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Who cares for the small farmer
Poverty alleviation is a hot current subject attracting
attention at all levels - national and international. There is
no dearth of official pronouncements in this
regard.
Recently, President General Musharraf announced a package for
farmers and this was reflected in the Federal Budget for
2004-5. A close examination of the
package shows that it has much for big farmers but, in effect,
nothing for the small except reduction of Rs100 on per DAP
bag.
Reduction in the rate charged by the ZTBL from 14 per cent to
9 per cent should, in theory, also benefits the small farmer,
but, as a matter fact, it would stop
at the door of the large farmer, not trickling downward. As
will be seen, the small farmer is more concerned with
availability of credit than its cost.
Rural poverty is a multifaceted problem and this was discussed
by this scribe in an earlier article. An attempt is made to
highlight the specific problems of
the small farmer and the critical role institutional credit
can play for the alleviation of rural poverty.
Unfortunately, in Pakistan agricultural farming is identified
with the big farmer who is influential enough to have his way
in any case. The need is to look
beyond him and focus on peculiar problems faced by the small
farmer who is not only important in number but also in
contribution to production. There
should be no illusion that there can be any poverty
alleviation in rural areas without improving the lot of the
small farmer.
According to the Agricultural Census 2000 (AC 00), there are
6.6 million farm holdings in the country with the average size
of 3.1 hectares of per farm and 2.5
hectares of cultivated area, of which those under 0.5 hectare
account for 19 per cent, from 0.5 hectare to under one hectare
17 per cent, one hectare to
under 2 hectares 22 per cent, from 2 hectares to under 3
hectares 15 per cent, from 3 hectares to under 5 hectares 13
per cent, from 5 hectares to under 10
hectares 9 per cent, and 10 hectares to under 20 hectares 9
per cent.
Farms under 10 hectares represented 95 per cent of the farms
and 68 per cent of the cultivated area. No less than 39 per
cent of farms are fragmented, the
overall average being 3.9 (say 4) fragments of the fragmented
farms. The average area per fragment is 2.8 hectares.
At the time of independence there were very few rich persons
and the present enterprise class is the creation of Pakistan.
Bank credit has played a major
role in their emergence and this is reflected in their
continued heavy dependence on this source of financing, in
spite of their own increased saving and the
alternate source of financing from the capital market.
In case of manufacturing, the ratio of outstanding bank
advances to the contribution of this sector to the GDP stood
as high as 89 per cent in June 99. In 03,
the ratio was lower at 62 per cent but this was not because of
any reduction in the amount outstanding, even though this was
affected by the recovery of the
non-performing loans (NPLs) and debt write-off, but increased
investment by banks in industry by way of purchase of shares,
the PTCs, the NIT units etc.
All this adds to Rs113 billion. If that is included, the ratio
would be 78 per cent. In sharp contrast, the ratio was 15 per
cent for agriculture. This speaks
volumes of banks' marked preference for manufacturing, or
discrimination against agriculture.
This is also reflected in the rate of return charged from the
two sectors. The weighted average of return on the Islamic
modes of financing charged by
commercial banks was 14.94 per cent for manufacturing and
15.54 for agriculture in '99. By 03, the average for
manufacturing had declined to 7.89 per cent
but for agriculture it was 10.30 per cent.
In case of specialized banks, the corresponding rate for
manufacturing fell from 18.58 per cent to 14.12 per cent and
for agriculture the drop was marginal
from 13.98 per cent to 13.90 per cent.
The overall weighted average rate for the Islamic modes of
financing by commercial banks for private business declined
from 15.14 per cent to 8.73 per cent.
The State Bank has been pursuing cheap credit policy, as a
result of which the weighted average of lending rates for all
types of advances by all kinds of
banks recorded a sharp drop from 16.09 per cent in June '98
and 14.61 per cent in '99, to 5.68 per cent in 03 and 4.69 in
March, 04.
It is obvious that the cheap credit policy has totally
bypassed agriculture, in spite of ceaseless pronouncements of
priority to agriculture. There is a striking
difference in 3.5 per cent currently charged for export
finance and 9 per cent charged from the agriculture.
Whatever little credit has been extended to agriculture, it
has mostly benefited the large farmer leaving the small farmer
in the cold. Distribution of banks
advances by size, as of June 03, reveals that out of total
advances of Rs111 billion, loans for less than Rs10,000 were
Rs115 million and from Rs10,000 to less
than Rs25,000 were Rs1.6 billion, from Rs25,000 to less than
Rs50,000 were Rs19.3 billion, from Rs50,000 to less than
Rs100,000 were Rs48.1 billion, from
Rs100,000 to less than Rs200,000 were Rs15.7 billion.
Even the small amount of lending to the small farmer has an
element of fake lending. It has been observed: "Again, the
influential politicians and feudal
lords take major part of loans against the names of their
tenants showing them as small farmers thus most of the actual
credit does not go to many genuine
small farmers and landless tenants.
The tragedy is that most of these politically influentials
also get their loans finally written off." Heavy dependence on
informal credit at atrocious terms,
particularly by the small farmer, has been the bane of
agriculture.
Development of financial institutions, as a source of formal
credit, was expected to reduce this dependence. However, after
some reduction, this has again
tended to increase.
According to a study by the PIDE, the share of
non-institutional credit, which had declined from 90 per cent
in 73 to 41 per cent in 85, was 76.per cent in 90
and 78 per cent in 96.
(Last year of the study) Interestingly enough,
non-institutional lenders do not rely solely on their own
resources, which account for 52 per cent of their
lending, but resort to borrowing from formal (33 per cent) and
informal sources (15 per cent).
The study observes: "Around one third of the credit extended
by the informal sector is provided by the formal institutions
like banks to processing units,
landlords and other influential persons for onward lending
through informal channels".
This inter-linking of formal and informal sources of credit
via the lenders in rural areas is very significant. The study
further reveals that the lenders who lend
to farmers charge a very high rate of 40 to 50 per cent for a
period of 8 to 10 months.
The following important developments emerge from a comparison
of the ACs for '90 and '00. Indebtedness of All-Households to
non-institutional sources of
credit increased from Rs27.9 billion to Rs54.6 billion while
that of the Farm-Households more than doubled from Rs17.5
billion to Rs37.5 billion, raising the
ratio to total indebtedness from 61 per cent to 68 per cent.
The main increase has been in case of small farmers - farms
less than 10 hectares accounting for an increase of Rs16
billion. Large farm holders, as a matter
of fact, have become important informal lenders in their own
right.
According to the PIDE study, the share of landlords\farm
machinery suppliers was 36 per cent of informal credit
followed by shopkeepers with 16 per cent,
commission agents with 12 per cent, input dealers with 11 per
cent, professional moneylenders with 3 per cent and processing
units with 2 per cent. Others
accounted for the remaining 11 per cent.
The basic problem of the small farmer is that his output is
small for want of adequate use of modern means of production,
which he cannot afford, and he
has to dispose it off at very unfavourable terms for a variety
of reasons.
Even if he is not indebted, he is at the mercy of middlemen
who take the lion's share in the price due to the absence of
proper marketing arrangements and
transport facilities.
It is reported that in case of perishable commodities, like
vegetable and fruits, he does not get more 30 per cent of the
final price. Poverty compels him to
take advance by committing his produce at a discount.
In case he sells cotton and sugarcane to ginneries and sugar
mills, he is often cheated in weighing as well as quality and
is frequently not paid for long, at
times up to or more than a year.
This compels him to sell his "chit"-receipt for the supply at
a deep discount. This reduces his income and whatever is left
is largely pre-empted by informal
creditors and government functionaries, such as petty revenue
officials at the village level, who must be kept in good
humour.
The disposable income remains inadequate forcing the small
farmer to contract more debt, hence the vicious circle of
poverty leading to debt and debt, in
turn, causing poverty.
The lot of the small farmer is much worse than is perceived by
policy makers and economic managers, many of them have never
been to a village in the
hinterland of the country.
With this perspective, the lot of the small farmer can be
improved only by increasing his holding capacity and for this
institutional credit has a vital role. This
will be a shot in his arm without any cost to the exchequer.
It would be stating the obvious that the existing approach of
increasing the volume of credit without reaching more small
borrowers through the existing
institutions as well as those set upon on their pattern has
failed to help the small farmer and will not do.
According to the SBP Report On the State of the Economy for
the Second Quarter of '04, "At present out of 6.6 million
farms only 1.0 million have access to
the institutional credit.
Therefore, the future growth of agricultural credit mostly
depends upon the outreach of the banks and the innovations
they bring to the field." (p.21) No more
than one million agricultural borrowers of banks represent
only 15 per cent of farms.
A totally new, rather unorthodox, scheme of things is called
for. Let us first take the ZTBL. The Bank, for that matter all
the DFIs, acts as a conduit for
dispensing the funds that become available to it from the
central bank and international financial institutions.
Its umbilical cord is yet to be severed even after half a
century. Its personnel behave in a bureaucratic manner, as if
they are doling out favours. Borrowers
also treat credit in that spirit and the result is large bad
debt, more than other financial institutions.
At one stage, the ratio of the NPLs to total advances of the
Bank was twice the overall ratio of all financial institutions
in the country. The State Bank
Governor had this to say, "the Zari Taraqiati Bank has Rs30
billion credit line that it revolves every year, but it could
not produce the desired results due to
the fact that it lacks skilled manpower that of commercial
bank standard."
The Bank is basically urban -based, having only 345 branches
which do not even cover all district headquarters, much less
reach the small farmer in the
rural areas. The newly established Khushhali Bank is following
the same pattern.
Instead of setting up a new institution to cater to the so far
grossly neglected needs of the small farmer, the ZTBL should
be converted into the Rural Bank
exclusively devoted to providing banking facilities in rural
areas.
For this purpose, it should be physically pushed out of urban
to rural areas and a ceiling be put on its individual lending
to keep out large farmers who can
easily meet their credit requirements from commercial banks
where they already enjoy good standing and are most welcomed.
The condition of collateral-based lending should also be
softened and loans with collective guarantee be experimented,
with small amount to begin with.
The universal experience is that a small borrower is much less
credit risky than the big one.
The amount of individual loans is quite small. For want of
clout, he would never imagine defaulting with impunity and he
has a big stake in continuing flow
of credit from the only reasonable source for him. Managers of
the Bank should develop close banker-client relationship with
the locals to ensure lending to
the genuine small farmer.
The task is too big to be handled by the Rural Bank alone and
commercial banks will have to be involved. For this, the banks
must change their basic
attitude towards the small man, as borrower as well as
depositor and the policy of pulling out from small towns, not
to mention rural areas.
Commercial banks very effectively discourage small depositors
by prescribing a minimum balance for imposing service charge
and some banks plainly
refuse to give any return on deposits up to Rs20,000 which is
54 per cent of the current annual per capita income in
Pakistan.
The result is obvious in a sharp decline in small deposits
with banks. Between '99 and '03, the number of deposit
accounts less than Rs10,000 dropped from
7.7 million to 4.7 million or by 38 per cent while their
amount fell from Rs45.7 billion to Rs21 billion, or to less
than half, reducing their share in total personal
deposits from 12 per cent to 3 per cent.
This has pulled down the total number of accounts in personal
deposits from 16.2 million to 14.8 million, in spite of rapid
increase in urban population. As
regards the commercial bank lending to agriculture, the State
Bank Governor is on record: "The Bank instructed commercial
banks to lend money to the
agriculture sector.
And imposed penalty on those who did not comply, but they
showed reluctance and choose to pay the penalty". It may not
be out of place to mention that in
India regulations require banks to lend 18 per cent of their
net advances to agriculture.
There is a deeply entrenched myth about the small man in
Pakistan as for as financial policies are concerned. It is
firmly believed that he can play no rule
worth the name in saving and investment.
It is true that the capacity of the small man, as an
individual, is limited. On the other hand, the fact is that
even the poorest of poor saves something for the
rainy day and for the expected future needs.
Such persons, however, are in such a large number that the
humble saving of each of them, if properly garnered and
pooled, can add to a very significant
amount to be reckoned with.
This is amply borne by the actual experience in Pakistan. As
of end-June 03, despite the reduction over the years, personal
deposit accounts with a balance
of less than Rs10,000 accounted for 3 per cent of total
personal deposits, and those with less than Rs25,000 had 17
per cent share and those less than Rs50,000
no less than 34 per cent of total personal deposits.
The Rural Bank will have a vital role to play in mobilization
of rural savings and this can make it self-sufficient after
some time, required to educate and give
confidence to the small rural saver.
Curtesy: The Dawn
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