5 managing risk in agriculture by mr. ramon yedra

Agricultural Credit Policy Council

4th Microfinance Best Practices Forum

June 9-10, 2011, Cebu City

By Ramon C. Yedra, Ph.D

Deputy Executive Director



1. State of Agricultural Credit in the Country

- Policy Framework - Some Key Indicators

2. Managing Risk in Agriculture

- Insurance and Guarantee - Agricultural Microfinance

3. Actions Needed


I. State of Agricultural Credit in the Philippines

Policy Framework: RA 8435 or the Agriculture and Fisheries Modernization Act (AFMA) of 1997

• Greater role of private sector in providing financial services

• Phase out of lending by gov’t line agencies • Adoption of market-determined interest rates• Creation of the Agro-Industry Modernization Credit

and Financing Program (AMCFP) as the DA umbrella financing program


State of Agricultural Credit Key Indicators

1.Bank Lending to Agriculture

• Average share of agri loans to total loans by banks (2001 to 2010) : 3%.

• In 2010, banks lent P522B, 19% of total loanable funds. Only rural banks were able to comply with PD 717 with a compliance ratio of 36%.

• Banks finance only about 30% of total credit requirements of major commodities


2. Borrowing incidence among small farmers

• Farmers who borrowed increased from 28% in 1995-1996 to 63% in 2006-2007.

• Those who borrowed from formal sources steadily increased from 24% (1997) to 43% (2007) as borrowers from informal lenders decreased from 76% to 50%

State of Agricultural Credit Key Indicators


II. Managing Risk in Agriculture

• Risk in agriculture remains a formidable challenge among farmers and rural lenders

• Production risk factors : weather, pests and diseases • Market risk : unpredictable and fluctuating prices

• Weather a major concern as the Philippines is visited by 19 to 20 typhoons a year.

• Climate change: frequent and longer droughts, excessive rainfall and strong typhoons


Managing Risk in Agriculture

Two levels

Agricultural insurance - addresses production risks faced by farmer-borrowers

Credit guarantee- addresses credit risks faced by financial institutions.


Managing Risks in Agriculture:Crop Insurance

• The Philippine Crop Insurance Corporation (PCIC). Established in 1978, PCIC is the government agency mandated to implement and manage an agricultural insurance program for small farmers.

• PCIC’s insurance programs provide protection to agricultural producers against losses due to natural calamities, pests and diseases.


The Philippine Crop Insurance Corporation (PCIC)

• Insurance products: Rice and corn Insurance, High Value Commercial Crops Insurance, Livestock Insurance, Agricultural Asset Insurance and credit-life insurance and accident insurance.

• Insurance for rice and corn remain as PCIC’s priority, constituting 84% of its total coverage.



The Philippine Crop Insurance Corporation (PCIC)

Performance:

Government premium subsidy increased from P113M in 2008 to P183M, enabling PCIC to increase its insurance coverage from

50,000 farmers to 98,579 farmers in 2010 with P5.92 B crops/livestock insured.



2. Credit Guarantee

Credit guarantee is a risk-reducing mechanism for banks and other financial institutions to encourage them to lend to socially-desirable sectors such as small farmers. Since most marginalized farmers cannot present acceptable collateral to banks, credit guarantees are offered as “substitute” collaterals.



• The Agricultural Guarantee Fund Pool (AGFP). The AGFP was created by virtue of Presidential Administrative Order No. 225-A in May 2008 that instructed government corporations and government financial institutions to contribute 5 percent of their 2007 surplus funds to a fund pool that would be utilized to guarantee loans of small farmers engaged in food crops.

Managing Risk in AgricultureCredit Guarantee


The Agricultural Guarantee Fund Pool (AGFP)

• Offers guarantee cover to lending institutions (banks, cooperatives, agri-business entities) for unsecured loans extended to small farmers.

• Covers up to 85% of the loan exposure of lending institutions.

• Covers all types of risks of default including nonpayment due to weather, pest and diseases, and other fortuitous events, except those arising from willful default and/or fraud.



The Agricultural Guarantee Fund Pool (AGFP)

As of April 31, 2011, 354 financial institutions have been provided with guarantee cover to loans of 124,761 farmers amounting to P4.9B (of which P1.2B is outstanding).



3. Agricultural Microfinance

Encouraging farm households to diversify

In 2003, ACPC piloted implementation of the Rural Household Business Financing (RHBF) Program.



RHBF Features

Encourages Farmers to Diversify Income Sources

• Provides financing for both farm production as well as off-farm/non-farm livelihood projects to diversify income and

risk.• The farmer, his spouse, or any member of the household of legal age may borrow for income-generating projects.

Managing Risk in AgricultureRBHF


RHBF FeaturesCashflow-based lending

Repayment capacity assessed through an evaluation of household’s financial cash flow.

Repayment Scheme: Weekly/monthly amortization on a portion of the loan plus balloon payment on the remaining portion of the loan at maturity.

Managing Risk in AgricultureRBHF


Lessons Learned• Pilot project ended in 2006 involving 12 partner

rural banks and 1 coop with a single bank defaulting on its loan (4.6% default rate)

• Microfinance methodologies can work for farm households but there are limitations:

Not all farmers have diversified income

(45% of rice and 49% of corn farmers don’t have non-farm income sources)

Need for protection to cover production risk

Managing Risk in AgricultureRHBF


ACPC Agri-Microfinance Program

ACPC tied-up with PCFC for an Agricultural Microfinance Program in 2009

As of March 2011, the Program has released P103M to 21 MFIs extending loans to 9,333 borrowers

Managing Risk in AgricultureAgricultural Microfinance


III. Actions Needed

1. Agricultural insurance needs to be strengthened. The current coverage is too limited to have significant impact.

2. Agricultural guarantee needs to be continued and expanded to reach out to more lenders and cover other loans (e.g. agricultural microfinance). Initial results are encouraging.


Economy & Finance

5 managing risk in agriculture by mr. ramon yedra