The State Bank of Pakistan’s collateral-free lending programme is designed to help small farmers access bank credit easily.

This credit guarantee scheme is being jointly sponsored by the central bank and the federal government. This is part of a larger effort to make the agriculture sector respond well to crucial needs like food self-sufficiency and higher value-added exports, said Finance Minister Ishaq Dar while approving the scheme around two weeks ago.

Small farmers can play a key role in revolutionising agricultural productivity and the supply chain if their financial needs are met and the process makes business sense for banks as well. Keeping this in mind, the federal government approved in mid-March a credit guarantee scheme for small farmers who can’t arrange collateral against loans.

Farmers with land-holding of up to five acres in canal-fed or 10 acres in rain-fed areas are eligible for the scheme, designed by the SBP. The scheme was announced in the FY15 budget, but its framework was developed months later with the input of all stakeholders.

The minimum loan size is Rs100,000, while the maximum tenor is 1-1.5 years. The government will share 50pc of the default risk and has already allocated Rs5bn for it.

Financing for small farmers is picking up because of higher demand for bank credit thanks to increased activity in crop-raising, livestock-breeding and poultry and fisheries etc.

Over Rs3bn has been lent to small farmers in 105 districts across the country under a SBP-DFID scheme, with 85pc of the loans going to previously un-served or underserved borrowers in rural areas

This reflects the continuous growth in lending to the agriculture sector as a whole. Bankers say they have been giving more loans to small farmers for two reasons. First, their lending to the manufacturing sector remains subdued due to low credit demand (as industrial growth is not picking up fast).

And second, the greater involvement of microfinance banks and institutions in agricultural lending continues to open up loaning opportunities for other commercial banks as well.

Bankers familiar with the working of the credit guarantee scheme say it is primarily group-based financing meant for farmers involved, on a limited scale, in cattle- and crop-raising, dairy, poultry, fisheries and horticulture segments.

Since it is a collateral-free lending scheme, small farmers groups (SFGs) would serve the purpose of guaranteeing bank loans. These groups will comprise 5-15 members with similar financial needs. Blood relations and spouses living in a village can be accommodated into such groups. But they would not be made part of one particular group.

Government officials and bankers would undertake on-site visits to verify the farming activities of the SFG members and assess their individual cash flow prospects. Bankers say if the on-site visits are undertaken by an NGO or an outsourced agency (which is permissible), the final nod for the formation of an SFG would come from the SBP instead of the banks participating in the financing scheme.

In either case, an SFG will have to be registered with a bank before the initiation of the lending process.

Crop-raising loans would be offered to the holder/tenant/lessee/allottee farmers with land-holding of up to 12.5 acres. Livestock breeders with 4-40 animals (depending upon the category of the animals, i.e. sheep/goats/cows/buffalos) would also be allowed to borrow under the scheme. In the poultry sector, small farmers with 500-1,500 birds would be eligible for borrowing.

In the case of fisheries, individuals working on fish ponds of up to two acres of land or those having just one fishing boat can get bank loans under the lending programme.

With the launching of the collateral free financing scheme for small farmers, every sub-sector of agriculture and the entire agriculture sector, as a whole, stands to benefit, bankers and central bankers say. They add that about 2m subsistence-level farmers already have access to formal financing, and this number should rise dramatically as the scheme progresses.

Studies conducted on the subject by think-tanks often show that banking institutions, including commercial and microfinance banks, meet the financial needs of just one-third of small farmers, leaving the rest to continue to arrange self-finance or borrow from informal sources at higher rates.

Whereas the credit guarantee scheme is likely to further accelerate loan disbursement to small growers, bankers say such farmers have already been borrowing freely under an ongoing SBP-DFID (UK’s Department for International Development) scheme.

They say they have so far lent over Rs3bn to small farmers in 105 districts across the country, with 85pc of the loans going to previously un-served or underserved borrowers in rural areas. Of these, 81pc were subsistence-level farmers.

Similarly, 91pc of the loans were provided to small businesses (including those in agriculture) with less than five employees, of which 90pc were sole proprietors.

Despite their extensive geographical spread and focus on under-banked segments, banks participating in this scheme demonstrated prudent lending practices and were able to keep their loan infection ratios for farmers to only 2.91pc.

One reason the implementation of this scheme has been smooth is that the scheme is being monitored by a technical committee comprising DFID, SBP and Pakistan Banks Association members.

Published in Dawn, Economic & Business, May 11th , 2015

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