Non-farm credit witnessed an increase of 57.2 percent as it received Rs 15.3 billion during FY05 as compared to Rs 9.7 billion during FY04. Interestingly, all categories of non-farm credit (except forestry) shared this increase.
According to State Bank of Pakistan sources, an even more encouraging development is the record increase of 385.5 percent in livestock followed by 184.8 percent in fisheries, 68.3 percent in poultry and 38.8 percent increase in dairy farming.
Farm credit comprises development loans as well as production loans. SBP's analysis shows that for fruit, horticulture and vegetables, the level of disbursement remained almost the same in FY05 while for crops and all other purposes it recorded an increase. Although development loans have declined from 16.0 to 11.6 percent as compared to production loans, it should be noted that this is just due to the introduction of the revolving credit scheme, otherwise there is an increase of 5.6 percent in the disbursement of development loans. The revolving credit scheme was introduced in June 2003 and banks disbursed actively under the scheme during FY05.
This overall increase is shared by many categories as the godown and cold storage on farm recorded an increase of 14.5 percent (the most required investment of the sector), transportation 26.9 percent, tractors and implements 1.2 percent and tube wells and machinery 1.0 percent.
ENCOURAGING FACT: A holding-wise credit analysis reveals an encouraging fact in that most of the available resources are utilised by the most deserving segments of the farmers' community.
Statistics revealed that about 70 percent of the total farm credit is used by the subsistence level land-holders, while economic and above economic holders have shares of 23.0 and 7.0 percent respectively.
In a similar vein, the non-farm sector has a share of 51.0 percent and 49.0 percent for small and large farms respectively.
Comparison of the number of borrowers with their share in total agriculture disbursement shows an almost similar pattern in case of farm sector loans, at 75.3 percent for subsistence level landholding, 21.5 percent for economic land-holding and 3.2 percent for above economic landholding.
In case of the non-farm sector, the situation is reversed. In case of large farms, 1.8 percent of the borrowers received 49.3 percent disbursements during FY05.
COMMODITY FINANCE: Commodity finance refers to the provision of bank credit to both the public and private sector for the procurement of commodities like wheat, rice, sugar, cotton, etc. Private sector commodity financing is usually done to procure cotton and public sector commodity operations are mainly for wheat.
Since the data on private sector commodity finance is not available, the following discussion is based on public sector commodity operations. Wheat financing has the largest contribution (around 60 percent at end-FY05) in overall commodity operations. The operations start and peak in the third quarter of the fiscal year following the season of wheat harvest.
Available statistics show that the outstanding volume of wheat procurement operations, besides being erratic, has generally been declining since the last three years. This is due to the fact that SBP, with an aim to deregulate the wheat procurement process, encouraged banks to provide financing facilities to the private sector for the procurement and storage of wheat.
Following this, bank credit to the public sector for commodity operations started to decline until the third quarter of FY04 when the SBP imposed margin restrictions on fresh disbursements to the private sector for wheat procurement.
The mark-up rates for private sector commodity finance are linked with the market-based six-month T-bill rate. Anecdotal evidence suggests that when the interest rate reached historic lows in FY03 and FY04, an incentive was created for the private sector to borrow funds at lower rates, procure and hoard wheat in order to control the supply and earn margins.
This led to supply shortages of wheat in the market leading to a sharp rise in wheat and flour prices in the country. To discourage this practice, the State Bank imposed a cash margin of 50 percent on credit to the private sector for wheat procurement and banks were asked to adjust their advances by the end of the first quarter of FY05. As a result, during FY05, government borrowings for commodity operations again started to rise. The bumper wheat crop during the period has also been one of the reasons of a higher volume of wheat financing.
TRACTOR FINANCING: Tractors can be categorised as a major source of mechanisation in the farm sector, due to their multi-purpose usage. Tractor finance registered an increase of 28.8 percent during FY05 as compared to FY04, and similarly, an increase of 28.0 percent in the number of tractors financed.
The boost in tractor financing is due to the collective efforts of almost all financial institutions, as they performed well in this sub-sector both in terms of the amount disbursed and the number of tractors financed.
Going forward, the increased use of fertilisers, import of agricultural equipment, pesticides, high quality seeds, ongoing improvisation in production techniques etc are some of the factors, which are expected to maintain a sustained demand for credit in this sector.
AGRICULTURE CREDIT: In broad terms, agriculture credit refers to: Farm credit for inputs, Farm Development Finance, Finance for the purchase of agricultural machinery and equipment and Financing for livestock farming.
The agriculture sector, which contributes 23 percent to the national income of the country, is in many ways the mainstay of the economy.
In previous years, agriculture credit used to be available from specialised institutions only, while commercial banks generally had a limited scope of operations in this area. However, in recognition of the importance of agriculture in economic development, banks have been encouraged to deploy their resources to promote the growth of this sector, with the result that there has been a major shift in the provision of agriculture financing from ZTBL to commercial banks in the last couple of years.
Some contributing factors in this credit growth are the increased prices of fertilisers and other agriculture inputs, which not only raised the financing requirements of the farmers but also increased the average agriculture loan size.
Factors like the continuous efforts of financial institutions to boost tractor financing and other equipment like tube wells etc have had a positive impact on the growth of agriculture credit. In addition, the increased emphasis on the building/purchase of farm godowns and cold storage has also created a demand for agriculture credit. In this way the scope of the Agriculture Credit Scheme, which was previously limited to production loans for inputs, has been broadened to the whole value chain of the agriculture sector.
From an economic growth perspective, the growth of agriculture credit by 21.2 percent at end-March FY05 over end-March FY04 is quite encouraging as it has strong positive implications on overall agriculture production, given the dependence of a large section of the population on this sector for earning their livelihood.
However, the dependence of this sector on factors such as weather conditions exacerbates the underlying risk factor of such financing activities in terms of its impact on the repayment capacity of the borrowers and thus the quality of the loan portfolio.
Institution-wise data shows that the big five commercial banks have the largest share in the credit disbursed to the agriculture sector during FY05, followed by ZTBL and DPBs.
The share of ZTBL, which although captures the largest share in outstanding credit, is gradually being taken over by the commercial banks, both the big five and the other domestic private banks.
In terms of meeting the annual targets for disbursement, DPBs have outpaced other institutions remarkably. DPBs made actual disbursements of Rs 8.7 billion, over and beyond the annual target.
This was followed by the big five commercial banks, including Allied Bank of Pakistan Ltd, Habib Bank Ltd, Muslim Commercial Bank Ltd, National Bank of Pakistan, and United Bank Ltd, who also exceeded the target during FY05. ZTBL and Co-operatives have yet to achieve their targets, though their performance is better in FY05 compared with FY04.
A holding-wise and commodity-wise analysis of agriculture credit also reveals a similar trend of increased circulation of credit throughout the sector. The share of the farm and non-farm sectors was 85.8 and 14.2 percent during FY05 out of a total disbursement of Rs 108.73 billion, as compared to 86.8 percent and 13.2 percent for the farm and non-farm sector respectively during FY04. This distribution of credit is crucial for the growth of the agriculture sector as concentration of credit within few sub-sectors or categories will not only skew the growth process but also hamper the overall equitable growth of the sector.
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