Agriculture credit: What ails?
The agriculture agrarian reform credit law (Agri-Agra law) was first passed as Presidential Decree 717 in 1975. It provided that all banking institutions shall set aside at least 25 percent of their loanable funds for agricultural credit in general, of which at least 10 percent of the loanable funds shall be made available for agrarian reform beneficiaries (ARBs).
For over 30 years, it has failed its mandate. Thus, to remedy the situation, Republic Act No. 10000 of 2009 amended PD 717 with the same credit quota of 25 percent: 15 percent for agriculture and fisheries in general and 10 percent for ARBs.
Noncompliance penalty consists of one-half of one percent of noncomplied portions. Of these penalties: 10 percent goes to the Bangko Sentral ng Pilipinas (BSP), and 45 percent each to the Philippine Crop Insurance Corp. and Agriculture Guarantee Fund Pool.
From January-September 2018, banks set aside P644.6 billion for agriculture and agrarian reform, up 23 percent from P524.8 billion during the same period in 2017. Total loanable funds of the banking industry rose by 17.5 percent to P4.69 trillion from P3.99 trillion during same period. The combined allocation, which is 13.7 percent of total loanable funds, was below the 25 percent threshold. It was 12.7 percent for agriculture, and a dismal one percent for ARBs. Only rural and coop banks complied.
Penalties for noncompliances hit P6 billion in the last two years, according to Monetary Board member Bruce Tolentino. Many banks preferred to pay the penalty rather than actually lend to farmers who are still perceived to pose high credit risks (as cited by Caraballo in her article “Agri-agra loans up, but still below threshold.” January 2, 2019, Manila Times).
Why is noncompliance very high, especially for agra loans?
The World Bank cites that the growth and deepening of agriculture finance markets are constrained by a variety of factors: (1) inadequate or ineffective policies, (2) high transaction costs to reach remote rural populations, (3) covariance of production, market and price risks, and (4) absence of adequate instruments to manage risks, (5) low levels of demand due to fragmentation and incipient development of value chains, and (6) lack of expertise of financial institutions in managing agricultural loan portfolios.
The above factors apply to the Philippine situation. The lack of experience of banks is evident. But the high transaction cost of small lending plus climatic and biological risks cannot be underestimated. The client small farmers also face high-transaction costs in dealing with distant banks. A perennial dilemma is lending to one-hectare farmers, many with low productivity whose cash flow cannot even pay adequate food expenses. This is especially so for unorganized, fragmented small farmers.
Is there light at the end of the tunnel?
There are existing models that engage small farmers in the value chain. These require two key elements: management and economies of scale.
One is the Piddig rice model in Ilocos Norte. The local government unit and the Basi Multi-Purpose Cooperative joined forces to consolidate small (less than one-ha average) landholdings. Presently, it has some 400 farmers on 300 ha. The interventions include: farm mechanization of plowing and harvesting, full input application, planting of similar varieties and transport to rice mill. The interventions raised yield from 3.8 tons per ha to 6.5 tons per ha; and increased net farm income 2.5 times to P135,000 per year.
Another model is that of ATISCO, a subsidiary of Yazaki Torres Group. It is providing farm support services to small rice farmers in Oriental Mindoro. The objective is to assure a supply of quality rice for its 50,000 employees in Calabarzon.
Farm consolidation is the wave of the future. It allows for mechanization and the benefits of scale.
Where do we begin?
The Philippine Chamber of Agriculture and Food, Inc. (PCAFI), a national umbrella organization of commodity associations, has made agriculture credit access its key mandate. Its president Danny Fausto recently organized a workshop with the BSP and the banks re value chain finance to agriculture. This is just the start.
Three strategic questions: Who will package the project for loan applications? Who pays? Who will manage the project?
Unless new management modalities are developed, the noncompliance, especially for ARB loans will continue. With low productivity and income, exacerbated by lack of scale, rural poverty (the highest among Asean peers at 34 percent of farmers) will persist. Addressing the credit access problem will definitely help.
Of relevance is loan risk mitigation. In July 2018, Pres Duterte approved the merger of the Home Guarantee Corp. (HGC) and the Philippine Export-Import Credit Agency (Philexim), transferring the guarantee functions, programs and funds of the Small Business Corp., the administration of the Agricultural Guarantee Fund Pool (AGFP), and the Industrial Guarantee and Loan Fund to the Philexim, and renaming the latter as the Philippine Guarantee Corp. Consequently, the administration of the AGFP was transferred to the new entity.
The HGC has outstanding guarantee of about P180 billion for housing while the agriculture sector has guaranteed barely 5 percent of that amount. Now that all the guarantee agencies were lumped into one, the loan guarantee to the agriculture sector might have a good chance of equalizing or be at par with the outstanding guarantee given to the housing sector. Loan guarantee mechanism for banks will definitely boost the lending to the agriculture sector, lower the risk of banks and encourage them to lend more to the sector.
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