Boosting farm credit

Addressing a meeting of the Agricultural Credit Advisory Committee (ACAC), the new Acting Governor, State Bank of Pakistan, Ashraf Mahmood Wathra highlighted the importance of agriculture sector in the economy of the country and outlined six-point action plan to boost agriculture financing. The plan includes (i) the launch of Financial Innovation Challenge Fund (FICF) for rural areas to foster innovation and test new markets, and streamline systems and procedures to provide more efficient ways of meeting the larger demands of farmer community; (ii) launch of countrywide Internship Programme for 100 top agri graduates to be funded through the ADB's Improving Access to Financial Services Endowment Fund; (iii) upward revision in the provisional agri disbursement target of Rs 360 billion to Rs 380 billion for 2013-14 in the light of banks' encouraging performance in the last two years; (iv) assigning of targets to banks for outstanding agri portfolio and a number of borrowers to have high impact of agri financing at grass root level; (v) making agricultural finance a key indicator of performance for banks, including Islamic banks, which will be reflected in their supervisory rating; and (vi) formulation of a working group to review the state of affairs of small farmers' financing and making recommendations for increasing financing to this segment.
Referring to the potential of agriculture sector in the economic development of Pakistan, Wathra said that Pakistan was the 9th largest producer of wheat, 4th largest producer of cotton and 12th largest producer of rice in the world and ranked one of the top ten largest producers in minor agriculture commodities. Pakistan also ranked 8th worldwide in overall farm output. Agriculture sector was the second largest sector in the economy, accounting for over 21 percent of GDP and was vital to the country because of its backward and forward linkages with other sectors of the economy having strong socioeconomic implications. The Acting Governor also recounted some of the initiatives taken by the SBP to increase farm credit like revision of per acre indicative target limit for crops, orchards and forestry and implementation of training programme for agri credit officers at NIBAF. Wathra also revealed that agri finance was close to his heart as he came from an agriculturist background and "hence it has become one of his top priorities since he joined SBP."
There is perhaps no need to argue that agriculture is one of the most important sectors of the economy and, therefore, requires encouragement and incentives including higher level of bank financing. It does not only generate almost one-fourth of the GDP but is labour-intensive and, as such, is a big source of employment generation and poverty reduction, particularly in the rural areas of the country. Agriculture, because of its backward and forward linkages, has also a strong impact on other sectors of the economy. As a result of various initiatives of the State Bank, agricultural credit disbursements by banks have been increasing over the year. During the first half of the current year, for instance, banks disbursed Rs 159.3 billion or 13.5 percent higher than the disbursement of Rs 140.3 billion in the corresponding period last year and, keeping in view the performance during July-December, 2013, it was only natural for the State Bank to increase the disbursement target from Rs 360 billion to Rs 380 billion for FY14. However, it goes to the credit of banks that they were able to increase agricultural lending despite multitude of challenges such as high non-performing loans, recovery drive, banks' insufficient infrastructure and overall security and macroeconomic conditions. Hopefully, most of the initiatives now taken by the State Bank would enhance the flow of credit to the agriculture sector further which would help meet some of the socioeconomic objectives of the government.
However, too much emphasis on bank financing for a particular sector, as is obvious from the proceedings of the latest ACAC meeting, could have pitfalls which cannot be easily ignored. Clearly, only increased level of agricultural lending cannot raise the farm productivity and contribute to the national economy if bottlenecks like water efficiency, land record management, proper marketing and storage, adoption of modern techniques, mechanization and other agri innovations and efficient use of extension services are not addressed. Also, problem with identifying agricultural sector as a priority sector is that other sectors like export finance, SMEs, youth employment scheme and certain other basic industries would also demand such a status. Excessive demand from various competing sectors could result in higher level of credit/monetary expansion than the safe limits which would exert inflationary pressures in the economy and cause depreciation of the rupee. In our view, it was better for the Acting Governor to continue persuading the government, like his predecessor Yasin Anwar, to reduce its dependence on bank borrowing for budgetary support so that more credit could be made available in adequate amounts to the non-government sectors including the agricultural sector. Also, we can understand the feelings of Wathra that agri financing is close to his heart because of his agricultural background but personal preferences should never be allowed to prevail over economic exigencies of the country, especially when a person is holding such an important office.