MANILA, Philippines - The agri and fisheries lending program is not resulting in financial inclusion since it still excluded those that really need credit, a study undertaken by the Philippine Institute for Development Studies (PIDS) showed.
The financing program is failing due to the credit rationing behavior of conduit lending institutions, the state research agency said.
‘The government may be going back to an old approach that did not work—the direct credit programs (DCPs),” the PIDS said.
PIDS is the government research institute under the guidance of the National Economic and Development Authority (NEDA).
The program design and guidelines of past DCPs resulted in low repayment rates, small number of program beneficiaries, unsustainable credit programs, and huge fiscal costs on the part of the government, it said.
PIDs economists Ma. Piedad Geron and Gilberto Llanto said the appropriate solution is to build and enhance the capacities of both the banks and the borrowers, if the farmers and fisherfolk are not able to borrow due to their inability to comply with stringent credit policies and requirements of banks.
“Capacity building and adoption of effective credit enhancement mechanisms such as agricultural insurance and guarantee mechanisms may be better alternatives,” said Llanto, who is also PIDS president.
Credit enhancements will encourage banks to be more comfortable with the risks associated with agriculture and thereby reconsider their stringent credit policies.
“It will also enable them to take calculated risks and adopt innovative ways of meeting the credit needs of small farmers and fisherfolk,” PIDs said.
Similarly, building the capacity of small farmers and fisherfolk to meet the basic loan requirements of banks, and implementing a financial literacy program with a particular focus on savings and basic borrower responsibilities, may lead to a bank-client relationship that will build their track record with the banks.
This will enable small farmers and fisherfolk to access credit and other formal financial services in the future.
“In turn, this will help fulfill the goal of financial inclusion for our marginalized sectors,” the PIDS authors said.
In 1998, the Agriculture Fisheries and Modernization Act (AFMA) was enacted, introducing market-based credit and financial policies. It also transferred all direct credit programs in the agriculture sector to the Agriculture Modernization Credit and Financing Program (AMCFP).
The program received a P1-billion flexible credit facility known as the Agriculture and Fisheries Financing Program (AFFP), to augment or fill in the credit gap since banks avoided extending loans to the agriculture sector.
The AFFP releases funds through government financial institutions (GFIs), which administers funds taken from the program for five-years, charges a management fee equivalent to 4.5-percent per annum of loans released, aside from other administrative expenses against the income of the AFFP.
They also have a pass-on fixed interest rate of 15 percent under the wholesale-direct lending scheme.