THE State Bank of Pakistan (SBP) has been advising the commercial banks since the 1980s to give more loans to priority sectors, including agriculture.

This was emphasised by SBP Governor Tariq Bajwa on Aug 26 during an Agricultural Credit Advisory Committee’s meeting held in Quetta.

The press release issued by the SBP’s external relations department lay emphasis on planning for the current fiscal year’s disbursement target, increasing financial inclusion of smallholders to address their credit needs, rationalising markup rates on agricultural financing to pass on the benefit of historically low discount rate, and increasing bank’s presence in underserved regions.

Mr Bajwa also urged banks to address geographical and sectoral imbalances.

The low level of credit to the agriculture sector can be partly attributed to factors which are within the scope of the financial sector and partially to ones that go beyond its reach.

A low literacy rate, poverty and lack of information about account operations are some of the reasons for low financially inclusion level in Pakistan

Asymmetric adoption of the automated land record management system along with handicap of underdeveloped physical infrastructure, and low or no literacy are some of the exogenous factors that hamper the sector’s growth.

The inclusion policy should create synergies rather than trade-offs; the SBP has instructed group-based lending methodology to banks for financing schemes for small farmers whereby members of the group can borrow up to Rs200,000 without any collateral from financial institutions.

Operational costs for group lending tend to be higher combined with relatively high risk that requires high revenues. In a nutshell, interest rates on group loans tend to be on the high side for the viable financing model.

One component of the financial inclusion programme is SBP’s credit guarantee scheme for small and rural enterprises for collateral-deficient borrowers, permitting banks to apply market-based markup rate under the scheme. Raised markups defy the very purpose of credit to poverty-ridden small farmers and the benefit of historically low discount rate.

Asking banks to designate at least 20 per cent of total branches as agriculture lending branches is an encouraging step towards financial inclusion of small farmers, but it is not a new measure.

The SBP has already mandated all banks through branch licensing policy to set up 20pc of their branches in rural and unbanked areas.

High ratio of non-performing loans, sector-centric risks and higher capital requirement under the capital requirement regime are significant impediments to lending to small farmers.

It can be argued that higher capital requirements have discouraged banks to lend to the sectors of high credit risk. Inadequate collateral or enhanced default risk warrants incremental capital under risk-based capital requirement.

Interventions in credit allocation by making agriculture credit a key indicator of banks’ performance may compromise financial stability and it can be a policy trade-off.

Under secured lending, banks intend to secure loans through eligible securities. Those who are not under the passbook system, securing loan through mortgage of rural or urban property is an uphill task.

Limited access to credit by collateral and information constraints forces small farmers to get finance from informal channels, such as arthis (middlemen or private lenders) who charge interest rates between 62pc and 80pc.

Limited financial capacity of small farmers subjugates them to informal agricultural credit market.

Developing legal frameworks for secured transactions and an electronic movable collateral registry is one measure to improve financial access in Pakistan.

Alternative financing methodologies that substitute traditional collateral may be doable for banks for up to a maximum of Rs1 million loan to individual farmer under value chain contract farmer financing facilities.

Warehouse receipt financing is another method, a contemporary financing methodology that will benefit processors not the small farmers.

It cannot be adapted to the Pakistani environment if it is not supplemented with improvement in storage facilities and warehouse receipts registry law. Lending paradigm needs to be shifted drastically for such innovative lending methodologies.

The agriculture loans of Rs704.5 billion disbursed in the previous fiscal year are mostly to finance flour millers, sugar-mill owners and ginners need of raw material.

Farmers get credit at the time of planting for buying seeds, fertilisers and host of other working capital needs from informal sectors.

A majority of unbanked respondents in the Finance Survey 2015 identified a lack of knowledge about banks and banking cost as the key obstacle to credit.

The basic transaction account with commercial banks is considered as the first step towards broader inclusion of small farmers.

Only 7pc of the population has a full-service bank account.

A low literacy rate, poverty and lack of information about account operations are some of the reasons for low financially inclusion level in Pakistan. Until reform framework and priorities are not synchronised, small farmers will remain poor and excluded from the financial market.

Banks are the engines of economic growth, but they are not missionaries. If a product is not economically viable they would be reluctant to spread the word out and avoid it no matter how hard you press them.

Building capacity and developing expertise in agriculture lending may be an area of high priority for banks.

Lending to small farmer needs more than a token agreement of increasing banks’ presence in underserved regions, reducing regional disparities by ensuring achievement of agriculture credit targets and capacity building of bank officials.

Published in Dawn, The Business and Finance Weekly, September 5th, 2017