THE State Bank of Pakistan has introduced a ‘Value-Chain Contract Farmer Financing’ scheme to build liaison between banks and small farmers who have no access to formal financing.

Earlier this month, the SBP circulated among banks elaborate guidelines about what the scheme is all about and how it has to be implemented. Bankers say the scheme is, by and large, practical.

Under this scheme, farmers can avail themselves of bank financing using processors’ guarantees. In return, they will make sure that the processors or buyers get the required quantity of a crop or any other agricultural produce.

This mutually beneficial arrangement is ideal for our agriculture sector where 5.4m or 65pc of the total 8.3m farm households own five acres or even less of land and most of them can’t get bank credit.

They lack the kind of collateral and guarantees banks demand before lending. On the other hand, uncertainty about and disruption in supply of crops, fruits, vegetables and milk etc make processing companies’ business difficult and affect their output, profit and expansion plans negatively.

Bankers say they can use the value-chain financing scheme in four main categories of lending operations i.e. trader credit, input supplier credit, marketing company credit and lead firm credit.

These types of financing arrangements have already been under practice with varying features depending upon the kind of relationship between a farmer and a trader or input supplier or a marketing company. This ‘value-chain financing scheme’ shows banks how they can find a role for them in between, and when they do what should be the rules of the game.

Sugar and tobacco mills and companies like Rafhan Maize, Nestle, Engro Foods and Lays currently provide inputs and transportation facilities to selected farmers who, in return, sell their respective produce (tobacco, sugar, maize, wheat, rice or potatoes etc) to them. This is an example of marketing company credit. Now, under the SBP’s ‘value chain financing scheme’ banks too can participate as a financier or a co-financier or facilitator.

The scheme has also laid down a procedure for banks to benefit from the centuries-old institution of Arthi, or intermediary. Banks can establish contacts with the Arthi and use his services to identify a genuine borrower, correctly assess his borrowing need, ensure proper utilisation of loan and facilitate and manage the borrower’s cash-flow by binding him to sell his produce through the Arthi.

Since this is what exactly a typical Arthi does for himself while lending money to small and unbanked farmers, one can hope he can do this for a bank as well.

When he acts alone, he earns profit by selling the agricultural produce of his clients but then he also has to lend money to them.

The attraction here is that while the Arthi would still be selling the agricultural produce of the clients he refers to the banks, actually the lending will be done by banks and not by him.

For banks, obtaining collateral or guarantees from small farmers has always been a problem in that it means dealing with a large number of generally disorganised individuals.

Now under the ‘value-chain financing scheme’, banks will be accepting such guarantees from ‘a lead firm’ acting as a bridge between banks and farmers. The term lead firm applies to the processors of agricultural produce, input suppliers, stockist, a marketing company, trader or exporter. Since the lead firm will act as the guarantor and will also assist banks in recovery of loans, banks will pay them a commission or monetary incentive.

Under this scheme, the loan limit for a single borrower is Rs1m, double the limit set by microfinance banks.

Banks can charge mark-up on the loans, keeping in view the prevailing KIBOR, their cost of funds and borrowers’ risk profile.

The SBP wants banks to arrange insurance cover for every borrower availing finance under this scheme. But for the time being, arrangement of insurance cover has been made mandatory on loaning against five key crops i.e. cotton, wheat, rice, sugarcane and maize.

The scope of the scheme covers all sub-sectors of agriculture including crop-raising, livestock, poultry and fisheries. “So, each commercial bank will start implementing the scheme initially in its own strong area,” says head of agricultural credit division of a big local bank.

Some banks have long been making crop loans and it is easier for them to start from here but for others, taking initiatives in livestock is a better option because for the last few years they have established strong contacts with cattle farmers and milk processing and marketing companies.

Information gathered from banks indicate that their executives overseeing agricultural credit disbursement seem enthusiastic about implementing this scheme. But banks may take some time in drawing their own respective plans on how they would go about it.

“Certain things need approval of our board of directors. Some issues like mark-up rate has to be discussed in our executives’ committee or assets and liabilities committee. I think, actual implementation on the scheme will start by end of this year or early next year,” head of a local bank told Dawn.

Published in Dawn, Economic & Business, October 20th, 2014