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Home SAARC Finance Microcredit Operation Seminar Nepal

Country Paper for SAARC Finance Seminar on Micro Credit Operations

(21-23 December, 2002)
Dhaka, Bangladesh
Presented by
Mr.D.K.Dhakal-Asst. Manager
Mr. H.K. Panthi-Asst. Director

Nepal Rastra Bank
21 December, 2002


Nepal is one of the least developed countries in the world having US$ 220.00 per capita income. The Nepalese economy is predominantly an agricultural economy. About 81 percent of the  population is engaged in the agriculture sector whereas about 86 percent of the population lives in the rural sector of the country. Agricultural sector contributes 40 percent to Gross Domestic Product (GDP) of the country. According to the National Living Standard Survey 1996, about 42 percent of the population were found to be living below poverty line but at the end of the Ninth Plan 2001, the figure has comedown to 38 percent.

Nepal has been witnessing planned development efforts since the last four and a half decades. The Ninth Five Year Plan has just completed in 2001. The objectives envisaged in most of the plans aim at reducing poverty. However, the intensity of poverty in the country calls for massive and genuine efforts. 

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The history of modern financial system of Nepal was begun in 1937 with the establishment of the Nepal Bank Ltd. (NBL) as the first commercial bank of Nepal with the joint ownership of government and general public. As mentioned above, Nepal Rastra Bank (NRB) was established after 19 years since the establishment of the first commercial bank ( i.e.,NBL). After the establishment of NRB, Nepal witnessed a systematic development of the financial system. After the restoration of democracy in 1991, Nepal has clearly been following a liberalized economic policy and witnessing diversification in financial system. As a result, various banking and non-banking financial institutions have come into existence. As of mid-July 2002, there are 16 Commercial Banks, 16 Development Banks, 5 Regional Rural Development Banks, 54 Finance Companies, 34 Saving and Credit Cooperatives and 25 Non Governmental Organizations (NGOs) operating in the country. These financial institutions are under the regulation and supervision of the NRB. Besides these institutions, there are more than 1500 registered saving and credit cooperatives operating in the different part of the country and there are many NGOs involves in this sector. 

The banking system in Nepal was introduced with the establishment of Nepal Bank Ltd. (NBL) in 1937. However, the activities of the bank was confined to accepting deposits & providing loans only to the commercial sector in Kathmandu and other limited urban areas. The country's central bank- Nepal Rastra Bank ( NRB) was established in 1956. In the initial years of operation, the NRB had been focusing towards monetization of the economy by circulating Nepalese currency all over the country. After achieving some progress, it started taking initiation towards institutional development. Consequently, Nepal Industrial Development Corporation  (NIDC), Agricultural Development Bank (ADB/N) and Rastriya Banijya Bank       (RBB) had been established.

The establishment of ADB/N was a landmark in the development of rural financial market in Nepal. However, it would be worth mentioning that the institutionalization of rural credit was actually begun in 1956, when cooperatives were established in Chitwan with a view to providing credit support to the resettlers. In the year 1974, the NRB introduced the concept of directed lending so that a said proportion of the commercial bank's sources could be utilized for the development of rural and agricultural sectors. The concept of directed lending was also considered to be a  ground breaking initiative in the development of small sector comprising agriculture, cottage industry and services. 

In order to support the national goal of poverty reduction, Nepal Rastra Bank has been carrying out a number of developmental functions along with its core function of central banking. For the development of rural financial system in particular, the NRB has initiated institutional development programs as well as various rural financing programs aimed at raising the standard of living of the people living in abject poverty below the poverty line and reduce the regional disparities. At the same time, it also encourages private sectors to take part in the rural financial system. 

Nepal Rastra Bank Act, 2002 has empowered the NRB to inspect and supervise all financial institutions including Rural Micro-Financial Institutions and issue directives. So, NRB has played a key role in policy formation and execution to the financial institutions. The major policies issued for the Micro-Financial institutions are as follows: 

*     Commercial banks are required to extend 12 percent of their outstanding loans and advances as priority sector credit, of which 0.25 to 3.00 percent should be extended to deprived sector. 

*  The central bank provides refinance facilities to commercial banks against the credit documents of   the priority sector credit. 

*     In order to open an urban branch, commercial banks need to open one branch in semi-urban and one in rural area compulsory. 

*     Micro credit is normally based on group guarantee and it is actually collateralless lending. 

*     Financial Intermediary Act, 1998 has been enacted to enhance the Financial Intermediaries ( FINGOs) for wholesale lending. 

*     "Poverty Alleviation Fund " has been created for the growth of rural financial markets. The fund will be utilized for conducting training programs and extending micro-financing services. 

*     Rural Micro-Finance Development Centre (RMDC) Ltd. has been established for wholesale lending to Micro Financial Institutions to enhance rural micro-credit. 

*  Single borrower limit of micro credit (deprived sector) has been fixed up to Rs.30, 000.

*  Commercial bank can also provide credit to the ADB/N, RDBs, SACCOs, and FINGOs as priority sector credit. 

*  Nepal Rastra Bank is carrying out the " Restructuring Programme "in Grameen Bikash Banks due to the heavy losses.

*  Priority Sector Credit Programme extended by the commercial banks will be phasedout within next five years but deprived sector landing will remain valid. 

Various rural & micro - financial activities and programs, which are being implemented through different types of financial institution, are briefly mentioned below. 

In the year 1974, the NRB introduced the concept of directed lending. Commercial banks were required to extend credit of at least 5 percent of their total deposit liabilities to the small sector comprising agriculture, cottage industry and services. The small sector program was redefined in 1976 and renamed as the priority sector-lending program. The ratio was then increased from 5 to 7 percent of the total deposits. In 1981, the lending ratio was set at 10 percent and the program started under the " Intensive Banking Program (IBP)". The program is based on the " Area Development Approach" and provides credit to all the beneficiaries within a specific geographical area on the merit of project viability and relies on the regular supervision of the credit projects. It also provides credit on group guarantee basis to the poor who cannot offer collateral.

The directed lending has been tied up with the total loans since 1984 and the commercial banks are directed to extend at least 8 percent of their total loans to the priority sector. In 1990, it was increased to 12 percent. Since 1991/92, the commercial banks have been directed to extend a certain percent of their total loans to the deprived sector.

The deprived sector-lending program was launched with the objective of uplifting the socio-economic status of poor deprived people of the society. A loan amount up to a limit of Rs. 30 thousand per borrower granted by the commercial banks for productive purpose qualifies for the deprived sector lending. As for such, commercial banks are required to lend a minimum of 0.25 to 3.0 percent of their total loans to the deprived sector. Failure to comply such provision causes them to be penalized in monetary terms.

The IBP programme has extended credit to more than 500 thousands borrowers out of which almost 300 thousands rural clients received the priority sector and deprived sector credits. The IBP has disbursed more than Rs.10 billion and out of the total amount almost Rs.4 billion has been disbursed to rural borrowers. 

Production Credit of Rural Women (PCRW) was introduced in 1982 by Women's Development Division (WDD) of the Ministry of Local Development, with financial support from UNICEF. The NRB has been mobilizing the funds through three participating banks namely Rastriya Banijya Bank, Nepal Bank Limited and Agricultural Development Bank. The basic objective of the program is to raise the socio economic status of rural women by providing access to institutional credit for employment and income generating activities. Since 1988, the program has been financed by IFAD.

The program has covered 67 districts and has disbursed loan amounting to Rs. 754.5 million to 81,000 clients by mid-July 1999. It has been implemented through 163 branch and sub-branches of commercial banks (IBP) and SFDP units of ADB/N. 

Nepal Rastra Bank has been managing and administering the Rural Self Reliance Fund (RSRF) created by the His Majesty's Government of Nepal with a corpus fund of Rs. 10 million in 1991. The amount had been raised to 20 million in 1992. The fund has been set up for purpose of providing loan to NGOs and Saving and Credit Cooperatives ( SACCOs) for lending to the rural poor. The main objective of the fund is to encourage NGOs and Sefl-help groups in rural areas for productive purpose and develop financial intermediation between the fund and local beneficiaries.

The RSRF provides credit to the SACCOs and NGOs on the basis of total regular savings/or share capital. The ceiling of credit to the SACCOs and NGOs is 10 times of their total savings/ or share capital or a maximum of Rs.750 thousands, whichever is lower. The Fund provides a small loan of up to Rs. 30,000 per borrower. The interest charged to the credit is just 8 percent.  It is noteworthy they will get back 75 percent of the interest in case of timely repayment of installment of their loans. The credit approved is disbursed for up to 3 years in installment basis. During the course of disbursement of the credit, the fund keenly observe whether the loan is properly utilized. It is after the confirmation, the concerned local financial institutions can get the remaining installment from the fund.

From the inception of the Fund to mid-July 2002, a total of Rs.52.4 million has extended to 7595 beneficiaries family through 129 SACCOs and 48 NGOs, spread over 42 districts of the country. During the period Rs.36.8 million has recovered and as a result the outstanding credit stood at Rs. 15.5 million. The recovery rate of the Fund is 92 percent.

Micro Credit Project for Women (MCPW) was launched in 1994 with financial assistance from Asian Development Bank to supplement the PCRW program. The program is jointly implemented by Women's Development Division (WDD) of the Ministry of Local Development and Nepal Rastra Bank. BRB is responsible for credit component whereas WDD and NGOs are responsible for non-credit activities. The participating banks in the program are Nepal Bank Limited and Rastiya Banijya Bank. As of mid-July 1999, the service of this project has been extended to 15 districts of the kingdom. The 46 branches of the participating banks have disbursed loan amounting to Rs. 233.7 million to at least 17 thousand women.         

Banking with the poor program was initiated by Austrian NGO named Foundation for Development Corporation (FDC) in 1991. The vision of the program consists access of credit to the rural poor on a sound commercial basis. RBB is executing the program through 31 branches to 18 districts of the country. The program is designed exclusively for the rural poor women. Credit is disbursed to a member up to the limit of Rs. 30,000. The first credit size is Rs. 10,000 and then increased by Rs. 5,000 in every consecutive year. The Bank is charged 14 percent interest to its borrowers. As of mid-July 1999, this program has extended Rs. 80 million credit nearly 9000 poor families through NGOs and self help groups. The credit is given to poor women under the group guarantee basis in this program. 

Agricultural Development Bank ( ADB/N) has been remaining the foremost financial institution for providing micro-financial services in Nepal. The ADB/N is one of the pioneering financial institutions in Asia which initiated the first group-based micro-credit program in 1975 which is known as Small Farmer Development Program (SFDP). Under SFDP, the ADB/N has availed credit to more than 200 thousand micro-borrowers out of which around 25 percent being the female borrowers. There are 357 SFDP sub-project offices (SPOs) covering 650 village development committees (VDCs) of Nepal. The ADB/N, through its SFDP offices, has participated in the IFAD-Funded Production Credit for Rural Women Project ( PCRW Project). Beginning from FY 1993/94, the ADB /N has initiated another innovative approach of developing self-help organizations at grass-root level, i.e., Small Farmer Cooperative Limited (SFCL) with the technical assistance of GTZ. Under this approach, the ADB/N has banded over 85 SPOs of SFDP as SFCLs  which is owned, managed and controlled by small farmers themselves. They play the role of financial intermediaries between the ADB/N and small farmers. 

The Grammen Bank Financial System was introduced in Nepal in 1992. Nirdhan, an NGO was the pioneering organization in this regard. Nepal Rastra Bank played an instrumental role in the establishment of rural development banks. There are altogether five rural development banks established on a regional basis. NRB holds about two third of the total shares of these banks. All these banks adopted the outreach model of Grameen  Bank, Bangladesh. It is worth mentioning that Nepal is the largest replicator of Grameen Banking Financial System outside Bangladesh. The main objective of all of these kinds of institution is to improve the socio-economic status of rural poor women by promoting the formation of self-help groups and facilitating their access to formal credit.             

As of mid-July 2002, the bank has disbursed of Rs. 6812.4 million to the economic upliftment of 150 thousands poor rural women. The banks have extended the services in 42 districts of the country. Out of the total amount disbursed, Rs.5626.5 million has recovered and the total outstanding credit has remained at Rs. 1185.9 million.The credit recovery performance is outstanding with nearly 100 percent and they have proved that the poor are bankable and trustworthy. Nirdhan and Centre for Self Development (CSD), NGO, is also involving in this system since 1993 and 1994 respectively. 

Saving and Credit Co-operatives (SACCOs) are member owned, controlled and capitalized organizations. They provide financial services to their own members. As of mid -July 1999, there are 1,138 SACCOs registered with the Co-operative Department in Nepal, out of which 322 SACCOs are members of the National Federation of Saving and Credit Union of Nepal (NEFSCUN). There are altogether 64944 members in the SACCOs. Out of these, 27,507 are female members and the rest 37,447 are male members. The total share capital of these SACCOs is Rs. 45,686,657. 

(i) Besides above, His Majesty's Government of Nepal has recently introduced some programs namely "Gareeb Sanga Bishweshwar" Bishweshwar Among the Poor), " Mahila Jagritee" (Women Awakening) and "Ganeshman Singh Peace Campaign" aimed at facilitating the rural development and reducing poverty. In addition "Third Livestock Development Project", " Poverty Alleviation Programme for Pashim Tarai" & " Community Groundwater Sector Irregation Project" are in operation in an organizational framework of Nepal Rastra Bank. 

A central level program execution committee and district level coordination and monitoring committee have been formed in 75 districts for implementation of Bishweshwar Among the Poor program. A manual for this program has been prepared and put into practice. ADB/N will carryout district level implementation of this program.

Recruitment and training of social mobilizers for their placement in 205 election  constituencies of the kingdom have been completed by the end of the fiscal year 2000/01. 

Mahila Jagritee Program has been launched by forming Central Guidance Committee and District Co-ordination Committees in 75 districts to benefit 6540 rural deprived women of 940 village Development Committees ( VDCs). A Mahila Jagritee and income Generation Guidelines (Manual) 1999, has been prepared and put in practice for the implementation of this program. Another Manual has also been prepared to carryout rehabilitation under the Ganeshman Singh Peace Campaign Program.

The problems of Rural and Micro Credit operations in Nepal can be summarized as below:

*       Presence of a number & variety of rural & micro financial institutions;

*       Lack of co-ordination between various rural & micro financing institutions & programmes;

*      Duplication & overlapping;

*      Micro-Credit is costlier activities ( operating cost is relatively high);

*      Limited outreach (about 20 percent of the total rural & micro credit demand is supplied by the formal sector);

*      Heavy concentration in the Tarai (plain) region;

*       Difficulties in extending the micro credit service in the hilly & mountainous region (About 68 % of the total land is covered by the region);

*       Lack of Proper regulation & supervision;

*       Legal  hindrance; etc.

*      Security aspect due to the Maoist activities is seems to be a serious problem.      

Rural micro-financing was started in Nepal since the establishment of credit cooperatives in 1956. Micro Financing in a mountaneous country like Nepal is considered as an effective system as it helps deliver credit in rural areas in simple and easy way. Commercial banks and other financial institutions normally do not like to go in that area because of the geographical constraints, underdeveloped infrastructure and other physical constraints. However on the other hand, there is a substantial demand of micro credit in the rural areas. In this scenario, locally operating micro financing institutions such as SACCOs and Fl-NGOs could obviously play an important role to mobilize local savings, extend credit as well as channelize borrowed fund/grant to the local rural people. 

Rural Credit Review Survey conducted by Nepal Rastra Bank in 1991/92, indicates that 86 percent of the economically active rural population have been found to be engaged in agricultural activities. The survey also indicates that 20 percent of the borrowing households borrow loan from formal sector whereas informal sector provides 80 percent of rural credit demand. However, it is noteworthy that the credit extended by informal sector is mainly unproductive. About 81 percent of the loan extended by informal sector goes to social and religious purposes. The total micro credit demand in rural areas has been found to be Rs. 18 billion each year but only Rs.5 billion is being supplied through MFIs. At the same time commercial banks with branches in rural areas have also been merging their branches to nearer viable branches, and they have also been closing some of the rural branches because of the security problem as well as unviability of the branch. On the other hand, agricultural sector contributes more than 40 percent to the GDP of the country and more than 80 percent of the population is engaged in this sector. In this scenario, micro-financing services should be enhanced and extended to the rural areas of the country. It will help to create conducive environment for income generating activities in the rural areas and thereby boost up the economy as a whole.

Main Committee                                                          SFs
Management of the organization                                                  Credit demand & repayment
Monitoring & Follow-up                                                                 Savings deposit
Co-ordination with the line agencies                                            Be an active members
Resources collection & mobilization 

Inter-Group                                                                              Group
Credit recommedations                                                             Identification of group activities
Saving collection & mobilization                                                  Saving collection
Playing an intermediatory role between main                               Credit recommendation
committee & the groups
Implementing social & community activities