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A critical look at agricultural lending

INCREASED agricultural lending over the past few years has helped achieve some objectives of financial inclusion but lending quality itself falls short on some counts, such as geographical spread.

Banks managed to reach out to 200,000 new borrowers in the last fiscal year, boosting the overall number to 2.4m. The disbursement of farm and non-farm agricultural loans to small land owners and agri-businesses has helped achieve the targets of the national financial inclusion plan.

In FY16, the number of agri-businesses served by the banks surged past 770,000, from 550,000 a year ago. A much smaller increase of 11,000 plus was also recorded in loan disbursement to subsistence level farmers.

Performance improved despite a negative growth (of 0.2pc) in the agriculture sector. These achievements were made by the State Bank of Pakistan’s efforts to boost farm credit. The bulk of farm loaning is revolving in nature and, thus, more rewarding for banks.

Livestock has started getting more attention from banks because of its higher average growth rate as compared to major crops. One of the factors that kept agricultural lending high, close to Rs600bn, in FY16 was that unlike the crops sector that saw a big fall of 6.3pc, the livestock sector grew by 3.6pc.


Livestock has started getting more attention from banks because of its higher average growth rate when compared to major crops


“This growth contributed its bit in keeping demand for agricultural credit,” says the head of a large local commercial bank. “Besides, though cotton production took a plunge and should have theoretically depressed demand for credit from the crops sector, cotton farmers’ net borrowing from banks remained intact as their repayments declined and demand for credit from sugarcane and wheat growers went up since the output of these crops remained high.”

Over the last four years, the volume of agricultural credit has increased at a high average rate of 45pc — from Rs212bn in FY12 to Rs598bn in FY16. But farmers in Sindh, the province that has roughly a 20pc share in the country’s overall agriculture, still feel neglected. The reason is obvious: In FY12, Sindh’s share in the total agricultural loans stood at 12pc but in FY16 it plunged to 8.3pc.

Sindh-based agriculturists complain that the state-run Zarai Taraqiati (Agricultural Development) Bank has not been making enough additional loans in the province for the past four years, adding that credit requirements of even first-class borrowers are not fully met by the bank.

They make a similar complaint about the state-run National Bank of Pakistan. Private commercial banks and microfinance banks are generally doing well, they say.

Central bankers say that the decline in agricultural credit disbursement in FY16 is just an aberration from an otherwise rising trend seen between FY12 and FY15 when the share of the province in such disbursements rose from 12pc to 12.7pc.

Balochistan, KP and Gilgit Baltistan also continue to get less than 1pc each of total agricultural loans for different reasons but the most cited one is, according to farmers, that banks do not reach out to new borrowers.

In addition to this, agricultural lending also remains short in meeting genuine needs of all farmers due to the fact that the government-sponsored schemes for boosting farm productivity is practiced in varying degree of enthusiasm across all provinces.

The credit guarantee scheme (for small and marginalised farmers) announced in the last year’s budget was implemented more vigorously in Punjab than in Sindh and other provinces, representatives of Sindh Abadgar Association allege.

Central bankers claim that agricultural lending during the current fiscal year is as much under focus of banks as in previous years but consolidated data on it for the first quarter of the year would be published after some time.

Bank executives dealing with agricultural finance say, however, meeting the full fiscal year target of Rs700bn seems too difficult.

A number of executives of five top local banks and two microfinance banks recently informed this writer that their respective banks have not seen much of agricultural credit demand in Q1FY17 both due to the traditional dip seen in every first quarter and also because the agriculture sector’s performance during this year is also not expected to rebound fully.

Bankers say that livestock and crop loan insurance scheme and agricultural value-chain financing system, introduced to support growers and livestock breeders, have made disbursement of agricultural loans a bit easier.

Risk management in agricultural finance was a major issue but these two systems (launched earlier but fully executed in FY16) have made assessment of agricultural borrowers and recovery of agricultural loans easier due to involvement of third party risk assessment and sharing, bankers say.

Initially both schemes have targeted a small number of agricultural borrowers ‘but going forward as provincial governments become more supportive, farmers get to know these schemes full well, banks would find it easier to lend against the cover of these two schemes larger amounts of loan. And, that may keep the growth momentum in farm lending going’.

But they say that agricultural warehouse receipt financing scheme that could mitigate the risks of agricultural loaning is yet to be made popular because growers have not shown much interest in it.

Growers complain that at people at bank branches handling this scheme often fail to explain to them in simple words about how exactly the scheme works.

Source: Dawn,

November 7th, 2016

Byline: Mohiuddin Aazim

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