Ram Kumar Thapa (name changed) owns two mini-trucks to transport construction materials. This is how he earns his livelihood. The mini-trucks however hardly impact the upscale status of his life. Besides the transport venture, he is into borrowing and lending money at huge profits. The modus operandi: He takes a loan of say Rs 100,000 from his friend paying Rs 2,000 a month in interest, he then loans the same amount to someone at Rs 3,000 per month in interest.
Parshu Ram Kari is one of Thapa’s debtor. He has taken Rs 500,000 in loan for his daughter’s marriage six months ago and pays Rs 15,000 as interest every month to his creditor. He had approached Thapa for the money after the nearby cooperatives denied him as he had no property to use as collateral, borrowing from Thapa despite the huge interest was a life saver. Thapa lends only to his villagers and permanent residents of his area as he considers them to be safe for transaction.
This is just one story. There are many lenders and borrowers in an informal banking situation. With the growing number of people wanting to travel to foreign shores for work, money lenders like Thapa help aid their process. While other borrowers are people who need short term loans for business or personal reasons and would rather not go through the hassle of bank paperwork and procedures.
Ironic considering banking is one of the industries in Nepal that has achieved the biggest growth since economic liberalisation of 1990s. Despite having two large government banks, 26 private banks and 33,599 cooperatives, a huge chunk of the population till today prefers dealing with private money lenders at exceptionally high interest rates.
Industry experts have estimated that informal banking constitutes 30 percent of lending transactions however there is no official data to substantiate the claim. In 2011, The World Bank had published a report – Access to Financial Services in Nepal – according to which only 26 percent of Nepali households have a bank account. The report stated that financial NGOs and cooperatives run a close second as largest providers of deposit accounts serving 18 percent of households. “These institutions are preferred by low-income households,” says the report adding, “Microfinance and regional rural development banks are a distant third provider of deposit accounts, serving only four percent of households —mainly poor, rural ones.” The report further says that about 38 percent of Nepali households have an outstanding loan exclusively from the informal sector, 16 percent from both the informal and formal sector, and 15 percent from only the formal sector.
Shedding further light, the report states that family and friends are the largest providers of informal loans accounting for 64 percent, followed by moneylenders at 29 percent.
Kesav Badal, a veteran of the cooperative movement in the country refers to his study conducted five years back in three districts of Terai saying that poor people have minima; access to loans and local landlords ask them to keep land worth Rs 100,000 as collateral for a loan of Rs 10,000. “The creditors are heavily pressed to pay the loan back that comes with an extreme rate of interest,” he says.
It’s not that there has not been any intervention from the government and civil society. Nepal Rastra Bank has made it clear that private sector commercial banks must invest in the deprived segment but banks have to bear higher operational costs even as borrowers are discouraged by the often troublesome and time consuming loan procedures of banks. Nar Bahadur Thapa, Executive Director of Research Department at Nepal Rastra Bank charges private sector banks for being inefficient when it comes to serving people at the bottom of the pyramid. “Banks seem satisfied just serving big institutional clients instead of catering also to the poor,” he says, “and that is why they resort to informal banking.” According to him, a huge segment of people prefer to lend money at high interest rates among a growing circle of friends and acquaintances. Many also are engaged in the growing trend of dhukuti, all attributing to the growth of the non formal banking method.”
Economist Rameshwor Khanal observes that the growth in informal banking is also due to the failure of banks and financial institutions (BFIs) to introduce loan schemes based on real life needs. “People go to informal lenders when formal lenders do not offer loans as per the needs of the people,” he says, “For example, one might have to fund education or go to abroad, invest in medical treatment or organise a family wedding.” He also points to the urgency of situations saying, “There might be situations when one has to spend huge amounts of money in a wedding or medical case having to arrange the finances within a short duration. Even if a person applies for a loan against collateral, the process is too lengthy.”
Observers also blame the tough geography and infrastructure as hindrances in the expansion of private commercial banks to different parts of the country. Moreover, the higher operation cost also discourages banks resulting in almost 60 percent of the Nepali population remaining beyond the banking channel.
Regarding the wide reach of cooperatives, people are unable to place complete trust in them due to repeated incidents of malpractices.
Despite this, Badal, also the Chairman of National Cooperative Federation of Nepal, estimates the sector’s total contribution in the financial sector at around 20 percent and says that the figure will reach 50 percent within the next two years.“While banks have been serving the premium segment of people, cooperatives are the ones to serve the poor, disadvantaged and marginalised,” he claims, “Had it not been for the cooperatives, the informal financial sector would have had a 50-55 % outreach by now.” He feels that cooperatives haven’t had the impact they could due to the stringent measures that the sector has to follow. “We have to understand that the loans a cooperative extends, comes from the money collected by the members of the cooperative, and we have to be careful in protecting this money.”
There are several organisations in the development sector that are working to ensure poor people’s access to banking and finance. Sakchyam Access to Finance Programme (Sakchyam is funded by UKaid as part of a bilateral agreement between the Governments of Nepal and the United Kingdom. The organisation has been conducting activities to improve SME Finance, capacity strengthening of Microfinance Financial Institutions (MFIs), and ways to improve financial capabilities of enterprises and households in selected districts. Sakchyam has reached over 130,000 beneficiaries including 59 percent women and 48 percent living in rural areas with increased access to a range of financial service by conducting activities including branchless banking initiatives, physical branch expansions in remote locations and financial literacy through interactive voice response and pico projectors among others.
“The footprint of formal financial institutions in remote rural areas is very low and locals have no choice but to avail loans at exorbitantly high interest rates from the local money lenders who often exploit the inability of the borrowers to repay the loans. Also, the habit of saving and investment in productive activities is found to be severely lacking,” says Nirmal Dahal, Deputy Team Leader, Sakchyam – Access to Finance Programme.
According to him, with Sakchyam’s technical and financial support, financial institutions are showing interest in serving the underserved communities using a combination of traditional (brick and mortar branches) and alternate delivery channels (branchless banking and mobile banking). “Sakchyam is also encouraging and supporting partner financial institutions to provide customised financial products and not to limit their offering to credit as these communities require an entire gamut of financial services including savings, remittance, insurance and financial literacy,” he adds.
Thapa from NRB suggests that the government create a scheme wherein every single Nepali owns a bank account. The government has recently made it mandatory to have a compulsory bank account for people receiving social security schemes like old age allowance and allowance for single women and others. He also feels banks operating in rural and remote regions must receive some form of subsidy or compensation to help meet the operational losses they incur.