KARACHI, Oct 10: Banks are free to fix mark-up on agricultural lending under the State Bank’s revolving credit scheme for the farming community.

“Banks may apply the rate of mark-up as are applicable to crop loans/production loans or any other agreed rate as per bank’s policy,” says the policy document of the credit scheme available with the banks involved in disbursement of agricultural loans.

Senior bankers told Dawn that there was no cap on the mark-up to be charged on agricultural loans advanced under this three-year scheme. They said banks would fix mark-up rates according to the demand for credit and supply of funds. Senior bankers involved in agricultural credit disbursement say currently banks are charging 11-12 per cent mark-up on agricultural loans. They say the mark-up rate under the three-year scheme may initially remain at the same level.

“I think mark-up structure will not immediately change,” said head of agricultural credit department of one of the five major banks.

“Banks have a lot of excess liquidity and the revolving credit scheme is so designed that the risk of default is minimal. So the banks can now make generous lending in agriculture,” said head of farm credit at another major bank. He said rising competition between the banks to employ funds profitably may finally result in lowering of mark-up rates on agricultural loans but not in the immediate future. “Much would also depend on overall movement in interest rate structure,” he said, pointing to bottoming out of bank interest rates. “Since the interest rates have seemingly bottomed out and there is little possibility that banks reduce their lending rates substantially the farming community should not anticipate much relief in mark-up on agricultural loans,” he said.

Weighted average lending rate of all the banks combined fell to 7.58 per cent at end-June this year from 12.17 per cent in July last year, recording a big fall of 4.59 per centage points within one year. But it was the trade and industry that benefited most from this big rate cut and agricultural loans remained expensive as ever. Bankers say they have to charge a higher mark-up on farm loans because agricultural loans carry greater risks of default and require huge network for disbursement.

Sources close to the State Bank told Dawn that in the current fiscal year banks would disburse Rs65.5 billion to agricultural sector under the three-year revolving credit scheme. The sources said the amount included estimates of fresh farm loans as well as reloaning of the amount of agricultural loans the banks would recover during this fiscal year. They could not give the break-up, but said this was how the agricultural loaning was done every year.

Senior bankers say the introduction of three-year revolving credit scheme will help increase the volume of agricultural loans and reduce the rate of defaults. “The volume will rise because the scheme is so designed that the risk of default is minimal,” said head of agricultural credit at one of the five major local banks.

Sindh Chamber of Agriculture president Syed Qamaruzzaman Shah made a similar statement. He said previously the borrowers used to default because they were not sure if they would get fresh agricultural loans after retiring the old ones. “Now that the scheme has it that the credit limits of the borrowers would be automatically renewed on repayment the rate of default would certainly fall,” he said. “But the condition of cleaning the account within a year is against the spirit of revolving credit scheme that we have been demanding since long,” he observed.

He was obviously referring to the validity/renewal clause of the revolving credit scheme. It says: “The revolving credit scheme shall be valid for three years with one-time documents; subject to repayment of principal and mark-up amount annually on any date with the consent of the borrower.”

“On cleaning the account on any date during the entire one year period by the borrower the limit shall automatically be renewed by the bank without any fresh document/request/ application.”

“The borrowers should be allowed to borrow money up to his sanctioned credit limit; repay any portion of it within a year and redraw that again,” Mr Qamaruzzman says insisting that this is what he had suggested at the July 4 meeting of the Agricultural Credit Advisory Committee. The meeting had decided to develop uniform definition and procedure of agricultural loan scheme and had laid down the basis of the three-year revolving credit scheme.

Mr Qamaruzzaman also says that banks should consider ways to lower the rates of mark-up on agricultural loans. “The mark-up on agricultural loan is the highest. Banks continue to charge 12 per cent and even higher mark-up on agricultural loans,” he complains. Top bankers admit that banks are generally making agricultural loans at 11-12 per cent, though in certain cases the rate moves either side.

Mr Qamaruzzaman says the unprecedented excess liquidity available with the banks should help them lower the mark-up rate on agricultural loans. “The mark-up on commodity operations of the government may serve as a good benchmark for agricultural loans,” he suggested.

Senior bankers say that out of the Rs65.5 billion allocated for agricultural loaning during this fiscal year Zarai Taraqiati Bank Ltd (ZTBL) alone would disburse Rs33 billion. They say that five major local banks — National Bank, Habib Bank, United Bank, Muslim Commercial Bank and Allied Bank — will disburse Rs22.4 billion. Punjab Provincial Cooperative Bank will disburse Rs7.5 billion and 14 local private banks will disburse the remaining Rs2.6 billion. The list of the banks include: Askari Commercial Bank, Bank Al-Habib, Bank Alfalah, Bolan Bank, Faysal Bank, Metropolitan Bank, PICIC Commercial Bank, KASB Bank, Prime Bank, Saudi Pak Commercial Bank, Soneri Bank, Bank of Khyber, Bank of Punjab and Union Bank.