Making the best use of farm loans

Bangladesh has achieved impressive success in industrialisation over the years with the industry sector's contribution to the gross domestic product (GDP) reaching around 40 per cent. Still Bangladesh is considered an agricultural economy as the sector remains the backbone of rural livelihoods, contributing roughly 12 per cent to the GDP. The sector holds the potential of multiplying the contribution, which the country fails to achieve thanks mainly to the lack of attention it needs. Much has been talked about the development of the agriculture sector and significant steps have also been taken, but the country still lags in actions that could transform the sector into a high-contributing one. Here farmers grow crops just for their survival, without knowing their real contribution to the economy, no matter if the government extends any support or not.

Farmers in Bangladesh have limited access to finance, one of the major inputs of production, from banking sources and most of those who can access it have to pay unofficial 'speed money', which adds to cost of borrowing and eats into the borrowed amount. This factor, coupled with a lack of proper supervision, natural calamities and political unrest, often leads to default in repayment. According to a report of The Financial Express, non-performing loans (NPLs) of farmers jumped nearly 42.50 per cent to Tk 61.79 billion during the July-January period of the current fiscal year. This rate is much higher than the overall NPL ratio in the banking sector, which stands at around 17 per cent.

Some examples, however, will make anyone believe that the NPL situation in agriculture credit could have been different had the lenders dealt with the funds a bit differently.  Data suggest agriculture loans provided by non-profits and agri-fintechs have much lower NPL ratio, mainly because of the identification of proper loanees, necessary advice to them and close supervision. For example, iFarmer facilitated Tk1.78 billion in loans to around 17,000 farmers from banks and from their own funds and the NPL remains less than 5.0 per cent. This figure represents a small percentage of farmers, but the replication of the model by agriculture lenders might bring in a big change in the agriculture finance landscape in Bangladesh.

Proper monitoring and supervision of farm loans is critically important as in many cases, such loans, especially short-term seasonal ones, are diverted to non-productive uses such as family expenses. This misallocation reduces the capacity of the borrower to repay the loan on time, increasing the NPL burden. However, farm loans, particularly those disbursed through state-owned banks, are often not subject to the same rigorous monitoring as commercial loans or as that offered by non-profits and agri-fintechs. Many rural bank branches are understaffed or lack sufficient capacity for post-disbursement monitoring, leaving a room for misuse of funds or a casual approach to repayment. Conventional lenders should forge greater cooperation with non-profit lending organisations and agri-fintechs in financing agriculture to ensure that their funds are best utilised and make the highest possible contribution to the sector in particular and to the economy in general. Such cooperation could also contribute to curbing informal payment for loans, creating a scope for farmers to invest greater amounts of money in the field they intend to.

Digitisation of agriculture credit disbursement is also necessary to curb NPL in the sector as manual processes always leave room for corruption. The implementation of crop insurance could also help reduce NPL. Crop insurance has been piloted in a few regions, it is yet to be implemented nationwide. Farmers often bear the brunt of losses due to crop failure or livestock disease in the absence of such insurance.

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