Surge in non-farm bank credit

September 02, 2013


— Photo by Dawn
— Photo by Dawn

BANKS’ lending to the agricultural sector that has been on the increase for some years rose further in the last fiscal year.

More importantly, lending to the non-farm sub-sectors like livestock, fisheries, horticulture and forestry got a real boost.

But the number of people benefiting from agricultural financing still remains limited.

In the outgoing fiscal year, overall lending to agricultural sector soared to Rs336 billion, up more than 14 per cent from what it was a year ago. And in nine months of the year, for which data is available, lending to non-farm sector was no less than a hundred billion rupees. That really counts. However, the number of agricultural loan beneficiaries remained below one million which, according to agriculturists, is less than one-fifth of the number of farmers who need bank financing.

Central bankers say the number of farmers benefiting from agricultural financing scheme has been rising steadily since 2011. The inclusion of microfinance banks in the scheme is helping in reaching out to larger number of farmers year after year.

“In the last fiscal year microfinance banks made about Rs19 billion agricultural loans against their indicative target of about Rs14 billion. That was purely due to their ability to reach out to a larger number of loan recipients,” says an SBP official.

The State Bank of Pakistan has put in place a comprehensive set of guidelines on agricultural lending and is also providing training to bankers in rural areas on how to monitor agricultural loans performance. Opening up of new branches of commercial banks in rural areas have also been helpful in meeting growing credit demand of the farming community.

The Zarai Taraqiati (Agricultural Development) Bank is now accommodating greater number of loan applications. As a result, agricultural loan volumes have been showing consistent increase for the past few years (see table). But despite all this, five to six million farmers have to meet their financial needs out of their own savings or turn to informal lenders.

“By the end of FY07, about 1.3 million farmers had access to agricultural financing by banks,” recalls a central banker involved in monitoring of agricultural loaning. “By the end of FY13, the number has come down to less than one million.” So what has gone wrong and where?

One explanation is that when banks squeezed their overall lending after the 2008-09 global financial crisis and recession, agricultural financing also took a hit. That’s why the number of agricultural loan beneficiaries fell to 740,000 in 2008 and to 570,000 in 2009. The worst-ever super floods of 2010 further reduced the number of people who got agricultural loans in that year to 470,000.

But in all these years, volume of agricultural lending continued to rise chiefly because big landlords obtained larger loans benefiting from the higher support prices of major food crops.

Besides, in these years, subsidised sales of tractors and sizable loans for other agricultural machinery like tube-well, wheat-thrashers and refurbished ginning units inflated the amounts of total agricultural loans.

In 2008, another trend began creeping in which now seems to have taken roots. Higher corporate activity in food sector and some uptick in both local and foreign demand for food items created room for banks to enhance their non-farm lending which is also a part of agricultural loaning.

In FY08 loans to farming sector totalled Rs160 billion against a meagre Rs52 billion to the non-farm sector comprising livestock, fisheries, horticulture and forestry etc.

But the share of non-farm sector in overall agricultural lending began to improve since then and in nine months of FY13 banks’ lending to the non-farm sector reached to Rs100 billion in comparison with Rs131 billion disbursed in the farming sector.

Two years ago, the central bank had approved of a model of agricultural financing to be used by Islamic banks but so far only one Islamic bank has used it.

“The model based on Salam mode of financing is comprehensive in all respects but the reason why it is not being widely used is two-fold,” says a senior executive of Meezan Bank. “One is that Islamic banks don’t have extensive branch network in rural areas and the second is these banks see little scope for earning huge profits in agricultural lending anyway.”

Interestingly, agricultural loaning by microfinance banks, which central bankers say can help in boosting the number of recipients, has so far remained limited in terms of per-party volumes.

The SBP has already raised the per-party limit for such loans to half a million rupees but microfinance banks hardly lend this much amount to a single borrower. Most of them normally don’t go beyond Rs0.1-Rs0.15 million, according to microfinance bankers.

However, this overly-cautious approach of microfinance banks is helping them in reaching out to more and more farmers.

Meanwhile, farmers’ lobby groups including Pakistan Agri Forum, Sindh Abadgar Board and Farmers Association of Pakistan all complain of cumbersome procedure and corruption that impede growers’ access to banks’ financing.

They say that ZTBL and commercial banks now entertain only large and middle-sized growers’ requests for financing and ignore small growers under one pretext or the other. They also lament the fact that the warehouse receipt system announced at the beginning of 2013 to enable farmers to use their stored crops as collateral has also not taken off.

Usually loan requirements of non-farm borrowers are huge but the number of loan seekers is limited.

Banks also find it easier to lend to the non-farm sub-sectors of agriculture where collateral is not an issue and where there is little or no issue of multiple titles of ownership, as in the case of crops’ financing.

This has also reduced the overall number of agricultural loan beneficiaries even at times when volumes of lending are showing consistent rise.—Mohiuddin Aazim