Policy Advocacy, Challenges, Threats, and policy Directions on Risk Management for smallholder Farmers and communities:

The Bangladesh Bank Experience

Shitangshu Kumar Sur Chowdhury

Deputy Governor, Bangladesh Bank

REGIONAL POLICY FORUM ON RISK MANAGEMENT FOR SMALLHOLDER

FARMERS AND COMMUNITIES

20-21 May2014Dhaka, Bangladesh

Background/Introduction

• About 80 percent of the population of Bangladesh is residing in the rural areas.

• 54 percent of total rural people are engaged in agriculture and the remainder in other small income generating activities.

• The rural economy contributes a significant portion to the national GDP, with agriculture (including crops, livestock, fisheries and forestry) accounting for about 19 percent.

• Most of the farmers in Bangladesh are either landless or functionally landless owning less than 0.05 acre of land.

• Banks and formal financial institutions are sometimes reluctant to finance these farmers as they think the investment would be risky.

• But, the scenario is gradually changing as a result of strong initiatives taken by Bangladesh Bank.

• Bangladesh Bank formulated "Agricultural and Rural Credit Policy and Programs" which include guidelines for the bankers regarding sub-sectors of agriculture to be financed, preferred group of farmers, crop-wise credit norms and crop calendar, technique for managing risk etc.

• Bangladesh Bank made it mandatory to extend agricultural and rural credit to the farmers amounting at least 2.5% of total loans and advances outstanding.

Background/Introduction……

Risk Management in Agriculture

Keeping in mind the inherent risks in agriculture, Government, as well as Bangladesh Bank, is increasingly seeking effective and sustainable strategies and approaches to mitigate, transfer, or cope with these risks.

The farmers of Bangladesh also lack access to both modem instruments of risk management- such as Agricultural Insurance, Future Contracts.

In that case farmers rely on different ‘traditional’ coping strategies and risk-mitigation techniques, such as contract farming, joint-liability lending

Bangladesh Bank is working towards identifying and quantifying agricultural sector risks, and would suggest useful techniques to minimize them. The agricultural risk management framework could be used for planning and investment purposes to reduce sectoral volatilities and improve sustainability.

Major challenges in the agricultural sector of Bangladesh

Major challenges in the agricultural sector of Bangladesh

Loss of arable land

Population growth

Climate change

Imbalanced use of fertilizers

Inefficient water use

Pests and diseases

Lack of quality seeds

Unfair price of agricultural produces

Weaknesses in agriculture sector of Bangladesh

• Agricultural marketing system is comparatively weak.

• Post-harvest loss is high.

• Farmers own capital for agricultural activities is inadequate.

• Access to institutional agricultural credit is limited.

• Farmers’ organizations are inadequate and ineffective.

• Input use (water, fertilizer, pesticides) efficiency is low.

• Technology to meet export market requirement is inadequate.

• Private sector investment in Research and Development is insignificant.

• Trained scientists and infrastructural facilities for advanced agricultural science are inadequate.

• Diversification in agriculture is low.

• Quality control of agricultural input mechanism is weak.

• Coordination among the public and private universities and research organizations is minimal.

• Use of ICT in extension system is almost insufficient.

• Opportunities for farmers and entrepreneurs training are inadequate.

• Inadequate production and supply of quality inputs persists (e.g. fertilizer, seed).

Weaknesses in agriculture sector of Bangladesh……..

Threats in agriculture sector of Bangladesh

Environmental vulnerability (climate change, flood, drought, storm, salinity, pest and diseases, river erosion) prevails.

Soil health is declining.

Cultivable land and water resources are shrinking.

Uncertainty of fair prices of agricultural commodities is causing disincentive to farmers.

Agricultural biodiversity is eroding.

Agricultural environment is degrading.

Budgetary allocation for agriculture, especially for research is inadequate use of agricultural land for non-agricultural purpose is increasing.

Opportunities

Modern technological know-how is available for dissemination.

Scope for expanding hybrid technology exists.

Prospects for adoption of advanced technology in agriculture are bright.

Potentials for proper utilization of hilly areas including agro-ecologically disadvantaged regions exist.

Export potentials exist for high-value crops to upstream and ethnic markets.

Scope for crop diversification and intensification exists.

Scope exists for value addition to agricultural produces.

Market for value added products exists.

Agriculture sector has capacity to absorb labor force and to generate income.

Scope for reducing yield gaps exists

Policy direction of Bangladesh Bank in Risk Management in Agriculture Sector

all commercial banks operating in Bangladesh (state owned or private sector owned, domestic or foreign) are now extending agricultural credit, either directly, through regulated Micro Finance Institutions (MFIs) or through intermediaries in value chain.

The core spirit of the Agricultural and Rural Credit Policy is that the share-croppers and marginal farmers get priority in getting agricultural credit.

The policy also directs banks for providing collateral free credit to farmers who are cultivating a maximum of 5 acres of land against crop hypothecation.

Total disbursements of agricultural and Rural credit are on a steadily rising trend; Taka 92.84 and 146.68 billion respectively from FY09 to FY13.

Since FY 2009-2010, Bangladesh Bank has brought all banks including the private and foreign banks under the mandatory annual target declaration for agricultural & rural credit disbursement.

For private and foreign commercial banks, remedial/punitive measures have been introduced for any shortfall in achievement of target.

A bank failing to achieve target has to keep the unachieved portion with Bangladesh Bank for a period of one year. BB provides interest at bank rate (currently 5%) for such deposit.

Mandatory disbursement of Agricultural & Rural credit for all banks

FY2008-09 FY2009-10 FY2010-11 FY2011-12 FY2012-13 FY2013-14(April)0

20

40

60

80

100

120

140

160

92.84

111.17121.84

131.32

146.68

131.09

Am

ount

in b

illio

nTak

a

Steady rising of Agricultural and Rural Credit Disbursement: FY2008-09 to FY2012-13

2009-102010-11

2011-122012-13

2013-14(March)

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.450.445

0.332000000000001 0.32000000000

0001

0.445 0.44

No.

of w

omen

(in m

illio

n)Agricultural and Rural Credit to the women

Under the ‘Lead Bank’ system, respective bank branches shall disburse their credit in crops and other agricultural sectors to the unions allotted to them.

Area Allocation for Disbursement of Agricultural Credit

Pass book is a mandatory requirement for disbursing credit under agricultural credit programs. Credit shall be provided to new borrowers along with a passbook. It may be mentioned that bank statement can be accepted as alternative of pass book.

Introduction of Pass Book for Agricultural Loan

In order to facilitate disbursement, monitoring and recovery of loan properly and timely by the bank branches, a crop calendar has been developed.

However, banks may change schedule of disbursement and recovery considering the local factors.

Credit Disbursement in Due Time According to Crop Production Calendar

Agricultural credit facilities may be provided to the interested farmers for producing associated crops (jointly cultivatable crops) with main crops in the potential areas.

In order to make the country self-sufficient in food production and to ensure balanced and nutritious food supply, it is necessary to increase the production of potato, pulse, oil seeds, maize etc. through the “crop diversification initiatives”. Banks/financial institutions were advised to give more emphasis on providing loan to these profitable crops over their normal loan activities.

Introduction of Mixed Crop/associated Crop/Relay cultivation

Crop Diversification System

2009-10 2010-11 2011-12 2012-13 2013-14(April) -

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

123.30

706.00

816.30 749.00

709.24

Amou

nt in

mill

ion

Taka

Credit at 4% concessional interest rate -promoting cultivation of import substitute crops:

Pulses, Oil Seeds, Spices and Maize

Agricultural credit shall be disbursed following Area Approach emphasizing the comparative advantages of producing certain crops in certain regions.

Uses of Area Approach

Adequate credit shall be disbursed for producing vegetables, onion, ginger, garlic, pulse, bau-kul, strawberry, palm, banana, orange, agor, betel leaf, pepper, potato etc. in the areas suitable for production of the same.

In order to ensure that the real farmers, especially the small farmers and sharecroppers get the agriculture credit, particularly the crop loans, easily and timely in a transparent manner, banks shall disburse the loans as far as possible publicly at the union level in presence of local public representative, concerned agricultural officers, teachers and other locally renowned persons.

Disbursement of Agricultural Credit in a Transparent Process

Banks were encouraged to open deposit accounts for farmers with a minimal opening balance of Taka 10 as a part of financial inclusion drive. These accounts are to be used to receive subsidies, credit disbursement, regular deposit and withdrawal, remittances, and other banking activities.

Introduction of Farmer's Tk. 10 Account

Around 10 million accounts of farmers have been opened by the State-owned Banks with an initial deposit of Tk. 10/- only (<20 cents).

Recently Bangladesh Bank has formulated a Revolving Refinance Fund of Tk. 2.00 billion from its own source in order to expand the institutional financial inclusion program by including the 10 Taka account holder who are small, marginal and landless farmers, lower income earner who are affected by natural disasters, marginal/small businessmen, handicapped people and women entrepreneur.

Another perspective to create this fund is to mobilize the rural economic activities by providing credit with very easy terms & conditions in order maintain the 10 Tk account active.

Banks can disburse credit to the 10Taka account holders through directly or using MFI linkage.

Revolving Crop Credit Limit System

In order to ensure continuous credit flow a 3 (three)-year revolving crop credit limit system has been introduced. Farmers engaged in continuous crop cultivation will get facilities under this scheme.

The contract farming system (contract between primary producer and enterprises using bulk agricultural goods) may play an important role to remove the marketing problem as well as to ensure fair price for the produces of the farmers.

Credit to the Farmers/Entrepreneurs engaged in Contract Farming

All scheduled banks including the private and foreign banks operating in Bangladesh are undertaking Agricultural Credit Program. Banks, operating with minimum branches in rural areas, may conduct the agri and rural credit operations in partnership with the Micro Finance Institutions (MFIs) approved by Micro Credit Regulatory Authority (MRA) under some terms and conditions.

Agricultural and Rural Credit Activities through Partnership with MFIs approved by MRA

The activities of agriculture loan disbursement and recovery need close monitoring.

If banks have insufficient manpower, then If not possible to appoint regular employees, banks may appoint employees on daily basis (no work, no pay) or may engage a company/institution as an agent or intermediary to select borrowers, to prepare loan proposal and to run other activities related to evaluation, sanctioning, credit disbursement, monitoring, recovery, etc. for its rural credit operation.

Outsourcing in Disbursing and Recovering Agricultural and rural Credit

For smooth implementation of the Agricultural & Rural Credit Policy and Program, the norms to be followed by the banks and MFIs are as under:

•Credit norms prepared on the basis of crop-wise cost of inputs and maximum credit limit per acre received from the Agricultural Extension Department under the Ministry of Agriculture.

•Annual production plan for classification/mixed cropping/associated cropping/relay cropping.

Credit Norms and Determination of Credit Limit

The use of chemical fertilizer increases the agricultural production temporarily but the fertility of the land decreases gradually.

Agriculturists and scientists have been giving importance on the use of organic fertilizer to reduce the damages.

Credit for Vermicompost Production

Vermicompost can be a very good, cheap and available alternative for the chemical fertilizer which can increase the agricultural production as well as help in retaining the fertility of the land.

Landless farmers (owner of less than 0.494 acres of land), small and marginal farmers (owner of land more than 0.494 acres but less than 2.47 acres) and the sharecroppers (the farmers who cultivate other people’s land and their ownership of land is maximum 1 acre) shall be given priority for extending credit.

Financing Marginal, Small Farmers and Sharecroppers

The sharecroppers directly involved in agricultural production will be eligible to have credit under this policy.

Special initiatives shall be taken to extend necessary finance to the successful farmers. This initiative will have a demonstration effect on the other farmers, and they will be encouraged to invest in similar initiatives.

Credit for Successful Farmers

A special credit scheme was initiated by Bangladesh Bank in the fiscal year 2009-10 to provide credit facilities in a timely, harassment-less, collateral-free manner with low interest rate through BRAC to the sharecroppers who have been so long remained deprived of bank credit.

Special Credit Program for Sharecroppers

As of April2014, an amount of

TK 12.83 billion agri. credit has

been provided through

Brac(MFI) to around 0.84

million sharecroppers in 250 upazillas of 48 districts.

2009-10 2010-11 2011-12 2012-13 2013-14(March)0

0.1

0.2

0.3

0.4

0.5

0.6

0.374000000000001

0.427

0.501

0.447

0.273

No.

of S

hare

crop

pers

(in m

illio

n)

credit towards sharecroppers through Banks

Besides, under the ‘Agricultural and Rural Credit Policy and Programs’ of Bangladesh Bank, all scheduled banks are advised to disburse agri-credit towards sharecroppers on individual or group basis.

The use of information technology may play a positive role in improving the standard of living of all spheres of people. As far as possible, the banks shall take initiatives to preserve the mobile phone number of the borrowers at branch level.

Use of Information Technology in Agricultural Credit Management

The bank branches/higher authorities of the concerned bank shall make phone calls to the farmers to know about the loan disbursement and recovery.

Bangladesh Bank also make calls to farmers from time to time to know the problems in loan disbursement and recovery.

In order to ensure more effective monitoring of the implementation of the Agricultural/Rural Credit Policy undertaken in the interest of the real farmers largely dependent on agriculture, a monitoring cell at Head Office and monitoring units at branches of Bangladesh Bank are in place.

Monitoring at Central Bank Level

The District Agricultural Credit Committee has been playing an effective role in successful implementation and coordination of the Agriculture/Rural Credit Program at field level under 'Lead Bank’ system.

The District Agricultural Credit Committee holds monthly meeting to discharge its supervision and coordination functions related to agricultural/rural credit.

The following tools are considered as useful to expedite the agricultural/rural credit recovery:

•The banks may award certificate/incentives under their own policy to encourage the officials for recovery of loan.

•Arranging 'Agricultural Credit Recovery Camp' at places of farmers gathering with prior publicity to recover loan.

•Use of information technology to recover agricultural and rural credit.

Special Initiatives for Agricultural and Rural Credit Recovery

Bangladesh is major among the countries most affected by climate change, mainly due to its geographical location.

Flood and water logging of mid-region, sudden flood of north-east region, draught and salinity of north-west and south-west region and the high tide of coastal may create acute problem for the agriculture of Bangladesh.

Since the recovery of agricultural credit becomes risky with the damage of crops, the banks shall be conscious about the adverse impact of natural calamities vis-a-vis climate change and encourage the farmers to take the following steps:

•Bring necessary change in the loan disbursement and recovery schedule from area to area;

•Cultivating salinity-resistant crops in the salty areas;

•Cultivating water- resistant crops in the water-logged and flood-prone areas;

Addressing the Adverse Effects of Climate Change

•Cultivating drought- resistant crops in the drought-prone areas;

•Arrange for irrigation during dry season to avoid low production and loss of crops;

•Encouraging of using surface water instead of ground water for irrigation;

•Using organic fertilizer and insecticide by natural means instead of using chemical fertilizer and pesticides;

•Banks shall be conservative to provide agricultural credit for cultivating land destroying forest or hills;

•Credit facilities shall be continued for cultivating fruits, vegetables, social forestry, livestock, duck, poultry and gardening at the home-stead normally in flood-free years.

Addressing the Adverse Effects of Climate Change……….

At present disbursement of agricultural credit is compulsory for all banks. Participation of private and foreign banks in agriculture and rural Credit program is relatively new.

Besides, a number of new items have been incorporated in the policy. As such, initiatives shall be taken to make the bankers at various levels, including field level, aware of the objectives, priorities and provisions of the Agricultural/Rural Credit Policy.

With this end, the banks shall take necessary steps including training and workshop program.

Awareness and Training

Bangladesh Bank is trying to introduce some high level risk management technique in agriculture such as Crop insurance, weather index based crop insurance, etc.

To increase the bargaining power of the farmers, contract farming system has been introduced. Bangladesh Bank is trying to make this system effective and beneficial for the farmers.

Bangladesh government should review the present Land Usage Policy with the relevant experts, professionals, and farmer's representatives and update it based on their comments and suggestions.

The policy should be enacted and put into operation immediately to stop further loss of arable land . Lands that are arable should not be used for housing.

It is highly imperative that the twin problem of arable land loss and population growth is addressed by the government simultaneously to ensure production sustainability and food security.

Since investment in agricultural research is highly rewarding and beneficial, the government should raise the investment significantly. The increased investment will certainly encourage scientists to develop technologies to cope with the hazards of climate change.

Conclusion

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