AGRICULTURAL CREDIT

Group Members

Name Roll No:

Imtiaz Naich

Abdul Salam

Adil Mukhtiar

Zeeshan Magsi

58

244

267

01

• The credit needed by farmers to grow the agricultural sector is termed as Agricultural Credit.

• Credit is required in every type of business and agriculture is not exception to it. The need for agricultural credit, however, becomes all the more important when it moves from traditional agriculture to modern agriculture.

Agricultural Credit:

Agricultural Credit

Agricultural sector is the mainstay of the economy of Pakistan. It accounts for 25.3% of GDP. It employees 45.1% of the population directly engaged in agriculture. Agriculture contributes about 65% of export earnings. Though agriculture is an important large industry, yet it is far away from the availability of financial resources:

Rural credit

Ali Nawaz Khan Mahar

Sindh Agriculture MinisterFederal Minister For Agriculture

Yar Muhammad Rind

• Agricultural credit is a vital input for leveraging the financial growth and ultimately leads to economic growth on sustainable basis. In line with the government priorities for development of agrarian economy, State Bank of Pakistan (SBP) has been striving for engaging the food security challenges in wake of various initiatives to support the government’s objectives and goals. During 2013-14 (July-March), the banks have disbursed Rs. 255.7 billion which is 67.3 percent of the annual target of Rs. 380 billion as compared to last year target of Rs. 315.0 billion. The disbursement is 10.7 percent higher than Rs. 231.0 billion disbursed during the corresponding period last year.

• Important crops account for 25.24 percent of agricultural value addition. This sub-sector has recorded a growth of 3.74 percent compared to a growth of 1.19 percent last year. The important crops includes all major crops like wheat, maize, rice, sugarcane and cotton which registered growth at 4.44 percent, 7.27 percent,22.79 percent, 4.27 percent and 2.00 percent, respectively. Other

Source Pakistan Economic Survey 2013-14

Difference between Agricultural Finance and Rural Credit

• There is a difference between agricultural credit and rural credit. Agricultural credit is linked with the growth of agriculture; whereas rural finance covers all the aspects of socio-economic life of rural area. It covers a wide variety of farm and non-farm productive activities such as agriculture, animal husbandry, fisheries forestry, small agro-based industries as well as development of physical and social infrastructure in the form of transport and communication, water and power education and health etc.

Need for Agricultural Credit:

• Credit is required in every type of business and agriculture is not exception to it. The need for agricultural credit however becomes all the more impotent when it moves from traditional agriculture to modern agriculture. The agricultural sector at present is beset with a number of handicaps. The land holding is very small. The population is growing at a fast rate. Agricultural labour is often underemployed. Production suffers from weather risks. The capacity of the farmers to save and invest is very low. The agricultural productivity is low due to low use of in-puts. The farmers, therefore, need credit to increase productivity and efficiency in agriculture. This need is increasing over the years with the rise in use of fertilizers, mechanization and rise in prices. Briefly the need for agricultural credit can be summed up as under.

The following points reveals the need for agricultural credit

1. Purchase of new inputs: The farmers need finance for the purchase of new inputs which include seeds, fertilizers, pesticides etc. if the seeds of high yielding varieties and other modern inputs are made available to the farmers, they can increase productivity not only of the land but also of labour.

2. Purchase of Implements:Credit is required by the farmers for the purchase water pumping sets, tractors, threshers etc. the use of appropriate machinery in land will increase production by growing more than one crop on the same piece of land at the same time.

3. Better Management of Risk: Credit enables the farmers to better to manage the risk of uncertainties of price. they can borrow money during bad years and pay back the loans during good years of crops.

4. Permanent Improvement in Land:Credit also helps the farmers to make permanent improvements in land like sinking of wells, land reclamation, etc.

5. Better marketing of Products:if timely credit is available to the farmers, they will not sell the produce immediately after the harvest is over. At that time the prices of agricultural goods are low in the market. Credit enables the farmers to withhold the agricultural surplus and sell it in the market when prices are high.

6. To Face Crisis:The credit is required by the farmers to face crisis. The crisis can be caused by the failure of crop, draught or floods etc.

7. Purchase of Cattle:The farmer needs credit to purchase cattle. Because the farmers mostly remain free after cultivating the farm, therefore they want to start off-farm business by purchasing cattle.

8. Payment of ancestor’s Debt:Most of the farmers remain in debt due to their ancestors. Therefore to retire the ancestors debt, the farmers take loan from banks and other sources.

9. Consumption Expenditures: the farmers need loans for getting married their children etc on which they spend a lot.

10. Civil and Criminal Suits:in order to civil and criminal suits, farmers need credit.

Agriculture requires the following three types of credit.

1. Short-term Credit: The short-term credit ranges upto one year. The farmers need short-term credit for meeting the working capital requirements of agriculture. For instance, they need short-term credit for the purchase of seeds, fertilizers, pesticides, bullocks and other casual expenses. The short-term credit is repaid after marketing the produce of the next crop.

2. Medium-Term Credit:Medium-term Credit extends from 1 to 5 years. The farmers require medium-term credit for the purchase of cattle, purchase of implements, improvement in water course. The loan is obtained on the security of movable or immovable wealth of the farmers.

Types of Agricultural Credit:

3. Long-Term Credit:The duration of long-term credit exceeds 5 years. The farmers need long-term credit for making improvement of permanent nature in land such as sinking of tube wells, purchase of machinery and implements etc.

• Credit in the farm sector is available from two sources

1. Non-Institutional Sources

2. Institutional Sources

Sources Of Agricultural Credit

1. The major non-institutional sources of farm credit are 1. Money lenders2. Friends3. Relatives4. Landlords5. Shopkeepers6. Commission agents

The Money Lenders, mostly nonmuslims were the main suppliers of loans to the farmers. However, their importance has decreased to a great extent now and the short-term credit needs of the farmers are met from commission agents, friends and relatives which supply roughly 50% of total rural borrowings.

The commission agents advance loans to the farmers for short-period. They force the farmers to sell the produce to them which generally is purchased at low rates.

1 . Non-institutional Sources of Credit:

The lenders of the informal sources (friends, relatives etc) have certain advantages over the formal credit sources.

• The informal lenders usually know the borrowers personally.

• They require little security for advancing loans

• The loans are provided for consumption as well as production purposes.

• The lenders are approachable at all times.

• They are also lenient in rescheduling loans.

The major institutional sources of farm credit are

a. Agricultural Development Bankb. Commercial Banksc. Taccavi Loans

d.Agricultural Development Bank:the agricultural development bank is an important source for

the supply of credit to agricultural sector. This bank provides short, medium and long term loans for farm and off-farm activities. The bank has the following windows

i. Development Loansii. Production Loansiii. Agri-business Loansiv. Off-farm income generative activities loans.

2 . Institutional Sources of Credit:

b. Commercial Banks:commercial banks are providing loans to the farmers for meeting their short and medium term requirements. The loans are advanced to the farmers against the security of land, crop, fixed assets and even on personal security.

c. Taccavi Loans:Taccavi loans are handled by the Provincial Revenue

Department. Necessary funds are allocated for different areas each year in the provincial budgets. The Taccavi loans are primarily given to the farmers for meeting emergencies such as flood, earthquake, famine etc. the farmers take these advances in the spirit of gift or relief given in calamity and are not serious in repaying them.

5 Big Commercial Banks

188.0 133.5 71.0 52.2

ZTBL 69.5 45.9 66.0 17.9

PPCBL 10.0 5.4 54.4 2.1

14 DPBs 90.4 54.2 59.9 21.2

7 MFBs 21.6 16.2 75.1 6.3

3 Islamic Banks*

0.5 0.5 94.6 0.2

Total 380.0 255.7 67.3 100

BanksTarget

2013-14

2013-14 ( July-March )

Flow % age Achieved % Share in Total

Source “ State Bank of Pakistan “ ( 2013-14 )

Supply of Agricultural Credit By Institutions

Credit Disbursement to Farm and Non-Farm Sector

• The continued increase in non-farm lending may be attributed as an outcome of SBP’s successive pilot project in selected districts across the country to encourage banks to diversify their agriculture credit portfolio. Sector-wise classification reveals that the share of non-farm sector in the overall agriculture credit disbursement has continued to increase by disbursing Rs.116.7 billion or 45.6 percent from Rs.99.7 billion or 43.2 percent during corresponding period last year. The share of farm sector in overall disbursement remained slightly lower from 56.8 percent to 54.4 percent ; however ,in terms of amount Rs.7.7 billion grew in farm sector from Rs. 13.3 billion to Rs.1.39.0 billion during the period under review . The comparison of farm and non-farm sector share is shown in below Table.

Credit Disbursement to Farm & Non-Farm Sector

A Farm Credit 139.0 54.4

1 Subsistence Holding 80.6 31.5

2 Economic Holding 35.5 13.9

3 Above Economic Holding 23.0 9.0

B Non-Farm Credit 116.7 45.6

1 Small Farms 39.4 33.7

2 Large Farms 77.4 66.3

Total ( A+B ) 255.7 100.0

Disbursement % Share in Total

2013-14 ( July-March )Sector

Source State Bank Of Pakistan

The shortage of rural credit both in quantitative and qualitative terms continues to be a limiting factor in the modernization and growth of production in agriculture. The major problems which are being met by the farmers in the receipts of agricultural credit from the institutional sources are summarized below:

1. Less Flow of Credit to Small Farmers:There are millions of small farmers throughout the country. The gain has reached more to the big landlords. It is therefore, an urgent need that the credit should reach the small farmers who are the backbone of agricultural industry.

2. Complicated Procedure for Advancing Loans:the procedure for advancing loans by institutional sources is quite complicated. The loans are advanced to the farmers on the basis of pass books which contain the details of land owned by the farmers. The procedure is quite complicated.

Problems Of Agricultural Credit

3. Delay in the disbursement of Credit:the procedure involved for advancing loans to the farmers is cumbersome. Who-so-ever succeeds in completing the documents is entitled to receive loans. It has been observed that the disbursement of credit is delayed even after it has been approved. It is a serious problem which the farmers are facing these days.

4. High Interest Rate:The interest charted by the various institutions on farm credit is high. The low income farmers can not bear it. As regards the interest-free loans, they are not reaching the small deserving farmers.

5. Amount of bad debts is increasing:The loans advanced particularly to the big landlords are not being repaid to the institutions. Since the big landlords have political influence, they, therefore, manage to get them written off.

• The credit agencies mostly do not take the risk of advancing loans to the farmers because heavy rains and droughts etc can destroy the crops and thus the repayment of loans may become difficult for the farmers.

• Due to unstable prices of the agricultural products, there is instability in the income of the agriculturalists. The credit institutions, therefore, hesitate to finance the farmers.

• Most of the agriculturists who live on subsistence farm units do not have the adequate information of the credit institutions which supply loans to the farmers.

• The villagers do not know how to keep the records of the loans which is a necessary element of proper credit analysis.

• The Government of Pakistan has taken the following measures for solving the problems of rural credit in the country.

• 1. Establishment of Zarai Taraqiate Bank Limited (ZTBL). The ZTBL was established in 1961 through the merger of ADFC and ABP . The ZTBL provides rural credit to the farmers through 49 regional offices. 343 branches and 1459 credit mobile officers (MCOs). Each mobile credit officer (MCOs) in the Supervised Credit Scheme of the Bank is in charge of 10 to 15 villages. The ZTBL advances loans on the vases of land mortgage or on personal security. Though the operation of ZTBL has reached 38500 villages out of 45000 yet the number of farmers availing of loan facilities particularly the small garners is small. The ZTBL disbursed 33% of the total loan to agriculture sector in 2006-07.

Measures taken by the Government to solve these problems

2. Role of commercial banks

 The commercial banks were inducted in the field of rural credit under Banking Reforms Act of 1972. The banks provide loans to the farmers for meeting their short-term and medium term requirements. These requirements include purchase of inputs, cattle dairy farming rural gardening installation of tube-wells, etc. The commercial banks advance loans both under the Supervised Credit Schemes and outside the Supervised Credit Scheme. The share of commercial banks has surpassed the share of ZTBL and was 49% in the year 2006-07.

Cost Free Production loans

•  The commercial banks are also advancing cost free production loans farmers. These loans are generally in kind and are given for seeds, fertilizers, pesticides, land sprayers. There is a complaint that deserving farmers are not benefiting from these loans. There is a large scale misuse of funds through proxy loaning.

3. Role of cooperatives

• The provincial cooperative banks and the cooperative societies are providing loans to the small farmers at low mark up. With the winding up of Federal Cooperative Bank in 2000, the provision of credit to agricultural sector has received a set back. The share of cooperatives in the total agriculture credit was only 5% in 2006-07.

4. Taccavi loans

•  Taccavi loans are handled by the Provincial Revenue Departments. Necessary funds are allocated for different areas in the provincial budgets. Taccavi loans are given to the farmers at the time of calamity such as floods, destruction of crops due to scanty rains, bad harvests, etc.

5. Role of State Bank in agricultural financing

• The SBP is playing an active role in improving the quantitative and qualitative targets of rural credit, briefly.

• (i) Agricultural Credit Department was set up in 1956 for research and assessment of credit needs.

• (ii) The SBP introduced Refinance and guarantee scheme in 1970. The Bank under this scheme bears 50% losses on loans advanced to agriculture.

• (iii) In order to increase the share of commercial banks in the rural credit. a Mandatory Credit Target Scheme was introduced in 1972.

• (iv) The Interest-Free Production Loans Scheme was introduced in 1976 by SBP.

• (v) A share of 75% of loans has been allocated to small farmers holding land up to 25 acres.

The following measures if taken can solve the problem of the flow of agriculture credit to the needy farmers:

1. The procedure for getting loans should be made easy.

2. The commercial banks operating in government sector should provide loans to the farmers on low interest rate and without any mortgage.

3. The provincial Govt. should allocate more funds for agriculture development as Taccavi Loans.

Remedial Measures

4. There is a need for establishment of Agriculture development Bank and its various branches through out the country.

5. The Availability of Agricultural Credit should be advertised to the agriculturalists.

6. There is greater need for agricultural price policy which stabilizes the prices of agri. products i.e. the income of the farmers. Hence the banks will agree to provide them loans due to stable prices.

Remedial Measures for agri. Credit, continued