ONE of the main causes of stagnation in agricultural productivity is the inability of small farmers to use modern technology and inputs due to resource constraints. For about 90 per cent of agricultural producers, adequate and timely credit is critical for enhancing farm productivity.

Credit provision to small farmers for acquiring technology, managing higher input and productivity has also assumed added importance in view of the price and market liberalisation policy, anticipated phasing out subsidies and selective government intervention.

In the past credit allocations for agriculture sector averaged one-third of the estimated requirements. Similarly, credit disbursement at an average level of 86 per cent of allocation has also lagged behind the annual targets given by the National Credit Consultative Council (NCCC). The main factors for low disbursement included liquidity constraints, low recovery rate and reluctance of commercial banks to make investment in agriculture. The ZTBL and the Federal Bank for Cooperatives have, by and large, achieved their disbursement targets.

Credit provision in recent years has considerably improved. As table I shows, institutional credit disbursement registered an annual average growth of 23 per cent during 2000-05 as compared to 16 per cent during 1999-00 and 12 per cent during 1990-95. In the last 5-6 years the flow of credit to agriculture sector has increased tremendously. As compared to Rs39 billion in FY 2001, credit disbursement has increased to Rs137 billion (250 per cent). Similarly the number of borrowers has increased from 1.4 million in FY 2001 to 1.6 million in FY 2006.

Table I: Institutional credit disbursement

Fiscal Year Total Amount %Change

Annual

Average

1990-95 83,640.0 12.1

1995-00 154,666.9 15.9

2000-05 338,414.2 23.0

2005-06 137474.3 26.4

Source: SBP Annual Report & Economic Survey, Various Issues

Presently, formal credit is available through ZTBL with a network of 351 branches and 1400 mobile credit officers; the Federal Bank for Cooperatives which operates through provincial cooperative banks having 234 branches and around 60,000 affiliated societies; and commercial banks which were inducted in agriculture financing in 1972 and have about 2,500 rural branches.

Comparative data relating to institution-wise disbursement shows that the ZTBL has been the main provider of agricultural credit. Its share in total credit disbursement has declined from 64 per cent during 1995-00 to 45 per cent during 2000-05, while the share of commercial banks has increased from 21 per cent to 45 per cent over the same period. This trend has further intensified during 2005-06 with the ZTBL share going further down to 35 per cent and that of commercial banks going up to 61 per cent. The share of co-operatives stood at four per cent.

It is thus evident that commercial banks are gradually increasing their role in the agricultural credit market since FY 2004, achieving above-target disbursement for the last three successive years as compared to below-target disbursement earlier. This positive trend will also encourage development of innovative products and add to the depth of the agri-credit market.

As part of financial sector liberalisation and reform successfully undertaken by the government, adoption of market based approach, greater participation of private sector institutions and mainstreaming of agriculture have shown positive results.

Other structural reforms include discontinuation of mandatory credit targets, revision of prudential regulations to improve access to small farmers, standardisation of agricultural credit documents, introduction of revolving credit scheme, guidelines for livestock financing, and greater participation of private sector institutions. A campaign of training and awareness has also been launched.

According to SBP Annual Report 2004-05, credit outreach to 24 per cent of 6.6 million households shows improvement over past performance but still leaves a huge gap. The State Bank is developing a strategy to enhance flow of credit through banks from the existing level of 45 percent to 75 per cent as well as an outreach target of 50 per cent households in the next 3-5 years. The strategy should focus on expanding geographical coverage, disbursement to small farmer and financing to non-farm sector. A crop loan insurance scheme should also be developed to encourage the banks to lend in high risk areas.

Agricultural credit delivery system continues to suffer from financial and managerial inefficiencies, resulting in limited flow of institutional credit to small farmers and their continued dependence on informal sources. A 1995 SBP survey showed that 85-90 per cent of the rural households had recourse to informal credit sources.

Agriculture Census 2000 pitches this figure at 61 per cent, which shows some improvement but still leaves a yawning gap. Major constraints are stringent regulatory framework, complex procedures and documentation, proxy loans and arbitrage by large landowners, high transaction costs, and cultural gap between lenders and borrowers.

Financial institutions are reluctant to diversify and extend their lending operations to poor and small farmers. More specifically, main reasons for this approach are as follows. First, micro loans are not cost effective. Achieving pre-determined loan targets is much easier through lending to big borrowers. Second, collated credit is more secure that non-collated credit. Third, flexibility needed by farmers for repaying the loan is not built into formal loans structure. Fourth, credit from formal lenders is tied to pre-identified production activities. Last, for a small borrower, credit from a money lender although at a high interest rate is often readily available.

In view of the foregoing analysis, the following policy measures are recommended to improve the coverage and delivery of credit to the small farmer: To keep transaction costs low, formal lenders, including micro-finance banks, need to adopt quick and simple lending procedures such as decentralised loan approvals, minimum documentation, and use of social collaterals (individual/group guarantees) in place of tangible collaterals on the lines of Bank Rakyat of Indonesia and Grameen Bank of Bangladesh.

To ensure high repayment rate, lending institutions should develop a range of techniques including peer pressure, contact intensification, investment counselling and frequent follow-up for recovery, especially during the periods when incomes are received.

Prudential regulations of the State Bank applicable to normal lending procedures/policies need to be rationalised so that micro-finance could be operated with flexibility and innovation.

Micro-finance banks and the main-stream credit institutions should re-design their products to suit peculiar requirements of the low-income groups in terms of loan size, assets owned, income consumption requirements, flexibility in repayment period, etc.

Diversification in lending is required to minimise lenders’ risk as well as to increase incomes of micro-entrepreneurs. Credit institutions should also accord high priority to the training of micro-entrepreneurs.

NGOs seeking linkage of their clients with formal lenders may be formally involved in credit operations by asking them to furnish personal guarantees to secure loans/advances to those recommended by them. This would ensure participation in credit delivery system and recovery of loans.

There is a need to evolve innovative credit arrangements between private sector institutions and small-scale borrowers e.g. NGO-supported rural development programmes.