October 9: The debtors of microfinance companies have been facing difficulties in repaying the installments and loans due to the coronavirus pandemic. A study by the Center for Microfinance Nepal (CMF) has shown that debtors from manufacturing and industrial sector are struggling more to repay their loans.

CMF had conducted a study of 25 percent of the total microfinances in Nepal during the months of Chaitra and Baisakh (mid-March to mid-May). It released its study report on the impact of COVID-19 on microfinance on Thursday.

According to the study done by CMF, the debtors from urban areas have more difficulties in repaying loans than the debtors in rural areas. The report shows that 63.82 percent of the borrowers in rural areas have difficulty in repaying their loans whereas 68.63 percent of urban borrowers have difficulty in repaying their loans.

A total of 22.66 percent of the rural population have partial difficulty in repaying the loan while 13.53 percent of the debtors have no problem in repaying the loan. However, 21.47 percent of debtors from urban areas have partial difficulty in repaying their loans while 9.89 percent have no difficulty in repaying their loans.

Debtors of the urban areas are struggling to repay their loans more as the businesses in the urban areas have come to a standstill. Presenting the study report, CMF's Operations Manager Jagdish Tiwari stressed on the need to adopt collateral strategy to get rid of such problems. Prakash Kumar Shrestha, executive director of the Department of Supervision of Microfinance Financial Institutions of Nepal Rastra Bank, says that the 18 percent of the loan is based on collateral at present. He said, “Recently, the number of debtors who have exceeded the loan payment period has reached 1,256,000. Therefore, collateral loans need to be emphasized as they have less risks.”

About 79 percent of those who take loans from microfinance have said that their ability to repay loans has become weaker. Similarly, the study showed that the condition of 42 percent of agriculture, 68 percent of productive loans and 32 percent of consumer loans has become weak. The CMF has also suggested to increase investments in digitization for the technical development of microfinances. The study has also brought attention to changing the model of services as new methods and technologies are now needed in microfinance too.

The trend of saving in microfinance has increased since the beginning of the coronavirus pandemic. According to the study, deposits in MFIs have increased by 47 percent despite the decrease in the flow of credit. The trend of withdrawing money has also increased by 80 percent during this period. The study has also shown that e-transactions have increased by 10 percent during this period. According to the institutions that were part of the study, about 70 percent of the customers have psychosocial problems due to lack of income. Customers are worried because of their unfavorable household budgets.

The study points out that the recent 5 percent interest rebate given to revive businesses through relief packages is not enough for small businesses. Therefore, the study has suggested that the government should give income tax exemption for two years as an incentive. "As Nepal Rastra Bank regulates and supervises all banks and financial institutions in Nepal, a separate regulatory body is now needed for microfinance institutions," Tiwari said while presenting the report, adding, “There is a separate regulatory body for microfinances in countries like Bangladesh. Nepal also needs a separate regulator for microfinance institutions.”

Rewat Bahadur Karki, executive chairman of CMF, says that the main objective of the study was to assess and analyze the overall, immediate, short-term and the long-term impacts of COVID-19 in the operation of microfinance institutions and their customers.