Post Source: Dawn Economic and Business Review – 01 Mar, 2010
By Rauf Nizamani
FARMING is vulnerable to unpredictability of nature, and the impact of natural disasters and other risks to farmers cannot be taken lightly. In case of natural calamities, farmers bear the loss of their produce/crop and face debt defaults. Hence, the interests and investments of farmers need to be safeguarded by crop insurance. In countries having multiple risk insurance schemes, government’s intervention or its support to agricultural insurance operations has been regarded justifiable and inevitable due to market failures.
Such support has been provided in the form of subsidies on premium to farmers, operational subsidies to private insurers to cover some of the high administrative costs associated with agricultural insurance contract, underwriting and subsidised reinsurance.
The method of intervention also varies from country to country. For example in Canada, Japan and Philippines the insurance schemes are operating under a central government or local government body, while in the United States, Spain and Mexico, they are operated under a partnership between government and private insurance companies with the state assuming the role of re-insurer. In India, the governments allows 50 per cent subsidy in premium to small and marginal farmers.
WTO’s regulations also support subsidisation of crop insurance premiums by the governments. However, the government support programmes are often fiscally burdensome.
Experts see crop insurance as a powerful tool in promoting and adopting modern techniques in agriculture especially by small farmers. However, despite exhaustive exercises spanning nearly three decades, economic and agricultural experts in Pakistan are still looking for a model crop insurance scheme, while India and Sri Lanka have been insuring crops for decades. India experimentally launched crop insurance in 1979 and formally introduced it in 1985.
To mitigate the risk of losses to agricultural borrowers affected by natural calamities and risks of defaults to banks, the State Bank of Pakistan had set up a task force on Crop Loan Insurance Framework in July 2006 comprising all stakeholders for developing operational modalities for crop insurance. Incidentally, the Bank of Punjab and Askari Bank Ltd were already providing crop loan insurance to their borrowers in collaboration with the East-West and United Insurance companies respectively. This scheme was introduced in Punjab in 2004 by the provincial government but it remained confined to seven to eight districts of central Punjab where, according to insurance business sources, the rate of farmers’ literacy was the highest and the farmers were far more progressive, and enjoyed the benefits of social networking.
The major banks and insurance companies have developed their crop insurance programme/products based on the framework developed by the task force and some of these products have come to the market. The task force in its concluding meeting on July 17, 2008 had decided to launch the crop loan insurance from the Rabi crop. The banks were free to negotiate their terms, conditions and operational modalities including rate of premium, making the scheme/crop insurance mandatory for their borrowers etc. with any insurance company as per bank’s policy and applicable rules and regulations.
Crop insurance was launched in a significant manner from Kharif 2008. The National Insurance Company Ltd (NICL) and the National Bank of Pakistan agreed to enter into an agreement to provide insurance cover to farmers against crop losses from natural calamities and their exposure to bank loan risks.
After a year-long negotiation and correspondence, the NBP at last agreed to be a partner of the NICL on April 2, 2008 in crop insurance as the prime minister had put crop insurance as one of the key points in new government’s agenda. Earlier the NICL had informed the NBP that its partners, the international reinsurance companies, had given a final notice of quitting support arrangement, if no headway was made in crop insurance.
Bankers and insurance executives had estimated a sum of Rs3-4 billion for insurance coverage which was hardly two per cent of the total agricultural loaning in 2007-08. About 100,000 farmers were estimated to benefit that year cover only a part of the NBP loaning. The ZTBL, which offers the highest amount to the agricultural sector, was reluctant to join the scheme at that time. Insurance executives were of the view that bigger the base of policy holders, the less would be the impact of loss being shared by the insurance firms. But there were many hindrances in this respect.
Presently the total number of borrowers of agricultural loans is hardly half a million as the over whelming majority i.e. about 70 per cent, according to the report of the Committee on Rural Finance, does not enjoy access to bank loans. Small farmers do not have collaterals to offer. The provincial boards of revenue do not give them pass books.
In Sindh as many as 250,000 small farmers have been denied pass books despite repeated advice from the SBP for last more than five years.
Documentation is a prerequisite for insurance cover. Insurance people observe that when a big part of urban economy is undocumented how it would be possible to bring agriculture under documentation and provide benefits of insurance business. Thus especially majority of small farmers would remain outside insurance cover if any time the banks agree to coordinate with insurance companies for getting a cover. Apart from this, the fear of risk in doing business with landed gentry also inhibits private insurance companies to go in a big way for crop insurance.
According to the National Sample Survey even in India, where the insurance scheme is in operation for many years, only four per cent of farm households have ever insured their crops whereas 57 per cent do not even know that such a facility exists.
Success of crop insurance scheme cannot be achieved in isolation; it depends on the reforms and improvements in the whole system.