Farmers in Pakistan face two opposite problems with reference to the availability of irrigation water: 1) drought-like conditions if rainfall is low and 2) flash floods if rainfall is high. In both cases standing crops are destroyed.
Small farmers in Pakistan either use their own money or borrow money from the formal banking system/ informal lenders to purchase seeds, fertilizers and other inputs. When the crop is destroyed, there is no way to recover the loss.
In the shipping industry, underwriters developed a system to reduce the losses of those whose goods were carried on ships. Not only did this system improve over the years, but it also became the norm for many other segments of the economy as well as real estate.
Due to heavy losses resulting from natural calamities, Pakistani farmers are largely deprived of any such risk mitigation opportunity.
Therefore, there is an urgent need to introduce ‘Comprehensive Crop Insurance’ in Pakistan.
The State Bank of Pakistan and financial institutions lending to farmers will have to take the first step. For the current fiscal year, the central bank has set an indicative target of PKR2.25 trillion for lending to farmers.
Since funds of banks of this colossal magnitude are at risk, these institutions have to introduce an insurance scheme to reduce/ minimize the losses.
It is on record that Pakistan has introduced various initiatives in the past, but the results were disappointing as many of these schemes could not become the norm.
It is important to mention that it is not only the farmers who suffer the loss but the biggest loser is the Government of Pakistan. Every year, billions of rupees have to be given to affected farmers and valuable foreign exchange is spent on importing food items lost due to floods or drought.
As a regulator of the financial sector, the State Bank of Pakistan has the responsibility to minimize losses to the financial sector as well as the Government of Pakistan.
Ideally, the central bank should come up with a comprehensive crop insurance system in collaboration with about two dozen companies. If that is not possible it should at least ask individual banks to start acquiring ‘Credit Insurance’.
In Pakistan, the most deprived class is known as ‘small landholders. They own less than 25 acres but are in the largest number. Normally the financial institutions are shy in extending credit to this category of farmers because they are considered highly prone to default in case of any natural calamity. To secure credit banks must pay the premium of insurance for this type of farmer.
Experts say that paying a 2% premium of tentative lending of PKR2.25 trillion is a minuscule amount. The rule of thumb is bigger the pool smaller the share per participant.
There are four big crops in Pakistan i.e. wheat, rice, maize and cotton. The Government could pick up anyone as a test crop and go ahead. However, experts are of the view that since the largest number of farmers grow wheat, which is also strategically important, the government should make it mandatory for financial institutions to cover the amount lent to wheat growers.
Some experts are also of the opinion that the central bank should go for Maize. Their argument is that since there are four crops of Maize in a year, the probability of losses is the lowest. It will be a win-win situation for both the financial institutions and the insurance companies.
Some of the experts are of the view that the Government of Pakistan (GoP) should pay the premium. The logic is simple the GoP has the largest stake. The example may not look very appropriate but during the current financial year, the GOP has spent around US$ one billion on the import of wheat, a huge drain of the limited foreign exchange.
This year the country had produced a record bumper wheat crop, exceeding 30 million tons. However, about 30% will go stale because of inadequate storage facilities. It is feared that next year many of the farmers will not grow. Some experts even go to the extent of saying that the forthcoming cotton and rice would also be affected grossly because farmers have no money to buy input.