Importance of agriculture finance cannot be overemphasised in Bangladesh Though it contributes only 17pc to the countries’ GDP, 85pc of our labour force is directly or indirectly dependent on agriculture.Changing the face of agro-finance in Bangladesh
The designed insurance products based on this will not only protect farmers for micro-climatic variations, but will pay them claims even for granular inconsistencies in rainfall, flood and/or draught condition
Premasis Mukherjee
Importance of agriculture finance cannot be overemphasised in Bangladesh Though it contributes only 17pc to the countries GDP, 85pc of our labour force is directly or indirectly dependent on agriculture.
Of all inputs that fuel growth of this sector, agriculture finance (credit and insurance) is considered most important globally. In addition to providing liquidity to farmers in times of need, agri-credit and insurance also ensure investment towards sophisticated and high yielding agriculture practices.
Agriculture finance in Bangladesh is poised for a qualitative change in the near future. Though banks in Bangladesh lend more than BDT17500 Crore in agriculture (2015), more than 60pc of farmers are beyond the purview of agri-credit in the country.
Interestingly, only 25pc of these loans are currently distributed directly by the banks, while they leverage the network of microfinance institutions (MFIs) for remaining 3/4th part of lending. However, from this year, Bangladesh Bank mandated banks to directly lend 30pc of their agri-lending target (2-3pc of overall advance).
This means banks, cumulatively, will lend TK 5135 crore to more than 10 lakh farmers through their branch network, for which, most of them do not have prior experience.
Due to their dependence on MFI linked agri-lending, most of the banks do not have a ready tool to assess risks of lending directly to agriculture. Approximately 16.7pc of agri-credit in Bangladesh is overdue, a clear indication that credit risk assessment quality in agriculture has been sub-optimal.
Seasonality of agricultural production and its exposure to natural disasters heighten the probability of default risk and expose financial institutions to covariant risks (in prices and yields).
Moreover, low ticket size of the loans (Avg. BDT50000) also increase transaction cost of assessing agri-loans, a key reason as to why banks cannot deploy sophisticated credit assessment methods for agri-loans.
Since insulation from credit appraisal in agri-credit will diminish from this year, banks will need to devise innovative and cost-effective tools to assess direct agri credit risks.
Fortunately for banks in Bangladesh, comprehensive bundled tool to contain agriculture risks are available in the country. International Finance Corporation (IFC) is providing expert support to Green Delta Insurance Company (GDIC) of Bangladesh to design customized agri-finance solutions for banks and financial institutions.
IFC has already developed an agri-credit risk assessment tool for easy and objective appraisal of agri-credit by the banks. The unique credit appraisal tool is built after sophisticated analysis of following parameters:
1. General Flood Risk: captures the risk of both river flood and flash flood in an area;
2. Flood Risk During Early and Late Aman season, which affect standing crops;
3. Draught Risk, divided into five different risk categories based on spatial maps
4. Inundation Risk: classifies landmass of Bangladesh into six different risk categories;
5. Farmer Progressiveness Risk: Takes into account fertilizer usage data classified from 10th to 90th percentile level;
6. Zonal Risk on Cropping Intensity: uses cropping intensity parameter to classify areas; and
7. Crop Suitability Index developed by FAO and Bangladesh Agriculture Research council (BARC) which categorizes a cropping area using crop characteristics, input/management levels, soil characteristics, hydrologic and climate conditions, plus seasonal variability.
Using this index, bank and/or financial service provider/s can plan their agri-credit portfolio geographically even upto upzilla level. Moreover, they can also adopt dynamic pricing in agri-credit product programs.
This credit risk assessment tool is intended to be a bundled service along with agriculture insurance products that GDIC is planning to pilot across Bangladesh. IFC and its associated global experts have already implemented such programs across the world successfully.
In Bangladesh, IFC is helping GDIC to design sophisticated agri-insurance products based on weather history of the country. IFC experts also developed a country-wide weather data grid, which minimized the gap of weather infrastructure necessary for development of such weather based insurance products.
The weather data grid uses information from the existing weather stations of Bangladesh to predict climate variables (e.g. Rainfall, temperature) for every 10KmX10 KM of the country.
The designed insurance products based on this will not only protect farmers for micro-climatic variations, but will pay them claims even for granular inconsistencies in rainfall, flood and/or draught condition.
The agri-credit risk tool and agri- insurance are significant for financial institutions of Bangladesh. On one hand, the agri credit risk assessment tool will enable the banks to efficiently plan and lend towards the sector; and, on the other, the agri insurance products will minimize weather risks for both farmers and banks. If properly deployed, the two innovations will definitely change the shape of agriculture finance in Bangladesh.
The writer is Program Support Officer for International Finance Corporation, IFC The World Bank Group
