AGRICULTURE has assumed special importance owing to rising risks to food security amid looming climatic changes and its growing significance for economic growth.

This calls for enhanced and more judicious distribution of bank credit among all stakeholders in the farm economy. But little is in sight. The number of borrows who get farm loans from banks has remained range-bound between 600,000 and 700,000 for several years whereas 6.6 million farmers and nearly 44 per cent of the population are directly and indirectly engaged in agricultural activity.

Moreover, the bulk of farm credit currently caters to crop raising needs of growers. Over the years, the share of production loans in overall farm credit has hovered around 90 per cent and the share of development loans has not risen beyond 10 per cent (see table).

According to latest statistics (as of March 2012) agricultural lending of all kinds constituted a very small percentage of banks’ overall lending—roughly seven per cent to be specific.

Besides, there is an uneven geographical distribution. Over the years more than 80 per cent of overall farm credit has remained concentrated in Punjab. And by the end of 2011 this percentage shot up to 85, according to the State Bank’s recently-released data.

For a country like Pakistan the need for lending more to the entire farming community—and specially the underserved classes—is very crucial. “We need more inclusive loaning in farming sector because ours is basically an agrarian economy and also because our agriculture sector has been grossly neglected,” says Ibrahim Mughal who heads the farmers lobby group Agri Forum Pakistan.

Access to bank credit still remains limited despite some expansion in volumes. In FY12 commercial and specialissd banks as well as microfinance institutions lent Rs294 billion to the farming community under the State Bank of Pakistan’s agricultural credit scheme. The amount was higher than the indicative target of Rs285 billion and the actual FY11 lending of Rs263 billion.

“But even at current levels agricultural lending is lesser than required. If we want to make this lending fully inclusive we need to boost lending beyond Rs700 billion,” insists Ibrahim Mughal citing some studies. These studies including several ones conducted by the central bank have found that formal lending meets only 40-45 per cent of financial needs of farmers.

What is even more disturbing is that agri lending volume in a given year shows gross loaning by specialised and commercial banks which they make out of the recoveries of outstanding loans.

“That is why you see agri financing at Rs294 billion in the last fiscal year when overall private sector credit off-take was just Rs235 billion,” explained head of agricultural financing at one of the top five banks. Central bankers confirmed that agricultural lending of banks form part of private sector credit.

This being the reality one can easily guess how much additional loaning is made into agricultural sector in a year—let alone what portion of that goes to small farmers. Bankers say that in addition to agri lending under the SBP scheme which is normally repaid within a year and where loan default ratio is not too big, they also lend to farmers as part of their general lending. But farmers complain that smaller among them seldom get money from banks under general loaning by banks or under the supervised agriculture credit scheme.

“I assure you most of us...almost all small farmers don’t get anything from any bank. And those who get it they pay high interest—not less than 18 per cent—in any case,” a progressive rice grower from Jacobabad Ghulam Sabir told Dawn.

Except for Zarai Taraqiati (Agricultural Development) Bank that charges 12 per cent interest on agri loans all other banks price their loans keeping the market conditions in mind.

Officials in ZTBL say that after the 150 basis points cut in SBP’s policy rate the lending rate of 12 per cent for agricultural financing would be reduced soon.

Farmers lobby groups say agricultural credit scheme should make it binding on all participating banks to charge lower than usual interest rate on agri loans. Currently on ZTBL lends at subsidised rate. They point out whereas in Pakistan only selected local banks are involved in SBP’s agri credit scheme in Bangladesh all banks including local and foreign ones provide such loans—at a subsidised rate of nine per cent against their weighted average interest rate of around 14 per cent.

“Unless we increase volumes of agri loans massively, facilitate small growers and unless we provide such loans at a single digit rate, boosting agricultural productivity would remain an elusive dream,” says a former head of agricultural finance of state-run National Bank of Pakistan.

Whereas overall volumes of agri lending has continued growing over the years the increase has originated in production loans that banks offer to growers for purchasing inputs like fertiliser and pesticides etc. The amount of lending for development loans which cover lending for purchase of tractors and tube wells and agricultural machinery etc has rather remained stagnant and even showed a decline in FY11.

Pakistan faces diverse challenges on agricultural front. Per hectare yields of our key crops are far lower than the world average—ranging from 20 per cent in case of cotton and wheat to 40 per cent in sugarcane and Basmati rice. Post-harvest losses are estimated around 40-80 per cent depending upon the crop and the area of production.

About 40 per cent of water available for irrigation also goes to waste because of poor management practices and lack of innovative ways of irrigating crop fields. Larger distribution of agricultural loans with a higher share of development loans is crucial for helping the rural economy meet these challenges.

Banks say they have lately adopted a better strategy to ensure availability of finance for meeting these challenges. They say they now distribute farm credit under ‘value-chain approach’ in distribution of agri credit whereby the lenders cater to financial needs of the entire value-chain of a particular commodity—from growers to rural market operators to urban businesses to corporates —all involved in adding value to a certain commodity at a certain stage.

Local private banks have also joined hands with microfinance banks to reach out to more distant segments of the farming community. On its part, the SBP has already merged its microfinance department into agricultural credit department to ensure success of value-chain paradigm in rural financing.

In FY12, SBP included, for the first time, rural financing of microfinance banks worth Rs12 billion into overall agricultural lending of Rs294 billion. But growers say whereas microfinance banks are helpful in reaching out to small borrowers, they cannot facilitate growth in agricultural development loans.—Mohiuddin Aazim