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.
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