The overdue farm credit
Wednesday, 5 May 2010
THE incumbent governor of the central bank, who completed his first year in office last Monday, has been trying relentlessly to orient banks' lending to the agricultural sector. The stated goal is to boost farm output and, thus, help reduce poverty. And to achieve that objective, he has already put in place a few innovative lending programmes for the country's farming community. Despite the fact that the programmes are very much in their preliminary stages, a few sceptics have, however, expressed the fear that a liberal distribution might lead to large-scale default on farm loan repayment.
The Bangladesh Bank governor, while talking to newsmen at a function in Dhaka last Sunday, apparently, tried to dispel such fears. He made it clear that the central bank would not encourage the 'culture of waiving defaulted farm loans'. His firm resolve came in the backdrop of the existence of a high level of overdue agricultural loan. The overdue, despite a substantial decline, stood at 31 per cent of the outstanding farm credit at the end of the fiscal 2009. The ratio is quite high compared to the overall non-performing loans (NPLs) of the commercial banks. The share of the NPLs in the total outstanding loans of banks stood at about 11 per cent at the end of 2008, a remarkable decline from over 41 per cent about a decade earlier. However, it would not be out of place to mention here the basic reason for the decline in the NPL size. The banks under a guideline introduced in 2003 have written off a large amount of loans classified as 'bad or loss'. This has contributed to the shrinking of the NPL in their balance sheets. However, the banks are required to provision in full the amount they write-off from time to time.
There is no denying that despite a continuous decline in the agriculture sector's contribution to the annual gross domestic product (GDP) over the years, the economy is still very much agrarian. For reasons of food security and employment, agriculture remains to be the key player in the economy and would continue to be so for many more decades. Understandably, the government has always tried to make available a substantial amount of credit to the farming sector every year overlooking the presence of high rate of default on loan repayment. However, the reasons behind the accumulation of a large amount of overdue farm loan have been many. Farmers do often default on repayment because of loss of crops. What is worse is that a section of rural touts and influential people with the connivance of the officials of some banks do manage farm credit for purposes other than farming. Since it is not possible on the part of the banks to monitor its actual use, it would be hard to stop diversion of farm credit for other uses.
The involvement of a few large NGOs having extensive networks at the grassroots in the distribution and supervision of farm credit is likely to produce better results. The central bank's special refinancing scheme for the sharecroppers taken up recently through the participation of the Bangladesh Rural Advancement Committee (BRAC) is a right step in this direction. If the scheme shows better recovery rate of credit, the central bank should take up more such schemes. Besides, another suggestion made by the BB governor relating to the introduction of credit guarantee scheme by the government for disaster-prone areas of the country deserves due attention. For logical reason, the banks avoid lending to farmers living in areas that are frequently struck by natural calamities such as floods, cyclones. With a credit guarantee scheme in place, the banks would feel secure to extend loans to farmers in these areas.
The Bangladesh Bank governor, while talking to newsmen at a function in Dhaka last Sunday, apparently, tried to dispel such fears. He made it clear that the central bank would not encourage the 'culture of waiving defaulted farm loans'. His firm resolve came in the backdrop of the existence of a high level of overdue agricultural loan. The overdue, despite a substantial decline, stood at 31 per cent of the outstanding farm credit at the end of the fiscal 2009. The ratio is quite high compared to the overall non-performing loans (NPLs) of the commercial banks. The share of the NPLs in the total outstanding loans of banks stood at about 11 per cent at the end of 2008, a remarkable decline from over 41 per cent about a decade earlier. However, it would not be out of place to mention here the basic reason for the decline in the NPL size. The banks under a guideline introduced in 2003 have written off a large amount of loans classified as 'bad or loss'. This has contributed to the shrinking of the NPL in their balance sheets. However, the banks are required to provision in full the amount they write-off from time to time.
There is no denying that despite a continuous decline in the agriculture sector's contribution to the annual gross domestic product (GDP) over the years, the economy is still very much agrarian. For reasons of food security and employment, agriculture remains to be the key player in the economy and would continue to be so for many more decades. Understandably, the government has always tried to make available a substantial amount of credit to the farming sector every year overlooking the presence of high rate of default on loan repayment. However, the reasons behind the accumulation of a large amount of overdue farm loan have been many. Farmers do often default on repayment because of loss of crops. What is worse is that a section of rural touts and influential people with the connivance of the officials of some banks do manage farm credit for purposes other than farming. Since it is not possible on the part of the banks to monitor its actual use, it would be hard to stop diversion of farm credit for other uses.
The involvement of a few large NGOs having extensive networks at the grassroots in the distribution and supervision of farm credit is likely to produce better results. The central bank's special refinancing scheme for the sharecroppers taken up recently through the participation of the Bangladesh Rural Advancement Committee (BRAC) is a right step in this direction. If the scheme shows better recovery rate of credit, the central bank should take up more such schemes. Besides, another suggestion made by the BB governor relating to the introduction of credit guarantee scheme by the government for disaster-prone areas of the country deserves due attention. For logical reason, the banks avoid lending to farmers living in areas that are frequently struck by natural calamities such as floods, cyclones. With a credit guarantee scheme in place, the banks would feel secure to extend loans to farmers in these areas.