Another ambitious scheme

Prime Minister Nawaz Sharif on Thursday launched Credit Guarantee Scheme for small farmers, at the PM Secretariat in Islamabad. The scheme was announced by Finance Minister Ishaq Dar in the budget for 2014-15. The next budget for financial year 2015-16 is due in less than a month and it may take a few more months before the scheme could finally become operational as the participating banks’ targets are yet to be fixed.

Unlike the past, two stints as Prime Minister, PML (N) this time cannot use the depositors’ savings to fund PML’s politically-motivated schemes as 85 percent of the financial sector is no longer in government hands. This has forced the PML (N) government to borrow from these privatised banks and pay them market rates – a job which banks have obligingly done in the presence of weak private sector borrowing.

As per the agricultural census 2010, out of 83 million households, 5.6 million have landholding of 5 acres or less in the country. These small farmers have a major share in the agriculture output and are still largely dependent on private money lenders or arhtis (middlemen) for the purchase of inputs at exorbitant rate of interest (as high as 36 percent per year) and sell their produce to arhtis at very low rates. The arhtis, through market committees, make profit and do not catch the eye of the revenue officials, making the cash-based economy more profitable.

The objective of the scheme to coax the banks into lending to farmers who do not have the required collateral for meeting their working capital needs. State Bank of Pakistan has evolved a comprehensive scheme for this purpose. But the million dollar question will remain why would a banker lend to these small farmers willingly in absence of mandatory targets?

Most banks are urban-based entities; only the big network banks have rural branches. Withholding tax on cash withdrawals is a major deterrent for rural folks not to bank. And, the increase in deposit base of these banks is largely due to addition of interest every quarter.

For too long the citizens have been fooled by grandiose schemes. The budget-makers, year after year, have been issuing statements to build physical infrastructure for food storage; launching of crop insurance and livestock insurance schemes. But these have been mere statements with no financial allocation. If there has been funding earmarked for these schemes – it has been cut due to our fiscal difficulties. We are afraid that this scheme too will meet the same fate. Success is only possible if specialist organisations manned by persons with missionary zeal are created; otherwise, it is just talking the talk and not walking the talk.

Big network banks do not have the technology or the trained manpower to operate these schemes. They are used to passbook system for farmers. The scheme envisages loan of one hundred thousand rupees. These small production loans fall under the category of micro-finance. It would be a better option that big commercial banks provide credit lines to micro-institutions who in turn will disburse and monitor these loans against a fee on profit basis.