By Dr. Emil Q. Javier
Last week’s column “Inclusive financing with informal lenders” elicited various comments from readers. Following are some further clarifications:
The premise was that government efforts to force the formal banking sector to provide loans to small farmers and fisherfolk (SFFs) has not worked well enough.
Under the Agri-Agra Reform Credit Act of 2009 (RA 10000) banks were required to set aside 25% of their total loan portfolios for lending to agribusiness and agrarian reform beneficiaries. To date after nine years, compliance is only 13.6% compared with the target of 25% (BSP 2018). This is equivalent to a shortfall of R460 billion which should have gone to agricultural lending.
Government has not been remiss in its efforts to provide credit support to SFFs. In addition to the Agri-Agra Act, it established a farmers bank (Land Bank of the Philippines); provided subsidized credit under the Agricultural and Fisheries Modernization Act (AFMA RA 8435); provided insurance for losses to farmers through the Philippine Crop Insurance Corporation (RA 8175); organized the Agricultural Guarantee Loan Fund (85% of loan value) as protection to rural financing institutions; and established the Credit Information Corporation (RA 9510) to facilitate collection of public credit data and information to reduce lending costs and manage risks.
The latest initiative was the Agriculture Value Chain Financing Framework issued by the Bangko Sentral ng Pilipinas (BSP Circular 908, Series of 2016).
Inspite of all of these, our small farmers continue to be less productive and uncompetitive compared with their ASEAN counterparts for lack of access to timely and affordable credit with which to obtain the inputs and technologies required of modern progressive agriculture.
Hence, the need to think outside the box. One way is to mobilize the informal lenders of whom there are many in the countryside as socially acceptable parallel, complementary sources of rural financing.
Informal Lenders . . . Why Not?
The interest rates imposed by informal lenders are very high compared with those available from banks. These are perceived by many as oppressive and exploitative. Maybe so but for SFFs who have poor credit records and have no collateral to offer, they have no other recourse.
Besides, much as we want to wish away informal lenders, the stark reality is that of the 48% of Filipino adults with outstanding loans, 72% of them borrowed from informal sources without subsidy from government (BSP 2018). Informal lending is therefore very much part of our economy whether we like it or not.
We should encourage the banks to take on the virtues of informal lenders: 1) minimal transaction costs to borrowers (no commissions, no application/processing fees, no feasibility studies, no financial statements), 2) no collateral needed, only easily understood promissory notes in the local language, 3) quick disbursements after application, 4) convenience and fitness to the cash flow pattern of borrowers, and 5) assurance of availability of future loans with good behavior.
We should persevere in our efforts to further strengthen the formal banking system. But it is time we realize that we can go only so far. We should recognize the valuable economic functions the informal lenders are performing and instead of ostracizing/excluding them, bring them into the fold.
In addition to formal rural financing institutions, SFFs also obtain loans and advances, in cash or in kind, from family, friends and the so-called 5/6 lenders, as well as from input and farm equipment suppliers, assemblers/middlemen, rice mills and food processors, contract growing integrators and exporters. The second set of lenders are in fact the other actors/players in the value chain who rely on the farmer/producers as buyers of their products and services and as sources of raw materials.
But unlike most banks, these other agribusiness players, out of business necessity, have strong presence in the countryside, personally know well the farmers and their needs, and are willing to assume the risks the latter are reluctant to take.
The new agriculture value chain financing framework of BSP encourages the links among these actors/players to facilitate participation of the farmers/producers in the value chain and at the same time moderate the risks to the banks.
The new BSP lending modality provides two incentives to the Banks, namely, 1) loans granted to the agriculture value chain players are considered as direct or allowable alternative compliance to the Agri-Agra Credit Law, and 2) increases the single borrowers limit (SBL) for an additional 25% for loans and credit accommodations to entities which act as value chain integrators.
In addition to the traditional loans and discounts that bank currently offer, the new BSP policy allows the following types of credit products: 1) trade receivables financing, 2) factoring, and 3) warehouse receipts.
BSP value chain financing not going far enough
Unfortunately, the incentives are bank-centered and only marginally improves the conditions for the other agribusiness players to expand their business and lending/advancing activities to the farmer/producers. The credit products mentioned are not new and have had little impact on rural financing. They have not worked before and there is no compelling reason they will work now.The better more straightforward model is for the banks to lend directly to the agribusiness operators as they normally do, who in turn pass the loans in cash or in kind to their client farmers/ producers. The banks’ transaction costs are small because the loans will be large. Moreover, since these agribusiness players usually have good credit record, have collateral and are bankable, the original lending banks have minimal risk. The risks are fully assumed by the agribusiness operators who assume the burden of exercising the utmost due diligence in selecting the borrowers, monitoring their performance and collecting from them.
Since the risks are now fully on the shoulders of the agribusiness players, they ought to be treated like the formal financing institutions i.e. the subsidized credit are passed on through them, and the loan guarantees accrue to them (not to the banks from which they borrowed). This is what is meant by thinking out of the box.
Dr. Emil Q. Javier is a Member of the National Academy of Science and Technology (NAST) and also Chair of the Coalition for Agriculture Modernization in the Philippines (CAMP).
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