AGRICULTURAL credit has gone up during the current fiscal year by Rs125 billion, including Rs5.5 billion by the microfinance banks, as compared to Rs102 billion last year — an increase of 23 per cent. The indicative target for the current year is Rs285 billion — 8.4 per cent higher than last year.
The Agriculture Credit Advisory Committee (ACAC) meeting last week noted, with a measure of justification, that credit disbursement trend in the first half of the fiscal year indicated gradual building of trust of formal banking sector towards agricultural financing. One hopes the trend continues in the second half of the year as well.
However, the bankers led by the State Bank of Pakistan need to review their entire agriculture lending policies – especially procedures – and put the money where it is required the most. The more benefits the credit brings to farmers and national economy, the higher volume of business the banking industry would get.
Their present banking procedures keeps the sector under-served. The government can also be blamed for this state of affairs due to high official borrowing, squeezing credit for the commodity producing sector.
The division between farming (crop) and non-farming (livestock and poultry etc.) clarifies the point. For example, 68 per cent out of the Rs125 billion disbursements went to the farm sector and 32 to non-farm sector. The livestock alone contributes around 55 per cent to the agriculture sector, and, as all experts agree, has a huge untapped potential – domestic and international – with much higher returns. The banks need to re-direct more money towards it. It, however, should not be at the cost of crop loaning.
The procedural and practical hiccups in farm sector loaning leave much to be desired. The outdated loan ceilings are one such issue. In the last three years, the cost of production has skyrocketed on three accounts: general sales tax on inputs, rupee depreciation and receding government writ on pricing. The GST has raised inputs price and cost of production by around 25 per cent.
The impact of weak governance can be gauged from the urea crisis: black marketing of urea is costing around 40 per cent more to farmers. Thus on these accounts, the cumulative cost has gone up by over 100 per cent. However, the banks have kept inputs loan ceilings constant for the last many years. The banks need to review the existing ceilings.
Second, the State Bank of Pakistan must lead an effort to rationalise collateral assessment. The price of land has gone up in the last one decade, especially in suburban areas of cities where one acre might have a value of up to Rs10 million. The banks, however, refuse to entertain the market value when it comes to inputs loaning. Even when they advance a loan of few hundred thousand rupees, they take the entire land as collateral and deprive the farmer of chances of further credit. This practice has hurt farming. It must stop. The banks should only take as much land (based on its market value) as collateral as much they lend.
Currently, once a farmer goes to a bank for loan, he is required to furnish a no-objection certificate (NOC) from all banks of the area to establish that he does not owe any money to them. He is, thus, restricted to one bank, which takes all his land to provide a small amount. It needs to be reconsidered.
The banks have also started loans in-kind, which is giving way to corruption. In certain cases, the banks provide tokens for purchase of inputs from certain companies and dealers – making money from both sides; cut from the company and mark-up from the farmer. This practice is also encouraging spurious pesticides and fake inputs because the farmers are bound to purchase them from a particular company or dealer, which affects the crop output. If a farmer has to return the money, he should be given cash and a right to bargain and purchase inputs from anywhere he gets the best.
The banks need to document their clientele profile; how much new clients they make every year and how much of them are the same old families, renewing their loans. If the banks do not spread the customer base, they would fail to contribute to national development.
Currently, cities and towns are flushed with banks branches and rural areas virtually without them. They should be pushed into relatively initially less lucrative areas as they have social and professional responsibilities to neglected areas.
The State Bank of Pakistan should make procedural problems a part of its review meetings. As custodian of monetary policies, it needs to go beyond targets settings and their achievement and delve in details, where proverbial devil is.