The Agriculture Development Bank Nepal served as a premier financial institution that extended credit to the agriculture sector for several decades since its establishment in 1968.

But it registered itself as a commercial bank in 2006 expanding its footprints in other profitable commercial businesses.

Now, the government has once again come up with the idea of setting up a separate financial institution that would finance the agriculture sector, with the budget for the fiscal year 2022-23 aiming to boost agricultural production.

The budget states that a separate microfinance fund with the mandate to finance as much as Rs500 billion in the agriculture sector would be established.

Banks and financial institutions will have to invest the loans to be provided to the deprived [low-income groups] and agriculture sectors through the newly formed microfinance fund. Likewise, an arrangement will be made under which even the Employees Provident Fund, Citizen Investment Trust and Social Security Fund will also have to contribute certain portions of their portfolio to the microfinance fund, according to the budgetary announcement.

“The government aims to mobilise financial resources in the agriculture sector through a single window,” said Chakra Bahadur Budha, chief of the budget and programme division at the Finance Ministry. “The concept has been announced to mobilise financial resources of the banks and financial institutions and the government’s subsidy through a single window.”

According to him, the new arrangement will make it easier for the government to keep tabs on financing in the agriculture sector.

The government, however, is yet to make clear how the whole process will move forward.

“We still need to work out whether a new institution should be set up or any existing financial institution can be asked to carry out the tasks of the proposed microfinance fund, and whether a separate law will be required, and who will regulate the institution,” said Budha. “These issues will be addressed after holding consultations with stakeholders.”

He said that the Agriculture Development Bank itself could work as a microfinance fund to invest in the agriculture sector if no new institution is formed.

The government is also not expecting to finance the entire Rs500 billion immediately in the agriculture sector through a new institution.

“It will be done gradually,” said Budha.

But central bank officials and representatives of commercial banks are in the dark about the very concept of the microfinance fund mentioned in the budget.

In fact, the central bank was not consulted formally during the budget making process amid a row between Finance Minister Janardan Sharma and Governor Maha Prasad Adhikari, according to officials at the Nepal Rastra Bank. In early April, on the recommendation of Finance Minister Sharma, the Cabinet formed a committee to probe Adhikari’s activities, leading to the latter’s automatic suspension. But weeks later, the Supreme Court stayed the suspension, paving the way for Adhikari to resume office.

Amid frosty relations, Sharma and Adhikari met only on Wednesday to discuss the monetary policy to be introduced by the central bank, after the budget for the next fiscal year was introduced on May 29.

It was the first meeting between the two after the fallout in April, according to a senior official of the central bank.

Prakash Kumar Shrestha, chief of the economic research department at the NRB, said that they were in the dark about the proposed microfinance fund.

“We are not sure whether the proposed fund will manage the credit already extended to the agriculture and deprived sectors by banks and financial institutions, or whether they will issue new credits,” said Shrestha.

Banks and financial institutions have lent to the agriculture sector by themselves while they have extended credit to the deprived sector on their own and through micro-finance institutions.

“If the government wants new financing of Rs500 billion, it is hard to manage the amount from banks and financial institutions as they have already lent to businesses including the agriculture sector,” said Shrestha.

Commercial banks are required to invest at least 12 percent of their total lending in the agriculture sector by mid-July 2022, according to the Nepal Rastra Bank’s directives.

As of the third quarter of the current fiscal year 2021-22, commercial banks have lent Rs490.15 billion to the agriculture sector and this accounts for 12.28 percent of their total credit. This means commercial banks are already close to meeting the lending target of Rs500 billion, which is also the lending target of the proposed microfinance fund.

Development banks and finance companies are required to disburse at least 17 percent and 12 percent of their total credit, respectively, to the specified sectors such as agriculture; micro, small and medium enterprises; energy, and tourism by mid-July 2022.

As of mid-April, development banks have lent Rs111.92 billion to these sectors, which account for 26.62 percent of their total credit while finance companies have lent as much as Rs16.15 billion, or 21.92 percent of their total credit, according to the NRB.

For the development banks and finance companies, there is no agriculture-specific credit target.

Commercial banks are required to lend 11 percent of their total credit to micro-, small and medium-sized enterprises and deprived sectors by mid-July 2022, and their lending to the two sectors as of mid-April stood at Rs393.28 billion, which accounts for 9.85 percent of their total credit, according to the NRB.

Bankers say that they are not clear about how the proposed microfinance fund will function.

“It is not clear whether all the lending to the agriculture and deprived sectors will be made by the proposed institution or we should also continue lending to the sectors,” said Anil Shah, chief executive officer of Nabil Bank. “If any separate institution lends to the deprived sector, it is good because commercial banks don’t have the expertise to lend to the sector.”

There are also concerns about whether the proposed microfinance fund would be regulated by the central bank or the government.

“Government-run institutions such as rural development banks failed because they could not recover the loans,” said Shah. “If banking norms and standards are not followed and the central bank does not regulate such institutions, it will only lead to mismanagement and failure.”