Impractical bank loansAgriculture is the mainstay of Nepal’s economy which accounts for a large portion of the GDP and provides employment to two-thirds of the population.
Agriculture is the mainstay of Nepal’s economy which accounts for a large portion of the GDP and provides employment to two-thirds of the population. Nepal has an open border with five adjoining Indian states offering duty free markets for its agricultural products like medicinal herbs and essential oils. Yet, the development of agribusiness has been limited. This is the result of failure to adopt an integrated approach to profitability, sustainability, post-harvest operations, grading, packaging and marketing of products. Private investment in infrastructure and facilities including agricultural farms, cold storage units, collection centres, laboratories, agricultural training centres and plant quarantines is key to improving the situation.
Nepal Rastra Bank (NRB) has built an apparatus to address the aforementioned problems and increase investments. Last year, it devised a procedure to grant commercial agriculture and livestock loans. The move was designed to address increasing unemployment and stem the flow of Nepali youths to foreign employment destinations and attract young people to agriculture through modernisation and commercialisation.
Under this scheme, the government will grant loans of up to Rs70 million at 5 percent interest to interested businesspeople in the agriculture and livestock sectors. The repayment period has been fixed at five years which can be extended by two years. Further, there is no service charge on the loan except insurance and loan information charges. A simple process has been developed: Potential borrowers have to fill out a formatted application form, submit the required documents, follow the specified principles and utilise the loan for the prescribed reasons. Despite the transparent and open procedure, there have been few takers.
Various reasons have been cited for the scheme’s failure. First, the income flow of Nepali citizens is irregular and unpredictable. Most Nepalis cannot afford the fees. This results in lack of commitment to make regular payments. Second, rural adults have a hard time accessing formal financial services from rural financial service providers (FSPs) due to difficult geographical terrain and low level of infrastructure development.
A low literacy level and high transport costs have led to low rural penetration by FSPs. Third, the low level of literacy has directly affected people’s ability to engage with financial services. This has resulted in a low level of appreciation of financial services among adults. Fourth, FSPs have fixed impractical requirements like compulsory insurance of all buildings and assets used as collateral which is difficult for Nepali adults. Ironically, there is no registry to record collateralised assets. This complicates the lending process and undermines the borrower’s ability to secure formal credit.
Fifth, the informal economy holds a large space in Nepal. There exist informal providers who serve as a source of finance and provide a safety net against risks. Sixth, there is lack of robust consumer protection provision and customer education. There still is a lack of understanding of how particular financial products function, and which are most appropriate for specific needs. All these reasons indicate that NRB’s efforts to increase loan issuance will not work unless there is an efficient system to handle grievances.
Out of reach
Moreover, an examination of institutions in Nepal reveals that they are designed to serve the needs of urban and semi-urban populations and are less concerned with the needs of the rural market. Bank facilities are mostly located in the district headquarters and hence serve comparatively privileged people. There is very limited mobile banking and branchless banking.
A new directive from NRB has envisaged having at least one commercial bank branch in each rural municipality. Its implementation is yet to be seen. Similarly, NRB’s know your customer (KYC) requirement prevents many people from obtaining banking services because those without a citizenship certificate are ineligible. As per KYC rules, only clients with transactions totalling less than Rs100,000 in annual deposits and withdrawals are considered to be low risk and thus eligible for simplified KYC requirements. The KYC form has a low threshold which discourages individuals from entering the banking system.
Since farmers, dependents and irregular earners live in rural areas, are poorer and have a lower level of education, not including rural populations has been an impediment for private investment in agricultural products in Nepal. For this reason, the country still lacks a chemical fertiliser manufacturing facility. Nepal continues to lack market sophistication besides technical and financial ability. The devastating earthquake of April 2015 caused a huge loss to the country. Not only did it affect the general economy, it created a lasting impact on the livelihoods of the poor connected to industries and made them vulnerable to larger risks. Considering these reasons, it is pertinent that the formal sector addresses the barriers and moves towards financial inclusivity in the private sector.
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