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Document of

The World Bank

FOR OFFICIAL USE ONLY

CR a / ~5- S F4Report No. 8263-PAK

STAFF APPRAISAL REPORT

PAKISTAN

AGRICULTURAL CREDIT PROJECT

MAY 4, 1990

Agriculture Operations DivisionCountry Department IEurope, Middle East and North Africa Region

This document has a restricted distribution and ma} be used by recipients only in the perfornance of* - I I I wI I ' W 1 *

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aRYUIVALE TS

US$1 = Rs 21.1 (November 1989)Rs 1 = US$0.047Rs 1 M = US$47,393

WEIGHTS AND MEASURESBritish/US Units Metric Units

2.469 acres (ac) - 1 lhectare (ha)1 ac - 0.405 ha1 square mile (sq. mi) - 259 ha1 cu ft/sec (cusec) 0.028 me/sec

ABBREVIATIONS

ABL - Allied Bank Ltd.ACO - Agricultural Credit OfficerADB - Asian Development BankADBP - Agricultural Development Bank of PakistanASAL - Agricultural Sector Adjustment LoanCECC - Credit Extension Coordination CommitteeCMCO - Couple Mobile Credit OfficerFBC - Federal Bank for CooperativesFMCO - Functional Mobile Credit OfficerFSAL - Financial Sector Adjustment LoanGOP - Government of PakistanHBL - Habib Bank Ltd.IFAD - International Fund for Agricultural DevelopmentMCBL - Muslim Commercial Bank Ltd.MCO - Mobile Credit OfficerMCOF - Mobile Credit Officer (Female)MCOI - hobile Credit Officer (Intensification)NBFI - Non-Bank Financial InstitutionNBP - National Bank of PakistanNCBs - Nationalized Commercial BanksNCCC - National Credit Consultative CouncilNGO - Non-governmental OrganizationOECF - Overseas Ecomomic Cooperation FundPBC - Pakistan Banking CouncilPFP - Policy Framework PaperPMI - Private Minor IrrigationSAF - Structural Adjustment FacilitySBP - State Bank of PakistanSSE - Small-scale EnterpriseVAF - Village Assistant (Female)

FISCAL YEAR

July 1 - June 30

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FOR OFmICIAL USE ONLY

PAKISTAN


STAFF APPRAISAL REPORT

Loan/Credit and Project Summary

Borrower: Islamic Republic of Pakistan

ImDlementina Agencies: Agricultural Development Bank of Pakistan (ADBP), fivenationalized commercial banks (NCBs), State Bank ofPakistan (SBP), and the Revenue Board of Punjab

Amount: US$150.0 million(Loan: US$148.5 million)(Credit: US$1.5 million)

Terms: Twenty years, including a five-year grace period, atthe Bank's standard variable interest rate, for theloan; and standard, with 35 years maturity, for thecredit.

Onlending Terms: The Government would onlend the proceeds of the Bankloan to ADBP and the NCBs at cost for 12 years,including a three-year grace period. The credit wouldbe made available as grants to the Government ofPunjab (US$0.5 million) and SBP (US$1 million).Medium-/long-term sub-loans to farmers and otherbeneficiaries would generally be for two to 12 years.Incremental short-term loans would be for 18 months orless. The foreign exchange risk would be assumed bythe Government, with ADBP paying a premium for suchcoverage resulting from an increase in the discountrate for funds from SBP. Additional recoveries by theGovernment would result from the maturitytransformation of the loan.

Proiect Description: The proposed project would support medium-/long-termlending by ADBP and the NCBs (for farm mechanization,private minor irrigation, livestock, orchards, inlandfisheries, and other on-farm development); by ADBP forrural small-scale enterprises and time-savingtechnologies, incremental short-term lending (for cropproduction and processing, sheep and goat fatteningand small-scale enterprises); and the institutionaldevelopment of ADBP and the NCBs. For ADBP, thelatter would include innovative approaches related to(i) establishing a credit delivery system for lending

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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to women through use of different types of femalecredit staff; (ii) use of group guarantees ascollateral for loans where group members (those owningless than 2.5 ha) are jointly and severallyresponsible for all loans disbursed; and (iii) directlending to and use of non-governmental organizationsby ADBP in lending-related activities. For the NCBs,the institutional development component wouldreinforce their existent supervised credit scheme.The project would also develop linkages between creditand extension, provide funds for vehicles andequipment, training, technical assistance, fellowshipsand study tours, and incremental administrative costson a declining basis, and promote environmentalsafeguards in the use of pesticides and fertilizerprocured with credit funds. It would also supportresearch on agricultural credit nationwide and thecomputerization of land records in one district on apilot basis.

Estimated Costs: Local Foreign Total-(US$ million)-------

Farm Development and Small-ScaleEnterprise LoansTractors 460.3 252.6 712.9Farm Implements 124.1 38.1 162.2Private Minor Irrigation 97.6 28.8 126.4Other On-Farm Development 453.9 3.2 457.1Small-Scale Enterprise Loans 69.4 29.4 98.8

Subtotal 1,205.3 352.1 1,557.4

Fisheries Development Loans 10.9 10.7 21.6Project Loans for Agroindustry 97.2 96.8 194.0Incremental Short-Term Loans 355.6 110.0 465.6

Subtotal All Loans 1 1,669.0 569.6 2,238.6

Institutional Development Assis ancei/Vehicles and Equipment 12.1 8.0 20.1Technical Specialists al.d Fe lowships 0.5 5.1 5.6Local Training 1 0.7 0.0 0.7Incremental Admin. Expenditure 7.2 0.0 7.2

Subtotal 20.5 13.1 33.6

Agricultural Credit Research 1.2 0.1 1.3Computerization of Land Records 0.5 0.1 0.6

Total Base Cost 1,691.2 582.9 2,274.1

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Physical Contingencies'/ 3.3 2.1 5.4Price Contingencies'/ 2.4 1.3 3.7

Subtotal 5.7 3.4 9.1

Total Project Cost 1,696.9 586.3 2,283.2

Financing Plan: Local Foreign Total-------(US$ million)-------

Borrowers 279.5 - 279.5IFAD - 25.0 25.0IBRD/IDA - 150.0 150.0ADB - 150.0 150.0NCBs 82.4 52.2 134.6ADBP 1,334.2 208.8 1,543.0GOP 0.8 0.3 1.1Total 1,696.9 586.3 2,283.2

l/ All items for institutional development are expressed in constant terms.2/ For institutional development component.

Estimated Bank/IDA Disbursements: IBRD Fiscal Year

91 92 93 94 95 96--------------(US$ million)--------------

Annual 34 34 39 32 7 3Cumulative 34 68 107 139 146 150

Beneficiaries: About 1.5 million Pakistani farmers and otherbeneficiaries borrowing through ADBP and the NCBs,including about 85,000 women.

Risks: The new emphasis on lending to small farmers and womenmay increase ADBP's administrative cost while theoutcome of the effort is not entirely predictable.Close monitoring by the participating institutions andthe Bank will ensure that corrective steps are takenpromptly to remedy shortcomings. A mid-term reviewwill facilitate remedial action. The NCBs may berequired by GOP to continue subsidizing theiragricultural lending. This risk would be reducedthrough the agreements with GOP in the context of FSALand the provisions of this project.

PAKISTAN


TABLE OF CONTENTS

Page No

Loan/Credit and Project Summary .......................... (i)

I. INTRODUCTION .......... 1.......... 1

II. THE AGRICULTURE SECTOR ................................... 2

A. Agriculture in the Economy ........................... 2B. Performance under the Five-Year Plan .... ............. 3C. Government Policy and Bank Group Assistance

and Strategy ...................................... 4D. Farm Size and Land Tenure ............................ 4E. Role of Women in the Agriculture Sector .... .......... 5F. Agricultural Input, Support Services, and Machinery .. 5

III. THE FINANCIAL SECTOR ..................................... 7

A. The Banking System ................................... 7B. Credit Sources and Policy ............................ 7C. Resource Mobilization ................................ 8D. The Financial Sector Adjustment Program .... .......... 9

IV. AGRICULTURAL AND RURAL CREDIT ............................ 11

A. Policy on Agricultural and Rural Credit .... .......... 11B. The Agricultural Development Bank of Pakistan .... .... 12C. The Nationalized Commercial Banks .................... 13D. Targeted Credit ...................................... 15

V. PERFORMANCE UNDER PREVIOUS AGRICULTURAL CREDIT PROJECTS 17

VI. THE PROJECT .............................................. 19

A. Objectives and Rationale ............................. 19B. Project Scope ........................................ 21C. Summary Description .................................. 22D. Project Cost and Financing ........................... 22E. Procurement .......................................... 27F. Disbursement ......................................... 28

VII. PROJECT IMPLEMENTATION ................................... 30

A. Participating Banks as Executing Agencies .... ........ 30B. Credit Delivery Mechanisms ........................... 30C. Savings Mobilization ................................. 35

Page No

D. General and Financial Performance ..... ............... 36E. Accounts and Audit ................................... 38F. Environmental Aspects ................................ 39G. Linkages to Extension Services ....................... 40H. Monitoring and Evaluation ............................ 40I. Computerization of Land Records ..... ................. 40J. Agricultural Credit Research ......................... 41K. Supervision Planning ................................. 41

VIII. PRODUCTION. MARKETING AND PRIES ......................... 41

IX. BENEFITS. JUSTIFICATION AND RISKiS ........................ 43

A. Benefits ............................................. 43B. Beneficiaries ........................................ 43C. Economic and Financial Analysis ..... ................. 44D. Project Risks ........................................ 44

X. AGREEMENTS AND RECOMMENDATION .46

ANNEXES

1. Detailed Features of ProjectAppendix 1: Computerization of Land RecordsAppendix 2: Agricultural Credit ResearchTable 1: Project Components by Year

2. Table 1: Schedule of DisbursementsTable 2: Withdrawal of Loan ProceedsTable 3: Withdrawal of Credit ProceedsTable 4: Withdrawal of IFAD Loan Proceeds

3. rinancial Analysis of ADBPTable 1: Profit and Loss Statements and Performance Ratios of ADBP

FY86-89 (Actual) and FY90-94 (Projected)Table 2: Balance Sheets and Growth Indicators of ADBP FY86-89

(Actual) and FY90-94 (Projected)

4. Financial Analysis of NCBsTable 1: Profit and Loss Statements and Performance Ratios of All

NCBs 1984-88Table 2: Balance Sheets and Staff Productivity of All NCBs 1984-88

5. Recovery Action PlanTable 1: ADBP Recoveries FY77-89 (Actual) and FY90-93 (Projected)

6. Farm Mechanization

7. Legal Matters Assoclated with Pilot Programs(Arnexes Continued)

8. Lending through Pilot Programs

9. The Introduction of Credit Delivery Systems for Women

10. Marketing, Prices, Ecoromic and Financial AnalysisTable 1: Economic Rates of ReturnTable 2: Financial Rates of ReturnTable 3: Financial and EconomLc PricesTable 4: Supervidson Plan

11. Table of Contents for Implementation Volume

NMAP

IBRD 22060IBRD 22061

CHAT6

EK/U46268z

PAKISTAN

AGRICULTURAL CREDIT pROJECT

I. INTRODUCTION

1.01 In FY89, the Government of Pakistan (GOP), in consultation withthe International Monetary Fund and the World Bank, initiated a medium-termstructural adjustment program to address major macroeconomic imbalances andstructural problems. The measures for FY90-92 to achieve these objectives areset out in a Policy Framework Paper'/ (PFP). In support of GOP's program, theFund approved a three-year arrangement under the Structural AdjustmentFacility (SAF) as well as a 15-month stand-by atrangement. Within the PFPframework, three sectoral ad4ustment loans were approved by the Bank'sExecutive Directors: an Agricultural Sector Adjustment Loan (Ln. 2986-PAK), aFinancial Sector Adjustment Loan (FSAL, Ln. 3029-PAK), and a Second EnergySector Loan (Ln. 3107-PAK). Of particular interest here is the FSAL, whichsupports financial reforms needed for macroeconomic stability as well assustained economic growth.

1.02 Since 1965, six agricultural credit projects have been approved bythe World Bank Group and implemented by the Agricultural Development Bank -fPakistan (ADBP). In the period from FY79 to FY89, ADBP's share in totalagricultural credit volume in Pakistan grew from 19X to 60X. In 1988, as partof an effort to strengthen the agricultural credit system, the Government ofPakistan (GOP), jointly with the Bank, undertook a review of the system -- itsaccomplishments and shortcomings. The exercise was the responsibility of acredit review committee, chaired by the Economic Adviser of the State Bank ofPakistan (SBP). The resultant "Working Paper for Joint Agricultural CreditReview"2 / served as the basis for the proposed Agricultural Credit Project,supplemented by the "Preparation Report for ADBP VII"3/ of ADBP's PlanningDivision. The proposed project would for the first time include thenationalized commercial banks (NCBs) and thus capture about 80-85X of thetotal institutional lending to agriculture in Pakistan, the balance beingserved by the provincial cooperative banks. It would have innovative featuresin terms of creating a system for the delivery of credit to rural women andincreasing lending to small farmers with lholdings of 2.5 hectares (ha) or lessand the landless. Chapters 3 and 4 herein summarize the analysis of theagricultural credit sector discussed in detail in the Joint Agricultural

Pakistan: Second-Year Policy Framework Paper, 1989-90 to 1991-92,Pakistan Authorities, November 29, 1989.

"Working Paper for Joint Agricultural Credit Review", Volumes 1-5,March 1989, EMlAG.

"Draft Preparation Report for ADBP VII Project," May 1989, ADBP,Planning Division.

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Credit Review and, in addition, provide financial analysis of ADBP and theNCBs.11

II. THE AGRICULTURE SECTOR

A. Agriculture in the Econ2Wnr/

2.01 Agriculture, accounting for 24.1X of GDP, 51X of employment and54% of export earnings, is the mainstay of the Pakistan economy. In 1987-88,the total cultivated area (net area sown plus current fallow) was estimated at20.69 M ha; and the total cropped area (net area sown plus area sown more thanonce) was 20.8 M ha, giving an average cropping intensity of 1011, althoughintensity varies considerably across agro-climatic zones.

2.02 Of the total cropped area, 11.5 M ha (55.31) was devoted to foodgrains. Cotton and sugarcane, the major cash crops, covered 2.6 M ha (12.4X)and 0.8 M ha (41), respectively. The remaining 5.9 M ha (28.31) was coveredby fodder, horticultural crops and minor crops.

2.03 Gains in production have mainly resulted from expansion ofcultivabLi area and, more recently (to a limited extent), from theintroductioa of new technology. The potential for increasing cultivable areais now limited, and future increases in output must be derived from greaterp-oductivity. There is potential for productivity increases because averageyields of major crops are generally well below those achieved in otherdeveloping countries of the region. This requires the alleviation of a numberof constraints facing the sector as noted in para 2.04 below.

Appraisal and post-appraisal were undertaken in June/July andNovember 1989, respectively, by joint World Bank/InternationalFund for Agricultural Development (IFAD) missions, the formerconsisting of Messrs/Mmes. DMster, Lee, Qayyum and Sacay (Bank),Barltrop, Baillie, Cree, Lloyd, Mohiuddin, Nott, Smith-Saulniersand Shepley (Bank and IFAD consultants), and the latter byMessrs/Mmes. D(ster, Qayyum (Bank), Baldwin (IFAD), Smith-Saulniers and Tasker (IFAD consultants). Mr. Hamid provided anevaluation of the legal issues. Ms. Blinco edited the report, andMs. Burnett handled the word processing.

Sources: Economic Survey 1988-89, Finance Division, GOP, May 1989.The State of Pakistan's Trade 1988-89, Ministry of Commerce, GOP,June 1989.Pakistan Medium-term Economic Policy Adjustments, IBRD, ReportNo. 7591-PAK, March 1989.

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2.04 According to agricultural census data (1980),'/ 74% of Pakistan'sfarms, covering 38% of cultivated area, are less than 5 ha in size. Smallfarmers generally lack facilities that would permit more efficient use ofwater resources, access to improved seeds and increased use of fertilizers,all of which will be the major factors in increasing cr.opping intensities andfuture yields. This should be facilitated by better access to credit andwider dissemination of new technologies through research and extension forsmall farmers.

2.05 Pakistan has a narrow export base, dominated by the agriculturesector. The structure of exports has changed in recent years, with the shareof primary commodities, notably rice and cotton, in exports falling from 43.8%in 1980-81 to an estimated 31% for 1988-89. Still, raw cotton accounted forabout 20.3% of total export value.

2.06 Agricultural commodities also account for a significant share inPakistan's imports. In 1983-84, wheat imports stood at 291,000 tons, thelowest level since 1970. Since then, the area planted has fluctuated,declining by 5.2% in 1987-88 but increasing by 5.7% in 1988-89, whenproduction grew by 13.4% despite adverse weather conditions for both sowingand harvesting. The fear of a reduced harvest caused by widespread floodingled to imports of 2.7 M tons in that year. In 1988-89 also, edible oilsconstituted 7% of total imports.

B. Performance under the Five-year Plan

2.07 In spite of significant achievements in a few crops, efforts toaccelerate growth of the agriculture sector had only partial success duringthe Sixth Plan period (1984-88). Average annual growth is estimated at 3.9%,compared with the Plan target of 4.9X. Impressive gains were limited to theproduction of wheat and cotton, with gains attributed to wider use of farminputs and the availability of agricultural credit. The output of rice andsugarcane was below the Plan targets. Shortfalls have been attributed to thepoor performance of the water subsector.

2.08 Diversification towards high-value orops and non-traditionaloilseeds was not achieved. This points to the need to direct research,extension and other services more systematically to achieve cropdiversification.

2.09 In financial terms, it is estimated that budgetary disbursementswere about 65% of Plan requirements. Major shortfalls were registered inexpenditures for storage, oilseeds, cooperatives and soil conservationprograms. Expenditures for education, extension and research exceeded Planallocation. The largest drain on resources was the fertilizer subsidy,estimated at Rs 9.1 billion, three times the allocation. This overrun had anegative effect on expenditures for agricultural services which amounted to Rs7.9 billion, compared with an allocation of Rs 12.1 billion.

I The next census is being conducted in 1990.

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C. Government Policy and Bank Group Assistance and Strate&Y

2.10 The major objective of GOP in agriculture is to increaseproductivity as the means to attain food self-sufficiency and to increaseagricultural exports. It also seeks to generate rural employmentopportunities through diversification into more labor-intensive high-valuecrops such as oilseeds and fruit. GOP's agricultural strategy consists ofstrengthening rural institutions to improve the provision of servicesessential to the farming population and at the same time encouraging privatesector participation in the distribution of agricultural inputs. Efforts havealso been made to improve commodity prices by moving them closer to borderprices, while gradually eliminating subsidies. However, water, fertilizer andcredit continue to receive subsidies.

2.11 The expansion of agricultural credit is a major feature of GOPpolicy to spur agricultural growth. During the past 10 years, agriculturalcredit has expanded considerably, although the pace has slowed down duringFY89. The agricultural credit system has contributed significantly to anincrease in agricultural investments. Increase in future yields, croppingintensities, agricultural productivity, and employment opportunities dependsto a large extent, however, on small farmers who have had limited access tocredit, as well as other inputs and technology.

2.12 The Bank Group has continued to support growth in the agriculturesector through projects in water management and drainage, research andextension, and agricultural credit. The Bank is also expected to fosterdomestic resource mobilization through cost savings and subsidy reduction inagriculture within the framework of the Agricultural Sector Adjustment Loan(Loan. No. 2986-PAK), and rationalization of investment in agriculture,particularly by optimizing the use of existing irrigation facilities. Inaddition, the Bank would support an attempt, being made for the first time, tointegrate women into the Supervised Credit System of ADBP on a national scale(para 2.15).

D. Farm Size and Land Tenure

2.13 The average landholding, as recorted in the 1980 agriculturalcensus, was 4.7 ha, compared to 5.2 ha in 1972. The average landholding inthe below-5 ha category (74% of farms) was 2.2 ha; the 5-10 ha category (17X)averaged 6.6 ha per farm; and the above-10 ha category (9%) averaged 21.1 ha.Furthermore, 2.2 M farms (55%) were owner-operated and the remaining 1.8 M(45%) tenant or tenant-cum-owner operated. Farm size and land tenure havedirect bearing on the access to institutional credit. Obviously land ownershave easier access since most lending is collateral-based and land remains themost commonly used form of collateral.

2.14 Of the 9 M rural households, about 3 M are small farmers below5 ha, of which at least half are tenants, and 1.5 M are landless livestock-holders. This target group needs to be focussed upon for the delivery ofcredit with a flexible non-traditional collateral system since it has little

traditional collateral to offer, which would be accomplished under theproposed project.

E. Role of Women in the Agriculture Sector

2.15 Women constitute about 48% of the rural population in Pakistan.They are an integral part of the rural economy and participate extensively incrop production, post-harvest activities, livestock and poultry production andcottage industries. However, their economic activities are underestimated insuch official data as the annual labor force surveys and the 1981 populationcensus. Only the 1980 agricultural census found that the rate of female laborforce participation in agriculture was 73%, and that women constituted about42% of all workers (25% of full-time and 75% of part-time) in agriculturalhouseholds. This finding is consistent with micro-level surveys. Althoughwomen's agricultural roles vary across regions, depending on farm-size, tenurestatus and caste, women participate extensively in most operations of cropproduction (sowing, weeding, harvesting), most post-harvest activities(threshing, husking and storage), poultry and livestock production and cottageindustries. They also fetcb water (for the family and livestock), fuelwoodand fodder, often from great distances. Surveys show that these activities,along with housework, typically take 12-15 hours per day. The surveys alsoindicate that women have substantial control over decisions and resources inthe activities for which they are responsible, e.g., seed selection, croppingpatterns, inputs, technology, etc. The contribution of women to family incomein livestock households is estimated at 15%. Evidence suggests that womenspend a greater proportion of their income on the family than men do -- onchildren's food, health and education. Rough estimates show that over 60% ofwomen's incomes are used to meet family food requirements and another 20% forsavings. Despite their contribution to labor, output and decision making,women, like small farmers, have limited access to inputs, credit andtechnology. Thus, efforts to put credit resources at their disposal, eitherdirectly or indirectly, may lead to increases in productivity of women-specific agricultural and non-agricultural activities. The proposed projectwould earmark a specific amount of credit for women.

F. Agricultural Inputs. Support Services. and Machinery

2.16 Fertilizers. Seed. and Pesticides. The consumption of fertilizersincreased at an average annual rate of 8.8% between FY83 and FY88, despite a3.3% decline in FY84 and another 3.6% decline in FY88. These setbacks weredue to inclement weather, either excessive rains/floods or drought, thatdamaged the principal kharif (rice and cotton) and rabi (wheat) crops. DuringFY89, consumption is estimated at 1.8 M nutrient tons, a 4.2% increase overthe previous year. Average use of fertilizer per hectare rose from 62 kg inFY83 to 86 kg in FY88, while the nitrogen:phosphorus (N:P) ratio improved from3.6:1 to 3.3:1 during the same period.

2.17 The use of improved seed during FY83-88 increased, on average, byabout 10% annually. Coverage of cropped area increased from 1.6 M ha to 2.9 Mha in the same period, showing 15% annual growth. While _iese indicators showa positive trend in the use of various farm inputs, there are significant

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differences in use among farmers. Small landholders and tenants, usuallyconstrained by their access to credit, use these inputs much below thenational averages and the optimally recommended levels.

2.18 Agricultural Extension and Research. The provincial extensionservices, deployed throughout the country, are responsible for promotingagricultural technologies and disseminating appropriate recommendations to thefarming community. However, tbese services have often nof 3atisfied emergingneeds, largely because, until a few years ago, the extens. n departments wereunderstaffed, ill-equipped, and their organizational structure and methodsoutdated. The links between extension and research are weak. Through aseries of IDA-assisted projects (Credits 813-PAK, 922-PAK, 1461-PAK, 1533-PAKand 1762-PAK), the strengthening and streamlining of the extension servicesare underway. Extension-research linkages are developing, research findingsare increasingly adopted at the farmers' fields, and awareness of the need todevelop and disseminate appropriate extension messages is growing.Improvements in the organization and mobility of extension staff arecontributing to a rise in their morale. Simultaneously, development of anefficient agricultural research system at the federal and provincial levelswould further sharpen the effectiveness of the extension services. Two IDA-assisted agricultural research projects (Credit 1158-Pak, and the secondresearch project in the final processing stages) focus on systemwide needs atboth these levels.

2.19 Tractors. In 1984, the agricultural machinery census indicatedthat tractors are used on 31% of the cultivated area. There is considerablepotential for expansion of tractor usage to a larger cultivated area, theextent depending on several factors such as terrain, type of farming and sizeof holding (see Annex 6 for discussion of manufacturing, cost andsocioeconomic and agricultural benefits of tractor use). The Seventh Plan(FY89-93) projects 6.1% annual growth in operational tractor units, from221,000 in FY88 to 297,000 in FY83. Due to the projected heavy demand onmanufacturing capacity for tractor replacement, however, a 2% annual increaseis more likely. The five manufacturers in Pakistan mainly produce 45-59 hp(85% of sales) and 60-75 hp (15% sales) tractors. Units sold were 24,000 inFY89, down from a 31,000 peak in FY84. End-1989 prices ranged from aboutRs 175,000 (US$8,290) for 50 hp to Rs 256,000 (US$12,130) for 75 hp machinesand are now broadly comparable with CIF Karachi prices. Farmers increasinglyrely on ADBP as the primary source of borrowing for tractor purchases. InFY88, its tractor lending was Rs 2,651 M (US$125.6 M) for 20,288 units(equivalent to 98.5% of total sales in Pakistan), and in FY89, Rs 2,899 M(US$137.4 M) for 19,725 units (82.2%). Tractor sales not financed by ADBP arepurchased with farmers' equity or financed by other banks.

2.20 The major benefits of tractor usage are better yields due totimely and deeper ploughing, increased cropping intensity and more financiallyoptimal cropping patterns, all resulting in increased agriculturalproductivity. Other benefits are increased income-earning opportunities forfarmers in tractor-hire activities and for farm laborers due to increaseddemand for casual and permanent labor on farms owning and hiring tractors,while there is reduced demand for family labor on tractor-owning farms.

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III. THE FINANCIAL SECTOR

A. The 1anking System

3.01 The banking system in Pakistan is composed of: (a) the State Bankof Pakistan (SBP); (b) 24 commercial banks (five NCBs and 19 foreign-owned)and four specialized banks including ADBP, all of them known as the scheduledbanks, which take deposits and dominate the sector; (c) 14 non-bank financialinstitutions (NBFIs), mostly owned by GOP, supervised by the Ministry ofFinance, and funded primarily by SBP; and (d) some collective investmentinstitutions which operate mutual funds. An informal parallel market providesdeposit taking, lending and foreign exchange. In FY85, only 41% of all farmhouseholds had access to credit. Of these, only 15X were served from formal,and 85X from informal sources, represented in declining importance by friendsand relatives, marketing intermediaries, landlords, and others (Annex 11,Implementation Volume).

3.02 The scheduled banks focus on general banking services and short-term lending, except ADBP which specializes in medium-/long-term lending,while the NBFIs focus on specialized long-term lending. The five NCBs'/handle nationwide commercial banking through an extensive network of branches.International business and the growing private sector are targeted by the 19foreign-owned banks. Agricultural lending is dominated by ADBP, one of thefour specialized banks, with a share of 60.01 (FY89); NCBs supplied a 21.1%share and the Federal Bank for Cooperatives (FBC) supplied 18.9%. The bankingsector was reviewed in June 1987 in connection with the FSAL which is designedto eliminate distortions in the sector within the macro-economic adjustmentprogram of the country (paras 3.09-3.13).

B. Credit Sources and Policy

3.03 Pakistan has experienced difficulties in keeping governmentexpenditures in line with revenues. It has yet to introduce indirect controlsover money supply, and thus uses direct credit controls on the banking systemthrough the imposition of credit ceilings to manage inflation. The scheduledbanks allocate resources in accordance with mandatory guidelines provided bythe National Credit Consultative Council (NCCC) chaired by SBP. The creditceiling is set by the NCCC at the beginning of the financial year and reviewedafter six months, based on its evaluation of the needs of the economy andmoderated by the need to control inflation through limits on the expansion ofbank credit. Any increment in the ceiling is allocated to state-owned

1 In order of increasing size: Allied Bank Ltd (ABL), MuslimCommercial Bank Ltd (MCBL), United Bank Ltd (UBL), National Bankof Pakistan (NBP) and Habib Bank Ltd (HBL).

co'mpanies and the private sector, the latter channelled through the banks.The requirements of the NBFIs and ADBP are met before those of NCBs.

3.04 The penalty applied for exceeding the credit ceilings are: a 100linterest-free deposit at SBP for the first week of the excess (or a 17X p.a.fine), 2001 deposit for the second week (or 341 fine) and 300X deposit (or 511fine) for the third and subsequent weeks. NCBs are also given mandatorytargets by the NCCC, e.g., for lending to agriculture, which they have to meetwithin their allocated credit ceilings. The penalty for not meeting mandatorytargets is a 1001 interest-free deposit equivalent to the amount of theshortfall.

3.05 The scheduled banks gather demand, savings and time depositsthrough a network of over 7,100 branches, of which the NCBs have 6,664branches, including some 100 overseas. Interest rates on deposits weretightly controlled by SBP when the interest-based system was in force. Thechange-over in 1984 from interest-based to Islamic banking principles (payinga fair return on funds based on an allocation of the banks' profit todepositors) increased the banks' flexibility in compensating depositors. Atthe same time, ceilings on lending rates for investment credit were removedand short-term loans, except those on concessional terms under the mandatorytargets for agricultural credit (para 3.04), may carry rates between 101 and201. Deposit rates are determined retroactively twice a year on the basis ofthe banks' profitability during the preceding six months. As a result, mostlending and time deposit rates have remained significantly positive in realterms since the early 1980s.

3.06 Despite the liberalization in interest rates brought about by theIslamization of banking, the financial markets continue to be segmented due totwo major factors: (a) GOP debt continues to dominate the financial sector anddistort the rate structure, and (b) credit is by and large still allocated.The fiscal deficit grew from 5.31 of GDP in the early 1980s to 8.6% of GDP in1988 and, as a consequence, domestic debt rose from 251 of GDP in FY81 to over401 in mid-1988. GOP finances this debt through reserve requirements whichbanks are required to maintain with SBP in the form of government paper at lowrates, i.e., 51 as cash and 30% in treasury bills at 61 interest. On theother hand, GOP pays very high rates on national savings schemes for the non-bank public by exempting their earnings from income tax.

C. Resource Mobilization

3.07 The major offices of NCBs are located in urban centers %herebanking business is concentrated. After nationalization in 1974, their ruralactivity increased under a GOP program requiring branch expansion to ruralareas and participation in agricultural lending. According to a PakistanBanking Council (PBC) study, in FY88 rural deposits accounted for 291 of total

NCB deposits'/ or the equivalent of Rs 75.1 billion in total deposits ofRs 259 billion as of June 30, 1988. Of the rural deposits, Rs 26.3 billionequivalent to 35% had to be held in SBP to meet the reserve requirement andRs 6 billion was the stock of agricultural loans outstanding, resulting in anet availability of Rs 42.8 billion in rural funds to NCBs for their urbanoperations.

3.08 ADBP, for its part, has only recently attempted to mobilize ruralsavings to support its own lending program. This lag is in part due to NCBsbeing better equipped for deposit taking and because GOP provided easieralternatives. ADBP has relied on funds provided by SBP at below-cost,supplemented by long-term foreign currency borrowings for which GOP assumedthe foreign exchange risk. These funds were provided at 4%, starting fromFY80. Based on ADBP's improving financial performance as determined in jointannual reviews with the Bank, this implicitly subsidized rate was increased to5% in FY87 and 6% in FY89. While ADBP is under pressure to increase itsdomestic deposits for which, on average, it would have to pay 6.5-7.5%depending on the composition by maturity, its branches are generally notsuited to deposit generation because of inadequate facilities and services fordepositors, and in only a few cases, are they located in commercial centersand markets. ADBP needs to initiate a cohesive marketing program based on atwo-pronged approach: first, developing branch facilities suitable for deposittaking and offering competitive and quality services, and second, using itsmobile credit officer (MCO) system for collecting small deposits at thedoorsteps of farmers (para 7.15). Such an approach, coupled with offeringcompetitive deposit rates and an effective public image-building program,should result in a significant increase in deposits.

D. The Financial Sector Adiustment Program

Contents

3.09 To address the issues in the financial sector, and with Bankassistance through the FSAL and ongoing financial intermediation operations,GOP initiated in 1987 a major financial sector reform program. The objectivesare to: (a) improve GOP debt management by introducing an auction system forGOP debt and reducing taxation on the financial sector (a concomitantreduction of the fiscal deficit is a condition under the macroeconomicadjustment program); (b) reduce segmentation by raising concessional interestrates and limiting directed credit schemes; (c) strengthen the prudentialsupervisory functions of SBP, including a more accurate appraisal of the realvalue of the NCBs' assets; restructuring-recapitalizing those NCBs that areshown to be deficient; and strengthening and unifying the legal and regulatoryframework governing the banking sector; (d) increase competition by improvingthe autonomy and accountability of bank managements, easing market entryrequirements for private domestic banks and moving towards privatization ofthe NCBs and developing the capital markets. The aim is to arrive at a

Excluding urban deposits of large landholders which vould add anadditional 7%.

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defined first phase of reforms. These reforms would be pursued and deepenedby succeeding financial sector adjustment loans and financial intermediationoperations, including the proposed project.

Timetable and Status of Reform Program

3.10 Management of Domestic Debt and Money SuDolv. In 1990, a debtfinancing and management strategy is to be put in place that would enable GOPto meet its financing requirements in a market-based manner, facilitatemonetary control, reduce segmentation of financial markets and develop thecapital markets. Auctioning of GOP securities is to start before the secondtranche release of FSAL. When the mechanism is firmly in place, the auctionyields would serve as the reference rates for GOP and other debt securitiesand for interest rates in the credit markets. In the longer term, as theauctioning of GOP debt leads to a fuller development of secondary markets,open market operations would be introduced and the system of credit ceilings,as an instrument of monetary control, would be reformed accordingly.

3.11 Directed Credit and Concessional Credit Schemes. With regard tocredit allocation and concessional credit schemes, the first stage of thereform process involves raising concessional interest rates to positive reallevels and freezing their volume at their relative FY89 levels. Eventuallycredit targeting would be abolished, leading to a market-based allocation ofcredit. In FY88, concessional credit schemes for small farmers, locallymanufactured machinery, exports, housing and general agriculture accounted forabout 33X of total bank credit. Before release of the second tranche,interest rates on all concessional credits are required to become positive inreal terms. Moreover, the volume of rediscounting by SBP for concessionalcredits has been frozen at the FY89 ratio to total credit outstanding.Finally, mandatory credit targets for lending to agriculture, fixed industrialinvestment and small-scale industries and businesses have been limited as apercentage of total incremental credit to the private sector at the FY89level.

3.12 Bank Supervision and Restructuring. As a condition of the firsttranche of the FSAL, the prudential regulations for banks on loanclassification, provisioning, interest income accruals, and exposure limitswere revised to reflect international standards. Portfolio audits wereconducted to uncover and qualify portfolio problems on the basis of theserevised regulations. The NCBs are to be recapitalized by end-1991 to achievean interim target of a capital-to-liability ratio of 3X. In future, a risk-weighted capital adequacy ratio based on international standards would berequired. A second and more thorough portfolio audit has been completed andthe restructuring plans of the NCBs based on these audits are underpreparation. Satisfactory progress in the implementation of the restructuri-..gplans is a condition of second tranche release. Finally, technical assistrnceto improve SBP's capability to supervise both banks and non-banks is beirgprovided under FSAL.

3.13 Competition. Since bank nationalizations in 1974, privatedomestic banks have not been allowed to open. In recent years GOP has only

11 -

allowed the establishment of private leasing companies. The impact of foreignbanks on competition has been limited to trade financing and corporatebanking. As part of the reform program, GOP is licensing private domesticinvestment banks which would have all the functions of commercial banks exceptfor demand and short-term deposit taking. Eventually, as the bank supervisoryframework' is improved, they are to become full deposit banks. As part of therestructurIng of the NCBs, partial privatization would be implemented and theywould become more autonomous and competitive among themselves. At the sametime, the authority of PBC1' has been reduced, with significantly moreautonomy being given to the management of NCBs. While a key objective of theFSAL program is the strengthening of bank management teams, its successdepends on putting in place the prerequisites of sound management:(a) managerial control over the institutions' lending portfolios, (b) aneffective, uniformly applied prudential surveillance and inspection process bySBP, and (c) a sound budgeting and planning process. To achieve theseobjectives, the banks have to develop a cost-effective management informationsystem and a result-oriented staff incentive system adequate to attract andmotivate the best bank managers. Additionally, it will be an importantprerequisite to efficient management that the control over staffing, which attimes had been exercised by PBC and lately directly by GOP, be returned to thebanks' managements (para 7.13).

IV. AGRICULTURAL AND RURAL CREDIT

A. Policy ona Agricultural and Rural Credit

4.01 COP's policy of credit expansion has led to the development of twodistinct delivery channels for agricultural credit based on the source offunds. The first is represented by ADBP and FBC, two specialized banks set upto meet the credit needs only of the agriculture sector. These agencies aredependent on SBP funds in varying degrees, and, in the case of ADBP, also onfunds derived from foreign borrowing, notably from the World Bank, the AsianDevelopment Bank (ADB) and IFAD. The second channel is represented by thefive NCBs which lend from their own resources that are raised throughdeposits.

4.02 At present, agricultural credit can expand only within thelimitations imposed by credit ceilings set by the NCCC (paras 3.03-3.04).Credit targets for agricultural lending by each NCB are mandatory targets setby NCCC, while those for ADBP and FBC virtually represent fund allocationsfrom SBP. Banks are under penalty for exceeding credit ceilings and/or fornot meeting mandatory targets. Since the penalty for exceeding creditceilings is more severe than t-he penalty for not meeting mandatory targets,

± At times, the PBC functioned as a cross between a board ofdirectors and a prudential supervisory authority. It developedpolicy and procedural initiatives and required implementation bythe managements of the NCBs, who functioned more as administratorsthan independent managers.

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banks are disposed occasionally to sacrifice agricultural lending in favor oflending to safer and more lucrative sectors. In the longer term (para 3.10),these monetary steering instruments would be replaced by market allocation ofresources to which GOP is committed. The proposed project would set the stagefor such market allocation to work in agricultural credit.

4.03 Between 1979 and mid-1988, short-term agricultural lending wasmade available on an interest-free basis in the cooperative sector and byNCBs. They were compensated through a direct subsidy from GOP. Claims forcompensation grew from Rs 4 M in FY81 to Rs 754 M in FY88, about 0.5% ofagricultural GDP or 0.1% of GDP. The interest-free policy was abandoned inFY89 because of blatant misuse and diversion of funds to other than theintended small farmer borrowers, and a mark-up of 8% was introduced. Whilethe lending for such concessional credit is close to being positive in realterms, it still does not cover the full cost of agricultural lending. GOPcontinues to provide a modest subsidy of 2% and a partial guarantee, but themajor burden of implicitly subsidizing agricultural credit still rests on theNCBs (para 4.11). Under a covenant with the World Bank, all loans granted byADBP have to bear a rate of return which should fully cover its costs,although such loans also contain an implicit subsidy since the funds providedby SBP are below the cost of generating deposits (para 3.08). The rate ofreturn has been 12% per annum since the introduction of Islamic banking in1984. This situation has not provided ADBP sufficient incentive to generateits own resources from deposits. Because of the politically sensitive natureof agricultural credit, it would not be feasible to discontinue concessionalrates all at once. The program under the proposed project is designed toincrease access to institutional credit by those farmers who have not hadaccess so far and had to rely on high-cost informal sources of credit. Tothat extent, the credit directed at target groups would, for a limited periodof time, continue to be extended at rates which do not cover all lending-related costs.

B. The Agricultural DeveloRment Bank of Pakistan

General DescriRtion

4.04 ADBP is the main institutional source of investment credit fotagriculture. It was established in 1961 with the merger of the thenAgricultural Development Finance Corporation and the Agricultural Bank ofPakistan. The organization is governed by a board of directors composed of achairman and 11 members, all of whom are appointed by the federal government.The chairman acts as the chief executive of the bank. The ADBP enjoys somemeasure of autonomy in the conduct of its operations.

4.05 ADBP is divided into 11 divisions which are managed by executivedirectors. These divisions are subdivided into departments headed bydirectors. In all, there are 42 departments. Field operations are conductedby a network of 47 regional offices, 276 branches, 54 field/valley developmentoffices and a team of 1,350 mobile credit officers (MCOs). Coverage by theMCO system has been expanded to 41,115 villages out of a total of about 47,000villages in Pakistan. However, there is no agricultural activity in most of

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the remaining villages. At the end of FY89, total staff strength was 7,688including 4,050 professional staff.

Progress and Main Achievements

4.06 ADBP has played a significant role in financing farm investments,as evidenced by its growth rate and share in volume of agricultural creditdisbursed (para 3.02). In the process, it has established an elaborate creditdelivery system to reach about 155,000 farmers annually. Nonetheless, thisrepresents less than 4% of all farms and less than 2% of all rural households.ADBP has developed a corps of MCOs which has increased farmers' access tocredit, while at the same time containing the administrative cost of lendingat relatively low levels (2.4% of average assets). It has made significantstrides in transforming itself into a financially viable, specializedagricultural credit institution. Its recovery rate steadily improved from 36%in FY79 to 72% in FY88, but declined in FY89 (para 4.07). Cumulative recoveryhas been 92%. Adequate provisions have been made (43% of past dues at the endof FY89). A sound debt-equity ratio of 7:1 was established and adhered to.

4.07 Beneath this impressive growth, ADBP has shown some weaknesses.Efforts to generate its own resources were not wholeheaited: despite SBP'sinstructions, there was no vigorous plan and implementation program tomobilize rural deposits and hence the efforts were only marginally successful.Also, problems in administrative policies, redundancy in staffing andorganizational structure, deterioration of the training unit, and weaknessesin the management system have surfaced. The lack of continuity in leadershiphas started to affect its effectiveness as a pre-eminent developmentinstitution. Qualitative performance has not been maintained at previouslevels. For the first time in raecent years, in FY89, ADBP suffered asignificant decline in repayment, from 72% in FY88 to 64%. To recover lostground, ADBP, in cooperation with the Bank, has developed a satisfactoryaction program (Annex 5) which is being implemented. First results toFebruary 1990 are encouraging. In July 1989, a new chairman with privatesector management experience was appointed. Articulated top priorities are toincrease the efficiency of ADBP's credit delivery system and to implement theaction program geared toward improving recoveries. In addition and in linewith the main focus of the project (para 6.01), ADBP intends to increase itsreach to a wider range of farmers, particularly small farmers, the landlessand women. The project would also aim at improving ADBP's decliningprofitability by raising rates of return to achieve adequate capitalformation. The financial analysis of ADBP is presented in Annex 3.

C. The Nationalized Commercial Banks

General Description

4.08 All 13 then privately-owned banks in Pakistan were nationalizedunder the Nationalization of Banks Act of 1974. The banks were regrouped andreduced to five. Outstanding stock is almost entirely held by SBP (93%) andthe rest directly by GOP and other stockholders. The orgarnizational structureof these banks is similar, with the common feature of decentralization at the

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provincial level. Each of the five banks operates four provincialheadquarters which supervise circle offices. These offices in turn bupervisezonal offices under which the brav.ehes fall. The largest bank is HBL whichoperates 24 circle offices, 76 zonal offices and 1,815 branches. The smallestis ABL which operates 8 circle offices, 27 zonal offices and 691 branches.T%;gether, five NCBs operate 71 circle offices, 231 zonal offices and 6,664branches, many located in rural communities. This network of branchesaccounts for the high level of accessibility of NCBs as a source ofagricultural credit.

Progress and Main Achievements

4.09 Exposure of NCBs to agriculture consists of only 5% of their totalloan portfolio, as compared to an estimated 29% (para 3.07) of depositsgenerated in rural areas. Although agriculture represents a very smallproportion of their credit operations, NCBs provide a significant volume (21%or Rs 3.1 billion of Rs 14.5 billion in FY89) of institutional creditdisbursed to the agriculture sector. Because of the commercial nature oftheir operations and the lack of profitability in agricultural lending, NCBshave not shown any enthusiasm in expanding lending to agriculture and only doso as mandated by GOP. NCBs primarily extend short-term loans which qualifytowards the fulfillment of their mandatory targets for agriculture, however,also development loans are counted to meet up to 15% of the mandatory targets.

4.10 Before June 1988, an artificial demand for loans was created,because of the interest-free nature of loans granted by NCBs. Multipleborrowing and misallocation of loans became rampant. To curb the practice ofa single borrower obtaining loans from different bank branches for the samepurpose, the "lead bank" system was introduced in FY87. Under this system,only one bank branch is permitted to extend agricultural loans in each unioncouncil/town committee. Phase I of this system was implemented covering 1,973union councils/town committees. Phase II was implemented in FY89 covering therest of the country with 2,553 union councils/town committees or a total of4,526. Because of the mandate for NCBs to establish branches wherever thereis a population of 5,000 or more, many small rural branches have been reducedto deposit-taking activities. The system has effectively controlled theproblem of multiple borrowing, but at the same time it has substantiallyreduced NCBs' agricultural loan disbursements and has led to a consequentialdecline of NCBs' share in institutional credit disbursed to agriculture --from 46% in FY87, to 33% in FY88, and 21% in FY89. The expansion of the leadbank system was carried out with no net increase in the number of agriculturalcredit officers (ACOs). The problem of the lack of supervision, therefore,has not been resolved because of the freeze on hiring additional staff.

4.11 In July 1988, a mark-up of 8% on production loans was imposed bybanks. SBP provided a subsidy of 2% and a guarantee of 50% of loan losses.However, while SBP maintains that the 8% mark-up should have been charged onan annualized basis, NCBs actually charged it on a seasonal basis due toambiguous SBP instructions in this respect. This practice gave NCBs aweighted average rate of return for short-term loans of about 11% per annum,composed of 5.5% for sugarcane with an 18-month season, including three months

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for recoveries, and 15.5% for all crops having a season of six to eight months

including recovery. A reduction of the mark-up to 7% on a per annum basis was

announced by GOP in December 1989. While the maximum loan per acre was kept

at Rs 1,200, a ceiling of Rs 14,000 per loan was introduced, thus limiting the

effective farm size with access to such concessional terms to 4.7 ha. An

increase of the subsidy paid to the NCBs from 2% to 3% is still under

discussion. The rate of return for investment loans charged by NCBs is 11%.

It is evident that while the rates are positive in real terms,'/ the

agricultural lending operation of NCBs is financially unviable. This is

reflected in their lack of enthusiasm to expand agricultural lending and

develop their institutional capabilities to deliver, supervise and collect

loans. Despite these institutional limitations and the lack of tangible

assets of borrowers to serve as collateral, NCBs have, under the mandatory

targets set by SBP, reached a large number of small farmers and have achieved

a respectable collection rate of 84% one year after loans have fallen due.

The impact of the lead bank system may further improve repayment. The

financial analysis of NCBs is in Annex 4.

D. Targeted Credit

Small Farmers and the Landless

4.12 It is one of ADBP's policy objectives to extend credit to small

farmers in general. Following the GOP definition, ADBP classifies subsistence

farmers as those with 5.1 ha or less21 in PunJab and NWFP, farmers below

economric size as those from 5.1 ha to below 10 ha, and farmers with economic

size as those above 10.1 ha. The corresponding figures for Sind are 6.5 ha

and 13 ha respectively, and for Baluchistan they are double those of Punjab

and NWFP. ADBP has made some progress in reaching subsistence farmers by

increasing the share of its general credit lending going to this category from

21.2% in FY83 to 46.9% in FY89. This indicates an effort to increase the

number of subsistence farmers being served, but, within this group, much

remains to be done for those owning less than 2.5 ha, the landless and other

target groups like rural women.

4.13 ADBP's experience with targeting credit to very small farmers and

landless peasants is limited and has involved three initiatives since 1984.

The first, a credit scheme to finance income-generating enterprises among

households of 2 ha or less, covered only 10 villages in the Gujranwala

District. In 1985, it was incorporated into a larger scheme in the same

district, supported by IFAD and implemented over five years, which focused on

farmers owning not more than 2 ha of irrigated land or 4 ha of rainfed land,

The inflation rate as measured by the GDP deflator was 9.2% in

FY89. It is projected to be 8% in FY90, 6.8% in FY91 and 6.0% in

FY92. However, it fell to below 6% in the first half of FY90.

Of irrigated land. One ha of irrigated land is assumed to be

equivalent to 2 ha of barani land.

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landless persons with assets worth not more than the local market value of 1ha of irrigated land, and rural women. Disbursements were largely for dairypurposes to landless (38X) and to small farmers (31X) and for cottageindustries (28%). By FY89, Rs 110.9 M was disbursed utilizing 30 MCOs,including 3 couple mobile credit officers (CMCOs) (para 4.17). The recoveryrate was 74% in FY88, but dropped to 621 in FY89 -- still better than the 561recovery rate for general credit in Gujranwala District.

4.14 The third initiative, the Rural Credit Scheme, was started inOctober 1987 and expanded nationally using 42 trained male functional mobilecredit officers (FMCOs, Rural Credit) each assigned to one union council perregion. During FY88 and FY89, disbursements were Rs 45.5 M, with the largestnumber of loans also for dairy farming (77%). The recovery rate in FY89 was60%. While mark-up free credit was being granted by NCBs, borrowers werelimited to subsistence farmers with not more than 5.1 ha or equivalent. Themaximum loan size was Rs.12,000. With the advent of mark-up bearing loans, aholding size limitation was no longer imposed, but a limitation on loan sizewas still applied.

4.15 Compared to ADBP, NCBs have reached more small farmers andlandless groups because of the 5.1 ha holding limit previously imposed by GOPfor access to interest-free loans. With comparable lending volumes in recentyears, NCBs served six times as many borrowers, partly because of type ofloans (production rather than development), with the average loan size beingone-fifth that of ADBP. The NCBs' minimum security requirement -- twosureties or guarantors -- has allowed landless farmers to L. in access to bankloans. Only 21% of NCB loans are secured by passbooks. On the other hand,831 of ADBP loans are secured by passbooks, indicating that ADBP is generallyless accessible to small farmers and the landless.

Women

4.16 Women need credit to buy inputs (seeds, saplings, and vaccines,for example), better equipment (rice-huskers, fodder-choppers, fruit-dryingtents, and sewing machines), and improved household technology (more efficientstoves and handpumps, for example). However, women are severely constrainedby the practices and procedures of financial institutions in meeting theircredit needs. Both supply and demand factors explain women's limited accessto institutional credit, but supply factors are more important. They includebanks' unwillingness to lend to small borrowers in general, and to women, whotend to bo small and inexperienced borrowers, in particular. In addition,women seeking credit often lack collateral and there is difficulty inidentifying guarantors for loans to women. Moreover, financial institutionslike ADBP and NCBs do not have female staff in rural areas to cater to femaleborrowers. The presence of female staff is usually considered a preconditionfor women to borrow in a society segregated by gender, although tradition alsoimposes limitations on the female staff as they cannot travel unescorted witha male driver. On the demand side, women are inhibited by custom from seekingcredit because male family members traditionally act as links between thefamily !'it and all commercial, legal, and political structures. It is notsocially acceptable for women to travel to bank offices or to engage in

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financial transactions on their own, especially with male bank officersbecause of cultural strictures. Moreover, application procedures areparticularly cumbersome and time-consuming for poor, often illiterate women.(A detailed analysis of the issues facing women with respect to access tocredit is summarized in Annex 9. Details about the credit delivery system forwomen are in Annex 11, Implementation Volume).

4.17 A major limitation in expanding the accessibility of credit towomen is the availability of female staff to process the loans of womenborrowers. To address these constraints, in 1985, ADBP introduced the conceptof the couple mobile credit officer (CMCO) into the Rural Credit Scheme. TheCMCO team consists of a male MCO who extends general and special loans to maleborrowers and his wife who processes, disburses, supervises and recovers theloans made to women. Despite this provision, women have received barely 5X oftotal loans disbursed under the project. Direct lending to women needsgreater expansion through an increase in the number of female MCOs and CMCOs,broadening of allowable security systems for loan guarantees, and anappropriate incentive system. Areas best suited for expansion are those withscope for development of small-scale enterprises (SSEs) and where women playactive roles in the farm and livestock households (Annex 9).

4.18 The NCBs' delivery system for rural credit to women consists ofregular credit channels, and credit through special women's facilities. NCBhas established three women's branches in major urban centers in 1989, whileNBP with GOP's Women's Division has set up a revolving credit fund for women.Located at 19 branches, it involves loans up to a total Rs 25 M for low-incomewomen, extended in surety and payable in 1-5 years, with a 2X service chargepaid by clients. HBL has recently established two branches dealing in women'sbanking and the First Women's Bank was established in Islamabad with initialcapital of Rs 100 M to provide lending and saving facilities to women. TheseNCB programs are dependent on grant funds and heavily subsidized. As such,they are not conducive to financial discipline and do not appear to besustainable in the long run.

V. PERFORMANCE UNDER PREVIOUS AGRICULTURAL CREDIT PROJECTS

5.01 Since 1965, the Bank Group has provided the agricultural creditsector with US$374.8 M in six credit/loans through ADBP. The first (Cr. 76-PAK) was signed in June 1965 and provided US$27 M for the foreign exchangecosts of tubewells and farm machinery. The second (Cr. 117-PAK), signed inJune 1968, was a short-range bridging operation for which IDA provided US$10 Mand the Swedish International Development Authority US$5 M. The third(Cr. 157-PAK), for US$30 M, was made in 1969 for the procurement of tractorsand tubewells. 'While these three projects proved to be beneficial for theinstitutional development of ADBP, it was found, particularly due to worseningrecoveries, that a spread of 4X between its lending and its borrowing rate wasnot sufficient to cover all lending-related costs and build up generalreserves.

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5.02 The fourth credit (Cr. 957-PAK) was therefore not approved beforemeasures were adopted to improve the situation. It provided US$30 M from IDAand SDR 23.75 or US$25 M equivalent from IFAD and supported ADBP's generallending activities, focusing particularly on improving its financial position.ADBP IV became effective in June 1980 and was disbursed in three years. OED'sProject Performance Audit Report (PPAR)'I notes the favorable impact of theproject both on ADBP as an institution and on the direction of agriculturalcredit as an instrument of social and economic policy. Two importantachievements are highlighted: First, the initiative of ADBP's management tobring the credit institution to the doorstep of the farmer through the MCOsystem; it demonstrated that frequent contact between credit officers andfarmers leads to a better understanding of farmers' needs and problems andthat the credit institution can then assist in resolving them. Second, ADBPsucceeded in improving its recovery of overdue loans and in shifting creditfrom large landholders to smallholders. However, the report states that muchof the financial improvement of ADBP was due to the low (and implicitlysubsidized) interest rate at which it obtained loanable resources.

5.03 The fifth ADBP project (Cr. 1380-PAK of US$47.8 M, Loan 2305-PAKof US$10 M) was cofinanced with SDR 23.2 M (US$25 M) by an IFAD loan and withUS$20 H by an Italian Government loan to finance farm machinery of Italianorigin. Through this project which became effective in November 1983, ADBP Vaimed at further strengthening ADBP to make it a sound and effective lendinginstitution and at providing financial support to ADBP's lending programs.The project closed in June 1987, following a one-year extension. The projectcompletion report prepared by ADBP and provided to OED with a supplementarymemorandum in February 1989 termed the project an unequivocal success. ItsachievemenLs are: (i) gradually extending the MCO scheme to cover all generallending in FY86; (ii) rapid and orderly expansion of agricultural lending inparallel with an improvement in portfolio quality through a well-managedsupervised credit system; (iii) significant progress in diversifying ADBP'slending operations and decreasing its share of tractor lending from 65X inFY84 to 37X in FY86; (iv) after detailed analysis, determination that Islamicmodes of financing with some exceptions are acceptable; and (v) based onADBP's elaborate impact evaluation and on Bank mission work, acknowledgementthat all types of ADBP's lending, including lending for tractors andimplements, are financially, economically and socially beneficial. ADBPremained dependent on low-cost funds from SBP but used part of the 7% marginto make provisions for expected loan losses at a level of about 401 of amountsoverdue. The PPAR is under preparation.

5.04 The sixth credit (Cr. 1699-PAK of SDR 47.6 M equivalent toUS$55 M, Loan 2693-PAK of US$165 M) became effective in November 1986.ADBP VI aims at continuing the institutional development of ADBP and atincreasing farm productivity and farmers' incomes by supporting ADBP's lendingprogram through its MCO scheme. Secondary objectives are to improve thequality of ADBP's lending, enhance its ability to cater to the needs of smallfarmers, and to lend for priority investments and investment packages that

± PPAR No. 6261 of March 23, 1986.

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would promote the adoption of improved farm practices, particularly use ofprimary tillage implements, e.g., disc, mouldboard and chisel ploughs.

5.05 By March 31, 1990, about 94% of the IDA credit and 82% of the Bankloan had been disbursed, slightly more than had been projected at appraisal.A preliminary impact evaluation of ADBP VI indicates that lending continued todiversify as planned, largely due to heavy demand for dairy animals, tractor-drawn implements (including primary tillage implements), and tubewells, whilethe growth in tractor lending further slowed due to sizeable increases intractor prices. In FY87 and FY89, ADBP had to reduce its planned lendingprogram because the availability of funds from SBP was curtailed to remainwithin the ceilings for credit expansion set for the banking sector as awhole. The lesson learned from the ADBP IV and V projects was that ADBP'saccess to low-cost funds from SBP was not conducive to its savingsmobilization efforts. To make the cost of SBP funds comparable to those ofsavings mobilized and further eliminate subsidies, SBP's discount rate to ADBPwas increased to 6% in two steps. ADBP has experienced frequent changes intop management since 1987, causing concern that it lacks direction andmotivation for financial discipline. Partly due to extended floods in wideareas of Pakistan and partly due to the reasons described above, recoveriesfell from 72% in FY88 to 64% in FY89 (para 4.07). GOP has indicated itscommitment to provide strong leadership to ADBP and to insist on financialdiscipline in agricultural credit.

VI. THE PROJECT

A. Objectives and Rationale

6.01 The overall objectives of the project would be to rationalize thedevelopment of the agricultural credit system into a viable system within theparameters set by the financial sector reform program initiated under the FSAL(paras 3.09-3.13). The FSAL proposes sectoral reforms to achieve progresstoward macroeconomic stability in a program that has been formulated to yieldthe desired structural impact on macroeconomic performance. Only a market-driven agricultural credit system can meet the expanding needs of theagriculture sector and increase its productivity. The project would supportthe consolidation of the gains already made in strengthening agriculturalcredit through further development toward financial sector liberalization andprogress in increasing competition between banks. It would attempt to achievethis in a carefully designed program to avoid worsening distortions in thetransitional phase. This program would consist of:

(a) Further developing institutional capabilities and continuingfinancial restructuring of intermediaries as far as theiragricultural credit activities are concerned, increasing financialdiscipline among borrowers by stopping the flow of new credit todelinquent borrowers, expanding delivery of credit in order toreach largar numbers of farmers, including specific target groupssuch as the landless and women who otherwise would not have

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access, and improving the efficiency of loan supervision andcollection;

(b) Expanding the resource base of financial institutions bydeveloping their capability to generate deposits and by providinglong-term funds to augment existing short-term resources;

(c) Establishing a policy framework which ould improve the efficiencyof financial intermediation in agricultural credit throughdefining a transitional period, after which determination ofinterest rates would be left to the market;

(d) Supporting, for the first time, the agricultural credit activitiesof NCBs and continuing support of ADBP, thus increasingcompetition among banks and encompassing more than 80X of theinstitutional outlays for agricultural credit in the country.

6.02 Although the Bank has previously assisted six agricultural creditprojects in Pakistan which have channelled the funds needed for agriculturaldevelopment, there is much that needs to be done with regard to institutionaldevelopment and policy reform in the subsector. While ADBP has been the majorinstrument for providing agricultural credit, it is handicapped by the factthat its network of branches is quite thin and even with the successfulintroduction of a supervised credit system operating through mobile creditofficers is not in a position to meet effectively the needs of millions offarmers whose access to credit is quite limited. The work of ADBP needs,therefore, to be complemented by the NCBs which have a wide branch network,and the project seeks to promote active involvement by the latter on aneconomically viable basis. The main purpose of project support is to channelterm credit to agriculture, and within this general objective to channelcredit to designated end-users. Importantly, for the development of thefinancial sector in Pakistan, it is expected to demonstrate that agriculturallending can exist without subsidization, which so far has been considereddoubtful. The Bank has a continuing role in promoting sound financialpolicies in order to strengthen the credit institutions and enhance theireffectiveness, and in directing a stronger effort toward the credit needs ofsmaller farmers, particularly of women who are severely constrained inobtaining credit. The Bank's support of the project will also result inresearch being undertaken on prior and ongoing credit programs in order toidentify policy shortcomings and promote sounder and economically more viablecredit programs.

6.03 Due to the past burden of subsidizing interest rates imposed onthe NCBs (para 4.03) by GOP, they would probably prefer to withdraw fromagricultural credit altogether. With Bank assistance it would be possible toassist GOP in developing a time-frame for agricultural interest rates toapproach market rates which would evoke renewed interest in the NCBs toenhance their share in agricultural lending and to avoid concessional creditgoing to unintended beneficiaries, the large farmers and landlords, who wouldlose interest in non-subsidized credit.

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6.04 The project would aim at reaching two subsidiary objectives:First, through studies to be carried out in an agricultural credit researchcomponent, a better understanding would be reached concerning the functioningof credit channels (including informal ones), procedures and beneficiarieswhich would help to prepare policy decisions by GOP and the banks. Second, inone district of Punjab the computerization of land records would be supported,which would have a salutary effect on the matters of collateral for creditbeneficiaries.

B. Project ScoRe

6.05 The credit programs supported under the project would benationwide. For ADBP, the supervised credit system is expected to be slightlyincreased to cover 41,300 villages (87%) out of a total of 47,000 villages;the remainder being villages whtich are inaccessible for parts of the year orare not expected to generate any significant demand for credit. All creditoperations would be managed in a decentralized system through ADBP's 47regional offices and about 350 branches, the niumber of which would also beincreased during project implementation.

6.06 The women's component of the project would start in specifiedregions in all provinces and, at the end of the three-year project period,would cover all 47 ADBP regions. However, within each specified region, theactivities for women's lending would be limited to two branches. Annex 9shows the projected regional build-up by province and the selection criteriafor branches and regions.

6.07 The pilot program for testing of individual lending with groupguarantees is proposed to be implemented in 15 branches of ADBP chosen for thewomen's credit program, with seven of these in Punjab, three in Sind, three inNWFP, and one each in Baluchistan and Azad Kashmir Territory. Another 15branches would be involved during the second year of the project.

6.08 In the first year of project implementation, the NCBs wouldimprove their supervised agricultural credit services in a limited number ofdistricts of Punjab province. Project activities would expand into a secondprovince during the second year. The other provinces would be included duringthe third project year. Punjab province would be the largest claimant of theadditional ACOs, with 353 ACOs to be added to the present level of 253. Thisnumber of ACOs would staff 1,472 lead bank branches out of total of 3,756branches to cover 2,672 union councils in Punjab province.

6.09 On a pilot basis, land records would be computerized in the Kasurdistrict of the Lahore region, while the agricultural credit researchcomponent would finance research on a nationwide basis.

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C. Summary Description

6.10 The project would support medium-/long-term lending of ADBP andthe NCBs, incremental short-term lending of ADBP,'/ and the institutionaldevelopment of both ADBP and the NCBs. Both ADBP and the NCBs would supportdevelopment lending for medium-horsepower tractors; primary and secondarytillage implements; seeding equipment; general farm machinery; private minorirrigation (PMI); dairy development; sheep, goat and poultry production;orchard development; vegetable production; inland fisheries development; andother on-farm development. ADBP would also extend credit to develop andexpand rural small-scale enterprises (SSE) (such as custom processing,manufacture of non-traditional processed products, artisan industries, andfarm-related enterprises) and for agricultural, non-agricultural and householdtime-saving technologies. Short-term lending for ADBP would include loans forcrop production and processing, sheep and goat fattening, and SSEs. Theproject would earmark specific amounts of credit for women and small farmersincluding the landless.

6.11 The institutional development of ADBP would include innovativeapproaches related to (i) credit delivery to women through use of femalecredit staff; (ii) use of group guarantee as collateral for loans where groupmembers (those owning less than 2.5 ha) would be jointly and severallyresponsible for all loans disbursed; and (iii) direct lending to and use ofNGOs by ADBP in lending-related activities. For the NCBs, the institutionaldevelopment component woull support reinforcing the supervised credit scheme.Financing under the institutional development component would include both forADBP and NCBs funds for vehicles and equipment, training, technicalassistance, fellowships and study tours, and incremental administrative costs.The project would also support research on agricultural credit nationwide andthe computerization of land records in one district on a pilot basis. Thedetailed features of the project including appendices on the computerizationof land records and agricultural credit research are presented in Annex 1.

D. Proiect Cost and Financing

6.12 The total cost of credit operations (98%) and institutionaldevelopment (2%) is estimated at Rs 50.3 billion or US$2,283 M equivalent, ofwhich the foreign exchange component would be about Rs 12.9 billion (US$586 M)or 26%. The credit component is expressed in current terms, based on theprojected lending program of the participating institutions for the three-yearcommitment period FY91-93, reflecting historical lending patterns and theexpected ceilings of SBP on net credit expansion. Since the number and typeof activities to be financed by credit and also their costs have only beenapproximately estimated, and thus the actual lending program would vary inaccordance with market demand, neither physical nor price contingencies havebeen calculated for this component. To take _ccount of the uncertaintiesinherent in the innovative project components, some of the items in the

Short-term loans are also provided by NCBs, but are not supportedunder the project.

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institutional development, agricultural credit research, and registration ofland records components ̂ontain a physical contingency of 10%. It isestimated at Rs 112 (US$5.3) of which Rs 42 M (US$2.1) are foreign and Rs 70 M(US$3.3 M) local costs. For the institutional development component, pricecontingencies on local costs, amounting to Rs 75 M (US$2.4 M), have beenapplied at the following rates, compounded annually: 2.0% for FY90 (3 monthsonly), 6.8% for FY91, 6.0% for FY92, and 6.0X for FY93. Price contingencieson foreign costs amount to Rs 41 M (US$1.3 1), computed on the basis of 0.5%for FY90 (3 months only), 4.9% for FY91, 5.0% for FY92, and 5.0% for FY93,also compounded. Total price contingencies amount to Rs 116 M (US$3.7 M) or0.2% of baseline costs.

6.13 Estimated project costs, detailed in Annex 1, Table 1 aresumlarized on the next page. The financing table is presented on the pagefollowing the Cost Table.

6.14 The project would be financed jointly by the Bank, IFAD and ADB.A potential other source of cofinancing is the Overseas Economic CooperationFund (OECF) of Japan which has been requested by GOP to participate. Bankfunds would be lent to GOP at the Bank's variable interest rate for 20 years,including five years of grace. IFAD funds would be lent to GOP at 4% for thesame maturity. The IDA credit of US$1.5 M would be lent to GOP at standardterms. Together with the Bank loan of US$148.5 M and the IFAD loan of US$25M, it would finance 7.7% of total project costs and 43% of the incrementallending of ADBP and the NCBs.

6.15 In accordance with its general policy, GOP would cover the foreignexchange risk and receive a premium for this coverage. The policy ofaccepting the exchange risk on all foreign credit it onlends to financialintermediaries was adopted in 1980 to avoid a repeat of the situation whichoccurred in 1972 when, following the large devaluation, numerous industrialsub-borrowers defaulted, jeopardizing the survival of the financialintermediaries. It would be inappropriate under the project to have farmerbeneficiaries or the banks bear the foreign exchange risk because GOP retainsthe foreign currency and passes on the rupee equivalent to the banks. Asignificant part of the foreign exchange risk premium would be derived fromthe benefits GOP would get when it onlends Bank and IFAD funds to theparticipating banks for periods which are shorter than its own maturity(para 6.16). It should be recognized in this regard that Bank intermediaryloans form only a small part of GOP's foreign exchange liability and risk.Therefore, rather than reflecting this premium in the onlending rate for theloan funds received, the cost of the foreign exchange risk would be reflectedin the discount rate available to the banks. In the case of NCBs, thismechanism is assumed to be already in effect, because the discount rate standsat 10% and SBP pays only 6% to the NCBs for their excess liquidity depositedin SBP. In the case of ADBP, to cover the exchange risk, the rate on theadditional funds needed from SBP to finance ADBP's expanding agriculturalcredit program would be increased by one percentage point from the present 6%on July 1, 1991, so that funds made available to ADBP during the secondproject year would bear a 7% rate of return. The incremental income to GOPgenerated from this increase is projected to be much larger than the income

Summary of Project CostX Foreign * Total.

Local Foreign Total Local Foreign Total Exchange Base Cost--------- (Re M) ----------- (-$ -------- (US M)-----------

A. FARM DEVELOPME8T AND M&LSCALE ENTERPRISE LOANS."1. FARMS WITH 2.5 ha OR LESS

Tractors 406.6 226.4 633.0 18.4 10.3 28.7 36 1Farm Implements 158.3 48.6 206.9 7.2 2.2 9.4 23 0Other Onfarm Development 4,330.8 26.0 4,356.8 196.7 1.2 197.9 1 9SmalL-Scale Enterprise 1.197.2 507.7 1.704.9 54.4 Z3.0 77.4 30 3

Subtotal 6,092.9 808.7 6,901.6 276.7 36.7 313.4 142. FARMS OVER 2.5 ha

Tractors 9,729.6 :,336.0 15,065.6 441.9 242.3 684.2 36 30Farm Implements 2,573.3 791.0 3,364.3 116.9 35.9 152.8 24 7Private Minor Irrigation 2,149.5 633.9 2,783.4 97.6 28.8 125.4 23 6Other Onfarm Development 5,661.1 44.4 5,705.5 257.2 2.0 259.2 1 11Small-Scale Enterprise 330.6 140.2 470.8 15.0 6.4 _21.4 30 1

Subtotal 20,444.1 6,945.5 27,389.6 928.6 3i5.4 1,244.0 25 55Subtotal Farm Development andSmall-Scale Enterprise Loans 26,537.0 7,754.2 34,291.2 1.205.3 352.1 1,557.4 23 68

B. FISHERY DEVELOPMENT LOANS 238.7 236.5 475.3 10.9 10.7 21.6 50 1C. PRAJECT LOANS FOR AOROINDUSTRY 2,139.9 2,129.6 4,269.5 97.2 96.8 194.0 50 9D. INCRDENMTAL SHORT-TERM LOANS 7,828.5 2,422.0 10,250.5 355.6 110.0 465.6 24 20

Subtotal MLT/ST Loans 36,744.1 12,542.4 49,286.5 1,669.0 569.6 2,238.6 25 98

E. INSTITUTIONAL DEVELOPMENT ASSISTANCEVehicles and Equipment 257.5 169.3 426.8 12.1 8.0 20.1 40 1Technical Specialists 11.3 107.9 119.1 0.5 5.1 5.6 90 0Local Training 15.1 0.0 15.1 0.7 0.0 0.7 0 0Incre. Admin. Expenditure 153.1 3 7.2 0.0 7.2a 0 1

Subtotal 437.1 277.1 714.2 20.5 13.1 33.6 39 2

F. AGRICULTURAL CREDIT RESEARCH 24.9 2.5 27.4 1.2 0.1 1.3 9 0G. COMEUTERIZATION OF LAND RECORDS 10.2 2.3 12.5 19 0

Subtotal Baseline Cost tE+F+G) 472.2 281.9 754.1 22.2 13.3 35.5 37 2

Physical Contingencies2 / 69.6 42.1 111.7 3.3 2.1 5.3 38 0Price Contingencies 75.0 41.2 116.2 i^ J.3 37 35 0

Subtotal 144.6 83.3 227.9 5.7 3.4 9.1 37 0

TOTAL PROJECT COST 37,360.9 12,907.6 50,268.5 1,696.9 586.3 2,283.2 26 100

of which:Total Base Cost 37,216.3 12,824.3 50,040.5 1,691.2 583.0 2,274.2 26 100Contingencies 144.6 83.3 227.9 5.7 3.3 9.0 37 0

1 All credit items (A.B.C and D) are expressed in current terms.

2 For institutional development component.

Financing Plan

Borr.Contr. IFAD IBRD/IDA ADD NCBs ADBP GOP Total

Amt S Amt I Amt I Amt S Amt S Amt S Amt S Amt 1

Farm Development andSmall-Scale Enterprise LoansFarmers with 2.5 ha or less

Tractors 4.2 14.7 0.0 0.0 1.4 5.1 4.2 14.5 1.0 3.3 17.9 62.4 0.0 0.0 28.7 1.3Implements 1.4 15.0 0.0 0.0 1.0 10.1 0.9 9.8 3.0 32.5 3.1 32.6 0.0 0.0 9.4 0.4Other On-Farm Development 12.4 6.3 13.5 6.8 22.0 11.1 0.0 0.0 18.4 9.3 131.6 66.5 0.0 0.0 197.9 8.6Smell-Scale Enterprise 4.8 6.3 5.4 7.0 8.2 10.6 0.0 0.0 0 0 0.0 59.0 76 2 0.0 0.0 77-4 3.4Subtotal 22.8 7.3 18.9 6.0 32.6 10.4 5.1 1.6 122. 7.2 211.6 67. 0.0 0.0 313.4 13.7

Farmers over 2.5 haTractors 133.4 19.5 0.0 0.0 35.2 5.1 100.4 14.7 21.0 3.1 394.2 57.6 0.0 0.0 684.2 30.0Implements 30.6 20.0 0.0 0.0 10.1 6.6 26.0 17.0 8.0 5.3 78.1 51.1 0.0 0.0 152.8 6.7Private Minor Irrigation 25.3 20.0 0.0 0.0 9.9 7.8 18.5 14.7 15.0 11.8 57.7 45.6 0.0 0.0 128.4 5.5Other On-Farm Development 16.2 6.3 0.0 0.0 26.3 10.2 0.0 0.0 62.8 24.2 153.9 59.3 0.0 0.0 259.2 11.4Small-Scale Enterprise 1.3 6.3 0.0 0.0 1.5 6.8 0.0 0.0 0.0 18. *IS6 86. 9 0.0 00 21.4 0.9Subtotal 206.8 16.6 0.0 0.0 83.0 6.7 144.9 11.6 106.8 8.6 702.5 56.5 0.0 0.0 1,244.0 54.5

Subtotal Farm Development andSmall-Scale Enterprise Loans 229.6 14.7 18.9 1.2 115.6 7.4 150.0 9.6 129.2 8.3 914.1 58.7 0.0 0.0 1,557.4 68.2

Fisheries Development Loans 1.4 6.3 0.0 0.0 0.7 3.3 0.0 0.0 0.0 0.0 19.5 90.5 0.0 0.0 21.6 0.9 IProject Loans for Agroindustry 48.5 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 145.5 75.0 0.0 0.0 194.1 8.5Incremental Short-Term Loans 0.0 0.0 2,0 0.4 13.9 3.0 0.0 0.0 0.0 0.0 _49.7 96.6 0.0 0.0 465.6 20.4 LnSubtotal All Loans 279.5 12.5 20.9 0.9 130.2 5.8 150.0 6.7 129.2 5.8 1,528.8 68.3 0.0 0.0 2,238.6 98.1 1

Institutional Dev. AssistanceVehicles and Equipment 0.0 0.0 1.4 5.7 8.9 35.1 0.0 0.0 3.6 14.4 11.3 44.8 0.0 0.0 25.3 1.1Consultancy and Fellowships 0.0 0.0 1.3 18.4 5.2 74.2 0.0 0.0 0.0 0.6 0.5 6.8 0.0 0.0 6.9 0.3Local Training 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 100.0 0.0 0.0 0.9 0.0Incre. Admin. Expenditure 00 0.0 1.4 15.0 50.0 0.0 0.0 1.7 I4 1.5 16.6 0.0 0 2 0.4LSubtotal 0.0 0.0 4.1 9.7 18.6 44.0 0.0 0.0 5.4 12.7 14.2 33.6 0.0 0.0 42.3 1.8

Agricultural Credit Research 0.0 0.0 0.0 0.0 0.8 51.9 0.0 0.0 0.0 0.0 0.0 0.0 0.8 48.1 1.6 0.1Computerization of Land Records 0.0 0.0 0.0 0.0 0.4 62.9 0.0 0.0 0.0 0.0 0.0 0.0 0.3 38.6 0.7 0.0

-- __------------------------------------------------------------------------------__-------------------------------

Grand Total 279.5 12.2 25.0 1.1 150.0 6.6 150.0 6.6 134.6 5.9 1,543.0 67.6 1.1 0.0 2,283.2 100.0

fin.tbl

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that would have been generated from a 3X premium on the loan funds to bewithdrawn from the Bank and IFAD that is usually applied by GOP. Thus, theexchange risk would be more than adequately covered. In annual reviews ofADBP's profit generating capability (para 7.17 (v)) it would be determinedwhether the return paid by ADBP continues to be sufficient for this coverage.

6.16 GOP would convert the proceeds of the IDA credit into grants ofUS$0.5 M to the Government of Punjab and US$1 H to SBP to carry out thecomponents on computerization of land records and agricultural creditresearch. The participating banks would bear the return and repayment risk onthe loan proceeds. GOP, through SBP, would onlend the proceeds of the Bankand IFAD loans at cost, i.e., at a rate of return that would yield theequivalent of the Bank's variable interest rate for the Bank loan and at arate of return of 4% for the IFAD loan. Repayment by the banks to GOP of thesubsidiary loans would be in 12 years, including three years of grace. TheNCBs would avail themselves of the proceeds of the Bank and IFAD loan on afirst-come-first-serve basis. IFAD financing would be available only for thelandless and assetless and for smallholders (not exceeding 2.5 ha). Besidesthe determination of the value of assets for the landless, all loans would besubject to a monetary ceiling, expressed in 1989 prices (para 6.22). Theonlending terms and conditions for making available finance to ultimatebeneficiaries are set out in paras 7.16-7.17 and would be reflected infinancing agreements between GOP and the banks. The execution of theseagreements would be a condition of loan effectiveness for both the Bank andIFAD loans.

6.17 GOP may wish to request retroactive financing (from January 1,1990 to loan signature) up to an aggregate amount of US$1 M in respect ofCategories 7,8, and 9 of the Loan and Categories 1 and 3 of the Credit forexpenditures incurred by the implementing agencies to set up the specialcredit delivery mechanisms envisaged under the project, the cost of trainingtrainers and staff, operational costs if such credit delivery goes intooperation, and vehicles and equipment and administrative expenditure for thecomputerization of land records and the agricultural credit researchcomponents. Subloans made by the banks before loan signature would not beconsidered for retroactive financing, because the banks will have to pre-finance their disbursements in any case and have access to bridging funds.

/

/

,/

j:

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E. Procurement

6.18 Procurement arrangements would be as follows:

Procurement Method"'ICB Otherb/ NAM/ Total Cost--------------US$ M-----------------

Leniing Program:Tractors 0.0 712.9 0.0 712.9

(0.0) (36.6) (0.0) (36.6)Farm Implements 0.0 162.2 0.0 162.2

(0.0) (11.1) (0.0) (11.1)Private Minor Irrigation 0.0 126.4 0.0 126.4

(0.0) (9.9) (0.0) (9.9)Other On-farm Developmentand SSE Loans 0.0 1,237.1 0.0 1,237.1

(0.0) (72.6) (0.0) (72.6)

Institutional Development:Vehicles 24. od/ 0.2d/ 0.0 24.2

(8.2) (0.1) (0.0) (8.3)Equipment 1.1 0.4 0.0 1.5

(0.6) (0.2) (0.0) (0.8)Consultancy and Fellowships 0.0 8.20/ 0.0 8.2

(0.0) (5.4) (0.0) (5.4)Incremental AdministrativeExpenditures 0.0 0.0 10.7 10.7

(0.0) (0.0) (5.3) (5.3)

Total 25.1 2,247.4 10.7 2,283.2(8.8) (135.9) (5.3) (150.0)

a/ Including physical and price contingencies. Figures in parentheses arethe amounts financed by the IBRD Loans.

b/ See para 6.19 below.c/ Procurement procedures not applicable.d/ Contract of less than US$100,000 up to an aggregate of US$1 M for ADBP

and NCBs and of less than US$20,000 up to an aggregate of US$200,000 forSBP and Punjab.

e/ Procurement in accordance with Bank guidelines.

6.19 Farmers would purchase tractors, farm implements, irrigationequipment, dairy cattle, buffaloes, equipment for SSE investments, andseasonal inputs in accordance with their own choice, through normal commercialchannels, even though under Islamic modes of financing, ADBP becomes thenotional owner of all financed items until transferral of title to clients.The two major tractor manufacturers, Massey Ferguson and Fiat, currently have

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89% of total sales. The others, Ford, IMT, and Belarus, have dropped to 1%,5%, and 5%, respectively, due to difficulties with the import deletionprogram.'/ In addition, importers could also participate subject toprovisions of GOP's standardization program, including approval of thespecifications and local testing by the Ministry of Agriculture and acceptanceby the importer to start assembly and undertake a progressive deletionprogram. Confirmation of the absence of import restrictions except for thosestated above was obtained during negotiations. The five existingmanufacturers are expected to provide a competitive market in the future andfour are expected to follow the lead of IMT and enter the export market.

6.20 The market for farm equipment and implements is com)etitive andgrowing rapidly. Manufacturers obtain up to 95% of their raw materialslocally and prices are well below world market prices for equivalentequipment. The market for tubewell pumps, diesel engines, electric motorsand casing is also competitive and can be supplied from indigenous sources atbelow world market prices. However, performance testing standards and trialsfor pumps, motors and engines need to be established to exclude sub-standardmanufacturers from ADBP-approved lists.

6.21 Equipment and vehicles for use by the implementing agencies wouldbe procured in bulk following ICB procedures. For procurement under ICB, apreference limited to 15% of the CIF price or the prevailing customs duty,whichever is lower, will be extended to local manufacturers in the evaluationof bids. Equipment items which cannot be grouped together and costing lessthan US$100,000 for each contract but not exceeding an aggregate amount ofUS$750,000 for ADBP and US$250,000 for the NCBs would be procured aftersoliciting prices from at least three independent supplie.rs in accordance withprocedures acceptable to the Bank. Tle ICB threshold for SBP and Punjab wouldbe US$20,000 for each contract, but the aggregate amount for procurement underinternational or local shopping would not exceed US$200,000. Tender documentsand advertising procedures for all ICB procurement would be reviewed by theBank before bids are invited, and bid evaluations would be approved beforecontract award. Consultant services would be procured following the Bank'sGuidelines for the Use of Consultants.

F. Disbursement

6.22 The Bank loan of US$148.5 M and IDA credit of US$1.5 M equivalentend the IFAD loan of US$25 M equivalent are expected to be disbursed over aperiod of five and a half years, adding two and a half years to the three-yearcommitment period envi3aged in ADBP's and the NCBs' lending programs. Theperiod in the estimated schedule of disbursements in Annex 2, Table 1 isshorter than the standard disbursement profile for agriculture (7 years). Itis based on a disbursement profile derived from the experience gained fromactual disburements under ADBP IV through VI and mission projections, takingthe innovative nature of the lending to small farmers and women into account.

A program successively replacing imported tractor components bylocally manufactured ones.

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Sub-loans or financing extended on the basis of the Islamic modes of servicecharge or profit-and-loss sharing (para 7.17) would not be eligible forreimbursement. Sub-loans would be eligible for joint financing from the IFADLoan if (i) they are made to farmers with farm holdings not exceeding 2.5 haor the landless, defined as having assets not exceeding the equivalent inlocal market value of 2.5 ha of land, and (ii) the sub-loan amount would notexceed the following limits per sub-loan expressed in FY89 prices: Rs 15,000for short-term inputs; Rs 35,000 for dairy livestock; Rs 15,000 for sheep andgoats; Rs 25,000 for poultry; Rs 20,000 for orchard development; Rs 15,000 forvegetable farming; and Rs 50,000 for SSE.

6.23 The disbursement categories are set in Annex 2, Tables 2-4.Disbursements for credit items, for equipment costing less than US$20,000equivalent under Category 7, and incremental administrative costs underCategory 9, would be made against certified statements of expenditure. Thisprocedure has worked well in earlier projects. Full documentation would beretained by ADBP for review by supervision missions and would be subject toaudit by independent auditors (para 7.20). Disbursements for incrementalshort-term lending of ADBP under Category 6 would be made on an incrementalbasis, i.e., in each quarter only that portion of ADBP's short-term lendingwould become eligible for withdrawal from the Bank and IFAD loans which wouldexceed the lending extended by ADBP for the same purposes in the same quarterof the previous year. Disbursements for equipment items exceeding US$20,000equivalent and all other non-credit categories would be made againstappropriate documentation to be forwarded to the Bank with the withdrawalapplications. Disbursements for incremental administrative costs underCategory 9 would be made at a declining scale as specified in Annex 2.'/ Aproject special account in foreign currency would not be established in thisproject for the banks because they have a well functioning accounting system,would make withdrawal applications monthly, and would have sufficientliquidity or have access to bridging loans from SBP to pre-finance theutilization of the loan funds. Consequently, application requests forpayments from the loan and credit proceeds, including those for replenishmentof the Special Accounts under the Credit, would be for no less than US$20,000equivalent except in the case of withdrawals for consultants' services,fellowships and study tours, for which the minimum amount would be US$10,000equivalent. Project special accounts would be established for SBP and Punjabto facilitate project implementation. Due to the joint cofinancing nature ofthe project, all payments from the proceeds of the loan will be made on areimbursable basis with the exception of payments to be made undercategories 7 "Equipment and Vehicles" and 8 "Consultants".

Incremental expenditures are those for field staff recruited andthe operating costs of vehicles procured with loan proceeds in thecase of ADBP for its credit scheme for women, and, in the case ofNCBs, for their general agricultural credit operations under theproject.

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VII. PROJECT IMPLEMENTATION

A. Participating Banks as Executing Agencies

7.01 As participating banks, ADBP and the NCBs would be the executingagencies for the credit component and for the institutional improvements to bebrought about in the agricultural credit system. The computerization of landrecords would be handled by the Revenue Board of Punjab and the agriculturalcredit research by SBP. Funds for these activities would come from the IDAcredit which would be converted into a grant for the Government of Punjab andSBP. Funds from the IBRD and IFAD loans would be channelled through SBP toall executing agencies on terms and conditions set out in paras 6.14-6.16.Implementation of the project by the NCBs would be coordinated by PBC.

B. Credit Delivery Mechanisms

ADBP

7.02 Supervised Credit: ADBP's entire lending operations, except thosefor agro-industries, are cirried out through its supervised credit schemeoperated by MCOs. This successful scheme would be expanded and modified, asdeemed necessary by ADBP, to accomplish the main project objective of reachingmore small farmers and special target groups such as the landless and ruralwomen. To achieve this objective the targeting system for lending would bemodified at inception of the project in a way that would facilitate lendingspecifically to borrowers below the 2.5 ha landholding threshold, includingthe landless and other target groups. General credit services would beprovided to all types of borrowers by MCOs and MCOFs. MCO and MCOF numberswould expand to 1,718 and 282, respectively, by the end of FY93. This wouldoffer the possibility of reducing the number of villages to be covered by oneMCO or of appointing more MCOs to the village intensification scheme (para7.04).

7.03 Functional mobile credit officers (FMCOs) in the fields of privateminor irrigation, fruit and vegetables, dairying, poultry production, andfisheries, posted to branches with proven potential to support a portfolio ofRs 6 H per year within their discipline, would provide specialist creditservices. Supervising branch managers would continue to allocate additionalgeneral credit lending targets to FMCOs for any shortfall in lending in theirparticular discipline. FMCO numbers would be reviewed annually and are notexpected to exceed 40 during the project life.

7.04 Smallholders. Tenants. and the Landless: A villageintensification scheme operated currently by a cadre of 31 MCOs(Intensification), each serving a circle of only five villages instead of theusual 25 villages served by other MCOs, has not been significantly expandedsince inception in 1985. Although originally aimed at handling 200 loan casesper year, MCOIs actually handle smaller numbers of larger borrowers. In aneffort to reach greater numbers of small borrowers in target categories, theMCOI thrust would be modified from the start of the project to ensure that aminimum of 15X of annual total loan disbursements is directed at qualifying

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IFAD target beneficiaries (para 6.16). Such targets would increase to 20% byFY92 and 25% by FY93. General MCOs and MCOFs would be expected to achieve asimilar 10% target in FY91, expanding to 15% in FY92 and 20% by FY93.

7.05 Lending to Women: ADBP would hire couple MCOs (CMCOs), femaleMCOs (MCOFs), and female village assistants (VAFs). One MCOF would superviseup to five VAFs: however, in areas where this is socially acceptable, MCOswould also work with VAFs. The importance of the various types of femalestaff in particular provinces would depend on local conditions. Each branchwith female MCOs would have three of them in any combination, i.e., only MCOFsor MCOFs working with CMCOs. Where possible MCOFs would also work with maleMCOs covering the same area. The VAF system would be gradually expanded from90 VAFs in FY91 to 552 in FY93.

7.06 Pilot Programs: As a matter of priority to maximize participationof potential target beneficiaries, ADEP would take steps to resolve legalproblems which could limit its participation in individual lending backed bygroup guarantee and lending through NGOs. Most of these could be resolved byexecutive action of ADBP, while some require the issuance of official gazettenotifications. The action would be related to: (i) extension of credit toindividuals secured by group guarantees; (ii) extension of credit to NGOs orto individuals identified by NGOs; (iii) the eligibility of time-savingdevices for lending under "agricultural purposes"; and (iv) the increase ofthe ceiling for loans secured by personal guarantees to Rs 100,000. In theindividual lending/group guarantee testing, functional MCOs (FMCOs) would beappointed at each pilot program branch (Annex 1) to handle the promotion ofindividual lending to men through group guarantees, while general MCOs wouldcontinue normal lending operations, offering modified security only to thosewithout land mortgage or security. Female MCOs (MCOFs) would promote alltypes of credit and securities both within and outside the pilot programs.

7.07 At nezotiations. assurances were obtained that ADBP would:

(i) recruit and train in its staff training facilities additional MCOsto bring its MCO force to 1,590 by June 30, 1991, 1,830 byJune 30, 1992, and 2,000 by June 30, 1993, these numbers toinclude 90, 180, and 282 female MCOs (MCOFs) respectively;

(ii) recruit and train 90 female village assistants (VAFs) byJune 30, 1991, an additional 180 by June 30, 1992, and 282 more byJune 30, 1993;

(iii) modify its amount-based loan targeting system so one that focusesalso on the number of loans to be made by MCOs and MCOFs toachieve a disbursement to farmers with holdings of less than2.5 ha and the landless of 10% of total disbursements in FY91, 15%in FY92, and 20% in FY93, and those of MCOIs to 15%, 20% and 25%,respectively; and

(iv) take all steps necessary to resolve legal issues related to thepilot lending schemes as described in para 7.06 above (Annex 8).

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This would include requesting GOP to issue official gazettenotifications to modify the definition "agricultural purposes".

7.08 irganizational Setup: In the past, ADBP has modified itsorganizational structure on an ad hoc basis to cope with the operational needsof expansion and changes in technology. Under the project, a study would becarried out to analyze organizational requirements to cope with changing needsfor more customer-oriented banking services and to streamline its operations.Subject to the recommendations of this study, ADBP has already made minororganizational changes to accommodate the requirements of the project. Amongthe changes is the establishment of four new wings in the Credit Division forthe implementation of the special schemes associated with the project. Theseare Smallholder/Landless and Women's Credit Wings in the Credit PolicyDepartment, and Pilot Projects and SSE Wings in the Appraisal and SpecialSchemes Department. In the Technology Division, a Small-Scale Machinery Winghas been established in the Machinery Department and a Women's Technology Wingin the Farm Technology Department to facilitate the transfer of newtechnologies for SEE and time-saving devices loans. Accordingly, atnegotiations assurances were obtained that ADBP would:

(i) undertake, by September 30, 1990, the required organizationalchanges in the Credit and Technology Divisions to create supportat headquarters for the new credit programs; and

(ii) commission and participate fully in an organization and managementstudy to be conducted by external consultants by December 31,1991. The organizational structure as well as the staffingpattern would be examined to identify weaknesses and recommendnecessary changes. Job descriptions would be related to trainingreceived. A career path for MCOs would be proposed, along with asystem of performance criteria for MCOs and the correspondingmonitoring and evaluation system. A plan to reorganize theTraining Unit to meet the requirements of the training programwould be prepared. Findings of the study would be discussed withGOP and the Bank by June 30, 1992, and t.he agreed recommendationswould be implemented by December 31, 1992.

7.09 By April 1989, ADBP had taken the following actions:

(i) Nine deputy director, seven assistant director, and one extraassistant director positions were created for the specialassignments under the project in the Credit, Technology andPersonnel Divisions, six of which would be filled by female staff;

(ii) a selection board chaired by ADBP's Executive Director Personneland including three other members was established to oversee therecruitment and assignment of the female staff needed (para 7.07);and

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(iii) 30 branches for credit delivery to women (Annex 9, Attachment 1)and 15 branches for pilot lending schemes (Annex 8, Attachment 1)in the first project year were selected.

NCBs

7.10 NCBs employ a total of 390 ACOs to supervise agricultural loans.Under the project, and over and above the requirement under the OilseedProject (Ln. 2973/Cr. 1931-PAK), the number of ACOs would increase by 592 to982. Punjab province would be served by 606 ACOs. They would staff 1,472lead bank branches of the total of 3,756 branches to cover 2,672 unioncouncils in Punjab province. The first two years of the project wouldprimarily cover Punjab Province. A second province would be included duringthe second year. The other provinces would be covered during the third yearof the project. Accordingly, assurances were obtained at negotiations thatNCBs would expand the number of ACOs by 200, 200, and 192 in each projectyear, respectively, up to June 30, 1993.

7.11 Each participating NCB would designate staff at the provincialheadquarters who would be responsible for the implementation of the project.Responsibility would be delegated to the circle office and to the zonaloffices. A senior ACO with responsibilities as outlined in the Model Schemefor Supervised Agricultural Credit'1 would be designated at the zonal officeto supervise ACOs and ACOs would report directly to them. Thus, they wouldnot be under the supervision of branch managers who would only have aresponsibility to decide on operational arrangements and tour scheduling withthe ACOs. Accounts at the zonal level would be computerized. Accordingly,assurances were obtained at negotiations that NCBs would create theorganizational structure necessary to implement the program by December 31,1990.

7.12 A realistic workload for an ACO to supervise effectively would be400 loans per year or 200 borrowers per season, with an average amountdisbursed of Rs 4.0 M. Based on 982 ACOs at full implementation, a total ofabout 196,400 clients would have active accounts at any one time, equivalentto about 30% of the total number of 638,700 during FY87. Considering that thenumber of borrowers and volume of lending have significantly declined as aresult of the lead bank system (para 4.10), NCBs would be expected to regaintheir previous level of lending by FY93. It would be possible to cover about75% of borrowers during the project period if borrowers who are supervisedover two seasons would graduate into a level requiring minimal supervision.

Simultaneous ImRlementation Action of ADBP and the NCBs

7.13 A number of implementation actions related to staff recruitment,lending for farm mechanization, monitoring and evaluation, and continuedcompliance with SBP's prudential regulations would be taken by both ADBP and

Model Scheme for Supervised Agricultural Credit, Pakistan BankingCouncil, 1986.

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the NCBs to achieve the greatest possible efficiency in the agriculturalcredit delivery system. They would include improvements in their respectivetraining systems and cooperation on an informal basis in various trainingprograms, the exchange of course syllabi, teaching staff, and impartingtraining in fields where individual institutions are particularly strong. Ofspecial importance would be the recruitment of new staff in the banks understrict adherence to policies which would be conducive to open competition andadequate qualification testing. End-user departments would be involved in theselection process. Accordingly, assurances were obtained at negotiations thatthe participating banks would:

(i) recruit additional staff in accordance with recruitment policieswhich would be based on merit, through open competition and withthe concurrence of the end-user department;

(ii) undertake, jointly with GOP, IBRD and other cofinanciers, a Mid-term Review at the end of FY92 to evaluate progress in projectimplementation, and make adjustments in various programs, to beagreed with the Bank, based on conclusions of the review;

(iii) raise, by July 1, 1990, sub-borrower contributions for tractor,implement and PMI lending to not less than 15% of the investmentcosts for farmers with holdings of 10 ha of irrigated land orless," 20% for farmers with holdings of 11-20 ha, and 25% forfarmers with holdings exceeding 20 ha. The equity contribution offarmers below 5 ha for PMI loans would be 10%. The equitycontribution requirements would be reviewed annually inconsultation with the Bank;

(iv) reduce, by July 1, 1990, the minimum landholding2' for NCB tractorloans from 10 ha to 5 ha. Also the area requirements would bereviewed annually; and

(v) make loans only after adequate appraisal that would includeassessment of the financial viability of on-farm investments.Special emphasis would be given in this respect to cases whichhave been shown as sensitive to variations in benefits derivingfrom custom work, e.g., tractor investment; and sale of water toadjacent farms, e.g., investment in pumps; or in cost derivingfrom the necessity to purchase feed requirements, e.g., investmentin dairy animals and poultry layers by the landless orsmallholders. Special attention would also be given at appraisalto market prospects for items produced with project investments.

Holdings to include owned and land rented-in.

Also in this case, holding to include land rented-in.

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C. Savings Mobilization

7.14 NCBs are over-represented in rural areas and have no marketincentive to compete for deposits with improved or innovative services.ADBP's branch structure is designed for loan servicing where contact with theclient is generally by field officer rather than on the branch premises.Since the NCBs have started limiting acceptance of costly time deposits andswitching to the less costly savings accounts, a clear opportunity exists forADBP to compete with NCBs for a more significant portion of this rural branchdeposit-taking activity. Development of a cohesive rural deposit mobilizationpolicy is essential if ADBP is to become less dependent on SBP (para 3.08) andto be in a position over the medium term that would permit expansion of itsloan disbursements within the ceiling imposed by NCCC. ADBP should follow athree-pronged approach to develop its resource base: First, it would have todevelop a "deposit branch" strategy involving identification of branch sitesfor a reasonable network and a "branch format" that would cover physicalfacilities, record-keeping practices, and staffing policies and procedures.Therefore, mini-branches using micro-computers to combine the teller andaccountant function would be developed under the project.

7.15 Second, ADBP would make efforts to mobilize savings through itsNCO system. Several new schemes would be tested on a pilot basis and expandedif successful.11 Additionally, particular emphasis would be put on themobilization of deposits in all women-related programs where a linkage betweenlending and savings mobilization would be promoted. Third, resources would bemobilized through the use of other instruments, e.g. commercial paper such asbearer bonds for mobilization of resources. All resource mobilizationinitiatives would be supported by technical assistance funded under theproject. In addition, ADB would establish a separate technical assistanceproject. To carry out the experimental schemes it would be necessary toobtain exemptions from SBP regulations which currently do not permit thecollection of savings outside branch offices. An action plan, outlining theapproach to resource mobilization and geared to achieve a target in the growthof resources mobilized of not less than 20% per annum over the resources ofthe preceding year, calculated as the average of deposits in ten months underexclusion of June and July, would be developed. Accordingly, at negotiationsassurances were obtained that ADBP would: (i) prepare and furnish to the Bankfor review, not later than March 31, 1991 an action plan to mobilize ruralsavings; and (ii) implement such plan as agreed with the Bank, not later tnanJune 30, 1991. An assurance has also been obtained at negotiations thatnotwithstanding the recommendations of the above action plan, legal measureswill be taken by December 31, 1990 to remove impediments to the mobilizationof rural deposits by MCOs.

rThese could be savings stamp schemes, prize drawings or thepayment of return at the time of redemption, authorizing the MCOsto accept normal passbook savings in the field, or theintroduction of mobile deposit officers.

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D. General and Financial Performance

ADBP

7.16 At negotiations. the following new assurances were obtained tomaintain and imRrove ADBP's general and financial performance and Rrotect itsfinancial viability:

(i) GOP would make additional funds available to ADBP within theceilings for monetary expansion set by SBP at rates of return of6% in FY91, 7% in FY92 and thereafter, unless a different rate ofreturn would be agreed on following the annual review to beconducted by GOP, ADBP and the Bank (viii below);

(ii) ADBP would charge: (a) service charges as prescribed by SBP on alloutstanding balances of funds made available on the basis ofservice charge; and (b) rates of return of not less than 12% perannum plus a charge of 3% of each installment, which charge may bewaived in cases where installments are paid within one month ofthe due date, on all outstanding balances of funds made availableon the basis of hire-purchase, leasing, mark-up, and other Islamicfinancing modes or such other rates of return as determined in theannual review (para 7.17(v)); and

(iii) ADBP would: (a) limit its short-term lending to no more than 25%of its total lending or other financing, (b) account for itsincome on an accrual basis, (c) calculate and collect theoutstanding principal and income in case of early repayment on thebasis of reducing balances, and (d) apply a permanent write-offpolicy satisfactory to the Bank and in line with SBP's prudentialregulations.

7.17 At negotiations. assurances on the following ongoing covenants(with some adaptations) were also obtained:

(i) GOP would cause SBP to increase ADBP's paid-up capital if othermeasures by ADBP to maintain its debt to equity ratio at 7:1 wouldprove inadequate;

(ii) GOP would not require ADBP to undertake emergency lending exceptin the event of major natural calamity, and as a disbursementagent for funds provided by GOP for that purpose;

(iii) ADBP would charge interest rates on loans made based on Islamicmodes of financing that would be positive in real terms'l at alltimes and sufficient to: (a) cover its operating expenditures andcharges, including taxes, if any, and interest payments or returnsand service charges on borrowing; (b) make provisions for bad

Defined as exceeding the increase in GOP's Consumer Price Index.

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debts and maintain such provisions at a ratio to total overdues ofnot less than 40%, but in no case at a level smaller than thatrequired in the prudential regulations of SBP; (c) accumulatereserves that would be adequate to ensure, in conjunction withcontributions by SBP to paid-up capital, that the ratio of debt toequity is not greater than 7:1;

(iv) ADBP would not pay dividends in any year in which ADBP's profitsfall short of the level required to fund the reserves in themanner described under (iii) above;

(v) ADBP would carry out annually by December 31 in-depth reviews ofits past and projected income and profit-generating capacity and,on the basis of the review, develop proposals to achieve theprofitability required to fund the reserves in the mannerstipulated in (iii) above, and obtain the concurrence of GOP andthe Bank to the proposals by March 31, of each year, beginning in1991;

(vi) take all measures necessary to reach minimum recovery rates beforerescheduling of 75% of total demand from general credit operationsby June 30, 1991, and 80% by June 30, 1993; and

(vii) limit its financing on the basis of service charge, profit-and-loss sharing, and any other modes of financing that may notgenerate income sufficient to cover expenses, to no more than 1%of its total lending.

All Intermediaries for Agricultural Credit

7.18 To make lending viable for all intermediaries extendingagricultural credit, GOP would take all measures necessary to ensure thatlending rates in the agricultural credit sector would, by July 1, 1992, coverfully all lending-related costs of the intermediaries. Additionally, as aconidition of participation, all participating banks would have to becreditworthy. For the NCBs, this would involve the preparation andimplementation of restructuring plans directed at improving their financialposition and reaching capital adeqacy in accordance with the stipulations ofthe FSAL (paras 3.09-3.13). Accordingly, at negotiations, the followingassurances were obtained:

(i) GOP would take all measures necessary to ensure that lending ratesin the agricultural credit sector would, by July 1, 1992, coverfully all lending-related costs of the intermediaries. To achievethis objective GOP would enable the intermediaries to charge ratesof return for their entire agricultural lending that would(a) from July 1, 1990 (A) be at least positive in real terms'/ and

Rates are considered positive if they exceed the increase in GOP'sConsumer Price Index.

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thereafter remain positive, and (B) for short-term loans, be notless than 7X per crop season of not more than eight months for allcrops except sugar cane for which the rate of return would be 10%per annum; (b) from July 1, 1991, cover their cost of funds andreasonable administrative costs attributed to agriculturallending; and (c) from July 1, 1992, cover their cost of funds andadministration, adequate provisions for expected loan losses onagricultural loans, and a reasonable margin of profit;

(ii) by September 30, 1990, NCBs would strengthen their cost accountingcapabilities (para 7.19) to be able to carry out arnually byDecember 31, reviews of the adequacy of their rates of return inagricultural lending. By March 31 of each year, NCBs would obtainthe concurrence of GOP and the Bank to recommendations made onmodifications of the rate structure, and by July 1 of each year,implement the agreed recommendations;

(iii) NCBs would limit their agricultural credit to financing modes ofhire-purchase, leasing, mark-up, mark-down, and buy-back; and

(iv) GOP would ensure that participating banks, as a condition of theirparticigation in the prolect, would be and continue to becreditworthy to the satisfaction of the Bank. GOP confirmed atnegotiations that in assessing creditworthiness the participatingbanks would be required: (a) to be in full compliance with theprudential regulations of SBP; (b) take steps, satisfactory to theBank, towards achievement of a minimum ratio of capital tocallable liabilities of 3X as specified under FSAL; and(c) achieve by December 31, 1991 and thereafter maintain suchratio to the satisfaction of the Bank.

E. Accounts and Audit

7.19 With the assistance of consultants, ADBP would examine theadequacy of its accounting policies and procedures in view of the newprudential regulations of SBP. Such examination would yield recommendationson how they can be streamlined and made more efficient. Also, proposals wouldbe made for the introduction of a cost-accounting system that would enableADBP to measure its profitability in its various lending operations andachieve more customer-oriented operations. The analysis would also includethe adequacy of the existing management information system and identifymodifications needed to better reflect financia. condition and performance,including recovery performance as it relates to the need for loan lossprovisions and write-offs, as a tool for improved planning and management.NCBs would, with the assistance of consultants, develop a managementinformation system related to agricultural lending and strengthen their costaccounting units to determine the cost of agricultural lending and carry outthe required annual reviews of the adequacy of rates of return in agriculture(para 7.18). Assurances to the foregoing were obtained at negotiations.

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7.20 ADBP would reformat its credit investigation report (CIR) used bybranches/regions to input individual borrower/loan data into the FieldOperations Computerization System to include the data required to separatelending to women. Until the accounting system is streamlined, suchmodifications would be linked to an expansion of general ledger heads toincorporate all new loan purposes. Appropriate scheme codes would bedeveloped to segregate genuine smallholders with 2.5 ha or less, tenants, andlandless/assetless borrowers qualifying for IFAD financing from otherlandholding borrowers. At negotiations. assurances were obtained that:(i) ADBP would, by September 30, 1990, modify its general ledger system in away that would allow the generation of project accounts in sufficient detail;(ii) both ADBP and the NCBs have their annual project and general accountsaudited by external auditors acceptable to the Bank, such audits to includeaudits of the Statement of Expenditure procedure and for ADBP, computeraudits; and (iii) SBP and Punjab have their project accounts, withdrawals madeon the basis of Statements of Expenditure, and the Special Accounts audited byexternal auditors acceptable to the Bank.

F. Environmental AsRects

7.21 Since short-term inputs, e.g. pesticides and fertilizers, would befinanced under the project, awareness of related environmental effects wouldbe created among participating banks to avoid any detrimental impact, andsteps would be taken to exclude borrowers who fail to adopt the prescribedsafeguards from further access to short-term credit. This would be achievedby:

(a) MCO training courses covering: the safe use ofpesticides, their handling and application; pesticidesnot recommended for use in agriculture or suitableonly for restricted use; integrated pest management;excessive fertilizer applications and their impact onground water pollution through leaching and run off;and soil conservation and contour farming in hillyareas where farm mechanization would be financed;

(b) establishing linkages to the extension services whosetraining forums would give increased emphasis toenvironmental concerns (para 7.22);

(c) providing the services of an environmental specialist(4 staff-months) to help design appropriate coursecurricula and materials in addition to recommendingpolicy measures to the participating financialinstitutions and GOP; and

(d) ensuring in collaboration with the extension service appropriateuse of pesticides and fertilizers by farmers through thesupervised credit system.

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Accordingly, at negotiations. assurances were obtained that 1DBP and NCBswould require the beneficiaries applying for short-term credit and found to beusing pesticides and/or fertilizer in a manner which is harmful to theenvironment to take satisfactory corrective measures in order to be eligiblefor such credit.

G. Linkages to Extension Service_E

7.22 A Credit-Extension Coordination Committee (CECC) would beestablished at ADBP by December 1990. It would be chaired by ADBP's ExecutiveDirector (ED) Technology with ED Credit as a member. Other members would besenior executives from PBC, SBP, the NCBs, the Ministry of Food andAgriculture, and directors general (DGs) of the provincial extension servicesand livestock departments. The committee would meet once or twice a year, asneeded, and review operational credit-extension lLnkages at the field level.It would also recommend policy measures, aimed a'; further improving thelinkages, for management of its constituent memEers.

7.23 By March 31, 1991, CECC would develop the modalities to facilitateparticipation of the field level credit/techn.cal officers (ACOs, MCOs, MCOFs,regionil technical officers) of the banks in the extension services' "messageformu'ation committees" at the district level, and "fortnightly/monthlytrairLng sessions" at the tehsil level. Furthermore. it would be CECC'smane te to prepare and agree upon guideline.s to foster two-way links betweenthe extension and credit services as and when necessary. At negotiations.assurances were obtained that ADBP and the NCBs would establish regularlinkages to the extension service throug' the creation of a Credit-ExtensionCoordination Committee and the participation of MCOs/ACOs in training sessionsof the extension service at the tehsil and district level.

H. MonitorirLg and Evaluation

7.24 Assurances were obtaine! at negotiations that ADBP and NCBs wouldprepare monitoring and evaluation ('.1&E) reports on a regular basis. Thedetails of the M&E functions of ADhP are explained in Annex 11, ImplementationVolume. The performance of the MU.E Department of ADBP is satisfactoryalthough there is a need to fill vacant positions with qualified staff toenhance its economic and statist'ical capability. The project would supportmore widespread utilization of M.&E techniques within the overall program to beoperated by ADBP. The M&E system of NCBs will need substantial improvement toprovide the necessary input to their management information system foragricultural lending. The NCPs would need to develop the statistical base forthe agricultural credit procezs and assessment of socio-economic impact.

I. ComRuterization of Land Records

7.25 The Revenue Boerd of Punjab would be the executing agency for thispilot program. The Directar of the Revenue Academy in Lahore would be incharge of all actions related to its implementation in Kasur district. PCswould be installed in the two tehsil headquarters of the district where thecomputerization of exist'.ng land records, in parallel with ongoing business,

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would be overseen by two tehsildars to be recruited under the program byDecember 31, 1990. Local consultants would be employed to produce thesoftware that must be operated in Urdu. Agproval of the project clearancedocument (PCi) by the Punjab Govey_ ent would be a condition of disbursementof Credit funds for this component.

J. Agricultural Credit Research

7.26 The Agricultural Credit Department of SBP would administer thecredit research component. By September 30, 1990, a Research AdvisoryCommittee would be constituted to guide the planning and implinmentation ofresearch projects as well as to disseminate the results of research topolicymakers. The committee would be chaired by a representative of SBP andwould be composed of representatives from PBC, ADBP, the NCBs, FBC, researchinstitutes and universities. The secretary of the committee would also comefrom SBP. The project would provide funds for surveys, equipment, consultantsand training. When practicable, research projects may be contracted out toexisting research institutions.

K. SuRervision Plannine

7.27 Because six banks and two other agencies will be participating inthe implementation of the project, a heavy annual supervision input would berequired. Particularly during the first two years of project implementation,besides the regular staff input special expertise would be needed to assist inthe following project activities: (i) setting up in ADBP the mechanisms forlending to women and for lending under the pilot programs, includingrecruitment of consultants, drafting course curricula for training,recruitment and training of staff; (ii) establishing in NCBs under thecoordination of PBC the phased program for improving the supervised creditsystem; (iii) launching the pilot computerization of land records in KasurDistrict of Punjab with the Revenue Board of Punjab; and (iv) launching theagricultural credit research program directed by the Agricultural CreditDepartment of SBP. Annex 10, Table 4 contains a proposed supervision plan forthe project which details the required annual staff inputs and expected skillrequirements needed on supervision missions. The start-up mission would takeplace in FY90 with an staff input of 12 staff-weeks. The number of staff-weeks in this and the following years include staff from the Bank's ResidentMission and consultants which may be financed from consultants' trust fundsestablished by individual countries. During the first two project years,i.e., FY91 and FY92, staff input would be 14 staff-weeks, it would fall to 12staff-weeks in FY93-94, to 10 staff-weeks in FY95 and 8 staff-weeks in FY96.

VIII. PRODUCTION. MARKETING AND PRICES

8.01 It is expected that the project would continue the efforts ofprevious credit projects by contributing to increases in cropped area,cropping intensities and yields of the major crops which play an importantrole in export promotion and import substitution. In addition, better"quality" lending in the dairy and livestock sector would increase

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productivity while maintaining the fodder resource base. Increases in theproductivity of labor, notably rural female labor, would also derive from theprovision or credit for crop, livestock and SSE activities as well as time-saving technologies.

8.02 Specifically, gains in production can be expected from thefollowing:

(a) increases in cropped area and cropping intensities through theprovision of tubewells and other modes of irrigation and throughinvestments in mechanization, both by expanding tractor ownershipand by improving productivity through tractor replacement;

(b) increases in crop yields resulting from greater, more timelyavailability of irrigation and from improved tillage practices,particularly from the use of primary tillage implements;

(c) increased output from orchards from increased area and improvedrootstock, and double cropping in newly established orchard areas;

(d) increases in milk yields resulting from improved feed availabilitywith an increase in the volume and quality of milk marketed;

(e) increases in poultry meat and egg production from small, on-farmpoultry units;

(f) increases in production of meat and wool from investments in sheepand goats;

(g) general improvements in agricultural productivity resulting fromshort-term lending for more efficient usage of complementaryinputs such as fertilizers and pesticides, etc. and from directlending to women for women-specific activities in the crop,livestock and SSE subsectors;

(h) increases in output from cottage industries, for instance inhandicrafts and made-up articles of cotton and wool and in small-scale agricultural implements; and

(i) greater productivity, particularly of female labor, through theprovision of time-saving technologies.

8.03 Agricultural produce in Pakistan is marketed through both privateand public sector channels. Public sector involvement in marketing covers themain food grains (wheat and rice), sugarcane, cotton, potato, onion and non-traditional oilseeds. The GOP procurement system operates through federalpurchasing agencies at government-announced support prices and provincial FoodDepartments which establish purchasing centers throughout major growing areasat the time of harvest. It is expected that demand for the produce generatedunder the project will remain strong with potential for import substitutionfor wheat and edible oil and potential for export for cotton, rice,

4*,

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horticultural and minor crops. A more detailed description of the marketingand price policies is in Annex 10.

IX. BENEFITS. JUSTIFICATION AND RISKS

A. Benefits

9.01 Project benefits would derive from improved productivity inagriculture through further investments in mechanization and irrigation,resulting in increased cropping intensities and greater yields. Increasedcrop and livestock production would be consistent with GOP policies of exportpromotion and import substitution with associated improvements in She generaleconomic situation in the country.

9.02 A new area of emphasis under the project would be the introductionof credit delivery systems designed to increase significantly the involvementof small farmers, the landless and women in the economic activities of ruralcommunities. The provision of credit for these groups, who play a major rolein agricultural production, would have significant effects upon agriculturalproduction and income distribution. Benefits would also accrue to smallfarmers through investments in livestock which would be accompanied byimproved feed regimes aimed at preventing further degradation of feedresources.

9.03 Income-earning opportunities would also be promoted under theproject through credit for SSEs, particularly involving women. In addition,there would be scope for increasing female productivity through the provisionof time-saving technologies.

9.04 Through the institutional support component of the project, ADBPand the NCBs would become more effective in meeting the credit needs offarmers and rural communities in general. The participating institutionswould be financially strengthened through the adoption of market rates inagricultural lending. Their institutional efficiency would be improvedthrough improved management information systems, streamlined organizationalstructures, refined M&E procedures, and strengthened cost accounting systems.

B. Beneficiaries

9.05 It is estimated that about 1.1 M subloans would be made by ADBPand the NCBs under the project for purposes eligible for refinancing. Theseloans would benefit about 1.3 N farmers or other beneficiaries. The landlessand farmers under 2.5 ha who would be eligible for IFAD-supported loans wouldreceive 396,000 loans (equivalent to 40X of all loans), representing 475,GOObeneficiaries, farmers with holdings above 2.5 ha would receive 667,000 loans(60X), representing 800,000 beneficiaries.

9.06 ADBP would disburse 0.9 H loans or about 88% of all loans. Ofthese, about 357,000 (38%) would go to the landless or farmers with 2.5 ha orless, and 581,000 (62%) to those above 2.5 ha. It would also make about

4

- 44 -

71,000 loans to 85,000 women beneficiaries representing 7.6% of all loan casesand beneficiaries. Some 19,000 loans would go to female beneficiaries who arelandless or possess 2.5 ha or less.

9.07 NCBs would make about 125,000 medium-/long-term loans or about 12%of all project loans. Of these, about 39,000 (31%) would go to 47,000beneficiaries in the landless and Lmallholder category of 2.5 ha or less.Farmers with farm sizes of more than 2.5 ha are estimated to get about 86,000(69%) loans involving 103,000 beneficiaries.

9.08 All farmer beneficiaries with holdings of 2.5 ha or less and thelandless are assumed to be below the absolute poverty level which is estimatedto be US$122 (Rs 2,013) per person in 1985 prices in rural areas. Averagepre-investment incomes for farms analysed in the illustrative farm modelsrange from Rs 15,000 to Rs 36,000 on farms of 5 ha to 8 ha which, at a familysize of 7.1, corresponds to a per capita income of about Rs 2,100-5,100. Ifprices are adjusted to the FY89 level by using the present exchange rate, thecurrent poverty level in rural areas would be Rs 2,574. It can be inferredfrom these figures that all loan beneficiaries who are landless orsmallholders with 2.5 ha or less would be below the poverty level. As themodels show, a significant portion of beneficiaries with larger holdings wouldalso fall in the target group, since 91% of all farms in the country are below10 ha. Therefore, it is roughly estimated that about 52% of all beneficiariesincluding 25% of loan beneficiaries above 2.5 ha would have pre-investmentincomes below the poverty level.

C. Econmic and Finanial Analysis

9.09 Economic analysis of the project is based upon individualindicative models. Economic prices of inputs and outputs of individual modelswere obtained by calculating parity prices for major traded commodities;import parity prices were used for wheat, sugarcane and fertilizers, whileexport parity prices were used for cotton, Basmati rice and IRRI rice. Non-traded inputs and outputs, net of taxes and subsidies, were adjusted by thestandard conversion factor (SCF) of 0.9. All labor inputs were valued by theshadow wage rate of 0.8. The major economic and financial prices used and adiscussion of the results of economic and financial analyses for individualmodels are summarized in Annex 10. The economic rates of return for thesubprojects range from 14% to 65%, depending on the type of investment, andthe financial rates of return from 13% to 59%.

D. Project Risks

9.10 Expansion of the credit program within the project to include theinvolvement of NCBs in addition to ADBP would not in itself broaden the risks.ADBP has proved its ability to sustain growth in its loan portfolio, and NCBshave demonstrated ability to handle investment lending in all sectors of theeconomy except in agriculture where they operate at the specific request ofGOP. One project risk is associated with the development of women's creditdelivery services. The need for 4-wheel drive vehicles and drivers to providefield mobility and security for female credit staff will push operational

- 45 -

costs significantly above those of male MCOs. At the same time, womenborrowers are expected to take out fewer and smaller loans on average thanmen. However, the additional costs are unavoidable, and are seen as animportant means of expanding credit to less privileged groups who werehitherto unable to obtain credit. More numerous loans to women per month willtherefore be essential to generate loan portfolios of equivalent value. It isalso expected that higher cost would be partially offset by better repaymentfrom women. Another risk is related to the ability of both ADBP and the NCBsto reach IFAD's target beneficiaries, farmers with 2.5 ha or less and thelandless and the ability of ADBP to reach women. Given the continuingdependence of both ADEP and the NCBs on the use of MCO/ACO supervision ofindividual loans and the absence of mechanisms to reach groups of potentialclients, their ability to reach large numbers of small borrowers will belimited. To address this situation, management of individual banks would haveto redirect the approach of bank staff to poorer borrowers in terms of smallerloans if real progress is to be made. To that extent, all details of lendingto women, small farmers, and the landless have been carefully appraised(Annexes 9 and 11, Implementation Volume) and extensive discussions have beenheld during preparation and appraisal of the project to generate the necessarycommitment to this objective within GOP and the banks. It is expected thatthis commitment can be maintained throughout implementation.

9.11 The initial hesitance of NCBs to participate in the project andexpand agricultural lending is occasioned by their condition of excessliquidity in short-term funds, limitations imposed by credit ceilings andtheir historical experience of small or no profits from agricultural lending.The problem of excess liquidity may be regarded as temporary in nature, butthe main justification for providing long-term funds to NCBs is to match thematurities of their medium- to long-term lending. The lack of commitment toagricultural lending is caused in part by their lack of institutionalcapability to properly administer loans to farmers, a problem that would beovercome by the means provided in the project to strengthen the NCBs'institutional capability. The profitability issues would be addressed througha set of policy measures to give NCBs full discretion to select borrowers andto raise interest rates toward market rates in order to move agriculturallending toward profitability. Risks associated with modifying interest ratepolicy would be minimized through close coordination with FSAL efforts andcontinuous dialogue with GOP and NCBs.

9.12 For ADBP the risk exists that its financial position woulddeteriorate as a result of its inability to bring its loan recovery back to amore acceptable level which would have serious repercussions on its interestincome and the amount of provisions to be made. It is expected, however, thatthe action program agreed on and being implemented by ADBP's new management(para 4.07) would reverse the setback encountered in FY89, restore loanrecoveries to the previous level, and eventually improve upon it.

- 46 -

X. AGREEMNTS AND RECOMMENDATION

10.01 During negotiations, assurances were obtained that Governmentwould;

(i) make additional funds available to ADBP at rates ofreturn specified in para 7.16;

(ii) (a) cause SBP to increase ADBP's paid-up capital as needed to keepits debt to equity ratio at 7:1 or better, and (b) not requireADBP to undertake emergency lending (para 7.17);

(iii) ensure that (a) all financial intermediaries by July 1, 1992 wouldbe able to cover fully all lending-related costs in agriculturallending as specified in para 7.18, and (b) all participating bankswould be and continue to be creditworthy (para 7.18); and

(iv) convert US$0.5 M of the IDA Credit or IBRD Loan into a grant tothe Government of Punjab and another US$1 M into a grant for SBPfor the computerization of land records and conduct ofagricultural credit research, respectively (paras 6.16, 7.25-7.26).

10.02 During negotiations, assurances were also obtained that ADBPwould:

(i) expand the number of its MCOs, recruit female village assistants,modify its loan targeting system for supervised credit, and takeappropriate steps to resolve legal issues related to the pilotlending schemos, all as specified in para 7.07;

(ii) undertake organizational changes as specified and have a study onits organization and management conducted by December 31, 1991,and implement the agreed recommendations by December 31, 1992(para 7.08);

(iii) prepare and implement an action plan that would include takingmeasures required to start mobilization of savings through MCOs(para 7.15);

(iv) charge rates of return on loans as specified in paras 7.16-7.17;

(v) (a) not pay dividends in any year in which its profits fall shortof the level required to fund prescribed reserves, (b) carry out,annually by December 31, reviews of its past and projected incomeand profit-generating capacity, (c) limit its short-term lendingto no more than 25X of its total lending or other financing,(d) take all measures necessary to reach minimum recovery rates of751 of total demand in general lending by June 30, 1991, and 801by June 30, 1993, and (e) limit its financing on the basis of

- 47 -

service charge and profit-and-loss sharing to no more than 1X ofits total agricultural lending (paras 7.16-7.17); and

(vi) examine the adequacy of its accounting system and modify itsgeneral ledger system (para 7.20).

10.03 During negotiations, assurances were also obtained that the NCBswould:

(i) expand the number of ACOs as specified in para 7.10;

(ii) create the necessary organizational structures for projectimplementation by December 31, 1990 (para 7.11);

(iii) review the adequacy of their rates of return in agriculturallending annually as specified in para 7.18;

(iv) strengthen their cost accounting capabilities by September 30,1990 (para 7.18-7.19); and

(v) limit their agricultural lending to the financing modes describedin para 7.18.

10.04 During negotiations, assurances were also obtained that allDarticiRating banks would:

(i) (a) recruit additional staff in accordance with recruitmentpolicies based on merit and through open competition,(b) undertake, jointly with GOP, IBRD, and other cofinanciers, aMid-term Review at the end of FY92, (c) raise sub-borrowercontributions for tractor, implement, and PMI lending as specifiedin para 7.13 and reduce the minimum landholding for NCB tractorloans from 10 ha to 5 ha, and (d) make loans only after adequateappraisal (para 7.13);

(ii) take measures ensuring the appropriate use of fertilizers andpesticides as described in para 7.21; and

(iii) establish regular linkages to the extension service through thecreation of CECC (para 7.22).

10.05 During negotiations, assurances were also obtained that theGovernment of Punjab would approve the PCl for the component related to thecomputerization of land records on a pilot basis as a condition ofdisbursement of Credit funds for this component (para 7.25).

10.06 GOP would enter into subsidiary financing agreements with ADBP andthe NCBs specifying the onlending terms and conditions for IBRD and IDA funds.The execution of these agreements would be a condition of effectiveness(para 6.16).

- 48 -

10.07 With the above assurances and conditions, the project would besuitable for an IBRD Loan of US$148.5 M and an IDA Credit of US$1.5 Mequivalent. The Borrower would be the Islamic Republic of Pakistan.

- 49 -

ANNEX I

PAKISTAN


Detailed Features of the Project

Medium-/Long-Term Lending of ADBP and the NCBs

1. Tractors and Implements. Lending would cover investments for twocategories of medium-horsepower tractors of 45-59 h.p. (85%) and 60-75 h.p.(15%), primary and secondary cultivation and seeding equipment, and generalfarm machinery including threshers and reapers. Tractor funding remains thelargest component of the proposed lending program. ADBP's tractor lending(for 22,300, 25,100 and 28,200 tractors, respectively in FY91-93, equivalentto approximately 86% of projected national demand) is projected to declineslightly to 37% of total ADBP general lending. The hiring out of tractorservices by owners for cultivation, on-farm and off-farm transport activitiesis well-developed in Pakistan and contributes markedly towards the viabilityof tractor ownership by smaller landholders. Hire rates are competitive andhave shown a decline in real terms in the Punjab to the benefit of those whohire.

2. In comparison to ADBP, the five NCBs' proposed tractor funding islimited, being about 4% of projected total demand. UBL and NBP lending wouldcover more than 80% of this. The total number of tractor units funded by theADBP and NCBs is thus anticipated to cover about 90% of the projected nationaldemand. The balance is anticipated from direct farmer financing and FBC.

3. ADBP lending for farm implements would be maintained at about 7%of total lending, or equivalent to 19% of tractor lending in FY93. Theproportion with respect to tractor funding is considered adequate to enablefarmers to purchase basic requirements of primary and secondary tillageimplements and a trailer. Adaptive research trials undertaken by PARC/CIMMYT,the Punjab Department of Agriculture and various universities and researchcenters indicate that appreciable yield increases and operating cost savingscan be obtained by the farmer through the adoption of deeper primary tillage.Increased market demand for such implements indicates that the farmer is alsobecoming aware of this potential. Transport remains an important on-farm andoff-farm income-generating activity and funds for trailer purchase have beenincluded within the primary implement package in order to ensure tractorviability. The NCBs would also lend for implements, seed drills, reapers andthreshers.

4. Individual loans would range from Rs 31,000 (US$1,469) for animplement package consisting of a tine-cultivator and trailer to Rs 320,000(US$15,166) for a 75-hp tractor with a full package of implements andequipment. Expressed in current terms, project costs for tractors would beRs 15,698 M (US$713 M), equivalent to about 79,100 tractor loans. Costs for a

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ANNEX[ -1Page 2

variety of implement packages, in most cases to be included in a tractor loan,would amount to Rs 3,571 H (US$162 M).

5. Private Minor Irrigation (PMI) financing would include medium- andlong-term investments by farmers to use groundwater or surface water forirrigation. Investments would cover the construction or improvement of alltypes and provision of pumping units (including power connection for electricunits), installation of pumps, improvements in spring water utilization, andon-farm water management. The growth in ADBP's lending for PMI is projectedto be 13%, 31% and 10% during FY91-93, respectively. The projections takeaccount of ADBP commitments to provide tubewell loans for the concurrentPrivate Tubewell Development Project.

6. Dairy Development. Sheep and Goats. and Poultrv: For borrowerswith irrigated land, loans would be made for dairy buffaloes and cattle cows,e.g. two females, shed, fodder crops, equipment and feed. Loans would also bemade for sheep and goat production for stock (e.g., 10 females plus 1 male),shelter, fodder crops, and feed. A significant percentage of medium-termloans to be extended to women would be made under these categories ofinvestment (Annex 11, Implementation Volume). For applicants with only baraniland, loans for ruminants would be sanctioned only where annual feed supplyrequirements are fully assured. Loans to rural landless applicants forruminants, for which the supply of feed, e.g., green fodder, straw and stallfeeding, must be purchased in its entirety are not financially viable atprevailing average farmgate prices. However, loans to landless applicants maybe sanctioned individually if justified by above-average product prices orbelow-average feed prices or both. Loans would also be made for poultrybroiler and layer units for chicks (e.g., 200 birds), shed, equipment, feedand other expenses.

7. Horticulture and Vegetables: Financing for orchard developmentwould include the establishment and maintenance costs of deciduous, temperate,and tropical orchards. Fruit production technologies leading to higher yieldsand superior quality output would be employed for designing the loan packages.For example, dwarf apples which have higher plant density per unit area, andhave improved clonal root stock ensuring fewer diseases and quality productionwould be promoted.

8. Vegetable production around the green belts of major towns and inthe specialized vegetable growing areas has considerable potential. Early andlate-grown vegetables, off-season vegetables, and quicker marketing of allvegetables fetch above-average prices. Appropriate technologies employingmini- and walk-in tunnels with polytene and shade netting, power sprayers, andfarm-to-market transport facilities are available for building into the loanpackages.

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ANNEX IPage 3

9. Other On-Farm Development: Financing in this category would befor water course improvement, on-farm water management, land leveling,aquaculture, social forestry and tree planting, apiculture, silviculture,floriculture, and miscellaneous on-farm implements and equipment. In the 5-10ha landholding category, 381 equivalent meters uf main water course with 20Xlining would cost Rs 20,993 (US$995); financing for 3 ha of land levelingwould amount to Rs 8,000 (US$379); and miscellaneous equipment would befinanced up to Rs 15,000 (US$711).

Additional Medium-/Long-Term Lending of ADBP

10. Small-Scale Enterprise (SSE) and Income-Generating Activities:The project would support medium-/long-term credit extended by ADBP to developand expand rural SSEs,'/ and support (i) suitable technologies; (ii) skillstraining; and (iii) marketing. ADBP would lend up to Rs 50,000 M (US$2,370)to individuals and to registered NGOs (on a pilot basis) who operate orservice rural enterprises which have fixed assets up to Rs 0.5 M(US$23,697) .2/

11. Scope for credit would be in: (i) small-scale custom processing;(ii) manufacturing of non-traditional processed products; (iii) artisanindustries; and (iv) farm-related enterprises. Loan sizes would vary by typeof enterprise, size of labor force, capital intensity, duration of startupperiod, and location of enterprise.

12. Time-Saving Devices: Credit would also be extended by ADBP foragricultural, non-agricultural and household time-saving technologies. Suchdevices include wool caruers, spinning wheels, butter churners, nut-crackingmachines, spice grinders and juicers, corn huskers, rice hullers, oil nutpresses, fodder cutting machines, as well as handpumps, more efficient stoves,and prepared animal feeds. These technologies should improve product quality,reduce processing losses, and minimize work effort, especially of women.Time-saving devices would be promoted to provide women opportunities to engagein other productive activities.

SSEs for project purposes are defined as having fixed assets of upto Rs 0.5 M and a labor force including self-employed unpaidfamily workers, contract labor, or casual laborers, the numberemployed not being a criterion defining firm size.

GOP defines small-scale industries as establishments with totalassets of Rs 10 M or less and micro-enterprises as those withfewer than 10 workers (Federal Government Act of 1934).

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ANNEX IPage 4

Short-term Lending of ADBP

13. CroR and Livestock Production: The project would support ADBP'sshort-term lending for crop production on an incremental basis. This wouldinclude lending for seasonal inputs such as seeds, fertilizer, pesticides,tractor hire, land leveling, and also the cost of harvesting and processingoperations. Short-term loans for livestock production and processing would bemade after careful appraisal. Lending purposes would include fattening sheepand goats, primarily for the annual Eid festival. Short-term loans forworking capital would be available for feed, fodder crops, medicines andchicks to the extent of actual requirements recoverable within 12 months forbuffaloes, cattle cows, sheep and goat operations, and within 18 months forpoultry broiler and layer operations.

14. SSEs and Other Income-Generating Activities: Short-termproduction or input loans would include such items as the purchase ofagricultural, livestock or semi-processed products; packaging; intermediateprocessing; hired labor and/or energy charges; accessories or replacementparts; product design materials like pattern books, manufacturers' catalogs,carpet-weaving patterns; and equipment repair charges. The loans which aretoo small to be handled individually under ADBP's Supervised Credit Schemewould be covered through NGOs (para 16 below).

15. Lending to Women: The project would support ADBP's lending towomen for crop production, livestock, poultry and SSEs through innovativeapproaches related to credit delivery to women on a country-wide basis. Threetypes of female credit staff would be hired: couple mobile credit officers(CMCOs) where the wife handles lending to women; female MCOs (MCOF) operatingindependently in the field, either alone or in pairs; and matriculate (orintermediate) female VAFs drawn from the local area to act as intermediariesbetween female or male MCOs and women borrowers. The projected recruitment offemale field staff is set out in Annex 9. Project costs of credit channelledto women through this delivery system are estimated to be Rs 2,392 M(US$108 M) of which the Bank would finance US$10.0 M and IFAD US$4.3 M(Annex 11, Implementation Volume).

16. Pilot Programs: The project would support the pilot testing ofnew lending initiatives at ADBP targeted at male and female borrowers from thelower-income groups through (i) promoting the use of group guarantees; (ii)offering a wide selection of legally available securities; and (iii) utilizingNGOs to provide social and technical support for individuals or groupsinvolved in ADBP lending activities, retailing ADBP credit to their own groupparticipants (Annex 8). The legal issues which could limit the implementationof the pilot programs and proposals on how they would be addressed are set outin Annex 7.

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ANNEX 1Page 5

Lending Not Financed under the Proiect

17. Loans for marine fisheries development and agro-industrialinvestments would be financed by ADBP with the support of the AsianDevelopment Bank (ADB) under previously concluded loan agreements. Loansextended by NCBs for short-term lending, fisheries development, and agro-industrial investments would not be supported under the project. The NCBswould make short-term loans from their own resources, while the other types oflending are covered under other credit lines of the World Bank Group.

Institutional Develo2ment of ADBP and the NCBs

18. Establishment Cost of New Delivery Mechanisms of ADBP. The newcredit delivery mechanism for women at ADBP would require the recruitment of90 female MCOs each in FY91 and FY92, and another 102 in FY93, totaling 282 bythe end of the project period. In addition, male MCOs (in CMCO teams), 552VAFs, 156 drivers, and 17 supervisory staff (out of which not less than 7would be female) would be needed. Expressed in base cost salaries wouldamount to Rs 63.4 4 (US$3.0 M), technical assistance to Rs 12.4 1 (US$0.6 M),training, fellowships, and study tours to Rs 47.0 M (US$2.2 M), vehicles toRs 149.9 M (US$7.1 M), and incremental vehicle-operating cost to Rs 8.8 M(US$0.4 M). The total cost would thus be Rs 281.5 M (US$13.3 M). Of this,Rs 209.3 M (US$9.9 M) would be cost for equipment, consultancy and stafftraining, i.e., non-recurring cost, and Rs 72.2 M (US$3.4 M) would berecurrent cost (Annex 9).

19. Training. Provision would be made under the project for theinduction training of all new female MCOs at ADBP staff colleges and ofvillage assistants (VAFs) at regional offices. A major briefing/awareness in-service training program would also be conducted to familiarize all regionalmanagers, branch managers, and male MCOs from ADBP outlets selected to handlewomen's credit with the importance of the women's component and the proceduralmodifications and operational strategies to be utilized. Separate additionaltraining in the operation of the pilot programs would be included forconcerned female MCOs on the completion of induction training, while malesupervisory officers and male MCOs would again be reached through mobiletraining units. The cost of the training would be financed from ADBP'sordinary training budget.

20. Fellowships and Study Tours. To assist in the efficient build-upof the credit delivery system for women, the project would provide fellowshipsfor female head office supervisory staff and technicians and would supportstudy tours for female MCOs and supervisory ADBP officers. Thirteen studytours, each of two weeks duration and involving 15 participants, would befinanced. The study tours would focus on regions with successful women'scredit programs in Pakistan or other South Asian countries. The study tourprogram could also encompass study tours to Pakistan by practitioners in othercountries, such as Bangladesh, to train MCOs in women's credit delivery

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ANNEX 1Page 6

programs. Additionally, 255 fellowships would be provided for ADBP staff and40 fellowships for NCB staff, namely trainers, officers at headquarters,regional/zoral and branch managers, and MCOs/ACOs. Total cost of fellowshipsand study tours is estimated to be Rs 72.0 M (US$3.4 M).

21. New Credit Delivery Mechanism of NCBs. For NCBs, effectivelysupervising, about 30X of borrowers during full implementation would require anadditional 200 trained ACOs in the first two years and 182 in the third yearor a total of 582 during the project period. The recruitment of these ACOswould be additional to the recruitment commitments made under other projectsassisted by foreign donors. The ACOs would undergo intensive training inbanking and technical agriculture. Training would cover all lending-relatedareas, supervision and collection. Salaries would be a major expenditure,amounting to Rs 69.3 M (US$3.3 M). Based on the cost of salaries and fringebenefits of ACOs, management overhead, training and vehicle depreciation, thefixed cost of maintaining an ACO is estimated at Rs 101,500 (US$4,810) peryear. The variable cost per loan, consisting of the running cost of avehicle, stationery and supplies, loan approval and clerical support, isestimated to be Rs 195. The total base cost of equipment and vehicles wouldapproximate Rs 107.7 H (US$5.1 M).

22. EauiRment and Vehicles: The project would support the procurementof equipment and vehicles for the institutional development of ADBP and NCBs.For ADBP, 207 station wagons would be financed to replace old vehicles at acost of Rs 159.7 M (US$7.5 1). For the women's credit delivery system, 235jeeps would be needed to provide transportation facilities to CHCOs and MCOFs(para 18). For the NCBs, 600 motorcycles and 120 jeeps would be provided toensure the mobility of ACOs and supervisors. In addition, computer equipmentwould be provided for both ADBP and the NCBs. For ADBP, personal computers(PCs) would be gradually introduced at the branch level, while for NCBs, PCswould be used at the zonal level to create a management information system forthe supervised credit scheme. Vehicles and equipment for NCBs would costRs 107.7 M (US$5.1 M) while equipment for ADBP would cost Rs 9.5 M(US$0.45 M).

23. Technical Assistance: For ADBP, 139 staff-months of consultancyservices would be provided under the project; for NCBs, 12 staff-months, foragricultural credit research, 6 staff-months, and for local consultantsregarding the computerization of land records, about 24 staff-months. InADBP, consultants would assist in: (i) devising new and improving existinglending programs for farm mechanization, PMI, fruits, vegetables, minor crops,and inland fisheries; (ii) preparing an organization and management study;(lii) preparing and implementing an action plan for rural savingsmobilization; (iv) designing crop insurance programs; (v) reviewing creditappraisal; (vi) designing computer application systems; and (vii) variousother short-term programs. Consultancy services under the women's creditdelivery and pilot lending programs would be provided for designing creditprograms. A consultant would work with existing male and newly recruited

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ANNEX 1Page 7

female staff in the Agricultural Technology Division to handle the provisionof back-up support and develop beneficiary training programs for newinitiatives in the crop, livestock and small enterprises sector. New coursesyllabi would be prepared by training consultants attached to the Training andManagement Development Department for mixed MCO/MCOF induction trainingprograms to be held at staff colleges and short-term VAF training programs atregional offices. Consultants would also work with the NCBs to prepare andimplement a management information system and a cost-accounting capability.Total base cost for the technical assistance component is estimated to beRs 43.2 M (US$2.0 M) for ADBP and Rs 4.0 M (US$0.2 M) for NCBs.

Agricultural Credit Research

24. Rural credit surveys would be conducted to provide informationconcerning the farm credit situation, particularly farm credit practices,access to institutional credit and characteristics of the informal creditmarket. A study of women's participation in decision-making in domestic,agricultural and non-agricultural affairs would be carried out. Theirperceptions and credit practices will be studied to serve as a basis formodifying features of the project in order to improve the impact on women.Specific policy issues would also be studied, such as causes of loandelinquency, cost and returns of agricultural lending, and impact of directedcred't programs. Tne estimated base cost of this component is Rs 27.4 M(US$1.3 M). Details are provided in Appendix 1.

ComRuterization of Land Records

25. The project would support the computerization of land records on apilot basis in one district of Punjab. This would facilitate the keeping andverification of land records which has been done manually for centuries byprovincial revenue authorities. Computerized land records would alsofacilitate the issuance of passbooks to all farmers in order to provide themwith access to agricultural credit facilities. The project wou,d providefinancing for computer and other equipment, appropriate software, twovehicles, training, consultancy and staff cost. Details are provided inAppendix 2. Total base cost for this component is estimated to be Rs 12.5 M(US$0.6 M).

- 56 - ANNEX 1

PANISIANAIMLTWAL CREDIT PROJECTProact Caronts bw Year

Totals Includirw Contiumncin Totals Including Cantingencies(RUPEES '000) (USS '000)

90/91 91/92 92/93 Total 90/1 91/92 92/93 Totalz=r2zxv2=z zr U 2 ZDZa * Z=ZgZra r =

A. FARM DEVELOPMENT AND SMALLSCALE ENTERPRISE LOANS

1. BORROERS OWNING 2.5 ha OR LESS

TRACTORS 172,342.5 208t,94.2 251,962.5 632999.1 7937.0 9,483.7 11,329.3 285750.0FARR IMPLEMENTS 49,950.4 67t945#0 90.87.7 2069883,1 2,249.7 3,086.1 4,052.3 9,388.2OTHER ON-FAR DEJELOPIENT 1,153,060.4 194369047.9 1767.7437 493569852*0 53,102.7 65.226.9 79,517.1 197,946.6SMALL SCALE ENTERPRISE 446.421.3 557,999.2 700,551.1 1,704,970.5 20,559.3 259340.3 31,512.4 77,412.0

Sub-Total BORROWERS MMING 2.5 ha OR LESS 1,920,674.5 2,270t6853 2.910,244.9 690146048 939498.7 103,137.0 126,411.1 313,396.92. BORROWERS DNING MORE THAN 2,5 ha

TRACTORS 4.1049489.0 4,971,429.9 5,98659.1 15,065,577.9 1899026.7 2259807.9 269,429.2 684,262.9FARM IMPLEMENTS 905104.0 1,119.129.5 1,340,073.2 3,364.306.7 41,693.4 50S832.1 60.279.5 152,794.9PRIVATE MINOR IRRIGATION 7031494.5 931,672.0 1.149229.0 279M335.5 32,39.0 429317.6 51,649.9 126.365.SOTHER ON-FARM DEVEOET 1614,734.2 199411530 2,206,643.0 5M705,530.2 744364.4 956590.3 99,259.7 259,204.5SHLL SCALE ENTERPRISE 135,919.9 165,948.1 168997.2 4709764.1 6,259.6 79537.5 74597.4 21.394.5

Sub-Total BORROIIERS DMNING NMRE THAM 2.5 ha 7.463,730.6 9,072,332.5 10,953,501.4 27,399,564#5 343,732.1 412.075.3 4899214.7 1,244.022.2

Sub-Total FARN DEVELOPMENT AND SMALLSCALE ENTERPRISE LONS 9,298405.1 11,343017.9 13,663,746.4 34,291,169.2 4279580.9 515,212.3 614,625.9 1,557419.0

8. FISHERY DEVELOPMENT LOANS 143.013,3 159,584.4 1734681.? 475,279.5 6,586.3 7.203.1 7M812.6 21,602.0C. PROJECT LOANS FOR AGROINDUSTRY 1.294.540,0 1424,9M2.7 1,560,003.2 4,269.525.9 59,157.8 649724.3 709172.4 1949054.5D. INCREMENTAL SHORT TERN LOANS 2,7869853,5 34392,084.4 4.0714590.1 10,250,52.0 129,344.8 154t072.2 193.149.2 465,566.2E. INSTITUTIONAL DEVELOPMENT ASSISTAICE

VEHICLES AND EQUIPlENT 110,348.6 200,083.6 247,292.1 557,714.2 5.082.0 9,088.0 119123.3 259293.3TECH. SPECIALISTS AND FELLOUWSIPS 489756.2 70,190.1 33.560.8 152F507.1 29245.4 3,199.1 1,509.6 64943.2LOCAL TRAINING 9,138.5 6.616#2 4,476.2 19,230.9 374.B 300.5 201.3 876.7INCREMENTAL ADMINISTRATIVE EDENDITURES 19,115.3 69,849.9 113,968.5 202,833.7 980,3 3,172.7 5.122.1 9.175.0

Sub-Total INSTITUTIONAL DEVELOPMENT ASSISTANCE 186,358.5 346,739.8 39,t187.7 932,295.9 89582.5 15,749.3 17,956.4 42,28.1F. AGRICULTURAL CREDIT RESEARCH 8,562.8 13,936.5 11,779.6 34927S.9 394.3 633.0 529.9 1,557.2G. COMPUTERIZATION OF LAND RECORDS 7,009.9 4,784.9 3.647.8 15,442.5 322.8 217.3 164.1 704,2

Total PROJECT COSTS 13.700,743.1 16684,130.3 19.993,636.7 50.268,510.1 630,969.4 757,811.5 9949410.4 2,293M19I.3

April 12 1990 11:11

- 57 -

ANNEX IAppendix 1

PAKISTAN


Agricultural Credit Research Component

1. The Agricultural Credit Department of the SBP would administer theagricultural credit research component under which agricultural research wouldbe carried out to deepen the understanding of the functioning of theagricultural credit sector. A Research Advisory Committee would beconstituted to guide the planning and implementation of research projects aswell as disseminate the results of research to policy makers. The committeewill be chaired by a representative of SBP and will be composed ofrepresentatives from PBC, NCB, ADBP, FBC, research institutes and theuniversities. The Secretary of the committee will come from SBP. The projectwould provide funds for staff, surveys, equipment, consultants and training.When practicable, research projects may be contracted out to existing researchinstitutions.

2. Among the topics to be covered (see Attachment) would be a ruralcredit survey to be conducted during the first year of the project to updateinformation concerning the farm credit situation, including in particular farmcredit practices, access to institutional credit and the characteristics ofthe informal credit market. This survey would determine the correlation offarm size, tenure, farm income and oi.her factors to agricultural credit. Astudy of women's participation in decision-making in domestic, agriculturaland non-agricultural affairs would also be carried out. Their perceptions andcre4lt practices will be studied te serve as a basis for modifying features ofthe project in order to fmprove the impact on womAn. Specdtfic po2lcy issues d ' '

would also be studied such as causes of delinquency, cost and returns ofagricultural lending, impact of directed credit programs and other issues tobe identified.

- 58 - ANNEX IAppendix 1Attachment

PAKISTAN


Rural Financial Markets Research

The research component, of the Agricultural Credit Project would consistof a series of inter-related studies on both the demand and supply sides to examinevarious issues in the rural financial markets (RFMs) of Pakistan. All studies wouldstart with a review of existing research literature to avoid duplication of work.The topics to be studied would include but not necessarily be limited to thoselisted below.

Demand Level Studies

1. Farm Credit Study. To provide information on farm financing practices,level of farm indebtedness, sources of credit, access to formal credit sources,nature of credit demand, terms and conditions of loans, use of credit, repaymentperformance, factors affecting repayment, and perceptions towards rural creditsources. In order to get a broader view of the demand for financial services in therural areas, the farm credit survey will consist of a nationwide sample of ruralhouseholds.

2. Borrower Transaction Costs and Credit Rationing in Rural FinancialMarkets. To examine the non-interest expenses incurred by the farmer-borrowersincluding actual cash outlay and the opportunity cost of time spent in applying for,securing and repaying a loan from both formal and informal sources; to determinehow borrower transaction costs affect borrower demand for and access to credit; toexamine the factors that determine the level of transaction costs; and to examinethe role of transaction costs as a mechanism in the rationing of credit in Pakistan.

3. Farm Household Savings in Pakistan. The study would provide informationon the patterns and determinants of saving of rural households viz., level and formsof savings, the importance of financial form of savings, households' propensity tosave, factors affecting households' decision to save, perceptions of ruralhouseholds regarding saving, responsiveness of saving, in general, and financialsaving, in particular to changes in interest rates. To provide broader informationabout the potential for mobilizing financial savings in the rural areas, the studywould include both farm and non-farm households.

4. A Study of the Role of Women in the Rural Economy and the Credit Market.The study would provide information on the participation of women in decision makingin domestic, agricultural and non-agricultural affairs, in the management offinancial resources for the household, the farm and non-farm income generatingactivities, and their saving and borrowing practices. The study will serve as abasis for modifying features of the Agricultural Credit Project. This study wouldconsist of case studies of farming villages and farm households in Pakistan orsample surveys in order to obtain in-depth information. In addition, the studywould examine the role of women in formal credit markets especially co-operativesocieties; in informal markets, especially 'bisis' or committies; and in communitybased credit programs especially of NGOs.

- 59 - ANNEX IAppendix 1AttachmentPage 2

SuDRly Side Studies

5. The Informal Rural Financial Markets (IRFMs) in Pakistan. This studywill examine a number of related issues on the informal rural financial markets asfollows:

- the major structure of the IRFMs, size, trends in size and policy andlegal environment impinging on the informal credit markets;

- role of informal lenders in savings generation and provision ofconsumption credit, allocation efficiency and issues on equity;

- sources of funds of informal lenders, size of clientele, types offinancial services given, form and nature of credit extended toborrowers;

- interlinkage of informal lenders' credit transactions with transactionsin other markets (such as input supply, trading of products) in whichthe lenders participate;

- linkages and interaction of informal lenders with the formal financialinstitutions and implications for monetary policy;

- interest rate formation in the informal credit markets and trends;

- competition between formal and informal sectors;

- informal lender transaction costs and recovery rates; and

- an optimal legal and policy environment towards the informal financialsector.

6. A Comparative Study of Rural Branches of Banking Institutions inPakistan. This study would provide information on the performance of branches ofbanks in the rural areas, sourcing of funds, lending practices, savings mobilizationpractices, credit allocation practices, repayment experience, costs of mobilizingdeposits and lending, efficiency of operation, customer satisfaction, and the policyand legal environment impinging on their operations.

7. The CooRerative Credit Study. This study would examine the financialand management performance of the primary cooperative societies as well as thedynamics of group action including informal groups, determine prospects forstrengthening capability in financial intermediation particularly in savingsmobilization, disbursement of loans and recovery. It would also examine theexperience of banks with lending to informal groups and compare these practices withlending to registered cooperatives.

- 60 -

ANNEX 1Appendix 2

PAKISTAN


Computerization of Land Records

1. The Revenue Board, Government of Punjab, in Lahore, would be theexecuting agency for the project component regarding the computerization ofland records on a pilot basis. Such computerization would be useful toeliminate the cumbersome procedures of manual land registration and recordkeeping which are in force since many centuries. Main benefits are expectedto be the availability of up-todate land records which would permit immediateaccess for the verification of land titles, and the access to the full rangeof agricultural data assembled by the natwari (the land registration official)and kept manually in large volume books. A list of the registers kept by theDatwari is attached. A secondary benefit would be the facilitation of theissuance of passbooks used as collateral in agricultural lending.

2. With respect ot the implementation of the component, the followingagreements were reached:

A. There is an urgent need of issuing passbooks to all farmers in order toprovide them with access to agricultural credit facilities, and thecomputerization of land records could be a means to facilitate thisobjective;

B. The district of Kasur was chosen to carry out a pilot program since itis small and close to Lahore, and can therefore be easily supervised;

C. The Director of the Revenue Academy in Lahore would be the ProjectDirector/Coordinator for the pilot project;

D. The computerized land records system would have to be run in Urdulanguage and nastaliq script with English figures and, therefore,keyboards and special computer software would be needed;

E. The pilot project would be strictly limited to computerizing theexisting land record system and would produce all existing records whichare currently produced manually; and

F. The Provincial Government has approved the concept clearance document ofthe pilot project presented by the Revenue Board. Approval of theproject clearance document (PCI) by the Punjab Government would be acondition of disbursement of funds.

3. The cost estimate for the pilot project is in Annex 11,Implementation File. Cost estimates have been prepared under the assumptionthat the initial heavy wnrk load of data input would be carried out on acontract basis and that the computer hardware to be installed should besufficient only for the day-to-day activities.

- 61 -

Appendix 2Attachment

List of Registers Kest by Patwari

1. Register Haqdaran-i-Z2amee [Jamabandil (Land Rights Register)2. Register Khasra Gardawri (Harvest Inspection Report)3. Register Integalat (Mutatinn Register)4. Roznameha Kargazari (Daily Work Performance)5. Roznameha Hidayati (Daily Instructions Report)6. Roznameha Wasqaati (Daily Incident Report)7. Lal Kitab (Red Book, Statistical Record)8. Shajra Parcha (Village Land Map on Cloth)9. Fard Partal (Verification of Rights Register)10. Dhal Bachh (Land Revenue Dues Register)11. Register Fees Ujrat (Service Fees Register)12. Register Fees Dakhel-Khar (Mutations Entry Fee Register)

- 62 -

ANNEX 2Table 1

PAKISTAN


Schedule of Disbursements

Ouarter IBRD IDA IFAD

FY911 15.0 0.3 2.52 21.0 0.3 3.53 27.0 0.3 4.54 34.0 0.5 5.7

FY921 43.0 0.6 7.22 50.0 0.7 8.33 58.5 0.8 9.84 68.0 0.8 11.3

FY931 78.0 0.9 13.02 87.0 0.9 14.53 96.5 1.0 16.14 107.0 1.0 17.8

FY941 118.0 1.1 19.72 127.0 1.1 21.23 135.0 1.2 22.04 139.0 1.2 22.5

FY951 141.0 1.3 23.02 143.0 1.3 23.53 144.5 1.4 23.94 146.0 1.4 24.3

FY961 147.5 1.5 24.82 148.5 1.5 25.0

- 63 -

ANNEX 2Table 2


Schedule 1 tg Loan Agreement

Withdrawal of the Proceeds of the Loan

Amt. of XLoan of Expenditures

Category Allocated to be Financed(S '000)

(1) Farm Tractors Financedthrough

(a) ADBP 31,900 81 of amounts disbursed by ADBP(b) NCBs 4,600 16X of amounts disbursed by NCBs

(2) Farm Implements Financedthrough

(a) ADBP 7,400 81 of amounts disbursed by ADBP(b) NCBs 2,500 161 of amounts disbursed by NCBs

(3) PMI Financed through(a) ADBP 5,800 81 of amounts disbursed by ADBP(b) NCBs 3,900 16X of amounts disbursed by NCBs

(4) Other On-farm and SmallScale EnterpriseDevelopment Financedthrough ADBP for

(a) Female Beneficiaries(i) with 2.5 ha or less 2,500 161 of amounts disbursed by ADBP(ii) exceeding 2.5 ha 5,400 81 of amounts disbursed by ADBP

(b) Male Beneficiaries(i) with 2.5 ha or less 23,500 121 of amounts disbursed by ADBP(ii) exceeding 2.5 ha 8,800 8X of amounts disbursed by ADBP

(5) Other On-farm DevelopmentLoans Financed throughNCBs for Farmers

(a) with 2.5 ha or less 4,400 161 of amounts disbursed by NCBs(b) over 2.5 ha 13,100 161 of amounts disbursed by NCBs

- 64 -

ANNEX 2Table 2Page 2

Amt. ofLoan of Expenditures

Category Allocated to be Financed(S '000)

(6) Incremental Short-termCredit Financedthrough ADBP for

(a) Female Beneficiaries(i) with 2.5 ha or less 500 301 of amounts disbursed by ADBP(ii) exceeding 2.5 ha 500 10% of amounts disbursed by ADBP

(b) Male Beneficiaries(i) with 2.5 ha or less 5,400 15 of amounts disbursed by ADBP(ii) exceeding 2.5 ha

disbursements 7,000 10% of amounts disbursed by ADBP

(7) Equipment and Vehicles for(a) ADBP 6,900 ) 80% of foreign expenditures,(b) NCBs 2,500 ) 80% of local ex-factory cost1'/

50Z of local expenditures for otheritems procured locally

(8) Consultants Services,Fellowships andStudy Tours for

(a) ADBP 4,100 ) 80X1/ for fellowships and study(b) NCBs 400 ) tours, 651 for consultants'

services

(9) Incremental Admin.Expenditures for

(a) ADBP 2,600 ) 56%, 40X, and 24%,'b) NCBs 3,200 ) respectively/

(10) Unallocated for(a) ADBP 1,300(b) NCBs 300

Total for ADBP 113,600Total for NCBs 34,600

Grand Total 148,500

1/ Additional 201 or 151, respectively would be disbursed by IFAD.2/ Disbursement for the. first US$0.8 M equivalent would be made a ratio of

561, for the next l'S$0.8 H of 401, and for the remainder of 241. The US$figure for the NCBs would be US$1.1 M. IFAD would reimburse 141, 101, and61, respectively.

- 65 -

ANNEX 2Table 3

PAKISTAN


Schedule 1 to Credit Agreement

Withdrawal of the Proceeds of the Credit

Amt. of IDA Credit X of ExpenditureCategory Allocated to be Financed

(S '000) (SDR '000)

(1) Equipment andVehicles for

(a) SBP 140 110 ) 100% of foreign(b) Punjab 140 110 ) expenditure, 100% of

local ex-factory cost,and 60% of other itemsprocured locally

(2) Consultants' Servicesand Training for

(a) SBP 90 70 100% for training and(b) Punjab 170 140 80% for consultants'

services

(3) Incremental AdministrativeExpenditures for

(a) SBP 720 570 ) 70%, 50% and 301,(b) Punjab 160 130 ) respectively'/

(4) Unallocated(a) SBP 33 29(b) Punjab 47 41

Total SBP 983 779Total Punjab 517 421

Grand Total 1,500 1,200

1/ Disbursement of the first SDR 190,000 (US$250,000) for SBP and SDR 45,000(US$60,000) for Punjab would be made at a ratio of 701, for the nextSDR 190,000 (US$250,000) and SDR 45,000 (US$60,000) of 50%, and for theremainder of 30%.

- 66 -

ANNEX 2Table 4

PAKISTAN


Withdrawal of the Proceeds of the IFAD Loan

Amt. of IFAD Loan XCategory Allocated of Expenditure

(S '000) (SDR '000) to be Financed

(1) Farm Tractors Financedthrough

(a) ADBP 0 0(b) NCBs 0 0

(2) Farm Implements Financedthrough

(a) ADBP 0 0(b) NCBs 0 0

(3) PMI Financed through(a) ADBP 0 0(b) NCBs 0 0

(4) Other On-farm and SmallScale EnterpriseDevelopment Financedthrough ADBP for

(a) Female Beneficiaries(i) with 2.5 ha or less 3,800 2,890 30% of amounts disbursed by

ADBP(ii) exceeding 2.5 ha 0 0

(b) Male Beneficiaries(i) with 2.5 ha or less 12,300 9,340 7% of amounts disbursed by


(5) Other On-farm DevelopmentLcans Financed throughNCBs for Farmers

(a) with 2.5 ha or less 2,700 2,050 12% of amounts disbursed byNCBs

(b) over 2.5 ha 0 0

- 67 -


Amt. of IFAD Loan XCategory Allocated of Expenditure

(S '000) (SDR '000) to be Financed

(6) Incremental Short-termLending Financedthrough ADBP

(a) Female Beneficiaries(i) with 2.5 ha or less 500 380 30% of amounts disbursed by


(b) Male Beneficiaries(i) with 2.5 ha or less 1,400 1,070 7% of amounts disbursed by

ADBP(ii) exceeding 2.5 ha

disbursements 0 0

(7) Equipment and Vehicles for(a) ADBP 1,000 760 ) 20% of foreign expenditures,(b) NCBs 400 300 ) 20% of local ex-factory

cost, and 15% of localexpenditures for other itemsprocured locally

(8) Consultants Services andFellowships for

(a) ADBP 900 680 20%(b) NCBs 100 80 20%

(9) Incremental Admin.Expenditure for

(a) ADBP 600 460 14%, 10%, and 6%(b) NCBs 700 530 respectively1'

(10) Unallocated for(a) ADBP 500 380(b) NCBs 100 80

Total for ADBP 21,000 15,960Total for NCB 4.000 3.040

Grand Total 25,000 19,000

1/ Disbursement for the first US$0.22 M equivalent of expenditure would bemade a ratio of 14%, for the next US$0.22 H of 1OX, and for the remainderof 6%. The US$ figure for the NCBs would be US$0.25 M. IBRD wouldreimburse 56%, 40%, and 24%, respectively.

- 68 -

ANNEX 3

PAKISTAN


Financial Analysis of ADBP

1. Analyses of the profit-and-loss statements and balance sheets for FY86-89 andprojections for FY90-93 are presented in Tables 1-3 andGraphs 1-8.

2. In line with the new prudential regulations issued by SBP in 1988, incomecannot be accrued on loans which are wholly or partly overdue for more than 180 days.This affects ADBP in particular in cases where one or several installments of medium-/long-term loans are overdue while one or several other installments are not yet due. Inthe past, ADBP continued to accrue income until payments were overdue for more than fiveyear. For ADBP, the new prudential regulations have to be applied for the first time inFY90, i.e., for the period ending on June 30, 1990. Upon proposal of the Bank, ADBP hasalready at the end of FY89 reversed income accrued on loans overdue for more than 360days. This was done to create a transitional period and to mitigate the effects ofcorrecting the reported irncome that has been inflated in the past due to these accountingpractices.

3. To create a comparable set of figures, income under recognition of the newaccounting principles has been restated for the FY86-89. The figures are based on ADBPestimates and are still under discussion with ADBP's management. The same set of figuresfor the past has been used to prepare projections for FY90-93. The projections are basedon the assumption that ADBP will continue to charge a rate of return of 12% on all loansexcept those for agroindustry in FY90-91 and will increase this rate to 13% thereafter.Further assumptions are that ADBP will not participate in the short-term lending programon concessional terms of 10% per annum, and that the rate which SBP charges for additionalfunds will be increased from 6% to 7% starting in FY92, i.e.. on July 1, 1991. Thefinancial statements with revised recognition of income are in Table 3.

4. Adjusted interest income and expense data show that net interest income as apercentage of total interest income declined from 61% in FY86 to 48% in FY89. The declinereflects the increase in funding costs resulting from the rise in SBP's lending rate toADBP which increased in the same period from 39% to 52%. After a recovery in FY90,reflecting the full absorption of the revised income recognition, the net interest incomeas percent of total interest income is expected to decline further from 55% in FY90 to 43%in FY93. Conversely, the funding cost is expected to increase from 45% in FY90 to 57% inFY93. Although the return of earning assets after a slump to 8.5% in FY89 is projected toimprove to 10.8% in FY90 and remain at a level of about 9.8% thereafter, it is clear thatthe 1% increase in the rate of return will be insufficient to generate equity sufficientto become independent from Government equity infusions. Graph 4 shows ADBP's past andprojected earnings performance.

- 69 -

ANNEX 3Page 2

5. The overstatement of income in the last few years resulted in a simultaneousoverstatement of equity. Consequently, in each of the years to FY93 substantial equityinfusions will be necessary as set out in Graph 1 to maintain a debt to equity ratio of7:1 or better. Graphs 2 and 3 indicate that although ADBP under consideration of therestated equity was not in compliance with the debt to equity covenant, the capitaladequacy is quite satisfactory.

6. Operating expenses as percent of average total assets improved from 2.9% inFY86 to 2.6% in FY89, an indication of improving performance (Graph 5) and decreasing costof intermediation. There was an absence of new loan-loss provisions in FY89. Thereduction in loan-loss provisions is more indicative of the underlying income positionthan of improving loan quality. However, based on past experience with the volume ofwrite-offs, a coverage of 44% of overdues by provisions is considered fully adequate.

7. Growth in deposit generation was not maintained in FY89. The rapid growth inFY88 appears to have been transitory rather than the result of the development of a sounddeposit base. Since normal risk assets continue to grow at about 25% per annum, ADBP isincreasing its dependence on borrowings from SBP and multilateral agencies and would notachieve the objective of moving towards financial self-sufficiency by FY96, as prescribedby SBP, unless deposit generation is more aggressively pursued (paras 7.14-7.15 of SAR).

8. Two different sets of projections are in the Implementation Volume (Annex 11).These have been prepared on the assumptions that no increase in the rate of return wouldtake place (scenario 2) and that, starting from FY92, the rate of retrun would beincreased to 14% (scenario 3). Only the latter would result in satisfactory improvementsof the income generating capabilities of ADBP.

9. Analysis of ADBP's financial system highlights also the need to rationalizeits accounting system so that accounting records better reflect its financial position.

10. ADBP's recovery position is discussed in Annex 5.

- 70- ANNEX 3Table 1

P811163F

AGDICOL?ORAL CR68T PROJKC

Profit and Los Statemnt aad Performace Ratlos of ADP noO-89 (Icteal) and 10O-93 (ProJected)

............................................. ......... .......................... ............... ..... .............. .............

PEOII a LOSS 1985 I 2 1987 8 I 1988 2 I 1989 I IAD8P Actual T 11/01 Ictual tl 11/GO! Actual tA 11/01 Actual ?A Il/GOI

laterst Incom 1,410.4 8.7 100.0 1,012.9 9.3 100.0 2,322.6 8.7 100.0 2,992.1 9.2 100.0lIterest xpense 491.2 3.0 34.8 626.2 3.0 32.7 787.3 2.9 33.9 1,117.2 3.4 37.3get Interest Income 919.2 5.7 65.2 1,286.7 6.2 67.3 1,535.4 5.7 66.1 1,874.9 5.8 62.1

Other Operating Iocoe 13.2 0.1 1.4 18.5 0.1 1.4 26.2 0.1 1.7 23.4 0.1 1.2Gross Operathi lcome 932.3 5.8 100.0 1,305.3 8.3 100.0 1,581.5 5.8 100.0 1,898.2 5.8 100.0

Staff 2147.5 1.5 26.5 280.9 1.4 21.5 414.1 1.6 26.5 425.2 1.3 22.4Director' ees g A Rpes 0.1 0.0 0. 0.1 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0Occupanc 26.0 0.2 2.8 40.0 0.2 3.1 44.1 0.2 2.8 56.8 0.2 3.0Trasprtation 25.1 0.2 2.7 36.7 0.2 2.8 43.2 0.2 2.8 43.4 0.1 2.3General lamnaemeat 30.2 0.2 3.2 37.6 0.2 2.9 37.7 0.1 2.4 17.1 0.1 0.9epreciation & Aort. 62.6 0.4 6.7 68.2 0.3 5.2 70.1 0.3 4.5 77.9 0.2 4.1Otker Operating Rpeness 55.1 0.3 5.9 78.1 0.4 5.9 70.1 0.3 4.5 102.4 0.3 5.4Total operating Rpe n 441.6 2.8 47.1 540.5 2.6 41.4 680.0 2.5 43.5 722.8 2.2 38.1

Ibt Operating Income 465.1 3.0 52.1 764.8 3.7 58.6 881.6 3.3 56.5 1,175.4 3.6 61.9

Loa Loss Provisions 140.0 0.9 15.0 406.6 2.0 31.2 618.4 2.3 39.5 0.0 0.0 0.0

Ile le ot of Provistons 345.1 2.1 37.1 358.2 1.7 27.4 265.2 1.0 17.0 1,175.4 3.6 61.9

Prior Period Adjustments (1.3) (0.0) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 (922.0) (2.8) (48.6)Other Incone 25.1 0.2 2.7 32.0 0.2 2.5 59.8 0.2 3.8 48.0 0.1 2.5Other Epenses 0.0 8.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ht Incoe before IT 369.4 2.3 39.6 390.2 1.9 29.9 324.9 1.2 20.8 301.4 0.9 15.9

-Icome Ta 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0get Income 369.4 2.3 33.1 390.2 1.9 29.9 324.9 1.2 10.8 301.4 0.9 15.9

Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0free Reees 369.4 2.3 39.6 390.2 1.9 29.9 324.9 1.2 20.8 301.4 0.9 15.9


AGRICOLIORAL CRIDIt PROJECT

Profit and Loss Stateamet and Perforacce Ratios of AD8P 116649 (Actual) and 1190-93 (Projected)

PUFllOUICB UTIOS 1986 1987 1988 1989

Fliancial Performance (Average)Rate on Earning Assets I 9.91S 11.692 11.21% 11.331Of Return on Risk Assets 2 3.411 4.741 4.30S 4.568Return on Total Assets S 3.00S 4.158 3.721 3.978Retrn on Equity 2 27.20a 37.10? 34.86% 37.692

AT Return on Risk Assets 2 2.602 2.422 1.592 1.112Return on Total Assets 2 2.288 2.12% 1.371 1.022Return on Equity 20.692 19.232 12.85$ 9.662

Total Op Expenses/Assets 2 2.162 2.931 2.81S 2.442

LiquidityRonal Rh/Core Deposits 2 9226.222 5441.10, 2226.00S 2006.602Current Ratio 1.14 2.00 0.99 1.18Current Portion/LTD 2 0.002 0.002 0.008 0.00S

Capital Adequacygquity/Hore Risk Assets 2 12.5S2 12.582 12.168 12.018Equity/All Risk Assets 2 12.308 12.311 11.462 11.89SEquity/Aisets * 11.039 11.012 10.43S 10.61PLn Loss Resi/tisk Assets 2 2.532 3.1U4 5.37S 4.352ebt to Equity 7.31 7.10 7.13 6.93

Prodectivity.Staff 6,281 6,691 1,607 7,688Cost/Staff in Rupees 11,110 83,288 95,012 914,519Op Incole/Staff in Rapees 71,327 117,866 123,260 153,6943Y Earnings/Staff tn Rupees 58,814 60,134 45,432 39,410Risk Assets/Staff Us (000) 2,265.4 2,782.5 3,203.5 3,140.0let Op UP/Ave IR hAests 3.14U 3.352 3.322 2.81?Grovth In Operating EIpenses 21.00S 25.812 6.318

Fudiag Cost 5 /TA 100 5 /TA 100 5 /Th 100Average Funding Cost 2 4.171 3.032 4.178 4.122 2.952 4.122 4.581 3.432 4.582Allocation of Ops Expease 5 /100 0.182 2.622 3.608 0.188 2.55S 3.552 0.15 2.22S 2.962Actual Cost of funds 2 4.352 5.652 1.7712 4.298 5.492 7.672 4.722 5.662 7.541Required leturn oa Equity 10 10.002 0.002 10.002 0.002 10.00S 0.002inluon Cost of Capital 8 0.886 0.88% 0.688 0.892 0.69a 0.892 0.871 0.872 0.872

fully Loaded funding Cost 2 5.232 6.532 8.65S 5.198 6.392 8.562 5.602 6.532 8.412Effective Lending Rate 2 18.721 9.97SRargin 2 13.53S 4.372

- 72 ANNEX3Table 1Page 3

PAKISTIE

AGRICOLUIML CUDIl PIOJICT

Profit and Loos Statemeat and Perfomance tattoo of ADD?P M6-89 (Aetual) and YY90-93 (Projected)

PROFIT & LOSS 1910 2 I 1991 2 2 1092 2 2 1993 2 2ADB? Projected TA 11/601 Projeeted TA 11/601 Projected TA 11/GOI Projected T 11/101

Interest Income 3,326.9 8.8 100.0 3,396.2 8.4 100.0 3,657.7 8.4 100.0 3,973.6 8.4 100.0Interest EIpense 1,507.9 4.0 45.3 1,778.1 4.4 52.1 2,001.2 4.6 54.7 2,261.5 4.8 56.9let Interest Income 1,819.0 4.6 51.7 1,618.1 4.0 47.6 1,656.5 3.8 15.3 1,712.1 3.6 43.1

Other Operating Income 27.3 0.1 1.5 28.9 0.1 1.8 31.1 0.1 1.6 33.9 0.1 1.9Gross Operating Income 1,846.3 1.9 100.0 1,647.0 1.1 100.0 1,667.6 3.9 100.0 1,746.0 3.7 100.0

Staff 464.1 1.2 25.1 491.6 1.2 29.8 529.2 1.2 31.4 575.8 1.2 33.0Directors' fees A RIpeas 0.1 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0Occupancy 62.0 0.2 3.4 65.7 0.2 1.0 70.7 0.2 4.2 76.9 0.2 4.4Transportation 47.3 0.1 2.6 50.1 0.1 3.0 53.9 0.1 3.2 58.7 0.1 3.4General lanagement 18.6 0.0 1.0 19.7 0.0 1.2 21.2 0.0 1.3 23.1 0.0 1.3Depreciation & AI ort. 85.0 0.2 .C6 90.0 0.2 5.5 96.9 0.2 5.7 105.5 0.2 6.0Other Operating EIpenses 111.7 0.3 6.0 118.3 0.3 7.2 127.4 0.3 7.5 138.6 0.3 7.9

Total Operating Expenses 768.8 2.1 42.7 835.5 2.1 50.7 819.4 2.1 53.3 978.7 2.1 56.1

let Operating Income 1,057.5 2.8 57.3 811.5 2.0 49.3 788.2 1.8 46.7 767.3 1.6 43.9

Lo;n Loss Provisions 520.5 1.4 21.2 523.8 1.3 31.8 506.9 1.2 30.0 536.5 1.1 30.8

Incone get of Provisions 537.0 1.41 29.1 287.7 0.71 17.5 281.4 0.6 16.7 228.7 0.5 13.1

Prior Pr.iod Adjustments (287.0) (0.8) (15.5) (37.7) (0.1) (2.3) (31.4) (0.1) (1.9) 0.0 0.0 0.0Other Income 56.0 0.1 3.0 59.4 0.1 3.6 63.9 0.1 3.8 69.5 0.1 4.0Other Expeases 2.4 0.0 0.1 2.4 0.0 0.1 2.4 0.0 0.1 2.4 0.0 0.1

let IncoOe before Tai 303.6 0.8 16.1 307.0 0.6 18.6 311.5 0.7 18.5 2&5.9 0.6 16.9

Icome Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0let lncone 303.6 0.8 16.4 307.0 0.8 18.6 311.5 0.7 18.5 295.9 0.6 16.9

Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0free Reserves 303.6 0.8 16.4 307.0 0.9 18.6 311.5 0.7 18.5 295.8 0.6 16.9

- 73 ANNEX 3Table 1Page 4

PAKIST'AN

AGRICOLIuRAL CREDIT PBOJiC?

Profit and Loss Statement and Perforeance Ratios of AD?P 1'66-89 (Actual) and 11O8-93 (ProJected)

~~~~~~~... ..... .... ... ... ...... ......... ......... ............... .... ... ... ... .... ..... .. ..... ..... ..... ....... ..

PERFORNANC' RATIOS 1990 1991 1992 1993

financial Performance (Avg)Rate on arnaing Assets 2 10.282 9.542 9.622 9.652OP Return on Risk Assets 2 3.362 2.338 2.121 1.91S

Return on Total Assets S 3.002 2.072 1.892 1.705Return on Iquity S 27.99$ 19.062 17.268 15.756

AT Return on Risk Assets S 0.96S 0.88S 0.84I 0.741Return on Total Assets 2 0.86S 0.78S 0.75S 0.65SReturn on Equity 8 8.041 7.21S 6.822 6.071

Total Op Expenses/Assets 2 2.242 2.148 2.15t 2.16S

Liquidityloroal RA/Core Deposits 2 2019.298 1773.612 1590.90S 1442,102Current Ratio 1.50 1.61 1.10 1.77Current Portion/LTD 2 19.472 18.471 17.74I 17.25S

Capital AdequacyEquity/lorn Risk Assets S 12.09S 12.33S 12.262 11.988Equity/All Risk Assets 2 11.918 12.15S 12.08S 11.80SEquity/Assets 2 10.80S 10.962 10.90S 10.641Ln Loss Resu/Risk Assets 2 5.0.9 6.152 6.892 7.482

Debt to Equity 6.49 6.33 6.34 6.49

ProductivityStaff 8 7,769 7,850 7,931 8,012Cost/Staff In Rupees 102,076 106,980 113,984 122,715Op lncone/Staff in Rupees 136,821 103,917 99,897 96,252RI Earnaings/Staff in Rupees 39,289 39,306 39,478 37,117Risk Assets/Staff Bes (000) 4,393.7 4,582.9 4,882.4 5,256.8get Op Rip/Ave RR Assets 2.51S 2.I40 2.42U 2.43UGroutb in Operating Expenses 9.142 5.928 7.652 8.82t

Funding Cost 5 /TA 100 5 /TA 100 5 /?A 100 5 /TA 100Average Fundiag Cost 2 5.10S 3.972 5.108 5.422 4.422 5.422 5.712 4.622 5,712 5.952 4.802 5.95SAllocation of Ops Expease 5/ 0.132 2.08S 2.67t 0.132 2.082 2.542 0.13t 2.082 2.571 0.132 2.082 2.57SActual Cost of funds 2 5.232 6.042 7.772 5.552 6.492 7.96t 5.842 6.69% 8.282 6.082 6.872 8.522Required Return on 3quitylO 10.003 0.002 10.002 0.002 10.001 0.00S 10.00S 0.002Dining. Cost of Capital 8 0.862 0.862 0.862 0.86S 0.862 0.862 0.86S 0.862 0,862 0.862 0.862 0.262

fully Loaded funding Cost 2 6.092 6.91S 8.632 6.411 7.352 8.822 6.70S 7.55S P.1i% 6.942 7.732 9.382Iffective Wending Rate S 10.242 9.782 9.772 9.742Margin 2 4.142 3.382 3.071 2.80'

FY June 30,amounts in Rs millior.

- 74- ANNEX 3Table 2

PAIISTIN

AGRICULTUOAL CEllD PROJECT

Balance Sheets and 6roeth Indicators of AD?P IYGG-89 (Actual) and PYO0-93 (Projected)

(Idjusted to Reflect Revised Recognition of Income as per Prudential Begulations)

BiAACE S3E8t 1986 I TA 1987 S tA 1988 I TA 1989 I T

ASSETS

Bisklese AssetsCash & Deposits 222.6 1.4 321.8 1.6 463.8 1.7 858.7 2.6Honey harket 200.9 1.2 233.2 1.1 224.1 0.8 181.9 0.6Treasury Bills 0.0 0.0 0.0 0.0 0.0 0.0 887.4 2.7

Total lisiless Assets 423.6 2.6 555.0 2.7 688.0 2.6 1,928.0 5.9

gormal Disk AssetsBills Discounted 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Loans I year 0.0 0.0 1,255.6 6.1 1,651.2 6.2 2,668.3 8.2Loans ) I year 14,598.6 80.2 17,500.? 84.8 22,559.6 84.5 27,233.6 83.7Less Provisions (369.4) (2.3) (701.0) (3.4) (1,299.3) (4.9) (1,300.1) (4.0)

Net Normal Risk Assets 14,228.2 87.9 18,055.3 87.5 22,911.5 85.8 28,601.9 87.9

'uvestbents 290.7 1.8 401.4 1.9 1,394.2 5.2 426.2 1.3

Plant & EquipeentLand 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0hildings 92.3 0.6 91.5 0.4 93.2 0.3 99.2 0.3Vuniture & Equipment 190.3 1.2 197.9 1.0 174.6 0.7 70.9 0.2Automtion 0.0 0.0 0.0 0.0 0.0 0.0 60.5 0.2Transportation 0.0 0.0 0.0 0.0 0.0 0.0 56.6 0.2Constrection In Process 7.5 0.0 22.5 0.1 51.4 0.2 76.7 0.2

Total Plant A IEquipmet 290.1 1.8 311.9 1.5 319.2 1.2 363.8 1.1Accu. Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0let Plant & Equipment 290.1 1.8 311.9 1.5 319.2 1.2 363.8 1.1

loreip Ecbange Beserve 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Due from Bngladesh 770.3 4.8 799.9 3.9 829.2 3.1 858.6 2.6Other Assets 189.5 1.2 518.8 2.5 560.8 2.1 348.9 1.1

Total Assets 16,193.3 100.0 20,642.3 100.0 26,702.9 100.0 32,527.3 100.0

-75 ANNEX 3Table 2Page 2

PUIST'q

AGRICOLTURAL CRIDIT PROJECT

Balance Shoots and Grouth lndicatore of ADIP 186-09 (Ictual) and 1190-93 (Projected)

(Adjusted to Reflect Revised Recognition of Incose as per Prudential Regulations)

BALANCE SHIRT 1986 8 TA 198? S TA 1988 8 ?A 1989 8 TA

LIABILITIES

Deposits 154.2 1.0 331.5 1.6 1,029.3 3.9 1,425.4 4.4Money Market 0.0 0.0 0.0 0.0 430.4 1.6 1,520.0 4.7Curreat Maturities LTD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other Current Liab. 216.6 1.3 573.0 2.8 914.8 3.4 935.3 2.9

Total Current Liabilities 370.9 2.3 904.5 4.4 2,374.5 8.9 3,880.7 11.9

Long Term Rorro1ings 13,048.7 80.6 16,119.2 78.1 19,853.0 74.3 23,911.8 73.5Mnaged Funds 161.6 1.0 212.7 1.0 284.6 1.1 373.8 1.1

Total Long Term Liab. 13,210.4 81.6 16,331.9 79.1 20,137.6 75.4 24,285.6 74.7

Due to Branches 56.2 0.3 333.9 1.6 576.2 2.2 50.7 0.2Due to Bangladesh 770.3 4.8 799.9 3.9 829.2 3.1 858.6 2.6

Total Liabilities 14,407.7 89.0 18,370.2 89.0 23,917.5 89.6 29,075.7 89.4

EQUITY

Capital 703.9 4.3 799.9 3.9 988.3 3.7 1,353.3 4.2General Reserves 703.9 4.3 799.9 3.9 988.3 3.7 1,353.3 4.2Special Reserve 377.9 2.3 672.1 3.3 808.6 3.0 745.0 2.3Retained larnings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Iquity 1,785.7 11.0 2,271.9 11.0 2,785.2 10.4 3,451.6 10.6

-Total Liab. & Equity 16,193.3 100.0 20,842.1 100.0 26,702.7 100.0 32,527.3 100.0

Opening Iquity & Reserves 1,416.2 1,785.7 2,271.9 2,785.2let Incose after ?ax 369.4 390.2 324.9 301.4Less Dividends 0.0 0.0 0.0 0.0Met Capital Oan Equity 1,785.7 2,175.9 2,596.8 3,086.6Eqaity Injectiona 0.0 96.0 188.4 365.0Endiag Equity A Reserves 1,785.7 2,271.9 2,785.2 3,451.6Iron Balance Sheet 1,785.7 2,271.9 2,785.2 3,451.6Rouding Irrors 0.0 0.0 (0.0) (0.0)

Grovth IndicatorsChange lorm I£ak Assets 8 26.898 26.90S 24.848Change In IIl fsik Assets 2 27.11S 31.698 19.438Change ie Total Assets 2 27.471 29.368 21.811CbavFe in Core Deposits t 114.922 210.52S 38.498Cha..e in Current LTD 2(a,nge in loa-Carrent LTD 8 23.538 23.168 20.411Change in EquIty 2 27.232 22.608 23.93S

- 76- ANNEX 3Table 2Page 3

PAIISTAN

AGRICOLTURAL CREDIT PROJICT

Balance Sheets and grouth Iledicators of ID8P Y80-89 (Actual) and I190-93 (Projected)

(AdJusted to Reflect Revised Becognition of Incone as per Prudential Regulations)

BALIANCE SREtT 1990 S ?A 1991 I TA 1992 S TA 1993 2 TA

ASSETS

Bisk1"t AssetsCaL.- t : 6posits 877.6 2.3 1,085.2 2.6 1,128.6 2.6 1,229.7 2.6Boney 1arket 181.9 0.5 181.9 0.5 181.9 0.4 181.9 0.4Treasury Bills 504.5 1.3 605.4 1.5 726.5 1.7 871.8 1.8

Total 8isklesa Assets 1,564.0 4.1 1,852.5 4.6 2,036.9 4.7 2,283.4 4.8

Normal Risk AssetsBills Discounted 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Loans < I year 15,071.5 39.7 16,771.9 41.7 18,788.2 43.4 21,070.0 44.7Loans ) I year 20,705.7 54.5 21,363.1 53.1 22,587.3 52.1 24,224.8 51.4Less Provisions (1,820.6) (4.8) (2,344.4) (5.8) (2,851.3) (6.6) (3,389.8) (7.2)

get Normal Risk Assets 33,956.7 89.3 35,790.5 88.9 38,524.2 88.9 41,904.9 88.9

Investments 498.4 1.3 527.8 1.3 568.2 1.3 618.3 1.3

Plant A EquipmentLand 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Buildings i68 2 0.3 179.2 0.3 192.9 0.3 209.9 0.3furniture & EquipmeAt 136.1 0.2 144.1 0.2 155.1 0.2 168.8 0.2Autonation 124.0 0.2 131.3 0.2 141.4 0.2 153.8 0.2Transportation 119.4 0.2 126.5 0.2 136.1 0.2 148.1 0.2Construction in Process 142.9 0.2 151.3 0.2 162.9 0.2 177.3 0.2

Total Plant & lquipment 691.5 1.8 732.4 1.8 788.4 1.8 857.9 1.8Accun. Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

get Plant & Equipment 691.5 1.8 732.4 1.8 788.4 1.8 857.9 1.8

foreign ethange Reserve 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Due fron Bangladesh 889.0 2.3 920.5 2.3 953.1 2.2 986.9 2.1Other Assets 408.0 1.1 432.1 1.1 465.1 1.1 506.2 1.1

Total Assets 38,007.5 100.0 40,255.8 100.0 43,336.0 100.0 47,157.6 100.0


PAISTAN

GCRiCULtORAL CREDIT PIOJECT

Balace Sheets and Growth Indicators of ADIP 1186-89 (Actual) and 1190-93 (Projected)

(AdJusted to Reflect Revised Recognition of Income as per Prudential Regulations)

BALAICi SRl" 1930 a UT 1991 2 tA 1992 8 TA 1993 2 SA

LIABILITIES

Deposits 1,681.6 4.4 2,017.9 5.0 2,1421.5 5.6 2,905.8 6.2Roney larket 3,120.0 8.2 3,120.0 7.8 3,120.0 7.2 3,120.0 6.6Current Maturities LTD 5,280.8 13.9 5,280.8 13.1 5,1465.6 12.6 5,808.9 12.3Other Current Liab. 1,028.9 2.7 1,131.7 2.8 1,244.9 2.9 1,369.4 2.9

Total Current Liabilities 11,111.3 29.2 11,550.5 28.7 12,252.1 28.3 13,204.1 28.0

Long Ter Borroulngs 21,355.3 56.2 22,666.5 56.3 24,492.9 56.5 26,761.0 56.7Managed Funds 490.9 1.3 644.7 1.6 816.7 2.0 1,111.9 2.4

Total Long TerB Liab. 21,846.1 57.5 23,311.2 57.9 25,339 6 58.5 27,872.9 59.1

Due to Branches 55.8 0.1 61.4 0.2 67.5 0.2 74.3 0.2Due to Bangladeab 889.0 2.3 920.5 2.3 953.1 2.2 986.9 2.1


IQUITY

Capital 1,1703.3 4.5 1,703.3 6.0 1,703.3 3.9 1,703.3 3.6General Reserves 1,1703.3 4.5 1,703.3 4.2 1,703.3 3.9 1,703.3 3.6Special Reserve 698.6 1.8 1,005.6 2.5 1,317.1 3.0 1,612.9 3.4Retained Earnings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Equity 1,105.2 10.8 4,412.2 11.0 4,723.7 10.9 5,019.5 10.6

Total Liab. & Equity 38,007.5 100.0 40,255.8 100.0 43,336.0 100.0 47,157.6 100.0

Opening Equity & Reserves 3,451.6 4,105.2 4,412.2 4,723.7let Income After Yax 303.6 307.0 311.5 295.7Less Dividends 0.0 0.0 0.0 0.0let Capital Own Equity 3,755.3 4,412.2 4,723.7 5,019.4Equity lnJections 350.0 0.0 0.0 0.0BEding Equity & Reserves 1,105.3 4,412.2 4,723.7 5,019.4from Balance Sbeet 4,105.2 4,412.2 4,723.7 5,019.5Rouding Errors 0.0 (0.0) 0.0 (0.1)

Grogth IndicatorsChange lor Risk Assets 17.152 5.402 7.641 8.782Chane in All Risk Assets 17.15S 5.411 7.642 8.781Chage in Total Assets 16.931 5.922 7.651 8.821Change in Core Deposits 20.001 20.001 20.00S 20.002Chage in Current LTD 7.602 0.00 3.50S 6.282Change In Eon-Current LTD 12.371 6.142 8.062 9.262Change In Equity 18.942 7.481 7.06S 6.261

FY June 30,amounts in million

ANNEX 3- 78 - Table 3

PAKISThI

AGRICOL0TURL CEiDt PROJECT

Profit nd Loas Statement and Performance Ratios of ADEP IY86-89 (Actual) and 11oO-93 (ProJected)

PROFIT & LOSS 1986 5 I 1987 I I 1988 I 5 1989 S IADiP Actual TA I/Go6 Actual TA 11/601 actual TA I/GO6 Actual TA 111601

Interest lacome 1,252.6 8.2 100.0 1,555.6 7.9 100.0 2,297.6 8.9 100.0 2,129.9 6.9 100.0Interest lxpease 491.2 3.2 39.2 626.2 3.2 40.3 787.3 3.1 34.3 1,117.2 3.6 52.5

let Interest Income 761.3 5.0 60.8 929.4 4.7 i9.7 1,510.4 5.9 65.7 1,012.7 3.3 47.5

Other Operating Income 13.2 0.1 1.7 18.5 0.1 2.0 26.2 0.1 1.? 23.4 0.1 2.3Gross Operating Income 774.5 5.0 100.0 947.9 4.0 100.0 1,536.5 6.0 100.0 1,036.1 3.4 100.0

Staff 247.5 1.6 32.0 280.9 1.4 29.6 414.1 1.6 27.0 425.2 1.4 41.0Directors' lees A ExpeAses 0.1 0.0 0.0 0.1 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0Occupancy 26.0 0.2 3.4 40.0 0.2 4.2 44.1 0.2 2.9 56.8 0.2 5.5TransportatioA 25.1 0.2 3.2 36.7 0.2 3.9 43.2 0.2 2.8 43.4 0.1 4.2General Management 30.2 0.2 3.9 37.8 0.2 4.0 37.7 0.1 2.5 17.1 0.1 1.6Depreciation A Aort. 62.6 0.4 8.1 68.2 0.3 7.2 70.1 0.3 4.6 77.9 0.3 7.5Other Operating Expenses 55.1 0.4 7.1 76.7 0.4 8.1 70.1 0.3 4.6 102.4 0.3 9.9

Total Operating bxpeases 446.6 2.9 57.7 540.5 2.8 57.0 680.0 2.6 44.3 722.8 2.4 69.8

let Operating Income 327.9 2.1 42.3 407.4 2.1 43.0 856.6 3.3 55.7 313.2 1.0 30.2

Loan Loos Provisions 169.9 1.1 21.9 159.2 0.8 16.8 548.2 2.1 35.7 (39.2) (0.1) (3.8)

Income let of Provisions 158.0 1.0 20.4 248.3 1.3 26.2 308.4 1.2 20.1 352.4 1.1 34.0

Prior Period Adjustments (1.3) (0.0) (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 .0 0.0Other lIcome 25.1 0.2 3.2 32.0 0.2 3.4 59.8 0.2 3.9 48.0 0.2 4.6Other Ezpeases 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

let Incone before Tax 181.7 1.2 23.5 280.3 1.4 29.6 368.1 1.4 24.0 400.4 1.3 38.6

Incose Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0let Income 181.7 1.2 23.5 280.3 1.4 29.6 368.1 1.4 24.0 400.4 1.3 38.6

Divideads 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0free Reserves 181.7 1.2 23.5 280.3 1.4 29.6 368.1 1.4 24.0 400.4 1.3 38.6

- 79 ANNEX 3Table 3Page 2

PAIKISTAN

AsRiCOLIORL CIREIT PROJECT

Profit ad Loss Statement ad Performance Ratios of ADIP 3181-6 (Actual) and ino-93 (Projected)

PERIOIACE RAnIOS 1986 1981 1988 1989

linancial Performance (Average)late on Eaning Assets S 9.365 10.09K 11.67S 8.522OP Return on Blst Assets 2 2.I5S 2.68S 4.40I 1.29SletUrn on Total Assets K 2.1UK 2.33S 3.78S 1.11lRetura on Iquity t 34.892 37.36S 56.t11 14.418

AT Retur on Rist Assets K 1.36K 1.841 1.89S 1.658Retun on Total Assets K 1.18K 1.60S 1.62t 1.42UReturn on Equity 2 19.332 25.70S 24.37S 18.511

Total Op Expeanes/Assets K 2.91K 3.09K 3.002 2.568

Liquidity.noral U/Core Deposits K 8677.812 5136.145 2128.302 1818.371All lA/Core Deposits 2 8866.298 5257.232 2263.168 1908.21SCarreat Ratio 1.14 2.00 0.99 1.18Current Portlio/LTD 8 0.002 0.002 0.002 0.006

Capital AdequacyEquity/lorm Risk Assets S 7.022 7.292 8.122 9.511Equity/All Risk lssets 8 6.87% 7.12S 7.642 9.362Iquity/Assets K 6.12S 6.33S 6.93S 8.29KEquity/Deposits & Borrow K 1.118 7.602 8.652 9.81SLa Loss Resn/Risk Assets K 4.241 4.231 5.602 4.492Dbt to Equity 13.88 12.99 11.16 9.39

ProductivityStaff 1 6,281 6,6917 7,607 7,688Cost/Staff in Rupees 71,110 83,288 95,072 94,519Op Income/Staff to Rupees 52,201 62,190 119,767 40,960BY Earaings/Staff o lRupees 28,929 43,193 51,4172 52,358Risk Assets/Staff 1s (000) 2,130.8 2,623.6 3,062.9 3,501.0Ret Op Rip/Ave H Assets 3.342 3.558 3.49S 2.918Growth in Operating xpenses 21.002 25.81S 6.311

funding Cost 5 /tA 100 5 nTA 100 5 (TA 100Average fundng Cost K 4.17S 3.192 4.17S 4.122 3.062 4.128 4.582 3.64U 4.58Killocatioa of Opt BEpense 5 /100 0.186 2.162 3.602 0.18S 2.65S 3.55S 0.158 2.351 2.962Ictaal Cost of Iunds 4.352 5.952 7.771 4.295 5.711 1.67S 4.722 5.998 7.5U4Required bRturn on SqCy 10 10.002 0.002 10.00 0.00K 10.002 0.00Klinimu Cost of Capitai 8 0.832 0.832 0.832 0.852 0.852 0.852 0.832 0.832 0.83Shlly Load6o lending Cost 2 5.182 6.18 8.60S 5.142 6.561 8.522 5.55% 6.822 8.368


AGRICULTURAL CREIDIT PROJECT

Profit and Lose Statement and Performance latios of AD8P 186-89 (Actual) and FT90-93 (Projected)

PROFI? & LOSS 1990 K S 1991 2 K 1992 8 t 1993 K SADRP Projected TA 11/601 Projected tA 11/601 Projected TA Il/GO Projected ?A Il/GOI

Interest lbcoe 3,326.9 8.9 100.0 3,396.2 8.6 100.0 3,657.7 8.6 100.0 3,973.6 8.5 100.0.nterest Kipease 1,507.9 4.0 45.3 1,778.1 4.5 52.4 2,001.2 4.7 54.7 2,261.5 4.9 56.9

get Interest Income 1,819.0 4.9 54.7 1,618.1 4.1 47.6 1,656.6 3.9 45.3 1,712.1 3.7 43.1

Other Operating Income 27.3 0.1 1.5 28.9 0.1 1.8 31.1 0.1 1.8 33.9 0.1 1.9Grosa Operating IAcone 1,846.3 4.9 100.0 1,647.0 4.2 100.0 1,687.? 3.9 100.0 1,745.9 3.7 100.0

Staff 464.1 1.2 25.1 491.5 1.2 29.8 529.1 1.2 31.4 575.8 1.2 33.0Directors' Fees & Expense 0.1 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0Occupancy 62.0 0.2 3.4 65.7 0.2 4.0 70.7 0.2 4.2 77.0 0.2 4.4Transportation 47.3 0.1 2.6 50.1 0.1 3.0 54.0 0.1 3.2 58.7 0.1 3.4General Nanagenent 18.6 0.0 1.0 19.7 0.0 1.2 21.2 0.0 1.3 23.1 0.0 1.3Depreciation & nort. 85.0 0.2 4.6 90.0 0.2 5.5 96.9 0.2 5.7 105.5 0.2 6.0Other Operating Expenses 111.7 0.3 6.1 118.4 0.3 7.2 127.4 0.3 7.5 138.6 0.3 7.9

Total Operating EIpeases 788.9 2.1 42.7 635.6 2.1 50.7 899.5 2.1 53.3 978.8 2.1 56.1

let Operating Incone 1,057.4 2.8 57.3 811.4 2.0 49.3 788.2 1.8 46.7 767.1 1.6 43.9

Loan Loss Provisions 560.5 1.5 30.4 523.8 1.3 31.8 506.9 1.2 30.0 538.5 1.2 30.8

Jacone get of Provistons 496.9 1.3 26.9 287.7 0.7 17.5 281.3 0.7 16.7 228.6 0.5 13.1

Prior Period Adjustienta 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other Incone 56.0 0.2 3.0 59.4 0.1 3.6 63.9 0.1 3.8 69.5 0.1 4.0Other Expenses 2.4 0.0 0.1 2.4 0.0 0.1 2.4 0.0 0.1 2.4 0.0 0.1

get Incone before Tu 550.6 1.5 29.8 344.6 0.9 20.9 342.8 0.8 20.3 295.7 0.6 16.9

Incone Yau 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0let Incone 550.6 1.5 29.8 344.6 0.9 20.9 342.8 0.8 20.3 295.7 0.6 16.9

Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Reserves 550.6 1.5 29.8 344.6 0.9 20.9 342.8 0.8 2C.3 295.7 0.6 16.9


Page 4

PAKISTAN

ASRICULTURAL CREDIT PROJECT

Profit and Loss Statesent and Perforeance Ratios of AD0P FY86-99 (Actuall and FY90-93 (Projected)

PERFORNANCE RATIOS 1990 1991 1992 1993

Financial Perforaance (Avg)Rate on Earning Assets 2 10.761 9.711 9.79' 9.79?OP Return on Risk Assets 2 3.522 2.372 2.161 1.942

Return on Total Assets 2 3.112 2.112 1.912 1.721Return on Equity 2 35.292 22.422 19.899 17.921

AT Return on Risk Assets 2 1.832 1.012 0.942 0.752Return on Total Assets 2 1.622 0.902 0.932 0.662Return on Equity 2 19.362 9.521 8.651 6.912

Total Op Expenses/Assets 2 2.322 2.172 2.102 2.192

LiquidityNoroal RA/Core Deposits 2 1980.102 1742.832 1566.542 1421.60lAll RA/Core Deposits 2 2009.742 1768.992 1590.012 1443.092Current Ratio 1.50 1.61 1.70 1.77Current Portion/LTD l 19.472 19.472 17.742 17.251

Capital AdequacyEquity/Nora Risk Assets 2 10.352 10.782 10.902 10.722Equity/All Risk Assets 2 10.20S 10.622 10.742 10.562Equity/Assets 2 9.232 9.562 9.672 9.512Equity/Deposits & Borron 2 11.392 11.952 12.192 12.042Ln Loss Resv/Risk Assets 2 5.192 6.252 6.992 7.582

Debt to Equity 7.73 7.37 7.25 7.35

ProductivityStaff D 136,820.7 7,698 7,699 7,690Cost/Staff in Rupees 10,918 11,564 116,999 127,317Op Income/Staff in Rupees 14,635 11,230 102,525 99,791BT Earnings/Staff in Rupees 7,620 4,769 44,595 39,465Risk Assets/Staff Rs (000) 460.6 496.7 4,934.2 5,374.0Net Op Exp/Ave NR Assets 2.631 2.442 2.462 2.472Sronth in Operating Expenses 9.142 5.922 7.652 8.922

Funding Cost 5 /TA 100 5 ITA 100 5 /TA 100 5 /TA 100Average Funding Cost 2 5.102 4.042 5.102 5.422 4.492 5.422 5.712 4.682 5.712 5.95? 4.862 5.952Allocation of Ops Expense 5 0.132 2.112 4.942 0.132 2.112 2.552 0.132 2.102 2.572 0.132 2.102 2.572Actual Cost of Funds 2 5.232 6.152 10.042 5.542 6.592 7.962 5.842 6.792 9.282 6.082 6.962 9.522Required Return on Equity 10 10.002 0.002 10.002 0.002 10.002 0.002 10.002 0.002

flinioun Cost of Capital 9 0.821 0.022 0.822 0.852 0.852 0.952 0.952 0.852 0.85l 0.952 0.852 0.952Fully Loaded Funding Cost 2 6.062 6.972 10.862 6.392 7.442 8.912 6.692 7.632 9.132 6.922 7.802 9.372


-82- ANNEX 3Table 4

PA8ISTAN

AGRICULOBURL CRIDIT PROJICT

Balance Sheets and Grovth Indicators of ADBP 1186-89 (Actual) and Y90-93 (Projected)

(idJusted to Reflect Revised Recognition of Income as per Prudential Regulations)

BALAICE SElT 1986 8 TA 1987 T 1988 ITA 1989 TA

ASSETS 921.906

Riskless AssetsCash & Deposits 222.6 1.5 321.8 1.6 463.8 1.8 858.? 2.8Roney Market 200.9 1.3 233.2 1.2 224.1 0.9 181.9 0.6Treasury Bills 0.Q 0.0 0.0 0.0 0.0 0.0 887.4 2.9

Total lishless Assets 423.6 2.8 555.0 2.8 688.0 2.7 1,928.0 6.3

Norval Risk AssetsBills Dlscounted 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Loan s 1 year 0.0 0.0 1,255.6 6.4 1,651.2 6.4 2,668.3 8.7Loans 1 year 13,975.4 91.1 16,520.1 84.2 21,554.0 83.9 25,365.9 82.6Less Provisions (591.9) (3.9) (751.1) (3.8) (1,299.3) (5.1) (1,260.1) (4.1)

let loreal Risk Assets 13,383.4 87.2 17,024.6 86.8 21,905.9 85.2 26,774.1 87.2

Ivestments 290.7 1.9 401.4 2.0 1,394.2 5.4 426.2 1.4

Plant a EquipmientLand 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Buildinys 92.3 0.6 91.5 0.5 93.2 0.4 99.2 0.3furniture a Equipment 190.3 1.2 197.9 1.0 174.6 0.7 70.9 0.2Automation 0.0 0.0 0.0 0.0 0.0 0.0 60.5 0.2Transportation 0.0 0.0 0.0 0.0 0.0 0.0 56.6 0.2Construction In Process 7.5 0.0 22.5 0.1 51.4 0.2 76.7 0.2

Total Plant a Equipment 290.1 1.9 311.9 1.6 319.2 1.2 363.8 1.2Accn. Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

let Plant & Equipment 290.1 1.9 311.9 1.6 319.2 1.2 363.8 1.2

foreign Ehbaage Reserve 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Due fron Bagladesh 770.3 5.0 799.9 4.1 829.2 3.2 858.6 2.8Other Assets "9.5 1.2 518.8 2.6 560.8 2.2 348.9 1.1

total Assets 15,347.5 100.0 19,611.5 100.0 25,697.3 100.0 30,699.5 100.0-- - -- -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -- - - - -


Page 2

PAKISTAN

AGRICULTURAL CUIDI PROJECT

Blance Sheets and Grovth Indicators of ADBP IY86-89 (Actual) and IY90-93 (ProJected)

(Adjusted to Reflect Rewlsed Recognition of nlecoe as per Prudential Regulations)

BLANCE SiEET 1986 TA 1987 * ?A 1988 5 ?A 1989 S Ta

LIABILITIES

Deposits 154.2 1.0 331.5 1.7 1,029.3 4.0 1,425.4 4.6lonea larket 0.0 0.0 0.0 0.0 430.4 1.7 1,520.0 5.0Current laturities LTD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other Current Liab. 216.6 1.4 573.0 2.9 914.8 3.6 935.3 3.0

Total Current Liabilities 370.9 2.4 904.5 4.6 2,374.5 9.2 3,880.7 12.6

Long Tera Borrosings 13,048.7 85.0 16,119.2 82.2 19,853.0 77.3 23,911.8 77.9lanaged Funds 161.6 1.1 212.7 1.1 284.6 1.1 373.8 1.2

Total Long Term Liab. 13,210.4 86.1 16,331.9 83.3 20,137.6 78.4 24,285.6 79.1



Capital 703.9 4.6 799.9 4.1 988.3 3.8 1,353.3 4.4General Reserves 703.9 4.6 799.9 4.1 988.3 3.8 1,353.3 4.4Special Reserve 377.9 2.5 672.1 3.4 808.6 3.1 745.0 2.4Retained larnings (845.8) (5.5) (1,030.7) (5.3) (1,005.6) (3.9) (905.8) (3.0)

total Equity 939.9 6.1 1,241.1 6.3 1,779.6 6.9 2,545.8 8.3

Total Liab. & Equity 15,347.5 100.0 19,611.3 100.0 25,697.1 100.0 31,621.4 103.0

Opening Equity & Reserves 758.2 939.9 1,241.1 1,1779.6get lncome Ater Tax 181.7 280.3 368.1 400.4Less Dividends 0.0 0.0 0.0 0.0let Capital Ovn Equity 939.9 1,220.1 1,609.3 2,180.0Equity InJections 0.0 96.0 188.4 365.0Ending Equity A Reserves 939.9 1,316.1 1,797.7 2,545.0Iroe Balance Sheet 939.9 1,241.1 11779.6 2,545.8Rouding Irrors 0.0 75.0 18.1 (0.8)

AdjustmentsProvisos Required 422.0 591.9 751.1 1,299.3 1,260.1Actual Provisions 229.1 369.4 701.0 1,299.3 1,300.1Uader-Provisioning 192.7 222.5 50.1 0.0 (40.0)

Excess Interest 465.4 623.2 980.6 1,005.6 1,867.8Prior Period Adjustment (1.3)(Pot related) 0.0 0.0 (922.0)

Equity Overstated 658.1 845.8 1,030.7 1,005.6 905.8


Page 3

PAKISTAN

A6RICULTURAL CREDIT PROJECT

Balance Sheets and 6routh Indicators of ADOP FY86-89 lActual) and FY90-93 (Projected)

(Adjusted to Reflect Revised Recognition of Income as per Prudential Regulations)

BALANCE SHEET 1990 1 TA 1991 2 TA 1992 2 TA 1993 2 TA

ASSETS

Riskiess AssetsCash & Deposit 877.6 2.3 1,065.2 2.7 1,129.6 2.6 1,229.7 2.6Money Market 191.9 0.5 191.9 0.5 191.9 0.4 181.9 0.4Treasury Bills 504.5 1.4 605.4 1.5 726.5 1.7 871.8 1.9

Total Riskless Assets 1,564.0 4.2 1,952.5 4.7 2,036.9 4.8 2,293.4 4.9

Noroal Risk AssetsBills Discounted 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Loans ( I year 15,071.5 40.4 16,771.9 42.3 18,796.2 44.0 21,070.0 45.2Loans ) I year 20,046.8 53.7 20,741.9 52.3 21,997.4 51.5 23,634.9 50.8Less Provisions (1,820.6) (4.9) (2,344.4) (5.9) (2,851.3) 16(.7 (3,389.81 (7.3)

Net Normal Risk Assets 33,297.8 89.2 35,169.3 98.7 37,934.3 88.7 41,315.1 98.7

Investments 498.4 1.3 527.6 1.3 568.2 1.3 618.3 1.3

Plant A EquipmentLand 0.0 0.0 0.0 G.0 0.0 0.0 0.0 0.0

.Buildings 169.2 0.5 179.2 0.5 192.9 0.5 209.9 0.5Furniture 1 Equipeent 136.1 0.4 144.1 0.4 155.1 0.4 168.8 0.4Automation 124.0 0.3 131.3 0.3 141.4 0.3 153.8 0.3Transportation 119.4 0.3 126.5 0.3 136.1 0.3 148.1 0.3Construction in Process 142.9 0.4 151.3 0.4 162.9 0.4 177.3 0.4

Total Plant & Equipment 691.5 1.9 732.4 1.8 799.4 1.8 857.9 1.9Accua. Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Plant & Equipment 691.5 1.9 732.4 1.9 788.4 1.9 857.9 1.8

Foreign E%change Reserve 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Due fron Bangladesh 889.0 2.4 920.5 2.3 953.1 2.2 996.9 2.1Other Assets 409.0 1.1 432.1 1.1 465.1 1.1 506.2 1.1

Total Assets 37,349.6 100.0 39,634.6 100.0 42,746.1 100.0 46,567.7 100.0::::==:::=====:::::::::::::::::::::::::::::::::=:::=:::::::::=: =: = ==


PAKlISTA

A(RICULTURAL CREDIT PROJECT

Balance Sheets and 6routh Indicators ot ADOP FY86-89 (Actual) and FY90-93 (Projected)

IAdjusted to Reflect Revised Recognition of Income as per Prudential Regulations)

BALANCE SHEET 1990 2 TA 1991 S TA 1992 l TA 1993 2 TA

LIABILITIES

Deposits 1,t81.6 4.5 2,017.9 5.1 2,421.5 5.7 2,905.8 6.2Honey Market 3,120.0 9.4 3,120.0 7.9 3,120.0 7.3 3,120.0 6.7Current Maturities LTD 5,280.8 14.1 5,280.B 13.3 5,465.6 12.0 5,608.9 12.5Other Current Liab. 1,028.9 2.8 1,131.7 2.9 1,244.9 2.9 1,369.4 2.9

Total Current Liabilities 11,111.3 29.8 11,550.5 29.1 12,252.1 28.7 13,204.1 28.4

Long Tern Borrouings 21,355.3 57.2 22,666.5 57.2 24,492.9 57.3 26,761.0 57.5Managed Funds 490.9 1.3 644.7 1.6 846.7 2.0 1,111.9 2.4

Total Long Tere Liab. 21,846.1 59.5 23,311.2 58.8 25,339.6 59.3 27,872.9 59.9



EQUITY

Capital 1,703.3 4.6 1,103.3 4.3 1,703.3 4.0 1,703.3 3.76eneral Reserves 1,703.3 4.6 1,703.3 4.3 1,703.3 4.0 1,703.3 3.7Special Reserve 698.6 1.9 1,005.6 2.5 1,317.1 3.1 1,612.9 3.5Retained Earnings (658.9) (1.8) (621.2) (1.6) (599.9) (1.41 (589.9) (1.3)

Total Equity 3,446.3 9.2 3,791.0 9.6 4,133.8 9.7 4,429.6 9.5

Total Liab. & Equity 37,340.6 100.0 39,634.6 100.0 42,746.1 100.0 46,567.7 100.0:~~~~~~ 2:::::2:: :::::::::s: : : ::::::,,,:..... 2 2. ..... :::

Opening Equity A Reserves 2,545.8 3,446.3 3,791.0 4,133.8Net Income After Tax 550.6 344.6 342.9 295.7Less Dividends 0.0 0.0 0.0 0.0Net Capital Own Equity 3,096.3 3,790.9 4,133.8 4,429.6Equity Injections 350.0 0.0 0.0 0.0

Ending Equity & Reserves 3,446.3 3,790.9 4,133.8 4,429.6From Balance Sheet 3,446.3 3,791.0 4,133.8 4,429.6Rounding Errors (0.0) (0.0) 0.0 (0.1)

AdjusteentsProvisns Required 422.0 1,920.6 2,344.4 2,951.3 3,389.8Actual Provisions 229.4 1,820.6 2,344.4 2,851.3 3,389.8Under-Provisioning 192.7 0.0 0.0 0.0 0.0Excess Interest 465.4 659.9 621.2 599.9 589.9Prior Period Adjustment 0.0 0.0 0.0 0.0

Equity Overstated 658.1 655.9 621.2 589.9 599.9


- 86 -ANNEX 3Graph 1

PAKISTAN


ADBP CAPITAL SHORTAGE (REAL)Correcting for Past Overstated Income

-190 a Nft IOW1O - Forat_ 19I- PrIcN d

5000< _

4000- _

1989 1990 1991 1992 1993 1994

Year ending June 30

| - Restated Capital Additional Required

- 87 - ANNEX 3Graph 2

PAKISTAN


ADBP CAPITAL ADEQUACYPublished and Restated

*19 tHistcal, 1990- Forect, 1991-Propctd

12 7

U 0-

1986 1987 1988 1989 1990 1991 1992 1993 1994

Year ending June 30

| - Published M Restated |

-88 - ANE 3

Graph 3

PAKISTAN


ADBP DEBT TO EQUITYPublished and Restated

- H - hWmINID tO recs F U 1S9I. Picmd

lo,

011986 1987 1988 1989 1990 1991 1992 1993 1994

Year ending June 30

| - Published M Restated |

- 89 - ANNEX 3Graph 4

PAKISTAN


ADBP EARNINGS PERFORMANCEPublished and Restated

|0 - Hstilcai, 1900- Forea 1991. Proeed l

600-,

5400 ,0

1936 1987 1988 1989 1990 1991 1992 1993 1994

Year ending June 30

Published = Restated |

-g90o- ANNEX 3Graph 5

PAKISTAN


ADBP COST OF INTERMEDIATIONAs a Percentage of Total Assets

7-

2- O

:ii 1-o, |l ,|Lll

(0

_ ~~1986 1987 1988'1989'1990' 1991 '1992 1993 1994

@ ~~~~~Year ending June 30

[-Staff Occupancy Depreciation

3Other Op. Loan Loss Cap Formation|

- 91 - ANNEX 3

Graph 6

PAKISTAN


ADBP OPERATING RETURN ON RISK ASSETSPublished and Restated

-16 | -itgadal 10 a F,ov 1001- Pe

5- _

4.5- __

°r 4erenigJue3

3|l)

CD

1986 1987 1988 1989 1990 1991 1992 1993 1994o Year ending June 30

I Published Restated!

- 92 - ANNEX 3

Graph 7

PAKISTAN


ADBP RETURN ON ASSETSPublished and Restated

-199 Mfstdcew, 1M90 - F .coC 1991. Pe

2.5-_ .

10

=.wo

C

0

Z 0- 1986 1987 1988 1989 1990 1991 1992 1993 1994

Year ending June 30

| - Published M Restated

-93 - ANNEX 3Graph 8

PAKISTAN


ADBP SOURCES OF FUNDING*iM - HIteicAa IBM - Farmcast 1391- Prjecbd

& - <H I- I I

a~, -7 I ii IX ___...<"... x"1.\\&R ...1X kk1988 1989 1990 1991 1992 1993 1994

Year ending June 30Equity SBP DepositsMoney Market m Foreign Other

- 94 -

ANNEX 4

PAKISTAN


Financial Analysis of NCBs

1. The NCBs form the major portion of the financial system and werereviewed in depth during the Financial Sector Mission in June 1987. Anupdated financial analysis covering 1984 through 1988 is presented in Tables1-2, and Annex 11. Based on this analysis, financial indicators are presentedin Table 4.1.1/ The cost of funds is shown to have declined since 1985,assuming that the 9.4% average rate of return identified for 1986 has notmaterially charged. This decline was accompanied by an increase in theinterest margin from 28% to 31%,2/ which improvemer.t was offset by a steadyincrease in expenses. As a percentage of operating income, expenses rose from70% in 1984 to 77% in 1988. In relation to total assets, expenses rose from2.7% in 1984 to 3.0% in 1988.1' As a result, the overall financialperformance of the NCBs has been declining steadily since 1984, with the keyratio -- return on assets -- declining from 0.51% to 0.32%. representing anerosion of 37%.

Table 4.1: NCB Financial Performance, 1984-88(percent)

1984 1985 1986 1987 1988

Cost of Funds 8.5 8.5 8.4 7.8 7.7Interest Margin 28.0 27.0 27.0 30.0 31.0Operating Expense/Operating Income 70.0 72.0 73.0 76.0 77.0

Operating Expense/Assets 2.7 2.7 2.7 2.9 3.0Return on Assets 0.51 0.57 0.40 0.36 0.32

1 This analysis is based on published figures. It should be notedthat the NCBs' financial year is the calendar year.

2 Defined as ratio of net interest income to total interest income.This should decline if larger loan-loss provisions were beingnetted against interest/return income as will be required from1989.

The ratio of operating expenses to total assets is not affected bythe expense of establishing loan-loss provisions, since thepractice has been to offset loan-loss provisioning againstinterest income, but could be increased by significant write-downsof existing risk assets.

- 95 -

Page 2

2. The variation in financial performance across individualinstitutions narrowed over the five-year period under review. Table 4.2 showsthat the variation in financial indicators, such as funding cost and interestmargin, was less in 1988 than in 1984.

Table 4.2: Variations across NCBs in Financial Performance, 1984-88(percent)

1984 1985 1986 1987 1988

Funding CostLow 7.6 7.4 7.5 6.9 6.5High 10.6 10.1 9.0 8.6 9.0Range 3.0 2.7 1.5 1.7 2.5

Interest MarginHigh 34 33 37 38 37Low 24 25 24 28 28Range 10 12 13 10 9

Expense/AssetsLow 2.3 2.4 2.4 2.6 2.6High 3.7 3.8 3.8 3.8 3.7Range 1.4 1.4 1.4 1.2 1.1

3. The declining financial performance of NCBs is primarilyattributable to rising operating expenses. As shown in Table 4.3, this islargely due to poor staff productivity, which has resulted in growth inbefore-tax earnings per staff that is substantially less than the inflationrate. In effect, productivity in real terms has declined for the NCBs as awhole. However, there were variations in productivity across institutions.ABL, MCBL and NBP showed steady improvement from relatively low levels in1984. UBL and HBL show stagnation in current terms or a steady decline inreal terms. MCBL appears to have been making reasonably satisfactoryprogress, but nas not reached the levei of' p4duc-UivlLy of FIEL.

- 96 -

ANNEX Page 3

Table 4.3: NCB Staff Productivity, 1984-88(Rs 000/staff)

Before-Tax Earnings/Staff 1984 1985 1986 1987 1988

ABL 4.5 4.4 5.3 6.6 7.1NCBL 10.6 10.5 11.5 15.8 17.8UBL 19.4 12.5 12.4 12.6 12.6NBP 10.4 12.5 13.0 14.4 14.5HBL 35.4 34.9 34.4 34.5 34.8

Average 19.0 17.9 18.2 19.4 19.8Growth Rate -5.8Z 1.6Z 6.6Z 2.4Z

4. The trend in declining productivity may prove difficult toreverse. A hiring freeze has not resulted in any significant reduction instaff. While NCBs are responding to the declining cost of technology, theyare unable to shed redundant or non-performing staff. The critical issue ofstaffing has not been satisfactorily addressed.

5. The difficulties of NCBs previously identified in the FSAL programhave so far not been resolved, and the trend continues to be disturbing. Therequirements of the PSAL program with respect to loan classification,provisioning and capital adequacy are expected to improve the financialposition of NCBs over time. All NCBs are required under the FSAL agreementsto prepare restructuring plans using the financial statements for 1989 as thebasis. Satisfactory progress in the implementation of these plans and beingfully creditworthy would be conditions of participation of each NCB in theproject. The project would reduce the losses incurred by NCBs fromagricultural lending and make such lending attractive to them by FY93 (para7.17).

-97 ANNEX 4Table 1

ruIstau

AgIICUL?URIL CURDI P8OJBCS

Profit and Loss Statemeats and Performance patios of All ICU 1984-1988

llB 31-9ec-84 S 31-Dec-85 * 31-Dec-86 I 31-9ec-87 I 31-Dec-88 I

P1Rol? a LOSS in i millions

Interest Incose/Return 16,169 100 18,596 100 19,8182 100 20,961 100 22,463 100Iaterest Bpense/leture 11,708 72 13,545 13 14,493 73 14,659 70 15,557 69

let 1It. DIff. Incoe 4,461 28 5,050 2? 5,388 27 6,301 30 6,906 31

lee lIcoae 1,901 30 1,833 27 2,127 28 2,679 30 3,010 30let Operating Income 6,362 100 6,883 100 7,516 100 8,891 100 9.916 100

Staffing 3,311 52 3,853 56 4,252 57 5,421 60 6,033 61Depreciation 1M 2 179 3 171 2 190 2 143 1heat, Ilaes, luar., thil. 6e 10 614 9 683 9 787 9 941 9Legal fees 38 1 38 1 43 1 51 1 48 0Other Rpenses 282 4 297 4 347 5 404 4 457 5

5et Operating tpenase 4,428 70 4,981 72 5,416 73 6,852 76 7,622 77

get OperatiAg Profit 1,934 30 1,902 28 2,019 27 2,129 24 2,294 23

Other Iaeome 340 5 488 7 438 6 513 6 500 5LO8D LOB Provitlous 1 0 0 0 0 0 0 0 0 0 0Other Expense l88 11 877 13 912 12 985 11 1,086 11

let Incose lefore ?u 1,586 25 1,514 22 1,545 21 1,657 18 1,708 17

lWen 621 10 283 4 591 8 691 8 772 8let Income After tax 965 15 1,230 18 954 13 962 11 936 9

DivideDd Payout (late) 101 10 !00 8 100 11 104 11 103 11

I Not Available, as loans are reported net of provislons, ad the expense is netted aainst interest/retern received.

ANNEX 4- 98 - Table 1Page 2

PAIISTII

AGRICULTORAL CREDIT PROJECT

Profit and Loss Statements ad Performance Rtlos of Al1 UCUs 1984-1988

EYE 31-Dec-84 31-Dec-85 I 31-Dec-86 I 31-Dec-87 2 31-Dec-88 S

PERFOROIACE RATIOS Ik I

Financial Performance (Average)T Return on lisk Assets 1.13 0.95 0.88 0.92 0.9Q

Retuan on DIsets 0.84 0.71 0.64 0.62 0.58Return On Iquity 32.41 25.53 22.20 16.69 13.27

At Return on Risk Assets 0.69 0.77 0.54 0.53 0.49Retura or Assets 0.51 0.5? 0.40 0.36 0.32Reteun ea Eqeuty 19.12 20.75 13.71 9.69 7.27

Total lipen.es/Avs lssets 2.69 2.74 2.66 2.94 2.97

Liquiditylormal RA/Core Deposlts 60.55 62.12 65.77 61.30 62.17All U/Core Depoests 87.88 89.31 85.25 77.23 80.35

Capital AdequacyEquity/lorsal Risk Assets 5.24 5.52 5.29 8.77 8.55Equity/All lisk Assets 3.61 3.84 4.08 6.96 6.62lquity/lssets 2.70 2.83 2.94 4.42 4.36Equity/Deposits 3.17 3.43 3.48 5.38 5.32

Growth Indicatorskroral Risk Assets 10.08 16.40 18.04 1.76 9.19All Risk AIsets 10.82 15.30 8.42 (1.10) 12.02Equity Participatioas 22.43 3.81 (1.24) 30.98 5.52Incose Receivable 31.64 22.71 14.31 6.94 18.52total Assets 8.07 16.9? 8.96 12.11 7.92Core Deposits 9.49 13.45 11.49 9.17 7.66

funding CostAverage esenre Rate 2/ 9.43 9.86 9.40 9.40 9.40Average unding Cost 6.71 6.91 6.61 6.11 5.94Resere Earnings Component (2.83) (2.96) (2.82) (2.82) (2.82)

Allocation of Ops hpenae 3/ 1.52 1.53 1.50 1.71 1.75Actual Cost of Fudst 5.40 5.48 5.30 5.00 4.87Cost of Lendable Funds 4/ 7.99 8.02 7.86 7.3? 7.18Cost of Capital 5/ 0.49 0.51 0.48 0.49 0.49fully Loaded Fueding Cost 8.48 8.54 8.35 7.86 7.67

2 Beseve Rate - asumes that 302 of core deposits invested In goverament securities are compensated at the average rate shoan by SUP stats.3 Operating Epense - assumes 605 of Institutional operating empenses are attributable to deposit mobilization.4 Statutory reserves leave 658 of core deposits and 1002 of due to banks and rediscount available for actual lending.5 Cost of Capital - souns an 82 capital adequacy requirement on the normal risk asseti fuded by leadable funds (per Base Agreement).

_ 99 AN?NEX 4Table 2

PAUSTAN

AgRICULTBAL CR1DI?T ?BOJECT

Balance Sheets of All UC0B and Staff Productivity 1984-1988

All Ech

fIT 31-Dec-84 I 31-Dec-85 I 31-Dec-86 I 31-Dec-87 S 31-Dec-88 S

ALACE suE io Re millions

Assets

Cash and PDA uith 58P 13,411 7 13,119 6 15,377 6 20,193 7 20,214 7Liquid Investeats 2,653 1 3,904 2 6,953 3 18,421 7 17,426 6Bluces .ith Other Banks 2,836 1 2,964 1 3,938 2 6,166 2 41,248 1State Securities 22,362 11 30,611 13 32,901 13 44,475 16 45,021 15Total Liquid Assets 41,268 21 50,604 22 59,169 24 89,555 32 86,910 29

Call nooey 16,144 8 19,611 9 12,524 5 5,613 2 197 2Overseas Placements 20,902 11 23,508 10 19,806 8 25,829 9 .,510 12

Total Lisited Risk Assets 37,04? 19 43,125 19 32,330 13 31,643 11 40,967 13

Discount Portfolio 6,824 3 9,832 4 12,066 5 14,321 5 17,121 6Loans and Advances 93,581 47 106,954 46 121,637 48 116,313 41 125,422 41bads a PLS NCs 1,274 1 1,565 1 5,994 2 11,519 4 12,674 4Total loml Risk Assets 101,619 52 118,352 51 139,698 56 142,153 50 155,217 51

Paid up Shares 1,261 1 1,380 1 1,554 1 1,599 1 1,241 0- Other lovestments 7,585 4 7,289 3 7,191 3 3,681 1 3,174 1Total All Risk Assets 147,572 75 170,115 74 181,013 72 179,076 64 200,601 66

IEquity Participations 534 0 554 0 547 0 717 0 756 0Income Receivable 5,252 3 6,415 3 7,367 3 7,878 3 9,338 3Other assets 1,545 1 1,802 1 1,931 1 3,093 1 4,971 2

Plant 623 0 692 0 715 0 889 0 1,011 0leAcumlated Depreclation (149) (0) (169) (0) (192) (0) (216) (0) (242) (0)

Equipment 1,517 1 1,780 1 1,998 1 2,277 1 2,360 1Accmulated Depreciation (946) (0) (1,104) (0) (1,253) (0) (1,1419) (1) (1,535) (1)

get Plant a Equipment 1,106 1 1,199 1 1,328 1 1,531 1 1,594 1

TOTAL ASSES 197,277 100 230,749 100 251,415 100 281,850 100 304,169 100--- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- -- --- --


PAEIStAS

AGRICULTOUL ClDlt PHROCT

Balace Sheets of hil ICBe and Staff Productivity 1984-1988

All ICBs

BYE 31-Dec-84 I 31-Dec-85 2 31-Dec-86 2 31-Dec-87 I 31-Dec-88 2

BALANCE SBEET in h millions

LiabilitiesDesand Deposits 30,970 16 35,060 15 42,645 17 48,915 17 55,877 18Fixed Time Deposits 78,427 40 89,150 39 92,417 37 93,351 33 914,222 31Savings Deposits 58,536 30 66,303 29 77,342 31 89,619 32 99,548 33

Core Deposits 167,933 85 190,513 83 212,404 84 231,864 82 249,647 62

Due to Banuk 9,356 5 15,519 7 10,267 4 13,178 5 13,974 5Rediscount t Refinance 4,133 2 4,399 2 5,197 2 7,189 3 7,843 3

Total funding Liab. 181,422 92 210,431 91 227,869 91 252,251 89 271,464 89

Bills Payable 2,158 1 2,575 1 3,721 1 3,315 1 4,141 1Other Lidblities 8,372 4 11,211 5 12,43i 5 13,819 5 15,291 6Provision for Loan Losses 0 0 0 0 0 0 0 0 0 0

Total Liabilities 191,952 97 224,217 97 244,028 97 269,385 96 290,896 96

EquityPaid In Capital 2,029 1 2,029 1 2,029 1 6,272 2 6,272 2Capital Reserves 3,288 2 4,499 2 5,347 2 6,188 2 6,993 2Retained larninge 8 0 4 0 11 0 5 0 8 0

Total Equity 5,325 3 6,532 3 7,387 3 12,466 4 13,274 4

TOTAL LIABILITIES & 1QUI0 197,277 100 230,749 100 251,415 100 281,850 100 304,169 100

Acceptances & Collections 49,434 25 61,576 27 70,345 28 89,581 32 103,756 34Balance Sbeet Total 246,711 292,325 321,780 371,431 407,925

Other Contingent Liabilitie 22,396 11 19,230 8 26,238 10 28,578 10 28,912 1O

STIAF PRODUCTIVITY I Groutb 2 6roatb 2 Grootb 2 Grovth 2 Growth

luber of Staff 84,249 1.4 85,121 1.0 85,002 (0.1) 86,182 1.4 86,124 (0.1)Operating Cost/Staff (Ra) 39,646 24.5 45,502 14.8 49,982 9.8 63,331 26.7 70,029 10.6Operating Income/Staff (Rs 76,042 20.7 81,280 6.9 88,355 8.7 104,923 18.8 115,101 9.7B? laraings/Staff (Be) 18,960 23.4 17,873 (5.7) 18,162 1.6 19,354 6.6 19,827 2.4Ave Core Deposits/Staff (00 1,920 4.0 2,116 10.2 2,368 11.9 2,595 9.6 2,795 7.7lve loreal RA/Staff (000 Re 1,160 4.3 1,299 12.0 1,517 16.8 1,646 8.5 1,726 4.8

let up Ezp/lv Core Deposits 2.76 18.8 2.78 0.8 2.73 (1.8) 3.08 13.1 3.17 2.6

Source: ICE's hAual Reports - Data equivalent to FSaL data, but updated and with modified ratio analysis.

- 101 -

PAKXSTAN

AGRICULTURAL CREDII PROJECT

Action Plan to Imnrove Recoveries

1. In FY89, AD3P's recoveries against total amounts due (including amounts past dueat the beginning of the year and amounts falling due during the year) deteriorated from 72%to 64X. This was due in part to the extensive floods that have occurred during the year inPunjab which have destroyed or heavily damaged farmers' crops. Other reasons, however, areassumed to be external interference in ADBPs s recovery operations. By the end of October 1989total recoveries were Rs 1,083 million as against Rs 886 million during the correspondingperiod of FY89 (growth of 251). However, the overall recovery ratA nf 1 against totalrecoverable is unsatisfactory and a matter of great concern. In fact, the recovery hasslightly deteriorated from the 12X recovered at the same time of last year.

2. In response to a request by the World Bank, ADBP's management has developed anaction plan and has initiated a series f measures to arrest the significant decline inrecoveries. These measures fall into three broad areas as follows:

A. Measures linked to enlisting assistance from agencies outqide ADBP. These includeapproaching the provincial governments and the provincial Boards of Revenues,and enlisting the help of ADBP's Board Members from the provinces to beinstrumental in these attempts and in initiating other direct approaches.

B. Administrative and oranizational measures_within ADBP. These include settingup a Recovery Operations Review Committee (RORC) at the highest level; revisingrecovery targetting policy; increasing the frequency of installment payments byborrowers; allocating regions with chronically poor recovery performance to thespecial attention of ADBP's senior executives; linking the disbursement limitof each MCO to his recovery performance; and establishing a separate RecoveryDivision. Furthermore, ADBP plans to induct regional recovery officers who wouldoversee the recovery efforts in the region.

C. Staff incentives and disciplinary measures. These measures include the linkageof the travel allowance system to recovery performance of the MCOs; specialincentive payments for MCOs and staff of the Revenue authorities on recovery ofwritten-off amounts; setting dated recovery targets for regional managers whowould, in case of failure to meet them, be penalized in terms of being reassignedto a function other than that of a regional manager; and offering monetaryrewards for outstanding recovery performance to MCOs, branch and regionalmanagers.

3. It has been pointed out by the Bank that the majority of these measures areuseful and the plan is a comprehensive attempt to improve the situation. The effect of themeasures will depend on the dedication and commitment used in their implementation. However,the measures proposed under (i) above will, under the prevailing circumstances of outsideinterference in ADBP's field operations, probably not have the desired impAct, unless drasticmeasures are taken against willful defaulters. These should include foreclosing on the items

- 102 -

Page 2

financed or on other tangible assets. Without a clear commitment of Federal and ProvincialGovernments to strengthen financial discipline, ADBP's efforts will only be partiallysuccessful. Also, establishing a Recovery Division alone would not be of much help unlessit would be appropriately sub-divided and staffed and made fully operational. A further pointhas been communicated to ADBP: the travel allowance incentives scheme for MCOs should be morerealistic in terms of ability to reach targets and in terms of the iecessity to increasethe number of field visits rather than reducing it through cutting back on travel allowance.The system of special monetary rewards should be further refined to ensure that the relativerecovery performance of regions is adequately taken into consideration.

4. Satisfactory progress in improving the recovery situation is being carefullymonitored. To that extent ADBP has agreed that information regarding recovery performancecollected from the weekly regional and branch reports should be summarized and submittedmontnly to the World Bank through the Resident Mission. Tnis has been done withoutinterruption. The latest available figures for March 31, 1990 show that there is a slightimprovement in overall recoveries as compared to FY89. The table below shows the details:

Table 5.0: Recovery Performance FY89-90 July-March

___ ___ ___ ___ _ _89__ FY90Recoverable Recovered Recoverable Recovered

Amounts AmounLts X Amounts Amout.ts X

Past Due atBeginning of Year 1,659 372 22.4 2,883 636 22.1

Falling Due DuringYear 6,516 3,001 45.6 7,626 3,768 49.4

Total 8,175 3,373 41.3 10,509 4,404 41.9

Although the improvement expressed in percent is only marginal, two things are noteworthy.First, the improvement has been achieved despite the fact that a.an amount of Rs 1,132 M hadbeen rescheduled in FY89 because of crop damages caused by floods and these rescheduledamounts are included in the amounts recoverable in FY90. Second, the total amountsrecoverable have grown from Rs 8,175 N by 291 to Rs 10,509 M. Past and projected recoveryfigures are in Table 1 of this Annex.

PAKISTAN


ADBP Recoveries FY77 to FY89 (Actuals) and FY90 to FY93 (Projected)(Rupees Million)

Collections During the Year AMainstNet Recoverables During the Yearl' Past Dues Current Dues Total

Years Past Dues Current Dues Total Amount 1age Amount %age Amount Xage

FY77 426 409 835 94 22X 202 49X 296 351FY78 539 718 1,257 226 42% 343 481 569 45XFY79 668 559 1,227 142 21% 303 54X 445 361FY80 776 665 1,441 223 291 421 631 644 451FY81 795 842 1,637 194 241 577 691 771 471FY82 861 1,044 1,905 203 24Z 779 751 982 521FY83 1,074 1,310 2,384 257 241 1,099 841 1,356 571FY84 800 1,596 2,396 256 321 1,395 871 1,651 691FY85 875 2,210 3,085 286 331 1,967 891 2,253 731FY86 914 3,398 4,312 327 361 2,700 791 3,027 701FY87 1,143 4,140 5,283 447 391 3,333 811 3,780 721FY88 1,450 5,074 6,524 639 441 4,058 801 4,697 721FY89 1,659 6,516 8,175 514 311 4,697 721 5,211 641FY90 2,883 7,626 10,509 1,236 431 6,330 831 7,566 721FY91 3,152 9,918 13,070 1,341 431 8,331 841 9,672 741FY92 3,398 11,747 15,146 1,526 45Z 9,985 851 11,511 761FY93 3,635 13,738 17,373 1,736 48% 11,815 861 13,551 781

1/ Excluding written off and rescheduled loans.

I.

- 104 -

AMNEX 6

PKSTAN

AGRICULTUa CREDIT PROJECT

Earm Mlechanization

1. Tractors. There are five tractor manufacturers in Pakistan whichproduce Massey Ferguson, Fiat, Ford, Belarus and lNT tractors, respectively,in two main power categories, 45-59 h.p. and 60-75 h.p. two-wheel drive units.Ford has not produced in 1989, but plans to go back into operation in 1990.The country's tractor manufacturing output reached a peak in FY84 of 31,100units. Annual sales thereafter declined to 23,400 in FY86, 23,900 in FY87,20,600 in FY88 and 24,000 in FY89. During this period the compulsory importdeletion program'/ continued, with a view to decreasing levels of foreignexchange expenditure while stimulating indigenous manufacturing and employmentcapacity. ADBP's financing of tractor purchases as a proportion of totalnational sales has remained at very high levels, reaching the exceptionallevel of 98.81 in FY87. This figure indicates the increasing reliance offarmers upon ADBP as the primary source of borrowing for tractor purchases.It also illustrates the historically low level of lending in this sector byFBC and the NCBs. During FY85-88, FBC lending increased from Rs 6 N toRs 117 M, while the NCBs' lending fluctuated between Rs 58 N and Rs 169 M,with no apparent increasing trend. In contrast, ADBP lending for tractorsincreased from Rs 2,306 M in FY85 to Rs 2,899 M in FY89.

2. Tractors in the 45-59 h.p. range account for 851 of the tractormarket and 60-75 h.p. units for most of the remaining 15X. Units below 45h.p. never exceeded 2.51 of sales during FY86-88 and stood at 0.81 in FY89,with manufacturers reporting substantial unsold inventories. Tractors above75 h.p. are not manufactured in Pakistan and are considered to have limitedpotential in the predominant basin-irrigated production areas. Since theremoval of price controls in 1985, tractor prices have increasedsignificantly; the price of a 50 h.p. unit rose 641 between FY86 and FY90. InJuly 1989, the weighted average price for a 50 h.p. tractor was about Rs160,000. Since then it has increased further to about Rs 180,000 for the 50h.p. tractor and Rs 246,000 for 60/75 h.p. units. In relation to world marketprices, tractor prices in Pakistan are now broadly comparable with importedCIF Karachi prices of Rs 191,000 (50 h.p), Rs 231,000 (60 h.p) and Rs 315,000(75 h.p), respectively, for tractors of the same specification. The retailprice for imported tractors, however, would be substantially higher afterhandling, clearance, duties and taxes are taken into account.

A program under vhich successively imported tractor components arereplaced by locally manufactured ones.

- 105 -

ANNEX 6Page 2

3. During the Seventh Five-Year Plan (FY89-93), the Ministry ofAgriculture projects 6.1X average annual growth in the number of tractorsoperated in the country, increasing from 221,000 in FY88 to 297,200 in FY93.However, analysis of sales and replacement requirements indicates fewertractors than officially stated and that strong demand for tractor replacementon manufacturing capacity in FY92 and FY93 will leave little scope forexpansion. The share of expansion in the market has gradually declined from15% in FY82 to 5% in FY89 and will continue to do so until saturation isreached. Therefore, a 2X increase is considered more likely for the periodunder review. Nonetheless, the potential for increased tractorization inPakistan remains significant. A census of agricultural machinery in 1984indicated tractor usage on 31% of cultivated area. The recent stagnation intractor growth may therefore be the result of various factors, includingflooding in Punjab in 1988 with a subsequent loss of farmer income, priceincreases, manufacturers' restructuring, the import deletion program, and ADBPlending limits.

4. As evidenced by studies undertaken by the Pakistan AgriculturalResearch Council (PARC) in conjunction with CIMMYT on farmers fields, yieldbenefits due to deeper ploughing reached 25% in rainfed (barani) areas. It isanticipated that 8-10% yield increases would be achievable by farmers withoutsuch improved practice. The Punjab Economic Research Institute's (PERI)report' on the socioeconomic impact of tractorization (fulfilling a covenantin the ADBP V project) showed a 22-25% increase in cropping intensityfollowing tractor use on irrigated land, compared to a 2% increase on farmsusing bullocks. Regarding cropping pattern, the area sown to fodder decreased15-43%, while cotton and sugarcane areas increased by 24-31% and 32-43%,respectively. The PERI report also reported that crop yields on tractorizedfarms were significantly higher than on bullock farms. Thus, the benefits oftractorization include better yields due to timely and deeper ploughing,increased cropping intensity and more financially optimal cropping patterns.Pakistan has an active tractor hire market in which farmers with holdingsbelow the 30-40 ha size justifying a tractor rent out their tractor to work onneighboring farms. Additionally, off-farm transport of inputs/outputs andcommercial goods increases their profit margins. Such benefits have madeinvestment in tractors financially attractive to farmers and is expected toremain so.

5. In Pakistan the tractor is primarily used for tiilage, threshingand transport and therefore directly replaces bullock draft power.Displacement of tenants and permanent labor or reductions in seasonal hiredlabor are widely cited as results of tractorization; however, casual andpermanent hired labor is a small percentage of farm labor on all categories of

Punjab Economic Research Institute. "The Socio-Economic Impact ofTractorization," Lahore, 1983. The sample consisted of a resurveyof 645 respondents out of 2,002 interviewed under the ExpandedAgricultural Economics Survey in 1977.

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ANNEX 6Page 3

farms in Pakistan. Family labor makes up 95% of net total labor input onbullock farms. The PERI study showed that irrigated farms with owned tractorshad 9% less labor employment per cultivated acre than when they used bullockpower in 1976-77, while farms hiring tractors had 14% more labor employment.Farms which maintained bullocks as the source of farm power also showed a 12%decrease in labor. Although the use of family labor was shown to decreasefollowing tractor ownership, the need for casual hired labor increasedsignificantly, due possibly to higher cropping intensity and yields. Onbullock farms surveyed, both permanent hired labor and casual labor decreased.In addition, the 1984 agricultural machinery census showed that the number offamily workers employed on tractor owning farms decreased by 3X, whilepermanent hired labor increased by 15X. The primary displacement involveddraft animals which declined to 47X of the level prior to tractor ownership.The effects of tractorization cannot therefore be looked at in isolation fromstructural changes in rural employment and fragmentation of landholdings.

- 107 -

ANNEX 7

PAKISTAN


Legal Issues

A. Experimenting with Different Tvpes of Collateral

1. The legislation'/ relating to the Agricultural Development Bank ofPakistan (ADBP) obligates ADBP to provide credit "for such term and subject tosuch conditions as may be prescribed by rules..."2/ The rules for carryingout this and other purposes of the ADBP Ordinance are to be made by theFederal Government.31 The rules4 / so far made for these purposes distinguishand define three types of credit that ADBP can provide, namely, short term (18months or less), medium-term (five years or less but more than 18 months) andlong term (more than 5 years) loans.5/ The ADBP Rules also provide that, as arule, every mediam-term or long-term loan should "be fully secured by mortgageof immovable property".'1 ADBP is permitted, in suitable cases, to accept "inlieu of such mortgage" a pledge or assignment in its favor of gold, governmentsecurities, life insurance policies and/or the assets (such as tractors orfarm machinery) proposed to be purchased with the loan applied for.", Certainexceptions are also explicitly recognized, for example, in favor of medium-term loans made for cattle, milch animals etc., which may be secured by a bondwith two sureties; in favor of medium or long-term loans, which may, at ADBP'sdiscretion, be secured by a bank deposit or by an unconditional bankguarantee; and in favor of medium-term loans for purchase of milch animalswhich may be secured by hypothecation of such animals duly insured with an

1 The Agricultural Development Bank Ordinance, 1961 (No. IV of1961), as amended from time to time (the ADBP Ordinance).

a Id., Section 19(1).

Id., Section 38(1).

The Agriculture Development Bank Rules, 1961, as amended from timeto time (the ADBP Rules).

Id., Rule 12.

Id., Rule 13 (1).

Z Id., Rule 13 (1).

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ANNEX 7Page 2

insurance company.'/ As for loans to be secured by a bond with sureties, theamount is made subject to a limit to be specified by the Federal Government bynotification in the Official Gazette.2 / This limit at present stands atRs 25,000.3/ In practice, only a person of substance (probably one who is aproperty owner himself) can stand surety. Also in practice, while the ADBPRules do not expressly provide for this, short-term loans made by ADBP arerequired to be secured in the same way as its medium- and long-term loans.

2. Under ADBP's current rules and practice, there appears, therefore,to be no room for loans, whether long-term, medium-term or short-term, whichare not secured either by mortgage of land and other immovable property, or incertain limited situations, by hypothecation of the assets to be purchasedwith the loan applied for. This situation gives rise to a severe constrainton ADBP's ability to provide credit to small farmers, the landless and women.It is, therefore, proposed to include in the Project a pilot program toexperiment with alternative schemes for providing loans to these groups (thespecial target groups). Under one such scheme, for example, wider use wouldbe made than at present of hypothecation of housing, buildings, livestock,high-value crops and equipment for securing medium- and long-term loans madeto individuals from the special target groups for low-cost investments. Underanother scheme, unsecured short-term loans of up to Rs 15,000 in value eachwould be made to groups of such individuals for income-generating activities;and repayment of such loans would be ensured through the joint and severalliability of the individual members of the group to repay the loan.

3. It appears that the introduction of such schemes under theProject, first, as proposed, on an experimental basis, and then, if theexperiment proves successful, on a regular basis, would require minimalchanges to the ADBP Rules. In fact, in certain cases, even that may not benecessary. For example, there is nothing in the ADBP Rules requiring ADBP'sshort-term loans to be secured in the same way as its medium- and long-termloans. That short-term loans should be secured is really a matter of ADBP'spractice, and the proposed scheme for unsecured short-term loans would at bestrequire a modification of that practice. Also, a change in the monetary limitfor loans that can be secured by a bond (as is also proposed under theProject) would only require the Federal Government to issue a GazetteNotification effecting the change.

± Id., Rule 13 (1).

ADBP Ordinance, Section 19 (1) (d), proviso.

a Gazette Notification S.R.O. (I)/84, dated March 10, 1984.Reportedly, the limit has been increased to Rs 50,000 in 1990.

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ANNEX 7Page 3

B. & Possible Role for Non-Governmental Organizations (NGOs)

4. Assuming that there is nothing to prevent ADBP from extendingcredit to the special target groups, the Project includes another set ofproposals, again to be introduced at first on an experimental basis, tofacilitate ADBP's efforts to reach out to the special target groups. Underthese proposals, ADBP would (a) make funds available to NGOs involved in ruralenterprise programs and the NGOs would, in turn, on-lend those funds tomembers of the special target groups, under criteria and on terms andconditions satisfactory to ADBP; and/or (b) seek the assistance of NGOs inidentifying suitable candidates from amongst individual members of the specialtarget groups for loans from ADBP, and, if need be, in standing surety forloans made by ADBP to groups of such individuals on the basis of joint andseveral liability alone.'/

5. Proposal (a) above gives rise to two questions: first, whether theNGOs which are proposed to be involved in the Project would be able to borrowfunds from ADBP and on-lend them to the individuals who are to be targeted forthis purpose; and secondly, whether ADBP would be in a position to lend suchfunds to such NGOs for such purpose. It appears that many different types ofNGOs can exist in law. A NGO may exist, for example, as a cooperativesociety, registered under the Cooperative Societies Act, 1925.21 For purposesof such registration, a cooperative society is defined as "a society which hasas its object the promotion of the economic interest of its members inaccordance with cooperative principles...."3' A cooperative society soregistered is ".. a body corporate by the name under which it is registered,with perpetual succession and a common seal, and with power to hold property,to enter int contracts, to institute and defend suits and other legalproceedings and do all things necessary for the purposes of itsconstitution".41 Because a cooperative society exists primarily for thebenefit of its members, it is subject to certain restrictions in its dealingswith non-members. Thus, a cooperative society is not permitted to make a loanto a non-member except under the sanction of the Registrar of CooperativeSocieties.s/ A cooperative society stands a good chance of getting suchsanction if it qualifies as a "financing bank" which means "...a society the

1 For a description of this scheme (as proposed), see paragraph 2supra.

Act No. VII of 1925, as amended from time to time (the CooperativeSocieties Act.)

The Cooperative Societies Act, Section 5.

Id., Section 23.

Id., Section 34(1).

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ANN-EX 7Page 4

main object of which is to make loans in cash or in kind to any other societyor to an agriculturist who is not a member of a society or to both societiesand such agriculturists...". /' A cooperative society, which is a member of afinancing bank, may, however, act as an agent of the financing bank forpurposes of disbursing loans made or to be made by the financing bank to non-members.2/ A cooperative society may receive deposits and loans from non-members but only if so permitted by the relevant rules or its by-laws.3 / Theprohibition on cooperative societies to make loans to, or receive loans from,non-members is, therefore, not absolute. Accordingly, a cooperative societyreceiving funds from, say, ADBP, could disburse these to its members, and,subject to certain conditions, to its non-members as well. As a bodycorporate and a property-holder, a cooperative society would also be in aposition to give, for loans received by it, and to obtain, for loans given byit, any suitable security4 / under whatever contractual arrangements areconsidered appropriate.

6. A NGO may also exist as a company formed for promoting, amongother things, social services, charity or any other useful object under theCompanies Ordinance, 1984.5/ As a condition for being licensed for thispurpose, such a NGO would be required to apply its profits, if any, or otherincome to the promotion of its objects, and would be prohibited from payingdividends to its members.11 Such a NGO would, once it has been registered,enjoy all the privileges of a limited company and be subject to all itsobligations (with one exception not material to this discussion).7/ Such aNGO would, therefore, like any other limited company, be a body corporate,capable of acquiring, holding and disposing of assets, of borrowing and

1 Id., Section 3 (bb).

Id., Section 34(4).

Id., Section 35.

Subject to the provisions of the Cooperative Societies Act underwhich a cooperative society with unlimited liability (such as asociety the majority of whose members are agriculturists) is notpermitted to lend money on the security of moveable property,except with the sanction of the Registrar (Section 34(2)), or isprohibited from lending money on mortgage of immovable property,if so ordered by the Provincial Government concerned.

Ordinance No. XLVII of 1984, as amended from time to time (theCompanies Ordinance), Section 42(1).

Id., Section 42(1).

Z Id., Section 42(3).

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Page 5

lending moneys, of disposing of its profits and other income (subject, in thiscase to the one restriction described above), of having its own seal, ofentering into contracts and of suing and being sued in its own name. Therewould, therefore, appear to be no bar to such a NGO borrowing funds from ADBPand on-lending them to its members and others with a view to promoting itsobjectives.

7. Another form that a NGO may assume may be that of a society formedfor a literary, scientific or charitable purpose and registered under theSocieties Registration Act, 1860.1/ Such a NGO would be capable of holdingproperty, both moveable and immovable, through its trustees or its governingbody.2' Such NCO would also be capable of suing and being sued through itspresident, chairman or principal secretary, or its trustees, or through anyperson appointed for this purpose by its governing body.3 1 The SocietiesRegistration Act is silent on the point whether or not a society registeredthereunder may borrow and lend funds. On a broad interpretation of thegeneral scheme of the Societies Registration Act, this silence may, however,be taken as implying that such a society may indeed borrow and lend funds forany purpose which may promote its objectives, so long as there is nothing inits regulations or by-laws preventing it from doing so. If so, it wouldfollow as a necessary corollary to the society's capacity to hold and dealwith property that is could offer its property, if necessary, as security forany funds borrowed by it, and that equally it could acquire property, ifnecessary, as security for any funds lent by it. Also, the society's capacityto sue and be sued would provide the society the means for enforcing thesecurity for loans made by it and provide its creditors the means forenforcing the security for loans made to it. Although the SocietiesRegistration Act does not state explicitly that a society registered under itis a body corporate, it leaves little room for doubt that such a society is toenjoy the status and privileges of a body corporate, except for therequirement that, instead of acting in its own name, it would need to actthrough its governing body, or its trustees or others. Similarly, thirdparties, if they wished to proceed against such a society would need to do sothrough the society's governing body, or its trustees or others. However,this fact alone should not deter ADBP from loaning funds to NGOs which aresuch societies and third parties from borrowing funds from such NGOs.

1 Act Ne. XXI of 1860, as amended from time to time (the SocietiesRegistration Act, Section 1.

2 Id., Section 5.

Id., Section 6.

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o. In yet another form, a NGO may exist as a voluntary social welfareagency registered under the Voluntary Social Welfare Agencies (Registrationand Control) Ordinance, 1961.1/ A "voluntary social welfare agency' may beestablished and operated for rendering welfare services in any one or more ofa number of possible fields, including women's social welfare and education./The Voluntary Social Welfare Agencies Ordinance does not provide explicitlyfor voluntary social welfare agencies to hold and deal with property, but anumber of provisions thereof leave no room for doubt that such agencies mayindeed do so.3/ Similarly there is nothing explicit in the Voluntary SocialWelfare Agencies Ordinance that such agencies may borrow and lend funds forthe promotion of their objectives or otherwise, but there are provisions inthe Ordinance which speak of the agencies' "debts and liabilities" and"securities and assets".4' The Ordinance does, no doubt, state in defining a"voluntary social welfare agency", that such an agency would depend "for itsresources on public subscriptions, donations or Government aid".51 It issubmitted, however, that this provision should be read in light of the generalscheme of the Ordinance, which, as pointed out above, allows for such aregistered agency to have debts and liabilities and assets and securities andshould not be construed as in any way restricting such agency's inherent powerto borrow and lend funds intended for the promotion of its objectives. TheOrdinance also recognizes such an agency's power "to institute and defendsuits and other legal proceedings" through a competent person appointed by thegovernment in the event of dissolution of the agency.'/ The implication ofthis provision seems to be that, in other situations, during the subsistenceof the agency and so long as there is no move to dissolve the agency, theagency may institute and defend suits and other legal proceedings on its ownbehalf and in its own right, i.e., without the need for the government toappoint a competent person to intervene for this purpose. A NGO, which is

Ordinance No. XLVII of 1961, as amended from time to time (theVoluntary Social Welfare Ageicies Ordinance), Section 4.

Id., Section 2 (f) read with the Schedule.

Id., Section 7(b) speaks of a registered agency's "moneys" beingpaid into a separate account kept in its name; Section 9(1)provides against a registered agency which has committedirregularity in respect of "its funds"; and Section 12 makesprovision for dealing, in the event of a registered agency'sdissolution, with "moneys, securities or other assets (held] onbehalf of the agency".

4fi Id., Section 12 (l)(c).

2fi Id., Section 2 (f).

Q Id., Section 12(l)(b).

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registered under the Voluntary Social Welfare Agencies Ordinance may,therefore, borrow funds from ADBP or any other source and lend such and otherfunds to third parties, if to do so would be to promote the NGO's objectives.

9. Under the ADBP Ordinance, ADBP may provide credit to'agriculturalists".1 / An agriculturalist has been defined as "any individualengaged in agriculture2 / or in the development of agriculture or agriculturalproducts .... and any public or private company or cooperative societyincorporated or registered by or under any law for the time being in force andso engaged .... "3 ADBP would thus have no difficulty in providing credit toNGOs which fall in the categories of "cooperative societies" registered underthe Cooperative Societies Act and "companies" incorporated and registeredunder the Companies Ordinance. The question whether ADBP can also providecredit to NGOs falling into the other two categories discussed in this paper,namely, "societies" registered under the Societies Registration Act, and"voluntary social welfare agencies" registered under the Voluntary SocialWelfare Agencies Ordinance, is. however, not free from difficulty. If a broadconstruction were placed on the term "cooperative society" as used in thedefinition of "agriculturalist" under the ADBP Ordinance, it could embraceliterary, scientific and charitable societies, as well as social welfareagencies. The term "cooperative society" has, however, itself been defined inthe ADBP Ordinance as "a society registered .... under any law for the timebeing in force relating to registration of cooperative societies."4' Theintention clearly is to limit coverage to societies registered under oneparticular type of law, and therefore to try to extend it to societiesregistered under other types of law would be to stretch the meaning ofTcooperacive society" to breaking-point.

10. Ideally, therefore, the ADBP Ordinance should be amended toinclude in the meaning of "agriculturist" a society registered under the lawrelating to registration of literary, scientific and charitable societies andan agency registered under the law relating to registration of voluntarysocial welfare agencies, in order for such a society and/or agency to qualifyfor credit from ADBP. Needless to say, such an amendment, would take time tobe passed by Parl.iament. Pending such approval, therefore, ways must be foundof facilitating the provision of ADBP credit to the societies and agencies inquestion, if so required under the Project, and yet not holding up the Projectfor want of enabling legislation. Three such possible ways come to mind.First, the amendment could be introduced through an ordinance. The

1 ADBP Ordinance, Section 19 (1).

a As defined id., Section 2(d).

Id., Section 2(c).

Section 2 (h).

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executive's power to legislate by ordinance is, however, subject to certainconditions under the Constitution,11 and, given the present political set-up,the executive may or may not be willing to use this procedure. Secondly, theState Bank of Pakistan (SBP) could issue directions21 to ADBP to start lendingto societies and agencies of the types in question. It may be recalled that,when in 1984 Islamic modes of financing were promulgated for the bankinginstitutions of the country, ADBP first commenced operations using those modesof financing in compliance with a SBP directive and it was only some monthslater that the ADBP Ordinance was amended to incorporate those modes offinancing into its credit operations proper. Thirdly, and this may perhaps bethe easiest way of resolving the issue under discussion, any societiesregistered under the Societies Registration Act and any agencies registeredunder the Voluntary Social Welfare Agencies Ordinance, which hope or expect toparticipate in the Project, should consider re-registering themselves ascompanies formed for promoting social services, charity or any other usefulobject under the Companies Ordinance.

11. It is submitted, however, that processing of the Project would befacilitated even more if instead of trying to resolve the rather difficultquestions raised in paragraph 10 above, such questions wŽre avoidedaltogether. The ADBP Ordinance limits the provision of credit to individuals,public and privat.- companies, and cooperative societies. Unless there is somemisunderstanding on this point, it appears that the funds proposed to be madeavailable to NGOs under the Project would be intended not for use by the NGOsthemselves but by the individuals for whose benefit the NGOs exist and operatein the first place. If so, then the beneficiaries of the ADBP credit to beprovided under the Project would be such individuals auld not the NGOs throughwhom such credit would be channelled to such individuals. Any NGOsparticipating in the Project could, in that sense, be regarded as performingthe functions of an agent of ADBP for the purposes of channelling such credit.There would, therefore, be no need for widening the definition of an"agriculturist" under the ADBP Ordinance in order to include NGOs which arewelfare societies and agencies registered other than as companies andcooperative societies, so long as such societies and agencies are being usedmerely for channelling funds to individuals who fall within the *aefinition of"agriculturist". The best way, of course, of avoiding any difficulties at allwould be to use the NGOs not as the conduit of ADBP funds under the Project

1 Article 89 makes it clear that an ordinance may be promulgated bythe President only when Parliament is not in session and that,once promulgated, it should be laid before Parliament for approvalwithin four months.

Under Section 41 of the Banking Companies Ordinance, 1961, SBP hasthe power to "issue directions as it deems fit" to any bankingcompany (ADBP for this purpose being one such banking company) andthe banking company is bound to comply with such directions.

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but merely as agencies for identifying suitable individual candidates for ADBPcredit and then letting those candidates deal directly with ADBP. This wouldseem to be the objective of proposal (b) referred to in paragraph 4 above.

C. Fin2ncing of Time-Saving Devices

12. It is also proposed that under the Project ADBP finance certaintypes of time-saving devices for use by women in the home. Such devices wouldinclude processing machines like grinders, pressers, beaters and hullers,household technology items like more efficient stoves and handpumps, and fuelsources like butane, compact sawdust and prepared animal feeds etc. It isexpected that the use of such devices wculd free up some of the women's timewhich they could then devote to more productive purposes, thereby increasingagricultural output and income.

13. ADBP is authorized to provide credit to 'agriculturists for thepurpose of agriculture and to persons engaged in cottage industries in ruralareas for the purpose of such industries... I'l' Agriculturist" means "anyindividual engaged in agricultural or in the development of agriculture oragricultural products or in storage, warehousing, marketing or processing ofagricultural produce..."2i And "agriculture" for this purpose has beendefined to include "... the raising of crops, horticulture, forestry, fishery,animal husbandry, poultry-farming, dairy, bee-keeping, sericulture..."3/ Itis thus clear that a woman member of a household would need to satisfy twotests in order to qualify for a loan from ADBP. First, she must be engaged inagricultural activity, and secondly, she should require the loan for purposesrelated to that activity. A woman engaged exclusively in household activitywould fail both tests, and a woman engaged in agricultural activity butrequiring the loan for purposes related to a household activity would fail thesecond of the two tests. Strictly speaking, therefore, ADBP would not be ableto finance any time-saving devices which merely facilitate a woman's householdactivity. A case could, however, be made out for ADBP financing of suchactivity if such financing were to lead, albeit only indirectly, to increasedagricultural activity on the woman's part. This would require anamplification of the term "agriculture" for the purposes of the ADBP Ordinanceto include any activity which, even if not an agricultural activity in thestrict sense, contributes in some way to agricultural activity. Under thenormal procedures, such amplification would require parliamentary approval ofan amendment to the ADBP Ordinance. In the present case, however, under a

1. The ADBP Ordinance, Section 19(1).

a Id., Section 2 (c).

a Id., Section 2 (b).

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procedure sanctioned by the ADBP Ordinance itself,'/ this could be done byexecutive action in the form of a Gazette notification. The desired changecould, therefore, be brought about without the Project being held hostage tothe rough and tumble of parliamentary politics. In adding to the list of"agricultural" activities, care should, however, be taken to make the linkbetween such activities and the rural setting in which they are to take placetransparent. The household activities to be financed by ADBP must clearlycontribute to "agriculture" in some way. Otherwise, financing of suchactivities may run the risk of being challenged as being outside the properrole and objectives of ADBP. It is noteworthy that the "cottage industries"which ADBP is authorized to finance, even though strictly speaking not"agriculture", are required to be located in a rural setting. 2

D. Mobilization of Rural Savings

14. The project is expected to give a boost to ADBP's rural savingsmobilization efforts by introducing, among other things, a scheme to beimplemented at first on experimental basis and under which ADBP would receivedeposits through its existing Mobile Credit Officers (MCOs) or through anewly-instituted set of mobile deposit officers (MDOs). The law appears atfirst sight to pose certain problems for such a scheme. Under the law,31 ADBPis deemed to be a "banking company" and so subject to certain of therequirements applying under and pursuant to the Banking Companies Ordinance,1962.4/ One such requirement is that no banking company "shall open a newplace of business ... or change ... the location of an existing place ofbusiness ... without first obtaining the prior permission in writing of theState Bank".61 'Place of business" is defined for this purpose as including"any sub-office, pay-office, sub-pay office and any place of business at whichdeposits are received, cneques cashed or moneys lent."'/ It is also providedthat, before giving permissi-n to a banking company to open a new, or to shiftan existing, place of business, the State Bank (SBP) may inspect the banking

Id., Section 2 (b), which defines "agriculture" as including theactivities listed therein "and such other activity as the FederalGovernment may, by notification in the Official Gazette, declareto be agriculture within the meaning of this clause."

Id., Section 28, Explanation (a).

Id., Section 3 (3).

Ordinance No. LVII of 1962, as amended from time to time (theBanking Companies Ordinance), Section 91.

Id., Section 28 (1).

Id., Section 28, Explanation (a).

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company and its books and accounts,'/ and that, for this purpose, theexpression "banking company" would include the banking company itself and "allits branches".2 / In practice, SBP reads all these provisions to mean that nobanking company may carry on its business, including the receiving ofdeposits, except at a designated fixed "place of business" or "branch". Inother words, if ADBP wished to receive deposits in the rural areas, it wouldbe required to open pay-offices or branches in those areas for that purpose.An MCO or MDO would not, because of the itinerant nature his office,constitute a "place of business" or "branch". A way could, however, be foundround this difficulty. Under the Batking Companies Ordinance, the Governmenthas the power, on the recommendation of SBP, to exempt any banking companyfrom the operation of any provision of the Ordinance. The Government could beasked to exercise this power in ADBP's favor and to exempt it from therequirement that deposit-taking should only take place at a branch.

F. Recovery of Agricultural Credit as Arrears of Land Revenue

15. Under the Project, ways are being explored for improving the debtrecovery record of institutions (ADBP as well as the Nationalized CommercialBanks (NCBs)) engaged in providing agricultural credit. Under the law,31

agricultural credit in default is recoverable as an "arrear of land revenue'.Such recovery is based on a summary procedure and commends itself particularlyto the banking institutions which are constantly on the look-out for ways ofavoiding lengthy and expensive court proceedings for the recovery of debt.Under this procedure, debt may be recovered through one or more of a number ofprocesses, including service of a notice of demand on the defaulter, arrestand detention of the defaulter, distress and sale of the defaulter's movableproperty and attachment or sale of the defaulter's immovable property.4 / Arevenue officer called the Tehsildar or his deputy is primarily responsiblefor carrying out the process,5/ upon the application of the creditor. Inpractice, a number of special Recovers Tehsildars have been appointedexclusively to assist ADBP recover its debt. ADBP pays the salaries of suchRecovery Tehsildars and provides them transportation and a small personalhonorarium depending on the level of recoveries attributable to their efforts.

Id., Section 28 (3)

Id., Section 40, Explanation (ii) (b).

The Loans for Agricultural Purposes Act (No. XLII of 1973), asamended from time to time (the Loans for Agricultural PurposesAct), Section 4 (7).

The West Pakistan Land Revenue Act (Act No. VII of 1967), asamended from time to time (the Land Revenue Act), Chapter VIII.

Id., See Chapter VIII.

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Indications are that the system works fairly well and that the recentdeterioration in the debt recovery situation is -not attributable to anyfailure of that system.11 Not very much, therefore, needs to be done to makethe system more effective beyond, perhaps, ensuring that the honorarium givenfor recoveries in a given case is actually distributed among the RecoveryTehsildar's staff, who were responsible for such recoveries, and notappropriated by the Deputy Commissioner's2J department, which was onlyindirectly concerned.

16. At one time, a similar system of recovery through speciallyappointed Recover' Tehsildars was also in place for use by the NCBs. Underthat system, the Revenue Tehsildars were appointed and paid by the PakistanBanking Council (PBC). In recent months, PBC's role in the nationalizedbanking sector has been progressively curtailed and PBC has had to devolvemany of its functions to the individual NCB's, including the function ofretaining Recovery Tehsildars. For variouq reasons, not the least beingbudgetary constraints, the NCBs have not bc.:. very quick to take up thisfunction and actually appoint Recovery Tshsildars for themselves. As aresult, the system, to all intents and purposes, now stands abolished. TheNCBs' efforts instead, particularly in Sind, to get their branch managers tobe clothed with the mantle of a Tehsildar or Assistant Collector for purposesof debt recovery, have met with dismal failure. It would be well worth theeffort for the bank to try to persuade the NCBs to revive the institution ofthe Recovery Tehsildar and to use it extensively under the Project.

F. Improvement of the Passbook System

17. In order to obtain a loan for agricultural purposes from ADBP orany of the NCBs, a land-owner may be required to produce a passbook settingout the particulars of the land owned by him.31 The passbook is prepared bythe Tehsildar of the area in which the land is situated and constitutes Rrimafacie evidence of the title of the holder of the passbook to the parcels ofland entered in the passbook, free of any prior encumbrance, except asotherwise specified in the passbook.4 / The lending bank is required to acceptthe passbook as a title deed for granting a loan or advance to the landowner

1 According to ADBP, the worsening debt recovery situation isprimarily attributable to flood damage, poultry disease, adeteriorating law and order situation and irresponsible politicalstatements by local leaders.

The Deputy Commissioner is the head of a revenue district and sothe superior of all the Tehsildars in that district.

The Loans for Agricultural Purposes Act, Section 4 (1).

Id., Section 4 (2).

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on the security of the land spec1fied in the passbook.t' The lending bankendorses the passbook against the entry relating to the land which constitutesthe security for the loan, and the endorsement creates a charge in the lendingbank's favor on the relevant land.21 The landowner is then debarred fromalienating such land until the loan has been repaid.3'

18. It appears that, in practice, if a landowner wishes to obtain aloan for agricultural purposes against the security of his land, he mustproduce a passbook to the lending bank.41 The importance of the passbook tothe landowner cannot, therefore, be exaggerated. If the landowner does notalready have one, he should be able to get a passbook quickly if and when hefeels the need to obtain a loan for agriculturil purposes. It is, therefore,provided that the Tehsildar (Revenue Officer) should undertake to prepare apassbook within a month of the landowner's application therefore.'/ Inpractice, however, this very rarely happens, and the procedure is slow andcumbersome. In fact, even though there is nothing in the law requiring thatpassbooks be issued to all landowners automatically, the provincialgovernments have made this their objective. Again, however, despite repeatedprovincial government directives to speed up the process, the issuance ofpassbooks has occurred at a pace falling pitifully short of the target.1

1 Id., Section 4 (3).

Id., Sections 4 (4) and 4 (5).

Id., Sections 4 (5) and 4 (6).

The Loans for Agricultural Purposes Rules, 1973 (issued under theLoans for Agricultural Purposes Act), Rule 6 (1). Cf.: the Loansfor Agricultural Purposes Act, Section 4 (1), which provides thata landowner applying to a bank for a loan "may.... produce beforethe bank a passbook..." (Emphasis added).

ffi Id., Rule 5.

i See, for example, the several directives issued by the Board ofRevenue, Punjab, between September 1986 and December 1988.

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19. Merely changing the law to make the issuance of passbooks to alllandowners compulsory and automatic is, therefore, not likely to improve thesituation very much. Perhaps, instead, the lending banks could be persuadedunder the Project to dispense with the requirement that landowners applyingfor agricultural loans produce passbooks in all cases.1' The wisdom of such acourse of action, would, however, need to be carefully assessed; the lendingbanks have the right to obtain the best possible security for their loans andwhat better security can there be than the possession of a document in thenature of a title deed such as the passbook. Meanwhile, however, effortscould continue to enforce the provincial government directives on expeditingthe issuance of passbooks.

As mentioned in note 59, supra., the Loans for AgriculturalPurposes Act itself does not provide that a landowner applying fora loan must produce a passbook (Section 4 (1) refers). Landownersare, however, required to produce passbooks as a matter ofpractice, and the Loans for Agricultural Purposes Rules have beendrafted accordingly. A change in the current practice may,therefore, be effected by revising the Rules but without amendingthe Act.

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ANNEX 8

PAKISTAN


Pilot Programs to Increase Women and Smallholders Access to ADBP Credit

A. Introduction

1. To improve the access of the disadvantaged sectors of society tocredit services, three pilot programs are proposed to be implemented by ADBP.Access to credit is difficult for women and small borrowers who are unable toput up any land or realizable assets as collateral but whose need for creditis nonetheless paramount. Experience elsewhere in East and South Asia hasshown that such poor rural individuals can be reached with savings and creditservices through groups. Such groups are formed both to develop savings andto guarant e the individual loans of group members. Loan recovery rates insuch situarions are high despite the absence of tangible security, because thealternative for such borrowers is informal credit, often at excessively highrates of interest. While cultural differences exist between and withinindividual Asian nations, similar saving and credit systems could be operatedon a pilot basis, by ADBP in parallel with its existing supervised creditactivities. These three pilot programs which will test alternative lendingand security systems in order to expand access to credit by women andsmallholders are: (i) the use of groups to promote savings and individualborrowing backed by group guarantees; (ii) the broader use of existing under-utilized loan security/collateral system; and (iii) the use of NGOs to assistin credit related activities, such as whole selling credit from ADBP for on-lending to beneficiaries. All three programs would be implemented togetherusing joint institutional support arrangements. Although, no fundamentallegal constraints exist which would prevent the implementation of pilottesting efforts, direct lending to NGOs may raise several issues which cannonetheless be handled in several alternative ways (Annex 7, paras 4-11).

B. The Use of Groups to Promote Savings and Individual BorrowingBacked by Group Guarantees

Background - Asian Experience of Relevance to the Pilot Program

2. Pakistan - The Aga Khan Rural SuDRort Program. The Aga Khan RuralSupport Program (AKRSP) was initiated in December 1982 for the purpose ofimplementing a rural development program in the Northern Areas of Pakistan.The essential elements of the strategy are the establishment of effectiveVillage Organizations (VOs) each with one grant assisted productive physicalinfrastructure project. The women VOs focus on various aspects of raisingwomen's productivity and welfare, such as introduction and dissemination ofimproved varieties and cultivation techniques for crops (particularlyvegetables and fruit), improved livestock husbandry practices, and newproducti.vity-raisin.g technology (such as apricot-drying tents, nut-crackingmachines, and butter churners) which have created new markets for their

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products. AKRSP further helps the individual village organizations to obtainaccess to ins- tutional credit by acting as a loan guarantor through itspromotion of savings by members which serve both as a form of loan collateralfor credit and provides supportive marketing services geared to maximizingprices obtained for production.

3. The savings and credit program initiated by AKRSP is based on asystem of collective savings and borrowing. Each member deposits his/hersavings with the Manager of the women's village organization. The collectivesavings of the Village Organization are deposited in a single account held ata nationalized commercial bank. Credit facilities are extended in a similarmanner. The village organization takes out a single collective loan and thendisburses sub-loans to members according to individual need. This system isaimed at minimizing the transaction costs of savings and borrowing. Theshort-term production loans are given interest-free and the medium-termdevelopment loans at a nominal interest rate. The repayment rates were nearly100%. As far as women's savings (about Rs 3.9 M in total) are concerned, theyhave not been in any productive village investment. AKRSP's conservativelending policy has restricted the use of these savings as collateral for loansand is now seen as a constraint to development in the area.

4. Internationally, AKRSP's program for women is considered to be oneof the most significant and successful development projects for women inPakistan. This is partly because the project integrates women into mainstreamagriculture ratLer than restricting and marginalizing them to handicrafts,thereby raising their productivity in the tasks which they traditionallyperform, as well as broadening their potential to exploit opportunities withinthe agricultural sector. Productivity and earnings in activities such asvegetable/fruit production, livestock, poultry, etc. has increasedsignificantly, due to the provision of extension training, the availability ofcredit, the regular supply of inputs, marketing outlets, and appropriatetechnology dissemination. By integrating the traditional division of labor inprogram planning and ensuring that women continue to perform tasks which theyhave traditionally performed even when the activity becomes more productive,AKRSP has tried to ensure that women are integrated in the production processwith the transition of the farm household operations from one of total homeconsumption to more orientation towards market production. It is not uncommonwhen an activity becomes more production orientated that the traditionaldivision of labor is restructured to allow men to shift from less productiveto more productive tasks within the enterprise. AKRSP thus appears to haveresolved the initial problem of failing to focus on activities performed bywomen and consequent female labor constraints, as indicated by a World BankReport on Interim Evaluation of AKRSP in 1986. At the same time, however, theWomen in Development (WID) section at the head office has been plagued byproblems of weak communication links with women, lack of female staff anddeficient organizational structure. Where communication was weak, andexamples of this abound, many among the women's organization staff are

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frustrated and feel generally let down by the program. Where communicationwas strong the women's organizations have shown remarkable results.

5. Pakistan - Informal Rotating Credit Societies. A rotating creditassociation popularly known as "bisil or "committee" in Pakistan is aninformal association formed by a core of participants who agree to makeregular contributions to a savings fund which is given, in whole or in part,to each contributing participant in rotation. The association agiees inadvance: (i) upon the amounts of individual regular contributions, the lengthof saving period and hence the resultant size of the fund, and (ii) on whetheror not the association will continue for only one savings cycle or forseveral. The order of rotation of allocation of funds to individualparticipants is determined by traditional seniority rights or by an evaluationof individual member's needs. The basic principle dictates that each membermust have received the collective fund once before any other member canbenefit for a second time. The surety provided for investors in rotatingcredit association derives from the existing personal bonds of mutualobligation. Most are organized along lines of either kinship or residence.Rotating credit societies are widely distributed geographically throughoutPakistan and involve large numbers of women, or even men. As they arestructured to protect the interests of all participants more or less equally,they demonstrate a high degree of equality and reciprocity in the ways inwhich resources are allocated and leadership and decision making isundertaken. These rotating associations perform an important intermediaryrole in many areas in mobilizing capital, often providing a very effective wayfor members to meet their credit needs collectively by providing mechanismsboth to save and to borrow. New credit and savings programs designed to reachwomen or the poor based on similar group concepts of joint participation andresponsibility are likely therefore to be successful provided they maintainthe necessary level of discipline in their operation and base the concept ofsecurity within the group on recognized personal bonds of mutual obligation.

6. Bangladesh - The Grameen Bank. The 13 year old Grameen Bank is aunique institution which is devoted to the upliftment of the poor by providingcredit to men and women without collateral at a commercial interest rate of16% per annum. Potential beneficiaries of whom 80X are women, themselvesidentify small investment projects to be covered by loans which mainly centeraround processing and manufacturing, livestock and fisheries development, andtrading. Banking services including the collection of savings, thepreparation of loan applications and the scrutiny of loan proposals, andsupervision of loan principal and interest repayments are performed at thedoorsteps of the borrowers and not in the offices of the Bank. In order toqualify for a loan, borrowers are required to form homogenous groups of fivemembers. Each group receives a brief orientation and training in credit andsavings procedures before starting borrowing activities. A loan is initiallyprovided to only one member of the group with the others acting as guarantors.The behavior of this member is closely watched for the first few months beforeother members begin to borrow. Peer reinforcement or institutionalized group

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pressure provides the incentive to pay back loans resulting in almost 100%recovery. Repayment rates by women have been found to be better than thosefor men. A client borrowing from the Grameen Bank may use credit in anyproductive activity of his or her choice, but must use the loan proceedsimmediately and repay the principal within one year in fifty weeklyinstallments of 2Z of the loan amount. Interest is paid in the remaining twoweeks of the year. A repeat loan is not approved for any member until allmembers of the group have repaid their outstanding loan principal and theinterest due.

7. The bank has grown quickly. By June 1988, Grameen Bank had 453branches in 9,000 villages covering over 10% of all villages in Bangladesh andservicing 413,000 borrowers in 16,910 centers. Every month, the Bankdisburses more than US$2.5 M in loan finances. About 84X of clients werewomen, receiving 70X of all loans disbursed. The average loan size iscurrently only US$67 and the maximum loan less than US$200. The Bank'sborrowers have now saved more than US$7 M within the regular savings programsoperated by the bank. Perhaps the greatest achievement of the bank is that itactually reaches the rural poor and that it has an excellent repaymentperformance. A survey by the Bangladesh Institute of Development Studiesfound that Grameen Bank borrowers had incomes about 432 higher than othergroups in villages outside Grameen Bank operations, with income increase beingthe most for the absolute landless who form the focus of Grameen Banktargeting, followed by marginal landowners.

8. C9Mlusi9M. On the basis of experience already gained on groupbased savings mobilization and credit programs in Pakistan and Bangladesh, thefollowing basic principles are seen to be of critical importance for thesuccessful use of groups for credit and savings purposes in any new programgeared to reaching disadvantaged members of rural society: (i) groupmembership should be homogenous in terms of economic and social status toavoid domination by more influential members of society; (ii) banking servicesto the poor and women are best provided at the doorstep of the client; (iii)loan disbursement and repayment transactions should take place in publicwherever possible, to minimize the opportunities for corruption and ensurethat cash proceeds are correctly utilized and accounted for; (iv) lending foractivities which generate regular income is most likely to be successful forthe poorest borrowers who are most in need of a reliable cash flow; (v) strictattention to disciplined repayment is essential. No special cases of loandeferment should be considered; (vi) peer pressure is a highly effectivemethod of ensuring loan repayment provided all participants are jointly andseverally liable for the loans of all individual members within the group;(vii) repayment collection in small amounts as regular installments work welland should be encouraged wherever possible; and (viii) positive market relatedinterest rates ensure that credit will not be misallocated or misused and atthe same time will be affordable by the poor, whose only recourse is the highinterest rate informal credit market.

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Design of the Program

9. The pilot tescing of individual borrowing backed by groupguarantee would last for the full three year life of the project and promotethe development of seven basic types of groups which would be tested ondifferent types of social groupings where membership qualifications would becategorized on the basis of land holding sizes and marketing activities. Thewomen groups would be for landless; landowners with 2.5 ha or less; and smallenterprise teams. The men's groups would be for landless; tenants; and landowners with 2.5 ha or less. Finally, there would be women's and/or men'smarketing groups for individuals with common marketing needs. Each groupwould consist of 5-10 members one of whom has at least 1 acre of land orimmovable property with equivalent market value of 1 acre to ensure that thegroup is not of a migratory nature and who must demonstrate that: (i) they donot originate from the same family, although they may belong to the samecaste; (ii) their land holdings and assets held are of a similar value;(iii) each individual has no outstanding debt with the NCBs which could berefinanced out of the proceeds of any loan from ADBP; and (iv) their agreementto jointly and severally guarantee any loans taken out by members. Suchgroups would be termed "Joint Liability Groups". Development of the groupmust be by the members themselves. Supervising male and female MCOs would nothave the authority to force individuals to join specific groups, as "top down"pressures of all types are to be avoided.

10. For the first year of the pilot period it is recommended thatindividual loans to members of registered joint liability groups would bewithin a ceiling of Rs 15,000 and that all loans should be short-term loans.The limit could be updated annually by index linkage to inflation indices.Where possible the maximum use would be made of the supply of inputs,materials and equipment in-kind to minimize potential misuse of loan funds.Under the pilot program borrowers would be encouraged to repay more frequentlyat monthly meetings whenever sufficient funds become available, rather than atthe rind of the regulatory term period which, for short-term lending, coincideswit:n the end of each production cycle. Loan recovery discipline in otherAsian countries under JLG systems is maintained through the threat of socialsatction by strict adherence to three principles known to the borrowers:(i) In any case where individual loan default takes place, the remainingmembers of the group are legally liable to jointly repay the outstanding debt;(ii) All future lending to each nd every member of the group for whateverpurpose involved will be stopped until such time that all outstanding loanrepayments are recovered; (iii) In cases of natural disaster, crop failureetc. which uniformally affect all members of the group, a joint approach bythe group as a whole to the Bank to request loan rescheduling is allowable butonly where such disasters are officially recognized by the Federal orProvincial Governments. These principles only effectively work in a situationwhere the Bank retains lOOX level vigilance. It is vital that Uq specialcases whatsoever of loan repayment deferment take place if the program is tosucceed.

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11. Savings Mobilization within GrouRs. Throughout the pilot programperiod savings would be encouraged to be undertaken by individual members ofJoint Liability Groups on a regular basis for a 12 month period to accrue atleast 30% of the cost of an investment item of value to the family home or foruse in generating income to be purchased with a contributory ,DBP loan in thefollowing year. Such loan would be secured with bonds provided by othermembers of the group.

C. The Broader Use of Existing Loan Security/Collateral Systems

Background - ADBP Loan Security and Collateral Systems

12. Current ADBP loan security and collateral procedures are operatedunder the controlling clauses of the ADBP Ordinance 1961 (No. IV of 1961)amended up to December 31, 1987 and the ADBP Regulations, which provide anextensive list of types of security systems, many of which are largelyunutilized. The ADBP rules specify the allowable valuation of each security.All loans must be fully cared by securities of equivalent assessed values.These valuation levels are 100% of value less interest, charges and expensesfor unconditional bank guarantee or bond with one or more securities; 85% ofvalue for government securities, gold (value fixed at Rs 100 per tala), lifeinsurance policy (surrender value); and 75% of appraisal value of crop and ofmilch animals purchased under the loan; 50% of appraised value of harvestpaddy pledged, of hypothecated paddy, sugar-cane or cotton crops; or of farmor fisheries machinery to be purchased under the Bank's loan or out ofborrower's resources; or 70X of the appraisal value of new machinery to beinstalled.

13. While all these 12 securities are essentially acceptable to ADBPsubject to their correct valuation, recording and safe keeping, in actualpractice mortgage of land and buildings is requested by ADBP as a firstpriority, and bonds from one or more suretors as the second. Such suretorsare generally only acceptable to ADBP if they are themselves landowners andare known to the bank. Both systems are known to encourage corruption as theyattract additional uno3fficial costs to the borrower which can be absorbed bestby larger borrowers but which are generally beyond the means of the potentialtarget beneficiaries that the project would wish to serve. The use of thepledging of gold ornaments as security, though not utilized within ADBP sincethe inception of its Supervised Credit Scheme in 1971 because of thedivergence between the stated valuation level of Rs 100 per tola and theactual of Rs 3,850 per tola (July 1989) is likely to expand lending to ruralwomen if the valuation levels can be amended. In fact, the pledging of goldas a security is currently a highly effective system in regular operationwithin the rural sector in Sri Lanka. Because of the high intrinsic valuethat most families attach to their gold jewelry, loan recovery rates areextremely high while cases of willful default are rare. Thus steps will betaken to update the gold valuation level fixed in ADBP Rules 1961 and the

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relevant wording would be expanded to include subsequent linkage to aninflation index to ensure regular realistic annual evaluation. Similarly, theuse of hypothecation as a security system is seen to have most potential forutilization by smaller borrowers. Considerable scope is seen for testing theconcept of expanding the use of these alternative securities albeit on a pilotscale to evaluate their potential as a method of ensuring that ADBP creditservices reach a greater proportion of potential target borrowers.

Design of the Program

14. The testing of the broader use of existing permissiblecollateral/security systems to cover medium- and long-term lending for lowcost investments by disadvantaged borrowers would last for the full three yearlife of the project. All such lending would be undertaken in line with ADBPRules and Regulations under the procedures set out in the ADBP Credit Manual.In promoting medium- and long-term lending within the pilot program, male andfemale MCOs would handle loan applications in the normal way for largerborrowers requesting mortgage of land and buildings or the use of two suretorsfo- loan security as a first priority. However, they would indicate that awider range of securities would be available to any potential borrowers fromwithin the target group and brief qualifying applicants accordingly.

D. The Use of Non-Government Organizations to Assistin Credit Related Activities

Background - Non-Government Organization in Pakistan

15. Non-governmental organizations (NGOs) are charitable groups,trusts and foundations and voluntary organizations established outside thegovernment by an individual or group to carry out social welfare ordevelopment work for a strata of society, community or multiple groups on anational or provincial level. Three types of NGOs exist in Pakistan: (i)welfare oriented NGOs; (ii) development/welfare oriented NGOs; (iii)professional/economic development oriented NGOs. This classification is basedupon the legislation governing their registration and the kind of activitiesin which they are engaged. In Pakistan there are now over 5,000 NGOsregistered with the Social Welfare Department of which approximately 70% arelocated in the Punjab. There are an additional 21,000 cooperative societies,and a vast array of non-registered organizations in operation within Pakistan.Of these, a considerable number are said to be "paper", moribund or politicalorganizations and exist simply to receive grants-in-aid. As a result,estimates of "active" NGOs are difficult to accurately compute. According toone information center the present number is about 700. A World Bankconsultant has reduced this number of active NGOs to only 45, based oncriteria of institutional capability, type of program operations, and impactof operations. However this estimate may be too low since several known"active" NGOs are missing from this list.

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16. Welfare Orientated NGOs provide specialist community services,such as health or education, and usually for a particular geographical area orwithin a socially disadvantaged sector, e.g., the poor, handicapped, women,orphans, or disabled persons. NGOs of this type are essentially attempting tofill gaps in public services, but are narrow in scope and their achievementsare limited particularly by lack of resources. Little scope is seen at thisstage for such NGOs to be involved in any way in future credit developments.Development Tyne Orientated NGOs address the longer range issues of self-development and self-reliance. Usually geographically specific to particularcommunities and focused on specific sectors, these NGOs respond to particularneeds such as the provision of family planning seivices among the very poor,the improvement of adult literacy and the provision of vocational skillstraining. While these organizations do not have an economic orientation, theydo have a focus on group dynamics, and preparing groups for cooperation andinterdependency. ADBP could work with development/welfare NGOs in severalways using them to identify borrowers, support borrowers' attendance at NGOrun technical skills training programs, identify existing self-help groups,and advise on the potential of group formation among the NGO's clientele forcredit delivery to individuals under group guarantee. Such NGOs include AdultBasic Education Society (ABES), Family Planning Association of Pakistan(FPAP), All Pakistan Women's Association (APWA), Fauji Foundation, Save theChildren Fund, Rural Youth Welfare Organization, Rural Development Foundation(RDF) and Aurat Publication and Information Service Foundation.Professional/Economic Development Oriented NGOs largely emphasize socio-economic development focusing on changing the causes of poverty. Theyemphasize the creation of institutional structure, organizational andmanagerial capacity, staff professionalism, and field programming oftenpreparing model projects on a small-scale to test proven research approachesand methodologies for achieving development objectives under varying socio-cultural and environmental conditions. It is these NGOs which particularlybuild flexibility into their approaches. They operate both as intermediaryorganizations as well as community-based organizations and have potential as avehicle for wholesaling ADBP credit for expandable small-scale production anddevelopment for smallholders, rural women, and the landless poor. Such NGOsinclude Aga Khan Rural Support Program (AKRSP), Idara-e-Kissan, BasicIntegrated Rural Development Society (BIRDS), Orangi Pilot Project (OPP), HARTProject Winock International, Sind Rural Workers Co-operative Organization(SRWCO), Alfalah Development Institute, Pak-German Project, and AgriculturalExtension and Farmers Training Center.

Design of the Program to Test NGO Lending Initiatives

17. The pilot program would investigate different methods of ADBPworking with NGOs over the three year life of the project. These wouldinvolve the use of NGOs to (i) provide vocational training programs forrecipients of ADBP credit particularly in the cottage industry/small-scaleenterprise production and development sectors; (ii) identify groups of self-help borrowers who could from the focus of indiridual-borrower/group guarantee

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lending in line with proposals set out in Section B of this Annex; and(iii) receive wholesale credit from ADBP both for on-lending to smallborrowers for production purposes and to develop marketing services for theirmembers.

18. The pilot program would support the testing of the concept ofusing NGOs as recipients of ADBP credit subject to the clearance of any legalconstraints imposed by ADBP's governing Ordinance, Rules and Regulations.Three types of loans would be tested: (i) sub-loans to individual borrowerslinked to the provision of technical/vocational training; (ii) marketing loansmade directly to the NGO; (iii) mini project loans made to the NGO to jointlyprovide sub-loans to individual borrowers linked to associated marketdevelopments undertaken by th.e NGO. Sub-loans made by NGOs to individualborrowers would be for short-term purposes backed by group guarantees asdescribed in Section A of the Annex. Such lending would be technicallysupported with NGO supplied services which are normally covered by grantfinance. An overall ceiling of Rs 200,000 for any type of NGO loan isproposed for the initial pilot program period. Security for loan from ADBPwould be provided by the NGO in the form of bank guarantees with repaymentscheduled in line with anticipated receipts of income derived from individualborrower sub-loans and market services. Internal sub-loan repaymentdiscipline would be imposed not only by peer pressures within the members ofthe joint liability groups guaranteeing loans but also by threatening anembargo of AUl NGO auxiliary services including health, education, literacytraining etc. on any defaulters. Such procedures have proved to be extremelyeffective in other areas of Asia where they are now in regular use. Given thesavings that ADBP would generate in not supervising large numbers of smallindividual loans and the need for NGOs to be allowed a margin to cover theirlending administration cost, it is proposed that ADBP should on-lend itswholesale funds to the NGOs concerned at a level at least 2X below the ADBPgeneral lending mark-up rates (presently 121 per annum).

E. Imolementation of the Pilot Program Components

Branch Location and Selection

19. A total of 15 of the 30 branches involved in the women's creditdelivery program in PYm and another 15 in PY2 would be selected to operate aparallel program for individual borrowing backed by group guarantees and thebroader use of existing security and collateral systems. All provinces wouldbe included in the program but with varying numbers of branches: 7 in Punjab;3 each in Sind and NUFP; and 1 each in Baluchistan and Azad Kashmir Territory.Selection of the branches involved would be undertaken by the ADBP Head OfficeAppraisal and Special Schemes Division (ASSD). The selection criteria wouldinclude: (i) the concentration of target beneficiaries within the area; (ii)potential for expansion of a balanced future loan portfolio based on crop,livestock and small-scale enterprise sector; (iii) an existing record oflending to small borrowers.

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Pilot Program Organization and Manag-ement

20. The Credit Division will be responsible for implementing thisprogram. Within the Division, the Head of the Appraisal and Special SchemesDepartment (ASSD) will expand the wings to include a Pilot Wing with twosections: group lending and savings cum lending promotion; and alternativesecurity system testing, including lending through and with the cooperation ofNGOs. This wing will be staffed by 1 Deputy Director, 2 Assistant Directorsof which at least one will be female and 1 Extra Assistant Director. The ASSDwill also have Small Scale Enterprise Wing staffed by 1 Deputy and 2 AssistantDirectors. This wing will have three functions: develop credit packages forfarm SSE lending, credit packages for off-farm SSEs in cooperation with theAgricultural Technology Department and (Farm) Machinery Department of theAgricultural Technology Division, and carry out marketing analyses tofacilitate rural SSE product production with urban and export markets. Whilethe activities of the lattez belong to the whole credit program for males andfemales, it is functionally placed in the Appraisal and Special SchemesDepartment because of the innovative nature of the technical activities to beperformed by staff in marketing and credit linkages.

QR_rational Responsibilities of Concerned Staff

21. Particular attention would initially be given to the selection ofstaff to be used at each Pilot Program Branch. The minimum quota of the NCOstaff operating within each Pilot Program Branch would be five male MCOs andthree female MCOs, and their lending targets established in both loan numberand disbursement terms. Division of pilot program responsibilities woulddiffer between male and female MCOs. As male MCOs would already have fielde'perience and their continuing involvement in general lending to all types ofclient must generate adequate loan disbursements, only one male MCO would begiven the responsibility to handle joint liability group development andrelated individual lending to male group members. Female MCOs at PilotProgram Branches would be starting up a totally new women's credit deliverysystem while at the same time participating in this pilot effort. They wouldtherefore each need to develop a portfolio of borrowers of all sizes. Toogreat a reliance on directing efforts at small borrowers in their first yearsof operation would not generate sufficient lending to justify their overalloperational costs. Female MCOs in Pilot Program Branches would therefore beallocated targets only for non-pilot program lending while being encouraged todevelop pilot program Ileding in line with demand. The targeting of 7.5% ofdisbursements to pilot efforts in the short-term lending sector for femaleMZOs and a further 10% for medium- and long-term is feasible for both male andfemale MCOs, with average loan size of Rs 10,000 for short-term loans andRs 20,000 for medium- and long-term loans. These loan sizes are lower thanthose projected elsewhere in the project. Both tests are designed to reachpoorer borrowers whose credit needs will be smaller than the average landlessor smallholder requirements. Projected loan disbursements of Rs 6.32 M in

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PY1, Rs 6.51 M in PY2 and Rs 6.71 M in PY3 are assumed for all general MCOswhile FMCOs are expected to handle only Rs 2 M in FYI, Rs 3.4 M in PY2 and Rs5 M by PY3, all handled as short-term lending. Female MCOF disbursements forall types of lending are estimated at Rs 2.2 M in PY1, Rs 3.3 M in PY2 and Rs4.3 M in PY3.

ImRIementation Scheduling

22. At the time of pre-appraisal it was projected that the projectwould become effective in July 1990 and run for only three fiscal years.Given the inevitably long lead times which develop whenever new programs haveto be planned and started up, it would be essential for ADBP to begin PilotProgram related operations prior to project start-up. Program planning, astudy tour to Bangladesh, training curriculum development, trainer trainingand Pilot Program Branch selection and staffing would all be completed by July1, 1990. Provision is included in the overall program of the project to coverstudy tours and training, publicity and the monitoring and evaluationrequirements of this component. The latter includes a baseline survey in thesecond quarter of FY91 and a pre Mid Term Review evaluation in 1992. Subjectto successful start-up at this time, male MCOs would have been involved inpilot program lending for a full 18 months prior to the proposed Mid TermReview while female MCOs would cover a shorter 12 month period due to theirlater recruitment and training. The Mid Term Review would be held in thethird quarter of FY92 to be attended by GOP and ADBP officials andrepresentatives from the external lending agencies. A principal objective ofthis review would be to evaluate the interim results of the first 18 months ofmale MCO and 12 months of female MCO lending under the program and theprogress made by Regional Office staff with ADBP/NGO initiatives.

F. Pilot Program Component Costs

23. A detailed breakdown of project component costs in constant termsis shown in Annex 11, Implementation Volume, Cost Table No. 150.

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ANNEX 8Attachment 1

Indicative List of ADBP Regions and BranchesSelected for Pilot Program Operations In FY91

Province Region Branches

Punjab Rawalpindi ChakwalGujranwala GujranwalaLahore KasurBahawalpur Bahawalpur

Sindh Mirpurkhas MirpurkhasLarkana Larkana

NWFP Kohat KohatMingora Mingora

Baluchistan Quetta QuettaAzad Kashnmir Muzaffarabad Muzaffarabad(FANA)

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ANNEX 9

PAKISTAN


The Introduction of Credit Delivery Systems for Women

A. IntroductionF

1. The development of specialist credit services to women would forma key element of the overall Agricultural Credit Project of which the IFADSmallholders and Women's Rural Credit Project would be a part. Absence ofsuch services is recognized as a serious constraint to increase in women'sproductivity within the rural sector. The principal objectives of theproposed component are to improve the access of rural women to institutionalsavings and credit services in Pakistan. The greater usage of credit by womenwould increase both on-farm and off-farm productivity and related farm familyincomes in areas selected under the project. Under the proposed AgriculturalCredit Project the financing of credit activities would include both short-and medium/long term lending for ADBP to both men and women while that for theNCBs would cover only medium and long term lending without a special focus onlending to women. Since women will require both short-term and medium/long-term loans provided under a single credit service ADBP would be the soleimplementing agency for this component. Thus ADBP would be gradually re-oriented and strengthened as an effective and self-sustaining institutioncapable of reaching and increasing proportion of the poorer strata of ruralsociety.

2. Some attempts have recently been made to provide financialservices to women, albeit on a very small-scale, especially in view of theoverall needs of women for such services. The Nuslim Commercial Bank hasestablished three women's brarches in major urban centers in 1989, while theNational Bank of Pakistan is setting up a pilot program with the GOP Women'sDivision to develop lending on a small scale to rural women. Also, in 19S9the First Women's Bank was established in Islamabad to provide lending andsaving facilities for women. ADBP in 1985, introduced the use of the CMCOteam for credit delivery to women under GADP. However, the number of couplesincreased from one to only three by 1989.

3. As the establishment of new credit services for women at ADBPwould essentially be a largely untried activity, scope is seen for introducingdifferent delivery systems in the field, based on different types of fie.ldstaff. These would include graduate married female MCOs working with theirhusbands who are also MCOs (CMCOs), and individual (single or married) femaleNCOs (MCOFs) working with matriculate female village assistants (VAF).Graduate staff would be expected to handle ADBP credit business on their own,while matriculate VAPs would act as intermediaries between the borrower andMCO/MCOF. Given the variability that exists between Provinces on the levelsof "Purdah" practiced and seclusion enforced, it is to be expected that thedifferent types of female staff involved will vary in the level of their

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actual success in reaching women and promoting lending. This projectcomponent therefore has been established in part to test the variousoperating systems. A Mid Term Review would be carried out in late FY92 toevaluate the operational costs of the various staff types and their relatedefficiencies in handling loan disbursement and recovery on province byprovince basis. Subject to agreement between ADBP and the lending agencies,successful female staff categories would be continued or expanded while thosenot achieving satisfactory results would be reduced.

B. Credit Delivery Mechanisms and Alternatives

4. The project would support efforts made by ADBP to launch a newcredit delivery program for women and to adapt its institutional framework toaccommodate the special emphasis required. Within the institutionaldevelopment component of the project, the major thrust of the ADBP Managementeffort would be directed towards the recruitment and training of a new cadreof female credit staff working in the field to promote and operate thespecialized credit services for women. Based on the past female hiringpractices within ADBP as well as those in other GOP offices, and privateorganizations, two types of female professional officers (female MCOs) and onetype of non-graduate, non-professional staff would be tried under the project.These are: (i) the Couple Mobile Credit Officer (CMCO); (ii) the Female MobileCredit Officer (MCOF); and (iii) the Village Assistant, Female (VAF).

5. Couple Mobile Credit Officers. CMCOs are married couples whereboth partners act as MCOs. The female MCO promotes, disburses, supervises andrecovers loans to women while her husband, the male MCO extends generallending services to men, each covering the same circle of 25 villages. Thistype of MCO team has been operated by ADBP under its IFAD financed GujranwalaAgricultural Development Project (GADP) since 1985. Given the socio-culturalsituation in Pakistan, a working women's need for protection is satisfied whenshe works in such a way and travels with her husband. However, it may not bein all cases socially acceptable for a husband to have his wife working withhim. The system has a number of cost advantages over other female MCOsystems, since the couple shares the use of a jeep and does not need a driver.Present ADBP recruitment qualification criteria for CMCOs stipulate that thehusband in the couple must be a BSc agricultural graduate or veterinarian,while the wife must also be a graduate but can hold a degree from anydiscipline. It is difficult to predict at this stage how many couples couldpotentially be available for hiring as CMCOs, as large scale recruitment drivehas never been previously attempted. Very few existing male MCOs areunderstood to have graduate wives who would wish to work as MCOs or be allowedby husbands to do so at the present time, so that most couples recruited wouldhave to be totally new employees. In fact, the Regional Manager at Gujranwalawhere the CMCO scheme originated has been receiving enquiries of vacanciesfrqm potential couple recruits. Should concentrated efforts to recruitsufficient numbers of graduate wives not have the desired results, then ADBP

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could consider reducing the educational qualification requirements for femalesin the CMCO team to the higher secondary certificate level. In such cases,the wife would be hired as an Assistant MCO at a lower scale of pay.Alternatively, the definition of couple MCO could be expanded to include teamssuch as brother-sister, or other male-female relatives.

6. Female Mobile Credit Officers. Female MCOs (MCOFs) are individualwomen who would operate in exactly the same way as male MCOs but handlelending to women. Although this type of female officer has yet to be tried byADBP, several government agencies and other departments successfully employsingle and married women on an inidividual basis so that future recruitmentpotential would appear to be good. Under the project it is proposed that allMCOFs would be graduates, with the highest priority given to the recruitmentof agricultural and veterinary science degree holders. It is anticipated thatADBP's current salary allowances and fringe benefit package would attract avery large number of potential recruits. Provision would also be made toprovide four wheel drive transport witn a male driver and if necessary eitherthe employment of a female chaperon or the allocation of a chaperon allowanceto meet the needs for "protection" in those areas in the field where "purdah"is rigidly enforced. It is recognized tnat initially the cost of thisalternative would be higher than that of the CMCO, but the productivity of theMCOF is also likely to be higher than that of the wife in the CMCO team, sincethe former is hired from a much larger pool of applicants. Thus, if highlending levels can be achieved early in the project this type of graduatecould provide a cadre of skilled and well trained professionals.

7. Village Assistants (Female). VAFs would act as intermediariesbetween male MCOs or MCOFs and potential women borrowers handling such liaisonin up to three local villages. VAFs would promote ADBP saving and lendingprograms amongst village women; assist potential borrowers with the completionof loan documentation for consideration by supervising MCOs/MCOFs; liaise onloan security matters and witness loan agreements; and liaise and coordinateon loan repayments made either via the MCO/MCOF or at ADBP branch. Whiledirect liaison between male MCO's and VAF's does not appear to be feasible inNWFP and Baluchistan, given the importance attached to the strict observanceof "purdah" in these areas, it should be attempted in Punjab and Sind. EachVAF would be a local village resident and would be recruited in the non-officer grade as non-salaried staff member. Where possible, women with highersecondary educational qualifications would be recruited, although lowersecondary levels could be acceptable if sufficient recruits are notforthcoming fi:m the desired level in localized areas. At the present time,there is no regular service post for VAFs within ADBP staff cadres. A newservice post would therefore have to be created.

8. Male MCO/Female MCO Liaison. It is recommended that wherepossible MCOFs should be allocated circles of villages corresponding to thosehandled by male MCOs within the same branch. It should then be possible toencourage the two officers concerned to act as a team in promoting ADBP

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activities within the circle area and for the male MCO to assist with liaisonwith male officers in other concerned sectors where regular ADBP contact isessential. Such liaison is seen to be essential particularly in dealing withland mortgage and surety registration matters associated with medium- andlong-term loan security issues with the District Revenue authorities.

C. Proposed Staffing for the Women's Credit Delivery Systems

Availability of Women for Recruitment

9. Where possible ADBP would wish to employ the maximum number offemale agricultural graduates to fill female XCO posts. Discussions withofficials of Agricultural Universities at Faisalabad (Punjab), Peshawar (NWFP)and Tando Jam (Sindh) and field visits elsewhere indicate that availability offemale agricultural graduates is unlikely to be constraint in any new women'scredit delivery program. Faisalabad university alone will produce 4,378graduates by 1991, out of which 130 or 3X will be women. Their numbers willincrease in subsequent years. These women represent a mix of disciplines inthe fields of agriculture, animal husbandry, veterinary science, andagricultural economics and rural sociology. Peshawar University will produceat least 10 female graduates in 1991 and increasing numbers in subsequentyears, whereas Tando Jam will produce at least 15 graduates in 1991, 25 in1992 and increasing numbers in subsequent years. Together all universitieswill produce a total of 113-156 potential female agricultural graduates by1991. Assuming that very few of these would be recruited by teaching andresearch institutes, a considerable number should be available for recruitmentby ADBP. It has not been possible to estimate numbers of couples that maywish to become CMCOs. Xale and female agricultural graduates in the sameuniversity year rarely inter marry so that recruits are expected to be mostlymale agricultural graduate/female non-agricultural graduate couples who wouldapproach ADBP only after a major advertising and recruitment drive.

10. University faculty everywhere indicated that many of single femaleagricultural graduates can be expected to work in a rural setting within theADBP field services as (i) their specialization in agronomy, veterinarymedicine, etc. reflects career orientation in these rural based sciences;(ii) their decision to study at agricultural universities away from homereflects their mobility; (iii) few alternative employment opportunities areavailable while the need for a second pay check in the family is increasing;and (iv) ADBP offers an attractive salary package which has better allowancesand fringe benefits than many other governmental agencies competing to recruitthem. Although willingness to work in rural areas should be an importantconsideration in employment, having a rural background should not be acondition for employment of female NCOs (as it is for male XCOs) since manyprospective agricultural graduates may not have such backgrounds.

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11. Should there be insufficient female agricultural graduaterecruits, a broadening of the recruitment specifications to cover all types ofeconomics and science degrees should generate the number of recruits required.No shortages are understood to exist of women holding a bachelors degree inthese disciplines. There are two potential sources of supply of highersecondary certificate holders for possible VAF recruitment. The Allama IqbalOpen University currently provides instruction for women in the rural areas intheir own villages in rural development activities and GOP Women's Divisionhas trained several hundred 'women development workers' with intermediatelevel educational qualifications within its rural outreach program. BothAllama Iqbal Open University and the Women's Division have indicated theirwillingness to identify women as potential VAF recruits in rural areas trainedunder the program if requested by ADBP.

D. Prolect Area

12. ADBP Management has stressed that all new developments in theirservices are routinely started up simultaneously in all provinces albeit on asmall scale. Balanced development throughout all areas of Pakistan is nowseen as a crucial issue by the GOP in relation to all aspects of the ADBP loanportfolio. It is intended therefore that the project would start in a limitednumber of specified regions in all provinces and would eventually cover all 47ADBP regions in an expanding basis over its three year project life but belimited to two branches within each specified region. Table 1 shows theproposed build-up of participating regions by province over the project life.

Table 1: ProRosed Build-up of Regions with Women's Lending

FY91 FY92 FY93 TOTALPunjab 7 6 6 19Sind 4 3 4 11NWFP 2 3 4 9Baluchistan 1 2 3 6FANA and AKT/ -1 1 0 2Pakistan 15 15 17 47

/a Federally Administered Northern Areas and Azad Kashmir Territory.

13. Regions within a province would be selected on the basis ofseveral criteria considered to be conducive to the success of the women'scredit program. These are the land ownership pattern in the region (measuredby proportion of total farm area under farms of less than 2 ha); the share offemale labor in total rural (agricultural and non agricultural) labor force;the concentration of urban centers within a region (measured by density ofurban population) and the viability of the regional lending program (measured

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by the number of branches in each region which fulfill the mean criteria ofnumber of MCOs per branch, number of loan cases and disbursement per MCO).The higher the value of each of these indices in the region, the greater wouldbe the chance of its selection the first or second year. On the basis of theabove criteria, the mission produced an indicative list of the followingproposed order of participation of regions within each province for each ofthe three project years. Punjab. Sialkot, Gujranwala, Sargodha, Lahore,Faisalabad, Okara and Multan in the first year; Jhang, Rawalpindi,Sheikhupura, Sahiwal, Vehari and Bahawalpur in the second year; and Islamabad,Minanwali, Gujrat, Muzaffargarh; D.G. Khan and Bahawalnagar in the third year.Sind. Nawabshah, Mirpurkhas, Hyderabad and Karachi in the first year;Khairpur, Sukkur and Larkana in the second year; and Badin, Shikarpur, Daduand Thatta in the third year. NWFP. Mingora and Peshawar in the first year;Abbottabad, Mardan and Kohat in the second year; and Timergara, Bannu, ChitralaTd D.I. Khan in the third year. Baluc>istan. Quetta in the first year; Sibir id D.M. Jamali in the second year; and Loralai, Khuzdur and Turbat in thehird year. FANA and AKT. Muzaffarabad in thc first year; and Gilgit in thesecond.

14. Selection of branch participation in the project would beundertaken by the ADBP Credit Policy Department of the Credit Division incoordination with the regional managers. It is recommended that the projectwould be confined to two branches per region one of which would be theregional branch which normally operates either from the same building orwithin the same town as its supervising regional office. Such branches havethe advantage of ensuring greaterinvolvement of all regional staff in the launching of the women's creditprogram and facilitating more active participation and backup support byRegional Managers and Regional Technical Officers. It is recommended that thesecond branch would be selected from among the outlying branches that meet, asclosely as possible, the mean regional selection criteria specified earlier.

Proposed Build-uM of Women's Credit Delivery Services

15. Regional Staffing Requirements. The build-up of female creditstaff would be gradual over the project life covering only two branches ineach selected region. Within each region, a minimum of six female MCOs andsix VAFs would be posted. All four types of female credit staff would beutilized under the project using different combinations at the branch level inthe various Provinces in view of the cultural differences and variations inthe degree to which purdah is practiced. In Punjab, Sindh and the FederallyAdministered Northern Areas (FANA), recruitment of CMCOs is seen to befeasible while VAFs are expected to be able to work with supervising maleMCOs. Within NWFP and Baluchistan it is considered unlikely that sufficientCMCOs recruits would be forthcoming and that VAFs would be able to work withmale MCOs. It is therefore proposed to test the cost effectiveness and work-ability of the proposed combinations of staff on a provincial basis. Fivebasic delivery systems would be tested. These are: (i) CMCO; (ii) single

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NCOFs; (iii) MCOFs working in pairs covering 50 villages; (iv) a male MCOworking with VAFs; and (v) a male MCO on his own attempting to reach bothgroups of women and individual women. CMCOs would operate using a single jeepwith no additional driver, while each single MCOF would be .llocated anindividual jeep and driver. As a cost saving method, paired MCOFs wouldoperate using a single jeep and driver. Table 2 shows the proposedrecruitment pattern for different female credit staff types in each region byprovince.

Table 2: Proposed Recruitment of Female Credit Staff Per Region by Province

Punjab Sind NWFP Baluchistan FANA & AKT

CMCO 2 2 0 0 2MCOF 4 4 6 6 4Sub-Total 6 6 6 6 6female MCOs

Male MCO 2 2 0 0 2

16. As only three female MCOs would be posted to each branch, it wouldnot be possible to fully test all alternatives against each other. This wouldrequire four female MCOs in every branch. The proposed recruitment patternand hence the tested combinations would therefore be different in the twobranches in each region. In Punjab, Sind and FANA a typical 125 villagebranch currently covered by five male MCOs could operate four different creditdelivery systems under the Project. In the first branch (Branch A) these fourcould be: 1 MCOF working separately, 2 CMCOs, male MCO with VAFs and male MCOon his own. In the second branch (Branch B) the delivery systems operatedcould be: 2 MCOFs in a team, CMCO, male MCO and VAFs and male MCO on his own.The pattern in Baluchistan and NWFP would be different because of the strictobservance of "purdah" and the restrictions on male/female contact that thisinduces. In the first branch (A) two different credit delivery systems wouldbe tested: 3 MCOFs working independently, and 2 male MCOs on their own, makinga total of 3 female MCOs and 2 male MCOs. In the second branch (B), thedelivery systems operated could be 2 MCOFs in a pair, 1 MCOF workingseparately, and 2 MCOs on their own, the only difference in branch A beingMCOFs working independently rather than in pairs. All female credit staffwould be employed on a contract basis for the first 2 years of the projectuntil their viability is proven to the satisfaction of both ADBP and thelending agencies, at which time they would be absorbed into the permanentstaff. Differences in workability and cost effectiveness of the alternativesare expected to develop on both a provincial and district basis given thewidespread cultural and sociological variety that exists within Pakistan.

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Proposed Staffing for the Women's Credit Delivery System

17. The project would provide financial support for the employment oncontract of all new CMCOs, MCOFs, VAFs, and male drivers.

Table 3: Proiected Recrultment of Branch Field Staff for Postingwithin Proiect Years

Type of Staff EX 91 FY 92 EY 93 Total

Male CMCOs 24 20 22 66

Female CMCOs 24 20 22 66

MCOFs 66 70 80 216

Subtotal Female MCOs 90 90 102 282

VAFs 90 180 282 552

These estimates are indicative and could be modified by ADBP to varyproportions of each staff type used provided each branch utilizes a minimum of3 female NCO alternatives. Actual allocation of MCOFs to postings either assingle MCOFs or as pairs of MCOFs would depend on Head Office and RegionalOffice evaluation of individual Branch needs and circumstances. It isanticipated, however, that the overall numbers of female MCO alternativesrecruited in any one year would follow the totals shown. Under the currentCorporate Development Plan of ADBP it is expected that by the end of FY93 theBank will have 2,030 male and female MCOs, with female MCos accounting for13.9% of the total MCO complement at that time. The project would furthersuppprt the establishment of permanent positions for women in Head OfficeCredit and Agricultural Technology Divisions. New postings are included forat least 4 female Deputy Directors, and 3 female Assistant Direc 3rs. AWomen's Wing would be set up within the Credit Policy Department of the CreditDivision which would supervise the women's credit delivery component of theproject. It is anticipated that this new Women's Wing would have 1 Deputy and1 Assistant Director, both female. Moreover, a Women's Wing would be set upunder the (Farm) Technology Department of the Agriculture Technology Divisionstaffed by 3 female Deputy Directors. These three positions are for SmallScale Industries, Women's Cropping Technologies and Women's LivestockActivities. Female technical staff would be recruited to handle small scaleenterprise and livestock development back-up activities and to act both assubject matter specialists and as trainers, developing loan packages forpromotior by NCOs and MCOFs in the field and providing specialist supportthrough in-service training courses held at both the Regional Office and Staff

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College levels. In addition, one female Assistant Director would be hiredeach year fot Pilot Projects and the Small Scale Enterprise Wings of theAppraisal and Special Schemes Department of the Credit Division. The projectwould require the recruitment of drivers to operate short-wheel base 4-wheeldrive (SWB4WD) vehicles used by single MCOFs, pairs of MCOFs as well as HeadOffice based support vehicles. Male MCOs would drive all vehicles allocatedfor use by couples.

E. The Proposed Lending Program for ULomen

18. Project finance would be used to support all types and purposes oflending under the new women's credit delivery program at ADBP. Lending wouldstart in the second half of FY91 following the posting into the field of newfemale credit staff. The projections for lending to women in following tablerelate entirely to direct lending through ADBP female credit staff to womenborrowers. At the same time, indirect lending to women would be encouraged incases ihere it is in the joint names of husband and wife (with the formerproviding security for loans and the latter being the beneficiary) or where itis in the name of the husband but the wife is the beneficiary. Such lendingwould be statistically separated from direct lending to women and to men andbe incorporated into the modified credit investigation report, as peragreement with ADBP. The numbers of loan cases handled by female credit staffwould build up on a gradual basis over a three year period since the newlyrecruited staff will take time to perform at full capacity. The projectedbuild up under the project is shown in Table 4.

Table 4: Projected Numbers of Loan Cases to be Handledper Month by Female Credit Staff in the Three Years from Recruitment

Staff Tyne First Year Secor.d Year Third Year

CMCO 11 13 15MCOF 9 13 15VAF 3 5 7

19. For CMCOs the initial target of 11 loans of mixed types (short-and medium-term) in the first year is seen to be feasible and the final yeartarget of 15 to be readily achievable, on the basis of GADP experience wherethe wife handled 6.5 medium-term loans on average per month in their first sixmonths, but 15 by the second year. Targets for MCOFs follow the same pattern.As they do not have NCO husbands to assist them, the initial target for theirfirst year is reduced to nine loan cases.

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Projection of Loan Disbursements to Female Borrowers During the Project Life

20. In the absence of adequate background data on the levels oflending which could be achieved by individual female staff, the projection ofloan disbursements by them was made in three steps. A comparison wasdeveloped as a first step between projections for male MCO lending under theproject and for newly recruited female MCOs and VAFs. Newly recruited MCOs atADBP in FY89 were expected to achieve a disbursement target of Rs 6 M by thesecond year of their employment. Such lending includes a high element oflarge loans for tractors and other investment items which are not expected tobe required by a majority of female borrowers. Average loan disbursementpotentials for female MCOs are therefore expected to fall short of male MCOtargets for the foreseeable future. Thus compared to the male MCOdisbursement of Rs 6.32 M is the first, 6.51 M in the second and 6.71 M in thethird year of the project, the corresponding projections for female MCOs are2.2, 3.3 and 4.3 only. Projections for VAF loan disbursements in conjunctionwith their supervising MCO/MCOF have been estimated on the basis of each VAFhandling one seventh of the target for the equivalent MCOF. VAFs are expectedto operate in only 1-3 villages compared to the 25 handled by an MCOF. Withtheir lack of transport and absence of sanctioning authority for any loans,processing and disbursement must be expected to be more time consuming. Giventhese constraints, this ratio would appear to be realistic.

21. Allocation for loan disbursement targets between types of loan wasthen undertaken as a second step in the loan disbursement projectionprocedures. Current ADBP Management policy allocates a target of 25% of maleMCO loan disbursement to short-term lending and 75% for medium/long-termlending. A target of 30% for short-term lending is seen to be more realisticfor female staff given the greater importance of lending for SSE workingcapital which is expected to develop during the project. Newly recruitedfemale credit staff would need to develop a portfolio of the loans in additionto helping smaller borrowers so as to offset to the extent possible the highercosts of their field operations in relation to their male counterparts. Anexpansion of the short-term lending target to 40% could be considered by PY3given satisfactory disbursement levels in PY1 and PY2. The third step in theallocation process for loan disbursement targeting involved an evaluation ofperceived lending for borrowers within the land holding limit of 2.5 ha orless and the landless. While it is understood that such lending would varywith actual demand, ADBP experience in its existing lending program indicatesthat medium-term borrowing requirements for the landless (which includeindividuals from urban environments borrowing for poultry and SSE development)are higher than for smallholders, as are the loan amounts since the former donot have farm assets. Average loan sizes for medium-term lending at 95%financing in line with ADBP requirements have therefore been stepped betweenlandless and smallholder borrowers at the level of Rs 29,000 and Rs 25,000respectively, (average for ADBP Rural Credit Scheme and GADP being 30,000)whereas average loan size is Rs 15,000 for short-term for both landless andsmallholders. Total allocations of lending for these two categories were then

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built up first dividing disbursements on a 30:70 short-term to medium/long-term basis. An allotment of 20X to landless and smallholders under 2.5 ha and80X to larger landholders was then assumed within the short- and medium/long-term individual lending. The 20% allotment for the landless and smallholderswas then further split on a 33:67 basis between these two categories ofborrowers and the resulting figures compared against average loan sizes forthe landless and smallholders and loan numbers for the viable lending packagesgenerated within the project program to check on the validity of theassumptions. Average loan sizes were not used for large borrowers with landholdings of greater than 2.5 ha as thresholds on such lending would not beincluded within the controlling covenants of the project. Lending availablefor larger borrowers is therefore effectively allocated as lump sums withinthe lending amounts projected by ADBP for the various loan purposes, but someestimates have nonetheless been made on the typical loan size for thiscategory to determine the total number of loan beneficiaries.

22. Table 5 summarizes the overall projections for loan disbursementsto women by project year. Total lending for the whole three year projectperiod is estimated at Rs 2,241 M in constant terms equivalent to 6.3% of theADBP estimated Rs 35,585 M lending projections for General Credit needs withinthe project.

Table 5: Deliver of Credit to Women - Projected Loan DisbursementsDuring the Proiect Period

(Rs Millions)

Lending By Farm Type FY: 91 92 93 TotalNo. Amt No. Amt No. Amt No. Amt

A. Short-Term Lending:(a) Land/Assetless 200 3 867 13 1,533 23 2,600 39(b) 2.5 ha or Less 400 6 1.733 26 3.067Z 4 5.2Q0 78

Subtotal (a+b) 600 9 2,600 39 4,600 69 7,800 117(c) Above 2.5 ha 2,696 62 7,565 174 13,870 319 24,130 555

Total 71 213 388 672

B. Medium-Term Lending:(a) Land/Assetless 310 9 1,310 38 2,241 65 3,861 112(b) 2.5 ha or Less 6QQ 15 2.640 66 4.560 114 7.800 195

Subtotal (a+b) 910 24 3,950 104 6,801 179 11,661 307(c) Above 2.5 ha 3,108 143 8,565 394 15,761 725 27,435 1-262

Total 167 498 904 1,569

C. Total Lerding (A+B) 238 711 1,291 2,241

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F. Implementation. Organization and Management of Women's Credit Delivery Systems

23. Overall management responsibility for the women's credit deliverycomponent would be held by the Credit Policy Department. The introduction ofa women's credit delivery program would necessitate changes in structuring ofthe Department as outlined in Para 17. A new Women's Wing would also beestablished within the Farm Technology Department of the AgriculturalTechnology Division in PY1, as also outlined in Para 17. Organization at thebranch and regional office level is not expected to change as female creditstaff would perform general MCO functions except that they would be dealingonly with women savers and borrowers. Overall management of the lendingprograms and their supervision would therefore continue to lie within theresponsibilities of the male Branch and Regional Managers.

Staff Training

24. The project component would support the training of all newlyrecruited female MCOs and VAFs as well as male CMCOs. Head Office femalestaff would participate in only part of these training courses.

25. Male CMCO/Female MCO Training. Both male CMCOs and female MCOswou-ld attend the newly structured basic three month induction courses at theADBP Staff college where the new syllabus would concentrate on training inbanking procedures, agricultural technology and on community development andbasic management techniques. A special component of the syllabus would bedevoted to women's lending activities which would be included within thelectures provided for both male and female participants. Lending systemsreaching male and female borrowers are not expected to differ substantially.The objective of this additional course component would be to create awarenessamong the credit staff of both sexes about women's role in crop, livestock andSSE sectors.

26. Head Office Staff Training. All newly recruited female HeadOffice administrative staff and technical specialists would also attend boththe ADBP operational procedures and agricultural technology and communitydevelopment sectors of the male CMCO/female MCO training course in PYI tofamiliarize them with ADBP operations and to liaise closely with specialisttrainers in their own fields. Such participation would involve an input byeach officer of one month of training.

27. Field Training of Village Assistants_and the Briefing of RegionalManagers. Branch Managers and MCOs on the New Women's Credit DeliveryServices. The project would support a major field operated training programinvolving newly recruited VAFs and the existing staff at the branches andregions selected to operate the new women's (cedit delivery systems. Becauseof restrictions on travelling imposed on most potential recruits by their

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families, all VAF training would be required to be carried out at RegionalOffices or at local centers within easy reach of their home villages.

28. While operating the training programs at regional offices,trainers would also provide a three day briefing course for Regional Managers,Branch Managers and male MCOs already in post on all aspects of the newwomen's credit delivery system. The general objective of this training andbriefing would be to create awareness of the perceived need for specialistwomen's credit services and to provide clear guidelines as to the types andpurposes of lending which would be promoted and the specific roles of maleMCOs in publicizing the new programs. All participants involved would beworking in Branches and Regional Offices where female MCOs and VAFs would beoperating. The training would therefore also set up the procedures by whichmale MCOs, CMCOs and female MCOs would liaise in the field and the methodologyfor handling situations where male MCOs require visits to be made to womenwithin households in connection with their own loan supervision and recoveryactivities relating to irndirect lending to women. The program would involve30 Regional Managers, 60 Branch Managers and 300 MCOs in PYl and 12 RegionalManagers, 24 Branch Managers and 120 MCOs in PY2.

FellowshiDs and Studv Tours

29. Provision is included within the overall project of which thiscomponent is a part for fellowships to support all aspects of ADBP's trainingprogram, with fellowship participation limited to female Head Officesupervisory staff and technicians. No specific fellowship proposals wereidentified during preappraisal, but allocations could be made for individualtraining fellowships at a later date. Provision has been allowed within theoutline costs for this project component for two study tours in each of PY2and PY3. Each tour would last two weeks and involve up to 15 participants.Study tours to India, Bangladesh and Nepal by best performing female MCOs andto Pakistan by practitioners in other countries like Bangladesh to train MCOsin women's credit delivery program would be promoted. Each study tour toanother country would be led by supervising ADBP officers. Male participantswould therefore be included in such tours.

Vehicles

30. The introduction of a women's credit delivery service within ADBPwould involve a high investment in vehicles. Provision has therefore beenincluded in the project component budget for 210 short wheel base four-wheeldrive vehicles. Each recruited CMCO couple and each individual MCOF would beallocated a single vehicle, while pairs of MCOFs would share the use of avehicle utilizing a "drop off" system to coordinate their field programs.While the investment in vehicles would appear to be very high, all vehicleswould essentially join the branch vehicle pool in which overall priority wouldbe given to women's lending activities. In addition, four vehicles would beretained in a vehicle pool at Head Office and be used principally to operate

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the VAF training and Regional Manager/Branch Manager/Male Mk.O briefingprograms. The Monitoring and Evaluation Department would also use thesevehicles for supplementing evaluation studies which would be carried out on asix monthly basis throughout the project.

Technical Assistance

31. Supportive technical assistance inputs would be required for thepreparation and development of training syllabi and the provision of back-uptechnical support services. These would include the use of the followingconsultants: (i) a Specialist/Trainer in Women's Credit for seven personmonths for the MCO/MCOF Basic Training Course; (ii) a Trainer/VAF Operationsfor five person months; and (iii) a Small-Scale Enterprise Economist for eightperson months. Separate consultancies are proposed for the two traininginputs as the work would be carried out in parallel during the first sixmonths of the project. MCO/MCOF training would be carried out in Englishwhile a considerable proportion of the VAF induction course would beundertaken in Urdu (for details see Implementation Volume).

Monitoring and Evaluation

32. Provision has been included within the overall project budget forassistance with the financing of a comprehensive monitoring and evaluationprogram at ADBP in line with IFAD project operational requirements. Visitingexternal consultants would be used to select the most appropriateimplementation system and to subsequently supervise report preparation for thewhole M&E program. Baseline surveys and Pre-Mid Term Review Evaluation fieldwork would be handled either by a local research institute within Pakistan orby the ADBP Monitoring and Evaluation Department to cover both the savings andlending programs directed at women and the overall impact and costs of thevarious alternative credit delivery systems (CMCO, MCOF, and VAF) in relationto their lending portfolio activities. Follow-up field monitoring studieswould be handled by the M&E Department based on a sample of villages selectedby the external consultants and focus primarily on the procedural aspect ofproject implementation. These evaluation visits would be undertaken every sixmonths and involve interviews with women borrowers and beneficiaries andconcerned staff.

Mid-Term Review

33. A Mid-Term Review would be held in the third quarter of FY92 to beattended by GOP, ADBP, NCB officials and representatives from the externallending agencies. A principal objective of this review would be to evaluatethe progress made in establishing the women's credit delivery system and theinitial impact of the program on women borrowers. The overall position of thevarious types of contract female credit staff would be reviewed at the closeof the Review and decisions taken on their future.

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Implementation Scheduling

34. Given the size of the project component and the short three yearlife of the project itself, planning for the implementation of the programwould begin in January 1990, six months ahead of project effectiveness. Thiswould include: (i) the selection of participant regions and branches; (ii)development of the procedures for the recruitment of incremental staff for theprogram on a contract basis and the subsequent design of the advertising andpromotional campaigns to recruit female MCOs and VAFs; (iii) advance planningfor the recruitment of consultants in line with World Bank and IFADprocedures.

G. Project ComDonent Costs

35. A detailed breakdown of project component costs in constant termsis shown in Annex 11, Implementation Volume, Cost Table No. 150.

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ANNEX 9Attachment 1

Indicative List of ADBP Regions and Branches Selected forInclusion in the Women's Credit Delivery Services ComRonent in FY91 (PY1)

Province Regions Branches

Punjab Rawalpindi RawalpindiChakwal

Sialkot SialkotShakargarh

Gujranwala GuiranwalaWazirabad

Jhang JhangShahiewna

Lahore LahoreKasur

Bahawalpur BahawalpurSadiq Abad

Muzaffargarh MuzzaffargarhKot Adu

Sindh Hyderabad HyderabadT.M. Khan

Mirpurkhas MirpurkhasSangar

Sukkur SukkurGhotki

Larkana LarkanaDokri

NWFP Kohat KohatKarak

Mingora MingoraBatkhela

Baluchistan Quetta QuettaPishin

Azad Kashmir Muzaffarabad Muzaffarabad(FANA) Bagh

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ANNEX 10

PAKISTAN


Project Monitoring and Evaluation

1. The co-financed Agricultural Credit Project would support the morewidespread utilization of monitoring and evaluation (M&E) techniques withinthe overall program to be operated by both the ADBP and the NCBs. ADBP hasdeveloped its own specialist M&E Department at Head Office which hasconsiderable experience in the operation of M&E programs required underexternally funded projects, while the individual NCBs separately manage theirown agricultural credit activities and liaise on an informal basis with thePakistan Banking Council (PBC). No single unified M&E capability is availableat the present time for NCBs. Provision has therefore been included withinthe proposed agricultural research component budget to assist PBC with thisrequirement. This component would be financed with World Bank assistance.

I. EXISTING MONITORING AND EVALUATION CAPACITY

2. As a major beneficiary of external finance from a large number ofinternational agencies, ADBP has built up a substantial monitoring andevaluation (M&E) capacity. Its present M&E Department was upgraded andstrengthened in the second half of 1987 to become one of 7 Departmentsattached to the Inspectorate Division at Head Office. Informal contacts havebeen established with University Departments and particularly with the PunjabEconomic Research Institute (PERI) which previously set up baseline studiesfor the Gujranwala Agricultural Development Project. Linkage of the ADBP M&Eoperations to wider national efforts is not presently practiced, althoughbasic management information summaries are routinely passed to the State Bankof Pakistan.

3. During FY89 the M&E Department had 15 professional staff at the headoffice and 11 at the regional offices. Prior to FY89, a hiring freeze wasimposed by the GOP on all public corporations which prevented the recruitmentof new staff. On the other hand, there is a shortage of suitably experiencedcandidates especially computer experts, partly because of the non-competitivesalary levels paid by the public sector. All existing M&E professional staffare graduates possessing computer and statistical skills and attend the annualinternal training courses carried out at ADBP Staff Colleges developed underthe overall long term training programmes established under the World BankSixth Agricultural Credit Project. All staff with the exception of theDirector have either been directly recruited into the department ortransferred from the Head Office Computer Division. Absence of broad-basedfield experience of resource mobilization and lending at the branch level istherefore a major constraint to the development of relevant M&E programmesrelating to small farming activities.

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AMNEX 10Page 2

4. The M&E Department currently provides reporting services for concernedADBP departments handling external agency projects as well as internal studiesrequested by Senior Management. External agency requirements on most projectsnow include baseline studies, quarterly/annual physical and financial progressreports, follow-up surveys, impact evaluation studies and project completionreports. Analysis required for inclusion in such reports now has priority andaccounts for up to 75X of work output.

5. To date ADBP has received assistance from the World Bank and IFAD withthe provision of short term expatriate consultancy services. As M&Etechniques have only comparatively recently been introduced into Pakistan, fewindependent local consultants exist in this discipline. However, a number ofacademic institutions are committed to extensive research in the rural creditsector and could be particularly supportive of ADBP's own M&E efforts. ThePunjab Economic Research Institute (PERI) has been involved in a majornational study programme which has in the past investigated the operationalefficiencies of the cooperative and NCB agricultural credit services thatprovide credit services to the rural population in general. Due to the natureof its financing it can be engaged to carry out independent evaluation studieson behalf of international funding agencies. Other University Departments andEconomic Institutions in Pakistan offer similar services.

II. PROPOSED M&E ARRANGEMENTS

6. While the M&E Department acts as a data processing unit, the Appraisaland Special Schemes Department (ASSD) would act as the overall coordinator ofthe Delivery of Credit to Women and Pilot Program project components. Theproposed M&E arrangements focus on base line surveys, concurrent evaluationand mid-term review impact evaluation. Staff shortages and the excessivelyhigh work-load of the M&E Department have proved to be a major constraint inquickly establishing baseline surveys internally for other externally fundingprojects. Base line surveys will be given high priority. It is thereforeproposed that external consultants would be engaged to carry out the tasks ofplanning and supervision of surveys, data analysis and report preparation witheither an external institution or the M&E Department carrying out the fieldsurvey activities required under consultant supervision, utilizing hired-inenumerators. This would free M&E Department staff to handle routine ADBPmonitoring and evaluation activities. The baseline surveys would covervillages within the jurisdiction of the 30 branches selected in PY1 under theDelivery of Credit to Women Component of the project as the overall studyarea, and where possible integrate areas which were also the focus of the ADBPVI Project baseline and project completion surveys. Methodology would beestablished to ensure that a statistically significant sample of villages andsavers/borrowers would be selected. The survey would have the dual role ofensuring that potential beneficiary identification methods required by IFADand the World Bank and criteria to be utilized by ADBP to separate outdifferent types of beneficiaries are feasible as well as collecting baseline

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ANNEX 10Page 3

data on the population targeted and the field support services which reachthem. The data generated during these initial surveys would provide the basiceconomic information on the families involved which is needed to serve as thebenchmark for assessing the impact of women's services and the 3 elements ofthe pilot program tests. This economic data would be supplemented byadditional information on social indicators collected every 6 months on asample basis by the M&E Department to meet the requirements of impactevaluation. A supplementary survey covering social parameters would beundertaken covering lOZ of the beneficiaries in total. In addition, matchingeconomic and social surveys would be applied to a group of similar men andwomen in villages outside of the project to act as a control group. The sizeof the control group would be around one third of the sample of individuals tobe covered under the benchmark and impact surveys. The economic datacollected during the baseline beneficiary household survey would include:household composition and age structure; literacy and education levels ofhousehold members; housing; land holding and tenureship; crops grown, culturalpractices and yields; ownership of livestock; ownership of other assets;income earning activities engaged in by household members (men, women andchildren); sources and levels of income by activity; contribution of householdmembers (men, women and children) to family income; expenditure patterns andresponsibilities; and skills possessed by men and women within the household.The supplementary surveys undertaken by the M&E Department to complete thebenchmark data for impact evaluation of the Delivery of Credit to WomenComponent of the Project would seek the type of data which would serve asindicators of the women's social standing against which to measure progressmade in social development under the project. These would include:involvement in decision making within the family; control over income andexpenditure decisions; involvement in community affairs; terms ofrelationships with husband and other family members; attitudes towards andresponses to treatment received from the village power structure; and mobilityof women within and outside of the village.

7. Concurrent evaluation would tun throughout the project period based on asample of villages and would focus primarily on the procedural aspects ofproject implementation. Particular areas under surveillance would be theperformance of ADBP branches in savings mobilization and disbursement of thecredit, the cooperation and assistance received from other ADBP staff and theoverall performance of the male or female credit staff alternatives relatingto each of the components under test. The concurrent evaluations would beundertaken every six months by the M&E Department in a sample of the branchesinvolved and would be based on interviews with borrowers and beneficiaries(both male and female) plus field credit staff, and branch and regionofficials. The size of the sample used and spatial spread would however bedetermined by the supervisory consultants and would depend on the pace ofimplementation. The sample would be scientifically chosen to berepresentative of the areas covered under the different project componentprogrammes with appropriate survey design modifications to fit theirspecialist needs. The monitoring system would also be directed towards

- 152 -

ANNEX 10Page 4

obtaining information on the savings and credit delivery systems utilized andtheir effectiveness. It would monitor the extent to which both male and fieldcredit staff are being successful in reaching male and female savers andborrowers, the constraints faced and the areas that call for action to improvethe pace of imnlementation. The data gathered in the monitoring exercisewould relate to: (i) the pace of project component implementation; (ii) theperformance levels of male CMCOs and MCOs attached to the project andcomparative performances and cost effectiveness of female CMCOs, female MCOsand VAFs working with stupervising male and female MCOs; (iii) theeffectiveness of the project savings and lending programs in reaching thetarget beneficiaries; and (iv) constraints on implementation in respect tologistics, inadequacy of staffing and other resources, lack of training andother factors.

8. Similarly, the monitoring program would obtain information separately onthe 3 program elements under test: (i) individual borrowing guaranteed byjoint liability security; (ii) the broader use of legally available loansecurity systems other than mortgage and the use of suretors; (iii) theintroduction of direct lending and lending related activities with NGOs. Thedata gathered would relate to: (i) the levels of participation by male andfemale smallholders, tenants, sharecroppers and landless; (ii) the performancelevels achieved for all lending activities associated with the pilot programelements; (iii) the effectiveness of male FIMCO (JLG)s, male MCOs, female MCOsand VAFs in operating the systems and reaching target beneficiaries; and(iv) constraints on promotion and implementation.

9. The external consultants would be responsible for the design of the dataformats and reporting requirements for all savings and credit components ofthe project in coordination with the ASSD and M&E Department, to ensurecompatibility with existing ADBP MIS programs to facilitate the futuredissemination of information needed for project management decision making.

10. Mid Term Review Imgact Evaluation studies would be planned andsupervised by the external consultants and undertaken by a local institutionor by the M&E Department in the second half of PY2 to assess the benefits thathave accrued to the women and the progress made on the pilot programs as aresult of the project. Studies undertaken would cover the sample of projecthouseholds and control groups who were included in the initial full benchmarksurveys carried during PY1. The Mid Term Impact Evaluation would also assessthe strengths and weaknesses of the Delivery of Credit to Women component inrespect to: the benefits to and participation of target beneficiariesclassified by type, i.e. landowners classified by size of holding, tenants,sharecroppers and the landless/assetless; lending impact on agricultural andrural enterprise productivity; impact on beneficiary household incomes andexpenditures; impact on growth of non-agricultural employment and/or income;impacts on "quality of life" factors; the progress made by different types offemale credit staff in reaching participants based on numbers and amounts ofloans disbursed and their recovery rates on a monthly basis since inception;

- 153 -

ANNEX 10Page 5

comparative costs of different credit delivery systems, i.e. single MCOFs,paired MCOFs and MCOs and MCOFs working with VAFs. The evaluation reportprepared by the consultants in consultation with the implementing field teamwould set out the results of the study and recommend future ADBP action on theconfirmation of female credit staff positions for staff operating the variousdelivery systems. Such recommendations would be separated out on a provinceby province basis to reflect the social and cultural differences which occurbetween them.

11. The Mid Term Impact Evaluation of the Pilot Programs would assess theviability of each of the 3 systems tested within the IFAD target beneficiarygroups to include: levels of participation by the target beneficiaries bygender and by the categories of smallholder with 2.5 ha or less, tenants,landless/assetless and marketing orientation and the number and amount ofloans disbursed and related loan recovery rates; the success rate of thedifferent types of male and female credit delivery systems in implementing theparticular program in relation to targets and actual achievements; the socioeconomic impact of the systems on target beneficiaries; an analysis of anyconstraints that have developed together with appropriate recommendations forremedial action. The evaluation report prepared would set out the dataavailable and make recommendations on the future continuation of the programseither on a continuing pilot testing basis under modified conditions ortarough their wider use within the ADBP lending system where appropriate.

12. It is intended that the results of the Mid Term Impact EvaluationStudies would be reviewed by the field staff themselves prior to the Mid TermReview to obtain feed-back on experience gained and reaction to therecommendations made. In this connection, the ADBP personnel involved inconducting all types of evaluation studies, particularly the concurrentevaluations would present findings and conclusions at annual seminars andtraining sessions involving project staff. Case studies would also be builtup on the basis of the evaluation study results and incorporated into thetraining materials to be used for newly recruited MCOs/MCOFs and otheroperational male and female personnel at ADBP during the later stages of theproject implementation period.

13. In addition to the baseline, concurrent and Mid Term impact evaluationstudies, additional special studies may also be commissioned from time to timeby ADBP with the help of outside agencies on a turn-key basis. Theappropriate areas of concern for these in-depth studies would become apparentfrom project monitoring and evaluation exercises. Provision has been includedwithin the overall project budget for additional consultancy inputs and anunallocated component which could be used to service both technical assistanceand additional external institution or M&E Department operations if required.The use of these funds would be subject to the concurrence of the lendingagencies.

- 154 -

ANNEX 10Page 6

14. For the implementation of the M&E component the Monitoring andEvaluation Department would retain overall responsibility under its Director.External consultants would plan, supervise and help make up the baselinestudies and the pre Mid Term Review Evaluation. Given the size and complexityof the M&E program, it is intended that the consultants would initiallyprepare costed proposals for ADBP and World Bank/IFAD considerationrecommending either the use of an external institution or the M&E Departmentitself as the field implementing organization. Thus, subsequent supervisionof the program would be undertaken by the consultants during short visits toADBP to coincide with d&E field operations. Terms of reference for theexternal consultants who would plan and supervise the program would beprepared by the M&E Department and to the satisfaction of World Bank/IFAD.Technical supervision would remain the responsibility of the externalconsultants and the managing financing agencies. The consultants proposalswould include recoer m;d-tions on M&E Department staffing and Training needs tosupport their propo 9s methodology. No proposals are intended at this stagefor incremental staff increases at ADBP. ADBP would however be expected tofill all vacant posts utilizing its own funds to supervise the efficiency ofits non project M&E activities. The recruitment of consultants would need tobegin in late FY90 to ensure that planning of the program can beginimmediately in FY91. The baseline surveys would be carried out within thesecond quarter of PY1 to ensure report completion by the external consultantsin time for the mid year posting of newly recruited female credit staff to befollowed by concurrent surveys every 6 months throughout the project periodundertaken by M&E staff and a pre Mid Term Review evaluation supervised by theexternal consultants in the second half of PY2. The Project completionevaluation study would take place within 6 months of project account closure.

15. M&E Department staff would be responsible for the routine analysis ofM&E material for the MIS and the preparation of reports on the results of theconcurrent evaluation programming which would take place every six months.All project component reports would be passed to the Planning Division whichwould act as the 'coordinating unit within ADBP for the whole AgriculturalCredit Project. Regular contacts would be maintained with the PBC on progresson the draw-down of funds from the lending agencies to ensure that overallproject coordination and liaison is maintained.

16. The M&E program would begin in the first half of PY1 at a time when newvehicles to be procured under the project may not be available. Existing HeadOffice and Regional Office vehicles and motor cycles operated within theirvehicle pools would therefore be used during this period until the delivery ofnew vehicle units later in the year. As no incremental increases in M&E staffnumbers are planned, except the filling of staff vacancies, routine allowancesand travel expenditures for such staff would be handled utilizing ADBP ownfunds. Existing computer hardware and software packaged used within the M&EDepartment and the Computer Division is already adequately handling routineM&E data processing operations. Consequently no provision for new equipmentis included within the project. Regional Monitoring and Statistical Officers

- 155 -

ANNU 10Page 7

would assist in the field only with concurrent evaluation data collection andrelated borrower and staff interviews. Direct employment of additionalenumerators by ADBP is not anticipated as the external institute or consultantcompany utilized would be expected to include such costs within its quotedprice.

17. The total costs for the provision of external consultant fees andexpenses for the planning, supervision and report writing elements associatedwith the baseline surveys and the Pre Kid Term Evaluation are proposed to beRs 4.4 M and a lump sum of Rs 1.4 M has been included to cover the overallcosts of the field implementation organization to be used, i.e. externalinstitute from within Pakistan or the M&E Department.

- 156 - ANNEX 10Table 1

PAKISTAN


Economic Rates gf Return and Sensitivity Analyssl

Switching Values

Model ffiBB Revenue Investment Qperating

Tractor/implements:

Irrigated 5 ha 22.8 -10 36 16Barani 10 ha 21.0 -12 44 19

Tubewell:

Diesel 5 ha 41.7 -32 281 57Electric 5 ha 39.3 -40 293 88

Orchard 5 ha 22.8 -36 389 67

Dairy/livestock:

Irrigated:Buffalo 29.7 -19 121 53Cattle cow 39.5 -21 153 58Sheep 19.2 -12 83 28Goat 15.8 -8 49 17

Barani:Buffalo 13.8 -4 26 9

Poultry:

Broiler 200 61.0 -11 281 13Layer 200 11.8 -1 14 1

Small-scale Enterprises:

Carpet weaving 65.3 -11 236 16Knitting 39.2 -6 116 8Sewing 53.2 -3 94 3Patti shawl N/A -3 692 6Fruit processing 55.4 -9 164 11Rice husking 62.6 -38 158 114

- 157 - ANNEX 10

Table 2

AGRICULTURAL CREDIT PRJECT

Financial Rates of Return and SensitivitY Analysis

Switching Values

Model &_ Revenue Investment Operating

Tractor/implements:

Irrigated 5 ha 13.4 -3 10 6Barani 10 ha 18.7 -15 50 29

Tubewell:

Diesel 5 ha 29.4 -24 143 39Electric 5 ha 27.7 -31 151 63

Orchard 5 ha 32.8 -80 864 756

Dairy/livestock:

Irrigated:Buffalo 43.3 -30 187 108Cattle cow 48.7 -27 186 81Sheep 25.8 -21 130 58Goat 20.4 -14 80 35

Barani:

Buffalo 30.1 -18 125 51

Poultry:

Broiler 200 59.1 -11 273 13Layer 200 11.6 -1 13 1

Small-scale Enterprises:

Carpet weaving 27.7 -4 96 6Knitting 28.2 -4 71 6Sewing 23.2 -1 29 1Shawl making 23.6 -0.4 47 0.4Fruit processing 50.7 -8 148 11Rice husking 33.0 -23 74 57

- 158 -

ANNEX 10Table 3

PAKISTA


Principal Financial ,and Economic Prices used in Project Analysis

Financial Economic1989 1989 1990 2000

uoumts

Crops (Rs per kg):Wheat 2.13 5.05 4.02 4.23Paddy - Basmati 3.59 6.28 5.04 4.97

- IRRI-6 1.65 2.56 2.00 1.96Sugarcane 0.31 0.41 0.37 0.47Seed cotton 5.32 11.29 11.35 11.13Maize 2.75 2.47 2.47 2.47Pulses 6.73 6.06 6.06 6.06Oilseeds - rape & mustard 4.73 4.26 4.26 4.26Fodder - Rabi 0.30 0.27 0.27 0.27

- Kharif 0.20 0.18 0.18 0.18Apple 7.30 6.57 6.57 6.57

Livestock products (Rs per unit):Milk - buffalo (litre) 4.50 4.50 4.50 4.50Poultry - broilers (kg) 20.00 18.00 18.00 18.00

- eggs (dozen) 11.00 9.90 9.90 9.90

InDuts

Seeds/seedlings (Rs per kg/plant):Wheat 2.66 2.39 2.39 2.39Paddy - Basmati 4.48 4.04 4.04 4.04

- IRRI-6 2.06 1.86 1.86 1.86Sugarcane 0.39 0.35 0.35 0.35Seed cotton 5.18 4.66 4.66 4.66Maize 3.43 3.09 3.09 3.09Pulses 7.40 6.66 6.66 6.66Oilseeds - rape & mustard 5.20 4.68 4.68 4.68Fodder - Rabi 22.50 20.25 20.25 20.25

- Kharif 3.00 2.70 2.70 2.70Apple seedling (dwarf) 25.00 22.50 22.50 22.50

Fertilizers (Rs per kg):Nitrogen (Urea 46 Z N) 5.84 11.15 12.61 11.88Phosphorous (DAP 46 X P205) 5.76 9.53 10.91 11.61Potassium (SOP 50 X K20) 2.77 6.23 6.37 6.53

Other inputs (Rs per unit):Tractor work (hour) 90.00 95.60 95.60 95.60Labour hired (hour) 3.75 3.00 3.00 3.00Bullock work (pairday) 45.00 40.50 40.50 40.50

- 159 -

ANNEX 10Table 4

PAKISTAN


Supervision Plan

Bank Supervision Input into Key Activities

1. The staff input indicated in the table below is in addition toregular supervision needs for the review of progress reports, financial data,audit reports, procurement, correspondence etc. The estimated annual stafftime for regular supervision is four staff weeks per year for the first twoyears anl three staff weeks rhereafter.

Borrower's and Implementing Agencies' Contributions to Supervision

2. Starting for the quarter ending September 30, 1990, theimplementing agencies will submit progress reports not later than three monthsafter the end of the quarter. Such progress reports would be submittedseparately by the Agricultural Development Bank of Pakistan (ADBP), thePakistan Banking Council (PBC) which coordinates the work of the NationalizedCommercial Banks (NCBs), the State Bank of Pakistan (SBP) and the RevenueBoard of Punjab.

3. ADBP, PBC, SBP, and the Government of Punjab would be responsiblefor coordinating and arranging, jointly with the Bank's Resident Mission inPakistan, mission itineraries and wrap-up meetings.

Table: BANK SUPERVISION INPUT INTO KEY ACTIVITIES

ApproximateDates Expected Skill Staff Input

(month/year) Activity Requirements (staffweeks)

6-7/90 Supervision Mission Agricultural Credit 12Y(Initiate project Specialistimplementation with Women's Developmentparticular attention Specialistto women's and pilot Small-scale Industryprograms in ADBP and Specialistsupervised credit in Computer SpecialistNCBs, and design ofcomputerization of landrecords)

- 160 -

ANNE 10Table 4Page 2

11-12/90 Supervision Mission Agricultural Credit 82'2(Review hiring of con- Specialistsultants, recruitment Agriculturisttraining of female MCOs, Cost Accountantreview setting up ofcost accounting systemin NCBs)

5-6/91 Supervision Mission Agricultural Credit 6V(Review overall project Specialistimplementation with AgriculturistADBP, NCBs, SBP andRevenue Board)

11-12/91 Supervision Mission Agricultural Credit 6V(Review overall project Specialistimplementation with AgriculturistADBP, NCBs, SBP andRevenue Board)

5-6/92 Mid-term Review and Agricultural Credit 8VSupervision Mission Specialist(Review implementation Agriculturistmance and propose pro-gram modification ifnecessary)

FY93 Two Supervision Missions As required 12Y'

FY94 Two Supervision Missions As required 12V

FY95 Two Supervision Missions As required 102'

FY96 One Supervision Mission As required 8V

1/ Including eight staff-weeks consultancy.2/ Including two staff-weeks RMP staff.3/ Including two staff-weeks consultancy.4/ Including three staff-weeks RMP staff.

- 161 -

PAKISTA

AGRICULTURAL CREDIT ?LOJECT

Selected Documents and Data Available in the Proiect Iimlementation File

A. Selected Regorts and Studies Related to the Proiect

- Seventh A&gicultural Credit Project, Preparation Report of ADBP,June 1989

- Smallholder, Landless, and Women's Rural Credit Project, IFAD,January 1990

B. Selected Working Papers and Tables Prepared by Bank Staff

- Working Paper for Joint Agricultural Credit Review in four Volumes

- Financial Analysis of NCBs

Table 1: Profit and Loss Statements and Performance Ratios of allNCBs 1984-88

Table 2: Balance Sheets and Staff Productivity of All NCBs1984-88

Table 3: Profit and Loss Statements and Performance Ratios of ABL1984-88

Table 4: Balance Sheets and Staff Productivity of ABL 1984-88Table 5: Profit and Loss Statements and Performance Ratios of HBL

1984-88Table 6: Balance Sheets and Staff Productivity of HBL 1984-88Table 7: Profit and Loss Statements and Performance Ratios of MCBL

1984-88Table 8: Balance Sheets and Staff Productivity of MCBL 1984-88Table 9: Profit and Loss Statements and Performance Ratios of NBP

1984-88Table 10: Balance Sheets and Staff Productivity of NBP 1984-88Table 11: Profit and Loss Statements and Performance Ratios of UBL

1984-88Table 12- Balance Sheets and Staff Productivity of UBL 1984-88

- Report on Organization and Management, Training, and Monitoringand Evaluation

PAKISTANAGRICULTURAL CREDIT PROJECT

AGRICULTURAL DEVELOPMENT BANK OF PAKISTANOrganization Chart as of 11-30-1989

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&~~~ ~ ~ coto Deatmn

MS I. .. l . . UnR a

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Devbpmen D Dep^4artmnI

IBRD 22060PAKISTAN 8' 7.2' U S SRP A K I S T A N .72..S..R

AGRICULTURAL CREDIT PROJECT CHINAADBP REGIONAL OFFICES J

-36- ^ ADfP REGIONAL OFFICES (r [ G t

* NATIONAL CAPITAL OtChittal ,:.

o CITIES AND TOWNS- NATIONAL ROADS

- PRIMARY AND SECONDARY ROADS ; Mi Oro

RAILROADS boTimergbohb . -4' AIRPORTS b'VtChod. p.oW . o ContoI

-. - PROVINCE BOUNDARIES owshlera \arobaa

INTERNATIONAL BOUNDARIES ( K'.Pesho bad

RIVERS %\ jfiwwolpz adg J1MU and KASHfAR

- 32- j' < 32-

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REPUBLIC OF L- . iarka O. Kho.pw

IRAN | 5 Dh 00 200 300 400

, I s , f ~~~~~~ ~~~~~~~~N D KitoMETERS(.J :Dodu 10 zbshoh ° 50 100 10S 200 250

( Bela \ 190 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MILES*' Turbot

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DECEMBER 1989

PAKI STAN L\ S. S. R . H ..- ~-,. £4 HINA

AGRICULTURAL CREDIT PROJECT r : r>

RAINFEDLtAN,JPJS: AS 1993e' Anneal Rainfall in inches, si

More than 20 \ K12 - 20 N hsl.,rr

Less than 12 __

FLOOD AND TORRENT WATERED LANDS:Lessthanl2 'V ' ' 'k\ (1Canal Irrigated Lands I/olsohyets is inches A

0 0,,,

C National Copitol /! . .r ... a ..a Province Capitals p - f' ej ;\t>- -o Other Cities and Towrns t M, ,

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o so too iso 200 250 300 350 400 e7h

0 00 00o 150 200 25

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