Microfinance institutions flush with profits

KATHMANDU, JUNE 07, 2013

Microfinance institutions are raking in profits amidst the growing concern over the massive lending rate being charged on borrowers.

Microfinance development banks have earned 21 per cent more profit than a year ago. The class ‘D’ financial institutions earned Rs 33.26 billion as net profit in the third quarter of the current fiscal year.

In the third quarter of last fiscal year, they had earned profits worth Rs 27 billion.

Likewise, according to the seven microfinance development banks that are listed at Nepal Stock Exchange among the 28 in operation, these

class ‘D’ development banks have increased their profit by 27 per cent.

They earned Rs 244.2 million by mid-April, 2013, against Rs 191 million earned in the corresponding period a year back.

The ever growing profits of the microfinance institutions and generous dividend payouts have made them popular stocks to be traded at the stock exchange. From last fiscal year’s profit, their average dividend distribution stood at 25 per cent of the paid up capital.

However, of late, many feel that the concentration of microfinance institutions on profits is at the expense of the rural populace who are their borrowers.

The central bank licensed microfinance banks and institutions charge lending rates as high as 20 per cent to 25 per cent from borrowers which is almost 10 percentage points higher than the rate charged by commercial banks for deprived sector loans that are similar to micro credit.

Meanwhile, Nepal Rastra Bank (NRB) is gearing up to monitor the interest rates being charged by microfinance institutions. “We have also realised that the current rate of interest being charged for micro loans by microfinance banks are not sustainable, both for the borrower and the banks in the long run,” said spokesperson of NRB Bhaskar Mani Gyanwali.

“However, it is against the principle of the central bank to directly regulate the interest of any financial institution, but we will keep a close watch on the institutions,” Gyanwali said, adding that intervention will be undertaken if the microfinance institutions are unnecessary burdening clients for profit.

Moreover, financial institutions that are obliged to fulfil deprived sector lending requirement by the central bank opt to lend the amount to wholesale microfinance lenders at interest rates of between seven per cent to 10 per cent. The wholesale lenders then lend to individual micro credit institutions who then give the money to clients that consist mainly of poor people who reside in rural areas.

However, microfinance bankers are of the view that the interest rates being charged is in accordance with the cost of microfinancing. “The cost of going to the field, organising groups, providing focus groups with skill based training and then lending them money without any collateral is not something commercial banks are up to,” said a chairman of a microcredit bank.

“Microfinance is a business albeit a social one, and investors also expect returns, so it is not wrong if we make good money. Ultimately, if we are able to earn better then we will be able to provide better services to beneficiaries,” added the microfinance banker.

Despite the obvious benefits of microcredit in supporting the poor and ultra poor population and in creating social awareness, the growing concentration in limited areas and multiple lending to the same client has raised an alarm within the microfinance community as well.

Source: THT