The Annual Agriculture credit disbursement target for 2005-06 has been fixed at Rs.130 billion

HAMESH KHAN, President, The Bank of Punjab
June 26 - July 02, 2006

THE AGRICULTURE SECTOR: As an agrarian economy, Agriculture constitutes its main stay contributing 26% to GDP and provides raw materials for 80% of industry. Over 70% of Country's population is directly or indirectly dependent on Agriculture sector. Effectively the same percentage resides and is physically present in the rural economy. To have a balanced economic structure, the country requires an efficient growing and developed Agriculture sector. All indicators for sustained social and economic development depend on Agriculture's viability and vibrancy. Its development and prosperity is essential for employment generation, poverty alleviation, growth in exports and industrial production, reduction in rural to urban migration, better health and education and growth in service sector.

Apart from various other inherent weaknesses in infrastructure support, inadequacy and lack of efficacy of credit flows to support agriculture has been a major constraining factor. Fortunately, this sector has the shortest gestation period for investments and therefore a remarkable capacity to bring about a turnaround in the economy. Due to policy and administrative exigencies, the savings in Agriculture remain low and the sector has thus perpetually remained credit starved. The pricing of input and output over the years has forced majority of farmers to plough back their incomes and non-institutional credit has more often than not served to sap their potential earnings. Availability of adequate credit inflows being a sine qua non for growth and development, its lack is one of the major contributants to growing poverty. Rural areas in the country claim the bulk of population, as much as two third and no attempt for poverty alleviation can be meaningful which does not make a major dent in the problem there.

AGRICULTURAL REFORMS: President General Musharraf, as far back as June 2004, announced a package of incentives to prompt growth in Agriculture. It consisted of a crash programme of Rs.66 Billion for lining 87 thousand water courses, abolition of custom duty on Agriculture implements, establishment of tractor plans, permission to import tractors below 35hp and above 100hp with no GST or with holding tax. The importers are to pay a nominal duty of 10% only. The rate of interest/mark-up charged by ZTBL will be lowered. The farmers who return their loan within the stipulated time will be charged only at 8%. The ZTBL will no longer exercise the special power given to it under the Land Revenue Act.

Rural poverty is a multifaceted problem determined primarily by the very culture of rural life and power culture therein. In an address, at the Pre Budget Seminar organized by The Nation last year, the then Governor SBP spelled out a strategy for reducing poverty. He observed that the single most difficult challenge facing us today is to reorient and strengthen key institutions that are mandated with the implementation and enforcement of policies, programs and investment that aim at achieving poverty reduction goals in the medium term. He added that the speed and dispersion of the trickle down from growth to poverty reduction have to be accelerated in addition to some specific interventions. For this he spelled out the program which included increasing agricultural productivity, devolution of powers to local governments, infrastructure developments, investment in education, health, nutrition, drinking water, sanitation and other social sectors, removal of the shortage of skills, building of social capital, reform of bureaucracy and government institutions, process and rules of business, judicial reform to ensure smooth and efficient functioning of private sector, improving urban management and social safety nets. He also highlighted the vital role of easy availability of institutional credit.

AGRICULTURE CREDIT DISBURSEMENTS: The Annual Agriculture credit disbursement target for 2005-06 has been fixed at Rs.130 billion. It is 53% higher than the last year target of Rs.85 billion and 19% higher than the actual disbursement of Rs.109 billion, Rs.63 billion have been allocated to five big commercial banks, Rs.43 billion to ZTBL, Rs.9 billion to Punjab Provincial Cooperative Bank and Rs.15 billion to domestic private banks.

The province wise allocation is:











The sector wise break up is:

Farm Sector










Banks during July - December, 2005 disbursed Rs.62 billion to Agriculture sector, which is 25% higher than the disbursements of Rs.49.5 billion during the same period last year. Bank wise break up reveals that five big commercial banks as a group disbursed Rs.33.5 billion, ZTBL Rs.19.3 billion, PPCBL about Rs.2 billion and 14 domestic private banks Rs.7.1 billion during the six months ended December 2005. Five big commercial banks as a group achieved about 53% of the full year target compared to about 63% last year, ZTBL 45% as against 51%, PPCBL 22% compared to 48% and domestic private Banks as group achieved about 47% of their annual targets as against impressive 93% achieved last year.

Out of total disbursements of Rs.62 billion during July - December 2005, Rs.9 billion or 14.5% was disbursed to non-farm sector against the target of 16%. Farm Sector (excluding orchards) obtained Rs.52 billion or 84% against the target of 80% and orchards attracted Rs.1.3 billion or 2.4% of total disbursements against the target of 4%. Disbursements to Farm Sector including orchards remained Rs.53 billion or 86.4% of the total disbursements. Farm Sector disbursements included Rs.47 billion for production, Rs.5.4 billion for development and Rs.0.7 billion for corporate farming.

Under Non Farm Sector, Livestock, Dairy Farming and Poultry received 11% of the total disbursement against a target of 8%, Fisheries received a very nominal amount of Rs.0.3 billion or 0.5% against target of 4% while Rs.1.8 billion or 2.9% were disbursed for other purposes against the target of 4% of total disbursements. Province wise disbursement remained.

a) Punjab availed 83.9% against target of 78%
b) Sindh availed 10.4% against its allocation of 14%
c) NWFP availed 5% against allocation of 6%
d) Balochistan received 0.4% against its share of 1.5%
e) AJK 0.3% against the target of 0.5%

Subsistence holding obtained 68.3% of total disbursement to Farm Sector, Economic holdings 22.4% and above Economic holdings attracted 9.3%. Non Farm Sector disbursements were shared 53% and 47% by small and large farms respectively. Total number of borrowers served was 488,241 of which 454,727 were Farm Sector and 33,514 Non Farm Sector.

Despite marked improvement in the outlay of the agriculture credit, this sector still in proportion to its contribution to the GDP remains a depraved sector as is evident by its share of 7% (Commercial Banks 3% and Specialized Banks 4%) out of the total credit outstanding by banking sector as of December 31, 2005.

AGRICULTURE CREDIT RECOVERY: Banks recovered Rs.51 billion during the period July-December 2005 and the banking cluster wise review of recovery performance shows that five big commercial banks recovered Rs.26 billion or 89% of the total recoverable amount. Domestic private commercial Banks recovered Rs.7 billion. PPCBL and ZTBL recovery rates remained low at 35% and 30% respectively.

NET CREDIT EXPANSION: The net credit expansion (disbursements less recoveries) during July - December 2005 remained Rs.11 billion.

SBP VISION: The vision statement of SBP with respect to Agriculture Credit focuses special attention on the following three areas during the next 3 to 5 years.

* The total Agricultural Households to be covered by the Bank's credit should reach upto 50% from the present level of 15% (1.1 million households).

* Special attention be given to finance livestock, orchards fisheries etc. particularly in NWFP and Balochistan by employing qualified experts in these fields and developing new products.

* Banks to increase the level of disbursement of agricultural loans in the provinces of NWFP, Sindh and Balochistan and expand their presence in the rural areas of these provinces through multi delivery channels.

NON-INSTITUTIONAL CREDIT SOURCES: It was hoped that development of institutional credit facilities would ease the oppressed farmer. The situation has undoubtedly improved but not to the level required or desired. According to a study by Pakistan Institute of Development Economics (PIDE) entitled the structure of informal credit in Pakistan the share of non-institutional credit was 58%. The relative shares of various lenders were commission agents 12%, input dealers 11%, landlords/farm machinery suppliers 36%, processing units 3% shopkeepers 16% and others 13%. The ratios vary markedly according to Region. For example landlords/machinery suppliers in Sindh accounted for 44%. Interestingly enough the lenders do not rely on their own resources, accounting for no more than 53% but themselves, resort to borrowing 33% from formal and 15% from informal sources. This inter linking of formal and informal sources of credit via the lenders in rural area is very significant. According to the study around one third of the credit extended by the informal sector is provided by formal institutions like banks, processing units etc.

A study by International Food Policy Research Institute Washington DC observes that more than 80% of loans taken by low income households of Pakistan are spent on consumption, food and non-food combined. These loans are mostly from the informal sector like friends neighbours and money lenders. A significant proportion of the poor who do not apply for loans are discouraged from applying by the collateral requirements and high transaction costs frequently involved in doing business with formal institutions. On the other hand formal institutions feel reluctant to finance the poor due to their low paying capacity, expensive delivery and seasonal nature of demand. In their book titled 'Finance against Poverty' Holmes and Mosley assert that development and refinement of micro finance products remain focused on the middle and upper segments of the poor, leaving the poor behind. They suggest that recognizing the heterogeneity of the poor should lead to more innovation and experimentation which deepens the downward reach of finance services.

HARDSHIPS TO SMALL BORROWERS: It would be stating the obvious that the small man in rural areas, particularly the small farmer has been given a step motherly treatment and has not received due share in dispensation of institutional credit. It is time to look beyond the large farmer and focus attention on him. The crux of his problems is that his income is very low to begin with and he is so hard burdened by various pressing claims that he is forced into a variety of advance commitments at atrocious terms or actual distress sale at the time of harvest. He is thus in a pincer squeeze. The remedy lies in first giving him a reasonable reward for his back breaking effort which at present is denied to him in many ways. He is always at the mercy of middle man who pre-empty the bulk of his income. It is reported in many cases mostly pertaining to perishable commodities that the grower does not get more than 30% of the market price of the produce. In this situation to take wholesale market prices as indicative of farmers income is grossly misleading. What is needed is to compile producer price index, based on the actual price received by the grower. For supplies to ginners and sugar mills he is not paid for long and is thus forced to sell the receipt for delivery called "Chit" at a deep discount.

It is imperative to enhance the small farmer's capacity to hold through institutional credit. This should be the main plank of any scheme for poverty alleviation in rural areas specifically designed to cater to the requirements of the small farmers instead of expecting the small farmer to approach the Bank which is the essence of present approach, banking facilities will have to be taken to his door step.

Target Allocations to Public Sector Banks: As for the role of public sector institutions targets allocated can be delineated, which represent 62% of the total allocated target:

National Bank of Pakistan

Rs.23.0 billion

Zarai Taraqiati Bank Ltd.

Rs.43.0 billion

Punjab Provincial Cooperative Bank Ltd.

Rs. 9.0 billion

The Bank of Khyber

Rs. 0.3 billion

The Bank of Punjab

Rs. 5.5 billion


Rs.80.8 billion

ROLE OF THE BANK OF PUNJAB: In order to cater financial needs of this sector, the Bank of Punjab has introduced various credit scheme which have been widely appreciated and warmly received by the concerned:



OUTSTANDING 31.03.2006


Kissan Dost Agriculture Finance



Kissan Dost Tractor Scheme



Kissan Dost Aabiari and Islah-e-Arazi



Kissan Dost Mechanization Support



Kissan Dost Livestock Development



Kissan Dost Farm Transport



Kissan Dost Commercial Agro Services



Kissan Dost Agri Mall



Kissan Dost Corporate Farming



Kissan Dost Commercial Tractor Lease Finance



Kissan Dost Village Veterinary Worker






In continued support to the Agriculture Sector the Bank is constantly striving for moving vigorously in the direction required to strengthen this important sector of the economy. Apart from launching above schemes, the Bank has recently undertaken following steps in this regard:

* MOU has been signed with Livestock and Diary Development Programme whereby 1000 loans amounting to Rs.513.66 million have been allowed.

* MOU has been signed with Pakistan Diary Development Company for lending Rs.2 billion to establish Model Milk collection centers and Model Diary Farms.

* On the advice of Honourable Chief Minister of Punjab Ch. Pervez Elahi, the Bank introduced Crop Insurance Scheme to provide relief to borrowers in case of crop catastrophe.

* To increase the shelf life of milk in farm areas, BOP has signed MOU with Diary Development Department for supply of 440 Milk cooling tanks without mark-up.

* MOU has been signed with Forestry Wildlife and Fisheries Department for providing loans worth Rs.50 million for establishment of small and medium size fish farms over 1,000 acres of land.


State Bank of Pakistan should encourage small private banks to make efforts by joining hands with large banks to penetrate into rural areas. Further SBP should also make arrangements to improve its capacity to collect and disseminate rural data enabling the banks to develop innovative products. Introduction of agriculture refinance scheme like export refinance shall also be helpful to cater the financial needs of the sector.

In order to encourage rural lending, a different tiered tax system should be introduced by the Ministry of Finance which should have lower tax for agriculture and SME lending as compared to applicable rate on commercial and corporate lending.

In order to protect the farmers and to save interest of the Banks from natural calamity and seasonality effects, the crop insurance arrangements should be mandatory for all banks who are extending loans to the Agriculture Sector. Further, the Government of Pakistan should create an independent authority for certifying areas / crops / activities as disaster hit with categories to justify payment of insurance claims.

The Government of Pakistan should confine its role to investments and inputs to infra-structural projects like water-courses, dams and provision of essential inputs like electricity, technical training and other related support services for agriculture.

Banks should concentrate more on building of their capacity and physical infrastructure focused on agriculture sector in accordance with SBP's mandated plans. Especial attention should be concentrated to advertise and market financial products/projects in the agri-food sector by optimum utilization of national media so as to ensure that private sector investments is attracted to agri-food sector. It is equally essential that banks should team up in a bid to capitalize on their strength as well as cover their inadequacies for enhancing capacity to lend to agriculture sector.