Chapter - 12

Agriculture and Rural Credit
12.1 Background
Agriculture and Rural Credit play very important role in poverty alleviation and in the creation of employment in the villages by promoting agricultural and other business. There have been enough a chievements as targeted from the agricultural and rural credit programmes. Lack of easy access to receive loan, inadequate institutional expansion, lack of security, excessive indirect expenditure to receive loan and high interest loan have been observed as the obstacles in the development of this sector. To create opportunities for income generation activities and employment by removing these obstacles it is necessary to make agricultural and rural credit system easily accessible to the general public.

12.2 Review of the Ninth Plan
The Ninth Plan had adopted the policy of creating opportunities for productive employment by gradually increasing the investment of financial institutions to the deprived sector, enhance the ac cess of poor and women in agricultural credit, manage easy distribution of credit and expand the livestock insurance. To increase the availability in agriculture and rural credit, the government subsidy in irrigation and fertilizers was to be gradually decreased, and strengthen the existing institutions to promote private and non-governmental organizations, mobilize capital from internal and external sources were also included in the policy of the plan. Following are the progress of the plan period: 1. The credit target set by the Ninth Plan in chemical fertilizers, shallow tube wells, animal husbandry, promotion of high value crops, agro industries and processing and fisheries and for other agricultural programs from Agricultural Development Bank, Commercial Bank and Rural Development Bank was Rs. 35.25 billion; however it reached up to Rs. 53 billion in the current price i. e. Rs 34 billion from ADB, Rs 11 billion for Commercial Banks and Rs 8 billion from Rural Development Bank. (Table 12.1) 2. Improvement in legal and regularly management has been carried out to increase the micro-credit . 3. In the context of increasing the access of women in the management of microcredit by expanding the rural banks working area in terai and hilly areas Rs 908 crore has been invested as loan from the rural development bank and other micro small financing institutions following the rural bank system. Moreover, about 233 thousand women of 965 VDCs in 42 districts have been organized into groups. 212

amendments were effected during the winter session of the year 2058 as to regularize the unlimited liability of the parliament of the institutions. Cottage and small industry credit fund set up to provide self-employment to people trained by cottage and small industry department and cottage and small industry development committee has issued loans amounting to Rs 2 crore 66 lakhs and 22 thousand. Under the program of Productive Credit to Rural Women (PCRW) and Micro Credit Program for Women (MCPW).The rural development banks have expanded their branches in 20 hilly districts during the period. Encouraging par ticipation from the private sector in the small credit transaction was observed during the period. Livestock insurance policy was implemented in 68 districts but the insurance based on the standing crops could not be institutions like cooperative and nonagreement organizations from the commercial banks. 9. 7. 4. Moreover. The bank has given continuity in simplifying the policy of loans disbursement under the package program s. Financial Intermediary Act 2055 had been already enacted to expand flow of credit also from the non. handing out loan upto Rs 40 thousand to blind and the handicapped and credit to encourage use of solar power and areas of minim izing environmental pollution have been included into the program. loan to rural development banks and micro. A per the policy of expanding the priority sector lending during the plan period the tea cultivation.000 and made it 3 percent of the total investment. 8. the credit from the NRB to the participating financial institutions was Rs 13 crore in the first three years of plan period and at the closure of the program in the fiscal year 057/058 the investment stands at Rs 43 crore. Moreover. 10 crore. micro–hydro project costing less than Rs. Four development banks have been set up from the private sector to run micro finance activities. 6. 213 . 11. The compulsory loan issuance to the deprived section of the population has been raised from Rs 15000 to Rs 30. 5. 10. since the Ac t did not have the provision to allow institutions to commence saving schemes . Rural Micro Finance Development Centre Ltd (RMDC) has been set up in the month of Mangsir 2056 with a view to provide wholesale to the credit institutions which work in the micro credit operations under the ownership of NRB and capital participation from the commercial banks. Agriculture Development Bank has issued Rs 34 billion loans for various uses. To raise the access of microcredit from the non-governmenta l organizations and saving and credit cooperative bodies about Rs 5 crore 23 lakhs loans from rural self reliance fund has been issued through 129 cooperative institutions and 48 non-governmental organizations during the review period. the bank has set up a small farmer's development bank during the period by converting 107 small farmers development program into cooperative institutions.governmental organizations working in the field of financial intermediation.

receiv ing appreciable results from the investment became a challenge . 12. Although commercial banks had to channel certain part of the fund towards the priority area and to the deprived section of the people it was not implemented seriously. It has been felt that the spread rate is high in the overall financial system.5 percent of credit from all the banking and financial institutions ha d been used in agricultural and micro. Due to lack of effective monitoring and supervision the loan repayment of the ban ks and financial institutions have not been satisfactory. There has been effect on targeted issuance of agricultural loan due to the nonimplementation of the package program as envisioned in the Agricultural Perspective Plan. The relocation of branches of Nepal Bank Ltd. Due to the lack of coordination between rural credit institutions and other institutions the duplication could not yet been avoided. There has not been effective mechanism to monitor the flow of credit. 12.3 Existing Problems There is still a lack of coordination in the issuance of agricultural and rural credit due to failure in institutional efforts in integrated and coordinated implementation of programs during the Ninth Plan. The transaction in rural and agriculture credit has not yet been adequately simplified. the task of crop insurance has not yet been initiated. Although there has been some progress on livestock insurance as per the agreement with credit deposit insurance and credit guarantee corporation. The gap in spread rate is high in agriculture and rural credit. the present institutional mechanism is not adequate to reach the loans to the targeted groups . In the use of shallow tube wells that play a very important role in groundwater irrigation during the plan period. Cooperative tha t has got permission from Nepal Rastra Bank to run limited Banking activities was 37 in number during the plan period. As such. Only 13.12. There has been expanded use o different materials which help in the rise of f agricultural productivity. Rastriya Banijya Bank and Agricultural Development Bank during the latter years due to the deteriorating law and order situation has an adverse effect in the issuance of loans in the village are as. there has not been rise due to anomalies in the policy and lack of budget.4 Tenth Plan a) Objectives 1) Mobilization agricultural and rural credit in an integrated manner to help rise in gross domestic product by increasing the agricultural productivity 2) The outreach of microcredit is to be increased to check the rampant rural poverty by involving maximum number of deprived people in production 214 . Although there has been rise in the number of banks and financial institutions.

b) Strategy Agriculture and rural credit play a very important role in alleviating poverty by increasing economic activities and opportunities for income generation and employment in the rural area. Despite the demand of credit . 2. The entrepreneurs have not been taking initiative for not being able to get guarantee of the credit availability. The targeted programs have been seen as an attraction in solving such problems. the major strategies in this sector have been formulated as following. Since the resources from existing bank and financial institutions are not enough to meet the excessive demands of agriculture and rural credit. In this context. Commercial banks and other development banks too shall be mobilised to avail the institutional agricultural credit . As majority of the farmers are small farmers the micro credit has a special importance on it .1 related strategies 1. 215 .oriented and income generating micro enterpr ises. 5. 3. All the banks and financial institutions involved in agriculture and rural credit shall be mobilized through a single coordination system by formulating a policy to avail institutional credit of alleviating the rampant rural poverty. the flow of the same has not been enough especially to the small farmers and deprived people. Income and employment shall be raised by involving women and unemployed rural youths in productive credit. Collateral has been a problem in the credit availability for the deprived people. § Objective No. § Objective No. 4. Regular monitoring shall be done to evaluate the target and progress of agriculture and rural credit . Agriculture Development Bank shall be mobilized as the main institution to meet the required of agricultural credit in the rural area. medium and long term in nature. Since the social aspects too are involved in the programs related with rural micro credit they can provide valuable support in development and increment of social consciousness.2 related strategies 6. a long term fund shall be mobilized in Nepal Rastra Bank in the form Rural Self-Reliance Fund. the coordination in the implementation process has not been effective. Nepal Rastra Bank shall be mobilized as the main body in this aspects. To increase the outreach of micro-credit to the deprived people there shall be improvement in the institutional mechanism to expand the credit flow as much as possible through the micro finance institutions in the rural area. Such type of credits will be short. Although various institutions have been involved in availing the credit for agriculture and rural development programs.

The credit of rural development banks which have been made available to the deprived women in the past in different income generating activities shall be further expanded. Saving and Credit Cooperatives (SACCOPs) and Financial Intermediary NGOs /INGOs along with the existing rural development bank shall be mobilized extensively to increase the access of micro-credit to rural areas. development banks and other financial institutions and their ongoing investment resources in a co-ordinated manner .2 strategy ) • The compulsory investment by commercial banks in the priority sector lending System (12 percent of the total credit ) in agriculture.1 Strategy) • • Agriculture and Rural Credit shall be developed as one of the main some for poverty alleviation. The policy to gradually handover the ownership of Rural Development Bank which are in Break Even Point (BEP) or in better position to the private sector shall be adopted. This process shall be initiated in western rural development banks and gradually applied in the other parts. § Mobilization of ADB as the main source for the agricultural and rural credits (Related with no. cottage industry and service oriented enterprises shall be gradually reduced by the second year of the Tenth Plan and completely removed by the end of the plan. Moreover. and their access to micro-credits will be enhanced.7. Realizing the necessity of agriculture and rural credit. 3 Strategy) • The deprived population will be encouraged to take income and employment generating activities. "Agriculture and Rural Credit Flow Program" will be initiated through a single coordination system by involving commercial banks. c) Policy and Work Plan § Agriculture and Rural credit Flow through Single Coordination System (Related with No. Agriculture Development Bank shall be strengthened as the main institution to flow the agriculture and rural credit . The policy to provide first priority to deprived women debtors shall be followed while privatizing the banks. the collective insurance of micro. § Increased access of the deprived people in the micro-credit (Related with no. Small Farmer Cooperative (SCFLs).credit at the farmers level shall be gradually expanded. 216 • • .

The current permit system enforced by the Nepal Rastra Bank shall be simplified after the review in order to encourage private sector and individuals who would like to work in the area of micro credit. This process will be initiated through the western rural development bank by giving priority to the deprived women debtors of the bank.4 Strategy) • The service of rural development bank in the hilly areas shall be expanded. For this finance shall be made available through Rural Micro Finance Development Centre Ltd-(RMDC) and other sources.• To increase the access of institutional credit in the rural areas the institutional system of bulk credit shall be strengthened. 5 strategy) • Continuing the five year structural reform programs initiated by Nepal Rastra Bank during the plan period the rural development bank under the NRB shall be operated according to the productivity standard set by the high level coordination committee. The institutional system to supply bulk credit to rural development bank and other financial institutions which work in the micro-credit shall be strengthened during the plan period. • § Loans to educated unemployed youths through project as collateral (Related with no. Nepal Federation of Saving and Credit of Cooperative Unions (NEFSCCOU) and central level institutions of National Cooperative Federation shall be mobilized for this purpose. In the present context of minimum presence of commercial banks in the rural areas the institutions working as financial intermediaries and saving and credit cooperative bodies shall be allowed to work as the agents of the commercial banks . The rural development banks operating in breakeven or better shall be gradually handed over to the private sector. There shall be a system of control and regular monitoring of the savings and credit cooperative institutions which have been directly helping in the rural credit. • • • § Privatization of Rural Development Banks (Related with no. 6 strategy) 217 . § Mobilization of Nepal Rastra Bank as main monitor in agriculture and rural credit (Related with no. In this context. there shall be necessary reforms in the current rural banking system prevalent in terai. The policy to encourage institutional presence in micro credit shall be adopted. The existing limit of 3 percent credit to the deprived groups by the commercial banks will be maintained and the areas within this sector will be reformed as per the need.

intermediary institutions and the investment of ADB such as in tea and fruits will get medium and long term credit as and when needed. saving and credit cooperative institutions and through micro finance institution which have been licensed to work as financial intermediaries .5 Programs 1. • § Guarantee to Credit investment through Investment Fund (Related to no. 23. The loan scheme initiated by the commercial banks to rural and deprived youths who strive for foreign employment and to the people from the Maoist insurgency affected area shall be given continuity.62 percent from commercial banks and related institutions. The policy to regard such loans as loans handed out to the deprived people shall be maintain ed. Moreover.• Credit programmes based on education certificate and projects as collateral will be mobilized for the unemployed agricultural graduates and technicians and unemployed rural youths to employ them in productive and income generating enterprises unemployed youth who have received skill oriented training shall be issued loans on project collateral to set up micro enterprizes.7 strategy) • Institution working in micro-enterprises through Rural Self Reliance Fund.1) The loans to be issued to the deprived sector by commercial banks maintained at the current level (3 percent of the total loans). 11. and rest 11. 100 thousand issued through the Commercial banks to anyone going abroad for employment shall be included in this scheme itself and monitoring shall be done accordingly. In case of the banks and financial institutions (except those involved in the micro credit) which do not have branch network in the rural areas provision shall be made for direct financing and indirect financing with a view to involve them in the scheme. 3. The total need of credit in agriculture and rural sector shall be fulfilled at the rate of 52. The fixed amount of financing to be borne by such development banks and financial institutions can be done through rural development banks. . The fund shall receive a fixed amount from His Majesty's Government and the Nepal Rastra Bank on annual basis.76 percent from Agriculture Development Bank. Loans up to Rs. the fixed amount which should have been invested by commercial bank and financial institutions in agriculture and rural credit shall be deposited in the fund if the same is not issued as loans. The share capital of commercial banks and 218 2. 12.81 percent from institutions working in micro-financings and other institutions (Loan projection is on table 12.81 percent from rural development banks. Rural Saving and Cooperatives.

handicapped persons . social. The provision of credit amounting to companies shall be deemed as part of the loans under the scheme. This provision shall be executed as per the recommendation of the high level coordination and direction committee for the rural development bank of the central bank . The institutional development will be made for the collective insurance of 219 5. Agriculture Development Bank. Various agriculture and rural credit programs.000 rupees shall be continued to fund income generating and employment oriented activities on basis of the project as the guarantee. The committee shall also decide on the scope of agriculture and rural credit . Finance and agencies like National Planning Commission. Arrangement will be made for necessary coordination from the poverty alleviation fund. 8.000 shallow tube wells through partner financial institutions (PFIs). Nepal Bankers' Association. The social mobilization cost needed for the activities related with microcredit to the governmental and private sector institutions which do not mobilize deposits. . educational. the blind. It is expected to irrigate about 40.000 hectares of land and serve about one thousand deprived and marginalized farmers as beneficiaries . Under the Community Ground Water Irrigation Sector Project (CGISP) financed by the Asian Development Bank. arrangements will be made to provide lump-sum amount in the annual basis through the poverty alleviation fund. To increase the access of the credit to the weak. micro-credit programs. 7. Apart from the policy provision under the agriculture and rural credit programs the concerned cell of the Nepal Rastra Bank shall be mobilized to conduct regular monitoring. A high level agriculture and rural credit policy making committee under the coordination of the central bank shall be formed at the outset of the Tenth Plan with the representation from ministry like Agriculture. Nepal Financial Institutions Association and at the most two representatives from other related agencies for the policy decisions conducting needed studies and ensure that coordination. credit will be made availa ble from NRB for self reliance fund and for deprived and marginal farmers in the 12 Terai districts of easter n and central development region in collective guarantee without collateral for 10. health. community and public awareness oriented programs of different institutions of the government shall be operated from one window as far as possible for coordination. deprived and marginalized people of the society. The Secretariat shall be at the central bank. shall also be regarded as the loans under agriculture and rural credit scheme. besides the commercial bank. 4. The flow of the credit from the commercial banks shall be deemed as the loans to the deprived people and as such monitoring shall be done. Industry. 9. evaluation and study. The loans if issued by other financial institutions. 6.

12. seeds. bullock carts etc. The loan investment under Third Livestock Development Project financed by the Asian Development Bank shall be deemed under agriculture and rural credit scheme throughout the project period (2002/2003 ) The loan investment under the program implemented by IFAD supported in poverty alleviation project in western terai (PAPWT) districts shall be deemed as loans under agriculture and rural credit scheme. the high level agriculture and rural credit assessment committee in the central bank will identify such needs and manage the same. With a view to enable the farmers to receive suitable price for their products medium sized godowns. commercial banks and financial institutions . the deprived and marginalized farmers will be encouraged to take part in an income generating activity. Since the staff working in financial institutions involved with agriculture and rural credit p rogram need capacity enhancement trainings. for which at least one credit per family will be mobilized. that will result an additional coverage of 100 thousand families through credit. 15. 14. 16. Agriculture Development Bank. College and small scale industry credit flow program established to provide credit to the trend persons by the Department of Cottage and Small scale 220 11. 13. 10. .the loans issued as micro-credit in the prioritized rural areas to the benefit of the small farmers. shall be managed as loans from commercial banks and financial institutions at reasonable interest rates. The agricultural industries related with the priority commodities of Agricultural Perspective Plan will be encouraged to set up their plants in the rural area long-term credit needed for industries will be provided with normal interest rate through Agriculture Development Bank. 17. The micro-credit institutions shall be encouraged for this purpose. cold storages shall be set up as cooperative bodies and the necessary amount of money for the means of transportation such as tractors. This will help develop the spirit of cooperative principles. pesticides and agricultural tools needed for then during the plantation period. Provision shall be made to avail refinancing from the central bank for such loans. commercial banks and rural development banks on the basis of their assessment shall be activated to provide the credit for small. The provision of Nepal Rastra Bank Act-2058 concerning the refinancing provision shall be amended to support agriculture and rural credit program. The national training institutes will get a priority to provide the training where national capability exists. To support the poverty alleviation programme. medium and marginal income group of farmers through the provision of total annual production credit on simplified basis to procure fertilizers. 18.

On the basis of policy and programs to be adopted in the Tenth P lan it is estimated that a total of 1.3 221 .industry and board will be expanded to rural areas and made further effective.6 Agricultural and Rural Credit Projection Agricultur al and rural credit flow in the Ninth Plan has been given in table 12. The detailed projections has been given in tables 12. 12.2 and 12.1.75 billion rupees shall be invested in agriculture and rural credit from the bank and financial institutions.

As per the statistics of upto Paush 2058 of the fiscal year 2058/59 the growth rate has not been normal so it is not accepted as the base year. 222 .7 * Preliminary estimates Note: Since credit of S o.1 19 52. included in the total.Table 12.8 -12. Projection of ADB as projected by itself.8 10410.0 Projection Basis: 1.1 12269 15742.3 -4. 3. 2.N .8 -3.8 Development Bank 9124 9924 10705 11437 11962 53152 Commercial Bank and 23.4 -8. 1 Description 1997/98 1998/99 Fiscal Year 1999/2000 2000/01 Total 2001/02* Agriculture Development Bank 4430 5560 7140 8090 8870 34090 2 Rural Development Bank 600 860 1170 1490 4050 8170 3 Investment in Agriculture from Commercial Bank 1420 1800 2140 2670 2770 10800 4 Investment in cooperative and NGOs from Rur al Self-Reliance Fund 8.2 -8.7 5 Production Credit and Micro-Credit for Women -50 -50 -30 -130 6 Investment of Cottage Small and Industries Credit Fund -5.4 -26. Projection of other banks and institutions has been according to the proposed program of the tenth plan.6 7 Community Ground Water Irrigation Investment Tube well Investment -3.8 institutions 1670 1980 2330 2700 3220 11900 Total 15814 17834 20025 22237 24842 100752 100. 4.5 7.8 20.1 : Status of Agriculture and Rural Credit flow during the Ninth Plan (Rs in crore) S. Source: Nepal Rastra Bank Micro Credit Department and Small and Cottage Industry Department.6 other financial institutions 3350 3950 4660 5400 6440 23800 Rural Development 11. In million) 2059/60 2002/03 2060/61 2003/04 2061/62 2004/05 2062/63 2005/06 2063/64 2006/07 Total Percentage Agriculture 52. Table 12.5 and 6 might have been included in S No 1.2 3 they are not . Projection is based on current prices.2 Total 6458.2: Projection of Rural and Agriculture Credit in the Tenth Plan (R s.3 107.9 -4.3 53167.5 8227.8 Bank 1670 1980 2330 2700 3220 11900 Other micro financial 11.N.

Agri. and cottage industry 7. Fruits 10. Food and cash crops 2. tools and mechanization 4. Agri. Buy and Sales 3.3: Investment projection of Agriculture Development Bank during the Tenth Plan (purpose wise) (Rs in million) Objectives 1. 223 .Table 12. Biogas 6. Tea and coffee Total 2059/60 2002/03 2011 2040 1176 141 124 1541 27 1785 105 174 9124 2060/61 2003/04 2353 2120 1350 151 145 1616 32 1850 123 184 9924 2061/62 2004/05 2653 2200 1428 161 170 1744 30 2000 125 194 10705 2062/63 2005/06 3001 2250 1452 161 199 1911 30 2100 131 204 11437 2063/64 2006/07 3104 2300 1743 161 210 2100 30 2200 141 214 11962 Total 13123 10910 6906 775 848 8912 149 9935 625 970 53152 Based on Agriculture Development Bank projection. Godown and cold storages 8. Livestock Poultry and pisciculture 9. Irrigation 5.

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