The central back has simplified the arrangements for disbursement of agricultural loans among the farmers with the aim of making it less costly, according to new farm loan policy unveiled by its governor this week.

From now on, Bangladesh Bank (BB) will allow agents of the scheduled banks to disburse agriculture loans in order to restrict farm loan distribution by non-governmental organisations (NGOs) and microfinance institutions (MFIs), a good many of which are otherwise reported to charge farmers at excessively higher rates of interest.

Past experiences suggest that many farmers who got farm loans through such NGOs and the MFIs counted more than double the interest rate indicated by the central bank. The agents of the banks will now have to disburse farm loans at an interest rate of 10 per cent to the farmers, the BB policy said. This is mandatory for the private banks to distribute 30 per cent of their total targeted loans through their own branches. The agents will be allowed to receive 0.50 per cent service charge from the farmers against their total disbursed amount of farm loans.

Earlier, most of the banks used to disburse their entire annual target of farm loans through the linkage of the NGOs. The BB has set a farm loan disbursement target of Tk 175.50 billion for the fiscal year (FY) 2016-17 which is 7.01 per cent higher than that of the FY 2015-16.

The marginal farmers will, from now on, be allowed to take agriculture credit from the banks to purchase equipment for cultivation. The farmers, according to some banking analysts, would get the required facilities from the agent banking. The banks will be able to disburse farm loans in the remote areas by expanding their network of agent banking.

To activate both the public and private banks in using the available excess funds in productive lending, the area-heads of the central bank offices are now conducting frequent field-visits with bankers in search of new areas for potentially rewarding economic activities. New client groups are needed to be brought under the inclusive financing initiatives of the central bank.

Agricultural analysts say such initiatives will hopefully create demand for more productive credits and generate new employment opportunities in the economy. The central bank is expected to keep a close eye on the sector to ensure adequate supply of agricultural loans.

The higher credit growth target has been set at a time when default loans in the banking sector as well as non-food inflation are on the rise and new investment activities are otherwise sluggish. The central bank governor instructed all banks to achieve the disbursement target to avoid penalty. The BB will also strengthen its supervision further to monitor farm loan disbursement operations by banks.

However, the loan recovery arrangements for agricultural loans need also to be strengthened and actively supervised. A considerable amount of outstanding agricultural credits are reported to have turned sour. This has impacted the banks because of the swelling non-performing loans in all sectors, not excepting the sizeable amount of funds that were disbursed earlier to the borrowers of the agricultural sector.

Meanwhile, the contribution of the agriculture sector to the economy has been declining. But it still accounts for nearly one-fifth of the country's gross domestic product (GDP) and 7.51 per cent of the export earnings.  Also, it employs 45 per cent of the country's workforce. On the whole, all kinds of farm production have, in volume terms, reported to have now risen to 45 million tonnes from 11 million tonnes 40 years ago.

Most of the NGOs and the MFIs working at the field level borrow funds from the banking system under refinancing or other related facility of the central bank and also from Palli Karma Shahayak Foundation (PKSF), a government-managed body. Then the funds are disbursed among the farmers at a disproportionately high lending rate. These institutions take funds from the scheduled banks at a rate of 10 per cent or even less than that, for agricultural loan disbursement, but are reported to charge farmers around 25 per cent rate of interest when giving out loans. Such practices subsequently defeat the purpose of giving low-interest loans to the farmers.

The indulgent NGOs and MFIs are engaged in such practices as these appear to be legal in the eyes of law. The lending rate range set by the central bank for farm loans by the banks does lose its relevance to the farmers, when these are disbursed through such NGOs and MFIs in most cases. On account of this flaw, such institutions are reported to be making otherwise lucrative profits by taking funds from banks at a low rate and lending them out to farmers at a much high rate.

The private banks did not have in the past an adequate number of branches in the rural areas. For that matter, the central bank had allowed such banks to disburse loans through the NGOs and MFIs. But as the situation now continues to change, many private banks have extended their outreach to the rural areas.

However, disbursement of only 30 per cent of farm loans by the scheduled banks will still leave room for the NGOs and the MFIs to cater to the needs for credits by the farmers to a considerable level. Farmers who fail to get loans straight from the banks will turn to such NGOs and MFIs for credits, thereby taking the burden of higher rate of interest on such funds.

Under the circumstances, there are two ways, as some analysts suggest, to solve the problem. Firstly, the central bank might instruct the NGOs and the MFIs to disburse agricultural loans at low rates also. Here the role of the Micro-credit Regulatory Authority (MRA), which regulates these institutions, is important. Only MRA can help reduce lending rate on the farm loans that the NGOs and the MFIs disburse.

It must also be noted here that not all NGOs and MFIs operating in the country are following the same track. There are quite a good number of them which have done real supportive activities in favour of the underprivileged in the rural areas and are doing the same now. There are thus some star performers here, too. The authorities concerned do need to be supportive of such NGOs and MFIs.

The other option is that the central bank, by taking the necessary measures, can persuade the scheduled banks to facilitate a higher amount of credit funds for direct disbursement to the farmers. However, such a move will require a wider rural banking network. Maintaining such a network involves costs also. Private banks are certainly not charitable organisations. They need to operate cost-effectively to stay in the business. As such, it is no easy job for all banks to overextend their operations to the rural areas without weighing the costs and returns.