The State Bank has been trying harder over the years to increase productivity in the agriculture sector by motivating the financial institutions to extend adequate loans on terms and conditions that are in accordance with the requirements of farming community. On 24th July, 2019, it made yet another amendment to its Prudential Regulations for Agriculture Financing to increase the maximum tenor of development loans from five years to ten years in order to encourage banks and development finance institutions (DFIs) to enhance development loans in crop and non-crop sectors. However, the SBP clarified that banks may decide the actual tenor of a product themselves which should be duly approved by the Board of Directors, based on the nature of the financial product, useful life of machinery/tool and repayment capacity of borrowers. According to the revised Regulations, R-13 for Tenure (tenor), Classification and Provisioning of loans for farm development can be extended for one to ten years whereas, the tenor of financing for machinery/equipment should not be allowed for more than the useful life of machinery/tool.
The maximum tenor for livestock financing would be 10 years (including the grace period) and loans extended for goat and sheep farming, breeding of animals, dairy farming, fishing farms, poultry farms etc. by banks and DFIs would fall under this category. Livestock financing would be extended for working as well as development purposes. Financial institutions were also allowed to grant relaxation upto one year in repayment schedule to their borrowers who are adversely affected due to certain unforeseen or unexpected factors like weather and water availability which are outside the control of farmers. Banks may also formulate internal policies for creation of general reserves to cover losses in calamity-hit areas.
It may be mentioned that this is not the first initiative of the SBP to enhance the availability of agriculture credit on easier terms and in sufficient volume/amounts to the farming community. In fact, the agriculture sector is considered so important that the SBP,in line with the government's priority for agriculture sector development, has set up an Agricultural Credit Advisory Committee (ACAC) to give indicative agricultural credit disbursement targets to 50 agriculture lending institutions including 19 commercial banks, 2 specialized banks, 5 Islamic banks, and 11 microfinance institutions. ACAC monitors the progress on indicative targets on a periodical basis and recommends policy initiatives to favour the agriculture sector. The importance accorded to agriculture sector is not without some solid reasons. Not only does agriculture contribute about 19 percent to country's GDP, it also provides about 40 percent employment to national labour force and is critical for accelerating growth in other sectors of the economy. However, over the last decade, the performance of the agriculture sector has fallen short of the desirable level and needs further push to make its rightful contribution to the national economy. The doubling of tenor of development loans to 10 years to the farming community under the latest policy initiative would increase the gestation period and help synchronize the repayment installments of the borrowed funds with the benefits likely to accrue by utilizing the development loans. It may be noted that development finance for agriculture is a medium to long-term loan extended by the financial institutions for making different types of improvement and developments work at the farm including construction of godown and development of orchards and nurseries while machinery and equipment loans are for the purchase of machinery and equipment to be used for agricultural purposes like tractors, threshers, reapers, harvesters, tube wells etc. Obviously, the money borrowed for these purposes cannot be repaid by farmers in a period of one year or so and its repayment should coincide with the gains likely to accrue to the farmers over a longer period of time. The SBP has also advised the banks to create general reserves to cover losses in the calamity hit areas which may be due to unforeseen adverse developments like earthquake, floods, heavy rains, epidemic diseases etc. These reserves will be good buffers to cover unexpected losses of the farming community. However, while we appreciate the latest initiative, we would advise the lending institutions to keep a close watch on the non-performing loans arising from this facility in order to avoid its misuse.