Government Funds: Loan Support for Entrepreneurs in Nepal (FY 2074-75)

With the whim of entrepreneurship leveling up in Nepal, the entrepreneurial ecosystem is taking new heights. Every year, the government allocates its budget towards funds that can support and capacitate new entrepreneurs. However, many entrepreneurs may not be aware of such funds that are currently in operation. Some of these funds include: Youth and Small Entrepreneur Self-Employment Fund, Rural Self Reliance Fund, Economic Rehabilitation Fund, and Women Entrepreneurship Development Fund.

According to the budget speech of Fiscal Year 17-18, a study will be carried out to establish a strong and effective institution by merging 3 existing funds: Youth and Small Entrepreneur Self Employment Fund, Rural Self Reliance Fund, and Economic Rehabilitation Fund. Until then, the funds will be operated in their individual capacities as follows:

1) Youth and Small Entrepreneur Self-Employment Fund (YSEF)

YSEF, operated under the Ministry of Cooperatives and Poverty Alleviation, helps to provide unemployed youths with subsidized loans to start small businesses. Any unemployed individual aged 18-50 is eligible for the loan and can receive up to NPR. 5,00,000 and a group of 20 people can receive up to NPR. 1,00,00,000. For more information on the organizations who have reached an agreement with YSEF and other details of this fund, follow YSEF’s official website.

The stakeholders involved in the loan allocation for YSEF are:

a) Youths seeking self employment:

Eligible youths should submit their loan application to any banks, financial institutions or cooperatives that has reached an agreement with YSEF. The loan application requires additional documents like citizenship certificate, certificate of business orientation training, details of individual and family assets and business plan.

b) Banks and Financial Institutions (BFIs) and cooperatives:

The loans will be channelized to individuals from the concerned BFIs and cooperatives. Under the self employment scheme, these organizations issue loans to youths at 10% interest for agro-based ventures and 12% interest for other ventures. The banks, financial institutions and cooperatives will keep the borrower’s self employment business itself as collateral until the loan and its interests are fully paid off.

c) YSEF Secretariat:

YSEF Secretariat, under the Ministry of Cooperatives and Poverty Alleviation, provides loans to concerned BFIs and cooperatives at the rate of 4-5%. All the borrowers of the loans provided under YSEF will be insured mandatorily and the premium of the insurance will be paid by YSEF.

Efficiency so far:

The funds have been operating in 75 districts so far. It has the maximum number of beneficiaries from Jhapa and minimal in the Western and Far-Western Development Region. The fund has not been operated at all in Manang and Mustang due to the relatively low number of BFIs and youth population in those areas. The government targets to employ 50,000 youths in the nation every year. But, only around 38,000 youths have established their micro-enterprises with this fund so far. Yet, the maximum amount of loan provided is not sufficient for the full-fledged operation of their enterprises.

2) Rural Self Reliance Fund (RSRF)

RSRF, operated under Nepal Rastra Bank, provides wholesale credit for on-lending purpose to the deprived people through MFIs, Cooperatives, NGOs. It also provides long-term loan to sectors like tea, cardamom & cold storage through Agricultural Development Bank and permitted MFIs. The target group of the fund is individuals of rural households, holding less than 15 ropanies of land in the hills or less than 1 bigha of land in Terai, or those who cannot meet the minimum annual consumption needed for their family members from their family income. Besides, the fund will also provide micro credit where the service of bank and financial institution does not exist. Rural Self Reliance Fund (RSRF) recognizes loan up to NPR. 90,000 per borrower as micro-credit and a group loan up to NPR. 1,50,000., as per its operation manual. More information on this fund can be found at NRB’s Micro-Finance Department.

The stakeholders involved in this process are:

a) Individuals of rural household:

Eligible individuals should submit their application to the concerned MFIs and Cooperatives. The application requires supplemental documents like citizenship certificate, details of individual and family assets and business plan

b) Savings and Credit Cooperatives (SCCs) and Non-Governmental Organizations (NGOs):

The funds are channeled to concerned SCCs and NGOs through Nepal Rastra Bank (NRB). Upon approval, SCCs and NGOs will get wholesale loans at 8 % interest from Nepal Rastra Bank. In turn, those organizations can provide loans to eligible individuals at an interest rate of up to 14 %.

c) Agricultural Development Bank Ltd (ADB) and Micro Financial Institutions (MFIs):

ADB & MFIs get funds for long-term loans at an interest rate equivalent to refinancing facility rate fixed by Nepal Rastra Bank. In turn, they can provide long term loans to eligible individuals at an interest rate not more than 4 points added to Nepal Rastra Bank’s rate.

d) Nepal Rastra Bank:

Nepal Rastra Bank approves loan applications from the concerned organizations (SCC/NGO/ADB/MFI) after analyzing the pre-investment probability of the applicants presented by the organization. Upon approval, Nepal Rastra Bank provides loans to these organizations up to NPR. 35,00,000.

Efficiency so far:

As of mid-March 2017, almost 58,000 family beneficiaries have been provided with this loan in 70 districts with 94% loan recovery rate. However, RSRF is still to reach all districts and poor households, so the national outreach is still low. Besides, the process of applying for RSRF is quite lengthy and complicated. RSRF depends on Nepal Rastra Bank for capitalization and doesn’t have a separate institution to regulate the program. The upper limit of the loan and weak monitoring are the other loopholes in the program. Thus, the establishment of a strong and independent institution for RSRF can help operate the fund more efficiently.

3) Economic Rehabilitation Fund

The Economic Rehabilitation Fund was established to provide refinancing facility and interest subsidy for the sectors including earthquake and blockade affected residential home, agriculture, business and tourism. The fund is currently guided by its operation manual 2072 B.S.

Interest Subsidy from the fund:

There is a provision of interest subsidy to crisis-hit industries related to agriculture, tourism, small and medium enterprises, and other productive sectors. Crisis hit industries will get 4% interest subsidy on loans up to NPR 100 million and 2% for amount above that cut off. Eligible individuals should submit an application to the concerned BFIs, which will present their application to Nepal Rastra Bank. Upon approval, Nepal Rastra Bank channelizes the required amounts through the concerned BFI.

Refinancing facility from the fund:

This fund under Nepal Rastra Bank will also provide refinanced loans to crisis-hit industries related to tourism, hydro power, agriculture, real estate, small and cottage industries, and productive sectors. Eligible individuals should submit an application to the concerned BFIs, and BFIs will then submit an application to Nepal Rastra Bank. Upon approval, Nepal Rastra Bank will channelize the amounts through those BFIs at an interest rate of 1.5%, while BFIs can provide loans to individuals at an interest rate of up to 5%. Refinancing facilities can be provided for a maximum of 2 years.

Efficiency so far:

A total of NPR 250 million has been spent from the fund as of January 2018. As the fund remained unused for a long time, Nepal Rastra Bank has announced to transfer NPR. 5 billion from this fund into Nepal Rastra Bank’s refinancing fund (as per NRB’s monetary policy of the fiscal year 17-18 ). The increment in the refinancing fund amount will extend concessional credit to strategically important sectors including the hydro power.

The common challenge of these 3 funds lies in their lower outreach, lengthy procedure and weak implementation. To merge the funds in a way that fits the modality of the federal structure remains the major challenge for the government. The government needs to simplify the procedures, and buck up its implementation and monitoring activities at provincial levels. The new institution should also ensure that it has a better outreach and no misappropriation of funds takes place. Only then, these funds can yield benefits to a larger pool of entrepreneurs across the country.

4) Women Entrepreneurship Development Fund

Additionally, the government of Nepal has initiated Women Entrepreneurship Development Fund (WEDF) to help women entrepreneurs meet their financial need for their enterprise growth. For more information about WEDF, follow http://biruwa.net/2017/10/women-entrepreneurs-government-support/

[The article has been prepared with references to Budget Speech FY 17-18, and Nepal Rastra Bank’s Monetary Policy FY 17-18, and the respective fund’s operation manuals. Please share links to similar funds in the comments below so that we can add them to this list.]

Author Drishti Maharjan -