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.
