Agriculture Credit in Pakistan -101 | Introduction & Significance

Credit, in technical terms, is an agreement by which a financial institute (such as a bank), agrees to lend a borrower a certain amount of money for a defined period of time. Interest is usually charged over the outstanding loan amount in such agreements/ transactions.

INTRODUCTION TO AGRI. CREDIT

Agriculture, which is simply defined as, growing of crops and raising of animals; among others is also a business. It also hold significant share in GDP and economy of Pakistan. It is source of a majority of agro-based industry such as textile industry, food industry and export.

Agriculture sector, thereby, also require credit like all other businesses.

Definition

Agriculture Credit/ Agri Loans is defined as financial support/credit extended to the agriculture sector through formal or informal sources.

Objectives of PakAgriFarming

This article part of series of articles aimed at ‘Financial Literacy’ of our farmer community and academia alike. There are, without any doubt, highly qualified & well-versed individuals and organizations already involved in similar campaign and PakAgriFarming will also be contributing a small share towards creating ‘Financial Literacy’. Do share with us your comments and suggestions.

SIGNIFICANCE OF CREDIT TO AGRICULTURE SECTOR

Agriculture business is a long-term investment, a farmer cultivates any crop and has to wait almost from 04 to 09 months to get any kind of produce to sell; and that too is subjective to market fluctuations and prune to attack of crop diseases, pest attacks and post-harvest damages.

In dairy & livestock, for examples, economy of scale is applicable i.e., the higher the number of livestock heads, the higher the gain & vice versa.

The farmer has to constantly inject capital to meet day to day for purchase of raw material, or payment of wages to labor, to purchase new machinery or for its maintenance etc.

Therefore, agriculture sector is in need of any kind of credit either to manage the operations or grow or both.

In Pakistan, the financial literacy is on the lower side, however, there are positive signs of financial and social awareness among the farmers.

Sources of Agriculture Credit

1.  Informal Credit

This kind of credit is extended from conventional sources such as Arthis, commission shops etc. (mostly based in village setup). Informal credit is largest source of credit to our traditional agriculture sector i.e., the farmers.

Informal credit gets the roots from the local setup of Arthis/ commission agents. Farmers feel more comfortable to get day to day expenses from these agents since they belong to the same rural setup and mostly both the parties are well aware of each other at family & generations’ level.

Setbacks

The biggest setback is the high gain or profit rate charged by the Arthis etc. In a conventional setup a farmer is being charged at least up to 40% interest rate. The farmers are mostly bound to provide their agriculture produce to their creditors.

2.  Formal Credit

Banks, Microfinance Institutes and NGOs etc are the source of formal credit to the agriculture sector.

In Pakistan, the trend of our farming community towards formal source of credit is low mostly due to lack of financial literacy, general awareness and fear of any terms & conditions of the banks etc.

Role of Regulator

State Bank of Pakistan (SBP) is the regulator of banking industry in Pakistan and grants of loans & banking policies for Agriculture sector are also governed by SBP through periodical circulars, policies and review of existing regulations.

Loan Extending Institutes

In Pakistan, an agriculturist/ agribusiness / any entity involved in agriculture can avail finance from following institutes;

·        Specialized Banks [such as, Zarai Taraqiat Bank Ltd (or ZTBL)]

·        Commercial Banks (such as; National Bank of Pakistan, Bank of Punjab etc)

·        Micro-Finance Institutes (such as, NRSP Bank, Khushali Microfinance Bank etc.)

·        Non-Banking Finance Companies (such as; Leasing companies & NGOs)

KINDS OF AGRI. CREDIT FROM FORMAL SOURCES

1.  Based on Nature;

Ø  Farm Credit

Ø  Non-Farm Credit

Farm Credit

Farm credit means all kind of credit related to farm (crops/ orchard farming); such as

·        loans for purchase of agri inputs (seeds, pesticides, fertilizers etc),

·        loans for purchase of farm related machinery (such as tractor, harvesters, tillage implements etc)

·        Letter of credit/ letter of guarantee (non-fund based facilities) for import of agriculture inputs

Non-Farm Credit

Non-farm credit is all kind of loan granted to sectors other than crops/ orchard farming such as dairy, fisheries and livestock etc.

 

2.  Based on Tenor of Loan;

There are 02 categories of loans based on tenure/ duration of credit facility;

1.   Short Terms

2.   Medium to Long Term

Short Term Loans

Short Term loans are loan obtained for a period of up to 01 years or less than 01 year.  Such loans are for both farm and non-farm credit for example; for purchase of agri inputs or to meeting working capital requirements of dairy/poultry business etc.

Medium to Long Term Loans

Loans obtained for period greater than one year are medium to long term in nature and can be obtained for a period of 03 to 10 or more years as per policy of the credit extending institute.

Long term loans are mostly for purchase of capital assets (such as farm / non-farm machinery etc.).

ELIGIBILITY FOR AGRI. CREDIT IN PAKISTAN

In Pakistan, the extension of agriculture credit from Banks etc is governed by the Prudential Regulations from Agriculture as defined by State Bank of Pakistan and list of eligible items defined under “Methodology Report for Estimation of Agriculture Credit” as advised by SBP and Agriculture Credit Advisory Committee and amended from time to time.