Kathmandu. Amid the debate on whether to reduce the mandatory quota or keep it as it is, the Nepal Rastra Bank has come up with a different strategy on the loan of the poor class.
Banks and financial institutions are preparing to expand the area for investment by maintaining the provision that banks and financial institutions should disburse a minimum of 5 percent of the total loans to the poor class. This has indicated that the system will be flexible by rejecting the pressure to reduce the quota.
According to an official of the Rastra Bank, now the central bank is going to adopt flexibility in this. In recent times, due to the slowdown of the rural economy, the demand for loans to the poor class is decreasing. On top of this, banks are reluctant to take risks due to the increase in the recovery problem in the microfinance sector. In such a situation, the compulsion to pay compensation due to not being able to meet the prescribed limit has become more pressure for the banks. This is the reason why the banks have been demanding to reduce the limit.
But instead of lowering the limit, the central bank is choosing a way to widen the scope of the ‘poor’, according to central bank officials. Now, loans up to Rs 20-25 lakh going to startups, collateral-free small enterprises or new business ventures will also be allowed to be counted under the poor category loan. This indicates that loans that have traditionally been limited to agriculture, small businesses or targeted groups will be diverted to new areas.
This change seems to expand the concept of poor class lending. Policies that were previously focused on income-based poverty are now focused on underserved groups and enterprising youth as well. Although this is expected to broaden access to finance, risk management can be challenging. This is because loans of a startup nature are inherently uncertain.
The data also shows the need for a policy change. In the first eight months of the current fiscal year, the loan to the poor has declined by about 6.8 percent to Rs 276 billion. This had also contracted in the previous year. This indicates that the current model is not effective. Therefore, it is understood that the central bank has adopted a strategy of increasing the flow by expanding the sector rather than taking the risk of shrinking the loan by reducing the quota.
Overall, the new thinking of the Rastra Bank seems to be trying to divert loans from social responsibility to partial enterprise promotion. The challenge now will be whether this new scope will really deliver loans to the target group or it will only become a tool to meet the goals of the banks.
