M. A.

Faisal Mahmud
faisal.mahmud@live.com

Financing the agriculture in Bangladesh: High time to revisit

Budgetary initiatives would lay a good patch

Agriculture, being the largest labor endowed sector (almost 50% of total workforce of the country), is contributing
18.7% to the country’s GDP. Hence, it is of great essence for the future to make major efforts to nurture the stimuli
to support the required growth in agriculture. However, by this time the greatest technical challenge remains to
develop and introduce new suites of productivity-increasing farming technologies, and the atmospheric conditions
on which future food output depends. To achieve this, it is vitally important to have good investment in
agricultural research and development (R&D), developing marketing system, adequate supply of quality inputs and
required financing.

As we know, in agriculture, inputs are transformed into outputs with considerable time lags; the rural households
need to balance their budget during the season when there are high expenditures for input. With limited access to
credit, the budget balance within the year can become a constraint to agricultural production. As our marginal
farmers are mostly constrained by means to finance the agriculture and cannot arrange required fund in any
private arrangement, so, one motivation underlying many government programs is to seek to provide more credit
to the farm sector to improve farm productivity and income of the poor.

Contribution of Agriculture in GDP Sector contribution to GDP-South Asian Countries

24.0%
23.3%
Contribution of Agriculture in
Service Industry Agriculture
GDP
21.9% 100%
22.0%
21.0% 80%
20.2% 52.6% 54.9% 58.0%
62.6%
20.0% 19.3% 60%
18.9%
18.6%
18.3% 18.0% 40%
18.0% 28.7% 24.3%
20.0% 29.2%
20%
18.7% 17.5% 20.8%
12.8%
16.0% 0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09P Bangladesh India Pakistan Sri Lanka
Fig. 1: Agricultural sector’s contribution to GDP decreasing but still holds a good share

Access to finance for agriculture has long been a constraint to agricultural production in Bangladesh, well
evidenced in NAP (National Agricultural Policy) as a weakness of the sector. The credit market has not been
responsive to agricultural sector in the past.

Typically, Bangladesh Bank sets Annual programme based indicative disbursement targets of credit by the lending
banks are designed. Yearly targets of disbursement are set by the banks themselves taking into consideration
expected demand for credit for the year, previous years’ disbursements and the availability of fund. GoB from
budgetary allocation has long been trying to provide financing to some extent. Government usually make
agricultural subsidy in agricultural inputs. However, government has got its constraints on funding in full.
Agricultural credit performance by lenders - FY09
BDT bn
Disbursement Actual Recovery Overdue Outstanding Overdue as % of
Target Disbursement outstanding
Lender
SCBs 20.15 15.89 14.79 26.63 53.19 50.06
BKB 38 38.24 35.72 21.24 81.03 26.21
RAKUB 8.55 8.8 9.01 8.54 27.34 31.24
BRDB 7.51 6.94 6.82 3.36 9.39 35.78
BSBL 0.45 0.05 0.07 0.72 0.75 96
Sub Total 74.66 69.92 66.41 60.49 171.7 35.23
Foreign Banks 1.91 5.13 3.09 0 5.73 0
PCBs 18.57 17.8 14.27 0.31 18.55 1.67
Sub Total 20.48 22.93 17.36 0.31 24.28 1.28
Grand Total 93.79 92.85 83.77 60.8 195.98 31.02
Source : Agricultural Credit & Special Programmes Department, Bangladesh Bank.
* Excluding PCBs and foreign Banks

The main sources of finance in agriculture are still the state-owned banks. As such specialised banks i.e. BKB and
RAKUB, state-owned commercial banks and BRDB are dominant players in the area of agricultural credit. BKB had
the largest share in annual disbursement of agricultural loan. In FY09, BKB alone disbursed 41.2% of the total
disbursement, followed by SCBs at 17.1%.
Term structure of loan disbursed
During FY09, BKB and RAKUB have enjoyed BDT bn
refinance facilities to the tune of BDT 2.94bn from 2007 2008 2009
Bangladesh Bank. No other institutions availed of Short term 38.66 41.82 45.78
refinance facilities from Bangladesh Bank in FY09. Longer term 14.27 19.85 24.14

Obviously, overdue loans in SCBs and Agricultural Credit Disbursement-'09

specialized banks remain as the main
bottleneck in the thorough proliferation. Bad
Other
loans The SCBs overdue loan as percentage of
agricultural
their outstanding stood at 50.06% at the end of activities
FY09, while overdue of BRDB, RAKUB and BKB 32% Crops
recorded 35.78, 31.24 and 26.2% respectively 41%
of their outstanding during the year.

About 46% of disbursement was as short term

lending and the rest 24% was in the form of Fisheries
long-term loans for irrigation equipments, 5%
agricultural machinery, livestock etc. The term Poverty
structure has its implication; the longer term Livestock alleviation
maturity loan is increasing which means some 4% 18%
structured firming is increasing.

Private Banks were not very responsive in agricultural lending historically. However, the role of private sector
domestic and foreign banks in agricultural lending seems to be increasing, as they contributed BDT 22.93bn which
is around 24.70% of the total agricultural loan disbursed in FY09. Overdue loan is 1.67% of total loan outstanding.

However, due to operational costs, high financial risk, and low return, formal financial institutions have strict
requirements for rural loans and have limiting lending. Formal loan approval process does not work that much for
agricultural loan, especially farmers’ eligibility assessment; reaching marginal farmers, securing
guarantee/collateral and assessment of the project is costly in the formal procedure.

In many agricultural community traders and contract farming firms typically contract to market or process a
farmer's harvest in exchange for credit and often other services like technical assistance and farm input sales. An
important characteristic of this form of lending is that the loan contract often involves much less collateral than
would a similar bank loan, and at times, no collateral other than a crop pledge.

One important point to note is that, PCBs attitude towards the agricultural sector is yet to be very responsive. BB
did not make any major economic repression in terms of interest rate caps. Following picture depicts interest rate
structure of agricultural lending and saving deposits. PCBs margin is above 5% in many instants where as they
could not think agricultural lending as a ‘Product’. This is because of their traditional focusing bias and the banking
system structure. Only few banks are thinking agricultural lending as a good product to diversify.

PCBs Agricultural Loan and Saving Deposit Rates

Agricultural Loan Rate Saving Deposit Rate

14
Saving Deposti and Agricultural Loan Rate (%)

12
10
8
6
4
2
0
AL-ARAFAH

SHAHJALAL
PUBALI

PRIME

TRUST BANK
ISLAMI

THE CITY

SIBL

BRAC
BANK ASIA
ICB

MUTUAL TRUST
UCBL

DHAKA
AB-BANK

MERCANTILE
ONE BANK
IFIC

EXIM

BCBL
FIRST SECU
SOUTHEAST

STANDARD
NBL

EBL
NCCBL
UTTARA

DUTCH-BANGLA

PREMIER

Banks can think of making the system (contract farming, Agri centers or partnership with MFIs). Rural Mutual Co- JAMUNA
operatives can be utilized to structure loan products and to reduce operational complexity. PCBs are now able to
participate in BB’s refinancing schemes which will eventually increase the participation in the agricultural lending.
Myanmar has created Village Peace and Development Council (VPDC) for agriculture financing. Village Peace and
Development Council (VPDC) headmen are in charge of requesting loan money directly from the Bank's regional
branches. Farmers apply for loans at their local village headmen's homes. Kisan Credit/Gold Card Scheme has been
introduced in India to provide term loan to the farmers. We can think this type of micro institutions or co-
operatives. Private Banks can open Agri Center spreading all over the country.

Partnership with Microfinance institutes is a good avenue to consider. Microfinance is now a nation-wide activity
in Bangladesh. The issue of a regulatory framework has come to the forefront because NGO-MFIs, the major
provider of this service, are providing financial services to the poor outside the formal banking system. Apart from
agricultural credit Grameen Bank and large NGOs played significant role through their microcredit programmes to
boost up the rural economy in the country.
With efficient disbursement and recovery position, their Microcredit operations of the Grameen Bank and large NGOs
disbursement during FY09 amounting BDT 222.0bn was BDT bn
217.5% higher than the agricultural loan disbursement of the FY07R FY08R FY09
institutional lenders. 1. Disbursement 156.6 198 222
i) Grameen Bank 50.2 54.6 71.9
Recently, BB has also taken up a special refinancing scheme ii)BRAC 52.7 75.1 80.9
of BDT 5.0bn and signed an agreement with BRAC, a leading iii) ASA 46.1 53.7 54.6
nongovernmental organisation (NGO), in which iv) TMSS 2.7 5.7 6.6
sharecroppers will receive collateral-free loans for the first v) BURO BANGLADESH 1.7 5.9 5.6
time. The BRAC will borrow such fund at 5% interest from BB vi) PROSHIKA 3.2 3 2.4
and disburse at 10% interest to sharecroppers in groups at 2. Recovery 137.3 171.1 224.7
i) Grameen Bank 48 48.9 61.1
150 upazilas under 35 districts across the country.
ii)BRAC 41.6 63.7 78.8
iii) ASA 41.4 45.6 68.8
Bangladesh Bank has announced its annual agricultural/rural
iv) TMSS 2.4 5.6 6.8
credit policy and programme for FY10. The target for v) BURO BANGLADESH 1.6 4.7 6
disbursement of agricultural/rural credit has fixed at so far vi) PROSHIKA 2.3 2.6 3.2
the highest amount of BDT 115.0bn for FY10. The 3. Outstanding Loans 102.1 120.7 132.6
government has set a target to disburse BDT 100bn as i) Grameen Bank 33.8 34.5 50.7
agriculture credit through banks and non-banking financial ii)BRAC 31.9 43.2 45.4
institutions for FY09-10, 6.6% increase compared to FY08-09. iii) ASA 28 33.9 26.7
iv) TMSS 2.8 2.9 3.4
The Government has distributed agro-input assistance cards v) BURO BANGLADESH 1.6 2.3 3.3
among 18.2mn farmer families throughout the country. An vi) PROSHIKA 4 3.9 3.1
amount of BDT 7.5bn has been distributed among 9.2mn 4. Loans Overdue 4.4 6.2 6.9
boro-farmers across the country to help them purchase i) Grameen Bank 0.8 1.2 1.4
diesel in the boro-season of FY09-10. By showing this agro- ii)BRAC 0.9 1.8 2.4
input card, farmers are now able to open a bank account iii) ASA 0.3 0.5 1
with only BDT 10. iv) TMSS 0.06 0.05 0.1
v) BURO BANGLADESH 0.04 0.05 0.1
vi) PROSHIKA 2.3 2.6 1.9
Budgetary allocation and avenues play pivotal role in
5. Overdue as percentage of outstanding 4.3 5.1 5.2
shaping a sectors future outlook. Fortunately, GoB is giving
i) Grameen Bank 2.4 3.5 2.8
importance in making the country self reliance in terms of ii)BRAC 2.8 4.2 5.3
food. The Finance Minister proposed to allocate BDT iii) ASA 1.1 1.5 3.7
74.92bn for development and non-development budget iv) TMSS 2.1 1.7 2.6
combined. The government has already created Agricultural v) BURO BANGLADESH 2.5 2.2 2.5
Research Fund and going to operationalise the fund from the vi) PROSHIKA 57.7 66.7 59.2
next year. The size of the fund now stands BDT 4.12bn. GoB
proposed an allocation of BDT 40bn for subsidy in agricultural Budgetary Allocation in Agriculture
sector and BDT 3bn for irrigation facility expansion in the (Development and Non-Development
budget for FY2010-11. Combined)
120
Budgetary allocation has not been increased that much
historically. Other developing agricultural countries are 100
increasing budgetary allocation continuously. Indian
government increased Agricultural Budget allocation by a 80
significant 300% in the period between FY03-04 and FY08-09.
60

Recently, Bangladesh Bank has formulated a strategic plan to 40

promote lending to agriculture and to introduce risk
mitigants (i.e- crop insurance). BB’s strategic focus along with 20
strong budgetary support and our farmers’ hardship can
make us self reliant in food. 0
FY07-08 FY08-09 FY09-10 FY10-11