Capital Adequacy Woes Leave 17 Nepali Microfinance Lenders Unable to Expand Credit

Kathmandu – Nepal’s microfinance sector is coming under increasing financial strain as a growing number of lenders struggle to meet regulatory capital requirements, raising concerns over their ability to sustain future lending.

According to data published by the Nepal Rastra Bank (NRB) for the quarter ending mid-April 2026, 17 microfinance financial institutions (MFIs) are either under regulatory action or operating with capital buffers perilously close to the minimum threshold. The situation has effectively curtailed their capacity to issue new loans at a time when credit demand remains significant.

Of these, eight institutions, Nerude Mirmire, Forward, Samudayik, Nadep, Aarambha Chautari, Ganapati, CYC Nepal and Abhiyan Microfinance, have already been placed under the central bank’s Prompt Corrective Action (PCA) framework after failing to maintain the prescribed capital adequacy ratio. An additional 10 institutions are only marginally above the mandatory 8% total capital adequacy ratio, leaving them vulnerable to similar regulatory measures if their financial position weakens further.

NRB regulations require every microfinance institution to maintain a minimum Tier 1 capital ratio of 4% and an overall capital adequacy ratio of at least 8%. Institutions that fall below these thresholds face stringent restrictions, including a ban on dividend distribution, limitations on branch expansion and fresh investments, and tight controls on new lending until their capital position is restored.

The industry’s mounting capital pressure stems largely from a rapid deterioration in loan quality. The average non-performing loan (NPL) ratio among retail-focused MFIs climbed to 11.32% by mid-April 2026, up 4.32% points from the end of the previous fiscal year. The sharp rise in loan defaults has significantly weakened the sector’s financial resilience.

As bad loans continue to accumulate, microfinance institutions have been compelled to allocate larger provisions for potential credit losses. Those provisions have eaten into operating profits, reducing retained earnings that would otherwise strengthen capital. The result has been a steady erosion of capital buffers, leaving many lenders with little room to expand their balance sheets.

With internal capital generation slowing and fundraising options proving difficult, many institutions are increasingly viewing mergers and acquisitions as a practical route to recovery. Although some have proposed rights issues to bolster their capital base, those plans have yet to gain momentum due to pending regulatory approvals, making industry consolidation appear increasingly likely.

Nepal currently has 51 licensed microfinance institutions, including 48 engaged in retail lending. Together, they serve more than 6.5 million customers, with approximately 2.72 million active borrowers and an outstanding loan portfolio exceeding Rs 425 billion. Given the sector’s pivotal role in extending financial services to rural and low-income households, prolonged weakness among microfinance institutions could have wider implications for financial inclusion and the country’s broader credit market.