Stringent collateral requirements, high interest rates, low financial literacy, and arduous loan process are some of the major obstacles in accessing credit for rural communities. The National Council’s Economic Affairs Committee highlighted these challenges while presenting the interim report on a review of Rural Credit Access. According to the committee, these barriers hinder small farmers from securing funds for agricultural investments. In addition, the committee also reported that high credit risk and inadequate insurance make banks reluctant to lend money to farming communities. The committee highlighted that addressing these issues requires policy changes to boost agricultural productivity.
One of the challenges faced by the borrowers is the high interest rate.
The committee’s report stated that there is a perception among rural residents that loan interest rates are significantly high impacting their access to credit.
According to the committee’s chairperson, this impedes investments in agriculture and small business in rural areas.
The burdensome documentation process was the other barrier to access credit in rural areas. Committee’s chairperson Tshewang Rinchen said documentation process is complex and confusing for rural farmers who have limited knowledge on loan application process.
“People say that the documentation process is lengthy. For example, to process a single document, they have to reserve a bolero pickup. There are a lot of similar problems. We are currently researching and will see what can be done and present in the next session.”
Moreover, the chairperson said the lengthy documentation process leads to delay in loan disbursement, depriving borrowers of timely access to funds.
Other challenges included inadequate financial literacy and collateral requirement and valuation among others.
For the lending institutions, it was difficult to assess credit worthiness of borrowers. The report stated that for banks to sanction loans, there is need to assess and verify the repayment capacity of a borrower.
According to committee’s chairperson, assessing the credit worthiness of farmers is challenging due to lack of standardised financial records and reliable income verification.
In addition, the committee found that exposure to credit risk in agriculture is a significant concern for financial institutions. As agriculture is highly dependent on weather conditions, unpredictable events such as droughts, floods, hailstorms and other natural disasters can destroy crops and livestock productivity. This makes it difficult for farmers to repay their loans, increasing credit risk.
“When we talked to the insurance companies, they also expressed their challenges since agriculture products are highly dependent on weather conditions. They say it is difficult to set criteria such as premium. Nevertheless, we see an opportunity to discuss more on this,” said the Chairperson.
Several National Council members expressed the opportunities and challenges in accessing rural credit.
Although the committee has yet to submit recommendations, it suggests providing targeted financial literacy programmes and calls for better stakeholder coordination to address the issues faced by both lenders and borrowers.
The National Council will deliberate on the report along with the recommendations in the winter session.
Devika Pradhan
Edited by Phub Gyem/Tshering Zam
