Profiling agri lending

The rural economy has historically suffered from the indifference of commercial bankers sitting in urban centers, who instead disproportionately value sponsor-based lending to clients. After all, banking in Pakistan has traditionally been a relationship-based sport, where seeing is often believing. And while there may not be any shortage of bad loans made despite these relationships, it is just a heck lot easier to lend to industrial units and people that you can meet and regularly visit, thanto go out all the way to farms and fields in far flung locations to make value-based loans.

But things have turned particularly dire over the last few years. According to SBP, share of agri-credit in total loans made to private sector businesses (that is, excluding consumer finance), has dropped from 10 percent in mid 2000s, to less than five percent during the last fiscal year. Although agri lending’s share in total private sector loans had plateaued around 8 percent between FY08 to FY18, it has dropped particularly precipitously over the last five years and is now close to half of where it stood five years ago.

In fact, loans to agriculture sector – which includes not just major crop farmers, but also livestock, poultry, horticulture, fruits & vegetables, fishery, support activities, seed multiplication, implements and tools etc – have risen at just 2.4 percent per annum on average over the last five years. Compare this to credit bonanza in manufacturing during the same period, where loan outstanding grew at 15 percent per annum to industries such as textile, garments, auto, and refineries.

Meanwhile, agri credit has not only declined in real terms on an aggregate level, many of the segments within the rural economy have witnessed banking credit decline in nominal terms! While some segments, such as cotton, come as no surprise (given the overall fall in local production) – credit made to sugarcane farmers have also dropped to half, even though official data indicates that the country has managed decent growth in crop output. The only winner in the agriculture sector seems to be rice farmers, where loan outstanding have tripled in just the last four years, taking it from number seventh to top three, even bigger than poultry.

But the most significant finding of the agri lending data is that the numbers don’t even come close to what are oft repeated in the press, to the tune of Rs 1 trillion +. First, total loan outstanding with the agriculture sector averaged below Rs 350 billion for all of past year, with official statistics overstating by double counting working capital loans disbursed and rolled over during the year multiple times. More importantly, however, the average outstanding of half a trillion rupees reported officially also seemingly glosses over the actual number, by possibly adding loans made to input suppliers and service vendors to the gross principal amount standing.

Agri credit stands at just 1.5 percent of total agri-GDP, which may possibly be the worst standing for access to credit across all segments of the economy. And while a lot might be wrong with the fundamental structure of agriculture markets and governance in Pakistan, when share of credit is so abysmally low, the behavior of the banking industry can also not skirt blame.