Govt Introduces Risk Coverage Scheme to Boost Financing for Small Farmers

The Federal Government of Pakistan has announced a financial incentive scheme under which banks will receive Rs. 10,000 for every new borrower added to their portfolio. The move is designed to strengthen financial inclusion, expand access to credit, and support small and marginalized farmers across the country.

How the Scheme Works

According to a notification issued by the State Bank of Pakistan (SBP), banks will assess their net increase in borrowers at the end of each fiscal year. They will then submit their claims electronically to the Financial Inclusion Support Department (FISD), SBP BSC, within 15 working days.

This initiative falls under a broader risk coverage program aimed at encouraging banks and microfinance banks (MFBs) to extend financing to farmers in underserved and unserved regions.

Key Features of the Incentive Program

• The government will provide 10% first-loss coverage on the outstanding agricultural loan portfolio for:
  • New borrowers (principal amount only).
  • The incremental outstanding portfolio for existing borrowers.
• Borrowers will be able to avail financing of up to Rs. 3 million for a maximum tenure of 12 months.
• For sugarcane loans, a longer repayment period of 18 months will apply.
• The scheme will remain valid until June 2028.

Risk Coverage and Recovery Mechanism

The government’s risk coverage will help reduce banks’ concerns about defaults. However, the payment of claims will not absolve banks of their recovery responsibilities. Financial institutions are required to continue their normal recovery processes for delinquent borrowers.

Recoveries from defaulted borrowers can be treated in three ways:

1. If a bank has pending subsidy claims with SBP, it may offset recoveries against these claims in its quarterly submissions.
2. Banks may net off recovered amounts from previously claimed coverage.
3. Standard recovery mechanisms will remain in place, ensuring accountability and reducing moral hazard.

Eligible Institutions

The scheme is open to:

• Commercial banks
• Islamic banks
• Specialized banks
• Microfinance banks (MFBs)

By including a wide range of financial institutions, the government hopes to ensure broad participation and maximum outreach to rural and agricultural borrowers.

A Step Towards Financial Inclusion

The program represents a significant step towards inclusive economic growth, as it seeks to reduce financial exclusion among farmers who traditionally face challenges accessing credit due to high risk, lack of collateral, and limited banking services in rural areas.

By providing direct incentives and first-loss coverage, the government aims to encourage banks to lend more confidently, strengthen agricultural productivity, and boost rural development.