ARTICLE (March 08 2004): The three main factors that contribute to agricultural growth are the increased use of agricultural inputs, technological change and technical efficiency.

Technological change is the result of research and development efforts, while technical efficiency, with which new technology is adopted and used more rationally, is affected by the flow of information, better infrastructure, availability of funds and farmers' managerial capabilities.

Higher use and better mix of inputs also requires funds at the disposal of farmers.

These funds could come either from the farmers' own savings or through borrowings. In less developed countries like Pakistan, where savings are negligible especially among the small farmers, agricultural credit appears to be an essential input along with modern technology for higher productivity.

Credit requirements of the farming sector have increased rapidly over the past few decades, as a result of the rise in the use of fertiliser, biocides, improved seeds and mechanisation, and a hike in their prices.

The agricultural credit system of Pakistan consists of informal and formal sources of credit supply.

The informal sources include friends, relatives, commission agents, traders and private moneylenders etc.

Presently, the formal credit sources are comprised of financial institutions like Zarai Taraqiate Bank Limited (ZTBL) - formerly known as Agricultural Development Bank of Pakistan (ADBP), Commercial Banks, and Federal Bank for Co-operatives.

Recently, some non-government organisations (NGOs) are also advancing agricultural credit to the rural communities.

Like most developing countries, expansion of subsidised institutional credit has been widely exercised in Pakistan.

The target is to attain higher agricultural growth by relaxing liquidity constraints leading to higher input use, adoption of new technology, and a possible diversification of crop mix and farm income sources.

However, in the case of Pakistan, a few studies have focused on the impact of institutional credit on agricultural production. Zuberi (1989) estimated production function for the agriculture sector and concluded that the impact of institutional credit comes through financing of seed and fertiliser.

The role of financing fixed investment was found insignificant. In a similar exercise, Qureshi and Shah (1992) concluded that institutional credit is impacting agricultural output also, through its role in the financing of capital investment.

They found that the responsiveness of agricultural output is larger to institutional credit than that of output to fertiliser.

Both the studies dropped important variables, like land and water, in their finally estimated equations blaming the problem of multi-collinearity, while overlooking the dependency of purchased inputs like fertiliser and seed on institutional credit.

The purpose of this study is to investigate the impact of institutional credit on agricultural production in Pakistan.

It is aimed at estimating the production function relating agricultural output with institutional credit and other independent variables including land and water.

The paper will also discuss various indicators of agricultural credit in Pakistan.

The study is divided into five parts. The next section discusses formal sources of agricultural credit in Pakistan.

The data and methodology are described in Section III. The results are explained in Section IV. The last section concludes the findings of the study and suggests implications.

II. SOURCES OF INSTITUTIONAL CREDIT IN PAKISTAN: The history of institutional credit in Pakistan starts from the pre-independence meagre amounts of taccavi loans and loans from co-operative societies in place at that time.

The farmers were heavily dependant on non-institutional sources for their credit requirements.

The Land Improvement Loans Act of 1883 (LILA) and Agriculturists Loan Act 1884 (ALA), later on replaced by West Pakistan Agriculturists Loan Act of 1958 (ALA), regulated Taccavi loans.

Under LILA, loans were disbursed for sinking of irrigation wells/tube wells, land levelling, and land re-claimation and development for agricultural purposes.

Under ALA, loans wore provided for relief of distress and for purchasing seed, fertiliser, cattle, and implements [Yusuf (1984) and GOP (2003)].

Taccavi loans were disbursed through revenue departments of the provincial governments.

The contribution of these loans towards total institutional credit declined overtime with the development of new institutional sources.

Small amounts were allocated in provincial budgets for these loans. Delays and procedural difficulties in sanctioning and disbursement of loans rendered the system of taccavi inefficient and ultimately these loans have been discontinued since 1993-94.

The co-operatives for credit exist in this region, they have existed since their introduction in India under the Co-operative Credit Societies Act of 1904.

The objective was to provide loans to small farmers through their own local associations on relatively easy terms to free them from the clutches of moneylenders and grain merchants.

The scope of co-operative activities was enlarged, through the Co-operative Societies Act of 1912, to other fields besides agricultural credit and co-operative technique could also be used by urban dwellers [GOP (1988)].

The Act gave powers to provincial governments to make rules to carry out the purpose of the Act, including the settlement of disputes among members and their societies by arbitration.

Under the reforms of 1919, co-operatives became a provincial subject and some of provinces proceeded to enact their own laws relating to co-operative societies.

The government of Bombay passed the Bombay Co-operative Societies Act of 1925 to replace the Central Act of 1912 (Sindh was part of Bombay before 1936).

The Act of 1925 was more stringent and enhanced the authority of the Registrar, giving him the power to impose penalties on managing committees and their members for mismanagement and defalcation. Punjab, NWFP, and Balochistan continued with the Act of 1912.

The Co-operative Societies Act of 1925 was extended to the whole of present Pakistan, during 1965.

Later, the West Pakistan Co-operative Societies and Co-operative Banks (repayment of loans) Ordinance, 1966 provided more powers to the co-operative department for recovery of loans [GOP (1988)].

The co-operative credit had no formal relationship with the financing of inputs and/or farm investments. It was designed to compete with non-institutional sources of credit and was aimed, generally, to meet the credit needs of farmers to finance their consumption expenditures
[Qureshi and Shah (1992)].

In 1976, the federal government established the Federal Bank for Co-operatives (FBC) with the consent of the provincial governments.

With the establishment of the FBC, the philosophy behind co-operative credit changed in a fundamental manner. An explicit relationship between the credit and input use and the credit and farm size was postulated.

The FBC depends on the State Bank of Pakistan for financial support.

Prior to independence, taccavi loans and borrowing from co-operatives were the only sources of institutional credit available to the farmers.

The small farmers, particularly, had to depend on non-institutional sources for meeting most of the credit requirements.

In order to overcome this inadequacy, two specialised agricultural financial institutions, namely; the Agricultural Development Finance Corporation (1952) and the Agricultural Bank of Pakistan (1957), were established.

These two institutions were later merged to form the Agricultural Development Bank of Pakistan (ADBP) on 18 February 1961.

Recently, it was renamed as the Zarai Taraqiate Bank Limited (ZTBL) and is the leading source of institutional agricultural credit in the country.

ZTBL mainly borrows from the State Bank of Pakistan. However, some special funding programs of the bank are funded by multilateral agencies like the World Bank, the Asian Development Bank, and the International Fund for Agricultural Development.

The commercial banks are the other important formal source of agricultural credit in Pakistan. Prior to the Banking Reform of 1972, commercial banks were generally reluctant to tend to the agriculture sector.

The financing was limited to agricultural marketing with produce as collateral for the loans [Qureshi and Shah (1992)].

Under the 1972 reforms, commercial banks were required to broaden the scope of lending to finance modern farm inputs and investments.

The banks are required to fulfil a target lending for the agricultural sector and are subject to penalties if they do not meet the target.

Unlike the other formal credit institutions, the commercial banks depend entirely on their deposits for financing agricultural credit.

The Agricultural Credit Advisory Committee (ACAC) of the State Bank of Pakistan prepares agricultural credit estimates.

The annual credit plan, along with sectoral and institutional credit ceilings, is approved by the National Credit Consultative Council (NCCC).

The State Bank of Pakistan performs a vital role in the development of the agricultural credit delivery system.

Its agricultural credit department is responsible for assessing and determining the agricultural requirement of the country as well as co-ordinating with the different federal and provincial departments of the major agricultural credit-disbursing agencies like the ZTBL/ADBP, FBC, and commercial banks [Hai (2001)].

The Federal Bank of Co-operatives provides production loans while ZTBL/ADBP and commercial banks advance both production and development loans. The NCCC allocates yearly credit targets to these institutions to promote investment in the agricultural sector.

III. RESULTS AND DISCUSSION: The disbursement of institutional credit (nominal) ranged from 128 million rupees in 1971-72 to about 51348 million rupees in 2001-2002.

The growth of nominal credit remained highest during the period 1974-75 to 1987-88 when it grew at the compound growth rate of 23.46 percent.

The disbursement of nominal credit declined during 1988-89 and 1989-90. It recovered slowly (at a growth rate of 5.54 percent between 1989-90 to 1992-93) to the level of 1987-88 during 1992-93.

After which, with the exception of a few years, it grew at a relatively higher rate of 13.97 percent.

In real terms also, the institutional credit showed a similar pattern but with a much slower growth rate. The growth of real credit after mid 1980s to mid 1990s remained negative.

The institutional credit as the percentage of agricultural GDP grew from 0.67 percent in 1971-72 to a highest of 11.56 percent during 1986-87.

Afterwards, the ratio of credit to GDP (expressed in percentage) continuously declined to 6.42 percent during 1990-91 and fluctuated below 6 percent during the period 1991-92 to 2000-01 with a lowest of 3.51 percent occurring in 1996-97.

It shows that after the mid 1980s to mid 1990s the institutional credit constituted a smaller and smaller portion of the agricultural GDP.

The availability of nominal and real institutional credit on per cropped hectare basis increased continuously till after the mid 1980s and stood at rupees 801.4 and 525 per cropped hectare, respectively in 1987-88 and 1986-87.

The nominal credit per cropped hectare declined in 1988-89 and fluctuated around 650 rupees per cropped hectare between the years 1988-89 to 1991-92 and after that it rose sharply with the exception of few years.

After 1986-87, the availability of real credit per cropped hectare declined till 1993-94, after which, it recovered slowly to the level of mid 1980s.

This declined availability of institutional credit in real terms, after mid 1980s, and increasing per hectare costs of production due to increasing prices of inputs, withdrawal of input subsidies, and levy of sales tax on inputs like fertiliser and pesticides, may have adverse implications for agricultural growth.

The production loans for purchase of seed and fertiliser constituted only a nominal portion of the total institutional credit up to the year 1979-1980.

However, during the period from 1980-81 to 1984-85, the proportion of institutional credit allocated for the purchase of fertiliser rose more sharply and stood at 42.21 percent in 1984-85.

Allocation of credit for fertiliser stood above 40 percent for the next couple of years and sharply declined to a level of 21.71 percent in 1988-89.

The share of credit for fertiliser staffed increasing slowly with some fluctuations but remained below 40 percent up to the year 1997-98, after which, the share again crossed over 40 percent.

The share of institutional credit, allocated for the purchase of seed, stood above 11 percent during 1980-81 and 1981-82, after which it showed wide fluctuations up to year 1993-94 and remained well below 11 percent, except during 1983-84 (10.95%).

The share of credit allocated to purchase seed rose continuously after 1993-94, except the year 1996-97, when the share again moved down to 8.83 percent.

The share of institutional credit advanced for installation of tube wells was the highest in 1975-76 and in the later years it fluctuated between 1.15 percent (in 1995-96) and 5.21 percent, (in 1990-91).

In the years prior to 1979-80, most of the institutional credit (over 50 percent in 1976-77 and over 65 percent during the other years) was advanced for the purchase of tractors.

This share declined sharply to about 30 percent in 1980-81 and remained roughly constant up to 1984-85.

More than one fifth of the institutional credit, disbursed between mid 1980s to mid 1990s, was allocated for the purchase of tractors, with the exception of 1991-92 when this share was about 17 percent.

After 1996-97, the portion of institutional loan advanced for the purchase of tractors remained well below 20 percent.

The share of institutional credit advanced for other purposes showed an increasing trend with relatively smaller fluctuations.

The shares of production loans for seed/fertilisers, development loans for tube wells/tractors, and loans for other purposes were relatively closer to each other and fluctuated roughly around one-third each during the late l980s and up to mid 1990s.

After mid 1990s, about one-half or more of the total loans advanced were meant the purchase of seed and fertilizers.

The share of loans advanced for the installation of tube wells and purchase of tractors declined to roughly one-fifth or less during the same period.

This shows a shift in credit policy from loans for fixed capital to loans for operational capital, during the early to late 1980s and after the mid 1990s.

IV. CONCLUSIONS: Institutional credit expanded at quite a high rate during the past three decades.

The rate of growth of nominal credit was slowest, especially in the period after the mid 1980s to mid l990s, while the growth of real credit was negative during the same period

The availability of institutional credit per cropped hectare also increased in nominal as well as in real terms and showed a similar pattern over time.

The ZTBL/ADBP and the commercial banks constitute the major sources of formal credit.

The share of commercial banks in the total institutional credit declined over time, especially in the 1990s. A significant shift from institutional credit for investment in fixed capital, like tube wells and tractors, to loans advances for operational expenditures, like purchase of seed and fertiliser, was observed especially in the early to after mid 1980s and after mid 1990s.

The relationship between institutional credit and agricultural GDP was found to be positive and significant.

Availability of irrigation water and agricultural labour per cultivated hectare, and cropping intensity are the other important determinants of agricultural GDP.

It is suggested that the commercial banks and other financial institutions be encouraged to expand agricultural credit and extend the net of institutional credit to a larger proportion of the farming community, especially the small farmers.

These institutions are required to extend consumption loans to the needy farmers in case of a large-scale crop failure, especially to farmer with good loan records and these loans be granted in addition to the credit required for their farm operations.

A generous yearly limit (kharif and rabi seasons) of institutional credit for each farmer should be fixed, based on productivity of the land he/she is cultivating and other assets as collateral.

At least 20-25 percent of this limited may be allowed to him/her as consumption loans, especially during the bad years.

The amount of loans obtained and repaid should be kept on deducted or added to this limit automatically.

Presently, most of the institutional loans are invested in crop production. Livestock is also an important sub-sector of the economy, accounting for about 39 percent of the value added in agriculture.

Increased institutional loans for dairy and other livestock production activities may prove as a catalyst in achieving higher agricultural growth and in the fight against rural poverty.

Courtesy Business Recorder