Gokul Chandra Adhikari

Since the nationwide lockdown from 11 Chaitra 2076 for the containment of COVID-19 in Nepal was introduced, almost every aspect of day-to-day life has been direly affected, including the banking sector. The different types of banks and financial institutions in Nepal consist of commercial banks with huge capital base as well as small scale micro finance institutions. Every financial institution is mainly involved in saving mobilisation and flow of loans amongst other services. But their aims and working directions are different depending on their types.
Providing banking services for big businessmen and big corporate houses are carried out by three categories of financial institution. Category ‘A’ consists of commercial banks, category ‘B’ consists of development banks and category ‘C’ consists of finance company. These are collectively known as non-micro finance institutions. A microfinance institution, which falls under category ‘D’, mainly works for providing micro credit without mortgage to low-income and impoverished people from rural communities. To understand the effect of lockdown in banking sector in Nepal, we need to analyse micro finance and non-micro finance institutions in separate ways. Regardless of their categories, the credit risk factor created by COVID-19 remains the same for these institutions.
A main source of profit for financial institutions is the interest from loan by debtors which has drastically dropped down due to lockdown. On the other hand, expenditures on rent, salary and wages, etc. remain the same which creates negative impact in profit and loss account of these institutions. Since debtors could not pay back the interest and principle during this time, the protocol requires financial institutions to show this loss as expenses under loan loss provision. This directly hits the profit and loss account and core capital of financial institutions.

NRB directives
In this scenario, there are directives placed by Nepal Rastra Bank to increase the time limit and reduce the amount of interest to be paid back by the debtors. Despite this, the debtors still could not payback even the reduced amount since their businesses were completely shut for more than three months. Now, the central bank needs to assist the financial institutions to find a way to revive the business of their customers instead of putting pressure on them to payback their money as it would ultimately benefit the banks. To reinstate businesses, it is important to introduce a new type of business loan for this specific purpose.
This gives a way out for businesses which have completely stopped and finds them in a difficult position to revive. Once the businesses are back on track through this practice, they will be fully capable of paying back the old as well as new principle and interest within no time. For this to happen, the Central Bank needs to have a positive mind-set and should reflect it in the upcoming monetary policy.
Currently, around 4.6 million households with minimum income have been benefited by the existing 90 microfinance institutions. In most of the cases, people borrowing money from microfinance institutions are from low income group and daily wage workers. These families normally depend on only one source of income. When they are unable to run their business for more than three months, their only income naturally reduces over time. With no income, there will be no chance of savings which results in problem to payback their principle and interest.
In a microfinance institution, majority of loan is provided without any mortgages. A credit without mortgage naturally bears high risk. But the microfinance institutions have a system in place through regular meetings of the members and borrowers under close and regular supervision by the bank which helps to bring this risk down. But because of the COVID-19 pandemic, regular meetings with the members have stopped and personal relations have been distant, and supervision by bank also became difficult which has brought the risk back to a higher spectrum.

Disruption
Microfinance banking, by definition, is an institution where members and staff regularly hold meeting to discuss financial problems of the members and provide loan to them through group member witness and mutual trust. This system works when the members are together and are able to meet physically on a frequent basis. However, due to social and physical distancing, the members are forced to stay afar from each other which resulted in a standstill situation in activities and transactions for these microfinance institutions. This has also led to a disruption in communication among the members and institutions.
A lot of low income members of microfinance institutions used to pay back their loans with remittance money sent by their family members from overseas. However, a lot of foreign workers are returning home at the moment, which has stopped the flow of remittance in the family. Nepal Rastra Bank is currently forming a new monetary policy for the fiscal year 2077/78. Not only the financial institutions, but large and small scale businesses, and corporate houses are all eagerly waiting for this monetary policy. The new monetary policy has to address new financial programme to revive the businesses which are shut for the past few months due to Covid-19. For this, it may be best to introduce separate policies and programmes for micro finance and non-micro finance institutions

(The author is ex-Deputy Director of Nepal Rastra Bank.)