Report highlights hardship for SMEs to start business without ancestral property, savings
KATHMANDU, Sept 27: Small and medium enterprises (SMEs) in Nepal have been largely relying on the ancestral property of their proprietors for the initial investment to start their businesses, according to the latest study report of the Nepal Rastra Bank (NRB).
The study report ‘SMEs Financing in Nepal’ released this week by the NRB shows that SMEs on an average get 33% of their initial capital from the ancestral property of their proprietors.
The finding of the central bank on the SMEs financing highlights the hardship for the entrepreneurs who want to start SMEs in the lack of ancestral property or savings.
According to the report, 26% of initial capital is sourced from the saving of the income of the proprietors while 16% is financed from bank and financial institutions (BFIs).
Other sources of investment include informal borrowing (8%), remittance income (7%), loans from cooperatives (6%) and venture capital (0.5%). The study, however, did not find any SMEs mobilizing capital by issuing its shares.
“The report shows that the SMEs in Nepal predominantly rely on ancestral property for investments,” Gunakar Bhatta, an executive director at the NRB, told Republica.
Despite implementation of various facilities, refinancing, concessional loan and credit guarantee schemes to promote SMEs financing, the report finding shows that SMEs have not been able to mobilize such financial resources.
“The report showed that many of those interventions have not become effective yet. Many were not even aware about the refinancing facility for SMEs,” said Bhatta, who heads the Research Department at the NRB.
The government has introduced a number of schemes including subsidized interest loans to SMEs. However, the efforts to channelize financial resources to the SMEs have largely failed as shown by the findings of the study report.
Bank loans – a major source of financing in business sectors – to the SMEs is also very low, the study report indicates. Nearly 50% of SMEs have borrowed from BFIs. As of mid-July 2019, the outstanding credits of bank and financial institutions to SMEs excluding agriculture, energy and tourism sectors stand at 3.26%.
Procedural hassles, over reliance on house and land collateral, lack of long-term lending, unstable, and high interest rates and low banking capacity are some the factors that have held many SMEs to tap bank credit for the investment, according to the study report.
SMEs find it easier to obtain loans from cooperatives despite high interest rates, according to the report.
The study report shows that SMEs have been paying in an average 12.51% of interest rates to BFIs in addition to one percent of service charge. In an average, it took 38 days for a SME for the loan processing in bank. According to the study, there are 275,433 SMEs registered across the country as of the end of Fiscal Year 2017/18.
The report has also come up with a recommendation for the coordination between various policies and programs scattered over various agencies like the Ministry of Industry, NRB and other institutions.