KARACHI, Oct 18: Two government-owned financial institutions — National Bank of Pakistan (NBP) and National Insurance Company Limited (NICL) — are launching from next week the crop loan insurance scheme to provide cover for the rabi crops against natural calamities.

The two have already reached an agreement to set in place a system under which all borrowers of agricultural loans from the NBP would have to obtain an insurance cover from the NICL. Under this policy, the farmer is being given coverage against national calamities and pest attack, etc.

“We are not charging any premium on insurance policy cover,’’ a senior officer of the NBP informed. Not only that the NBP is offering a premium-free insurance scheme to farmers, the scope of crop insurance scheme has also been extended beyond what government has prescribed.

The government has offered crop loan insurance cover to only five crops—cotton, sugarcane, rice, wheat and maize—but the NBP is offering such a cover on other minor crops as well and also fruit orchards. Besides, the NBP, along with its loan, is offering insurance coverage on livestock and on health and life of the farm borrower free of cost.

Under the government scheme, the participating bank has been assigned to pick premium of crop loan insurance policy at the time of giving credit.

The bank has been asked to give premium cost to the insurance company which will pass it on to the federal finance ministry. In case of subsistence holding farmers, constituting almost 80 per cent of borrowers, the finance ministry will reimburse premium to the bank.

The State Bank of Pakistan, under its circular has made it clear that premium will be less than two per cent. The NICL has fixed premium at 1.5 per cent for every crop. But the NBP is not charging any premium on crop loan being given to subsistence far land owners or those who own farms of economic size.

The NBP will get compensation on default of farm loans from the insurance company in a certain ratio. The NBP officials estimate the volume of outstanding agricultural loans at about Rs23 billion.

“Had these borrowings been covered under loan insurance, the bank might have received some compensation,’’ the NBP official said.

The NICL has lined up reinsurance arrangement with two top international companies and a final agreement is expected to be signed with these companies very soon.

The government has promised to pay premium of the subsistence holding farmers while the NICL will charge 1.5 per cent premium.

The NBP estimates that 80 per cent of its borrowers come under subsistence land ownership for which the government has committed to make payment of premium.

“According to our initial calculation, the premium for these subsistence land holding farmers comes to about Rs240 million,’’ an official of the NBP disclosed who said that the finance ministry is in touch with the bank.

“As far as the NBP is concerned, the farm loan insurance coverage for this rabi will be free of cost, for subsistence land holding farmers and for those who have economic size holding.

According to government’s criteria, determined on basis of land productivity, farmers who own 12.5 acres and less in Punjab and NWFP are put in category of subsistence holding. In Sindh the limit of subsistence holding is 16 acres and in Balochistan it is 32 acres. In Sindh, Seraiki Punjab and in Balochistan, the landless farmers outnumber the land owners and will not get any benefit from this scheme. Farmers having ownership of 100 acres or more control a big mass of agricultural land in Sindh, Balochistan and Seraiki Punjab, and have access to bank loans.

“We are approaching our borrowers through media to educate them of loaning and insurance scheme procedure from next week,’’ the NBP official said.

The NICL wanted the formal launching of crop loan insurance in a big way, but for obvious security reasons, neither the president, nor the prime minister is available in October for a formal launch.

“The formal launch of crop loan insurance may perhaps be held in November within the limits of Presidency, Prime Minister House, Governor House or Chief Minister House in any province,’’ hinted an insurance executive.

The State Bank of Pakistan has already issued a five-point circular to banks which spells out guidelines of crop loan insurance policy.

Banks have been asked to pick up premium from their borrowers while extending loans to farmers and get it reimbursed. Farmers say that rabi is relatively a calamity-free phase of agriculture in the year and natural disasters, like floods, and excessive rains are rare.

The crop loan insurance concept was introduced by the Bank of Punjab with two insurance companies on a very limited scale in 2004.

But the Bank of Punjab and the two private insurance companies never came out with a review of the scheme or results and benefits that farmers were able to get.