In Collaboration with:

Access to Finance for the Poor Programme

Potential AFP Programme Value Chain Finance Opportunities in Priority Districts

Inception Phase Deliverable A1.4 – Prioritising Value Chain Interventions in

Priority Districts

November 2, 2014

DISCLAIMER The Access to Finance for the Poor Programme in Nepal is funded by UK aid from the UK government; however the views expressed in this report do not ecessarily reflect the UK government’s official Policies. This report, including any attachments hereto, may contain privileged and/or confidential information and is intended solely for the attention and use of the intended addressee(s). If you are not the intended addressee, you may neither use, copy, nor deliver to anyone this report or any of its attachments. In such case, you should immediately destroy this report and its attachments and kindly notify Louis Berger. Unless made by a person with actual authority, the information and statements herein do not constitute a binding commitment or warranty by Louis Berger. Louis Berger assumes no responsibility for any misperceptions, errors or misunderstandings. You are urged to verify any information that is confusing and report any errors/concerns to us in writing.

Contents I. Executive Summary..................................................................................................................................... 1

III. Value Chain Finance Products in Use Globally ....................................................................................... 2

IV. Understanding Economic Dynamics in AFP Programme Priority Districts and the Potential for Introducing VCF Products ............................................................................................................................. 4

IV.1 Kailali (Dhangadi and adjoining areas) ....................................................................................... 4

IV.2 Dadeldhura (and adjoining areas) ............................................................................................... 4

IV.3 Accham (Saphe Bagar and adjoining areas) ............................................................................. 4

IV.4. Bajura (Dhab Bagar, Mallika Bagar, Rittah Bagar, Bhamak Bagar)...................................... 5

IV.5. Baitadi (Patan, Khodpe) ................................................................................................................ 5

IV.6 Dang (Tulispir and Ghorahi) .......................................................................................................... 5

IV.7. Salyan (Khalanga, Sri Nagar, Kapurkot) ..................................................................................... 6

IV.8. Rukum (Musikot-Khalanga, Rukumkot, Chaurjahari, Radijyula) ............................................ 6

IV.9. Doti (Dipyal and Silgadi) ............................................................................................................... 6

V. Value Chain Financing Opportunities under the AFP Programme ........................................................ 6

V.A Proposed VCF Interventions in Certain Commodities across the AFP Programme Districts ...................................................................................................................................................... 7

V.B Potential Quick Win VCF Opportunities for AFP Programme ............................................... 9

VI. Potential Partners for Proposed AFP Programme Interventions ......................................................... 10

VI.A. Financial Institutions - Banks .......................................................................................................... 10

VI.B. Cooperatives ................................................................................................................................... 14

VI.C. Donor Funded Programmes........................................................................................................... 14

VII. Addressing Challenges in Implementing Value Chain Finance ......................................................... 16

VIII. Working with Financial Institutions to Mitigate Value Chain Risks .................................................... 17

IX. Phasing in Value Chain Finance Products during the Life of the AFP Programme ............................ 19

IX.1 Category 1: Credit Products ............................................................................................................ 19

IX.2 Category 2: Savings .......................................................................................................................... 20

IX.3 Category 3: Ancillary Products and Services ................................................................................... 21

IX.4 Category 4: Delivery Channel Innovations ...................................................................................... 21

IX.5 Category 5: Enablers ........................................................................................................................ 24

X. AFP Programme Value Chain Financing Launch Methodology ........................................................... 25

XI. Rollout Plan ............................................................................................................................................. 26

Annex A: Value Chain Overview

Annex B: Product Design Card

Acronyms

AFP Access to Finance for the Poor CF Challenge Fund DDC Dairy Development Corporation FAO Food and Agriculture Organization FWDR Far Western Development Region GDP Gross Domestic Product GIZ Gesellschaft fur Internationale Zusammenarbeit HVAP High Value Agriculture Project INCLUDE Inclusive Development of the Economy IFAD International Fund for Agricultural Development IT Information Technology KGT Kenya Gatsby Trust MAPS Medicinal and Aromatic Plants MEDEP Micro-enterprise Development Programme MIS Management Information System MSE Micro and Small Enterprise MWDR Mid-Western Development Region NEFSCUN Nepal Federation of Savings and Credit Cooperatives NGO Non-Government Organization NPR Nepali Rupee PACT Project for Agriculture Commercialization and Trade P(FI) Partner Financial Institution POS Point of Sales RFP Requests for Proposals RMDC Rural Microfinance Development Centre RSMFIP Raising Small Farmers Income Project SACCO Savings and Credit Cooperative SAFAL Sustainable Access to Finance And Livelihoods in Nepal SIMI Smallholder Irrigation Market Initiative SFDB Small Farmers Development Bank SME Small and Medium Enterprise TA Technical Assistance TCD Tonnes Crushed Per Day USAID US Agency for International Development VC Value Chain VCB Validation Clearing Bureau VCF Value Chain Finance VDC Village Development Committee

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I. Executive Summary

The districts of Dang, Salyan, Rukum, Kailali, Accham, Bajura, Dadelhura and Baitadi located in the Mid and Far West Development Regions (MWDR and FWDR) have been prioritized by the AFP Programme in year one to rollout interventions that will expand access to finance and significantly increase employment for a large numbers of farmers and other individuals. These districts will be expanded during the life of the programme following an established set of criteria discussed in Inception Phase Deliverable A0.6 (District Network Plans). At this early phase of a dynamic and evolving programme, it is impossible to detail exactly which financial partners AFP will collaborate with, the exact district and the specific form of value chain finance (VCF). However, the intent will be to work with a select number of financial institutions with whom some quick wins have been identified during the inception phase for possible rollout in the priority districts. A broader engagement with a large number of banks on a wide range of value chain product and service innovation will then follow. These will also include collaboration with cooperatives in need of larger capital investments, but with significant impact potential. It is envisaged that during the early months of the AFP Programme, variations of the six most common value chain credit products: term loans, overdrafts, order finance, warehouse receipts, invoice discounting and leasing (hire purchase) will be designed and piloted with Private Financial Institutions (PFIs). As collaboration with the banks mature, a wider range of more innovative products and services will be launched.

Nevertheless, during the first two months of the Implementation Phase, a Challenge Fund call for Concept Papers as well as a Request for Proposal (RFP) will be advertised. The focus will be on the most salient obstacle to access to finance along various value chains: lack of, or insufficient collateral. The Challenge Fund and RFP will target quick win opportunities in the priority districts listed above. Among others, Concept Papers for the Challenge Fund and RFP responses will include (i) the design and launching of warehouse receipt financing, in which a receipt from a certified warehouse can be used as collateral to access a bank loan against the security of stored goods in the warehouse; (ii) co-financing by the Challenge Fund on investments in cold-chain and other processing facilities; and (iii) purchase order and sales invoice financing products which incorporate a legally binding tri-partite agreement between the banks, buyer and seller (farmer); and which enable banks to accept purchase orders and sales invoices in lieu of collateral. The AFP Programme recognizes that credit guarantees, Challenge Funds and other risk-sharing mechanisms may not be sufficient to make the business case for commercial banks to engage in VCF. Convincing commercial banks that VCF is a significant, untapped market opportunity is a real, but manageable challenge. As this requires a change in mind-set, it is crucial for the AFP Programme to identify and present the full cross-selling, customer loyalty, profitability and market share benefits to encourage banks and other financial institutions to target rural value chains. Nevertheless, the demand for VCF is vast, and the initial response to AFP’s objectives from banks and other financial institutions has been very positive.

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II. Background and Introduction The activities under the Value Chain Assessment deliverable (number A1.6) for the AFP Programme are to: “Undertake the value chain assessments to identify SME financial products to be rolled out to targeted communities through banks. Assessment will also include the identification of various value chain partners that will be integrated towards the development of new products and services, to be rolled out using bank partners.” Value chain finance is defined as: the flows of funds to and among the various links within a value chain. It is any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. Value chain finance is a comprehensive approach which looks not only at the direct borrower, but rather analyses the value chain and those within it, and their linkages in order to best structure financing according to those needs.1 The report begins by discussing value chain finance instruments that are being implemented globally. It moves on to summarize the economic dynamics of the priority districts with potential value chain financing opportunities in each. VCF for three common commodities of the priority districts is then covered, followed by more specific VCF opportunities per district. The subsequent section is an assessment of potential partners for launching proposed AFP interventions (which include banks, cooperatives and other donor funded projects). Value chain finance challenges are then summarized, followed by risk mitigation techniques for banks to counter the challenges. Perceived value chain products based on the preliminary assessment of the priority districts covers five categories of products, innovations and incentives. Finally, the roll out plan for the first six to 12 months of the programme is detailed. It is important to underscore at this point that potential products and services, and potential value chain partners for the prevalent business sectors in the FWDR and MWDR are included in this report. However, actual products and services, specific value chains and sectors, and exact regions where new products and services will be rolled out, can only be finalised after Partner Financial Institutions (PFIs) have been identified and technical assistance plans finalized.

III. Value Chain Finance Products in Use Globally

Figure 1 provides a summary overview of value chain finance instruments – both traditional forms of credit as well as more sophisticated and complex models that are being implemented in today’s environment of more tightly integrated value chains and financial systems. Not all of these instruments are applicable to small farmers’ suppliers or traders – many risk management tools, for example, are more practical for agro-industries and wholesalers. However, these tools can stabilize prices, reduce risks and/or reduce the cost of financing, with the benefits passing to participants throughout the value chain.2

1 http://www.fao.org/ag/ags/agricultural-finance-and-investment/value-chain-finance/en/ 2 Agricultural Value Chain Finance Tools and Lessons, FAO

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Figure 1: Description of Agricultural Value Chain Finance Instruments3 Product Financing 1. Trader

credit

Traders advance funds to producers to be repaid, usually in kind, at harvest time. This allows traders to procure products, and provides a farmer with needed cash (for farm or livelihood usage) as well as a guaranteed sale of outputs.

2. Input supplier credit

An input supplier advances agricultural inputs to farmers (or others in the VC) for repayment at harvest or other agreed time. The interest is generally embedded into the price. Input supplier credit enables farmers to access needed inputs while increasing sales of suppliers.

3. Marketing Company Credit or Lead Firm Financing

A marketing company, processor or other company provides credit in cash or in kind to farmers, local traders or other value chain enterprises. Repayment is most often in kind. Upstream buyers are able to procure outputs and lock in purchase prices and in exchange farmers and others in the value chain receive access to credit and supplies and secure a market for selling their products.

Receivables Financing 4. Trade

Receivables Finance

A bank or other financier advances working capital to agribusiness (supplier, processor, marketing and export) companies against accounts receivable or confirmed orders to producers.

5. Factoring Factoring is a financial transaction whereby a business sells its accounts receivable or contracts of sales of goods at a discount to a specialized agency, called a factor, who pays the business minus a factor discount and collects the receivables when due. Factoring speeds working capital turnover, accounts receivable bookkeeping and bill collection services.

6. Forfaiting A specialized forfaitor agency purchases an exporter’s receivables of freely negotiable instruments (such as unconditionally-guaranteed letters of credit and ‘to order’ bills of exchange) at a discount, improving exporter cash-low, and takes on all the risks involved.

Physical Asset Collateralization 7. Warehouse

Receipts Farmers or other value chain enterprises receive a receipt from a certified warehouse that can be used as collateral to access a loan from third party financial institutions against the security of goods in an independently controlled warehouse. Such systems ensure quality of inventory, and enable sellers to retain outputs and have opportunity to sell for a higher price during the off-season or other later date.

8. Repurchase Agreements

A buyer receives securities as collateral and agrees to repurchase those at a later date. Commodities are stored with accredited collateral managers who issue receipts with agreed conditions for repurchase. Repurchase agreements provide a buy-back obligation on sales, and are therefore employed by trading firms to obtain access to additional funds.

9. Financial Lease A purchase on credit which is designed as a lease with an agreement of sale and ownership transfer once full payment is made (usually in instalments with interest). The financier maintains ownership of said goods until full payment is made making it easy to recover goods if payment is not made, while allowing agribusinesses and farmers to use and purchase assets without requiring the collateral otherwise needed for such a purchase.

Risk Mitigation Products 10. Insurance Insurance products are used to reduce risks by pooling regular payments of clients and

paying out to those affected by disasters. Payment schedules are set according to statistical data of loss occurrence and mitigate the effects of loss to farmers & others in the value chain.

11. Forward Contracts

A forward contract is a sales agreement between two parties to buy/sell an asset at a set price and at a specific point of time in the future, both variables agreed to at the time of sale.

Financial Enhancements 12. Securitization

Instruments Cash-low producing financial assets are pooled and repackaged into securities that are sold to investors. This provides financing that might not be available to smaller or shorter-term assets and includes instruments such as collateralized debt obligations.

13. Loan Guarantees

Agricultural loan guarantees are offered by 3rd parties (private or public) to enhance the attractiveness of finance by reducing lending risks. Guarantees are normally used in conjunction with other financial instruments.

14. Joint Venture Finance

Joint venture finance is a form of shared owner equity finance between private and/or public partners that creates opportunities for shared ownership, returns & risks.

3 Ibid.

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Trade-related financing is the most frequently used form of value chain finance. These credits assume the form of pre-financed sales when credit is provided to farmers by vendors who sell farm inputs, or advance payments given by buyers who purchase farm outputs.

IV. Understanding Economic Dynamics in AFP Programme Priority Districts and the Potential for Introducing VCF Products

The AFP Programme has developed a structured methodology and criteria for the prioritisation of districts in the MWDR and FWDR that will be covered during the five-year programme period. Deliverable #A0.6 provides the details on this prioritisation, as well as the listing of the districts to be covered in the first year. Provided below is the understanding of the local district economies and the potential for value chain finance based on visits undertaken during the Inception Phase. This section covers the eight districts prioritised for AFP interventions in the first year: Dang, Salyan, Rukum, Kailali, Accham, Bajura, Dadelhura and Baitadi. Furthermore, notes from field visits to Doti are included. For a detailed overview of the different value chains across all geographical locations in Nepal, along with the implications for rural value chain financing see Appendix A.

IV.1 Kailali (Dhangadi and adjoining areas) Kailali is approximately 5 kilometres from India and is the regional commercial hub for the incoming flow of vegetable produce and other agriculture products from the outlying districts of the Far West region (especially Dadeldhura). The transportation network infrastructure links the district to over seven of the far western districts. Although there are over 26 bank and financial institution branches; approximately 80% of financial intermediation revolves around financing to traders with minimal financial products for more elaborate value chains. Financial access is the lowest in Bajura, Darchula and Bajang. Besides the large presence of FIs, there are various input suppliers of seeds, fertilizers and pesticides, producers, processors and distributors in the district, with backward linkages to co-operatives, farmer groups and businesses in the FWDR. Some promising sectors in Kairali and most other towns in the priority districts include: flour mills, dairy, poultry, piggery, livestock, fisheries, bee keeping, cotton farming, and consolidation of vegetable produce from neighbourhood districts. Additionally, a warehouse/collection point for farmers to sell at a higher price would enhance the value chain in most priority districts.

IV.2 Dadeldhura (and adjoining areas) Favourable seasonality and better farming practices have increased the potential for high value vegetables and other commodities in the area. There are good feeder load linkages with 18 out of 20 Village Development Committees (VDCs) connected through feeder roads to the main highway. One constraint is the lack of a cold chain along the 136 kilometre corridor to Dhangadi/Attarya. More than 2,500 farmer organizations within groups and cooperatives located in nine districts could benefit from the cold chain while asset finance term loans could be analysed to address this need. Elaborating on this value chain would be the need for financing and guarantee support towards the provision of pick-up trucks by farmer groups to take produce to the cold storage. Warehouse receipt financing support would assist with storing goods to obtain a better price and to address collateral constraints.

IV.3 Accham (Saphe Bagar and adjoining areas) Although there are three banks trying to gain traction in the area, Accham is exceptionally challenging for SME value chain finance due to: a very high

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concentration of marginalised groups, land records being burnt down during the insurgency in the district headquarters of Mangalsen, and seasonal migration (common in a majority of the priority districts). Nevertheless, these are the areas specifically targeted for access to finance and that will need financial product innovation built around this issue. One option may be building closer linkages between banks and cooperatives and creating financial linkages between transport, storage and packaging firms.

IV.4. Bajura (Dhab Bagar, Mallika Bagar, Rittah Bagar, Bhamak Bagar) The district is thinly populated, scattered, extremely rural, hilly and with challenging access. There is limited economic activity of livestock farming, goat rearing and vegetable produce, but currently the only viable option for rollout of financial products and services is through cooperatives and an incentive plan for development of commercial bank and cooperatives partnership.

IV.5. Baitadi (Patan, Khodpe) There are various opportunities for collaboration with commercial banks, MFIs, SACCOS, insurance companies, the district level apex cooperative Nepal Federation of Savings and Credit Cooperatives (NEFSCUN) and Rural Microfinance Development Centre (RMDC). What needs to be developed with PFIs are supplier – buyer linkages for vegetables, goats and poultry. Further study will be required to analyse periods of seeding, harvest, marketing and selling to determine the optimum loan products, amount and terms. There is also a need for tailored term loans for making seed storage drums, which depend on acquisition of raw materials. Constraints need to be addressed for larger loans to accelerate business growth. Branchless banking is also prevalent in the district.

IV.6 Dang (Tulispir and Ghorahi) The major hub is Ghorahi, with significant economic activity also in Tulispir. Both towns have active Chambers’ of Commerce eager to assist the AFP Programme with further district knowledge, bank; cooperative and MFI engagements, identification of value chain financing opportunities, and introductions to prominent SME owners.

Some of the more common VC products include dairy, poultry, lentils, rice, mustard seed oil, honey, herbal medicine, vegetables, potatoes, oranges and dry ginger; all sold at local markets, but in need of large scale commercialization. There is also a need for cold storage for potatoes, oranges and dry ginger in Tulispur.

There are numerous financial institutions in the two towns, several ATMs and branchless banking agents. All banks define SMEs on loan size only and none have staff dedicated to SMEs, especially in the rural outlying towns. Short-term collateralized overdrafts are common for many of the town traders. Term loans are also available, but less common, whereas SME credit products are inaccessible in the rural areas. Western Development Bank has wide coverage in surrounding rural areas.

Promising financial partners are Laxmi Bank, which opened a new branch in the Dang hub of Gorahi on October 9, 2014 and is also opening branches in the priority districts of Salyan and Rukum. Although the branch wasn’t officially opened, it seems inclined to focus on SMEs, but primarily the town traders with no collateral constraints. SMEs are not clearly defined and all loans exceeding NPR one million require audited financial statements. Deficit financing could be considered to cover operating losses, but the AFP Programme would need to collaborate with them on designing factoring products, warehouse receipts and loosening collateral

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restrictions to increase access to finance in surrounding rural areas. Potential value chain partners for the banks include the SME Ganesh’s Dairy and Bakery and Laxmi Milk Cooperative, among others.

Future visits will require more detailed studies on the government cattle insurance project. This is an effective risk mitigation mechanism to minimize commercial banks apprehensive about lending to this sector.

IV.7. Salyan (Khalanga, Sri Nagar, Kapurkot) A variety of VCF potential exists in this district, primarily in the areas of storage and commercialization. The highest quality ginger is produced in this district. There is a large market for fresh vegetable in Kapurkot, where more than 18,000 farmers from four adjoining VDCs are selling their commodities. Oranges are produced in four district VDCs, with further research needed for increased production, storage and marketing. Goat rearing is common in rural areas, but commercialization would need development. Poultry is a prevalent business as well as milk production and its by-products ghee, curd, paneer and cheese. The AFP Programme will conduct further research on commodity storage, transportation and other means of VCF for the 2,000 micro entrepreneurs trained by MEDEP and other programs across the district in need of capital.

IV.8. Rukum (Musikot-Khalanga, Rukumkot, Chaurjahari, Radijyula) Rukum district is well known as a vegetable seed producing district, with demand for Rukum vegetable seeds in many adjoining as well as far away districts of Nepal. There are 16 varieties of seeds produced by the vegetable seed production centre (government owned farm). Other prominent VC products with potential for AFP interventions include ginger, the commercialization of dairy products (>4,000 H/Hs) and livestock for meat production (>4,300 H/Hs). Potential partners include Global Bank, Nepal Bank Limited (NBL), Agricultural Development Bank, Yeti Development Bank, the District Cooperative Union, Shre Digre Shai Kumari SACCOS, Grameen Bikash Bank and the Kishan multi-purpose and dairy cooperative society. Rukum is also relatively better than many mountainous districts in producing electricity (500+ kilowatts generated through micro-hydro).

IV.9. Doti (Dipyal and Silgadi) Similar to other districts, farmers are facing challenges fulfilling collateral requirements of banks; as they are reluctant to accept property beyond the main road network passing through VDCs in the district. Citizens Bank does accept property accessible only by foot, but currently does not have a branch in the district. There is a distinct need for a more reliable network to gather produce and move to larger hubs such as Dhangadi. The district shows a high potential for potatoes and vegetables but linkages need to be established between producers and suppliers.

V. Value Chain Financing Opportunities under the AFP Programme

In this section, we look at potential Value Chain Financing (VCF) opportunities for the AFP Programme. The first part looks at interventions in value chains across all districts in certain commodities, whereas, the second part identifies some quick win interventions for the first year in the 8 priority districts.

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V.A Proposed VCF Interventions in Certain Commodities across the AFP Programme Districts Honey Value Chain Currently, Nepal produces around 1,600 tons of honey annually with more than 10,000 tons of production potential a year. Being used for food, religious and medicinal purposes, beekeeping has become a major source of income for rural people in Nepal.6 Despite the large production potential, there is still an acute need for warehousing honey (see Figure 3 for an example in India), as well as other farm commodities; both for storing commodities to sell at a higher price in the future and to address collateral constraints. The AFP Programme will have discussions on collaboration with the Inclusive Development of the Economy (INCLUDE) Programme, which is supporting value chain development of honey production in the FWDR and MWDRs of Banke, Surkhet, Dang, Pyuthan and Kailali. INCLUDE is assisting farmers and other business and service entities along the value chain to identify and manage activities that help create value in Nepal for products such as honey, medicinal and aromatic plants (MAPs) and dairy. The objective of the programme’s value chain development interventions is to increase the annual turnover and number of producers in selected value chains, to improve the services provided by cooperatives to their members and producers, and to facilitate business linkages among the actors. INCLUDE does not have a concentrated focus on creating greater access to finance.

Nepalese banks have mentioned that factoring has been a challenge due to the buyers’ reluctance to directly pay the seller in the seller’s bank account and apprehension about having their accounts debited if the seller is not paid on time. Nevertheless, it is a product that addresses collateral constraints. The demand is high as purchase orders for commodities are common for farmers; as well as cash needed for invoices so farmers can meet production costs while

4 Agricultural Value Chain Finance Tools and Lessons, FAO, case authors, Chakravathy and Poosapati 5 Closing the gap: Reaching the missing middle and rural poor through value chain finance, Brian Milder 6 http://includenepal.org/article-honey

Figure 3: Warehousing of Honey in Northern India

Honey producers are able to deposit their honey in warehouses managed by the YES Bank appointed collateral manager who assesses its quality and quantity. The honey is pledged as security without transfer of title or possession. The honey receipts are used for borrowing from the bank, which will lend up to 70 per cent of the price of the honey offered from a large honey exporter, Kashmir Apiaries Export (KAE), with whom YES Bank has set an agreement. However, the beekeepers are free to sell to whichever buyer is the highest bidder at the time he/she decides to sell. By not having to sell at harvest, and being able to achieve prices averaging 50 per cent higher and loans rates much lower, total volume of sales of KAE has more than doubled to over US$17 million.4

Figure 4: Factoring in Kenya: The Case of Kenya Gatsby Trust

Kenya Gatsby Trust (KGT) Financial Services Department established a factoring program to bridge the gap between commercial banks and microfinance. The facility pays participating MSEs cash against delivery of product to customers in good standing whose payment terms would otherwise overextend the seller’s working capital. This facility enables MSEs that were previously selling their products to brokers for cash, to cut out these intermediaries and sell product directly into formal markets that pay higher prices but on 30, 60, or 90 day terms. MSEs register with KGT and pay a fee in order to utilize the factoring service. When an MSE delivers its product to its buyers, KGT immediately pays the seller 70-95% of the invoice value. After collecting payment from the buyer on the pre-agreed terms, KGT remits the remaining 5 - 30% to the seller. This system smooth’s cash flow for small and growing businesses and removes the uncertainty of having to collect accounts receivable from larger private companies or institutions. In doing so, it enables MSEs to source from smallholder farmers, who typically require cash payment on delivery, without overextending their working capital.5

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waiting for payment. This form of VCF has high potential as a source of income for financial institutions and could greatly benefit small farmers’ cash flow deficits in the FWDR and MWDR. The AFP Programme will consider MFIs as partners when designing factoring products for the Nepalese context (see Figure 4).

Lentil Value Chain Lentil is mainly grown in the Terai by smallholder farmers. Three of the five top five ranked lentil districts are in the priority districts: Dang in the MWDR, Kailali and Bardiya in the FWDR. The lentil value chain is quite simple. In hill areas most lentils are used for household consumption, but in the Terai producers sell their product to hundreds of middlemen at the village and district level. It is then collected in 11 collection centres spread across the Terai, and from there it goes to approximately 15 large scale mills, many of them located in the town of Birgunj on the Nepali side of the Indian border, with others located around Butwal. Lentil millers and exporters are organized in ANROPI (Association of Nepalese Rice, Oil and Pulses Industry). The export value of lentils has dramatically increased over the last few years, with most of the export going to Bangladesh via overland crossings in the east of Nepal. There is great potential for further export, on the condition that stocks for national consumption are adequate. AFP will visit the exporters to Bangladesh to ascertain the demand for letters of credit, preferential exchange rates for SME account holders and other auxiliary bank products. Dairy Value Chain Dairy is one of the most important agricultural sectors in Nepal, making up one-third of agricultural activity. The dairy sector is primarily covered by buffaloes, which constitute two-thirds of the 1.35 million metric tons of milk produced annually. Other milk animals are cows and yaks in the higher altitudes. Dairy contributes 8% to overall gross domestic product (GDP), employs 130,000 people in the formal value chain, and is served by half-a-million smallholder producers. An additional 2.6 million households--spread throughout the country--produce for their own consumption. Within the sector, however, only 15% of production is processed by formal sector enterprises. In recent years, in response to surging demand for processed milk, there has been a rise in investments in processing facilities. Yet these units are generally operating under their full capacity and rely on imported milk, which has grown rapidly. Local producers, with high costs and low productivity, are not competitive. The opportunity for growth, and for improved incomes, is currently largely unrealized.

The dairy value chains are intensely regulated and were formerly state controlled. Dairy farmers are organized in more than 1,500 dairy cooperatives. Milk is collected fresh from the farming households and stored in chilling centres before being transported to the main factories around the urban centres. The Dairy Development Corporation (DDC) is a fully state-owned corporation and now has a market share of less than 50% of the dairy sector; they operate sales outlets throughout the country. Private sector companies, which started to become active in the last 20 years, now have the largest market share; and are organized into the Nepal Dairy Association. Based on discussion with dairy cooperatives and private dairy processors, the greatest need for the AFP Programme to work on with PFIs are leasing or long-term fixed asset loans for the purchase of refrigerated trucks, high tech pasteurization equipment, milling equipment for feed, and cold milk tanks in centrally located villages. Another valuable product would be life insurance for animals to mitigate risks for banks when assessing loans.

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V.B Potential Quick Win VCF Opportunities for AFP Programme Figure 5 summarizes potential quick win opportunities identified in AFP Programme districts for initiation during the Implementation Phase.

Figure 5: Potential Opportunities by District

DISTRICT PROPOSED OPPORTUNITY INTERVENTION TYPE

Kailali and

the 9

Adjoining

Districts with

Linkages to

the Hub.

- Innovations in Power-Tiller Financing that might pose a better option than tractors for smaller farmers. These can be used for: a) generating electricity, b) harvesting, c) ploughing, etc. With a MSRP of Rs. 180-200,000/tiller, there is potential for over 3,000 tillers/year in these districts.

- Develop a structured AFP Financial Loan and Guarantee Products (AFP Krishi Safalta Tiller Loan) that link the 3-parties to the transaction; and through AFP Programme/CF participation allows sharing of risk through credit line enhancement, linking buyback guarantee, liquidity guarantee and specific proportion of loan guarantees, etc.

Kailali and

the 9

adjoining

districts with

linkages to

the hub

- Upcoming Sugar Mill in Atariya- to be set up in the Kanchanpur area with 1750 Tonnes Crushed per Day (TCD) crushing capacity with provision to go to 2500 TCD. 3.3 million quintals/year of sugarcane processing capacity; upwards of 3,000 farmers could be involved in sugarcane production. Mill will itself generate employment of 700 during the processing season.

- Cultivable land in the adjoining areas is around 25,000 bighas but only 8,000 bighas being currently deployed. Sugarcane farmers to be incentivized.

- Farmers require to be paid within 30-60 days of delivery of sugarcane; previous track record with a closed down mill of not paying farmers has affected the trust factor.

- Tailoring loan products with financial institutions to extend to the farmer groups.

- Invoice discounting product. - Tri-partite agreement.

Dadeldhura - Investment in cold chain – with promoters in Dadeldhura. - Location in Badkara, Capacity – 500-1000 MTs - Rs 100 million investment, around Rs 70 million on the verge

of commitment; looking for funding the shortfall - Immediate benefit to 18 out of 20 VDCs with feeder roads in

the district. Also to benefit would be some of the other 9 districts.

- Investment analysis completed and there is interest in investing by promoters and the ADB project (RISMFP)

- Introduction of scheme to provide information to farmers, traders, middle men and buyers on market prices, input costs, weather, advice on planting/harvesting etc.

- Chilling Centres

- Co-investing the remaining amount under the AFP Programme/CF auspices

- Loan guarantee program to support loans from financial institutions to promoters

- Financing and guarantee support towards the provision of pick-up trucks by farmer groups to take produce to cold chain

- Technical support for orchestrating the financial transaction

- Warehouse receipt financing support - Website, apps for information to farmers

to cell phones/community computers Surkhet

- A marketing cooperative consisting of farmers and traders managing a four chamber warehouse for fruit and vegetables in Birendranagar. The cooperative is interested in further investments into warehouses and a cold storage facility (2,500 tons), with a planned investment calculated at NPR 50 to 70 million.

- Long term construction loan utilizing the credit guarantee and Challenge Fund.

- Stored fruit and vegetables can possibly be used for warehouse receipt financing for farmers lacking collateral.

Kahalpur near Nepalgunj

- The Bheri Potato Cold Storage Cooperative concentrates on managing large seed potato storage with a capacity of 2,500 tons. The cooperative includes 3,900 members and would like to expand their business by adding a 1,000 metric ton cold storage facility and increase the number of farmer members by 1900.

- Long term construction loan utilizing the credit guarantee, Challenge Fund and cooperatives land for collateral.

- Stored potatoes can possibly be used for warehouse receipt financing for farmers lacking collateral.

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DISTRICT PROPOSED OPPORTUNITY INTERVENTION TYPE Dang - Branchless Banking/Micro-banking- Expansion of branchless

to more sub-districts, and within existing establishments to expand clientele to allow wider service offerings.

- Usage of POS machines in these locations capable of reading cards and thumb prints to open banking relationships; including providing micro-banking services to borrower groups.

- Cost-sharing in POS installations. - Assisting in rolling out banking products

through the branchless bank location and with the use of POS devices.

Rupandehi and Dang

- Ostrich Farming- Support expansion plan for a full-fledged ostrich farm located in Rupandehi with breeding facilities also located over an enclosed 50 acre of land in Dang district.

- Present capacity to breed and process 1,000 birds/annum with the potential to expand to 10,000 birds/annum by 2018.

- Investment requirement of $6 million. Promoter investing $2 million in equity, 2 financial institutions have committed to lend $2.5 million with an additional financial institution being seriously courted. Finding shortfall of around a $1 million.

- 300 households currently involved in growing grass used as feed for the bird.

- 20 households also currently involved in rearing around 4-6 birds/household; with plans to expand to more households.

- Potential challenge fund co-investment in the expansion.

- New financial loan product to enable household/farmer families to acquire inputs for raising birds as well as growing the feed required by the farm.

- Development of a new value chain/economic activity in the priority districts.

Banke and surrounding districts

- Investment in grain warehouse in partnership with Global IME Bank and promoters in Banke District.

- The Mill plans to provide the facility to be used by farmers, i.e. the farmers will store their produce (paddy, wheat, etc.) in the warehouse. The Mill will issue a Warehouse Receipt valuing the products at the current market price.

- The bank will provide financing up to certain percentage of the warehouse value.

- When the farmers want to sell the product, the Warehouse will have first right of refusal to buy the stored products at the then prevailing market price.

- Besides Banke, the initiative will benefit farmers in the surrounding districts of Bardiya, Dang and Kailali.

- Co-investing for the construction/expansion of warehouse under the AFP Programme/CF auspices.

- Technical support for orchestrating the financial transaction and MIS.

- Warehouse receipt financing support. - Loan guarantee program to support

loans from financial institutions to individual farmers.

VI. Potential Partners for Proposed AFP Programme Interventions

Several potential Financial Institutions (FIs) have been identified during the inception phase for rollout of AFP programme sponsored VCF activities based on their on-the-ground presence, prior experience with SME and VCF lending, as well as innovation in SME products and services offerings. These institutions will be invited to participate in a solicitation process that will lead to shortlisting of a select number of institutions to rollout AFP Programme interventions. Other partners for VCF interventions also include relevant donor funded programmes and non-government organizations (NGOs).

VI.A. Financial Institutions - Banks Although many banks target SMEs in urban towns, VCF has only been implemented through donor projects at a limited scale. Convincing commercial banks that VCF is a significant, untapped market opportunity is a real challenge. As this requires a change of mind-set, it is crucial for AFP to identify and present the full cross-selling, customer loyalty, profitability and market share benefits to encourage banks to target rural value chains. Other FIs, with a lower capital base than commercial banks tend to work with VCF more frequently than commercial banks. Most of them are relatively small and operate only at the

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district level, although there are a few strong performing Microfinance Development Banks (MFDBs) with large networks and donor project experience such as Nirdhan Utthan Bank. The advantage of these other FIs over commercial banks is based on their proximity to rural SMEs. Nevertheless, due to the stronger capital base, wider branch networks, higher profitability and more robust infrastructure; commercial banks will be the primary financial partners for Output 1 of the AFP Programme. The seven banks highlighted in Figure 6 have shown the most promise at the Inception Phase. Other promising banks to be further analysed during the Implementation Phase include Kumari, Machhapuchre, Sunrise Bank and NMB.

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Figure 6. Commercial Banks’ SME Lending Operations

Potential AFP Priority Partner

Bank

SME Products and Services and Scale of Offering Presence in Priority Districts of West, Mid- Western and Far West Regions as well as

Select Eastern Districts

Managerial Capacity and Interest in AFP Proposed Interventions For Increasing SME Business and

Downscaling Bank of Kathmandu

• Development Credit Unit (DCU) handles Micro Finance, Agriculture and Forest Based Product Loans, Women Entrepreneurship Loans, Kissan Banking Sewa, Equipment Finance, and Vehicle and Accessories Finance via Micro Finance Inst, Co-ops, Financial Intermediary NGOs, Development Banks, Community-Based Orgs, etc.

• Small Entrepreneur Loans vary from NRs1-10 million, 7- 8% of the total lending portfolio, require tangible collateral

• Mobile banking for rural areas in partnership with FinAccess • Implementing m-banking solutions • 730 NRs in millions of Microfinance loans distributed; 4.08%

of total loans were dedicated to deprived sector through microfinance partners/directly (such as RMDC, etc.)

• Net Deprived Sector domestic uninsured loans at NPR 723,919,838

Butwal, Nepalgunj, Dhangadhi, Kohalpur, Tatopani, Surkhet, Ghorahi, Jumla, Tulsipur, Attariya, Tikapur, Guleral, Dadeldhura, Sandhikharka, Beni, Baglung, Dailekh

• A prominent bank with country-wide presence and over 50 branches, Rs. 34 billion in deposits and loans outstanding of Rs 29 billion, highly credible leadership with strong financial sector qualifications in Nepal.

• Strong potential to lend to individual farmers, traders and SME processors. AFP Programme support to bank to expand to more peri-urban/rural areas; piloting SME lending to women; has 24 branchless banking points and maintains high interest in R&D for new products.

• Management experienced with disbursing innovative uncollateralized loans under the USAID-funded Non-Timber Forest Products (NTFP) value chain development project in the MWDR

Laxmi Bank Limited

• Dedicated SME banking unit headed by a progressive manager, and a separate MF entity- designed group lending programmes for fixed assets acquisition as well as an ingenious livestock financing programme working closely with value chain participants

• Small business loans-Sana Byawasai Karja, simplified loan products consisting of Overdraft and Term Loan up to NPR 2.50 million for Working Capital Loans and Laxmi Udyami Karja, simplified term loan product up to NPR 1 million for term loans.

• Small business loans-Supply Finance Loan, simplified loan product Commercial Vehicle Financing.

• Working with NGO Lumanti that guarantees up to 50% of Laxmi Banks’ low income housing loans

• Implementing m-banking solutions, “Mobile Cash” Services; large network of branchless banking agents

• Retail loans, SME loans, and deprived sector comprised 24.42% of portfolio and Uninsured loans amounted to Rs. 488 M

Kohlapur, Nepalgunj, Wailing, Pokhara, Butwal, Kapilvastu, Siddharthanagar, Narayanghat, Parsa. Three new branches in priority districts of Dang, Sulyan and Rukum.

• Acknowledged as the most progressive bank in SME lending; has also established its own separate MF intermediary, known for bringing in product and services innovation, keenly interested in partnering with AFP, well regarded by DFID.

• Discrete AFP TA assignments focused on SME product profitability analysis, loan officer productivity training, product packaging and marketing, development of HR/staff retention policies and loan officer incentive programme development.

• Support targeted financing to priority rural value-chains, branch expansion and network efficiency improvements.

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Figure 6. Commercial Banks’ SME Lending Operations Potential AFP

Priority Partner Bank

SME Products and Services and Scale of Offering Presence in Priority Districts of West, Mid- Western and Far West Regions as well as

Select Eastern Districts

Managerial Capacity and Interest in AFP Proposed Interventions For Increasing SME Business and

Downscaling Citizens Bank International

• Over NRs 1 billion in SME lending of a total outstanding portfolio of NRs 18 billion.

• A Citizens Fast Track Loan that targets customers in remote areas with emphasis on women. Uses agricultural land as collateral, at a 13% interest rate, 1,000 customers with 400M NP outstanding. Maturity depends on their income level. Has been most successful in the FW and MW region.

• For deprived lending, don’t lend directly but work with MF partners, total deprived sector uninsured loans were Rs. 439,006,727 (3.1% of total loans and advances).

• Branchless banking network.

Simikot, Mahendranagar, Dodhara, Beldandi, Dhangadhi Pahalmanpur, Birendranagar, Chhinchu, Pabitra Bazar, Mainapokhar, Gulariya, Nepalgunj, Bijauri, Ghorahi, Arthunge, Pokhara Armala, Pokhara, Butwal Ranibagiya, Butwal, Kerwani, Meghauli, Gunjanagar, Bharatpur, Hetauda.

• Dynamic and progressive minded CEO who is also the President of the NBA and a former Executive Director at NRB.

• AFP support towards value chain based finance, and linking potential borrowers to value chain facilitators, more product innovation and introduction through branch network, as well as branch network efficiency improvements.

• One of the few, possibly only, commercial banks that accept property in rural areas not accessible by road.

Mega Bank • Network of branchless banking agents • Planning a warehouse receipt system for a rice storage

facility, including a loan for the storage facility • Provided loans to sugar cane farmers who supply the sugar

to the processing plant.

Dang, Dailekh, Banke, Kailali • Rs. 17 billion in deposits with loans outstanding of Rs. 14.5 billion.

• Progressive leadership interested in AFP. Programme Activities; especially in value chain finance driven interventions.

Siddhartha Bank • Branchless banking network with WFP and UNCDF Dang (2), Dailekh, Banke, Kailali (2), Kanchanpur

• Value chain finance interventions in priority districts.

Civil Bank • Micro-banking and branchless banking coupled together as a consolidated offering that is rolled out through agents

• Branchless banking outlets in over 14 districts with another 20 planned in the next fiscal year; these outlets also promote account opening and provision of micro-loans using PoS devices capable of reading cards and thumb-prints

• Recently acquired Class C and D financial institutions to increase access in rural areas

Pyuthan, Banke, Dadeldhura • Support from AFP towards increasing branchless banking outlets in more sub-districts.

• Increasing the deployment of POS machines in locations capable of reading cards and thumb prints to open banking relationships, including providing micro-banking services to borrower groups.

• Value chain financing opportunities around ostrich farming, poultry and other agriculture sectors.

Global IME • Global Small Business Loans (GSBL) and Global Krishi Karza (GKK)- the most successful SME products on offer.

• 80% of the 16,000 loans issued are deemed as small business loans.

• Successful branchless banking model deployed by a dedicated branchless banking team.

Rolpa, Dang (2), Rukum, Surkhet, Banke (2), Kailali (2), Baitadi, Dadelhura, Kanchanpur.

• Pro-active leadership keen to expand branchless banking presence and introduce innovations in value chain financing.

• Interested in pursuing warehouse receipts financing in Banke and Sarlahi working with prominent rice/wheat/oilseeds processors.

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VI.B. Cooperatives Although the cooperatives in the section below are not located in the eight first year priority districts, they are in the programme’s overall priority districts and deserve special mention due to the advanced capacity level and potential to significantly increase employment and expand access to finance for large numbers of farmers. These are cooperatives in need of larger capital investments, but with significant impact potential. Bheri Cold Storage was visited during the Inception Phase, while the other two will be visited during the Implementation Phase. Bheri Cold Storage Cooperative Limited, Kahalpur near Nepalgunj, Banke district Already discussed as a quick win in a section above, the Bheri Cold Storage Co-Operative Limited, founded in 2008, manages a five-floor, 2,500 ton cold storage facility for large seed potatoes. It was initially financed by the National Cooperative Board, which gave them a grant for NPR 48.1 million for the building and the local municipality, which gave them 30 katha of land, which can be used as collateral7. Bheri has permission to work throughout Nepal and has the following membership composition: 3,100 shareholders, 88 VDCs, 37 cooperatives, three District Development Committees and one cooperative development board. Potato production is done (individually) at group level, while the groups are members of the cooperative. According to the Cooperative Act only members and ultra-poor peasants may have access to the facility. Bheri would like to double its storage capacity to increase membership by 1,900 and better serve existing members. The expansion would also allow them to store other fruits and vegetables, in particular for produce coming from hill areas down to the Terai, as is the case with apples from the MWDR district of Jumla, which produces over 4,000 metric tons per annum. The board has approved the capacity expansion strategy and is in the process of writing a business plan, but projects to need NPR 100 million, secured by the premises. Marketing Cooperative, Birendra Nagar, Surkhet A marketing cooperative consisting of farmers and traders is managing a marketplace (four chamber warehouse) for fruit and vegetables. The cooperative initiated the construction of the warehouse, an investment of NPR 4 million, with financial support from USAID’s Nepal Smallholder Irrigation Market Initiative (SIMI). The trade at the market place remains in the hands of individual farmers and traders. The cooperative is interested in further investments into warehouses and a cold storage facility (2,500 tons), with a planned investment calculated at NPR 50 to 70 million. The cooperative has applied for support from the grant facility of IFAD’s HVAP, since bank financing is challenging due to the lack of collateral. The AFP programme will follow up with the cooperative during a field visit and HVAP to potentially serve as a liaison between the cooperative, a PFI and the Challenge Fund. The increase in farmers receiving access to finance and employment will also need to be ascertained.

VI.C. Donor Funded Programmes Figure 7 provides a list of donors involved in supporting rural and SME finance. Further meetings will be conducted by the AFP Programme during the first and second months of the Implementation Phase to maximize potential synergies and avoid competition.

7 20 katha = 1 bigha = .16 hectare

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Figure 7: Donors Active in Rural/SME Finance Support

ADB IFC WB DANIDA (UNNATI)

KFW

Brief Project Description

Credit and technical support to restore and strengthen Small Farmers Development Bank and expand microfinance services in the hills and mountains.

Supports private sector firms and reaches farmers through their supply chains. Invests in commercial banks and venture funds that provide SME loans.

Project for Agriculture Commercialization and Trade to improve the competitiveness' of smallholder farmers and the agribusiness sector in selected commodity value chains.

A 5-year Programme (2014 - 2018) focusing on the value chains of tea, ginger and dairy.

MSME and/or value chain financing

TA for FIs

SFDB, ADBL, Grameen Bikas Banks

Nirdhan Utthan Bank

Nirdhan Utthan Bank

Not finalized, expected to be Citizens Bank, Mega Bank and/or Laxmi Bank

Funding

SFDB, ADBL

Bank of Kathmandu Laxmi Bank

Regions

Mid and Far Western

Across Nepal 25 districts Seven hilly districts in the Eastern region

Other additional donor funded Projects Involved with VCF to be contacted by the AFP Programme for partnerships will include:

SAFAL (Sustainable Access to Finance and Livelihoods in Nepal): is funded by UKaid through DFID and implemented by Blueberry Hill Charitable Trust and Mercy Corps Nepal. The Blueberry Hill Charitable Trust implements in four of AFP’s priority districts: Doti, Achham, Bajura and Dadeldhura. Mercy Corps implements in seven of AFP Programme’s focus districts: Banke, Jumla, Rukum, Kalikot, Bajhang, and Kanchanpur. SAFAL key activities are:

o Stimulate demand for financial services by strengthening community institutions and providing financial literacy training, livelihood support and market linkages.

o Strengthen supply of financial services by supporting financial institutions to design and deliver commercially-viable products and services.8

Inclusive Development of the Economy (INCLUDE): is a joint Nepali-German initiative with technical assistance provided by GIZ. Five districts in the MWDR and FWDR are being supported in assisting farmers and other business and service entities along the value chain to identify and manage activities that help create value in for products such as honey, medicinal and aromatic plants (MAPs) and dairy.9

8 http://samriddhapahad.org/project.php 9 http://www.includenepal.org/home

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High-Value Agriculture Project (HVAP): The programme helps remote communities to integrate into the local rural economy through initiatives that develop small businesses and increase trade by building the capacity of rural institutions. It operates in the Hill and Mountain Mid-Western Development Regions. It aims to increase the incomes of these populations by responding to the private sector’s demand for 18 high-value crops such as vegetables, fruits, non-timber forest products, medicinal and aromatic plants, and livestock.10 Rural Access Programme (RAP): “The overall arching purpose of RAP 3 is to boost income and improve quality of life for the residents of some of Nepal’s poorest districts. This is being achieved through generation of employment, access to markets, and access to economic opportunities.” AFP will meet with various partners of DFID’s Rural Access Programme to determine potential partnerships on increasing access to finance for women. Meetings will be conducted with IMC Worldwide, Helvetas Nepal, Practical Action, Winrock International, Alliance Nepal and Young Innovations to discuss successful interventions and possible collaboration.11 Micro-enterprise Development Programme (MEDEP): The programme is now in its fourth phase (August 2013 - July 2018). Its role has a more specific focus on developing conducive environment and building institutional capacity of the Ministry of Industry and other partners for the sustainable delivery of micro-enterprise development services contributing to reducing poverty through transferring entrepreneurship development knowledge and skills; creating, promoting, and sustaining micro-enterprises, and generating self-employment and employment opportunities to the rural poor.”12

VII. Addressing Challenges in Implementing Value Chain Finance

Nepal’s agriculture is still at a low level of development. Commercialization is at the beginning phase of development, receiving substantial support from donors trying to develop the existing potential in production, processing and trade. However, various challenges along the value chains need to be reviewed by the AFP Programme, and when possible, addressed during the Implementation Phase to increase access to finance and utilize the production and market potentials. These include:

• Finance: There is a clear lack of access to capital for expansion with access to banks

problematic for rural farmers in the priority districts. Many agricultural stakeholders are alienated by the paper work and lengthy procedures. The lack of collateral is a paramount constraint, exacerbated by a majority of the banks requirement that the collateral be accessible by a paved road network.

• Production: The production of value chain commodities is scattered, with low levels of technology used in production, poor seed and nursery materials, poor husbandry skills and feeding knowledge, pests and diseases, insufficient pest management, and poor on site farm infrastructure. The production challenges further add to the bank’s reluctance to engage in VCF.

• Framework Conditions: There is a lack of research and regulations, poor extension 10 http://www.hvap.gov.np 11 http://www.rapnepal.com 12 http://www.medep.org.np

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services, and infrastructure problems with roads, electricity, water, and communication. Roads are particularly a problem and make it difficult for the banks’ loan officers to conduct a site visit when accessing an application and to monitor active loans.

• Post-Harvest Management: There are low standards of sorting, grading, packaging and storage facilities, both on farms as well as at collection centres or market places. There are limited cold storage facilities and poor quality of transport, especially during the rainy season in the hills and mountains. The limited cold storage is a prominent constraint throughout all priority districts, and one that must be addressed when selecting PFIs. Potential products stemming from this challenge are medium term loans for storage construction, and warehouse receipt financing for farmers to store their commodities for collateral, as well as hold their commodities until market prices increase.

• Marketing: Very few marketplaces exist, those that do are poorly equipped, and are dominated by the Indian market as an export destination. There is a lack of market information (domestic and international), laboratory facilities to control residues to meet international standards, and there is no culture of branding.

• Value Addition: Product quality is often insufficient, and the market is mostly focused on the export of raw materials and the import of finished products. The processing industry is still at a low level of development, with underutilized capacities present, particularly in the dairy subsector.

All the above-mentioned challenges contribute to the reluctance of banks to engage in value chain finance in the rural towns and villages of the priority districts. Lending to SMEs in populated towns with a solid road infrastructure is not an issue for banks, as collateral is generally available and the businesses are easy to monitor. However, banks will not strategically target rural businesses in need of VCF without AFP Programme proposed incentives such as the Challenge Fund, credit guarantee scheme and technical assistance. A cost to benefit analysis will need to be undertaken to further convince the banks that the challenges can be managed and the sector has profitability potential. The AFP programme will undertake this in partnership with other donor-funded value chain projects.

VIII. Working with Financial Institutions to Mitigate Value Chain Risks

A thorough risk analysis with PFIs will be a crucial component for the successful launch of innovative products and services for value chain finance (VCF) by the AFP Programme. Banks are generally risk averse and VCF products are not yet offered by the banks at a large scale. The credit guarantee schemes and Challenge Fund are useful risk mitigation mechanisms; nevertheless, banks must thoroughly comprehend all risks for full buy-in and successful product launching. Figure 8 will be used as a guideline when assessing various value chains and mitigating risks with PFIs.

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Figure 8: Risks to Financial Institutions13

Type of Risk Risk Mitigation Measures

Production: These arise from a variety of factors (input supplies, lacking or late credit, low quality standards, improper storage and packing, weather risks, diseases, etc.).

By employing a comprehensive chain approach that looks beyond the borrower to the health of the chain, the PFI is better informed about the capacity of the chain partners and linkages, including producers’ capacity to ensure adequate supply in terms of quantity and quality. The PFI can also finance and manage financial transactions for various actors in the chain (e.g. input suppliers, storage facilities, trade) and appropriate insurance.

Supply: Situations where producers (farmers) may not honour their contractual supply obligations. A commonly observed problem in contract farming is “side-selling,” which derails the built-in repayment mechanisms for farm credits.

Strong producer organizations (farmers’ cooperatives) and/or group solidarity systems (mutual guarantees based upon savings) provide some assurance that contracts will be honoured and the risks of “side-selling” minimized. Reliable supply allows for collateralization through warehouse receipts in which the PFI becomes a party.

Finance: The non-repayment of credit provided to farmers, other producers or other value chain actors. This risk is borne by the PFI or the chain agent acting as retail-finance provider for farmers/other actors or by both.

Non-repayment of credit to chain actors can be greatly reduced by incorporating a lead actor considered trustworthy. Such actors help instil and ensure accountability. Arrangements of this type are strengthened when a lead actor (co-signatory) is able to absorb risks (e.g. through its equity capital or member savings) and when contingency arrangements are in place to deal with unavoidable risks (such as crop failure). Providing financing through a tripartite arrangement not only improves the efficiency of credit delivery, but minimizes the risk of non-performing loans.

Marketing: The inability to sell on time, in the right quantities and/or at an acceptable quality standard. This includes the short- and long-term market situation and the use or absence of marketing contracts.

Fixed contracts throughout the chain help stabilize turnover, especially when dependence on one market can be avoided. Sales or export agreements are a strong asset in negotiations with financiers, especially when they are also financing other agribusinesses within the value chain. In niche markets, such as fair-trade channels, the buyer relationship can significantly reduce marketing risks, even for small-producer groups. Product standards and certification can also reduce risks.

Price: Risks arise from fluctuations in market prices in the period between the time a farm contract is signed and the delivery date. These risks are borne by producers/farmers or the buying chain actor, depending on the type of contract.

Direct linkages to the end-consumer markets can promote fair and relatively stable prices. Information technology can be used to minimize price risks. Contractual arrangements should be transparent to help the PFI assess risks. Forward contracting and futures are examples of more advanced price-stabilization mechanisms in VCF.

Climate: Shocks produced by weather, such as droughts or floods. Weather shocks can trap farmers and households in poverty, but the risk of shocks also limits farmers’ willingness to invest in measures that might boost their productivity and improve their economic situation.

Agricultural insurance, including weather index insurance, has shown potential to help small-holders, PFIs and input suppliers manage low to medium-frequency covariate risks such as drought or excess rainfall. Farmers can buy insurance as part of a package (e.g. credit and other financial services, technology, agricultural information) or, occasionally, as a stand-alone product.

13Agricultural Value Chain Finance Strategy and Design, Technical Note, IFAD

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IX. Phasing in Value Chain Finance Products during the Life of the AFP Programme

As discussed in earlier sections, Value Chain Financing encompasses a wide range of products and services. It is envisaged that during the early months of the AFP Programme, variations of the six most common value chain credit products: term loans, overdrafts, order finance, warehouse receipts, invoice discounting and leasing (hire purchase) will be designed and piloted with PFIs. Most of these products are well understood, widely offered and can be rapidly adapted to value chain financing. As collaboration with the banks mature, a wider range of more innovative products and services will be launched to increase the competitiveness of agricultural value chains while lowering transaction costs for farmers in the FWDR and MWDR.

The five broad categories of value chain financing and incentives for AFP include:

1. Credit 2. Savings 3. Ancillary products 4. Delivery Channel Innovations 5. Incentives

IX.1 Category 1: Credit Products Term Loan • Used to finance the purchase and sale of agricultural, trade, service or manufacturing

products. • Borrowed for a set period within an agreed repayment schedule, with farmers often

needing more flexibility with repayment schedules to coincide with the harvest. • Short-term: 4 - 12 months primarily for working capital for trade and to meet production,

transportation and marketing of agricultural produce and animal husbandry. • Medium-term: 13 – 36 months primarily for purchase of farm equipment, raising of

livestock and processing equipment. • Long-term: 37 – 84 months primarily for new and existing projects requiring heavy capital

outlay and / or long maturation periods. Overdraft • Provided when businesses make payments from their current account exceeding the

available cash balance. • Ceiling amount established, but interest paid on utilized amount only. • Designed to meet short-term cash flow obligations. • Usually requires collateral. • Can be a seasonal facility for growers of beans, apples, rice, wheat, vegetables etc. • Growers can be allowed to overdraw their current account against cash flow projections

up to an agreed seasonal limit. Order Finance • Short-term borrowing allowing a business to draw money against a purchase order prior

to the delivery of supplies or fulfilment of a service contract. • The business borrows a percentage of the value of the purchase order, which should be

sufficient to enable the client to produce or acquire goods and services to satisfy an

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order. • The contract won should be in the same business line and the business must have

technical competence in managing the contract, with proven experience managing orders of equivalent size by a specified time.

• The loan can be collateralized with the borrower’s assets, similar to a term loan and overdraft.

• Or, to counter the insufficient collateral constraint in rural Nepal, the bank would extend loans against secure sales contracts or purchase orders. Under this approach, the bank receives a confirmed purchase contract from the producer, and then enters into a tripartite agreement with the producer and buyer that commits the buyer to pay the entire amount of sales due to the producer to the bank. After payment, the bank deducts the interest and principal against the producer‘s loan, and remits the remaining funds to the producer.

Invoice Discounting (trade receivables finance) • Short-term borrowing used to improve a company's working capital and cash flow

subsequent to the fulfilment of an order for products, services or construction. • Allows a borrower to draw money against its sales invoices / accounts receivables before

the buyer has actually paid the borrower / seller. • The loan can be collateralized with the borrower’s assets, similar to a term loan (pre-

shipment). • The business borrows a percentage of the value of its sales ledger (maximum 80%),

effectively, using the unpaid sales invoices / accounts receivables as collateral for the borrowing. Similar to order financing, a tripartite agreement is drawn up with the producer and buyer that commits the buyer to pay the entire invoice amount to the bank. After payment, the bank deducts the interest and principal against the producer‘s loan, and remits the remaining funds to the producer.

Leasing (hire purchase) • An alternative to long-term loans for a farmer (or other borrower) to buy equipment,

vehicles or other assets on a contractual basis. • The borrower chooses the asset from a vendor and utilizes the asset. • The bank pays the vendor for the asset. • The borrower pays the bank in instalments. • The asset becomes the borrower’s property after all payments are made. • The bank can repossess the asset in case of default.

IX.2 Category 2: Savings • Savings: Several banks offer women oriented savings products, but few banks offer

savings products that align with SMEs cash flows or their value chains, with the exception of Standard Chartered Bank. To enhance access to finance in the priority districts and target specific value chains, the AFP Programme will collaborate with banks to conduct research on cash surpluses and deficits throughout the value chain to collaboratively design SME savings specific products. SME savings products will need to include features attractive to SMEs: a lower minimum balance, preferred exchange rates for customers with SME accounts, current accounts with no or minimal transaction charges, and higher interest bearing term deposit accounts, etc.

• Remittances: Currently the total remittance is overwhelmingly withdrawn from the bank one time and utilized for consumption purposes. As remittances are frequently sent by the large Nepali Diaspora, the AFP Programme will work with banks on designing

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savings products where SMEs will be encouraged to maintain a certain amount of funds in an interest bearing account, preferable for business investments or for loan repayments.

IX.3 Category 3: Ancillary Products and Services Apart from the basic banking activities of deposit mobilization and lending the funds as loans and investments; banks provide a variety of other services/products benefitting SMEs: • Funds transfer service: useful for sending and receiving money domestically and

internationally. The products that cover these services are demand drafts, pay orders, electronic fund transfers, etc. This service is especially useful for SMEs importing or exporting goods.

• Advance Payment Guarantees: a form of protection that makes it possible for a buyer to recover any advance payments extended to a seller (bank client) in the event that the seller fails to abide by the terms and conditions that govern the purchase of goods or services. May be used when goods are imported or exported; or with domestic transactions such as the purchase of heavy equipment, construction projects, or large quantities of retail goods.

• Key man insurance: a policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business.

• Bid Bond: A written guaranty from a third party guarantor (usually a bank or insurance company) submitted to a property developer/owner by a contractor (bidder) with a bid. A bid bond ensures that on acceptance of a bid by the customer, the contractor will proceed with the contract and will replace the bid bond with a performance bond.

• Foreign exchange service: the conversion of one currency into another currency is an essential service for importers and exporters.

• Custodial service (safe deposit vaults): banks securely hold valuables and documents, for possible use as collateral.

• Investment service: Investment of money in mutual funds run by banks. • Debit and credit cards: primarily intended for security and convenience. • Internet banking: useful for the transfer of funds to another account in the same bank or

another bank. • Salary accounts for employee payments. IX.4 Category 4: Delivery Channel Innovations

• Warehouse receipt financing: facilitates a partnership between a warehouse, a financial

institution (FI), and the farmers in a network to finance the working capital needs of the latter. Farmers or other value chain enterprises receive a receipt from a certified warehouse that can be used as collateral to access a loan from third-party financial institutions against the security of goods in an independently controlled warehouse. Such systems ensure quality of inventory and enable sellers to retain outputs and have the opportunity to sell for a higher price during the off-season or other later date.14 There are reports on donor supported initiatives in Nepal to introduce a warehouse receipt system, but these initiatives are still on a trial base and have not yet established value chain financing instruments. A warehouse receipt system is not yet covered by NRB regulations, although the approach has not been opposed. Warehouse receipts would significantly enhance VCF in most priority districts.

14 Agriculture Value Chain Finance Strategy and Design, Technical Note, IFAD

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• Mobile Technology: Mobile finance can promote increased investment in value chains by

providing a cheaper, more efficient, traceable and transparent payment method for high- volume, low-value transactions. A quicker, safer and more efficient transaction channel allows the value chain to better meet market demand. Using mobile technology can facilitate more widespread access to agricultural financial services by reducing the administrative costs to financial institutions and providing more accessible repayment and savings options for customers. Mobile money transfer also allows agribusinesses to offer farmers more financial services, such as payments into savings accounts or electronic vouchers for inputs and services. The development of a mobile financial services ecosystem can additionally open up business opportunities for buyers, traders, input dealers, service providers and farmers.15

A few examples of mobile technology for VCF include: ⇒ In agricultural value chains, the usage of mobile phones can reduce the cost to

agribusinesses working with large numbers of small farmers and support increased investment in rural areas.

⇒ Can be utilized for large buyers of agricultural commodities to transfer working capital to their intermediary buyers, who then buy crops from farmers and pay with mobile money transfers.

⇒ Alternative delivery channels, like Point of Sale machines, enable farmers to withdraw cash at more convenient locations (such as input supply stores, warehouses, and kiosks). For the buyer and small-holder farmer, this reduces time, travel expenses, and mitigates the risk of theft when travelling with cash in remote areas.

• Branchless Banking: is the delivery of financial services outside conventional bank branches using retail agents and technology. It is based around recruiting retail stores as agents, who are able to accept deposits and enable withdrawals in addition to their usual business lines in return for a small commission. The bank provides the agent with simple technology such as a POS device or phone, through which they can connect directly to the bank using the mobile phone network in order to verify customer identities and record transactions.16 Laxmi Bank was the first to launch mobile money services through 250 mobile agents. Services include mobile phone payments, loan disbursements and repayments, savings deposits and withdrawals, and money transfers.17 Global IME Bank, Civil Bank, Mega Bank, NIBL, Siddhartha Bank and others also offer various forms of branchless banking.

• Validation Clearing Bureau (VCB) eInvoice Banking: The VCB is a web based system whereby supplier’s invoices are automatically validated electronically by the VCB and are then able to be financed by their bankers through discounting of the invoices. Principles of the VCB include: • Banks purchase receivables from high quality buyers.

15 Kendall, J., Machoka, P., Veniard, C., Maurer, B. (2011, May). An Emerging Platform: From Mobile Money Transfer System to Mobile Money Ecosystem 16 http://www.upsides.com/2013/03/25/banking-beyond-branches/ 17 Strengthening the Foundations for Inclusive Economic Growth. Nepal economic, Agriculture, and Trade (NEAT) Activity: Final report. August 2013

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• In this effective reverse factoring, the credit risk is equal to the default risk of the buyer and not the supplier.

• The financial risk is eliminated in view of the financial strength of the buyer. • The operational risk (fictitious invoices, credit notes issued due to damaged stock,

poor quality stock, and price differences) is greatly reduced through the VCB processes and systems implemented with the buyer.

• It is under operational risk where banks usually suffer losses in ordinary factoring. In reverse factoring in view of the VCB procedures, these losses can be substantially reduced.

Figure 9: Validation Clearing Bureau Flow Chart

The flowchart is executed as follows:

1) The supplier’s (bank client/seller) invoice is sent to the debtor (buyer) with the delivery of the goods for financing.

2) The supplier submits the invoice to the bank. 3) The debtor/buyer, upon receipt of the goods, checks the goods and passes the

invoice to Accounts Payable for entry into the accounting system. a. An automated link to VCB is available for coding into the buyer’s accounting

system, which will then automatically submit the invoice information to the VCB web platform

4) The bank inputs the invoice information to the VCB. Invoice information uploaded is: Invoice number; account number; order number; buyer’s name; invoice face value and due date for payment.

5) The bank logs onto the VCB web platform and view’s the validated supplier’s invoice/s.

6) The bank can then discount the validated invoice in accordance with their standard Invoice Discounting credit procedures

Supplier (Seller) Debtor (Buyer)

Bank

Validation Clearing Bureau (“VCB”)

1. Supplier Invoices Debtor

4. Bank uploads

Invoice to VCB

5. Bank view’s validated Invoice at VCB

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Currently, there is no known system similar to the VCB in Nepal. Nevertheless, the AFP Programme will research the capacity of designing and implementing a system, as the advantage to banks could counter resistance to discounting invoices and greatly enhance access to finance in the priority districts. If the technology is feasible, the banks would then need to be convinced of the following advantages:

• The lending portfolios can increase significantly. • The invoice is validated by the buyer and the credit risk is mitigated accordingly. • The system can reduce process times for credit applications. • Earnings increase from interest and non-interest revenue. • Provides cross selling opportunities. • Fraud is prevented as invoices are validated by the buyer and cannot be entered

more than once onto the system.

IX.5 Category 5: Enablers

AFP will offer matched financing through the Challenge Fund, guarantees through the Guarantee Fund scheme and targeted technical assistance (TA) to help traditional and unconventional financial agents reach MSMEs in rural and agricultural value chains. 1. Loan Guarantee Scheme: A loan guarantee facility to be housed on an interim basis with participating banks (and later institutionalized into a legal entity) will serve as an additional incentive for SME lending. The main objectives of the loan guarantee will include:

• Improving SMEs access to credit from private banks through the provision of up to 75% of guarantees on individual and a portfolio of loans.

• Support the use of modern credit methods and sound banking practices in providing loans to SMEs.

• Assist private banks in developing profitable new markets lending to SMEs. • Portfolio guarantees to MFIs and Banks that increase loan sizes to higher thresholds.

2. Challenge Fund: A cost sharing grants scheme that encourages the private sector to invest in riskier ventures that can lead to increased financial access and facilitate sustainable growth in employment. The main objectives include:

• Mobilise the financial sector to invest in and develop financial sector capacity in target districts where AFP Challenge Fund could share the initial risk.

• Catalyse the financial services sector in target districts to create, widen the range of products, introduce new channels for delivery of financial services in rural communities (including innovative mobile financial service solutions), improve efficiency of intermediation and extend services to the poor.

3. Technical Assistance: Training and capacity building will be provided to all PFIs through tailored training sessions, seminars, individual staff mentoring, exposure visits and training of trainers’ programmes that enable the PFIs to absorb the lending technology adequately and to build up capacity. Value chain studies, manuals, policies and procedures, costing and pricing structures, recruitment plans, application forms, loan contracts, loan assessment workflow charts and various technical tools will be designed for all innovative products during the initial piloting phase of each product and for wide-scale launches.

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The TA will be tailored to the specific market vision and strategy of each partner bank(s) and adapted to fit within the bank(s) broader organizational, operational, management, systems and procedures. Technical specialists with vast field experience creating VCF products such as warehouse receipt financing may be utilized to assure that the product design, technology, legal structures, policies, procedures, and risk mitigation mechanisms follow universal best practices. The details of each bank’s technical components will be included in a comprehensive work plan, structured on an annual basis, and encompassing the following key technical area components, with associated benchmarks, deliverables, and impact targets:

• Component 1: Launch of Technical Assistance - with concretely defined project deliverables, objectives, and the work plan of activities to achieve these goals.

• Component 2: Institutionalisation of an in-house technical team at each PFI to champion new products, develop policies and procedures through a pilot phase, full roll out within a demonstration branch and ultimately, various bank branches.

• Component 3: Implementation of credit risk management policies to provide PFIs with an awareness of the most pertinent risk of expanding into VCF and recommendations on how best to address these threats.

X. AFP Programme Value Chain Financing Launch Methodology

As Value Chain Finance (VCF) requires an integrated approach, a thorough analysis of the entire value chain project will be done to ensure weaknesses and gaps are addressed in the design and subsequent implementation of VCF. There will be a need for AFP PFIs to recognize the entire VC of any commodity as one interdependent unit. This will help to understand the nature of support required to enhance the value generated by the whole unit. This recognition will be helpful to PFIs as they are often involved in financing players at multiple levels of the VC through different types of credit products. Thus, any input which helps the VC in improving its overall productivity, will reduce the risk for the bank across all the credit products offered to different players in the VC. One of the most important inputs is improving the market linkages of the VC at both of its ends. At the producer level, it will involve ensuring their access to good agricultural inputs, suitable equipment and timely credit. At the level of trader/exporter, it will involve providing them with marketing links to buyers around the world as well as provision of timely line of credit needed for export. Another area where additional impetus will be pursued is risk management for the producer and the produce through weather/crop insurance. To reduce the losses from weather fluctuations, it is important to create awareness for various insurance products and insure crops.18 As there are differences in the VC products, the AFP Programme will not have one standard offering across different VCs. Thus, technical assistance provided by the AFP Programme will assure that PFIs focus on developing customized products based on the needs of the players in a specific VC. This requires an in-depth understanding of the VC and the 18 Agricultural Value Chain Financing (AVCF) and Development for Enhanced Export Competitiveness, African Development Bank Group.

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relationships between the different players within it. This understanding will also allow PFIs to accurately measure the value generated by the entire VC as a unit and thus, help in more accurate estimation of the different players’ repayment capacity. One of the biggest problems PFIs face in lending to small-scale agricultural producers is high credit risk and non-availability of collateral. To overcome the credit risk challenge, the AFP Programme will provide TA to the PFIs and the small-scale agricultural producers. This will be done in collaboration with the PFI, AFP Programme financial literacy team and/or specialised entities. This ensures that producers are using the most optimal cultivation techniques and agricultural inputs, which reduce the chances of crop failures and subsequent defaults.19 To overcome the lack of collateral, the AFP Programme will be collaborating with the PFIs on designing credit products such as warehouse receipts where commodities are stored and used as collateral, and factoring where the purchase order or sales invoice serve as collateral replacements. The Challenge Fund and loan guarantee scheme will further mitigate collateral constraints. In most cases, small-scale agricultural producers are exploited and agree on the rates offered by middle-men as they are not aware of the prevailing rates in larger markets. This situation can be improved if there are means to regularly inform them about the prevailing rates of different products. In many parts of the world, different approaches have been tried to solve this problem. The AFP Programme will collaborate with PFIs to determine the most efficient information sharing system available to assist the farmers and thus reduce overall credit risk. Regional models to emulate include: (i) Kissan (farmers) Call Centers in India use cell phones to disseminate information to farmers; and (ii) the widely recognized ITC’s e-choupal model (in India), and Information and Communications Technology (ICT) platform used to disseminate the same information. The same system can also be used to disseminate useful information like weather forecasts, farming techniques, and updates on crop infections.20

XI. Rollout Plan

As noted above, during the first year, AFP Programme will focus on the eight priority districts of Dang, Salyan, Rukum, Kailali, Accham, Bajura, Dadelhura and Baitadi. Banks and large-scale cooperatives such as those noted above will be visited to assess financial needs during the first three months of implementation. These institutions will be targeted due to the wide impact along the value chain and higher capacity for increasing access to finance for a large number of farmers. Specific Requests for Proposals (RFP) will be distributed to address the specific financial constraints. During the first month of the Implementation Phase, a focused Request for Proposals (RFP)--supported by already issued Challenge Fund solicitation--will be advertised which focuses on the most salient obstacle to access to finance along various value chains: including lack of, or insufficient collateral. The RFP will target the priority districts and its objectives will be the design and launching of warehouse receipt financing, and purchase order and sales invoice financing products which include legally binding tri-partite agreements between the banks, buyer and seller (farmer); and which enable banks to accept purchase orders and sales invoices in lieu of physical property and buildings. The RFP will be advertised widely and be distributed to all banks and FIs, including cooperatives.

19 Ibid. 20 Ibid.

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During the third month, the awards should be approved and the roll out plan detailed below will be executed. Note that the roll out plan is to develop and roll out value chain products and services after the selection of the PFIs (detailed in the Criteria for Participating Bank Selection). Depending on the PFI, the order may alter and some steps may be skipped to expedite the product launch.

1. Finalize the terms of reference for bank (and other PFI) partner participation; which outlines output 1 objectives, the districts to be targeted, the products and services to be launched and the technical assistance and Challenge Fund support that would be available to help rollout the programme.

2. Conduct thorough VC risk analysis and determine risk mitigation measures with PFIs (see Figure 8).

3. Update district fact sheets consisting of data on value chain sector: locations, estimated size of sector and sub-sectors, other stakeholders, donor and government involvement in view of potential synergies, degree of organization and implications. (see Appendix A- Value Chain Overview).

4. Develop implementation plan with PFI, including marketing, human resource needs, cost accounting, profitability analysis, MIS and IT and overall infrastructure needs.

5. Design product using product card as template (see Product Design Card in Appendix B)

6. Write policies and procedures; create forms and development of risk management tools with PFI. Include credit approval workflow from marketing though disbursal and monitoring.

7. Write job descriptions and recruitment plan with PFI. 8. Write training plan and create training materials with PFI. 9. Set up parameters on IT and MIS. 10. Amend accounting system. 11. Prepare all legal aspects aligned with new product or service i.e., loan contracts,

security registration, recovery policies and procedures etc. 12. Recruit staff. 13. Train staff. 14. Market and launch product.

Annexes Annex A: Value Chain Overview Annex B: Product Design Card

Appendix A

Value Chain Overview

Subsectors/Value Chains

Geographic locations of value chains

Estimated size of subsector and missing middle / processors

Other stakeholders

Donor/Government involvement in subsector (in view of potential synergies with commercial banks)

Degree of organization of value chain (in light of future VCF)

Implications to incur in rural VCF

Honey/Beekeeping

Scattered across the country

50,000 farmers 8 major honey processing and exporting companies

Federation of Beekeepers and Cooperative

Significant SNV, GiZ, ICIMOD, MEDEP, PACT, AEC, ADO, USAID

• About 50% of the produce directly from producer to consumer.

• Lack of effective linkages among input providers, beekeepers, processors, traders and service providers.

• Few processors or companies in the missing middle.

• Little growth potential of the sector as quality does not comply with international standards and domestic market is nearly saturated.

Medicinal herbs /essential oils / non timber forest products

Terai, hills and Mountains

42,000 households in collection, cultivation and production 108 processors (mainly essential oils) 4 essential oil industries with more than NPR 30 million capital investment

Nepal Forest Industry Association Jadibuti Entrepreneurs Association of Nepal Nepal herbs and products association

Significant MEDEP, PACT, HVAP, WUPAP, GiZ, EIG, iDE, PA, ICIMOD, Forward, ANSAB, AEC, JABAN, FDO, FECOFUN, USAID, DFID, WWF

• Small processing companies focus on essential oils and cosmetic for the local market. Most exported raw and processing done in India.

• Growth potential of sector exports increasing (NPR 36 million)

• Little value added on national level.

Cardamom Eastern Region (Taplejung, Ilam)

Produced and processed by 70,000 households (420,000 people) 4 processing industries

Nepal Cardamom producers association Cardamom; Development Centre Large Cardamom; Entrepreneurs Association of Nepal

Significant CADP, PACT, NEAT, ADO, SNV, USAID, NTCB

• Produce collected by village/district traders

• Simple drying, grading and processing sometimes done on this level Wholesalers/ exporters all in Jhapa, centralized, controlling pricing mechanisms.

• Lack of a critical mass of processing enterprises

• Pricing controlled by a few large enterprises

• 90% is exported, mostly in raw form

Subsectors/Value Chains

Geographic locations of value chains

Estimated size of subsector and missing middle / processors

Other stakeholders

Donor/Government involvement in subsector (in view of potential synergies with commercial banks)

Degree of organization of value chain (in light of future VCF)

Implications to incur in rural VCF

Ginger Eastern Region (Ilam) Mid-western Region (Palpa, Pyutan) in the hills

200,000 ginger farmers 43 entrepreneurs (producers, exporters and processors)

Nepal Ginger Producers and Traders Association; Turmeric and Ginger Producer Peasant’s Association; National Ginger Research Station.

Significant MEDEP, CADP, PACT, GiZ, NEAT, PA, EIG, MC, AEC, ADO, USAID

• Low level of organization • Produce collected on village

level Mid-level actors: collectors, traders, wholesalers

• Little value added - 75% of ginger is traded as fresh

• High price fluctuations • One export market: India

Tea Eastern Region Orthodox tea grown in Ilam, Panchthar, Dhakuta, Terathum CTC tea grown in lowlands Jhapa Tea processors mainly located in Ilam

12,200 smallholder tea farmers (average plantation area of 0.75 ha per farmer) organized in 60 farmer cooperatives. 19 large and medium processing orthodox tea factories Approximately 20 firms trading tea

Himalayan tea producers cooperative limited National Tea and Coffee Development Board Nepal; Nepal tea association; Nepal tea planter association; 21

CADP, NEAT, ADO, GiZ, SNV, USAID, ADB, DANIDA, NTCB.

• Farmers rather well organized into cooperatives

• 53 Tea estates (sometimes owned by factories)

• Small, medium and large processors

• Blenders and packagers • Wholesalers and retailers

mainly based in Kathmandu, Pokhara and other major cities

• Several processors/cooperatives that could constitute the missing middle

• Pricing follows trends in India, its main export market

Dairy products

Scattered across the country

500,000 smallholder producers organized in more than 1,500 cooperatives 130,000 people in formal value chain. 250 dairy processors 35 dairy processors with more capacity than a 1,000 litres of milk/day

Dairy Development Corporation Association of Livestock Farming Nepal; Central Dairy Cooperative Union Nepal Dairy Association (76 members who are processors);22

Significant GIZ, DFID, DANIDA, MEDEP, PACT, GiZ, MASF, iDE, PA, Forward, AEC, DLS, USAID

• Rather well organized • Processing facilities often

underutilized; they rely on imported milk

• Dairy Development Corporation holds around 50% of the market share and is state-owned.

• Badly organized distribution channels, only 10% of supply passes through formalized channel

• 35 small and medium sized processors across the country

21 Others stakeholders include: Himalayan Orthodox tea planters association; Himalayan Orthodox tea producers association Nepal; Nepal tea development alliance 22 Others include: Nepal Milk Producer Farmers Association; Veterinary Chemist and Druggist Association of Nepal

Subsectors/Value Chains

Geographic locations of value chains

Estimated size of subsector and missing middle / processors

Other stakeholders

Donor/Government involvement in subsector (in view of potential synergies with commercial banks)

Degree of organization of value chain (in light of future VCF)

Implications to incur in rural VCF

Lentils Terai (Dang, Kailali, Sarlahi, Bardiya) Mills in Birgunj, Butwal, Banke

700,000 farms 11 collection centres 15 large scale mills

Association of Nepalese Rice, Oil and Pulses Industry

Limited

• Scattered and informal • Mainly grown by smallholder

farmers, surplus sold to middle mencollection centres mills

• Large profit share in the hands of middle men

• Lack of organized markets cause procurement shortages at the mills

Potato Across the country Smallholder farmers with 0.6 ha average land holdings 136 snacks and vegetables processing companies which may also process potato

Nepal Potato Producers Association CADP, PACT, MC, ADO, EU

• Farmers sell in local markets or to commission agents who trade it then with processing industries.

• A limited amount is exported to India and Bangladesh

• Lack of secondary data on the sector

Coffee Western region 14 coffee processors are members of national tea coffee development board

Coffee producers groups District coffee producers association Nepal Coffee producers association

Rather limited PACT, iDE, WI, EIG, Li-Bird, AEC, ADO, USAID

• Well organized • Smallholders provide seedlings

to pulping centres and processors and exporters

• Low production volumes

Fish Terai 26,036 ha farmed 1,500 manmade reservoirs Pond polyculture No large processing facilities (as of 1995 data)

Nepal Fish farmers association CEAPRED, ANEP, IDE, ADO, USAID, WF

• Scarce information • Fish mostly consumed fresh by

local communities

• Lack of recent secondary data on the sector

Floriculture Across the country in 36 districts

600 nurseries Cut flower farms 635 showrooms Floriculture association

Limited • Cut flowers mainly exported to Europe with around 6 processors

• Nurseries sell mainly to wholesalers and vendors

• Heavy dependence on imported raw materials from EU, US

Subsectors/Value Chains

Geographic locations of value chains

Estimated size of subsector and missing middle / processors

Other stakeholders

Donor/Government involvement in subsector (in view of potential synergies with commercial banks)

Degree of organization of value chain (in light of future VCF)

Implications to incur in rural VCF

Meat Across the country 17 large meat processors&/retailers (momo, drying) Association of Livestock Farming Nepal Neap Feed Industries Association, Veterinary Chemist and Druggist Association of Nepal

PACT, HIMALI, WUPAP, EIG, PA, Forward, Li-Bird, AEC, ADO and Heifer International-Nepal

Riverbed farming fruit & vegetables

Terai and Hills 500,000 households Farmer groups/cooperatives some with collection and grading centres 3 Wholesale markets in Nepalgunj, Butwal, Biratnagar

USAID, SIMI, GiZ, IFAD

Handmade paper

Lokta cultivation in hill districts Jajarkot, Dailekh, Bajhang, Rukum and Solukhumbu (main producing districts)

170 enterprises employ around 4,000 households in paper making (rural areas) 100 enterprises employ 2,500 households in paper product making (Kathmandu)

Handmade Paper Association of Nepal Federation of Handicraft Association of Nepal

GiZ, UNICEF, SDC, AUSAID

• Cooperatives/community forest user groups

• Paper making factories • Paper producing companies in

Kathmandu valley. 5 largest producers hold 64.5% of market share.

• Low investment needs in rural areas: a typical paper making factory has an investment level of NPR 30,000 – 200,000

• Most of value added done in urban centres who might have investment needs

• Export value: 269 million NPR (2005)

Appendix B

Product Design Card

Loan Characteristics Application Requirements Loan minimum Financial statements Loan maximum Collateral and

collateral substitutes

Currency Ratio of collateral coverage Loan tenor range Grace period Loan purpose Debt Equity Ratio

Target Customers

Repayment frequency

Eligibility Criteria Interest Rates and Fees Age of client Interest rate Identification Calculation method Banking experience Administration fee Age of business Other fees Location of business Legal status Business activity