KARACHI, Sept 11: The State Bank of Pakistan wants all the banks to employ their additional resources in agro-business as its analysis on banks’ mark-up rates and pricing mechanism for agro-financing found that banks were earning much more from farm portfolio as compared to overall returns on loan portfolio.

This is despite the fact that effective lending rates on agri-finance are always higher as compared to corporate and commercial loans mainly due to “high administrative and transaction cost and high risk of default,” a report of the State Bank given to all commercial banks reveals.

The report makes a strong case for “timely availability of credit to farming community on easy terms is most important than interest rates’’ because the alternate sources of credit for farmers, which are informal sectors, provides loans to farmers at 36 per cent to 60 per cent.

The agri-lending is a viable and profitable business avenue for banks,’’ the report observes while pointing out that the proposition to expand operations in agro-business is justified by “attractive prices of agricultural products, both internationally and locally.”

A comparison of banks’ spread on different types of lending reveals that banks are earning higher spread on consumer financing based on KIBOR plus 376 basic points followed by on agricultural financing. The spread on commercial and corporate lending is low. The SBP found average spread of five major banks at around 2.9 per cent (varying from 1.75 per cent to 6.15 per cent) while spread of domestic private banks was around 3.10 per cent.

Analysis of the data and information gathered by the central bank found that banks were generally using one year to six months average KIBOR plus certain basis points ranging from 150 to 600 for pricing their agri-loan products, particularly for the farm loans for production as normally a crop cycle is of six months.

However, high administrative cost and risk significantly influence effective lending rates of agri-loan products.

The report concedes that the ratio of non-performing loans in agri-credit is historically higher than overall stock of total loan portfolio. But thanks to banking reforms, the ratio of infected agri-loans is improving for last three years mainly because the recovery of banks has improved and there has been a constant clean up of balance sheets of the banks under which loans are written off or a waiver is given on long outstanding loans.

As a result the banks have improved the ratio of their non-performing farm loans to 16.5 per cent of total outstanding agri-loans in December 2007 from 21.2 per cent in the year 2005. The report contains data, according to which the total outstanding agricultural loans on December 2007 amounted to Rs162.11 billion in which the amount of non-performing loans was Rs26.67 billion.

In December 2006, the total amount of outstanding agri-loans was Rs145.47 billion in which the ratio of non-performing loans was 19.6 per cent or Rs28.48 billion. In the base year 2005, the total amount of outstanding agri- loans was Rs138.44 billion of which NPLs were 21.2 per cent amounting to Rs29.34 billion.

Among all the banks involved in sanctioning and disbursement of farm loans, the Punjab Public Cooperative Bank has been found to be the worst performer as it was having highest infected ratio of 35.6 per cent of agricultural loans in the year 2007 as against 30.6 per cent in 2005.

The SBP report reveals that total NPLs of agri-loans of Punjab Public Cooperative Bank swelled to Rs3.71 billion when the total outstanding farm loans portfolio amounted to Rs10.41 billion. In the year 2005, the total amount of outstanding farm loans of Punjab Public Cooperative Bank was Rs7.44 billion of which infected portfolio was Rs2.27 billion.

The situation further worsened in the year 2006 when infected portfolio ratio of agri loans was 42.3 per cent.

The Provincial Cooperative Bank in Sindh was closed down in 1989 and since then never allowed to function because it failed to recover about Rs1 billion loans from big farmers of the province. “The interest rate was fabulous then and the principal amount was hardly a few hundred millions,’’ complained a leader of farmers while pointing towards a glaring contradiction in government policies towards Sindh and Punjab in the past.

Another disturbing trend in agri-loan portfolio was seen in farm lending operations of five big commercial banks that include the government controlled National Bank of Pakistan. The stock of non-performing agri- loans of these five banks is showing increasing trend in last three years.

In the year 2007 all these five banks (HBL, ABL, MCB, UBL and NBP) had outstanding farm loans stock of Rs55.22 billion of which Rs5.11 billion or 9.3 per cent were NPLs. This has worsened from 8.4 per cent ratio of NPLs amounting to Rs4.50 billion of total outstanding farm loans amounting to Rs53.89 billion in the year 2006.

In 2005, the five big commercial banks maintained a stock of Rs45.61 billion outstanding farm loans of which 7.5 per cent or Rs3.42 billion was infected.

The Zarai Tarqiati Bank (ZTBL) is showing a gradual improvement in reducing NPLs ratio of farm loans to 22.7 per cent in 2007 from 29.4 per cent in 2006 and 31.4 per cent in 2005. The government controlled ZTBL remains the single largest operator in farm lending that maintained a stock of Rs73.62 billion outstanding farm loans in 2007. Of this, Rs16.70 billion was NPL.

In 2006, the total outstanding farm loans amounted to Rs68.39 billion of which Rs20.10 billion was NPL. In 2005, the total NPL was Rs23.42 billion out of total farm loans stock of Rs74.55 billion.