Agricultural loan: The loopholes in the system
FARMERS' access to finance is one of the major problems in rural areas. This is a major drawback in achieving self-sufficiency in food and alleviating poverty. Because of lack of finance, farmers have to cultivate crops with lower cost and lower return. After finishing their meager earning from the crop they cannot cultivate properly in the next season, or invest on cash crops. And the cycle of low investment and crop with low return starts once again.
This is not enough to go through the lean period in the northern region and, since there is no other scope to find work in that area at that time, the farmers face monga. This vicious cycle cannot be broken unless the farmers get easy access to finance.
To address this issue, the government is trying to reach finance to the farmers through various organisations. The agriculture sector will get Tk.11,512.30 crore credit from various public and private banking channels in this fiscal, which would be about Tk.2,133 crore more than the previous year. Bangladesh Bank Governor Atiur Rahman said: "The policy is aimed at increasing agricultural production, and the increased farm output will push up the activities in industrial and service sectors."
According to the Bangladesh Bank's agricultural loan and special programs division, the target of distributing agriculture loan through state-owned commercial banks and Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank for this fiscal year has been fixed at Tk.7,779.23 crore.
Among the private banks, Islami Bank set Tk.880 crore as agri-loan this year. Pubali Bank will give Tk.200 crore, AB Bank Tk. 132.25 crore, and National Bank Tk.105.65 crore.
Getting finance at the grassroots level is still a big problem. Even now, when the governor of the Bangladesh Bank has issued a directive to all the banks to disburse loan to the farmers at a lower rate and also allotted a certain portion of BB finances to other banks for farmers, the banks are finding it difficult to disburse loan to the farmers for several reasons.
Even large-scale farmers, having land papers, find it difficult to avail finance from formal sources.
The major issues for private bankers are assessing the farmers' eligibility for receiving loan, high cost of reaching individual farmers for small loans, securing a guarantee for the loan, receiving proper collateral papers for the loan, assessing the risk of the project and reducing the cost of realisation and management to a minimum.
For these reasons most of the bankers give loans to large-scale farmers or to the agro- traders, who have enough transaction with the bank and also have assets to use as collateral. In this way, the objective of the government to reach finance to the poorest farmers is not being attained.
The foremost issue is finding the right farmers and assessing them, which is beyond the scope of the bank's regular work, and is also very time consuming. The operating cost of the bank will also increase if loans have to be realised by going to each individual farmer.
The farmers are not aware of the bank facilities and most of them are afraid of the
paperwork needed to receive a loan.
Second, giving a loan depends upon the manager of that particular branch. Some managers are reluctant to take the risk and go for large-scale agro projects. This is another loophole in the system. The managers are directly responsible for the loans that they disburse, so they are unwilling to take risks, no matter how much the government encourages the private banks.
Small or marginal farmers usually do not have any collateral papers like land deeds. Even if they have documents, most of them are not updated. So the bankers do not give loans because of their unwillingness to take the risk without collateral.
Third, most bankers do not have agricultural background, so they do not usually understand the risks in agro projects. Some banks do have agriculturist for this particular purpose, but they are usually posted in the head office and do not go to the field that often.
Last, bank managers do to have enough manpower to reach many farmers and realise the loan from them.
Contract farming is one solution to these problems. The bank gives the loan to the contractor, or the contractor acts as a guarantor for the farmers. The contractor provides the technology and the knowledge about cultivation techniques. He also buys the harvest from the farmers.
After the contractor buys the harvest the farmers pay back the loan through the contractor. But the contractor is not always willing to take the risk, and the bankers also, at times, want to give the loan directly to the farmers.
Another solution is crop insurance; banks can give loan against the insurance. Though this idea is difficult to implement in Bangladesh, crops and seasons can be chosen to minimise the risk of both the parties.
To solve these problems different private banks have taken different strategies. Some banks have solved the problem through arranging family groups with cumulative liability, which spreads the risk and at the same time makes monitoring easy for the bank. Group members are liable for any defaulter within the group. Also the bankers have to go only to the group leaders instead of all the farmers.
The bank makes a deed on non-judicial stamp paper for each group. This keeps the farmers conscious about the loan. National Bank in Gaibandha adopted this strategy in 2008. The contractor was the technology provider and buyer.
Uttara Bank of Gaibandha solved this problem in a slightly different way. They gave loans to the farmers directly but the contractor acted as a guarantor and was responsible for any defaulter. In this case also, the farmers had to sign on non-judicial stamp. But in both the cases, land papers were not needed. This was more or less a tri-party agreement. These two banks gave loan of Tk.13 lacs to around 76 farmers in this way. Recovery was 100%.
In a perfect example of tri-party agreement NCC bank has been giving loan to farmers on the guarantee of the contractor for the last four years. In 2004, NCC gave Tk.1 crore loan to 360 farmers under both group and individual responsibility. By 2007, the number of farmers increased to 3,700 and the amount of loan to Tk.3.5 crore. But in all the cases the contractor recovered the loan for the bank.
In conclusion, it can be said that, even without land collateral, banks can give loans to farmers if they have the will. And contract farming, if utilised properly, can be another way to arrange collateral and disburse loan to marginal, landless farmers and share- croppers.
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