Target setting for higher agricultural lending is one thing; developing a strategy for its implementation and achieving the broader objective of boosting agricultural productivity is another. Changing old tactics or finding new ones to make the strategy work is a real hard business.

Bankers who have overseen agricultural disbursement programmes for decades say Pakistan has never failed in goal setting, but faltered in strategy and implementation. Meeting the lending target is good, but is it pushing up productivity and leading to financial inclusion?

These are two key questions. For some years, lending to the agriculture sector has been on the rise. In the last fiscal year, it reached Rs972.6 billion, close to the initial target of Rs1 trillion. Now the State Bank of Pakistan (SBP) has announced an even more ambitious target of Rs1.25 trillion for the current fiscal year.

SBP Governor Tariq Bajwa has also advised banks to bring a qualitative shift in agricultural lending by being innovative in providing swift credit to small farmers.

For some years, the SBP has been striving to remove geographical discrepancies in agro-credit disbursement, but no big improvement is in sight so far. Our agricultural lending remains heavily tilted in favour of Punjab. The tilt is not quite in proportion to its lion’s share in agriculture. To address this issue, the SBP had promised to facilitate the government of Balochistan in setting up Balochistan Bank on the lines of Sindh Bank to get more of agricultural loans disbursed in the province. But we do not know why it is taking so long to implement this idea. In fact, in the budget for 2017-18, the then Balochistan government had set aside Rs10bn for establishing Balochistan Bank. But now the fate of this project remains unclear.

Agricultural lending is heavily tilted in favour of Punjab. The SBP has been striving to remove geographical discrepancies in agro-credit disbursement for some years, but no big improvement is in sight so far

In agriculture, gross distribution of loans in a year is not as important as the increase in total stocks of loans. That’s because unlike industrial or services sector loans, a very large part of these loans is repaid within that year. It is heartening to learn that in the last fiscal year, the stock of agricultural loans also grew 15.7 per cent, according to media reports based on an SBP press release.

But the fact is that the bulk of such development loans goes into the buying of subsidised agricultural machinery and implements. A negligible part of these loans is actually used for innovating agricultural practices in farming, livestock breeding and health care and fishing etc.

In fact, the distribution of agricultural credit is such that the bulk of it goes to growing crops. That is where our farmers need money year after year to buy inputs and repay bank loans or revolve their credit lines with informal moneylenders.

For some years, agricultural credit flow to livestock and poultry sub-sectors has seen a rising trend, but politically influential borrowers get priority, senior bankers who oversee agricultural lending concede.

In fact, net credit flow to the livestock sector has been growing faster than that to the crop sector. This is chiefly because livestock borrowing entities are far smaller in number and the per-borrower lending volume is larger than that of crop-sector borrowers. That makes it easier and less costly for banks to disburse credit to borrowers engaged in animal farming. In 2016-17 alone, banks made additional net lending of Rs25bn just for the farming of animals, bankers say.

Whereas banks have to go a long way to disburse agricultural loans more judiciously across Pakistan, one noteworthy thing is the increase in the number of new borrowers. During the last fiscal year, banks added 450,000 new borrowers. Now the SBP wants them to add 700,000 new borrowers in 2018-19.

Farmer groups, however, keep complaining that whereas microfinance and commercial banks actually cater to some independent new borrowers every year, politically connected land owners influence Zarai Taraqiati Bank and state-run banks to lend to so-called ‘new borrowers’ — majority of whom are not independent growers and the loans that they take are used by their landlords.

Digitalisation of land records and titles could help in better distribution of agricultural credit. It can also help banks recover loans and keep the level of bad debts low.

A province-wise breakdown of agricultural bad debts is available with the central bank. Based on the historical trend, the SBP should convince provincial members of the Agriculture Credit Advisory Committee to help banks improve the recovery of non-performing loans.

The recent tightening of interest rates, in response to a fall in the rupee’s value and a rise in inflation, is likely to have an impact on agricultural lending rates as well. The central bank should also make it clear to banks during the first quarter of the new fiscal year, when the pace of agricultural lending remains slow, how agricultural lending rates will be managed.

While assigning banks an ambitious Rs1.25tr target for agricultural lending in 2018-19, the SBP chief advised them to enhance their overall advances-to-credit ratio (ADR) in all provinces and regions to support local economies.

The ADR of our banking system rose to 56pc in 2017-18 from less than 52pc in 2016-17. That is good, but still lower than the level required for keeping the economic growth momentum. Pakistan’s banking system’s ADR stood above 70pc just 10 years ago.

Once banks start improving their overall ADR, the resultant growth will, in turn, help them find more creditworthy clients. “It is in banks’ own interest to do this and create a win-win for all — provincial stakeholders, agriculturists and themselves,” said the head of a large local bank.

Published in Dawn, The Business and Finance Weekly, August 20th, 2018