Nepal faces a paradoxical situation. During the one and a half decade of economic liberalisation, commercial banks, development banks, finance companies and cooperatives have sprouted. But a recent study, Access to Finance Services Survey — undertaken by the World Bank and the DFID, the British aid agency — has found that the access of Nepali people to financial services has rather gone down over the decade. A major cause of this, it says, is that commercial banks were displaced by the conflict from rural areas and private and joint venture banks feared to tread. As for the micro-finance institutions set up in the villages, they could not extend credit for reasons such as the lack of technical knowledge, rather than the shortage of funds. Only roughly one-fourth of the respondents were found to have a bank account. Most of the loan-seekers relied on relatives and individual village lenders, who are known often to charge exorbitant interest rates. This suggests that much has to be done yet to break the stranglehold of high-charging village lenders.

Conflict or no conflict, it would probably not have made a big difference to the poor people, all the more so those living below the poverty line, because the financial institutions often seek collateral as a pre-condition for a loan. As micro-finance services without collateral have not spread well despite their debut in the country years ago, their impact has been limited, whereas in some other least developed countries — for instance, Bangladesh — the micro-finance campaign has changed the lives of many poor people. In the Nepali context, however, almost all the expansion in financial services has taken place in urban areas — in the Kathmandu Valley and a handful of towns. Other factors in villagers avoiding the institutional channels include the lengthy loan-processing formalities, while in the informal sector a loan can be obtained almost instantly.

The poor represent a majority in Nepal. The services of commercial banks are beyond the reach of these people, and even the micro-finance institutions have catered mainly to the poor, not the people below the poverty line. NGOs acting as financial intermediaries and cooperatives are reported to have included these groups too, but given their limited coverage, most people are excluded from institutional lending. For decades, successive development plans and special anti-poverty campaigns have talked much of poverty reduction, but not paid enough attention to strengthening the capacities of the poor, which lies at the heart of any fight against poverty. Things cannot be improved significantly through mere sporadic efforts of some NGOs and micro-finance institutions, as is the case now. The flow of credit needs to be sustained, along with sound monitoring and recovery mechanisms, and the coverage areas constantly expanded. It is reported that on the basis of the report, multilateral donors are launching a major project to increase this access to financial services. It is a good thing. But in the past, too, they financed more than one such project.