CSS Forums - Elusive credit targets

[B]Elusive credit targets [/B]

By Ahmad Fraz Khan

ACCORDING to the Ministry of Food and Agriculture figures, the banking sector has disbursed Rs106.26 billion loans – Rs95.41 billion for production and Rs10.85 billion for development – to growers during July-December 2009-10.
The disbursement is 6.8 per cent higher as compared to Rs99.45 billion during the first half of the last fiscal year. The Agricultural Credit Advisory Committee (ACAC) had allocated Rs260 billion target for the year 2009-10 against Rs250 billion last year.

Out of total target of Rs260 billion, Rs124 billion were allocated to five major commercial banks, Rs80 billion to the ZTBL, Rs6 billion to the Punjab Provincial Co-operative Bank Ltd and Rs50 billion to domestic private banks.

However, net credit expansion – disbursements minus recoveries – during the period was Rs3 billion against Rs8.53 billion last year. This trend indicates that net credit to the farming community has decreased during the first six months of the current financial year, mainly due to liquidity crunch in the banking sector.

These figures, by and large, represent a loaning status quo in the agriculture sector, showing a marginal improvement here and minor decrease there – painting as perfunctory a picture as the Agricultural Credit Advisory Committee was in its work of fixing the target. The ACAC had routinely increased target from last year’s Rs250 billion to Rs260 billion this year, knowing well that banks never met even a relatively lower target of Rs250 billion. The banks, in all probability, will miss the target this year as well, and the ACAC, true to its bureaucratic approach, will habitually increase the disbursement target next year.

The loaning picture, along with agriculture sector, is not likely to change unless the federal government in general and the ministry of food and agriculture in particular, undergo some paradigm shift – trying to change ground realities rather than loan targets.

As things stand today, the formal sector meets less than half of officially recognised Rs533 billion loaning requirements of the agriculture sector. The farmers, however, put the requirement beyond Rs800 billion given the skyrocketing prices of inputs. The gap between loan demand and supply is met by the middleman, making the farmers vulnerable.

The marginal increase in loan is more due to inflation, reflected in higher input prices, rather than any enhancement in outreach of the banking sector. The official statistics testify the fact: according to them, out of 6.6 million farming families in the country, the formal sector reaches only 1.9 million of them. The farmer bodies, however, put the number even lower.

Majority of the loan beneficiaries are growers from Punjab, leaving farmers from other three provinces far behind. In Punjab, the banking sector in cities has almost reached a saturation point but is still refusing to spread to rural areas and benefit the growers, citing higher administrative cost. Loaning disparity is thus increasing among provinces.

The mix of production and development loan also leaves much to be desired. The latter category hardly forms 10 per cent of the former. That means that the current loaning pattern pre-empts, instead of promoting, development of the sector.

These structural problems need to be removed if the federal government wants substantial change in the sector. Though the agriculture sector falls under provincial purview as far as the constitution is concerned, the banking sector does not …and it would continue to be a federal subject. The federal government needs to take the lead, with provincial governments following in honesty, and banking sector becoming socially responsible businesses.

To begin with, the federation must force the banks, through policy measures, into the rural areas. The ever multiplying profits of banks provide them enough fiscal cushions to absorb higher administrative cost of operating in rural areas and advancing small loans. The State Bank of Pakistan must instruct these banks to expand to apparently less attractive areas because they are already creaming off the financially lucrative urban market.

The government should also ensure that these banks go to rural areas under a benevolent national policy, which balances the interests of banks a as well as the farmers. Leaving the commercial banks to their own could actually hurt the farming at best and occupying lands at worst. The possibility needs to be avoided through policy measures, so that both parties benefit from each other rather than one at the cost of the other….as has been the case in urban areas.

The government can even assign one bank branch to each union council, which means 6,000 to 10,000 acres for it to cater for, and computerised the land record to be linked to the bank. It would create personal liaison between the bank and the farmer, which is essential to any attempt to pre-empt the role of middleman. The middlemen work as family member of farmers, providing money on when and as much required basis and winning trust of the farmers. The banks need to be cast in that role. Only then they could become harbinger of change.

The provincial governments can play their role by charging the lower officials of the revenue departments to provide passbook to each farmer falling in their jurisdiction, rather than farmers running after them every year to renew their record for loan eligibility.

The banks, on their part, need to make loaning process easy and farmer friendly. Currently, the process is the biggest hindrance for small farmers. Even routine procedures can take up to one month, substantial gratification and many man hours to finalise the process. It needs to be simplified to one-window operation, where farmers can get money easily and whenever he requires.

The federal and provincial governments and the State Bank of Pakistan need to work in tandem for a concerted effort to bring some change in agriculture sector through provision of money. Each one of them has a role to play, and play it effectively. Unless that is done, the federal government would continue fixing loan target every year, only to be missed by the banking sector and the government repeating the exercise next year. They all need to get together to break this vicious circle