Two state-run units — the National Bank of Pakistan and the National Insurance Company — agreed on Wednesday last to formally launch a crop loan insurance scheme from early next month for Rabi crops. Wheat is the main Rabi crop while tobacco, pulses, barley and mustard are also grown in selected areas.

“We hope to give crop loan insurance cover initially to more than a quarter million farmers,’’ Mr Abid Javed, Chairman National Insurance Company, said.

The scheme is being launched amidst reports of an estimated 40 per cent shortage in water supply and relatively less availability of fertiliser in coming Rabi. “We will entertain all applications from the farmers who will seek loans, assuming that they are set to go ahead with cultivation,’’ said an NBP officer. The NBP has earmarked Rs37 billion for loans in 2008-09 for an estimated 300,000 farmers.

A five-point circular was issued by the State Bank of Pakistan last week, spelling out instructions and clarifications given by the federal finance ministry on various issues raised by the banks, particularly on premium cost of subsistence farmers.

The insurance premium of subsistence farmers will be picked up by the government. In Punjab and NWFP, the subsistence holding is up to 12.5 acres, in Sindh 16 acres and in Balochistan 32 acres. Banks will pay for premium on behalf of these small farmers and the claims on this account will be filed with the State Bank of Pakistan. After verification by the central bank, the claims will be forwarded to the federal finance ministry for payment to banks.

The government is moving cautiously to pick up the insurance premium cost of subsistence farmers in view of the budgetary constraints. From queries made to banks, insurance companies and farmers, the premium amount estimates vary anywhere between Rs500-850 million, based on indicated agricultural loan portfolio of Rs250 billion in 2008-09. It is not known how much of the insurance premium the government would target for subsistence farmers.

For economic size farms, the farmers will pay premium on crop loan insurance policy. But the National Bank of Pakistan has decided to pick up this loan insurance cost on crops, livestock and on health and life of the borrower for which agreement has been reached with the National Insurance Company.

Insurance cover will also be offered on fruit orchards for which operational details are being worked out.

“We are picking up the premium cost of crop insurance policy of the farmers who have economic holdings and above,’’ a senior executive of NBP informed.

We are trying to bring in our fold private insurance companies and private banks,’’ Abid Javed said. “We are negotiating with New Jubilee Insurance Company which has an arrangement with Habib Bank,’’ he disclosed. Once these institutions agree to the framework within which NICL and NBP are working, the New Jubilee Insurance and Habib Bank and others may also join the scheme.

The NICL-NBP scheme offers coverage of losses from natural perils like excessive rains, hail, frost, floods, drought, crop related viral and bacterial and locust attacks. The sum insured will be linked to per acre borrowing limits prescribed by State Bank of Pakistan subject to a maximum of Rs2 million per farmer, per crop, per season.

On production loan insurance coverage, the premium rate has been fixed at 1.5 per cent per crop. The same rate will be levied on development loan for machinery. Additional 0.125 per cent premium will be charged for coverage against fire and lightening, 0.125 per cent for theft and burglary, 0.225 per cent for accidental death of borrower and 1.75 per cent per head of animal.

The NICL finalised re-insurance arrangements with international re-insurers Swiss Re and AA Security almost a year ago. The operational framework arrangement for claims payment is expected to be signed next month.

Banks are offering loans to farmers at 15.5 per cent and premium cost on insurance policies for two crops in a year can push up a farmer’s cost to a minimum of 19.5 per cent. The NBP is offering to pick up 1.5-4 per cent premium cost in a year and offering loan at 15.5 per cent.

Private banks and insurance companies prefer to keep a watch on how the crop insurance policy of the two public sector units moves ahead. The domestic private and major privatised banks are showing good loan recovery results.

At a meeting held last month, the State Bank Governor Dr Shamshad Akhtar informed the participants that ratio of non-performing agricultural loans has improved considerably over the last few years.

The ratio of farm NPLs has come down to 16.5 per cent in December 2007 from 21 per cent in 2005.

Agri loaning, she had stressed was viable and profitable and is becoming attractive with increase in domestic and international prices of agricultural products.

“Agriculture still remains a big gamble with weather’’, a senior executive of a private insurance company remarked as to how would it be possible to put a big stake in a most uncertain business. Then, there is the debt culture of big landlords that is keeping private insurance companies away.

But in the NICL, the officials want to expand their business to horticulture, fisheries, animal husbandry, dairy farming at all levels and poultry far more extensively than what is being done now in few areas on a selected basis. However, it all depends on the results of crop insurance being launched in the first or second week of October.