The need to address farm credit issues has now become even more vital amid the increasing forces of globalization and economic liberalization on the financial and agricultural markets in the region, which has narrowed the policy options of the governments in many countries. Likewise, credit institutions have to observe more rigid rules following international standards, and are now restricted to lessen their traditional role of protecting the interests of the farmers. Trade liberalization has also led to a considerable decrease of agricultural product prices, consequently making farmers' cash-flows unstable. In this process, small-scale farmers in Asia are likely to experience harsher farm credit environment.
It is imperative, therefore, to enhance the efficiency and effectiveness of farm credit programs to cushion the impact of these recent trends on small-scale farmers, particularly the potential destabilizing effects of uncontrolled short-term capital flows and increased exposure to price risk. This seminar served as a venue for the exchange and sharing of information and policy implications on farm credit issues among countries in Asia. Specifically, the activity sought to address three major problems: the debt burden of farmers and current programs aimed at helping farmers in debt; improving access to farm credit by small-scale farmers; and financial institutions' sustainability and management of non-performing loans.
Korea's efforts and initiatives in improving its agricultural finance system provided valuable insights and lessons for other Asian countries to emulate. Under the changing economic environment, and with the opening of the Korean agricultural market, including the rural financial market, the attainment of improved competitiveness has become the country's main agricultural development policy. This policy is being realized by promoting production of high-quality and high-safety farm products; modernizing agricultural cooperative marketing system; and establishing effective supervised credit system especially for agricultural credit supply. In the context of market liberalization and globalization, the cooperative approach is one of the best means to protect small-scale farmers from adverse economic impacts due to its self-help and participatory concepts.
To achieve overall improvement of the agricultural finance system, every country must address the following development issues: 1) enhancing capital market flexibility through the continuous improvement of banking services and techniques, and adopting reforms toward a universal banking system catering to both farm and non-farm credit; 2) improving management efficiency through effective monitoring and evaluation system and development of cost-effective financial innovation; and 3) strengthening supervised credit system.
In some developing Asian countries, agricultural credit policy heavily relies on commercial banking, the rigid mechanism of which is not compatible with the resources of the small-scale farmers. This has resulted to lower access by the farmers to financial resources. Important lessons from past rural credit programs point to the need to redesign or improve delivery mechanism to minimize institutional barriers and, hence, open access of small-scale farmers to credit. In developing countries where physical collateral is a major problem, land certification program could be one of the national policy options. Sustainable microfinance institutions (MFIs) could also be established, and could lead to modified-conventional banking system based on the capacity and resources of the small-scale farmers.
The problem of farm household debt is a sign of agricultural policy failure in some Asian countries. Hence, the government plays a big role in terms of providing debt measures focused mainly on postponement of repayment schedules, lowering interest rates of policy loans, or providing concessionary loans to replace unfavorable loans. However, while debt measures are intended to help borrowers and contribute to the stabilization of the farm household economy and rural communities, their effectiveness in solving the problem is often questioned. This is because of the substantial moral hazards that they cause such as disincentives to normal repayments and deterioration of income redistribution.
The prospect of debt restructuring is gloomy in many countries because there is no immediate simple solution for this complicated problem. For one, it is difficult to expect that the debt problem will be solved without sufficient income growth among farm households, but most farmers believe that the environment surrounding the agricultural sector is too difficult to overcome. Also, trade liberalization will further lower down the barriers to the inflow of imported agricultural products to domestic markets, making it more difficult for local producers to compete. Some of the issues raised on the problem of debt burden of small-scale farmers include lending priority, credit line and repayment, interest rates and collateral, and strengthening the role of local organizations.
Agricultural development is considered as the foundation of industrial development and, consequently of a country's overall economic development. But to attain agricultural development, every government must consider agricultural credit as an important policy. The basic principle of reform in agricultural finance is to maintain and repair instead of to destroy or take apart the whole system.
Agricultural finance is vital to the achievement of agricultural policy objectives, and should not be regarded and treated as a general finance system, especially during this era of agricultural trade liberalization when the agricultural sector, the rural society, and the farmers need all the help and assistance they can get to cope with the necessary transformation/adjustment.
To improve the agricultural finance system, some recommendations include integrating individual credit departments, providing a better environment of operation, and raising the efficiency and competitiveness of such credit departments within the financial market. Agricultural finance policies must also be continuously developed to ensure the sustainable development of the agricultural finance system. It is also crucial to reconstruct the whole system of farmers' associations so that the problems of credit departments could be solved fundamentally.
In some developed Asian countries, credit guarantee fund is established for the liabilities of promising farmers and fishermen who do not have enough collateral, and to enable them to have better access to credit facilities from loan providers. Some of the present challenges faced by credit guarantee systems are: enhancing the financing of the guarantee system and making it more effective by more fund injection from commercial banks as well as from government institutions; stricter credit appraisal and guarantee scoring to prevent moral hazard of contracting institutions by applying stricter application review procedure; and, to facilitate the development of advanced agricultural industries in view of greater competition brought about by the WTO, providing more loans to biotechnology research and business or innovative agricultural and fishing ventures.
Credit risk management is important to prevent agricultural cooperatives' insolvency. In most Asian countries, local agricultural cooperatives have a limitation in managing credit risk because they do not specialize on credit activities, but instead conduct multi-functions such as marketing, supply, services, and credit. Small local cooperatives usually are not able to adapt to changes in business environment and to use advanced risk management techniques. Geographical regulation, in which clients are determined by geographical location, also makes local cooperatives inefficient. With the advent of financial deregulation and liberalization of capital market, competition among financial institutions has become intense. This means that minimum capital requirements, supervisory review, and transparency for banks will have to be intensified with incentive-based approaches to risk and capital adequacy management. Consequently, capital requirement and risk management of local agricultural cooperatives will have to be reformed as well.
Agriculture remains to be an important sector in every country, whether its share in the Gross Domestic Product (GDP) is large or small. Hence, agricultural finance and/or credit are essential to the farmers and to the improvement of the rural economy in the region. Within Asia, agricultural finance systems differ among countries, due primarily to their differences in socio-economic conditions and stage of economic development. There may not be a unique system which is applicable to all countries.
The demand for agricultural credit is increasing parallel to meeting the requirements of increasing agricultural productivity and improving the livelihood of Asian farmers. However, as a result of economic globalization and trade liberalization, small-scale farmers in the region face keen competition with foreign farm products, making it difficult to improve the relative level of farm income. This, in turn, has unfavorable impact on the creditability and payment ability of the farmers. Effective measures must be taken to solve the increasing debt burden of farmers, particularly to raise the competitiveness and sustainability of agricultural banking institutes.
For the survival and competitiveness of agricultural banking institutes, their efficiency must be enhanced through better facilities, manpower and services, and by expanding their scale/coverage. Because of the specific nature of agricultural finance, there is a need to establish specific laws and regulations, and banking and credit institutes in this area. While farm credit guarantee systems have been established in some developed countries in the region, similar systems have yet to be established in developing countries. Inspection system, both internal and external, is also essential for the sound operation of agricultural banking institutes.
Most importantly, while it is essential to improve agricultural credit system and banking institutes, it is fundamental to raise agricultural productivity, competitiveness and farm income, as well as to reduce the risk and uncertainty of farming to ensure the improvement of the region's rural economy.
Held at the Grand Hilton Hotel, Seoul, Korea on June 21-25
No. of countries participating: 7 (Indonesia, Taiwan ROC, Japan, Vietnam, Korea, Philippines, Thailand)
No. of papers presented: 12
No. of participants: 60 plus observers
Cosponsor: National Agricultural Cooperative Federation (NACF), Korea
For further information, contact:
Mr. In-Woo Lee, FFTC Agricultural Economist
Figure 1 Participants of the International Seminar on Farm Credit Issues in Asia Held in Korea
Figure 2 Goyang Agricultural Marketing Complex in Korea