EDITORIAL: Pakistan is primarily an agriculture economy with a one-fifth of direct GDP contribution and over a two-fifth of labour participation. Indirectly, a huge chunk of services sector is associated with agriculture-related activities. The credit to agriculture sector is important for overall economic growth and to ensure food security. The credit disbursement in FY2019-20 to agriculture sector stood at Rs1215 billion, which was 3 percent higher than in FY2019-20; but was below the target of Rs1350 billion. The reasons cited for the shortfall were water shortage, low production of sugar and cotton, and low offtake of fertilizer. COVID-19 and locust attack are two exogenous factors that have adversely impacted the sector and its credit offtake. The worrisome aspect is that the overall pie of borrowers has reduced from 4.01 million to 3.74 million in the past 12 months. These are perhaps small farmers. The focus of the State Bank of Pakistan (SBP), according to its governor, Dr Reza Baqir, is on increasing credit to small farmers. He informed the National Assembly Special Committee on agriculture that 91 percent of the borrowers were small; but they received 25 percent of the disbursed amount.
The number of borrowers is decent; but the share of the credit in value is paltry in view of the declared objective and needs to increase. The same holds true for Small and Medium Enterprises (SMEs) in general. SMEs are considered the backbone of any economy; and many countries have moved up the ladder and expanded the sector by providing it easy and cheap access to credit. However, in Pakistan, SMEs’ credit remains below 10 percent as against the economic contribution of the sector of around 25 to 30 percent.
Banks in Pakistan are generally lazy insofar as their approach is concern and are happy with routing low cost of funds into risk free government assets; ultimately leaving less for private credit. Within the private domain, it is primarily big corporates that are the darlings of banks. Some of the banks are pushing to enhance SME and agri credit and this is where SBP should provide support to expand their portfolio. Once there are some success stories, it would be natural for others to follow suit. Another impediment is the prudential regulations prescribed by the central bank that may not be conducive for clean lending. Banks usually ask for immovable collateral or personal guarantee (at times both) to lend to SMEs. In agriculture, the credit is primarily extended against passbooks. Even if all the required collateral is available, banks assess cash flows before underwriting a loan. But SMEs usually don’t have books audited by reputable auditors for banks to gauge the cash flows. Here technology can be used for better understanding of this challenge. With more payments routing through digital means, it would be easier for financial institutions to lend to deserving borrowers.
For agriculture, the absence of crop insurance is another reason for banks reluctance. The real juice in agriculture is to tap the value chains – from farm to fork. HBL has taken an initiative by piloting development finance in the agri segment. Within it, this bank has disbursed 55 percent clean lending on a portfolio of around Rs500 million. This was done for the maize value chain – from farmer to chicken feed millers. The next move is on rice. Potato and wheat will follow. But this portfolio constitutes only peanuts for the bank compared to its traditional loan book of agriculture at Rs30 billion. Banks need to recognize that this country is primarily an agriculture country, and financing should be tapped around it. SMEs in the value chain are critical. They should be able to easily access formal credit. The reliance on arthis (middle men) for credit is limiting farmers’ growth. With this model, banks can actually replace the middleman by becoming the intermediary.
Back in the days when banks were nationalized, lending was based on sector-wise allocations. The banks not complying with these allocations were penalized by the regulator. With privatization, this strict allocation was not possible. It is true that banks need to develop their own niches. Not every bank should be in every business. Some may grow in agriculture, others in SMEs, trade or regions to name a few. But to boost credit in these specific sectors, there can be regulator’s support. The SBP should identify banks that are keen on agriculture and SME lending and should help them through regulatory and other supportive measures to expand their portfolios.
There should be some form of crop insurance mechanism to reduce the risk of lending to small farmers. SBP should come up with a credit guarantee mechanism for lending to small famers. But not all the farmers or small agri businesses can be tapped by commercial banks. Micro-finance institutions should be incentivized to increase their average loan size. Around 40 percent of their loan book of Rs310 billion is in agriculture; but the average loan size is of Rs40,000. That is too small a number given these have loan limits for individual loans at Rs300,000 and micro enterprise at Rs500,000. The objective of SBP should be to push micro lenders to increase the average size of loans. In so doing, their intermediation cost per loan would come down significantly to lower the interest rates charged. The use of digital means of payment for famers cannot be overemphasized.
Copyright Business Recorder, 2020
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