Second Small Farmer Development Project

Completion evaluation

Under the Second Small Farmer Development Project (SFDP II), the assistance given to small farmer groups (SFGs) was extended to a further 12 districts. At the same time, operations were intensified in the 31 districts already covered by the First Small Farmer Development Project (SFDP I). A total of 43 of the country's 75 districts were covered by SFDP II. About 60% of the districts covered are in the Hills and 40% in the Terai or the plains.

Project objectives and design

Target group

At full development, the project would help to form about 5 000 SFGs covering some 50 000 small farmers. This would be additional to the 3 500 SFGs and 35 000 small farmers supported under SFDP I.

The SFDP II eligibility criterion was designed to overcome limitations connected with coverage in the first phase. In the SFDP I, farmers with high income were eligible as long as their holding was small. On the other hand, the SFDP II eligibility was designed only with a per capita income threshold of Rs 1 200 at 1978/79 prices (USD 70).

Objectives and components

The project was approved to intensify and expand the activities of the SFDP I. Its objectives were: (i) to increase the income and improve the well-being of small farmers, landless labourers and the rural poor; (ii) to develop self-reliance among these disadvantaged groups and to encourage savings so that they are able to organize themselves to plan and carry out their own projects; and (iii) to adapt the local delivery mechanisms of government agencies and institutions to the needs of the rural poor.

The project, as appraised, consisted of two main components: (i) support for crop production, livestock, minor irrigation works, horticulture and village industry/agroprocessing; and (ii) service activities, necessary for effective project implementation, comprising training, technical assistance, monitoring and evaluation, and support for the salaries of additional Agricultural Development Bank of Nepal (ADBN) staff (group organizers -GOs-, assistant group organizers -AGOs-, etc.) involved.

Expected results and assumptions

The project was conceived as a credit project aimed at rural poverty alleviation. With declining per capita agricultural production and increasing rural poverty, more effective institutions for the delivery of extension and credit were considered essential. The main benefits expected were the increased production of basic necessities (such as food, consumer goods and services), expanded employment opportunities and increased income for poor families in the rural areas.

The project design reflected the assumption that the organization of small farmers, landless labourers and disadvantaged rural poor, including women, is essential for: (i) reaching them with information; (ii) soliciting their demand for assistance with credit and extension; and (iii) reducing risk in credit delivery through substituting group responsibility for individual liability.


The Completion Evaluation (CE) mission remained in Nepal from April 13 to May 9, 1992. The analysis of beneficiary impact is almost entirely based on primary data collected through the IFAD Completion Evaluation Survey (CES), undertaken in January-February 1992. The mission's interviews and case studies provided further information.

Implementation context and evolution

The election climate negatively affected credit repayments. During general election campaigns promises were made that loans to farmers would be written off. Other statements made were that ADBN loans were international gifts and need not be paid back. Such rumours discouraged farmers from repaying their loans and wilful defaulting increased.

Project achievements

Almost all quantitative targets were met or surpassed by a wide margin. To an extent, this reflects favourably on the drive of the SFDP II to quickly disburse funds so as to reach the project targets. Quantitative targets for creation of Sub Project Offices (SPOs), groups and staff were overachieved. Credit provided exceeded appraisal targets, commonly by not less than 518 to 200%. Credit was extended for irrigated as well as for non-irrigated land, for livestock, horticulture, village industry and agroprocessing. For livestock, 18 900 buffaloes and 39 705 goats were purchased, representing 125% and 280% of the targets, respectively.

Effects, impact and sustainability

Intensification of agricultural practices is essential, given scarce arable land, and the project definitely contributed to technology adoption. One-third of the sampled farmers bought at least one of the technology related inputs through SFDP credit. But most farmers in the SFDP areas continued to use traditional cultivation methods and practices.

A larger proportion of Terai farmers bought inputs on credit than the farmers in the Hills (40% vs. 24%). Farmers with irrigation facility bought more inputs (primarily fertilizer and pumps) on credit. Improved livestock breeds were adopted only by a few farmers; improvements were not reported and observed in feed and fodder management.

Credit has been important in facilitating adoption of improved technology for crop production. Credit contributed to adoption of irrigation, wheat seed, and potassium based fertilizer. Precise impact of technology adoption could not be quantified.

The project assumptions for yield increases were too optimistic. Yields rose 17% compared to expected 40-60% for improved maize and paddy. Extension contact increased yields over and above the direct effect of fertilizer application. But extension coverage was far from adequate: extension services were available to less than one-third of small farmers group members.

While about 40% of the credit was allocated to livestock, credit was not associated with sustained adoption of improved livestock. The livestock component aimed at improving the productivity of buffaloes and goats, and at providing farmers with little or no land, with animals to hire out for draught and transportation. But the livestock component did not take off as intended. There is little evidence that the project has resulted in an increase in livestock productivity, despite sometimes reasonable marketing opportunities. High mortality of improved breeds explains why credit failed to generate a positive statistical association for adoption of improved breeds. Farmers referred to high mortality rates as a major reason for non-adoption, explained not least by limited veterinary services.

Farmers generally perceived per capita income to have risen through earnings from crops, livestock, and employment, especially if debt service is not taken into account. Data limitations negated the effort to ascertain precise changes. But income at least from crop production has risen. In addition to yield increases, relative prices remained favourable from 1986/87 to 1990/91.

The Staff Appraisal Report (SAR) envisaged that there would be negligible negative environmental effects associated with the project. But there is no evidence of advances in feed and fodder management in the SPOs sampled and visited. The SFGs surveyed indicated that the area under vegetation during the project period has decreased in most of the SPOs. Nearly half of the communities reported that they had experienced a decline in forest resources. In contrast, farmers' evaluation of the environmental component in the training system developed for the project is positive. This training, covering forest fires, deforestation, migration, pollution, and soil erosion, was found useful. Possibly, this could mean that in the absence of such training, environmental changes would have been even more adverse.

After 17 years (1975/1992) women's participation is still below 20%. Women are not specifically referred to in the SFDP II eligibility criteria; this explains at least in part the low participation of women. Another reason is that the skill development programmes are not designed for women. Almost all skill development training programmes are conducted far from the homesteads and women are not attracted. However, the project recruited a large number of female group organizers. These WGOs have become a key factor in increasing women's involvement in the project.

Effectiveness of the M&E System

Support was rightly given to the ADBN for monitoring, but was not well used. The SFDP division should have been guided by the Evaluation and Management Information Systems (MIS) division. But the flow of data both to and from the field was inadequate. The actual support for the SFDP division was quite limited. The MIS support in the first place should have been lodged within the SFDP division. The SFDP manager needed to be in direct command, but was not in control. Even though incentives within ADBN as a whole remained aligned with continued credit expansion,

location of M&E to the responsible project manager would have given him greater possibilities to obtain required information on performance and repayment.

The M&E activities of the ADBN did not evaluate impact, nor were impact indicators developed for the project.

Main issues

The project, because of its design, faced formidable constraints. The provision of subsidized funds to ADBN directed the institution towards a focus solely on credit expansion. Policies with incentives and controls were not introduced so as to induce ADBN to become less dependent on external subsidized funds and to reward borrowers who performed in line with contractual obligations.

ADBN's declared profits turned negative towards the end of the 1980s. Profits were positive in 1986/87 and 1987/88, zero for the subsequent two years, and estimated as negative for 1990/91.

In spite of the large predominance of those borrowing sums below Rs 10 000 (74%), the percentage of "medium loans" between Rs 10 001 and Rs 30 000 is also considerable (25.5%). The latter percentage is striking, considering that income per capita is particularly low in Nepal (USD 170), and that less than 30% of SFDP loans apparently were disbursed without property collateral. A loan of Rs 20 000 already represents no less than 2.7 times the per capita income.

Loan recovery became the major issue. The decline in recovery rate started during the SFDP I period with a rate of 68% in 1982/83, which fell to 48% in 1987. The rate slid to no more than 40% in 1990/91. The loan recovery rates of the SFDP II were greater than those of the ADBN except for 1990/91. In this year total arrears rose from Rs 41.7 million to Rs 155.4 million. The rapid growth in the number of groups has negatively affected loan collection. For instance, a statistical analysis based on the female SFGs showed that credit recovery is negatively associated with an increasing number of groups per SPO in these zones.


A separate strategy should be adopted for the small farmers who are above their subsistence level and can readily undertake bankable projects. The provision of technical extension services is vital also for this group. The Projects must ascertain that: (i) technology and/or the economic environment are not the primary constraints, only when this is not the case is there the rationale for credit provision. Impact certainly would have been improved, had credit been preceded or accompanied by extension services that had responded to farmers' demand. Moreover, the environmental implications need to be pursued, e.g. additional fodder requirements of livestock investment.

Factors that explain variations in low credit repayment need to be pursued. Such understanding is necessary in order to find instruments with which to design a strategy for raising performance in recovery.

The large share allocated to the livestock sector to finance improved breeds was not justified. Instead, more funds should be made available for other more productive types of investments.

The project group formation was regarded primarily as a vehicle to obtain loans from the SPOs. But experience has shown that groups should first be formed for activities that may later require credit.

In the absence of proper credit norms, disbursement of loans on an ad hoc basis has resulted in over-financing. It is recommended that specific norms be developed on a regional basis for each SPO and be used in loan appraisal by the GOs and small farmer groups to determine loan amounts for participating households. It is also recommended that these norms be updated every year to reflect the changes in cropping patterns, cropping intensities, and technology adoption.

The training provided to the group organizers, group leaders and members-beneficiaries was inadequate. Far more attention has to be given to the training of group leaders and members. Groups should be trained to evaluate their leader's performance.

More than two-thirds of group savings earned only 8.5% interest which is much lower than the market interest rate and the annual inflation rate of about 20%. The Nepal Rastra Bank and ADBN should agree on a timetable for shifting from negative towards positive rates of interest on savings.

Members' contributions to group savings schemes were irregular and records were not maintained properly in several SPOs. Groups should make savings a standard prerequisite for membership. Furthermore, individual savings should be promoted at group level.

The WGOs should be given intensive training in credit appraisal, use of savings funds, supervision, loan collection, and monitoring. The WGOs should avoid over-financing women members, particularly those who tend to borrow under pressure from their husbands. WGOs represent vital resources for the project at the local level. They should be rewarded with incentives and recognition of better performance. It is also recommended that women SFG members be assisted in the identification of projects which contribute directly to women's welfare. Drinking water supply, planting of fast-growing fuelwood trees, and provision of alternative cooking energy sources represent potential impact points.

To introduce an element of participatory evaluation, annual meetings at each SPO should be held with the aim to have the views of the SFG members expressed and brought to the attention of SFDP regional officials as well as head office staff. A compilation of the results of all those annual SPO meetings should be prepared by the Evaluation and MIS Division and presented to SFDP and ADBN top management.

ADBN should continue its present policy to decentralize monitoring functions and capabilities. Monitoring is an integral part of each management information system. It should be made operational, according to needs, at all levels involved in the bank's SFDP programme.

Monitoring and evaluation functions with regard to the SFDP programme should be separated. Impact evaluation should be sub-contracted to a local institution. A work plan with

clearly specified outputs is required. The latter would reflect targets set out in the annual work programme for number and type of submitted reports with defined quality standards.

Lessons learned

Lessons on Credit Projects or projects with credit component

For IFAD, the provision of low cost funds to a Rural Financial Institution (RFI) must be justified in terms of an acceptable, minimum leakage of lent funds to "non-poor" groups, coupled with an assured sustainability of the RFI reflecting minimum default rates and profit margins. This can be ensured by: (i) distinguishing between groups as to whether or not credit is an appropriate solution; (ii) reducing leakage through cost-effective targeting; and (iii) introducing a regulatory framework which rewards repayment performance, i.e. lending rates become flexible to reflect actual risk in lending.

Projects that are predominantly credit based need to employ at least one farming system economist (within the financial institution). Such professionals would assist in setting out guidelines and perform supervision so that credit is not provided when required technology support is not available, and repayment for the debtor and/or the community is not assured.

The lending rate of the RFI needs to include sufficient provision for defaults so as to ensure pre-determined financial break-even conditions. To achieve financial and institutional sustainability,

rural financial institutions to become successful are advised to introduce an incentive framework with rewards to borrowers and groups that perform well in credit recovery and savings mobilization. Such a performance based system has been set out in the Completion Evaluation Report (Annex 6). Groups are classified as to their performance inter alia in recovery (AA groups: fully credit worthy; AB groups: credit worthy; and AC groups: not yet credit worthy). Borrowers who perform well should be rewarded inter alia through lower interest rates, and/or other incentives, so as to reflect their lower credit risk. Groups who repay in line with contractual obligation are rewarded, others pay a higher cost for the credit obtained, and/or are denied access. The distinctions made facilitate analysis of needs and potential of credit groups, and subsequent training delivery.

Lessons on extension activities

For food insecure households, extension support should precede and replace the singular emphasis on credit expansion. Credit provision must consider livelihood levels and repayment capacity. A large proportion of "small farmers" in Nepal live below the subsistence (poverty) level. The first step should be to define those households that are "food insecure", so as to assist them through agricultural extension, skill development and other support services, and employment generation programmes. The second step would be to determine the proportion of this group that can productively use and repay credit. Use of joint liability or group collateral for this group could contribute importantly, at the margin, to lowering the direct cost of lending.

Lessons on Monitoring and Evaluation

In relation to M&E activities: (i) It was unrealistic to have assumed that ADBN could take the full responsibility of all monitoring and evaluation functions given its lack of experience in impact monitoring. During the first phase of the project impact studies were subcontracted to Agricultural Project Support Centre (APROSOC); and (ii) it should be remembered that the supervision missions paid limited attention to monitoring and evaluation issues. With more attention given to M&E, corrective measures to improve the system could have been taken much earlier in the life of the project.



29 March 1993