No clarity on Rs 500 billion microfinance fund to lend to farmers

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Although the government announced through the budget that a 500 billion rupee microfinance fund would be established to extend agricultural credit to farmers’ doorsteps, government and central bank officials are still unsure of the nature of the proposed scheme.

It has been almost two months since the budget for the current fiscal year 2022-23 was presented on May 29.

Finance Ministry officials say they are working to conceptualize the nature of the microfinance fund.

“The exact nature of the proposed microfinance fund is not yet clear,” said Ramesh Kumar KC, Joint Secretary at the Ministry of Finance. “But we are working on a draft concept paper with two options: forming a separate microfinance fund to invest in the agricultural sector and investing in the sector through existing rural development banks.

According to him, the nature of the proposed microfinance fund will be clarified in the next two months when the concept paper is finalized.

Finance Ministry officials said they were exploring different options as political leaders gave no clear instructions regarding the nature of the proposed microfinance fund.

Since Janardan Sharma, who presented the budget as finance minister, resigned on July 6 over allegations that he employed foreigners in the preparation of the budget, Prime Minister Sher Bahadur Deuba has not appointed his replacement and takes care of the portfolio himself.

According to the budgetary provision, banks and financial institutions will be obligated to divert a certain part of their loans to agricultural production and other priority sectors.

An arrangement will also be made to invest a certain amount of funds from the Citizens Investment Fund, the Employees Provident Fund and the Social Security Fund.

“The microfinance fund arrangement is expected to contribute significantly to increasing financial access to agricultural production,” the budget states.

Chakra Bahadur Budha, head of the budget and programs division at the Ministry of Finance, told the Post in early June that the government had introduced the concept of lending through a microfinance fund to mobilize financial resources in the agricultural sector through a one-stop shop.

The government has yet to elaborate on the weakness of the current agricultural lending arrangement, although the central bank has directed banks and financial institutions to earmark a certain portion of their total lending to the agricultural sector.

By mid-July 2022, commercial banks must ensure that at least 12% of their total loans go to the agricultural sector, according to Nepal Rastra Bank guidelines.

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

Banks and financial institutions have increased their lending to the sector in recent years.

Despite the budgetary provision that banks and financial institutions would be invited to inject a certain amount of their agricultural loans through the new body, the government does not intend to force them to transfer all their agricultural loans to the proposed fund.

There is already a rural development bank and wholesale lenders like the Microfinance financial institution for the development of small farmers Limit.

There is a single rural development bank, formed by the merger of five of these banks, which provides micro-credits of up to 1 million rupees, including up to 300,000 rupees under collective guarantee to micro and small enterprises.

Microfinance for smallholder development provides wholesale credit and technical support services to small agricultural cooperatives in particular and to all other community cooperatives in general. The cooperatives are class “D” financial institutions according to the Nepal Rastra Bank categorization.

KC, however, suggested that the proposed microfinance fund could be a wholesale lender like the Microfinance financial institution for the development of small farmers.

According to KC, the proposed microfinance fund could be larger than the category “D” microfinance fund with a paid-up capital of up to Rs 2 billion.

The government plans to reach an agreement for local governments to invest in the fund as shareholders.

“The plan is to ask each municipality to invest Rs 10 million while rural municipalities will be asked to invest Rs 5 million to establish the fund,” said KC, who is also the head of the management division of the financial sector at the Ministry of Finance.

The ministry plans to ask local governments to invest in the fund considering that access to finance is a big problem for farmers as banks and financial institutions are not present in all local units.

But despite announcing the 500 billion rupee fund, the federal government has not allocated a single penny to it.

As finance ministry officials prepare to draft the concept paper, they have yet to consult with the central bank on the plan.

“We don’t know what is the concept behind budgetary provision of agricultural loans through microfinance funds,” said Prakash Kumar Shrestha, head of economic research department at Nepal Rastra Bank. “Obviously this was not a provision recommended by the central bank.”

According to him, they had previously discussed the proposed fund and found a lack of clarity in the budget provision. “Things might become clear after holding more talks,” he said.

The Monetary policy 2022-23 presented by the central bank last week, however, said the central bank would facilitate the implementation of the budget provision based on legal, institutional and working procedures to be formulated later.

One of the main reasons for the lack of proper consultations between the ministry and the central bank on the proposed fund is the frosty relationship between then finance minister Janardan Sharma and governor Maha Prasad Adhikari, according to sources. Nepal Rastra Bank officials.

In early April, on Sharma’s recommendation, the Cabinet formed a committee to investigate Adhikari’s activities, which led to the latter’s suspension. But weeks later, the Supreme Court suspended the suspension, clearing the way for Adhikari to return to office.

Amid bitter relations, Sharma and Adhikari meet only on June 8 to discuss the monetary policy to be introduced by the central bank, after the budget for the next fiscal year was presented on May 29. It was the first meeting between the two after the April fallout, according to a senior central bank official.

“It is unclear whether loans from banks and financial institutions to the agricultural sector should also be included in the proposed microfinance fund,” Shrestha said. “If so, under what law such transfer of loans is possible is unclear.”

Shrestha said that if the additional loans were to be made through the proposed microfinance fund, it could be done through existing microfinance institutions that are engaged in wholesale lending to disadvantaged sectors.

Central bank spokesman Gunakar Bhatta said it would be better for the new entity [microfinance fund] seek new sources of funding for loans instead of taking resources from banks and financial institutions.

Apart from the central bank, commercial banks are also unclear about the proposed microfinance fund.

Ashoke Rana, managing director of Himalayan Bank, said they did not know how the proposed microfinance fund would work.

“At least this proposed program should not be like other entities such as the Youth Self-Employment Fund and the Poverty Alleviation Fund whose funding by political interests has resulted in no recovery of credits. “, did he declare. “Regulation and supervision by the central bank are indispensable.”

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