NUBL Project Results & Lessons
AgriFin (February 2015) | The following note summarizes key results and lessons from AgriFin's project with NUBL, Nepal, aimed at strengthening the agriculture finance portfolio of NUBL.
The objective of AgriFin’s project with Nirdhan Utthan Bank Ltd (NUBL) was to strengthen the bank’s capacity to serve agricultural clients in Nepal. NUBL is a regulated microfinance bank, primarily offering group loans with over 87,000 clients. The project supported the establishment of a new agricultural finance unit; the development of new agricultural loan products; training of agricultural lending staff; and improvements of the bank’s overall internal processes which relate to agricultural lending. This note highlights the initial results and key lessons emerging from the project which may be useful for financial institutions undergoing similar institutional changes.
The rollout of a dedicated agricultural change program with new products, services, processes, and staff training has resulted in a rise in both number of clients and volume of lending. As of Q2 2014, the bank reached over $US 25.5 million in outstanding agricultural loans, compared to $US 8.9 million in 2010, with a very low portfolio at risk (PAR > 90) of 1%. In addition, the number of its agricultural clients has more than doubled from approximately 33,000 in 2010 to 87,697 in Q4 2014.
The creation of a dedicated agricultural finance unit (AFU) was critical in bringing the necessary focus, skills, and experience into the institution to enable the expansion of agricultural lending. The Unit consisted of a team leader and two field-based agricultural officers who were recruited externally for their agricultural expertise and were subsequently trained in agricultural lending. The AFU manages NUBL’s agricultural finance operations including design and roll out of new agricultural products, provides expertise to branch and regional staff on agricultural lending, conducts market research, and ensures that products perform well and risk mitigation measures are adequate. The unit has enabled the bank to provide more attention and management resources to its agricultural finance operations.
Development of four loan products for agricultural clients. Before the AgriFin project, NUBL did not offer dedicated loan products tailored to farmers and their specific investment and seasonal needs. To address this, the bank developed four agricultural loan products, which by the end of 2014 had been piloted in 10 branches. Initial results were positive; by Q4 2014, over 2,200 loans were disbursed and repaid with a 100% recovery rate. The specific products are:
- Dairy Loan – can be used to purchase up to two dairy animals in order to set up or expand a dairy unit.The client is expected to make a 10% down payment. Group loans can go up to $US 1,000 without collateral and up to $US 1,500 with collateral. Individual loans require collateral and can go up to $US 600. The loan term is 24 months, and repayment is done on monthly basis.
- Agricultural Equipment Loan – the loan helps clients acquire farm equipment for use on their farms and/or rental to other farmers. The client is required to make a 20% down payment. Group loans can go up to $US 1,000 without collateral and up to $US 4,000 with collateral. Individuals can borrow up to $US 600 with collateral. A formal quotation from the supplier is required. Loan term is 36 months and repayment is made on quarterly installments.
- Crop Loan – the loan is designed to finance the purchase of agricultural inputs includingseeds, fertilizers, and pesticides. The client provides a 20% contribution towards the total cost. The maximum loan amount increases yearly starting at $US 400 for the first year, up to US$ 1000 on the fourth year. The term of the loan is 12 months. Repayment is made quarterly, twice per year, or annually based on the crops financed.
- Irrigation Loan – the loan can be used to purchase new irrigation equipment or expand existing irrigation facilities. The client is expected to make a 10% contribution towards the total cost for non-collateral loans and 20% for collateral loans. Clients can borrow up to $US 500 without collateral and up to $US 1,000 with collateral. A formal quotation from the supplier is required. The loan term is 24 months and repayment is made on quarterly installments.
Technical training provided to loan officers to improve the provision of agricultural financial services. Before the AgriFin project, NUBL staff was not trained in agricultural lending. During the project NUBL staff received basic training on agriculture to understand the agronomics and marketing of agricultural production. In addition, loan officers were trained on new product features, client risk assessment, and marketing strategies so that they could effectively provide new loan products to clients. Domestic and international learning visits in India and Indonesia were also organized. As the bank expands its agricultural lending, continuous in-depth training of lending staff is required to reinforce agricultural knowledge, increase productivity, and manage operational risks.
Improvement of NUBLs Management Information System (MIS). A good MIS system is critical for the Bank to improve its decision-making ability and manage effectively its loan portfolio. At the beginning of AgriFin project, the Bank’s MIS was based on decentralized system without a direct linkage between the head office and branches. This made the reporting process very inefficient and as such the head office was unable to effectively monitor the agricultural loan portfolio. As a result, during the AgriFin project, NUBL conducted an in-depth analysis of its MIS system and identified essential improvements. The bank upgraded its IT infrastructure and expanded internet access to one third of its branches, with the remaining branches expected to connect in first half of 2015. In addition, the MIS was updated to capture data from the new agricultural loan products. As a result of these investments, the overall communication between branches and head office has been significantly improved. In addition, the reporting from branch offices is done more efficiently and is less prone to errors, and NUBL’s head office is able to monitor the agricultural loan portfolio and manage risk more effectively.
Rather than investing in hiring specialized staff for agricultural lending, financial institutions can serve agricultural clients effectively using existing staff. In the NUBL’s group-based lending model, each loan officer is assigned a specific geographic area which includes both agricultural and non-agricultural clients. As such, the bank could not hire specialized agricultural staff, but instead, it provided basic agricultural training to all of its loan officers where the new products were rolled out. In order to boost the agricultural expertise throughout the branch network, the bank recruited two agriculture officers who provided additional support to loan officers during the credit appraisal process. The bank found that with a good basic training for existing staff and support of few specialized staff, it is possible to effectively handle a new business line of agricultural lending. This option can be especially effective for MFIs who operate at the lower end of the market.
Visiting financial institutions with more experience in agricultural lending can help expedite the learning and implementation process. International study tours have proven an effective way to foster knowledge exchange among banks as the hosting institutions are more willing to share information with foreign banks given that they do not compete in the same market. NUBL staff visited bankers in India and Indonesia to learn about their agricultural lending operations and management information system (MIS).The knowledge gained during these visits helped NUBL strengthen the supervision and monitoring of agricultural lending activities which resulted in a very low PAR rate, improved the loan processing and approval, and provided insights into the important role of financial institutions in linking agricultural clients with business development service providers. In addition, as a result of the visits, NUBL staff decided to prioritize investment in MIS, given the critical role MIS had played in strengthening agricultural finance activities of the institutions they visited.
Providing technical support to agricultural clients helped the bank grow the number of clients and its average loan size. NUBL identified an additional benefit of having expert agricultural staff. Namely, NUBL found that when the bank’s agriculture experts advised farmers, they were more likely to ask for loans in order to expand their business. Client feedback suggested that training sessions which included entrepreneurship, technology use, and marketing were especially useful.
Preference for informal equipment purchases affected loan take up. In order to obtain an equipment or irrigation loan, clients are required to submit a formal quotation from the supplier when making the purchase. This assures the bank that the client is making a quality investment, which ultimately provides security for the bank. NUBL learned that farmers were reluctant to provide formal quotations since purchasing investment items through formal vendors results in sales tax being levied, raising the price of the machinery compared to the price they would have to pay when making the purchase informally. Although this affected the overall number of loans that the bank could make for farm equipment and irrigation, the bank considered it necessary in order to ensure the overall quality of the loan portfolio. In the long run, however, in order to increase the take up of farm equipment loans, NUBL has to either redefine its criteria or band together with other FIs to lobby government to relieve taxes on agricultural equipment.
Regulatory restrictions affected NUBLs ability to respond to demand. Although the demand for higher loan amounts has increased among NUBL clients, the bank could not meet this demand because of the regulatory restrictions on microfinance institutions in Nepal. According to Nepal Rastra Bank (NRB) regulation, MFIs are not allowed to disburse loans exceeding $US 600 under individual lending methodology in areas where other banks and financial institutions are present. These restrictions limit NUBL in meeting the demand even in villages that fall within NUBLs operational areas and are unserved by the other financial institutions. The current loan sizes are too small to meet the needs of larger farmers.