Agriculture contributes nearly one-fourth of the GDP of Pakistan. Over the years State Bank of Pakistan (SBP) has been increasing the lending target to farmers. Various schemes have been introduced for the financial inclusion of farmers, particularly small land holders. For the current financial year the Government of Pakistan has an indicative target of PKR2.25 trillion, which is a welcome sign.
For the last financial year (FY23) the SBP had assigned agriculture credit disbursement target of PKR1.8 trillion to meet the growing demand of funds by the farmers. Making the farmers financially strong is aimed at achieving food security.
The central bank set specific targets of PKR140 billion for production loans of wheat crop, PKR45 billion for tractor financing, and PKR20 billion for financing for harvesters, planters and other farm machinery under the overall target for FY23.
In addition, SBP has also enhanced the per acre indicative credit limits for agriculture financing to support the farming community to avail adequate financing from banks and optimize usage of agriculture inputs. With a view to ensure food security, per acre indicative credit limit for wheat was enhanced to PKR100,000 from PKR60,000 to facilitate the farmers to deploy quality inputs for achieving higher yields.
During FY22, the financial institutions managed to disburse PKR1.4 trillion to the agriculture sector as compared to the disbursement of PKR1.3 trillion during FY21 whereas the outstanding agriculture credit recorded an encouraging growth of over 10% and reached PKR691 billion by end June 2022.
The unprecedented disbursement and growth in agriculture credit portfolio was supported by various recent initiatives of SBP to promote agriculture credit and financial inclusion in the country.
One of the major recent initiatives of SBP was the introduction of a comprehensive agriculture credit scoring model to bring focus of banks towards improving qualitative aspects and regional distribution of agriculture financing in the country.
The model, adopted by the Agricultural Credit Advisory Committee, provided individual scores reflective of each bank’s agriculture credit performance against a multi-dimensional criterion based on various indicators including sectoral disbursement, regional performance, outstanding amount, and outstanding borrowers etc.
However, growth in agriculture credit disbursement remained subdued due to various challenges such as adverse climate change effects, resource constraints in banks, underutilization of approved limits by borrowers etc. A few banks, particularly large public sector banks among others performed slower than usual and struggled to achieve their assigned annual targets.
SBP released the annual ranking of banks under this scoring model to bring transparency and competition among the various agriculture credit providers. As per the model’s results for FY22, HBL ranked on top among Large Banks with a score of 75.4, Bank of Punjab scored 62.1 and ranked highest among Mid-Sized Banks, and BankIslami stood first among Small Banks with a score of 55.7. U Microfinance Bank ranked the highest among Microfinance Banks with a score of 80.4.
To understand the actual lending against the targets, it is necessary to understand certain terms. Agriculture financing according to the Prudential Regulations of SBP, includes: farm credit production loan/ finance for inputs like seeds, fertilizers, pesticides, etc. including working capital finance to meet various expenses attributable to farming , farm development loan/ finance (including improvement of agricultural land, orchards, etc.) and construction of on-farm structures/godowns/warehouse etc. for storage of seed, raw agriculture/farm produce.
Finance for the purchase of farm machinery and equipment like tractor, trolley, harvester, thresher, cotton picker etc. Credit/ debit card holders can use their cards for purchase of agricultural inputs/machinery under agriculture financing schemes. Non-fund based facility (Letter of Guarantee/Standby Letter of Credit (SBLC) & Letter of Credit etc.) for procurement/import of agricultural supplies etc. by corporate & non corporate farmers. Non-farm Credit Financing for livestock, dairy, poultry2, fisheries, sericulture, apiculture, ostrich framing etc.
Generally, agriculture financing also covers the items published in “Indicative Credit Limits and Eligible Items for Agriculture Financing” or any other item approved by SBP/Agricultural Credit Advisory Committee (ACAC) from time to time. Agriculture financing shall not include loans to traders and intermediaries engaged in trading/ processing agriculture commodities. Such lending would be categorized under Commercial or SME financing and treated under Prudential Regulations for Corporate/Commercial Banking or SME financing.
However, agriculture financing can be extended to entities (including corporate farms, partnerships and individuals) engaged in farming activity as well as processing, packaging, and marketing subject to compliance of Prudential Regulations for Agricultural Financing, revised from time to time.
In farm sector, farmers usually need credit for production and development activities. Production loans are used for the purchase of crop inputs like seeds, fertilizers, pesticides, water, fuel for on farm activities/cultivation of various crops, while development loans are mainly used for purchase of farm machinery like tractors, tube wells, threshers and activities like construction of on-farm infrastructure like tunnel farm, godowns/warehouses, silos etc.
The credit requirement of different groups of farmers may vary with their farm size and cropping pattern. Pakistan Bureau of Statistics, Government of Pakistan has defined province wise landholding in the agricultural census of 2010.
The per acre indicative credit limits for crops, orchards, forest trees and agriculture related infrastructure based on technical data received from leading agricultural research institutes and other stakeholders. These limits may be used by the banks for assessment of the credit requirements of farmers.
Moreover, these limits are indicative in nature and banks are allowed to provide financing for the crops as per given indicative limits or Banks/DFIs may extend financing on the basis of actual/ justified cost of production in any particular region/ area.
Further, agriculture financing may also be extended for crops other than the specified crops. To facilitate banks and field officers in assessing cost of production for different crops, separate working standards have been developed and made public.