CREDIT is believed to be the backbone of any business, more so for agriculture, which is traditionally a non-monetary activity for the rural population.
Rural credit, though not a direct tool of production, yet it can help break the vicious circle of ‘grow-eat-grow’ by removing financial constraints and adoption of new technologies.
Agricultural credit is an integral part of the process of modernisation of agriculture and commercialisation of the rural economy. Despite considerable efforts to streamline, reinforce, expand and institutionalise the agricultural credit system, the achievement falls short of proclamations. Unless agriculture credit is systematically institutionalised and focused on small farmers, agricultural development can not be materialised.
Due to small holdings, low crop yields and small income there is a little or no saving left with the majority of farmers. Therefore, it is imperative that credit agencies help them in adopting improved farm practices. The introduction of easy and cheep credit is, therefore, the quickest way to give boost to agricultural production.
The rural financial market is composed of two broad segments: informal and formal.
Informal credit market: Traditionally, friends and relatives, village shopkeepers, traders, commission agents etc. have remained a major source of agricultural credit. These sources generally lend for short periods and charge an exorbitant rate of interest. Such loans are given to tide over bad periods and as such are meant for consumption purposes.
Loans are also made available for buying seasonal inputs where cash is essentially required. These sources are both inadequate and non-dependable. No comprehensive data are available on the amount of credit advanced by informal credit sources. As such it is difficult to find solid evidence on the relative share of these sources in the total credit supply. However, some other rough estimates show that the formal credit sources have been able to meet 40/50 per cent of the total credit requirements of the farm sector and it may be assumed that the rest are met by informal sources or remain unmet.
These sources play a vital role in our rural economy, especially for meeting the consumption requirements of thousands of small farmers along with fulfilling the need for irrigation water, hiring of farm power, cost of fuel etc. Mark-up tends to vary from product to product and also by the type of borrower as well as lender.
According to a study conducted by Irfan et al, (1999) on an average, the mark-up was estimated at 25 per cent. In the case of fertiliser it was 29 per cent while for pesticides it came out to be 35 per cent. High mark-up charged on pesticides sold on credit was mostly due to rather unholy alliance between the manufacturers and traders/dealers. The cash lending was on the rise with quite exploitative interest rates ranging from 48 per cent to 120 per cent per year.
The informal credit sources however are still popular, particularly among small farmers, because of easy access, no documentation, no collaterals and availability of credit in time.
Institutional credi: Credit requirements of the farming community have increased over the years due to rise in the use and prices of fertilisers, pesticides and cost of mechanisation. In order to cope with the increasing demand for agricultural credit, institutional credit to farmers is being provided through Zarai Taraqqiati Bank Limited (ZTBL), Commercial Banks, Punjab Provincial Cooperative Bank Ltd (PPCBL) and domestic commercial banks.
According to the Economic Survey of Pakistan, Rs160 billion was allocated for agriculture credit disbursements for the year 2006-07-- 23.1 per cent higher than the preceding year’s Rs130 billion. The allocations, however, are totally voluntary and indicative in nature as the mandatory allocations policy has been phased out and the allocations for commercial banks have also been made indicative.
The flow of necessary funding to the sector will now be ensured through a policy conducive to regulatory environment, policy advocacy and promotional initiatives and monitoring of agri-disbursements and portfolio build-up plans. Out of the total credit target of Rs160 billion, Rs80 billion were allocated to commercial banks, Rs48 billion to ZTBL, Rs9 billion to Punjab Provincial Cooperative Bank Ltd. (PPCBL), and Rs23 billion to domestic private commercial banks (DPCBs).
How much important credit is and what is its impact on the productivity of agriculture sector, remained an important area for researchers. The studies have concluded that agricultural credit is proving to be the best aid for the farmers. To improve the system to help these farmers to increase their productivity are a few suggestions:
Loan size should be sufficient enough to meet the genuine requirements of borrowers; timely disbursement of credit must be ensured; the banks should revise repayment schedule if credit users suffer any natural disaster and write off the loans in extreme cases; the bank staff should be cooperative and friendly with the farmers especially with illiterates; technical know-how must be improved for the borrowers by the bank officials (for this purpose proper training is necessary so the workshops and seminars must be arranged for the field staff); there must be a proper planning that if a borrower defaults, the sufferings of others must be minimum; repayment procedures must be revised at least twice a year; it must be ensured that the loan is utilised for the purpose it was sanctioned; multipurpose cooperative societies must be re-introduced in the farming communities to look after their interests and to help them to get and spend the loan; interest-free Islamic lending or zero interest lending in agriculture must be initiated The banks can earn by giving loans on partnership (Musharka, Muzarba) basis.