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 landlordsfarm 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
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
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