Rural credit bottleneck

Rural credit has been identified by the five-coalition Agri-Fisheries Alliance (AFA) as the biggest obstacle to agriculture development.

At this point, small farmers and fisherfolk are especially disadvantaged. They constitute 12 million workers, or 30 percent of our total workforce. They live in the rural areas where the poverty rate is 36 percent, higher than the 17 percent of Vietnam and 14 percent of Indonesia and Thailand.

Given the industry’s large role in society, putting food on our tables, it is regrettable that only 2 percent of our financing institutions’ loanable funds go to them.

Today, the average interest rate charged by formal lenders to agriculture is at 27 percent per annum. This is extremely high, compared to the rates our neighboring governments charge their constituencies: Vietnam and Indonesia at 12 percent; Thailand at six percent; China at five percent; and India, zero, if the loan is paid within six months.

In informal lending, wherein most farmers and fisherfolk use the “5-6” system, the 20-percent interest in a typical three-month period effectively becomes 80 percent in a year. Our farmers’ difficult situation is made worse because, unlike China, India, and Indonesia, our seeds and fertilizers are unsubsidized.

Agriculture Lending. There have been attempts to solve this problem, such as the Agri-Agra Law. Banks are required to lend 25 percent of their funds to agriculture and agrarian reform-related enterprises. However, these banks find agriculture lending very risky. This is because agriculture profitability is largely dependent on unpredictable weather, outdated technology and poor rural infrastructure from farm-to-market roads, irrigation to post-harvest storage facilities.

Thus, banks prefer to just pay the penalty of one half of one percent (0.5%) of the amount of non-compliance or undercompliance.

What do we do then?

Danny Fausto, AFA’s lead person for rural credit, says there must be a good guarantee system in place. Fausto, awarded the Agri-Entrepreneur of the Year by President Duterte through the Department of Agriculture (DA)’s Gawad Saka Program while also chair of the guarantee committee of the Home Guaranty Corporation, believes that agriculture should learn from the very successful housing guarantee system.

New Direction
He has three suggestions. First, instead of the 85-percent agriculture guarantee cover, the system should have a 90-95 percent cover, closer to the 100-percent implemented in the housing industry. Second, the agriculture’s version should not require a bank to pay back 30 percent of its guaranteed loan. Third, the leveraging of the agriculture guarantee by only three times should be increased to a level allowed by the Bangko Sentral ng Pilipinas for housing guarantees.

In addition, to support the life of the agriculture guarantee, at least five percent of the profits of government financial institutions (GFIs) and government-owned and -controlled corporations (GOCCs) should be tapped until such time the fund reaches an appropriate level.

The Land Bank of the Philippines currently handles an Agriculture Guarantee Fund Pool (AGFP). Because we heard this might be a deterrent for other banks to avail of the AGFP, we talked to Landbank president Alex Buenaventura if he was open to allowing a neutral body take over the management of the fund. He said he was willing to consider.

We also fully support Finance Secretary Carlos Dominguez’s announcement that all guarantee funds of the different sectors, including agriculture, might be consolidated into one fund. This way, the management of the different funds will be done more effectively and equitably.

Fausto jokingly says: “You cannot eat the walls and floors of housing. But you must eat the rice and vegetables of agriculture to survive.”