Need to overhaul agricultural finance regime

Published March 8, 2021
In Pakistan, 90-94 per cent of farm loans are offered for production and only 6-10pc for agricultural development. — File photo
In Pakistan, 90-94 per cent of farm loans are offered for production and only 6-10pc for agricultural development. — File photo

In Pakistan, 90-94 per cent of farm loans are offered for production and only 6-10pc for agricultural development.

According to the State Bank of Pakistan (SBP), the share of development loans in total agricultural finance stood at 6pc in 2018-19. This percentage improved to 6.7pc in 2019-20 and further to 10pc in the first seven months of this fiscal year.

Among other things, this factor is also responsible for keeping our agriculture where it is today — under-exploited, low on productivity, high on wastages, slow-progressing and least prepared for future challenges.

“The development and commercialisation of agriculture requires financial services that can support: larger agriculture investments and agriculture-related infrastructure that require long-term funding, a greater inclusion of youth and women in agriculture and advancements in technology.” This statement coming from the World Bank in October 2020 sums up, to a great extent, how agricultural financing should be overhauled in most developing countries.

Pakistan is no exception. On its part, the country has long been making efforts to restructure its agricultural finance regime. And, one can find some examples of these ongoing efforts in the introduction of measures like warehouse receipt financing and greater involvement of microfinance institutions in agricultural lending.

The SBP should consider assigning sub-targets for agricultural development loans to banks

Last year, the SBP had come up with a detailed report on agri financing. In that report, it had defined development agri finance as medium- and long-term loans that banks offer in all sub-sectors of agriculture i.e. major and minor crops, livestock, dairy, poultry, fisheries and forestry. Short-term loans of six months to one year are offered to the entire agriculture sector mostly for meeting their working capital needs. But medium- to long-term loans of three- to five-year maturity are advanced to enable agriculturists to undertake projects that can help improve productivity and cut wastages.

That is why looking at the volumes of agricultural development lending is important to understand how much Pakistan agriculture is prepared to meet future challenges like national food security and environmental protection.

Within agricultural development financing, farm sector’s development loans are mainly offered for improvement of farmland and orchards, construction of tunnel farms, storage sites and warehouses, installation of efficient irrigation systems and purchase of farming machinery. But no study has been conducted by the provinces to ascertain how development finance offered to crop growers in each province have resulted in better yields and low wastages.

After all, agriculture is a provincial subject and in the absence of such studies one cannot expect banks or the central bank to overhaul agricultural development finance with a view to increasing crop yields and cut pre- and post-harvest losses. Banks just offer agricultural development finance as part of overall agricultural financing and their lending remains demand-driven. It is up to growers to see the benefits of development finance and seek it from banks if they meet the eligibility criteria. For those in corporate farming, this makes sense. But leaving such crucial decision-making to small individual growers seems unwise.

The SBP should consider assigning sub-targets of agricultural development loans to banks as a certain percentage of overall agricultural lending targets. The central bank may also push banks for greater agricultural development lending to small and medium-size individual growers as well.

Sub-targets for agricultural development loans can also be set for banks for making agricultural loans in livestock, fisheries and poultry sub-sectors. And, banks should seek help from provincial governments in creating awareness among farmers — and devising a mechanism for aligning agricultural development loans with the overall national food security targets.

In case of overall agricultural lending that includes loans for production as well as development, distribution of loans still suffers from geographical discrepancies. If this issue is left unaddressed, it would produce undesired political fallouts besides hurting the objectives of national food security via sustainable high growth in agriculture.

In continuation of a long-held trend, agricultural lending in July-December 2020 remained disproportionately high in Punjab and the smaller provinces got little. Out of Rs617bn worth of total agricultural loans, Punjab-based farmers got Rs517.6bn or 83.9pc, followed by Sindh that got Rs88.8bn or 14.4pc. Only 1.7pc of the total agri credit was distributed among farmers in Khyber Pakhtunkhwa, Balochistan, Azad Jammu and Kashmir and Gilgit-Baltistan, latest data released by the SBP reveals.

This pattern needs to be broken once and for all. Sindh’s contribution to Pakistan’s agriculture is close to 20pc and the collective contribution of Khyber Pakhtunkhwa, Balochistan, Azad Jammu and Kashmir and Gilgit-Baltistan is about 5pc.

Besides, agricultural loaning, particularly agricultural development loaning, cannot be linked to the exact contribution of a federating unit to the country’s total agriculture. It ought to be linked to the provinces’ specific agricultural needs and unique development potential. That will eventually help in sustained growth of the country’s entire agriculture.

Under the umbrella of the China-Pakistan Economic Corridor (CPEC), Pakistan and China have signed several agreements for cooperation in the agricultural sector. The SBP-supervised agricultural credit scheme under which banks make agri loans to farmers must now encourage banks to roll out specific financing models for the projects that these agreements cover. The central bank should also revise the scheme in the near future to accommodate inputs from the smaller provinces. This is important as some of the planned agricultural projects under CPEC aim at improving the irrigation system across Pakistan.

Irrigation, fishing and corporate and joint farming are some key areas of planned cooperation under CPEC’s agricultural outreach programme. In each of these areas, agriculturists and provincial agricultural authorities complain of a lack of clarity and also have some reservations. The federal government must provide them with the required clarity and remove their reservations. That, too, is very essential in redesigning the agricultural credit scheme with a view to making it responsive to the upcoming specific needs of CPEC-related agricultural projects.

Published in Dawn, The Business and Finance Weekly, , March 8th, 2021

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