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Agricultural credit.

The donor agencies have prescribed the actions required to resolve these key issues. These are: raise on-lending rate of general agri-lending to 13.5 per cent from July 1992, which has already been done. Adjustment of rates for tractor/implements loans to 13.5 per cent has also been done. Fund subsidy cost incurred by ADBP and CBs on account of reduced lending rates for tractors, implements from fiscal year 93 was assured by the ADBP.

Agriculture has been the mainstay of Pakistan's economy accounting for 25 per cent of GDP, providing livelihood to 70 per cent of the population and contributing directly and through value added 51 per cent to export earnings. Despite its importance, the sector's performance is characterised by low productivity due to many reasons. One is, inter alia, improper Utilization of agricultural credit and limited credit delivery services.

Mismanagement, inefficiency and political considerations had hitherto a large bearing on effective utility of credits in agriculture sector. The donor agencies, time and again, have pointed out deficiencies and loopholes in agricultural credit programmes. In this connection the most glaring example is Agricultural Credit Project worth dollar 2,283.2 million, which has shown lacklustre progress and hence termed by the World Banks as "problem project".

This project carries a dollar (275) million loan component from various donors. These include: the World Bank (dollar 150 million), International Fund of Agricultural Development (IFAD) (25 million dollar and Asian Development Bank (ADB) (dollar 150 million). The project is far behind its schedule as it could disburse only 48.6 million dollar out of 85.7 million dollar appraisal target. Percentage-wise, it makes merely 32 per cent.

The deficiencies are, certainly, on the part of implementing agencies: Agricultural Development Bank of Pakistan (ADBP); five Commercial Banks (CBs); State Bank of Pakistan (SBP) and the Punjab Board of Revenue. Ministry of Finance is playing the supervisory role. According to the official papers the commercial banks component continues to lag behind. There is little evidence of CBs being enthusiastic enough to be involved in agricultural lending. Unless their lending rates for agriculture are completely free from government of Pakistan's control, their commitment to agricultural credit programme will remain only marginal. Pakistan Banking Council's (PBC) role has yet to take full effect.

Two other project components relating to rural financing and agricultural credit policy research, which is undertaken by the State Bank of Pakistan (SBP) and the computerization of land records by the Board of Revenue, Punjab, have also shown no tangible progress although consultants are closer to recruitment in their former (SBP) case. The main problem has been the procedural difficulties for institutions like SBP and Punjab's Board of Revenue to recruit the consulting firms expeditiously.

However, the project has made significant progress for the ADBP component on a number of key actions, although violation of some critical loan conveyance persists. The donor agencies have emphasised to restore vitality and staff morale in ADBP, and for achieving a turnaround in implementation of the ADBP component. A beginning has essentially been made in this long term process. Institutional priorities are being set, motivation and training of staff and managers is underway, a foundation is being laid for the evolution of a new credit culture and higher quality loan portfolio, measures are being devised for tightening the operational linkage and budget efficiency of the bank's resources and there is a greater awareness to strengthen ADBP's capacity and systems for financial management. While action has been taken on most items of the plan, quite a few items necessitate follow up actions since preliminary steps indicate intent and beginning. Major problem areas are concessional lending rates for tractors, unsatisfactory recovery (excluding caretaker government period), and emergency lending.

The big issues hindering the smooth and viable operation of the agricultural lending agencies are:

ADBP

a) Concessional lending rate for tractors and implements (ADBP's general credit lending rate) has been increased from 12.5 per cent to 13.5 per cent, to be effective retrospectively from July 1992. However, loans for tractors and implements are still dispensed at 9 per cent (increased for 8 per cent) and the government picks up the subsidy i.e., difference between 13.5 per cent and 9 per cent.

b) Financial restructuring of ADBP portfolio audit and clean up of the portfolio, reducing riskier lending by eliminating non-performing sectors, and diversifying portfolio in favour of short term lending (ADBP estimates fiscal year 93 funding deficit to reach Rs. 12.6 billion.) Debt rescheduling from SBP is on ad hoc basis. To avoid future liquidity crisis, a complete debt rescheduling plan needs to be developed and agreed upon by all concerned taking into account resource mobilization, loan recoveries and terms of the credit lines available to ADBP).

c) Recruitment of banking and training consultants to achieve above mentioned issue and to assist in human resource development.

e) Reformulation and implementation of personnel policies directed to building staff morale so as to enhance operational efficiency and to gradually change the credit culture.

f) Commencement of lending to special target beneficiaries through innovative schemes such as group based and NGO (non governmental organisations) based lending to small holders, women and the landless.

g) Establishment of a trust fund to absorb exogenous demands which are incompatible to sound banking operations (e.g. emergency lending, special credit delivery operations with high social mobilization and staff training cost).

Commercial Banks (CBs) and Pakistan Banking Council (PBC)

Key issues for the commercial banks and PBC are:

a) Removal of concessional lending rate for tractors, implements and short-term lending. Although the government has allowed agricultural lending rate to increase by 1 per cent (by way of the excise tax to the mark up which was 7 per cent per cropping season or with a yield 10.5 percent per annum), the rate for short term loans (equivalent to 12 per cent per annum) is still below the break-even. Based on the cost accounting exercise, the lending rate structure of CBs needs to be revised. CBs should charge rates of return which cover cost of resources, provision and administration. PBC, in consultation with CBs should take a decision along with government of Pakistan and State Bank to modify the lending rates.

b) The medium and long term (MLT) loan portfolio of CBs branches is very small and collateral and equity requirements (25 per cent to 40 per cent) are excessive. CBs should look into the possibility of increasing their agricultural loans portfolio.

SBP and Government of Punjab components' issue is recruitment of consulting firms is essential for measuring further progress.

The donor agencies have prescribed the actions required to resolve these key issues. These are: raise on-lending rate of general agri-lending to 13.5 per cent from July 1992, which has already been done. Adjustment of rates for tractor/implements loans to 13.5 per cent has also been done. Fund subsidy cost incurred by ADBP and CBs on account of reduced lending rates for tractors, implements from fiscal year 93 was assured by the ADBP. Rut hiring of remaining female credit staff (MCOFs) to implement the women credit component, improving loan recoveries to 75 per cent and, finally, formulation and implementation of saving mobilization strategy and financial restructuring plan are yet to be hit.
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Author:Ashraf Khan, Mohammad
Publication:Economic Review
Date:Sep 1, 1993
Words:1213
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