Record cotton output, higher sugarcane crop, soaring farm input costs, expansion of rural banking and rising microfinance lending has resulted in higher agricultural credit disbursement.
The farm credit jumped to Rs294 billion in FY12, up from Rs263 billion in FY11, exceeding the State Bank indicative target of Rs285 billion for the last fiscal year.
For the first time, microfinance banks were also included in the SBP’s indicative target about a year ago. Five microfinance banks together lent more than Rs12 billion against the indicative target. This year they are targeting to lend Rs20 billion.
“Microfinance banking naturally suits small farmers, both because we have strong presence in rural areas and also because we make easy-to-repay small loans, quite often to a group of farmers,” says a senior executive of Khushhali Bank.
According to the latest State Bank report, advances of five banks — Khushali, First Microfinance, Pak-Oman, the NRSP and Tameer — surged 58 per cent to Rs16.84 billion in March 2012, from Rs10.68 billion in March 2011. More recent data is not available.
But microfinance bankers say that end-June 2012 statistics would possibly show an even bigger rise in advances because it was in mid-March 2012 that they were allowed by the SBP to raise their per-party lending limit to half a million rupees from just Rs150,000.
The central bank had allowed this upscaling for lending to all sectors including agriculture, trading, manufacturing and services.
Inclusion of microfinance banks into indicative farm lending scheme has also pushed up the total number of borrowers of these banks, from about 625,000 in March 2011 to about 808,000 in March 2012. Microfinance bankers say there was a 29 per cent increase in the number of borrowers. “Our lending to borrowers of manufacturing sector has not been expanding fast. Some expansion has been witnessed in lending to trading and services sector but the highest growth has been seen in lending to agricultural sector,” says an executive of NRSP, which has a deep penetration into rural areas.
One big reason for faster growth in loan volumes and in the number of borrowers of agricultural sector is that agricultural sector remained more vibrant compared to manufacturing.
After the increase in per-party limit in March, microfinance banks are now witnessing growth not only in agricultural lending but also in lending to agro-based manufacturing units and trading houses operating in rural areas.
According to the latest SBP report, agricultural lending by microfinance banks constituted 53 per cent of their total advances as of March this year. Most of this lending was concentrated in livestock breeding and in financing of purchases of agricultural inputs like fertiliser and seeds.
Leaders of farming community say that two issues continue to deprive farmers of the opportunity to borrow from banks. “Banks normally remain reluctant in accepting farming land as the collateral despite the fact that it is the most secure form of collateral anywhere in the world,” argues Mr Ibrahim Mughal, Chairman of Agri Forum Pakistan.
“And in cases where they do accept land as collateral, they grossly underestimate its value.” Farmers say that banks lend no more than Rs50,000 to someone who presents as collateral an acre of land worth half a million rupees. On the other hand, bankers say that the genuineness of the title of land in rural areas is too complex a business which makes them shy of accepting land as collateral.
They also say that unlike in urban areas where they do have professionals who determine the market price of land, in rural areas they have to depend on the records of the revenue department.
Microfinance banks are catering more to cattle breeders and small growers particularly female peasants. And they boast of success stories of lending to groups of women who reared cows or goats or who used to grow vegetables or other minor crops on very small scales. Executives of these banks say they mostly lend “to groups of borrowers, whose togetherness alone becomes a sort of social collateral.”
Microfinance bankers say their mobile teams visit the remotest villages in all the four provinces and offer credit to clusters of borrowers. They say this helps them keep the cost of credit lower than what it would be if they were to operate through proper branch networks.
But they admit that they have yet to make their operations more cost-effective to lower the mark-up charged on farm loans.