Beginning July 20 we witnessed a new chapter in natural disasters, and being unprepared for facing up to its impact compounded our miseries. But while nature's anger has cooled for us to pick up the pieces, the ongoing political chaos may induce sidelining the revival of the key agriculture sector. Should this happen (which seems likely), it will prove more destructive than the floods.
But in this malaise, banks must act responsibly because going will be tough once the economy contracts as more of bank credit is diverted (directly as well as via public borrowing from banks) to rehabilitation efforts putting the other sectors under greater pressure. In essence, that's what the latest IMF report predicts, and its forecast of 4.5 percent GDP growth in FY12 depends entirely on quick rehabilitation of agriculture.
Financing rehabilitation ventures offers an opportunity provided banks design deposit products that mobilise higher savings because requisite foreign aid, and obtaining concessional or market loans are unlikely - a fact the IMF softly but clearly hints at. Banks, therefore, must start analysing all possibilities to play their key role in this mega revival effort.
In the last cabinet meeting, the ministers assured the PM about stocks of wheat, rice and pulses, but importing wheat (whose surplus used to be exported) seems inevitable since, in the coming months, sowing of wheat at the traditional scale is unlikely. The big challenge is to reverse the crop shortfall so that trade deficit (and resultant external borrowing) doesn't cast its shadow on the economy for too long.
Although agriculture's share in bank credit has risen substantially, to quicken the revival of this sector, it must rise much higher. Besides containing food import-driven trade deficit and its economic fallout, banks must realise that two-thirds of the country's workforce, which this sector employs, must remain self-sufficient to forestall a mega social upheaval.
For farmers to make productive use of credit, completion of the land reclamation process involving uprooting foreign bodies that got embedded in farmland and its re-levelling, repairs to river embankments, and desilting of water courses is imperative; without it, no farmer can commence farming. Given the lack of focus on draining out stagnant floodwater, this crucial process may be delayed.
To save their agricultural land, big landlords diverted the flood even to small towns, which damaged or wiped out the land registries there. Authentic copies of the records (if stored elsewhere) may not be quickly available to banks to verify and collateralize prospective borrowers' properties. Banks can overcome this obstacle, but only with the active co-operation of provincial and district governments.
The main stumbling block, however, is that in many small towns and villages, the flood wiped out the landscape making it difficult to re-establish plot locations. Banks must force the government to re-demarcate the plots as quickly as possible if it wants banks to play their role in extending quicker and larger credit to the farmers.
The most worrying part is that 'patwaris' could exploit this evidence vacuum for the benefit of the ever-greedy landlords, and hurt the small landowners. This is a task wherein banks, the legal community, and land revenue offices must pool their energies and skills to forestall the success of such exploitative efforts.
Banks should focus on rebuilding basic infrastructure - houses, shops and silos - and on providing agricultural gadgets, seeds, pesticides and fertilisers via soft loans to revive farmers' confidence in the all important farming activity. But this won't work until the government shifts farmers back to their villages to provide the workforce for rebuilding highways and streets leading to them, riverbanks, and watercourses.
Low literacy among our farming community is a reality whose impact will become awesome when a much larger number of farmers will seek bank loans. In this setting, self-styled middlemen may become loan 'facilitators', and benefit at the expense of the illiterate farmers by offering their 'services' for hefty 'fees'.
Such fraudsters must not be allowed to succeed. Banks must publish brochures on loan packages in all provincial languages stating loan-specific modes of credit referencing, documentation, securitization, disbursement and repayment options, and ensure free availability of these brochures to the farmers.
Loan packages (mix of goods whose purchase the loan must fund) that only partially meet the needs can't help farmers generate loan repayment capacity. Designing purpose-oriented packages would require advice from sector experts so that borrowers get enough of all the goods necessary for productive farming to repay their loans from its income.
Developing this capacity is imperative not just for limiting loan losses but for rebuilding banks' resource bases for continued lending. In the given scenario - banks' limited access to rural areas and borrower illiteracy - banks must expand their field forces, train them quickly with clear guidance on loan monitoring in this setting, and reporting to the loan-extending branches in the nearby towns.
While banks have a variety of agricultural loan products, their attributes may require redesigning, ie pricing and repayment tenors, to match the circumstances of the flood-afflicted farmers; in both areas concessions have to be made. Loan losses suffered due to the flood tragedy shouldn't induce risk aversion in banks. To limit the risk of default, banks must develop the capacity for accessing pre-agreed portions of the crop sale proceeds.
Banks should set-up interactive channels with the farmers' identified suppliers of building and farming inputs as well as crop buyers. By soliciting the help of these market players in verifying agreed use of funds, ie requiring documentation of sale and material delivery to the borrowers, and surrendering to banks portions of payments for crop purchases agreed by the farmers, banks can contain their risk.
Although quick revival of the agriculture sector is in the interest of all stakeholders, banks will be forced to increase loaning to this sector. While it calls for innovating convenient lending systems for this key sector, banks must press the government to speedup rehabilitation of the infrastructure without which the agriculture sector (and banks) can't deliver the desired results.