Maximum Interest Rate on Microfinance Lending Drops to 14.72 Percent

The interest rate of microfinance institutions has decreased following a drop in the base rate of commercial banks.

Nepal Rastra Bank (NRB) had allowed microfinance institutions to add up to a 3 percent premium on their own base rate when setting lending rates for the current fiscal year. However, the central bank also clarified that the rate should not exceed nine percentage points above the average base rate of commercial banks.

As commercial banks reduced their average base rate, microfinance institutions lowered their lending rates for the second quarter (mid-October to mid-January) of the current fiscal year 2025/26.

According to NRB, the average base rate of commercial banks stood at 5.72 percent in Bhadra (mid-August to mid-September). Based on this, microfinance institutions are not allowed to charge more than 14.72 percent interest. In mid-July, the average base rate of commercial banks was 6.02 percent, allowing microfinance lenders to charge up to 15.02 percent interest for the first quarter (mid-July to mid-October).

From mid-October to mid-January, most microfinance institutions have set their maximum lending rate at 14.72 percent. They determined the applicable premium based on their individual base rates—those with higher base rates applied smaller premiums, while those with lower base rates applied higher premiums.

Among national-level institutions, Manushi Microfinance did not publish a new rate since its base rate itself stood at 14.98 percent, exceeding the current maximum limit.

Although some companies have lower base rates, their lending rates have also declined due to NRB’s restriction on adding more than a 3 percent premium.

Ram Bahadur Yadav, president of the Nepal Microfinance Bankers’ Association, said that most microfinance institutions have reduced their rates in line with NRB’s directives. “Since microfinance interest rates are now linked to the base rates of commercial banks, the adjustment has slightly lowered lending rates,” he said.

NRB began imposing caps on microfinance lending rates in 2016 following complaints that institutions were charging excessively high rates from poor and low-income groups without access to banks. Initially, the ceiling was set at 18 percent, which was gradually reduced to 15 percent over the years.

Although the central bank stopped fixing the interest rate ceiling directly from mid-July 2025, it continues to control microfinance rates by setting limits based on commercial banks’ base rates and premiums.

NRB introduced the base rate system after microfinance operators complained that the fixed rate cap had made the market uncompetitive and difficult to operate in.

As of mid-July 2025, there were 52 microfinance institutions in operation, serving 6.21 million clients, of whom 2.706 million were borrowers. During the same period, these institutions disbursed loans totaling Rs 491 billion.