Agricultural Financing

Definition and meaning

A field of work in which people aim to improve the access of the agriculture industry, including farmers and all related enterprises, to efficient, sustainable financial services. Agricultural finance can be dealt at both micro level and macro level. Macro finance deals with different sources of raising funds for agriculture as a whole in the economy. It is also concerned with the lending procedure, rules, regulations, monitoring and controlling of different agricultural credit institutions. Hence macro-finance is related to financing of agriculture at aggregate level.

Micro-finance refers to financial management of the individual farm business units. And it is concerned with the study as to how the individual farmer considers various sources of credit, quantum of credit to be borrowed from each source and how he allocates the same among the alternative uses with in the farm. It is also concerned with the future use of funds. 

Therefore, macro-finance deals with the aspects relating to total credit needs of the agricultural sector, the terms and conditions under which the credit is available and the method of use of total credit for the development of agriculture, while micro-finance refers to the financial management of individual farm business.

Nature and Scope

Agricultural finance can be dealt at both micro level and macro level. Macro-finance deals with different sources of raising funds for agriculture as a whole in the economy. It is also concerned with the lending procedure, rules, regulations, monitoring and controlling of different agricultural credit institutions. Hence macro-finance is related to financing of agriculture at aggregate level. 

Micro-finance refers to financial management of the individual farm business units. And it is concerned with the study as to how the individual farmer considers various sources of credit, quantum of credit to be borrowed from each source and how he allocates the same among the alternative uses with in the farm. It is also concerned with the future use of funds. Therefore, macro-finance deals with the aspects relating to total credit needs of the agricultural sector, the terms and conditions under which the credit is available and the method of use of total credit for the development of agriculture, while micro-finance refers to the financial management of individual farm business.

Significance of Agricultural Finance

1) Agriculture finance assumes vital and significant importance in the agro–socioeconomic development of the country both at macro and micro level.

2) It is playing a catalytic role in strengthening the farm business and augmenting the productivity of scarce resources. When newly developed potential seeds are combined with purchased inputs like fertilizers & plant protection chemicals in appropriate / requisite proportions will result in higher productivity.

3) Use of new technological inputs purchased through farm finance helps to increase the agricultural productivity.

4) Accretion to in farm assets and farm supporting infrastructure provided by large scale financial investment activities results in increased farm income levels leading to increased standard of living of rural masses.

5) Farm finance can also reduce the regional economic imbalances and is equally good at reducing the inter–farm asset and wealth variations.

6) Farm finance is like a lever with both forward and backward linkages to the economic development at micro and macro level.

7) As agriculture is still traditional and subsistence in nature, agricultural finance is needed to create the supporting infrastructure for adoption of new technology.

8) Massive investment is needed to carry out major and minor irrigation projects, rural electrification, installation of fertilizer and pesticide plants, execution of agricultural promotional programmes and poverty alleviation programmes in the country.

Need for Agricultural Credit.

Credit is required in every type of business and agriculture is not exception of it. The need for agriculture credit becomes more important when it moves from traditional agriculture to modern agriculture. The agriculture sector at present is best with number of handicaps. The land holding is very small. The population is growing at a fast rate. 

Agricultural labour is often underemployed. Production suffers from weather risks. The capacity of farmers to save and invest is very low. The agricultural productivity is low due to low use of inputs. The farmers therefore, need credit to increase productivity and efficiency in agriculture. This need is increasing over the years with the rise in use of fertilizers, mechanization and rise in prices. Briefly the need for agricultural credit can be summed up as follows -

1. Purchase of new inputs: 

The farmers need finance for the purchase of new inputs which include seeds, fertilizers, pesticides, irrigation water etc. If the seed of high yielding varieties and other modern inputs are made available to the farmers they can increase productivity not only of land but also of labour.

2. Purchase of implements: 

Credit is required by the farmers for the purchase of tractors, threshers, harvesters, water pumping sets etc. The use of appropriate machinery in land will increase production by growing more than one crop on the same piece of land at the same time.

3. Better management of risk: 

Credit enables the farmers to better manage the risks of uncertainties of price, weather etc. They can borrow money during raining days and pay back the loans during peak years of crops.

4. Permanent improvement in land: 

Credit also helps the farmers to make permanent improvements in land like sinking of wells, land reclamation, horticulture, rotation of crops etc.

5. Better marketing of crops: 

If timely credit is available to the farmers, they will not sell the produce immediately after the harvest is over. At that time the prices of agricultural goods are low in the market. Credit enables the farmers to withhold the agricultural surplus an sell in the market when prices are high.

6. Facing crises: 

The credit is required by the farmers to face crisis. The crisis can be caused by failure of crop, drought of floods.

7. Balanced development: 

Agricultural sector generally remains neglected compared to industrial sector in the country. For balanced development, it is essential that credit should be provided at concessional rates to the agriculture sector so that it should also expand and help in “take off” process of the country.

Types of Agricultural Credit

Agriculture requires the following three types of credit -

1. Short-Term Credit: 

The short term credit ranges upto one year. The farmers need short term credit for meeting the working capital arrangements of agriculture. For instance, they need short term credit for the purchase of seeds, fertilizers, pesticides, bullocks and other casual expenses. Sometimes short term credits are also raised for paying rents, revenue and also meeting the financial requirements of the family. The short term credit is repaid after marketing the produce of next crop.

2. Medium Term Credit: 

The medium term loan extends from 1 to 5 years. The farmers require medium term credit for the purchase of cattle, purchase of implements, improvements in water courses etc. The loan is obtained on the security of movable and implements.

3. Long Term Credit: 

The duration of long term credit exceeds five years. The farmers need long term credit for making improvements of permanent nature in land such as sinking of tubewells, reclamation of land, building, purchase of machinery and implements etc.

Sources of Agricultural Credit.

Credit in the farm sector is available from following two sources -

1. Non-Institutional Sources/ Informal Sources: 

The major non-institutional sources of farm credit are money lenders, friends, relatives, 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 borrowing. 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, informal lenders are also accused of charging higher rates of interest. They extract monopoly profits from the borrowers.

2. Institutional Sources / Formal Sources: 

The major institutional sources of agricultural credit are Zarai Taraqiate Bank Limited (ZTBL) formally known as Agricultural Development Bank of Pakistan, State Banks, Commercial Banks, Cooperative credit and Taccavi Loans.

A. Zarai Taraqiate Bank Limited (ZTBL) formally known as Agricultural Development Bank of Pakistan (ADBP): 

The ZTBL was established in 1961 through merger of Development Finance Corporation and Agricultural Bank of Pakistan. The ZTBL is an important source for supply of credit to agricultural sector in Pakistan. The ZTBL provides short, medium and long term credits for farm and off farm activities. The bank have five windows of investment. 

(1). Development loans 

(2) Production loans 

(3) Agri-business loans 

(4) Cottage industry loans and 

(5) Off farm income to farmers generating activities loans.

B. Commercial Banks: 

Commercial Banks were introduced into the field of agricultural credit under the Banking Reform Act of 1972. The Banks, since then, 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. Commercial Banks disburse agricultural credits for the purchase of inputs, cattle, tractors, dairy farming, installation of tubewells etc. Banks provide loans under the Supervise Credit Scheme and outside the Supervise Credit Scheme.

C. Cooperatives: 

The cooperatives are oldest institutional sources of farm credit in Pakistan. The performance of 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 their cooperative department.

D. Taccavi Loans: 

Taccavi loans are handled by the Provincial Revenue Department. Necessary funds 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 the calamity and are not serious in repaying them. Now 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 low mark up.