Factors Affecting Delay in Repayments of Agricultural Credit; A Case Study of District Kasur of Punjab Province

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1 World Applied Sciences Journal 17 (4): , 01 ISSN IDOSI Publications, 01 Factors Affecting Delay in Repayments of Agricultural Credit; A Case Study of District Kasur of Punjab Province 1 1 Yasir Mehmood, Mukhtar Ahmad, Muhammad Bahzad Anjum 1 Department of Agriculture, Planning and Evaluation Cell, Government of the Punjab, Lahore, Pakistan United Nations Development Program Abstract: The productive use of agricultural credit in Pakistan is quite limited that affects the repayments behavior of the farmers and ultimately categorization of loans into default stages and finally auction of their lands. This paper attempts to analyze different factors affecting the repayments of agricultural credit in district Kasur of Punjab province. For the purpose purposive sampling was adopted and 60 respondents were selected after booting a list of defaulters from respective branches of UBL. Through well structured questionnaires necessary information were collected from the respondents as well as from the bank employees regarding actual delay in repayments of these selected clients. Finally, data were summarized using descriptive statistics and found that sloppy supervision by the bank employees, miss-utilization of loans, high interest rate and change in business/residential place of the borrowers etc. caused delay in repayments of agricultural credit. Key words: Agricultural credit Repayments NPLs Pakistan INTRODUCTION national economy. Different studies like [3-16] reported that in time availability of agricultural credit whether Agriculture sector assumes greater importance in institutional or non-institutional provides financial developing country like Pakistan where growth in GDP is assistance to the farming community particularly for the largely determined by the production trends. This sector purchase of primary/production inputs like seeds, remains by far the largest employer, absorbing nearly 43 fertilizers, pesticides, irrigation charges, farm implements. percent of the total labor force and a source of livelihood As far as the scenario in Pakistan is concerned the for 67 percent of the country s population. Despite its productive use of agricultural credit is quite limited critical importance this sector has been suffering a secular because majority of the farmers are suffering from decline for the last few decades [1]. Growth in this sector, financial anemia (both invested and working) which particularly in the crop sub sector, has been falling encourage them to use agricultural loans for non continuously and productivity remains low, with high agricultural purposes including marriage ceremonies, yield gaps which may be due to the criminal negligence of litigation, prestige or even for political purposes. Thus the concerned authorities []. agriculture loans fail to alter the financial condition of the In order to cope with the situation injection of farmers and hence burden of debt increases which sufficient agricultural credit and its proper utilization are ultimately results in categorization of loans into default prerequisites to accelerate the pace and volume of the stages (OAEM, SS, DF and Loss). According to the prudential regulations of State Bank of Pakistan, farm credit for inputs classified in following manners [17]. OAEM (Other assets especially mentioned ): Interest or principal is overdue (past due) by 90 days from the due date of sanctioning of loan. SS (Substandard): Interest or principal is overdue by one year or more from the due date. DF (Doubt Full): Interest or principal overdue by one year and a half or more from the due date. Loss: Interest or principal is overdue beyond two years or more from the due date. Corresponding Author: Yasir Mehmood, Department of Agriculture, Planning and Evaluation Cell, Government of the Punjab, 66/A Rewaz Garden Lahore, Pakistan. Tel: , Fax:

2 Therefore, agricultural credit whether obtained from institutional or non-institutional sources is working on the rule of give and take. Farmers enjoy increases in profit margin if they properly utilize, whereas financial institutions gain benefits in term of markup. Keeping in view the high default ratios of agricultural loans in district Kasur of Punjab province the study in hand was undertaken to highlight various factors that were responsible for delay in repayments of credit and also to make recommendations for both the government agencies and financial institutions. MATERIALS AND METHODS Keeping in view the paramount importance of problem under investigation it should have been conducted at the national or provincial level but due to time and resources limitations of the researchers the universe of the problem was confined to district Kasur. Both primary and secondary sources were used for data collection. A list of defaulters was obtained from the 3 respective branches of United Bank Limited (UBL). Purposive Sampling was adopted and 60 respondents 10 from each village (60 respondents from 6 villages) were interviewed to get necessary information. A well structured questionnaire was designed which was divided into three parts i.e. a) defaulters related questions b) employees related questions c) amount falling in over dues stages. Finally data thus collected were summarized using descriptive statistics [18]. Described that descriptive statistics provides a method of reducing a large data into manageable summaries to permit easy understanding and interpretation. RESULTS AND DISCUSSION The factors affecting the recovery of loans disbursed by financial institutions were broadly categorized into two categories, the external and internal questions. The external questions were related to the defaulters, e.g. high interest rate, climatic condition, prices of inputs, less/more loan than required, lack of post disbursement follow up, whereas internal questions were related to the institution s/bank s employees, i.e. miss utilization of loans, willful defaulters, death/accident of loanee farmers, transfer of field staff. Defaulters Related Questions: Table 1 and Figure 1, indicates different reasons for delay in repayment reported by loan defaulters. Majority of the respondents Table 1: Reasons for delay in repayments of agriculture credit reported by defaulters Sr. No Reasons Frequency Percentage 1 High interest rate Prices of inputs Delay in disbursement Less loan than required Distance from the bank s branches Follow up by the bank s employees Climatic condition Loan amount more than the requirement Elements of bribery Fig. 1: Reasons for delay in repayments of agriculture credit reported by defaulters i.e. 78 % reported that they did not pay back the loan amount because of high interest rate that affect the loaning behavior of the farmers. [19] Narrated that commercial banks in Pakistan are charging the markup rate in between 16% to 0% which after addition with the principal amount affects the repayment capacity of the farmers, thus the loans categorized into default stages. Further, 68% were not in a position to repay the outstanding amount because of sudden increased in the prices of inputs while about 57 % of the respondents blamed to delay in the process of disbursement. The other reasons offered by the defaulters were loan amount received from the bank was far less than the actual requirements (37%), live far away from the banks created hurdle in visiting the bank branches for repayment (3%), similarly lack of post disbursement follow up by the bank employees (18%), climatic conditions (1%), loan amounts more than their requirements and illegal gratifications (5%). Similarly, [0] described that lack of supervision by the bank employees, inconvenient repayment schedule, diversion of loan for other purposes and additional factors leading to the non repayment of loans. 3 The reason behind the selection of UBL was due to higher numbers of accounts fall under NPLs categories 448

3 Table : Reasons for delay in repayments of agriculture credit reported by bank employees Sr. No Reasons Frequency Percentage 1 Miss-utilization of loan Change in business/residential place Willful defaulters Political approach of borrower Death/accident of the loanee Table 3: Distribution of loanees according to their classification stages Default Amounts Sr. No. Stages No of Res. Percentages (Million) 1 OAEM Sub-Standard Doubt Full Loss Total Similarly willful defaults and political approach was another important reason offered by the employees. Perhaps willful defaulters were mostly the criminals who did not repay even a single paisa to the bank due to their illicit strengths in the areas. In this case the bank employees were reluctant to follow up for their own safety. Deaths/accidents also caused delays in the repayment of agricultural loan (5%). Over Dues: Repayments of loans are an important factor that shows the efficiency of management in terms of risk analysis and monitoring. Table and Figure 3, indicated that 36.6% of the respondents were found under the classification of OAEM followed by doubt full stage i.e. 6% while, 1.6% of the borrowers fall in substandard category and 15% lies in loss category. CONCLUSION Fig. : Reasons for delay in repayments of agriculture credit reported by bank employees Fig. 3: Distribution of loanees according to their classification stages Employees Related Questions: Different questions were also asked from the bank s employees regarding actual delay in repayment of selected defaulters. According to them high percentage of clients (60%) defaulted the loan as they miss-utilized the amount for non agricultural purposes, in fact the granted amounts were used for marriages, home construction, litigations etc. Change of business/residential location was another important reason offered by 13.3% of the bank s employees. Agricultural credit serves as a means to empower the farming community and provides a valuable tool to assist the economic development of a country. However, ineffective policies and unproductive use limit the role of agricultural credit which hinders in reducing poverty and fuel the Vicious Circle of Poverty. Through the above mentioned facts and figures it can be concluded that high interest rate on agricultural loans, price hikes, delay in disbursements, lack of sound monitoring by the bank employees, changes in business/residential places, death/accident of the borrowers etc. caused delay in repayments of agricultural credit which resulted in increase in NPLs ratio. Suggestions: The following suggestions are offered which need immediate attention of both the financial institutions and government agencies to improve and maximize the efficient utilization of agricultural loans, so that the farmers would get the utmost profits and the recovery would also be improved. Financial institutions should develop sound monitoring and tracking system by regular visits of the field officers to their respective customer. Moreover, in order to avoid the miss-utilization of agricultural credit bank may adopt alternate method of providing primary/seasonal inputs. The rate of interest on agricultural credit should be reduced, as it commonly affects the repayment behavior but should not be below the cost of obtaining funds and administrating credit. 449

4 Financial institutions should reschedule or 3. Feder, G., L.J. Lau, J.Y. Lin and X. Luo, The restructure loans in case of natural calamities, accident of the borrowers which will not only to facilitate the borrowers but the banks will also be able to avoid the SBP penalties. The farmers who use their political background for 4. Relationship between Credit and Productivity in Chinese Agriculture: a Micro-Economic Model of Disequilibria. American J. Agricultural Economics, 7(5): Khandker, S.R. and R.R. Faruqee, The Impact of obtaining agricultural credit should not be Farm Credit in Pakistan, World Bank Policy Research entertained as political advantages give moratorium in shape of waiver or write off. Legal action must be taken against willful defaulters 5. Paper No: 653. Awudu, A. and R. Eberlin, 001. Technical Efficiency During Economic Reform in Nicaragua: Evidence from as the delay can cause the burden of provisioning on Farm Household Survey Data, Department of Commercial Banks (CBs). Agricultural Economics, Swiss Federal Institute of Group financing system should be introduced. Before disbursement of agricultural loan bank should take guarantee or references from any reputable institutions or persons to restrict the borrowers to default. Capacity building of the borrowers on timely and proper use of credit and repayment schedule of credit in accordance with the loan agreement is need of the hour. Technology, Sonneggstrasse 33, 809 Zurich, The financial institutions should introduce the facility of Islamic Finance like Musharka/Muzarba. New branches should be established in the rural areas which would be easily accessible. Financial Institutions should avoid frequent transfers and reducing the number of agricultural field officers. To sum up, credit alone is not the major determinant of productive growth in the rural areas of Pakistan. The establishments of infrastructure, paved road, cool chain facilities, market existence holds the key for growth and development of agricultural sector [1]. In addition, financial institutions have to join hands with the government agencies, NGO s, Rural Development Organizations (RDO s) to enable the farming community as well as to achieve the growth target and facilitate the broad contribution of agriculture in national GDP. REFERENCES 1. GOP, 011. Economic Survey of Pakistan , Economic Advisor s Wing Finance Division, Ministry of Finance, Islamabad. Online available at: < Agriculture11.pdf>.. Mehmood, Y., M.B. Anjum and M. Ahmad, 011. Agricultural Credit and Constraints. The Nation Newspaper published on dated: 5-September, 011. Switzerland. 6. Sarwar, N., 001. An Evaluation of Small Farmers Agriculture Credit Program of Agriculture Development Bank Pakistan, (unpublished thesis), Department of Agriculture Economics, University of Agriculture, Faisalabad, Pakistan. 7. Nazli, H., 001. Role of Micro Credit in Economic Revival and Poverty Alleviation, J. Institute of Bankers Pakistan, 67: Duong, P.B. and Y. Izumida, 00. Rural Development Finance in Vietnam, a Micro Econometric Analysis of Household Surveys World Development, 30(): Nosiru and M. Omobolanle, 010. Microcredits and Agricultural Productivity in Ogun State, Nigeria. World Journal of Agricultural Sci., 6(3): Iqbal, M., M. Ahmad and K. Abbas, 003. The Impact of Institutional Credit on Agriculture Production in Pakistan. The Pakistan Development Review, 4(): Fayaz, M.D., A.U. Jan and B. Hussain, 006. Effect of Short Term Credit Advanced by ZTBL for Enhancement of Crop Productivity and Income of Growers. Journal of Agriculture and Biological Sci., 1(4): Olagunj, F.I., 007. Impact of Credit Use on Resource Productivity of Sweet Potato's Farmers in Osun-State. Journal of Social Sci., 14(): Mehmood, Y., 008. The Role of Commercial Bank in the Uplift of Agricultural Sector; a Case Study of District Lahore, (unpublished thesis), Department of Development Economics, Faculty of Agricultural Economics and Rural Sociology, University of Agriculture Faisalabad, Pakistan. 14. Bashir, M.K., Z.A. Gill and S. Hassan, 009. Impact of Credit Disbursed by Commercial Banks on the Productivity of Wheat in Faisalabad District. China Agricultural Economic Review, 1(3):

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