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Banking on loans

Though the government is framing policies to help small farmers, they are facing hard times due to lack of financial support from banks

Banking on loans
Small growers are exploited by industrialists, middlemen and money lenders.

Agriculture is the foundation of country’s economy and provides livelihood to majority of rural population. Today, Pakistan’s agriculture is facing many challenges like water shortage, natural resource conservation, rising prices of inputs including seeds, fertilizers, pesticides, electricity and gasoline.

World Bank and IFPRI (International Food Policy Research Institute) verify that three-quarters of the world’s poor live in the rural areas of developing countries and depend primarily on agriculture for their livelihoods and overall well-being. IAASTD (International Assessment of Agriculture Knowledge, Science and Technology for Development) data shows that 70 percent of the world’s food is being produced by small farmers.

According to the State Bank of Pakistan (SBP) 6.6 million small farmers are producing food items across the country. However, small farmers are facing many problems because of financial shortages. Financial constraints have always been a problem because they need a concrete financing system for fertilizer, seeds, insecticide, pesticides, harvesting equipments etc.

To acquire financial support, farmers have two options; formal and informal lending. Prior to 1972, commercial bank’s lending to agriculture was nominal. Bulk of credit to this sector was being provided by the Agricultural Development Bank of Pakistan (now ZTBL). The SBP, under Section 25 of Banking Companies Ordinance 1962, effective from December 1, 1972, introduced an agricultural loans scheme.

Nevertheless, according to the SBP, 84 percent small farmers in the country still rely on informal sector credit at exorbitant rates to meet their agriculture credit requirements. One of the main reasons of the financial exclusion of these small farmers has been their inability to provide collateral to banks.

Therefore, for the financial inclusion of small farmers, SBP, in consultation with stakeholders, has developed a financing scheme based on “Group Based Lending Methodology (GBLM)”.

GBLM is called “Grameen Model”, a successful programme in Bangladesh where individuals have no collateral to offer and financial institutions share the burden of monitoring and recovery of loans at low cost with minimum risk of non payments. Under group based lending programmes, loans are made to individuals through a peer group. In this case, group members guarantee repayment of each other’s loans. Collateral is generally not used; peer pressure and collective responsibilities generated by the group take their place.

Besides, there are some other success stories of innovative lending techniques in different countries like Self Help Groups (Indian Model), Solidarity Group (Latin America Model), and Community Based Organization (Village Banking). These initiatives brought a paradigm shift in the lending methodologies to the small farmers.

Small growers and their families are struggling hard to earn their bread. They have nothing to invest in agriculture; circumstances compel them to approach money lenders who become the actual beneficiary of all the hard work done by the poor farmer.

In addition, Bank for Agriculture and Agricultural Cooperatives (BAAC) Thailand and Bank Rakyat Indonesia (BRI), have proved to be the most successful agriculture sustainable financial models serving mostly small farmers. The success of these financial institutions has also broken the myth that people without tangible assets can neither pay the real cost of credit, nor save money, and in general are poor credit risks.

The SBP’s group scheme will target farming community involved in small agriculture related activities like livestock, dairy, poultry, fisheries, horticulture etc. and do not have any tangible security to offer to banks as collateral. Under the scheme banks can finance individuals through Small Farmer Groups (SFG) comprising 5-15 farmers. Banks will form these groups. However, banks can also outsource intermediary task to NGOs and outlets of farm input services providers etc.

Chairman Pakistan Kissan Ittehad Chaudhry Anwar calls this initiative a delusion as nothing is available for small farmers without an explicit guarantee. “Small farmers cannot get credit from financing institutions on SFG ground. Helpless farmers have to submit their gold to get money — also a lengthy and painful process for them.”

“This discouraging policy is in fact to discourage small farmers so that banks with minimum risk factor may serve big guns. Unfortunately, small growers and their families are struggling hard to earn their bread. They have nothing to invest in agriculture; circumstances compel them to approach money lenders who become the actual beneficiary of all the hard work done by the poor farmer.”

Condition for small growers in Sindh province is more pathetic than any other province. Pasban Democratic Party (PDP) President Altaf Shakoor tells TNS that millions of acres of farmland belonging to small growers are barren because of the nexus of industrialists, middlemen (money lenders) and rulers.

“The rising prices of agro inputs including seeds, pesticides and fertilizers have puzzled small growers. Similarly, diesel and electricity to run tractors and tube wells are very costly. The government neither offers subsidies to small growers nor do they get easy bank loans and other credit facilities. That is why they have no other option except taking credit from informal sector.”

Most of the growers are producing sugarcane, wheat, rice chili, cotton and vegetables. Payments of billions of rupees of small growers are overdue to the sugar millers and other industrialists. Therefore, farmers neither get proper support rates for their crops nor are able to sell their produce in-time. “The whole situation is politically managed by industrialists and politicians through market committees, middlemen and moneylenders. This unholy nexus is systematically killing small farmers in Sindh,” Shakoor describes the situation.

Under the policy of SFG, an individual holder of land up to 12.5 acres or involved in small scale livestock activities like goat and sheep up to 40 animals, meat cattle up to 25 animals, milch animal up to 4 animals, poultry farming for broiler up to 1,500 birds, layers up to 500 birds and desi up to 500 birds, and inland fisheries with pounds up to 2 acres is eligible for short term financing.

Sindh Bank Vice-President Abbas Ali Ghurki tells TNS that the pivot of banking business is ‘collateral’ which serves as an explicit guarantee against the possible risk associated with the trade of money. “No one can acquire loan without submitting any implicit guarantee. A farmer has to present “Pass Book” against his land authorised by Tehsildar or Patwari with the note if he has any unpaid loans or not. One who does not have this explicit or implicit guarantee is not considered bankable.”

Ghurki adds, “In case of approval maximum financing would not exceed Rs200,000 per borrower. However, credit card facility is available which does not require submitting any guarantee but financing authority verifies the applicant’s financial capability of repaying the debt. Micro financing is another opportunity for small growers but the markup rate for this policy lies in between 36 to 42 percent which appears unaffordable for them.”

In Feb 2017, parliamentary secretary for finance Rana Afzaal Hussain provided a written statement to the National Assembly stating the average rate of interest being charged by the banks is up to 29 percent on all types of loans including agriculture, business, housing and auto. In private sector, Silk Bank was charging the highest rate of 28.89 percent and among public sector banks, the First Women Bank stood first with 18.44 percent and Zarai Taraqiati Bank Limited (ZTBL) with 13.84. ZTBL refused to decrease markup on the agriculture loan despite the demands of agriculturists sitting on treasury benches in the assembly as well as small farmers.

Farmers have shown dissatisfaction on the announcement of decreasing interest rate for farmers from 39 to 20 percent in the mini budget presented by the PTI government on Jan 23, 2019. They have demanded the government reduce the prices of inputs including seeds, fertilizers, pesticides, electricity and gasoline and make the process of borrowing money from banks simple.

Shehryar Warraich

The author is a member of the staff

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