Government must formulate directed bank credit policy for small growers, says Dr Rashid Bajwa, CEO NRSP

Dr Rashid Bajwa is the Chief Executive Officer of the National Rural Support Programme (NRSP), here in Pakistan. NRSP was established in 1991 as a not-for-profit organisation. It currently touches around 2.2 million poor households through social mobilisation. Its main areas of operations include microfinance and enterprise development, social sector services and natural resource management.
BR Research recently sat down with Dr Bajwa in Islamabad for a discussion on issues of rural employment and financial access. Following are selected excerpts from that encounter.
Before joining the NRSP, Dr Rashid Bajwa spent some 25 years of his career in rural areas as a government servant. His observations of the rural families, eg how they conduct their lives and how they confront their everyday life issues, suggest that the rural dwellers are not only smart and insightful people, but also enterprising, irrespective of whether they are educated or not.
"People living is rural areas are very entrepreneurial, they have great potential, and they are looking for opportunities - which strikes a note of optimism for Pakistan. But there are barriers that limit this potential. For instance, these people do not have adequate means of production - there is excess labour, yes, but there is not much work to do. The means of production in rural areas are either land or livestock. Being landless mostly means having little or no livestock at all.
The only way landless individuals can earn a living is either through education (which is long term) or after they acquire some skills training. However, even if adequate skills are acquired, access to finance for them remains a major hurdle as institutional finance is very scarce. All these issues stifle the entrepreneurial spirit, and hence, poverty perpetuates," the NRSP CEO started off.
Unlocking Rural Entrepreneurship: The Bottom-Up Approach
Though he appreciates and considers essential the role of macroeconomic stability in generating economic growth and reducing poverty, Dr Bajwa blames policymakers for ignoring these simple rural issues altogether. "The poor keep jumping up and slipping down the poverty line with corresponding changes in macroeconomic fundamentals. But there is a need to have a sound bottom-up approach that ensures access to finance to the poor and asset-less entrepreneurs so that their effort complements the macroeconomic measures. We at NRSP call it social mobilisation; others call it community-driven development.
There have been programmes initiated by many governments, but what they all missed out, was to take measures to unlock this entrepreneurial ability. That leads us again to the issue of 'means of production' in such areas. My experience suggests that this doesn't require money, but a proper policy formulation by the government."
Dr Bajwa then goes on to highlight how the lack of adequate healthcare coverage can be an impediment to the rural entrepreneurship even when other variables are taken care of. "According to official data, around 80 percent of Pakistanis have to pay out of pocket for their healthcare. This percentage increases when it comes to poor people, who have to pay for their tertiary healthcare (hospitalisation). How do they pay for that? Well, since the poor don't have excess cash (or none at all), they start selling their assets to foot the hospitalisation bills.
These are their productive assets, their means of production. So, they would first sell their livestock, then their ornaments, and finally their lands - all at stress sale value because of the urgency. Once their productive assets are all gone, these folks usually have nothing left for them in villages, so they migrate and move to Katchi Abadi's," he said, while stressing on adequate provision of tertiary healthcare for the vulnerable rural households.
Access to Finance
Turning to the issues of financial access, the NRSP CEO thinks that the reason why rural economies remain functional, a going concern if you will, despite all the problems and troubles, is that there is a very sophisticated, parallel financing system that works outside the ambit of the formal system. That system is very costly, he points out, to the extent that most of the production's worth is lost to the beneficiaries of this informal system, leaving the small producers with only that much money that can buy them just enough calories.
"This system keeps the poor at a subsistence level, who are dependent on layers and layers of middlemen. Since 70 percent of the rural poor are engaged in agriculture as small Thekedars (share croppers etc), they are unable to break away from this "generational bondage". There are Aarhtis, big and small, doing a range of business - they are selling fertilisers, seeds, even fuel.
Countries like Korea have overcome this problem, where more than 60 percent of farming community has organised themselves. They supply their produce directly to the markets, and most of these markets are owned by them through the NACF (National Agriculture Co-operative federation). Something similar is needed in Pakistan, too."
To break the hold of this middleman as a supplier of credit to the small and poor farmers, Dr Bajwa accentuates a policy of 'directed credit' for priority areas like Agriculture and Livestock, in which each commercial bank is required by regulation to disburse a certain percentage of their credit to poor farmers.
He recalls that that this policy was discarded in the past but needs revival as now many microfinance institutions, including the NRSP, are present on ground for financial intermediation. He feels that the microfinance institutions have barely been able to provide access to finance to only seven percent of the demand in the last 10 years, and that the government, by reviving the directed credit policy and using Micro Finance Institutions as financial intermediaries, can increase the coverage many times over, and in a very short span of time.
The microfinance sector is currently serving 2.4 million clients, which is only seven percent of the potential. The sector can grow exponentially but is starved of liquidity. After taking into account the cost of funds which are linked to KIBOR and the intermediation costs, the lending costs to Microfinance clients become quite high.
But still, the clients queue up for loans from MFIs as the cost is still three or four times less than what they get from the traditional financial intermediaries. (Rural poor are smart; though less educated). This helps them keep a major portion of their profits for reinvestment back in their fields, farms and businesses."
Dr Bajwa questions the absence of a directed agricultural credit policy in place in Pakistan when it is there in the region. "It does not cost additional expenditure on the part of the government. It is a simple issue of policy. Let the Commercial Banks charge market rates. The poor will still benefit.
Why is Indian agriculture doing better than Pakistan? One reason, in addition to many, is directed credit there. We have lost precious time: there are too many people, but there are too little jobs to offer. No additional budgetary provisions are required for such a policy. Even if we lend two percent of total credit to micro clients, it will bring great change."
Collaborative Financing Model for Agriculture
Dr Rashid Bajwa also discussed with BR Research what he called a 'collaborative financing model' for agricultural products and services. "If you create a farming product which is a primary raw material for a processing unit and where there is no need for any third party to intervene in the entire chain, you can build a collaborative agricultural financing model around it. The farmer has an incentive in the form of purchase certainty and better price; the processing unit makes good money; and the intermediary, who provides the financing, earns solid returns. If the processing unit has equity investment, then the value chain becomes stronger and synergy and loyalty is created among the producers. If the processing unit is newly established, it's going to require a lot of labour, which can be sourced from the same producer households."
In a special feature that he wrote recently for the World Bank's CGAP research policy institute recently, Dr Bajwa first shared the 'proof of concept' for this model through NRSP's "Sugarcane Production Enhancement Project". Launched in 2001, the SPEP project aimed at addressing issues of credit access and advisory services, and enrolled some 1,800 sugarcane growers in the Rahim Yar Khan District. Growers included sharecroppers and farmers which had landholdings of around three acres.
The model effectively brought together the grower, the microfinance provider and the processor (sugar miller). The loans were meant for input purchases and typically ranged between Rs7,000-Rs10,000 per acre. The farmers were also provided with yield enhancement advisory services - acting on the advisory was requisite for loan disbursement. As per an agreement with the NRSP, local sugar mills would purchase these growers' output with instant cash after deducting NRSP's loan & service charges.
Dr Bajwa noted that there was something for everyone in this project: small growers improved cane yields and increased their incomes; the local sugar mills benefited from high sucrose-yielding cane; and the NRSP recovered its loan portfolio and associated charges at source (sugar mills) with negligible recovery staff. Moreover, local irrigation systems were developed and technical guidance was provided for seeds and farm equipment.
Dr Bajwa told BR Research that this model has the potential to revolutionise Pakistan's agricultural production and processing activities. "All this model requires intermediary financing for farmers' credit and equity investment for setting up processing units. NRSP has scaled this model in the sugarcane industry."
"Other areas that we have identified include cotton ginning, rice husking, pulses, fruit storage, and wheat items. Every unit that is set up will create hundreds of jobs. If the provincial governments, donors and commercial banks take interest, this will be a game changer for rural Pakistan. This model would create opportunities in rural areas, which will also pull the urban poor back to the villages," he summed up.