Does the existing system of financing smallholders match with their real needs? That may satisfy some of them. But the majority of smallholders are deprived of the potential benefits of viable system of financing for ages. Any financing policy or programme must have two fundamental objectives-- one for the lender, and the other for the borrower. These refer to ensuring the viability of both the lender and the borrower and are very critical particularly for the resource-poor segment of the population like smallholding farmers.
What is a viable financing system? Let us define a viable farm household. A viable farm household is one that is able to recover the entire investment (equity and debt plus cost thereof ) made in farm and other economic activities from the annual aggregate of gross farm income, off-farm income and net non-farm income earned by family member(s) after meeting annual family expenditure. Hence, a viable financing system refers to one that makes a borrowing farm household viable as explained earlier.
Smallholding households constitute about 40 per cent of the total dwelling households in Bangladesh. We have now around 14 million smallholders. They produce more than half of rice and other crops but more than 50 per cent of the producers are not financially viable. Most of them don't have their own fund to invest in farming or in other income-generating activities and are financially non-viable. An appropriate financing system can make them viable. Present discussion aims at illustrating the proposed system of financing for the smallholders.
A hypothetical example-- a small farmer sought credit of Tk.30,000 from a bank for cultivating Boro paddy. The farmer has a cropland of one acre. He has four family members including two school-going (primary level) children. He is to incur annual family expenditure of Tk.100,000. The bank sanctioned a loan of Tk.30,000 at an interest rate of 9 per cent per annum to the farmer. No other thing than timely recovery was considered by the bank. The farmer used Tk.20,000 for paddy production, and the rest Tk.10,000 for bridging up the deficit in family expenditure. 60 maunds of paddy were grown. Its market price was Tk.48,000. But the farmer did not repay the loan after the harvesting had been over. The bank repeatedly requested the farmer to repay the loan. But the loan was not repaid. Consequently, the borrowing farmer's debt burden escalated on the one hand, and the loan default put the bank in distress on the other. Why did it so happen ?
The case can be analysed in depth. It was the duty of the farmer to repay the loan in time. Apparently, it is seen that the farmer had an income of Tk.48,000 against the loan of Tk.30,000. If he had repaid the loan together with six months' interest of Tk.1,350, an amount of Tk.16,650 would have been left for spending by the household. But what made the farmer reluctant to repay the loan dues? Was the farmer really able to repay? If annual family expenditure is split into two halves, six month's (considering Boro production cycle and lag as well as grace periods) amount stands at Tk.50,000. Supposedly, he has no other source of extra income. He is unable to meet even six months' family expenses as he has income Tk.48,000 against the expenditure of Tk 50,000.
Obviously, the farmer, in the above case, would have no loan repayment capacity if he pays periodic family expenditure. What will the bank do? Can it donate fund to the poor farmer? The answer is , no doubt, negative. If so, how can the bank lend money to farmers and recover? Most essentially, the farmer must be assisted with adequate finance. How is it possible to enhance farmer's capacity to repay? Here lies the real dilemma of financing poor farmers under prevailing credit system. Undeniably, we cannot but emphasise on the need to raise a poor farmer's ability to repay loan. Besides, that a small farmer's farm and family are inseparable cannot be ignored at all.
We can refer to the example for further use in quest of a solution. The bank would go to finance that type of farmer adopting 'Make viable approach'. The bank is to make a loan project for financing a single or group of small farmers according to field circumstances. The bank must collect sufficient information from the farm households. This would include income and family expenditure, indebtedness, land size, region, fertility position, possibility of paddy, non-paddy and non-crop agriculture, petty business possibility etc. The lending institution will design a project planning for a year in which all paddy and other crops would grow. Based on minimum possible family expenditure, the bank will assess credit needs for all probable economic activities (farm and non-farm) as a package.
Assumed variant of the aforementioned example-- the borrowing farmer will use 80 decimals of land for Boro and Aman paddy, and 20 decimals for non-paddy crops. Total fund needed is assessed at Tk.60,000: Tk. 20,000 for Boro paddy, Tk.10,000 for Aman paddy, Tk. 10,000 for non-paddy crops, Tk.10,000 for deficit in family expenditure, and Tk.10,000 for petty business investment. Total credit requirement would be Tk. 40,000 ( after deduction of Tk.20,000 to be recycled at the end of Boro harvesting).
Annual income is estimated at total Tk.138,000 [Gross income from paddy (90 mds @ 800)= 72000, Non-paddy crop income (gross) 30000, Business income Tk.36000 (net)]. Total fund position stands at Tk. 148,000 (adding original investment in business Tk.10,000). After family expenditure is met, the surplus is Tk.48,000. The farmer is able to repay the loan of Tk.40,000 plus Tk. 3,600 interest thereon. This is the concept of viable financing model. We have many projects, programmes and huge fund for assisting the poor, but the real hurdle is that the very financing approach is incompatible.
Thus, it is evident that multi-purpose credit system (replacing currently practised piecemeal approach) is likely to make smallholder farm households viable. The financing institution would have to perform grave responsibilities for making and implementing of loan projects suiting the needs of each small farmer by following "make viable approach". New government policies, programmes, and regulations would be necessary for introduction of viable financing system. We may have to think of new institutional framework because of enormous, innovative and intensive workload and the need for the services of agriculturists, economists, technical experts, and related government agencies.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management. [email protected]