KATHMANDU: Nepal Rastra Bank (NRB), the country’s central bank, recently announced that it is requiring microfinance institutions (MFIs) in the country to establish a “Client Protection Fund”[1] to which they must deposit 1 percent of their annual net profit. In cases in which the annual dividend payout of an MFI reaches 20 percent of the organization’s annual net profit, it also will be required to deposit 25 percent of the dividend into the protection fund.
Trilochan Pangeni, the spokesperson of NRB, said that “as MFIs provide loans without collateral, such a fund has become necessary for the protection of MFIs and their clients”[1] due to the fact that the borrowers are “financially vulnerable people and a small shock could affect their businesses”[1].
In addition to the Client Protection Fund for MFIs, NRB also is requiring each financial institution in Nepal to draw up a “contingency management framework”[1] to be used in cases of natural disasters and other events that may have an impact on the financial stability of the country.
In parallel, NRB relaxed loan loss provision requirements for banks and allowed an increase of one year in the length of grace periods between the disbursement of loans and the time that borrowers must begin repayments. The grace period change applies to loans to individual borrowers as well as organizations.
The newly announced requirements are in response to the financial and economic risks that were exposed by the earthquakes that hit the country in April and May 2015 and are anticipated from the unofficial economic sanctions that were imposed on Nepal by the Indian government as of September 2015. The effective date of the requirements are unspecified.
