Crop Loan Insurance Scheme in Pakistan

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Finance Sub Committee of Prime Ministerial
Committee on Agriculture
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Major Impeding Factors vis-à-vis Recommendations
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Major Impeding Factors vis-à-vis Recommendations
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Due Diligence Company in Private Sector

• The Company will do due diligence of the loan
  applicant farmers as per banks requirements,
  through their Field Officers (FO) and with the
  help of state of the art IT system. The
  information will cover the following -
• Details of personal data with new CNIC
• Land holdings being managed
• Crops sown, input used, yield, other expenses ,
  cash flows of last 2-3 years, etc.
• A fortnightly/ monthly report on the activities
  of the borrower
• Credit risk lies with the bank, however, in case
  of default, the Company will be responsible in
  case of incorrect information.
• Around 58 districts in Sindh Punjab covers 90
  of agriculture and each district has an average
  of 4 Tehsils/Talukas, therefore, the estimated
  running expenses of the Company would be around
  250 million per annum.
• The Company may charge a fee of 1 of the loan
  disbursed from the bank.
• The scheme will benefit banks in terms of
  reduction in cost of due diligence in addition to
  development of a comprehensive database of the
  farmer borrower.

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Warehouse Receipt System

• Warehouse Receipt (WR) is a document issued by a
  warehouse that provides proof of ownership of
  commodities i.e. quantity, quality, type, etc.
  that are stored in the warehouse (silos or cold
  storage).
• The warehouses are usually run by professionals
  under the private sector according to
  international standards of storage of food and
  non food crops.
• WR can be negotiable (transfer of ownership of
  the commodity without physical delivery) or
  non-negotiable (transfer of ownership of the
  commodity with physical delivery)
• Most warehouses issues negotiable WR that serves
  as collateral for bank loans.
• WR system will enable farmers to keep their
  produce under safe custody of warehouse company
  and can also get finance from banks against the
  WR in addition to making immediate delivery or
  delivery in future of the commodities.
• The cost of establishment of Warehouses and
  system of WR would need to be worked out by the
  consultants/experts.

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Implementation of Recovery Laws

• As per provision of law Loans of Agricultural,
  Commercial Industrial Purposes Act, 1973, the
  banks can recover Non Performing Agriculture
  Loans through provincial revenue departments
  (Board of Revenues) as Arrears of Land Revenue.
• Banks under the provision of section 489-F of
  Pakistan Penal Code have a legal recourse
  available to register complaint with the Police
  in cases of dishonor of cheques of their
  customers for loan repayment.
• Both of the above regulations are not implemented
  properly, making it difficult to banks to recover
  their Non Performing Loans.
• The issue may be taken up with the concerned
  quarters.

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Rural Credit Guarantee Fund

• Around 84 of the farming community has land
  holding up to 12.5 acres and majority of them do
  not have collateral to offer to banks. They are
  un-bankable under normal circumstances.
• Rural Credit Guarantee Fund (RCGF) offsets risks
  of banks landing to such small farmers.
• RCGF can be used to pay the lending bank an
  agreed percentage of losses (usually 30 for
  small farmers and 50 for marginalized/landless
  farmers) on guaranteed loans.
• Credit requirement of small and marginalized
  farmers is estimated to be around Rs 420 billion
  (US5.3 billion).
• Rs 160 billion is estimated amount initially
  required for the RCGF, however, actual amount
  will be calculated by the consultant.
• Technical Assistance to setup the guarantee
  scheme would also be required in addition to the
  guarantee fund.
• RCGF will encourage banks to lend to farmers who
  have good prospect of success but do not
  necessarily have collateral or business record
  needed to meet the banks requirements.

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Automation of Land Record

• Banks major lending to farmers is against the
  collateral of passbook in accordance with the
  provision of law Loans of Agricultural,
  Commercial Industrial Purposes Act, 1973.
• Moreover, banks would need other information like
  record of cultivation, possession of land,
  Produce Index Unit, nature of land, etc.
• There are issues of fake passbook, delays in
  processing of charge creation, un-authentic data,
  hidden cost and other issues which discourage
  banks and farmers in utilization of the agri.
  loans system under the above Act. Moreover, it
  takes weeks at times to process the passbook
  related issues.
• The automation of land record will ensure the
  availability of authentic information of land and
  land owners and will facilitate banks and farmers
  in efficient agri. loan processing/disbursement.
  

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