Revamping ZTBL Part-II
By: Shaukat Masood Zafar
12. In most parts of the country, farmers face acute distress because of the heavy burden of debt from non-institutional lenders (e.g., moneylenders). They need credit for carrying out current farm operations. It becomes difficult for the farmers to come out of this debt-trap even when faced with a favorable season and a good harvest. The problem stands compounded and further exacerbated when farmers look forward to taking advantage of modern high yielding seed technology and absorbing newer methods of scientific farming which require both working capital and investment capital. Small farmers require a credit package covering production, investment and consumption credits, and if necessary, credit for redemption of prior debts. With a view to mitigating farmers’ indebtedness to moneylenders at exorbitant rates of interest, a one-time measure of providing long-term loans by ZTBL to farmers to enable them to repay their debt to the money lenders. The cost of the scheme should be met by providing a sufficient special fund to ZTBL. The Bank should be provided funds to advance loans to such farmers to provide them relief from indebtedness. The main stay of the national agricultural credit policy should be the institutional credit system. This system should include different types of loans to be funded by the national budget and markup-subsidized loans to be extended by ZTBL to small farmers having holding less than 6 acres.
13. The bank generally focuses on providing credit rather than accepting deposits with adverse consequences on its self-reliance and viability. It is also unable to serve small farmers and other customers in the rural areas because it restricts its loans to agricultural activities instead of covering other kinds of rural–income generating activities. Interest rate reduction prevented it from covering its costs and restricted the access of the poor to financial services. The bank lacks the managerial wherewithal to diversify and enhance customer services.
The Bank should design to assist small farmers and the landless rural poor in increasing their incomes and standards of living, and to promote self-help and self-reliance through:
- building up the institutional base for organizing the disadvantaged rural poor into small-farmer groups around common economic activities and/or production resources;
- providing supervised credit to enable these groups to undertake a range of income-generating activities; and
- providing training and technical assistance to ensure effective utilization of facilities provided by the project
14. Development practitioners, policy makers, and multilateral and bilateral lenders, recognize that providing efficient microfinance services is important for a variety of reasons. Improved access to microfinance services can enable the poor to smooth out their consumption, manage their risks better, build their assets, develop their micro- enterprises, enhance their income-earning capacity, and enjoy an improved quality of life. Microfinance services have a significant positive impact on the depth (severity) of poverty and on specific socio-economic variables. People’s participation and their involvement in the planning, implementation and monitoring of programs will enhance sustainability of such programs and promote ownership and commitment. Planning for rural infrastructure will involve local user groups, particularly farmers, traders, village development committees and NGOs. This is expected to change the entire system of planning rural infrastructure from a top-down to a bottom-up approach. Transferring of all operation and maintenance responsibilities of rural assets to the local community is the first step towards achieving this objective.
15. The Bank should make efforts in the formation of Farmer Groups countrywide and provide them with technical support and training for capacity building, social security, and establishing market linkages. With a view to expanding the livelihood opportunities, particularly for small and marginal farmers, income diversification opportunities should be created by promoting allied agricultural, agro-processing and other rural non-farm enterprises.
16. Village development committees and collective management of ZTBL is the cornerstone of development. Unless there is a framework of grassroots institutions, meaningful and effective development cannot occur. Individuals by themselves cannot overcome the limitations. The first step is to inspire villagers to organize so they can take control of decisions that affect them and make the best use of resources. This organization becomes each village’s permanent means to more development. There has been general consensus around the world in bridging the formal sector banks with the semi-formal sector NGOs (including village development committees) exploiting the comparative advantages of each. The informal and semi-formal sectors have a comparative advantage over the banks in lending small loans without collateral or in “re-lending” to women and poor borrowers. NGOs mobilize savings from their members but not from non-members which deny them access to large savers. They are therefore in a position to lend more than they can mobilize as deposits. Creating a link between NGOs and ZTBL therefore ensures the comparative advantage of both sectors.
17. The Bank should train the Village Development Committees to leads villagers to save their money and use it to generate capital. Savings should be commercially banked, generating interest for villagers, and serve as collateral for loans from the Bank. No solution to hunger and rural poverty can be found without providing secure and gainful employment to people, whether on farm, off-farm (handicraft, trade, fisheries, etc.), or urban employment. Microfinance has emerged as a powerful tool for accelerated rural development and it helps the poor to acquire new assets, produce goods and services, and encourage collective self-management of resources for sustainable development. The Bank should provide small scale credit and other financial services to low income households and small informal businesses in the rural areas through Village Development Committees. The objectives of the rural credit policy of the Bank should be to minimize the dependence of rural poor on non-institutional / private sources of credit.
18. A formal establishment of financial relationship between ZTBL and self-help-groups / Village Development Committees (VDCs) for savings mobilization and credit delivery and recovery, with following objectives, would bring best results.
- · To facilitate and mobilize savings by VDCs so that they can generate their own part collateral and loan guarantees;
- To provide delivery and recovery channels to VDCs;
- To recycle locally generated funds to the areas from where they derive;
- To provide a framework for a permanent business relationship between the VDCs and the bank;
- To minimize transaction costs between the banks and the VDCs.
VDCs in collaboration of ZTBL will focus on those who are “financially excluded” in the rural areas and the extant institutional response to them.
- · SHGs will be formed by the VDCs to facilitate collective decision-making by the poor and pre ‘doorstep banking‘;
- · Bank as whlesaler f credit, should prvide the resources; and
- · NGOs will act as agencies to rganize the poor, build their capacities and facilitate the process of empowering them.
19. The interest rate charged on credit by different informal providers is exorbitant and varied from ten to fifteen percent per month. Lending may be either secured by physical collateral (e.g. land, movable property such as gold and jewelry, or by production assets such as animals and standing crops), or by social collateral, such as third-party guarantees or loss of reputation in one’s social network. These collateral substitutes are effective in sustaining the informal lending business because contract enforcement is legitimized by social norms. Debtor-agriculturists often have to sell the whole or part of their produce at low rates to creditors to repay debts. On the other hand, the decline in the price of agricultural commodities increases the extent of peasant indebtedness. Informal credit continues to remain important in the rural areas. Informal credit is easily available, and is therefore, more capable of meeting the urgent needs of rural farmers and the people of other professions. Informal private credit is however, exploitative in nature and is often used for unproductive purposes. The bank should bridge the gap by providing credit to the needy people on normal market markup rates. Village Development Organizations may have a comparative advantage over socially distant ZTBL in using social capital for the enforcement of their contracts on behalf of the Bank. Also, Village Development Organizations, being deposit–taking institutions can have a comparative advantage in using informal enforcement mechanisms compared to ZTBL that lends “cold” money.
20. Although farmers are already experts on their own survival; by giving extra knowledge through Agricultural Graduate MCOs of the bank and providing physical demonstrations through my already proposed Agricultural Training Centers, they can also become their own technical and managerial experts. To put this into practice, Village Development Committees should nominate members to be trained by those Centers. Each trainee would then return to his village as specialist consultant. Much of what the specialists do is to help their fellow villagers.
21. A complex issue is how to deal with natural calamities/ disasters and their impacts on both borrowers and the Bank. Loan and interest forgiveness in flood / calamity affected areas is justified on social grounds. However, the role of financial institutions is not to carry out social or political programs. In order to maintain financial discipline, disaster relief has to be separated from commercial operations altogether. There is clearly a need for innovative insurance options that can overcome these problems. This requires an appropriate institution. The bank should better create an insurance subsidiary within the Bank to cope with this problem.
22. About one year back, in a comprehensive 15 pages summary of the business plan I had suggested that:
“The thrust of my suggestions is to directly utilize agriculture as an engine to raise on-farm incomes and purchasing power, generate additional on-farm employment opportunities, and stimulate rural industrialization and services. These would in turn increase demand for agricultural products, manufactured goods and services throughout the economy, creating a multiplier effect that generates jobs in other sectors. The specific focus on the strategy should be on raising on-farm productivity and fostering closer linkages with industry and markets through innovative approaches to the organization of the rural economy. An integrated effort needs to be put in by the Zarai Taraqiati Bank by introducing in private sector SOIL TESTING LABORATORIES, FARM ADVISORY INTELLIGENCE SYSTEM, RURAL INFORMATION SYSTEM, AGRICULTURE SERVICE CENTERS, and FARM SCHOOLS. Once these services are in place, there is ample scope to raise average productivity on a wide range of crops by a factor of 100 to 200% or even more by focusing on improved methods for plant nutrition, land preparation and irrigation”.
Unfortunately, I think, that summary have been put by the Government / Bank into dustbin. Being expert in rural development and having complete knowledge and experience of this Bank from village to Head Office level, I had offered to produce a complete business plan for the Bank in line with the summary I submitted to the Government and that too free of any cost. The Bank management probably does not like free services and is showering millions and millions of Rupees to the near and dear consultant firms just to get merely partial theoretical plans only, not worth of contributing something towards actual development and actual sustainability of the Bank, which is quite evident from previous experience. It is my pledge that by putting into implementation the proposed business plan, the country can be put on the path of agricultural revolution. The Government and the bank should consider my patriotic move.
23. The basic aim of the bank reforms during 2002 was to improve the soundness, efficiency and productivity of whose financial health was far from satisfactory. The reforms sought to enhance the areas of commercial freedom, increase its outreach to the poor and stimulate additional flows to the sector. As a result of the so called reform process, the financial health of the bank could not be improved in terms of parameters such as capital adequacy, Non Performing Loans and return on assets consistent with international standards for classification of advances and prudential norms being applied. According to Para.20 of Country Partnership Strategy Report issued by Asian Development Bank during 2009 “A Rural Finance Program approved in 2002 supported the restructuring of another DFI: the Agricultural Development Bank of Pakistan (now ZTBL). These efforts were not successful: the State Life Insurance Company and IDBP could not be privatized and the restructuring of ZTBL did not materialize in any meaningful way”.
24. The bank has presently absolutely negative public image. It is important to capitalize on the existing positive aspects of the bank, but the bank also needs to be seen as “new and improved” from both a customer and employee perspective. ZTBL has a particularly unfavorable reputation in the eyes of the public but is trusted to some extent for its implicit government backing and has retained the support of local politicians, who still see it as mechanisms to favor some groups of society at the expense of others; that is, as instrument for political patronage. It is a major obstacle taking on the existing perception of the Bank. The Bank still suffers from being seen as a politically driven and mismanaged organization. The first approach is to provide valuable corruption-free products and services to the customers as soon as possible. A major public relations campaign should be launched very early telling Pakistanis that the bank was serious about business and is open to all.
25. The bank is fighting with troubles because of poor management and irresponsible lending. The Government should recapitalize the Bank, it is critical that a new image be created under new management to break the perception in the market that ZTBL has established. To achieve the objectives of production and productivity, the stance of policy towards rural credit should be to ensure provision of sufficient and timely credit at reasonable rates of interest to as large a segment of the rural population as possible. The strategy devised for the purpose should rest on three pillars: expansion of the institutional structure, directed lending to disadvantaged borrowers and sectors and market markup rates.
26. The management team should develop a new lending program, enter into Government payment services like pension, postal, money transfer etc. and convert payment services into deposits, create an extensive marketing program to increase deposits, implement strong controls through new policies and procedures, create a more effective management structure, and significantly increased training activities. The bank should prove that it can sustain itself and, in fact, contribute significantly to Pakistan’s overall economic development. Its turnaround should result developing and implementing products throughout the country profitably. Before beginning the assignment, the turnaround team must understand the true position of the Bank’s balance sheet and negotiate accordingly with the government. All earning and fixed assets must be properly evaluated and any needed capital must be put into the bank to raise the capital base to no less than zero. To generate the profitability, the increase in revenues needs to be met with the cutting of unnecessary expenses.
27. By agreement among all parties, the mission of the turnaround should be to:
I. Restore financial soundness to the Bank;
2. Bring financial services to the country‘s rural population; and
3. Prepare the Bank to operate independently.
The strategy should be to develop products that meet the needs of a large segment of the rural market, ensuring diversification by product and by geographical area. The idea should be to quickly pilot products and then to expand the delivery throughout locations countrywide rapidly. A focus on conservative lending should always been maintained.
28. In the seasonal credit requirements of farm operations, institutional credit was perceived fairly early in the development process as a powerful tool for enhancing production and productivity and for poverty alleviation, and the result was quite encouraging. To achieve the objectives of production and productivity, the stance of policy towards rural credit should be to ensure provision of sufficient and timely credit at reasonable rates of interest to as large a segment of the rural population as possible. The strategy devised for the purpose should rest on three pillars: expansion of the institutional structure, directed lending to disadvantaged borrowers and sectors and market markup rates.
Unfortunately neither Ministry of Finance nor State Bank of Pakistan played their effective role being regulators and stakeholders of this bank. Both the regulators seem to be helpless. The Bank where it has reached now needs their immediate intervention. The bank may be immediately restructured not based on theoretical approaches, as had been the case previously, but based on actual and genuine demands of the most vital sector bank is catering.