December 4, 2003	Thursday	Shawwal 9, 1424

KARACHI, Dec 3: A top-level experts committee on rural finance (CRF) has recommended setting up of a new set of private sector rural banks focussed on a whole range of rural finance products for the exclusive benefit of the rural sector.

This and several other recommendations of the committee are integral part of the CRF report placed on the State Bank website on Wednesday.

State Bank Governor Dr. Ishrat Husain had constituted this committee in July 2001 under the chairmanship of Jahangir Khan Tareen. Later it had co-opted chief executive officer of National Rural Support Programme Rashid Bajwa and a former chairman of Federal Bank for Cooperatives Shoukat Hayat Durrani as its members.

The committee as well as its sub-committees spent more than two years on extensive research and analysis of Pakistan’s existing rural finance system. It has now come up with a blueprint of reforms aimed at developing a viable and self- sustaining system that can address the weaknesses of the rural financial system.

It has recommended that a subsidy of 2-5 per cent be given on the loans advanced by a rural bank depending upon the local conditions the bank is operating under. The committee suggests that the existing commercial banks should also be allowed to set up rural bank subsidiaries under the new system. “This would allow them to take a fresh look at their policy of closing down rural branches and will help in increasing access to the rural sector to banking services.”

The committee also recommends that the post offices should be involved in extending rural finance services across the country because they have physical infrastructure and manpower required for this purpose. It suggests that the State Bank should convert its existing agricultural credit department into a new rural finance department to play a pro-active role in facilitating a quantum leap in providing rural finance services.

CONCLUSIONS: The committee has concluded after two years of research and analysis that all banks combined meet only 30 per cent of the total agriculture credit requirement and they cater to only 15 per cent of the total number of borrowers.

While highlighting weaknesses of agricultural credit system the report says that the Agricultural Development Bank of Pakistan (now Zarai Taraqiati Bank Ltd.) “ended up serving mostly the privileged and the better off farmers.” It says that ADBP “has lost billions of rupees in business in meeting the needs of the better off farmers.

The CRF also concludes that the commercial banks have ventured into the agriculture credit sector only reluctantly. “They too have primarily dealt with a small number of better off farmers.”

“Co-operative banks have played an even smaller role,” says the CRF report. “The huge SBP subsidy (to them) has resulted in even greater hijacking of the agriculture co-operative credit by influential farmers,” it concludes.

Criticizing the role of ADBP as an important flag bearer of agriculture credit the CRF report remarks: “The history of ADBP reads most like a case study on how not to run a bank, specially an agricultural bank. In fact, ADBP has never operated as a bank. It has been used only as a “disbursing agency” throughout its long history. Policy makers have never sought to make it operate as an actual Agricultural Rural Bank.”

The CRF report says the reason why the ADBP remains basically a profitable institution despite its inefficiencies is that it gets highly subsidized funds from the central bank. Analysing the ADBP’s balance sheet of fiscal year 2001 it points out that while ADBP’s yield on total advances was 15.5 per cent, its real cost of funds was only 4.5 per cent.

The report also laments that a massive 80 per cent of the total advances of all commercial banks are concentrated in just seven cities thus resulting in lower credit disbursement in the rural areas.

“The record major rural finance failure is traced to the dismal performance of commercial banks,” says the report.

It says that the decision makers and the professional bankers in Pakistan are highly urbanized. “They are most uncomfortable in dealing with rural problems in a meaningful manner.”

This cultural complexity has been further compounded by a single-minded focus on industry to the detriment of agriculture that has been the hallmark of policy-making beginning in the 1960s and continuing till the early 1990s. “For most of this period, resources were continuously transferred from the rural to the urban sector using coercive economic policy,” the report remarks.

It points out more than a local private banks have also managed to concentrate a greater proportion of their business in the traditional industrial urban centres although the SBP had dispersed their headquarters geographically to broaden the banking base in Pakistan. The report gives examples of three local private banks namely Bank Al-Habib, Askari Commercial Bank and Bolan Bank that have 96.5 per cent, 91 per cent and 88.6 per cent of their total advances in four, six and five cities respectively.

The CRF report says that the rural sector is capable of mobilizing savings far and beyond what is being captured by the formal sector at present. “The lack of relevant saving products available to the rural sector has led it to concentrate its savings primarily in livestock rearing,” the report concludes.

“The acute shortage of capital, the resultant exorbitant rates charged by the informal sector, the lack of appropriate saving products for the rural sector and the inability to reduce risk through appropriate insurance products has led to reduced farmer profitability and suffocation of rural entrepreneurial activity.”

“As a result the growth of existing rural activity has been severely constrained,” concludes the CRF report adding that “the rural economy is mired in a vicious circle of low growth, low productivity, weak employment generation, rising poverty and abject helplessness.”