Major issues in agricultural financing and their possible

solutions.
Agriculture remains the mainstay of the Pakistan economy. Farming and
related activities accounts for about 25 per cent of our gross domestic
product (GDP) and about 45 percent of our export, Agriculture which
would include farming and allied activities like dairy, poultry,
horticulture, silviculture, sericulture, piscialture etc. employ 50 per
cent of our labour force.
In our country agriculture growth has not kept pace with rising
domestic demand thereby not enabling the country to eliminate food
grains import, although all emphasis has been laid to come over food
problem by producing more wheat which is the major staple diet. The
average growth rate during current decade has been over 4 per cent per
annum as against 2.1 per cent per annum during the first five year plan
(1955-60). The total food grain production which stood at 5.03 million
tonnes in the year 1947-48 has increased to 21.05 million tonnes in
1992-93. This was possible because of the conscious efforts of our
planners by providing requisite priority to the agricultural sector and
affording the necessary policy focus over the years. However, to cope up
current and future food demand as a policy there should have been laid
emphasis on slowing down population growth so that augmenting good
supplies by expanding production could visibly be planned. The fact is
that massive investments in terms of financial resources are required
for modernising Pakistan agriculture for which multi agency approach was
adopted to achieve the envisaged objective. But despite of making all

out efforts the quality of loans advanced to needy growers is still

doubted which need dispassionate realistic strategy to be adopted so
that the objective of Rural Finance to make it a success is attained.
The advancing of credit by commercial banks and Specialised Finance
Institutions is an area which is causing concern at various levels as it
has direct impact on the financial health of banks and economic
development. Rural finance being one of the components of banks credit
an attempt has been made in this article to bring out as to how it can
be made a success. There is no other way or short cut but to follow the
principle which have brought about success elsewhere and are being
advocated by the credit experts. There is need for propagating these
principles among the rural banks so that there is clarity about the role
they are expected to play with this and monitoring by the controlling
officers the quality of rural finance will improve and result in good
recovery of credit as well as economic development.

Major Issues
There is a growing recognition among Pakistan farmers of the effect
of improved inputs and new technology on agricultural yield. The use of
these improved inputs and the adoption of the yield-inducing techniques
have given rise to an increased demand for agricultural credit.
Accordingly the government has established various types of financial
institutions and it has also encouraged the development of credit
schemes including cooperative credit scheme, SACP, Agribusiness and the
programme for the landless poor which is the focus of this paper. During
the past four and a half decades financial services have expanded

substantially in rural areas. The provision of cheap credit is another

measure besides introducing reforms in land tenure, subsidies on
producer prices, research on technology appropriate to small farm Rao
Abdul Rauf Khan Executive Director (Services) ADBP, Islamabad resources
and improved extension and technical support, has often encouraged upon
governments as a means of stimulating production, specially among the
rural poor. During the past four decades financial services have
expanded substantially in rural areas. The sets of problems tend to be
associated with these activities. The first set includes widely
recognized problems that are often associated with any business
management and training difficulties. There is almost always a shortage
of adequately trained people to fill positions in financial
institutions. As a consequence, there is often slowness in making loan
decisions, high cost lending operations, data processing problems,
poorly designed loan payment procedures and lack of coordination between
credit programmes and other development efforts. The second set of
problems is much less widely recognized although probably more
important. Serious loan repayment eros further reduce the viability of
some loan portfolios. In many cases loan repayment problems emerge in
all loan size groups. Further, it is often the case that financial
markets resist lending to the agricultural sector. It is very difficult
to serve the rural poor as such they prefer to lend to small farmers
more strongly than they resist lending to agriculture in general
specially for self income generating activities on the basis of self
help or group lending. Typically formal credit institutions are badly
fragmented. Each lender tends to service a narrow slice of the rural

population. To solve this issue there is need to adopt area approach

without which effective loaning cannot be ensured. It is because of this
reason they have also proved in effective in mobilising of local
resources or taping of rural savings.

It has also been observed that some clients are forced to consume
their "surpluses" or invest them in a very low return
activities while others must skip profitable investment opportunities
because they lack additional liquidity. Thus it becomes difficult to
introduce any innovations successfully typically, a promising innovation
is tried by any of the formal credit institution on a pilot project
basis, but ultimately fails because it cannot reduce cost enough to
overcome the effects on lender revenues of suppressed interest rates.
These kinds of innovations typically increase rather than decrease
costs.
Specialised Banks and Commercial Banks under the directives of the
State Bank or the Federal Government carry out strategies mainly meant
for specific target group in rural areas which alter their performance.
A notable feature of the agrarian scene in Pakistan is the predominance
of small holdings, small farmers, defined as those with land holdings,
up to 12.50 acres in Punjab and NWFP, 16 acres in Sindh and 32 acres in
Balochistan provinces (5 acres in India) constitute 91 per cent of the
total number of farmers in the country though the area commanded by them
is only 42 per cent of the total area. Along with tenants, the share
croppers, small farmers, near landless and the landless account for a
very large proportion of the "Weaker sections" in rural areas.

In view of these facts, improvement of the productive capabilities of

the "weaker sections" is an important objective of economic
policy in Pakistan. Provision of adequate and timely credit has received
a good deal of attention in this connection. This paper deals with the
problems and their possible solutions of institutional credit to the
farmers in Pakistan.

Major Constraints and their Solutions

The objective of the rural finance provided by the banks are to bring
about meaningful improvement in the economic status of the rural poor,
good repayments to bank and increasing saving potential for further
growth. In developing country like Pakistan where majority of population
depends upon agriculture and rural activities by and large, comprises a
large number of small farmers and other weaker sections. There are in
fact few borrowers of the rural areas who can make file best use of the
credit and derive benefits out of its small farmers and other weaker
sections by virtue of their low level of literacy, pressing consumption
needs and poor access to the various employed services and lack of
marketing skills are at various disadvantage in the matter of utilizing
the credit properly. Often they have temptation to sell the produce and
other assets when it proves uneconomical or to misutilise the credit due
to lack of use for development. In short their motivational and risk
bearing levels are also low. In such scenario, if only credit is given
to this type of borrowers, we will be taken chances about the efficient
use of the credit and its recycling. Experiences have proved that such

finance mostly, becomes unsuccessful and thereby burdens the economy

(being unproductive) and affects the financial soundness of the banks
(due to default, in repayment). It is for these reasons, that the rural
finance is regarded as complicated and risky and therefore more
demanding subject characterised by security and conflict and the experts
recommended certain principles to be followed for rural finance so that
the intended objective therefore are achieved. Presently the advancement
of these objectives is made short of the requirements.

It is now increasingly recognized that development depends on a much

broader process of capital accumulation that the simple accumulation of
physical capital. The various forms of capital that are relevant include
not only physical capital also investment in human skill, in the proper
kind of technological changes and of adequate organizational and
managerial capacities. The absence of these aspects in the rural and
semi urban areas were largely responsible for supply of non-qualitative
credit. The possibilities of extending credit were simply not geared to
the specific needs of the farmers although during the past four decades
financial services have expanded substantially in rural areas. Of late
the quality of Credit Administration of banks is an area which is
causing concern at various levels as it has direct impact on the
financial health of banks and economic development. The objectives of
the Formal Credit in rural sector provided by the banks are to bring
about meaningful improvement in the economic status of the rural poor,
good repayment to the banks and increasing saving potential for further
growth. There is no other short cut but to follow the principles which

were already set by the formal institutions involved in advancing credit

in the agrarian sector. The main principles set by ADBP as a result of
introducing Supervised Agricultural Credit Programme (SACP) in the form
of Mobile Credit Officers were:

* Rising of funds by enlarging credit cycle and mobilising of local

resources.

* To contract real prospective loanees.

* To advance timely loans in the form of required ingredients.

In order to make financing a success there is need for laying

emphasis on monitoring by the controlling office for improving quality
of rural finance resulting in good recovery of credit as well as
bringing economic development in a sustainable way. In developing
country like Pakistan majority of the population depends upon
agriculture and rural activities. Agriculture with its branches of
animal and crop husbandry, forestry, fisheries and horticulture is the
largest segment of Pakistan's economy. Today the bulk of population
(71 per cent) live in rural areas is dependent on it for livelihood and
accounts for one fourth of GDP and more than 70 per cent of export
earning directly or indirectly and provide 50 per cent employment in the
country. The happy features of Pakistan's agriculture are the
fertile soil, a generally favourable climate and a most elaborate
network of irrigation. There on the other hand, some unhappy aspects

also which despite of making all out efforts and policy measures still
persists: such as low crop yield per acre, low rate of diversification,
low cropping intensity and land use, incidence of large scale
waterlogging and salinity, subdivision and fragmentation of holding and
high post harvest losses. Finally mechanization of farming still need
improvement in true perspective. Further predominance of small farmers
and other weaker sections of society is another notable feature which
need special attention with utmost care. There are few innovative cum

progressive borrowers of the rural areas who can make the best use of
the credit and derive benefits out of it. Small farmers and weaker
sections by virtue of their low level of literacy, pressing consumption
needs and poor access to the various services viz: extension, supply of

quality assets and inputs and the lack of

marketing skills are at
various disadvantages in the matter of utilizing
the credit properly.
Often n they have temptations to sell the asset
when it proves
un-economic or to misutilize the credit due to
lack of urge for
development. In short their motivational levels
are also low. In such
scenario if giving of only credit to this type of borrowers continued
then we will be taking chances about the efficient use of the credit and
its recycling. Experiences have proved that such finance, mostly becomes
unsuccessful and thereby burdens the economy (being unproductive) and

effects the financial soundness of the banks (due to defaults in

repayments). It is for these reasons, that the rural finance is regarded
as complicated and risky therefore more demanding subject characterized
by scarcity and conflict which is mainly due to not following the
principles set for achieving the intended objectives. The other
principles which are recommended to be followed in order to make it
effective are:

* Credit not provided in a package of required services/ingredients.

* Not made really of supervised nature with problem solving attitudes.

* Technical Assistance in order to make the credit productive as

envisaged was not provided.

If the above principles are followed then Agricultural credit is

bound to be productive and it would have result into better repayment of
the loans and mobilization of rural savings. Therefore if we are looking
for development of the people and the economy and growing financial
health of the banks for undertaking more of development banking, there
is no escape from adopting the above principles in the true perspective
in providing the credit in agrarian sector. Apart from helping the
credit to be of expected productivity, these principles are capable to
help build a sound relationship between the banks and its rural
borrowers which has definite impact in getting better recovery of the
credit which is the major issue of the day.

With increase in production of agricultural produce, the forward

linkages such as (a) Agro processing industries (b) Storage,
transportation and marketing and (c) export of agricultural produce will
have to be strengthened to enable the farmers to realise remunerative
prices for the increased produce. The importance of small scale sector
in developing economics lies in advantages of low capital intensity and
high employment generation potential. It also promotes decentralization of industrial growth and
widens entrepreneurial base. The village sector
plays a key role in Pakistan fact of which is rightly been perceived by
the present regime under the process of "Privatization"
because of its low investment, high potential for employment generation,
decentralization of industrial base and dispersal of industries to rural
and semi urban areas. Thus Small Scale Industries is an important sector
in the economy of Pakistan which has been made as integral part of our
present policy. In fact for the Agricultural Credit to be a success
following factors are kept in mind by me before envisaging sound but
realistic strategy for ADBP.

* Emphasis is given on making this development bank capable of giving

timely and adequate finance, and making field staff capable of
supervising them with problem solving attitude.

* To provide required technical guidance enabling loanee growers

utilizing available resources in a planned way realizing high production
and income to generate sufficient surplus to repay the bank's loan.

Everybody agrees that by giving credit alone one cannot bring about
improvement in the economic status of the borrowers, because according
to them, for success of credit there has to be proper infrastructure
development, backward and forward linkages and marketing should not be a
problem. Inspite of this, excepting few, they restrict their role only
to provision of credit with the believing that provision of these
facilities, services and assistance is the job of some body else i.e.
the officials of Government department. This hardly happens as the
coordination is left loose. Therefore, this type of approach is bound to
result in the credit being risky to the borrowers and in turn, the risks
are passed on to the banks risks of the clients are the risk of
financing agency. The principles will prove meaningful if nature of
credit advanced is determined keeping in view the following aspects:

a) The assets to be acquired out of the credit and natural resources

should be of good quality capable of high production.

b) It should be suitable for the beneficiary and the area should be

available at reasonable price.

c) Required inputs of good quality should be available at reasonable

price.

d) The output i.e. produce/product should have market and marketing

channels fetching remunerating price.

e) The borrower should be conversant with the managing and organizing

the client of enterprise.

f) The financing bank should be capable of giving timely and adequate

finance and field staff should be capable of supervising the credit with
problem solving attitude.

g) The activity should have capacity to generate sufficient supplies

to repay the banks loans and leave sufficient surplus to the borrowers
to serve as an incentive to carry on the activity on long term basis.

In this context, the question arises as to who should ensure that the
above requirements are met. Keeping in view the opportunities available
in the area, the bank should identify the types of corrective measures
and solutions that are possible to satisfy the above factors.

Giving credit with the package of required service is one step

towards the success of rural finance, but this in itself will not
guarantee the success for the reason that the borrowers may face certain
new problems requiring further services for the agencies which were
supposed to have provided the package of required services that may not
be providing the same for various reasons or the borrowers may have
certain other problems in getting the inputs, marketing their products
or managing the activity in a cost effective manner.

The supervision over the credit should not only be done by the field

officers of the branch managers of the bank, but should also be done by
the Regional Managers, managers for which they are supposed to be mobile
so that the intended type of the lending culture is incalculated among
the branch functionaries and they get the required encouragement,
guidance and support. The supervision does not mean only verification of
the physical existence of the assets.

To sum up by following the above three principles rural finance is

bound to succeed to a great extent and thereby contribute to the
development of the people, economy, and financial health of banks for
further growth apart from inculcating a saving and repayment culture
among rural borrowers. The task may look difficult but it is not
impossible or incredible if beginning is made. The fact is that when
loans are provided without proper credit appraisals results are
disappointing - based on rural finance-ending principles.

If the above principles are followed rural finance is bound to be

productive and it will result into better repayment of the loans and
mobilization of rural savings. As against this, if the banks for
whatever reasons were to attempt to provide only credit ignoring other
element of the above principles, the result will be lesser or no
productivity of the credit, poor repayment, lesser or no productivity of
the credit, poor repayment lesser potential for deposit mobilization and
of course inflationary pressure in the economy leading in price rise.
If, therefore, we are looking for development of the people and the
economy and growing financial health of the banks for undertaking more

of development banking, there is net scope from adopting the above

principles in providing rural finance. Apart from helping the credit to
be expected productivity these principles are capable to help build a
sound relationship between the banks and its rural borrowers which has
definite impact in getting better recovery of the credit and that too at
the banks counter.

(The views expressed in this paper are the personal views of the
author and do not necessarily represent the views of the ADBP)

Selected Bibliography

* Panda Dr. R.A. Agricultural Indebtedness and Institutional Finance,

Ashish Publishers House, New Delhi, India.

* Howell John; Borrowers and lenders; Overseas Development Institute,

Percy Street, London.

* Khan Shamshad Ashraf, Agricultural Credit Department, State Bank of

Pakistan, an unpublished paper in growth of Agricultural Credit
Facilities in Pakistan, A Historical Review, 1981.

* Economic Review: Peoples Bank, Colombo Sri Lanka,

November/December, 1991.

* Economic Revival of Small Farmers (Seminar Proceedings) March 4-5,

1989, University of Agriculture, Faisalabad.

* Pakistan Census of Agriculture, 1980, Agricultural Census

Organization, Statistics Division, Government of Pakistan, Lahore.

* Economic Survey, 1991, Finance Division, Government of Pakistan.

* Report of the National Commission on Agriculture, 1988, Ministry of

Food & Agriculture, Government of Pakistan.

* The Sixth Five Year Plan, 1983-88, Planning Commission, Government

of Pakistan, Islamabad.

* Seventh five Year Plan, 1988-93, & Perspective Plan 1988-2000,

Planning Commission, Government of Pakistan, Islamabad.

* Khan Rao Abdu/Rauf, Some Operational Issues and Institutional

Constraints in Lending Small Farmers, The Pakistan Development Review,
30:4 Part-IIC Winter 1991, Pakistan Institute of Development Economies,
Islamabad.

* Khan Rao Abdul Rauf, Improving Credit Service: Recovery Management,

Economic Business Review, DAWN (English Daily) May 11, 1991, Karachi.

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