The State Bank of Pakistan is expected to issue a working paper to the banks on the modalities of crop loan insurance in a week or so, a spokesman for the SBP said last Wednesday.

Simultaneously, the federal ministry of finance is working on the operational framework for payment of insurance premium by the government on behalf of small farmers.

The crop loan insurance is planned to be launched from next Rabi crop. And the commercial banks want the crop loan insurance to be obligatory for all borrowers.

In his first address to the nation last week, the prime minister announced that government would pay the insurance premium on behalf of small farmers. But the question is: what is the definition of a small farmer? How many small farmers are going to be potential beneficiaries of crop loan insurance scheme? And, what will be the modalities of payment of premium? These are to be spelt out.

Background interviews with bankers and insurance company executives revealed that if one goes by the criterion of 12.5 acres subsistence level holding, there are about 5.30 million farmers with ownership of less than one acre to 12.5 acres in the country. Constituting almost 86 per cent of total farming community, these small farmers share only 48 per cent of cultivated land while 52 per cent is with 14 per cent of landowners with individual holding of more than 12.5 acres.

“The premium from subsistence level owners of farms is reckoned anywhere from Rs3-4.5 billion’’, a senior official of a privatised bank says. But he agrees that this assessment of subsistence level land holding and the indicated premium for crop loan insurance is merely a guesswork. Large tracts of agricultural land in Sindh, Seraiki Punjab and Balochistan are not properly demarcated.

“In Balochistan, big tracts of land are owned by tribes and not by individuals and hence any estimate of subsistence level owners or big owners is deceptive’’, a banker said.

In Sindh, almost 250,000 small owners do not have access to bank loans simply because the tardy Sindh Revenue Department has not issued them ownership documents and pass books for banks. The question as to how this premium would be made available by the government to insurance companies or banks on behalf of farmers will be spelt out by the finance ministry.

The loan insurance schemes for the three crops are under consideration of the government, insurance companies and the banks. Two schemes have been proposed by the finance ministry and one has been designed by task force constituted by the SBP more than a year ago. It is headed by President of Habib Bank Limited Zakir Mehmood.

The task force comprises representatives of all big insurance companies, banks and officials of SBP and Security Exchange Commission (SECP). Its scheme excludes the government controlled Zarai Taraqiati Bank Limited (ZTBL) which is the single largest loaning agency for farmers. The government-owned National Insurance Company (NICL) also does not come under the purview of the scheme.

The two government institutions, ZTBL and NICL with all other banks and insurance companies figure in another two schemes said to be designed by the federal finance ministry. After induction of an elected political government in late March, there was a need to bring a populist dimension to the crop insurance scheme. The finance ministry is said to have called a meeting of the bankers and insurance companies before budget 2009 where the idea of offering a “free’’ crop loan insurance scheme was floated.

“Such an insurance scheme can be operated only by government institutions,’’ a senior executive of one of the top insurance companies involved in designing of crop loan insurance scheme said.

“In the USA, crop insurance is subsidised by the federal government but is administered through private firms,’’ a senior executive of another leading insurance company remarked. His comment was, “let us see the operational details of the government sponsored crop insurance scheme before making any final decision.’’

Under the government scheme — the National Agricultural Insurance Scheme (NAIS) — the small farmers are described on the basis of subsistence land holdings which varies from province to province. Officially, the owners of land up to 12.5 acres in Punjab and NWFP are subsistence land owners. But in Sindh, the criterion is 16 acres of land while in Balochistan it is 32 acres.

There is a proposal to set up a separate agency for administration of this scheme. Initially, the subsidy will be provided by the federal government for launching of scheme through National Insurance Company. Later, however the subsidy will be shared on fifty-fifty basis between the federal and provincial governments. This scheme is open to non-loanee farmers also. The scheme does not mention any rate of premium but states that it would be collected through network of ZTBL and other financial institutions. The other scheme of finance ministry is Crop Loan Insurance Scheme which covers all major crops. While NICL puts a premium for crop loans at 1.5-2 per cent of the loan amount, the private insurance firms seek two per cent.

What is a matter of concern for the banks and insurance companies is the assessment of crop losses from calamities covered under the insurance schemes. Currently, the revenue departments of provincial governments estimate losses from natural calamities, whether it is flood, rains, drought, or an earthquake. Agricultural departments assess losses from pest attack. But insurance companies and banks have no trust in competence and skill of the provincial government revenue departments.

“Canal breaches and fire cause much damage to standing crops and mostly it is because of personal rivalry rather than an accident’’, an insurance company executive said. Insurance companies do not have qualified surveyors to do the job. And most of the insurance company executives and bankers are convinced that calamity affected areas are declared on political consideration to benefit one’s constituency.

Crop insurance has proved to be a losing business in India where claims are six times of the premium amount. Even in Europe and USA where many financial services have reached rural areas, crop insurance is said to be not so popular with the insurance firms.

In Pakistan, the Governor of State Bank, Dr Shamshad Akhtar has tried to extend financial services to rural areas and nearly 50 per cent of 7,500 branches of the banking system are said to be operating in the countryside.

The outstanding agricultural credit has swelled up to Rs170 billion or about eight per cent of Rs2.2 trillion of total advances portfolio of the banking system.

After having disbursed Rs212 billion among the farmers in 2007-08, the banks are expected to provide Rs250 billion in the current fiscal year.