Loans to Small Farmers

Small farmers have had a meagre share in the organised institutional credit for improving their production. The only credit enquiry commission, constituted by the government in 1959, revealed that the share of small farmers in overall credit was only Rs 60 million. Their credit needs were met largely by the village artihs, input suppliers, money lenders and landlords, and to some extent by the cooperatives. Banking reforms were introduced in 1972 which inducted the commercial banks, with their large resources and extensive branch network, in the field of agricultural credit. Special annual mandatory loaning targets were given to each bank for disbursing loans to small farmers, under special scheme, loans to small farmers. Defaulting banks were liable to penalties. A special legislation was enacted to introduce a pass book system which simplified the procedure for establishing charge of the bankers on the lands of the farmers for securing their loans.

The State Bank undertook to guarantee 50 percent of the genuine losses to the banks, if the loans were granted strictly according to the scheme. Pending the securing of pass books, the banks were allowed to grant loans on the guarantee of two sureties.

The banks were not happy with this scheme because they had to retail a large number of small loans with heavy management cost. They did not make a serious attempt to adopt the pass book scheme and instead granted loans on personal sureties. Most of the loans were utilised by the sureties themselves, and hence the small farmers could not utilise these in full for increasing their agricultural production and improving income. With the nationalisation of banks in 1974, the banks gradually wriggled out of the scheme, thus defeating its intended purpose of improving the lot of the small farmers.

With the establishment of the Federal Bank for Cooperatives subsidiary of the State Bank, production loans to small farmers, through their cooperatives, increased manifold. The failure of cooperative finance companies, however, has affected the overall efficiency of the cooperative system and its benefits to the small farmers.      

The small loans scheme of the State Bank and the loans extended by the Federal Bank of Cooperatives were restricted agricultural loans only.  Other activities of the rural poor were not  eligible under the above scheme of loans.

Source: Poverty Alleviation in Pakistan: Present Scenario and Future Strategy, Mohibul Haq Sahibzada. Republished with permission.