KARACHI: The State Bank issued “guidelines on value chain contract farmer financing” on Wednesday to encourage banks to extend credit to small and marginalised farmers.

These guidelines will serve as a basis for banks to develop a mutually beneficial relationship between banks, farmers and value-chain agent.

Small farmers, with up to 5 acre land-holding constitute 65pc or 5.4 million as against 8.3m farm households in the country. Therefore, SBP, in line with government’s efforts to promote access to finance to small farmers, is working on a number of initiatives that include credit guarantee scheme for small and marginalised farmers, crop and livestock insurance and warehouse receipt financing.

Contract farming assumes an extensive number of arrangements along the value chain linking small-scale farmers to markets by either formal or informal contracts. Value chain contract farmer financing schemes are broadly defined as binding arrangements between banks and agriculture value chain actors, including producers, processors, aggregators, traders through which a farmer or group of farmers ensures supply of agricultural products to individual firms.

It replaces traditional collateral requirements with trade agreements by facilitating coordinated commercial relations between value chain actors.

“The introduction of value chain contract farmer financing scheme will enable farmers to avail financing from banks backed by processor’s guarantee and in return buyers/processors may get assurance of getting required quantity and quality of agricultural produce,” said the SBP.

The guidelines have introduced five instruments, including trader credit, input supplier credit, marketing company credit, lead firm credit and arthi or intermediary, besides identifying roles and responsibilities of stakeholders, financing mechanism, eligibility criteria, types of financing, loan limits, security and collateral, insurance and loan monitoring mechanism.

It is expected that the guideline would benefit farmers in terms of enhanced productivity in variety of ways, such as availing quality input facilities, adopting new technologies, insurance coverage for crop/non-crop activities and most importantly assurance of buyer in advance.

The processors, traders, exporters and Artis gains ensured supply of desired quantity of quality produce and bankers are at ease with assured loan settlement by the value chain agents.

These guidelines are headway into SBP’s consistent efforts to improve small farmers’ access to finance to achieve the broader goal of financial inclusion.

The SBP has advised banks to use the guidelines for developing their own products for providing credit to contract farmers, particularly to those who lack collateral to offer to the bank. Successful adoption of the guidelines will improve depth and spectrum of agriculture financing to escalate rural household incomes and economic growth of the country.

Published in Dawn, October 2nd , 2014