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AGRICULTURE AND TECHNOLOGY: Credit-starved farm and agro industries   
By Muhammad Bashir Chaudhry

June 27, 2011: THE government should focus on development of agro industries in the rural areas for boosting export of processed food products, says the president of the Islamabad Chamber of Commerce and Industry.

It should help farmers to modernise farming, improve per acre yield and cultivate new varieties of fruits and vegetables.

Foreign buyers can be particularly attracted if more attention is paid to organic farm products. The country can become self-sufficient in food grains and create exportable surplus.

But the basic question is whether the existing institutional framework of farm credit and rural development is sound enough to deliver.

A review of the SBP and other publications gives the impression that the sector needs much more attention than what the lending institutions provide. Banks are meeting only around 45-50 per cent of the farm credit requirements and the number of borrowers is around two million out of 6.6 million of the country’s farmers.

The credit is highly concentrated in crop sector or production loans with around 75 per cent of the total disbursement on this count, and there is an uneven geographical distribution with more than 80 per cent of the credit going to Punjab.

Agriculture credit is only six per cent of the loan portfolio of banks. There is lack of commitment among the banks’ management and non-availability of innovative lending products.


Banks do not see farm financing as a viable business due to agriculture-specific risks. The ratio of nonperforming farm loans is high due to the culture of write-offs/waivers.

The mark-up rate of farm credit is generally higher than the commercial and industrial credit. Banks’ markup rates are not fixed sector-wise but are based on their cost structure and risk profile of the borrowers and the sector. Banks are required by the SBP to use Kibor as a benchmark for pricing of their loans.

Informal credit market is characterised by low transaction costs, very high interest rates and rapid disbursement of credit.

The close familiarity of borrowers with informal lenders, coercive loan recovery methods and the inability of formal institutions to reach the poor, have brought about heavy dependence of the rural population on informal credit markets.

Agriculture is also susceptible to risks on account of natural hazards, unreliable infrastructure, poor pricing policies, insufficient and improper marketing mechanism, poor quality seed, low per acre yield and lack of coordination among the government service delivery agencies.

Fears are that many farmers are crossing poverty line because of decrease in land holding to below subsistence level due to
Islamic inheritance laws.


Farm workers are being displaced due to mechanisation of large land-holdings. These unemployed or under-employed poor people move to cities and create social problems.

Enough steps are not being taken to hold them in rural areas by providing them jobs with productive and income-generating activities. The farmers and rural workers are thus left at the mercy of informal lenders and middlemen to exploit.

There is an urgent need for specialised banks/DFIs for facilitating credit flow to small farmers-cum-handicraftsmen for development of agriculture as well as cottage and village industries, handicrafts and other rural crafts.

Rural development can be promoted by financing of agro-based micro-industries, small industries and agro-infrastructure.

Loans by the commercial or microfinance banks are at high commercial rates and unsuitable for small farmers and unemployed rural workers.

The agro-finance banks should offer soft small loans that are affordable to people in the rural areas. These banks may be provided suitable credit lines to be used as soft loans to farmers cum-handicraft men and women. The whole structure of the agro-financing and rural development should be revamped.

Growing of food grains or cash crops and working of rural cottage industries or handicrafts is closely interlinked. A typical farmer with small land holding may be concurrently involved in all these activities for survival and welfare of his family. All members of the family contribute in this endeavour.

However, their efforts are often frustrated when they are unable to get fair price for their produce, owing to machination of shrewd middlemen.

The lending and loan recovery practices of the financiers in rural areas should be fair, equitable and non-exploitative. This is essential for economic revival, public welfare and self-sufficiency in food.

Courtesy: The DAWN;


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