Illustration via The Banker
Six million Nepalis are members of a microfinance institution. Fewer than half of them are active borrowers. Nearly 750,000 are overdue. These are not idle statistics. They speak to a model fraying under the weight of its own success.
The financial edifice looks impressive superficially. Total assets of microfinance financial institutions (MFIs) hit NPR 588.81bn by mid-June, up nearly 1% from the month prior. Deposits have swollen to NPR 193.36bn, continuing a steady mobilisation trend since 2022. Capital funds are robust, at NPR 67.13bn. But dig deeper and cracks begin to show.
Profitability is deteriorating. Net profit for the latest period is NPR 5.72bn, a 14% rebound from May but still 61% below the peak in FY 2022. Retained earnings have shrunk to NPR 2.54bn, down 6.6% in a single month, suggesting what little profit remains is being siphoned off to cover provisioning costs or losses. Loan loss provisions rose again to NPR 30.1bn, and interest suspense accounts—typically a marker of loans not being serviced—surged to NPR 18.7bn.
The picture is clear: microfinance institutions are lending into rising risk. Loans and advances climbed to NPR 487.16bn, with individual lending growing notwithstanding a fall in institutional lending. Borrower quality meanwhile is worsening. Overdue borrowers now make up more than a quarter of the active loan book. The number of active borrowers has fallen to 2.7m, down by more than 18% since FY 2022. Passive membership by contrast has jumped, with nearly 800,000 clients technically on the books but no longer participating. These are not mere bookkeeping artefacts. They point to borrower fatigue and financial distress.
MFIs have tried to shore up capital. Paid-up capital has held steady at NPR 38.33bn while statutory reserves have grown modestly to NPR 13.41bn. But much of the stability in capital comes from regulatory fiat rather than from profitability. The real action is taking place in liabilities. Other liabilities swelled to NPR 77.75bn, up more than 11%, encompassing provisioning, contingent liabilities and operational overheads. NRB (Nepal Rastra Bank) borrowings have collapsed to a token NPR 543m. Microfinance institutions are flying without a central safety net.
This makes them unusually reliant on market-based funding. Total borrowings are NPR 223.72bn, nearly flat from May but still vast in scale. Of this, NPR 223.18bn comes from wholesale lenders or commercial banks—sources that are increasingly sensitive to asset quality. Any further deterioration in repayment behaviour could choke this line of credit.
On paper, income is recovering. Interest income rose to NPR 54.87bn, of which NPR 53.92bn came from loans and advances. Interest expenses dropped to NPR 28.95bn, improving net interest margins. But these are thin cushions against the weight of provisioning. Risk provisioning is NPR 24.64bn, draining most of the income earned.
Operational costs are rising, too. Employee expenses jumped nearly 10% month on month, to NPR 12.45bn. Fixed and other assets have grown, reflecting either digital expansion or provisioning reserves. Yet the number of branches and staff appears to be contracting, perhaps signalling cost control efforts or retrenchment.
The bigger context is not reassuring. Microfinance in Nepal has become embroiled in public controversies. Borrowers complain of exorbitant interest rates, coercive recovery practices and opaque terms. Activists allege institutions are preying on vulnerable households already under stress from unemployment and economic stagnation. Unlike the urban middle class, most microfinance clients have no recourse to formal legal remedies. The fallout is a simmering public resentment.
Regulators face a conundrum. Any heavy-handed crackdown on rates or recovery would threaten the sector’s viability. But ignoring the problem risks more social unrest and moral hazard. The NRB has encouraged consolidation and raised prudential norms, but its supervisory reach remains thin, especially outside the Kathmandu Valley. Politicians, sensing opportunity, have floated calls to cap microfinance interest rates in the single digits, an idea that would destroy lender confidence altogether.
The trouble is structural. Microfinance was designed as a vehicle for inclusion and empowerment. It has metastasised into a deposit-heavy, credit-risk-intensive financial sub-sector that mimics the features of banks without their regulatory buffers. Its client base is overstretched, its profits are under siege and its provisioning suggests a rolling crisis of collection. If the system holds, it will be thanks to the embedded savings culture of rural households and the institutional memory of lenders hardened by Nepal’s cyclical shocks. If it buckles the effects will ripple through the broader financial system.
The next few quarters will test whether microfinance can restore its balance. Stabilising profits, stemming borrower attrition and rebuilding trust will be critical. Otherwise the poor man’s bank may turn into an expensive liability. ■
