Since its inception, Sakchyam – Access to Finance Programme (Sakchyam) has worked in partnership with financial institutions, including commercial banks, to facilitate easy access of innovative new financial products and services, to Small and Medium Enterprises (SMEs) and individuals, to unleash their potential in Nepal. So far the programme has provided technical support to more than 40 financial institutions in rolling out innovative financial products and services (savings, credit, payment and insurance), and in the use of alternative delivery channels to increase the outreach of the financial services provided in far-flung areas. The programme also provides technical assistance to partner financial institutions to help them better service the SME sector and financing gaps faced by individuals, in a more focused and structured way. These interventions work towards ensuring improved access to finance for SMEs and individuals as banks and other financial institutions provide tailored financial services.
In line with this approach, Sakchyam provided Technical Assistance (TA) to Bank of Kathmandu Limited (BoK) to launch an innovative loan scheme: Sakchyam Sana Kisan Ukhu Karja, in partnership with Mahakali Sugar Industries back in 2015. Through this financial product, sugarcane farmers in Kanchanpur were able to use the invoice issued by Mahakali Sugar Industries for their sugarcane as a collateral and obtain a loan from BoK. Loans of up to 75% of the invoice value were provided.
Cash crops like sugarcane contributes to around 30% of Nepal’s GDP. Despite the significance it creates in generating profits and employment, issues of delayed payments in the sector is one that has affected the sugarcane industry for a long time. To meet their financing needs, the practice of delaying payments for their sugar, leaves the farmers with no choice but to borrow from local money lenders, who are known to charge exorbitant interest rates and service charges. Also, it has pushed farmers to quit sugarcane farming and look for other farming options. As per the recent statistics, Sugarcane output in Nepal is steadily declining: from 3.3 million tonnes in 2014 to only 2.6 million tonnes in 2017.
Introduction of the Invoice Discounting product allowed the invoice to be used as a collateral to facilitate access to loan funds at reasonable rates from Bok for more than 1,500 farmers, helping them to meet their expenses for farm inputs and their own livelihoods. As per the agreement, Mahakali Sugar Industries releases payments to farmers in their respective bank accounts on due dates. The bank then settles the dues of the farmers and transfers any remaining sum as a balance in individual farmers’ respective saving accounts.
The financing mechanism has provided convenient access to loan funds from a formal financial institution, replacing costly borrowing of farmers from local money lenders. Moreover, since payments were being routed through bank accounts, it also promoted savings habits. Positive experiences and successful transactions with the bank also encouraged farmers to seek a range of financial services from the institution. It increased cross-saling of the bank’s other financial products and services.
The initiative proved to be a huge step, not only towards supporting agricultural production through innovative financial services, but also towards supporting the livelihoods of the sugarcane farmers. The bank, encouraged by the adoption of the Invoice Discounting products, decided to establish a dedicated bank branch in Bellauri, closer to the farmers, than continuing to provide the service from their branch at Dhangadi, the closest market centre, which was about 30 km away. The branch opened record number of saving accounts within a period of six months. The initiative was started with a single credit product ‘Invoice Discounting Scheme’ targeted at the farmers, and it led to establishment of a fully-fledged branch which offers a full suite of commercial banking products.
Lessons Learnt & Sustainability
The chief reason for the success of the project was due to the fact that all three parties were aligned to the objective of the overall wellbeing of the farmers. The shared vision allowed all sides to be quickly on board and on the same page throughout the duration of the project. The outcomes also expanded because this product created a demand for formal, direct financial institutional delivery channel that BoK was able to identify and capitalize on.
On a larger scale, the initiation has already prompted few other Financial Institutions to replicate or revise their financial instruments to cater to the farmers and their similar financing needs. The success of ‘invoice discounting’ as a tool to mitigate the financing gap has also prompted Sakchyam to mull over wider replication, an industry wide solution based on a technology platform. As of now. There is already a new concept being developed, which if successful, will lead to the establishment of a larger platform that will enable individuals, as well as MSMEs, access ‘invoice discounting’ facility.