Dec 17 - 23, 2012

Pakistan is an agrarian economy which gives the country comfort to be self-sufficient with food. The agriculture sector accounts for 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. For 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

Currently, 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. 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 challenges 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. Banks have taken initiatives maintain and train sales teams who would visit farmers and guide them regarding loans extended by banks versus those extended by an informal network. The large 5 banks have rural presence; however, with geographic area within Pakistan, not all farmers can be reached. 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.

Agriculture financing is on 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 percent of their annual target of Rs 141 billion for FY12. 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. Five Microfinance Banks as a group disbursed agriculture loans of PKR 12.1 billion accounting for 99.3 percent of their annual target of PKR 12.2 billion during FY12.

SBP has prepared prudential regulations, insurance framework, handbook for best practices and provides industry wide data to assist in disbursements. In addition, SBP has also introduced various financing schemes and guidelines for farmers. The Agricultural Credit & Microfinance Department of SBP has a team who visit farmers and research core issues on ground before policies are discussed with banks and later implemented to assist this sector. 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. 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.

Currently only the large banks with rural presence have the muscle to tap into this market and disburse. Increase in rural presence of banks will not only eliminate parallel banking but would also encourage agriculture financing through ongoing training to farmers. Other banks and micro finance institutions are gradually increasing their reach to farmers. As the market potential is wide, it is expected that disbursements through agriculture financing in FY13 will be higher than FY12 target of PKR 285 billion.