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MFIs allowed to borrow from foreign financial institutions

2018-09-17

Nepal Rastra Bank (NRB) — the central regulatory and monetary authority — has allowed microfinance institutions (MFIs) to borrow in convertible foreign currency from foreign banks and financial institutions to lend in sectors designated by the central bank.

Earlier, the central bank had opened up borrowing from foreign financial institutions only for commercial banks in both convertible currency and Indian currency. NRB has notified the MFIs today that they will be able to borrow under certain conditions set by NRB. As per the central bank’s provision, MFIs can borrow up to 25 per cent of their primary (tier 1) capital from foreign financial institutions to lend in specified sectors that also contribute in foreign exchange earnings namely, tourism, agriculture, micro enterprise, micro hydro and renewable energy, income generating activities and self-employment, poverty alleviation and productive sector lending under the jurisdiction of MFIs.

NRB has told MFIs that the total capital mobilisation from MFIs, including local resources, should not exceed 30 times of their core (tier 1) capital. There are 67 MFIs in operation in the country. The total core capital of the MFIs stands at around Rs 10.25 billion. Taking this into account they can borrow around Rs 2.50 billion in total.

The MFIs, which have maintained the capital adequacy ratio as per the requirement of the central bank, can obtain loans from foreign financial institutions. MFIs that distribute dividends have to maintain nine per cent capital adequacy ratio and those that do not distribute dividends have to maintain eight per cent capital adequacy ratio, as per the regulatory requirement.

MFIs that intend to borrow from foreign financial institutions will not face action to prevent cross-border transaction by the central bank. The board of directors of the MFIs must approve the proposal of obtaining loans from foreign financial institutions, according to NRB. MFIs have to borrow funds within the six-month average rate of London Interbank Offered Rate plus three per cent interest rate from foreign lenders. They are barred from offering commissions and other fees to the foreign lender.

The payback period of such loans can be from one year to five years and the concerned MFI can renew it if the central bank grants it permission. MFIs that want to obtain foreign loans must take pre-approval from the central bank and also notify it regarding the repayment of principal and interest of the foreign loan.

Also, MFIs must comply with the rules of Money Laundering Prevention Act while obtaining loans from foreign financial institutions. Though NRB has opened the window for obtaining credit from foreign financial institutions the core capital of the MFIs is low. The largest MFIs in terms of core capital are Nirdhan Uthan Bikas Bank and Chhimek Lagubitta Bikas Bank which have primary capital of Rs one billion each.

MFIs have welcomed the central bank’s move allowing them to borrow from foreign financial institutions, which has opened the window to bring funds to serve the credit appetite of sectors specified by the central bank and to help enhance the production base in the country, according to Janardan Dev Pant, CEO of Nirdhan Uthan Bikas Bank.

Source: The Himalayan Times