Issues and Challenges of
Agriculture vs. Rural Finance in Nepal:
Involvement of Nepal Rastra Bank
Paper Prepared for 62nd Excom Meeting/Seminar
Organised by APRACA, Bangkok
February 26 – March 1, 2013
Prepare and Presented by:
Hon'ble Deputy Governor
Mr. Gopal Prasad Kaphle,
Director, Dr. Bama Dev Sigdel
Nepal Rastra Bank
I.
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Introduction
Nepal is least developed country in the world with per capita
income US $725 in 2012/2013.
The single agriculture sector's contribution to Nepalese GDP is
around 35 percent, service sector's contribution to GDP is 55
percent, industrial sector's contribution to GDP is 20 percent
and rest on other sectors.
Some 20 percent population live in urban sector and remaining
80 percent live sub-urban and rural remote terai, hills and
mountain regions. This means 70 percent plus Nepali
population are still living in rural areas.
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Poverty is high in rural economy due to poor agriculture
production, less access of finance, slow pace of social inclusion,
less access of basic infrastructure, less access of market,
primitive farming practices, less provision of agriculture inputs
during cultivation season.
Nepal's barren topography has been also hindering on
meaningful vs. equitable growth in all development regions of
the country. Financial inclusion process has been obstructed by
this reason too.
II.Nepalese Agriculture, Issues and
Challenges :
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Viewing the later situation of the composition of GDP,
contribution of the primary sector (agriculture, forestry, fishery,
etc.), which stood at 37 percent, contribution of secondary
sector (industry/small scale industry, too) and tertiary sector
remained at 14.1 percent and 49.8 percent to GDP
respectively in 2011/2012.
Despite more than 70 percent of the workforce involved in
agriculture sector of Nepal, it produces only one third of the
gross domestic product and till this date food self-sufficiency is
not ensured. The challenge faced by agriculture sector is low
productivity rate, traditional farming practices and lack of
commercialization. Fragmentation of agriculture land is another
challenge to commercialize this sector. Average holding size of
the farm at present is 0.8 hector of land.
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Nepalese agriculture still remains heavily dependent on
rainfall for irrigation as the required infrastructure for
irrigation are yet to be built. Such over dependence on
monsoon (rainfall) has adverse effects on the
consistency of agriculture crop production. Similarly,
lack of proper collection and storage houses for
agricultural products is another hurdle for satisfiable
growth of agriculture sector.
Non-availability fertilizer to the rural farmers during
plantation season is another problem with the
agriculture sector.
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Climate change throughout the world has also adverse
effect on Nepalese agriculture sector. Increase in
temperature and C02 is also threatening Nepal
particularly on the production of major crops as rice,
wheat, maize, etc. Nepal is witnessing food insecurity
situation in nearly 45 districts.
This is not due to no production of food crops in such
areas but because of changes in food habits of rural
population and gradual reluctance on production of
indigenous crops as maize, wheat, barley, etc.
III. Policy Response of Nepal Rastra
Bank on Nepal's Agriculture Sector
Development
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Nepal Rastra Bank is involved with agricultural development
efforts in Nepal since 1970's decade. By that time onward,
NRB supported Small Farmer's Cooperative movement to
Agriculture Development Bank/Nepal through policy guideline
and advocacies. NRB actively involved establishing Five
Grameen Bikas Banks in 1990's decade in each development
regions.
Government of Nepal requested Nepal Rastra Bank to work
with Rural Self-reliance Fund; the wholesale lender especially
to support on various income raising and employment
generation programme especially targeted to the
deprived/poor rural households.
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The activity of RSRF has spread in 64 districts of Nepal and
some 35 plus thousand households have been benefited from
RSRF's credit facilities. Some Rs. 40 million has been invested
through RSRF's credit facilities to Cooperatives and FINGOs
worked in rural areas.
Nepal Rastra Bank's involvement on Third Live Stock Project
(Asian Development Bank, Manila), Community Ground Water
Development Project, Inner Terai Region Irrigation Support
Project, (CGISP/ADB/M), Production Credit for Rural Women
(PCRW), etc. are the instances of involvement and commitment
of Nepal Rastra Bank on the promotion and growth of
agriculture sector of Nepal.
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NRB induced Deprived Sector Credit Programme in 1990.
Under this programme, Commercial Banks of Nepal were
requested to allocate 3 percent of their total loans and
advances for the hardcore poor households. Recently, Nepal
Rastra Bank has urged banks to invest at least ten percent in
productive sectors as; agriculture, energy and rural vs. small
industries of their total loan portfolio and has also urged them
to upgrade this selling up to 20 percent within three years
period, i.e., by 2015.
IV. Rural Financial Activities in
Nepal: Issues and Challenges
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The priority sector credit programme started in 1974 as a
policy directive of Nepal Rastra Bank, had also some
components of rural finance (micro-finance) services.
Nepal Rastra Bank further involved in wholesale lending to
MFIs working in extending credit to underprivileged people
particularly of rural areas of Nepal. Similarly, Five Grameen
Bikas Banks were established in 1990s decade under the
leadership of NRB in five development regions of Nepal so as
to provide concessional credit to the poor/deprived rural
households to engage in heterogeneous income raising
activities.
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Sana Kishan Bikas Bank Ltd. (SKBBL) and First Microfinance
Development Bank Ltd. (FMFDBL) were also established in
2001 and 2009 respectively.
Donor sponsored programmes as Production Credit for Rural
Women (PCRW), Micro Credit Project for Women (MCPW),
Third Livestock Development Programme (TLDP), Community
Ground Water Irrigation Sector Project (CGISP), Rural Finance
Project (RFP) Village Banking (VB), Rural Finance Cluster
Programme, Enhance Access to Finance Programmes (EAFP),
etc. were also launched successfully in various districts of
Nepal.
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Nepal Rastra bank is involved with the Raising Income of Small
and Medium Farmer's Project sponsored by Asian Development
Bank, Manila. This project commenced in 2011 and supported
to end by 2016. The objectives of this project is to involve
small and medium farmers of Mid Western and Far Western
Development Regions on the production and marketing of high
value agricultural products, marketing and thereby raise their
income gradually.
(ii) Rural Financial Activities and
Outreach
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Nepal is involved with various rural financial activities since
1970's decades. The number of microfinance banks increased
24 and another 3 microfinance development banks are on the
process of registration. Similarly, there are 33 Financial NGOs
working in rural areas with different modalities and were
registered under Financial Intermediary Act, Nepal.
Similarly, there are 16 Cooperatives, which are also working in
rural areas and were registered in Nepal Rastra Bank. Some
658 Cooperatives and 53 Financial NGOs are affiliated to
Nepal Rastra Bank's Rural Self Reliance Funds activities.
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Some 36847 rural households have benefited from RSRF's
activities and these activities have spread in 62 districts of
Nepal.
The microfinance development banks are also working in
different parts of the country. The total assets of these banks
have remained at Rs.30156364 thousand and their
contribution to Nepali GDP is 2 percent (MPSD, The Data
Prepared For IMF Mission 2013 (Article IV), NRB, January,
2013).
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A rural financial activity in Nepal is generally divided into two
categories: formal and informal. The formal sector comprises
of commercial banks, development banks, microfinance
development banks, cooperatives operating under the limited
banking licenses from Nepal Rastra Bank, saving and credit
cooperatives, small farmers cooperatives and financial NGOs.
The informal financial actors in Nepal are money lenders,
merchants, relatives, friends, saving group and traditional
mode of cooperatives as Dhukuti, Dharma Bhakari; etc.,
particularly engage in rural credit activities as: lending,
deposits; etc.
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Despite the efforts in the past by Government of Nepal, Nepal
Rastra Bank and Financial Stakeholders, the outreach of
finance is not that much sufficient and covered all regions of
Nepal.
By July 2012 the stake of deposit and credit of financial
institutions remained at 64.0 percent and 52.0 percent
respectively. Entire financial sector of Nepal is still dominated
by commercial banks followed by development bank, finance
company, microfinance development banks, savings and credit
cooperatives, cooperatives, FINGOs, etc.
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The outreach of financial institutions on savings and investment
have remained at 21.2 percent and 29.3 percent respectively,
this means some 5.6 million Nepali people are bound with
Nepali financial market.
The data of financial inclusion reveals that per branch
population, per person deposit and per person credit have
remained at 20,500/- Rs.29,000/- and Rs.22,500/- by July
2012.
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Recently, Nepal Rastra Bank assessed the access of finance
situation relying on secondary data; revealed that some 38
percent of the Nepali population are covered by formal
financial institution's activities. This means 62 percent Nepali
population are still relying informal sector on financial
activities.
Financial service provisions particularly in rural/remote hills
and mountains is still insufficient. The poor Nepali people are
still under banked.
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Most of the commercial bank's activities have found to be
concentrated in and around accessible regions while other
regions as Mid Western and Far Western Development
Regions have failed to possess more branches and activities of
Commercial Banks, Development Banks and Finance
Companies. Such vacuums of finance have been mitigated by
microfinance development banks, cooperatives, financial
NGOs and self-help groups (Shags).
(iii) Issues and Challenges of Rural
Finance
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There is still limited access to finance services in hills and
mountain regions. In these areas, people have to walk one, two
or even three days to reach at bank, microfinance institutions
or their branches to get financial services.
There is still urgent need for increased access to financial
services particularly in hills and mountain regions. However, the
cost of operation in such areas for financial institutions is high.
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Microfinance institutions are coy to involve there. In such
circumstances; local cooperatives, FINGOs and self-help
groups (SHGs) could break this barrier and work on the
front of financial access for rural poor households on the
front of economic betterment.
Many rural unemployed adult people, especially the
younger generation, could use funds from microfinance
institutions to start new ventures, which could allow them to
be self-employed and independent. Microcredit or rural
finance would help them support their family without
borrowing money from informal sources.
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Microfinance institutions have not been able to reach the
extreme poor in remote areas of Nepal due to lack of proper
transportation and communication infrastructure. They are
clustered in accessible parts of hills, terai and urban areas.
People in rural areas of Nepal have access to 30 percent of
the roads compared to these in terai region that have access
to 60 percent of roads.
The pace of social inclusion (access of education, health, etc.) is
very slow in rural areas. As a result, rural poor household
members lags the knowledge on the credit, use of credit and
various sources of credit at local level.
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Women centric microfinance programmes are more viable in
rural areas. Rural women are trustworthy, honest and
farsighted in comparison to male counterpart.
Additionally, studies on microfinance in Nepal reveals that the
recovery rate of credit has been found to be high and
promising in the microfinance activities run by female
households members.
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A study CMI in Nepal reveals that lack of knowledge and
skills were pointed out as the most important obstacle to
do business both by people in and outside of
microbusiness in Nepal. Hence, in order to enable rural
poor people, group, households to diversify and grapse
profitable investment opportunities, targeted basic micro
business training programmes would be the viable policy
intervention.
There is duplicating practices among microfinance
institutions and even donors involved with microfinance
activities in rural areas. Such unhealthy practices could not
yield desired outcome on financial access front in Nepal.
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It is confess that Cooperatives, FINGOs and SHGs are the best
carrier of rural finance activities particularly in remote/rural
areas. They are involved with saving, credit, remittance; etc.,
activities on behalf of poor rural households. The vacuum of
financial institutions as: commercial banks, development banks
has been mitigated by such institutions.
V. Nepal Rastra Bank's Response
on Rural Finance:
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Nepal Rastra Bank has been playing a significant role in
developing and promoting rural financial activities so as to
help strengthen credit delivery services to the productive
agriculture sector in rural areas.
Easy access to refinance of Nepal Rastra Bank on agriculture
sector, low bank rate in rural and agriculture refinance,
minimum capital requirement to establish rural development
bank, line of credit facilities to selected microfinance
development banks, wholesale lenders and NRB's continuous
involvement on Rural Self-reliant Fund's activities are the
instances of NRB's active involvement on the promotion and
facilitation of rural financial activities in Nepal.
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There are 24 microfinance development banks, 16 registered
cooperatives, 33 financial NGOs, some 700 plus cooperatives
affiliated with RSRF are functioning in rural areas on behalf of
poor households on the front of microfinance; have been
benefiting from Nepal Rastra Bank through the support of
finance, consoling and advocacies.
The monetary policy of 2012/13 has spelt on borrowing
facilities to the financial institutions working in less accessed
nine districts. Accordingly, such institutions could obtain up to
Rs.15 lacks credit facility with no interest rate. Similarly, the
monetary policy has urged Commercial Banks, Development
Banks and Finance Companies to invest 3.5 percent, 3.0
percent and 2.5 percent of their total portfolio investment on
deprived sector.
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This policy has further urged the banks and financial
institutions to open their branches in remote/rural areas. Some
incentive packages as; provision of credit of up to Rs.15 crores
to the financial institutions or their branches with no interest
rate usually work for remote areas is also provisioned.
Likewise, the monetary policy has counted deprived sector
lending on the activities as: small enterprises run by rural
women worth Rs.3 lakhs in rural areas, the establishment of
rural cold storage facilities by rural farming households, the
credit worth Rs.2 lakhs 50 thousand to run the enterprises as;
bee keeping, fish farming and animal husbandry by the poor
rural households; etc.
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Nepal Rastra Bank is also involved with rural credit survey so
as to better know the access of finance situation, credit
demand and supply status, and thereby yield policy feedback
to the Government of Nepal, Nepali Financial Institutions and
Microfinance Institutions so as to work further jointly with
policies on the front of rural finance in Nepal in coming year.
Namaste and Thank you!