Nepal is an agricultural country. More than 60% of the populations are employed in agriculture. Majority of the farmers are poor. Their income is not sufficient to meet their subsistence needs. Hence, they are unable to make an investment in agriculture this is the main reason behind low production and productivity in agriculture. Therefore, there is the need of agriculture finance.
Importance of agricultural finance:
1. Low income and saving: The farmers have less tangible property and have low production. So, to increase their income and saving, agriculture finance is needed.
2. Seasonal nature of income: The income earned by the farmers is of seasonal nature. Generally, they receive income once a year after harvesting. They need credit to maintain their production throughout the year.
3. Multiple wants: People have multiple wants. They desire to raise the standard of living. Farmers need credit to fulfill their wants since they do not have sufficient income.
4. Meet contingencies: Agriculture is overly dependent on monsoon in Nepal. The farmers have to face the problems of drought, excess rainfall, landslide, floods, etc. They need credit to compensate for these unforced circumstances.
5. Fluctuation in production and price: There is frequent fluctuation in agriculture production and prices of these products. So, farmers need credit to meet their expenses in the time of a sharp fall in price.
Purpose to meet finance:
1. Meet traditional requirement: The farmers need credit to meet their traditional requirements. This type of credit requirement is called consumption loan. It is mainly required for the meeting, day to day needs and religious and social needs.
2. Investment in agriculture: Since the farmers lack surplus income, they need credit to make an investment in agriculture. The credit needed for production purpose is called production loan. The production loan is required for working capital like fertilizer, seed, tools, pesticides, etc. and fixed capital to invest in irrigation facility, the building of farmhouse and storage, buying machinery, etc.
Period of finance:
1. Short-term credit: The credit needed and repayable within one year to 18 months is called short-term credit. This type of credit is needed to meet day to day requirements and also to buy inputs like seed, fertilizer, tools, maintenance, machinery, etc.
2. Medium-term credit: The credit needed for less than 5 to 7 years is called the medium-term loan. This type of credit is usually demanded for production purposes. It is demanded to make wells, lift irrigation, to build canals, to buy expensive machinery, to build a farmhouse, etc.
3. Long-term credit: The credit needed for a maximum of 10 years is called long-term credit. This type of credits required for reclamation and development of land, buy very expensive machinery, to build a large warehouse, for making mechanized farming, etc.
Sources of Agriculture Finance:
The sources of agriculture finance are broadly classified into two groups which are as follows:
a) Traditional or Informal source:
1. Friends and relatives
3. Merchant’s and agricultural traders
4. Village money Lenders
b) Institutional or Formal source:
1. Commercial Banks
2. Development Banks
3. Financial Companies
4. Micro-Finance Development Banks
5. Cooperative Societies