RURAL CREDIT DISBURSEMENT EXPANDING FAST

AGRICULTURE TO PRODUCE EXPORT SURPLUS

AMANULLAH BASHAR
Feb 18 - 24, 2008

Dr Shamshad Akhtar, Governor, State Bank of Pakistan reported to the Agricultural Credit Advisory Committee (ACAC) the progress of banking sector in delivery of credit to agriculture sector.

The overall credit disbursement to the agriculture sector during the first half (July-December, 2007) of the current fiscal year has been good and based on the achievements, it is hoped that the indicative disbursement target of Rs 200 billion for the year will be achieved.

She made these observations while chairing the mid-term review meeting of ACAC, held at State Bank of Pakistan, Karachi. The meeting was informed that banks have disbursed a total of Rs90.3 billion to the agriculture sector during the first half of FY08 as against Rs 71.7 billion disbursed in the same period last year, showing an increase of Rs 18.6 billion or 26 percent. The overall disbursement during July-December, 2007 is about 45 percent of the full year target and is in line with the percentage achieved during the same period last year.

The ACAC had set indicative agricultural credit target of Rs 200 billion for the fiscal year 2007-08. The target was 25% higher than the previous year's target of Rs 160 billion and 18.3% higher than the actual disbursements of Rs 169 billion. Out of total credit of Rs 200 billion, Rs 96.5 billion was allocated to big five commercial banks, Rs 35.5 billion to domestic private banks, Rs 60 billion to Zarai Taraqiati Bank Limited (ZTBL) and Rs 8 billion to Punjab Provincial Cooperative Bank Limited (PPCBL).

The five big commercial banks (ABL, HBL, MCB Bank, NBP and UBL) as a group disbursed Rs 44.9 billion, ZTBL Rs 23.9 billion, domestic private banks Rs 19.1 billion and PPCBL Rs 2.4 billion as against disbursements of Rs 34.3 billion, Rs 24.2 billion, Rs 10.2 billion and Rs 3.0 billion respectively in the same period last year. Percentage share of five big commercial banks and domestic private banks in total disbursement increased from 48% to 50% and from 14% to 21% while the share of ZTBL and PPCBL declined from 34 % to 26% and from 4% to 3 %, respectively.

PROVINCE-WISE DISBURSEMENT

The province-wise disbursements during July-December, 2007 depict that the share of Sindh in total disbursements has improved from 9.9% to 11.3 % over last year whereas the disbursements to other provinces remained almost at the same level. Disbursements in Sindh have increased by Rs 3 billion or 44% to Rs 10.2 billion as compared to the same period of last fiscal year. The sector-wise disbursement shows that the share of non-farm sector has increased to 27% from 13% during the first half of FY08. To facilitate and encourage banks to focus on non-farm sector, SBP has taken a number of initiatives which include issuance of guidelines for livestock & fisheries financing, horticulture financing and recently designed a financing scheme for small farmers based on group lending methodology.

Dr Akhtar said that the State Bank is taking a number of initiatives for financial inclusion of rural population and in this regard it has developed a micro finance strategy in collaboration with the stakeholders. A key to enhancing financial penetration and augment inclusion is to enhance greater commercialisation of both agriculture and non-agricultural industry with Government focusing on creating a conducive and enabling environment.

The subsidized lending has proved unsuccessful across the world. She emphasized on commercialised lending to the rural sector at an effective pricing so that it could be beneficial for both the farmers and the commercial banks. In order to increase the flow of credit to agriculture sector, the Governor issued the following directives:

To have an analysis of interest rate pricing mechanism of banks on their agri lending to ensure that farmers are not overcharged but at the same time banks are able to effectively recoup the cost of administration and are able to price the associated risk properly.

To initiate a crash educational program for the capacity building of the agri/rural credit officers of banks in order to improve their capacity in agri financing.

Ministry of Food, Agriculture & Livestock (MINFAL) and the State Bank to develop a comprehensive mapping of districts/ villages where government initiatives are underway to facilitate banks in lending to respective areas.

To continue exploring effective crop insurance mechanism to mitigate the risks of losses in case of natural calamities.

To liaison with provincial governments in expediting the computerization of land record.

Speaking on the occasion, Mr. Zia-ur-Rehman, Secretary, MINFAL appreciated the efforts of SBP and banks in increasing outreach of agri credit. He gave a presentation on Government's initiatives for the development and promotion of agriculture sector. He said that MINFAL has initiated 62 projects at a cost of Rs 130 billion while the allocation for the current year is more than Rs 15 billion for the development of agriculture sector. He said that we are encouraging private sector to play its vital role in the development of this sector. He said that banks should plan to disburse maximum agricultural credit at lowest possible mark up to meet the growing requirements of farming community. He also suggested that the processing time for the disbursement of agricultural loan should be minimized. He stressed upon banks to accept animals as collateral for the diversification of agri credit to non-farm sector.

SBP DEFENDS TIGHTENED MONETARY POLICY

Meanwhile , the Governor State Bank of Pakistan, Dr. Shamshad Akhtar has said that export oriented industries having strong balance sheet can arrange direct foreign loans from commercial banks abroad yet on competitive interest rates.

The governor while justifying the tightening of Monetary Policy in her address to the Textile community at APTMA office last week said actually the central bank was in the process to allow the private sector for direct foreign loans by introducing a broader scheme. However due to circumstances prevailing the country this scheme has been postponed for a certain period yet the individual private sector parties interested in entering into credit transaction with foreign banks will be provided guidelines by the central bank to enter into the transaction at competitive interest rates if they are capable to payback the loans within a short period of six months

While defending the tightened monetary policy being pursued by the state bank she said actually it is not simple to understand the impact of the monetary policy as the monetary expansion has immediate impact on the economy while the corrective measures to control the impact of monetary expansion takes its own time.

It was the crux of the meeting that the primary reason for increasing inflationary pressures in the country was the excessive government borrowing which has already been conveyed to the government. The government has however promised to retire the debt within a stipulated time frame.

The governor said that state bank was fully aware of the situation faced by the textile industry and in order to increase cotton production and other agriculture products, it has enhanced the farm credit from Rs15 billion to Rs200 billion for the current financial year. An easy access to banking credit to the farming community would certainly produce better results, she expressed the hope.

Dr Shamshad Akhtar urged upon the textile industry to seek consolidation of the sector through mergers & acquisitions in order to effectively face tough international trading environment. "I request you people to seriously look into the consolidation of the sector as international and regional competitive pressures are going to further build up and it will be a large corporation that is more likely to survive," Dr Akhtar said and added that the textile sector should endeavor to achieve economies of scale. "With size comes everything," she said and added small-sized enterprises could also benefit by contributing to large-scale export units.

The Governor also briefed the APTMA members about the rationale behind the recent increase in the key policy rate. It may be mentioned here that the State Bank released its Monetary Policy Statement on January 31, 2008 in which the SBP raised its discount rate by 50 basis points to 10.5%.

Dr Akhtar reiterated that recent monetary tightening by the State Bank was carried out to contain macro-economic imbalances, which are creating inflationary pressures in the economy.

"Strengthening macroeconomic imbalances is critical for the economy," she said and added that the rising fiscal and current account deficits along with excessive Government borrowing from the State Bank prompted the central bank to raise its key policy rate.

Government's reliance on State Bank for budgetary support is also fueling inflation and the Government has borrowed Rs 334 billion from the central bank up to 7th February in FY08. Governor said hopefully with the issuance of Global Depository Receipts and financing through other external resources, the Government will be able to retire central bank borrowings.

SBP Governor said the tight monetary policy has helped to bring down inflation. She said headline inflation measured by Consumer Price Index (CPI) declined from 11.1% in April 2005 to 7.4% by May 2007 (even though inflation rate of 7.8% for FY07 was higher than original target of 6.5%). She said that monetary policy has more distinct impact on reducing core inflation defined to include non-food and non-energy items that have 51% weight in the CPI. It is notable that Pakistan was able to bring down the core inflation to 5.7% by May 2007 from local peak of 8.3% in October 2005. "So, monetary policy is as relevant in Pakistan as it is in the U.S. or any other developed or developing economy," Dr Akhtar emphasized. Inflationary pressures that have built-up recently are mostly due to demand side that required an upward adjustment in SBP policy rate.

She said that the State Bank recognizes the problems being faced by the domestic industry and added that the central bank is taking a number of measures for the benefit of the industry, including the introduction of new Long Term Financing Scheme.

Regarding availability of working capital loans to exporters under EFS, the participants were apprised that the export refinance facilities are being extended by commercial banks to the exporters at 7.5%. The Governor SBP encouraged industrialists to use this facility as funds under it would be available on competitive rates.

APTMA members were also apprised that an amount of around Rs 475 million has been paid as subsidy by the State Bank to the spinning sector under the interest rate subsidy scheme announced in October 2007. Besides refinance under the defunct LTF-EOP scheme has also been provided to the banks in respect of Letter of Credits (LoCs) pertaining to the transitory cases i.e. cases LCs of which were opened before 30th June 2007 but refinance could not be availed by 30th June 2007 .

Some of the participants suggested extending the scope of the subsidy scheme for the spinning sector which was not agreed to. Some of the APTMA members from Lahore also suggested allowing the cross currency swaps to mills having zero exports. The Governor said that members of the APTMA, who are exporters, may like to avail the benefit of the foreign currency borrowings provided they have healthy balance sheets and that their borrowing cost is within the range specified by the State Bank.

Some of the members raised the issue of across the board relief in repayment of principal to banks because industry has been suffering from power failures etc.

INFLATION AND ECONOMIC SITUATION

Iqbal Ebrahim, Chairman, All Pakistan Textile Mills Association showed concern over current economic situation as it having a direct impact on the textile industry with pertinent reference to inflation, trade deficit and industrial growth during a meeting with Dr. Shamshad Akhtar, Governor, State Bank of Pakistan held on 12th February 2008 at APTMA House, Karachi, Lahore and Peshawar on Video Conferencing System largely attended by Members of APTMA.

Iqbal Ebrahim further stated that hundreds of development projects/public works projects were initiated during the last couple of years; however, it is ironic to see that the funding of these projects were financed from Government borrowings rather than from own resources/reserves, which have in-return fueled inflation. He added that the year 2008 seems to be quite challenging for our economy due to various socio-economic factors like law and order situation, rising food inflation, rise in global oil prices and the consequences from the United States sub-prime issues, credit crunch and recession.

Chairman - APTMA said that the weak competitive position of textile industry is likely to come under further pressure due to end of quota restrictions under safeguard measures on China, and entry of Vietnam in the WTO. He added that the export performance in general and textile sector in particular is likely to remain hampered, as textile sector exports may suffer from increased competition, safeguard measures imposed on China's exports to the EU and the US are scheduled to end soon.

While addressing the meeting, Iqbal Ebrahim apprised that energy crisis is looming ahead, because of an increase in demand and a rather slow improvement in the supply. The lack of sustained and affordable energy to industry has restrained economic growth and created problems for industrial growth and investment. The shortfall in electricity generation and gas supply is now affecting all the sectors including industry. Chairman APTMA further informed that textile industry located in Punjab and NWFP have suffered badly due to prevailing energy crisis since last one and a half month.

Dr Shamshad Akhtar, Governor State Bank of Pakistan while addressing the members of APTMA informed that recent monetary tightening by the State Bank was carried out to contain macro-economic imbalances, which are creating inflationary pressures in the economy. "Strengthening macroeconomic imbalances is critical for the economy," she said and added that the rising fiscal and current account deficits along with excessive Government borrowing from the State Bank prompted the central bank to raise its key policy rate. Government's reliance on State Bank for budgetary support is also fuelling inflation and the Government has borrowed Rs 334 billion from the central bank up to 7th February in FY 08.

The SBP Governor said that the State Bank recognizes the problems being faced by the domestic industry and added that the central bank is taking a number of measures for the benefit of the industry, including the introduction of new Long Term Financing Scheme. She apprised APTMA members that an amount of around Rs 475 million has been paid as subsidy by the State Bank to the spinning sector under the interest rate subsidy scheme announced in October 2007. While replying to the suggestions relating to extending the scope of the subsidy scheme for the spinning sector, Governor SBP showed her inability in this regard. The Governor said that members of the Aptma, who are exporters should avail the benefit of the foreign currency borrowings provided they have healthy balance sheets and that their borrowing cost is within the range specified by the State Bank.

Some of the members raised the issue of across the board relief in repayment of principal to banks because industry has been suffering from power failures etc. The Governor while agreeing to industry's problem on account of energy shortages stated that this is an issue which needs to be discussed further with the banks first to ascertain the actual gravity of the matter.