SAARCFINANCE Seminar on Regulation and Supervision of Microfinance Institutions in SAARC Region March 20-22, 2013 Kathmandu COUNTRY REPORT NEPAL Presented by: Participants*, Nepal Rastra Bank * : Mr. Raman Nepal, Deputy Director, Micro Finance Promotion and Supervision Department Mr. Ananda Paudyal, Deputy Director, Bank and Financial Institutions Regulation Department Mr. Ram Hari Dahal, Deputy Director, Micro Finance Promotion and Supervision Department Mr. Madhav Prasad Adhikari, Assistant Director, Bank and Financial Institutions Regulation Department. Mr. Shalikram Pokhrel, Assistant Director, Research Department
1. Country Profile Nepal : Also well known as : Area : Population : Geographical Division : Administrative Division : Political System : Economic Aspect : South Asian country, landlocked between India and China. i. Country of Himalayas (out of 14 more than 8000 m. high peaks, 8 lies in Nepal) ii. Land of Mount Everest (highest in the world, 8848m) iii. Birth Place of Lord Buddha (Lumbini, Western Nepal) iv. Well-Known Tourist Destination (Top 10 in most of the world travel surveys) 147,181 sq. km, with top of the world 8848 m and lowest part at 70 m from the sea level. 265 million with growth rate of 1.35 percent 68 percent land in Hills, 17 percent in Terai and 15 percent in Mountain Divided into 5 Development Regions, 14 Zones and 75 Districts Republic Nation with Multi-Party Democracy / involving for the election of 2 nd Constitutional Assembly The richness in geographical diversity is the opportunity as well as the challenge of Nepal. About 20 percent population live in urban sector and remaining 80 percent live in sub-urban and rural remote terai, hills and mountain regions. Remittance holds nearly 1/4 th of Nepal's GDP. Out of total GDP, more than 90 percent is used on internal consumption. This increasing trend of consumption pattern is largely contributed by the remittance income, especially in the rural areas. (i) GDP Growth : Last 5 year's average GDP growth was 4.5 percent / 4.6 percent in 2011-12 / 4.1 percent estimated for 2012-13 / agriculture shares 1/3 rd in GDP. (ii) Inflation : 8.3 percent in 2011-12 / 10.1 percent in mid-feb 2012-13 / expected to remain at 9.5 percent in 2012-13. (iii) BOP : USD 1.45 billion surplus in 2011-12 / USD 18.6 million surplus in mid-feb 2013 / largely dependent upon remittance income, travel income, foreign aid and exports. (iv) Forex Reserve : USD 5.1 billion in mid-feb 2013 which is sufficient to cover 8.5 months' imports of goods and services / around 80 percent holding of convertible currencies and remaining 20 percent of Indian currency. (v) Exchange Rate : The exchange rate per 1 USD was NRs. 88.60 at mid-july 2012, NRs. 85.30 at mid-feb 2013 and NRs. 86.40 at mid-mar 2013 / Other than Indian currency, the daily exchange rate of all the convertible currencies are determined by the market with NRB intervention as and when required. / The exchange rate of Indian currency has been fixed at NRs. 160 per 100 INR for a long time. (vi) Poverty: As per National Living Standard Survey 2010/11, 25.16 percent population falls below the poverty line with 0.41 percent Ginni Coefficient. (vii) Per Capita Income : USD 725 as of 2012-13. 1
2. State of MFIs Regulation and Supervison 2.1 Overview Micro finance emerged as a poverty reduction tool in Nepal since the mid-1970s with the implementation of the Small Farmer Development Program through the government owned banks. Based upon the 'Grameen Banking' concept of Bangladesh, Nepal Rastra Bank (NRB) with the help of the government, took an initiation to establish 5 regional-level Rural Development Banks in Nepal during the 1990s. During the same era, 5 different NGOs (Nirdhan, CSD, NSSC, Deprosc and Nerude) replicating the 'Grameen Banking' concept established and worked in the rural areas of Nepal which later on were developed into first five private-sector micro finance development banks (Nirdhan, RMDC, Chhimek, Swablamban, Nerude) till the late 1990s. The other private sector Micro Finance Development Banks were also established gradually. Meanwhile, new Financial Intermediary Act came into effect in 1998 and financial intermediaries NGOs (FINGOs) were restrained from mobilizing the client savings and were authorized for micro finance activities in Nepal. As most of the banks and financial institutions were centered in cities and accessible areas, thousands of saving and credit cooperatives emerged in most of the rural areas of Nepal especially after 1990s. These institutions are broadly guided by the Cooperative Act 1992. Nepal Rastra Bank Act, 2002 authorizes Nepal Rastra Bank to license, regulate and supervise the banks and FIs. The Bank and Financial Institutions Act 2006 (BAFIA) broadly guides Nepalese financial system, based upon which NRB issues necessary directives. BAFIA categorizes commercial banks as 'A', development banks as 'B', finance companies as 'C' and microfinance development banks as 'D' class financial institutions. Presently, the overall financial system of Nepal constitutes as : a) Central Bank : 1 (Nepal Rastra Bank) b) Commercial Banks : 32 c) Development Banks : 89 d) Finance Companies : 66 e) Microfinance Development Banks : 28 (including 3 wholesale lending MFDBs) f) Co-operatives permitted by NRB for limited banking transaction : 16 (There are around 12000 Saving and Credit Co-operatives registered with the Department of Cooperatives, Government of Nepal. These cooperatives are regulated and supervised by the Department of Cooperatives itself) g) Financial Intermediaries NGOs (FINGOs) : 34 h) Contractual Saving FIs : 3 (Insurance Companies 30, Employee's Provident Fund and Citizen Investment Trust. Among them, EPF and CIT are owned & managed by the government and insurance companies are regulated and supervised by the Insurance Board) Among the above 28 MFDBs, 5 of the government sector regional Grameen Development Banks are in the process of merger and among the 34 FINGOs; 4 of them are in the process of upgradation to 'D' class categories. Regarding the policy aspect, Microfinance Policy has already been formulated and two legal drafts regarding sphere have already been submitted to the government authorities for establishing the 'Microfiannce Authority' and the 'National Microfinance Development Fund'. Among them, the microfinance authority is a II-tier institution broadly responsible for the regulation and supervision of all kinds of microfinance institutions including the cooperatives. 2.2 Regulation and Supervision of MFIs 2
The Bank and Financial Institutions Regulation Department of NRB is solely responsible for the licensing as well as regulating all kinds of BFIs. This department issues 'Unified Directives' for all the BFIs consolidating all of its previous directives, notices, code of conducts, etc. The task of supervision of FIs is done by the respective supervision departments of NRB, i.e, the Bank Supervision Department, Development Bank Supervision Department, Finance Company Supervision Department and Microfinance Promotion and Supervision Department. In this context, Micro Finance Promotion and Supervision Department supervises all kind of micro finance institutions ('D' class FIs, cooperatives permitted for limited banking services and FINGOs). This Department is also involved in the promotional activities of microfinancing through the different projects, funds, programs, etc., with the collaboration of government as well as foreign/national agencies. As per NRB Act, Nepal Rastra Bank carries out its supervisory function by applying different approaches of supervision in practice. The major guiding documents for NRB supervision are: NRB Act, BAFIA, Supervision Bylaws, Basel Core Principles, Onsite and Off-site Supervision Manuals, NRB Unified Directives to Banks and FIs. Supervision Mechanism include the following: a) On-Site supervision (Routine Onsite, Special Onsite) b) Off-site Supervision c) Follow-up Supervision The onsite supervision is carried out based on onsite supervision manual. The review is basically designed to assess the health and financial soundness of the bank. Accordingly, it covers the analytical review, system appraisal and detail verification. The scope of off-site supervision includes financial analysis, compliance review, consolidated offsite report, annual report and enforcement report. The major functions of off-site supervision are: collecting information from the MFIs, checking the accuracy and appropriateness, analyzing the financial indicators, monitoring the compliance, preparing the periodic reports and submitting to the authorities, analyzing annual financial statements and manuals, providing AGM clearance, CRR monitoring, imposing penalties in case of non-compliance. Similarly, follow-up supervision is also done as a part of the off-site supervision. As per the latest Unified Directives, the major prudential regulation for BFIs include: Capital Adequacy, CRR and SLR Provisions, Loan Classification and Provisioning, Single Obligor Limits, Accounting and Financial Disclosures, Risk Mitigation, Corporate Governance, Compliance of Supervisory Directives, Investment Guidelines, Reporting Requirements, Consortium Financing, Transfer of Promoters Share, Credit Information and Black Listing, Branch Expansion, Interest Rate Determination and Disclosure, Resource Mobilization and its Limit, Deprived Sector Lending, Upgrading/Expansion of Operation Area/Merger & Acquisitions, Anti-Money Laundering and Countering of Terrorist Financing, Subsidiary Company Provision, e-banking, Miscellaneous Directives, etc. Licensing Policy: The major provisions highlighted in the current licensing policy regarding the MFIs are as follows: 1. The minimum paid up capital required to establish a Micro Finance Development Bank ('D' class FIs) is Rs. 10 crore for national level bank, Rs. 6 crore for regional level bank, Rs. 2 crore for 4-10 districts level bank and Rs. 1 crore for 1-3 districts level bank. 3
2. The promoters are required to submit their formal source of income as well as the tax clearance for the investment in BFIs. 3. Regarding the share capital, the promoters are required to invest minimum 51 percent and minimum 30 percent should be set a side for the public offering. Out of that 30 percent, 5 percent may be allocated for their staffs also. The maximum limit of the shareholding for a single person/single family/single firm/single company/single institution/or a single group's company is set at 15 percent of paid-up capital for 'A', 'B' and 'C' class FIs and 25 percent for 'D' class FIs. These single shareholding limits are set for only one financial institution where as they can invest up to 1 percent of the paid-up capital in rest of the other FIs. Cross-holdings among the FIs (except D class) either in shares or in securities are not allowed. Stock brokers, market makers, persons holding any political positions, staffs/board members/auditors/legal advisors of any other FIs, persons below 21 years and bankrupt and fraud persons are not allowed to be the promoters of any FIs. 4. There should be only one representation in the board of directors of a financial institution (no restrictions for 'D' class FIs) from a single family/single firm/single company/single institution/or a single group's company. At least one board of directors of FIs should be from the professional experts' list published by the NRB. 5. Regarding the foreign investment, joint-venture with minimum of 20 percent to maximum of 85 percent of foreign investment is allowed for all kinds of BFIs. If the foreign investment is less than 50 percent, minimum 30 percent is to be set for the public offering. In case of more than 50 percent foreign investment, only 15 percent may be allocated for the public offering. Out of that 15 percent, 5 percent may be allocated for their staffs also. 6. In case of Non-Resident Nepalese's investment in BFIs, it should be as per the NRN Act and the amount should be received through the authorized BFIs as remittances. 7. Before providing the letter of intent (LOI) to new BFIs, the detail of the proposed promoters is published as a public notice so that complaints, if any, may be received against the promoters regarding their financial indiscipline. This provision is not mandatory for the 'D' class FIs. 8. Regarding the promoter's qualification, 1/3rd of the promoters should be graduated and at least 3 years should be completed if any of them is released from the blacklisting. Capital Adequacy : Based upon risk-weighted asset, 'D' class FIs are required to maintain at least 4 percent of core capital and 8 percent of capital fund. Other FIs except 'A' class are already adopting Basel I in Nepal. Regarding 'A' class, they have been fully (all pillars at the same time, minimum capital requirements, supervisory review process and market discipline) implementing Basel II since 2008-09. Liquidity Provision : 'D' class FIs permitted for taking public deposits should maintain at least 2% of total deposit liabilities as CRR. This amount should be kept with NRB or the 'A' class FIs in current/call accounts. For the other 'D' class FIs, it should be 0.5% of total deposits and borrowings. Moreover, 'D' class FIs are also required to maintain 2.5% of total deposit liabilities as 'Liquid Assets'. Cash balance, government securities, NRB securities and deposits kept at 'A' class FIs are to be counted for this provision. Besides, 'D' class FIs permitted for taking public deposits are required to maintain 4% SLR (statutory liquidity ratio). This includes government securities, CRR amount, cash balance, deposit kept at 'A' class FIs, demand deposits kept at other banks and FIs in case of regional FIs. These all ratios are counted on monthly basis. In case of noncompliance, fine is to be levied at the 'Bank Rate'. Loan Classification and Provisioning : Loans are classified in following 4 categories and provisioning is to be done as per the classification: a) Pass Loans : good loans and upto 3 month's overdue loans :1% provisioning b) Sub-standard Loans : 3-6 month's overdue loans : 25% provisioning 4
c) Doubtful Loans : 6-12 month's overdue loans : 50% provisioning d) Loss Loans : more than 1 year's overdue loans : 100% provisioning Among the above classification, pass loans are categorized as 'performing loans' and rest of the others (including re-scheduled and restructured loans) are categorized as 'non-performing loans'. In case of insured loans, the provisioning should be only 25% of the above provisions. Deposit Mobilization: 'D' class FIs can mobilize the resources from their members up to 30 times of core capital as of the last quarter. FIs cannot charge any service charges from their customers who open accounts with them. The 'D' class FIs involved in retail micro banking services will be granted permission to mobilize the resource from the general public up to 5 times of their core capital. But those FIs should fulfill many of the conditions and they can only have saving deposits as well as fixed deposits up to 2 years. They can collect institutional deposit from a single firm up to 20 percent of their total deposit collection. No FIs could announce any lottery-based schemes to attract the public deposits. FIs must do deposit insurance with the Deposit and Credit Guarantee Corporation for the personal deposits up to Rs. 2 lakhs (which should be later on raised up to 5 lakhs). The premium charges for those insurance should not be levied to the customers separately. Deprived Sector Lending: As a directed lending, 'A', 'B' and 'C' class FIs are compulsorily required to lend respectively 4%, 3.5% and 3% of their total lending as the deprived sector lending. This amount might be disbursed either by the FIs themselves or may be provided to 'D' class FIs in the form of wholesale lending. The 'D' class FIs are required to fully utilize that kind of borrowing in deprived sector and keep its account separately. They ('D' class FIs) cannot keep this amount as a deposit in any other FIs for getting interest. If it is not fully utilized or kept as deposit in other FIs, it could not be counted as deprived sector lending. The share capital invested by 'A', 'B' or 'C' class FIs in 'D' class FIs or 'D' class subsidiary is also counted as a indirect deprived sector lending for those three FIs. Expansion of Operating Area: 'D' class FIs (Regional/District level) can be permitted to expand their operating area to next adjoining districts and so on if they raise their paid-up capital by Rs. 2.5 million. Likewise, only 'D' class FIs will be provided zero percent loan up to Rs. 1.5 million by the NRB if they expand their operation in 9 listed remote districts where there is less access of financial services. The BFIs will be permitted to open one more branch in the Kathmandu valley if they open at least one of their branch in 17 listed less access districts and another one at outside the Kathmandu valley. 'A' 'B' and 'C' class FIs are allowed to establish 'D' class subsidiary in listed 9 remote districts with 51-70 percent of promoter's capital. They should set a side at least 30 percent share for public offering also. The 'D' class FIs permitted for operating in 4-10 districts with Rs. 2 crore's paid-up capital may be allowed to go upto 5 more districts in the hilly region if they fulfill rest of the other necessary conditions. Up-gradation of 'D' Class FIs: Upon fulfilling the required conditions, 'B' and 'C' class FIs can be upgraded to the respective higher categories. But, 'D' class FIs are not allowed to upgrade themselves to upper categories, as the work nature of 'D' class is fundamentally different from rest of the others. For the upgrading of FIs with in the 'D' class category, (from 1-3 districts to 4-10 districts to regional level to national level), they need to fulfill the following conditions: a) compliance of minimum paid-up capital; b) regular auditing and annual general assembly; c) fulfilling the capital adequacy; d) compliance of loan classification and provisioning; e) less than 5% of NPA; f) compliance of conditions of licensing; g) completing at least one year after the overcome of cumulative losses; h) completing at least 3 years in one category ix. at least opening 5
one office in one district within operation area and i) collecting at least 60% of their minimum paid-up capital in two bi-annual periods x. chairman, CEO or board of directors completing at least 3 years of getting clearance from blacklisting. Interest Rate Determination and Disclosure: All the BFIs are free to fix their interest rate themselves. Only 'D' class FIs can fix flat interest rates. All the FIs must publish their interest rates in the national level newspapers on quarterly basis. For the 'D' class, they may publish it at their own notice board only. FIs should provide the interest to their customers on quarterly basis. FIs can alter (raise) up to 0.5% in published deposit interest rates but cannot raise the lending rates. In case of fixed deposits of more than 5 years maturity, interest rates may be fixed on the mutual understanding with the clients. NRB does a close monitoring of interest rate fixed/published by the FIs on a regular basis so as to keep the spread in track. In this concern, NRB has very recently introduced the provision of publishing 'base rate' for the lending aspect by the commercial banks. Single Obligor Limit: Single borrower limit (included both fund-based and non-fund based) is 25% of core capital for 'A', 'B' and 'C' class FIs. For specified productive sectors, the limit is set 30% and for hydro projects it is fixed at 50%. For the 'D' class FIs, non-collateral (group guarantee) loan limit is maximum Rs. 100,000 per member (deprived/with low income) and collateral loan limit for the group members is maximum Rs. 300,000 per person and maximum of Rs. 60,000 per person for non-members. All the FIs are required to share credit information with the local MFDBs, Cooperatives and FINGOs before they disburse loan equivalent of more than Rs. 30,000. The total collateraled loan of any FIs should not exceed 1/3 rd of total loan. For the 'D' class FIs involved in wholesale lending, the single borrower limit is set 25% of core capital. In case of non-compliance of single borrower limit, there should be 100% provisioning for the excess amount. Regarding the sectoral lending limit, lending for housing and real estate sector should not be more than 25% of total loan. But, it does not include personal home loans up to Rs. 1 crore. Financial Disclosure: Final auditing should be completed with in the 5 months of fiscal year. Before finalizing the audit report, all the financial statements must be presented to the concerned supervision department of NRB for the pre-approval. After the approval, the final audit report and all the financial disclosures including Long Form Audit Report should be presented to the Regulation and Supervision Department of NRB with-in 15 days. Major financial disclosures like balance sheet, profit and loss account, cash flow statements, capital fund's table, main financial indicators, etc., should be made public on a quarterly as well as yearly basis through their annual reports as well as in the news papers and web-sites. Regarding the 'D' class FIs, it can be disclosed at their notice board only. Accounting Principles: Accounting principles of BFIs should be broadly guided by the general accounting principles, accepted accounting practices adopted in banking business, the Nepal Accounting Standards (NAS) and the International Accounting Standards (IAS/IFRS). All the incomes and expenditures should be accounted in 'accrual basis' except interest income of loans/advances, which should only be shown in 'cash basis'. While recovering the due loans, due interest should be recovered first. But, this may not be applicable in case of rescheduled/restructured loan recoveries. Dividends cannot be allocated from any general reserves without the pre-approval of NRB. 6
Foreign Currency Transaction: With the NRB permission, 'D' class FIs can do inward remittance transaction and purchase Indian Currency from the public under condition that the currency must be sold to authorized BFIs only. Black Listing Provisions: Every defaulter with more than Rs. 2.5 million loans exceeding 1 year period (with 3-months grace period) must be informed to the Credit Information Bureau (CIB) for the blacklisting. Before the blacklisting, it should be notified to the related customer giving 35 days time period. Before issuing new loans/restructuring/rescheduling of more than Rs. 1 million, every FIs must check with the black list first. The black list of more than Rs. 1 crore's loan should be made public by the CIB through the national daily newspapers on half yearly basis. For rest of the names, it should upload the list at its web-site. If the default loan is recovered from the blacklisted persons, FIs should request the CIB with in 3 days to de-list the name and the CIB should do it within next 3 working days. Response to Supervisory Reports: FIs must response the issues/directives raised by the supervisory report within 30 days. In case of inadequate capital, it should make it adequate within 35 days. In case of inadequate liquidity, it should be managed within 30 days. In case of loan portfolio adjustment, it should be submitted within 30 days. If additional provisioning is necessary, it should be adjusted during the current quarter. The follow-up directives should be complied within 2 months. Additionally, the FIs should present their quarterly progress report as well as the implementation progress of supervisory directives within specified deadline. Miscellaneous : 1. Newly established FIs should go for the public offering with-in 2 years of operation. 2. The 'A' class FIs with deposits of more than Rs. 2 billion are required to stress test themselves based upon stress testing guidelines (prepared by the NRB) and report to NRB. 3. Deposites more than Rs. 1 million by a customer in a single day or more than Rs. 5 lakh's foreign currency exchange or more than Rs. 1 million's foreign currency payment must be reported to NRB under AML/CFT provision. 4. All the BFIs are directed to have a separate micro credit and SME desk under their loan department. 3. Policy Stance Continuation of modified deprived sector credit programs. Increase coverage area of MFIs especially in rural and remote areas. Encourage self-regulatory systems under NRB guidance. Improve the institutional and funding capacities of the MFIs for women, poor and deprive communities. Promote and regulate self developed MFIs. Microfinance accepted as vital tool of poverty reduction. Concentration on productive sector lending. 7
4. Best Practices Separate regulating and supervising departments exist in NRB as well as competent and experienced staffs are assigned in these departments. New and qualified staffs are being recruited in a regular basis by NRB. Frequent trainings, seminars and knowledge sharing programs and similar activities take place for NRB staffs regarding regulation and supervision of FIs. Adequate legal provisions with international standards are already there and time to time revisions and amendments are undertaking for effective regulation and supervision. Priorities and incentives are being provided for MFIs going to remote areas. Microfinance has been accepted as an 'effective tool' of poverty reduction by the government in its official documents and government time to time unveils different policies for the development of this sector. NRB and government are working together for the promotion of microfinancing in Nepal. Establishment of Rural Self-reliance Fund, conduct of different projects, strengthening of the legal provisions and structural developments are some of the major activities where NRB and government are working together. 'Deprived Sector Lending Provisions' has been reinstated for BFIs by the NRB. It was phased-out some years back. MFIs are also involved in socio-economic activities under credit-plus program, which includes basic education, entrepreneurship trainings, sanitation, women empowerment, etc. Government and NRB are working together hand-in-hand for getting the financial as well as technical assistance from the donor agencies for the betterment of microfinancing in Nepal. 5. Problems and Challenges MFIs are mostly concentrated in urban and accessible areas and less presence in hilly and remote areas. We find multiple financing of MFIs and duplication of lending in most of the accessible/pro-urban areas. Due to this, high drop-out rates are being observed in those areas. There is duplication among the donors even in rendering microfinance services. Comparatively high interest rates are charged by MFIs mainly due to their higher operational costs. MFIs are found to be more business oriented in recent years and they are being deviated from their social responsibility. Their presence is relatively less in targeted deprived sectors and they are more concentrating on the middle class and lower middle class. Mushrooming MFIs are seen in accessible areas where less professionalism and unhealthy competition is also increasing. There are challenges to drive the MFIs in productive and agricultural sector. There is a lack of financial literacy among the general public and the group members. There is a lack of professional staffs in MFIs with enough knowledge of NRB directives, rules and regulations. It is found to be more difficult to supervise the mushrooming MFIs in accessible areas. 8
Problems regarding the corporate governance and non-compliance of NRB directives are widely seen in most of the MFIs. Most of the MFIs are running with the weak management information system. Almost all the MFIs are running with more labor intensive model and using less of IT facilities. 6. Measures for Improving Legal and Regulatory Architecture Problem of multiple financing and duplication may be addressed with the compulsory provision of having credit information from Credit Information Bureau before the new lending. Appropriate spread rate cap may be set for the MFIs to address the higher interest rates. Sound code-of-conduct may be issued for the MFIs so that they show more professionalism and healthy competition. Some sorts of good practices guideline should be issued for MFIs so as to have uniformity in their operation and practices. More incentives and liberal policy may be adopted for those MFIs, which go to remote/inaccessible areas. Some provisions may also be introduced for MFIs so that they do not avoid the credit-plus activities along with their financial transactions. Government should have a policy, which persuade the MFIs to go to the productive sector in the rural areas. NRB should take initiation to train the staffs of MFIs so that they are fully informed/aware of NRB directives. Regulatory and supervisory actions may be made stronger so that MFIs concentrate on real deprived sector and reach the backward section of the society. NRB should take initiation for the financial literacy part so that more needy poor/deprived people get benefited from the MFI services. Regulation and supervision of MFIs should be stronger so that they could be able to maintain the public confidence upon them. 9