By Bianca Cuaresma & Jasper Emmanuel Arcalas
NEARLY four decades ago, artist Rody Vera sang about Tano, a farmer victimized by usurious practice that led him to join the enemies of the State. The song popularized by Vera’s group Patatag struck a discordant note in civilized society that the State issued policies addressing usury. The latest among these policies is Republic Act (RA) 10000 or the Agri-Agra Reform Credit Act.
When the 10,000th law was signed in 2009, the government intended to pursue equal access to opportunities for farmers and fishermen, in an effort to promote rural development. The spirit of the law is on enhancing access of the agricultural sector to financial services and programs that increase market efficiency and promote the modernization of the farm sector.
The mandated lending to agriculture and agrarian reform requires banks to allocate 25 percent of their total loan portfolio to the two sectors—10 percent for the agrarian reform credit and 15 percent to other agricultural credit.
The decade-old law, however, has failed to steer the target level of bank funds to the farm sector.
Bank compliance
IN end-September 2018, universal and commercial banks’ compliance to the 10-percent required lending to the agrarian reform sector hit 0.79 percent; their compliance to the 15-percent required lending to the agricultural sector reached only 12.95 percent.
The thrift banking sector follows the universal and commercial banks’ trend, with a 1.2-percent compliance rate against the 10-percent mandate for the agrarian reform sector and 6.19 percent as against the 15-percent mandate for the agricultural sector.
Even rural and cooperative banks—whose major market are composed of farmers and fishermen—are finding it increasingly difficult to comply with the mandatory lending to the agrarian reform and agricultural sector, data from the Bangko Sentral ng Pilipinas (BSP) showed.
Five-year data trend from the BSP showed that while rural and cooperative banks are still the only banking group that is able to comply with the agri-agra lending quotas, their share in this sector has been shrinking over the years.
This is despite the crucial role of agriculture in a country’s overall development.
By end-September of last year, the rural and cooperative banks’ lending to the agrarian reform sector hit 11.79 percent and 24.19 percent for the agricultural sector. This is versus their allocation in end-2013, when these smaller banks were able to allocate 24.53 percent of their total loan portfolio to agrarian reform credit, way above the 10-percent mandate. For the agriculture sector, rural and cooperative banks set 44.59 percent of their loan portfolio to this sector, also exceeding the 15-percent quota.
According to the BSP, providing access to credit to the agriculture sector has significant economic implications especially for a developing country like the Philippines especially in terms of food security, employment and poverty reduction.
Data from the BSP also showed that the nonperforming loan (NPL) ratio of agricultural loans has actually been decreasing along the overall decline in NPLs of the whole banking industry. From an NPL ratio of 4 percent in 2014, the NPL ratio of agri-agra loans dropped to 2.78 percent in 2018 as end-September 2018. However, this is still higher than the NPL ratio of the banking industry, which posted a ratio of 2.3 percent in 2014, 1.7 percent in 2017, and between 1.83 percent and 1.87 percent in 2018.
Implementation challenges
A BSP official who requested to remain anonymous told the BusinessMirror that although mandatory credit quota appears to be a straightforward approach in channeling funds to the agri sector, it does pose serious implementation challenges and financial stability risks.
The BSP has, for years, been vocal in its support to amending the decade-old law, saying that mandated lending is an outdated mode of pushing funding into specific sectors in the economy.
In October 2017, the Inter-Agency Agri Agra Task Force— composed of the BSP, the Department of Agriculture (DA) and the Department of Agrarian Reform (DAR)—submitted to the Senate Joint Committee on Agriculture and Food and Agrarian Reform its report on the state of agriculture financing in the country, as part of the mandated periodic review of the implementation of the mandated credit quota under RA 10000.
The report aims to shift the focus of government efforts to promote sustainable agriculture financing from mandated credit into other strategic interventions around building the necessary financial and data infrastructure, improving capacities of both borrowers and lenders, and other mechanisms.
“We recognize that agriculture is a highly political issue and amending the agri-agra law is—ultimately—the sole discretion of the legislators; stakeholders can simply advocate and support a position,” the BSP official said. “As a financial system regulator, BSP’s main interest in the mandated credit is its potential impact on financial stability and consumer protection.”
The BSP also urged banks to “formalize” their position as a group to provide legislators a better appreciation of their concerns and issues not simply from the perspective of agri-agra compliance but also, and perhaps more importantly, on how they can play a more strategic role in rural development as financing providers.
Absorptive capacity
HOWEVER, the problem of financing the agricultural sector, the BSP official further explained, is not just a banking issue, but an issue that will have to be addressed coherently by multiple sectors of the government.
Although banks are known to be hesitant to lend to the agricultural sector because of the given risks to the sector’s ability to earn, such as seasonality and susceptibility to weather conditions, the BSP argued that not all impediments to the implementation of the agri-agra law are due to financing issues.
“There are many factors affecting the state of agriculture financing and why bank lending to the sector is not at the desired level [at least based on agri-agra quota requirements], including the issue on the productivity and absorptive capacity of the sector,” the BSP official said.
In particular, in terms of loan disbursements by banks to the agriculture sector, it actually grew from P232.7 billion in March 2012 to P598.3 billion in September 2018.
“While compliance rates to the Agri-Agra Law actually fell, the absorptive capacity of the agriculture sector could be a limiting factor as it has been significantly outpaced by the growth of the banking sector’s total loanable funds,” the BSP official said.
New moves
EARLIER, the Asian Development Bank (ADB) funded a comprehensive study on financing agriculture value chains in the country. The draft report prepared and submitted by an ADB consultant in October last year emphasized, among others, the need to build the technical capacity of banks and farmer-based organizations to effectively engage in value chain financing.
In response to the findings of the study, the BSP official told the BusinessMirror that they are—in partnership with the ADB—exploring the possible development of a pilot value chain financing ecosystem that will involve a bank or several banks, and value-chain players and government agencies such as the departments of agriculture (DA), agrarian reform (DAR), trade and industry (DTI) and the Cooperative Development Authority, among others.
“Lessons from this pilot can inform interagency approach to ensure implementation of focused, structured and coordinated efforts to promote AVCF [agriculture value chain financing] in the country,” the BSP official said. “For the BSP in particular, the pilot implementation can provide useful inputs for policy development and interventions to strengthen the technical capacity of banks to engage in value chain financing.”
Such intervention may include development of an AVCF toolkit for banks and design of a training program for agriculture-focused bankers, documents from the BSP revealed.
Compliance rates
FOR the Philippine Chamber for Agriculture and Food Inc. (PCAFI), the problem of how to increase compliance rates could be addressed by guarantee.
To turn around the low compliance rate by commercial banks to RA 10000, PCAFI President Danilo V. Fausto proposes that the government intervene by providing sovereign guarantee.
Fausto told the BusinessMirror that the government used to have the Agricultural Guarantee Fund Pool (AGFP). However, he said the government failed to maximize this scheme that allows farmers to have wider access to credit.
The AGFP, together with other state guarantee funds, was merged with the Philippine Export-Import Credit Agency to become the Philippine Guarantee Corp. (PhilGuarantee). The merger was approved by President Duterte last year.
“It is not attractive to banks to grant loans to the agriculture sector due to risks. And the government could intervene to mitigate risks by providing guarantee to banks,” Fausto said. “In this way, farmers would now have access to credit from banks.”
He added they are hoping that PhilGuarantee would focus on providing guarantee to borrowers from the farm sector. Fausto chided the government’s predilection to provide more guarantee to loans going to the housing sector than to the agriculture sector.
“The guarantee fund for agriculture then was only P5 billion compared to the P180 billion for housing sector. If you just do to the agriculture sector what you did with the housing sector then, for sure, the farm sector would expand by leaps and bounds,” he said.
“So our appeal to the government is to increase the fund for the agriculture guarantee fund. As much as possible put it at the same level as the fund for housing guarantee,” he added.
Anomalous approval
Fausto pointed out that even state-run Land Bank of the Philippines (LandBank) is not able to fully cover the agriculture sector in providing financial credit.
He pointed out that LandBank’s loan exposure to the agriculture sector is only about 30 percent, with 7 percent being directly granted to farmers or producers.
This, according to him, is far from what China, Thailand and other Asian countries’ LandBank-counterpart financial institutions are doing: a 100-percent loan exposure to their farm sector.
“LandBank was built for the agriculture sector,” he said. “Why is it lending to companies such as Hanjin?”
Farmers groups like the Philippine Maize Federation Inc. (PhilMaize) criticized LandBank for being involved in the credit default by Hanjin Heavy Industries and Construction Co.-Philippines (HHIC-Phil).
PhilMaize has written to leaders of both chambers of Congress and even to Duterte to probe the $85-million loan exposure of LandBank to HHIC-Phil.
“The anomalous approval is an outrageous act, a mortal sin and an act of treason to the farming and fishery sector, which [LandBank]’s mandate emanates,” Navarro said in the letter, which was sent to Duterte and other government officials on January 17.
“We must take a closer look on whether [LandBank] granted in haste and on whether it has even granted 50 percent of its loan portfolio to agriculture, its foremost beneficiary,” he added.
Justifiable spending
Fausto also proposes that LandBank employ credit extension officers (CEOs) that would reach out to Filipino farmers, especially those who are financially illiterate.
Duterte has repeatedly pronounced that the LandBank should go to the farmers and not the other way around.
Fausto surmises that LandBank could put five CEOs across all of its branches which he estimates are around 380.
This means that LandBank would hire 1,900 CEOs and, at a conservative estimate of P20,000 monthly wage, the state-run financial institution would only have to spend at least P456 million.
“LandBank earned P14 billion in 2018 and it remitted P7 billion. You are just asking or looking at P450 million to P5000 million to be invested on extension services so that farmers learn how to create business plans, be financial literate and be knowledgeable on credit,” he explained.
“So what is P500 million in relation to their income? That’s nothing, especially the extent of benefits that it would give to farmers,” he added.
“Farmers lack financial literacy, that’s why traders take advantage of them easily,” he added.
Fausto added that the government could tap professors from state universities and colleges to teach financial literacy to farmers.
Acquiring funding
The DA, for its part, has been keen on issuing bonds that would fund the agency’s flagship programs to improve the country’s farm productivity.
Last month, Agriculture Secretary Emmanuel F. Piñol said he had had initial talks with private banks, which have already expressed interest to offer financing of up to P200 billion worth of government agricultural projects.
According to Piñol, the banks include the members of the Chamber of Thrift Banks, the Metropolitan Bank and Trust Co., Bank of the Philippine Islands, EastWest Bank and Sterling Bank of Asia. These banks, he said, also signified interest to fund projects that would be certified compliant to the Agri-Agra law.
“They said they have about P200 billion, which they could use to fund agriculture and agrarian projects to comply with the Agri-Agra law,” he said.
Some of the projects being eyed to be funded by the private banks are DA’s solar-powered irrigation system banner program, farm mechanization and farm-to-market road construction, according to the agriculture chief.
“The banks said they are not avoiding exposure to agriculture. It’s just that they do not know the government’s programs where they can invest in,” he told the BusinessMirror in an interview in February.
“They said it is unfair to them that they pay the fines while the government is not offering any agricultural programs to them,” he added.
Sectoral support
According to the Agricultural Credit Policy Council (ACPC), the total loans granted to the agriculture, fishery and forestry (AFF) sector in 2017 rose by 23.7 percent to P619 billion from the P500 billion recorded in 2016.
The double-digit growth drove the share loans granted to AFF sector to increase to 1.6 percent of the total loans granted by banks to the whole economy, from 1.3 percent in 2017, documents from ACPC showed.
“This may be attributed to the favorable factors affecting the agricultural sector, like favorable weather conditions, ample government interventions, which boosted agricultural production,” the ACPC said in an annual report.
ACPC data showed that the bulk or about 61.68 percent of the loans granted to the AFF sector came from the private banks, with the remaining amount being provided by state-run financial institutions.
In 2017, private banks provided P381.642 billion as loans to the AFF sector, which was 24.50-percent higher than the P306.541 billion the banks lent in 2016, ACPC data showed.
Private commercial banks led the sector in terms of agricultural loans in 2017 as it accounted for 56.47 percent of the total loans granted by the private sector. These banks accounted for 34.83 percent of the loans provided by all financial institutions to the AFF sector.
Agricultural lending by private commercial banks in 2017 rose by nearly 24 percent to P215.524 billion from P173.929 billion in 2016, ACPC data showed.
This was followed by loans extended by thrift banks that reached P123.812 billion in 2017, 31.5 percent over the P94.151 billion thrift banks provided in 2016, according to ACPC documents.
“Rural banks (RBs), on the other hand, whose commitment is to sustain growth in the countryside, barely posed a 10-percent growth in loan releases to agriculture amounting to P42 billion,” ACPC said.
Total agricultural loans by state-run banks in 2017 expanded by 22.58 percent, but their share to the total value shrank to 38.32 percent.
“As the leading government agricultural lending institution, LandBank continues to beef up its lending to priority sectors (i.e., small farmers, [fishermen], microenterprises, small and medium enterprises, among others), posting a 24.57-percent growth in agricultural loans at P202 billion,” ACPC said.
“On the other hand, loans released by the DBP [Development Bank of the Philippines] to the agriculture sector rose by 12.28 from last year’s level amounting to P35 billion,” it added.
Production loans
Likewise, the ACPC observed growth in the agricultural production loans granted by all types of banks in 2017.
Total agricultural production loans in 2017 reached P350.382 billion, which was 29.20 percent higher than the P271.204 billion recorded in 2016, ACPC data showed.
This is the highest value of loans provided directly to farmers since 2012, according to the Philippine Statistics Authority (PSA).
Loans provided directly to farmers accounted for more than half or about 56.62 percent of the total agricultural loans granted during the reference period.
The ACPC noted that the value of government banks’ farm loans expanded by 26 percent to P65.435 billion from P51.896 billion in 2016.
Loans provided by state-run financial institutions to farmers accounted for 18.68 percent of the total agricultural production loans granted in 2017, according to ACPC.
“LBP, as it continued to intensify lending to the agricultural sector, released nearly P62 billion worth of production loans, a 14-percent increase compared to the previous year,” it said.
“On the other hand, DBP showed strong performance as the bank continued to strengthen its assistance to agriculture when its agricultural production loans grew more than double (147 percent) from P1.3 billion to P3.3 billion for the year,” it added.
Loans granted directly to farmers by private banks, which accounted for 81.32 percent of the total value, expanded by nearly 30 percent to P284.947 billion from P219.308 billion in the previous year.
Exposure rate
ACPC data revealed that Philippine banks in 2017 had a total loan exposure of P8.811 trillion, 1.9 percent over P7.473 trillion recorded amount in 2016.
Of the total amount, outstanding loans to agriculture only accounted for 4.6 percent with a value of P405.329 billion.
Nonetheless, the loan exposure to agriculture sector rose by 10.5 percent from P366.824 billion recorded in 2016, ACPC data showed.
“The loan receivables of government banks rose by almost 10 percent amounting to P143 billion,” the report read.
Total loan exposure to agriculture sector by private banks, which accounted for 64.73 percent of the total value, expanded by 11 percent to P262.366 billion from P236.351 billion.
“Meanwhile, among the private banks, only private commercial banks and thrift banks exhibited an increase in their loan exposure to agriculture at 13 percent and 6.5 percent, respectively,” the ACPC report added. On the other hand, total agricultural loans outstanding of rural banks contracted by measly less than 1 percent.”
Real transformation
TO address the issues underlying agriculture financing, the BSP said the country will have to have a clearly laid out and demonstrated commitment to implement a whole-of-nation road map for the agriculture sector.
“We believe that the issues and challenges confronting the Philippine agriculture sector will not be solved by mere allocation and pouring of more credit resources to the sector. What is needed is a real ‘structural transformation’ where resources are directed not only to credit but more importantly to infrastructure development, research and development, training and capacity-building, modern equipment and machineries, and land distribution,” the BSP said.
For the agricultural sector, the BSP said it would be good, especially for the smallholder farmers, if they could gather themselves and form an organized group such as a small farmers’ organization or cooperative. Doing so, their agricultural endeavors could be viewed by banks as something more viable and sustainable.
“Further, as an organized group, they will be able to purchase farm inputs at lower cost, get access to farm machineries and equipment, obtain fair prices for their farm produce and possibly increase their likelihood of getting access to formal credit from banks given the lower risk associated with a larger group vis-à-vis individual smallholder farmers,” it added.
The BSP said it will take more than a whole-of-government approach to get things done.
“All stakeholders, including the private sector and civil society, should work closely together in order to meet the current and future challenges of the Philippine agriculture sector through a combination of policy and market reforms, training and capacity-building, better governance and a stable political environment and improved relations with trading partners,” the Central Bank said.
The BSP, nevertheless, reiterated its commitment to continue pushing for a more sustainable lending environment to the agricultural sector.
“As a regulator, the BSP’s primary goal is to provide an appropriate and enabling regulatory environment that facilitates access to credit and other financial services while ensuring the stability of the financial system as a whole. While we seek to encourage financial innovation and promote innovative financing models in agricultural financing, we also aim to effectively manage any and all ensuing risks that may arise from these activities. Nevertheless, we recognize that agricultural financing, if better understood and with risks properly managed, can have a transformative effect for smallholder farmers, the agriculture sector and the economy as a whole” the BSP said.
Image credits: Michael Pine | Dreamstime.com