hazara universty

1. Presentation on
PRUDENTIAL REGULATIONS
FOR AGRICULTURE FINANCING

2. Importance of agriculture

Agriculture is a vital sector of Pakistan economy.

It accounts 23 % of total GDP in Pakistan.

It employs 42 % of the labor force of Pakistan.

About 25 % of Pakistan's total land area is under
cultivation.

Large contribution to foreign exchange earnings

3. BANKING POLICY AND REGULATION
DEPARTMENT
STATE BANK OF PAKISTAN

5. Part- A
DEFINATIONS

6. 
Agricultural Financing
(i) Farm Credit,
(a) Production Loans for inputs like seeds, fertilizers, etc
(b) Farm Development Finance (including finance for
improvement of agricultural land, etc.) and construction
of Godowns .
(c) Finance for the purchase of agricultural machinery and
equipment like tractors
(d) Credit Card (including Kissan Card )
(e) Non-fund based facility (letter of Guarantee/SBLC &
Letter of Credit etc.)

7. (ii) Non-farm credit (Livestock, Dairy, Poultry)
(iii) Agriculture Financing shall also cover those items
eligible under “Methodology Report for Estimation
of Agriculture Credit” or any other item approved
by SBP/ACAC (Agriculture Credit Advisory
Committee)
(iv) Agriculture Financing shall not include loans to
traders and intermediaries engaged in
trading/processing of agriculture commodities

8. 
Agriculture Pass Book
(Revenue records and gives details of Ownership of Land with
address, exact location of the land,Khasra Number, Produce Index
Units (PIU) Value & Market Value of the land, )
 Bank
(Banking Companies Ordinance, 1962)

Borrower (Person/corporate farm)

Corporate Farm ( legal entity separate from its owner)
 DFI (Development Financial Institution)


9.  Exposure
(financing facilities whether fund based and / or non-fund based)

Financial Institution
(Banks, Development Financial Institutions (DFIs) and NBFCs.

Forced Sale Value
( value which fully reflects the possibility of price fluctuations )

Government Securities
(include such types of Pak. Rupee obligations of the Federal
Government or a Provincial Government)


10. 
Group
(means persons, whether natural or juridical, if one of them or his
dependent family members or its subsidiary have control or hold
substantial ownership interest over the other)

Liquid Assets
( the assets which are readily convertible into cash .bank
deposits, certificates of deposit, gold/silver ornaments, certificates of
National Saving Schemes)

Market Value
( value assigned by the revenue authorities)

NBFC ( Non Bank Finance Company )

11. 
Subordinated Loan
( unsecured loan extended to the borrower by its sponsors, subordinate
to the claim of the bank)

Tangible Security
(liquid assets, land ,building and any other fixed asset)

12. Part – B
GENERAL
REGULATION

13. REGULATION R-1
REPAYMENT CAPACITY OF
THE BORROWER
While extending agricultural financing, the
banks/DFIs should take into account the total
indebtedness of the borrower and his disposable
income
.

14. REGULATION R-2
COMPREHENSIVE AGRICULTURE
FINANCING POLICY
Banks/DFIs would prepare a comprehensive
agriculture financing policy duly approved by their
Board of Directors. The agricultural policy may be
part of the overall credit policy of a bank/DFI.

15. REGULATION R-3
STANDARDIZED DOCUMENTS
The banks/DFIs may use standardized documents,
prepared by a committee of bankers and issued by
Agriculture Credit Department in order to safeguard
their interest.

16. REGULATION R-4
EXPEDITIOUS PROCESSING AND
COMMUNICATION OF DECISION TO
BORROWER
Banks/DFIs will ensure that the applications for
agriculture financing are processed expeditiously
in accordance with the Agricultural, Commercial
and Industrial Purposes Act 1973, and the
decision for grant/decline of the credit is
conveyed to the borrower as early as possible.

17. REGULATION R-5
MAXIMUM PER PARTY LIMIT
The maximum exposure on any single borrower (fund
based and non-fund based) by a bank/DFI should not
exceed 30% of the bank’s/DFI’s equity
The total outstanding exposure (fund based and nonfund based) by a bank/DFI to any group shall not exceed
50% of the bank’s/DFI’s equity

18. REGULATION R-6
MAXIMUM UNSECURED
FINANCING
Maximum unsecured financing, which can be
availed by a borrower, from all
banks/DFIs, would not exceed Rs. 500,000

19. REGULATION R-7
REPAYMENT SCHEDULE AND RELAXATION TO
AGRICULTURAL BORROWERS
The unexpected factors like weather, availability of
water, may adversely affect the repayment capacity of the
borrower at least temporarily. The banks/DFIs
are, therefore, allowed to grant relaxation period up to
one year in repayment schedule

20. REGULATION R-8
PROPER UTILIZATION OF LOAN
loans have been extended for specified
purposes, the banks/DFIs are encouraged to
ensure that the loans have been utilized for
the same purposes

21. REGULATION R-9
CREDIT REPORT
the State Bank of Pakistan from time to
time, the banks/DFIs would obtain credit report
of the borrower from Credit Information Bureau
of State Bank of Pakistan.

22. REGULATION R-10
BORROWER BASIC FACT SHEET
AND KYC REQUIREMENTS
Before extending any financing facility, banks would
obtain information from the borrower as outlined in
the Borrower Basic Fact Sheet (Annexure I-A )for
corporate

23. REGULATION R-11
CASH RECOVERY OUTSIDE THE BANK’S
AUTHORIZED PLACE OF BUSINESS
In order to facilitate the recovery
efforts, banks/DFIs are allowed to undertake
cash collection/recovery at places other than
their authorized places of business

24. REGULATION R-12
BAR ON ADJUSTMENT LENDING TO AVOID
CLASSIFICATION OR MEET INDICATIVE
TARGETS
Banks/DFIs are strictly prohibited to undertake any sort of
adjustment lending (adjusting the outstanding loan with a
fresh loan) to avoid classification or meet allocated targets
for agriculture financing

25. REGULATION R-13
GUARANTEES
All guarantees issued by the banks/DFIs shall be
fully secured and the bank must be satisfied with
regards to the underlying transaction and the
collaterals

26. REGULATION R-14
CLASSIFICATION OF AGRICULTURE
LOANS
While time based criteria for the classification of each
category of agriculture loans is given under the respective
head, banks.

27. REGULATION R-15
REGULARIZATION OF THE NONPERFORMING LOANS
this will not impact the de-classification of this account if
all other criteria (meeting the terms and conditions for at
least for one year and payment of at least 10% of
outstanding amount by the borrower) are met
.

28. Part-C
SPECIFIC
REGULATIONS

29. SPECIFIC REGULATIONS
 A.
FARM CREDIT FOR INPUTS
 B.
FARM DEVELOPMENTAL FINANCE
 C.
LOANS FOR THE PURCHASE OF MACHINERY/EQUIPMENT
 D.
FINANCING FOR LIVESTOCK
 E.
CORPORATE FARMING

30. A. FARM CREDIT FOR INPUTS
The finance provided by banks/DFIs to purchase
inputs like seeds, fertilizers, etc. as well as working
capital finance provided to meet various sort of
expenses attributable to farming like wages, etc.

31. A. FARM CREDIT FOR INPUTS
REGULATION R-16
TENURE
Since such loans are self-liquidating at the end of the
growing cycle from the proceeds of the product
sale, therefore, the maturities of these loans shall coincide
with the production cycle for the product being financed.

32. A. FARM CREDIT FOR INPUTS
REGULATION R-17
CLASSIFICATION AND PROVISIONING
CLASSIFICATION
DETERMINANT
TREATMENT OF INCOME
PROVISIONS TO BE MADE
1
OAEM
Where mark-up
Overdue by 90
days
Unrealized mark-up
No
2
Substandard
overdue by one
year or more
do
20%
50%
3
Doubtful
overdue by one
year and a half
do
50%
25%
4
Loss.
overdue beyond
two years or more
do
100%
25%

33. B. FARM DEVELOPMENTAL FINANCE
Farm Developmental Finance is a finance extended by the
banks for making different types of improvements in the
land including construction of garden, nurseries etc. Such
loans will be of long-term nature, to be allowed for a period
of 5 years and above .

34. REGULATION R-18
B. FARM DEVELOPMENTAL FINANCE
CLASSIFICATION AND PROVISIONING
CLASSIFICATION
DETERMINANT
TREATMENT OF INCOME
PROVISIONS TO BE MADE
1
OAEM
Where mark-up
Overdue by 90
days
Unrealized mark-up
No
2
Substandard
overdue by one
year or more
do
20%
50%
3
Doubtful
overdue by one
year and a half
do
50%
25%
4
Loss.
overdue beyond
two years or more
do
100%
25%

35. C. LOANS FOR THE PURCHASE OF
MACHINERY/EQUIPMENT
The loans extended by banks/DFIs for the purchase
of machinery and equipment used for agricultural
purposes at the farms like tractors, threshers, tube
wells, etc.

36. C. LOANS FOR THE PURCHASE OF MACHINERY/EQUIPMENT
REGULATION R-19
SECURITY
The equipment financed by the bank/DFI would be
hypothecated in the favour of the bank/DFI.

37. C. LOANS FOR THE PURCHASE OF MACHINERY/EQUIPMENT
REGULATION R-20
INSURANCE
The banks/DFIs would ensure that the tractors financed by
them remain insured at all times during the tenure of the
loan. Banks/DFIs are also encouraged to arrange insurance
of other machinery and equipment financed by them to
protect their interest.

38. C. LOANS FOR THE PURCHASE OF MACHINERY/EQUIPMENT
REGULATION R-21
CLASSIFICATION AND PROVISIONING
CLASSIFICATION
DETERMINANT
TREATMENT OF INCOME
PROVISIONS TO BE MADE
1
OAEM
Where mark-up
Overdue by 90
days
Unrealized mark-up
No
2
Substandard
overdue by one
year or more
do
20%
50%
3
Doubtful
overdue by one
year and a half
do
50%
25%
4
Loss.
overdue beyond
two years or more
do
100%
25%

39. D. FINANCING FOR LIVESTOCK
The loans extended for goat/sheep
farming, breeding of animals, dairy farming, fishing
farms, poultry farms, etc.

40. D. FINANCING FOR LIVESTOCK
REGULATION R-22
SECURITY
The banks/DFIs at their own discretion may accept
livestock as security. However, as the values of
livestock may fluctuate substantially depending
upon factors such as the animal's
age, health, breed, sex, and reproductive capacity,

41. D. FINANCING FOR LIVESTOCK
REGULATION R-23
PERIODIC INSPECTION AND VERIFICATION
Due to the relative ease with which livestock can be
moved, lack of formal mechanism for transfer of
title and ownership and volatility of livestock
values, banks/DFIs shall, in all cases where livestock
has been accepted as security

42. D. FINANCING FOR LIVESTOCK
REGULATION R-24
TENURE
The maximum tenure for livestock financing
would be five years.

43. D. FINANCING FOR LIVESTOCK
REGULATION R-25
CLASSIFICATION AND PROVISIONING
CLASSIFICATION
DETERMINANT
TREATMENT OF INCOME
PROVISIONS TO BE MADE
1
OAEM
Where mark-up
Overdue by 90
days
Unrealized mark-up
No
2
Substandard
overdue by one
year or more
do
20%
50%
3
Doubtful
overdue by one
year and a half
do
50%
25%
4
Loss.
overdue beyond
two years or more
do
100%
25%

44. E. CORPORATE FARMING
REGULATION R-26
LINKAGE BETWEEN FINANCIAL INDICATORS OF THE
BORROWER AND TOTAL EXPOSURE FROM FINANCIAL
INSTITUTION
Any exposure, banks/DFIs shall ensure that the total
exposure availed by any borrower from financial institutions
does not exceed 10 times of borrower’s equity as disclosed
in its financial statements

45. E. CORPORATE FARMING
REGULATION R-27
COPY OF AUDITED ACCOUNTS WHERE EXPOSURE
EXCEEDS RS. 10 MILLION
Banks shall, as a matter of rule, obtain a copy of financial
statements duly audited by a practicing Chartered
Accountant, relating to the business of every borrower who
is a limited company or where the exposure of a bank
exceeds Rs
10 million, for analysis and record.