Nov 26 - Dec 2, 2012

Agriculture is the backbone of Pakistan's economy and continues to play a pivotal role. The agriculture sector is the second largest sector, accounting for over 21 percent of 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. Despite the challenges, the agriculture sector has produced bumper crop which gives the country advantage with self-sufficiency with food supplies. Those residing in rural areas, agriculture provides seasonal through sustainable income. As financial constraints are common, farmers face a constant challenge to generate funds to support agricultural output.

The large 5 banks have rural presence; however, with geographic area within Pakistan, not all farmers can be reached. 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 extend such credit. Agricultural financing is being pushed by SBP to increase advances year on year. Farmers in general keep investments in gold and tend to use gold as collateral for financing. Gold financing in the agricultural sector would give the sector further boost. It is only unfortunate that with the exception of NBP, banks are not comfortable holding gold as security.

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 exposure 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 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 effort 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.

It is estimated that approximately 1 million people from all over Pakistan from as far as North Waziristan and Kashmir and reaching Karachi to find jobs despite the law and order situation. Almost all of these people leave rural areas for urban areas like to find jobs. Many leave their land at the disposal of relatives for safekeeping. Urban areas as Karachi provide ample opportunities to those unemployed or seeking a better standard of living to earn a wage. The inflow of people from all over Pakistan is simply due to the fact that rural areas lack employment opportunities where these people could be employed. Since agricultural activity is the only job opportunity in rural areas, special focus needs to be brought in to reduce poverty levels. Furthermore, rural education should be made mandatory with vocational training schools to impart education with skills which would reduce poverty through better jobs.

Agriculture financing through carrying 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 much 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 which would increase production, output and reduce poverty.