ISLAMABAD: Repressive power structures affect credit distribution: study
By Our Reporter
ISLAMABAD, Nov 15: Existence of unjust and repressive power structures, unequal distribution of resources, particularly land, inefficient performance of formal credit institutions and an inherent discriminatory credit policy has led to inequitable distribution of credit in rural areas.
According to a recent study conducted by a prominent economist, Dr Sohail J. Malik, the credit in other parts of the world is an instrument of increased productivity and uplift of small farmers and landless poor. However, in Pakistan its distribution is tilted towards large landholders.
These are the same landholders who, noted Dr Sohail J. Malik in a study presented to the Agricultural Prices Commission, were responsible for 72 per cent default in payment of past loans owed to the Zarai Taraqiati Bank (ZTBL) in 2002, denoting 22.2 per cent decline from 2001.
The interface of this performance was the increase in recovery of current dues from 66 per cent to 71 per cent in 2002. It appears that the recipients of these loans reduced their payments on past dues in order to show improvement in their loan- repayment behaviour on current dues and get more loans.
Dr Malik cited a survey of 4,380 households in 217 villages conducted jointly by PIDE and other research bodies which showed that institutional sources (ZTBL, commercial banks and Federal Cooperative Bank) accounted persistently for only 22 per cent of the total rural credit.
The remaining 78 per cent was obtained from non- institutional sources including friends and relatives. It is the small farmers/landless tenants who, for the most part, take recourse to this source.
What most studies, however, ignore is the fact that relatives and friends of small farmers are poor themselves and perhaps also in urgent need of help. It is mainly the usurers they bank upon to fulfil their needs.
Despite an increase in the share of borrowing from institutional sources, Mr Malik said small farmers and poor households had limited access to this credit. The recipients of loans said they faced two major problems; lack of timely availability of loan and inadequacy of loan according to their needs.
The main reasons given for delayed disbursements were non- cooperation of the staff and lengthy procedures. Among 519 farm households, 42 per cent were found credit-constrained.
The study found an unequal distribution of constrained households across farm size, e.g. 57 per cent landless and 59 per cent marginal and small farmers taken together.
According to the study, initial liquid assets of higher value provided a disproportionate advantage in access to credit. “This could be a result of the nature of rural credit market that is dominated by the larger and better off farmers.
Credit constraint casts its impact on rural households in a number of ways. It forces them to reduce the use of modern inputs, thus affecting productivity. Its ultimate result is decline in farmers’ welfare, e.g., directly by forcing them to reduce their consumption expenditure, already at subsistence level, and, indirectly by reducing fertilizer use.
Lack of sufficient funds for landless and small farmers (even from informal lenders) is the major cause of rising trends in the sharecropping arrangements of tenancy, Mr Malik said.
The focus of rural financial markets, he said, was mainly on agriculture, primarily on the crop sector. Very little credit is made available for livestock, fishery and forestry, activities associated with small farmers and other operators.
Thus lack of credit for non-farm sector is a major factor in the lack of diversification of the non-farm sector, it added.
Small farmers and poor households borrow not only for production, but also consumption purposes such as marriage, medicines etc. Thus, the Rural Financial Market Study 1996 found that the proportion of consumption as the objective of informal loans was as high as 56 per cent, thus further accentuating poverty.
Informal loans are mostly short-term in nature. In 1985, 70 per cent loans were short-term; in 1996, this proportion had increased to 93 per cent. The term structure of short-term loans too varies across the provinces. In Sindh, they constituted 91 per cent of the total informal loans, in Punjab 67 per cent, in Balochistan 61 per cent and in the NWFP only 40 per cent.
The largest proportion of short-term loans in the lending portfolio was from factories (93 per cent), followed by professional money lenders (87 per cent) and commission agents and merchants (81 per cent).
Apart from high interest rates (33.4 per cent for professional money lenders), these lenders attach conditions to their loans that restrict the borrowers’ ability to make independent decisions such as which crop to produce and the compulsion to sell it only to certain shopkeepers/commission agents, purchasing their necessities only from them and so on.
The study throws light on another interesting aspect. Nearly one-third of the total funds used by the private lenders originates from the formal credit sources. Thus, they serve as intermediaries between the borrowers (mainly small farmers etc.) and the ZTBL/commercial banks whose business it should be to proactively meet the credit needs of these people and thus help them emerge out of poverty.
