The Central Bank last week announced a Rs.5 billion credit infusion into the domestic dairy industry to help small scale dairy farmers, liquid milk and agricultural crop processors.

Loans from Rs.50,000 to Rs.400,000 per borrower will be granted to dairymen at an interest rate of 12% per annum with payments spread out over a maximum of five years.

The processing industries will be eligible to a maximum credit of Rs. 300 million per borrower at 14% payable within a maximum five years.

The government is providing an interest subsidy of 5% per annum to participating financial institutions enabling them to keep their own lending rates lower than market.

The Central Bank’s Regional Development Department said that the credit scheme, effective from April 2008, involved an expected disbursement of Rs.5 billion at concessionary rates of interest and said that the credit infusion was intended to enhance local liquid milk production, milk and milk-based products and promoting agricultural crop processing industries in the country.

"The credit scheme has been introduced as announced in the Budget 2008," the bank said in a news release. "With the sharp increase in the prices of milk powder and food crops in global market, a favourable environment has been created for development of local dairy industry and the food crop sector."

The Central Bank pointed out that the non-availability of a credit scheme for dairy products has been identified as one of the constraints for developing liquid milk production in the country. Further, strengthening the agro processing industry by funding agro-based industries, storage and processing of crops would help to develop the cultivation of food crops on a sustainable basis.

"Accordingly, this credit program will increase the investments in the local liquid milk and food crop sectors in the country," the bank said.

The intention is to help farmers to move away from traditional farm practices and adopt modern scientific animal husbandry by helping them with credit.

Borrowers would be required to build modern cattle sheds for their animals instead of allowing free grazing and part of the loan funds can also be used to feed their cows with concentrated feed, grass and fodder. Provision of adequate water and proper veterinary care too will qualify for credit.

The bank said that while farmers will be allowed to keep local breeds or cross breeds, they could also purchase quality animals, if available, with the loan funds limited to a ceiling to be determined by a veterinary surgeon’s recommendation on the capacity of each farm.

"The veterinary surgeons will examine the experience of the farmer, availability of water and fodder and other necessaries when they issue such recommendations," the news release explained.

The Central Bank, in association with lending banks, will make arrangements for forward sales contracts between dairy farmers and milk collecting companies to ensure a stable market with a remunerative price for liquid milk.

Loans will be provided for building of cattle sheds, purchase of cows, purchase of feed concentrates, veterinary services and drugs, construction of biogas tanks and any other requirements recommended by vets.

The loans scheme will also enable liquid milk processing industries to obtain credit at 14% per annum payable over a maximum of five years with borrowers required to arrange for the purchase of milk from 2,000 to 10,000 dairy farmers under forward sales contracts.

Agro-based industries that will be eligible for the concessionary loans at 14% per annum will be limited to a maximum of Rs.300 million per borrower with such industries required to enter into forward sales contracts with 1,000 to 10,000 farmers to purchase their produce.

The Central Bank as well as the lending banks will assist industries to enter into such contracts with farmers, the Central Bank said.

These loans will be available for the construction of industrial buildings, for modernization of existing buildings, purchase of modern machinery and equipment, building stores space and cold rooms and setting up transportation services and provision of other required services and equipment for maintenance of standards.