Bank motivation for agriculture lending
For agriculture to improve and for our nation to attain inclusive growth, our banks should be motivated to lend to agriculture. This is not happening.
Many years ago, a law was passed to achieve this objective. Banks were required to lend 15 percent of their funds to farmers and fisherfolk, and 10 percent to agrarian reform beneficiaries. This law failed in motivating banks to do this. Instead of 25 percent in agriculture lending, only 2 percent was extended.
In 2014, only P778 billion out of the P40.195 trillion or about 2 percent went to agriculture. This has been the same for the last five years. The penalty of not complying to the 25-percent loan requirement is paying only 1.5 percent a year. This is financially wiser than suffering much greater losses when incompetently lending to high-risk agriculture.
Also in 2014, our government agriculture bank, Land Bank of the Philippines, lent only 9 percent of its P386 billion loan portfolio to small farmers and fisherfolk.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. told me that LBP could not do much better than this. It is because LBP has to meet the required financial ratios if it wishes to remain a universal bank.
On Aug. 20, at a regular bi-weekly meeting of the five-coalition Agri-Fisheries Alliance (AFA), Danny Fausto identified two funds that were designed to help agriculture. Fausto is a former banker, the former national chair of the Federation of Dairy Producers, a DA Gawad-Saka awardee and a leader of the coalition Philippine Chamber of Agriculture and Food.
One is the P12-billion loan fund established by the Agriculture and Fisheries Modernization Act , which allows Department of Agriculture officials, who have no financial expertise and experience, to bypass the banks and lend directly to farmers and fisherfolk. The release of the first P1 billion has been disastrous and the balance of P1 billion has remained unused.
The second fund is the P4-billion Agriculture Guarantee Fund Pool (AGFP). This is lodged at Landbank. Though the central bank allows the P4-billion fund to have a multiple of three in terms of agriculture loans it can guarantee (P12 billion), AGFP covered only P5 billion.
The reason is simple. First, the fund guarantees only 85 percent of the loan. If the loan is not repaid, the bank is required to pay an additional 30 percent of the loan, or else the bank’s line will be discontinued. It is understandable that there are not many takers of this fund. Also, since the AGFP is lodged in the LBP, other banks are discouraged to tap the fund as they see LBP as a competitor.
In contrast, the successful Home Guarantee Fund in the real estate sector is a body independent of any bank. It often guarantees 100 percent of the loan and has a multiple of 20 in terms of what it can guarantee.
The solution to the problems of AFMA fund and AGFP is to consolidate them into one large guarantee fund. It should be lodged in another financial institution such as Quedancor (which should be rehabilitated), or a similar body.
The guarantee fund rules should be liberalized. Examples would be guaranteeing 90 to 95 percent of the loan and not requiring a 30-percent additional contribution from banks for failed agriculture loans.
A third component that will motivate agriculture lending is insuring farmers and fisherfolk against uncontrollable events like the weather. If they are not insured, they will not be able to recover and pay back their bank loans, discouraging banks from lending to them.
Today, Philippine Crop Insurance Corporation (PCIC) has a capital of only P2 billion. It should have at least five times more. In addition, the PCIC limits its coverage to only the 20 poorest provinces for various agriculture commodities. While there is only rice and corn insurance for the rest of the country, this insurance should be expanded to cover other deserving agriculture and fisheries products.
With the political will of President Duterte, Agriculture Secretary Emmanuel Piñol, and Finance Secretary Carlos Dominquez III, financial arrangements must be made through executive action, without need for legislation. These mechanisms will motivate banks to release more of their idle funds to agriculture.
Only then can we break the credit gridlock that hampers agriculture development and impoverishes our small farmers and fisherfolk.
(The author is chair of Agriwatch, former Secretary for Presidential Flagship Programs and Projects, and former Undersecretary for Agriculture, Trade and Industry. For inquiries and suggestions, email [email protected] or telefax (02) 8522112).
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