Paper

Impact of Deprived Sector Credit Policy on Microfinancing

Evaluating the developmental impact of Nepal’s credit policy
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This paper discusses the impact of Nepal’s deprived sector credit policy (DSCP) on microfinance.

The DSCP was designed by Nepal Rastra Bank to meet the microcredit demand of weaker sections of the population. Under this policy, commercial banks, development banks and finance companies are liable to lend up to 3% of their total loan outstanding to deprived people. DSCP has led to:

  • Increased loan flow to the deprived sector, with commercial banks providing more than 50% loans to microcredit development banks (MCDBs);
  • Increased access to finance, expanded microfinance activities and improvement in the socioeconomic status of deprived people;
  • Increase in number of borrowers;
  • Increase in number of MFIs with private sector participation, resulting in competition and institutional efficiency;
  • Continuous sources of funds for MFIs;
  • Financial discipline among the poor;
  • Increased income generating activities and increased productivity among the poor.

Going forward, the government should allow MCDBs to collect deposits in order to enhance DSCP’s impact. It should maintain a national level microcredit development fund, increase microcredit access to hilly and remote areas, and maintain overall macroeconomic stability.