FORUM (Spotlight Weekly)

Banking For The Rural Poor

By BAL RAM PAUDEL

The modern banking sector has developed significantly after the restoration of multiparty democracy in 1990. More than a dozen joint-venture banks (JVBs) are in operation today. These banks are in cutthroat competition in urban areas to optimize profits. Credit card, Automated Teller Machine, diverse banking transactions, mobile banking are some of the modern facilities seen in the major cities of Nepal these days.

The rural poor might have expected the development of the banking sector to contribute in a meaningful way to bringing them out of their poverty. Many policy makers probably had the same feeling. The rural branches of two old commercial banks, Nepal Bank Ltd. (NBL) and Rastriya Banijya Bank Ltd. (RBB), too, might have expected the new banks to support their decades-long

endeavors to serve the rural poor.

The contributions of the RBB and the NBL in rural Nepal are laudable, although they were set up with same objectives of the JVBs - to provide banking services to the nation and optimize profits for investors.

In Nepal, more than 80 percent of the population resides in the rural areas. Unemployment, endemic poverty and lack of economic opportunities are major hindrances to national development endeavors. Development efforts are now being gradually diverted toward rural areas. In the absence of the rural community's easy access to banks, however, these efforts would prove meaningless.

In many places, it takes up to two days' walk to reach to the nearest branch of the RBB or the NBL (and in some instances, the Agriculture Development Bank), which are located at district headquarters. Transportation, where it is available, is expensive for most people.

The Nepal Rastra Bank (NRB), the nation's central bank, develops policies and priorities for effective operation of financial institutions. Another important function of the central bank is to streamline financial institutions in keeping with the nation's development priorities.

The NRB requires banks to open one rural branch or two sub-urban ranches (branches in adjoining Village Development Committees of specified municipalities) before they can open an urban branch. In addition, a bank is required to invest 12 percent of its total investment in the priority sectors.

Saving and credit groups and co-operatives are symbols of local efforts and initiatives. Their effort to serve the community as an alternative banking system needs to be appreciated. However, low capital base, insufficient educational and management skills as well as lack of clear vision for the future are hindering them. Because of legal provisions, cooperatives have very limited banking functions. Moreover, they are mostly limited to areas where other development programs are implemented with external support, mainly through NGOs and INGOs.

Is this what the rural poor were expecting? Are existing policies properly implemented in order to ensure the welfare of the rural poor? Isn't the urban-centered banking approach unfair to the majority of Nepalis who live in rural areas and are the backbone of national economic development? There are reports in the media that priority-sector investment is often placed as fixed deposit in the same JVB in the name of some rural development bank. The penalty that the NRB may impose for violating these rules (either opening branch or investing into priority sector) is very soft on offenders.

The nation needs to concentrate on how policies and practices could be made more equitable toward the needy and the rural poor. One very courageous step would be to ask these banks to invest by opening branches in specified areas. The NRB can do this by ranking the districts according to the economic development index as well as economic viability. Furthermore, District Development Committees could be involved to determine their priority for specific locations (say, Village Development Committees). The requirement to open rural branches before opening an urban branch should be strictly implemented. Priority-sector investment needs to be accelerated and banks should invest only through their own rural branches rather than keeping funds in fixed deposits at urban centers in the name of some rural financial institutions.

The present policies need to be reviewed and reworked. The NRB needs to fulfill its supervisory role effectively and honestly. Another important task is to provide better guidance to saving and credit cooperatives so that, in the end, they could serve the wider community more effectively. The major challenge undoubtedly would lie in implementing these policies effectively.

Economic upliftment of the rural poor is essential not only for the nation but also for the JVBs and other financial institutions in order to maintain their present level of profitability over the long term. Only then can our vision of development and a more equitable society be translated into reality.

(Mr. Paudel is an ACCA student)