According to the 'In-Site Supervision Report' for the fourth quarter of FY 2082/83 released by the Microfinance Institutions Supervision Department, institutions violating capital fund ratios, cash reserve requirements (CRR), and collateral loan limits have been slapped with prompt corrective action (PCA) and cash penalties.
Regulatory Breaches and Penalties
Out of 51 operating microfinance institutions, eight institutions recorded capital funds below the mandated 8 percent threshold against the required minimum 4 percent primary capital and 8 percent capital fund (CAR) of total risk-weighted assets. In total, 10 MFIs faced action under Bylaw 3 of the Banks and Financial Institutions Bye-laws, 2074.
-
Capital Fund Deficits: Forward Microfinance (6.12%), Dhaulagiri Laghubitta (6.38%), Matribhumi Laghubitta (4.08%), and NIC Asia Laghubitta (6.39%) failed to maintain the required ratio during the review period. They join Nerude, Mirmire, Samudayik, NADEP, Ganapati, CYC Nepal, and Abhiyan Laghubitta, which were already under PCA. Meanwhile, Aarambh Chautari Laghubitta was released from corrective action following structural improvements.
-
CRR and Mortgage Violations: Sanjivani Laghubitta and Wean Nepal Laghubitta faced cash penalties for failing to maintain mandatory cash reserves. Sanjivani was further penalized for issuing retail collateral loans up to 38.34 percent, breaching the strict one-third (33.33 percent) ceiling.
-
Data Compliance: Sanjivani, along with Srijansheel, Abhiyan, Kalika, CYC, Manushi, NADEP, Unnati Sahakarya, Wean Nepal, and Nerude Mirmire, were directed to submit regular details to the Supervisory Information System (SIS).
Rising Bad Loans and Risk Challenges
The sector is grappling with mounting financial stress as non-performing loans (NPLs) surged to 10.42 percent in mid-July, up sharply from 7 percent in the previous fiscal year. Total bad loans spiked by 63.83 percent to reach Rs 50.82 billion, pushing total loan loss provisions up by 34.88 percent to Rs 35.24 billion. Wholesale lending institutions also saw their NPL ratio edge up from 2.90 percent to 3.04 percent.
Sectoral credit deployment shows that microfinances channeled the lion's share of their credit—58.63 percent (Rs 313.05 billion)—into the agriculture sector. This was followed by the service sector at 20.45 percent, wholesale loans at 8.65 percent, and cottage and micro industries at 2.64 percent.
Profitability Amid Adversity
Despite the spike in bad loans, retail microfinance companies posted a strong 48.14 percent growth in net profit, climbing from Rs 7.28 billion in the previous year to Rs 10.78 billion. Out of 48 retail loan providers, only two recorded net losses during the review period. Conversely, wholesale microfinance companies witnessed a 23.27 percent decline in net profit, shrinking to Rs 981.5 million. Overall sector assets expanded by 7.88 percent to reach Rs 655.42 billion.
Branch Network and Membership Status
Mergers and acquisitions have streamlined the industry, reducing the number of microfinance institutions from 52 to 51, while total branches dipped by 0.75 percent to 4,924. Lumbini Province hosts the highest concentration of branches at 22.03 percent (1,085 branches), while Karnali Province has the lowest at 4.79 percent (236 branches). Total membership grew by 4.96 percent to reach 6.53 million, supported by a total workforce of 21,792 employees.
