Let’s do Countryside banking in the Philippines

For most of my life I had been a banker and reading this article shows despite the economic progress the country has gained the past several years, many Filipinos particularly in the rural sector working in the agricultural sector continue to suffer limited access and high cost to credit essential for their needs.

Let’s work together now to address some if not all of the recommended solutions through Startups and Joint Ventures. With Foreign banking institutions now can own 100% of local commercial banks while Rural Banks can be owned by foreigners up to 60% limit, we can do this.

From the Manila Bulletin

Credit to the unbankable and underserved
by Dr. Emil Javier

January 17, 2015

If our agriculture were to hold its own in the coming liberalized market in ASEAN, there are a number of conditions which we need to markedly improve upon. We have to continue investing for the intermediate and long term in key public investments like irrigation; farm-to-market roads; modern grain centers, slaughterhouses and fish ports, and in research, development and extension. Much more immediate in impact is farmers’ access to credit. Technology is available but most small farmers and fishermen are unable to source necessary inputs like improved seeds/stocks, fertilizers, feeds, pesticides and fishing gear and farm equipment with which to attain higher productivity.

In 2013, the agriculture and fisheries sector (AF) contributed 12 percent of our Gross Domestic Product (GDP). During the same period, bank loans to agriculture and fisheries amounted to P729 billion which was only 1.93 percent of total bank loans. And of the loans for AF sector, only 0.63 percent were for actual agricultural production. This gross lack of congruence between contribution to the economy and credit demonstrates dramatically what’s wrong with agriculture.

The Agriculture and Fisheries Modernization Act (AFMA) of 1997 recognizing the role of credit stipulated that the amount of P2 billion be appropriated for the first year of implementation and P1.5 billion every year for the next six years.

Unfortunately, this did not materialize. For the period 2003-2011, the average loanable funds released under the Agro-industry Modernization Credit and Financing Program (AMCFP), the umbrella government credit program under AFMA, was only P369 million per annum. It was only starting 2012 under the Aquino administration when the loan funds were substantially increased to P1.12 billion, still short of the AFMA law appropriation and 15 years late.

The sad reality is that agriculture is inherently risky and the returns usually not commensurate with the risks. If these were not so, commercial banks would have exploited the opportunity and credit should not be a problem. The trading, processing and marketing parts of the agriculture value chain are often bankable but the problem really lies in primary production which is performed for the most part by small farmers and fisherfolk. It is ironic that those most vulnerable and those least able are made to bear all the risks both natural and man-made.

Insisting therefore that credit for the whole of agriculture be at market rates is unrealistic and anti-poor. The commercial banks should be able to take care of the more profitable, less risky segments of the value chain. But primary production by small farmers which is most risky and least profitable ought to remain as a concern of government and must receive special support as they do in our ASEAN neighbors and all over the world.

The magnitude of the challenge is captured in the following statistics in the strategic plan of the Agricultural Credit Policy Council (ACPC), the national agency under the Department of Agriculture (DA) tasked with providing direction and coordination to credit support for the modernization of the agriculture sector.

Of the estimated six million small farmers and fishers households, only 1.68 million (28 percent) had access to credit. Twenty-two percent wanted and attempted to, but were unable to borrow. Moreover, of the 28 percent who had access to credit, only 57 percent obtained loans from formal sources i.e. Land Bank, Development Bank of the Philippines, commercial banks, cooperative, thrift and rural banks, cooperatives, micro-finance institutions and NGOs. The rest got their credit from land owners, traders, rice and corn millers, agriculture input suppliers, local lenders, friends and relatives.

The interest rates and credit terms from informal lenders are often very onerous to farmer-borrowers. Hence in the ACPC strategic plan 2011-2016, the target is to increase the number of formal borrowers from 1,677,000 to 2,501,000.

The problem of credit for small farmers had been with us for so long. Over the years, government had embarked in various schemes with mixed outcomes. Credit support for government-initiated programs like Masagana 99 for rice in the 1970s enabled farmers to have access to good seed, fertilizers and pesticides and dramatically raised productivity. However, repayment was very low and weakened the rural banks through which the credit was coursed. Similar directed commodity-oriented programs were implemented essentially with the same results — low repayments, high unsustainable subsidies and no lasting measureable impacts.

One of the major flaws had been the ineptness of regular government agencies in managing credit programs. The regular agencies really had no competence to administer loans, and worse, farmers viewed the loans as government money and therefore need not be repaid. This has since been rectified under AFMA which provided that henceforth all government credit programs be coursed only through government finance institutions (GFIs), principally Land Bank and the Peoples Credit and Finance Corporation (PCFC), which serve as wholesalers. Commercial banks, cooperative banks, thrift banks, rural banks, farmer cooperatives, micro-finance and other NGOs deal directly with farmers as retailers. Most of the government funds are now coursed through this wholesaler-retailer scheme.

Recently, ACPC introduced an innovation in which special time deposits were placed directly in partner banks thereby eliminating the need for a wholesaler hence reducing interest rates to farmers.

We still have a long way to go to adequately service the needs of small farmers for credit. In fairness to ACPC and our credit and finance specialists, after so much trial and error, we now have more or less a fair idea of what have not worked and why and what we should be doing moving forward.

Three years ago the ACPC, under the auspices of the Congress Coordinating Committee for Agriculture and Fisheries Modernization (COCAFM) then chaired by Senator Francis Pangilinan, in partnership with a broad-based farmers coalition, Alyansa Agrikultura, led by Ernesto Ordonez convened a credit summit. This stakeholders’ consultation among farmers, agribusiness people, bankers, government workers and academe came forward with a comprehensive set of recommendations which have since been incorporated into the strategic plan of the ACPC.

January 24, 2015

Sad to say the Philippine legislature and executive departments are great in enacting laws and articulating national development plans but notoriously wanting in implementation and follow through. We have committed so many errors in the past and we should be much wiser now. We do have a strategic plan for agricultural credit developed by the Agricultural Credit Policy Council (ACPC) and what we need to do now is to scale up, fine-tune, and execute.

REDUCING RISKS AND COSTS TO LENDING

Private formal lending institutions i.e. commercial banks, thrift banks, cooperative banks, rural banks, farmer cooperatives, microfinance institutions and some NGOs actually provide the bulk of the credit that flow to the agriculture and fisheries (AF) sector (90 percent in 2013). This is the way it should be and most of government efforts ought to be directed to providing incentives for them to lend more.

However, of the total P729 billion loans to the AF sector in 2013, only P236 billion (32 percent) were for agricultural production in which small farmers and fisherfolks are engaged. Unfortunately this aspect of agriculture is where the risks are highest and the need for operating capital the most acute to enhance productivity and people welfare.

Many small farmers and fisherfolk are unbankable because they have no collateral to offer, their default rates are high, and it is costly to reach them.

The most obvious reasons why farmers default are 1) losses to floods, strong winds and drought (seasonal environment risks), 2) losses from insect pest outbreaks and disease epidemics (biological risks), 3) low farmgate prices at time of harvest and post harvest losses (market and postharvest risks).

Thus to minimize these losses we should continue investing in rural infrastructure and institutions, research and development, farmers education and extension. Among the key rural infrastructures are irrigation and drainage (drainage is as important as irrigation!); farm-to-market roads; rural electrification; modern grain centers, slaughterhouses, dressing plants and fish ports, and bagsakans or farmers markets. Unfortunately, among other things we severely lag behind our ASEAN competitors along these measures.

We have more to say about each of these key public investments in support of the agriculture and fisheries sector in succeeding columns. Suffice to say at this point that these investments significantly reduce/mitigate risks to the farmers and the lenders. But equally important, they enhance productivity. From the credit point of view, manageable risks and high productivity spell bankability.

How else can we encourage banks to lend to small famers and fisherfolk?

CREDIT GUARANTEE

One way of moderating lending risks to small farmers is through a credit guarantee scheme. This is a common financial intervention all over the world. We had such a scheme for many years but it did not work because many banks still demanded collateral on top of the credit guarantee.

Since 2008, all credit guarantee schemes of government were pooled together in the Agricultural Guarantee Fund Pool (AGFP) under the administration of the Land Bank. AGFP secures up to 85 percent of loans to small farmers against all kinds of default, except fraud.

AGFP appears to be working now. In 2013, it provided guarantee cover to P4.9 billion worth of unsecured loans to 134,208 beneficiaries. AGFP now has 243 partner lending institutions including 67 banks. Banks naturally want to raise the guarantee to 90–95 percent but I think that’s too much. That will make the banks less vigilant.

The payout rate of AGFP is in the order of 10 percent but the guarantee fee is only 3 percent, a loss of seven percent. In 2013, the variance between payout and generated fees was P400 million. With more climate-resilient production systems, higher yielding technologies and more efficient logistics, farm losses ultimately should moderate. In any case, AGFP needs continuing budgetary support which as of now comes from dividends of large government-owned and controlled corporations (GOCCs) as well as from the fines paid by banks for non-compliance with the Agri-Agra law.

It will be ideal if credit guarantee is bundled together with agricultural insurance.

AGRICULTURAL INSURANCE

Taking out insurance and currency hedging are regular features of doing business. All the more so for a business like farming which is subject to floods, very strong winds and drought which are beyond the control of the farmers as well as episodes of disease epidemics and insect outbreaks.

Twenty-five years ago, government established the Philippine Crop Insurance Corporation (PCIC) by virtue of P.D. 1467. The coverage of PCIC was initially confined to rice and corn but its charter was amended in 1995 to include other crops, livestock and fisheries.

Like credit guarantee, the government-initiated agricultural insurance system appears to be working albeit still at a relatively low level. In 2013, PCIC provided coverage to P9.21 billion worth of production loans benefitting 220,233 farmers. Nevertheless, it is worth noting that these performance numbers represented a 35 percent increase in performance from the previous year.

The immediate challenge and opportunity is to increase the capitalization of PCIC, to expand its coverage. In 2014, the Lower House proposed (House Bill 469) to increase the capitalization of PCIC from P2 billion to P10 billion. This should be part of the PNoy legislative agenda for 2015.

Verifying insurance claims cost money and delays frustrate the farmers. Moving forward ACPC and PCIC should study further and refine the weather-index based crop insurance scheme advocated by the World Bank. In the aftermath of a severe weather disturbance which is duly recorded by Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) anyway, the insured farmers automatically get paid without need of field inspections.

The weather index-based scheme, however takes care of weather disturbances but not other risks like pest outbreaks and disease epidemics. An alternative scheme which ACPC conducted a pilot study on was area-based and takes all the risk factors into account. In an area-based insurance scheme, affected insured farmers are automatically compensated when the average yield in the area (not just the insured farmer’s yield) falls below the insurance floor limit. Farmers complain of the delays in processing of claims. ACPC should conduct further research and pilot demonstrations to see whether these new schemes will work better.

January 31, 2015

Most Filipino farmers and fisherfolk are poor because of the low productivity of the livelihoods they engage in. However, the technologies and practices to enhance productivity and reduce risks are available. Their immediate need is for operating capital with which to acquire improved seeds/breeding stock, fertilizers, feeds and crop protection and animal health drugs.

However, of the estimated six million farmers and fisherfolk households, only 28 percent have access to credit. Hence, the need for proactive and innovative government programs to encourage the lending institutions to expand coverage in the countryside.

We can, and do coerce the banks, to lend at least 25 percent of their loan portfolios to the AF sector under the Agri-Agra Law (P.D. 717) as amended by RA 10000. But the more reasonable and lasting way is a combination of: 1) measures to raise productivity and minimize risks to farmers, and 2) schemes to minimize the risks and costs to lending such as credit guarantee, insurance, credit information and quedans.

Credit guarantee and agricultural insurance are globally accepted practices to expand rural credit. We have these two schemes in place — the Agricultural Guarantee Fund Pool (AGFP) under the administration of the Land Bank, and crop, livestock and fishery insurance under the Philippine Crop Insurance Corporation (PCIC). The problem is their current coverage is only in the order of 135,000 to 220,000 farmers out of six million. These are not large enough numbers to make an impact. Their clientele should include at least one million small farmer and fisherfolk borrowers.

ESTABLISH A CREDIT BUREAU FOR AGRICULTURE AND FISHERIES

A third approach to encourage rural lending is systemizing credit information. Gathering information on individual farmers on their credit history, farm size, location, etc. take time and cost money. Information will help lower payment defaults, reduce risk of lending and encourage banks to lend thereby increasing access to credit for all borrowers. Among our neighbors Singapore, Malaysia and Thailand have fully functioning credit bureaus.

The Credit Information System Act of 2008 legislated the establishment of the Credit Information Corporation (CIC). But up to now it is still not operational.

More advanced is the Registry System for Basic Sectors in Agriculture (RSBSA) initiated by the Department of Budget and Management (DBM) in close coordination with the Department of Agriculture (DA), Department of Agrarian Reform (DAR), Department of the Interior and Local Government (DILG) and the National Anti-Poverty Commission (NAPC). The RSBSA gathers baseline information about farmers, farm laborers and fisherfolk as well as the geographical coordinates of their households. These data are very relevant in the identification and location of target beneficiaries of agriculture-related programs and services. With the Registry, phantom farmers and households should be a thing of the past. The RSBSA partly satisfy the needs of the banks for information but what we need is a real credit bureau.

REHABILITATE QUEDANCOR

Another way to encourage banks to lend to farmers is by way of warehouse receipts or quedans. Farmers deposit their products in bonded warehouses and as proof of ownership obtain warehouse receipts which they can in turn use as credit collateral.

Time of planting and/or harvest are usually climate-determined. Thus at harvest time, the local markets are flooded and as a consequence farm gate prices plummet. By temporarily storing their products in warehouses, farmers can wait for better prices. The quedan system therefore has the added benefit of helping farmers manage market price risks.

The original Quedan Guarantee Fund Board was organized in 1978 for rice farmers to deposit their palay in National Grains Authority (NGA)-bonded warehouses. This was consequently expanded to other commodities with its reorganization into Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) in 1992.

The quedan system has worked well with the sugar industry. The hope that QUEDANCOR will work as well with rice, corn and other commodities did not pan out. A call for review of QUEDANCOR and its rehabilitation was one of the topics discussed during the 2011 credit summit.

If politics are kept out of QUEDANCOR operations, if we hire professional managers, and appoint well-vetted and knowledgeable professionals in its Board to provide policy direction and oversight, it should work. This is not as simple as it reads but either we help QUEDANCOR shape up or we close it down and let Congress resurrect it with another acronym. Our sugar industry people who are knowledgeable of quedans should be able to help.

SCALE UP AMCFP TO P50 BILLION

Private lending institutions (commercial banks, thrift banks, cooperative and rural banks, microfinance organizations and some accredited NGOs) provide 90 percent of the lending to the agriculture and fisheries (AF) sector. This is the way it should be and the main thrust of government should be to encourage these Rural Financial Institutions (RFIs) to lend more.

The balance of the 10 percent comes from two government banks, mainly Land Bank of the Philippines and to a less extent the Development Bank of the Philippines (DBP). Land Bank derives a large part of its funds from the Agro-industry Modernization Credit and Financing Program (AMCFP), the umbrella credit program under the Agriculture and Fisheries Modernization Act of 1997 (AFMA). Under AFMA the AMCFP was supposed to receive P2 billion during the first year of implementation and P1.7 billion each year for the succeeding six years for a total capitalization of P12 billion.

Unfortunately, the annual level of funding remained at the historic level of less than P400 million. It was only in 2012 under the PNoy administration when ACMFP started to receive P1.12 billion, still short and 15 years late.

The budget appropriations for the AMCFP should therefore be scaled up to make good on the intent of AFMA. The 22 percent of the six million farm households who wanted and attempted to but unable to borrow is in the order of 1,320,000. However, the 2014 budget of P1.12 billion was programed to reach only 64,000 farmer-beneficiaries. Hence instead of P12 billion cumulative funding to AMCFP, the target ought to be P50 billion, i.e. P5 billion each year for the next ten years.

To rationalize and appreciate the need for continuing government support for rural credit, it will be useful to benchmark ourselves against what our neighbors are doing. The current lending rate to small farmers in the Philippines is in the order of 18-36 percent. Compare this with the interest rates offered by government banks in Thailand (6 percent); Indonesia and Vietnam (12 percent); India, zero interest if loan is repaid in six months, and China, five percent of which government further subsidizes four percent, and the farmer-borrower ends up paying only one percent.

Thus, among our neighbors against whom our small farmers have to compete, two things stand out : 1) dedicated government banks continue to play a key role in rural lending, and 2) the pass on lending rate to small farmers is zero to 12 percent. Thus in order to level the playing field at least as far as cost of money is concerned, farm credit interest to the Filipino farmers should be less than 12 percent per annum.

February 7, 2015

Among our neighbors, dedicated banks for agriculture play key roles in rural lending. And the pass-on lending rate to farmers ranges from zero in India if loan is repaid in six months; one percent interest rate to farmers in China; six percent for Thai farmers; and 12 percent for farmers in Indonesia and Vietnam. Thus, in order to level the playing field as far as credit is concerned with our neighbor-competitors, farm credit interest to Filipino farmers which currently is 18–36 percent should be brought down to less than 12 percent per annum.

ZERO INTEREST TO RURAL LENDERS

To align our effective lending rates to our farmers with the competition, without jeopardizing the health of the lenders, the obvious way is to zero out the cost of money to the rural financing institutions (RFIs).

Effective lending rates are based on cost of money plus cost of lending plus bank margin. With the cost of money zeroed out, the variables left are the cost of lending (in the order of 4–8 percent) and bank margin. The RFIs will still compete for clients based on how efficient they are, the level of bank margin they are willing to accept and of course intangibles like location, organization, convenience, and farmer-friendly bank officers and agents.

However, the zero cost of money to the rural lenders is in conflict with the market rates philosophy of our finance managers and academic economists who argue that interest rates to farmers do not matter as shown by the 43 percent of farmer-borrowers who continue to patronize informal lenders despite onerous rates and exploitative conditions of lending. This reasoning is specious, i.e. plausible but false. As they say in Tagalog “Hawak sa patalim.” If one has no choice, one takes whatever terms are on offer, even how bitter.

The cost of money, of course, matters in business, whether you are a small farmer-entrepreneur or a big corporation. That’s why large corporations pay big money to hotshot chief financial officers (CFOs) whose job is to keep the corporate costs for capex and operating capital to the minimum. Why should it be different for small farmers?

Where will the cheap money for AMCFP come from? One source is official development assistance (ODA). ODA loans from the World Bank, (WB), Asian Development Bank (ADB), Japan International Cooperation Agency (JICA) and other bilateral sources come at very concessional rates, with grace periods and long repayment durations stretching to 40 years. Without the foreign currency hedging fee imposed by Department of Finance (DOF), these ODA loan interests are in the order of 3–4 percent, just matching inflation.

Another source are the funds the Department of Agriculture (DA) spends for free distribution of seeds, breeding stock, fertilizers, chemicals and farm equipment. This practice is wasteful and often the source of graft. These funds are better realigned for subsidized credit.

The interest subsidy to the proposed P50 billion AMCFP pool is P1.5–P2.0 billion per annum. This is much less than the P60 billion per year which we invest in the Conditional Cash Transfer (CCT) program for the poor. Consider also that the returns from the P1.5–P2.0-billion interest subsidy to farmers can be realized in four months while the returns from CCT investment come after a generation!

MAINSTREAMING INFORMAL LENDERS

If zero interest rate to rural lending institutions is contentious, mainstreaming informal lenders is even more controversial. But why not!?

The fact that informal lenders continue to proliferate in the countryside only goes to show they are performing economic and social functions valued by the unbankable and underserved poor. Farmers with dismal credit records, no collateral to offer, farming marginal land without irrigation and located far from civilization will not be entertained by banks, They have no choice but to go to money lenders (5/6 operators), traders, rice/corn millers, fertilizers and seed dealers, and to generous and sympathetic friends and relatives.

However, many of these informal money lenders themselves borrow from banks. If we provide them access to cheap money with which to lend to small farmers, there will be more competition and put downward pressure on interest. At least in theory.

In fairness to these informal money lenders reaching the unbankable and underserved is hard work and could be a very risky business. A report in the Hindustan Times called attention to the physical perils (hold ups, beatings and worse) Filipino Bombay lenders endure.

But how do we provide access to cheap, subsidized funds in the AMCFP to informal lenders for relending to farmers?

Feed mills, grain centers, rice and corn mills, food processors, supermarkets, fertilizer, seed and farm equipment distributors actually advance cash and/or inputs to small farmers. They actually function as informal lenders and can serve as conduits. They are large and safe enough to be accredited as depositories of subsidized AMCFP funds. These cheap funds could be an incentive especially for feed mills, food processors and supermarkets for purposely including small farmers in their raw materials supply chains. They should welcome the privilege of helping small farmers while expanding their business.

Alternatively, large corporations not necessarily engaged in agriculture but with well-established national distribution networks may volunteer as conduits for AMCFP funds for relending to informal lenders. They may shoulder the modest cost of lending as part of their corporate social responsibility (CSR) commitment or they may be partly reimbursed by government for the effort.

The risk of diversion of subsidized AMCFP funds to real estate and other more profitable non-agriculture uses is very real. The conduits and informal lenders must submit clear proof that borrowed funds went to farmers/fisherfolk identified in the Registry System for Basic Sectors in Agriculture (RSBSA). The penalties should be severe, and in exceptional cases, they should be held criminally accountable.

Mainstreaming informal lenders cannot be business-as-usual. We have to think out-of-the-box and experiment with different modalities.

February 14, 2015

SUMMARY AND RECOMMENDATIONS

Most farmers and fisherfolk are poor because of the low productivity of the livelihoods they are engaged in. The technology and means to enhance productivity and minimize risks are available. What many of them need is operating capital with which to acquire improved seeds and breeding stock, fertilizers, animal and fish feeds, crop protection and animal and fish health medicines.

The agriculture and fisheries sector (AF) contributed 12 percent of our Gross Domestic Product (GDP) in 2013. However, the sector received only 1.93 percent of the total loans provided by the banking system. Worse, primary agriculture production, the part of the agriculture value chain which is most risky and in which small farmers are most involved received only 0.63 percent. This gross mismatch between economic contribution and access to production loans demonstrates dramatically what ails Philippine agriculture and fisheries.

Of the estimated six million small farmers and fisherfolk households, only 28 percent are able to obtain credit. Twenty-two percent want and attempt to but are unable to borrow. And of the 28 percent who are able to receive credit, 43 percent obtain their funds from informal sources, often at onerous interest rates and exploitative lending conditions.

Actually, the bulk (90 percent) of the loans for the AF sector come from private lending institutions like commercial banks, thrift banks, cooperative banks, rural banks, microfinance institutions and some accredited NGOs. Thus the main thrust of government should be to provide incentives to these rural financial institutions (RFIs) to lend more.

Coercing the banks to lend at least 25 percent of their loanable funds legislated under PD714, later amended by RA 10000, is a heavy handed way of redirecting much needed credit to the sector. The more reasonable and lasting way is by a combination of 1) measures to enhance productivity and minimize risks to farmers, and 2) schemes to reduce risks and costs of lending.

For the former, we have to continue investing in rural infrastructure and rural institutions e.g. irrigation and drainage; farm-to-market roads; rural electrification; modern grain centers, slaughterhouses, dressing plants, and fish ports; research, development and higher education in agriculture, forestry and fisheries, and to farmers training and rural extension.

However, for many farmers and fisherfolk, their immediate need is for operating capital with which to purchase productivity enhancing and risk mitigating inputs. These are the immediate low hanging fruits with which to raise productivity, improve income of farmers and competitiveness for the AF sector.

And indeed in fairness to our rural economists and lending specialists after so much trial and error, now we do have a credible strategic plan developed by the Agricultural Credit Policy Council (ACPC), an office in the Department of Agriculture (DA), which is tasked with providing policy direction and oversight to rural lending. What we need to do now is to scale up, fine-tune and execute.

RECOMMENDATIONS

Specifically, the Agricultural Guarantee Loan Fund (AGLF) administered by the Land Bank which secures up to 85 percent of loans extended to small farmers against all kinds of default, except fraud, should be scaled up. In 2013, its beneficiaries numbered 134,000. In order to make a significant impact, the target ought to be a million out of the potential six million small farmers and fisherfolk households borrowers.

The same is true with agricultural insurance which help farmers cope with natural calamities and major pests and diseases outbreaks. The Philippine Crop Insurance Corporation (PCIC) in 2013 provided cover to only 220,000 farmers. PCIC operations are constrained by its narrow capitalization. We need immediate legislation to raise capitalization of PCIC from P2 billion to P10 billion.

In addition, PCIC should adopt new procedures such as weather-indexed and area-based schemes to facilitate processing of insurance claims. Also, agricultural insurance should be bundled up with loan guarantee to be more effective and comprehensive.

Gathering information on individual farmers every time they borrow — on their credit history, family circumstances, farm size, access to other resources and location — take time and money. Among our neighbors, Singapore, Malaysia and Thailand have fully functioning credit bureaus. Let’s put our act together and finally implement the Credit Information System Act of 2008, which legislated the establishment of the Credit Information Corporation (CIC).

In the meantime, the CIC can build upon the Registry System of Basic Sectors in Agriculture (RSBSA) conceived by Secretary Butch Abad and the Department of Budget and Management (DBM) to identify and geographically locate small farmers and fisherfolk households for proper targeting and eliminating phantom households in the process.

Another way to encourage banks to lend to farmers is by way of warehouse receipts or quedans. Farmers deposit their harvests in bonded warehouses and as proof of ownership obtain quedans which they can use as credit collateral.

The quedan system works for sugar. Let’s rehabilitate the Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) and make it work for other commodities. This is easier said than done but by now we should know what went wrong the first time around.

Filipino farmers pay 18–36 percent interest on their loans. Their counterparts/competitors in India pay zero percent if the loan is repaid in six months. Chinese farmers pay only one percent; Thai farmers, four percent and farmers in Indonesia and Vietnam, 12 percent. In order to level the playing field, we should bring down their cost of money to less than 12 percent.

One way to achieve this is to zero out the cost of money to the rural lenders — to Land Bank itself and the commercial, thrift, cooperative and rural banks and the microfinance institutions — by way of special interest-free deposits from the Agro-Industry Modernization Credit and Financing Program (AMCFP). The AMCFP is the subsidized farm credit fund created under the Agriculture and Fisheries Modernization Act of 1997 (AFMA).

The AMCFP should be scaled up from P12 billion to P50 billion over a ten-year period i.e. P5 billion per year in the General Appropriations Act (GAA) passed by Congress. The annual interest subsidy to a P50 billion AMCFP is only P1.5 billion to P2.0 billion. This is much less than the P60 billion Congress allots each year for the Conditional Cash Transfer (CCT) program to eradicate poverty. Moreover, the returns from credit subsidy to poor farmers can be realized in four months while the returns from investments in CCT come after a generation.

Finally, the most contentious and controversial — mainstreaming informal lenders. The fact that informal lenders continue to proliferate in the countryside only goes to show that they are performing economic and social functions valued by the unbankable and underserved poor. Let’s mainstream informal lenders as much as we can. With proper safeguards we should give them access to the subsidized AMCFP to generate more competition and exert downward pressure on interest. Mainstreaming informal lenders cannot be business-as-usual. We have to think out of the box and experiment with different modalities.

***

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). For any feedback , email eqjavier@yahoo.com.

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