AGRICULTURE FINANCING

BANKS SURPASS DISBURSEMENT TARGETS

SAAD ANWAR HASHMI
(feedback@pgeconomist.com)

Aug 6 - 12, 20
12

Agriculture is the backbone of Pakistan's economy and continues to play a pivotal role in the economy. The agriculture sector is the second largest sector, accounting for over 21 percent of the countries GDP. The sector remains by far the largest employer, absorbing 45 percent of the country's total labour force. Nearly 62 percent of the country's population resides in rural areas, and is directly or indirectly linked with agriculture for their livelihood. Agriculture provides raw materials to the downstream industry and is a large market for industrial products such as fertilizer, pesticides, tractors and agricultural implements. The sector has faced challenges with rains, flooding along with the need for investment in farming for land development, seeds, farming technology, techniques, and water infrastructure

Based on the existing industry structure, farmers in need for financing are largely directed towards informal loans extended through landlords and rural land mafia requiring minimum to no documentation. The interest rate offered through an informal network is above 25% higher than what is being offered by the financial institutions with perpetual repayments. With limited geographic coverage by financial institutions and lack of knowledge of banking products by farmers, the informal network of extending loans for agricultural output has thrived. Farmers who avail such loans do not understand the repayment structure and tend to give repayments over an undefined period which is only terminated at the discretion of the lender. In order to help eliminate the informal system of financing, SBP has been keen for geographic reach by financial institutions and provide loans to farmers in remote locations. To extended agricultural credit, banks have taken initiatives to train and maintain a sales team who would visit farmers and guide them regarding loans extended by banks versus those extended by an informal network carrying a high interest rate. Larger banks with branches spread over in rural and urban localities were especially encouraged by SBP to extended such credit. In comparison to Corporate or Retail advances were the business strategy is to hold and maintain the current portfolio to yield as much profitability from the existing portfolio, agricultural financing is being pushed by SBP to increase advances year on year. SBP defined a target of PKR 285 billion in terms of advances for FY12 which was 5.5% higher than period year allocated through Commercial Banks, Domestic Private Banks and Microfinance Banks.

During FY12, banks have faced a challenge to combat disbursements despite the impact of flooding which was more prevalent in Sindh than Punjab. Banks who took large exposures in disbursing funds in flood affected areas in 2010 further impacted with rains in 2011 witnessed an increase in NPLs where banks became more cautious with the lending. For micro finance banks and few commercial banks missing achieving the target set by SBP, another reason is the geographic reach of the branches. Banks missing targets have been cautious looking at the overall trend with the reduction in private sector credit which has spilled over to the agriculture business function. With the existence of an informal network for loans to agriculturalists, SBP is encouraging banks to hold road shows and awareness programs which would induce farmers to avail financing from the formal banking system. Crop insurance is at the forefront of the lending practice where SBP has made mandatory for banks to obtain insurance based on acreage of ownership for five crops mainly sugarcane, rice, cotton, maize and wheat. Other challenges include continuous efforts to train a sales force, monitoring of accounts booked, problematic accounts, capacity to assess repayment capacity and site visits to ensure that the loans disbursed is utilized as desired by the bank.

In comparison to Retail or Corporate lending, Agriculture financing is on the growth stage with wide market potential keeping with the population and demand for food which is the basic necessity for those living at or below poverty line and earn a wage only to sustain a living. Despite the challenges highlighted banks have surpassed the agricultural disbursement target for FY12 by extending loans amounting to PKR 293.8 billion to agriculturists which accounts for 103 percent of annual target for FY12 more than the indicative target of Rs 285 billion set by the Agricultural Credit Advisory Committee (ACAC) for the whole fiscal year. The large five commercial banks collectively disbursed loans amounting to Rs 146.3 billion which was 103.7% of their annual target of Rs 141 billion for FY12. National Bank of Pakistan (NBP) achieved 106 percent, Habib Bank Limited (HBL) achieved 103.46 percent, MCB Bank achieved 103.28 percent, Allied Bank Limited (ABL) achieved 102.85 percent whereas United Bank Limited achieved 100.73 percent disbursement target defined by SBP. Other than the large commercial banks, Fourteen Domestic Private Banks (DPBs) achieved 112.5 percent of their target set at PKR 54.1 billion by disbursing agricultural loans amounting to PKR 60.9 billion. DPBs who could not achieve their targets for FY12 have cited flooding coupled with geographic coverage restricting the advances. Five Microfinance Banks as a group disbursed agriculture loans of PKR 12.1 billion accounting for 99.3% of their annual target of PKR 12.2 billion during FY12. Keeping all lenders into account, NBP is leading the agriculture business with disbursements of PKR 45.789 billion in FY12 and outstanding highest among other banks recorded at PKR 41.527 billion in FY12 compared to PKR 30.450 billion in FY11, an increase of 36.5%. The percentage of non-performing loans of NBP was about 5 percent as on December 31, 2011, compared to 15 percent average NPL's of commercial banks in agricultural.

Agriculture financing is an area which could see extreme growth however its potential is considered risky due to natural calamities as already experienced in Pakistan with floods and rain on which neither the banks nor the agriculturalist have control over. With agricultural production representing the only livelihood for many resource constrained Pakistani farmers, natural calamities affecting farm land not only results in loss of crop but also defaults for repayment of bank advances. According to SBP, the best tool to mitigate such risk and safeguard banks interest is crop insurance which should be taken into account with every disbursement. For small farmers holding land below 12.5 acres, the insurance for these farmers is guaranteed by the government. Investments are required to develop seeds and farm lands which is at its minimum and has not attracted large investors towards this sector. Farmers are in constant need for financing keeping with the market demand for agricultural output expected to keep the disbursements high. With the initiatives in place to provide farmer credit and need of the economy to increase agriculture output, this sector is expected to grow through the coming years.