Banks channel farm loans thru microfinance institutions

The share of bank loans to microfinance institutions (MFIs) has been on the rise for the straight eighth year, as the banks are required to meet their farm loan target.

According to the Microcredit Regulatory Authority (MRA), the share of banks loans to MFIs accounted for around 21 per cent (Tk 132 billion) of overall credit in 2017; some 19 per cent (Tk 95 billion) in 2016; 17 per cent (Tk 68 billion) in 2015; 16.4 per cent (Tk 51 billion) in 2014; 15.2 per cent (Tk 42 billion) in 2013; 14.2 per cent (Tk 32 billion) in 2012 and 12.4 per cent (Tk 23 billion) in 2011.

The MRA is still preparing the data of 2018. An official, however, indicated that the amount of bank loans to MFIs would be 25 per cent of total loans or around Tk 160 billion in 2018.

But there are criticisms that farm loans of banks go to MFIs with high interest rate as the mainstream banks do not have branches and agents in rural areas.

There are also allegations that farmers get farm loans at an interest rate three times over, which actually do not benefit them.

Contacted, Brac Bank Chairperson Ahsan H Mansur said banks can't go directly to rural areas to provide only farm loans. It is not viable for them.

The purpose of farm loans is financing the rural economy, he said, adding that MFIs are doing this effectively.

He also said some banks are now going to rural areas through agent banking.

"More banks will go to rural areas through agent banking or other means if the cost of fund declines," he said.

A top executive of a state-owned specialised bank, who declined to be named, said farm loans disbursed through MFIs actually do not go to farmers.

This 'wholesale lending' of farm loans actually do not contribute to the agriculture financing in rural areas, he added.

He also suggested that the government should either make it mandatory for banks to disburse farm loans only through their branches or ask the MFIs to reduce the interest rate on loans to farmers for their benefit.

As per the central bank's agriculture credit policy, each bank has to disburse at least 2.0 per cent of their total loans to farmers in a year.

In recent years, banks have attained the disbursement target by outsourcing the lending activities to MFIs (NGOs).

Bangladesh Bank set the farm loan target for 2019-20 fiscal at Tk 241.24 billion, up by 10.66 per cent over the last fiscal year's target.

Of the target, eight state-owned banks have been asked to disburse Tk 103.75 billion in the current fiscal while the targets for private commercial banks (PCBs) and foreign commercial banks (FCBs) are Tk 137.49 billion combined.

Meanwhile, the banks' disbursement of farm credit exceeded the target in the last fiscal year.

All the banks have achieved 108.33 per cent of their total annual agriculture loan disbursement target of Tk 218 billion for the FY '19.

The disbursement of farm credit grew by more than 10 per cent to Tk 236.16 billion in the FY '19 from Tk 213.93 billion a year earlier, the BB data showed.

At least 26 banks disbursed more than 70 per cent of their farm loans last year through MFIs.

According to the Bangladesh Bank (BB) directive, banks must disburse at least 30 per cent of their annual farm loans through their branches.

Farmers are supposed to get loans at nine per cent interest rate if the banks disburse them through branches. But the MFIs make a mint from the bank money they borrow at nine per cent interest.

Former Chairman of Credit and Development Forum (CDF) Mosharraf Hossain said the reason behind the rise in bank loans to MFI is that banks can't disburse loans in rural area.

Firstly, banks do not have network in rural area and secondly, they do not have expertise on how to deal with small loans in rural areas, he said.

Mr Hossain, finance director of Buro Bangladesh, which is one of the top receivers of bank loans, said MFIs provide "utilization" and "livelihood programme" for recipients of small loans.

"Banks can't do that," he said.

He also pointed out that MFIs have the lowest rate of bad loans despite high interest rates while default loans has a very high rate when it comes to agriculture loans despite the interest rate being three times lower than that of MFIs.

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