OUT OF 6.6 MILLION ONLY 2 MILLION FARMERS HAVE AN ACCESS TO BANKS

SBP INITIATES TO FACILITATE SMALL FARMERS

AMANULLAH BASHAR
Jan 14 - 20, 2008

Small farmers are the backbone of our rural economy. However, this important segment has been neglected so far due to political pulls, which never allowed the small farmers to become economically independent in our society.

Actually, the outreach of agricultural credit is limited to the extent of about 2 million borrowers as against total farmer's population of 6.6 million. Majority of the country'sfarmers i.e. 84% comprises of small farmers and rely on informal sector credit at exorbitant rates to meet their agricultural credit requirements. One of the main reasons of the financial exclusion of these small farmers has been their inability to provide collateral to banks. It is expected that the problem of financial exclusion will be mitigated with the introduction of group-based financing scheme for small farmers.

Agriculture being the mainstay of country's economy it provides livelihood to majority of rural population. Today, Pakistan's agriculture is facing many challenges like water shortage, natural resource conservation, rising prices of inputs including seeds, fertilizers, pesticides, electricity and gasoline. The farmers, particularly the small farmers are facing problems in early adoption of new technologies because of financial shortages. Facilitation to this sector, by expanding agricultural credit at the grass root level is a credible effort towards economic and rural development. Taking cognize of the situation, SBP has taken several initiatives during last 6-7 years to enhance the flow of credit to the agriculture sector. These initiatives have paid rich dividends in the form of substantial rise in agricultural credit disbursements.

Outreach of agriculture credit is limited to the extent of about 2 million borrowers as against total farmer's population of 6.6 million. Majority of the country's farmers i.e. 84% comprises of small farmers and rely on informal sector credit at exorbitant rates to meet their agriculture credit requirements. One of the main reasons of the financial exclusion of these small farmers has been their inability to provide collateral to banks.

IMPEDIMENTS

The pivot of banking business is "collateral" which serves as an explicit guarantee against the possible risk associated with the inter-temporal trade of money. One who does not have this explicit or implicit guarantee is not considered bankable. The small farmers face difficulties in getting credit from financing institutions on these grounds.

With the success stories of innovative lending techniques like Group based Lending (Grameen Model), Self Help Groups (Indian Model), Solidarity Group (Latin America Model), Community based Organization (Village Banking) and other approaches, there is paradigm shift in the lending methodologies to the small farmers/borrowers. The Grameen of Bangladesh, Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand and Bank Rakyat Indonesia (BRI), have proved to be most successful agri/rural sustainable financial institutions models serving mostly to small farmers. The success of these financial institutions has broken the myth that people without tangible assets can neither pay the real cost of credit, nor save, and in general are poor credit risks.

GROUP BASED METHODOLOGY

The State Bank of Pakistan has developed a Financing Scheme on group-based methodology for small farmers involved in crop and non-crop activities in order to improve the access to finance to such farmers who are unable to meet adequate collaterals requirements of commercial banks.

Under the scheme, banks shall provide loans to the members of small farmers" group for crop and non-crop activities, based on their cash flow under joint cross guarantee of group members. The scheme covers all areas of the group-based financing methodology including group formation, roles & responsibilities of members, bank & group coordinator, size and tenure of loans, documentation and other related matters. However, financing to small farmers under the scheme shall be subject to compliance with SBP regulations on agriculture financing.

Financing under the scheme will not exceed Rs200,000/- per borrower, which is within the clean lending limits of Prudential Regulations for Agriculture Financing. However, the exact amount of loan will be determined by the bank based on genuine requirements and cash flow of the applicant. Maximum period of loan should be fixed as per Prudential Regulations, repayment schedule may be set as per production cycle of the crop/non-crop activities being financed or revolving credit facility for three years subject to mandatory clean up of entire liabilities (both principal and mark up) once in a year or cash flow of the borrower in case of non-crop activities. Banks are advised that they should have detailed understanding and information about the borrower's business and his/her assets as well as his/her capacity to effectively use and repay the loan

The loan can be extended for working capital requirement of the farming community both for crop as well as non- crop activities. Banks can also provide term loan facility to small farmers for making different types of improvements in the land, construction of sheds/ ponds, development of orchards/ nurseries, purchase of livestock, farm implements, machinery, tube wells, generators etc.

The amount of loan to be disbursed for crop and non crop activities (wherever available) and life insurance of the borrower to safeguard the interest of the borrower and the bank, in case of losses due to natural calamity or event beyond the control of the borrower. In addition, where the agricultural loans have been extended for specified purposes, the banks/DFIs are advised to ensure that the loans have been utilized for the same purposes for which they were obtained.