Governor State Bank of Pakistan Salim Raza has prodded banks to revisit their lending mechanisms to the agricultural sector through the launch of innovative products and adoption of international best practices. The frustration of the Governor with regard to stagnation in agri-credit disbursement is quite understandable because of the fact that despite SBP's best efforts, commercial banks have found it a difficult business to handle a hardly 2.5 percent of their overall advances.
A high incidence of non-performing loans even in a specialised institution such as ZTBL strongly indicates that local lenders not only lack the expertise but are also not adequately equipped with the infrastructure and systems towards loans repayments for any borrowed amount. Helping the subsistence farmer is even more difficult for these institutions because of their fairly large number, which requires higher level of automation.
That is precisely the reason why banks prefer large loans in agri-sector and favour corporate farming to small loans which can be generalised as micro-credit. However, one cannot overlook the fact that small farmers' access to institutional credit is still limited. This fact becomes a source of concern since small farmers account for 80 percent of aggregate land holding. According to Agriculture Census 2000, small farmers are those farmers who have land holding of up to 20 acres or less.
The major reason for the poor credit access to small farmers is non-availability of financial infrastructure in rural areas and the poor performance of provincial governments in documentation of land titles. While rural population is approximately 67 percent of total population of the country, rural areas have only 33 percent of total bank branches.
As pointed out by the SBP in one of its reports on the state of country's economy sometime ago, there is, therefore, a need to extend the outreach of bank branches to improve access to institutional credit as well as to exploit huge base of small depositors in these areas.
This year, tractor sales are doing well despite a serious lack of buoyancy in farm loans. Manufacturers depend on bank credit for tractor sales. They are now reporting a much higher cash sale - attributing this change to higher procurement price for wheat, cotton and sugarcane placing much more money in the hands of farmers.
Despite this silver lining, a sustained trend requires a higher level of investment in rural infrastructure, storage facilities, farm to market roads, food processing, refrigeration and canning units, etc. Further more, the potential for growth cannot be adequately realised without production and distribution of high quality seeds.
The Governor also noted that the SBP has been working to develop credit guarantee scheme for small and marginalised farms, simplifying lending procedures to the sector, model Shariah compliant products, market development for farm commodities through warehousing facilities and trading at National Commodity Exchange Limited.
Be that as it may it is relevant to note here that Pakistani banks have been reluctant to create a separate business line consisting of loans giving, credit appraisal, recovery and marketing for the farm sector as they can earn Kibor plus 3 percent from commodity financing and sugar and other food imports by the Trading Corporation of Pakistan.
Thus it stands to reason that banks are unlikely to heed the Governor SBP's exhortation especially given that in the past when credit to the farm sector was mandatory banks opted to pay the penalty rather than to lend to this sector. And yet there is a need in this country for greater investment in a sector that can raise the GDP as well as earn export revenue.
Other regional countries including India have mandatory lending of 18 percent of advances for farm sector. Pakistan unfortunately has a defunct co-operative banking sector and market economy does not favour direct credit. This does not preclude SBP from coming up with the right incentives to entice banks to lend aggressively to the farm sector.
The present government has repeatedly claimed that its focus is on the agricultural sector. Crop yields cannot rise without substantial investment in agriculture. The current level is a dismal contribution to GDP. The surge in international commodity and food prices underscores the need to improve supply of quality inputs, research and extension services to obtain food security as well as the exportable surplus to earn foreign exchange.