Need to overhaul agriculture lending mechanism

Latest figures on agriculture credit disbursement released by the SBP, for the first eight months of the current fiscal year, show improvement in lending by commercial and specialized banks to the much deprived farming sector, as they increased by 11 percent to Rs144.7 billion.
Credit enhancement reflects the growing element of munificence on the part of formal lenders, but mounting inflation, which also rose by 11.08 percent during the same tenure, will water down the impact of economic benefits arising from the expansion in advances.
The agriculture sector which contributes 21 percent towards the countrys GDP and provides the source of livelihood to nearly half of the population, is still found wanting for more as the loan granted to this segment is way below the demand. This can be gauged from the fact that less than 5 percent of yearly financing plan is focused on agriculture, which in turn has made the Aarti system more popular in villages.
It is not wise to blame the banks alone for an inept agriculture lending system. The very nature of the rural economy: Low-level of literacy among farmers, scattered far flung villages, farmers high vulnerability to default, absence of collateral and irregular income make it difficult for the banks to expand and regulate financing activities.
The policy makers and government officials are undoubtedly aware of the strong positive correlation between agriculture financing and farming productivity.
This creates the need for better agriculture microfinance model, which will provide easy formal financing access to the farmers on one hand, and decrease interest rates on the other. To achieve this, it will be highly beneficial to take a cue from lending models practiced in other developing countries as they have tailored financing instruments and channels according to the market requirements.
For instance, Equity Building Society in Nairobi and Kenyas Central Province expanded reach to isolated clients in rural area through mobile banking units. Likewise, in Mozambique, small farmers were clustered into association in order to establish better relationships with commodity traders and to gain access to credit and advances from agribusinesses.
Similarly, Caja Los Andes, operating in Bolivia, designed loan product according to farmers need. For instance, advance payments were scheduled according to revenue flows or crop cycle. Now is the time to revamp the agri-financing model to reap maximum results.