ADB Extends over $72 Million to Help Nepal Expand Credit Access to Rural Poor

MANILA, PHILIPPINES - The Asian Development Bank (ADB) will provide $72 million in further assistance to Nepal for an ongoing program aimed at helping poor and isolated rural communities access credit and financial services.

The ADB Board of Directors today approved a loan of $60.4 million equivalent, and a grant of $12.1 million, both from its concessional Asian Development Fund, for the second phase of the Rural Finance Sector Development Cluster Program, and for a related sector project.

Nepal is emerging from a decade-long period of conflict into a new phase of reconciliation and rebuilding, and has made substantial headway in reducing poverty. But in the countryside, including remote hill communities, poverty rates remain high. A lack of access to affordable credit is a key factor holding back development, as rural households are unable to access funds from the formal sector, forcing them to tap informal sources such as money lenders who typically charge high interest rates.

The cluster program aims to remove obstacles to credit access in rural communities by carrying out institutional and policy changes designed to make rural financial institutions more willing and able to provide credit and services to those in need.

Under the second phase of the program, reforms in the Agricultural Development Bank Ltd ― the country’s largest commercial lender ― will be completed, including a capital restructuring which will involve the entry of a private strategic investor, marking the first major financial privatization in Nepal. This will be complemented by reforms at the Small Farmers Development Bank with the goal of increasing credit access to 20,000 more marginal farmers in remote mountainous areas by 2012. Support will be given to develop and expand credit information services for microfinance institutions and savings and credit cooperatives, and to provide specialist skills training for financial institutions.

“The policy and institutional reforms under this phase of the program will transform key rural financial institutions into viable finance intermediaries with a strong client orientation and pro-poor focus, while improving the efficiency and outreach of semiformal institutions,” said Mayumi Ozaki, Finance Specialist, Rural and Microfinance, in ADB’s South Asia Department.

The cluster program is targeting an increase in credit access to the rural poor from 1 million accounts in 2008, to 1.17 million by 2012, and an increase in women’s access to finance from 200,000 accounts to 283,000 over the same period.

ADB’s loan ― which will help cover adjustment costs related to the restructure of key rural finance institutions ― has a 24-year term, including a grace period of 8-years, with interest charged at 1% per annum during the grace period and 1.5% for the balance of the term. The grant will help fund a sector project to develop a legal framework and regulatory authority to supervise and develop capacity at rural finance institutions. An additional grant of $200,000 from ADB’s Technical Assistance Special Fund will provide capacity support to assist Agricultural Development Bank’s transformation.

The Ministry of Finance is the executing agency for the program, which is due for completion around June 2012.

Source: http://www.adb.org/Media/Articles/2010/13254-nepalese-credit-access/