghubitta Bittiya Sanstha meet the paid-up capital requirements to get the PSP license as of the end of last fiscal year.

Central bank directs banks to hike paid-up capital

Encouraging further consolidation, central bank today directed the banks and financial institutions to hike paid up capital within next two years.
The commercial banks need to increase their paid-up capital by four fold to Rs 8 billion – from current Rs 2 billion – by the end of fiscal year 2016-17, said central bank governor Dr Chiranjivi Nepal unveiling the Monetary Policy for the current fiscal year 2015-16, here today.
Likewise, development banks should increase their paid-up capital upto Rs 2.5 billion as per their working area, he said, adding that the minimum paid-up capital requirement for finance companies will be increased from Rs 200 million to between Rs 400 million to Rs 800 million.
Nepal said that the move to raise the paid-up capital was taken to strengthen the banks and financial institutions, make them competitive and bring financial stability. "The objective is to enable a commercial bank to invest in a big infrastructure project on its own without consortium,” he said.
The banks and financial institutions have no other options than to issue rights share, bonus share and further public issue apart from merger to increase their paid up capital. Earlier, central bank had asked the banks and financial institutions to go for merger, according to their convinence. "The move will help lead merger and acquisition – the buzzword that started a decade ago – or the consolidation process in the banking sector to a logical end," said deputy governor Maha Prasad Adhikari. " The central bank move will also encourage good governance," he said, adding that the move is also aimed at bringing a mixed group of promoters to promote self-supervision.
The banks and financial institutions will have to meet the new capital requirement without reserves within the next two years according to the Monetary Policy 2015-16. "The move is aimed at encouraging mergers and consolidation apart from rights issue, bonus issue and issuing further public issue," he added.
But the bankers said that the time period of two years – to increase paid up capital –  is too short, though in the long run, they accept, they have no option than to increase paid up capital. "The merger is not a magic wand," the bankers said, adding that mergers without right partners could be disastrous.
Likewise, some bankers also argued that the move will hurt central bank’s policy of separating the professional bankers and businessmen because the latter are ones with more money to invest. "The increament of paid up capital itself is not an issue, but the time frame is too short,” said president of Nepal Bankers’ Association (NBA) Upendra Poudyal.
However, the sudden but expected move of the central bank to hike paid up capital will fuel the share market.
According to share narket analyst Rabindra Bhattarai the bull run in the share market will not last long as the investors willnot get desired return on their investments in the next two years.
The first Monetary Policy of the incumbent governor Dr Chiranjivi Nepal has, however, not changed much of the existing provisions.
The expansionary Monetary Policy has kept cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged, despite speculation that both could be hiked to check inflation. The Policy has targeted to keep the inflation at 8.5 per cent, though it has not devised any monetary instrument to crack whip on inflation.
The Policy acknowledging the reconstruction drive – in the aftermath of devastating earthquake – and supporting the expansionary fiscal policy lacked plans to deal with price hike, though it has focused on macroeconomic stability and fuelling growth to six per cent.
The monetary policy has also failed to come up with measures to effectively deal with the issue of excess liquidity as the banks and financial institutions currently have over Rs 100 billion of excess liquidity that could increase inflationary pressure.
Last fiscal year, central bank had raised CRR — the portion of total deposits that banks and financial institutions must park at the central bank — for commercial banks to six per cent. Likewise, development banks have to maintain CRR of five per cent as in the past, while finance companies do not have to park more than four per cent of the total deposits at the central bank like in the previous year.
Likewise, SLR — the portion of deposit that has to be invested in government securities and assets like gold — has not been changed either. But policy rate, also popularly known as bank rate, has been revised downwards to seven per cent from eight per cent. The banks and financial institutions that approach the central bank — the lender of the last resort — for loans in dire situation will start getting funds at seven per cent interest rate from now onwards.
The policy has also introduced a new concept of Infrastructure Development Bank – following the budget – as a joint venture with a paid up capital of Rs 20 billion to fund big infrastructure projects.

Paid-up capital requirement 
Institutions – existing capital – requirement in two years
Commercial banks – Rs 2 billion – Rs 8 billion

Development banks
• National level – Rs 640 million – Rs 2.5 billion
• 4 to 10 district-based – Rs 200-300 million – Rs 1.2 billion
• 1 to 3 district-based – Rs100-300 million – Rs500 million

Finance Companies
• National level – Rs200-300 million – Rs 800 million
• 1 to 3 district-based – Rs100-300 million – Rs 400 million

Monetary Policy 2015-16 Highlights
• Inflation target of 8.5 per cent
• Banks and financial institutions should bring chip-based debit and credit cards by mid-October
• Spread rate to be used for microfinance institutions also
• Special supervision of too-big-to-fail banks
• Foreign exchange facility of up to IRs 75,000 to be extended to settle payments of Indian transport companies
• Foreign exchange facility of up to $500 to be extended to Indian tourists visiting Mansarovar Kailash through Nepali tour operators
• CRR, SLR not changed
• Banks and financial institutions should invest certain portion of profit to train human resources and for corporate social responsibility (CSR)
• Banks and financial institutions can use local currency bonds to maintain statutory liquidity facility
• Liquidity Monitoring and Forecasting Framework to be revised
• Registration fees and other pre-operating expenses of foreign investors — who establish business with 100 per cent foreign investment — to be reckoned as investment
• Permission to be extended to establish national-level Infrastructure Development Bank with a minimum paid-up capital of Rs 20 billion
• Banks to be categorised as ‘Systematically Important’ depending on impact they could create on the entire financial system; separate standards to be created to regulate and monitor such institutions
• Prompt corrective action to be taken against banks and financial institutions that fail to meet liquidity requirements
• Deprived sector lending requirement raised by 0.5 percentage point
• Banks and financial institutions allowed to extend loan of up to Rs 1 million on security of land not linked with motorable road unlike current provision
• Special refinancing facility at one per cent interest to increase credit flow towards agriculture sector and small enterprises in districts with high poverty incidence