COLLATERAL FOR AGRICULTRAL LOANING (PART II)
The banks should be flexible on the choice of collateral so that the small farmer should not feel collateral as a curse but a blessing
Aug 22 - 28, 2005
Demerits/drawbacks in the prevailing modes of collaterals
THE RELIABILITY OF COLLATERAL
Each type of collateral is used to protect the rights (exposure) of the lending institution. The reliability of collateral depends mostly on the repayments culture of the region. A large number of problems lie in realizing the collaterals. In Pakistan, banks refer their defaulted cases to the district government/administration for recovery as arrears of land revenue. Also, normal legal courts or banking recovery courts can be moved for allowing foreclosure. However, both these courses involve considerable time and expenditure. Even the bank is able to obtain a decree in its favour; it is generally difficult to execute the decree against the local populace, due to limitations under Haq-e-Shifa right (first preference goes to the adjacent land owner) and Transfer of Property Act. This resulted role of recovery of the agricultural loans much less than the desired level and ultimately had affected seriously the repayment capacity & developed unproductive & default culture of bank credit.
Traditionally, villages in Pakistan are a close cultural entity, where newcomers, particularly strangers to the village populace are not only unwelcome, but are also vehemently resisted. This creates problems in execution of court decrees. In case the mortgaged land is to be disposed, none of the co-villagers would purchase such land even if he is in a position to do so for fear of social repercussions / boycotts nor would they like any stranger to settle in the area. This resulted role of the recovery for agricultural loans much less than the desired level and ultimately had affected seriously the repayment capacity and developed unproductive and default culture of bank credit and the situation further erodes the reliability of mortgage of land as security. Similarly, the guarantors also being from the same village and also having limited means cannot be proceeded against effectively. This obviously reinforced banks, perception of collateralized lending to the total disregard of even other essential factors, like d a noble era. Let us impress the minorities by word, deed and thought that as long as they fulfill their duties and obligations as loyal citizens of Pakistan, they have nothing to fear."To the freedom loving tribes on our borders and the States beyond our borders, we send our greetings and assure that Pakistan will respect their status and will extend to them its most friendly co-operation in preserving peace. We have no ambition beyond the desire to live honorably and let others live honorably."Today ulted there appeared million of rupees as infected and non-performing loans.
The extent of the effect each type of collateral has on improving the percentage of loan repayment (i.e. does a relationship between the type of collateral provided and the percentage of repayment exist). The lacuna in improving the percentage of loan repayment does not lie in the type of collateral. It needs certain legislation which would overcome the difficulties in execution of the decrees. One step in this direction could be resumption of the decreed land/property by the Government in case no buyer thereof is available. This will go a long way to discourage the non-cooperative tendencies by the co-villagers.
New innovations in loan collateral are loans against warehouse inventory receipts (warehouse bonding), loan guarantee funds, group lending etc. Warehousing system where feasible, can also go a long way in repayments of loan provided. The custody of the warehouse lied with the lending agencies / banks.
Similarly, majority of farming community (83% of the total number of farmers) consist of small farmers, these farmers are not only lacking tangible collateral but have negligible literacy rate. Under these circumstances group lending could be a possible answer, where each and every member of the group is jointly and severally liable to repay the loan. This would, in effect, put pressure on every member of the group and result in higher or full repayments of loan.
Another alternate is a strong and organized marketing system under one roof (Agri-Super Market), monitored by the lending agency, at the village level. This would ensure adequate prices & prompt recovery of loan.
Those borrowers who are not able to provide tangible collateral, are provided loans against two credit worthy sureties as acceptable to banks. (Group lending under Cooperative System, CBOs, SHGs and NGOs etc can also help small farmers in obtaining loans).
Against collateral, facilitation is provided to small fishermen (owning only one boat exceeding 5 gross tons capacity) actively engaged in marine / inland fishing are provided loans up to 75% of the credit requirement as percentage of cash requirement. These loans, as far as possible are disbursed in kind for (i) purchase / major repairs of out boat motors (ii) partial replacement of nets and (iii) purchase of fuel, ration, ice, etc. Apart from normally acceptable securities, these loans are given against hypothecation of boats and nets along with two personal sureties and / are recoverable in one year.
There is a necessity for resorting to the court in cases of mortgaging, selling of collateral (foreclosure), including the cost relating to taking such legal actions as a percentage of the value of the loan. The Agricultural loans are recoverable under the law as arrears of land revenue. In case of default, the bank has to resort to court proceedings for realization of securities. Such cases normally consume a lot of time, and entail heavy expenses before finalization. Even after decrees are issued in favor of the banks, in most of the cases, these cannot be executed for reasons given earlier. The most discouraging aspect of agricultural loans is that the loans granted to small farmers are normally of small amount, whereas the cost of litigation is high and execution of decrees doubtful.
The banks really seem serious in resorting to the sale of collateral (foreclosure) to recover the defaulted loans, but the external factors such as litigation process/charges are mostly discouraging factors for the banks. Some times government announces certain relief packages to the defaulted borrowers in order to facilitate recovery of loan. However, such practice encourages defaulters, in the hope of such relief in future.
ALTERNATIVE ARRANGEMENTS FOR SECURING LOANS
Alternate arrangements currently in use, apart from real and chattel mortgage for securing agricultural loans include:
CROP PLEDGING/WAREHOUSE BONDING
Crop pledging is not directly carried out but loans can be provided against guarantee of processing unit with whom agreement for supply of produce has been signed. Loans against warehouse bonding are allowed only for enterprises, rural industries and processing units. Personal and third person guarantee, both are acceptable and widely taken. Most loans provided to farmers are against third party guarantees.
Only NGOs and certain other associations are offering loans against such security but it is not common with financial institutions. This form of security is fairly new and procedure has been introduced for financial institution.
(i) Mutual Guarantee Funds: Loans are provided by financial institutions against mutual guarantee funds to organizations and individuals.
(ii) External Loan Guarantee Fund: Although there is no external guarantee fund as such, there is a loan guarantee scheme put in place by the Central Bank of the country, viz., State Bank of Pakistan, under which bona-fide losses incurred by the banks, due to non-recovery of agricultural loans made under the specifications of State Bank of Pakistan, guarantee up to 50%.
(iii) Agricultural Insurance: The need for agricultural insurance is widely recognized in Pakistan. However, no formal agricultural insurance scheme has yet been enforced. The governmentís desire that any insurance scheme for agriculture should operate on self-sustained basis, is facing snags due to high rate of illiteracy in the rural area and high premium cost demanded by private insurance and reinsurance companies. However, a Crop Loan Insurance Scheme by SBP in coordination with SECP is expected to be introduced shortly, in consultation with all stakeholders, which will be administered by banks and a consortium of private insurance companies.
RECOMMENDATIONS FOR IMPROVING RURAL LENDING EFFICIENCY
LEGISLATION / LEGAL PROCEDURES FOR COLLATERAL.
The pass-book system has made mortgage of land easier. However, the system is not working with the desired efficiency, due to manual handling of land-record. Prime importance needs to be placed on computerization of land record which will make things easier. Similarly, legislation is needed to ensure that the surety / guarantor of a loan remain accountable in case of default by the borrower. To this end, government has very recently announced certain legislative measures to ensure a lien on the assets of the guarantor. This would not only enable the bank to recover the loan but also discourage injudicious and carefree provision of guarantees / sureties.
VALUATION OF LOAN COLLATERAL
The existing method of valuation of collateral appears to be satisfactory. However, the margin retained by the bank, as discussed earlier, can be adjusted in the light of experience of the banks in the recovery of their loans.
USE OF COLLATERAL SUBSTITUTES
Tangible securities must be insisted upon in case of lending to medium and large farmers. As small farmers have little to offer as collateral, personal sureties, social guarantees & group lending would serve the purpose.
The Supervised Agricultural Credit System needs to be promoted and strengthened. Under this system, the Agricultural Credit Officers (ACOs) of the bank are entrusted with the duty of contacting the prospective borrowers at their doorstep in order to ascertaining their credit needs, verifying the position of land and giving technical advice during the crop season. The ACOs also keep a track on the produce of the farmer in order to ensure that he promptly repays the bank loans. The recovery position under this system is very encouraging as compared to non-supervised credit. (Although the cost of supervised credit may be relatively higher than the prevailing markup rate charged (9%), yet the higher percentage of recovery compensates the cost).
COLLATERAL FOR AGRICULTURAL LONING
A BLESSING OR A CURSE FOR SMALL FARMERS
While analyzing & evaluating the collateral in length & breadth, this paper finally discusses the collateral, as being a prudent requirement for agricultural financing, either is considered a blessing or a curse for the small farmer, particularly those having no tangible security or any saving (in kind) to use as a collateral or with no social status in the traditional elite society to obtain two signatures from any third party/organization as a guarantor for obtaining any institutional credit at the time of need. Supplemented to it are the rest of hurdles, like cumbersome procedure, lengthy documentation, poor mechanism, improper attitude of banks with small farmers/borrowers and least interaction by the urban oriented bank policy makers with the needy borrowers at the grassroots level, higher transaction costs, higher risk involved being perishable & more calamity affected product, law & order situation in far flung areas, traditional elite system, lack of technical knowledge, illiteracy of farming community, shortage of input factors, no prudent provision for consumption loan between sowing & harvest period of crops etc, that constrains preferably small farmers to borrow from the informal sector.
Furthermore, the impact of discrimination in the rate of mark up (nearly 35% between formal & informal credit) brings terrible implications on the incomes, living standard, poverty alleviation that apparently brings a long & deepened negative implications on the life style particularly of small farmers and ultimately on the overall growth, development and efficiency of the Pakistanís economy.
Similarly, keeping in view the other end, a credit institution is financially viable if its net interest spreads & is high enough to build reserves to cover bad debts after providing a reasonable level of transaction costs to improve its quality of lending, to achieve the objective set for the credit policy. Over the last half a century (1972-2004), Pakistan has pursued a supply lead approach to the specified economic activities. Despite the rapid increase in the institutional credit from Rs. 19515 million to Rs. 73559 million i.e. around 377%, during the last eight years (1996-97 to 2003-04), only 15% of the active cultivators/ farmers had access to institutional credit, with 1/3rd of their total credit requirements. Thus the objectives of increased and equitable distribution of institutional credit had not been achieved while equity outcome is judged according to any of the three criteria. (i) the share of the small farmers in the institutional credit is less than their share in production (ii) operational area & (iii) farm area. Most of the small farmers have no or negligible access to the formal credit.
From the above facts, figures & discussion one can deduce that although the lending banks are free and have every right to secure the interest of bank, however, in the interest of countryís economy, improving condition/living standard of the farming community, their step towards insisting on obtaining only tangible collateral /security should not be a reason to deny the small farmers access to institutional credit. Moreover, banks are expected to be flexible on the choice of collateral/ security (tangible/ social, as in the case of NGOs), to make small farmer feel collateral, not a curse but a blessing.
While analyzing one can deduce that although the banks are free to secure their interest, however, in the interest of the country and to improve the living conditions and eliminate poverty from the farming community, only the tangible collateral should not be the reason to close the bankís door on the farmer for institutional credit. The banks should be flexible on the choice of collateral so that the small farmer should not feel collateral as a curse but a blessing.