Project Evaluation Summaries
Prepared by the Policy, Planning and Evaluation Unit (PPEU)

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Bhutan

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I. Basic Project Data

Project Number:	BHU/88/C02, BHU/92/009
Project Title:	Agricultural Credit Extension
Government Executing Agency:	Bhutan Development Finance Corporation
Sector:	Agricultural Development Services
Sub-Sector:	Rural Credit
UNCDF Budget:	US$     1,537,478
UNDP Budget:	266,000
Gov't. Budget:	160,500
> Total Project Costs:	1,963,978
UNCDF disbursements at evaluation (01/12/97):	1,379,022
Duration:	4 years
Date Project Approved:	March 1991
Date Project Began:	1 January 1991
Scheduled Completion Date:	1 January 1995
Expected Completion Date:	31 December 1997
Date of Evaluation:	December 1997
Type of Evaluation:	Final

II. Background

Agriculture is the source of livelihood for an estimated 87 % of the population in Bhutan and contributes some 44% to the national GDP. However, there is limited land available for the expansion of agriculture, and farmers use traditional methods of farming –thereby only being able to produce enough for subsistence. Since the early 1980s, food imports have been steadily increasing. The early years of agricultural development were characterized by the introduction of modern farming methods and the free provision of inputs like fertilizers, pesticides, seeds and extension services. The Government’s Sixth Five Year Plan (1987-1992), however, placed greater emphasis on the liberalization of markets and self reliance. This resulted in a conscious effort to reduce and eventually withdraw subsidies. With farmers no longer able to rely on subsidies for modern inputs, the need for rural credit to enable farmers to improve farming practices was considered essential for agricultural development.

In 1988, the Bhutan Development Finance Corporation (BDFC) was established with the specific purpose of providing credit to rural areas (this notwithstanding BDFC also has an industrial lending department). At the outset of the Seventh FYP, a total of 23,000 farmers (cumulative data since 1982) had received credit through recognized institutional channels.

III. The Project

The project's development objective was to contribute to increased productivity in the small farm sector in Bhutan, and thus to contribute to the national goals of increasing the level of food self-sufficiency, thereby raising rural incomes and living standards.

The project's immediate objectives were as follows:

• Improved small farmers income, increased agricultural production and efficiency in 12 districts of Bhutan through the provision of rural credit; and
  
  
• Improved efficiency of the Bhutan Development Finance Corporation through the systematic introduction of a Management Information System, ad hoc technical assistance and the provision of small office equipment and vehicles.

It was expected that seasonal and medium-term credit would be provided to an additional 3000 small farmers through the extension of the BDFC revolving fund. There would be an improved delivery mechanism of credit by BDFC in association with the Ministry of Agriculture, including:

• An improved Management Information System enabling immediate knowledge of loan performance on a district by district basis;
  
  
• Increased loan recovery reaching over 80%;
  
  
• Improved assistance to farmers in loan utilization; and
  
  
• Provision of office equipment and technical assistance to promote efficient administration of the revolving fund.

The project document itself spells out that “while additional funds for credit comprise a substantial proportion of the overall project, the major thrust is to properly institutionalize and improve the capability of the BDFC to function as a financial institution by strengthening the supervisory capabilities of its management, improving its disbursement and recovery procedures, and refining and institutionalizing a management information system that allows for timely, accurate and reliable reporting.” Thus, as pointed out in the project document, considerable importance has been given to the institutional conditions guiding the delivery of rural credit.

IV. Findings of the Evaluation

A. Summary of the Results Achieved

The project has met its immediate objectives. The evaluation results indicate that production levels of the main agricultural and horticultural export crops have risen. In addition, the Micro Banker software; the provision of office equipment; and technical assistance have all made a major contribution to the institutional development of BDFC and the efficiency of the credit scheme. It will be difficult, however, for the credit scheme to become sustainable on a commercial basis without fundamental changes to its support systems, operating procedures and some fiscal policies.

Contribution to agricultural economy

Medium-term lending has essentially focused on developing farms (orchards) that produce export cash crops such as apples, citrus, mushrooms, potatoes and cardamom. During the time of this project, the production of all these crops has expanded considerably throughout the country. In addition, access to credit has been a major contributor to the success of the export programme. Production of food grain crops has increased since the start of the project and many loans have been made for farm mechanization and draught animal power for cultivation and transport.

BDFC retains several extension workers who specialize in agriculture and horticulture. Their primary responsibility is to visit with farmers and help them improve production. The extension workers told the evaluation team that the farmers are highly dependent on the availability of credit, which they would like to see made more easily available on easier terms.

Contribution to family incomes

Limited field survey results from interviews conducted with 35 borrowers indicate that 25 (72%) of the clients identified increased cash income as the primary benefit from having taken a loan. Ten of the clients (28%) claimed that they had derived no cash income so far from the project for which they had taken a loan. The loan types included in the survey included two dairy loans, six orchard loans, one machinery and one seasonal loan.

However, 25 clients spoke freely about the non-cash benefits of the loan, benefits that included time and labour saved through machinery use (thereby not having to organise labour); timely planting, mobility; land development; and savings in wages. They also mentioned improved nutrition as a direct result of having taken out a loan. Although the clients claimed no cash income, it is almost certain that they enjoyed tangible benefits in the form of savings arising from reduced expenditures.

In all cases the loans were for projects that were considered to be environmentally friendly – a practice that is consistent with the major emphasis that the RGoB places on conservation.

Credit coverage

Although access to loans is theoretically good (there are 19 district offices covering the country), the actual outreach is somewhat limited. Numbers of active clients declined in 1993 and 1994 but began to rise again in 1995. Following a small decline in 1996, the number of active clients increased in November 1997. There was, at this time, 9,474 active clients.

It is extremely difficult to quantify with any degree of accuracy the actual coverage of the programme. There is a dearth of statistical data on the number of rural families. However, one can estimate based on the current population of approximately 700,000. With up to six members per extended family, there would be 116,000 families. If there were 9,500 loans at one per family, the coverage rate would be 8.2%. This figure could be higher if urban families are deducted from the total. However, the conclusion under any circumstance is that overall coverage is low.

A survey on gender and rural lending in 1994 showed that 31% of BDFC loans were made to women. The current analysis indicates that this figure has since risen to 34%.

Loan performance

Examination of loan repayments data indicates that the values for on-time repayment and cumulative repayment have slowly risen since the 1991 levels of 35%. However, the on-time rate of repayment is still only 59%, causing concern regarding the sustainability of the lending programme.

On-time and cumulative rates are rising as a result of determined efforts by BDFC staff and the district administration to recover debts. However, in November 1997, 89 out of 186 (48%) sub-district blocks were excluded from access to new loans. With on-time recovery rates rising, each district office revises upwards the cutoff rate as recovery improves. BDFC is currently making plans to revise the block exclusion system and replace it with a more selective system in which families with good repayment experience can avail of new loans. As soon as this is done a major increase in coverage could result.

Institutional strengthening

The establishment of the Agricultural Lending Department and the Industrial Lending Department early in 1992, and the appointment of both a Managing Director and a Joint Managing Director to take sole responsibility for the Agricultural Lending Department all contributed to the strengthening the institutional infrastructure for microfinance. During the design of the project, the formulation team recognized that the BDFC had only been created in January 1988 and needed to be strengthened. As of November 1997 the BDFC staff strength had increased from a total of 66 persons in 1990 to 120. Of these, 52 staff members were posted to the field. All of the districts are staffed by a District Credit Officer and a District Credit Assistant. Four of the districts, Trashigang, Mongar, Chukka and Paro have a staff of four, each to cater to larger areas and loan portfolios.

BDFC has placed considerable emphasis on human resource development and training. Senior staff members have graveled within the region to examine other schemes. This has strengthened their resolve to adjust the credit delivery system to one which is more suitable to the resource poor families. To build capacity, training events have been organized for staff on computerisation and the Management Information System. Staff also have been introduced to block level group savings and credit schemes.

Management information system

Computerization has made reporting simpler and has eliminated errors. According to BDFC officials, the use of computers has allowed them to become more service-oriented and has given them more time to look into problem areas. Micro Banker software is in use and has recently been upgraded to MB EXTE to allow for the management of savings accounts, which will be a key component of the future group based savings and credit system. The greatest achievement of the computers, however, is the availability of timely information for programme management. The transfer of data to the system has created a wealth of data available on loan types, by district, by gender and by age.

Sustainability of BDFC

The agricultural lending rate of 13% (reduced from 14% on 1 October 1996) is resulting in a situation in which BDFC is making a loss due to:

• A high cost of loan administration of 9.3%;
• A lower than expected on-time recovery rates;
• A high percentage of non-performing loans;
• A need to maintain offices in all districts;
• Recent changes for Provident Fund and Staff Gratuity contributions;
• Increased provisioning rates and suspended interest rules;
• A cessation of the RGoB operating subsidy; and
• The new requirement to pay corporation tax on any profit.

All these constraints have caused BDFC to face increasing difficulty and will probably be responsible for a negative balance sheet in 1997. Without action to mitigate some or all of these adverse effects on its agricultural operations, the project cannot become sustainable.

B. Assessment of Project Design

The project design assumed that the credit delivery system was working well and that the main task for the new project was to consolidate the design and implementation by extending coverage to additional farmers and introducing a strengthened computerised management information system. Both these tasks were achieved but made only a limited contribution to the quality of the credit delivery system, which increasingly suffered from a high percentage of non-performing loans, with the BDFC becoming unprofitable due to interest rates that do not cover operational expenses and other external factors causing a declining profitability. The design of the credit delivery system is essentially conventional agricultural credit to individuals with no elements of group organisation or group guarantee systems.

The Evaluation Team strongly supports the following recommendations:

• That BDFC be given more freedom to determine interest rates and introduce selective loan pricing;
  
  
• That the credit delivery system be reorganized based on a decentralized model;
  
  
• That group savings and lending be introduced at the Gewog (block) level; and
  
  
• That improved collection procedures be established, and management targets strictly monitored by the Board (to progressively reduce lending costs and raise on-time repayment levels to at least 95%).

Additional funds are required to further develop the BDFC agricultural programme. It is essential that further RGoB support be given during the next five years in order to achieve increased accessibility and coverage of credit to both resource poor and to middle income families. Further RGoB support also is needed to assist with the operational costs of the District Credit Offices until they are profitable (as a result of the planned changes). In order to ensure the success of the microfinance sector in Bhutan, UNCDF and/or other donors should contribute support for these essential changes.

VI. Policy Implications and Lessons Learned

The main lessons learned from UNCDF's project support may be summarized as follows:

• At the time of the project formulation, more attention should have been given to emerging savings-based group guarantee systems that are being used with varying degrees of success in other countries within the region.
  
  
• Putting into place institutional strengthening and management information systems does not in itself lead to successful credit delivery.
  
  
• More use of community-based associations and specific commodity production and marketing associations (as intermediaries assisting the credit delivering institution) should be made to ensure that the needs of farmers and rural families are met in a timely manner.
  
  
• Credit alone will not assist most resource poor families unless steps are taken at the same time to identify and promote suitable livelihood systems.
  
  
• In order to maximize the chances of recovering loans, the credit delivering institution must be ultimately responsible for approving them.
  
  
• There are dangers that inappropriate credit may make some families poorer. This is because if the families cannot repay the loan through no fault of their own, they will have a debt which they did not have before the agency tried to help them.
  
  
• A credit delivering institution cannot work effectively without a close liaison with other development agencies, both Government and international.
  
  
• Where a Government controls a rural financial institution and charges it with the responsibility of supporting the financing needs of government-promoted development programmes, that Government should be expected to assume some of the costs and risks before requesting external donors to contribute.

VII. Evaluation Team

The Mission consisted of Colin E. McKone (team leader and micro-credit specialist); Dechen Choden (national consultant); and T.R. Upadhya, Sashi Satyal, and Anil Dhungel (international audit team from Messrs T.R. Upadhya, Katmandu, Nepal). The Team was accompanied throughout the field visits by Tshering Dukpa, Credit Officer Head Office, Bhutan Development Finance Corporation.