13

# Box 2.1. Alternative Approaches For Estimating Farm Credit Requirement

The State Bank of Pakistan uses a direct approach to estimate the need for credit in agriculture (Report on Preparation of Estimates of Agricultural Credit Requirements, State Bank of Pakistan, 1989 edition). The methodology for this direct approach was devised in 1973-74. For estimating short term loans, the procedure involves a detailed bre3kdown of crops sown and the key inputs used for those crops. Assumptions are then made regarding the proportion of inputs that the fanner purchases. These estimates are revised periodically. Revisions were carried out in 1978-79 and in 1983. In 1987 again a committee was constituted to revise the estimates based on farm surveys carried out by the Punjab Economic Research Institute (PERI). For example, the 1987 committee revised up the estimates of percentwge of acreage for which seed is purchased for nine crops. Similarly revisions were also made for electricity charges, for cost of tractor hire and for pesticides. For long term loans, similar revisions-are carried out for key investments such as land and water course improvement, tubewells, open wells/Persian wheels, threshers and other farm machinery. In order to capture differences in credit needed across farm size, periodic adjustments are also made for the weights of small, medium and large farms in total farmed acreage.

How well does the indirect approach of this report approximate the direct approach of by the State Bank in its credit allocation decisions? This report argues that growing at the trend rate of 4 percent, the projected 1992-93 agricultural GDP of Rs. 350 billion would be associated with a credit requirement (from institutional sources) of Rs. 15.5 billion. The actual credit disbursed by institutional sources was Rs. 15.4 billion. Thus the two approaches yield almost identical estimates. However, note that this is for the projected agricultural GDP. Because of monsoon flooding, the actual 1992-93 agricultural GDP was estimated at a considerably lower Rs. 297.8 billion, Thus the actual credit allocation was considerably higher than that required by actual GDP. But this is ex-post. What matters is the ex-ante estimate and for that the two approaches give very similar results.

Another comparison between the two approaches may be made on the basis of total credit requirement of the farm sector. Using the direct method, the State Bank estimates the 1995/96 farm credit requirement for investment (medium and long term requirement) at Rs. 29.3 billion or 6.8 percent of the projected agricultural GDP(estimated at Rs. 453 billion if agriculture grows by 4 percent over its 1994/95 value). This report's indirect method estimates the requirement for investment credit at a somewhat higher 8 percent. The big difference in the two approaches is for production or short term credit. The State Bank method estimates it at nearly twice the investment credit while this report, following evidence from other countries, estimates it at half the investment credit requirement.

However, the demand for credit may be higher given that some borrowers may shift to institutional sources if credit is available at rates lower than prevalent rates in the informal market. Although no such recent estimates are available, the rates in the informal market are generally higher than what is charged by institutional sources. But one could argue that if credit is available to borrowers at a reasonable rate of interest, though not subsidized, the amount of credit demanded from institutional sources is bound to increase as the rate of interest will be lower than the rate charged in the informal market. Such empirical issues can be resolved through further studies of the informal credit market.