Confusion surrounds budget plan to create Rs 500 billion fund for agricultural finance

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The Agricultural Development Bank of Nepal has been a leading financial institution providing credit to the agricultural sector for several decades since its inception in 1968.

But it registered as a commercial bank in 2006, expanding its footprints into other profitable business ventures.

Today, the government again mooted the idea of ​​creating a separate financial institution that would finance the agricultural sector, with the budget for the fiscal year 2022-23 aimed at boosting agricultural production.

The budget stipulates that a separate microfinance fund with a mandate to finance up to 500 billion rupees in the agricultural sector would be established.

Banks and financial institutions will have to invest the loans to be granted to the poorest [low-income groups] and agriculture through the new microfinance fund. Similarly, an arrangement will be made whereby even the Employees Provident Fund, Citizen Investment Trust and Social Security Fund will also have to contribute parts of their portfolio to the microfinance fund, according to the budget announcement.

“The government aims to mobilize financial resources in the agricultural sector through a one-stop shop,” said Chakra Bahadur Budha, head of the budget and programs division at the finance ministry. “The concept was announced to mobilize financial resources from banks and financial institutions and government subsidy through a one-stop shop.”

According to him, the new arrangement will make it easier for the government to control the financing of the agricultural sector.

The government, however, has not yet specified how the whole process will move forward.

“We have yet to determine whether a new institution should be created or whether an existing financial institution can be invited to carry out the tasks of the proposed microfinance fund, and whether a separate law will be required, which will regulate the institution,” says Boudha. “These issues will be resolved after holding consultations with stakeholders.”

He said the Agricultural Development Bank itself could function as a microfinance fund to invest in the agricultural sector if no new institutions are formed.

Nor does the government expect to immediately fund the entire Rs 500 billion agricultural sector through a new institution.

“It will be done gradually,” Budha said.

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 officially consulted during the budget-making process amid a row between Finance Minister Janardan Sharma and Governor Maha Prasad Adhikari, according to Nepal Rastra Bank officials. In early April, on the recommendation of Finance Minister Sharma, the cabinet formed a committee to investigate Adhikari’s activities, leading to the latter’s automatic suspension. But weeks later, the Supreme Court suspended the suspension, clearing the way for Adhikari to return to office.

Amid frosty relations, Sharma and Adhikari only met on Wednesday to discuss 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 fallout in April, according to a senior central bank official.

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

“We don’t know if the proposed fund will manage credit already extended to agriculture and disadvantaged sectors by banks and financial institutions, or if it will issue new credit,” Shrestha said.

Banks and financial institutions lent to the agricultural sector on their own while they extended credit to the private sector on their own and through micro-finance institutions.

“If the government wants new financing of Rs 500 billion, it is difficult to manage the amount from banks and financial institutions as they have already lent to businesses including the agricultural sector,” Shrestha said.

Commercial banks are required to invest at least 12% of their total loans in the agricultural sector by mid-July 2022, according to Nepal Rastra Bank guidelines.

In the third quarter of the current financial year 2021-22, commercial banks lent Rs 490.15 billion to the agricultural sector, which represents 12.28% of their total credit. This means that commercial banks are already close to meeting the lending target of Rs 500 billion, which is also the lending target of the proposed microfinance fund.

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.

As of mid-April, development banks lent Rs. or 21.92% of their total credit, according to the NRB.

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

Commercial banks are required to lend 11% of their total credit to micro, small and medium enterprises and disadvantaged sectors by mid-July 2022, and their loans to the two sectors as of mid-April stood at 393, 28 billion rupees, which represents 9.85% of their total credit, according to the NRB.

Bankers say they are unclear on how the proposed microfinance fund will work.

“It is not clear whether all lending to agriculture and private sectors will be provided by the proposed institution or whether we should continue lending to sectors as well,” said Anil Shah, managing director of Nabil Bank. “If a separate institution lends to the private sector, it is because commercial banks do not 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 couldn’t recover the loans,” Shah said. “If banking norms and standards are not adhered to and the central bank does not regulate these institutions, it will only lead to mismanagement and failure.”

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