Financial institutions wary of agro loans

KATHMANDU, JUNE 24:

Despite constant prodding by the central bank, financial institutions still remain sceptical about financing the agriculture sector.

In the last few months, the amount of loans floated by financial institutions to the agriculture sector has remained almost static at Rs 37 billion. Amount of agro loans extended by financial institutions — commercial banks, development banks and finance companies — stood at Rs 37.08 billion by sixth month of current fiscal year and increased to Rs 37.62 million by 10th month.

“Banks lack the required expertise to make efficient financing for agriculture loans,” said president of Nepal Bankers’ Association Rajan Singh Bhandari.

Yet, financing received by the sector has more than doubled in the last two years. Financial institutions, that had lent Rs 12.5 billion until July 2011, have increased the size of agro loan in its lending portfolio to Rs 37.6 billion by May 2013, according to the banking data published by the central bank.

Moreover, such accelerated lending to the agriculture sector can be attributed to Nepal Rastra Bank (NRB)’s directive that has asked commercial banks to float a minimum of 10 per cent of their total lending to agriculture and energy sectors, by the end of current fiscal year.

“Banks will fulfil the requirement by lending to hydro projects as it is will provide assured returns unlike agro,” said Bhandari.

Though agriculture contributes about 35 per cent in the total gross domestic product (GDP) of Nepal and employs more than 65 per cent of the population, formal financing to the sector has remained nominal due to low commercial viability and higher risks.

Agro loans still comprise less than five per cent in the total loan portfolio of financial institutions. By the 10th month, agro loans made up 4.1 per cent of loan portfolio of financial institutions.

“Recognising the importance of agriculture financing in national growth and development, the central bank is encouraging more financial institutions to enter the sector,” said spokesperson of NRB Bhaskar Mani Gyanwali.

NRB has recognised sectors such as crops, crops-related service, tea, coffee, tobacco, jute plants, forestry, irrigation, animal husbandry, poultry and fishery under agriculture. It also provides refinancing facilities for agriculture at 6.5 per cent interest as it does with hydropower loans.

“Eventually, financial institutions will warm up to agro as the sector also has immense scope for financing,” said Gyanwali. “Those financial institutions that feel agro financing will not make money need to be innovative and bring products that benefit both borrowers and the institution,” he said.

Source: THT