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SPIS Toolbox - Rural Bank / Development Bank Loan
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2. Rural Bank / Development Bank Loan
Outcome/Product
Agrarian development banks also referred to as rural development banks, are financial institutions operating at the regional level, which provide financial services with comparatively low interest rates, flexible repayment terms, amortized lending and technical and marketing support to actors involved in the food value chain. The main goal of a rural bank is the development of rural areas in terms of standards of living, food security and sustainability of the agrarian production through financial inclusion of SMEs. This implies, that rural banks use financial models which are substantially more focused on development than their conventional counterparts.
Rural development banks are able to offer convenient conditions because they collaborate with governments, NGOs and private companies, which support them economically. This strategic cooperation imposes limitations to financing activities since farmers need to meet specific requirements of the donors. For example, just specific food value chains, considered relevant for the development of a country, are subsidized by the government. And private companies finance just farmers, who agree to sign commercial contracts with them.
The main weaknesses of rural banks are a higher operating risk, lower earning capacity and the competitiveness of minor financial institutions as MFIs. Usually, rural banks finance just part of the investment (around 75%), meaning that farmers need to possess seed capital. Interest rates are much lower than the ones charged by commercial banks. For instance, the interest rate charged by the Agricultural Bank of Ghana ranges between 4 and 8.5%.
One example of a governmental program is the subsidy scheme for Solar PV systems launched by the Indian government and supported by the National Bank for Agriculture and Rural Development (NABARD). This sharply reduced the price burden on farmers. Farmers could buy SPIS from manufacturers approved by the Ministry of New and Renewable Energy (MNRE) with a discount of 40%. Out of remaining 60%, 20% is beneficiary contribution and 40% is eligible for a soft loan, which usually could be repaid in 5 years at the bank-specific interest rate.
Data Requirements
The information needed in order to finalize a credit with a rural or a development bank are mostly the same as those requested by commercial banks. In addition, environmental and social considerations also play a role:
- Farmer personal data: as those requested by commercial banks.
- Farm information: as those requested by commercial banks.
- In some cases farmers need to pay a deposit: In order to secure the loan.
- A bank account at the rural bank or at another financial institution is required: In order to check the farmer’s cash flow and transactions.
- Collateral or alternative source of income are requested in order to secure the investment: In the framework of some development programs, farmers need to provide soft collateral only, or in some cases, the donors provide a guarantee for them.
- Proof of identity: Normally just citizens of a specific country, can get access to government subsidies.
- Insurance on the loan: In some development projects, insurance is provided by the donor.
- Submission of the business proposal: Banks need to verify if the business plan of the farmer matches the requirements imposed by donors or within the pillars of the subsidy scheme.
- Environmental and social feasibility of the project need to be verified.
People/Stakeholders
- Rural/ Development Bank
- Government/NGOs/Private Company
- Farmer
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