POOR RECOVERY OF AGRI LOANS
SHABBIR H. KAZMI
Dec 13 - 19, 2010
Availability of credit at competitive cost enables the farmers in timely purchase of various inputs. With the growing emphasis on agriculture to achieve food security credit requirements of the farmers have increased for both inputs implements. The small farmers with a limited ability to finance these purchases need greater support of the financial institutions.
Farmers often face a fragmented credit market with a pre-dominant non-institutional credit with several rates of interest generally much higher than the institutional loans. Factually, the government began to emphasize the role of institutional credit to increase both productivity and production.
Different specialized financial institutions, catering specifically to the credit requirements of the rural sector have been established. Despite such efforts, there was a growing feeling that most farmers were unable to borrow sufficiently to take full advantage of the opportunities opened up by the emergence of green revolution.
The frustration of the regulators as well as the player regarding stagnation of credit disbursement is quite understandable because of the fact that despite the best efforts, financial institutions find it a difficult business to handle because lending to farmers remains less than three percent of overall advances. The high incidence of non-performing loans even for a specialized institution like ZTBL strongly indicates that local lenders not only lack the expertise but also are not adequately equipped with the infrastructure and systems towards loans repayments for any borrowed amount.
The major reason for the poor credit access to small farmers is non-availability of financial infrastructure in rural areas and the poor performance of provincial governments in documentation of land titles. While rural population constitutes over one-third of the country's total population, it remains mostly un-bankable.
As pointed out by the central bank in its various reports, there is a dire need to extend the outreach of banks to improve access to institutional credit as well as to exploit huge base of small depositors in these areas. For example, sale of tractor is dependent on availability of credit. Similarly, purchase of inputs like seeds and fertilizers is also dependent on the availability of the credit.
In many countries of the region, the central banks fixe the mandatory lending limits of the farm credits, with as high as 20 percent of total lending. The successive governments have tried to boost lending to farmers, mostly in vain. Crop yields cannot be improved without substantial investment in agriculture. The current level is a dismal contribution to GDP. The surge in international commodity and food prices underscore the need to improve supply of quality inputs, research and extension services to obtain food security as well as the exportable surplus to earn foreign exchange.
Recently, the central bank has issued fresh instructions to all banks for streamlining the agricultural lending procedures and documentation to ensure timely disbursement of agriculture credit to the farming community. The SBP in consultation with other financial institution involved in this business has revised the list of documents to be obtained against various kinds of agriculture loans and streamlined the turnaround time for agriculture loan processing to avoid unnecessary delay in sanctioning of agriculture loans. With a view to further strengthening the existing agriculture lending structure and remove lapses in agriculture loan management, the SBP has asked the banks to take the following measures before December 31, 2010.
1) Developing a comprehensive Agriculture Finance policy in line with Prudential Regulations;
2) Setting up and maintain a fully dedicated Agriculture Finance Department/Division/Unit equipped with qualified agriculture financing experts and officers with specified job responsibilities and career opportunities; and
3) Developing an overall annual regional agricultural portfolio plan and assign targets for disbursement, growth in outstanding portfolio and number of borrowers to respective agriculture designated branches.
The concerned Regional Business Chiefs or Area Heads have been made responsible for achieving the targets. Number of agriculture designated branches and Agricultural Credit Officers have to be increased significantly in a phased manner in proportion to the overall credit portfolio of the area and potential of agricultural activities.
These institutions will also be responsible for launch financial literacy program for the awareness of the farming community about agriculture lending products/ schemes of the bank. They will have to provide the field function necessary for logistics, communication, and other facilities to ensure timely delivery of services including spot verification, processing, disbursements, follow-up, and recovery.
Many sector experts say that disbursement system may be a little slow. However, the real issues emerge at the time of recovery. Since the number of borrowers is huge, keeping track of every borrower is very difficult. The situation becomes very precarious if any natural calamity hits the farmers. After the recent devastating floods, both the borrowers and lenders have gone in trouble. Since farmers have lost, whatever they had, they are not in a position to repay the loans and ideally such loans should be written off. However, financial institutions do not seem ready for this fearing an adverse impact of the profitability.
Though the financial institutions were required to acquire credit insurance, they failed in hedging the risk. Now, they are insisting on rescheduling/restructuring of loans trying to transfer the burden to the borrowers, which is not fair. They must take the hit for not following clear instructions of the central bank.
This should also be an eye opener for the farmers. They must ensure getting the risk covered through credit insurance being offered by most of the non-life insurance companies operating in the country. There is certainly a cost involved but a little expense can save from extreme problems.