It is only Zarai Bank (previously Agricultural Development Bank of Pakistan) which was set up for providing agricultural credit on a larger scale others do it only casually and secondly, their main concern and interest being credit in general.
The term "Agricultural Credit" is perhaps not appropriate in the context of the development of the rural industry. Instead, it should be 'rural credit'. The National Commission of Agriculture 1988 is also of the view that "a stage has been reached when there should be an explicit more towards a broad conceit of 'rural credit' as distinct from 'agricultural credit'.
According to the Commission, only 47 percent of the rural households are engaged in actual farming and another 15 percent are small livestock holders. It means that over 50 percent of the rural population have no farm land or have only a marginal stake to the agricultural economy.
In order to encompass this large faction of the rural population into the agricultural economy, it should be widened to call it a rural economy so that greater credit support may be given to strengthen its economic position.
The expansion in the off-farm lending by the Zarai Bank, as well as the contemplated reforms in the co-operatives towards this end, is a pointer to make a shift from 'agricultural credit' to rural credit.
SLOW PACE OF LENDING: Zarai Bank among the DFI's is the largest source of agricultural credit (on an average annually sharing about 40 percent of the total agricultural credit disbursement) in this, development loans account for 10 percent while production loans and agri-business loans constitute only 20 percent and 10 percent respectively.
The loans advanced for agri-industry fall under agri-business loans. In other loan giving agencies, the situation of providing credit to the agri-industry is also no better.
If we take the rural industries located in the rural areas, it is rather worse partly due to very little industrial development over there and partly on account of hesitant lending by DFI's.
The basic problem in the development of agri-industries in the rural areas is that there are two distinct categories of farmer's have and have-nots.
It should be the farmer himself who may come forward to set up agri-industrial units of his interest particularly in the rural areas.
While the haves are ignorant of the advantages of industrialisation, as well as the technical know-how, the 'have nots' have no resources either.
This phenomenon has caused the emergence of urban based entrepreneur-ship and consequently the concentration of agri-industries in the urban areas far away from production centres.
Some experts are of the view it is not feasible and economically viable to set up industrial units in the rural areas due to a variety of reasons including the absence of a necessary infrastructure.
It is only an untested hypothesis that industrial units in rural areas cannot do as well as those established in the urban areas.
As a matter of fact, it is the urban-based entrepreneur (whose major and main business is not agriculture-related) who has to pay large amounts of income tax on his earnings, obtained through economic pursuits in the urban areas.
But there being no such tax on agricultural income, he invests some of his capital in agro-industrial units in the rural areas but is never serious in making them operationally efficient or financially viable.
Now for examining the case of the agri-industry, irrespective of its location in the context of credit availability, the writer would like to mention what he had noted in this regard during the course of a field survey of the fruits and vegetable processing industry in the country while he was on an US-aid assignment.
THE MAIN POINTS OF HIS OBSERVATIONS ARE SUMMARISED BELOW:
1) Besides the ADBP (now renamed as the Zarai Bank) a specialist in providing agricultural credit for agricultural purposes, all the commercial banks have a separate finance section/department to provide funds/loans to agriculturists primarily for production purposes.
ADBP (now called Zarai Bank) had also introduced a supervised credit programme under which the banks reaches the farmers to assist them financially and watch against the misuse of the credit granted, through the bank's motor-cycle squad of bank's inspections.
2) The fruit and processing industry, particularly big processing units established on sound economic footing, have been facing financial constraints. On the other hand there are a number of loan giving agencies like the ADBP (now known as Zarai Bank Commercial Banks, NDFC (now closed down), PICIC, most of which have set up their offices/branches even in the far flung rural centres to advance loans.
Beside providing funds they also arrange for feasibility studies and also provide technical/professional guidance to prospective investors in the agri-industries.
3) But finance is the main constraint being faced by the small processing units in expanding their operations and experiencing the benefits of economies of scale.
The banks in the area are hesitant even to sanction a credit limit to them, as working capital, what to speak of capital loans for land and machinery.
4) ADBP (now called Zarai Bank) had been funding some over a dozen fruit juice concerns, out of which only half of them were in operation by 1989 and the rest were in various stages of implementation.
Their equity ratio is 40:60. Collateral's acceptable to the bank are generally fixed assets.
The procedure of loaning has been modified over time and now it is a sort of project loaning. Once the prospective project is found feasible and economically stable, funds are provided forthwith.
As for the recovery of loans, the situation is not very encouraging. The bank claims to be the largest lender to the processing industry.
5) NDFC (before its winding up) a couple of years back, as funding the dairy, sugar, poultry feed and also the fruit juices industries.
6) IDBP had funded some fruit juice plants in the past 3 years, but their experience has not at all been happy.
Their equity ratio between the borrower and the bank is generally 40:60. But in certain cases, 30:70 was also allowed for collateral security. They generally accept cash and government security certificates.
MAIN PROBLEMS: The main problems in the disbursement of credit to the procession industry are identified as under:
1) Influential businessmen and industrialists eat away the major portion of the financial allocations at the cost of small ones.
2) Some of the loan giving agencies are not careful in funding to the processing units on exclusively economic consideration. But some other considerations (personal and political) are given more weight to assess the credit-worthiness of these units.
3) Some times there is no proper liaison and co-ordination among various DFI's for avoiding double/multiple borrowings by the same company/individual and for the same purpose as well as to have a uniform policy for sanctioning loan limits to the prospective processors.
SUGGESTIONS: The following suggestions are made to improve the situation in lending regime:
1) Separate funds may be allocated to the processing industry as distinct with from overall agricultural/rural credit provision.
2) Now, when all the financial agencies (banks etc) are mostly working in the public sector, the government should ensure an equitable distribution of credit availability between the big and small units.
3) At the district level there should be a co-ordination committee with representation of various input supplying agencies like fertiliser, pesticide/chemical water management etc.
The loan may be disbursed (as far as possible) through the relevant agencies, both in the public and private sectors. The supply of various inputs may be ensured to the farmers and perhaps at competitive rates.