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.
The GBP 753 K in loans that has been disbursed over the project duration has benefitted 1,606 smallholder sugarcane farmers, of which 80% are from the Tharu community, and rest are Madhesis and Dalit women (at least 3% of the total beneficiaries are women). Progress in all these factors means possible replication of this product in other districts in Nepal.
Lessons Learnt & Sustainability
- Focused Technical Assistance and a time-bound Credit Guarantee Scheme from Sakchyam worked as catalyst for the Bank to initiate the Invoice Discounting Programme. The Bank had originally categorised this as “highly risky”.
- The Bank, during the life of the project, realised that the risk initially perceived as high was now acceptable and decided to continue the project activities beyond the project period on its own. In fact, BOK intimated Sakchyam that guarantee fund commitment from Year 2 of the project would no longer be needed, and the same guarantee fund was the used to cover credit risk of other innovative products targeted to project beneficiaries.
- Eagerness of the Bank to reach out to the smallholder farmers along with support from the anchor firm (Mahakali Sugar Mill), have played a crucial role in the successful implementation of the project. Now commercial banks recognize the value of reaching out to smallholder farmers, based on BOK’s long-term relationship with a critical mass of sugar farmers.
- It is essential that anchor firms understand the benefits to the firm that are established when the VC is strengthened.
- Product features should be designed as per the needs of the target market and banks should be willing to be flexible to adjust its current lending practices.
This project has successfully concluded.