"Financial Risk Management in Banking Dector"
Microﬁnance and Guarantee System in Nepal pp. 71-108 Microfinance and Guarantee System in Nepal 1 Abstract Nepal is a rural based country and majority of the population reside in the rural sector of the country. Different studies reveal that the majority of the population is below the poverty line. The recent findings show that 31 percent of the total population live below poverty line and development effort in the country has been geared for the alleviation of the poverty. The provision of the microfinance in the hands of the poverty targeted population has been as the major intervention in this effort. In line with the policy of the Government of Nepal (GON), Nepal Rastra Bank (NRB), the Central Bank of Nepal issued a policy directive to the commercial banks to allocate 5 percent of its deposit in the priority sector to flow the loans in the grass root level. This indeed, is a pioneering step in the flow of formal microfinance system in the country. Since then it laid the development of the banking sector, cooperatives, along with the development of NGOs for the supply of microfinance. Multiple programs and projects are under implementation for the supply of microfinance services. The central bank has stated financial rules, regulations and recently announced the National Policy on Microfinance –2007 for regulating and developing microfinance dector. Credit Guarantee system, 1974 worked as an institutional instrument to guarantee the small loans provided by the commercial banks. Further, group guarantee system in the microfinance is also another system adopted by the microfinance projects and NGOs with banking activities. In spite of the increasing microfinance service to cater the financial needs of the rural people attached with poverty alleviation goal, surveys still reveal prominence of informal credit institutions 1 Ex-General Manager of Deposit and Credit Guarantee Corporation, Nepal; Executive Chairman of Development and Finance Study Center, Nepal. 71 10 in the supply of rural credit in comparison to formal credit institutions. Thus it demands, microfinance development still needs to deal with priority consideration intensively and extensively. In this respect the GON and NRB have to work together with impact based monitoring approach. Key Words: Government of Nepal (GON), Nepal Rastra Bank (NRB), Deposit and Credit Guarantee Corporation (DCGC), Banks and Finance Companies, Poverty, Microfinance, Livestock Insurance Program (LIP), Small Farmers I. To Introduce Nepal In the global map, the geophysical status of the Nepal presents land locked setting, with India on three sides in the south, east and west, and China in the north with the Tibetan plateau. Being between these two big emerging super powers of the global economy gives Nepal avenues to benefit the multiplier effects of their development. Nepal covers an area of 147,181 sq km with the snowy Himalayas, the high hilly Mountains and the Tarai plain areas. According to the latest Nepal Population Census 2001, the total population of the country stood at 23.15 million and out of that 11.56 million (49.94 percent) are male and 11.59 million (50.06 percent) female. The annual growth rate of population is recorded as 2.25 percent. The country is rural based. Only 14.2 percent of the total population live in the urban areas and the remaining 85.80 percent live in the rural areas. Nepal has been ranked as one of the least developed countries in the world. The average economic growth rate during last five years has been around 4 percent. One of the major causes of the slow economic growth of development is the decade long conflict that the country suffered. During the period, the priority of the Government was directed more to security and conflict management rather than development activities. Agriculture still remains the major economic sector of the country with a contribution of 33 percent in the GDP. Remittance from the foreign labor employment is emerging as an important economic sector. 72 Microﬁnance and Guarantee System in Nepal pp. 71-108 The per capita income of Nepal is US$383, 15 percent of the population enjoy access to health, the crude birth rate (/1000) is 33.5 and the crude death rate (/1000) is 8.3. The life expectancy at birth as of 2001 was 60.8 years. As for the adult literacy rate, it was 54.1 percent (6+ years) as of 2001 census with male literacy rate was 65.5 percent and female literacy rate was 42.8 percent. The country has crossed half a century of planned development with the introduction of the First Five Year Plan in (1956-1961). Since the Eight Plan (1992-1997) poverty alleviation has been the main objective with sustainable economic growth and reduced regional imbalances as principle goals. The Ninth Plan (1997-2002) and Tenth Plan (2002-2007) adopted alleviation of poverty as the only objective, with emphasis on achieving high economic growth and employment opportunities. The Government of Nepal (GON) has also adopted the UN call for Millennium Development Goals, 2000 (MDGs) as one of its bases for formulating the country's development policies. MDGs call for reducing world poverty in all its forms by 2015 with significant improvements in education, gender equality, health care, overcoming hunger and environmental degradation. The eight MDGs are: eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability and develop a global partnership for development. Under these MDGs, there are 18 targets that have to be fulfilled within 2015. The Eleventh plan (2007-2010) targets to decrease the poverty level of the country from 31 percent to 24 percent. In this context, a priority strategic policy taken is the provision of credit to the targeted population through the institutional development of the microfinance up to the grass root level. The conceptual theory behind the banking approach of microfinance is to flow collateral- free micro credit to the poor. It aims to empower them economically and socially by aiding them to generate self-employment. The target group of the microfinance comprises of the socially and economically marginalized section of the population. With a voice of gender 73 10 balance, equality and women empowerment, especially the poor and disadvantaged women have become priority target under microfinance service. It has been accepted as strategic approach under the microfinance policy for decreasing poverty. The antidotal preview of the banking and monitory system in Nepal shows the establishment of the two commercial banks–Nepal Bank in 1937 and Rastriya Banijya Bank in 1964 and the central bank, NRB, in 1956. This marks the beginning of the modern banking system in Nepal. However, it took more than two decades for the banking system in Nepal to develop because the Government initially practiced a centralized policy. It was only in the late 80's that the Government adopted a liberal banking and monetary policy under the Structural Adjustment Program (SAP) in 1986 and Extended Structural Adjustment Program in 1992, as recommended by the International Monitory Fund. This opened doors for the private sector to be an active player in the banking system. The number of private commercial banks, joint venture banks and finance companies has now increased significantly. In addition, there is also an increasing trend in emergence of the microfinance development banks, cooperatives and NGOs with microfinancing functions. The NRB records 204 banks finance and semi finance institutions of 2008. The institutional infrastructure of microfinance is built with a network of agricultural development banks, rural banks, NGO licensed banks that have the ability to reach out to the rural poor. In this respect, the programs launched for poverty alleviation and microfinance are basically on project approach through such institutions. Many NGOs with microfinance services have gradually reestablished themselves as microfinance institutions (MFIs) such as into rural banks (Grameen Banks) or cooperatives. However, there is only a single Government and central bank supported institution, Credit Guarantee Corporation (CGC), which provides guarantee to the priority sector loan provided by the commercial banks. The priority sector, as defined by the central bank, includes agriculture, small-scale industries and services. The corporation provides guarantee service under the agreement between respective banks and the corporation. The loans provided by the MFIs are guaranteed under the group guarantee and peer guarantee system. 74 Microﬁnance and Guarantee System in Nepal pp. 71-108 In spite of increasing trend of supply of credit through microfinancing and its collateral free guarantee system, the current supply of credit has not been able to meet the demand of Nepali rural poor. The main reason for this has been the inadequacy of branches of the rural financial institutions administrative and managerial constraints and lack of awareness. The informal sector, including moneylenders and relatives, still plays vital role in meeting credit need of the rural people with high rate of interest The experience of Nepal in poverty and microfinance shows that despite inherent challenges in policies, implementation hurdles and monitoring problems, microfinance is a major instrument to empower poor population. With productive money in their hands for gainful employment, the poor can change their living standard and consequently decrease the national level of poverty. Therefore, the GON and the Central Bank of Nepal have committed and retained the efforts for intensive and extensive microfinance and guarantee system policies, legal provisions and programs. This builds the infrastructure to support the rural people for entrepreneur occupation in line with the objective of microfinance by fulfilling their financial requirement, especially that of women and marginalized population. However, there remain challenges to ensure the maximum impact of microfinance to those in people in the poverty bracket of the country. II. Poverty Situation While normally linked with the income status, the poverty situation is a multi dimensional scenario. The Canadian International Development Agency-1994 (CIDA) states that apart from material deprivation, poverty is not unusual to include health status, illiteracy and several types of vulnerability, powerlessness absence of choice. The Development Assistance Committee (DAC) guidelines on poverty reduction strategy identify five core dimensions of poverty: economic (income, livelihood and decent work), social (health and education), political (empowerment, right and voice), culture (status and dignity) and protection (insecurity, risk and vulnerability). The guidelines state that poverty reduction 75 10 policies and plans needs to be developed by addressing these areas in the context of needs of gender indigenous population, minority, socially excluded group, disabled population and people living with HIV AIDS. The broad coverage of the poverty situation and reduction strategy also takes includes Professor Mohammed Yunus's concerns on poverty concept. As a pioneer to introduce rural microfinance to alleviate poverty in Bangladesh, Professor Yunus gained universal recognition for developing as an effective tool for poverty alleviation. He has classified poverty in three types as P1 hard core, P2 bottom and P3 bottom consisting of poverty level population between 20-25, 35-40 and 50-55 percent respectively. Microfinance policy and program has been directed to cater the demands of these core groups strategically. The Badan Kredit Kecametan (BKK) in Indonesia, Bank for Agriculture and Agriculture Cooperatives and Grameen Bank Financial System in the Philippines and Grameen Bank in Bangladesh are some of the examples of microfinance programs. These programs have been implemented to provide credit to the poor with an objective to alleviate the poverty. The microfinance program in India operates on a network basis among commercial banks, regional rural banks, state cooperatives and district central banks. It has been noted that the provision of the small loans at the grass root level adopted by the development modality in Japan is the major contributing factor to empower people and eventually fuel the high growth rate of the Japanese economy. In the context of poverty situation of Nepal, different studies and the evaluation report of the periodic plans reveal that poverty is a major challenge of development. Multiple studies have been conducted at different times by different organization to reveal the status of poverty in the country. The first attempt to define and quantify the level of poverty in Nepal was made in FY 1976/1977 by the National Planning Commission (NPC). It conducted the Survey on Employment, Income distribution and Consumption pattern in FY 1976/1977. The findings of the study report show that the national average of poverty was estimated at 36.2 percent of the rural population with 37.2 percent of the rural population in absolute poor and 17 percent in 76 Microﬁnance and Guarantee System in Nepal pp. 71-108 urban areas. NRB conducted Family Budget Survey in 1984/1985 to estimate incidence of poverty in the country. The survey was based on the basic need approach and it estimated that 42.55 percent of the total population were under the incidence of poverty. Out of the total population within poverty incidence, 43.1 percent were estimated in the rural areas and 19.2 percent in the urban areas. The study on "Poverty Situation Analysis of Nepal" conducted by Agricultural Projects Services Center (APROSC) in October 1989 shows that the position of the above poverty consists of 29.6 percent where as below poverty consists of 70.4 percent. Nepal Living Standard Survey, 1996 conducted by Central Bureau of Statistics (CBS), NPC is another household survey to estimate poverty in Nepal and the survey has revealed that 42 percent of the population lived below poverty line. The survey further revealed that the percent of poverty is different from one region to the other. In the hills, it is 41 percent and in the mountains it is 56 percent. In the case of rural areas, it is 44 percent whereas in the urban areas, it is 23 percent. The Nepal Living Standard Survey 2003/2004 conducted by CBS provides updated status on the poverty situation of the country. The poverty status has decreased from 42 percent to 31 percent but the gap between rural and urban development regions and geographical region still remains high. The findings of the different studies on the situation of poverty of the country point out that the incidence of poverty in the country is severe and widespread. These findings provide policy guidelines for development. They direct the plans, policies and legal provision that have to be considered to achieve a sustainable reduction in the poverty level and thereby enhance the living standard of the people. Further, these findings also show that the income poverty dominates the poverty status of the rural population in the country. The vicious circle concept on poverty and microfinance is based on the model that once the resource will be in the hands of the targeted population the five identified core dimensions 77 10 of poverty, which are economic, social, political, culture and protection, will be taken care of as a ripple effect. Microfinance services can visibly contribute to relieve the income poverty and consequently to enhance the human development indicator. Reducing poverty has always been an important concern. During the Fifth Plan (1975-1980), the Government introduced Basic Minimum Need Program (food, firewood, primary health and public hygiene, primary, vocational and non-formal education and basic road link in the rural area) with an objective to cater the basic services for the low-income people. The Sixth Plan (1980-1985) also embraced the fulfillment of the basic need of the people as one of its objectives. The Seventh Plan (1985-1990) came forward with an explicit objective of poverty alleviation perspective. The Eight Plan (1992-1997) aimed to achieve three objectives: sustainable economic growth, poverty alleviation and reduction of regional imbalances. The Ninth (1997-2002) and the Tenth Plan (2002-2007) had sole objective of poverty reduction with twenty years perspective vision. In addition, the long-term target is to reduce the poverty by 10 percent by the end of the Twelfth Plan (2012-2017). The Nepal Living Standard Survey-CBS 2003/04 reveals that, 1. In the year 2003/2004, around 31% of the population were estimated to live below the poverty line. It was estimated at 42% in the year 1995/1996. 2. According to the current estimates, over a period of 8 years between 1995/1996 and 2003/2004 the population below the poverty line in the rural areas has declined by 8% points (from 43 to 35) and in the urban areas by 12% point ( from 22 to 10). 3. Over the period, there has been an improvement in the Poverty Gap (P1). It is estimated that a larger proportion of population lying below the poverty line has moved up towards the poverty line. 4. A follow up analysis of the households who were included in the 1995/1996 survey reveals that the population living below the poverty line has gone down to 32% from 39%. Sources: GON, MOF 2005. Economic Survey, Fiscal Year 2004/2005, p.150. 78 Microﬁnance and Guarantee System in Nepal pp. 71-108 In line with policy of the GON to alleviate poverty and the studies on the status of the rural financing system, the NRB launched microfinance. The bank introduced the Small Sector Loan policy direction to only two commercial banks (Nepal Bank and Banijya Bank) to lend 5 percent of their total deposit liabilities to small sector with an objective to increase the production and employment in the rural areas. The Agricultural Development bank also introduced the Small Farmer Development program to increase the flow of rural credit directed to enhance the production of agriculture. Within the four decades of the introduction of system in the country, the development in this sector is encouraging in the context of policy, legislations and institutional development. However, it raises a big question if the system has been capable enough to cater the need of its target population, i.e. the mass of the poverty affected population to provide employment and income in their hands. III. Legal Status of Microﬁnance Before the National Microfinance Policy 2007, there was no such definite policy guideline, and inspect the microfinance institutions in Nepal even though there was consensus to do so. With this new policy NRB has been able to power the regulation of microfinance institutions. The main objective of this policy is to provide easy access of microfinance services from the microfinance institutions and to create healthy atmosphere among the private sector to enter into the stream of microfinance services. For this, the policy such as to provide easy access to microfinance services to the target group at the rural and urban sector, to provide microfinance to the target group on collateral as well as non-collateral under group guarantee basis have been formulated. Further, the objective of the policy is to co-ordinate poverty alleviation programs, to manage microfinance institutions, to provide microfinance services and also to encourage deprived sector of the community for saving. The policy aims to establish a separate department under supervision of NRB for long term easy access to microfinance services and to formulate law and regulation for supervision 79 10 and evaluation of microfinance services. It creates the theoretical environment to establish National Microfinance Development Fund, where funds from domestic and international agencies will be added. The policy intends to conduct survey of the existing cooperatives and microfinance institutions to evaluate their performance, provide training to individuals to add to their capacity, implement policy to develop their share capital by making easy access for deposit collection and making provision for easy in institutional tax and tax on deposit. IV. Microﬁnance Institutions Before the establishment of institutional financial institutions in Nepal, informal credit intermediaries provided loans. The informal credit intermediaries include landlords, merchants, moneylenders, goldsmiths, pawnbrokers, friends, relatives and urban based money lenders. They were often the only source of credit, especially in rural area. Various surveys were conducted by NRB at different periods regarding the credit coverage by formal institutions and informal credit intermediaries. In FY 1969/1970, NRB conducted the Agriculture Credit Survey (ACS). The survey revealed that out of the total supply, the informal credit intermediaries contributed 82 percent and the formal credit institutions only 18 percent. The second survey, Agriculture Credit Review Survey was conducted in FY 1976/1977 and even then, the informal rural credit contributed 78 percent. Again, NRB conducted Rural Credit Review Survey in FY 1991/1992 which revealed that in the total loan supply the share of informal credit intermediaries still stood at 72 percent and the formal credit institutions was 28 percent. In spite of all the efforts to increase the percentage of flow of formal rural credit from the side of GON and NRB there was no significant reduction in the percentage of coverage of informal credit agencies in the total supply of rural credit. A. Wholesale Microﬁnance Financial Institutions 1. Rural Microﬁnance Development Center Rural Microfinance Development Center (RMDC) was registered in October 30, 1998 80 Microﬁnance and Guarantee System in Nepal pp. 71-108 under Company Act, 1996, as a public limited company. RMDC also had the mandate to operate as a development bank within the framework of the Development Bank Act 1996. As of FY 2005/2006 the authorized capital of RMDC was NRS160 million, issued and paid-up capital NRS100 million. The CBs has a major share followed by NRB. The objective of RMDC is to provide wholesale fund to microfinance institutions (MFIs) to provide microfinance facilities to the rural poor and landless households especially to women to undertake viable farm and off farm economic activities. RMDC is the apex body to operate as a wholesale lender to MFIs and also supports their institutional strengthening and capacity building. The implementing agencies of RMDC in Rural Microfinance Projects are RDBs, microfinance development banks, cooperative, NGO and financial intermediaries. RMDC is receiving fund from various international agencies to support its fund. The area of operation of RMDC has covered 26 districts. 2. Rural Self-Reliance Fund GON established Rural Self-Reliance Fund (RSRF) in FY1991/1992 as a wholesale financial system with the contribution of NRS10 million as seed capital. The amount later was raised to NRS40 million. NRB had also made a policy from FY 2002/2003 to manage long-term funds necessary to intensify and diversify the microfinance investment by allocating every year five percent of net profit of NRB. Accordingly, NRB has also contributed a total of NRS253.4 million from FY 2002/2003 to FY 2004/2005. The main objective of the RSRF is to uplift the socio-economic status of the deprived sector by providing institutional wholesale credit through Saving and Credit Cooperatives and Financial Non-Governmental Organization and thereby help the rural people achieve self-reliance. The RSRF also provides wholesale credit to development banks to deal with national priority areas like tea plantation and 81 10 processing, cardamom plantation and processing and cold storage. The provision of micro credit through the participating institutions has been made by RSRF as NRS30,000, NRS35,000 and NRS40,000 per person as first, second and third installment respectively. The line of credit was open in 2006 for activities as tea, cardamom cultivation and cold storage construction of NRS40 million. A long term line of credit of NRS119.2 million was also opened to Agricultural Development Bank (ADB/N). As of FY 2005/2006, RSRF had disbursed loan to 51 NGOs and 199 Cooperatives an amount of NRS101.4 million which has benefited 9,949 households of 47 districts. Out of this NRS68.6 million has been recovered. 3. Saving and Credit Cooperative Societies The establishment of 13 credit cooperatives in 1956 by GON is the first approach on the part of the Government to inject rural credit in Nepal. The cooperatives were formalized with the enactment of the Cooperative Act 1959. As of FY 2006/2007 there were altogether 9,720 cooperatives and among them, Saving and Credit Cooperatives was the highest with 3,390 numbers followed by Multipurpose Cooperative Societies, 2,532. The number of cooperative societies which are authorized by NRB to undertake limited banking transactions as of FY 2005/2006 numbered 19 and has covered 42 districts. Women Cooperative Society Ltd. (WCS) is another cooperative that is involved in the microfinance delivery activities. WCS was registered under Cooperative Act 1992 and was established on March 12, 1995 and it was authorized by NRB to operate limited banking function in November 1995. As of FY 2005/2006, the authorized capital of WCS was NRS10 million, issued capital NRS9 million and paid-up capital NRS5 million. Out of the total paid-up capital 95 percent was owned by women and as such it was the first of its kind to be recognized as the banking and credit cooperation of women. With the objective to mobilize internal and external saving and provide easy 82 Microﬁnance and Guarantee System in Nepal pp. 71-108 access of credit to women, WCS launched microfinance program in 1998 with the financial assistance of Grameen Trust, Bangladesh and Nepal Arab Bank Ltd. in nine Village Development Committees (VDCs) of Kathmandu district. As of FY2005/2006 the loan disbursement was NRS83.97 million, collection was NRS78.45 million and outstanding was NRS47.91 million. Bindabasini Saving and Credit Cooperative Society (BBCCS) was another cooperative established in Kavre District in December 27, 1993 with 55 promoters, a share capital of NRS62 thousand and a total member of 122. The objective of BBCCS is to develop the economic, social and cooperative development of its members especially focused towards the deprived women population through its micro credit programs. As of FY 2005/2006 the loan disbursed was NRS21.30 million, recovery NRS15.34 million and outstanding NRS5.9 million. B. Commercial Banks (CBs) The CBs, development banks and finance companies are also the source of microfinance in Nepal. Until FY 2006/2007 it was mandatory for the CBs to invest in the priority sector. But the NRB changed its policy and the CBs were bound to only invest 3 percent of their investment portfolio in the deprived sector. In addition, the policy of NRB has directed the development banks to invest in the deprived sector at the rate of 1.5 percent and to finance companies 1 percent of their investment portfolio. C. Agricultural Development Bank Agricultural Development Bank (ADB/N) was established in 1968 under the Agricultural Development Bank Act, 1967 by incorporating all the assets and liabilities of the Cooperative Bank. ADB/N obtained license from NRB on March 16, 2006 to function as "A" class commercial bank. ADB/N is governed by the Banks and Financial Institution Ordinance Act (BAFIO) and the Bank has been converted into Agricultural Development Bank Ltd. with the share participation of the public. ADB/N is a specialized major source of credit to the rural people and cooperatives for 83 10 financing agricultural production, farm improvement, irrigation, agro-business and industrial business. It has become the main source of supply of agricultural credit and it covers a major percentage of the total formal institutional rural credit of Nepal. ADB/N has 240 branches/sub-branches and most of them are rural based. The urban based branches collect urban based money and use some portion of that deposit in the rural sector to finance in rural and agriculture sector for the benefit of the rural poor to raise their economic status. The loan delivery as of FY 2005/2006 was disbursement NRS12,729 million, repayment NRS11,950 million and outstanding NRS21,855 million. The Institutional Development Program of ADB/N started in the FY 1993/1994 with the objective to hand over Small Farmers Development Project (SFDP) to Small Farmers Cooperatives Limited (SFCL) that was registered as primary cooperative societies. SFCL is an organization of the beneficiaries themselves and the main objective of the Institutional Development Program is to provide legal status to these organizations in order to establish long term relations between ADB/N and the small farmers and also develop SFCL as an autonomous and self-reliant organization. SFCL's objective is to maintain long term relation with ADB and to raise the social and economic status of the farmers, increase their self- reliance and gain access to services and facilities from service delivering institutions. The outreach of SFCL in FY 2006/2007 was 228, the VDCs 228, groups 21,678 and the members 136,064. As for the loan in FY 2006/2007, the disbursement was NRS1,316.53 million, repayment NRS1,385.96 million and outstanding NRS2,202.64 million. Sana Kisan Bikas Bank (SKBB) is another financial institution established in 2001 as organizational development of ADB to support SFCL. The objectives of SKBB are to extend wholesale credit/refinancing to SFCL and similar other grassroots microfinance institutions committed to poverty reduction program. It also aims to extend support and cooperation in the area of finance, promote technology and training along with the promotion, expansion, consolidation and development of micro rural business and rural financial market. SKBB supports social mobilization process to speed up social transformation and extends support to poverty reduction program by exploring employment opportunity and enhancing income 84 Microﬁnance and Guarantee System in Nepal pp. 71-108 through the institution. The authorized capital of SKBB is NRS240 million, issued capital NRS120 million and paid-up capital NRS112.6 million. Out of the paid-up capital, NRS20 million is owned by GON, NRS70 million by ADB/N, NRS7 million by CBs and NRS15.674 million by Small Farmers Cooperatives. The outreach of SKBB as of FY 2005/2006 was branches 8, districts covered 39, VDCs 219 and borrowers 103,880. As for the loan in FY 2005/2006, the disbursement was NRS697 million, repayment NRS657 million and outstanding NRS1,327 million. D. Non-Governmental Organization The Non-Governmental Organizations (NGOs) are allowed to register under the Society Registration Act, 1978 in the District Administrative Office. Till 2005/2006, NRB has given license to operate limited banking activities to 47 NGOs. They are also one of the agencies of finance in microfinance sector. With regard to the outreach of NGOs, they have covered 26 districts. As of FY 2004/2005, the Fund had sanctioned loan to 50 NGOs, amounting to NRS21.61 million benefiting 3,844 families. Out of this amount, NGO had disbursed loan of NRS19.55, recovered NRS18.79 million and outstanding NRS2.93 million. E. Canadian Centre for International Studies and Cooperation Canadian Centre for International Studies and Cooperation (CECI) is an international organization and has implemented projects in 1977 under bilateral agreement between GON and USAID. CECI is a leading INGO engaged in microfinance in Nepal. The projects implemented by CECI include Market Accesses for Rural Development which covered three districts and Self-Help Organization in the Productive Sector that covered one district. F. Center for Microﬁnance (CMF) Center for Microfinance (CMF) is an autonomous organization established in July 2000 as a non profit organization. It is an outcome in response to a growing demand for a 85 10 national focal point for the microfinance sector. This organization was previously a project implemented by CECI. With a vision of sustainable access to microfinance services for the poor, CMF's mission is to promote and strengthen microfinance services through capacity building, training, knowledge management, research, policy lobbing, consultancy and net working with mutual trust and cooperation among service recipients practitioners and stakeholders. CMF has program management partnership with 80 MFIs in 39 districts in Nepal. G. National Cooperatives Bank Limited The National Cooperatives Bank Limited (NCBL) was established in August 2, 2004 and has come into operation on August 3, 2004. NCBL has an authorized capital of NRS64 million, issued capital NRS32 million and paid-up capital NRS16 million. The main aim of the NBCL is to provide financial assistance to more than 7,000 cooperative societies, which involves four million people spread through out the country. NCBL is a breakthrough initiative to develop the existing cooperative societies in Nepal and has become one of the main microfinancing institutions to reach the target group, the rural poor. V. NGOs--Grameen Banks Adopters A. Introduction The Grameen Bank (GB) was pioneered by Professor Mohammad Yunus in the year 1976 in Bangladesh as an action research project to examine the possibility of designing the micro credit delivery system to provide banking services to the rural poor. GB has proved to be a model worldwide as a microfinance institution to support the poor population for their income generating activities. This model was also adopted by Nepal and was introduced in 1970s with the establishment of Grameen Banks, Cooperatives, Grameen Bank Adopters NGOs, Microfinance Development Banks and wholesale microfinance institutions. Together with this, microfinance programs in different periods were implemented and became the main supply source of formal microfinance services in Nepal. These financial institutions and 86 Microﬁnance and Guarantee System in Nepal pp. 71-108 NGOs exercise their microfinance services in the capacity as Grameen Bank replicates. These institutions have to be registered under Company Act and obtain license from NRB for their operation. Later, the Microfinance Development Banks were registered under BAFIO. B. NGOs Four NGOs have been re-established as Rural Development Bank replicators in Nepal. These NGOs are Nirdhan, Center for Self-Help Development, Neighborhood Society Service Center and Development Project Service Center. 1. Nirdhan Nirdhan was registered under Society Registration Act, 1977 with the objective to provide skill and micro enterprise development trainings to the deprived sector of the rural community, specially the women. Nirdhan was authorized by NRB to operate limited banking functions in November 1994 and was in operation for about seven years only. In 1999 Nirdhan, the NGO, became the parent organization of Nirdhan Utthan Bank Ltd. (NUBL). The concept of "One Village One Product" was introduced by Nirdhan. As of FY 1998/1999 the outreach of Nirdhan covered 6 districts, 21 branches, 3,955 groups, 789 centers and 15,382 borrowers. The loan disbursement was NRS115.40 million, repayment NRS87.13 million and outstanding NRS51.84 million. 2. Development Project Service Centre–Nepal Development Project Service Centre–Nepal (DEPROSC–N) was established in September 26, 1993 as an NGO. NRB has authorized DEPROSC–N to carry out limited banking functions in 1996. The objective of DEPROSC–N is to empower rural people for attaining self-sustenance to uplift socio-economic condition through a package of policy research, action, research and training programs. In addition to these, the objective is to provide microfinance services in the rural areas and also promote equal access to opportunity, resources, ownership and participation for 87 10 women and underprivileged section of the society As of June 2007, DEPROSC–N had a network of one head office, three regional offices, 16 branch offices, 29 field offices, 1,346 centers covering 35,439 members spread over 8 districts of the country. The loan activities of DEPROSC-N as of June 2007 were: disbursement NRS900.79 million, collection NRS613.49 million and outstanding NRS287.30 million. The saving and credit program covers 12 districts that cover the poorest of the poor community and where there is no approach of CBs. To boost up microfinance services, DEPROSC–N has implemented micro credit program with Savings and Credit Organizations (SCOs) model in four districts and once they become sound and sustainable they will be the potential clients for microfinance wholesalers. DEPROSC–N also conducts research and studies programs in collaboration with national and international agencies. 3. Center for Self-Help Development Center for Self-help Development (CSD) was established in 1991 as an NGO with the objective to provide socio-economic empowerment to the poor, mobilization of internal and external resources for the benefit of the poor and also to bring them to the mainstream by raising awareness and self-help development. CSD is financially supported by Grameen Trust Bangaladesh, domestic banks and international agencies. As of FY 2005/2006, CSD with total of 48 staffs had a network of one project office, 11 area offices, 11 branch offices and 702 centers. The program of CSD is in operation in 92 VDCs covering five districts. The loan status as of FY 2005/2006, the disbursement was NRS337 million, recovery NRS261.8 million and outstanding NRS575.78 million. 4. Neighborhood Society Service Center Neighborhood Society Service Center (NSSC) was established in 1991 under Nepal Social Organization Act 1911 and is affiliated with Social Welfare Counsel as a non- 88 Microﬁnance and Guarantee System in Nepal pp. 71-108 political, non profit and non-governmental organization. The objective of NSSC is to provide the underprivileged children the opportunity to basic education and thus give them the chance to involve in constructive learning. It also develops vocational skills among underprivileged women so as to make them economically self-supportive. NSSC contributes towards the overall development of the underprivileged and the society as a whole by organizing various development activities. The outreach of NSSC as of FY 2005/2006 was districts covered 9, VDCs/ Municipalities 132, branches 12, members 14,996 and borrowers 12,284. As for the loan activities the disbursement was NRS517.20 million, recovery NRS420.35 million and outstanding NRS96.85 million. C. Microﬁnance Development Banks The microfinance development banks and the grameen replicate banks are major contributors to microfinance services in the rural areas to meet the demand of the target group. These replicates emerged as NGOs and promoted themselves as microfinance development banks but still continue their previous NGOs activities as a separate institution. Some took over the NGOs assets and liabilities partly and continued their activities independently and some started their own activities independently. These replicates have been functioning in Nepal for a short span of time and are accounted as one of the windows to provide microfinance services and also to create awareness to the target women group. 1. Rural Development Banks (Grameen Bikash Banks) Five Rural Development Banks (RDBs) were established in different regions of Nepal in different periods from 1992 to 1996 to cater the micro credit needs of the rural poor women under group guarantee without collateral. The authorized capital of each four RDBs is NRS120 million and the paid-up capital is NRS60 million and only the Far Western Rural Development Bank has the authorized capital of NRS56.5 million with a total of NRS29.8 million paid-up capital. 89 10 As of January 2008, NRB held the share totaling NRS83.95 million, banks and other financial institutions with the highest of NRS133.87 million, others NRS50.98 million and the lowest by GON amounting to NRS29.70. NRB and GON are withdrawing their share capital to give more percentage to public participation and cooperatives in the share capital of RDBs. The outreach of four development banks as of FY 2005/2006 was districts covered 40, VDCs covered 1,163, branches 120, members 185833 and borrowers 146,402. As for the loan status the disbursement was NRS4,629.92 million, repayment NRS2,518.33 million and outstanding NRS1,171.71 million 2. Nirdhan Utthan Bank Nirdhan Utthan Bank Limited (NUBL) is the product of the initiative of Nirdhan NGO. NUBL was registered as a company in November 1998 and in April 1999 NRB granted license to undertake banking activities under the Development Bank Act 1996. NUBL started its operation from July 1999 after Nirdhan handed over all its microfinance operations and is governed under BAFIO. NUBL vision is to be a bank with social conscience that enables poor to contribute equally to a prosperous, self-reliant rural society through self-employment and social awareness and also help to reduce poverty in Nepal. As of July 2006, the authorized capital of NUBL was NRS50 million, issued capital was NRS25 million and paid-up capital was NRS27.44 million. Out of the total paid- up capital, the promoters own 79.5 percent and the general public own 20.5 percent. As of FY 2005/2006 the outreach of NUBL was districts covered 10, VDCs 424, branches 43, members 75,268 and borrowers 58,679. As for the loan status as of FY 2005/2006, disbursement was NRS800.32 million, recovery NRS661.06 million and outstanding NRS552.40 million. 3. Deprosc Development Bank 90 Microﬁnance and Guarantee System in Nepal pp. 71-108 Deprosc Development Bank (DD Bank) is one of the replicators of Grameen Bank promoted by DEPROSC-Nepal, Agriculture Development Bank, Nepal Bank Ltd, Nabil Bank, Lumbini Finance and Leasing Company, Center for Environmental and Agricultural Policy Research, Extension and Development (CEAPRED) and other former banking experience personalities. The objectives of DD Bank are to provide microfinance services to the poor and backward women group below poverty line, aiming at the poor and helpless population. It helps them in their income generating and financial development activities. It supports in the capacity building of an individual and the group in the probable cottage industries, trade, agriculture and other occupations. The target group of DD Bank to provide microfinance services are those living below poverty line, widow and schedule caste, rural women and those population who live in thatch houses. As of FY 2005/2006, DD Bank has an authorized capital of NRS23.2 million and issued and paid-up capital of NRS11.6 million. Out of the paid-up capital, 35.52 percent are owned by Class A licensed institutions, 12.93 percent by other licensed institutions, 15.86 percent by other institutions and 35.69 percent by general public. The outreach of DD Bank in FY 2005/2006 was districts covered 10, VDCs 200, centers 857, members 20,310 and borrows 16,759. The loan status of DD Bank as of FY 2005/2006 in million is disbursement was NRS225.67, recovery NRS447.84 and outstanding NRS304.03. 4. Swabalamban Bikas Bank Ltd. Swabalamban Bikas Bank Ltd. (SB Bank) was registered under Companies Act (1997), obtained license from NRB in January 3, 2002 to operate under Development Bank Act (1996) and started its operation on January 14, 2002. SB Bank has been promoted by Center for Self-Help Development (CSD) and the overall assets and liabilities of CDS were taken over by SB Bank on January 14, 2002. At present SB Bank is 91 10 governed by BAFIO. The objective of SB Bank is to provide microfinance services to the disadvantaged section of the rural women to uplift their socio-economic status and also to make the maximum use of their existing skills and resources. It encourages mobilization of rural savings and strengthening of credit delivery system to help increase productive assets of the poor people. The authorized capital of SB Bank is NRS20 million and the issued and paid-up capital is NRS10 million and out of the total paid-up capital 70 percent are with the institutional and the individual promoters and the rest 30 percent are allocated for the general public. The outreach of SB Bank in FY 2005/2006 was districts covered 10, VDCs 364, branches 40, members 61,739 and borrowers 47,811. As for the loan status, disbursement was NRS606.66 million, repayment NRS517.62 million and outstanding NRS193.97. 5. Chhimek Bikas Bank Ltd. Neighborhood Society Service Center (NSSC) supported in the establishment of Chhimek Bikas Bank (CBB). CBB was registered under Company Register Office in 2001 under Company Act 1997 and received license from NRB in January 2002 as per Development Bank Act 1996. It is governed by BAFIA. The vision of CB Bank is to enable the poor to contribute equally to a prosperous, self-reliant rural society through self-employment, social awareness and reduction of poverty. With this vision, the objective of the CB Bank is to improve the socio- economic condition of the poor, the landless, assets less and deprived rural women through microfinance services. The authorized capital of CB Bank is NRS60 million, issued capital NRS30 million and paid–up capital NRS10 million. Out of the paid-up capital, 36 percent are owned 92 Microﬁnance and Guarantee System in Nepal pp. 71-108 by Class A CBs, 12 percent by Neighborhood Society Service Center, 30 percent by public shareholders and 22 percent by others. The outreach CB Bank in FY 2005/2006 was districts covered 10, VDCs 187, branches 16, members 28,509 and borrows 14,300. As for the loan status of CB Bank: disbursement was NRS709.76 million, recovery NRS508.07 million and outstanding NRS201.69 million. VI. Microﬁnance Programs and Projects Many microfinance programs and projects have been implemented in different periods in Nepal by GON and NRB with CBs, Development Banks as implementing agencies. The main objective of these programs and projects is to increase the flow of institutional micro credit services in the rural sector to uplift the economic level of the heavy percentage of rural population and decrease the population below poverty line. A. Programs 1. Priority Sector Credit Program NRB implemented Priority Sector Credit Manual in 1974 and the revised manual came into operation in July 2000. The term priority sector has been defined by NRB as to include micro and small enterprises which help increase production, employment and income as the prioritized under the national development plans. NRB has directed CBs in FY 2001/2002 to invest twelve percent of their total outstanding credit in this sector. The deprived sector is also a part of Priority Sector Program and 3 percent out of 12 percent must be invested in this sector. This sector includes low income and particularly socially backward women, tribes, lower caste, blind, hearing impaired and physically challenged persons and squatter's family. Intensive Banking Program (IBP) was implemented in 1981 to boost up Priority Sector Credit. This program was designed with project viability, area approach 93 10 and regular supervision. In the beginning, IBP covered 27 districts and later it was extended to all the 75 districts. However, the IBP was dropped before its maturity period due to policy weaknesses and implementation issues. As for the Priority Sector Credit, it could sustain up to FY 2006/2007 and then it has its survival with only Deprived Sector Credit. 2. Small Farmers Development Program The Small Farmers Development Program (SFDP) is the first poverty reduction program of Nepal implemented by ADB/N in 1975 and is also the first program to provide micro credit on non-collateral and group guarantee basis. The main objective of the program is to improve the socio-economic status of the small and landless population with the provision of credit as opportunities for income generating activities. As for the outreach of SFDP as of FY 2006/2007, the number of SFDP was 23 and had 8,310 branches, had covered 12 districts with coverage of 23 Village Development Committees. As for the loan, the disbursement was NRS7,744.27 million, Collection NRS5,810 million and outstanding NRS226 million. 3. Production Credit for Rural Women Production Credit for Rural Women (PCRW) program was launched in 1982 by GON with the support of United Nations International Children's Emergency Fund (UNICEF). It is the first women target micro credit program of Nepal. The main objective of the program is to improve economic and social status or rural women in the society and to establish self-reliant women's group to enable them to initiate and undertake productive activities. NRB is the main agency to channelize the credit and Nepal Bank Limited (NBL), Rastriya Banijya Bank (RBB) and Agricultural Development Bank (ADB) are the participating banks. In the beginning the program was launched in five districts and gradually by FY 2000/2001, it expanded its activities in all the 75 districts of the country covering 28 94 Microﬁnance and Guarantee System in Nepal pp. 71-108 municipalities and 564 VDCs. The program has been completed in FY 2000/2001 and within this period the cumulative total loan disbursement amounted to NRS933.81 million provided to 82,416 clients from 163 branches of the Public Banks (PBs). As of mid-Jan 2005, the outstanding loan stood at NRS158.35 million. The PCRW program is now a regular program of GON. The women credit groups formed by the program have been transferred into cooperatives. 4. Micro Credit Project for Women The Micro Credit Project for Women (MCPW) was launched with the loan agreement between GON and Asian Development Bank, Manila (ADB/M). The project covered a period from 1993 to 2002 and was extended for two more years. Under this project, ADB provided an assistance of SDR3.54 million. The executing agency is the Department of Women Development and the participating agencies are NRB, RBB, NGOs and Saving and Credit Groups. The objective of the project was to assist GON to improve and enhance socio- economic status of women and promote their participation and integration in national development, thereby contributing towards poverty reduction in Nepal. In addition to this, the project aimed to improve the income and employment of poor women in selected rural and urban areas. The project covered 12 districts and five municipalities. The loan was disbursed through 46 bank branches and till the date of its termination the total amount disbursed to 26418, borrowing was NRS395.38 million with an outstanding balance of NRS125.66 with the repayment rate of 83.3 percent. 5. Women Awareness and Income Generation Program The Women Awareness and Income Generation Program (WAIG) is a GON program focused on women empowerment. It is synonyms to the previous PCRW and MCPW programs for women development. The program intends to cover all the 3,914 VDCs of Nepal with the objective to uplift socio-economic status and increase political 95 10 awareness of women. 6. Lead Bank Scheme The Lead Bank Scheme (LBS) was launched in 21 districts in 1988 with an objective of assigning one of the affiliated banks as the lead bank. The bank was assigned with the lead role for the formulation, monitoring and maintenance of coordination of banking plans and for the extension and promotion of banking activities. The bank chosen as the lead bank is supposed to set up the lead bank office to formulate the annual plan, implement, monitor, review the progress and evaluate the banking sector at all levels in order to increase the income and purchasing power of small farmers through micro credit. In this scheme, the affiliated banks consisted of NBL, RBB and ADB/N. The main role of the Lead Bank is to support the policy of GON in the micro credit programs at the district level, help the participating banks for the formulation and implementation of micro credit plans and monitor such programs. Further, it should identify means and mechanisms to mobilize saving and motivate bank branches to bring out such means towards the poor. The LBS could not survive long and in spite of its active operation for some years. The program could not take a great leap forward as it was dropped at the earlier stage of its take-off period. This was a great setback in the flow of micro credit and for the coordination between banks, financial institutions and Government departments in their activities to uplift the rural poor from poverty level. 7. Banking with the Poor "Banking with the Poor" was launched as a special poverty alleviation program. It was launched in 1991 in RBB in cooperation with Gundu Village Development Board, a local NGO. The program was first launched inwards of Gundu VDC of Bhaktapur district with an Association of Self-Help Group. Later, the program was extended to various parts of the country by RBB. 96 Microﬁnance and Guarantee System in Nepal pp. 71-108 With a very small amount loan of NRS10,000 per project, NRS15,000 per individual and NRS30,000 per household on group guarantee basis, the project aims to open a window for the access to credit for the rural poor on a sound commercial basis. Till 1997, the program was extended to 22 branches or RBB through 72 associations of self-help group and has disbursed loan amounting to NRS46.79 million to 5,476 borrowers. 8. Poverty Alleviation Fund One of the targeted program of the strategy of the Tenth Plan is Poverty Alleviation Fund (PAF). It was established as an autonomous institution under a separate Act– Poverty Alleviation Fund Ordinance 2004. The main objective of the PAF is to decrease the poverty level of the ultra poor by demand driven programs to promote income generating activities and also finance directly to community organizations on cost sharing basis to implement and manage their program by themselves. The PAF started its activities in six pilot districts and latter added 19 districts. In addition, the program was implemented in other 20 window districts with innovative proposals. The capital was provided to the community organizations in the form of grant and community revolving fund was created from the same. The revolving fund is responsible for the flow of required capital to launch micro enterprise activities. As of FY 2006/2007, 4,615 community organizations have been established in 591 VDCs of 25 districts. In this period, 3,941 projects under income generation micro enterprises have been implemented. These projects include livestock, vegetable farming, floriculture, juice processing, carpet weaving, bamboo products, retail shops, motorcycle repair, etc. with 65 percent women participation. 9. Village Banks Women's Empowerment Program (WEP) is a program of Pact/Nepal and is operated in 21 districts of Nepal. It has designed a model "Empowerment Village Bank" for Nepal. A group is formed and the amount of loan is NRS5,000 covering a majority of 97 10 members and is of short term loan. The program is to boost up the women group to create saving habit and keep the book of accounts. A day in the week is designated as Village Banking Day. B. Projects 1. Cottage and Small Industries Project The Cottage and Small Industries (CSI-I) Project started its operation in 1982 in nine districts. NRB is the apex body of the project and the participating banks are NBL, RBB and ADB/N. NRB provided 80 percent refinance facility from the project fund to the participating banks. The concept of the project is mainly project based lending. The project had given an opportunity for commercial services to cottage and small industries by way of credit delivery, product and skill development. The CSI-II Project was implemented in July 31, 1987 with the International Development Association (IDA) assistance of US$10 million. But the project was dropped on June 30, 1992, i.e. three years prior to the project period. During the operation of CSI Project, the total loan disbursed from the project was of NRS364.41 million which helped to establish 5,000 export-oriented cottage and small industries. 2. Third Livestock Development Project The Third Livestock Development Project (TLDP) came into operation on December 23, 1996 for a period up to July 2003 which was extended to July 31, 2004. Under this project, there was loan agreement of SDR12.555 million between GON and ADB to finance TLDP through financial institutions that have an agreement with NRB. The objective of TLDP was to improve nutrition, income and employment opportunities for the farmers and poor people in the project area, especially women through improved productivity of their livestock. There are 19 participating financial institutions which include two CBs, three development banks, four rural bank 98 Microﬁnance and Guarantee System in Nepal pp. 71-108 replicates, eight cooperative enterprises and two non-governmental enterprises. The project covers 19 districts. The major achievements of TLDP are found in the fields of forage development, dairy, meat, animal health and breeding, credit and institutional strengthening and organizational development. 3. Poverty Alleviation Project The Poverty Alleviation Project was implemented in Western Terai on December 12, 1997 in the eight districts. The project is operated under the joint agreement between GON and IFAD. The fund of NRS131.49 million was made available from GON to NRB for the implementation of this project. The target group of the project is the deprived community. The participating institutions of the project are Western Regional Rural Development Bank (WRRDB), Mid Western Region Rural Development Bank (MWRRDB), Far-western Regional Rural Development Bank (FWRRDB), Nirdhan Utthan Bank (NUB) and Rural Self-Reliant Fund (RSF) Project. The objective of the project is to contribute to uplifting the economic and social status of such community and also to strengthen the participating financial institutions through microfinance. Under the project, NRB had disbursed all available funds to the participating institutions. The fund was disbursed through the 16 branches of the participating institutions and which laddered down to the target population benefiting 22 thousand families. The project period was completed on December 31, 2006 and till mid-July 2006 the recovery was NRS62.1 million. In the same period, NRB paid back NRS23.8 million to GON and the due amount is NRS124.1 million. 4. Community Ground Water Irrigation Sector Project The Community Ground Water Irrigation Sector Project covered a period from FY 2001/2002 to FY 2004/2005. It was implemented in November 17, 1998 based on the loan agreement of SDR 21.9 million between GON and ADB/M. Its objective 99 10 was to enhance agriculture productivity and thereby increase the income of small and marginal farmers. The participating financial institutions in the project are NBL, Eastern Regional Rural Development Bank (ERRDB), Mid Western Regional Rural Development Bank (MWRRDB), Sahara Nepal Saving and Credit Cooperative, Deprosc Development Bank, Chhimek Development Bank, Arunodaya Saving and Credit Cooperative, and Krishak Upahar Saving and Credit Cooperative. Out of the total SDR21.9 million, SDR9.9 million was provided in installment as credit to the farmers for shallow tube wells and crop production. Within the project period the investment from the participating financial institutions for 5,365 shallow tube wells was NRS157.5 million. The project had benefited 13,976 marginal farm families and irrigated 24,741 bighas of land. Various programs and projects were implemented within a period of three decades to flow institutional micro credit but could not be continued. However, it has helped to generate awareness among the women population and helped to generate income to support poverty reduction. Nevertheless, it is important to formulate policies for the continuity of the programs and the projects at least to its full period. VII. Credit Guarantee and Insurance System in Nepal A. Credit Guarantee 1. Introduction The history of credit guarantee system in Nepal began three decades ago in FY 1974/1975 with the establishment of Credit Guarantee Corporation (CGC). CGC was renamed Deposit and Credit Guarantee Corporation (DCGC) in FY 2006/2007. The credit guarantee system was based on the recommendation of the Agriculture Credit Survey (ACS), a survey conducted by NRB, the central bank of the country in FY 1968/1969. The main objective of DCGC was to guarantee the loans provided by 100 Microﬁnance and Guarantee System in Nepal pp. 71-108 commercial banks (CBs) in the priority sector--micro credit sector, which included agriculture, industry and service sectors. It also includes insurance of livestock purchased by bank loan, self finance and compensation of loss in case of default of such loan and livestock. Later, DCGC had extended its operation in Credit Card Insurance, guarantee on loan in cash crops and guarantee of loan on microcredit to small and medium enterprises. The authorized capital of DCGC is NRS100 million and the paid-up capital NRS70 million and out of that NRS30.21 million is owned by GON, NRS30.29 million by NRB, NRS0.32 million by NBL and NRS0.16 million by RBB . The main source of income of DCGC is the premium income generated from the guarantee and insurance of different schemes, interest earned from investment of capital and the refund of compensated amount. As for the expenditure, it is the compensation paid in case of non-recovery of loan of different schemes, compensation paid in case of death of insured livestock and administrative expenses. From FY 1994/1995, DCGC had extended its activities by opening its contact offices in six districts: Birgunj, Biratnagar, Nepalgunj, Dhangadi, Sidarthanagar and Pokhara. Later, among these five contact offices four were closed down and the remaining one as of FY 2007/2008 is only in Biratnagar. 2. Schemes and operations The schemes operated by DCGC are Priority Sector Credit Guarantee Scheme operated in 1974, Educated Unemployed Credit Guarantee Scheme in 1984, Livestock Insurance Scheme in 1987, Credit Card Insurance, Small and Medium Enterprise Credit in 2004, Foreign Employment Credit Guarantee and Vegetable Guarantee in 2005 and Small and Medium Enterprises Scheme in 2006. There are altogether 28 banks, financial institutions, cooperatives and NGOs working as participating member institutions in different guarantee and insurance schemes of DCGC. The operation of guarantee is effective on the date of agreement between 101 10 DCGC and the member institution. In the priority sector the limit of guarantee is up to NRS2 million per loan in agriculture and service sector, and NRS2.5 million in industry sector. The member institutions have to send the details of the outstanding loan to DCGC every quarter with a premium at the rate of 0.25 percent based on the outstanding quarterly loan, which is one percent per annum. The guarantee figures in the priority sector of DCGC have been decreasing from the last few years. The CBs can file for claim to DCGC before as well as after the due date of the loan. The CBs have to give a 35 days notice to the borrower to settle the due amount. If the borrower does not settle the due amount in the specified period, the CBs have to transfer the remaining balance amount after the due date of the loan to the claim account and this amount is the maximum liability of DCGC. CBs have to file for claim with DCGC within four years from the due date of the loan. If the CBs fail to file for claim within the specified period DCGC is not liable to pay the compensation. There are some provisions for the CBs to file for claim before the due date of the loan with the specified documents. If the CBs fail to present any such documents, DCGC can reject the claim, with a deadline of 91 days to re-file. After the review, if DCGC finds that it meets the requirements, it can accept the claim and pay compensation. The amount of claim paid by DCGC to the CBs is at the rate of 75 percent of the outstanding balance as of due date of the loan. Out of this 75 percent, 50 percent are paid in advance and the rest 50 percent are paid only upon auditor certificate mentioning that the loan cannot be recovered. It is the responsibility of the CBs to recover the loan from the borrower by taking legal action within one year of the receipt of compensation from DCGC and if the CBs fail to do so within the specified period, the CBs have to refund the entire fund received as compensation to DCGC. There is provision that the CBs can deduct all the legal expenses incurred for the recovery of the loan not exceeding the compensated amount. The premium income from the guarantee of loan of the CBs by DCGC is seen at 102 Microﬁnance and Guarantee System in Nepal pp. 71-108 an increasing trend but then it started decreasing. The claim, the claim paid and the refund amount went in an increasing trend till FY 2002/2003 and then onwards the decreasing trend started. DCGC was in profit all along its three decades of operation but the provisional figures show that it is facing loss in the FY 2006/2007. If such loss continues DCGC will have to face a big problem in the years ahead. B. Livestock Insurance 1. Introduction Based on the recommendations of different feasibility studies and workshops, NRB and GON supported the policy to implement Livestock Insurance Program (LIP) in Nepal through DCGC, which implemented the LIP in the FY 1987/1988. In the initial stage, the implementing partners of LIP were Small Farmers Development Project (SFDP) of Agricultural Development Bank (ADB/N), DCGC and National Insurance Corporation (NIC). But in a very short span of time NIC ceased to operate the program and only the two institutions continued to operate the program. In course of time, Small Farmers Cooperative Limited (SFCL), which had been handed over by SFDP, also operated the program. 2. Insurance mechanism The policy of LIP of DCGC is to cover the livestock purchased by the livestock farmer with the loan of participating banks and financial institutions. With this policy, the main objective of LIP of DCGC on one hand is to safeguard the farmer from the burden of debt and on the other hand play as a safety net to the banks and financial institutions in case of non-recovery of loan from the farmer due to death of livestock purchased from bank loan. At the first stage, the LIP was implemented by DCGC in only 10 districts and later the whole country. The participating institutions were also extended. The LIP of 103 10 DCGC covers 10 verities of livestock and the coverage amount is different from one kind of livestock to another. The maximum insurance amount per big livestock is NRS45,000/- and per small NRS7,000/-. An agreement has to be signed between DCGC and the participating institutions to enter into LIP. Once an agreement is signed then the livestock purchased from the loan of such participating institutions is automatically insured. The insurance policy is issued only after all the insurance procedures are complete and the authority to issue the policy rests with DCGC. The participating institutions can also issue the policy but they have to take the approval of DCGC. The representative of the participating institutions and veterinary office issues the death certificate of the livestock. At the initial stage of operation of the LIP, the premium rate was eight percent. Later, it was reduced to six percent of sum insured. The premium can be paid each year in advance or be paid for the whole period of the policy. Out of the premium rate, the livestock farmer pays three percent and GON subsidizes three percent by making provision in the budget every year. The period of insurance coverage is equal to the loan period. There are special provisions for the continuity of policy in case the previous owner of livestock is changed. If the livestock dies within the insurance period, the farmer must file for claim within seven days through the related banks and financial institutions with the required documents. The documents include insurance policy, death certificate and tag. If the death of the livestock is due to wild animals or by natural calamities, the death certificate must be signed by the local people and by the concerned institutions. Once the claim documents are received, DCGC must settle the claim and pay compensation to the farmer through the banks and financial institution within 15 days. The rate of compensation is 80 percent of the insured principal amount. Out of the amount received as compensation the recipient institution deducts the outstanding balance of the loan and makes it nil. The remaining balance is given to the livestock farmer. 104 Microﬁnance and Guarantee System in Nepal pp. 71-108 There is a provision to provide remuneration by DCGC to the related officials for tagging and health check-up. Health workers get paid at the rate of NRS60 per big livestock and NRS30 for small livestock. For tagging the remuneration is NRS50 for big livestock and NRS30 for small livestock. Further, NRS20 is given to veterinary technician for retagging the livestock. In the case of issue of death certificate, the related representatives are given NRS50 for big livestock and NRS30 for small livestock. There is special provision for unproductive livestock. The livestock is kept under observation of the veterinary technician for a period of three months. After the observation period the farmer can claim for compensation through the related bank and financial institution within seven days after the issue of certificate with the required documents. Once the required documents for claim are received by DCGC, the farmer is given 40 percent of the principle loan amount or the outstanding amount on the date of issue of the certificate, which ever is lower. DCGC also introduced the Self Livestock Insurance Program in the FY 1992/1993 to provide livestock insurance services to the livestock farmers who are not attached with bank or financial institution loan. This scheme is voluntary. All the rules and regulations is the same as LIP but the maximum amount of insurance per livestock is NRS40,000. VIII. Remarks The contribution of the Microfinance Development Banks, RDBs, NGOs and Cooperatives for the flow of rural microfinance has crossed more than three decades and within this time frame thousands of rural poor. The women population has been the target group. Microfinance has benefited to generate income and to spend independently for the education of their children, provide nutritious food to the family, good clothes, good shelter and also gain a social status. 105 10 The present Development Banks, NGOs, cooperatives and other microfinance institutions that are in operation in Nepal have become the main sources to deliver institutional microfinance services to help the rural poor and deprived community to make their own livelihood and uplift themselves from below the poverty line. The new policy of NRB for the investment of the Development Bank and Finance Companies in the deprived sector has led to additional institutional flow of micro credit at the rural areas. Therefore, the strategic plan of action/policies must be formulated to divert microfinance services to all parts of the country including the areas where microfinance services have not been extended. New programs and projects must be launched to flow microfinance services to cover the places where there is a high ratio of population below poverty line with long term vision and continuity. New microfinance financial institutions must be developed to add microfinance services and consequently improve and diversify the activities and coverage to reach the rural poor people. The institutional guarantee and also the group guarantee to all the microfinance institution have to be provided as backbone for the default loans. Accordingly, the guarantee institutions need to be strengthened and expanded, depending upon the density of microfinance institutions. Note: Exchange Rate: US$1 = NRS80. References ADB (Asian Development Bank), 2000. Finance for the Poor: Microfinance Development Strategy . ADB (Asian Development Bank), 2001. Social Protection Strategy. Bashyal, Rama, 2008. Microfinance Access to Finance for Nepal's Rural Poor . GON (Government of Nepal), Ministry of Finance, (2002/2003), (2003/2004), (2004/2005), (2005/2006), (2006/2007). Economic Survey. GON, NPC (National Planning Commission), 2006. Millennium Development Goals: Needs 106 Microﬁnance and Guarantee System in Nepal pp. 71-108 Assessment for Nepal . GON, NPC, Central Bureau of Statistics, 2001. Population Census 2001. Mathema, Vijaya Ram, 2000. Livestock and Livestock Insurance in Nepal . Mathema, Vijaya Ram, 2008. Microfinance in Nepal . NPC, 2004. Poverty Monitoring and Analysis System . NRB (Nepal Rastra Bank), 2004. Economic Review . NRB, 2005/2006. Monetary Policy . The Foundation for Development Cooperation, 2002. Banking with the Poor . UNDP (United Nations Development Programme), 2004. Nepal Human Development Report 2004. 107