Central Bank Eases Rules for Microfinance Institutions: Dividend Linked to Capital Adequacy and NPL

Nepal Rastra Bank (NRB) has introduced new provisions regarding dividend distribution for microfinance institutions, replacing earlier rigid rules with a more flexible yet disciplined approach. Unlike past years, when dividends were tightly regulated through reserve allocations, the new policy directly links dividend ceilings to capital adequacy ratios and non-performing loans (NPL).

Previously, institutions distributing dividends above 15 percent had to allocate 50 percent of the excess to general reserves, 35 percent to a customer protection fund, and 10 percent to a social responsibility fund. This provision has now been removed, making the dividend policy simpler and more practical.

Under the new rules, microfinance companies with NPLs above 15 percent will not be allowed to distribute dividends at all. The objective is to prevent financially stressed institutions from luring investors with attractive payouts. Instead, these firms will be pressured to first improve loan quality.

Institutions with a capital adequacy ratio above 12 percent can distribute higher dividends. For instance, if NPLs remain below 5 percent, they may distribute up to 25 percent dividends. However, as NPL levels rise, the dividend ceiling will gradually decline.

For institutions with capital adequacy between 10–12 percent, stricter provisions apply. They may distribute up to 20 percent dividends if NPLs are under 5 percent, but only 15 or 10 percent as NPLs rise. This forces mid-tier microfinance firms to adopt stronger risk management practices.

The most restrictive rules apply to those with a capital adequacy ratio between 8–10 percent. If their NPLs are under 5 percent, they can distribute up to 15 percent dividends. But if NPLs exceed 10 percent, they may only distribute up to 5 percent. This sends a clear warning to weaker microfinance firms to strengthen their capital structure.

Additionally, microfinance institutions failing to maintain minimum paid-up capital will not be allowed to propose cash dividends—only bonus shares. Meanwhile, lending limits have been revised: retail-focused microfinance companies can now issue loans of up to NPR 300,000 for migrant workers and up to NPR 500,000 for women.

Analysts say this approach reflects a balance between flexibility and discipline. NRB’s objective is to bring microfinance under tighter financial discipline, ensure safer loan flows, and manage investor expectations around dividends. As one analyst noted, “This time, NRB has focused more on balance than rigidity, which could stabilize the market.”