ANALYSIS OF THE NEED AND ROLE OF SPECIALIZED ANALYSIS OF THE NEED AND ROLE OF SPECIALIZED ANALYSIS OF THE NEED AND ROLE OF SPECIALIZED ANALYSIS OF THE NEED AND ROLE OF SPECIALIZED

FINANCIAL INSTITUTIONS FOR PROMOTING FINANCIAL INSTITUTIONS FOR PROMOTING FINANCIAL INSTITUTIONS FOR PROMOTING FINANCIAL INSTITUTIONS FOR PROMOTING

AGRICULTURE IN BHUTANAGRICULTURE IN BHUTANAGRICULTURE IN BHUTANAGRICULTURE IN BHUTAN

Aditya Banerjee,

Wahengbam Jotin Singh,

Shad Ahmad Khan,

Kavita Sharma

IMPORTANCE OF MICROFINANCEIMPORTANCE OF MICROFINANCEIMPORTANCE OF MICROFINANCEIMPORTANCE OF MICROFINANCE

� Over 74 million microfinance borrowers worldwide in 2009, and

- The total loan portfolio was about $38 billion USD.

� Agriculture is an important aspect of lives of people in Bhutan.

Imports of Nu.286 million worth of vegetables, and � Imports of Nu.286 million worth of vegetables, and Nu.1.1 billion worth of rice in 2011.

� Foreign currency amounting to Rs.4 billion in the year 2011 spent on food imports.

� Immediate need for improving its agricultural production and reduce dependence on imports

BACKGROUND

� Made popular by the success of Grameen Bank in Bangladesh.

� 4 stages of development (worldwide)

� 28 percent of the total demands for microfinance services covered (Globally) by 2010.

� The World Bank estimated a microfinance requirement of USD 300 billion (2010)

BACKGROUND: CHALLENGES OF

MICROFINANCE

� Subsidized interest rates in some cases

� High Non performing assets

� Drastic fall in aid given to agriculture (only

35% of 1980’s levels by the 1990’s)35% of 1980’s levels by the 1990’s)

� Interest rates still high

� Commercial model of operations (Focus on

high financial rewards)

RESEARCH METHODOLOGY

� Scope of study: Scope of study: Scope of study: Scope of study: To find out the current situation of specialized institutions catering to the agriculture sector in Bhutan, and evaluate its future prospects.

� Objectives of Study:Objectives of Study:Objectives of Study:Objectives of Study:

- To understand the challenges and opportunities that specialized financial institutions catering to the To understand the challenges and opportunities that specialized financial institutions catering to the agriculture sector have.

- To evaluate the state of agricultural microfinance in Bhutan.

- To suggest methods that might be useful in further development of such specialized financial institutions.

� Research Design: Research Design: Research Design: Research Design: Descriptive research

RESEARCH METHODOLOGY (CONT.)

� Data Sources:Data Sources:Data Sources:Data Sources: Secondary data collected from various electronic sources such as websites, articles and newspaper journals available online, etc.

� Geographical extend of the study:Geographical extend of the study:Geographical extend of the study:Geographical extend of the study: The Territorial boundaries of Bhutan.Geographical extend of the study:Geographical extend of the study:Geographical extend of the study:Geographical extend of the study: The Territorial boundaries of Bhutan.

� Limitations:Limitations:Limitations:Limitations:

- There is only one financial institution catering to agricultural microfinance in Bhutan.

- The amount of information available in this area is quite limited as very few studies have been conducted related to this sector.

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN

� Still in nascent stages

� First started in 1980’s

� BOB was mandated to 20% of its portfolio in

rural credit, it lent less than 1% rural credit, it lent less than 1%

� Rural credit program was handed over to Food

Corporation of Bhutan (FCB)

� FCB borrowed money at 14% from BOB and

RICB and re-lent at 6% to 10% to farmers

- Program lasted only two years

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN (CONT.)

� January 31, 1988, with the signing of Royal Charter

(RC), Bhutan Development Finance Corporation Ltd.

(BDFC) was established

� Rural credit program was handed over to BDFC -now

called as Bhutan Development Bank Limited (BDBL)called as Bhutan Development Bank Limited (BDBL)

� Rural moneylenders (lend at 3-5 percent)

� Monastic Institutions (lend at 15%-25%)

� National Women Association of Bhutan (NWAB) lends

at 14%

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN (CONT.)

� Less than 20% of farmers had access to credit from financial institutions

� This figure is about 10% for small farmers

� The absence of other dedicated microfinance � The absence of other dedicated microfinance institutions

� Total loans to different sectors in Bhutan in 2010: Nu. 36,005.02 million

- Out of this, only 1.39% was allocated to agriculture

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN (CONT.)

1.92%1.76%

2.61%

1.53%1.39%

1.50%

2.00%

2.50%

3.00%

Agricultural Sector Investment Over the Years (in Percentage)

� Investment in agriculture has declined over the years

0.00%

0.50%

1.00%

1.50%

2006 2007 2008 2009 2010

Agriculture Sector Investment Source: Statistical Yearbook of Bhutan, 2011

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN (CONT.)

24.82%

16.47% 15.85% 16.40%

14.15%

10.00%

15.00%

20.00%

25.00%

30.00%

Figure 2: Ten Largest Sectors By Investment Made Through Banks, 2010 (in percentage))))

� Agriculture takes a backseat for lending institutions and it comes at eight in terms of lending

3.06%

5.81%

1.39% 1.21% 0.61%

0.00%

5.00%

10.00%

Building and

construction

Manufacturing Trade and

commerce

Service and

Tourism

Personal loans Transport

(Light)

Transport

(Heavy)

Agriculture

Sector

Investment

Staff loan Loan Against

Shares

Source: Statistical Yearbook of Bhutan, 2011

� In 2010, 99.10% of the loans given to

agriculture sector came from BDBL.

� Bank of Bhutan (0.60%) and T-Bank (0.30%).

� Lending rates for 10 years were static at 13%

SPECIALIZED FINANCIAL INSTITUTIONS IN

BHUTAN (CONT.)

� Lending rates for 10 years were static at 13%

for 3 years for agriculture sector

�Microfinance clients borrow about Nu.30,000

to Nu.50,000, (as per survey in Samtse)

CONCLUSION

� Agricultural sector lending is risky and returns

are not very high.

� This can change in future as Bhutan is willing

to adopt ‘organic farming’, which is lucrative

� Bhutan needs to put more efforts in developing

microfinance sector

RECOMMENDATIONS

� Robust policies required for the development of specialized financial institutions

� RMA finalizing Financial Inclusion Policy (FIP)

� RMA also received applications for five microfinance institutions (MFIs)microfinance institutions (MFIs)

�MFIs can work closely with banks and other financial institutions

�MFIs should also encourage farmers to save with them

RECOMMENDATIONS

� Flexible terms for both lending and repayment.

� Loan structured as per requirement

� Allow foreign investment in microfinance sector

� Provide farmers with specialized training � Provide farmers with specialized training

facilities.