Paltry Agricultural Credit Disbursement in Pakistan

According to the details released by State Bank of Pakistan, during 2017-18 financial institutions have disbursed Rs972.6 billion as compared to disbursements of Rs704.5 billion during 2016-17, up nearly 38 percent. As a consequence, the outstanding portfolio to agriculture increased to Rs469.4 billion at end June, 2018 as compared to Rs405.8 billion at end June 2017, registering a growth of 15.7%. Similarly, the agricultural credit outreach increased to 3.72 million farmers from 3.27 million farmers during the period under review, recording a growth of 13.8%.

The central bank said achieving target of credit disbursement to farmers was a challenging task in the backdrop of various challenges faced by the agriculture, which included water shortage, low production of maize and wheat, price volatility of agricultural produce and high cost of production. It also took credit of making concerted efforts for achieving the indicative target by implementing various budgetary initiatives set by the government. These efforts included; provision of enabling regulatory environment for lending to farmers, persuading banks to adopt lending to farmers a viable business proposition, exploring new avenues of financing; value chain financing, digitalization of credit, warehouse receipt financing and implementation of credit guarantee scheme for small and marginalized farmers etc.

The SBP also boasted of undertaking various initiatives for promoting lending to farmers, which included allocation of regional targets, recruitment of ACOs by organizing job fairs in agricultural universities and continuous follow up with banks to ensure achievement of the targets. Further, arrangement of awareness programs for farmers at grass root level has also helped in improving lending to farmers in underserved areas.

The analysis of lending to farmers during 2017-18 reveals that five major banks collectively disbursed loans amounting to Rs523.9 billion as against and indicative target of  Rs516 billion or 101.5% above the target. The central bank had set an ambitious target of Rs516 billion that was nearly 53% higher as compared to actual disbarment of Rs342.6 billion during 2016-17. Under specialized banks category, ZTBL disbursed Rs83.2 billion or 66.6% of its annual target of Rs125 billion while PPCBL disbursed Rs10.7 billion by achieving 71.5% of its target of Rs15 billion during 2017-18.

Fifteen domestic private banks as a group achieved 92.4% of their target of Rs200 billion and five Islamic Banks achieved 82% of their target of Rs20 billion. The performance of Microfinance Banks and Microfinance Institutions remained encouraging and collectively these institutions surpassed their annual targets by disbursing Rs124.8 billion and 28.7 billion respectively to small farmers during 2017-18.

While the SBP narrative may appear significant to some of the banking sector experts who review the performance in complete isolation and may to not be fully aware of the credit requirement of Pakistan’s farmers. The five major crops of Pakistan are wheat, rice, maize, sugarcane and cotton. Pakistan produces 25 million tons of wheat annually and its value is estimated around Rs750 billion. If one adds to this the value of other four crops the total amount runs into trillions of rupees. Therefore, lending of less than a trillion rupees looks paltry.

Lending to farmers can be distributed into two categories: 1) input loans and 2) development loans. Input loans are primarily for the purchase of seed and fertilizer. The development loans are for the purchase of tractors and other agricultural implements, installation of tube wells and grain storage facilities. It must be kept in mind that the average yields of different crops are much lower, which can be doubled through better crop management, without increasing the area under cultivation. Production and productivity can be increased through use of superior quality seeds, balanced application of fertilizers and proper irrigation.

It is also on record that nearly 20% of good grains and 40% of vegetable and fruits goes stale before reaching the market, which deprives the farmers from their legitimate return and does not allow export of surplus production and earn extra foreign exchange. Nearly four years back the central bank had embarked upon ‘Warehouse Receipt Financing’ program. Hardly any success has been achieved because of the absence of basic infrastructure unit, warehouses. Unless warehouses are made available for storing crops, how will the receipts be issued? Unless receipts are issued lending against these will remain a dream.

To date lending to farmers is ‘Pass Book’ based, which is the documentary evidence of ownership of land. Despite various land reforms one percent farmers owns 99 percent of cultivable land. The most common practice is that people who don’t own land enter into an agreement with the feudal lords on the basis of crop sharing. In case of any calamity the farmer has to bear the losses. Keeping this harsh reality in mind lending has to be done on the basis of crop as collateral. Bankers have not been able to understand that the risk of lending against crop can be hedged through credit insurance. It is on record that the central bank had announced the policy to pay the insurance premium. Therefore, the banks are not exposed to any risk.

It is also on record that Islamic banks suffer because of surplus liquidity problem. In Islamic banking various types of agreements are available for lending to farmers as well as hedging the risk. The beauty of these agreements is that crop itself is the collateral and risk of loss of crop can be mitigated through Takaful. Therefore, the need of the time is to bring change in the mindsets of bankers, be it Islamic or conventional. The real issue is that Islamic banks believe in ‘Big Ticket’ financing and wish to avoid lending to small farmers. According to some banking sector experts, some of the banks are ready to pay penalty but not willing to lend to the small farmers.



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