By Marissa Mae M. Ramos
Weather conditions may be unfavorable, crops may fail.
These factors increase the risk profile of farmers (and fisher folks), which, with their tendencies to not have enough collateral, make farming a risky business for banks.
This is a concern considering that last year, the agriculture sector only managed to contribute 8.5% to the country’s economic output while absorbing a quarter of the country’s labor force. While these are lower compared to 2016, they remain a huge part of the country’s economic growth engine.
The contribution of agriculture to the Philippine gross domestic product (GDP) has been gradually declining over the years, but that does not mean the government has abandoned the sector.
In recent years, the Department of Agriculture (DA) has revitalized national concern for the gradually shrinking sector. Projects were introduced through the efforts of the national government and global organizations like the World Bank.
Last year, DA with its attached agency the Agricultural Credit Policy Council (ACPC), launched the Production Loan Easy Access (PLEA) program to serve small scale farmers and fisher folks with cooperative banks, rural banks, cooperatives and non-government organizations (NGOs) acting as lending conduits.
PLEA covers 81 provinces as of this writing. Under this program, loans need not be collateralized in addition to terms of repayment that can vary depending on the project of the borrower. Eligible borrowers can apply for a loan amounting as much as P50,000 for short term crops/commodities and P150,000 for high value crops and long gestating crops.
“Most DA programs channel credit funds to conduits as mandated under the Agriculture & Fisheries Modernization Act (Republic Act 8435)… This is mostly brought about by the government’s bad/costly experience with lending programs in the 1970s and 1980s, which had huge amount of loan defaults,” DA Undersecretary for High-Value Crops and Rural Credit Evelyn G. Laviña said.
“Further, direct loans from the government is prone to politicization and is often seen by borrowers as dole out instead of loan. By experience, this is costly because the government would have to shoulder both operational costs as well as the high default rate.”
Other programs of the DA include the Survival and Recovery (SURE) Loan Assistance and the Agricultural Competitiveness Enhance Fund (ACEF) Lending Program. The former was implemented with partner conduits that target calamity-affected farmers and fisher folks whereas ACEF had the Land Bank of the Philippines (LANDBANK) as a credit facility serving the agri-fishery sector in procurement of necessary equipment. The latter was extended to 2022 from 2015 under Republic Act 10848.
The SURE assistance program can give survival assistance grant up to P10,000 per borrower or recovery assistance loan up to P25,000 per borrower at 0% interest payable for up to three years.
Meanwhile, up to 80% of the ACEF is for financing, providing up to P5 million per project for cooperatives and P1 million for small farmers. The remaining 20% of the fund is for research and development grants.
Ms. Laviña added that the government can wring the “existing systems and networks” of lending conduits by tapping them as middlemen in providing credit assistance to farmers and fisher folks.
“Farmer borrowers also benefit from this arrangement in terms of lower costs of transactions (mainly transportation and time) in availing loan as conduits are usually their cooperatives /organizations or the nearest rural and cooperative bank,” she said.
Average monthly repayment rates for PLEA and SURE clocks in at 97% and 100%, respectively, as detailed by Ms. Laviña. High repayment rates of credit programs like PLEA and SURE shows how lack of collateral can deprive farmers and fisher folks a decent access to financial resources.
Signed last August, RA 11057 or the Personal Property Security Act aims to link this gap in enabling farmers and fisher folks to apply for a loan without land titles as collateral.
The legislation expands acceptable collaterals for different loan applications from land or real estate to other personal properties and movable assets. For instance, farmers can now use farming equipment, produce, warehouse receipts, and accounts receivables as collateral.
On the other hand, Union Bank of the Philippines (UnionBank) Chief Economist Ruben Carlo O. Asuncion reasoned, “[a]lthough there are case studies that show high loan repayments in developing economies, loan repayment in the agriculture sector are a challenge. This is why very few formal banking institutions are involved in agriculture sector financing.”
As a regulatory body, the Bangko Sentral ng Pilipinas (BSP) has been backing proposals to amend the Agri-Agra Reform Credit Act of 2009 (Republic Act 10000), which mandates banks to allot at least 10% of total loanable funds for agrarian reform beneficiaries (ARBs) and 15% for farmers and fisherfolk.
Among such proposals were those from the Agri-Fisheries Alliance, which include lumping the agri-agra lending provisions into a 25%-blanket requirement for lending to agriculture, which they said will provide more leeway for banks to help out the sector.
Albeit lending by the banks to the sector was 26% higher than what was granted as of June 2017, total lending to the sector settled to roughly half the required amounts during the period.
Non-compliance to the Agri-Agra Reform Credit Act subjects the bank to administrative sanctions and penalties imposed by the BSP. Almost a decade after its enactment, only rural and cooperative banks have kept to managed in meeting the quota.
As observed last quarter from BSP data, rural and cooperative banks had shelled out 35.64% of their total loanable funds or P26.65 billion of P74.76 billion as compliance to the law while thrift banks only lent 8.1% and universal and commercial banks had granted 13.6% to the sector.
“Agri-agra compliance rates might show a declining trend, but this does not necessarily mean there is lack of interest from the banks to invest in the agriculture sector,” Pia Bernadette Roman-Tayag, Head of BSP Financial Consumer Protection Department and Inclusive Finance Advocacy Office, stated.
“Absorptive capacity of the sector [can] be a limiting factor, where growth of the banking system’s total loanable fund significantly outpaces the sector’s growth. Hence, even when total exposure to the [agriculture] sector has increased by 26% in terms of absolute amounts (from P500.79 billion in June 2017 to P629.98 billion in June 2018), compliance rates fell during the same period.”
BSP collects 10% of the penalties charged to non- or under-complying firms for administrative expenses. The remaining 90% were shared equally among the Philippine Crop Insurance Corporation (PCIC) and the Agricultural Guarantee Fund Pool Program (AGFP).
According to Ms. Laviña, AGFP and PCIC includes the penalties received to their existing fund which had accumulated to P3.5 billion for both agencies. The AGFP covers 85% guarantee to private financial institutions against default risks of farmers while PCIC gives insurance protection to farmers against certain type of damages and losses to their agricultural assets.
“Since AGFP and PCIC insurance guarantees repayment of agricultural loans, they are considered substitute to collaterals as they lower risks by ensuring that loans will be paid even if there is no asset for forfeiture in the event of a default,” she mentioned.
For his part, University of the Philippines Los Baños (UPLB) Associate Professor and Agricultural Economist Prudenciano U. Gordoncillo saw that, “the penalty [clause] is insignificant and [banks] earn more on the alternative compliance, like buying government securities.”
Meanwhile, UnionBank’s Mr. Asuncion promotes partnership between banks and financial technology (fintech) companies in the country as a better substitute for penalties.
“Banks can provide the financial might and fintechs can contribute their agile response and familiarity dealing with agriculture institutional clients and farmers. Innovation should be in the forefront and help financing work for agriculture,” he said.
With direct lending proving to be a challenge, there are indirect ways to which banks can lend to the agriculture sector.
For one, banks can alternatively invest in bonds issued by government-run LANDBANK and Development Bank of the Philippines (DBP). Another is to lend for infrastructures that will benefit the sector; or invest in preferred shares of stock in rural financial institutions or shares of stock of the PCIC; and lend or invest to projects under Agro-Industry Modernization Credit and Financing Program (AMCFP) of RA 8435 or the Agriculture and Fisheries Modernization Act (AFMA) of 1997.
In an interview, Ms. Tayag of BSP, said that the central bank is aware of the reluctance of the banking system in serving the agricultural sector.
“We have to recognize that banks inability and disinclination to lend to the agri[culture] sector stem from a number of factors, which make serving the sector high risk or high cost. The goal therefore is not simply to enforce mandatory lending, but to address the fundamental issues that disincentivize banks from going into agriculture lending,” she said.
“The goal is to make mandatory credit quotas eventually unnecessary, with the sector’s financing requirements being adequately met by market players who are strategically positioned to do so.”
BSP, according to Ms. Tayag, had remarked in their joint review presented to the Senate Committee on Agriculture in October 2017 the need for “supportive legal frameworks (e.g. warehouse receipt system), high-quality agriculture database, index-based crop insurance, and organizational capacity of farmer based organizations” to further the effects of the regulation.
Ms. Tayag had also previously expressed intentions of the BSP to utilize technology in “address[-ing] the high transaction cost of serving the agriculture sector.”
“The BSP issued a package of policies for digital financial inclusion which are particularly relevant and designed for rural communities and small value transactors, such as farmers and fisherfolk.”
Earlier this year, BSP already partnered with FINTQnologies Corp. (FINTQ) of PLDT Group’s Voyager Innovations, Inc. to introduce a digital platform called Accelerated Growth and Rural Inclusion (AGRI) together with the DA and the Rural Bankers Association of the Philippines (RBAP), among others.
AGRI expects to connect local producers to its consumers by providing a virtual marketplace for their produce and for financial services offered by several public agencies and private organizations. Platforms like AGRI simplifies the flow of market information for all agricultural players involved.
Traction of private ventures to value chain applications such as AGRI aids to fix not only the logistical shortcomings in the agricultural sector, but also the information asymmetry between farmers and their buyers.
Value chain explores each activity a commodity undergoes before used by its final target consumers. Inefficiencies or gaps in the production, marketing, or distribution process of a good are exposed in this way. Thus, the weakest link along the sequence of activities can be noticed and possibly solved through a direct intervention.
Companies in the private sector use value chain analysis in seeking its competitive advantage over its opponents, whereas the state can adopt it to pursue for a better-organized provision of its services, particularly to the marginalized.
In 2016, BSP jumped to the movement and released Circular 908, also called Agricultural Value Chain Financing Framework. The handbill outlines lending program features and regulatory incentives for companies who wants to participate in agricultural value chain financing.
The circular mentioned additional credit products that can be offered through this framework aside from traditional loans offered by banks. Financial bodies can provide trade-receivables finance in which banks directly lend the working capital to the farmer’s supplier based on its repayment history to his/her suki.
Aside from trade receivables, factoring and warehouse receipts were also available. Factoring allows an enterprise to sell “contracts of sales of goods” at a discounted price to a financial institution that will receive the entire sales revenue once the contracts matured while warehouse receipts can be used by the farmer as a collateral to the bank.
Warehouse receipts are issued by officers of the warehouse to certify how much of a commodity a farmer has stored in their facility. Issuance of warehouse receipts are not new to the Philippine agricultural sector. The quedan system is a similar scheme being carried out by the Sugar Regulatory Administration (SRA) on sugarcanes allowing them to allocate certain portion of sugar to the local market or for a foreign market.
BSP’s Ms. Tayag added that involvement of financial institutions in this area “increase the productivity and business sustainability of value chain actors which encourage banks to develop appropriate products to support the financing needs of all the actors along the chain, including smallholders.”
“Organized value chains are able to address key risk factors such as lack of reliable information about the farmers, unstable markets and income sources that are typical deterrents for banks… Through value chains, banks can directly extend loans to farmers more confidently using the farmers’ business relationship with the institutional buyers or suppliers as a form of soft collateral,” she stated.
Creditworthiness appears to be redefined with a new lens of looking at how farmers/borrowers can repay their finances. From what was usually perceived to be assets and stable flow of income as basis, creditworthiness became synonymous to trustworthiness. Soft collateral became a test of character for the farmers if they can deliver to their word.
The BSP had also incorporated in Circular 908 some incentives for financial institutions interested to participate in the agricultural value chain financing. First, amounts lent through the framework were calculated as direct or alternative compliance to the mandatory quota of RA 10000.
Second, parties who were engaged in the chain were granted additional 25% in Single Borrower’s Limit (SBL) as per previous BSP Circular 425 of 2004, though, the incentive is still up for review within three years of involvement. The SBL was a ceiling imposed by BSP where amount of loans, credit accommodations and guarantees of a bank shall not exceed 25% of its net worth.
Though promising, the BSP stresses the need for the bulletin to have auxiliary policies to fully realize the benefits of the framework.
“As contemplated in Circular 908, value chain financing must be supported by well-defined policies and analysis which inform the bank’s entry point in the value chain and the financing products to be provided, among others,” Ms. Tayag said.
Likewise, BSP plans to introduce a “pilot value chain financing ecosystem bringing together selected value chains,” select government agencies for support services, and a financial institution.
“Ultimately, the pilot can serve as basis for the development of a national roadmap for AVCF to ensure effective coordination and convergence of government and private sector initiatives.”
The consciousness of a public-private partnership as a necessity in delivering large-scale developmental programs is not new to the Philippine society. However, the need for their cooperation is certainly pressing now more than ever.
UPLB’s Mr. Gordoncillo and UnionBank’s Mr. Asuncion both called for support in the development of agriculture.
“The role of agriculture is very significant even in developed economies. It is even more critical in developing economies like the Philippines because of the sector’s role in terms of food supply, employment, raw materials, and exports among others,” said UPLB’s Mr. Gordoncillo.
UnionBank’s Mr. Asuncion was of the same assessment: “In advanced economies, agriculture sectors receive huge subsidies to support expansion and growth. These economies understand the crucial part of agriculture output to economic development.”
“In fact, mere minimal positive annual growth increments from agriculture will make a huge difference for all of GDP growth in the Philippines. Thus, it is very important to support agriculture development.”