AGRICULTURE plays a central role in the economies of developing countries. In Pakistan this sector is the driving force behind growth. It employs 48 per cent of the total work force, supplies raw material to industry, serves as a market for industrial products and contributes substantially to export earnings.

Almost 68 per cent of the rural population is directly or indirectly linked with agriculture for its livelihood. Any improvements in agriculture will not only help in economic growth at a faster rate but also benefit a large segment of the population.

Increase in farm productivity- a prime objective-- is possible by ensuring timely availability of quality inputs. Small farmers – the largest section of the agrarian society -- are not in a position to utilise quality inputs because of their meagre resources. Hence, avenues for institutional sources of financing must be opened to them. Among all categories of loans available to farmers, production loans are the most relevant.

Agriculture is passing through a period of transition, shifting from predominantly a way of living to a lucrative business. The concept of corporate farming is evolving. Marketable surplus is the chief concern of today’s farmers. The impediments in the way of this change are the poor access of farmers to credit and lack of technological advancements.

Shortage of capital is the inherent reason why the farmers are reluctant to embark upon new practices/activities. The investment can come either from household’s own savings or through borrowing.

Hence, improving agricultural productivity of farmers and increasing their income should be a matter of priority. Credit facilities are the integral part of the process of commercialisation of rural economy, whereas small farmers had been totally neglected..

Small farmers at the moment are in need of more credit than any other sector because of severe unemployment and negligible savings. They need to be provided with credit in a systematic way for supporting agricultural productivity. This should be backed by proper guidance and close supervision. The assessment of these loans on periodical basis is crucial for evaluation of loans on overall productivity.

Small farmers at present are trapped in a vicious circle of poverty and are helplessly watching their land being destroyed by water-logging and salinity leaving them in hunger and abject poverty.

These farmers whose income is small and family-size is relatively large, are generally constrained for want of funds to meet their farm input needs like seed, fertiliser, pesticide, etc. To improve farm productivity and income of these tillers, there is a need for appropriate measures on priority.

There are two sources of credit, formal and informal. Among informal sources, the most prevalent are friends and relatives, moneylenders, beoparies, market intermediaries etc. But, these have their own flaws and limitations. However, farmers are compelled to utilise these sources because of easier access, absence of cumbersome procedures and availability as and when required which are rare in formal sources.

Formal institutional sources cater to the needs of rural credit in general and agricultural-credit in particular. Agriculture credit may be classified into two categories -- production loan and development loans. Production loans, which are disbursed to meet working capital requirements of farmers, are typically short-term loans and are repaid within one year. These loans are needed to acquire inputs for crop production and allied activities (e.g. seeds, pesticides, fertilisers etc.).

Development loans, which are disbursed for acquiring fixed assets of the farm, are usually medium-term loans and occasionally long-term loans. The outcome of these loans is long-lasting and of permanent nature. These loans are extended for purchase of farm machinery, agricultural implements, and livestock, additional land and tube-well installations.

Timely access to loans is a key factor for low-income farmers, so the time between the decision and disbursement of funds should be kept as short as possible. There are various forms of disbursements. In order to avoid loan resources being spent on assets other than those agreed upon in the loan contract, some institutions try to transfer at least part of the loan amount directly to suppliers using purchase orders. Other lenders give loans in kind, while some prefer to disburse loan in cash.

Disbursing loans in cash acknowledges the fact that loans are needed to meet people’s financial needs, rather than just for specific projects. However, when larger investments are financed with a loan, e.g. a tractor, it might be advisable to pay the amount directly to the supplier to avoid a large amount of money ‘burning’ for too long a period of time in the hands of the borrower.