Assignment on

AGRICULTURAL AND RURAL CREDIT FINANCING IN BANGLADESH

Submitted To MR. SUBHANKAR SAHA General Manager & Director of Foundation Course Bangladesh Bank Training Academy Mirpur-2, Dhaka

Submitted By Group No. 15 Foundation Training Course 2012 (1st Batch) Bangladesh Bank Training Academy Mirpur-2, Dhaka

April 17, 2012

INTRODUCTION TO GROUP MEMBERS

Foundation Training Course 2012 (1st Batch) Bangladesh Bank Training Academy (BBTA) Group No. 15

Serial No. 01 02 03

Name & Designation Chandan Kumar Roy Assistant Director Golam Mostafa Assistant Director Akter Jahan Shukhee Assistant Director

Roll No. 32 37 46

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

AGRICULTURAL AND RURAL CREDIT FINANCING IN BANGLADESH

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

TABLE OF CONTENTS
Sl. No. 1 1.1 1.2 2 2.1 2.2 2.3 3 3.1 3.2 4 4.1 4.2 4.3 5 5.1 5.2 5.3 6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 7 8 Topic Introduction What is Agricultural Credit? What is Rural Credit? Agricultural & Rural Credit Agencies in Bangladesh Need for Institutional Framework/Network Rural Financial Market NGOs as Source of Rural Credit Government Endeavor in the Past The Nationalized Commercial Banks Role of Specialized Agricultural Banks Present Scenario of Agricultural and Rural Credit in Bangladesh Disbursement & Recovery of Agricultural Loan Disbursement of Agricultural/Rural Credit by Lenders Agricultural/Rural Credit Disbursement Target Agricultural/Rural Credit Initiative by Bangladesh Bank Policy Formulation Credit Targeting Credit Refinance Challenges of Agricultural/Rural Financing & Proposed Remedial Measures Inadequate Rural Branches Farmers Selection Bias Collateral Requirements Credit Recovery Balancing Farmers Preferences Interest Rate & Repayment Method Political Interference Agricultural Credit Share over Total Bank Advances Uneven Distribution of Agricultural Credit Supervised Credit Agricultural Insurance Conclusion References Page No. 07 08 08 09 09 09 11 12 12 14 18 18 20 22 23 23 24 24 26 26 26 27 27 27 28 28 28 29 29 29 30 31

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

LIST OF ABBREVIATIONS Abbreviation ABL ASA ADBB ADBP ADFC BADC BARD BBS BKB BRAC BRDB BSBL FCB FY GB GDP GOB HYV IFAD JBL MFI NCB NGO PCB PKSF RAKUB SACP SB SBL SEF SFDP Tk. Elaboration Agrani Bank Limited Association for Social Advancement Agricultural Development Bank of Bangladesh Agricultural Development Bank of Pakistan Agricultural Development Finance Corporation Bangladesh Agricultural Development Corporation Bangladesh Academy for Rural Development Bangladesh Bureau of Statistics Bangladesh Krishi Bank Bangladesh Rural Advancement Committee Bangladesh Rural Development Board Bangladesh Samobay Bank Limited Foreign Commercial Bank Financial Year Grameen Bank Gross Domestic Product Government of Bangladesh High Yielding Variety International Fund for agricultural Development Janata Bank Limited Micro Finance Institution Nationalized Commercial Bank Non-Government Organization Private Commercial Bank Palli Karma Sohayok Foundation Rajshahi Krishi Unnayan Bank Special Agricultural Credit Programme Specialized Bank Sonali Bank Limted Small Enterprise Fund Small Farmers Development Projects Taka

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

PREFACE
This assignment work on Agricultural and Rural Credit Financing in Bangladesh is an integral part of the Foundation Training Course for the Newly Recruited Assistant Directors of Bangladesh Bank. This work has been carried out following the instructions of the course administration. Various books, journals, reports, online resources have been studied for preparing this assignment paper. The data used in this assignment work have been collected from the secondary sources. This paper has been grouped into eight chapters. Chapter 1 is the introductory part while the chapter 2 describes the agricultural credit agencies in Bangladesh. Chapter 3 describes the past endeavor by government regarding agricultural and rural credit. Present scenario of agricultural and rural credit has been depicted in chapter 4. Initiative taken by Bangladesh Bank to boost up agricultural and rural credit has been shown in chapter 5. Chapter 6 focuses on the challenges of agricultural and rural credit and possible remedial measures. Chapter 7 draws conclusion and chapter 8 is the references sources studied in preparing the assignment. We are grateful to our honorable course director, chief course coordinator and section coordinator for their valuable guidance and direction.

............................... Akter Jahan Shukhee

..................... Golam Mostafa

............................. Chandan Kumar Roy

Bangladesh Bank Training Academy (BBTA) Mirpur-2, Dhaka April 17, 2012

1. INTRODUCITON
Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

Agriculture forms the base for economic development. It is the oldest and most widely practiced form of production activity in the world and has evolved gradually with the passage of time. Agriculture contributes significantly to overall economic growth all over the world. Development of agriculture still holds paramount importance today, not merely because it provides food, fodder and other agro-products to a rising population, but because it also ensures a strong base for the extension of markets and ingestible resources. Agriculture also provides many of the raw materials used by industry. The fate of the textile industry, for instance, is crucially linked with the supply of raw cotton, and the food processing and tobacco manufacturing industries are equally dependent of agricultural products. Bangladesh is a predominantly rural country, with most of its population dependent on agriculture. Agriculture is thus the most important sector of the national economy generating more than 20 percent of the countrys Gross Domestic Product (GDP), and 6 percent of export income, while employing more than 48 percent of the labor force. The food security of the country is dependent on agriculture. The rural people (specially the farmers) depend entirely on agriculture for their livelihoods. It is only through the development of the agriculture sector that they can increase their earnings and enhance their standard of living. Agriculture continues to play a pivotal role in rural growth. Development of the rural economy is thus should be central to Bangladeshs Development Strategy. Finance is the lifeblood of all economic activity. Extending credit to the rural economy is crucial for the development of the rural economy as well as overall development of Bangladesh. Bangladesh Bank, by its active direction, guidance and supervision, has set priority in agricultural and rural credit financing in Bangladesh. Thus, agricultural and rural credit financing has got special attention in the financial system of Bangladesh economy.

1.1 What is Agricultural Credit?

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

Agricultural credit refers to the amount of money that the farmers borrow to meet their production requirements as well as their current consumption needs. Farmers may borrow to purchase new agricultural land or to release mortgaged lands, to make permanent improvements on land, to purchase production inputs or agricultural machinery, to meet consumption expenses etc. The money that is borrowed by farmers to meet all such requirements is termed as agricultural credit. It is needless to mention that credit plays a vital role in accelerating agricultural production.

1.2 What is Rural Credit? Rural credit is a small amount of money which give to the poor people including small scale farmers and unemployed person as loan to start there own work by development banks or any other financial institutions. Rural credit is any type of lending program or line of credit that is aimed at impacting a rural population in some manner. There are banks and cooperatives that specialize in extending this type of credit to farmers and others engaged in the agricultural/other income generating tasks. Depending on the nature of the organization, credit plans may focus on providing mortgage assistance, securing new equipment, or even funds to support research into various aspects of land development within a rural community.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

2. AGRICULTURAL & RURAL CREDIT AGENCIES IN BANGLADESH

2.1 Need for Institutional Framework/Network For any credit program to be implemented effectively, proper institutional arrangements are most essential. Even well-designed programs can fail if the institutional framework is not adequate. This is even truer in the case of agricultural and rural credit where a vast area and a large rural population have to be covered by the credit program. Rural credit programs also have to be designed keeping the socio economic condition of the target people in view. For rural advancement of a nation, rural credit agencies generally have to cater to the financing need of (a) agriculture, (b) small business and (c) cooperative development. Separate institutional credit arrangements may also have to be made to meet the special needs of a particular class of people with reference to their economic, professional or regional status.

2.2 Rural Financial Market From time immemorial, the Rural Financial Market (RFM) of Bangladesh had been controlled mainly by professional money lenders (mohajons) and land owners. Friends and relatives also had a role to play in this respect. It is mentionable that all of them also used to meet financial needs of the farmers during natural calamities or socio-economic crises of the subsistence farmers. But there is the allegation that, particularly the mohajons and the land owners had been charging exorbitant rate of interest on the money they lent out and, hence, are marked as "usurious monopolist". This kind of situation also prevails in other developing countries. However, the basic truth is that everywhere including Bangladesh, these credit sources are considered a bane rather than a boon. But an opposite view of this is also available which can hardly be overlooked. In an imperfect credit market, where small-scale farmers have always had difficulty gaining access to banks and credit societies, these agriculturalists-turned money lenders perform a socially useful function of financial mediation. Because, in extreme distress, they engage in large financial intermediation for the small groups and serves as friend in need. However, the basic truth is that everywhere these sources of credit are considered bane rather than boon as far as rural

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

investment is concerned. More often than not, indebted farmers are driven to destitution in the face of a harvest failure. The sources of rural credit (or RFM) can broadly be classified into three groups as follows; 1. 2. 3. Formal Financial Market Informal Financial Market Semi-Formal Financial Market

The structure of RFM cab be depicted as shown in below:

Figure1: Rural Financial Market Structure The players of the Formal Financial Market in the rural areas are the various banks operating in Bangladesh. They include Nationalized Commercial Banks (NCBs), the specialized commercial banks like Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (RAKUB), Private Commercial Banks (PCBs), the Foreign Commercial Banks (FCBs) etc. Informal sources of rural credit include moneylenders, friends/ relatives, traders, landowners etc. Semi-Formal sources include Palli Karma Sohayok Foundation (PKSF), Non Government Organizations (NGOs). Other sources include Bangladesh Rural Development Board (BRDB), Cooperative Societies.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

10

Bangladesh Bank

Nationalized Commercial Bank

Bangladesh Krishi Bank

BSBL RAKUB

Branches

UCCA

Branches

Branches

KSS

Farmers

Members

Individual Farmers

Individual Farmers

Figure 2: Channel of Agricultural Credit 2.3 Non Government Organizations (NGOs) as Source of Rural Credit In the context of Bangladesh, another source of rural credit is the NGOs. Following the success of the Grameen Bank, a large number of NGOs stepped in to supplying rural credit in remote areas as part of their social development programmes. These programmes targeted mostly women from landless and poor households. It is estimated that, in 2000, about 6 million of the estimated 11 million functionally landless households have received the advantage of NGO credit. Presently, ASA and BRAC are mentionable among the large NGOs operating in Bangladesh and also involved in agricultural and rural financing.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

11

3. GOVERNMENT ENDEAVOR IN THE PAST

3.1 The Nationalized Commercial Banks. Prior to the liberation of Bangladesh in 1971, commercial banks had played an insignificant role in agricultural and rural credit. Even after this event, the newly nationalized commercial banks remained rather unconcerned about rural finance Institutional participation in the agricultural credit programmed was stepped up after 1977 when a special agricultural credit programme (SACP) was introduced by the Government of Bangladesh (GOB). Through the SACP, the GOB induces the NCBs to participate more actively in the disbursement of agricultural credit. The agricultural credit activities of the NCBs in Bangladesh need to be examined in relation to the national banking policy on agricultural credit. The past endeavor for extending credit by the three major NCBs is analyzed next. 3.1.1 Sonali Bank Limited Sonali Bank Limited (SBL) has been extending financial support on priority basis to potential growth sectors in Bangladesh including agriculture, industry, trade and commerce, in order to strengthen the national economy to accelerate the pace of industrialization, SBL had expended its industrial credit programme by extending financial support for the establishment of large, medium and small scale industries. It has also continued to follow government policies for financing people of smaller means on easy terms and conditions. SBL commenced its rural financing programme in 1973 by financing the projects of Bangladesh Rural Development Board (BRDB). SBL started directed financing programme for rural people from 1976. The major rural credit scheme of SBL provides credit suport for the SACP, the Swanirvar Self Reliance Programme and the Krishi Shakha Programme and extends credit to farmers for sugarcane, banana and jute cultivation. SBL provides finance under the IFAD Credit Programme and Bangladesh Swiss agricultural project, also extends scheme assistance for rural irrigation, rural housing and rural transport. For rural poverty alleviation, SBL supports fisheries and shrimps development projects, and also finance the BRDB Scheme for establishing Central Cooperative Society at each Thana. The Bank also extends direct financial support to fertilizer dealers.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

12

3.1.2 Agrani Bank LImted Agrani Bank Limited (ABL), another leading NCB, was brought into existence by the Bangladesh Bank (Nationalization) Order of 1972, under which Agrani Bank Limited took over the assets and liabilities of the Habib Bank Limited and the Commerce Bank Bank Limited which had functioned in East Pakistan. At the time of commencing operations, it had a network of 888 branches located through out the country, including its Head Office, 4 Circle offices, 54 Zonal offices and 38 branches handling foreign exchange, 582 branches (66 per cent) of the Agrani Banks 888 branches were located then in rural areas. Since then, Agrani Bank Limited has witnessed an expansion in terms of deposits, advices and branches. By the end of 2002 the total number of branches had risen to 870, of which 528 (61 per cent) were rural branches. Agrani Bank Limited has been involved in rural finance since 1975 to 1976. Its credit activities have extended to most sub sectors of rural financing including agricultural and non agricultural credit programmes. Credit operations by ABL are dominated by general lending. Thus although it has been an active participant in the rural credit sector, the share of agricultural credit in its lending portfolio amounted to a meager per cent in 1997 and 2.75 per cent in 2004. The principal rural finance schemes of ABL provide credit support for the crop loan programme, the Swanirvor Self Employment Programme and rural finance projects; banana and coconuts plantations and the cultivation of minor corps; silk weaving, sault manufacture; and livestock loan and shrimps culture and small scale duckery and poultry projects. ABL supports Grameen Development Projects and the BRDB Rural Poor Programmes, and finances small farmers under IFAD, DANIDA/NRDP I & II. Under rural infrastures, ABL finances Grameen Godown and Food Godown Projects, Community Schools, Rural Housing, Rural Electrification and Transport, Village Machinery, agricultural and irrigation equipment including power pumps. 3.1.3 Janata Bank LImted Like other NCBs, the banking objective of Janata Bank Limited (JBL) includes the mobilization of deposits from urban and rural areas in Bangladesh and the financing of agriculture, industry, commerce and trade. JBL has been extending credit assistance to priority production activities like tea, jute, tannery, and so on, in order to strengthen the economy of Bangladesh. The bulk of its credit resources

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

13

are deployed among traders and industrialists in the urban areas as well as in rural finance to farm and non farm activities. The credit policies and programmes of JBL are designed to cover all occupational groups among the rural population, including landless farmers labors, rural artisan, destitute women, educated youth, blacksmiths, fishermen, small traders and so on. Under its rural lending programmes, JBL has financed rural activities covering the cultivation of different seasonal crops, installation of irrigation equipment, livestock and poultry rearing, fisheries development and salt production, as well as allied activities like horticulture, shrimp culture, development of cottage industries, weaving, beef and goat fattening, paddy processing, petty business, rural transport, rural electrification, rural house construction and so on. Like the other NCBs, JBL also finances a variety of rural schemes. Some of its major rural credit schemes include the SACP, the Swanirvor Credit Programme and Small Farmers Development Project (SFDP); Crop Loans through CIDA assistance, loans for the cultivation of sugarcane, cotton and tea; horticulture development loans and loans for the purchase of irrigation equipment and powered pumps sets, as well as project loans to small farmers. Land mortgages and livestock loans for the purchase of bovine livestock like buffalo and cattle are also supported. In the non-farm sector, JBL extends credit to weavers and supports self-employment programmes for trained rural youths. It also extends infrastructural credit for rural transport and rural electrification and finances rural house building. Its rural credit programmes thus cover the gamut of rural activities in Bangladesh and seek to accelerate rural development. 3.2 Role of Specialized Agricultural Banks It has been seen that the NCBs in Bangladesh have been reluctant participants in providing agricultural credit to the countrys farmers. Despite the wide base of their financial operations, their commitment of financial resources towards the declared policy objective of strengthening agriculture and rural development is meagre and leaves much to be desired. Hence the role of the specialized agricultural banking institutions like Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB) and BSBL comes to the fore, and is examined next.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

14

3.2.1 Bangladesh Krishi Bank (BKB) As it name suggests, the specific function of the Bangladesh Krishi Bank (literally, the Bangladesh Agricultural Bank or BKB) is to provide credit support for the promotion of agricultural and allied activities. As the pioneer specialized agricultural bank in Bangladesh, BKB has played a vital role by supplying nearly 60 per cent of the institutional credit support received by agriculture. Hence the history, objectives, policies and functions of BKB deserve special attention. After the large-scale migration of private professional moneylenders to Indian following the creation of Pakistan in 1947, the need for a specialized agricultural credit institution was acutely felt. To meet this need, the Government of Pakistan established the Agricultural Development Finance Corporation (ADFC) in 1952 to extend medium and long-term credit to agriculture. However, the demand for agricultural credit was so large the ADFC was unable to cope with the situation. Consequently, the Government established the Agricultural Bank of Pakistan in 1957 to supplement the credit effort of the ADFC. Since the purposes of both two state-owned institutions were similar, they were merged in February 1961 and renamed the Agricultural Development Bank of Pakistan (ADBP). The Bangladesh Krishi Bank (BKB) is the direct successor of ADBP. After the liberation of Bangladesh in December 1971, ADBP was initially renamed as the Agricultural Development Bank of Bangladesh (ADBB) and subsequently as the Bangladesh Krishi Bank (BKB) under the Bangladesh Krishi Bank Order, 1973 (Presidents Order No. 27 of 1973) published in April 1973. The authorized capital of the Bank was Tk. 50.00 crore, of which Tk.45.61 crore (91 per cent) was paidup and fully subscribed by the Government. An 11-member Board of Directors (including a Managing Director and three non-official Directors) was constituted by the Government in 1975 for overall administration of BKBs operational activities. The primary objective of BKB is to provide credit facilities of individuals and cooperative those are engaged in crop (i.e. non-plantation) production. BKB also extends financial and technical assistance to individuals and cooperative societies engaged in agro-based cottage industries, and in storage, warehousing or processing of agricultural produce. IN the interest of agricultural development in

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

15

Bangladesh, BKB aims to increase agricultural output and thereby to improve the economic and social conditions of the countrys farmers. Under the provisions of the BKB charter, preference is given to the credit needs of small agriculturists including sharecroppers and other backward socio-economic groups over other more advanced sections of the rural population. To extend the banking facilities available to the rural population, BKB has been continuously expanding its network of branches throughout the country. In 197273, BKB only had 102 branches. This number increased significantly to 936 in 2004-05, implying nine-fold growth in the BKB branch network compared to 1972-73. Of the 936 BKB branches that now exist, 815 are located in rural areas against 121 in urban areas.

3.2.2 Rajshahi Krishi Unnayanb Bank (RAKUB) The Rajhsahi Krishi Unnayan Bank (literally, the Rajshahi Agricultural Development Bank, or RAKUB) was constituted under the Presidents Ordinance No. 58 on 1986 and started functioning within the administrative sheer of Rajshahi Division on March 15, 1987. The genesis of RAKUB lay in the special circumstances faced by Rajshi as one of the more backward and impoverished regions of Bangladesh. RAKUB is the largest agricultural credit institution operating in the Division. It was established with the aim to extending specialized agricultural credit support to farmers in Rajshahi Division in order to promote rural development within its area. The authorized capital for RAKUB was set at Tk.1500 million, from which Tk.50 million was paid-up in the year of RAKUBs establishment. In March 1999, total paid-up capital of RAKUB had increased to Tk.128.00 crore. The Head Office of RAKUB is located at Rajshahi, the divisional headquarters. The number of RAKUB branches, nearly all of them located within the Divison, stood at 349 as on June 2004. A single RAKUB branch was established outside the Division in Dhaka, in order to liaise with the Government and NGOs. Regional offices of RAKUB were opened at each to the 18 district headquarter in Rajshahi Division. In accordance with the Ordinance governing RAKUB, a 7-member Board of Directors was constituted in January 1988 and entrusted with the responsibility

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

16

of steering the operations of RAKUB in the desired direction. The Managing Director of RAKUB thus fulfills dual responsibilities as an ex-official Director on the Board. .Like BKB, which operates throughout the country, RAKUB also fulfils the functions of a specialized rural credit bank, while also functioning simultaneously as commercial bank. RAKUB has been playing their role of financier in the rural money market and has also extended banking services to the farmers of Rajshahi Division, with the help of its divisional network of 349 branches located at municipal settlements and rural growth-centre and other areas in Rajshahi Division. RAKUBs lending portfolios provide financial support to the production of various seasonal crops, and the installation of irrigation equipment. Besides these, RAKUB funds other allied activities like horticulture development, livestock and poultry rearing, beef and goat (mutton) fattening and the development of fisheries. In addition to agricultural and agro related activities, RAKUB extends credit support to weaving activity and the development of cottage industries, as well as paddy processing, petty trade, etc. RAKUB also finances activities aimed at rural poverty alleviation and employment generation through farm as well as no-farm activities. Major rural credit activities undertaken by RAKUB include SACP and the Swanirvar self-reliance schemes, loans towards crop production and crop intensification by the marginal and small-farming system, loan disbursements towards livestock acquisition and fisheries development. RAKUB also offers technological credit for the supply of low-priced shallow tube-wells, irrigation equipment and farm machinery, and extends credit support to the Womens Entrepreneurship Development Programme, and to small traders located in urban areas.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

17

4. PRESENT SCENARIO OF AGRICULTURAL AND RURAL CREDIT IN BANGLADESH

4.1 Disbursement & Recovery of Agriculture Loan Agriculture sector is still the single largest contributor to income and employment generation and vital elements in the country's challenge to achieve self-sufficiency in food production and to ensure food security reduce rural poverty and foster sustainable economic development. The Government has therefore accorded highest priority to agriculture sector to enable the country to meet this challenge. In spite of favorable weather condition and strong policy support the agriculture sector grew moderately by 5.0 percent in FY11 lower than 5.2 percent in FY10 which accounts for 19.9 percent of GDP. In line with Government efforts Bangladesh Bank also continued its proactive policy and programme support to boost up agricultural production. Agricultural/ Rural credit policy and programme has also been formulated in that consideration and BB declared its annual agricultural/ rural credit policy and programmes for FY11 with a disbursement target of Taka 126.17 billion higher by 13.49 percent compared to the actual disbursement of Taka 111.17 billion in FY10. The policy aimed at increasing the scope of agricultural credit and financial inclusion, expanding banking services to rural areas using information technology, deciding the course of action for adapting to the adverse impact of climate change including credit norms for a number of new crops. This policy support has expected to help directly to stimulate the agricultural production and reduce dependency on import and alleviate rural poverty through increased flow of funds in rural areas. The achievement against this target was 96.6 percent marked by the remarkable participation of private sector banks through their branch network as well as linkages with Micro Finance Institutions MFIs). BB's policy highlights in agricultural/ rural credit policy and programme for FY11 ere:

Priority has been given in the 3 core sectors viz. crop, fisheries and animal resources over other sectors in disbursing agricultural credit.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

18

To ensure timely availability of necessary amount of credit to the small and marginal farmers, including share-croppers, especially n less developed and neglected areas (i.e char, haor, coastal belt etc.).

For the sake of transparency in credit disbursement emphasis has been given on publicity of disbursement of agricultural credit at union level. Banks have been put in place an effective monitoring system to ensure timely and hassle free disbursement of necessary credit to real farmer and 100 percent achievement of the target of agricultural credit.

.Agricultural credit has been provided to the small, marginal farmers and

sharecroppers by single or in a group following easy process. Successful farmers have been provided with necessary credit so that other farmers may get encouragement with their success. Women borrowers have been given priority in disbursing agricultural/ rural credit. Use of IT and mobile phone in agricultural credit system has been encouraged.

A special refinance scheme for sharecroppers has been continued in FY11 which BB undertook in agricultural credit programme in FY10. Under this refinance scheme BB has been refinanced Taka 2.66 billion to more than 1.40 lac share croppers up to FY11.Another refinance scheme for solar energy, bio-gas and ETP sector has also been continued in the agricultural/ rural credit programme in FY11. BB has been provided Taka 0.13 billion to refinance the banks under this scheme.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

19

Comparative Statement of Disbursement & Recovery of Agriculture loan

(Billion Taka) Disbursement Disbursement (Target) A B C D E F G 2 A B C D E F G 3 4 5 6 7 8 9 Crops Loan Purchase & Installment of irrigation equipment Livestock Marketing of agricultural goods Fisheries Poverty Alleviation Other Agricultural activities Actual Disbursement Crops Loan(Other than tea) Purchase & Installment of irrigation equipment Livestock Marketing of agricultural goods Fisheries Poverty Alleviation Other Agricultural activities Term Structure of loan disbursed Short term Longer term Recovery Total outstanding Loan Overdue overdue as percent of outstanding FY09 74.66 31.1 0.7 6.2 0.2 4.86 13.03 18.57 69.57 28.54 0.06 3.15 0.79 3.42 12.35 21.61 45.78 24.14 66.14 171.7 60.49 35.23 FY10 84.53 35.88 0.68 7.26 0.2 5.43 13.97 21.11 82.79 33.19 0.52 4.08 0.62 3.99 13.61 26.77 52.16 30.63 76.51 199.61 63.66 31.89 FY11 89.86 37.41 0.67 7.34 0.3 5.44 15.55 23.15 92.1 36.88 0.53 4.27 0.3 4.65 16.29 29.18 58.04 34.04 89.19 225.99 59.72 26.43

1.

4.2 Disbursement of Agricultural & rural Credit by Lenders in FY11 The actual disbursement of Taka 92.10 billion in FY11 against the disbursement target of Taka 89.86 billion (excluding PCBs and foreign banks) was 11.25 percent higher than the disbursement of Taka 82.79 billion in FY10. The target attainment in FY11 was 102.52 percent as against 97.94 percent (excluding PCBs and foreign banks) in the previous year. The disbursement of FY11 exceeded the target due to poverty alleviation and other agricultural activities have remarkably exceeded the target though other sub-sectors fell short in some extent from the target. Agricultural Credit Disbursement by Lenders-FY 11

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

20

Lender SCBs BKB RAKUB BRDB BSBL Sub Total Foreign Banks PCBs Sub Total Grand Total FY11 FY10 FY09

Disbursement Target 25.75 45 11.4 7.7 0.01 89.86 5.82 30.49 36.31 126.17

Actual Disbursement 22.14 52.34 10.1 7.5 0.02 92.1 5.46 24.28 29.74 121.84

Recovery 20.11 50.18 11.91 6.91 0.08 89.19 10.4 21.89 32.29 121.48

Overdue 25.83 16.47 12.95 3.91 0.56 59.72 0 1.25 1.25 60.97

Outstanding 64.36 116.22 33.15 10.65 0.61 224.99 3.31 26.62 29.93 254.92

(Billion Taka) overdue as % of Outstanding 40.13 14.17 39.06 36.71 91.8 26.54 0 4.7 4.18 23.92

Summary
126.17 115.12 93.79 121.84 111.17 92.84 121.48 101.12 83.77 60.97 64.04 60.8 254.92 225.87 195.98 23.92 28.35 31.02

About 63.00 percent of disbursement was as short term lending and the rest 37.00 percent was in the form of long-term loans for irrigation equipments, agricultural machinery, livestock etc. The lion's share of the short-term credit was for production of crops and poverty alleviation programmes constituting 63.5 percent and 28.0 percent respectively of total short term loans. The total outstanding loan in the agricultural sector (including all banks) in FY11 increased by Taka 29.05 billion or 12.86 percent to Taka 254.92 billion over the previous year's level Two specialized banks viz. BKB, RAKUB, four NCBs and BRDB although played key role in disbursement of agricultural and rural finance, the remarkable contribution of foreign and private commercial banks are also imperative in this regard. However, PCBs, NCBs, RAKUB, FCBs and BRDB fell short of targets by 20.37, 14.02, 11.40, 6.19 and 2.60 percent respectively. On the other hand, BSBL and BKB exceeded the disbursement target by 100.0 and 16.31 percent respectively in FY11.

4.3 Agriculture/Rural Credit Disbursement Target

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

21

A target of Tk.13,800 crore has been fixed up for FY2011-2012 by Bangladesh Bank, break up of which as follows: Agriculture/Rural Credit Disbursement Target for the Banks in 2011-12

(Taka in crore)
Sl No. Name of the Banks Target (Taka) Sl No. Name of the Banks Target (Taka)

A. State-owned specialised Com. Banks 1 Bangladesh Krishi Bank 4600.00 2 Rajshahi Krishi Unnayan 1220.00 Bank Sub Total 5820.00

D. Private Commercial Banks: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Premier Bank Limited AB Bank Limited Al-ArafahIslami BL Bank Asia Limited BASIC Bank Limited Bangladesh Commecrce Bank Ltd Brac Bank Limited Dhaka Bank Limited Dutch Bangla Bank Ltd Estern Bank Limited Exim Bank Limited First Security Islami Bank Limited IFIC Bank Limited Islami Bank Bangladesh Limited Jamuna Bank Limited Mercantile Bank Ltd Mutual Trust Bank Ltd National Bank Ltd NCC Bank Limited One Bank Limited Prime Bank Limited Pubali Bank Limited Shahajalal Islami Bank Ltd. Social Islami Bank Ltd South East Bank Ltd Standard Bank Ltd City Bank Limited Trust Bank Limited UCBL Uttara Bank Limited Sub Total 96.00 172.00 122.00 151.00 99.00 18.00 171.00 128.00 141.00 114.00 179.00 113.00 97.00 1000.00 104.00 143.00 85.00 189.00 129.00 87.00 232.00 169.00 135.00 80.00 196.00 105.00 115.00 78.00 198.00 97.00 4743.00

B. State Owned Commercial Bank 1 Sonali Bank Limited 1150.00 2 Janata Bank Limited 750.00 3 Agrani Bank Limited 660.00 4 Rupali Bank Limited 130.00 Sub- Total 2690.00

C. Foreign Banks 1 Standard Chartered Bank 2 Bank Al Falah Limited 3 Commercial Bank of CL 4 Citi Bank N.A. 5 Habib Bank Limited 6 HSBC 7 National Bank of Pakistan 8 State Bank of India 9 Worry Bank Sub-Total

174.00 11.00 21.00 200.00 6.00 99.00 19.00 16.00 1.00 547.00

5. AGRICULTURAL

Total Target

13,800.00

AND RURAL CREDIT INITIATIVE BY BANGLADESH BANK

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

22

As the apex monetary institution of the country, Bangladesh Bank exercises ultimate control over all banking programmes in Bangladesh. It formulates the polices, rules and regulations that govern institutional credit and also monitors all development activities in the national economy. Bangladesh Bank also provides institutional supports for efficient implementation of agricultural credit policies. In view of the countrys primary dependence on agriculture, Bangladesh Bank has the authority to announce the agricultural credit policy applicable for each year, especially on matters governing crop loans. This policy is implemented through the credit operations of the NCBs as well as BKB and RKUB. After the annual agricultural credit program has been formulated by Bangladesh Bank in consultation with the Ministry of Agriculture., it allocates funds for the credit program to different Banking institutions and closely monitors the implementation of policy guidelines. While resolving any difficulties that may be encountered by banking institutions, Bangladesh Bank also functions as the lender of the last resort. The major functions of the Bangladesh Bank that define its role in relation to agriculture credit are discussed below-

5.1 Policy Formulation Agricultural Credit and Financial Inclusion Department of Bangladesh bank issues detail policy guidelines for proper disbursement, utilization and recovery of agricultural credit for implementation through the NCBs, BKB, and RAKUB. In farming credit norms for financing the agricultural sector, the bank takes account of the crop wise, sector-wise and target group-wise credit needs of farmers to enable effective channelization of finance. Specific time schedules are announced for disbursement of various types of credit. The policy guidelines also make specific mention of the norms on borrower eligibility, the quantum of credit support to be disbursed for various crops, and the period over which credit recovery is to take place. Participating banks are expected to follow these schedules and norms meticulously. 5.2 Credit Targeting: Special attention is given to ensuring the adequate flow of bank credit to farmers in order to make Bangladesh self-sufficient in food grains by increasing major

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

23

crop production and achieving overall development of the agricultural sector. Bangladesh bank earlier used to prepare an annual agricultural credit program to be followed by all financing banks and institutions. 5.3 Credit Refinancing To ensure smooth and timely disbursement of agricultural credit to farmers at reasonable rate of interest, Bangladesh Bank has expended liberal refinance facilities to all formal sectors agricultural credit, institutions since 1983. During FY11, only RAKUB has enjoyed refinance facilities to the tune of Taka 1.86 billion from Bangladesh Bank. No other institutions availed refinance facilities from Bangladesh Bank in FY11. An amount of Taka 3.64 billion (including interests) was recovered from different banks and institutions leaving an outstanding balance of Taka 56.03 billion (including interests) as on end June 2011. Details of Bangladesh Bank's refinance to different institutions are shown in the following Table.

Bangladesh Banks Refinance against Agriculture Loans

Lender Refinanc e FY 09 ReOutstandin payme g nt Refinanc e FY 10 ReOutstandin paymen g t Refinanc e

(billion Taka)
FY 11 ReOutstandin paymen g t

BKB RAKU B BSBL BRDB Total

1.00 1.94 2.94

2.27 1.42 0.04 3.73

41.96 17.42 0.30 0.12 59.80

1.58 1.58

2.40 1.84 0.04 4.28

39.91 17.16 0.26 0.12 57.45

1.86 1.86

2.40 1.20 0.04 3.64

37.80 17.90 0.21 0.12 56.03

5.3.1 Refinance Scheme for Agro Product processing Industries For financing establishment of agro product processing industries in the areas outside Divisional Head Quarters and Narayanganj town, Bangladesh Bank launched a scheme of Taka 1.0 billion from November 2001 out of its own fund. Refinance facilities were provided to banks and financial institutions at the bank
Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

24

rate under the scheme. An amount of Taka 1.3 billion has been disbursed under this scheme till end June 2011. 5.3.2 Refinance for Small Enterprises 46 banks and non-bank financial Institutions have signed participation agreement with Bangladesh Bank for financing SME sector under following schemes: 5.3.3 Bangladesh Bank Fund: Bangladesh Bank introduced a refinance scheme named Small Enterprise Fund (SEF) of Taka 6.0 billion out of its own fund for supporting the development of small enterprises in the country. Refinance facilities under the scheme were extended for the banks and financial institutions at bank rate against their financing to the small entrepreneurs, usually left out by the formal sector financing. The scheme demonstrated a high market demand. Recovery against refinanced loan will be used as a revolving fund for financing SME sector. An amount of Taka 12.36 billion has been refinanced to 43 banks and non-bank financial institutions under this fund up to end June 2011 against 13869 enterprises.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

25

6. CHALLENGES OF AGRICULTURAL/RURAL FINANCING AND PROPOSED REMEDIAL MEASURES

In the past, lot of questions and complaints were raised by the farmers at field level on the effectiveness of credit polices. Typically, performance of various lenders is determined based on credit disbursement, outstanding loan, recovery rate etc. While selection/judgment of the appropriate clients and harassment for obtaining credits are neglected. Encouragingly, Bangladesh Bank has upgraded agricultural/rural credit policies particularly sets target for individual lenders and offering some incentives. However, there is still scope for further improvement. Therefore, following section tries to address the major challenges for agricultural and rural financing and proposes some remedial measure to overcome these difficulties. 6.1 Inadequate Rural Branch Offices Branch network of the banks in the rural areas are not adequate. Sometimes, bank branches are situated at upazilla level. Hence, farmers are reluctant to handle the application and other formalities at upazilla level having their extreme busyness during peak season of agricultural farming. On the other hand, PCBs do not have adequate branches in rural areas while FCBs do not have any rural branch offices to expand their rural or agricultural credits which tend to reduce the business scale and performance. Hence, NGO-MFIs linkage program to channeling the credit can be treated as positive movement but the concerning matter is such linkage program increase the cost for lending. So, it is suggested to adopt cost sharing mechanism or Bangladesh bank should consider providing soft loan to limit the lending cost. 6.2 Farmer Selection Bias Bangladesh bank has encouraged all scheduled banks to collect farmer information from department of agricultural extension to identify the real farmers. However, the selection bias is still prevail as bank officers given special priority to their relatives, friends, and those maintain good relation with bank personnel in selecting the borrowers. Thus, appropriate monitoring and supervisory approach should be adopted by the central bank to reduce the tendency of malpractices by the bank personnel.
Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

26

6.3 Collateral Requirements Typically, farmers have to keep some of his/her assets as mortgage for obtaining loans from scheduled banks. Even, the formalities and procedures are complex requires longer time. As most of the farmers are illiterate, they caution about the formalities/contract eventually they lost their intention to borrow from formal banks. Despite recent initiative for extending credit to marginal and small farmers through guarantee of land owners or responsible person from village, has not gained much success as small and marginal farmers find difficulties to accomplish the requirements. Not to mention, group lending approach is so successful in Bangladesh, hence it is proposed to adopt group guarantee approach same as NGO-MFIs to expedite the agricultural credit disbursement. 6.4 Credit Recovery It is apparent from previous discussion that the overdue as percentage of the outstanding loans found higher which is definitely a concerning issue for the banks providing agricultural credit in a long run. It may also be discouraged PCBs and FCBs for extending agricultural credit furthermore in a larger scale although they achieved significant recovery at present context. Besides taking legal action against default farmers, there should have frequent motivation and propaganda for encouraging farmers to repay their loans on time. 6.5 Balancing Farmer Preferences Generally, farmers are enthusiastic to borrow from formal lenders particularly from specialized banks (BKB, RAKUB) due to lower interest rates. However, most of the farmers face difficulties to borrow from them due to collateral requirement, complex application procedures, claim on bribe, lack of required amount of credit and in timely fashion etc. Hence, they prefer to borrow from NGO-MFIs as easily accessible to them and require less formality. There are concerns that NGO-MFIs are little shy to lend to farmers in absence of a real group model, potential of credit risk due to natural calamity, government pressure on subsidized interest rate for agriculture sector etc. So, it is quite challenging to make balance between farmer preference and the reality of agricultural credit market. To address such challenges, it is suggested to adopt simple application and loan approval process

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

27

by the scheduled banks, meanwhile NGO-MFIs should be encouraged to extend their group lending approach in agricultural lending. 6.6 Interest Rate and Repayment Methods Generally, farmers have to pay higher interest rate for the loans they borrow from NGO-MFIs. The initiative to channeling credit through NGO-MFIs is not so productive. The concern is that the credit became costly for the farmers to have their production profitable. This is because the NGO-MFIs borrow these funds from PCBs/FCBs at high interest rate; after adding their cost the mark-up interest rate on credit become above 20-22%, which is well above the market rate of interest available for agricultural credit. So, the higher interest rate may shirk the market access of PCBs and FCBs. Generally, NGO-MFIs provide credit for short period of time and ask for weekly repayment which may not be suitable for agricultural sector. It is expected that agricultural loans should be advanced at the beginning of crops farming, livestock and poultry raising; fish farming etc. and repayment should be made after getting returns from the investment. In the meantime, the interest rate for agricultural credit should be caped at minimum level considering agricultural as priority sector. 6.7 Political Interferences In the past, there were several evidences on exemption of interest rate for agricultural credit due to political favor, hence farmers waited for further opportunities and delay to repay their loans. In addition, bank directors have recruited on political consideration- the directors use the banks' vehicles for their personal purposes as well as based on political wishes. Thus, it is suggested to keep financial intermediaries away from such political good will. 6.8 Agricultural Credit Share Over Total Bank Advances The percentages of agricultural credit over total bank credit are still comparatively low. It is regarded that the allocation for agricultural credit was unrealistic considering the importance of agricultural sector for achieving self-sufficiency in food. So, allocation of agricultural credit should be increased considering growing demand and importance of agricultural credit. 6.9 Uneven Distribution of Agricultural Credit

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

28

Within agricultural credit allocation among sub-categories, some like the livestock and fisheries sub-sectors were neglected. Even, the target attained was only between 50 to 70%, while other sub-categories almost reached their settled target even exceeded the defined target. Considering the contribution of livestock and fisheries sub-sectors (2.66 and 4.49% agricultural GDP) the allocation need to be readjusted as well as must trace the reasons for lower target achievement.

6.10 Supervised Credit Despite central bank initiatives, there is still lack of supervision and monitoring services from lenders side particularly it is true for NCBs and SBs. Hence, farmers are transferring agricultural credit to non-farm or business purposes as farming is more risky compared to non-farming activities. To reduce such deviation of agricultural credit there is nothing better than proper monitoring and supervision.

6.11 Agricultural Insurance In Bangladesh, the agricultural insurance system has not yet been developed. The earlier initiative on crop insurance failed due to lack of government patronization, and lack of interest from insurance companies due to higher risk in agricultural farming. Therefore, the government patronize insurance company (Jiban Bima) should come forward to channeling the insurance facilities to agricultural sector (crops, livestock, fisheries etc.)

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

29

7. CONCLUSION
Farmers need financial support for the shift from low-yielding traditional agriculture to more costly but highly productive modern agriculture. Modern agriculture comprises the use of improved inputs like High Yielding Variety (HYV) seeds, chemical fertilizers and pesticides, irrigation, mechanical power and so on, all of which require capital investment. In developing countries like Bangladesh, the majority of poor farmers cannot afford to undertake this investment. The only solution that can benefit them is the smooth flow of agricultural credit in adequate amounts. The history of agricultural development in all the advanced countries also confirmed that an integrated system of credit provisioning has led each country to the path of agricultural prosperity. More concentrated effort is therefore called for, on the part of developing countries like us to initiate agricultural and rural development through the strengthening of credit services to farmers. Agricultural credit thus assumes great importance in an agrarian county that us trying to modernize traditional agriculture. Agricultural sector financial access has expanded over the decades with the combined efforts of scheduled banks and NGO-MFIs. Not to mention, Bangladesh bank policy on agricultural/ rural credit has promoted the access to credit for small and marginal farmers. Although PCBs and FCBs contributed limited in respect to credit disbursement but their participation in agriculture/rural financing deemed as major movement of formal private banks to financing in rural Bangladesh. Many PCBs and FCBs have formed linkages with NGO-MFIs for expanding market horizon in a viable and sustainable manner, while NCBs and SBs have been using their existing branch network to do so. Since, there is a significant positive relationship between agricultural credit and production, there should have demand for favorable agricultural credit policy and implication which can increase the budgetary allocation as well as will take steps to overcome the target shortfall. Meanwhile, policy makers should emphasize on monitoring and supervision to extend the credit to the target clients. Finally, there should have incentive for financial intermediaries to encourage them to financing the agricultural sector and rural areas in a sustainable manner.

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

30

8. REFERENCES
Ahsan, A.S.M. Fakhrul Bangladesh Bank (2012), Annual Report, Year 2010-2011, Bangladesh Bank, Dhaka

Bangladesh Bank (2012), Agricultural/Rural Credit Policy and Programme for the FY 2011-2012, Bangladesh Bank, Dhaka Bangladesh Bureau of Statistics (2008), Yearbook of Agricultural Statistics of Bangladesh, 2006, Bangladesh Bureau of Statistics, Dhaka Bangladesh Institute of Bank Management (2011), Banking Research Series 2010, Bangladesh Institute of Bank Management, Dhaka Hossain, Bayes (2009), Rural Economy and Livelihoods Insight from Bangladesh, A H Development Publishing House, 2010 Sarker, R. A (2006), Rural Financing and Agricultural Credit in Bangladesh: Future Development Strategies for Formal Sector Banks, The University Press Limited, 2006

Website Visited:

www.bb.org.bd www.moa.org.bd www.mof.gov.bd www.bbs.gov.bd www.badc.gov.bd www.brdb.gov.bd

Assignment on Agriculture and Rural Credit Financing in Bangladesh/Group#15 / Page

31