Cheap loans: throwing good money after bad

Updated February 04, 2019


.— Dawn
.— Dawn

The State Bank of Pakistan (SBP) is not upbeat about the prospects of agricultural growth during the current fiscal year. Its first quarterly report acknowledges all the issues that the farmers’ lobby has been highlighting right from the beginning of the year.

Severe water shortages in Sindh that created a drought-like situation in some areas, higher prices of inputs, including fertiliser, and a reduction in the area under cultivation of major crops are some of the reasons why the central bank believes growth in agriculture could remain subdued.

Add to this list the perennial issue of water scarcity in Balochistan affecting both the crops and livestock sub-sectors of agriculture, slower growth of the food processing industry that is keeping demand for raw materials low, piecemeal implementation of corrective measures and the absence of a sense of direction among the provinces owing to the unending political rift between the federal and Sindh governments, and you can draw a mental picture of agricultural productivity in the current fiscal year.

Net growth in the disbursement of credit to the agriculture sector remains extremely low

In the absence of a comprehensive agriculture promotion policy formulated with the input of all the provinces, offering further concessional loans alone cannot put this sector on a high growth trajectory.

In December 2018, the government unveiled an Rs82 billion incentive package for agriculture. It announced some additional support measures for farmers in the mini-budget on Jan 23. Despite that, no major improvement is in sight to suggest that growth in this sector will touch the targeted mark of 3.9 per cent.

The government keeps boasting about growth in the gross disbursement of agricultural credit to make people believe that it shares the pains of the farming community. What it does not tell is that growth in the net disbursement of credit to this sector remains very low and the distribution pattern wanting on several counts.

In the first half of this fiscal year, gross agricultural lending of banks totalled Rs429 billion against loan recoveries of Rs366bn a year ago. That is, banks’ additional net lending to the agriculture sector was of Rs63bn.

People are impressed when government officials tell them banks have lent Rs429bn in six months of this fiscal year and compare this figure with what they had lent in the six months of the last fiscal year, about Rs358bn. They think such a huge lending will soon revolutionise agricultural practices and lead to greater productivity in the commodity sector.

But the fact that the agriculture sector utilised only Rs63bn loans on a net basis ruins this impression. The reason why farmers have to retire such a large percentage of agriculture loans (Rs366bn against Rs429bn, or more than 85pc) is that these soft loans are advanced for less than a year in most cases and fresh lending is made only against recoveries of the loans applied for.

Crop loans for the Rabi season are generally disbursed between Oct 1 and March 31 and are recoverable by June 30 or July 7, farmers say. Similarly, loans for the Kharif season offered between April 1 and Sept 30 become due for recovery by the end of December. Those who can’t repay the loans by Jan 7 are not entertained for next Kharif loans.

When you keep this in mind, the announcement about increasing the Produce Index Unit value from Rs4,000 to Rs6,000 and thus enabling farmers to qualify for larger loans does not impress you at all.

People often wonder why soft agri loans that are far cheaper than ordinary corporate loans do not increase Pakistan’s agricultural productivity. There are lots of reasons for it. Some of them are as follows.

One, agri loans are mostly offered for production purposes. They are not to help farmers buy modern technologies for processing and value-addition. Out of the Rs429bn agri loans extended in the first six months of this fiscal year, Rs398bn worth of loans were meant for production. Loans of only Rs31bn were offered for agricultural development.

Two, the bulk of agri loans are consumed by the producers of major crops. Only a small part of them goes to the growers cultivating minor crops.

Three, agri loans offered to livestock breeders cover the cost of animal breeding and upkeep, but are not designed to encourage them to use modern technologies.

Four, in the poultry and fisheries sector, little or no agri loans are used for purchasing plants and equipment, fishing boats and modern hauling systems.

Five, most of agri loans are revolving and repaid in less than a year. Development loans, in contrast, need to be offered for one to three years. Banks don’t want to lock their funds for longer periods because they want to deploy them in either riskless government debt securities or consumer and corporate lending where the rates of return are far higher.

The lack of efficacy of soft agri loans in promoting productivity is also rooted in large part to the distribution of credit across various segments of agriculturalists.

For example, in the last fiscal year, 18,606 big landlords received agricultural credit worth Rs222.7bn. Against this, 1.75 million small farmers received just Rs183.6bn. A little more than 110,000 mid-sized landowners received Rs76.3bn. The practice of tenure farming or the tilling of big landlords’ land by poor farmers is another reason that keeps agricultural productivity low despite the distribution of more bank loans among farmers. This agricultural land tenancy has always been and still remains a form of poor farmers’ slavery.

In addition to increasing the Produce Index Unit by 50pc, Finance Minister Asad Umar also announced in his mini-budget speech the government decision to provide subsidies on both imported and domestically produced fertilisers.

But on imported urea, the subsidy has been limited up to 100,000 tonnes. In the case of local fertiliser, fertiliser manufacturers are being provided with the subsidy by means of cheaper feed gas. The subsidy in the former case stands diluted due to 30pc depreciation in the rupee over a year. In the later case, it cannot be guaranteed that fertiliser manufacturers will pass the subsidy on to farmers, particularly poor and small ones.

Higher headline inflation along with the rupee depreciation does not only affect the cost of fertiliser but also dozens of other agricultural inputs, including seeds, rented machinery, insecticides and pesticides besides hired seasonal labour. It seems the government wants to solve this problem by offering more bank credit to farmers. Perhaps, all that PTI has to offer are sweet words for agriculture.

Published in Dawn, The Business and Finance Weekly, February 4th, 2019