LAHORE: Only 15 percent of farmers in Pakistan have access to the formal credit while this ratio is further decreased when it comes to poor farmers where only 6.5% have access to formal financial system, said Zarai Taraqiati Bank Ltd (ZTBL) sources.
While, informal borrowing sources such as friends and relatives, agricultural traders, money lenders and landlords, remained the major source of credit for farmers, which come around 78 percent, they added. Agricultural financial services may play a key role in the development of agriculture sector. However, the provision of agricultural financial services in rural areas is a key challenge in Pakistan, where majority of the rural household are either small or landless farmers and have very limited access to credit due to lack of guarantee or collateral.
State Bank of Pakistan (SBP) Governor Dr Reza Baqir has informed National Assembly Special Committee on Agriculture the other day that only 25 percent of the total Rs1.215 billion disbursed by banks to the agriculture sector in the financial year 2019-2020 was given to the small farmers in the country. The sources said that there are various constraints to farmers' demand and access to credit in rural Pakistan.
They said landlessness or small holdings is one of the major constraints to access to formal credit at rural level. Further, they added, high rate of illiteracy in rural areas also restrict farmers' intentions and access to formal credit as there are lengthy documentation and procedures to complete before getting agricultural loan. Similarly, according to sources, lack of guarantee and collateral is another important hurdle to formal credit access as most of the farmers in rural areas have subsistence farming and unable to provide required guarantee. Therefore, they have to rely on informal sources of credit.
Moreover, said the sources, high interest rate on formal credit and inflexibility to return the loan also restrict farmers to contact formal institutions. Furthermore, they added, formal institutions do not have their networks in most of the rural areas which also limit access at local level.
According to the sources, informal credit is mainly worked on the principal of trust and local reference where one person gives guarantee of other. The terms and conditions are also flexible and settled through negotiation. Even in some cases, they said, no paper work is required in case of informal credits. This is the reason that most of the cases farmers rely more on informal means of credit. While, on the other hand, to acquire formal credit, one has to provide collateral and follow lengthy procedure.
The sources said there is a need to increase credit towards small farmers by curtailing hurdles faced by banks. It is worth noting that the SBP had prepared a detailed reform programme regarding the ZTBL and sent to the government for approval. The ZTBL sources are of the view that the bank can play an important role in the improvement of the agriculture sector if we the transformation plan is implemented successfully.
The government has also announced agriculture package worth Rs 8.8 billion for reduction in mark up of agriculture loans to farmers. Under the package, the government would pick a major portion of mark up on agriculture loans for a period of one year.
Copyright Business Recorder, 2020
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