This post was written by Dyutiman Choudhary and Narayan P. Khanal at CIMMYT

The continued growth of Nepal’s formal seed sector is critical to modernizing and commercializing agriculture. In Nepal, seed companies and cooperatives produce most of the seed for the formal sector, and like any enterprise, they need access to finance in order to grow and increase their production capacity. This is why USAID’s Feed the Future Nepal Seed and Fertilizer (NSAF) activity has expanded its seed sector support to include finance, and is working hand-in-hand with commercial banks to develop and expand access to innovative financial products for seed companies and cooperatives.  

Nepal’s seed market is largely untapped by financial institutions. NSAF’s facilitation, which is providing an interface between banks and seed enterprises, is improving banks' knowledge about seed business. By accessing information on needs and growth opportunities in seed business, banks can develop loan products and credit modalities that match the requirements of seed producers and agribusinesses. Nepal’s Agricultural Development Strategy (ADS 2015-2035) and National Seed Vision (2013-2025) are key policy documents of the Government of Nepal that provide a roadmap for agricultural and seed sector development, respectively, in the country. Lack of access to finance is a major constraint for farmers and agribusinesses seeking to improve production efficiency and adopt improved technologies. In 2017, realizing the need to increase investments in the agricultural sector, Nepal Rastra Bank (NRB), the Central Bank of Nepal, adopted the Priority Sector Lending Programme (PSLP). This mandates banks and financial institutions (BFIs) to allocate 10 percent of their loan portfolio to the agricultural sector at a subsidized interest rate of 5 percent.

Among the seed companies with which NSAF partners, business plans indicate that the average size of a loan required is around $50,000 – 60 percent for infrastructure development and 40 percent for working capital. About 66 percent of the working capital is used to procure raw seed from contract seed growers. Given the huge requirement for finance for seed procurement, access to loans through the PSLP can provide respite to seed companies. However, unlike in other commercial agribusinesses, bank lending under PSLP is uncommon in the seed business, as financial institutions lack understanding of the sector. Many seed companies have not been able to benefit from the opportunity created by the PSLP to access the much required working and long term capital due to perceived high risks, lack of business plans and compliance mechanisms required by banks.

In 2018, NSAF examined the current status, challenges and opportunities in seed business financing through the PSLP. The project also facilitated a seed growers’ lending model through a tripartite agreement between Laxmi Bank Pvt. Limited, Panchashakti Seed Company and seed growers to access loans under PSLP. On June 14, 2019, NSAF in collaboration with Seed Entrepreneurs Association of Nepal (SEAN), organized a meeting to present findings of their assessments and experiences. The meeting brought together representatives from the Ministry of Agriculture and Livestock Development (MoALD), national financial institutions, private sector banks, seed companies, agricultural cooperatives and development organizations who took part in the deliberations and also contributed to refining policy recommendations to enhance seed sector financing.

The assessments showed that PSLP awareness among farmers is low and seed growers borrowing from the informal sector were paying high interest rates, ranging from 24 percent - 36 percent per annum. Lack of adequate business plans and compliance mechanisms for seed companies, limited eligibility criteria for PSLP under the current NRB’s directives, complex loan acquisition processes and collateral issues were factors that made funds largely inaccessible to smallholder farmers. Moreover, the terms and conditions for loan repayment stipulated by banks do not synchronize with the agricultural crop calendar and farm cash flows.

Participants in the meeting discussed ways to create a conducive environment to access financial services for agricultural producers and agribusinesses. Seed companies suggested to improve BFIs’ understanding of the agricultural markets and build their capacity to assess business opportunities. They requested banks to simplify the documentation process for acquiring loans for farmers. Participants from the Kisanka Lagi Unnat Biu-Bijan Karyakram (KUBK), a Nepal government project located in Rupandehi district Province 5, highlighted their model where farmers, organized into cooperatives, are linked to the Small Farmer Development Bank, which could be worth exploring in other sites. The experience shared by NSAF’s action research to finance contract growers of seed companies was also considered a viable model for improving access to finance for seed production. Branchless banking promoted by NSAF is a workable strategy to provide financial services to seed growers in remote areas. The action research also highlighted that innovative modalities such as group guarantees can be a feasible approach to mitigate risks to fund seed growers who do not have land registration certificates and whose land rights have not been transferred in their names. In the case of female producers, this is especially helpful, as many women are the lead decision-makers on the land which is registered in the names of their husbands who are migrant workers abroad. Appreciating the idea of group guarantees to fund small and marginal seed growers, bank representatives shared their willingness to increase investment in the seed sector through seed companies. 

Utilizing the learning from this event, NSAF and SEAN will share the evidence-based policy recommendations with MoALD, Ministry of Finance, NRB and the Bankers’ Association of Nepal to unlock access to finance for the seed sector. Through NSAF’s facilitation, banks have approved loans amounting to $2.5 million for business expansion of seven seed companies in 2018. NSAF will continue to support its seed partners in developing and strengthening their business plans and will facilitate linkages with commercial banks as well as the Small Farmer Development Bank. NSAF will also engage with banks to support the development of innovative financial packages for the seed sector, especially on addressing issues of repayment and farm cash flows. Lessons learned from the pilot activities will further be documented and shared with all concerned stakeholders and development partners to improve access to finance for Nepali smallholder farmers and agribusiness enterprises.    

This article is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents of this article are the sole responsibility of International Maize and Wheat Improvement Center (CIMMYT) and do not necessarily reflect the views of USAID or the United States Government.