ADB approves grant for extending rural finance

Kathmandu, October 30:

Asian Development Bank (ADB) has declared that a loan and grant package totaling $100 million would support a comprehensive reform programme to improve access of rural households to financial services in Nepal.

The comprehensive package, as per the ADB, will help increase access to reliable and affordable financial services to rural people, allowing them to enjoy the opportunities of a reviving economy, said ADB in its statement.

Despite rural poverty in Nepal having been on the decline mainly due to larger remittance inflows, about 95 per cent of the country’s poor continue to live in rural areas. Access to institutional financial services in Nepal is severely limited, reaching only 28 per cent of the population.

This can be solved, ADB said, by revitalizing the network of rural finance institutions. However, a high-risk profile, restrictive policies, and security concerns, along with difficult terrain, inhibit the growth of private institutional rural finance services, says ADB. “Wider sectoral reform is needed to address bottlenecks to growth of efficient rural finance services for the poor,” Mayumi Ozaki, an ADB finance specialist was quoted as saying in ADB’s statement.

The Rural Finance Sector Development Cluster Programme (RSDCP) comprises of two subgroups, the first of which aims to consolidate the fragmented rural finance regulatory framework, commercialise rural finance institutions, and strengthen the capabilities of rural finance service providers, said the ADB statement.

ADB added, “This subprogramme backed by a $56 million loan from ADB’s concessional Asian Development Fund (ADF), should create an environment that stimulates growth of rural finance through policy, legal, regulatory and institutional reforms.”

The loan carries a 24-year term including an eight-year grace period and an annual interest charge of one per cent during the grace period and 1.5 per cent afterwards, said ADB. A second loan, which could total $35 million, will be prepared in 2009, according to ADB.

Funds from this first loan will be used to re-capitalize the Agricultural Development Bank Ltd (ADBL), the third largest bank in the country that, despite its institutional weaknesses, remains the single most important institution in the rural sector.

An $8.7 million grant, also from the ADF, complements the reform efforts by supporting restructuring of ADBL and, the Small Farmers Development Bank, an institution catering to cooperatives of small farmers. It will also establish a training institute in banking and finance and support product and process innovations.

The second sub-programme, after satisfactory completion of the first one in 2008, will continue to promote reforms, expand reach of commercial-based rural finance services, and support privatisation of important rural finance institutions, including ADBL.

In addition, a $500,000 technical assistance grant from the Japan Special Fund from the government of Japan, will ensure quality inputs from experts on ADBL restructuring in line with international best practices, says ADB. The ministry of finance is the executing agency for the entire programme, which will be carried out until 2011.