Sustainability of grameen bikas banks in Nepal : a financial prespective

Abstract

Grameen Bikas Banks (GBBs) are in operation since beginning of nineties with the initiation of Nepal Government and Nepal Rastra Bank in the regional level in Nepal. GBBs have provided micro finance services to more than 150 thousand families as a form of tiny loans in group based guarantee associated with compulsory savings. The total loan outstanding by the end of mid-July 2008/09 is 2,361 million; at the same time, they have collected Rs. 649 million as savings. Beside loan disbursement and saving mobilization, they have contributed for social mobilization and women empowerment as well. Many studies have shown that GBBs have helped remarkably to reduce poverty. Although, GBBs are instrumental for poverty reduction, financial health of GBBs is not satisfactory. It was thought that GBBs would have operationally viable within 3-5 years and attain financial viability in 5-7 years of their operation. But the result appeared opposite. Out of five, four GBBs incurred heavy losses and NRB and GoN injected extra capital to revive them in the beginning of twenties. Even though, after more than 15 years of their operation, financial viability of GBBs always appears questionable. They are not able to be financially self sufficient till now. Many impact studies have been made by many researchers and organizations including NRB, but their financial sustainability have not been examined yet. Therefore, the researcher has undertaken this study to assess the financial sustainability of GBBs. Sustainability is meeting goals now and in the long term. Sustainability looks to the future. Sustainability depends on future performance. Human can only guess future performance. Financial viability analysis provides the base to forecast sustainability. Viability can be measured in terms of operational self–sufficiency (OSS) and financial self-sufficiency (FSS). The main objective of this research is to assess the operational and financial viability of GBBs. This is an evaluative research focusing on evaluation of services of GBBs to determine whether and to what extent they are working in financially sustainable fashion. Mainly secondary data have been used in this study to analyze the different aspects of financial sustainability. For sustainability analysis, the research is based on the model developed by "PLAN International Credit/MED Monitoring System". To know the perception of clients and staff about sustainability, primary data have also been used and analyzed using simple statistical tools. Profits of GBBs matter for sustainability and sustainability matters for repayment. Profits protect for permanency. It has to depend upon its own income to provide sustainable services. A financially self- sufficient GBB should collect that much profit that when external support if not provided, it will not shrink in real terms nor will it reduce the size or scope of its service to the poor. Repayment also depends on the sustainability and permanence of the GBBs. Dishonest debtors stop repayment to weak and sick GBBs. As the expected life of an MFI shrinks and as the chance of future loans drops, the net present worth of default is more likely to exceed the net present worth of repayment from the point of view of a debtors. Major findings of this study are Purwanchal Grameen Bikas Bank (PuGBB) and Paschimanchal Grameen Bikas Bank (PaGBB) are operationally viable and financially possible to be self sustainable. Madhyamanchal Grameen Bikas Bank (MGBB) and Madhya Paschimanchal Grameen Bikas Bank (MPGBB) are operationally viable in recent year but the trend is not positive but, the financial performance of Sudur Paschimanchal Grameen Bikas Bank (OSS) very pitiable. The OSS ratio of Sudur Paschimanchal Grameen Bikas Bank (SPGBB) is always below hundred i.e. SPGBB is in operational losses almost every year. All GBBs have not crossed the Financial Sustainability Ratio yet. Unless and until they cross that level, their sustainability is questionable. The equity of SPGBB is negative since long ago. The unrecovered loan ratio is highest of all in SPGBB. The staff efficiency in PuGBB and PaGBB as compared to other GBBs are better. But it seems low in MGBB SPGBB and MPGBB. But the extent of saving collection is low in PuGBB as comparative to other GBBs. There is a lack of professionalism in GBBs. Similarly, weak technical capacity is also hindering the performance of GBBs. Staff are less motivated in GBBs. Limited outreach, poor governance and lack of supervision are also hampering the productivity of GBBs. Lack of capacity build up activities of staff and clients, poor marketing, high competition, lack of attractive loan and saving products, lack of sufficient loan fund, lack of insurance, general strike and road obstacles are some major hurdles to achieve sustainability of GBBs. To achieve the financial viability, these banks should increase their revenue to cover all the cost including cost of capital and adjusted impact of inflation to its equity. To increase revenue is impossible because clients are hesitating to repay the current rate of interest (20 percent in average in general loan) if it increased, the dropout rate may increase. Therefore other alternative way to achieve financial viability is to reduce its cost of fund as well as to reduce operating costs. Therefore, GBB should generate internal fund by attracting savings from its borrowers and should increase its efficiency performing business in low cost. On the other hand it should extend its outreach to the level which may generate the economies of scale leading towards financial viability. For this, GBB should strengthen its institutional capacity, management information system, internal control mechanism, delinquency management, human resource management and product and delivery management. The self evaluation system of their performance in GBB is very poor. They only produce their reports to fulfill the requirement of NRB only. NRB regulation for microfinance institution has not been so effective because microfinance is new concept and NRB is manly focusing its activities to regulate and supervise bank and financial institutions other than MFIs. There is also another perception that microfinance should be self regulated. This concept is also true because microfinance institution is rural organization which provides its services from the corner of the remote areas and from inaccessible location. Therefore, self regulation is justifiable. To be self regulated, these institutions should follow some international models of performance measurement for the evaluation of themselves. All GBBs are operating in Nepal replicating the Grameen Bank financial system. They are adopting almost same methodology and also facing same problems. Lack of professionalism and low productivity, high operating cost, weak management and limited network are the major problems facing GBBs. Therefore, merge of five regional GBBs to a national wide Grameen Bikas Bank becoming more professional, strong nationwide network and scale of outreach would be the other alternative to be GBB financially self-sufficient. To sum up, the researcher has tried to adopt the newly developed 'PLAN' model for the evaluation of GBBs. Good evaluation of GBB itself helps to perform better and reduces inefficiencies which in turn, increase the productivity and finally help the GBB to be sustainable. If the knowledge sharing as the form of this dissertation would have little bit helpful for any sectors like GBBs themselves, researchers, policy makers, planners, NRB and GoN; that would have been a modest achievement for the researcher.