AGRICULTURAL credit has been growing steadily for some years, but it still has limited outreach and an unequal disbursement pattern.

The government and the State Bank are taking measures to sustain this growth, and to remove imbalances in its distribution, though not with much success so far.

Agricultural loans extended in FY14 totaled Rs389bn, showing an average annual growth of 13pc since FY09, when credit volumes stood at Rs233bn. But credit outreach has not been as impressive, and Punjab continues to get the bulk of the credit. Out of 8.3m total farm households, only 2.4m have access to agricultural credit, and 85pc of the total credit is distributed in Punjab. All other provinces get the remaining 15pc.


Out of 8.3m total farm households, only 2.4m have access to agricultural credit, and 85pc of the total credit is distributed in Punjab. All other provinces get the remaining 15pc


Besides, only one-fourth of 5.3m small farmers get financing from banks. Others suffer for want of finances, or secure much costlier loans from informal sources.

The SBP is trying to expand credit outreach and remove grievances of borrowers regarding this uneven distribution. “Behind this two-pronged strategy is the goal to boost the agriculture sector’s growth and its contribution to GDP,” says a member of the Agricultural Credit Advisory Committee (ACAC).

In its July 12 meeting in Lahore, ACAC reviewed agricultural credit distribution in the light of concerns raised publicly by Finance Minister Ishaq Dar a couple of months ago.

Addressing the launching ceremony of the 2nd round of the Financial Innovation Challenge Fund recently, the finance minister pointed out that up till FY14, agricultural loans accounted for 7pc of the total loan portfolio of commercial banks. “Ideally, this percentage should be closer to agriculture’s share in the GDP, i.e. over 20pc,” he had said.

Outdated modes of financing through collaterals such as title documents etc. impede expansion in farm credit outreach and almost exclude non-farm activities and landless farmers. This affects growth of the non-crop sector, which accounts for over 50pc of farm output.

The agricultural sector is the backbone of the economy, with 21pc share in GDP and 45pc share in the total labour force. About 68pc of the rural population is dependent on it for livelihood. So, widening agricultural credit distribution is a must to help more and more farmers meet their current expenses and to encourage them to invest in productivity-boosting technologies.

Central bankers say increased inflow of farm credit, despite the uneven distribution, has led to higher investment in the sector, and add that its pace should accelerate further from the current fiscal year.

“For FY15, the indicative target for agricultural credit has been set at Rs500bn (28.5pc higher than actual disbursement in FY14). This massive increase in loans, combined with our efforts for extending credit outreach and for a better distribution pattern, should encourage investment by farmers,” says a senior SBP official.

Central bankers say the increase in per-acre lending for major crops from February had a real impact on expansion of agricultural loans. The SBP had raised per-acre financing limits for rice and wheat to Rs34,000 and Rs29,000, from Rs19,000 and Rs16,000 respectively. It had also scaled up the limits for cotton and sugarcane financing to Rs39,000 and Rs53,000, from Rs21,000 and Rs30,000.

This big hiking of loan limits had become overdue as they were last reset in 2008. And the limit-raising itself has been a key factor behind expansion in farm credit from Rs333bn in FY13 to Rs389bn in FY14.

However, growers say an increase of Rs56bn in one year is no big deal, considering the huge 77-85pc rise in loan limits for the four major crops. They say since loans for crop production accounts for roughly 90pc of total farm credit, a hike in loan limits for major crops is bound to push overall credit volumes.

But central bankers believe that the federal government’s scheme for facilitating the outreach of agricultural lending and the SBP’s efforts for improving credit disbursement would start changing this scenario for the better from this fiscal year. The federal budget for FY15 envisages bank loans of up to Rs300,000 for 100,000 small, unbanked farmers by way of picking up 50pc of losses if these loans remain unpaid.

And the SBP, on its part, has recently revised prudential regulations for agricultural lending, paving the way for bank financing to more borrowers, including small farmers. Besides, SBP officials believe that microfinance banks (MFBs), whose involvement in farm lending has yielded good results, should provide further impetus to it in FY15. In the last fiscal year, agricultural lending by MFBs was about 6pc of the total.

Published in Dawn, Economic & Business, July 28th, 2014

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