Issues and Challenges of Agriculture vs. Rural Finance in Nepal: Involvement of Nepal Rastra Bank

1. 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

2. I. 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.

3. 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.

4. II.Nepalese Agriculture, Issues and Challenges : • 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.

5. 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.

6. 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.

7. III. Policy Response of Nepal Rastra Bank on Nepal's Agriculture Sector Development • 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.

8. 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.

9. 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.

10. IV. Rural Financial Activities in Nepal: Issues and Challenges • 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.

11. 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.

12. 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.

13. (ii) Rural Financial Activities and Outreach • 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.

14. 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).

15. 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.

16. 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.

17. 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.

18. 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.

19. 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).

20. (iii) Issues and Challenges of Rural Finance • 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. V. Nepal Rastra Bank's Response on Rural Finance: • 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.

27. 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.

28. 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.

29. 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.

30. Namaste and Thank you!