SMALL FARMERS DEPENDENT ON INFORMAL LENDERS
SHABBIR H. KAZMI
Nov 8 - 14, 2010
Experts are never tired of saying that Pakistan is an agrarian country and its economy and exports are highly dependent on agriculture. However, the minuscule amount of credit extended to farmers indicates the bias against the sector. It is only recently that the total lending to agriculture has reached Rs250 billion. Though, the central bank was slow in recognising the importance of lending to farmers, the biggest resistance came from the commercial banks. Apprehensions of financial institution are right to some extent, simply because loans to farmers are exposed to harsh natural calamities and unless some kind of risk mitigation system is developed no sensible lender should be willing to assume an un-quantified risk.
Historically, banks have been mainly investing in government securities because of the attractive return and no risks attached. After the commencement of operations by private banks the situation was expected to change but political environment, economic scenario and government's lust for more borrowing the practice has prevailed. Second priority of the bankers is blue chip corporate. Though, the blue chips insist on borrowing at lower rates financial institutions bow down before their demands, as the probability of delinquency is relatively low. The other reason is that the amounts involved are so big that no financial institution is willing to miss the opportunity.
Banks have been least interested in lending to farmers. When the central bank decided to allocate agriculture lending on pro rata basis for some time many of the banks preferred to pay penalty rather than lending to the farmers. The size of agriculture loans is still too small when compared to overall lending to the manufacturing sector. Lending to farmers has reached Rs250 billion level lately. This became possible only because of credit insurance made mandatory by the central bank. However, experts say still 70 per cent of lending is without any insurance cover. It is partly because of the resistance of farmers and partly because of the perception that acquiring insurance cover was waste of money and also that insurance is contrary to Shariah covenants. But both the arguments are weak and lack logic. After the commencement of business by Takaful operators any resistance against risk hedging can be termed illogical.
Interest rates charged on agriculture loans are exorbitantly high as compared to rates charged on loans extended to other sectors. Till recently, the rational put forward was high risk attached to such lending. However, this is not a valid excuse now, mainly because crop insurance is common around the world. Comprehensive crop insurance is offered in our next-door country India. There are no reasons why crop insurance could not be made available in Pakistan. It is the responsibility of the government to ensure availability of such a cover. The recent flood showed had any scheme been enforced neither the government nor the farmers would have encountered such a precarious situation.
Experts have been talking about crop insurance in Pakistan for decades but little has been done for mitigating the risk. Whatever risk hedging is available falls under credit insurance. Governments around the world play key role in protecting farmers through payment of subsidy and comprehensive crop insurance. Farmers are also assured good return by fixing support price of crops. However, many experts are of the opinion that support prices are much higher in Pakistan. While the farmers demand hike in support price due to increasing cost of inputs, experts say poor yields in Pakistan don't allow the farmers to earn good return. The situation turns real precarious when farmers are hit by any natural calamity like the recent floods or drought.
Financial sector experts say that lending to farmers pose many risks beside natural calamity. Since most of the lending is collateral based, absence of clean title of land does not allow banks to extend any credit. The prevailing situation is the outcome of highly corrupt land revenue department. It is also said that 98 per cent of cultivable land is actually owned by less than two per cent of total farmers, thanks to absentee landlords and highly tempered landholding record.
Another factor containing disbursement of agriculture loans is the mindset of bankers. Since head offices and/or principal offices of banks are located in Karachi and senior executives have not learnt as yet to go beyond working capital loans and medium-term lending they prefer not to lend to the farmers. Managers of branches located in rural areas also try to look after the interest of feudal lords, who maintain huge deposits, though also borrow heavily against these deposits.
It is encouraging that the central bank has come up with a scheme to facilitate the farmers from flood-affected areas, offering loans at subsidised rate. The government also aims at distributing free seeds and fertiliser. However, the only apprehension is will the small farmers benefit from this scheme. The general consensus is that feudal lords will take bulk of the free seeds and fertilisers and then sell these to small farmers at exorbitant prices.
Disbursement of loans can become somewhat easy if bankers coordinate closely with marketing companies of seeds, fertilisers and pesticides and refrain from distributing development loans (for buying tractors etc). Preference should also be given to those farmers who are willing to acquire the insurance cover.
It is encouraging to note that the central bank has developed special schemes for providing loans to growers of oil seeds like corn, canola and sunflower. However, care should be taken to avoid switchover from to oil seeds from wheat. Farmers must take advantage of available financing schemes and try to earn the best because the government has already announced support prices of all the crops.