The SBP has launched a credit guarantee scheme for small and marginalized farmers aimed at enhancing their access to formal credit. The scheme, funded by the government, will provide a 50 percent risk coverage against the principal amount of outstanding loans extended by commercial, specialised and micro-finance banks. The federal government has made an initial allocation of Rs one billion for the purpose for FY16 which could be topped annually.
Covered by the scheme will be production loans up to Rs 100,000 and the tenor will be based on cropping cycle up to a maximum period of one year. The purpose of borrowing may include meeting working capital requirements, purchase of input supplies, rental of farm implements, etc. The scheme will provide risk sharing to the Participating Financial Institutions (PFIs) against their collateral-free lending and all farmers cultivating up to five acres of irrigated and 10 acres of non-irrigated land will be eligible for the loan. The scheme will be applicable across the country, including Azad Jammu & Kashmir, Fata and Gilgit-Baltistan. However, if the borrower was not eligible for financing under the scheme at the time of extension of loan, the concerned PFI will bear 100 percent of the credit risk of such borrower.
Agriculture, of course, is the backbone of Pakistan’s economy and this sector has the potential to stimulate and sustain broad-based industrial and economic growth. In line with the priority of this sector, State Bank has all along been striving to ensure adequate availability of credit to farmers. In this endeavour, annual indicative agriculture credit disbursement targets are prescribed by the SBP and often fulfilled by the PFIs. Such an arrangement has not only resulted in consistent increase in agricultural credit but benefited the farmers in enhancing their productivity. Since it was often observed that formal bank credit was mostly utilised by big landholders, it was considered necessary to devise a suitable scheme for small farmers. The present guarantee scheme, in our view, could go a long way in encouraging the PFIs to make collateral-free lending to small and marginalized agriculturalists to meet their working capital requirements. It may be noted that as per the Agriculture Census 2010, 5.35 million farm households (out of total 8.3 million households) in the country had land holdings of up to 5 acres and these small farmers had a significant share in the national agriculture output. However, despite their importance in the economy of Pakistan, they had to face difficulties in accessing formal credit due to small holdings and a lack of collateral and access to the relevant officials of the PFIs. The present scheme, it seems, has been especially designed to enhance the access of small farmers to the formal banking channels and reduce their dependence on informal channels of credit which could be more costly and burdensome. It is also good to see that the scheme will cover the whole of Pakistan and will not be available to agriculturists holding more than 5 acres of irrigated and 10 acres of rain-fed land. Only 50 percent coverage of the risk by the government in eligible cases and 100 percent burden of liability to be borne by the financial institutions in case of ineligible borrowers will guarantee that PFIs act responsibly and with great care. The fact that only Rs one billion has been earmarked for the scheme does not mean that its scope would remain limited. According to latest Economic Survey, “the size of total disbursement will be Rs 30 billion” under the scheme. This shows the intention of the government to enlarge coverage of the scheme over a period of time.