April 1, 2002	Monday	Muharram 17, 1423

The crop farming is a roofless industry. Its activities take place mostly out in the open. In fact, among the various agriculture enterprises, it is the most exposed, and of the longest duration, to a host of natural factors including weather.

Unfortunately, in spite of many technological advancements, many of these factors are still beyond the control of farmers. Thus, even in the presence of good management practices, hostile weather conditions, at any stage, and especially in the critical stages of germination, flowering and fruiting can adversely affect quantity and/ or quality of the crop output. This gives rise to uncertainty of the crop yield.

Another feature of crop farming enterprise is the time-lag between planting and harvest. It means that investment in labour and other inputs must continue for a few short-duration crops, to several months for long-duration crops before the final product becomes available. Consequently, during this period, the farmer continuously need finances, whether his own or borrowed for the purchase of inputs as well as for family expenses.

As the farming becomes more commercialized and capital- intensive, the need for (borrowed) finance increases correspondingly. Moreover, with the rapid increase in prices of inputs due to withdrawal of subsidy on fertilizer and pesticides, etc, farmers’ demand for (borrowed) finance has further increased significantly. Whereas big farmers can provide much of their finance needs from their own resources, small and medium-class farmers, whose personal financial resources are rather meagre, obviously cannot.

It is in this backdrop that the National Commission on Agriculture in its report (1998) had postulated that 30 per cent of the estimated cash requirements for seeds, fertilizer and pesticides would be met from credit by the large farmers, 60 per cent by the medium farmers and 90 per cent by the small farmers.

The Crop Credit Insurance (CCI) can be useful to farmers in both these respects. Firstly, it can play an effective role in providing financial protection to them against crop losses due to natural factors. Thus for relatively small payments (premium) farmers can buy the security of financial protection against large crop losses. Secondly, as it improves farmers credit- worthiness, his access to institutional credit also increases.

It is particularly important in a country like Pakistan where access of small farmers to institutional credit is severely limited. Also, the CCI has to effect of improving the supply of institutional credit to the farming sector in at least two ways. Firstly, when there are large crop losses, farmers tend to default on loans. It the crop losses are widespread due to natural calamities like floods or persistent drought, this leads to decapitalization of credit institutions. The CCI can help reduce/stop this decapitalization of financial institutions. Secondly, in the presence of insurance arrangements, commercial institutions which are otherwise shy of providing agriculture credit are encouraged to move in to advance credit for agriculture purposes. Consequently, overall availability of credit to farmers increases.

In fact, absence of insurance has been a major constraint on supply of credit by the commercial banks for agricultural purposes. For the past few decades, nationalized commercial banks (NCBs) have been given yearly mandatory targets by the State Bank of Pakistan (SBP) to advance loans for agricultural purposes, e.g. production loans, etc. If a given bank does not meet the target, it is penalized by the SBP. In the absence of insurance, because of the risks involved, some of the banks have preferred to pay the penalty rather than meet the SBP given target for mandatory agriculture loaning.

In its meetings with the executives of the banks, small and medium enterprises development agency (SMEDA) found that NCBs as well as other private commercial banks seem to have excess liquidity but are reluctant to advance credit to agriculture sector because of perceived high risk/cost of agriculture loaning. As the Finance Minister, Mr. Shaukat Aziz, and the SBP Governor, Dr. Ishrat Husain, in their reported addresses to the participants of the Agriculture Conference-2002 in Islamabad have pointed out, this psychological barrier of commercial banks that “agriculture bank loan is not a profitable business” -needs to be broken. Credit insurance is imperative in this regard.

In the past or present, the government has provided economic incentives to farmers and undertaken various support measures for the growth and development of agriculture in the country.

These have included subsidy on various inputs (seed, fertilizer, pesticides etc) provision of agriculture credit on reduced rates, adoption of price support and procurement policies in respect of selected crops, etc. These measures have undoubtedly helped the farmer and contributed to greater production of cash and food crops, stability of prices in respect of major crops and to that extent the farmers income, etc.

The record production of wheat crop by farmers in the past two years (mainly due to higher support price) can be cited as recent success story of the effectiveness of these measures. However, these measures do not provide protection to farmers in the event of crop losses or failure due to natural calamities which are largely beyond his control. Under these adverse circumstances, farmers are most likely to default on borrowed finance. That is when growers demand waiver of loans. This is the risk factor commercial banks are reportedly scared of. Crop credit insurance can provide this protection to the lending bank. Knowing that they will get their capital back even in case of crop failure caused by natural calamities, commercial banks would feel safe and therefore confident in providing finance for crop farming.

Crop credit insurance and other support measures such as mentioned above are mutually reinforcing and tend to have a synergistic effect on the growth of a stable and prosperous agriculture. In fact, these programme are only partially effective when these operate in isolation or in the absence of the other. Thus, whereas, price support and procurement programme help in stabilizing farmers’ income to the extent and only when the farmer has a produce, the CCI provides income stability even in the event of a crop failure, when a farmer has no produce to show. Similarly a farmer is likely to benefit more from a govt subsidy on inputs/new technology in the presence of a crop insurance programme as then he may be induced to use higher levels of these inputs and be more willing to try new technology under the security of insurance.

The CCI is thus not only an important component of a sound agriculture credit policy but it is also an essential link in the chain of various supporting measures which the government can undertake to bring about a stable and prosperous agriculture.

The increasing sophistication of agriculture technology and greater reliance on intensive cultivation for improving agriculture productivity is forcing the farmer to use increasing quantities of cash inputs. An overwhelming majority of our farmers are poor with meagre savings if at all. They are unable to provide funds for the purchase of these inputs from their own resources.

This fact necessitates use of borrowed finance and underlies the increasing importance of credit in crop farming. However, the central problem of farm credit is the risk of nonpayment by farmers when their crops fail or they suffer major crop losses due to the adverse weather or other natural factors which are largely unpredictable and beyond their control. Insurance provides protection against this risk.

Recognising the increasing role of credit in the future development of agriculture and the risk factors associated with crop and livestock farming, it was recommended in the seventh five year plan to introduce crop and livestock insurance wherever institutional credit was involved. Whereas loans for the purchase of livestock are already being insured on a mandatory basis, credit for crop farming is not being insured. This anomaly needs to be removed.

It is heartening to note that the present government was focussing on the promotion of agriculture sector for the socio-economic development of the country. The Finance Minister and the Governor of the State to whom goes the credit for introducing many economic and banking reforms which have lead to positive growth and strengthening if country’s otherwise ailing economy have shown keen interest in policies for the rapid expansion of agriculture credit for the farmers. The Agriculture Development Bank of Pakistan (ADBP) is expected to play an increasing role in this regard. It is anticipated that if (crop) credit insurance is introduced reluctance on the part of commercial banks to advance credit to the agriculture sector would be overcome, and along with the ADBP they would play an active role in meeting the growing credit needs of our farming community.

In combination with other sound credit management practices, introduction of the CCI will not only facilitate overall expansion of agriculture credit, but it will improve its availability to small and marginal farmers who form an overwhelming majority of our farming community. This will greatly contribute towards greater stability and prosperity of agriculture in Pakistan.