On affordable and accessible agriculture credit

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

http://jang.com.pk/thenews/dec2011-weekly/nos-04-12-2011/pol1.htm#3

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.

 

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