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Credit in the farm sector is available from sector is available from two sources--Non institution and institutional. These two sources of credit are now discussed in brief.

(1) Non-institutional sources of credit.

 The major non-institutional sources of farm credit are money-lenders, friends, relatives, landlords, shopkeepers and commission agents. Before 1947, the money lenders mostly non-Muslims were the main suppliers of loans to the farmers. After Partition however their importance has decreased to a great extent and the short term credit needs of the farmers are met from commission agents, friends and relatives which supply roughly 50% of total rural borrowings.

The traders and commission agents advance loans to the farmers for short period These loans are provided mostly for productive purposes before the maturity of crops. The commission agents force the farmers to sell the produce to them which generally is purchased at low rates.

The lenders of the informal sources (friends, relatives etc) have certain advantages over the formal credit sources. The informal lenders usually know the borrowers personally. They require little security for advancing loans. The loan are given for consumption as well as production purposes. The lenders are approachable at all times. They are also lenient in rescheduling loans.

However, the informal lenders are also accused of charging higher rates of interest. They extract monopoly profits from the borrowers. As such a need was felt to organize and develop the institutional sources of credit.

(2) Institutional sources of credit.

The major institutional sources of farm credit are ZTBL, Commercial Banks,  Cooperative Credit and Taccavi Loans.

(1) The Zarai Taraqiate Bank Limited (ZTBL) formerly known as Agricultural Development Bank of Pakistan (ADBP). The ZTBL was established in 1961 through the merger of Development Finance for the supply of credit to agricultural credit. The Pakistan. It contributes over 32.9% of the national institutional agricultural credit. The ZTBL provides short, medium and long term loans for farm and off farm activities. The Bank has five windows of investment (1) Development loans (2) Production loans (3) Agri-business loans (4) Cottage industry loans and (5) Off farm income generating activities loans. It provided about Rs. 34 billion as agricultural loans to farmers during the year 2006-07.

(2) Commercial Banks. Commercial banks were inducted into the field of agricultural credit under the Banking Reforms Act of 1972. The banks, since them, are providing loans to the farmers for meeting their short and medium term requirements. The loans are advanced to the farmers against the security of land, crops, fixed assets and even on personal security. The share of commercial banks in the supply of agricultural credit has considerably improved and was 46.9% during the year 2006-07.

Commercial banks disburse agricultural credit for the purchase of inputs, cattle, tractors, dairy farming, installation of tube wells, etc. Banks provide loans under the Supervised Credit Scheme and outside the Supervised Credit Scheme.

(3) Cooperatives. The cooperatives are oldest institutional sources of farm credit in Pakistan. The performance of the cooperatives in the spread and utilization of credit to the small farmers is not satisfactory. The loans are mostly utilized by big farmers who have got their pocket societies registered with the Cooperative Department. Share of cooperative banks in the supply of total agricultural credit was 5% in the year 2006-07.

(4) Taccavi Loans. Taccavi loans are handled by the Provincial Revenue Department. Necessary founds are allocated for different areas each year in the provincial budgets. The Taccavi loans are primarily given to the farmers for meeting emergencies such as flood, earthquake, famine, etc. The farmers take these advances in the spirit of gift or relief given in calamity and are not serious in repaying them. So this source is now occupying insignificant position in the disbursement of overall credit to the farmers. Agricultural loans are being made available to the farmers at the farmers at low mark up.

Is the agricultural credit adequate?

The Government of Pakistan fully realizes the increasing credit requirements of the farming community for the purchase of fertilizers, pesticides and mechanization. The ZTBL Commercial Banks, Cooperatives are making every effort to provide credit to the farmers particularly small farmers for the purchase of inputs like seeds, fertilizers, machinery fisheries etc in time. The campaign for one window operation for preceding short term production loans is quite successful. However, the requirement of the landless and small farmers for loans is so large that it cannot be fully met.
According to Agricultural Census 1990, there are 5.1 million farms in the country and 93% of these are small farms (up to 10 hectares account for 60% of total cultivated area). The large farms are only 7% of total farms and account for 40% of total cultivated area. The loan portfolio of the various credit institutions and industry. The shortage of rural credit both in quantitative and qualitative terms continues to be a limiting factor in the modernization and growth of production in agriculture. The major problems which are being met by the farmers in the receipts of rural credit from the institutional sources are summarized below:

1. Less Flow of credit to small farmers. There are millions of small farmers throughout the country. In spite of expansion of institutional rural credit, the gain has reached more to the big landlords. It is therefore, an urgent need that the credit should reach the small farmers who are the backbone of agricultural industry.

2. Complicated procedure for advancing loans. At present, the procedure for advancing loans by institutional sources is quite complicated. The loans are advanced to the farmers on the basis of pass books which contain the details of land owned by the farmers. The procedure is quite complicated.

3. Delay in the disbursement of credit. The procedure involved for advancing loans to the farmers is cumbersome. Who-so-ever succeeds in completing the documents is entitled to receive loans. It has been observed that the disbursement of credit is farmers are after it has been approved. It is a serious problem which the farmers are facing these days. One window operation started by ADBP has solved this problem to some extent.

4. High interest rate. The interest charged by the various institutions on farm credit is high. The low income farmers cannot bear it. As regards the interest-free loans, they are not reaching the small deserving farmers. These loans are being misused on large scale through proxy loaning, family loaning and paper loaning.

5. Amount of bad debts is increasing. The loans advanced particularly to the big landlords are not being repaid to the institutions. Since the big landlords have political influence, they therefore manage to get them written off.

6. Reaching the small farmers is expensive. The financial institutions which provide rural credit avoid to advance loans to the small farmers. It is because of the fact that the procedure involved in advancing loans is cumbersome, complicated and expensive.

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7. Provision of loans for marketing storage, processing of agricultural produce. The various financial institutions are trying to provide loans to the farmers mostly for the purchase of seeds, fertilizers, pesticides, tractors, etc. There is a considerable need to provide loans for marketing, storage and processing of agricultural produce.

Measures taken by the Government to solve these problems

The Government of Pakistan has taken the following measures for solving the problems of rural credit in the country.

1. Establishment of Zarai Taraqiate Bank Limited (ZTBL). The ZTBL was established in 1961 through the merger of ADFC and ABP . The ZTBL provides rural credit to the farmers through 49 regional offices. 343 branches and 1459 credit mobile officers (MCOs). Each mobile credit officer (MCOs) in the Supervised Credit Scheme of the Bank is in charge of 10 to 15 villages. The ZTBL advances loans on the vases of land mortgage or on personal security. Though the operation of ZTBL has reached 38500 villages out of 45000 yet the number of farmers availing of loan facilities particularly the small garners is small. The ZTBL disbursed 33% of the total loan to agriculture sector in 2006-07.

2. Role of commercial banks. The commercial banks were inducted in the field of rural credit under Banking Reforms Act of 1972. The banks provide loans to the farmers for meeting their short-term and medium term requirements. These requirements include purchase of inputs, cattle dairy farming rural gardening installation of tube-wells, etc. The commercial banks advance loans both under the Supervised Credit Schemes and outside the Supervised Credit Scheme. The share of commercial banks has surpassed the share of ZTBL and was 49% in the year 2006-07.

Cost Free Production loans. The commercial banks are also advancing cost free production loans farmers. These loans are generally in kind and are given for seeds, fertilizers, pesticides, land sprayers. There is a complaint that deserving farmers are not benefiting from these loans. There is a large scale misuse of funds through proxy loaning.

3. Role of cooperatives. The provincial cooperative banks and the cooperative societies are providing loans to the small farmers at low mark up. With the winding up of Federal Cooperative Bank in 2000, the provision of credit to agricultural sector has received a set back. The share of cooperatives in the total agriculture credit was only 5% in 2006-07.

4. Taccavi loans. Taccavi loans are handled by the Provincial Revenue Departments. Necessary funds are allocated for different areas in the provincial budgets. Taccavi loans are given to the farmers at the time of calamity such as floods, destruction of crops due to scanty rains, bad harvests, etc.

5. Role of State Bank in agricultural financing. The SBP is playing an active role in improving the quantitative and qualitative targets of rural credit, briefly.

(i) Agricultural Credit Department was set up in 1956 for research and assessment of credit needs.

(ii) The SBP introduced Refinance and guarantee scheme in 1970. The Bank under this scheme bears 50% losses on loans advanced to agriculture.

(iii) In order to increase the share of commercial banks in the rural credit. a Mandatory Credit Target Scheme was introduced in 1972.

(iv) The Interest-Free Production Loans Scheme was introduced in 1976 by SBP.

(v) A share of 75% of loans has been allocated to small farmers holding land up to 25 acres.


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