Assignment Final

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. Name & Designation Roll No.

01 Chandan Kumar Roy

Assistant Director

32

02 Golam Mostafa

Assistant Director

37

03 Akter Jahan Shukhee

Assistant Director

46

Assignment on ‘Agriculture and Rural Credit Financing in Bangladesh’/Group#15 / Page 2

AGRICULTURAL AND RURAL CREDIT FINANCING IN BANGLADESH


TABLE OF CONTENTS

Sl. No. Topic Page No. 1 Introduction 07

1.1 What is Agricultural Credit? 081.2 What is Rural Credit? 08

2 Agricultural & Rural Credit Agencies in Bangladesh

09

2.1 Need for Institutional Framework/Network 092.2 Rural Financial Market 092.3 NGOs as Source of Rural Credit 11

3 Government Endeavor in the Past 123.1 The Nationalized Commercial Banks 123.2 Role of Specialized Agricultural Banks 14

4 Present Scenario of Agricultural and Rural Credit in Bangladesh

18

4.1 Disbursement & Recovery of Agricultural Loan 184.2 Disbursement of Agricultural/Rural Credit by Lenders 204.3 Agricultural/Rural Credit Disbursement Target 225 Agricultural/Rural Credit Initiative by Bangladesh

Bank23

5.1 Policy Formulation 235.2 Credit Targeting 245.3 Credit Refinance 24

6 Challenges of Agricultural/Rural Financing & Proposed Remedial Measures

26

6.1 Inadequate Rural Branches 266.2 Farmers Selection Bias 266.3 Collateral Requirements 276.4 Credit Recovery 276.5 Balancing Farmers Preferences 276.6 Interest Rate & Repayment Method 286.7 Political Interference 286.8 Agricultural Credit Share over Total Bank Advances 286.9 Uneven Distribution of Agricultural Credit 29

6.10 Supervised Credit 296.11 Agricultural Insurance 29

7 Conclusion 30

8 References 31


LIST OF ABBREVIATIONS

Abbreviation ElaborationABL Agrani Bank LimitedASA Association for Social AdvancementADBB Agricultural Development Bank of

BangladeshADBP Agricultural Development Bank of PakistanADFC Agricultural Development Finance

CorporationBADC Bangladesh Agricultural Development

CorporationBARD Bangladesh Academy for Rural

DevelopmentBBS Bangladesh Bureau of StatisticsBKB Bangladesh Krishi BankBRAC Bangladesh Rural Advancement CommitteeBRDB Bangladesh Rural Development BoardBSBL Bangladesh Samobay Bank LimitedFCB Foreign Commercial BankFY Financial YearGB Grameen BankGDP Gross Domestic ProductGOB Government of BangladeshHYV High Yielding VarietyIFAD International Fund for agricultural

DevelopmentJBL Janata Bank LimitedMFI Micro Finance InstitutionNCB Nationalized Commercial BankNGO Non-Government OrganizationPCB Private Commercial BankPKSF Palli Karma Sohayok FoundationRAKUB Rajshahi Krishi Unnayan BankSACP Special Agricultural Credit ProgrammeSB Specialized BankSBL Sonali Bank LimtedSEF Small Enterprise FundSFDP Small Farmers Development ProjectsTk. Taka


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


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 country’s 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 Bangladesh’s

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?

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.


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


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;

01. Formal Financial Market

02. Informal Financial Market

03. 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.


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.

3. GOVERNMENT ENDEAVOR IN THE PAST

3.1 The Nationalized Commercial Banks.


BranchesBranches BranchesBranches BranchesBranches

FarmersFarmers Individual Farmers

Individual Farmers

Individual Farmers

Individual Farmers

UCCAUCCA

KSSKSS

MembersMembers

Bangladesh BankBangladesh Bank

Nationalized Commercial

Bank

Nationalized Commercial

Bank

Bangladesh Krishi BankBangladesh Krishi Bank

BSBLRAKUBBSBL

RAKUB

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.

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

Bank’s 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

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 country’s 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.

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

(President’s 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 paid-up

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 BKB’s 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

Bangladesh, BKB aims to increase agricultural output and thereby to improve the

economic and social conditions of the country’s 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 1972-

73, 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 President’s 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 RAKUB’s 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 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. RAKUB’s 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 Women’s Entrepreneurship

Development Programme, and to small traders located in urban areas.


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.


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.


Comparative Statement of Disbursement & Recovery of Agriculture loan

(Billion Taka)

Disbursement FY09 FY10 FY111. Disbursement (Target) 74.66 84.53 89.86

A Crops Loan 31.1 35.88 37.41

B Purchase & Installment of irrigation equipment

0.7 0.68 0.67

C Livestock 6.2 7.26 7.34D Marketing of agricultural goods 0.2 0.2 0.3E Fisheries 4.86 5.43 5.44F Poverty Alleviation 13.03 13.97 15.55G Other Agricultural activities 18.57 21.11 23.15

2 Actual Disbursement 69.57 82.79 92.1A Crops Loan(Other than tea) 28.54 33.19 36.88B Purchase & Installment of irrigation

equipment0.06 0.52 0.53

C Livestock 3.15 4.08 4.27D Marketing of agricultural goods 0.79 0.62 0.3E Fisheries 3.42 3.99 4.65F Poverty Alleviation 12.35 13.61 16.29G Other Agricultural activities 21.61 26.77 29.18

3 Term Structure of loan disbursed 4 Short term 45.78 52.16 58.045 Longer term 24.14 30.63 34.046 Recovery 66.14 76.51 89.197 Total outstanding Loan 171.7 199.61 225.998 Overdue 60.49 63.66 59.729 overdue as percent of outstanding 35.23 31.89 26.43

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


(Billion Taka)

LenderDisbursement

TargetActual

Disbursement Recovery Overdue Outstandingoverdue as

% of Outstanding

SCBs 25.75 22.14 20.11 25.83 64.36 40.13

BKB 45 52.34 50.18 16.47 116.22 14.17

RAKUB 11.4 10.1 11.91 12.95 33.15 39.06

BRDB 7.7 7.5 6.91 3.91 10.65 36.71

BSBL 0.01 0.02 0.08 0.56 0.61 91.8

Sub Total

89.86 92.1 89.19 59.72 224.99 26.54

Foreign Banks

5.82 5.46 10.4 0 3.31 0

PCBs 30.49 24.28 21.89 1.25 26.62 4.7

Sub Total

36.31 29.74 32.29 1.25 29.93 4.18

Grand Total

126.17 121.84 121.48 60.97 254.92 23.92

SummaryFY11 126.17 121.84 121.48 60.97 254.92 23.92

FY10 115.12 111.17 101.12 64.04 225.87 28.35

FY09 93.79 92.84 83.77 60.8 195.98 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

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)

A. State-owned specialised Com. Banks

1 Bangladesh Krishi Bank 4600.00

2 Rajshahi Krishi Unnayan Bank

1220.00

Sub Total 5820.00

B. State Owned Commercial Bank1 Sonali Bank Limited 1150.002 Janata Bank Limited 750.003 Agrani Bank Limited 660.004 Rupali Bank Limited 130.00

Sub- Total 2690.00

C. Foreign Banks1 Standard Chartered Bank 174.002 Bank Al Falah Limited 11.003 Commercial Bank of CL 21.004 Citi Bank N.A. 200.005 Habib Bank Limited 6.006 HSBC 99.007 National Bank of Pakistan 19.008 State Bank of India 16.00

9 Worry Bank 1.00Sub-Total 547.00

Sl No.

Name of the Banks Target (Taka)

D. Private Commercial Banks:

1 Premier Bank Limited 96.002 AB Bank Limited 172.003 Al-ArafahIslami BL 122.004 Bank Asia Limited 151.005 BASIC Bank Limited 99.006 Bangladesh Commecrce

Bank Ltd 18.007 Brac Bank Limited 171.008 Dhaka Bank Limited 128.009 Dutch Bangla Bank Ltd 141.0010 Estern Bank Limited 114.0011 Exim Bank Limited 179.0012 First Security Islami Bank

Limited 113.0013 IFIC Bank Limited 97.0014 Islami Bank Bangladesh

Limited1000.00

15 Jamuna Bank Limited 104.0016 Mercantile Bank Ltd 143.00

17 Mutual Trust Bank Ltd 85.0018 National Bank Ltd 189.0019 NCC Bank Limited 129.0020 One Bank Limited 87.0021 Prime Bank Limited 232.0022 Pubali Bank Limited 169.0023 Shahajalal Islami Bank

Ltd. 135.0024 Social Islami Bank Ltd 80.0025 South East Bank Ltd 196.0026 Standard Bank Ltd 105.0027 City Bank Limited 115.0028 Trust Bank Limited 78.0029 UCBL 198.0030 Uttara Bank Limited 97.00

Sub Total 4743.00

5. AGRICULTURAL AND RURAL CREDIT

INITIATIVE BY BANGLADESH BANK

As the apex monetary institution of the country, Bangladesh Bank exercises

ultimate control over all banking programmes in Bangladesh. It formulates the

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

Total Target 13,800.00

22

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 country’s 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 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 Bank’s Refinance against Agriculture Loans (billion Taka)

Lender

FY 09 FY 10 FY 11

Re-finance

Re-payment

Outstanding

Re-finance

Re-payment

Outstanding

Re-finance

Re-payment

Outstanding

BKB 1.00 2.27 41.96 - 2.40 39.91 - 2.40 37.80

RAKU

B

1.94 1.42 17.42 1.58 1.84 17.16 1.86 1.20 17.90

BSBL - 0.04 0.30 - 0.04 0.26 - 0.04 0.21

BRDB - - 0.12 - - 0.12 - - 0.12

Total 2.94 3.73 59.80 1.58 4.28 57.45 1.86 3.64 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

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.


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.


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

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

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.)


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.

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


http://www.brdb.gov.bd/

http://www.badc.gov.bd/

http://www.bbs.gov.bd/

http://www.mof.gov.bd/

http://www.moa.org.bd/

http://www.bb.org.bd/

Assignment Final

Documents

bangladeshgroup15

agrani bank

formal financial

rural poverty

financing

rural credit

private commercial

rural credit