EXECUTIVE SUMMARY
Nepal is among one of the least developed country in the world. 31% people dwell on below poverty line. The formal financial sector has neglected and unable to include this people. The central bank of Nepal, Nepal Rastra Bank (NRB) has attempted to benefits poor since 1950’s, with establishment of credit cooperatives, Agricultural Development Bank, and then Small Farmer Development Program (SFDP) in 1975. To reach more poor, NRB directed commercial banks to allocate “deprived sector credit”. In 1992, Government has taken initiative with two Regional Rural Development Bank as replications of the Grameen Bank of Bangladesh. Then, NRB allowed private sector to enter in microfinance.
NeRuDO is one of the early NGO to start microfinance in Nepal, has 9 branches in 4 districts. It has been working for socioeconomic empowerment of women in Nepal, through microfinance program. Microcredits are processed easily on group liabilities without collateral, fortnightly or monthly repayment lessens the loan burden of the borrower.
This project has been carried to see the practices of microfinance in Nepal. The following is the summary of research plan;
Title of the project: “Practices of Microfinance in Nepal with reference to NeRuDO”
Objectives:
· To understand People perspective over lending institutions.
· To understand process of microcredit and vivid aspect of deposit, granting of credit, processing.
· Employee view and client view towards MFIs in Nepal.
Methodology:
Two different questionnaires have been used for managers and clients separately. Observation and survey was the major tools for this project. All branch managers are met and interviewed with standardized questionnaire. Over 500 clients are met during this project and discussed about microfinance and its practice. 74 clients are questioned formally to get various insights from clients’ points of view.
Finding:
· The average lending per clients is Rs. 21,555 and recovery rate 97.33%.
· 90% of them think that there is more pressure of work at MFIs and same numbers of people are not satisfied with their current payment and benefits. Only 30% of employees are satisfied with current holiday and leave.
· Huge chunk of clients are paying their installment with the help of the husbandry and agricultural income. This accounts 51%, followed by wages (31%), borrowing to others (11%), and rest 7% accounts for others. The others are like income or salary of husband and son, loan from another institutions etc.
· The various lending institutions are ranked as following;
I. MFIs
II. Co-Operatives
III. Commercial Banks and Development Banks
IV. Finance
V. Money Lenders
Suggestions:
NeRuDO should implement software package, increase benefits to employee and should not increase interest and service charges to maintain long term preference from clients. It is better to expansion and increase volume of loan.
Microfinance in Nepal is targeting rural and poor people. The loans given are tiny, and based up group surety of clients payment. People benefited by convenience and flexible approach but will benefit more if interest is reduced.
The following are the some findings of this study;
1. Most of the microfinances in Nepal are Micro Credit Development Bank and Financial Intermediary Non-Government Organization. NeRuDO falls under FINGO categories. This is recognized by central bank of Nepal (NRB), and duly licensed under “E” categories financial institution.
2. Group surety is basis for providing loan. Whereas MFI also put slight exertion to investigate clients previous history and transactions before granting credit.
3. The trend of holding meeting once a week and collecting and disbursement of loan once a week has been shifted towards fortnightly and still moving towards once a month. This trend can be linked with the way clients manage to pay their installment. 51% clients used to pay their loan installment with the income of husbandry and agricultural activities. These activities ensure monthly income.
4. The interest rate is 20% declining and service fee at current is 1% of total loan. This rate is slightly higher than commercial banks and development banks and lower than the prevailing money lenders.
5. Microfinance in Nepal is accepting deposit from their member. They are accepting flexible deposit, in which they accumulate 8% interest at the end of the financial year.
6. The average lag period between loan demand and grant is 2-3 days.
7. The average loan granted per clients last year was Rs. 21,555, which is marginally higher than industrial averages, which are 14000. The loans are usually granted for one year period. NeRuDO is able to grant on an average 93.11% of loan demanded by their clients.
8. The repayment rate seemed 97.33%. There is little scope for improvement. This figure can consider better one because they do not have incentives for timely and regular repayment.
9. Field collection is preferred against office collection due to reduce the burden of manager.
10. MFIs believe in monitoring of loan will reduce portfolio risk, but do not have common methodology to do the same. They might visit their client once a month to observe.
11. The sources of fund are saving of member, loan from the bank, funds from head office, inter branch etc. The saving of clients is growing substantially. The average cost of fund to the organization is around 9-11%.
12. This organization is growing in all aspect like size, loan disbursement, personal saving, number of employee, profit, reducing portfolio risk and so on. These are parameter indicates microfinances; especially NeRuDO is in positive direction toward achieving substantial in long run.
13. Out of 9 branches, 6 have already achieved Break Even Point. Harnamdi branch is near to it. Whereas Pharping and Birgunj branch are still in loss zone. These two branches are relatively younger than others. On an average, NeRuDO branches are arriving at BEP at span of two and half year.
14. The organization has not use services of external experts till the date. NeRuDO has not also applying software for day to day transactions.
15. NeRuDO has perceived other MFIs are major competitor for them. The growing cooperatives and government of Nepal priority to cooperatives might threat MFIs in Nepal. It has not called traditional competitor Money Lenders as competitor.
16. It has believed commercial banks and NGO/INGO are equally friendly to MFIs.
17. The following are the major problem faced by MFIs in Nepal;
· Scarcity of fund,
· Duplication,
· increasing competitors,
· Low demand of product
· Lacks of good software are the major problem and difficulties for functioning.
18. No braches have availed any type of government assistance to it. Whereas tax reduction is the prime expectation.
19. 90% of them think that there is more pressure of work at MFIs and same numbers of people are not satisfied with their current payment and benefits. Only 30% of employees are satisfied with current holiday and leave.
20. All of them are satisfied with their reporting officer (immediate officer) and 80% are satisfied with their junior staff performance. 20% feels that their junior staff has to improve lot. 70% are thinking the promotion scheme should be scientific and fair.
21. There is contradictory response on Nepali microfinances are marching towards commercialization. 50% believes on that and 40% opposed the same.
22. 90% of them wish to be intervened by government for ensuring benefits to poor.
23. 60% of them have hope on the future of MFIs, and 30% see no ray of hope. And cent percent are bewildering of doing sacred deed for poor. But, the alone microfinance cannot alleviate poverty by allowing 20% interest on credit.
24. Most of the clients have taken 2 and 3 times loan from NeRuDO. There are people who have taken more than nearly one fifth (20%) people who have taken loan more than 6 times. At the same time, there are more than 50% clients who are member of it more than 3 years.
25. 80% clients denied being beneficiary of any training and development program conducted by NeRuDO. It has practice to train a week initially about their program, which also ensure all members are taught how to write their name and put signature.
26. Expectations from MFIs:
Most of the people are expecting NeRuDO should reduce the interest rate. Including this the following are few expectations from clients’ side;
· Reduce the interest rate charged.
· The reserve of 5%, which is charged at the time of granting loan and kept in the name of the client itself, that amount, should return within 2 year. Either that amount should make available to repay last installment.
· NeRUDO should organize or co-organize some skill oriented training for its member.
· Scholarship for extreme poor family. The organization can pay the fee or purchase study materials for few high school student.
· Foreign employment loan.
· Contribute on social cause and development activities.
Employment is another issue. People wanted they should prefer to employ local people for employment.
27. Huge chunk of clients are paying their installment with the help of the husbandry and agricultural income. This accounts 51%, followed by wages (31%), borrowing to others (11%), and rest 7% accounts for others. The others are like income or salary of husband and son, loan from another institutions etc.
28. MFIs in Nepal has good image because of loan without security (57%). The positive of microfinances is quick processing of loan (38%). The facilities of micro loan and acceptance of flexible saving are also has little importance from clients’ perspective.
29. MFIs in Nepal are diluting image because of high rate of interest (62%), high service charge (28%), and heavy penalty (8%).
30. MFIs in Nepal have competitive advantage against commercial bank because of granting of loan without security (50%). People perceived MFIs are useful because of nearness and easy processing of loan. Quick service and availability of micro loan are least preferred.
31. People preferred MFIs against local money lenders on the ground of lesser rate of interest (68%), loan without security and availability of loan at any time.
32. From this study, the following are the critical factors for Microfinance success and sustainability;
· Nearness of Office
· Availability of loan on demand
· Prompt services
· Staff cooperation and behavior
· Volume of the loan
· Flexible product and services
· Manager cooperation and behavior
This list is the priority of the clients. People want nearer office so that they should not occur cost and waste time to travel long distance. MFIs should able assist their clients with adequate amount of credit for running their subsistence. They want quick services. Clients feel cooperation with staff more than manager, because, clients are supposed to deal and have interface with staff then branch manager.
33. Clients are quiet contented with the paper work required at MFIs. They are confused with peer evaluation. 63% of them seem somewhat satisfied, whereas 16% still in dilemma and one fifth are not satisfied with their peer. The interest charged by MFIs could make only 23% client satisfied, equally somewhat satisfied and kept remaining not satisfied.
34. The various lending institutions are ranked as following;
1) MFIs, 2) Co-Operatives, 3) Commercial Banks and Development Banks, 4) Finance and 5) Money Lenders
Commercial banks are cheaper in terms of interest rate, calls for cumbersome documentation and heavy security. Finance has no reach to rural people and also demands security for loan. The cooperatives are cheaper, locally available but lack sufficient money for fulfilling necessities. Money lenders are opportunist and put heavy interest. Microfinance is between among all these. It has reach to mass rural people, has medium interest. It has got sufficient fund to lend. This all makes popular among rural mass in Nepal.
Suggestions:
1. NeRuDO has been offering various products to their clients. It can further offer educational loan, emergency loan and consumption loan etc. It has been agreed that people are not utilizing the loan on what purpose they have taken. Many times people take loan on other heading, and expend on consumption, medicinal purpose and other various purpose. To reduce such problem, loan should be given for the real purpose.
2. The company can introduce new product having installment of 2 month or 3 month. This type of product is recommended by seeing the trend that how clients pay their installment. Most of the clients are paying their installment from the income of agricultural activities.
3. NeRuDO needs to implement software for solution of their day to day transaction. 75% of their employees and even managers are investing their time to keep account of day to day transaction only. The use of software will benefit by handling more clients on the branch, solve employee dissatisfaction.
4. NeRuDO needs to invest on locally and viable CSR. It is better to spend small amount; could help on building brand image. It is better to spend small amount on women organized programs, sports items for kids, Chowk construction, Tube well r well for the village if there is drinking water problem etc.
5. MFIs should not take security for granting loan, but must conduct assessment of customer before granting loan. There should be common practice for all branches. It can use some standard questionnaire to do the same.
6. It can ask clients who is paying last installment to fill up some standard questionnaire to appraisal the customer. This might satisfy the ego of customer that they are being considered. Further, this will help for the organization contribution to the society and getting fund from INGO and NGO.
7. MFIs, especially, NeRuDO should enhance some sort of salary or benefits to the employee. The Government of Nepal has drastically hiked the salary this year. The employee perception of high work pressure can be addressed with employment of software.
8. Note counting machine is desirable for all branches.
9. The organization should conduct or co-sponsor some skill oriented training for its members.
10. The most crucial point is the MFIs in Nepal should attempt to reduce interest rate. If reducing the interest is not viable, it should not increase for couple of years. NeRuDO is planning to hike its service fee. That will invite serious dissatisfaction to its members. Thus, may result into increase in drop out of members.
11. NeRuDO being one of the oldest MFI should have self-owned land and building for offices. The investment in fixed assets will reduce the rent, which are one of the major operating cost. Thus will increase credibility to the clients.
12. NeRuDO should establish at least one or two branches per year. The contemporary competitors are grown much faster than it.
13. The volume of the loan should be increased, so that clients need to be addressed. This will prevent clients to reach another lending institution, more over another MFI.
14. The practice of deducting Group Fund has been trend in Nepal. This has increase hidden cost to clients. The fund is credited with 8% of interest and interest has been charged 20% plus service fee. This is practiced and people accepted unwillingly. But, there is strong dissatisfaction on this issue. NeRuDO should allow its clients to adjust with last installment.
Conclusion:
Despite ongoing development efforts, poverty remains rampant in Nepal with approximately 31% of the population living below the poverty line. The incidence of poverty is highest in remote and rural areas.
Microfinance has been one of the few effective tools for poverty reduction over the past years. Through the creation of sound microfinance institutions and systems, poor people can safely deposit money and accumulate funds for future investments or emergencies as well as access loans for productive purposes leading to higher incomes. Additionally, microfinance produces an impact in other areas including good governance, participation in the political processes, women empowerment, social inclusion, and conflict transformation.
Currently, more than 2.4 million individuals in the rural population have access to microfinance services. This figure represents approximately 8% of the population and approximately 26% of the people living below the poverty line. In order to obtain more effective statistics and further diminish poverty, the outreach of sustainable and sound microfinance institutions to the rural and urban poor must be increased.
NeRuDO is one among the three dozen MFIs in Nepal, serving from last 14 years. Many products have been developed. Around 10,000 people have taken numbers of credit to meet their financial needs. There has been increase in standard of living of people, which is not sole reason of microcredit. But, microcredit became indispensible part of poor people live.
MFIs in Nepal have acquired virtuous position among lending institution, especially for below poverty line population. This will remain in the future if they will not increase hidden and direct cost to the clients.
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