MICROFINANCE banks are making their presence felt in agricultural lending. In just three years, from FY12 to FY15, they have more than doubled their lending to small farmers under a SBP-supervised agricultural lending scheme, taking advantage of e-banking.

Farmers now have access to funds offered by MFBs and they get the much-needed not only at banks’ counters but also closer to loan-providing points.

Once their loan request is approved, all they have to do is to go to a nearby shop, having franchise of an MFB and a mobile phone company, and take the loan installment in cash. Sanctioning of loans has also been made easier than before, as in some cases, farmers just need to show to banks that as a member of a group they are trustworthy. Social collateral, is it is called, has enabled farmers to seek bank loans without offering a material collateral of their own.

And, it is a win-win game. MFBs are making huge profits on agricultural lending not only by charging a higher rate of return than that of commercial banks but also by way of tapping into a huge borrowing potential of the farmers growing crops to those owning a few milk and meat-producing animals to women taking care of tiny stocks of domestic poultry; all are benefiting from money being lent by the MFBs. “Credit demand of this kind is only destined to grow constantly and even if MFBs can meet a small part of it, say 10-20pc, their loan portfolios, and profitability, will keep showing a sustained growth for a long time,” says a central banker.

One outstanding thing about agricultural micro-financing, apart from the MFBs’ ability to market small loans in the remotest villages through franchised shops, has been the simplification of loan applications and the use of Urdu in the documentation

“Timing and leverage make things easier,” says a senior executive of one of the five MFBs participating in this scheme. The timing was perfect because by FY12 the MFBs had learnt through experience that without penetrating deeper into agriculture sector they couldn’t expand loan portfolios fast. And the leverage came with speedy mobilisation of deposits, also from rural areas that had started witnessing a surge in income as a result of frequent increases in support prices of crops and expanding business-to-business rural-urban linkages. In the last five years, food companies have made big profits by rolling out fresh dairy and meat products, packaged rice, corn flakes, jams and jellies, spices, syrups and juices.

One outstanding thing about agricultural micro-financing, apart from the MFBs’ ability to market small loans in the remotest villages through franchised shops, has been simplification of loan applications and the use of Urdu in documentation.

In addition to this, prudential regulations for agriculture financing and micro-financing introduced by the SBP has helped MFBs monitor the quality of loans in simple but more effective ways. Interest rates had remained high till FY13 but monetary easing in the last two years has made it possible for MFBs to give cheaper loans to farmers that, too, has facilitated growth in net credit disbursement. The prevailing interest rates on agricultural micro loans range between 16-20pc, farmers say.

MFB executives say as their agricultural lending increases, the need for skilled field officers who can effectively communicate with small farmers is also growing. They sometime hire graduates in agricultural science with background of finance or young MBAs to assess agricultural loan proposals at the first stage before their final approval by executives’ committees.

Currently MFBs are more focused on some selected areas of agriculture financing like inputs financing at the beginning of the crop year, financing for animal feed, storage of crops or dairy milk and processing of dairy and poultry products.

They admit that the MFBs’ medium-term financing remains limited to loaning for purchase of smaller agricultural implements and building of small storage points or disbursement of money for installing tubewells or constructing sheds for keeping small lots of animals.

Going forward, they see immense scope in providing finances for purchase of small lots of lands for herding, building small fish ponds and environment-controlled poultry sheds or small fishing boats etc. But they say that credit appraisal capability of MFBs need to be raised for this purpose.

Published in Dawn, Economic & Business July 27th, 2015

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