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Farm loans up despite low crop outputs

DESPITE multiple issues including a 7.2pc drop in major crops’ output, the bank lending to the agriculture sector remained strong during the current fiscal year.

In the first 10 months (July-April) of 2015-16, banks lent Rs441bn to farmers against the full fiscal year target of Rs600bn. This gross lending is 19.6pc higher from a year-ago period. On net basis, however, farm loans totalled just Rs13bn in 10MFY16 as banks’ credit recovery stood around Rs428bn.

A majority of bankers, who oversee lending to farmers, say given the seasonal credit flows pattern, the target is still achievable while some of them don’t rule out a slippage.

Development loans account for no more than 10pc of the total agricultural credit

“In May lending to wheat millers and livestock sector remained strong and in June, too, we hope to make new loans in these and other sub-sectors of agriculture including fish farming, rice and sugarcane crops,” says head of farming credit division of one of the leading local bank..

In May and June rice and sugarcane growers borrow substantially from banks for the two crops whose harvesting is done in winter. Fish farmers also borrow for capacity building for fish hauling that picks up pace immediately after the summer, he says.

Microfinance banks (MFBs) and Islamic banks (IBs) reported a big year-on-year increase of 56pc and 47pc respectively in lending to farmers. “The MFBs lending is significant in that all of their agricultural lending goes to the small farmers and reduces reliance of unbanked farmers on traditional informal lenders,” says a senior central banker.

In terms of volumes, too, MFBs lending of Rs38bn constituted 8.6pc of the total agricultural loans in 10MFY16. “This percentage needs to be doubled in a few years. Only then we’ll be able to make an impact on small farmers’ productivity,” says a senior executive of Khushhali Bank.

Islamic banks’ agricultural lending at Rs6.7bn in 10MFY16 is not too big. “What keeps IBs from lending liberally to farmers is that their branches are too concentrated in urban areas and their ability to develop Shariah-compliant farming loan products is still very limited,” according to a former director of Islamic banking department of SBP.

“Besides, instead of reaching out to the farmers who need money for development, they find it easier to offer agricultural development loans for purchase of machinery and tools.”

Commercial banks extend both development and non-development production loans.

But during 10MFY16, some of them reported a net decline in their agricultural lending more due to structural problems rather than for a fall in loan demand. Four out of 20 banks that reported a fall in farming loans are: Allied Bank, Bank Al-Habib, Bank of Punjab and Standard Chartered Bank.

The first two banks were too focused on expanding their consumer finance base and the third one ran in troubles because it undertook overhauling of agricultural loan portfolio to improve the asset quality, bankers say. Standard Chartered also played safe.

The development loaning to farmers remained at just 8pc of the total (Rs35.5bn vs Rs441bn) in 10MFY16. Normally, development loans account for no more than 10pc of total agricultural credit but given the fact that during this year two credit schemes were in operation, this percentage should have been a bit higher. The agricultural development scheme announced in the budget and special incentives scheme announced later were aimed at not only boosting productivity through larger production loans but also via investing in farm mechanisation. The small-scale vegetable and fruit growers and fish farmers got very little. Even rice growers in Sindh continue to wait for the promised concessional loans, agriculturists in the province say.

Many growers also blame some big banks did not make timely loans to small cotton growers for purchase of quality seeds and branded pesticides.

Bankers admit that the net lending to major crops sector declined in FY16 because of historic fall in cotton production that made bankers shy of lending to growers on fears of loan defaults.

Lending to the livestock sector expanded also due to big appetite for loans showed by clusters of dairy farmers that form part of supply chain of food processing companies.