Saturday, 29 January, 2022

Agricultural Credit: Problems & Prospects

Babu Kaji Thapa

About 65 per cent people in Nepal rely on agriculture and allied activities for their livelihood. Its contribution to the gross domestic product (GDP) stands at about 26 per cent in the country. If we look at the data, about 3.1 million (21 per cent) land is cultivated and still one million hectares of land is said to be fallow in the country, which can be brought under cultivation. This signals that a large proportion of land is either fallow, semi-fallow, not registered or not cultivated. It may be because that those who want to farm have no land and those who have land do not do farming. It merely can be termed as unfair distribution of land resources.

Nepal's agriculture has experienced many problems since long and farmers are impatiently waiting for its resolution, too. To quote some of them are low investment, subsistence farming culture, unavailability of agricultural inputs on time, place and rate, haphazard land fragmentation, unorganised market (broker domination), poor research and extension, unscientific agricultural organogram (after federalism), misuse of agricultural grants, natural calamities, monsoon-based farming, etc. Millions of youths have returned from abroad, displaced from the domestic cities or have lost their jobs because of the COVID-19 pandemic. They are waiting for the government's favourable policies in agriculture so that they can get involved in farming for the commercialisation, export promotion and import substitution of the agriculture sector.
The Ministry of Agriculture and Livestock Development has announced many innovative and farmer-friendly agriculture development programmes for the Fiscal Year 2078/79 and the same is the scenario of the provincial ministries. It is worthwhile also if we look at the import data of agricultural products in in Nepal. The country had imported different agricultural goods of almost Rs. 324 billion (rice: 50.78 billion) in FY 2077/78. It is said that the import of goods has already exceeded Rs. 1300 billion at the end of Jestha 2078. It is really an alarming scenario.
Agriculture credit is one of the important factors for the entire development and promotion of agricultural sector. Unless and until there is a big investment in agriculture, commercialisation, mechanisation, import substitution, export promotion and industrialisation are almost impossible. To achieve all these things, it needs big investment/credit. If we look at the agriculture credit flow in Nepal, it is not so satisfactory. Despite the regulatory requirement of at least 11 per cent of the Banks and Financial Institutions’ total investment in agriculture, it is below 7 per cent. If we add investment in the sectors like agriculture commodity marketing, processing and storage as agricultural investment, then it is around 11 per cent. Now the question arises why the BFIs are not positive enough towards investing in agriculture? Why BFIs pay penalty to the Nepal Rastra Bank (NRB) against not fulfilling its guidelines?
To be honest, it is not easy to answer to these questions. However, this article has attempted to explain some policy related hurdles in investing in agriculture. Investment would be increased if the upcoming monetary policy by the NRB could consider some policy-related hurdles pertaining to agricultural financing to create conducive environment and motivation for BFIs to finance.
The NRB has instructed BFIs to estimate working capital based on the basis of stock, receivable and payable of the enterprises. It is true for the trading type business. But, in agricultural enterprises particularly in production aspect, estimation of working capital on the basis of stock, receivable and payable is not practical. Similarly, agricultural production cycle is quite different from trading cycle. Financing must be based on cost of cultivation required for the year round production of the particular agricultural crops or livestock.
In addition, farmers are of different categories in Nepal. Their requirement is different from one to other. Small farmers require small volume of credit and commercial entrepreneurs seek big volume. So, there must be a segregation of agricultural credit like below Rs. 2.0 million, Rs. 2-10 million or above Rs. 10 million. Documents required to each category must also be identified-small volume with simplified compliances and large volume with detail documents and compliances. Grace period is another point for discussion. Fruits, tea, coffee, etc. are perennial crops; they generate revenue at least after three years having negative cash flow during the initial years. In that case, farmers cannot pay interest and principal installment in the scheduled time. Provision of grace period and interest capitalisation facility could be the major option.
In Nepal’s case, agriculture is a risky business. Because farming in most cases is monsoon-based, there is no surety of getting agricultural inputs and, market is not guaranteed too. In such situation, the insurance companies obviously become reluctant to insure crops and livestock. Some sorts of government interventions have been realised to make insurance policy strong and farmer-friendly. Another hurdle is associated with restructuring and rescheduling of loans if it becomes default because of unavoidable circumstances like natural calamities, insect, pest, diseases, floods etc. About 1-2 per cent of loan loss provisioning must be regulated by NRB and that must be facilitated to categorise as pass loan.

Credit ceiling
Agricultural cooperatives are of different types. Some of them are livestock/dairy related, vegetable, cash crops or forest related. In the present context, they cannot enjoy subsidy loans above Rs. 10 million. This ceiling if increased will be helpful for establishing big cold storages, go-downs, purchasing agricultural commodities on support price fixed by the government, etc. Farmers who are operating agriculture based micro enterprises in rural areas do not have access or idea to register in the concerned authorities as firm or company. In that case, if a provision can be made to extend a credit up to Rs. 2 million as natural entity to a farmer would help promote the agricultural sector in Nepal.
To sum up, both BFIs and agricultural entrepreneurs have faced some policy related hurdles for financing in agriculture. So, certain relaxations and policies must be imposed by NRB if we really want to see the agriculture sector further flourished.

(Thapa is the head of Agriculture Department at ADBL.