Exploring hurdles of subsidized agriculture loans

1st November 2018

Kathmandu: The financial experts have pointed out three major measures that need to be taken to overcome the hurdles seen in subsidized agriculture loans - providing financial literacy to both the banks and the beneficiaries, have more clarity on policies and regulations and introduce lenient conditions for collateral.

The representatives of various banks and financial institutions (BFIs) highlighted the points at the workshop on ‘Exploring the hurdles of subsidized agriculture loans to the farmers and MSMEs in Nepal,’ organized on November 1, 2018 by UNNATI-Access to Finance project. The MSMEs are Micro, Small, and Medium Enterprises.

The workshop was organized to share the findings of the study on Nepal Rastra Bank (NRB)’s interest subsidy policies on agriculture loans, major hurdles in the expansion of such loans and recommended measures to address such hurdles.

The study shows that out of 28 Class ‘A’ banks, 24 received the interest subsidized agriculture loans by the end of Ashadh 2075 and Laxmi Bank was among the highest in providing 3,290 loans, followed by Rastriya Banijiya Bank with 2,251 loans and Agriculture Development Bank 1,268 loans.Around 96 % interest subsidy was received by Class ‘A’banks and 4 % by Class ‘B’banks during the 2074/75 fiscal year.

One such example of hurdles in the effective loan delivery was seen during the field survey in Hile of Dhankuta district which showed that a majority of respondents had 10 to 20 ropanis of farming land and they relied on agriculture for their livelihood. However, they felt that the BFIs are not interested to float any kind of agriculture loans. The field survey also showed that the BFI’s set additional conditions such as land within the ambit of road transportation for providing loan against the collateral. The BFIs either prefer lending in district headquarters and urban areas or demand large land as collateral, very high interest rate is charged by doubting farmers’ credibility and creditworthiness, according to the farmers.

“Except Rastriya Banijya Bank (RBB) which provides subsidized loan at 10 %, other banks’ interest rate was higher than 10 % and the providers were not much aware about the provision of the subsidised interest rate,” said Mr. Narendra Thapa, one of the members of the study team.

The study team recommended that a fixed base interest rate should be set to not affect the farmers, more trainings need to be provided to the BFIs on subsidized loan and there should be a flexibility of collateral such as if a farmer shows a lease agreement of at least five years, then a bank should be able to provide the subsided loan. But they should have their own strong monitoring unit to check the possible misuse of the fund.

Mr. Tej Raj Joshi, Deputy General Manager of RBB, said that they have a regional loan department which ensures at least two field visits a year and internal audit to check misuse of fund utilisation. “RBB has prepared work procedures, manual and team of agriculture officers in place to provide the subsidized loan to the farmers and it takes fixed assets as collateral for working capital,” said Joshi. The ceiling of such loan is maximum of Rs. 2.5 million in urban areas and Rs. 1.5 million in remote branches with the authority resting with the branch managers.

The branch managers said that the there is a lack of clarity on NRB’s policy on interest subsidy on agriculture loans regarding target group and loan amount ceiling.

Mr. Surya Acharya, agriculture loan expert, said that there is a need for enabling environment so that more farmers will be benefitted. “More than process hurdles, structural hurdles are discouraging farmers to acquire the facility,” he said.

Ms. Bibha from Laxmi Bank said that they have an agriculture financial unit which provides small loans and there are many beneficiaries. The bank has a ceiling of Rs. 10 lakh for credit guarantee and has initiated for the approval from the NRB’s central monitoring and coordination committee for Rs. 50 million loan.

Mr.Anshu Shrestha of Sunrise Bank said that there is a need to check customer snatching tendency of other banks.

Mr. Uttam Kumar Rai, Agriculture Unit Chief of NIC Bank, said that the policy has left out two important cash crops - betel nuts and tiger grass (or broom grass).

Mr. Janak Bahadur Adhikary, Executive Director of NRB and also the National Project Director of UNNATI-A2F, said that there is a need to look at long term benefits in case of capital subsidy. He also informed that the loan ceiling has increased from Rs 50 million to Rs. 100 million for MSMEs and large farmers to address big financial hurdles. “NRB too conducts feasibility studies which will provide value add to the economy,” Mr Adhikary said.