J. Agril. Univ. 4(1): 165-172, 2006 ISSN 1810-3030 Effectiveness of RAKUB crop credit in selected areas of

M.R.U. Mian and M.A. Kasem Department of Agricultural Finance, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh

Abstract•

In examining the effectiveness of RAKUB crop credit present study found that the lending procedure of RAKUB was quite lengthy. Large farmers received more amount of loan within shortest possible period and with least cost compared to medium and smaller ones. Loan obtained for banana production was the highest and maximum of the loan was utilized purposively. Overall loan recovery rate was 66 percent during the study period and large farmers were observed to be better repayers. Major factors affecting timely loan repayment were fear of imposing additional interest and penalties and of avoiding certificate case. RAKUB crop credit became able to bring favorable change in the socioeconomic conditions of the respondents but large farmers were the major beneficiaries. Problems like tips and bribe, delay loan disbursement, etc. were identified in connection of loan receipt which surely hampered productive loan use as well as loan repayment. Repayment of old debt and credit exemption by the government were the major causes of loan defaults. Keywords: Adequacy, Utilization, Repayment, Effective cost and Impact Introduction About 60 percent people of Bangladesh live under poverty line (BBS, 2002). One of the main reasons for low productivity and widespread poverty is the lack of access to productive assets and financial resources by the poor. Now-a-days, institutional credit plays a vital role in accelerating the development of agricultural sector. To expedite the growth of agricultural sector, RAKUB is entrusted with the responsibility of supplying credit with its 349 branches to the entire northern part of the country (RAKUB, 2002). The present study is concerned with RAKUB loanees. From different studies it is revealed that our farmers do not use loan for the purposes for which it has been taken. On the other hand, the farmers allege that the cost of receiving loan is high and required time to receive loan is also long (Kasem, 2005). Repayment capacity is one of the major considerations of credit analysis .and the proper utilization of loan has a great influence upon repayment capacity of the borrowers. RAKUB .like other institutions, therefore, gives due emphasis on the repayment aspect of the borrowers in evaluating a credit program. A successful credit program is always conceived of its satisfactory loan use, level of loan repayment by the borrowers and the institutions by and large are interested in -those credits which could ensure higher repayment and reduce risks thereby. The present study is therefore, pragmatic effort to inquire into the effectiveness of credit provided by RAKUB on crop production. The study is expected to generate reliable information regarding distribution, adequacy, purpose, cost and repayment aspects of RAKUB loan. Moreover, it would benefit the planners as well as the policy maliers to formulate more viable decisions to improve the lapses and omission of agricultural credit program of RAKUB and other similar credit institutions. The specific objectives of the study are: i) to examine the adequacy and distribution of RAKUB credit, ii) to study utilization and repayment patterns of RAKUB loan, iii) to determine the effective cost of credit incurred by the borrowers and iv) to identify the socioeconomic impacts of RAKUB crop credit on the borrowers. 166 Effectiveness of RAKUB crop credit

Materials and Methods

Three of Rangpur district were selected purposively for the study in convenience of well communication with RAKUB branch offices. One RAKUB branch was randomly selected from each of the upazilas and thus the selected branches were Parshuram, Sukurhat and Madhabpur branch of Rangpur sadar, Mithapukur and Badarganj .respectively. Total sample size stood at 60 comprising 20 loanees from each of the branches selected randomly from the given list by the branch officials. The loanees were belonged to 13 villages of the selected upazilas.

Survey method was followed to collect necessary information from the respondents. The time period of data collection was March to April, 2005 and data used in this study covered the year 2004. Simple statistical technique, i.e., descriptive statistics like percentage, frequency counts, mean, etc. were applied to attain the objectives of the study.

Results and Discussion

Adequacy and purpose-wise distribution of RAKUB credit: Table 1 shows the adequacy of credit in the study area. The table indicates the average amount of loan received and percentage of loan received in relation to amount applied for by the small, medium and large farms which were 86, 92 and 94 percent respectively. It also reveals that the farmers in general, received 91 percent of the loan amount applied for which was more or less satisfactory with respect to present situation of Bangladesh. On the other hand, approximately 22 days were required to get loan from the RAKUB. Actual time required by the small, medium and large farmers were 23, 21 and 20 days which indicates that the larger farmers got loan within shorter period of time compared to other two categories of farmers possibly because of their relatively easy access to the bank officials.

Table 1. Adequacy and time required to receive RAKUB credit

Farm size Amount applied for Amount received Amount received as ' Days required (Tk.) (Tk.) ,,, percent of applied for Small 18167 15583 • _•,. .86 •23

Medium • 28143 26000 92 — •21 Large 43750 41125 94 • 20 All 26233 23850 91 22

Table 2 reveals that small farmers received maximum of loan (29 percent) for potato production while it was banana production for the medium and large farmers (25 and 53 percent respectively). Distribution of loan for boto production stood the second highest (28 percent) for small farmers while zinger and tobacco ranked the third (each of 13 percent). For medium farmers, the second and third highest use of loaned money were found for zinger and potato production (24 and 21 percent respectively) While they were potato and zinger for large farmers (21 and 18 percent respectively). Loan taken for tobacco production was found only for small farmers and large farmers did not take any loan for brinjal and papaya production. On an average, loan taken for banana production was the highest (26 percent) and it was the lowest for tobacco production (3 percent) during the period of study. Mian and Kasem 167

Table 2. Purpose-wise distribution of loan according to farm size

Farm size. Purpose , All Small Medium . Large Amount (Tk) % - Amount (Tk) % Amount (Tk) % Amount (Tk) cro Boro 4417 28 5143 20 3125 8 4584 19 Banana 625 4 6678 . 25 21875 , 53 6283 26 . Potato 4458 29 5393 21 8625 21 5450 23 Brinjal 1250 8 1286 5 .. . .. 1100 5 Papaya 750 5 1286 5 - - . 900 4 • Zinger. 2000 13 6214 24 .7500 18 4700 20 Tobacco 2083 13 - - - - 833 3 Total 15583 100 26000 100 41125 100 23850 100

Utilization of credit according to farm size: Pattern of credit utilization is very much important in farming because use of credit for unproductive purposes very often results in overdue of loans and weakens the financial viability of the concerned financial institutions (Alam, 2004). Table 3 shows that the borrowers invested 9.75 percent of credit, money mainiy in three major capital items and among them purchase of land occupied the largest share (5.01 percent). It is encouraging that the farmers at present give emphasis on productive fixed assets in their farm expenditure. The table also reveals that the percentage of total loaned money utilized in meeting capital expenditure on farming increases as the size of farm increases.

It is apparent from the same table that 48.85 percent of total loan was utilized in meeting current expenditure on farming. Among the items of current expenditure fertilizer/manure was the most important item. It alone comprised 16.12 percent of the total borrowed money. The table also reveals that large farmers were more dependent on fertilizer/manure than other two groups. Cost of seed/seedlings was the next important item (11.68 percent) and it was followed by hired labor (10.32 percent). The low percentage of credit used for lard preparation (5.14 percent) indicates that most of the farmer prepared their land themselves. Only a small amount of total loan (1.26 percent) was spent for insecticides. It implies that only an insignificant acreage of land was affected by insect/pest during the study period. It is clear from the table that current expenditure increased by the increase in farm size and large farmers used expectedly the highest proportion of loan for current expenditure on farming.

Non-farm business expenditure (investment in trade and other subsidiary occupations) and family expenditure constituted 9.68 and 31.72 percent of total loaned money respectively (Table 3). It alone accounted for 18.17 percent of total loan and there found an inverse relationship between farm size and repayment of old debt. Social ceremony (6.13 percent) came next to repayment of old debt and it showed positive relationship with farm size. The next important item is purchase of food (1.89 percent) maintained negative relationship with farm size. The small farmers were found to spend maximum (5.88 percent) while medium Spent a little (0.69 percent) and large spent nothing for this item. The last iterri of .family expenditure was litigation (0.89 percent). 168 Effectiveness of RAKUB crop credit

Table 3. Utilization of loan according to farm size Percentage use of credit Head of expenditure Small Medium Large All Purchase of land - 6.87 6.99 ., 5.01 : Purchase of cattle 2.81 1.37 4.86 2.95 2.67 2.75 - , 2.01 Release of mortgaged out land _ Total capital expenditure on farming 5.48 10.99 11.85 9.75 Land preparation ' 4.87 4.82 6.14 5.14 Purchase of seed/seedling 4.10 , 11.11 21.58 ' 11.68 11.07 16.32 21.43 16.12 Purchase of manure and fertilizer _ Charge of irrigation water 4.73 4.35 3.85 4.33 Hire charge for human labour , 7.57 ' 10.98 12.01 10.32 Purchae of insecticides , 1.22 1.32 1.17 1.26 _ Total current expenditure on farming 33.56 48.90 _. 66.16 48.85 Non farm business expenditure 9.09 10.85 7.75 . 9.68 Purchase of food 5.88 0.69 - 1.89 Purchase of clothes 2.81 6.37 0.61 1.57 Educational expenses 1.82 1.73 0.76 1.53 Medical treatment 1.79 1.18 2.10 1.54 Repayment of old debt . 33.69 , 17.03 3.04 18.17 ' Social ceremony 5.35 6.14. 6.98 6.13 Litigation 0.53 1.12 0.75 0.89 51.87 29.26 - 31.72 Total family expenditure _ 14.24 Grand.total 100 100 100 100

• Repayment of RAKUB credit: Table 4 shows that average amount of loan repaid was found to be Tk.16685 (66, percent) and the average amount due was Tk. 8566. Average repayment made by small, medium and large farmers were found to be 44, 69 and 83 percent - 4,mspectivply. S9., repayment performance was not satisfactory for all the respondents. It again indicates the:.deClini0g.rOpayment situation of institutional credit in Bangladesh since 1984-85 (Raquib, 1992).

Table 4. Repayment of loan according to farm size Amount repaid Amount due Total repayment Farm size .- Piincipa - Interest Total Principal Interest Total (%) (Tk) ..(Tk) (Tk) (Tk) (Tk) (Tk) Small 6917 _ 310 7227 8667 466 9133 44 . : Medium • 18107 1067 19174 7893 548 8441 69 . Large 34250 2095 36345 6875 425 • 7300 83 All 15783 902 16685 8067 499 8566 66 Mian and Kasem 169

Table 5 shows the factors affecting loan repayment considering those farmers who timely repaid their loan in full. Out of 60, 39 borrowers repaid their loan in time. Among them 95 percent borrowers repaid loan at fear of imposing additional interest and penalties while 90 percent did the same to avoid certificate case. It was followed by notice served by the bank; expectation of having loan in future and proper supervision (85, 82 and 79 percent respectively). Self consciousness (77 percent) and higher price of agricultural products (60 percent) were also found to encourage the farmers to repay the loan in time. It is evident from the table that fear of additional interest and penalties and fear of certificate case were the main factors affecting timely loan repayment by borrowers.

Table 5. Factors affecting timely loan repayment

Factors Respondents Small Medium Large All No. % No. % No. % No. % Fear of additional interest and 12 92 19 95 6 100 37 95 penalties _ ' Fear of certificate case 11 85 18 90 6 100 35 90 Expectation of having loan in future _ 9 69 17 _ 85 6 100 32 82 Notice served by the bank 12 92 16 84 5 83 33 85 _ Proper supervision by bank staffs 10 77 16 80 6 100 31 79 . Self consciousness 8 62 17 85 5 83 30 77 Higher price of agricultural products 7 54 12 60 4 67 23 60 Pressure by relatives 2 15 4 20 - - 6 15

Problems faced in receiving credit and causes affecting loan default: In obtaining loan from institutional sources, farmers may have to face a number of problems in Bangladesh which sometimes, discourage the farmers to have loan from such sources of credit. Table 6 shows that only 10 percent of borrowers reported of facing no problem and large farmers faced minimum problems, which is usual. Among the problems payment of, tips and bribes was observed (85 per cent) to be quite alarming in the study area likely those of other parts of the country. The borrower farmers alleged that the bank did not provide loan indue time (75 Percent). As a result the borrowers did not have their loan when the loan was actually needed. From the table it is found that 25 percent of borrower-farmers reported that the bank staffs did not supervise the credit regularly.

Out of 21 loan defaulters maximum number of 17 (81 percent) reported that they could not repay their loan due to repayment of old debt (Table 6). Loan exemption by government was mentioned as one of the major causes (71 percent) during the study period. Only the small farmers reported that they failed to repay the loan because of emergency food,purchase and use of credit for social ceremony.

Litigation assumed to be one of the reasons of being loan defaults especially by the large farmers living in the study villages (19 percent). Regular persuasion by the bank staff was Considered to be positive indication towards loans repayment. But it was lacking in the area reported by 19 percent of the respondents. 170 Effectiveness of RAKUB crop credit

Table 6. Problems faced in receiving loan and causes of loan default

Problems and causes Respondents according to farm size Small Medium Large All No. °/c. No. % No. % No. % Problems faced in receiving and utilizing loan _ Not face any problem 2 8 3 11 1 13 6 10 Compelled to pay tips and bribes 21 88 24 86 6 75 51 85 Delay to sanction loan 20 83 20 71 5 63 45 75 No regular and proper supervision 6 25 7 25 2 25 15 25 Causes of loan default Repayment of old debt 9 81 7 88 1 50 17 81 Loan exemption by the government . 8 73 6 75 1 50 15 71_ Low price of rice and other crops 6 55 4 50 1 50 11 52 Investmerii in business 5 45 4 50 1 50 10 48 Purchase of agricultural equipment 3 27 2 25 - - 5 24 Crop damage by natural calamities 4 36 3 38 1 50 10 48 Social ceremonies - 4 36 3 38 1 50 8 38 Emergency food purchase 6 55 1 13 - - 7 33 Encouragement by local leaders 4 36 2 25 - - 6 29 Litigation 1 9 2 _ 25 1 50 4 19 Hardly persuasion from the bank 1 9 2 25 1 50 4 19

Effective cost of RAKUB credit: While getting loan from any source, particularly institutional ones, the farmers have to spend some amount of money for negotiating the loan. Summation of all costs (seen and unseen) incurred by a borrower is termed as effective cost of credit. Seven cost components were mentioned by the respondents to obtain credit from RAKUB (Table 7). Total cost incurred for the loan was found to be Tk. 832, 1569 and 2169 for small, medium and large farmers against their received amounts respectively. Thus the overall effective cost of RAKUB credit was found to be Tk. 1354. Tips and bribes were the major cost items for receiving loan from RAKUB. In terms of total cost large farm faced the highest cost followed by medium and small farms. But in terms of cost per Tk. 100 of loan, medium farm stood the highest followed by small and large farms.

Table 7. Average cost to obtain loan from RAKUB

Farm size Components of cost Small Medium Large All (Tk) (Tk) (Tk) (Tk) Price of application form and loan fee 90 90 90 90 Document, stamp and deed 20 20 20 20 Photograph _ 30 30 , 30 30 - Cost of transportation 70 . 97 101 • .. 87 Cost of entertainment 97 164 211 145 Tips and bribe 536 989 1556 884 Labour cost of days spent 124 • 150 174 144 Total 832 1569 2169 1354 Cost per Tk. 100 5.35 5.92 5.32 5.87 Mian and Kasem 171

Socioeconomic impacts of RAKUB crop credit: An attempt was made in the present study to examine the socioeconomic changes, which might have occurred among the respondents participating in RAKUB loan program. Responses of the borrowers about the change are summarized in Table 8. It is evident from the table that maximum overall change occurred in the case of awareness building (87 percent) and it was followed by increase in family income (73 percent), use of sanitary latrine (68 percent) and increase in crop production (62 percent). The subsequent changes were found in the case of scope of family education, adopting family planning measure and development of petty trading with respective percentage of 57, 23 and 17. It is evident from the table that except awareness building and family planning measure, other changes were occurred the highest in the case of large farmers. Medium farm experienced the maximum change in awareness building while small farm experienced the same in adopting family planning measure. So, it is clear from Table 8 that RAKUB crop credit brought more or less positive impact on the socioeconomic conditions of the borrowers and the large farmers were the main beneficiaries/of RAKUB loans.

Table 8. Socioeconomic impacts of RAKUB credit

Types of change Farm size Small farm Medium farm Large farm All farm Change No Change No Change No Change No occurred change occurred change occurred change occurred change Awareness building 20 4 25 3 7 . 1 52 8 (83) (17) (89) (11) (88) (12) (87) (13) Scope for family 13 11 15 13 6 2 . 34 26 education (54) (46) (54) (46) (75) . (25) (57) _ (43) Increased crop 13 11 20 8 6 2 37 23 production (54) (46) (71) (29) (75) (25) (62) (38) !lcreased family 15 9 22 6 7 1 44 16 income (63) (37) (79) (21) (88) (12) (73) (27) Development of petty 6 18 8 20 3 5 17 43 trading (25) (75) , (29) (71) (38) (62) (17) (72) Adoption of family • 11 13 12 16 1 7 14 46 planning measure (46) (54) (43) (57) (13) (87) (23) (77) Use of sanitary 15 9 18 10 8 - . 41 - 19 latrine (63) (57) (64) (38) (100) - (68) (32) Figures within parentheses indicate percentages

Conclusion Time taken to receive loan from .the RAKUB branch seemed to be not reasonable. Large farmers were the major beneficiaries of the RAKUB credit and they were better repay-ers compared to the small and medium farmers. Repayment of old debt and loan exemption by the -government were the important causes of loan default in the study area. Maximum of loaned money was -utilized for productive purposes. Tips and bribes seemed to be the major problems faced by *the. borrowers obtaining loan from RAKUB. RAKUB crop credit brought positive impact on socioeconomic conditions of the borrower farmers.

The following suggestions are put forward for the policy makers, academicians, credit agencies andith.eir-beneficiaries of the -country: 172 Effectiveness of RAKUB crop credit

There should be special mention for the majority of rural mass in general and crop production loans (short term) in particular and RAKUB lending procedure should be minimized as far as possible. ii) RAKUB needs more trained employees for supervising the loan program regularly. iii) The present study suggests to make the lending procedure of RAKUB more easy and borrower friendly avoiding all complexities. iv) The study suggests for further study of similar type in other parts Of the country to represent the entire country because of the limitations of the present one. References

Alam, M.Z. 2004. Study on the Tenurial Arrangements and Its Relationship with credit in a Selected Area of . M.S. Thesis, Department of Agricultural Finance, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh.

BBS. 2002. Statistical Yearbook of Bangladesh. Dhaka: Bangladesh Bureau of Statistics, Ministry of Planning, Government of the People's Republic of Bangladesh:

Kasem, M.A. 2005. Effectiveness of Credit Provided by the Rajshahi Krishi Unnayan Bank (RAKUB) on Crop Production in Some Selected Areas of Rangpur District. M.S. Thesis, Department of Agricultural Finance, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh.

• RAKUB. 2004. Annual Report, 2003/04. Dhaka: Rajshahi Krishi Unnayan Bank.

Raquib, A. 1992. Agricultural Loan Recovery Problems in Bangladesh. Journal of Institute of Bankers, Vol. 34 & 35.