On affordable and accessible agriculture credit

A small beginning
Banks must simplify and re-structure their lending mechanism
By Tahir Ali


Financial help of farmers is necessary for the modernisation of farming and farmers’ prosperity. But small farmers who, according to some estimates, constitute 85 percent of the total 6.6 million farmers in the country, have negligible share in the agriculture credit disbursed in the country in general and Khyber Pakhtunkhwa in particular. Those residing in the far-flung hilly and tribal areas are particularly affected by it.

Financial exclusion of the small farmers who have little resources to approach the research and extension systems, coupled with their illiteracy and poverty, keep away from commercial farming and expose themselves to low productivity, eventually adding to severe financial hardships.

They, in turn, have to rely on informal sector for their credit needs offered at higher rates, leaving them in a vicious debt-cycle and poverty trap.

Acknowledging that agricultural credit disbursement was worse in KP, the SBP launched some agriculture-credit schemes as part of its financial inclusion programme for KP but credit disbursement ratio couldn’t improve.

Countrywide, less than 2 million farmers of the total 6.6 million, get agriculture credit facility. The situation in KP, which accounts for less than 4 percent of the national agriculture credit disbursement and where over 90 percent are characterised as small farmers, is particularly dismal. Khyber Pakhtunkhwa accounted for Rs 7.9bn or only 3.4 percent of the total agriculture credit of Rs233bn in 2009. Only six percent of farmers in Khyber Pakhtunkhwa have access to agriculture credit against 21 percent for the country.

Various easy credit schemes, support price mechanism and subsidy regimes in the past were designed for small and medium scale farmers, but they scarcely benefited from the schemes and big landlords were the main beneficiaries.

One of the main reasons of small farmers’ financial exclusion is their inability to be bankable — to be able to provide collateral (the explicit or implicit guarantee against the possible risk associated with the loan) to banks as most of them are tenants, who don’t have any property registered in their names or own land below the required level.

Plenty of these farmers, especially those in villages, are also influenced and kept from applying for credit by the Riba-element, a necessary part of credit but avoided by most on religious grounds.

Small farmers have been practically neglected in the existing provincial agriculture policy developed in 2005. The policy has, however, yet to be updated to focus them despite several announcements.

As per the prudential regulations for agriculture financing, banks are required to ensure disbursement of working capital/short term loans within seven days but it is usually delayed. “The entire formalities for any agriculture loan require lengthy documentation and procedure and take around two to four months to get the loan,” says a bank manager on condition of anonymity, when asked about the process of loan delivery.

“Small farmers should be given loans on personal guarantee. Group-based credit schemes are being followed by small banks but needs to be taken up by the main private banks as well to improve credit disbursement ratio in the country. Crop and life insurance is the best way to decrease the risk of farming community against losses and of banks against non-repayment,” he adds.

Some farmers hold the banks responsible for low agriculture credit in the province. “The banks are risk-averse. They avoid lending loans to farmers for fear of default. Much has been said of the one-window operation but no bank as yet has come out with a fast track mechanism for credit disbursement. The banks must simplify and re-structure their agriculture lending mechanism and mobile credit officers should reach farmers at their doorsteps to boost credit delivery,” says Shahid Khan, a farmer in Mardan.

Last year, the KP government revived the erstwhile cooperative bank and promised to provide Rs1 billion seed money for easy farm and non-farm loans to small farmers from the bank but practically just Rs200mn were released. This year too, Rs400mn will be released. How can credit ratio be improved with this? 

Under agricultural loans scheme through the passbook system, banks are bound to allocate 70 percent of their loans to subsistence farmers but whether the law is followed is not clear.

In group-based lending, developed by the SBP, small farmer groups are formed by the lenders involving 5-10 members having identical needs and registered with the former. Collateral is generally not used and is replaced by personal guarantee —-a joint liability agreement/undertaking — takes its place wherein each member takes the responsibility of the outstanding debt of all group members. In case of any change in the group, a fresh guarantee would be signed by the members.

A group coordinator acts as facilitator of the group and agent of the bank. The bank ensure that group coordinator is executing the assigned tasks as prescribed like liaison with members, arrangement of meetings, etc, and if need be replace him, with the consensus of the group, in case he fails to deliver. Group members ensure that the bank receives timely repayments from individual borrower/group members. But if a borrower dies, liability lies to remaining group members. However life insurance is urged to safeguard the interests of both the borrowers and lenders.

Everyone who owns or is a tenant or lessee over up to12.5 acres of land or have more than 40 sheep, has computerised national identity card, residence in the village and membership in the village organisation, is eligible for crop or non-crop loans in the scheme. 

Though globally 12.5 acres of land is the threshold of subsistence farming but in Pakistan one having that much land is considered a rich person given the phenomenon of small land holding in the country. According to an estimate, cultivated land per person in Khyber Pakhtunkhwa stands at just at 0.2 acres. The benchmark needs to be brought down for bank credit if small farmers are to be benefited.

Repayment schedule for farm loans may be set as per production cycle of crops and for non-crop activities, like livestock farm establishment, it should be three to five years.



Agriculture in budget of Khyber Pakhtunkhwa

Bakau agriculture 1

Image via Wikipedia

When it comes down to food

The budget of Khyber Pakhtunkhwa does not hold much for the agriculture sector

By Tahir Ali


Agriculture sector in Khyber Pakhtunkhwa has once again failed to elicit enough funds and attention from the provincial government in the budget.

Contrary to official claims that the new budget would be innovative in its outlook, an analysis of the annual strategy shows that it is yet another exercise characterised by meagre funding, phased allocation of funds that delays completion of projects for years and with overstretched plan of action that has no or negligible results.

Agriculture sector, which accounts to 25 percent of provincial gross domestic product and on which the livelihood of around 70 percent of its population depends directly or indirectly, requires an out of box solution, sufficient funds and their en-bloc release, and most of all commitment of provincial authorities whose indifference could be devastating for the sector after the 18th amendment.

The Chief Planning Officer of ministry of agriculture, Ahmad Said, informs agriculture Annual Development Programme (ADP) for 2011-12 has been prepared in the light of provincial agriculture policy 2005, horticulture policy 2009, and reconstruction priorities.

The total outlay of ADP has been increased by 15 percent from Rs69bn to Rs85bn. Allocation to agriculture and its related sectors has been increased from Rs1.175bn in the outgoing fiscal to Rs1.355bn for new fiscal but its share has decreased from 1.70 percent to 1.59 percent as percentage to the ADP. The ADP has 71 projects, including Rs0.849bn for 47 on-going and Rs0.505bn for 24 new schemes.

The whitepaper 2011-12, issued by the provincial finance department recently, says this year’s provincial ADP reflects higher priority to income generating sectors of economy, including agriculture. “Agriculture can easily attain the status of big industry in the province if proper care and patronage is given to it,” it argues.

For example, for five old and new schemes of agriculture mechanisation requiring Rs855mn, only Rs164mn are allocated. And for 37 old and new schemes in agriculture research that required Rs1040mn, only Rs243 have been earmarked for the coming year. Similarly, agriculture planning schemes have been provided only Rs21mn out of the total required Rs640mn.

For project distribution of cultivable land amongst landless farmers and agriculture graduates, which has a total outlay of Rs200mn, only Rs10mn have been allotted to the year, which means it will take years for the project to complete and benefit the farmers.

Again, only Rs1mn have been set aside for rehabilitation of germ-plasma units in Hazara division that involves Rs10mn in all. And for the establishment of the olive orchards in wasteland, another good intervention, only Rs10mn out of the total Rs60mn have been approved for the year.

Similarly, for a 2008 project of strengthening of planning and monitoring capacity of the agriculture department involving Rs15, only Rs3mn have been allotted while Rs5mn had been spent on the project. Can there be any better proof for half-hearted measures on the part of the government?

According to an official document, in the outgoing year, out of the total core ADP estimates of Rs69 billion, Rs45bn were released but actual expenditure stood at only Rs26bn. For the agriculture sector, over Rs1.22bn were released against the budget estimates of Rs1.175bn but only Rs0.67bn of these could be spent till 20th May, 2011.

Viewed in this backdrop, the amount to be spent on agriculture may be much less than allocated in the ADP. In the new ADP, there are 39 foreign-funded projects worth over Rs16bn but the agriculture sector has no projects in it like the outgoing fiscal. The government should have arranged research and development projects with the help of foreign donors to give a fillip to the under-performing sector.

Last year, the KP government had announced revival of cooperative bank and promised to provide Rs1 billion seed money for easy farm and non-farm loans to small farmers and rural women from the bank but actually onlyRs200mn were released. This year too, Rs400mn will be released. How can credit ratio be improved in this situation?

“The main problem confronting farmers is their poverty and costliness of agricultural inputs but there is no scheme to address the problem. The government should have announced an agriculture subsidy regime on its own or with the help of foreign donors,” says Haji Niamat Shah, a farmer. Despite these shortcomings, the annual agriculture roadmap of Khyber Pakhtunkhwa is comprehensive and has something for each sub-sector.

According to Ahmad Said, lands that were washed away by floods would be rehabilitated and orchards would be established anew through free plants provision. “Another project for improving quality and increasing production of fruit plants through tissue culture technology has also been proposed. A public-private joint scheme for olive cultivation in areas where ordinary crops cannot be grown is being launched,” he adds. Subsidized inputs availability, weak coordination between farmers and government and wastage of on farm produce have gone unaddressed.

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