Are affluent businessmen reaping the benefits of the agriculture loan subsidy program?

ANUPAM UPRETY, Daayitwa-CIB Fellow 2022

Agriculture is the biggest sector of Nepal with more than 60.4% of households being engaged in farming, providing 64.54% of employment, and contributing 27.7% to the national Gross Domestic Product (GDP). However, low agriculture productivity has been a long-lasting problem that aggravates food insecurity in Nepal. There are several factors contributing to low agriculture productivity in Nepal, such as shortage of agricultural labor, inadequate land management and underutilization of cultivable land, shrinking farm size, scattered farmlands and fragmented landholdings, low level of improved agricultural technology adoption, and climate change, and lack of investment in agriculture. The government of Nepal has made several provisions prioritizing commercial agriculture and livestock sectors to improve the sector’s productivity. The major form of government intervention to improve investment in agriculture is a subsidized agriculture loan where the borrower only pays a part of the commercial interest rate and a reminder is paid by the government. 

Access to credit endorses investment opportunities for farmers on improved technology, innovation, mechanization, and climate-smart agricultural practices henceforth improving farm production. Provision of agriculture credit allures those who feel constrained to start agribusiness due to a lack of necessary funds. The credit accessibility empowers impoverished rural farmers to wander into a new sector of economic activities, widen their sources of capital, and manage risks that are bound to occur. The lower labor productivity in the agriculture sector along with associated factor-like traditional methods of farming, poor irrigation facilities, and low use of modern farm technology is mainly due to low credit availability. Therefore, the agriculture credit enhances farm productivity and the loan subsidy program is a much-needed program to address investment opportunities for small and medium-scale farmers of Nepal. 

The scheme of subsidy on interest rate in agricultural credit was introduced by the Nepal government in 2014/15 and the subsidy rate was revised after two years raising from 4 percent to 5 percent. The provision of a loan of up to NRP. 70 million to every borrower at an interest rate of base rate +2% but not exceeding 10% had been made. To support government objectives, Nepal Rastra Bank (NRB) periodically issues monetary policy based on budget and fiscal year policy and has adopted the Priority Sector Lending Program (PSLP) in 2017. As per the procedure, the bank and financial institutes (BFIs) should sanction loans to agriculture and livestock sector targeted clients intending to provide interest subsidies to the borrowers from the government through NRB. The NRB has directed the commercial bank to disburse 12% of their total credit to the agriculture sector by mid-July 2022. The scheme applies to loans that can be used to produce, process, store, and distribute vegetables, fruits, seeds, fishes, herbs, mushrooms, dairy items, ostriches, turkeys, ducks, sugarcane, coffee, tea, cardamom, ginger, turmeric, jaitun, sunflower, allo, lokta, barley, buckwheat, and silam seeds. Interest subsidy also covers loans extended to floriculture and beekeeping businesses, rear livestock and poultry, establish slaughterhouses, and store, process and distribute meat items.

By mid-May 2022, a total credit of NRP. 139 million has been disbursed to 60,163 borrowers.  The concession loan has been mainly dispersed with a mortgage (98%) through commercial banks (90%), followed by development banks (2%). The proportion of outstanding amounts to an approved limit of concession loan in the agriculture sector stands at 86%. So far the government of Nepal has spent at least NRP. 15.7 billion in this kind of donation, funded from taxpayers’ money. The Agriculture Development Bank Limited (ADBL) ranks first in disbursing concession loans as a whole (10.74%), followed by Rastriya Banijya Bank (7.63%). ADBL has become the leading bank to disburse agriculture credit by providing  loans in different aspects of agriculture, for instance, agriculture, livestock and poultry, fishery and aquaculture, agriculture mechanization, storage, processing, markets and marketing, and consortium loans. 

Despite the financial assistance to farmers, the national agricultural productivity is still behind. There is a slight increase in the productivity of some crops like paddy (3.82 mt/ha), maize (3.06 mt/ha)), wheat (2.99 mt/ha) and fresh vegetables (14.05 mt/ha), but the outcome is unsatisfactory. The agricultural imports have increased six fold in the last decade from NRP. 44.4 billion to NRP. 250 billion in 2020s. Nepal imported cereals worth NRP. 64.7 billion and vegetables worth NRP. 31.5 billion only in the first ten months of fiscal year 2021/22. The data showed a negative trade balance for the first ten months of fiscal year 2021/22 despite several interventions of government in the very sector. The subsidy loan program is failing to produce intended results due to the low number of beneficiaries, poor implementation and the misuse of the program. The agriculture loan subsidy program was meant to ensure farmers’ access to capital, to create employment opportunities within the country for unemployed educated youths, to utilize the skills and business efficacy of youth returned from foreign employment, and to make them self-employed within the country. However, affluent businessmen are reaping the benefits of the government’s loan subsidy program. A handful of people with access to information and resources are benefited from it. The government has been spending billions of interest on the loan taken by businessmen with billion-dollar business empires while the plethora of farmers are compelled to move abroad for work after failing to get any assistance from the government. They are exploiting the loopholes in the banking sectors of Nepal and the banks are forced to provide loans to anyone who comes with valid papers. The recent data has shown that the beneficiaries of such loans are from large cities like Kathmandu and Chitwan, with minimal numbers of farmers, and whose businesses were already established These groups of loan borrowers are utilizing the subsidized loan to scale their business and processing sectors rather than production which diverts from the main objective of the establishment of the loan in the first place. The statistics of NRB show that a small but increasing number of big businesses have been abusing the subsidy program intended for small farmers.  By mid-May 2022 the number of companies registered to work in the agriculture sector has reached 2118 that have taken out loans over NRs. 10 million each. The major or the sub-branch of such huge companies are receiving donations from the government under the subsidy program which does not amount much to them. For instance,  Eastern Agriculture Firm Pvt. Ltd. (NRP. 4,039,378 interest subsidy), Golyan Group (NRP 5 Million interest subsidy), Jagadamba Tea Processing Pvt. Ltd. of Saurabh Group (NRP. 675383 interest subsidy), Nepal Tea Development Company Limited of Tribeni group (NRP. 665970 interest subsidy), Valley Group of Industries, the biggest dealers of poultry in Nepal (NRP 3.1 million in subsidies under its four companies) are some of the big companies that have received a huge amount as subsidy, although their daily transactions exceed millions. However, the small farmers are unaware of such government programs and procedures and thus have to pay exorbitant interest to even purchase basic farm inputs for production.

The small-scale farming community faces several hurdles to accessing a loan from such a program. Lack of information on the program, long and tedious legal procedures, numerous papers works, a recommendation from local government, arranging a mortgage for the loan, and frequent visits to BFIs make it hard for farmers to take out such subsidized loans. Furthermore, a copy of the citizen certificate of the applicant, details of the farmer’s experience with related business, PAN/VAT, copies of audit and tax payment certificates for previously operated projects, and a detailed business plan based on the nature and capacity of the project, copy of official documents of the property owned and secured by the project site, details of infrastructure available at the project site, guarantee about market management of business products and other details as per banks’ rules need to be submitted for applying for a subsidized loan. Small-scale farmers find it difficult to arrange these paper works and they are not guaranteed to be eligible for a loan even after such long hardship which discourages such farmers to expect any help from the government and thus looking for rich landlords or microfinance, both of which charge exorbitant interest. The low financial literacy rate of destitute Nepalese farmers, a greater proportion of the farming community dependent on semi-formal and informal sources of finance, and poor outreach of banks in remote areas of Nepal are concerning for the effective implementation of such subsidy programs besides being monopolized by few large companies.

The subsidized loan program, although implemented, does not address the needy farming community and it is imperative to redesign the program in such a way to reach the targeted group. The banking process should be simplified for easy access to subsidized loans. The program should focus on providing donations to poor and niche groups of farmers and should have provisions to cancel out those with already established agri-business. 

For An Enterprising Nepal