SBP encourages banks to boost agri sector lending

Staff Reporter

State Bank of Pakistan (SBP) continues to encourage banks to lend loans to individual farmers by adding a corporate guarantee as eligible securities/ collateral that will allow banks to provide unsecured financing up to a maximum of Rs 1,000,000.

In case, a bank intends to secure its financing facility to farmer, it may obtain security/collateral from a leading firm who can be a processor, input supplier, stockiest, marketing company, trader, exporter etc.

The same security/collateral may also be used by the banks for securing their marketing loan provided to the leading firm for meeting their short terms/ seasonal financing requirement.

The banks financing may be secured against the following securities, including agricultural land through passbook system; mortgage of rural, urban or commercial property; hypothecation/ mortgage of assets, e. g., building, processing plant and machinery, grading & packaging machinery, generator & refrigerators, vehicles etc. Besides, corporate guarantee ( only valid to secure financing to farmers) or any other tangible collateral security acceptable to bank in accordance with SBP Regulation and other laws.

During fiscal year FY15 (JulNov 2014), the banks have disbursed Rs 167.6 billion which is 33.5% of the overall annual target of Rs 500 billion and 42.7% higher than disbursement of Rs 117.4 billion made during the corresponding period last year. Small farmers dominate agricultural landholding patterns in Pakistan, where financial exclusion remains alarmingly high. Farmers, particularly the small landholders are facing problems in accessing finance from the banking sector due to their inability to provide collateral acceptable to banks.

Hence, they are forced to rely on informal sector to meet their agriculture credit requirements. These factors also limit the ability of small land holding farmers to boost their farm productivity due to lack of access to yield enhancing inputs like improved seed & fertilizers and information on how to get credit to finance investment in agri. production and development activities. Moreover, they commonly lack ability to market their produce at competitive rates which restrict them to invest in land improvement.

Consequently, small and marginalized farmers are unable to deliver the volume and quality of produce that commercial buyers, retailers, processors and other agri- business firms require, which in turn limits the develop- ment of markets for agricultural produce.

The central bank introduced contract farming that assumes an extensive number of arrangements along the value chain link small-scale farmers to some type of market as a way to supporting them to become successful independent commercial farmers in the long term in a developing country context.

The farmers can be linked to markets by either formal or informal contracts as a result of some type of arrangement with a buyer who adds value to the raw commodity in some way (processing, storage, marketing). Contract Farming is being adopted in many developing countries including India, Thailand, Indonesia, Malaysia, Vietnam, Philippines and Cambodia. The Contract Farming is also being practiced in Pakistan for the production of Sugarcane, Maize Tobacco, Potato, rice, etc.