A 40% Leap in Microfinance Profits: Driven by Technical Provisioning and Cheaper Funds, Not Business Expansion

Despite a challenging economic environment, Nepal's microfinance institutions (MFIs) reported a remarkable surge in profitability during the fourth quarter of the last fiscal year. The 50 operational MFIs collectively posted a net profit exceeding Rs 12 billion—a sharp 40% increase from the Rs 8.5 billion recorded in the previous year. However, a deeper analysis of the financial statements reveals that this impressive bottom line is not the result of aggressive credit expansion or robust loan recovery. Instead, the inflated profits are primarily the byproduct of reduced loan loss provisioning tied to credit risk insurance and a significant drop in borrowing interest rates.

Financial experts point out that many MFIs recently enrolled in the credit insurance program offered by the Deposit and Credit Guarantee Fund. Taking advantage of this, the central bank (Nepal Rastra Bank) has allowed these institutions to maintain substantially lower loan loss provisions for insured loans. While this technical adjustment instantly slashed operating expenses and boosted paper profits, industry insiders warn it might just be a temporary relief.

An anonymous MFI Chief Executive Officer (CEO) cautioned that relying on this provision could invite future financial shocks. The CEO noted that insurance claims come with highly stringent conditions. "Claims can easily be rejected on technical grounds, such as incomplete documentation or if a loan has been restructured," the executive explained. Furthermore, prevailing rules dictate that an institution cannot claim an amount exceeding the premium it paid within a fiscal year. If actual claims are rejected later, MFIs will face immense pressure to immediately cover those massive provisioning gaps. Recognizing this looming risk, the central bank has reportedly initiated a closer review of the actual eligibility of these insured loans.

Conversely, Ram Bahadur Yadav, President of the Nepal Microfinance Bankers' Association, attributes the sector's profit growth largely to the declining cost of funds. The interest rates on wholesale loans borrowed from commercial banks dropped by approximately 3 percentage points compared to the previous year. According to Yadav, this cheaper access to capital significantly improved the net interest margins for MFIs. Even though non-performing loans (NPLs) have increased, the drastically lower cost of funds has kept interest income looking healthy and positive.

Looking at individual company performances, Chhimek Laghubitta stands at the forefront with the highest net profit of Rs 1.29 billion. It is followed by Jeevan Bikas Laghubitta at Rs 1.08 billion, Deprosc Laghubitta at Rs 98.94 crore, National Microfinance at Rs 89.13 crore, and Sana Kisan Bikas Laghubitta at Rs 65.31 crore. By the end of the review period, the total loan portfolio of the entire microfinance sector had reached Rs 562 billion, while total deposit collection stood at Rs 231.6 billion.