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Surge in farm credit

January 27, 2013

DISBURSEMENT of agricultural credit has surged by 12 per cent on year-on-year basis to touch Rs140.32 billion during July-December. Last year, the corresponding amount was Rs125.21 billion.

According to the State Bank of Pakistan, lending by five major commercial banks (Allied, Habib, MCB, National and United Bank) went up to Rs76.04 billion from Rs70.56 billion..

In the comparative period, The Zarai Taraqiati Bank Limited disbursed Rs19.28bn, down 8.39 per cent from Rs21.04bn. The Punjab Provincial Cooperative Bank Limited disbursed Rs3.59 billion, down by 7.02 per cent from Rs3.87bn.

Fourteen private banks also loaned a combined amount of Rs33.16bn, up by 36.84 per cent, as compared to Rs24.23 billion. Five microfinance banks (Khushhali, NRSP Microfinance, First Microfinance, Pak-Oman and Tameer Microfinance) disbursed Rs8.25 billion as compared to Rs5.50 billion. The report is certainly heartening when read out of context. However, the contextual reality exposes (ir)relevance of the figure to the agriculture sector.

According to the official as well as farmers’ bodies’ estimates, the cost of production of different major and minor crops has topped Rs3 trillion in the country. Out of which, the formal credit, even if Rs300 billion is taken as a benchmark, is only one per cent of the total cost of production. How much difference does the SBP or the government think it should make to the sector?

The rest of the loan comes from informal sector (middle man, personal and social), which is highly expensive, exploitative and contributes hugely to under-production of the sector and perpetuates rural poverty. The situation is going on unchecked for the last six decades.

The loan figure increases by five to 10 per cent every year. However, the formal credit volume lags behind the surge in production cost. The taxation policy and free fall of rupee against the dollar further spurs farm input costs.

In the last few years, the governments (federal and provincial) have emerged as the biggest credit-seeking agencies, squeezing credit for other sectors. The reality of Rs300bn loan gets exposed even if one sector (wheat procurement) in one provinces (Punjab) is studied. In the last three years, the Punjab Food Department had been under close to Rs200 billion loans, paying Rs75 million a day in mark-up.. If one adds loan of the Sindh Food Department as well, the digit may cross the figure of agriculture loaning.

Farm credit must have had some impact on procurement of technology and usage of inputs. But the spread of even as basic machine as tractor, has not improved much, barring the Rs200,000 per tractor subsidy by the federal and provincial government, leave alone harvesters, chisels and other technological usage. Same has been the case of inputs: not even urea and DAP usage has shown any significant improvement.

The farmers’ bodies have been saying on record that even industrial loans are being categorised as agricultural ones to meet the central bank target.

The mix of production and development loan also needs to be looked into. The latter category hardly forms 10 per cent of the former. That means that the current loaning pattern is not oriented towards agricultural development. These structural problems need to be tackled for which the banking sector has to be socially responsible.

Apart from looking into clientele profile, the banks should be encouraged, through policy measures, to further step their lending to the rural areas. The ever-multiplying profits of banks provide them enough fiscal space to absorb higher administrative cost of operating in remote areas and advance small loans. The State Bank of Pakistan must ensure that banks open more branches apparently in less attractive countryside with a huge potential for deposit mobilization as well as lending.

The government should also ensure that banks go to rural areas under a benevolent national policy. Leaving the commercial banks to their own devices could actually hurt the farming at best and occupying lands, in case of default, at worst. The possibility needs to be avoided through policy measures, so that both parties benefit from each other rather than one at the cost of the other. —Ahmad Fraz Khan