Quo vadis, Landbank?

In his last State of the Nation Address, President Duterte minced no words in calling the attention of the Land Bank of the Philippines for veering from its mandate of lending to small farmers, fisherfolk and agrarian reform beneficiaries. The President censured the bank for being “mired in so many commercial transactions,” and threatened to dissolve it if it doesn’t mend its ways.

In a press statement, Landbank officials pointed out they were the only bank fully compliant with the Agri-Agra Law, which required banks to lend 10 percent of loanable funds to agrarian reform beneficiaries and 15 percent to farmers and fisherfolk.

The officials also trumpeted their credit exposure to agriculture had reached P219.5 billion or 27.45 percent of total loans. More importantly, they committed to further jack up their loans to farmers to an average annual increase of 20 percent from 15 percent.

Will Landbank’s new strategy be enough to satisfy President Duterte? Is it equivalent to a dramatic shift in focus from commercial loans to agricultural loans?

First off, Landbank’s declaration it is the only Agri-Agra Law-compliant bank is indeed commendable. However, it begs the question of whether or not the yardstick for measuring the compliance of ordinary banks should be the same as that for a bank especially mandated to lend to farmers and fisherfolk.

In regards Landbank’s claim of registering total agriculture loans of P219.5 billion (as of June 2019), this is without a doubt a sterling accomplishment. But still, the figure is dwarfed by Landbank’s total loans to other sectors of P799.64 billion or 77.8 percent of total loan portfolio. Hence, it undermines its contention of being an “agricultural bank.”

Another point to consider is whether or not the beneficiaries of those nonagri loans are truly deserving of government assistance.

As for Landbank’s strategy to broaden its loans to farmers, based on record, the bank’s loans to farmers amounted to only P42.17 billion as of June this year. This amount is 5.27 percent of total loans of P779.64 billion. A 20-percent annual increase will raise Landbank’s loans to farmers to about P104.93 billion in five years. This will improve the proportion of loans to farmers from 5.27 percent to 13 percent of all loans.

There’s a catch. The figures were arrived at based on the assumption that commercial loans would remain constant, a near impossibility considering the continued rise in Landbank’s loanable funds. If the percentage increase in commercial loans keeps pace with the increase in loans to farmers, the result is a further deterioration in the share of the farmer’s loans.

In fairness to Landbank, even if it wanted to, it would be extremely difficult for it to immediately transfer the bulk of its loan portfolio from commercial enterprises to the small farmers and fishermen. There are just not enough qualified farmers and fishermen ready to avail themselves of those loans.

Moreover, since Landbank is under the supervision of the Bangko Sentral ng Pilipinas (BSP), it has to comply with credit guidelines, which include the stiff requirements of Basel IV. To force Landbank to shift its loans from commercial to agrarian in a snap is tantamount to credit suicide.

But the limitations of operating as a bank do not absolve Landbank from setting aside its mandated clients—it simply makes its job more challenging.

The answer to Landbank’s quandary may not be that elusive. In the 1970s, the then bank president, Basilio Estanislao, divided the institution’s two main functions into distinct sectors: a banking sector that operated like any regular commercial bank, accepting deposits and lending to commercial clients; and an agrarian sector that serviced the mandated clients of the bank—the farmers and fishermen. Estanislao’s thinking was that it was difficult to find managers who could excel in both banking and agrarian work. It was a unique setup that made Landbank probably the only one of its kind in the world.

But in the 1990s, Landbank decided to merge the two sectors for efficiency’s sake and to save on cost. In the years following the merger, the bank registered record profits. Unfortunately, the gains came at the expense of the farmers.

Why is it critical to have a focused and dedicated group to handle the loans to farmers and their organizations? As my mentor and former senior Landbank officer, Antonio T. Hernandez, used to emphasize, developmental banking was a long and arduous task.

In many cases, before credit is released, several interventions need to be implemented first to be successful. For the individual farmers, knowledge enhancement and education in new production methods and technology are a must. For their organizations, institution or capability building is critical. Back then, Landbank had put up specialized departments to handle the noncredit interventions.

In simple terms, in commercial loan transactions you simply apply the credit standards of the bank. If the clients fail to pass the standards, their loan applications are disapproved. In developmental banking, if the farmer/fisherman-clients don’t measure up, your task is to intervene so that sooner or later, they will qualify.

In the banking sector, the targets were the number and amount of loans booked while in the agrarian sector, the targets were the number of clients assisted. The success of the farmers’ organizations, therefore, became Landbank’s success as well.

During my stint with Landbank, which coincided with the height of the unification debate, I suggested that instead of merging the agrarian and banking sectors, it might be better to totally separate the two—in effect spinning off the agrarian sector into a separate company.

The banking sector can therefore continue operating like a regular commercial bank. They can do this without the guilt of abandoning the farmers and fisherfolk because the income they produce will end up benefiting the farmers anyway by way of subsidy to the spun-off company.

The spinoff company—let’s call it the agricultural finance and development company—could be a nonbank institution focused solely on its mandated clients. The approach will be holistic in the sense that both credit and non-credit assistance will be provided. As mentioned previously, its operation will be supported and subsidized by the commercial bank. Since it is not a bank, it will not be under the strict supervision of the BSP. Their credit requirements can be more accommodating because it is developmental in nature.

Landbank is a great institution, but its greatness must be felt by the farmers and fisherfolk. Otherwise, it loses its reason for being. As former Landbank president, Mr. Estanislao, once said, “to run Landbank, you don’t have to be a banker; what you need is a heart that has an honest concern and affection for poor farmers.” This is an ideal guiding principle for the “agricultural company” that must be put up.