ile' philippines agricultural credit sector...

Report No. 4117-PH ILE' COy

PhilippinesAgricultural Credit Sector Review

May 12, 1983

Projects DepartmentEast Asia and Pacific Regional Office

FOR OFFICIAL USE ONLY

(N&H

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Peso (P)IF 1.00 = US$ 0.12US$1.00 = P 8.3P 1,000,000 = US$120,000

WEIGHTS AND MEASURES

1 hectare (ha) = 2.47 acres1 kilometer (km) = 0.62 miles1 metric ton (m ton) = 2,204.6 pounds1 kilogram (kg) = 2.2 pounds1 cavan rice = 50 kg20 cavans rice = 1 m ton

ABBREVIATIONS AND ACRONYMS

ACA - Agricultural Credit AdministrationACCFA - Agricultural Credit and Cooperative Financing AdministrationALF - Agricultural Loan FundAMC - Area Marketing CooperativeBOCD - Bureau of Cooperative DevelopmentCB - Central Bank of the PhilippinesCF - Compact FarmCFC - Compact Farm ClustersCRB - Cooperative Rural BankDBP - Development Bank of the PhilippinesDRBSLA - Department of Rural Banks and Savings and Loan AssociationsFMG - Farm Management GroupFSDC - Farm Systems Development CorporationGSIS - Government Service Insurance SystemIEDP - Integrated Estate Development ProgramKB - Commercial BankLBP - Land Bank of the PhilippinesM-99 - Masagana 99MAR - Ministry of Agrarian ReformMLG - Ministry of Local GovernmentMOA - Ministry of AgricultureMNR - Ministry of Natural ResourcesMPWH - Ministry of Public Works and HighwaysNEDA - National Economic and Development AuthorityNFA - National Food AuthorityNIA - National Irrigation AdministrationNIDC - National Investment and Development CorporationPAB - Philippine Amanah BankPCA - Philippine Coconut AuthorityPCAC - Presidential Committee on Agricultural CreditPCI - Philippine Commercial and Industrial BankPDB - Private Development BankPFMG - Professional Farm Management GroupPHILSUCOM - Philippine Sugar CommissionPNB - Philippine National BankRB - Rural BankRDC - Regional Development CouncilRPB - Republic Planters BankSLA - Savings and Loan AssociationSMB - Savings and Mortgage BankSN - Samahang Nayon (Village Cooperatives)SSS - Social Security SystemTBAC - Technical Board for Agricultural CreditUCPB - United Coconut Planters' Bank

FOR OFFICIAL USE ONLY

PHILIPPINES

AGRICULTURAL CREDIT SECTOR REVIEW

PREFACE

This report, based on the findings of a mission which visited the

Philippines in March 1982, reviews the major issues affecting agricultural

credit and makes recommendations on policy and institutional changes to

address these problems. The review was undertaken in view of the serious

problems of arrearages that have emerged in the Bank-assisted credit

projects and Government-financed agricultural credit programs, and the weak

financial condition of many banks engaged in agricultural credit activities.

A major concern was to identify the causes which make agricultural financial

intermediaries excessively reliant on government resources and subsidies for

continued agricultural lending. The draft of this report was discussed with

the Technical Board for Agricultural Credit and the Presidential Committee

on Agricultural Credit during November and December 1982. The comments

received have been appropriately incorporated in the final report. The

report is intended to provide the basis for a continuing Bank-Government

dialogue on appropriate action to strengthen the country-s agricultural

credit system and policies.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PHILIPPINES


Table of Contents

Page No.PREFACE

SUMMARY AND RECOMMENDATIONS ....... ........... i-v

1. THE RURAL SECTOR .1.. . . . . . . . . . . . . . . . . . . . . I

A. Dimensions .1... . . . . . . . . . . . . . . . . . . IB. Composition of the Rural Economy ... . . . . . . . . . . 2C. Agricultural Performance . . . . . . . . . . . . . . . . . 3

2. THE RURAL FINANCIAL MARKET: INSTITUTIONAL ANDNONINSTITUTIONAL ARRANGEMENTS. 6

A. Introduction. 6B. Organization of the Rural Institutional Financial Market . 6C. Noninstitutional Credit Arrangements ... . . . . . . . . 17

3. MAJOR TRENDS IN AGRICULTURAL CREDIT ... . . .... . . . . . 24

A. Introduction .... . . . . . . . . . . . . . . . . . . . 24B. Trends . .. . . . . . . . . . . . . . . . . . . . . . . . 25

- Increased Use of Noninstitutional Credit .25- Trends in Institutional Credit . . . . . . . . . . . . . 25- Mediur- and Long-term Credit ... . . . . . . . . . . . 29- Resource Mobilization ... . . . . . . . . . . . . . . 29

4. GOVERNMENT POLICIES AND PROGRAMS FOR AGRICULTURALCREDIT .... . . . . . . . . . . . . . . . . . . . . . . . 33

A. Introduction .... . . . . . . . . . . . . . . . . . . . 33B. Credit and Extension Programs for Commodity Production . 33C. Agricultural Credit Quota Policy ... . . . . . . . . . . 37D. Agricultural Loan Guarantee Scheme and Crop Insurance . . 38E. Low Interest Rates ... . . . . . . . . . . . . . . . . . 42F. Government Subsidies ... . . . . . . . . . . . . . . . . 45

5. GOVERNMENT AGRICULTURAL POLICIES, PROGRAMS AND INSTI-TUTIONS: THEIR EFFECTS ON AGRICULTURAL INVESTMENT . . . . . 47

A. Introduction .47B. Tenurial Reforms .47

This report was prepared by a review mission which visited the Philippinesin March 1982. The mission consisted of Ramesh Deshpande, J.D. Von Pischke,Robert Hindle, John Macgregor (Bank), and Parviz Maleki and Loretta Sonn(FAO/CP). P. Brereton (Bank) assisted in preparing the report.

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Page No.

C. Support Services . . . . . . . . . . . . . . . . . . . . . 49D. Marketing and Pricing Policies . . . . . . . . . . . . . . 52E. Cooperatives . . . . . . . . . . . . . . . . . . . . . . . 54F. Administrative Organization . . . . . . . . . . . . . . . . 57

6. THE STATUS OF MAJOR INSTITUTIONS IN THE RURAL FINANCIALSECTOR . . . . . . . . 6 . . . . . . . . . . . . . . . . . . 62

A. Philippine National Bank . . . . . . . . . . . . . . . . . 62B. Land Bank of the Philippines . . . . . . . . . . . . . . 65C. Agricultural Credit Administration . . . . . . . . . . . . 69D. Development Bank of the Philippines . . . . . . . . . . . . 71E. Private Commercial Banks . . . . . . . . . . . . . . . . . 77F. The Rural Banking System.. . . . . . 78G. Thrift Banks . . . . . . . . . . . . . . . . . . . 84H. Cooperative Rural Banks .. . . . . . ....... 85I. Institutional Performance in World Bank-assisted Credit

Projects . . . . . . . . . . . . . . . . . . . . . . . 86

7. SUMMARY OVERVIEW, AND A SUGGESTED ACTION PROGRAM . . . . . . . 89

A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . 89B. Problems in Agricultural Credit . . . . . . . . . 91C. An Action Program . . . . . . . . . . . . . . . . . . . . . 98

STATISTICAL ANNEXES . . . . . . . . . . . . . . . . . . . . . . . . 113

TABLES IN TEXT

Table 2.1: Structure of Financial System, 1980 . . . . . . 8Table 2.2: Number of Financial Institutions in

Operation, 1975-80 . . . . . . . . . . . . . 9Table 2.3: Formal Institutions in Rural Financial

Market . .. . . . . . . . . . . . . . 12Table 2.4: Agricultural Loans Granted, by Bank . . . . . . 14Table 2.5: Agricultural Loans as a Percent of

Total Loans, by Bank . . . . . .. . . . . . 15Table 3.1: Composition of Institutional and

Noninstitutional Credit to Agriculture . 25Table 3.2: Agricultural Loans Granted

by Activity, 1972-75 . . . . . . . . . . . . 26Table 3.3: Agricultural Loans Granted, 1975-80 . .27

Table 3.4: Agricultural Loans Granted by Activity,1975-80 . .. . . . . . . . . . . . . . . . 28

Table 4.1: Coverage and Payments of Loan Guarantee Funds . 39Table 4.2: Crop Insurance Premium Rates . . . . . . . . . 40Table 6.1: Agricultural Production Loans Granted by

PNB, 1975-81 . . . . . . . . . . . . . . . . 63Table 6.2: LBP: Agricultural Loans Granted . . . . . . . 66Table 6.3: DBP: Agricultural Loan Approvals . . . . .. 72Table 6.4: DBP: Agricualtural Loan Approvals by Activity 74Table 6.5: DBP's Margin on Agricultural Lending . . . 76Table 6.6: Rural Banks Arrearages under Central

Bank Loans, Septemer/December 1981 .81

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SUMMARY AND RECOMMENDATIONS

1. During the past decade or so, the Philippines- agricultural sectorhas made impressive gains. Overall output has grown at an average rate of4.9% p.a. and the country has achieved self-sufficiency in rice production.The Government has introduced a number of new credit policies and programs tosupport its production objectives, and these have made important contributionsto the sector-s production achievements. As a result of greatly expandedcrop-specific credit programs, made available through a growing network ofgovernment and private banks, many more farmers found themselves able to takeadvantage of the greater opportunities provided by the Government's owninfrastructure investments and by improved extension services. Althoughcredit for medium and longer-term purposes did not expand much, productioncredit grew rapidly throughout the 1970s. Continued growth of theagricultural sector remains crucial for the future of the economy and for the46% of the population who are farmers. The growing availability of credit,for various terms and purposes will be essential to agricultural growth.

2. Despite the strong performance of agriculture during the 1970s, andthe support provided by rural credit institutions over many of those years,the present condition of the rural credit markets is far from healthy. Alarge number of the loans made by both government and private banks havefallen into arrears, disqualifying many borrowers from further loans anddisqualifying the banks from use of discount privileges at the Central Bank(CB). These twin constraints have caused the proportion of institutionalcredit, which rose to 68% in the mid-seventies when the government-sponsoredsupervised credit programs were in full swing (1975), to fall back to only 32%in late 1970s. Currently about two-thirds of all agricultural credit is beingprovided by informal or non-institutional sources -- relatives, friends,traders, landlords, and professional moneylenders. Noninstitutional creditusually costs more than institutional credit, and is generally not availablefor medium- and longer-term loans. In 1980, 98% of bank credit was forshort-term use, i.e., for loans that had to be repaid within 12 months.

3. The unhealthy state into which rural credit institutions have fallenhas not only reduced credit availability but has threatened the viability ofmany of the institutions, both public and private. The Government's majorterm lending institution, the Development Bank of the Philippines (DBP), hasarrears of + 1.1 billion or 65% of the amount due for repayment (para.6.39). The Philippine National Bank (PNB), a government commercial bank, hasarrears of nearly P 200 million (para. 6.06). The privately owned ruralbanks have arrears of over P 1 billion owed to the CB, disqualifying aboutone half of 1,041 banks from further access to rediscounting facilities. Muchof the serious arrearage problem has arisen in the Government-sponsoredsupervised credit programs designed to achieve production targets for specificcrops. Supervised credit does not require collateral, and the drying up ofit has caused a shift towards nonsupervised credit, which almost always

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requires collateral. However, even the performance of non-supervised creditprograms, which provide collateralized loans to farmers and commercialentrepreneurs in relatively high income groups, has not been satisfactorybecause of low subloan collections. A large proportion of small farmers haveno collateral to offer, partly because the land reform program has movedslowly and has not yet given many farmers clear land titles. Thesedevelopments also underlie the return to much greater reliance onnoninstitutional credit.

4. Apart from arrearages the rural credit system has many otherweaknesses that need attention. Some of the more important weaknesses arenoted below:

(a) Rural financial institutions have typically specializedtheir functions, and this has inhibited efficient financialintermediation, led to high transaction costs and a limitedspread of risk, and restricted the range of banking servicesavailable to farmers. Examples of functional specializationrelate to the type of clientele served (small vs. largerfarmers), length of loan (short vs. long-term), type of commodityfinanced (coconut, sugar, etc.) and activity financed(production, marketing or processing). Rural banks, PNB, theLand Bank of the Philippines (LBP), and the Agricultural CreditAdministration (ACA) support smallholder rice and corn productionwhile private commercial banks, DBP and PDBs finance only aselective clientele, usually medium- and large-scale borrowers.

(b) Although there has been a considerable expansion of ruralbanking facilities during the past decade, the country'sbanking system is still highly urban-oriented, leavingmany rural areas seriously "under-banked."

(c) The banking system has not been fully successful in tapping therural savings potential. Although the limited network of ruralcredit institutions partly explains the low mobilization rate, amore important reason has been the government's low interestrate policy which was not adequate to attract larger savings.With inadequate deposits to finance their lending, and lowinterest rates on agricultural loans, rural credit institutionshave had to rely heavily on low-cost funds provided byGovernment.

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(d) The transaction costs of banks handling supervised credithave been high, despite access to low-cost funds throughCB rediscounting. The transaction costs include not onlyadministrative costs (4.5-6.0%) but compulsory insurancepremiums (3%) and the cost of carrying past due loans (4%for rural banks, 12% for PNB). With lending rates regulatedat 12% (15% for corn), many banks found supervised creditlending unprofitable. From the farmers viewpoint, a 12-15%interest cost was not in fact their full borrowing cost: tothis had to be added a 2% service charge, a 3% charge forcompulsory deposits in the Barrio Saving Fund (sincediscontinued), plus a transaction charge of 3%. For manyfarmers, these and other costs have pushed the cost ofinstitutional credit close to that of informal credit, whichis often easier to arrange.

5. A 1980 joint IMF/World Bank review of the Philippine financialsector led the Government to introduce a set of reforms that had two mainobjectives, (a) increased competition among financial institutions to achievegreater efficiency and (b) the greater availability of longer-term credit.One major change designed to help achieve these aims was the deregulation ofinterest rates on both deposits and loans, excluding agricultural loansrefinanced by CB. The benefits of liberalization are unlikely to be felt inagriculture until remedial measures are taken to overcome the difficultiesthat are now preventing rural credit institutions from giving farmers the helpthey need.

Recommendations

6. Chapter 7 of the report suggests an Action Program to nurse therural credit markets back to health. There are three broad sets of problemsthat need to be addressed: (a) limitations on the supply of formal credit tofarmers; (b) institutional weaknesses; and (c) deficiencies in governmentpolicies affecting agricultural credit. The principal means proposed foraddressing these problems are:

(a) Fostering greater competition between formal and informallenders;

(b) Completing the deregulation of interest rates in order topromote greater deposit mobilization in rural areas and theuse of deposit resources for agricultural lending;

(c) Rationalizing and, in phases, eliminating credit subsidies;

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(d) Increasing the efficiency of the rural financial marketsthrough functional de-specialization and the financialrehabilitation of DBP and the private and cooperativerural banks; increased participation of commercial banksand savings and mortgage banks in agricultural lending,especially for medium- and long-term credit; and animproved field-level credit-delivery mechanism, includingthe strengthening of village cooperatives; and

(e) Establishing an agency or mechanism to support retaillending agencies and to coordinate their agriculturalcredit activities.

Implementation of these objectives will require a number of initiatives by theGovernment, including agreement on flexible interest rate policies for thesector, changes in the corporate policies of some banks, a realistic resolu-tion of the problem concerning the large volume of uncollectable debts, andthe creation of a new central mechanism to support retail lending institu-tions. Equally important will be agricultural pricing policies which will, asearly as feasible, turn the terms of trade in favor of agriculture, withemphasis on benefiting the productive activities of small farmers. Some ofthese steps must be taken promptly, but the creation of a sound system ofrural credit will require various actions extending over several years.

1. THE RURAL SECTOR

A. Dimensions

1.01 Agriculture, including forestry and fisheries, plays a dominantrole in the Philippine economy. The country's population is predominantlyrural, with about 70% (34 million people) living in rural areas, two thirdsof whom depend on farming for their livelihood. Over all, more than half ofthe labor force are engaged in agricultural activities. Agricultureproduces about 26% of gross domestic product (GDP) and 60% of aggregateexport receipts.

1.02 Of the total land area of 30 million ha, about 28% is cultivated./INearly three fourths of this is devoted to grains, essentially rice andcorn. Other important crops are coconut, sugarcane, fiber crops, pineapple,banana and tobacco. Almost all of the irrigated area, estimated at 1.2million ha, is planted to rice; rainfed agriculture, which sustains 60% ofthe total farm population, is dominated by mixed farming systems where rice,corn and coconut are grown together with livestock raising.

1.03 The rural scene is characterized by small units farmed by tenantfamilies. The Agricultural Census of 1971 estimated the total number offarm holdings at 2.35 million, 85% of which were less than 5 ha. Theaverage farm size was 3.6 ha for all commodities, 2.7 ha for palay and13.6 ha for sugar. Due to population growth and inheritance customs, theaverage farm may now be even smaller, probably about 2.7 ha, and fragmented.

1.04 Farm productivity is generally low and, combined with landscarcity and the fact that most of the non-marginal lands are already undercultivation, results in low incomes. In 1971, the average family income inrural areas was about P 4,400 (US$580), representing 75% of the nationalaverage. According to the World Bank's 1980 Poverty Report,/2 aboutthree quarters of the poorest 40% of all Filipino families in the 1970slived in rural areas, with per capita incomes equivalent to the 1975 povertyline of P 827 (US$110) /3 or less. While farm size was the most

/1 Effective harvested area is larger due to multiple cropping.

/2 World Bank, "Aspects of Poverty in the Philippines: A Review andAssessment," Report No. 2984-PH, December 1, 1980.

/3 P 1,103 (US$147) for urban areas.

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important variable explaining disparities in income level, poverty incidencevaries considerably among the 13 regions in the country. Together withrelatively poor access to services and social infrastructure, low farmincomes have encouraged migration from the rural to the urban areas,particularly in the Manila region where population grew by more than amillion in the period 1975-1980.

B. Composition of the Rural Economy

1.05 Crop production is the predominant subsector, contributing 61%of gross value added in agriculture./l Livestock and poultry accounted for12%, fisheries 18% and forestry 8% (Annex 1, Table 1)./2

1.06 Food crops are more important than commercial crops in both areaand value of production, occupying some 69% of the planted area and yielding64% of the value of production. Rice is grown on 3.5 million ha, providingthe staple of both urban and rural populations in the lowlands and plains.Corn, the other major food crop, is grown on a subsistence basis on about3.3 million ha, mainly in the uplands where it is complemented by upland riceand root crops. Corn also provides livestock feed. Yields are typicallylow (0.8-0.9 tons per ha).

1.07 The commercial crops area is largely planted to coconut /3(about 3 million ha), followed by sugar, abaca and coffee. Sugarcane andcoconut products account for about 83% of the total value of commercialcrops. Exports of copra have fluctuated widely but those of both dessicatedcoconut and coconut oil have registered steady increases. Despite a muchsmaller magnitude, the two most successful commercial crops in recent yearshave been pineapple and bananas, both developed efficiently as plantationcrops. Cotton production has also increased.

1.08 In livestock, commercial pig and poultry farming has expandedrapidly, while beef production has been lagging behind fast-growing demand.Forty percent of the beef consumed is imported, mainly in the form of cornedbeef. About three quarters of the nearly 2 million farms with cattle -mainly carabao for power - are in rainfed areas, concentrated in the drierand upland zones.

/1 1975 figures.

/2 Gross value added at 1972 constant prices in Annex 1, Table 2.

/3 One third of the population is in one way or another involved inthe coconut industry.

1.09 The country's vast inland fishery resources are estimated toinclude 900,000 ha of freshwater areas, mainly suited for fishpond purposes;about 20% of this potential has been developed. Marine fishing groundscovering about 170 million ha of coastlines have a potential maximum sustain-able yield of 1.95 million tons, of which about 1.25 million tons areexploited. However, some traditional fishing grounds are already overfished,and this has become a major economic and social problem, particularly for the200,000 or so "municipal fishermen" who constitute part of the rural poor.

1.10 Forest resources occupy some 65% of the total land area, or13.7 million ha, most of which is public forest lands. Although commercialforests are estimated to contain 1.9 billion cubic meters of sound woodresources, exploitation has greatly reduced timber stands. Strictersupervision of fellings, planting of fast growing species, and squattercontrol are among new approaches that should enable sustainable exploitationof the forests.

C. Agricultural Performance

1.11 Self-sufficiency in food production, especially in rice, hasconsistently received highest government priority. This objective wasachieved in 1977 through a two-pronged strategy which envisaged: expansionand rehabilitation of irrigation systems to remove the constraint ofinadequate water supplies; and increased use of high-yielding varieties(HYVs), fertilizers and pesticides through the Masagana-99 (M-99) credit-cum-extension program. During the last decade the Philippines also madesignificant progress toward other objectives which included expansion ofagriculture-s share in exports, land reform and land distribution, andconservation of natural resources. Since the early 1970s, the Governmenthas accorded increasing importance to raising income levels of small farmersand fishermen, and reducing income disparities between the rich and the poor,between rural and urban areas and among the rural regions.

1.12 Although in proportion to other sectors of the economy, the contri-bution of agriculture has been declining slowly, from 28.9% of GDP in 1970to 25.5% /1 in 1980, the agricultural sector grew at an annual rate of about4.9% during 1970-80 which was comparable to the performance of other EastAsian countries (Annex 1, Table 3). Increased grain production was associ-ated with the Philippines' shift from being a major importer of rice up to

/1 Preliminary estimate of NEDA.

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1977 to having small exportable surpluses (currently estimated at about200,000 tons a year). Corn production, however, continues to be below thetotal estimated corn consumption for food, feeds and other uses. Output ofvegetables, peas and beans, fruits and nuts, roots and tubers has markedlyand steadily increased. Vegetable and fruit production, however, isconstrained by problems related to post-harvest facilities, marketing anddistribution.

1.13 From a small base, coffee and rubber production have increased bymore than 10a annually, and export potentials are good. Among other exportcrops, results have varied: output of cocoa is estimated to have fallen,while that of abaca and tobacco has essentially remained at the same level.Production of sugar has risen at less than 2.5% p.a. Exports of bananas andpineapple have notably increased, but coconut, still the country's majorforeign exchange earner, has suffered from low world market prices andfluctuating yields due to weather conditions, diseases and the age of thetrees.

1.14 While production of fish, pigs and poultry has expandedsignificantly, value added in the traditional livestock (cattle) subsectorstagnated during the 1970s. However, Government has intensified itsactivities to promote livestock production, in particular through BakahangBarangay and other credit programs.

1.15 Continued agricultural growth will remain crucial for thePhilippines to grapple with its major economic problems. First, althoughthe total population is growing by 2.5% annually, the labor force isprojected to increase by 3.7% annually due to very high fertility rates pre-vailing in the 1960s, before the introduction of family planning programs,and an expected increase in the proportion of working women. Between L980and 1987, the economy will have to find jobs for 5 million people, or700,000 persons annually, if an increase in unemployment is to be prevented.While the manufacturing sector will promote more rapid growth of employment,the labor force is expected to grow so rapidly that most of the incrementwill have to be absorbed by the agricultural sector./l Second, despitesignificant increases in output, the Philippines' agricultural productivitycontinues to be low by international standards. Reaching higher levels; ofproductivity. both in irrigated and rainfed areas, is important for generaleconomic growth and for increased rural incomes. Third, during the lastdecade average rural incomes increased in real terms as the rate of growth

/1 World Bank, "The Philippines - Selected Issues for the 1983-87 Plan.Period," Report No. 3861-PH, June 1, 1982.

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of agricultural production exceeded that of the population by a substantialmargin. But while employment increased by more than 20%, the gains in bothincome and employment were not evenly produced. Fourth, agriculturalstrategies will also have to respond to ongoing efforts to reduce dependenceon imported energy, promote larger domestic resource mobilization and, inthe context of deteriorating terms of trade, reduce dependence on foreignborrowings and promote exports.

1.16 The Government's proposed development plan (1983-87) thereforeenvisages more efficient exploitation of agricultural potential, sustainedself-sufficiency in rice, fish, poultry, pork and fruits and vegetables andexpanded production of export crops, import substitutes and agro-industrycrops. The development of infrastructure, particularly small-scale irriga-tion systems, mini hydro projects, and farm-to-market roads, will receivehigh priority. Agrarian reform is proposed to be intensified. Crop insur-ance will be expanded. Incremental resources are intended to be generatedfrom greater reliance on domestic savings through financial innovations andmore efficient intermediation, development of long-term capital markets,expanded commercial banking, greater reliance on resource mobilizationthrough issue of government securities, and floating interest rates. Thenew plan emphasizes significant improvement in access by a larger section ofthe population to facilities and resources such as infrastructure, credit,raw materials, technology and markets. Formal credit-facilitated agricul-tural development and efficient financial intermediation, particularlyresource mobilization and credit, should support Government's developmentobjectives in agriculture. It is against this background that this reportreviews Philippine agricultural credit.

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2. THE RURAL FINANCIAL MARKET: INSTITUTIONALAND NONINSTITUTIONAL ARRANGEMENTS

A. Introduction

2.01 The Philippine rural financial market consists of a formalinstitutional sector and an informal noninstitutional sector. Institu--tional credit for agriculture is offered by a variety of government- andprivately-owned entities whose lending operations often have rather welldefined emphasis in terms of loan amount (large vs. small loans), duration(long vs. short-term), recipients (commercial operations, agrarian reformbeneficiaries, etc.), commodities (sugar, coconut, etc.) and activity(production, marketing or processing). Noninstitutional credit is offeredby private moneylenders, traders, relatives, friends and landlords. Ittends to be short-term, often requiring no collateral but at interest rateswhich are substantially above those used for institutional credit.

B. Organization of the Rural Institutional Financial Market

2.02 A clear demarcation between the Philippines' rural and nonruralfinancial markets is not feasible /1 since the Manila offices of rural creditinstitutions participate in the rural financial market through resourcemobilization and the extension of credit for agricultural activities. Infact, the Metro Manila area has a sizable share in institutional credit foragriculture. The national financial structure is therefore described belowin order to provide a context for the operations of the rural sector.

Structure of the National Financial System

2.03 The financial sector in the Philippines is relatively well-developed. The sector grew rapidly during the 1960s, and total resources

/1 In the Philippines, rural areas are defined as those with a populationdensity of less than 1,000 persons per sq km and where at least 50% ofthe population is engaged in agricultural activities. By thisdefinition, 99.4% of the total land area of the country is classified asrural, and 84% of the 1970 population are rural dwellers. In thisreport, however, "rural" refers to areas outside Metro Manila, whichrepresent 99.8% of the country's total land area, where 89% of the 1970population reside. Systematic data on financial institutions'activities in "rural" areas and "nonrural" areas are not available.

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of the financial system as a percentage of GNP increased from 48% in 1960 to115% in 1980. During 1975-80, growth in total assets averaged 8% p.a. inreal terms while real GNP grew at 6% (Table 2.1). This growth was accom-panied with and made possible by a significant expansion in the network ofoffices, which increased from 3,396 in 1975 to 4,918 in 1980 (Table 2.2).Exclusive of the Central Bank portfolio, ownership of the sector is aboutequally divided between private and government entities.

2.04 Within the financial sector, the banking system is predominant andcontrols about 60% of total assets, mainly through the commercial banks.Non-banking financial institutions account for a relatively small share oftotal assets, but perform specialized functions not handled by the commer-cial banks, and thus broaden the sector's geographical coverage and range ofservices. Insurance companies and investment houses, for example, areimportant by undertaking resource mobilization and capital formation.

2.05 The Banking Sector. The banking system comprises commercialbanks, rural banks, thrift banks ard specialized government-owned banks.The Central Bank (CB) is responsible for monetary stability and creditregulation. It also ensures availability of credit for agricultural produc-tion and related activities, as far as is consistent with conventionalcentral banking functions.

2.06 Commercial Banks. At the end of World War II, there were 4domestic banks and 4 foreign banks. However, at the end of 1980, thecommercial banking sector included a total of 32 banks, comprising 26 privatedomestic banks, 2 government or semi-government banks and 4 branches offoreign commercial banks. A large number of banks were established between1955-65, in response to government efforts to rehabilitate the bankingindustry and to meet the growing demand for financial services. Thegovernment-owned Philippine National Bank (PNB), established in 1916, is thelargest commercial bank in the country with 175 offices and 25% of the totalassets of the banking system. The five largest private domestic banks have23% of total assets and 616 offices./1 Foreign banks own about 12% of totalassets and operate mainly in Metro Manila.

2.07 Commercial banks operate through 1,503 offices, more than half ofwhich are in Metro Manila (651), Central Luzon (121) and Southern Tagalog(106). Other regions, particularly Ilocos, Cagayan, Visayas and Mindanao

/1 Bank of the Philippine Islands, Allied Bank, Metropolitan Bank, UnitedPlanters Bank and Far East Bank & Trust Co.

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Table 2.1: PHILIPPINES: STRUCTURE OF FINANCIAL SYSTEM, 1980(Billion pesos and percentages)

Asset size Real rates of growth p.a.Compo- 1960- 1965- 1970- 1975-

Amount sition 65 70 75 80(Pesos) - …---------- (%) --------------

Central Bank 65.4 21.1 4.0 6.3 16.8 8.0

Banking SystemCommercial Banks 138.4 44.5 17.2 7.9 12.3 8.8

Private 85.1 = T17T.0 T 8.8 14r.0 73Government 34.6 11.1 17.5 6.3 8.6 2.3Foreign 18.7 6.0 - - - -

Thrift Banks 10.6 3.4 28.2 15.0 -2.9 24.2Savings & Mortgage 7.4 2.4 25.3 14.7 -5.5 25.3Private development banks 1.6 0.5 46.5 9.2 -0.8 18.3Savings & loan associations 1.6 0.5 - - 17.3 25.3

Rural Banks 5.6 1.8 23.0 10.5 14.0 3.2

Other Banks 34.2 11.0 10.0 10.7 7.4 11.4Development Bank of the Phil. 28.9 9.3 10.0 10.7 3.4 72.1Land Bank 5.2 1.7 - 128.0 7.6

Philippine Amanah Bank 0.1 0.0 - - - --8.4

Total Banking System 188.8 60.7 16.4 8.8 10.9 9.6

Nonbank Financial IntermediariesInsurance Companies 27.5 8.9 7.0 4.7 -4.5 6.3Government /a 18.5 6.0 4.8 4.1 -3.0 7.1Private 9.0 2.9 13.3 6.2 -8.0 5.0

Investment Institutions 25.6 8.2 - 16.6 11.2 7.8Finance companies 11.9 3.8 - 9.3 -3.5 14.9Investment companies /b 5.0 1.6 - - - 7.2

Others /c 8.7 2.8 - 37.1 25.8 0.9

Trust Operations 1.7 0.5 - 23.7 18.8 -10.1

Other Financial Intermediaries 2.1 0.6 -8.4 22.3 13.9 -6.8Security dealers & brokers 1.0 0.3 - 111.8 29.7 -8.1Nonbank savings & loan assn. 0.3 0.0 - - -5.3 11.8Agricultural credit admin. 0.5 0.2 -23.3 12.0 -9.0 -9.5Pawnbrokers 0.3 0.0 - - - 11.8

Total Nonbank FinancialIntermediaries 56.9 18.2 11.5 8.5 2.7 9.5

Total Financial System 311.1 100.0 12.0 8.3 10.1 8.2

/a Includes GSIS and SSS.7b Includes mutual funds./c Includes investment houses.

Note: (-) = insignificantn.a. = not availablep = preliminary

Source: Central Bank of the Philippines.

Table 2.2 NUMBER OF FINANCIAL INSTITUTIONS IN OPERATION, 1975-80(As of December 31)

Percentage1975 1976 1977 1978 1979 1980 change 1975-80

of which of which of which of which of which of which of whichTotal head Total head Total head Total head Total head Total head Total head

offices office offices office offices office offices office offices office offices office offices office

Banking Institutions 2,129 891 2,461 934 2,669 998 2,904 1,092 3,206 1,171 3,364 1,164 58.0 30.6Commercial hanks 996 33 1,109 31 1,208 32 1,287 32 1,405 32 1,503 32 50.9 -3.0Thrift banks 246 87 392 95 447 113 509 126 589 134 673 144 173.6 63.6

Private development hanks 86 33 98 33 109 34 117 36 130 38 154 43 79.1 30.3Savings & mortgage banks 91 10 162 10 184 10 207 10 236 10 268 10 189.1 -9.1Stock SLAs 69 44 132 52 154 69 185 80 223 86 251 91 209.9 106.8

Rural banks 820 768 887 805 933 850 1,024 931 1,123 1,002 1,096 985 33.6 28.2Specialized government

banks 67 3 73 3 81 3 84 3 89 3 92 3 37.3 -

Nonbank FinancialInstitutions 1,267 1,232 1,334 1,279 1,246 1,159 1,302 1,198 1,426 1,293 1,554 1,394 22.7 13.1

Investment houses 40 13 43 12 56 12 56 12 57 12 62 12 15.0 7.7Finance companies 319 194 348 219 338 244 419 263 478 300 531 342 66.5 76.3Investment companies 117 117 59 59 59 59 58 58 63 63 62 62 169.6 169.6Securities dealers/brokers 23 23 126 126 128 128 130 130 137 137 141 141 20.5 20.5Fund managers 194 194 178 178 9 9 9 9 9 9 12 12 - -

Lending investors 38 38 31 30 34 33 40 39 53 50 61 57 60.5 50.0Pawnshops 462 428 472 430 492 447 508 460 546 498 598 544 29.4 27.1Money brokers - - 2 2 3 3 4 4 5 5 5 5 - -Nonstock SALs 67 67 68 68 70 70 71 71 71 71 72 72 7. 5 7. 5Mutual RLAs 7 7 7 7 7 7 7 7 7 7 7 7 - -

Private insuranicecompanies /a n.a. 149 n.a. 146 n.a. 145 n.a. 143 n.a. 141 n.a. 137

GSIS /a and SSS n.a. 2 n.a. 2 n.a. 2 n.a. 2 - - - - - -

Covernment nonhank finan-cial institutions - - - - - -

Total 3, 396 2,123 3,795 2,213 3,915 2,1 57 4,206 2,290 4,632 2,464 4,918 2,558 44.8 20.5

/I Refers to fiscal year endiing June 30.


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are less well served in terms of the ratio of number of offices to thenumber of municipalities and cities in the regions (Annex 2, Tables 1 and2). The commercial banks' offices outside Metro Manila (852 offices) aresecond in network only to that of the rural banks (1,125 offices).

2.08 Commercial bank credit is apportioned over a wide range ofactivities, comprising manufacturing and industry (35.1%); trade, insuranceand mining (34.3%); and agriculture (10-15%). The agricultural lending ofprivate commercial banks is mainly for large commercial plantations,processing and marketing. PNB does however lend to smallholders, particu-larly to finance agricultural production under government-sponsoredcommodity credit programs.

2.09 Thrift Banks. The thrift banks comprise 10 savings and mortgagebanks (SMBs), 91 stock savings and loan associations (SLAs) and 43 develop-ment banks. Together, they recorded the highest growth rate in total bankingassets during 1975-80, at about 24% p.a. in real terms, compared with 8.2%for the entire financial sector. The thrift banks account for about 9% ofthe total deposits of the banking system. SMBs and SLAs specialize inpersonal loans for consumer goods, housing and real estate, while thedevelopment banks provide medium- and long-term credit for agriculture andindustry, especially to small and medium enterprises. The development banksare specialized institutions which, though predominantly private, are partlyowned by the Government-owned Development Bank of the Philippines throughits purchase of shares in these institutions which helps them to extendmedium-and long-term credit to industry and agriculture.

2.10 Rural Banks. The more than 1,000 rural banks, generally unitbanks, constitute an important component of the rural financial market inview of their wide geographical coverage, proximity to rural areas andaccessibility to the farming community. Rural banks are generally family-owned although partially capitalized by government shares. In addition,25 cooperative rural banks have been organized, primarily by farmerorganizations (samahang nayons), to provide financial services to theirmembers. The rural banks' share in the total assets of the financial systemis less than 2%, although in 1975 they provided about 50% of the totalinstitutional production credit for cereals, the absolute amount of whichhas steadily declined as has the number of loans. Rural bank lending ismostly short-term for production of cereals, livestock and poultry, and to alesser extent for export crops like sugar and coconut. Rural banks alsoextend credit to small industries and enterprises. The rural banks' depositliabilities constitute about 2% of the total deposit liabilities of thebanking system.

2.11 The rural banking system has actively supported the Government'scommodity production programs, particularly for rice. In view of theircrucial role in the rural economy, rural banks receive financial incentivesand subloan guarantees from the Government as well as low-cost rediscountingfacilities from the Central Bank. At present, the rural banking system

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faces major financial problems such as low capital, poor liquidity onaccount of high arrearages, ineligibility for access to Central Bank fundsdue to high subloan arrearage levels, an inadequate number of field staff,and nonviability due to low turnover.

2.12 Specialized Government Banks. The government-owned DevelopmentBank of the Philippines (DBP), the Land Bank of the Philippines (LBP), andthe Philippine Amanah Bank (PAB) provide long-term resources to industry andagriculture and perform specialized functions important to the Government'spolitical, socioeconomic and development objectives. Altogether, they havea total of 92 offices. DBP was established in 1958, with a mandate tosupply credit for industry, housing, and agriculture. In 1964, it was givenresponsibility for assisting in the establishment of smaller privatedevelopment banks (PDBs) in order to provide decentralized credit facilitiesto small enterprises. DBP's current lending is largely for industry (69%),followed by real estate (19%) and agriculture (12%). DBP-s resources comefrom equity contributions by the Government, borrowings from CB, foreignborrowings, deposits from the Government, sale of DBP bonds and internalcash generation. LBP, established in 1963, functions as the financial armof the Government's land reform program, although it has recently begun toaccept and undertake all functions performed by a commercial bank. PABprovides banking services including credit to Muslim areas in Mindanao.

2.13 Nonbank Financial Intermediaries. Nonbank financial institutionsare widely diverse, comprising insurance and finance companies, investmenthouses, trusts and specialized government institutions. The insurancecompanies primarily support industrial and commercial activities throughshort-term investments and loans, besides policy loans to customers. TheGovernment Service Insurance System (GSIS) and the Social Security System(SSS), also government-owned, provide benefits to government employees andprivate sector employees, respectively. While both GSIS and SSS extendloans to policy holders, GSIS allocates about 33% of its resources forpurchase of stocks and bonds, and private and government securities, SSSinvests about 45% of its resources in notes receivable issued by PNB andDBP. The government insurance and social security systems are alsoimportant sources of longer-term funds for government institutions otherthan DBP and PNB.

2.14 Investment houses engage in underwriting corporate securities,equity investments, stockbroking and quasi-banking functions. Majorinvestment houses provide long-term credit to industry and, in a very smallway, to agriculture. Finance companies, on the other hand, specialize inextending credit through discounting of commercial paper on accountsreceivable for individuals and enterprises.

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2.15 The government-owned Agricultural Credit Administration (ACA) andPNB's subsidiary, the National Investment and Development Corporation(NIDC), were established to perform specialized functions. ACA supportsagricultural production through the provision of credit to farmers and toagricultural projects. The government has since merged ACA with LBP. NIDCpromotes a wide variety of industrial, agricultural and commercialenterprises and also acts as a holding company.

The Rural Financial Market

2.16 As indicated in Table 2.3, all of the various types of institu-tions described aboved are involved in the rural financial sector. Detailsof their activities in the rural areas are given in Annex 2, Tables 3 to 6.

Table 2.3: FORMAL INSTITUTIONS IN RURAL FINANCIAL MARKET

Private financial Government financialinstitutions institutions

Banking Rural Banks /a /b Philippine National Bankinstitutions Private Commercial Banks (PNB)

Private Development Banks /a Development Bank of theSavings & Mortgage Banks Philippines (DBP)Stock Savings & Loan Land Bank of theAssociations Philippines (LBP)

Philippines Veterans BankAmanah Bank

Nonbank Nonstock Savings & Loan Agricultural Creditinstitutions Associations Administration (ACA)

Mutual Building & Loan National Investment &Associations Development Corp. (NIDC)

Investment Houses Farm Systems Develo?mentCorporation (FSDC)

/a Government participates in the equity of the rural and private develop-ment banks.

/b Includes cooperative rural banks sponsored and assisted by theGovernment.

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Evolution of Formal Rural Financial System

2.17 Since early in this century, the Philippine rural financial markethas been characterized by Government intervention. The Government first usedthe Bank of the Philippine Islands to channel its funds to the sugarindustry. Later, to broaden the credit system, the Government establishedthe Agriculture Bank, but this too became wholly involved in the sugarindustry to the neglect of other subsectors. In 1916 the Government estab-lished the Philippine National Bank (PNB) to take over the by then defunctAgriculture Bank. Like its predecessors, PNB paid little attention tosmallholders and instead supported commercial crops and general banking.However, with the establishment of the Central Bank in 1946, rural financialmarkets and credit mechanisms received greater government attention. TheRural Banks Act was passed in 1950 to establish a viable rural credit systemwith the intention of providing credit on reasonable terms at locationseasily accessible to the rural population.

2.18 Since a nationwide private rural banking system would take sometime to become established, in 1952 the Government organized a fullygovernment-owned nonbank agency, the Agricultural Credit and CooperativeFinancing Administration (ACCFA), to assist small farmers through liberalcredit and cooperative marketing. ACCFA, however, went bankrupt in 1960 dueto poor management and low collections. ACCFA was reorganized into the ACAto expand finance for agrarian land reform. ACA has recently been mergedwith LBP.

2.19 The institutions currently most active in lending for agricultureper se are the Government-owned PNB, DBP and LBP, as well as the privatecommercial and rural banks, the PDBs and savings and mortgage banks. Theirrelative importance in the sector is shown in Table 2.4, which highlightsthe greatly increased activity of the commercial banks and the decline inPNB lending. The share of government-owned banks in agricultural loans fellfrom 35.2% in 1975 to 18.6% in 1980, while the private commercial banksexpanded agricultural lending from 56.8% to 74.5% during the same period.

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Table 2.4; AGRICULTURAL LOANS GRANTED, BY BANK(Annual Disbursements)

(? billion)

1980Amount

1975 1980 (at 1L975% of % of constant

Source Amount total Amount total price)/a

Government BanksPNB (Gov-t commercial bank) 8 84 31.7 8.43 15.9 4.88DBP 0.86 3.1 0.65 1.2 0.38LBP 0.05 0.2 0.80 1.5 0.46ACA 0.06 0.2 0.03 - 0.02

Subtotal 9.81 35.2 9.91 18.6 5.74

Private BanksCommercial banks 15.84 56.8 39 .50 74.5 22.88Rural banks/SLAs /b /c 2.12 7.6 3.26 6.2 1.89Private development banks /c 0.09 0.3 0.16 0.3 0.09Savings & mortgage banks 0.04 0.1 0.20 0.4 0.12

Subtotal 18.09 64.8 43.12 81.4 24.98

Total 27.90 100.0 53.03 100.0 30.72

/a Deflated by consumer price index at 193.00 (1975=100).

/b Includes cooperative rural banks.

/c Private development and rural banks are partially capitalized by theGove rnment.

Source: TBAC.

2.20 The relative importance of agricultural lending to the totallending of each institution is shown in Table 2.5.

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Table 2.5: AGRICULTURAL LOANS AS A PERCENT OFTOTAL LOANS, BY BANK

1975 1978 1979

GovernmentpNB 48 39 37DBP 36 23 17LBP 21 60 71ACA 100 100 100

PrivateCommercial banks 23 19 20Rural banks /a 89 87 86PDBs /a 46 40 31SMBs 10 2 4

/a Mixed ownership.

Source: TBAC.

Banking Reforms of 1980

2.21 The evolution and growth of the financial system in the Philippines,though impressive and innovative, was not without its problems. In 1979, ajoint IMF/IBRD review of the Philippines financial sector noted thatfragmentation among institutions reduced competition in the system and, inturn, its responsiveness to changing opportunities and demands. Thesystem also appeared to have done little to promote longer-term lending andborrowing.

2.22 Following the recommendations of the IMF/World Bank mission,/l thePhilippines introduced a set of financial reforms with two principal objec-tives: (a) increased competition in the financial sector to achieve greaterefficiency, and (b) increased availability of longer-term credit. Towardthe latter objective, a certain proportion of the nominally short-term fundsof deposit banks will be used for longer-term lending. Toward the goal ofincreasing competition, the functional distinctions between bank and nonbank

/1 The Philippines: Aspects of the Financial Sector, World Bank Country,Study, May 1980.

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financial intermediaries have been reduced and the range of financialservices provided by these institutions has been broadened through thefollowing measures:

(a) the commercial banks can combine domestic and internationalbanking and engage in the functions of an investment house, suchas underwriting, equity investments and security dealing. Theminimum capital requirement of P 500 million for expanded(universal) commercial banks will encourage consolidation of thesystem into larger units. Further, commercial banks can now ownrural and thrift banks to take advantage of economies of scale.They can also form subsidiaries for specific financial services.Expanded commercial banking authority should result in benefitssuch as economies of scale in operations, flexibility inarranging financial packages, stronger competitive capacity andability to service broader markets;

(b) all functional distinctions among thrift banks (privatedevelopment banks, savings and mortgage banks, and stock andsavings and loan associations) have been abolished. Upon meetingminimum capital requirements, thrift banks can qualify for fulldomestic banking powers;

(c) rural banks have been given broader domestic banking powers. Tostimulate growth and profitability, restrictions have been liftedon rural banks' lending coverage which had fonnerly been limitedto farm families cultivating less than 50 ha of land and tomerchants and cooperatives with less than P 10,000 in capital.Rural banks, which were established as unit banks, may nowestablish chain banking or group banking arrangements, directlyor through a holding corporation including a commercial bank.Minimum capital requirements have been enhanced and will beconformed to by existing banks over about a three year period;

(d) a former requirement that PDBs invest 75% of their loanable fundsin medium- and long-term loans has been changed to a requireraentof 75% of the aggregate par value of DBP's subscribed shares, andonly as long as such counterpart capital exists. This willpromote diversification of PDB operations into short term lendingand will also give PDBs greater access to DBP's long-term funds;and

(e) nonbank financial intermediaries can now undertake quasi-bankingactivities authorized by the Central Bank, which will also allowthem access to Central Bank credit facilities to enhance theirintermediation in longer-tera capital flows. I

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2.23 Another major change in the financial sector was the deregulationof interest rates on savings deposits and all types of deposits and loanshaving an original maturity of more than 720 days (subsequently lowered to365 days)./l The limited floating of interest rates was an important steptowards achieving the universal banking concept by fostering greater competi-tion among the banking institutions. This should eventually lead to greaterefficiency in the use of capital, the cost of which will be determined bymarket forces. The elimination of ceilings on interest rates is also intendedto give financial institutions greater flexibility in financial intermedia-tion, especially for longer-term funds, and to allow the system to respondmore promptly to domestic and external developments.

2.24 While it is too early to judge how the banking system would respondto these reforms, these have paved the way for initiating measures whichwould go a long way in resolving the Philippines- current institutional andfinancial issues in agricultural credit, especially with regard to thefollowing: (a) greater mobilization of domestic long-term resources; (b)expansion in medium- and long-term lending by the government-owned PNB andprivate commercial banks; (c) introduction of structural and operationalchanges in DBP and LBP; and (d) facilitation of an increased agriculturalcredit and resource mobilization effort by thrift banks.

C. Noninstitutional Credit Arrangements

2.25 Informal financial arrangements are especially important to theagricultural sector. For most farmers, the informal financial system mustbe seen as the natural provider of financial services since transaction costsand other costs of access to formal finance are not appropriate for thesefarmers. The informal financial sources seem to serve them effectively.Recent estimates indicate that the informal sector now provides between 64%and 78% of the total credit received by the agricultural sector./2 Informalcredit may be classified as land based, commodity based, or socially based.

Major Sources of Informal Credit

2.26 Land-based Credit Arrangements. These are made either within oroutside of the traditional landlord-tenant relationship. Landlord credit totenants takes the form of landlords providing inputs and other workingcapital to tenants between harvests. This arrangement may be expected todiminish over time as land reform continues, and also to the extent that

/1 Effective January 1, 1983, the interest rate ceiling on loans withmaturities of less than 365 days was also lifted.

/2 Source: TBAC, "A Study of the Informal Rural Financial Markets in ThreeSelected Provinces of the Philippines."

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tenants become able to enter the formal financial market through thriftinstitutions, rural banks and pawnshops. Transactions outside of thelandlord-tenant relationship primarily involve a redeemable pledge, underwhich an owner of a plot of land permits another farmer to operate the landin exchange for an advance. The lender has access to the land and enjoysthe fruits of its production so long as the advance remains unpaid. Theredeemable pledge is not permitted by regulations applied to land reformareas, but unregistered transactions of this type frequently occur.

2.27 Commodity-based Credit Arrangements. Commodity-based credit isfundamentally commercial in nature, always involving interest payments inkind or cash, directly or hidden. The most common type of commodity-basedcredit arrangement is "five-six" credit which in its most basic forminvolves the borrowing of five units of rice and repayment of six units ofrice. Five-six arrangements are common in food marketing. Vegetablehawkers, for example, might borrow e 50 worth of produce each morning froma stallholder in a vegetable market and return e 60 in cash to thestallholder each evening. The five-six rate of interest in the daily caseis 20% per day and in annual terms is astronomical. The high rates seem tobe acceptable, apparently because they are more closely related to theopportunity costs of small vendors' labor than to the scarcity of capital.Rates of interest specified in percentage terms can be a very abstractnotion when applied to informal finance.

2.28 Another common form of commodity-based credit is a salesarrangement under which a farmer obtains a loan after promising to sell hisproduce to the lender at a below-market price. Commodity-based credit isalso found in relationships between small-scale "integrators" and producersin the livestock sector. Integrators, often landlords, traders andranchers, place animals with backyard or other small-scale commercialproducers, and take them back when they are ready for slaughter.

2.29 Socially-based Credit Arrangements. These may be defined as thosein which the relationship between lender and borrower is primarily of asocial rather than a commercial nature. This would cover friends, neighborsand relatives. Disbursements and repayments may be in cash or in kind. Theloans frequently carry no specified interest rate, but generally involveobligations of reciprocity on the part of the borrower.

Terms and Conditions of Informal Credit

2.30 A survey made by TBAC found that the informal sector issues creditprincipally on the basis of the good credit standing of the borrower and averbal promise to pay (Annex 2, Table 7). Only 35% of the loans surveyedwere secured by a written promissory note and a verbal agreement to sellfarmer produce, and only 2.8% were secured with land title (Annex 2, Table8). Private lenders, particularly those engaged in palay trading, require

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their borrowers to pay in kind (Annex 2, Table 8). In cases of default,private lenders impose strict measures. Any additional loans are secured byland title or chattle mortgage, and have interest rates double those of thedefaulted loan. Repayment rates on informal loans are, however, relativelyhigher than in the formal sector (Annex 2, Table 9). The incidence ofdefault in aggregate terms is significant in informal lending, as it is informal lending. However, the overall interest rates charged by privatemoneylenders include a risk premium of 1-5% and are designed to leave anadequate profit margin, explicit or hidden in commodity transactions (Annex2, Table 10).

Other Characteristics of Informal Credit in the Philippines

2.31 A selective study of informal rural financial markets in thePhilippines carried out by the Technical Board for Agricultural Credit (TBAC)in 1978 provides glimpses of vitality, competitiveness and flexibility whichare quite at variance with the traditional view of informal lenders as mono-polistic, and exploitive./l Some moneylenders, for instance, were found tocharge interest rates below those of commercial banks while others chargedhigher rates. Moreover, high rates prove somewhat illusory in terms ofreturns to lenders because of default risks and repayment experience.

2.32 The Changing Structure of Rural Moneylending. Competitivebehavior in moneylending is seen in the emergence of a new class of lendersduring the 1960s and 1970s, consisting of farmer moneylenders and inputdealers. The input dealers included in the TBAC sample accounted for twothirds of the loans made by sample moneylenders, which is indicative oftheir prominence. The survey results indicate that the new class ofmoneylenders has to a large extent displaced landlords as the traditionalsource of funds for share tenants and small operators, although landlordsstill constitute about 15% of the sample. Annex 2, Table 11 shows aclassification of the sample moneylenders by type of business.

2.33 According to the TBAC study, the new class of lenders arose inresponse to the profitable opportunities in product and credit marketscreated by the revolution in seeds, fertilizer and related technologies aswell as the expansion of irrigation and the infusion of low-cost officialcredit into the rural economy. These developments may have particularlyfavored increased lending by input dealers in that their administrativeexpenses per peso loaned are lower than those of any other type of informal

/1 TBAC, "A Study of Informal Rural Financial Markets in Three SelectedProvinces in the Philippines, 1978." The study surveyed 163 privatemoneylenders and 912 farmer borrowers in the provinces of Bulacan,Camarines Sur and Isabela.

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lender included in the sample (see Annex 2, Table 12). This suggests thatthe change in market structure reflects the effects of cost-reducingfinancial innovation in the provision of service to clients. Input dealersentering moneylending were in many cases also new entrants into farm inputsupply. iialf of the sample had been moneylenders for less than six years,suggesting competition in the market. Another suggestion of competition isthe survey finding that moneylenders who were buyers of rice were reportedby half the farmers to offer higher prices for rice than other buyers.

2.34 The presence of competition within the informal sector also seemsindicated in a survey carried out by TBAC and the University of thePhilippines Business Research Foundation. The survey found that the averageannual interest rates (in 1978) on all fully paid informal loans were 33%,51%, and 83% p.a. in the three provinces surveyed (Annex 2, Table 13).Interest rates were lower in two of the provinces where input dealers, whoare generally sources of low-cost informal credit, tended to predominate andcompete with one another. In one of the provinces surveyed, input dealerscontributed around 90% of the total volume of loans issued to all borrowersby sample private lenders (Annex 2, Table 14).

2.35 Loan Size. The average loan amount obtained from informal lendersin the TBAC survey was smaller than that from formal sources. This isindicated by the fact that informal lenders provided two thirds of thevolume of funds borrowed by sample borrowers, but about 83% of the number ofloans (Annex 2, Table 15). As is generally observed, formal lenders avoidsmall-scale lending in an effort to economize on administrative costs.

2.36 Lending Rates. Average annual informal lending rates in theTBAC sample ranged between 25% and 96% (Annex 2, Table 16). The highestaverage annual rate reported was 163% on 2% of the total loan volume, while26% of all informal loans surveyed carried no contractual rate of interest.Interest rates on informal loans tend to be lower in areas where officialcredit and other formal lending is relatively widespread. The extent towhich this reflects the impact of formal credit on the overall supply ofcredit, or is simply the result of formal lenders' preference for low riskareas, has not been ascertained. Presumably, both effects apply.

2.37 The Justification for Informal Credit. The TBAC study finds aneconomic justification for the activities of small-scale private money-lenders in their comparative advantage arising from economies of scale.These economies are realized through their integration of product and creditmarkets based on face-to-face arrangements. The study concluded that themethod of operation of informal lenders tended to result in repayment rateswhich were superior to those which can be achieved by formal institutions.Portfolio diversification and risk minimization were also possible becauseprivate lenders tailor their interest rates to specific borrowers and

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transactions, while rural banks and other lenders tend to have fixedinterest rates. Administrative expenses are also relatively low, averaging5.7% of amounts lent by sample moneylenders.

2.38 The study proposes that more flexibility for bankers, in the formof removal of interest rate ceilings (a step since partially taken), and useof informal lenders as conduits for official funds, would improve theefficiency of the rural credit system. In other words, TBAC urged that theformal sector become less so.

Informal Credit and the Formal Financial Market

2.39 Interaction between formal and informal financial markets is tosome extent competitive and to some extent facilitating and complementary.As development occurs, financial markets expand, and formal markets expandfaster than informal markets, taking over part of the latter's functions.

2.40 The advantages of informal finance include: a willingness to dealwith transactions that are small in absolute amounts, absence of burdensomedocumentation and bookkeeping requirements, confidence engendered by face-to-face relationships between creditor and debtor, flexibility of loanterms, rapidity with which informal lenders can respond to the applicants-requests, and access costs which are generally low as a result of all thesefeatures. The advantages of formal finance include: the confidentiality ofinstitutional finance, the ability to deal in relatively large amounts ofmoney, the confidence provided by documentation and established legalpractice within the formal sector, specialization and the resultingeconomies of scale and expansion of markets, and the convenience oftranscending face-to-face relationships through communication systems whichcan transfer financial claims through space cheaply and quickly.

2.41 An interesting aspect of the interaction between formal andinformal credit is the extent to which informal credit appears to havereplaced formal credit as a source of funds for farmers who defaulted ongovernment-backed loans and thus became ineligible for further officialcredit. This is best exemplified by the use of credit by rice farmersunder the Masagana 99 program (M-99) introduced in 1972 (paras. 4.03-4.06).At its peak, approximately 800,000 small farmers used M-99 credit forseasonal inputs. This number has fallen to fewer than 100,000 becauseborrowers failed to repay the loans as specified and were subsequentlydenied further access to M-99 credit. Remarkably, the decreased use offormal credit was accompanied by significant increases in rice production.It must be presumed that the gap in institutional credit was filled by acombination of informal credit and self-financing.

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Government Policies Toward Informal Finance

2.42 The Government has no articulated policy concerning informalfinance. However, many officials in government and in government-ownedfinancial institutions express concern that informal finance ischaracterized by exorbitant rates of interest, and these perceptions arefactors in decisions which result in government intervention in ruralfinancial markets. Although the informal sector does not seem to be asusurious as some officials believe, a fruitful area for consideration bypolicy makers is how to motivate the formal financial sector to providesmall-scale services which could compete with informal financial inter--mediaries and expand access to formal finance. Historically, attempts todisplace informal finance with formal credit arrangements by utilizinglow-cost government resources have tended to develop into high-costfailures (except when subloan collection is linked with captive marketingarrangements for the produce financed). But despite this lack of success,continued efforts should be made to encourage the growth of the formalsector which has an advantage over the informal sector in that the latterdoes not offer two other services provided by the formal sector, namely:deposit mobilization and provision of medium-and long-term credit. Growthof the formal sector is, therefore, important to promote resource mobiliza-tion, especially through innovations that attract rural savings and offer abroader range of banking services, including investment credit.

2.43 Deregulation of short-term lending rates by the Central Bank couldincrease the developmental potential of informal credit by stimulatingcompetition between formal and informal lenders and by eliminating thepre-emptive activities of those having access to low rate, regulated loans.Loans having an original maturity of less than 365 days are the only loanssubject to lending rate ceilings at present, and it is in providing thistype of financial contract that formal and informal credit would be mostcompetitive, given the short-term emphasis of commercial lenders, especiallyinformal ones.

2.44 Changes in other Central Bank regulations that create barriers toentry into innovative finance would also increase the scope for competitiionbetween formal and informal finance. The money shop innovation of thePhilippine Commercial and Industrial Bank (PCI), for example, is a demon-stration of how new, small-scale financial services can be provided by formallenders in market segments where informal lending has a large market share.Regulations that prohibit pawnshops, the formal lending institutions withprobably the highest concentration of clients among the poor, from acceptingdeposits should be re-examined./l The merger of pawning with deposit taking,

/1 CB believes that this is not feasible in view of formidable difficul-ties in monitoring the financial operations and stability of numerouspawn shops.

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including rural banks and rural branches of commercial banks, would permitthe poor to enjoy expanded options in liquidity management and would providethe means for introducing them to services that would increase theirwillingness to invest in financial assets, such as deposit accounts.

2.45 It may also appear attractive to promote informal lending throughprograms designed to permit greater access to funds by informal lenders suchas input dealers and rice traders and millers. This approach is exemplifiedin the following ongoing arrangements: Planters Products Inc. currently useslocal input dealers as distribution channels for fertilizer and pesticidecredit; the CB grain-financing program provides funds to rice traders toaugment their working capital; and DBP, LBP and commercial banks extend loansto integrators who in turn provide credit, in cash or kind, to participatinglivestock producers. An evaluation of these programs is important to promotea wider use of similar arrangements and to establish effective monitoringarrangements for ensuring that the greater access given to informal lenders isreflected in their increased lending to clients. Through this strategy, itshould be possible to provide larger resources to the private sector toestablish a network of depots to supply inputs to farmers, either on credit orfor cash, as the retail supplier may consider appropriate. A condition forthe success of this facility would require a means of directing credit towardthose informal lenders currently uneconomically constrained by inadequatecredit. It would also have to be demonstrated that input dealers and othertargeted lenders could increase their net income from lending if more creditwere available to them, and also that the financial institutions passing ongovernment funds could increase their net incomes by participating in such aprogram. Attempts to gather evidence that informal lenders are uneconomicallyconstrained by lack of credit could be difficult, and no research methodologyis readily available that would precisely determine the existence or extent ofthe credit shortage. However, CB through its proposed credit budgetingmechanism should be able to monitor subsectoral and commodity-specific creditflows and, through selective credit measures, regulate the flow of formalsector funds to the private sector intermediaries which use informal lendingarrangements to support agricultural activities. Obviously, any innovationsin expanding the formal sector into the informal credit market should beapplied only after careful consideration.

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3. MAJOR TRENDS IN AGRICULTURAL CREDIT /1

A. Introduction

3.01 Production credit for cereal crops is currently provided by theformal credit sector on a limited scale, and the informal credit sectorseems to have replaced formal credit. Financial institutions have becomemore restrictive in defining creditworthy borrowers, with the result thatentrepreneurs of small means tend to be excluded from credit programs.Although credit availability would normally not be a constraint for commer-cial enterprises in view of their capacity to provide collateral, resourceavailability, high arrearage levels and high transaction costs seem to havecontributed to significant credit gaps especially in medium- and long-termcredit and difficulties in mobilizing deposits. Institutional constraintsand a consequent erosion in the sector's capabilities to undertake efficientfinancial intermediation now appear to be a major handicap to the growthobjectives of the country.

/1 Agricultural data in the Philippines include all loan-financing activi-ties relating to agriculture, fisheries and forestry as well as theprocessing, storage and distribution of the resulting products. Thedata are not classified by maturity; thus, for the purpose of analysis,all loans disbursed by the commercial banks including PNB and LBP areconsidered as short-term credit, while those of DBP and thrift banks aremedium-term. Furthermore, the time series on agricultural credit wasmodified as of 1975 to include activities which are agriculture-basedbut classified under industry, e.g., manufacturing and marketing ofinputs like fertilizers, feeds, chemicals, farm implements, andconstruction of warehouses and irrigation systems. For this reason,Tables 3.3 and 3.4 show both the old and new time series. Some data,especially that relating to credit issued by private commercial banksand thrift banks, are based on TBAC estimates.

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B. Trends

Increased Use of Noninstitutional Credit

3.02 As noted in para. 2.25, the informal sector currently providesabout 64-78% of the total credit received by the agricultural sector.Informal sources provided an even larger volume of credit, ranging between75-80% of the total, prior to the mid-1970s when formal credit increaseddramatically, largely as part of Government-sponsored supervised creditprograms which made funds available to rural banks under a rediscountingfacility from the Central Bank. In the late 1970s the flow of credit undersupervised credit decelerated because of high default rates on loans, whichcaused a majority of banks to become ineligible for further rediscounting.

Table 3.1: COMPOSITION OF INSTITUTIONAL AND NONINSTITUTIONALCREDIT TO AGRICULTURE /a

(In percent)

Source 1950s Mid-1970s Late 1970s

Institutional 20-25 64-67 22-36Noninstitutional 75-80 31-33 64-78

/a TBAC, "A Study on the Informal Rural Financial Markets in ThreeSelected Provinces in the Philippines," 1980.

Trends in Institutional Credit

3.03 Constraints. The Philippine rural financial sector has beenremarkably responsive to Government's development strategies related tocredit programs and savings mobilization. However, these strategies have ledto a situation in which the performance of the rural financial sector withregard to credit has become increasingly constrained by major institutionalproblems, most notably high levels of arrearages and high transaction costs.The high arrearage levels are in part a product of high default rates onloans made under Government-backed supervised credit programs for farmers, but

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also reflect problems specific to the individual institutions. The banksmost affected by this are the PNB, LBP, DBP and, in particular, the ruralbanks. High transaction costs are a problem for banks like PNB and DBPwhich have a comparatively small branch network and a wide operating areafor each outlet. In view of these difficulties, the affected banks havelimited the availability of credit for agricultural development, and havebeen particularly cautious about lending to small farmers and ruralentrepreneurs who lack collateral.

3.04 Credit Trends, 1972-75. The availability of institutional creditfor agriculture expanded rapidly during 1972-75, when lending increased fromabout P 6 billion to P 17.8 billion. At 1975 prices, the increase wasat an average annual rate of 27% (Table 3.2). Production credit increasedduring the period primarily because of a large number of loans for sugarproduction, for which the export market was then buoyant, and sizeabledisbursements under the Government-sponsored Masagana 99 (M-99) programwhich channelled low-interest credit for rice production through PNB, ACAand the RBs. Processing activities in rice, sugar and coconut also receiveda larger share in total credit as did the livestock and fisheriessub sectors.

Table 3.2: AGRICULTURAL LOANS GRANTED BY ACTIVITY, 1972-75(P billion)

1972/a %(at 1975 prices) 1975 increase

Production 4.8 7.3 52Processing 0.9 1.5 66Marketing 4.1 8.9 117

9.8 17.7 81

/a Data base for 1972 is not consistent with that for1975 and should be regarded as indicative.

3.05 The performance of the formal credit system in expanding credit tosmall farmers was notable. The percentage share of total production creditextended to farmers cultivating less than 3 ha increased from 1.6% in 1965 to

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19.4% in 1974. This increase was due primarily to loan operations underM-99 (average farm size 1.4 ha) and to ACA and LBP lending to agrarianreform beneficiaries.

3.06 Credit Trends, 1975-80. After 1975, however, the growth ininstitutional credit for agriculture slowed to an annual average of 2.1%(Table 3.3).

Table 3.3: AGRICULTURAL LOANS GRANTED, 1975-80(P billion)

Old series /a New seriesAnnual Annual

At At growth At At growthcurrent 1975 rate current 1975 rate

Year prices prices (%) prices prices (%)

1975 17.8 17.8 - 27.9 27.91976 22.0 20.7 16.0 29.0 27.3 (2.1)1977 22.5 19.6 (5.3)/b 29.2 25.5 (8.0)1978 28.6 23.2 18.3 36.7 29.8 16.91979 36.0 24.6 6.0 45.5 31.0 4.01980 37.8 21.9 (10.9) 53.4 30.9 -

Average annualgrowth rate(1976-80) 4.8 2.1

/a Reflects old time series data base prior to redefinition affect-ing data from 1975 on.

/b Parenthesis indicates negative growth.

3.07 By activity, total institutional credit in real terms for agri-cultural production and processing more than doubled during 1975-80, whilethat for marketing was lower by about 75% (Table 3.4 below and Annex 3,Tables 1-3). Production credit for rice decreased by about P 700 millionor 41% due to the high default rate under M-99 (Annex 3, Table 1). Allother commodities, especially livestock, fisheries, coconut and sugarreceived a higher volume of credit.

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Table 3.4: AGRICULTURAL LOANS GRANTED BY ACTIVITY, 1975-80(P billion)

Old series /a New series1975 1980 1975 1980

At current At 1975 Increase At current At 1975 IncreaseActivity prices prices /b (%) prices prices/a (7)

Production 7.3 15.8 116 7.3 15.8 116Processing 1.5 3.8 153 4.5 10.4 131Marketing 9.0 2.1 (77) 13.8 2.4 (83)Others - 0.2 20 2.3 2.1 (8)

Total 17.8 21.9 23 27.9 30.7 10(37.8)/b (53.0)/b

/a Reflects old time series data base prior to redefinition affecting datafrom 1975 on.

/b Figures in parentheses represent total loans granted at current prices.

3.08 The slow growth in agricultural credit during 1975-80 was sharedby different commodity groups in varying degrees (Annex 3, Table 4). Over-all, rice received about 45% more credit for processing and marketing, whilecredit for fruits and vegetables increased by 460%; livestock and poultry122% and fisheries 109%. Credit for commercial and export crops as a groupwas lower by about 19%. Except for rubber, coffee and cocoa, which receivedsizable incremental credit, other commercial crops received lesser amounts.

3.09 The flow of institutional credit to different commodity groups, asa percentage of their contribution to gross value added (GVA) to the agri-cultural sector, shows great variation (Annex 3, Table 5)./l In 1980, ricereceived production credit equal to 20% of its contribution to GVA, whilecorn received only 6%. This compares to the 32% and 10%, respectively,received in 1975, and indicates that informal credit and self-financingcontinue to be predominant in these commodities. Major commercial cropsutilized credit in excess of their respective contribution to GVA. Forexample, the coconut industry received production credit of about 103% ofits contribution to GVA, although a large number of coconut farmers do notyet have access to formal credit. The sugar industry received productioncredit for over three times its contribution to GVA. In the case of sugar-cane, this situation seems to arise because of the overlapping character

/1 This index - the ratio of credit share to GVA share - is useful for illus-trative purposes only, because there is no optimum ratio applicable todifferent crops or activities.

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of crops under an 18-month production cycle. In the livestock subsector,production credit has increased from 20% of GVA in 1975 to 46% in 1980, inthe case of fisheries from 7% to 13% and forestry 21% to 60%.

Medium- and Long-term Credit

3.10 The share of medium- and long-term credit in total institutionalcredit in 1980 was estimated at only about 2%./l Traditionally, thePhilippine banking system has preferred short-term lending in view ofthe short-term character of resources and the absence of permanent arrange-ments for refinancing and liquidity support from the Central Bank.Currently, long-term loans are provided mainly by governmentowned or-assisted institutions, viz., DBP, LBP, PDBs and the rural banks, throughresources provided by the Government or foreign currency loans from theWorld Bank, ADB and bilateral arrangements. Private commercial and ruralbanks finance substantial agricultural investments, especially grainprocessing and commercial livestock, poultry and fishery projects, throughshort-term loans which are rolled over through annual renewals on payment ofinterest and loan installments.

3.11 Although the Philippines' agricultural sector recorded an annualgrowth rate of 4.9% during 1970-80, it is conceivable that larger flows ofcapital through formal financial intermediation, especially in term credit,could have contributed to increased production and productivity. Despitesignificant increases in output, the Philippines' agricultural productivitycontinues to be low by international standards. Raising productivity, bothin irrigated and rainfed areas, will be important for the country's generaleconomic growth and enhancing rural incomes (para. 1.15). In this context,limits to availability of formal credit would continue to hamperagricultural development in the Philippines.

Resource Mobilization

3.12 Informal Financial Markets. Financial intermediation in theinformal sector is not easily documented, but observers generally agree thatthere is very little deposit mobilization. Informal lenders' resourcesnormally include funds generated from their business undertakings and tradeand borrowings from formal lending institutions./2 The one informal arrange-ment worth noting is the rotating savings and credit association, whichconsists of an organizer and a number of participants who know one anotherpersonally and therefore can judge each other's creditworthiness. Thecentral feature of this arrangement is periodic collections from participantsand allocation of the total to each participant in turn.

/1 TBAC. Systematic data on agricultural investments financed throughformal credit are not available.

/2 TBAC and the University of the Philippines Research Foundation, Inc.,"Rural Finance Markets in the Philippines."

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3.13 Formal Financial Markets. Private sector banks and thegovernment-owned PNB are active in rural deposit mobilization. Thegovernment-owned LBP, though established as a specialized bank to functionas a financial arm of the Government's land reform program, now alsofunctions as a commercial bank and has stepped up its efforts in depositmobilization through expansion of its branch network. DBP is not acommercial bank, and relies mainly on government equity, deposits and loans,and commercial borrowings.

3.14 Deposits constitute about 46% of the Philippine banking system'stotal resources; the share of deposits in total resources is highest forthrift banks (75.7%), followed by commercial banks (50.5%), rural banks(30.8%) and specialized government agencies (20.8%).

3.15 Formal financial institutions in the Philippines use numerousdevices to mobilize savings in rural areas, including gifts for newdepositors and incentives to the staff of the financial institutionconcerned. Some savings mobilization programs are national in scope or inmanagement. These have included forced mobilization programs, notably theBarrio Savings Fund, and voluntary savings-promotion activities of theCentral Bank on behalf of the National Commission on Savings. The status ofprograms involving the Central Bank appears to be changing, as mandatoryBarrio Savings Fund contributions have recently been discontinued, and theNational Commission on Savings was dissolved.

3.16 Savings and time deposits in banks have increased from P 7.8billion in 1973 to P 57.4 billion in 1981, a more than seven-foldincrease; when deflated for changes in the consumer price index, theexpansion has been three-fold (Annex 3, Table 6). The number of savings andtime deposit accounts in the banking system has tripled in about a decade,from 7.9 million in 1973 to 23.5 million in 1981. The market share ofcommercial banks in terms of numbers of accounts tended to fall through the1970s. In 1980, increased competition and a loss of public confidence inthe financial system resulted in a movement of funds towards largerinstitutions, especially the government-owned commercial banks, whichreversed the trend. In spite of this change, the number of these accountsheld at rural banks and specialized banks, starting from a small base,expanded more rapidly than the market between 1973 and 1981 according tothis measurement.

3.17 The composition of savings and time deposits has also changedsignificantly. While in 1973 aggregate time deposit balances were less than21% of total time and savings deposit balances, by 1981 they were 39% of thetotal (Annex 3, Tables 6 and 7). In terms of both numbers of time depositaccounts and balances, the market share of commercial banks was about 63% in1981. The movement of time deposits out of specialized banks and thriftbanks in 1981 is seen in the very steep decline in terms of both balancesand numbers of accounts, in favor of commercial banks, particularly thelarger and government-owned institutions. The distribution of savingsaccounts and time deposits by size is given in Annex 3, Table 8.

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3.18 Resource Mobilization in Rural Areas. An indication of the extentto which the formal deposit-taking institutions serve the poorer elements ofsociety is suggested by the fact that 14.1 million or 79% of the 17.8 millionsavings accounts in existence in December 1980 had balances of e 500 orless. Another indication of willingness to serve the poor is seen in theacceptance of time deposits of less than e 500, although these representedless than 4% of the number of time deposits outstanding.

3.19 A study carried out by the TBAC and the University of thePhilippines Business Research Foundation, Inc./l indicated that there seemsto be a significant capacity on the part of certain farm households to save.Around 13-18% of total income is saved and around - 0.25-0.35 of everypeso of additional income is saved. However, this surplus may not bemobilizeable since the savings units largely invest their surplus inhousehold and farm assets; only a small portion of such surplus is held asfinancial assets. This results in a low proportion of farmers having bankdeposits.

3.20 The income level at which positive savings take place has beenincreasing, from around e 3,000 in 1976 to around i 5,000 in 1977.Inflationary conditions have forced around 25% of the sample farm householdsto dissave during 1976 and 1977. By 1978, the proportion had risen toaround 37%. This prima facie indicates an increasing dependence on sourcesexternal to the agricultural sector for agricultural productivity and incomeimprovements.

3.21 Other variables did not seem to exert significant influence onsavings capacities. In particular, interest rate and rate of returnvariables did not appear to be statistically significant determinants ofsavings, while income level did. Can attractive financial rates induce thesaver to save in the form of financial assets and not in real assets? Thestudy indicated that from the observed pattern of investment, investing inreal assets has returns far higher than what financial assets may yield.

3.22 Average asset accumulation was noted at about 21% of householdincome. A large proportion of such increases are from a households' ownsavings. The balance is accounted for by borrowings. A substantial portionof asset increases (from a low of 45% in 1976 to a high of 63% in 1978) hasbeen in household fixed assets. Investments in fixed capital average onlyabout 3% of income as against 10% for purely household fixed assets.Interest rates did not have any significant effect on fixed capitalinvestments. This suggests either that borrowings are not being used forfixed investments or that loans are utilized but rates of return far exceedthe cost of borrowing.

/1 TBAC and University of the Philippines Business Research Foundation,Inc., "Rural Financial Markets in the Philippines."

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3.23 Financial liabilities of most households displayed a negativeeffect on fixed investments. In general, less investment occurs ifoutstanding liabilities from informal sources are relatively high. Threstudy concluded that credit is important to rural households as a source offunds.

3.24 The growth of rural deposits /1 has been slower than that of urbandeposits. Rural deposits constituted 23-28% of national total depositsduring 1975-79 and increased by about 26% annually, compared to a 28% annualgrowth in total deposits (Annex 3, Table 9). In line with the nationaltrends, deposits constituted 71% and 63%, respectively, of thrift banks' andcommercial banks' resources in rural areas. On the other hand, in the caseof rural banks and the government-owned specialized banks, the proportion ofdeposits to total resources in rural areas has been about 31% and 6%,respectively. Both rural banks and the government-owned specialized banks'reliance on government resources, especially borrowings from the CentralBank, tend to be much greater than in the case of commercial and thriftbanks.

3.25 The overall impact of the deregulation in interest rates whichbecame effective in July 1981 (para. 2.23) on the growth of deposits is notyet evident. All banks except PNB have generally maintained the prereforminterest rate of 9% p.a. for deposits below e 50,000 and 1l%. p.a. forbigger deposits; PNB has increased the interest rate from 9% to 10%. As forinterest rates on fixed deposits above two years, KBs and SMBs presentlyquote an interest rate of 4-6% above the prereform rates (10% to 12%) whilethe Government-owned banks offer an increase of only about 1%. Theregulated interest rate ceilings of 16% and 18% on short-term secured andunsecured loans, respectively, influence interest rates on savings deposits,while rates on the fixed deposits are limited by investment opportunities atrelatively high interest rates.

/1 Rural areas are defined to include those outside Metro Manila. No dataare available to show the extent to which saving deposits may beclassified as "rural" that would identify the ownership or origin ofdeposits according to appropriate geographic or economic criteria.

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4. GOVERNMENT POLICIES AND PROGRAMS FOR AGRICULTURAL CREDIT

A. Introduction

4.01 Past government policies and programs for agricultural credit wereaimed at creating an environment for viable agricultural investments,especially among high risk but potentially viable farmers. To encourage banksto extend credit and farmers to seek credit to upgrade farm productivity, theGovernment assured the flow of relatively low-cost funds to credit institu-tions, provided subloan guarantees, and has recently introduced crop insurancefor rice and corn. Conscious efforts were also made to expand potentialdemand for credit through agricultural policies and programs supportingwidespread use of improved technological practices, extension support, inputsubsidies and price supports.

4.02 Followiing the rapid expansion in the volume of credit fostered bythe various government programs during the mid-1970s, the share ofinstitutional credit in total farm credit provided to farmers has declinedfrom a high level of about 65% in the mid-1970s to about 30% to date. Thefactors which led to this situation are as follows:

(a) high default rates on loans extended under government-sponsoredcredit programs led to a deterioration in the financial positionof the participating rural banks and their ineligibility fot theCentral Bank's rediscounting facility and for furtherparticipation in the government programs;

(b) efforts to channel urban-based commercial banks- deposit resourcesto the rural sector through an agricultural credit quota policyhad only limited success; and

(c) the low interest rates charged by the government-backed creditprograms did not seem to have served the objective of expandingcredit through low-cost incentives.

Government's main interventions in the sector are discussed in more detailbelow.

B. Credit and Extension Programs for Commodity Production

4.03 The Masagana 99 Program. The Philippine Government's first majorintervention in agricultural production credit was mainly through the super-vised credit approach adapted to the Masagana 99 Program (M-99) begun in 1973in order to bring about self-sufficiency in rice production. Prior to M-99,

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production had stagnated, and financial institutions were reluctant to lendfor food crops and to small farmers. Perceiving the unavailability of formalcredit as a major constraint to increased production, which had becomepronounced following the 1972 land reforms, the Government launched the M-99program to raise the per hectare yield of paddy (palay) from the prevailingnational average of 40 cavans (1.9 m tons) to 99 cavans (5 m tons) throughpromotion of widespread adoption of improved rice technology. Governmentoffered an integrated package consisting of: inputs; adequate institutionalcredit to finance the relatively capital-intensive M-99 technology under asupervised credit mechanism;/l technical advice from government technicians;and market opportunities through a government price support mechanism.

4.04 The supervised credit programs including M-99 had built-in incen-tives for both farmers and financial institutions: to farmers, subloans wereavailable at relatively low rates of interest, based on the viability andprofitability of the project financed, rather than their capability to providecollateral for the loan; and to financial institutions, these programs offeredfull refinancing from the Central Bank at 1% p.a./2 in addition to fieldsupport from the Government's extension technicians. Government extensionmachinery was used to prepare the individual farmers- farm plan and budget forthe M-99 and other commodity loan applications, to provide agroeconomicadvice, and to supervise the use of loan proceeds and loan collection.

/1 Under a supervised credit program, a farmer-borrower undertakes to applyproven farm practices or a package of technology and abide by theapproved farm plan and budget jointly prepared by him and the authorizedsupervised credit technician. A loan is disbursed without collateralagainst a joint and several guarantee of a 4-5 member farmer groupcalled a "selda." In comparison, nonsupervised credit for agriculturaloperations implies that loans are disbursed without insisting upon afarm plan and budget, or mandatory technical guidance and supervision.Nonsupervised loans are disbursed primarily on the basis of collateralsecurity offered, borrowers' creditworthiness, and the apparent viabilityof the project proposed. Nonsupervised credit thus has elements ofinformal finance, but the latter is superior in that it is available tothose who do not have collateral to offer, though at a relatively highcost.

/2 The interest rate on Central Bank rediscounting was increased to 3%in 1981.

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4.05 M-99 was initially outstanding in terms of inputs provided. In1973, the first year of M-99 operation, the participating rural banks, thegovernment-owned PNB and the Agricultural Credit Administration (ACA) issuedloans totalling P 600 million to about 631,000 farmers cultivating an areaof 923,000 ha. Allowing substitution for earlier nonprogram financing, totalcredit to rice production, processing and marketing in 1973 was about 87%higher than in 1972, with M-99 representing 56% of the total. The program wasat its peak in 1974 when the credit extended reached P 1.13 billion to830,000 borrowers for planting rice on 1.3 million ha. By 1977, when thePhilippines reached self-sufficiency in rice, production was about 4.2 millionm tons, or 31% higher than the 1969-71 average of 3.2 million m tons. Thiswas a remarkable achievement especially because M-99 was launched at a time ofsizeable domestic deficits in the production of staple foods, necessitatingexcessive reliance on imported grains in a situation of global scarcity.Total rice production continued to increase in the following years and by 1980reached 6.8 million m tons as a result of both steady expansion in area underirrigated rice (1.9 million ha) and an increased average per hectare yieldfrom 67.6 cavans in 1973/74 to 79.7 cavans in 1980.

4.06 Other Supervised and Nonsupervised Credit Programs. Following M-99,other commodity-specific programs were planned around the supervised credit/technical assistance approach. At the close of 1980, the Philippines had72 agricultural credit programs in operation, providing production credit on acommodity basis for cereals, fruits and vegetables, livestock and poultry,fisheries, export and commercial crops, forestry and for cooperative activi-ties. Details of these programs are given in Annex 4, Appendix 1.

4.07 After 1975/76, there was a sharp fall in the amount of M-99 creditdisbursed and the number of farmers financed by the credit system. The ricearea financed by institutional credit decreased from 920,000 ha in 1973/74 to330,000 ha in 1979/80 or from 79% to about 18% of the total rice area in therespective years. The decline in institutional credit was the result ofarrearages under past M-99 and other supervised credit subloans which were dueto several factors including: natural calamities, inadequate post-harveststorage facilities, marketing problems, unremunerative cost-price relation-ships, the low priority given by farmers to repaying the Government-backedloans, poor selection of credit risks and the provision of excessive loanamounts. The arrearages disqualified a large number of small farmers fromreceiving fresh credit and also disqualified many rural banks from receivingrediscounting support from the Central Bank. The accumulated nonrepaymentsunder M-99 amount to about P 180 million in PNB and P 300 million inrural banks. Under supervised credit programs other than M-99 andnon-supervised credit, the rural banks arrearages to CB amount to P 313million and P 390 million, respectively. The number of rural banks indefault to CB exceed 500 - 340 due to arrearages under M1-99, 420 under othersupervised credit programs and over 500 under non-supervised credit programs.

4.08 The performance of ongoing credit programs varies greatly, dependingon the institutional setting and management, geographical location, availa-bility of support services (extension, input supplies and marketing), and,

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above all, the extent to which the programs are in line with national,regional and provincial priorities. While some programs have been by andlarge successful, especially those for livestock and fisheries development,many others have had low collection rates. EIigh default rates under bothproduction loans and medium- and long-term credit packages have weakenedfinancial institutions and led to their increasing reluctance to participatein government-sponsored credit programs, especially in lending to smallfarmers. The credit programs generally suffer from:

(a) a failure to reach the majority of small farmers; additionally,formal credit schemes, especially 11-99, were aimed at irrigatedagriculture, and rainfed areas that comprise 85% of total cropland and 88% of rice land received much less emphasis in makingcredit available;

(b) high default rates in loan repayment by farmers brought about bydiverse factors including natural calamities, disqualify theparticipating banks from further use of the Central Bankrediscounting facility;

(c) fragmented credit and financial services based on a singlecommodity approach rather than a farm systems approach;

(d) inadequate support services, excessive reliance on governmentextension service for subloan appraisal and collection, andcumbersome credit documentation; and relaxation of lendingdiscipline for banks, especially to enable them to draw onCentral Bank funds to implement credit programs; and

(e) the existing policies and guidelines to address loan deliquen-cies attributable to both willful default and natural calamitieshave been insufficient and lacked clarity. There has been noconsistent set of rules to determine the extent of financialrelief through postponement or restructuring of loan repaymentswarranted in varying situations; or a linkage between the govern-ment's financial assistance for persons affected by naturalcalamity and adjustment of the affected person's existing obliga-tions to banks.

As a result, there is a growing shift from non-collateralized supervisedcredit to collateralized loans, especially under M-99, which results inexclusion of small farmers who cannot offer viable security. High trans-action costs, resulting primarily from excessive institutional specialiLz-ation, also contribute to the generally poor performance of the formal ruralfinancial market with regard to agricultural credit programs. Mostcommodity-specific credit programs tend to be costly, ineffective andinefficient. By and large, farm units in the Philippines are diversifiLed,particularly outside irrigated areas, and it is doubtful whether a commodityline of credit could be successful if its interrelationship with other farmactivities and needs are not taken into account.

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C. Agricultural Credit Quota Policy

4.09 In 1975, the Government introduced agricultural credit quotas toeffect a resource reallocation benefitting agrarian reform areas andproduction. All banking institutions, whether government or private, wererequired to set aside at least 25% of their net incremental loanable fundsfor agricultural credit, of which at least 10% of the loanable funds was tobe made available for agrarian reform beneficiaries. The 25% quota could befilled through direct agricultural lending, other than that for agrarianreform beneficiaries, and investments in commercial paper issued by entitiesengaged in agricultural credit. The objectives of this policy were twofold:(a) to encourage urban-oriented institutions to undertake rural lending; and(b) to mobilize the resources of urban-based institutions for agriculturaldevelopment. It was particularly hoped that commercial banks would increasetheir agricultural lending and use their wide network of branches insemi-urban and rural areas to provide farmers with increased credit.

4.10 Most banks complied with the quota policy, largely by investmentsin Central Bank securities and eligible commercial paper rather than bydirect agricultural lending. The quota policy thus had a negligible impactin attracting urban-oriented banks to rural lending. A TBAC study has shownthat commercial, savings and development banks deployed only about 36%, 55%and less than 1%, respectively, of their loanable funds earmarked foragriculture in direct lending, and invested the balance in eligible govern-ment securities. The overall share of agriculture in net loanable funds andoutstanding loans did not increase. Further, an apparent increase in directlending by commercial banks was due to a liberal definition of agriculturalcredit which included trade credits and agro-based processing and marketingloans. The credit quota policy was in fact not adequate, in terms of itsdesign and liberal enforcement, to promote the commercial banks' participa-tion in broad-based agricultural production or investment programs. Even thegovernment-owned PNB provided only a limited amount of credit directly foragriculture.

4.11 Growth in Supply of Funds. As for the objective of mobilizingbanking resources for agriculture through the quota, the overall supply ofagricultural credit expanded at a 2% average annual rate in real termsduring 1975-80. But since funds are fungible and the Central Bank does notsegregate the funds it obtains from the agricultural quota policy, thesurplus loanable funds invested by commercial and other banks in eligiblebonds were not necessarily used by the Central Bank for financing itsrediscounting operations in agriculture. Moreover, the availability of

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the Central Bank's rediscounting facilities, including budgetary funds forspecial credit programs, has become significantly constrained due to hiLgharrearages in the rural banking system and the consequent ineligibility forCentral Bank support. It is possible that the net effect of the quotasystem was a decrease in the supply of loanable funds in the banking system.Certainly, farmers continue to use informal sources of production creditwhile the flow of medium- and long-term credit is weak.

4.12 The Government has recently announced that the agricultural creditquota policy has failed to achieve the intended objectives and that it wouldreplace the quota system by one in which the Central Bank-s Monetary Boardwill allocate the total credit resources of the monetary system to differentsectors of the economy according to government priorities. The financialinstitutions are expected to be given flexibility in their lending operations,so that a slow demand for credit in one sector can be balanced by lending inanother. At present, there is no permanent machinery in the Government or theCentral Bank to undertake credit budgeting, especially for agriculturalcredit.

D. Agricultural Loan Guarantee Scheme and Crop Insurance

4.13 Agriculture in the Philippines has generally faced high productionrisks due to the frequent occurrence of natural hazards such as typhoons,floods and droughts /1 as well as plant pests and diseases. These factorsare often cited as major causes for nonrepayment of loans, and haveencouraged the creation of a guarantee mechanism, recently complemented byinsurance protection to farmers against crop failure. Both programs are nowadministered by the Philippine Crop Insurance Corporation (PCIC), whichstarted operation in May 1981./2

4.14 Agricultural Loan Guarantees. The agricultural loan guaranteeserves mainly to minimize lending institutions risk of financial failure byproviding credit funds in the form of advances in the event of force majeure.The guarantee fee is paid to the PCIC, not by the farmer, but by the finan-cial institution participating in the guarantee operation. While cropinsurance relieves the farmer of the responsibility of repaying his loan in

/1 An average of 19 tropical cyclones hits the country every year.

/2 PCIC was created by Presidential Decree (PD) No. 1467 of June 11, 1980supplemented by PD No. 1733 promulgated on October 21 of the same year.

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case of proven crop failure, under the credit guarantee system his loan ismerely restructured, i.e., its maturity period is extended (to not more thanthree years). The lending institution, meanwhile, receives advances againstvalid claims, to be recovered by the PCIC upon repayment by the farmer.

4.15 At present, guarantee funds exist for palay production, corn andfeedgrains, vegetables, cotton, diverse other crops and cattle fattening.Only loans extended under supervised credit programs are guaranteed. Totalloans covered and payments are shown in Table 4.1. Although guaranteepayments for May 1981 - January 1982 are not available, the amountsrecovered out of the paid claims appear to represent only about 3% of theamounts covered, raising questions as to program effectiveness (para. 4.19).

Table 4.1: COVERAGE AND PAYMENTS OF LOAN GUARANTEE FUNDS(P million)

1974-80 May 1981-Jan. 1982Loans % Loans %covered Payments paid covered Payments paid

Palay 3,200 93.1 4 /a n.a. n.a.Corn 378 2.7 1 14.1 - -Vegetables } 25 - - 1.2 - -Cotton } 27.7 - -Cattle fattening, etc. - - - 2.3 - -

/a Loan guarantees replaced by crop insurance.

The loan guarantee schemes are viewed by the authorities as operations thatwill be phased out gradually and replaced by crop/commodity insurance, andthis has already happened for palay and corn.

4.16 Crop Insurance. On the farmer-borrower's side, crop insuranceserves not only to protect the farmer's capital but also to enable him toobtain credit after a crop failure that otherwise would have left him indebt. Thus to a certain extent it can contribute to the security andstability of farm income, and help to level fluctuations of income acrosstime. From the lender's point of view, insurance is both an incentive toextend credit and a guarantee of recovery. By assuring loan repayment, cropinsurance helps prevent the decapitalization of rural credit sources while

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minimizing recapitalization by Government to lending institutions forfarmers indebtedness resulting from national disasters. As a result, banksshould be able to reserve a larger portion of their portfolio to projectswhich augment production and productivity.

4.17 Crop insurance has been made compulsory for all farmers obtainingproduction loans for palay under M-99 credit and for corn under theMaisagana program. Insurance for palay and corn covers only the cost ofproduction or production inputs, including labor, subject to the ceiling setby Government-s supervised credit programs./l Effective May 1982 thepremium rates for rice and corn have been set at 11% and 7% of the loanamount to be shared by and among the following:

Table 4.2: CROP INSURANCE PREMIUM RATES

Farmer borrowing for Self-financedRice under Corn under farmer

M-99 program Maisagana program Rice Corn

…___ _ __ _ __ __ _ __ _ ( % )…_____________________

Farmer 2.0 1.25 2.0 /a 1.25Lending institution 1.5 1.25 - -Government 7.5 4.50 9.0 5.75

Total 11.0 7.00 11.0 7.00

/a Prior to May 1982, the premium rate for self-financed farmers was3.5% and the government share was 7.5%.

Government's large share in the premium is seen as the cost of its commit-ment to social insurance for the protection of farmers.

4.18 Crop losses are assessed according to whether they are total orpartial. Loss is considered total when it amounts to 90% or more of theguaranteed yield, called the average normal yield (ANY). Loss amounting to10% or less of the ANY does not qualify for indemnification. Loss is

/1 The official loan ceiling for M-99 borrowers of P 1,350 per ha hasrecently been increased to P 1,600-1,700 per ha in 17 provinces.

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partial when it ranges between 11% and 89% of the ANY./l ANYs aredifferentiated by province between irrigated and rainfed areas, and wererecently revised upward by an average of about 60% to reflect current actualyields. A total of 130,796 farmers with 239,375 ha have been covered by cropinsurance during the two seasons since its inception; of the total amountcovered, i.e. P 320.9 million, claims represented P 19.4 million or 6%.Only 39% of the claims were settled.

4.19 Evaluation. Agricultural loan guarantee operations in thePhilippines have helped in encouraging lending institutions to extend creditto farmers by minimizing their risk of financial failure. A study by TBACconfirmed that the loan guarantee fund for rice had resulted in increased bankparticipation, particularly in the earlier phases of the supervised creditprograms./2 However, a major problem in the guarantee operations is theirineffectiveness in paying off the banks claims on guaranteed loans, as shownby the negligible proportion (3%) of guarantee payments to amounts covered.This situation was primarily due to lack of clarity In procedures governingdetermination of the extent of the damage caused by natural calarities, andconsequent delays in processing claims (para. 4.08). Furthermore, banks donot generally file loss claims in case of minimal damage to avoid what theyconsider to be cumbersome administrative procedures.

4.20 The impact of the crop insurance program is still unknown. Itseffect on improving production and/or productivity has not yet been proven,and coverage is still very limited. Of the nearly 3.5 million ha planted torice, only 5% were covered during the 1981 wet season and 2% during the1981-82 dry season. Since the credit component of the M-99 program has beendwindling in the last few years, the implication is that the crop insurance

/1 For total loss, indemnity is related to the loan size and corresponds tothe cost of the actual production inputs applied, according to the farmplan and budget, at the time of loss. Partial loss is compensated afterharvest on the basis of the shortfall between the farmer's actual yieldand the ANY, using the following formula to obtain the amount ofcompensation.

ANY - Actual yield x Amount of coverage or loanANY

For example, where ANY = 80 cavans; actual yield = 50 cavans; andamount of coverage = P 1,600, the indemnity paid to the farmerwould be 80 - 50 x P 1,600 = P 600 per ha.

80

/2 The Agricultural Loans Guarantee Policy: a Review, by T.V. Segura,TBAC Discussion Paper No. Dl0-76, August 1976.

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scheme may be following the same path, unless changes are adopted that wouldmake the scheme more attractive to non-borrowing cultivators who pay thepremium of 3.5% compared with 2% paid by the borrowing farmers. If cropinsurance continues to serve the limited objective of safeguarding farmereligibility for fresh loans, without any significant impact on overallproduction and productivity, low-cost alternatives to crop insurance will haveto be explored. The Government should also explore whether its rehabilita-tion programs for persons affected by natural calamities, except those forimmediate relief for food, shelter, etc., should contain a built-in arrange-ment whereby government assistance is tied to the affected persons' existingobligations to banks and their future credit needs. This should help safe-guard both the institutional viability of credit institutions and ensureadditional financial support to Government's rehabilitation objectives.

E. Low Interest Rates

4.21 In the Philippines, as in many other developing countries, lowinterest rates have been used to support government objectives of increasingcredit flows to agriculture and to provide incentives to farmers to bcorrowproduction and investment credit for improvement of agricultural productivityand farm incomes. The low rates were also expected to encourage the expansionof the financial system./l Since the early 1970s, interest rates on bothsupervised and non-supervised agricultural loans have been 10-12%. This waslower than the 16% charged on secured non-agricultural loans and the 18% onunsecured non-agricultural loans and loans not rediscounted with the CentralBank. To support these low interest rates on agricultural credits, theCentral Bank's rediscounting facilities were offered at the preferential rateof 1% on supervised credit and 3% on nonsupervised credit.

4.22 Whether the low interest rate policy served its objectives is adebatable issue; there is much evidence that it did not. Self-sufficiency inrice was achieved by 1977 under the M-99 program, which was financed in itsinitial phases largely through supervised credit. Self-sufficiency in rice isoften stated to be the most direct contribution of the credit policy, thoughit is difficult to assess in the absence of systematic empirical evidence howfar the low interest rate was an important factor for the formal credit flowor how important credit was for stimulating rice production. It is possible,for example, that appropriate pricing policies for inputs and rice could haveachieved the intended production goals.

4.23 There has been a sharp deceleration of formal credit for Masagana99, and most farmers now raise production finance in the informal market atrelatively high rates of interest. The PNB and rural banks, which are theprincipal agencies for delivery of production credit, are by and largeslowing down their commitments under low-cost supervised credit, except ona very selective basis to those who have tangible collateral, though the

/1 Governor J.C. Laya, "Floating Interest Rates in the Philippines: A NewDimension in the Philippine Financial System."

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subloans may appear on paper as supervised credit without collateral./lConsequently, the growth of supervised credit in nominal terms has beensluggish and, in real terms, significantly negative.

4.24 Effective Cost of Borrowings to Farmers and Margins Available toLending Banks. Although the supervised credit interest rate is 12% p.a.,the effective cost of borrowing to farmers is in the range of 26% to 34%p.a. In addition to interest, farmers have been paying the followingcharges on a 6-month loan: service charge (2%), crop insurance premium(2%), compulsory savings to the Barrio Savings Fund (3%) and transactioncosts (3%). These charges, if annualized, represent over 30% of the loanamount. Interest spreads to the lending banks have significantly narrowedwith the introduction of crop insurance, on which the banks pay a premium of1.5% (for rice), and from the increase in the rediscounting rate from 1% to3%. The interest spreads tend to be negative when default costs areadded./2 These are significantly higher for PNB since, unlike the ruralbanks, PNB cannot withhold funds obtained from the Central Bank againstsubloan arrearages. The interest rate structure does not provide incentivesto the lending banks to extend supervised credit on a larger scale, whichresults in the exclusion of small farmers from the credit program. Fornon-supervised and term loans, sufficient analytical data on transactioncosts to farmers and the credit institutions are not available but, by andlarge, banks with lower default rates, are reported to earn a reasonableprofit on such lending.

4.25 The agricultural guarantee funds which reimburse banks fordefaults against subloans affected by natural calamities provided refinanceonly to the extent of 5% to 10% of uncollected M-99 loans, and thereforewere not a significant relief to the banks' liquidity problems arising fromarrearages. The Government proposes to minimize the banks' default costs bya fresh review of past reimbursement claims, and to provide funds of up toe 450 million over a period of three years (1982-85) against subloanarrearages under M-99. This process has now begun. The Government has alsorecently discontinued compulsory savings deposit deductions to reducefarmers' borrowing costs. These measures together with expanded cropinsurance coverage are expected to reduce the lending institutions' costsespecially with regard to default risks arising from natural calamities.However, as long as sizable defaults continue to occur for reasons otherthan natural calamities, the lending costs will continue to be high, esti-mated by TBAC at about 15.5% for supervised credit, compared with relativesubloan interest rates of 12% and 16%, respectively. The default costs workout to about 4% for supervised and 0.34% for nonsupervised credit. Thebanks are, therefore, moving toward lending for nonsupervised credit or so

/1 Based on mission's discussions with rural bankers and PNB.

/2 Source: TBAC. The data base used for transaction cost analysis isbeing further refined by TBAC.

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called supervisedcredit which in reality tends to be collateralized.Appropriate reforms in the interest rate structure for short-term supervisedloans and efforts to reduce transaction costs therefore appear to beurgently needed.

New Interest Rate Policy

4.26 Since 1974, there has been a gradual shift from the low interestpolicy to effect resource transfer at low direct cost, toward more use ofinterest rates to mobilize domestic savings and ensure efficient allocationof resources. In July 1981, as part of the general banking reform, tlhePhilippines adopted a floating interest rate policy and deregulated interestrates on deposits and loans above two years; short-term loans continued tobe subject to a regulated ceiling of 16% for secured loans and 18% forunsecured loans. Effective January 1, 1983 interest rate ceilings onshort-term loans were finally lifted, but interest rates on short-termsupervised agricultural credit rediscounted with CB remain unchanged at 12%,except for supervised credit for corn which now carries interest at 15%.The question of increasing interest rates on other loans, particularly thosefor rice under M-99, is now politically related to price policy for rice.In May 1982 palay prices were increased from P 155 per cavan (48 kg) toP 170 per cavan, although this represented no increase in real terms. Asa result, the Government may have regarded it politically impossible itoraise interest rates on supervised credit.

4.27 Effective July 1981, the Central Bank increased the rediscountingrate for supervised loans from 1% to 3%, and on nonsupervised loans, from 3%to 8%, indicating the beginning of a shift from the cheap money policy.However, the reduced margin now available on supervised credit has created anew concern among rural banks, and has reinforced the shift from supervisedto more secure and flexible nonsupervised credit. Further rationalizationof the interest rate structure on short-term supervised production credithas, therefore, become urgent. Ideally, interest rates should be related tothe average cost of deposit funds and transaction costs of lending banks inorder to minimize reliance on the Central Bank's low-cost resources and tosafeguard institutional viability. The political limitations of such ameasure, however, cannot be ignored. It is also important that interestrate reforms be backed by measures to reduce transactions costs, currentlyas high as about 13% without the cost of funds, especially by lowering theadministrative overheads through a broad-based business expansion. Theimmediate objective should be to reverse the interest rate differentialbetween supervised and nonsupervised credit; the interest rate on supervisedcredit should be flexible enough to cover relatively larger default risks aswell as the cost of services provided by the Government. Moreover, creditprovided by the banks to small farmers should be accompanied by extensionsupport, as needed. The Government should begin a phased program toencourage banks, through appropriate interest rate adjustments, to usedeposit resources rather than low cost government resources for agriculturallending, with the banks assuming responsibility for resource mobilizationand their lending decisions.

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Central Bank Rediscounting

4.28 Government-s credit policy also involves the regulation of access ofthe rural banking system to CB's rediscounting facility up to a ceiling fixedas a multiple of net worth and level of savings and fixed deposits. Thelinkage of the rediscounting ceiling to net worth and deposit mobilization wasintended to promote larger capitalization and self-reliance in financingagriculture. While rural bank deposits increased by 42% during 1975-81, theiruse for agricultural lending was not feasible in view of the interest ratesceilings on agricultural loans linked with low-cost refinancing from theCentral Bank. The reduction in CB's rediscounting facility generally reducedthe rural bank's agricultural lending, since the latter's deposit funds couldhave been used for supervised credit only at a negative margin and at a highrisk of default. The CB refinancing has thus primarily served the objectiveof credit expansion while discouraging resource mobilization through the ruralbanking system.

4.29 In addition to CB rediscounting, diverse other arrangements are inoperation for rediscounting and resource support to credit institutiuons,generally without any unified criteria. Rural banks dealing with CB areauthorized to obtain resources from LBP and DBP; PDBs can use the redis-counting facility of DBP and/or CB; DBP receives funds from the Governmentand CB. This multiplicity of arrangements has a significant potential tolead to inefficiencies in resource allocation. There is no mechanism in CBto make a comprehensive assessment of the resource needs of creditinstitutions, based on an assessment of their lending strategies andperformance.

F. Government Subsidies

4.30 In the Philippines, though credit programs have involved govern-ment subsidies, mainly through low interest rates and budget allocations,to serve as incentives to producers, equity objectives have not beenexplicit. Under the past credit programs, there have been no consistentoperational norms, based on a poverty line, to direct the flow of governmentsubsidies to the appropriate group and to monitor its efficacy. Sincesubsidies contribute to distortions in resource allocations, it would beuseful to review the government strategy in providing subsidies and toestablish guidelines which would ensure that the subsidy is kept to theminimum, that it reaches the people who deserve it and that it serves as acatalyst for promoting economic development. In particular, institutionswhich have depended on Government's low cost funds or subsidies to safeguardtheir own viability and, in the main, to serve borrowers or subsectors whichdo not deserve the subsidy on economic grounds, should review theircorporate goals and operations to focus the impact of subsidy on eligibleclients or subprojects.

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4.31 Past studies in the Philippines have shown that one of the majorcauses for arrearages under credit programs, besides natural calamities, hasbeen the prevalence of highly skewed family budgets of small farmers whoregard credit as one more source of funds to be used at will. Resourcesbeing fungible, a substantial share of the additional funds received throughthe credit programs is utlized for activities not related to crop produc-tion, and after harvest, farmers give low priority to their repaymentobligations to the credit institutions. The misallocation of credit fundsarises when borrowers of formal credit have sizeable prior indebtedness orsignificant unsatisfied priorities such as family health, education, etc.No matter how well organized and technologically sound the credit programsare, they will not succeed unless incremental farm income or increasedoff-farm income is adequate to take care of the borrowers initial needs.In the process, however, credit institutions and, in turn, the Government orthe Central Bank, carry massive arrearages which eventually jeopardize thefinancial viability of intermediate credit institutions. Not only are thecosts involved in this operation substantial, but the unsuccessful creditprograms create new pressures for more government resources for additionalloans and the writing off of past debts. The issue is whether the Govern-ment should use credit institutions as conduits for expanding the supply ofcredit on soft terms if such programs tend to jeopardize the system'sviability and eventually even exclude the poor for whose benefit theprograms were originally designed.

4.32 It should however be recognized that, although phasing out o:E sub-sidies is a complex issue, in the long-term interest of the credit system aswell as the clientele it is supposed to serve, credit programs should bekept distinct from the Government subsidy. Operationally, for instance,Government subsidies could promote borrowers eligibility for credit andfinance institutional development and infrastructure facilities which helpcreate an environment for viable agricultural projects. By and large,credit should serve the borrowers who, on the basis of their skills, equityand the technoeconomic feasibility of the project, qualify for a commercialloan while Government subsidies could be directed to eligible clients on thebasis of well-defined poverty norms.

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5. GOVERNMENT AGRICULTURAL POLICIES, PROGRAMS AND

INSTITUTIONS: THEIR EFFECTS ON AGRICULTURAL INVESTMENT

A. Introduction

5.01 The availability of agricultural credit and its effectiveness onceobtained are in part functions of Government's policies, programs andinstitutions for the agricultural sector. Too often in the Philippines,government financial policies intended to support small farmer developmentthrough expansion of agricultural credit are poorly coordinated with itsagricultural policies and programs aimed at increasing overall productionand raising the incomes of small farmers. As a result, valuable andincreasingly scarce resources are often not efficiently used. In particular,government agricultural policies and programs relating to land reform, theprovision of inputs and extension services, and marketing and pricing ofagricultural production need to be reviewed and appropriately modified tosustain and encourage more rapid growth in the sector. Tenurial reforms,for example, are proceeding very slowly, and relatively few land reformbeneficiaries have received the land titles needed to obtain institutionalcredit. Once obtained, credit is not always used as effectively as it mightbe due to Government-s sometimes inadequate or uncoordinated provision ofinputs and extension services. And most important, marketing and pricingpolicies, but especially the latter, can deprive farmers of a full return ontheir investment. At base, these problems largely reflect the proliferationof public sector agencies involved in agriculture and agricultural credit,and the absence of any effective institution or mechanism to oversee themany programs and ensure the consistency of their objectives with respect tothe credit sector.

B. Tenurial Reforms

5.02 Following the imposition of martial law in 1972, the Governmentdeclared all tenanted rice and corn farms as land reform areas underPresidential Decree No. 27 of October 1972. Government policy has been toestablish family-owned smallholdings as the foundation of Philippineagriculture, and the Presidential Decree sought to transfer the ownershipof tenanted rice and corn lands above 7 ha to the actual tillers. Thereform is in two parts: Operation Land Transfer (OLT) applicable to allfarms (estates) above 7 ha, whereby the tenants become owner-cultivatorsundertaking to pay for the land over a period of 15 years; and the LeaseholdEnforcement Program, for all farms up to 7 ha.

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5.03 Agrarian reform covers 1.5 million ha tilled by 1 million tenantfarmers./l The Ministry of Agrarian Reform (MAR) functions as theadministrative arm for implementation of the land reform program, while theLand Bank of the Philippines (LBP) functions as its financial arm. In eightyears of implementation of OLT, MAR has issued Certificates of Land Transfer(CLTs) to 345,000 farmers, with land totalling 635,000 ha. About 87% of theOLT tarmers have received CLTs. However, because of administrative andprocedural difficulties and socioeconomic and political problems arisingfrom the concentration of land ownership in the hands of a few, the processof settling the financial claims between tenants and landowners, through theintermediation ot LBP, is proceeding rather slowly. So far LBP has madepayment for about 25% of the land (185,000 ha), while only 1,800 farmers(1,648 ha) have become full owners of land after repayment to LBP. LBP andMAR expect that valuation and compensation formalities can be completed by1990. It is important that they give priority to this task, since the mereissuance of a CLT is not in itself a "title" to land, and does not permaitthe agrarian reform farmers to raise capital for land improvement and gainaccess to formal (other than LBP) and possibly even informal credit. Withthe increasing reluctance of banking institutions to provide credit withoutcollateral, the absence of valid titles to land poses a serious constraint tosmall farmers in raising resources for on-farm productivity improvements.

5.04 A comprehensive evaluation of land reform in the Phillipines seemsessential to determine tuture strategies, especially with regard to (a') thesuitability of the existing uniform financial packages for land reform pro-grams and the allied credit programs, considering varying land productivity,status of irrigation, rural incomes and farm family budgets; and (b) LBP'scapacity to serve the multitude of land reform beneficiaries. Consideringthe high transaction costs involved in administering land reform programsand relatively risky lending to small farmers, it would be unrealistic toexpect a single institution, in this case LBP, to expand its operations andnetwork to a scale sutficient to serve all agrarian reform beneficiarieswithout sacrificing its financial viability. Appropriate financial packagesand legal reforms may be necessary to induce other financial institutions,especially the rural banks, to lend to agrarian reform beneficiaries, withan appropriate charge on land. In this context LBP's corporate objectiveswith regard to the land reform program need to be clearly defined inrelation to its other objectives as well as operational costs and the sizeof government subsidies.

/1 Operation Land Transter covers about 730,000 ha (396,000 farmers) andthe Leasehold Enforcement Program covers 732,000 ha (690,000 farmers).

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C. Support Services

Agricultural Inputs

5.05 Seeds. Organization of seed production and distribution in thepublic sector is primarily the responsibility of the Bureau of PlantIndustry (BPI). Private sector involvement in seed programs was initiatedin recent years and has grown substantially for rice and hybrid corn andvegetables. While significant progress has been made in the development ofseed programs, the existing programs have not increased production as muchas expected. The following problems seriously'limit the contribution ofseed programs to agricultural production: (a) piecemeal and unbalanceddevelopment of various program components; (b) failure to apply controlstandards after the initial stages of production and distribution; (c) fartoo few seed processing, storage and handling facilities; (d) lack of welldefined marketing and distribution channels' and (f) lack of effectiveextension work for promoting use of quality seeds. Improvements in theperformance of seed programs in the Philippines call for a concerted effortto strengthen and consolidate the programs under a national scheme withprivate sector participation. Systematic financial assistance needs to beorganized for improvement of seed programs which directly affect levels ofagricultural production and farmer capacity to repay loans.

5.06 Fertilizers. The local fertilizer industry provides about 20% ofthe total consumed; the rest is imported. The local industry is currentlysubsidized at rates ranging from 30% to 60% depending on the type offertilizer, while a 20% duty is paid on imports. The Government intends togradually abolish the subsidy and instead provide production incentives tofarmers through review and adjustment of produce prices. Farmer reaction toremoval of the subsidy on fertilzers and its impact on fertilizer use andproductivity is uncertain.

Agricultural Extension

5.07 Extension services are provided by several institutions, thelargest being MOA's Bureau of Agricultural Extension (BAEx) which mainlydeals with food crops and livestock. With the initiation of theGovernment's supervised credit programs, the effort to expand extensionservices gained strong support, particularly in irrigated areas. The mainapproach was to increase the number of extension staff and orient theextension effort to program implementation in coordination with thefinancing institutions. MOA's present extension staff numbers about 9,300(with new recruits of 800) and is expected to reach a target of 12,500 inthe next few years. Despite the adequate educational background ofextension staff, and the relatively high ratio of extension workers to

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farmers (presently 1 to 270 rice and corn farmers), the performance of theextension service has been constrained because extension arrangements arecommodity-specific and not yet organized on a unified farm systems approach.BAEx primarily serves rice farmers, while specialized agencies dealing withother commodities have separate extension services for coconut, tobacco,sugar, cotton and fisheries. The proliferation of agencies, complicated byinadequate practical training, lack of sufficient mobility of extensionstaff, and excessive involvement of extension staff in credit programs,especialy in subloan collection, has impaired the effectiveness of theextension systems.

5.08 The Bank-assisted National Extension Project (Loan 1626-PH) wasdesigned to overcome some of these problems by introducing a modifiedtraining and visits (T&V) system which would help to unify the extensionstaff. Unfortunately, implementation of this project has been considerablydelayed due to budgetary constraints. Efforts are, however, proceeding tostreamline extension activities through an improved organizational structureand close coordination between extension and research, as well as systematicstaff development and training in T&V methodology.

5.09 Credit Functions of Extension Staff. Under the existing extenr-sion arrangements, field-level extension technicians are responsible forassisting farmers to prepare farm budgets and loan applications, ensuringtimely availability of input supplies, and providing suitable technologypackages and supervising their adoption. Somewhat surprisingly, extensionworkers are also required to assist the banks in collection of loans. TheWorld Bank-assisted National Extension Project (NEP) proposes that theinvolvement of technicians in credit should be phased out under the project,particularly because the emphasis on debt collection conflicts with the mainpurpose of the extension worker, i.e., to assist and befriend his client-farmer. This proposal should improve the quality of extension work, but noarrangements have yet been evolved to ensure appropriate staff developmentin the rural banks, PNB and other institutions to facilitate take over ofthe debt collection function from the extension staff. Government shouldreview the implications of the NEP proposal and suggest appropriate staffdevelopment policies for adoption by the relevant banks.

Integrated Area Development (IAD)

5.10 To avoid the lack of coordination described above, the Governmenthas made several attempts to provide better integrated production packages.Since early 1975, Government has adopted on a selective basis an areadevelopment approach which was an improvement on commodity-specific programssuch as M-99. The IAD projects envisaged horizontal integration ofdifferent phases of agricultural development, namely: infrastructure, inputsupply, technology transfer, processing and marketing. Currently 13 such

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projects are under implementation, the most notable being the WorldBank-assisted Mindoro Integrated Rural Development Project (Loan 1102-PH);the Rainfed Agricultural Development (Iloilo) Project (Loan 1815-PH); andABC Land Settlement Project (Loan 1421-PH). Seven of these projects includea credit component. Experience has shown that despite the apparentintegrated character of these projects, their credit components have notprogressed as anticipated, primarily because the projects tended to utilizethe existing credit delivery mechanism without any significant reforms. Themajor weaknesses in the credit delivery mechanism which affected theperformance of the supervised credit programs still persist and, therefore,institutional support for broad-based rural development continues to belukewarm. Additionally, ineffective coordination, failures of performanceby certain government agencies and shortfalls in budget funds havecharacterized a number of these projects./l

5.11 Integrated Agricultural Financing Fund (IAF). In 1975, theGovernment also established an Integrated Agricultural Financing Fund (US$15million) with assistance from USAID. The IAF concept improved uponcommodity-specific lending arrangements by providing participating banks andsub-borrowers with a single line of credit for multi-crop or diversifiedfarming. The IAF scheme aimed to reduce transaction costs for both bor-rowers and the banks by integrating borrowers' credit use with facilitiesfor better farm management and improved subloan collection by participatingbanks. Implementation of the scheme, however, progressed slowly in view of:limited participation of banks (about 250 out of 1,000) since many banks didnot qualify for the Central Bank's rediscounting facility; slow progress intraining rural bank staff; inadequate national level planning; the tendencyto lend to large-scale farmers; and insufficient extension support due tothe commodity-based (especially rice) extension system. The subloancollection performance is also not superior to that of more typicalsupervised programs. Conceptually, the IAF program is sound and should bethe basis for future broad-based area development programs. However, thecredit institutions, especially the rural banks, are not organized for thistype of program and seem to be excessively dependent on the Central Bank'sloan officers for advice and supervision. It is important that the ruralbanking system become self-reliant in administration of the credit deliverymechanism.

5.12 Innovations in Credit Delivery Mechanism. Also in response to theweaknesses of commodity-specific credit programs, two government agencies,LBP and ACA, introduced significant innovations in credit delivery throughthe Integrated Estate Development Program and the Compact Farm Clusters

/1 World Bank Report NIo. 3796, "Sector Operations: A Review of Agricultureand Rural Development Programs in the Philippines."

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Program, respectively. Together they finance production loans for about40,000 ha. LBP arrangements, in particular, provide professional manage-ment to farmer groups and ensure timely delivery of credit, substantiallyreduce subloan documentation, improve linkages with marketing, enhanceeffectiveness of the extension system, and seem to result in relativelybetter subloan collection performance. The LBP program is not yet finan-cially viable and must be cross-subsidized from profits under otheractivities or subsidies from the Government. It has, however, a potentialto become viable through participation of other lending agencies besidesLBP, stronger linkages with the national extension system; and the provisionof integrated rural savings mobilization and credit delivery, based onbanker-customer confidence.

D. Marketing and Pricing Policies

General

5.13 Different government agencies are responsible for formulating andadministering price controls for various commodities while free marketprices govern the bulk of agricultural products. Furthermore, the degree ofprice intervention, taxes and subsidies varies both by commodity and byinput. Government pricing policies are generally influenced by theconsideration not only of maintaining producer incentives but also lowconsumer prices.

5.14 Pricing policies have had a certain impact on internal agricul-tural terms of trade, which improved from the early 1960s to 1975 and thendeclined through 1981. The agricultural international terms of trade alsodeclined due, in part, to factors such as the increased cost of petroleumproducts and a substantial fall in sugarcane and coconut prices. A recentstudy by the University of the Philippines, Los Banos,/1 observed that "theeconomic policies affecting prices of outputs and inputs have created anincentive structure that substantially favors non-agriculture overagriculture. During the 1970s, the growing regulation of the agriculturalsector has led, perhaps inadvertently, to implicit taxation or negativeprotection in agriculture particularly in the major export crops."/2

/1 Christina C. David, "An Analysis of Agricultural Policies in thePhilippines," February 1982.

/2 The World Bank and Government have during 1983, planned a study of thecurrent policies and programs for agricultural pricing and marketingin the country, inter alia, to document and explain how agriculturalpricing and marketing policies have helped shape the financial incen-tives and risks facing the private sector.

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Government Agencies Involved in Marketing

5.15 The primary government institutions active in the marketing sectorare the National Food Authority (NFA) for foodgrains and other basiccommodities, the National Sugar Trading Corporation (NASUTRA) for sugar andthe United Coconut Oil Millers (UNICOM). NFA, whose mandate is to ensurestable prices through its purchase and storage activities, acts as a buyerof last resort and has a monopoly on import and export of grains. Theprocurement operations of NFA are basically geared toward maintenance ofbuffer stocks for food security purposes and price stabilization both at theproducer and consumer levels. It is estimated that NFA has procured about8% (1977 and 1981) to 18% (1978) of marketed rice, although in recent yearsthe average has been more around 10%./1 However, NFA price policies forrice appear to be consumer biased.

5.16 Although the relatively large procurement of marketed surplus inthe late 1970s indicated a certain degree of effectiveness in NFA price sup-port operations, this resulted in huge stocks held by the grains authorityin 1979-80 which could not be easily exported because of the poor quality ofPhilippine rice. At the same time, NFA's rapid expansion in warehousingcapacity has probably reduced the role of private sector trading. In thisrespect it will be useful to assess whether NFA should continue to expandits costly infrastructure program. The extent of government subsidy in NFAoperations is not known, but in two of the last four years, NFA lost aboutP 200 million a year on its procurement operations.

5.17 NFA's procurement operations have not been adequately accessibleto small farmers, and there is now a trend toward institutional buying fromor through farmer organizations (SNs). For the last two years, NFA hasstarted to implement a grain procurement scheme, targeted over a period offive years, in which SNs act as procurement agents for the grains authority,buying and collecting palay from their members for a small fee (P 1.5 percavan) /2 paid by NFA and using post-harvest facilities that the agency putsat their disposal.

/1 Distribution of food commodities is carried out through NFA kadiwastores which serve to provide the public, particularly low-incomefamilies, the essential consumer items, although in limited quantities,at lower prices, usually 10-15% less than market prices.

/2 In addition they would get P 1.5 per cavan for premium quality andP 1.0 for transport costs if they haul the produce themselves to NFAbuying stations.

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5.18 NFA is responsible for maintaining support (floor) prices forpalay, corn, mango, sorghum, soybeans, peanuts and cassava. Prices aredetermined by an inter-agency committee (chaired by the Minister ofAgriculture), largely on the basis of estimated production costs. Prices ofpalay and corn have been adjusted upwards several times in the last twoyears, the latest revision occurring in May 1982 as a result of an increasein input costs.

5.19 Copra and coconut oil prices reflect world market conditions, butdomestic retail prices are regulated by the Philippine Coconut Authority(PCA). Copra is subject to a levy which is recovered by mills and paid intoa special fund used for various purposes including price stabilization. Forsugar, NASUTRA and the Philippine Sugar Commission (PHILSUCOM) determine theprice to be received by the miller and, in turn, by the farmer. Retailprices for household sugar are controlled.

5.20 Domestic retail (ceiling) prices of a number of commoditiesincluding rice and corn are fixed and monitored by a Price StabilizationCouncil under the Ministry of Trade and Industry. Although penal andadministrative sanctions may be applied in emergencies, price violations areusually not treated seriously, mainly because price control is seen only asa temporary measure, hopefully to be phased out in favor of free markets.

E. Cooperatives

5.21 Hlistorical Introduction. Although the spirit of cooperation(bayanihan) is as old as society in the Philippines, formal cooperativeorganizations date only from 1916. Cooperatives have gone through a seriesof reorganizations in response to a variety of situations in which thecommercial or political basis of the existing structure has been judged nolonger adequate by the Government. The latest major reorganization was in1973, when Presidential Decree 175, "Strengthening the CooperativeMovement," was promulgated. PD 175 emphasizes cooperative developmentthrough stronger primary level organizations (samahang nayons) /1 andreaffirms the cooperative principles of open membership and democraticcontrol through one-member-one-vote.

/1 Samahang nayons, originally constituted as village level pre-cooperatives,have now been recognized as full-fledged cooperatives. A samahang nayonis composed primarily of small farmers, having fewer than 7 ha of land andresiding and/or farming within the geographical limits of a barrio.Membership must include at least 25 persons. In early 1982, the numberof samahang nayons exceeded 22,000. Samahang nayons have been recentlyauthorized to undertake commercial activities.

C

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5.22 The cooperative structure in the Philippines consists of anational cooperative union, other national organizations, regional apexbodies, provincial societies, municipal groupings and barangay-levelcooperatives and precooperatives (Annex 5). The strength of the variouscooperatives at the different levels varies greatly, but seems greatest atthe lowest levels, with deterioration upward through the structure.

5.23 The Cooperative Marketing System (CMS) was established in 1975 toserve as a national apex institution for marketing the products of membercooperatives and for supplying inputs to these members. Its trading volumein 1980 amounted to P 9.8 million in marketing and P 2.4 million ininput supply. Corresponding volumes for 1979 were P 11.6 million andP 4.3 million. The decline registered in 1980 continued in 1981, reflectingproblems in affiliated Area Marketing Cooperatives (AIIC) and inability toachieve economies of scale and commercial viability. Timeliness in inputdelivery, payment terms and collections of accounts receivable have beenspecial problem areas. Steps to liquidate CIMS are reportedly underway.

5.24 At the provincial level, AMCs are formed by samahang nayons.Some 43 AMCs are operational. Member samahang nayons numbered about 4,000at the end of 1980, including about 225,000 farmers. Paid up capital inAMCs approximated P 9.6 million. Of 42 AMCs surveyed by the Government'sBureau of Cooperative Development (BOCD), only five reported both profita-bility and positive net worth. An additional nine indicated currentprofitability and negative net worth, while four were just beginningoperations. Eleven were currently losing money but had positive net worth,while 13 required liquidation or rehabilitation. AMC's problems includeoperating losses and poor management, and reflect a desire to provide"service to members" without sufficient commercial motivation. Farmerreluctance to support the AMCs seems to stem from the inability ofcooperatives to offer attractive prices, to pay in full and on time, tooffer services related to marketing, and to project an image of fairness andcompetence.

5.25 Credit-oriented cooperatives include cooperative rural banks(CRBs) and credit unions. CRBs are generally unit banks organized primarilyon a provincial basis by samahang nayons to provide financial services totheir members (para. 6.70). CRBs face certain unique problems. Theirestablishment on a provincial level gives them a relatively large marketarea, which raises their costs. Resource mobilization is also difficultbecause of the inconvenience of their facilities to farmers in remote partsof the provinces concerned, although by June 1980, 29% of total SN fundswere reported to be deposited with CRBs. Cooperative credit unions (840)which constitute over 50% of the total registered cooperatives are, by andlarge, viable and operate at a profit.

5.26 Samahang nayons ideally have between 25 and 200 members. SN4s areexpected to facilitate bulk purchases of inputs, to aggregate members'

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produce for sale to area marketing cooperatives or other buyers, and to bulkmembers production loan requests or otherwise assist lenders throughmeasures which would decrease thieir transaction costs of lending to a largenumber of small farmers. The model promoted by BOCD is input supply andproduce marketing through an AMC, credit and saving with a CRB, andremittance of delivery proceeds by the AMC to the CRB for the accounts ofmembers. Given the problems and coverage of AMCs and CRBs, however, thisideal is not fully realized.

5.27 A recent study done by TBAC indicated that while government tookinnovative measures to promote cooperatives through resource allocation andmanpower support, the cooperative structure concerned with agriculture orother farmer based activities is now beset with diverse problems whichinclude: weak village level cooperatives; insufficient resources due tolimited deposit mobilization and excessive reliance on government's limitedbudgetary funds; poor management capabilities at times aggravated by a lackof integrity intrinsic to the cooperative movement; and insufficientgovernment supervision and monitoring due to organizational constraints.Consequently at the field level, initial farmer response to cooperatives hassignificantly weakerned. Recent measures to formalize SNs as regularcooperatives with powers to undertake economic activities to earn profitsmight help revitalize these organizations. Additionally, TBAC has suggestedthat cooperatives should be given a built-in mechanism, with an appropriatelegal framework, to improve their business turnover through a monopolyto market rice and other commodities produced by small farmers, undertakeproduction, purchase and sale of seeds, and market fertilizers and otherinputs for the manufacturers. This would obviously curtail the privatesector activities, the vitality of which seems to have been by and largesafeguarded in the Philippines; however, TBAC believes that given thepolitical will, the transformation of the policy framework to develop strongand effective cooperatives will be possible. As for the non-agriculturaland nonfarmer based cooperatives, especially credit unions, and credit-,consumer-, service- and producer-cooperatives, these are generally viablebecause their business risks are relatively limited. TBAC has suggestedthat these cooperatives should integrate their resources to expandoperations. Also, there is a suggestion that an apex organization for allcooperatives should be established so that risks in small farmer lendingcould be set off against profits in commercial banking and other profitableactivities.

5.28 Special funds provided by the Government for cooperative develop-ment are nearly used up. SN capital build-up (P 100 million) standslargely invested in cooperative banking and is not available for othercooperative projects; the Samahang Nayon Support Program (P 5 million) isset to end soon; the Cooperative Flarketing Program (P 95 million) has pro-vided only a limited benefit to AMCs due to their financial problems; and the

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Cooperative Loan Fund (P 114 million) is blocked by overdue loans whichhave a low collection rate of 3%. It is clear that the Government shouldarticulate its strategies for future initiatives in cooperative development.In evolving new strategies, greater attention should be provided to savingsmobilization, self-help and the service-oriented objectives of cooperatives,especially through strengthening of village and municipal level cooperativescombined with suitable linkages with apex-level cooperative or commercialorganizations and government assistance to institutional development,-without which cooperative credit arrangements would not succeed.Cooperative credit should commence with credit union activity, howevermodest, rather than credit disbursed from government funds, to promoteself-help, business skills, and management of credit. The Government shouldset up a task force to outline the strategies with regard to futuredevelopment of cooperatives generally and those dealing with credit inparticular.

F. Administrative Organization

5.29 Since the early 1970s, the Philippine Government has attempted toreinforce its development efforts by supporting the decentralization of itsadministration and expanding the participation of local governments.Several measures were therefore introduced during the last decade to makethe administration more effective in responding to the country s socio-economic objectives. However, the administrative structure as it hasevolved over a long period of time has become unnecessarily complex andseems to present a formidable challenge to effective management of theeconomy and the pursuit of growth. This is particularly a problem for theagricultural sector as a whole, for which there is no single agencyresponsible for policy formulation, planning, determination of priorities,and accountable for the results. The sector is handled by 19 of theGovernment's 26 ministries. Responsibilities for agriculture are scatteredamong 125 central and 36 regional agencies, abetted by several committeesproviding links between the ministries and the executing agencies. Most ofthe agencies are autonomous and have a designated role to play. Since thereare too many bodies, the Government faces the problem of proliferation ofprograms and insufficient coordination in their implementation.

The Agricultural Sector

5.30 At the national level, MOA is responsible mainly for planning,programming and coordination of rice and corn production. Other importantministries concerned with the agricultural sector include the Ministries ofNatural Resources (MNR), Agrarian Reform (MAR) and Public Works and Highways(MPWH). MNR is responsible for lands, forestry and fisheries and mines; MARimplements land reform programs with support from the Land Bank of thePhilippines; and MPWH is concerned with irrigation development, flood controland drainage, and rural roads construction. Four agencies under the

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administrative control of MPWH are important to agriculture, especial:Ly theNational Irrigation Administration (NIA) and the Farms Systems DevelopmentCorporation (FSDC). NIA operates and maintains 141 national irrigationsystems which irrigate 363,000 ha during the wet season and 640,000 c:rop areasplanted to rice. The FSDC provides management support to farmers, and assiststhem in the formation of water users' or irrigation service associations undercommunal irrigation schemes. In addition, about 13 agencies attached to thePresident's Office are concerned with agriculture and significantly influencethe Government's sectoral development policies. These agencies tend ito befocused on important crops like coconut and sugar or specific matters likeagricultural credit and crop insurance.

5.31 The National Economic and Development Authority (NEDA) is one ofseveral other ministries involved in agriculture, and is responsible forplanning and coordination. It has two agencies under its administrativesupervision,/l 8 area development bodies, 12 regional development councils(RDCs), and two banks attached for policy and program coordination. NEDA isnot an implementing ministry, and instead relies on associated agencies, suchas those listed above, and the line ministries for project implementation.NEDA has a special relationship with the RDCs, which were established aftermartial law was imposed in 1972, and NEDA's regional offices act as the RDCs'executive arms in each region.

5.32 NEDA's regional and provincial planning mechanisms do not expli-citly identify the role expected of banking institutions, nor do theycoordinate with the concerned line ministries and local government agenciesin developing bankable projects. The Government recognizes that the arrange-ments for translating plan programs into bankable projects are notably weak.There is no single person or entity responsible for coordinating thedelivery of agricultural services and inputs undertaken separately byseveral government agencies, especially at the provincial and municipallevels. This has resulted in an overlap of activities, lack of standardsfor the deployment of extension personnel, and inadequacies of extensionworkers in terms of the skills necessary to meet the varied requirements forintegrated area development. The Government therefore proposes to set up anintegrated area management system for agricultural services under which an-Area Manager- will have the necessary authority for coordinating andintegrating agricultural services. Eventually, an extensive reorganizationof the MOA is also contemplated. This effort should help improve the creditdelivery mechanism.

/1 Laguna Lake Development Authority and National Census and StatisticsOffice (for agricultural data).

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5.33 The Government has also established a Presidential Commission onReorganization to review its entire administrative structure. It isanticipated that the Commission will try to minimize complexities in thesystem so that government intervention, where needed, does not provecounterproductive.

The Credit Sector

5.34 Presidential Committee on Agricultural Credit (PCAC) and TechnicalBoard for Agricultural Credit (TBAC). The creation of the PCAC and TBAC andthe Technical Board for Agricultural Credit (TBAC) arose out of a need tohave a permanent body which could oversee the entire agricultural creditsystem - a body which would regularly assess the agricultural creditsituation, be a repository of data and information, provide essential coor-dination, undertake research, and recommend policy directions and options todecision makers. PCAC /1 is responsible for advising government-ownedfinancial institutions concerning agricultural credit; reviewing creditprogram proposals and operations; ensuring coordination of activitiesrelating to agricultural credit undertaken by financial institutions andother government agencies; synchronizing production credit with other typesof credit for land development and improvement, mechanization, inputmanufacturing and supply, transport and storage, processing, marketing,etc.; establishing priorities for credit allocation; and overseeing thecredit activities of institutions not wholly owned by the Government butinvolving government funds. PCAC is, however, not expected to attend today-to-day management of the agricultural credit sector.

5.35 The operational extension of PCAC is the TBAC,/2 which is respons-ible for research, oriented toward the design and improvement of agricultural

/1 PCAC members comprise the following: Governor of the Central Bank(Chairman); Minister of Agriculture (Vice-Chairman); Director-General ofthe National Economic and Development Authority; Minister of LocalGovernment and Community Development; Minister of Natural Resources;Minister of Agrarian Reform; President of the Philippine National Bank;Chairman of the Development Bank of the Philippines, and President ofthe Land Bank of the Philippines.

/2 TBAC members consist of the Deputy Governor of the Central Bank(Chairman); Deputy Minister for Cooperatives; Deputy Minister ofAgriculture; Deputy Minister of Natural Resources; Assistant DirectorGeneral of the National Economic and Development Authority; ExecutiveVice President of the Philippine National Bank; Executive Director of theNational Food and Agriculture Council; Deputy Minister of AgrarianReform; Administrator of the Agricultural Credit Administration; Managerof the Agricultural Department of the Development Bank of thePhilippines; Senior Vice President of the Land Bank of the Philippines;Director of the Department of Rural Banks and Savings and LoanAssociations of the Central Bank of the Philippines.

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credit programs. TBAC evaluates credit policies and studies proposals fornew projects, project concepts and institutional changes. While some TBACassignments are undertaken at the request of PCAC or TBAC members, much ofits work is initiated by the staff in response to their own view of issuesand policies. One of TBAC's major contributions has been the derivation ofcredit plans, which were essentially projections of credit use under speci-fied farming conditions and production targets. As the PCAC secretariat,TBAC staff prepare the agenda for PCAC meetings, which are held at leastquarterly. TBAC has also organized several national conferences andnumerous other meetings to discuss issues and disseminate findings. It haspublished a number of studies, and for a while published a statisticalseries on agricultural credit./l TBAC has also produced a number of brief-ing or position papers for the Chairman of PCAC and other Committee arLdBoard members.

TBAC Staff Status and Prospects

5.36 The TBAC staff has been independent and innovative, and appearsto have taken well-reasoned positions which were probably not initiallypolitically popular. Its leadership has retained a research and issuesorientation. Founded as a response to credit problems arising from theM-99 program, TBAC has challenged some of the conventional wisdom respon-sible for M-99 and numerous other government credit programs including thosesupported by external donors.

5.37 TBAC is not, however, in a position to provide a formal overallreview of the agricultural credit sector, despite the fact that it has themost comprehensive view of any agency concerned with rural credit in thePhilippines. Athough its staff monitors individual institutions active inrural credit, the specification of reporting requirements for lenders andthe collection and processing of information returns remain the province ofthe Central Bank. An additional problem is that reporting categories andregional boundaries used by several major government-owned lenders are notstandardized.

5.38 TBAC is the key agency for reviewing and monitoring agriculturalcredit but is not organizationally designed to undertake a sectorwideassessment of development programs, institutional performance and problems,resource mobilization arrangements and monitoring. TBAC-s access toindividual institutions is limited; TBAC and the Central Bank's operationaldepartments have limited rapport and consultations; and TBAC has no

/1 This series was discontinued because of changes in reporting require-ments specified by the Central Bank.

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machinery to review credit flows to avoid duplication and overinvestment.While the TBAC's contribution to research in agricultural credit issues andpolicy dialogue has been outstanding, organizational limitations havehampered its efforts in bringing about action-oriented reforms.

5.39 TBAC staff are directly responsible to the Ministry ofAgriculture. The possibility of making TBAC a department of the CentralBank has been suggested as one way in which it could gain more control overthe rural credit information system and upgrade its monitoring andanalytical activities. One view is that if TBAC is merged with the CentralBank, it would increasingly become a think tank for the Central Bank ratherthan an agency to which all institutions represented in PCAC/TBAC have anaccess. In turn, TBAC staff might find it more difficult to obtaincooperation from institutions other than the Central Bank. TBAC staffremain in a situation which is bureaucratically unstable, however, and inthis position may believe that their best interests lie in amalgamation withthe Central Bank, the most powerful agency in PCAC. There are costs andbenefits to all possibilities, including continuation as at present. TBACis unique to the Philippines, and has been a highly effective andindependent mechanism for evaluating some of the major credit programs.Given this role, TBAC's future disposition should receive carefulconsideration in the context of any major initiative which the Governmentmight take in the credit field.

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6. THE STATUS OF MAJOR INSTITUTIONS IN THE RURAL FINANCIAL SECTOR

6.01 The various institutions active in the rural financial market havebeen affected in different ways by developments in the sector during the lastdecade. The status and performance of the most significant of theselenders, on whom the sector's future strength will depend, is reviewedbelow. Included for discussion are the Philippine National Bank, Land Bankof the Philippines, the Agricultural Credit Administration, the DevelopmentBank of the Philippines, private commercial banks, the rural banking system,thrift banks and cooperative rural banks. Finally, the performance of therural banks, DBP and LBP during the implementation of World Bank-assistedagricultural and rural development projects is reviewed.

A. Philippine National Bank (PNB)

6.02 Agricultural Lending. Over the years, PNB has emerged as thecountry's largest commercial bank, with a network of 176 domestic branchesand over 25% of the total resources of the commercial banking sector. During1975-81 PNB's resources increased at an average annual rate of 25% in nominalterms and at 5% p.a. in real terms (Annex 6, Table 1). Pursuant to its man-date, PNB participates in government-sponsored agricultural credit programs,the most notable among them being M-99. Traditionally, PNB's agriculturallending has been concentrated in sugar (71%), rice (15%) and livestock andpoultry (10%), besides supporting supervised credit programs for tobacco,vegetables, and backyard cattle (Annex 6, Table 2). PNB also extends sizableloans to government agencies, especially the National Food Authority (NFA) forits rice procurement operations (Annex 6, Table 3). PNB's credit line to NFAhas grown from P 100 million in 1975 to P 0.5 billion in 1981.

6.03 In 1975, PNB's agricultural production credit reached P 2.2 bil-lion which amounted to about 12% of its total loan portfolio and over 30% oftotal institutional agricultural credit. Since 1976, however, the growth inPNB's agricultural production credit has been minimal (Table 6.1). During1976-78, PNB's loan disbursements were lower as a result of a depressedexport market for major agricultural commodities, reduced lending underM-99, and a change in credit arrangements for sugar production.

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Table 6.1: AGRICULTURAL PRODUCTION LOANS GRANTED BY PNB (1975-81)(P billion)

% of agricul-tural produc-

Agricultural pro- tion loans toduction loans Total loans /a total loansAt At At At At

current 1975 current 1975 1975Year prices prices prices prices prices

1976 1.8 1.7 14.9 14.0 12.11977 1.2 1.0 14.1 12.2 8.21978 1.0 0.8 16.8 13.6 5.91979 2.1 1.4 21.4 14.6 9.61980 2.3 1.3 29.3 16.9 7.71981 2.5 1.4 28.0 15.0 9.3

/a All sectors.

Source: PNB

6.04 Sugar. Prior to 1978, 80% of PNB's sugar loans financed tradingactivities of its own sugar marketing subsidiary. W4ith the transfer in 1978of sugar marketing operations from its subsidiary to a government agency andthe takeover of several loan accounts by the newly established RepublicPlanters Bank (RPB), PNB-s share in total formal credit for sugar declinedfrom 78% in 1975 to less than 30% in 1980. The expanding role of RPB, whichhas been sponsored by sugar industry interests, and the emergence of manyproblem accounts in PNB's sugar loan portfolio, seem to have restrained PNBfrom expanding its commitments in the sugar industry. Thus, the 1981 levelof production credit for sugar in real terms (P 1 billion) was lower thanthe 1975 level of P 1.4 billion.

6.05 The government should review the future role of PNB, RPB and otherbanking institutions in financing expansion and rehabilitation of the sugarindustry. The Government's Philippine Sugar Commission (PHILSUCOM) hasformulated a development plan which proposes to increase current sugarproduction of 2.3 million m tons by some 690,000 m tons to meet exportquotas and rising domestic demand. This increase would require the plantingof an additional 100,000 ha of sugar and improvement of milling capacityutilization which is currently low at 65-70%. Overall, additional croploans of P 1 billion and P 400 million for plantation development wouldbe required. Prior to launching such an ambitious program, a review offinancing arrangements for sugar is a matter of high priority. It would bebeyond the institutional and financial capabilities of a single bank, in

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this case the RPB, to undertake such a massive development program on itsown; consequently, a broad-based banking arrangement for financing the sugarindustry's renovation and development is important.

6.06 Rice and Other Crops. PNB's rice loans declined from 21% of itstotal production credit in 1975 to about 10% in 1981. Since the launching ofM-99 in 1973, PNB disbursed loans amounting to e 2.3 billion to some1.4 million farmers (Annex 6, Table 4). PNB's share in total M-99 credit hasbeen about 50%. However, the rate of subloan disbursements which reachedP 600 million (for 643,000 ha) in 1974 declined to P 151 million for64,000 ha in 1980. Of its total outstanding loans under M-99, PNB carriesarrearages of P 489 million /1 or 85%, and loans amounting to P 306 mil-lion have been restructured. Arrearages under supervised credit for corn werealso high, at about 93% of outstanding loans (P 112 million). Overallcollection rates averaged 85.6% for 1975-81, with the lowest rate (68%) forthe year 1981 (Annex 6, Table 5). In general, collection rates are low forrice, corn, sugar, and coconut, but satisfactory for tobacco, livestock andpoultry. In view of the high level of arrearages, PNB is now selective inextending new loans and, as a result, coverage of small farmers, for whomsupervised credit is intended, has declined in PNB's credit programs.

6.07 PNB and the Extension Service. As a government bank, PNB iscommitted to support Government's socioeconomic policies and receives fieldlevel support from the Government's extension staff in implementing theseprograms./2 Since most PNB staff dealing with agricultural loans have hadvery limited exposure to agricultural lending and PNB lacks incentives toemploy additional staff for this purpose because of negative or low interestspreads, supervised credit, especially subloan collection, tends to be overlydependent on Government's extension workers, while nonsupervised credit tendsto be excessively collateral-oriented rather than determined by a subproject'stechno-economic viability. Thus, aside from the normal extension duties ofassisting small farmers to prepare farm budgets, ensuring timely availabilityof input supplies, and supervising adoption of technological packages, theextension staff are responsible for carrying out loan collection on acommission basis (P 6 per loan and P 3 per loan in default).

6.08 PNB's reliance on the extension system for debt collectionappears to have been detrimental to the quality of both extension work andPNB-s loan portfolio (para. 5.09). Debt collection seems to conflict withthe principal focus and thrust of extension. When extension workers receivefinancial incentives to process and collect loans, they tend to concentrateon farmers who are eligible for bank loans to the neglect of those who areineligible for or do not need loans; consequently, their service to thegeneral farming community falls off. The intermediate role of extension

/1 Past due loans: P 183 million; restructured loans: P 306 million.

/2 This arrangement is also applicable to supervised credit programsadministered by private and cooperative rural banks.

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workers in collecting loans has also adversely affected PNB's loan portfoliosince a borrower having no direct contact with his bank, perceives credit asassistance with the lowest priority for repayment. This is exacerbated ifthe bank is government-owned and if, as is true in the Philippines, there isa high turnover rate of extension workers. Consequently under WI-99, PNBcarries arrears of about P 489 million, of which P 180 million are longoverdue. Cross subsidization of losses on supervised credit is thussignificant and, from a financial point of view, PNB has no incentive tolend for this purpose, although it continues to do so on socioeconomicgrounds, and regards subsidies as regrettable but necessary.

6.09 Long-Term Lending Strategy. PNB seems to have no long-termstrategy for financing broad-based agricultural development throughout thecountry. In view of its total dependence on government extension staff, itsagricultural lending plans do not go beyond the government-sponsoredcommodity-specific programs which are often constrained by the limitationsof the extension system itself and heavy arrearages. As for traditionalsugar financing, no well articulated strategy is in evidence. Medium- andlong-term lending is minimal, though capital investments through renewal ofshort-term loans on the strength of collateral is not uncommon.

B. Land Bank of the Philippines (LBP)

6.10 Organization. LBP-s primary responsibility has been to serve asthe financial arm of the Government-s agrarian reform program, to effect andhold farmers amortization agreements and to provide credit in support ofproductive activities. In line with the latter objective, LBP is curentlythe implementing agency under the Bank-assisted Small Farmer DevelopmentProject (Ln. 1646-PHl). It is also involved in commercial banking in orderto generate revenues to offset a portion of the public sector costs of landreform. LBP operates through agrarian, banking, and operations divisions atits Head Office in lIanila. The operations division is concerned withadministration and accounts. The agrarian and banking divisions haveseparate field-level organizations without any operational links between thetwo functions. The agrarian division has 26 field offices and 62 subofficeswhich collect land reform dues from farmers and extend credit. The bankingdivision has established 14 offices in various regions.

6.11 The Government has recently merged the Agricultural Credit Adminis-tration (ACA) (see paras. 6.22 ff.) with LBP so that an expanded LBP can beeffective in financing both rural development activities and land settlementprograms. Unlike DBP which concentrates more on medium- and large-scalecommercial enterprises through its essentially urban-based branches, LBPcould develop greater penetration in rural areas through its field officesand estate-level suboffices. LBP also has a potential to function as a leadbank in the rehabilitation of rural banks and in the formulation of broad-based banking arrangements for small-scale agricultural development. LBP's

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corporate goals and land reform objectives would need to be redefined,however, in the interest of overall sectoral development (para. 6.20).

6.12 Resources. LBP-s resources comprise government equity(P 1.4 billion), government deposits (P 1.7 billion), long-term borrow-ings (?P 1 billion) and other short-term commercial resources (Annex 6,Table 6). Deposits of private individuals constitute only about 1% of LBP'stotal non-equity resources. LBP-s debt-equity ratio is, however, relativelylow at 2.7:1 in 1981. Government equity provided for financing land reformoperations remains underutilized due to slow progress in settlement of landreform claims and issuance of bonds to farmer-landowners. LBP's debt-equityratio, is projected to be at 5.5:1 by 1986, when land claims will be fullysettled. LBP-s overall long-term resource position inclusive of landamortization transactions is at present comfortable and indicates a surplusof e 1.8 billion (Annex 6, Table 7). Its overall liquidity stems fromsizable funds placed with it by the Government; as a commercial bank, ithas made only limited progress with regard to mobilization of deposits.

6.13 LBP declares no dividends on the government equity which consti-tutes about 20% of its resources. Interest rates on government depositsalso tend to be relatively lower than the commercial rates. LBP's overallprofitability is thus comparatively high though it declined from 2.9% oftotal assets in 1975 to 1.7% in 1981. LBP's losses on agrarian reformamounted to P 58 million and e' 78 million in 1980 and 1981, respectively,but were offset by profits in commercial banking.

6.14 Agricultural Lending. LBP lending now totals about P 800 mil-lion, which constitutes a modest 1.5% of the total institutional credit foragriculture. The bulk of this credit has gone to finance processing andmarketing operations, including those of NFA, and less than 10% for produc-tion (Table 6.2 and Annex 6, Table 8). LBP's role in agricultural creditis, however, unique. First, it is the only institution responsible forassisting the lower strata of the small farmer-tenants and, second, it has aspecial stake in the development of smallholder tenants, on whom it dependsfor liquidation of land reform dues (Annex 6, Table 9). The focus of LBP'soperations is not on credit, per se. LBP intends to adopt an integratedapproach to small farmer development, which comprises: (a) implementation ofan Integrated Estate Development Program (IEDP); (b) promotion of agri--business units with participation of groups of farmers and management supportfrom LBP or its subsidiaries;/l (c) sponsorship of infrastructure projects,such as rural roads, irrigation, power, through government agencies, and (d)provision of support services, especially post-harvest facilities to farmerson a lease-purchase basis.

/1 LBP has established an agri-business subsidiary, Masaganang SakahanIncorporated (MSI) to support agri-business activity. Another LBPsubsidiary, Lamang Bayan Realty Development Corporation (LBRDC),assists former landowners in shifting their investments fromagriculture to industry.

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Table 6.2: LBP: AGRICULTURAL LOANS GRANTED(P million)

At current prices 1980 atActivity 1975 1980 1975 prices

Food CommoditiesCereals 0.6 309.9 179.5Livestock & poultry 1.6 49.3 28.6Fisheries 0.6 1.8 1.0Others - 50.5 29.3

Subtotal 2.8 411.5 238.4

Export and commercial crops 0.3 7.2 4.2

Others 2.0 378.8 219.5

Total 5.1 797.5 462.1

6.15 Integrated Estate Development Program. In view of the lack ofsuccess of commodity-specific credits programs, LBP launched the IEDPconcept for land reform areas (estates) /1 in order to provide an integratedpackage of credit, extension, post-harvest and marketing facilitiessupervised by a full-time Farm Management Group (FMG). An FMG comprises anLBP Estate Development Coordinator responsible for program implementationand 4-5 field level technical and extension staff deployed by the Ministryof Agriculture (MOA), the Ministry of Agrarian Reform (MAR), the Ministry ofLocal Government (MLG) and other related agencies. A master plan and, anannual development plan and budget are prepared for each IEDP as a basis forproduction credit programs and subprojects to be financed by medium- andlong-term credit. The IEDP approach is a distinct improvement over theexisting credit delivery mechanisms adopted by other banks because: (a) thecredit institution has day-to-day contact with borrowers; (b) bulkprocurement of inputs reduces the cost of production; (c) technical adviceis available on a regular basis; (d) a marketing tie-up is arranged with theNational Food Authority; and (e) postharvest facilities help improvefarmers'incomes.

/1 Estates cover one or more contiguous or adjacent areas and include300-500 farmers.

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6.16 LBP realizes that it will not be able to introduce the IEDPconcept in all land reform areas. First, it lacks the institutionalarrangements to do so, and second some very poor areas require a good deal ofbasic infrastructure and other kinds of assistance before any formal creditprogram can be viable. During 1978-81, LBP established about 59 IEDPs witha coverage of 33,000 ha and 25,000 farmers; it actually financed about 10,000farmers (Annex 6, Tables 10 and 11). This represents only a fraction of thearea under its jurisdiction, which totals 200,000 ha held by about 110,000farmers. By 1987, with progress in settlement of land reform claims, LBP'spotential clientele would further expand to 300,000 farmers with an area of494,000 ha. The IEDP concept would thus involve a major effort for which LBPis at present institutionally unprepared.

6.17 A recent LBP survey indicated that for the majority of land reformfarmers, income levels in real terms have not improved and their familybudgets continue to be in deficit, particularly in rainfed areas where theincidence of poverty is notably high. The total annual gross income of mostland reform farm families is not sufficient to meet minimum nutritionalneeds and other basic requirements, and by and large, the land reformbeneficiaries comprised the lowest 40% of the rural population. As a result,LBP's collection performance in the land reform areas has been very low(about 50%) and amortization collection has been as low as 16%. At the sametime, LBP's collection costs amount to 20% of the amount collected under thereform program. LBP-s land reform operations are now heavily subsidizedfrom profits earned from government equity contributions and commercialbanking operations, but in view of Government-s resource constraints,subsidies should be kept to a minimum and subsidy programs need to befocussed on target groups in order to achieve the desired equity objectives.

6.18 New IEDP Strategy. LBP has recognized these constraints and hasplans to modify its IEDP strategy. Following surveys of the agrarian reformareas, LBP will classify them into three categories: (a) areas relativelywell developed in terms of current production levels, employment andinfrastructure support and, therefore, not requiring the presence of LBP½sFarm Management Groups; (b) areas which have adequate infrastructure butneed support for production programs and allied activities; and (c) areaswhich need basic infrastructure, without which production programs would notsucceed. In category (b) areas, the emphasis would be on productionprograms and in category (c) areas, on identification and implementation ofinfrastucture projects through the government line agencies, viz., MAR,MLGCD, MPWli and NIA. The IEDP approach would primarily be applied to estatesin category (b).

6.19 Evaluation of New Strategy. While it is an improvement over theearlier approach, LBP's new strategy has significant institutional limita-tions: (a) a nationwide assessment of the approximately 500,000 ha underland reform would be beyond the institutional capabilities of LBP, and istruly the function of national and regional government authorities; and (b)LBP cannot serve an estimated 300,000 agrarian reform beneficiaries without

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sacrificing operational economies and institutional viability. Appropriatelegal changes in land reform laws and procedures are needed to improve theability of land reform beneficiaries to obtain credit from sources otherthan LBP and the informal market. Also, economies of scale could beachieved through the expansion of the IEDP concept to include all farmers,not only agrarian reform beneficiaries.

6.20 However, before any expansion of the IEDP concept, a comprehensiveevaluation of the land reform program in the Phillipines is essential todetermine future strategies, especially with regard to the following: (a)suitability of the existing uniform financial packages for redemption ofland dues, considering varying levels of land productivity, irrigation,rural incomes and farm family budgets; and (b) LBP's total responsibilityfor all land reform beneficiaries, for both collection of land dues andprovision of credit, which is currently beyond its institutional capability.Considering the high transaction costs involved in administering land reformprograms and the relatively high risk in lending to small farmers, it wouldbe unrealistic to expect a single institution, in this case LBP, to expandits organization to a scale sufficient to serve all agrarian reformbeneficiaries. LBP's corporate objective with regard to the land reformprogram therefore needs to be clearly defined in relation to itsinstitutional capability, operational costs and the size of governmentsubsidies.

6.21 Future Institutional Development. LBP recognizes that itsprincipal objective of gaining a central role in rural banking will not beserved by opening expensive new branches. It is therefore planning to workwith the rural banks through (a) loan syndication or joint financing tie-upsand/or (b) participation in rural banks equity and management in order touse them to carry out LBP's operations in land reform areas. The objectivesof these schemes are dual: to participate in government efforts torehabilitate the ailing rural banking system; and to make use of the widelydistributed rural banking system to serve LBP's own corporate objectives(para. 6.20).

C. Agricultural Credit Administration (ACA)

6.22 ACA, a non-bank agency of the Government since its inception in1963, is concerned with promotion of farmer cooperatives and provision ofliberal credit to small farmers and to land reform beneficiaries. ACA scorporate policy hinges on a belief that the supervised credit concept isinadequate to administer small farmer credit programs, especially because ofits overdependence on sometimes unreliable government extension machinery.ACA therefore lends through farmer cooperatives or groups known as compactfarms.

6.23 Compact Farms. Under compact farms (CF), farmers cultivatingsmall, contiguous farms aggregating about 30-50 ha form voluntary groupsunder the management of a leader chosen by them from among the group inorder to gain efficiency and economies of scale. A compact farm does not

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disturb the identity of the individual farm or the ownership or tenure, butgives farmers the option of undertaking farm activities individually orcollectively by pooling the resources of land, labor, and capital and ofproportionately sharing the produce. Compact farm clusters (CFCs) comprisecompact farm units with a total area of 500 to 1,000 ha. In addition to thebasic objectives of compact farms, CFCs are organized to: (a) strengthenthe competitive position of the farming community vis-a-vis the othersectors of the economy; (b) upgrade the quality of management and introducebusiness methods and practices into farm operations; (c) optimize use ofavailable resources; (d) improve the viability of the institutional creditsystem; (e) facilitate structural shifts in agricultural activities; and (f)transform economic returns into social benefits through welfare activities.Basically, the program has three major components: the CFC which providesland, labor and organization; a Professional Farm Management Group (PFMG)which provides technology and management services; and support servicesprovided by a complex of government and private entities.

6.24 A PFMG is provided by ACA's field staff, farmers- organizations orprivate management groups, with the cost of services paid for by farmers.PFHIGs undertake a range of functions which include: planning andprogramming; technical assistance and supervision; bulk procurement ofinputs; assistance in marketing; loan collection for ACA; and promotingwelfare projects. ACA's own evaluation indicates that its programs couldachieve: productivity increases of up to 50% to 60% per unit area financed;higher prices for farmers through collective marketing; lower social costsin terms of reduced grain loss in processing; and greater participation bythe private sector in rural development.

6.25 Lending Operations. ACA's overall lending operations during1972-81 are summarized in Annex 6, Tables 12 and 13. ACA's annual lendingwas higher at P 60-65 million during the initial years of M-99 but laterdeclined to an average of P 45 million. In real terms, ACA operationshave not recorded any growth.

6.26 Performance of Compact Farms and Compact Farm Clusters. During1981, ACA's annual disbursements to compact farms have been in the range ofP 114 million for 39,000 ha and 21,000 farmers and about P 84 million tocompact farm clusters (Annex 6, Table 14). TBAC-s evaluation of CFs andCFCs indicates that at 76% and 86%, respectively, their repayment per-formance was relatively better compared with the overall sectoral repaymentrate of 34.6%. In terms of its past due ratio, the CFs are still carryinglong outstanding defaults, as 54% of ACA's branches registered past dueratios of 75%. For this reason, ACA's overall operations have been in loss(Annex 6, Table 15).

6.27 A TBAC sample study of CFs and CFCs showed that in successfu:Lproject areas, the system operated efficiently in that (a) loandocumentation was minimized; (b) credit was provided in time and at thefarmers' doorstep; (c) marketing tie-ups ensured high collection rates;(d) production and productivity showed increases; (e) farmers were helped to

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accumulate deposits with rebates provided on inputs and timely loanrepayments; and (f) administrative costs which are high at 7% were reducedby about 1/20. On the other hand, ACA's operations have always been inloss, and it lacks sufficient resources, apparently because it has had towrite off substantial bad debts. In addition, problems emerging fromfarmers' dissatisfaction with the functioning of farm managment groups andloan policies and procedures adversely affected ACA's performance.

6.28 With the recent merger of ACA with LBP, LBP will continue to carryout their current responsibilities, besides assuming new responsibility forfinancing Government's land settlement program for the landless. Governmentalso proposes to develop the area-management concept within the ACA-LBPregional/provincial organization to support these efforts. While Governmentshould review the overall corporate goals of the ACA-LBP, care has to betaken to prevent credit, rather than services, from becoming the principaltheme of the program, and thereby possibly making both the program and theinstitution unviable.

D. Development Bank of the Philippines (DBP)

6.29 DBP's major activity is in industry, which represented 83% of itscumulative loan approvals, equity investments and guarantees at end-1981.Nevertheless, consistent with the mandate provided by its charter andGovernment's strategy for countryside development, DBP gives priority toagriculture, and 63% of DBP's accounts (by number) are in agriculture,although the share of agriculture in its total loans has declined from 32.1%in 1976 to 11.7% in 1981 (Annex 6, Table 16) and the amount of itsagricultural lending in real terms since 1978 has been almost stagnant(Table 6.3 below). DBP's share in total institutional credit has alsodeclined from 3.1% in 1975 to 1.2% in 1980, largely because of the sizableexpansion in credit provided by private commercial banks. Since the latterare largely involved in short-term credit, DBP still remains by far the mostimportant source of medium- and long-term agricultural credit.

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Table 6.3: DBP AGRICULTURAL LOAN APPROVALS(P million)

No. of Agricultural loans /aYear accounts At current prices At 1975 prices

1975 63,120/b 724 (596)/c 724 (596)/c1976 50,200 774 (665)/c 728 (626)/c1977 24,887 536 4681978 17,431 509 4121979 12,876 701 4781980 13,204 648 3751981 15,933 793 411

/a DBP data slightly differ from TBAC figures.

/b Includes social loans originally approved by the Government and latertransferred to DBP approximately as follows: 1975 - 34,000 accountsand, 1976 - 22,570 accounts.

/c Figures in parentheses exclude social loans.

6.30 DBP was organized so that it could concentrate on providinglong-term development loans at a time when the rest of the banking systemhad comparatively fewer branches and a limited geographical coverage, andtheir operations were confined to short-term lending. By any measure, DBPhas largely served its institutional goals, but its prospective role inagricultural credit should now be viewed in the context of the 1980 bankingreforms which were aimed at the promotion of universal banking, whichemphasizes the despecialization of banking institutions, term transformationand increased term lending. Against this background, it would not servethe interest of the agricultural sector if DBP were to be regarded as theonly major institutional source to provide medium- and long-term credit foragriculture.

6.31 Resources. Being a development bank (and not a commercial ordeposit bank) DBP is a secondary mobilizer of savings: it relies mainly ongovernment equity and loans, a share in the government security market anddomlestic and foreign borrowings. Following the recent partial deregulationof interest rates in the Philippines, DBP-s cost of domestic borrowings hasincreased, as has the cost of foreign borrowings. The average cost of DBP'soverall resources, which was 8% in 1979, increased to 9.2% in 1980 and to10.5% in 1981; the cost of marginal funds has been as high as 16%.Therefore, in 1981, DBP raised its interest rates on loans by about 3% to

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18-21% depending upon the size of the loan. However, since the new rates ofinterest are reported to be close to or higher than the rates of return onmany projects, the interest rate increases seem to work as a strongdisincentive to potential borrowers, and may partly explain the slow pace ofnew subloan approvals in real terms.

6.32 Financial Position. DBP-s financial position is becomingincreasingly difficult. Its current ratio has deteriorated from 0.72 in1977 to 0.48 in 1981 while the debt-service ratio fell from 1.39 in 1977 toa precariously low 0.97 in 1981. Cash collection levels are also lowreflecting the poor quality of the portfolio and the unfavorable businessenvironment in most subsectors supported by DBP, i.e., metals, mining,sugar, copra and, to some extent, textiles. Currently DBP-s financialdifficulties stem mainly from industrial and real estate loans (83%).Agricultural lending is also in loss and carried high levels of arrears,while cash collection has shown moderate improvement. However, owing to theoverall weak level of internal cash generation, DBP is resorting tohigh-cost domestic and foreign borrowings to amortize its debts. During1981, DBP-s profit at P 108.7 million was less than 50% of the 1980profits (P 223 million), with a reduced average return of 0.3% on totalassets. But if noncash collections were not shown as income, which wouldhave been consistent with the accounting practice until 1979, DBP wouldhave suffered a loss in 1981 of about P 2 billion, eroding the Governmentequity. The magnitude of the DBP-s problems with regard to liquidity,solvency and viability is so serious that without major financial andinstitutional restructuring, its capability to function as a development bankeither in industry or agriculture would stand significantly eroded.

6.33 Agricultural Lending. DBP's agricultural lending supports a widerange of production activities in cereals, commercial and plantation crops;livestock and poultry; and inland and marine fisheries (Annex 6, Table 18).The rate of subloan approvals for cereals, livestock and poultry in 1981 wassignificantly lower than in 1975, while DBP's support to commercial crops,especially cotton, coffee, rubber and banana, has increased (Table 6.4).The average loan amount per account in real terms has been substantiallyhigher for livestock and poultry (73%) and fisheries (75%), followed bycereals (20%) and commercial crops (8%). Hiowever, about 99% of DBP'sagricultural loan accounts are for amounts less than P 500,000.

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Table 6.4: DBP AGRICULTURAL LOAN APPROVALS BY ACTIVITY(P million)

198119 75 No. of At current At 1975

No. of account prices pricesActivity account Amount ---------- Amount ----------

Cereals 16,416 244 6,137 218 113Commercial & plantation

crops 6,632 77 7,078 176 91Livestock & poultry 4,877 214 2,083 284 147Fisheries 1,145/a 61/a 635 115 60

Total 29,070 596 15,933 793 411

/a Excludes Government transferred social loans (34,050) for P 131million.

6.34 Organization for Agricultural Lending. As a bank, DBP is wellorganized in terms of institutional management, lending procedures,evaluation of collateral securities, sound internal financial controls andsupport from many competent staff. Agricultural lending policies arerelatively well established, though efforts are underway to integrate theminto a coherent sectoral approach. DBP has initiated computerization of itsaccounting and management information systems which have been relativelyweak areas.

6.35 DBP's operational units in agriculture include: an AgriculturalLoan Department (ALD) at the Head Office in Manila which is responsible foragricultural loans in Metro Manila, and a network of 5 regional offices, 42branches, 14 subbranches and 9 agencies. The agencies provide extendedservice to farmers but have no authority to approve subloans. The teclnicaldepartments at the Head Office, namely the Agricultural Planning andSupervision Departments, provide support through review of lending policiesand programs, and supervision and monitoring. DBP's Regional Offices reviewsubloan requests above prescribed limits referred to them by the branches,but their involvement in supervision and follow-up is minimal. DBP'sorganizational set-up in agriculture is under review, especially to redefinethe role of Regional Supervising Managers and to upgrade the planning,monitoring and evaluation effort at the Head Office.

6.36 DBP has gained considerable experience in agricultural lendingthrough implementation of eight World Bank-assisted agricultural projects(U$130.4 million in loans) in livestock and fisheries development and tree-

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farming./l DBP's overall performance in agricultural lending has beengenerally satisfactory, in that the production objectives of most programshave been largely achieved. However, its past and future activities havebeen significantly constrained by heavy arrearages, high transaction costs,a negative margin on agricultural lending, and a worsening of its financialposition due to poor performance in its overall operations, including thosein industry and real estate.

6.37 Arrearages. DBP carries arrearages in as many as 116,000 of itsagricultural accounts, representing 65% of its total outstandingagricultural accounts (179,000) (Table 17-A). In terms of amount (principaland interest), arrears have reached P 1.1 billion (U$137 million) or 60% ofthe amount fallen due under all loans and about 31% of total outstandingagricultural loans at P 3.4 billion (Table 17B). About 45% of the princi-pal in affected loan accounts is in arrears (Table 17E). Arrearages arereported to be mainly in loans for foodcrops and fisheries followed bycommercial crops and livestock and poultry. About P 300 million of theagricultural arrears are either in "social loans" originally approved by theGovernment and later transferred to DBP or in loans disbursed undergovernment-sponsored commodity programs. In many of these loans, DBP relaxedits strict banking requirements by requiring little or no real estatecollateral, especially in the case of loans made to small farmers orfishermen in remote areas where administrative costs are high andsupervision difficult.

6.38 DBP's top management and senior staff have been aware of theworsening arrearage situation and have periodically launched intensivecollection drives. DBP has also prepared an Arrearages Reduction Plan whichfunctions through a process of (a) portfolio analysis and rehabilitation/restructuring of loan accounts; (b) foreclosure of distressed accounts;(c) writing off of subloans which are not expected to be collected; (d)hiring of collection agents to handle distressed loan accounts which areless than P 2,000 outstanding per loan; and (e) establishing a subsidiarycompany to manage acquired assets and to act as DBP's agent in themanagement of enterprises in financial trouble. Meanwhile, the appraisal ofnew applications has almost ceased, except for loans below P 100,000.

6.39 DBP's arrearage problem has become chronic and should now bereviewed to determine its underlying causes. On the basis of a preliminaryanalysis, the high rate of arrears seems to stem from: inadequate numbers of

/1 DBP has also been a financial intermediary for nine World Bank-assistedindustrial projects ($436 million).

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staff to supervise subloans; operational inflexibility leading to lack of, ordelayed response to, problems faced by subborrowers subsequent to projectcompletion; and functional limitations in providing a total banking service,especially timely and adequate working capital.

6.40 DBP has recently modified its lending guidelines with the primaryobjective of improving loan collections and the quality of the loan port-folio. The more important modifications include: (a) a higher debt-equityratio for projects financed; (b) conservative valuation of collateral; (c) aminimum rate of return of 3% above DBP's interest rates which range between18% to 21%; and (d) limitation of the DBP loan to 50% of total project costfor large projects with possible cofinancing from commercial banks. W'hilethe new loan terms will increase the borrower's stake in a project, DBP'sproposal to involve commercial banks in long-term financing is significantfor future institutional arrangements for term lending to agriculture, andcould be particularly valuable in reducing transaction costs in agriculturallending, and facilitating term transformation of commercial bank depositsfor augmenting the supply of long-term resources for agricultural lending.

6.41 Transaction Costs. DBP has been subsidizing losses on agricul-tural lending from profits earned on industrial and other loans and throughlow-cost funds received from the Government. DBP's margin on agriculturallending has been negative for the last several years. During 1979 and 1980its position was as follows:

Table 6.5: DBP'S MARGIN ON AGRICULTURAL LENDING

Bank-wide Head office Branches1979 1980 1979 1980 1979 1980

Average investment (P mln.) 2,492 2,901 564 799 1,928 2,102Gross income (%) 8.9 7.1 11.8 6.9 8.0 7.2Interest cost (%) 7.2 8.1 7.4 8.4 7.2 8.0Administrative cost (%) 4.9 4.7 3.2 2.2 5.4 5.6Net income (%) (loss) (3.2) (5.7) 1.2 (3.7) (4.6) (6.4)

Source: DBP.

6.42 During 1981, DBP's profit and loss in agricultural loans, withoutcosting equity, showed a profit of P 7 million at the Head Office and aloss of P 15 million at the branches. If equity is costed at the averageinterest rate on DBP's borrowings (11.7% p.a.), the profits of the HeadOffice are reduced to P 3 million while the loss at the branches isincreased to P 187 million or about 8.3% on outstanding loans.

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6.43 Issues. DBP suffers from the following institutional problems:(a) relatively high transaction costs (4.7% at the Head Office and 5.8% atthe branches) owing to its small branch network, wide operational area foreach outlet, and higher establishment expenses, (b) increased cost of marginalfunds, and (c) high default costs due to low collection levels arising frominsufficient staff to supervise subloans and functional limitations in provi-ding a total banking service (especially flexible working capital support)which causes gaps in monitoring loan performance.

6.44 DBP's capabilities to efficiently handle agricultural credit,especially for small enterprises, have thus significantly eroded. Since DBPis not a primary mobilizer of deposits, its average cost of domestic fundsother than government equity will always be higher than that of deposit banks.DBP will thus continue to depend on the Government's low-cost funds and it mayhave to accord low priority to small loans which carry a low interest rate of15%. Furthermore, if DBP continues to finance mainly medium and largeborrowers in the form of low cost equity, deposits and loans, especially forprojects which should carry commercial interest rates and costs, the equityobjective of the Government's subsidies to DBP will not be fully served. DBPmay have to increasingly commercialize its operations through sheddingunprofitable activities and financial innovations such as mobilization oflow-cost funds through cofinancing with PNB, LBP, and private deposit banks.

E. Private Commercial Banks

6.45 Agricultural credit extended by private commercial banks (KBs)increased during 1975-80 at an average annual rate of 5% (Annex 6, Table 19)and now constitutes about 15% of KBs' total institutional credit to thesector. Unlike PNB and the rural banks, KBs do not finance noncollateralized"supervised" production credit, and, unlike DBP, the KB loans are primarily ona short-term basis with maturity of less than one year. The principalsubsectors supported by KBs include: sugar (22%), coconut (18%); andlivestock and poultry (11%). KB agricultural loans by commodity and activityare given in Annex 6, Tables 19 to 21.

6.46 Government has attempted to increase the flow of KB credit toagriculture through allocative devices such as special rediscounting facili-ties and earmarking a portion of loanable funds for agriculture and agrarianreform beneficiaries. These measures have not been successful. The KBs haveused the CB low-interest rediscounting facility only for sugar, coconut andtobacco and have conformed with the agricultural credit quota policy, to alimited extent by using their resources for direct agricultural lending andlargely by buying CB financial instruments, which is allowed by the quotarequirement. Consequently, there has been no significant institutionaldevelopment within the KBs to facilitate a broad-based participation inagricultural development. CB gives priority to licening new offices proposed

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by KBs in areas currently not served by any bank. Some KBs, however, believethat the current regulation which restricts the number of new proposals for CBapproval to six at any one time, is not helpful in evolving a long-tenm stra-tegy for branch expansion in rural areas. CB, on the other hand, regards thisarrangement as helpful for reviewing the financial viability of the concernedKBs before licenses for new offices are issued and also to ensure that thebanks open the licensed offices in due time. While CB's concerns should beaddressed, perhaps through suitable monitoring procadures, it would be helpfulif its branch licensing policies were reviewed in the broader context ofsectoral issues and objectives.

6.47 As for term lending, KBs have preferred to grant loans withmaturities of less than one year since their resources are comprised of publicdeposits which they see as demand liabilities, though term transformation ofcore deposits has always been feasible. Also, CB has had no refinanciLngarrangement to promote term transformation which would safeguard the KBs'liquidity while they lend long term. For this reason, Government institutionslike PNB and DBP were called upon to expand their lending for commerciLalenterprises such as livestock, poultry and fisheries by using Government'slow-cost funds at a negative margin, while the KBs' wide network of semiurbanand rural branches could not be effectively utilized to achieve growth in thesector at a relatively low cost. CB's recent introduction of a long-tenmrefinancing facility is restricted to four larger KBs and LBP, primar:Lly forrehabilitation of problematic industrial accounts.

6.48 Though KBs have a distinct preference for short-term lending forreasons of liquidity and profitability, short-term loans are often extendedwith the understanding that they will be rolled over. The Bank's financialsector survey /1 indicated that in industry about 50% of the loans booked asshort-term are likely to be rolled over for at least another year and 30% for1-3 years. This pattern is also expected to occur in a sizable portion of theKBs' agricultural lending, especially in livestock and poultry, fisheries,grain processing and storage, agro-industry and commercial crops. KBstherefore seem to be performing the sane role as DBP, although the latterrelies on low-cost government funds and operates at a negative margin.

6.49 In view of the pressing need to increase both the amount and avail-ability of agricultural credit through greater use of private resources and ofcredit retailing outlets, the KBs should be encouraged to shift their role infinancing agriculture from ad hoc lending to systematic area and sectorbasedlending with: (a) appropriate institutional development; (b) technicalsupport in formulating lending strategies, project packaging and appraisal;(c) refinancing support to safeguard liquidity and facilitate term transforma-tion; and (d) extending the maturity structure. Another promising area forexpanding the KBs' participation in agricultural lending is cofinancing withother lending institutions, especially DBP and a large number of rural banks.

/1 World Bank, Report No. 2546-PH, "Aspects of the Financial Sector."

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6.50 Consideration should also be given to policy changes specificallyfor two KBs - the Republic Planters Bank and the United Coconut Planters' Bankwhich provide the bulk of total credit for sugar and coconut, respectively.

6.51 Republic Planters Bank (RPB). RPB finances about P 3.3 billion or50% of the sugar industry's annual net cash requirements for sugar planters(P 3.4 billion), sugar mills/refineries (P 0.7 billion) and NASUTRA(P 2.7 billion). On a gross basis, the industry's annual requirements areestimated at P 12-14 billion. The Central Bank provides rediscountingfacilities against sugar crop loans at 3% p.a. based on 70% of the prevailingsugar liquidation price, with a maturity of 270 days. RPB believes that CB'srediscounting term of 270 days is not compatible with the industry's needs inview of (a) the overlapping nature of crops, (b) undervaluation of sugar forpurposes of collateral, and (c) delays in documentation for the CB facility.RPB proposes that the maturity of CB loans should be increased since onexisting terms CB's effective rediscounting amounts to only 40% of theproduction loans, and the banks have to cover the balance not refinanced by CBwith borrowings at higher cost. The rediscounting arrangements for sugarloans should, therefore, be reviewed.

6.52 United Coconut Planters Bank (UCPB). In 1978 coconut accounted for26% of the country's total exports. Coconut now receives over 15% of theformal agricultural credit through private commercial banks (87%), PNB (5%),and rural banks (5%). Production credit for coconut accounts for about 11% ofthe total, and is largely provided by the private commercial and rural banks.

6.53 The Philippine Coconut Authority (PCA) established by PresidentialDecree in 1973 is responsible for promotion of the coconut and other oilpalm industries, for which PCA has established a Coconut IndustryDevelopment Fund. The Fund is replenished from a levy imposed on the exportof copra, and the levy is deposited with UCPB. Rather than pay interest onthe levy, UCPB uses the Fund to extend credit to coconut farmers atpreferential rates as follows: 8% p.a. for coconut plantation loans; 10% p.a.on coconut hybrid loan assistance; and at 12% p.a. for coconut processingloans. According to PCA, the policy of not requiring interest on levy fundsis intended to maintain the financial viability of UCPB and make it possibleto lend at concessional rates. The rationale of this policy is debatable,however, because it creates distortions in the overall interest rate structureand benefits only UCPB borrowers. Since UCPB has only about 50 branches, thesubsidized rates are beyond the reach of thousands of coconut farmers. PCA,therefore uses its municipal and provincial chapters to disburse the credit,although they are not credit institutions. In the overall sectoral context,charging low interest on coconut loans by utilizing the levy amount is not inthe interest of healthy development of the credit sector, and more so if thegovernment-subsidized development finance is restricted to a singleinstitution which cannot establish a nationwide organization, except at a highcost, to serve millions of small farmers engaged in the industry. It would be

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useful to evaluate the credit programs entrusted to commodity banks, so thatfuture institutional arrangements could be more effective in serving theconcerned industries.

F. Rural Banking System

6.54 The Philippines rural banking system comprises over 1,000 small,private unit banks owned by family groups. A breakdown of these banks byregion and length of operations is given in Annex 6, Table 22. To encourageestablishment of rural banks (RBs) and to help them retain their rura:Lcharacter, the Government and the Central Bank (CB) have been providing therural banks with financial and fiscal incentives which include: (a) sharecapital contributions and tax exemptions; (b) a rediscounting facility at alow interest rate of 1% (increased to 3% in 1981), which provides a nominalspread of 10-11% to rural banks on supervised credit; (c) guarantees of upto 85% of production loan defaults; and (d) field-level support for process-ing of loan applications and collections through agricultural techniciansemployed by the Government for extension purposes. The Government-s liberalsupport has led to the expansion of the system as well as the flow of creditto agriculture.

6.55 Loan Operations. RBs provide about 5% of total institutionalcredit for agriculture, but as high as 50% of total production credit forcereals, and over 85% of their total loans are extended to agriculture(Annex 6, Table 23). Since 1964, they have also been channels for medium-and long-term credit under World Bank-assisted rural credit projects (para.6.73).

6.56 Resources. Annex 6, Table 24 gives a breakdown of current ruralbank resources. RBs have mobilized deposits of P 2 billion (about 2% ofthe total deposits of the banking system) which constitute 32% of theirtotal resources. As prudent banking would demand, the deposit funds areusually invested in secured and easily realizable loans. The rural bankingsystem is, therefore, heavily reliant on CB's low-cost resources forsupervised credit which, being noncollateralized, tends to be risky. Topromote savings mobilization in rural banks, CB manipulates the ceiling onits rediscounting facility which is liberalized as and when the need arisesto facilitate larger flows of credit for government-sponsored foodproduction programs. The CB credit flow was liberalized in 1975 and 1976,curtailed in 1977 and again relaxed in 1981. CB's credit policiessignificantly influence rural banking operations and though intended tobring about a financial discipline among rural banks, not infrequently leadto operational problems in agricultural credit since stoppage, or reduceddisbursement, of credit by RBs for the new season adversely affectscollections under loans provided for the preceding season. This arisesbecause farmers usually repay bank loans if they are assured of a fresh loanfor the following planting season. A consistent policy which will graduallyreduce the rural banks- dependence on CB funds and promote savingsmobilization is necessary.

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6.57 Arrearages. The rural banking system carries massive arrearages ofover P 1 billion to CB (Table 6.6).

Table 6.6: RURAL BANKS ARREARAGES UNDER CENTRAL BANKLOANS, SEPTEMBER/DECEMBER 1981

P million

Short-term Loans 2,796

ArrearagesM-99 261Other supervised credit 299Non-supervised credit 157Restructured loans 126

Subtotal 843

% of past due loans to total loans 30%

Term Loans (World Bank Projects) 457

Arrearages 159% of arrearages to total loans 38%

Total Loans 3,253

Total arrearages 1,002% of arrearages to total loans 31%

The total subloan arrears of the rural banks are even larger than these to CB.Annex 6, Table 25 shows the past due ratio of the rural banking system.

6.58 Although a rural bank which is in arrears to CB and has a past dueratio in excess of 25% becomes ineligible for CB refinancing, CB keeps thesystem going through restructuring of loan accounts and rescheduling of RB li-abilities. During 1977-82, 403 RBs restructured loans totalling 1P 204 mil-lion, while during 1980 and 1981, 478 banks rescheduled loans amounting toP 649 million. Thus, since 1977, about 700 banks have been consistentlyeligible for the Central Bank's rediscounting facility. However, under theWorld Bank-assisted Fourth Rural Credit Project (Ln. 1399-PH), the number ofeligible banks has declined to about 130, with about 30 banks actively parti-cipating. In view of their high level of arrears, RBs have reduced lendingunder supervised credit, especially under the M-99 program, in favor ofnonsupervised credit backed by collateral. Although RBs lent a substantialamount for corn production in 1981 under a Government-sponsored supervisedcredit program with a CB facility of P 77 million, this could be done only

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because the allowable past-due ratio was liberalized from 25% to 50% tofacilitate program financing. While the decision to relax collectionperformance standards reflects the high priority accorded by Government tothis and other such programs, its impact on institutional performance could bedisastrous. Eventually, Government may have to come forward to refinance thebanks either by direct assistance or through the guarantee mechanism, as hasrecently been done for Masagana 99.

6.59 Financial Problems of Rural Banks. The major financial problems ofmost RBs include: (a) low capitalization; (b) poor liquidity due to higharrearages; (c) ineligibility, through default, for access to CB-s rediscoun-ting facility; (d) excessive dependence on government/CB resources foragricultural lending; (e) high incidence of poor management; (f) inadequatefield staff and consequent reliance on government extension workers for bothprocessing of loan applications and subloan collections; and (g) low returnsto capital.

6.60 Despite these problems, the rural banking system should not beallowed to wither away since RBs have a significant potential to providefinancial services in competition with the informal sector, and also undertakedeposit mobilization. No other major credit agency currently has thecapability to provide a viable alternative to RBs: PNB's performance inagricultural lending has been poor; DBP specializes in medium- and long-termcredit, not the production credit needed by large numbers of smallholders; LBPconcentrates on agrarian reform beneficiaries; and the commercial banksconcentrate on trade and commercial enterprises.

6.61 Given the status of the institutional credit system and the need forimproving financial intermediation in rural areas, the Government proposes torehabilitate the rural banking system through:

(a) the restructuring of past arrearages with additional equitycontributions from private contributors, Government's matchingcontribution and the rescheduling of CB borrowings; and

(b) a consolidation of the rural banking system through mergers orholding company arrangements with LBP, PNB and private commercialbanks.

6.62 Progress in regard to goal (a) is slow since the rural banks areeither unable or unwilling to bring in new equity and expect the Government tocontribute to the equity as well as to reimburse past supervised loans, which,the banks contend, were disbursed at the behest of Government. The Governmenthas declined to take over the loans but has recently agreed to provide aspecial trust fund of P 450 million to be built up in three annualinstallments of P 150 million, to reimburse the rural banks the M-99arrears under the subloan guarantee mechanism. This arrangement will notreduce RBs' arrearages under the subloans to farmers but will reduce theirarrearages to CB and will thus make them eligible for CB's rediscounting

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facility so as to expand credit for agriculture. The farmers who are inarrears under past loans will have their subloans restructured to becomeeligible for new loans.

6.63 The idea of consolidating RBs arose because the small size of mostRBs is believed to be the principal cause of their inability to functionadequately, and past studies have shown that a rural bank with an equity ofless than P 250,000 is usually not a viable unit. CB's new minimumcapitalization regulations will therefore require rural banks either to bringin more equity or merge with other institutions. Compliance with the newregulations is already under way. As a result of the initiative taken by someprominent rural bankers, 14 rural banks in Bohol Province merged into a singleunit in late 1981, with Central Bank support provided in the form of financialand technical assistance, including the rescheduling of CB borrowings. CB isalso spreading this message to other rural banks, but obviously cannot offerthe same financial incentives to all banks since it is not prepared toundertake such sizeable financial commitments. LBP and UCPB have also takeninitiatives to establish holding companies which would be associated withrural banks, and negotiations are in progress. CB's new minimum capitaliza-tion regulations will therefore require RBs either to bring in more equity ormerge with other institutions.

6.64 There are important constraints to the proposed rehabilitation ofthe rural banking system in view of the following:

(a) it is unclear how rural bank arrearages of about P 740 millionunder subloans not for M-99, P 159 million under IBRD-assistedrural credit projects and P 582 million under other loans shouldbe treated in undertaking the financial rehabilitation of thebanks;

(b) banks sponsoring mergers or holding companies are not willing totake over responsibility for arrears under past subloans and baddebts; further, LBP initiatives to take over majority control inequity and nominate its officers as directors is perceived by therural banks as government intervention and possible control and istherefore resisted;

(c) most of the rural banks in distress are willing to merge but areunable to bring in fresh capital; and

(d) except for UCPB, other commercial banks including the government-owned PNB have not shown much interest in the proposal.

6.65 Given these uncertainties, it is important that the Governmentshould evolve a national strategy indicating options available and acceptableto the banking system, on a provincial/regional basis and within a giventime-frame, for reorganization of the rural banking system. At the sametime, RBs being private institutions have now become pronouncedly consciousof safeguarding their equity, profitability and liquidity, in the context of

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the past unhappy experience with supervised credit programs. Governmentpressure on RBs to lend for agriculture in future will therefore have itsdirect and indirect costs, which the Government may have to explicitlyacknowledge. In this process, the RBs response to development challengeswill inevitably be slow. This problem should be approached through effortsto promote greater competition among RBs through the system s overallstructural expansion thereby bringing banks closer to farmers. As part ofthis approach, CB should appropriately liberalize the existing ban onestablishing new rural banks. Further, the rural banking system will haveto be supplemented by active direct and indirect participation of commercialbanks, including PNB and LBP, and the strengthening of village and municipallevel cooperatives.

6.66 The overall profitability of the private rural banking system hasdeclined from 3% in 1975 to 1.5% of the average total assets in 1980 (Annex 6,Table 26). Analytical data on trends in other profitability indicators suchas rates of return on equity, or net yield on investments and loan portfolioare not readily available. However, some 250 banks are incurring losses andabout 470 banks earning only marginal profits. Nevertheless, about 150 bankshave been established in recent years, which are financially stable. Thesebanks are by and large under progressive management and could be involved inbroadbased agricultural development programs if the needed financial reforms,especially in the interest rate structure, were enacted. CB should identifythe institutional development needs of these banks so that they may functionas viable credit outlets, while the overall rural banking system is beingreorganized.

G. Thrift Banks

6.67 Private Development Banks (PDBs). The thrift banks most involvedin agriculture are the PDBs. Government interest in private developmentbanking began in the 1950s when it required DBP to promote establishment ofprivate development banks to provide decentralized credit facilities tosmall agricultural and industrial enterprises. To facilitate the system'sgrowth, in 1964 PDBs were made eligible for tax exemption and access togovernment resources. The growth of PDBs has, however, been generally slow,uneven and halting. The regional distribution of PDBs is highly skewed,with as many as 33 out of 44 PDBs located north of Manila. The slow growthwas due to management problems in existing PDBs and the conflicting role andinstitutional constraints of DBP which had originally intended to functionas a wholesale banker, but in fact expanded its retail banking, perhaps toexpedite the development process which authorities perceived as beyond thecapabilities of the PDBs. DBP's new management proposes to reverse thistrend.

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6.68 PDBs are predominantly private, with a government equity contribu-tion through DBP and LBP at about 28% and management participation by DBP.Most PDBs have satisfactory collection rates and profitability. PDBsparticipate, though on a limited scale, in World Bank-assisted industrialand agricultural projects. While PDBs have made significant progress inmobilization of deposits which constitute 51% of the system's resources,they continue to depend on DBP for rediscounting of mediunr- and long-termloans and technical guidance in subproject appraisal and supervision. TheCentral Bank does not provide long-term resources to PDBs, except to a smallextent under the World Bank-assisted Rural Credit Project (Ln. 1399-PH).Consequently, DBP has from time to time liberalized its rediscountingfacilities to PDBs, and also allowed them to retain in deposit, the proceedsof any DBP bonds they sell. Now, DBP is finding it increasinglly difficultto place larger funds with PDBs either through rediscounting or deposit inview of its own resource constraints and the high cost of borrowing. DBPrecently had to increase the interest rate charged to PDBs by about 4% to14-16% in order to cover the increasing marginal cost of borrowed funds.PDBs would accordingly increase interest rates on subloans up to 21-23% formedium and large borrowers compared with DBP-s rates of 15-18% on its directsubloans. PDBs believe that the new interest rates are too high and notattractive to their borrowers and, therefore, if DBP cannot provide low-costfunds to PDBs, alternate arrangement such as rediscounting by the CentralBank should be found. DBP is a secondary mobilizer of resources, and withthe increasing cost of borrowing and its difficult cash flow position, itmay in the long run find it difficult to efficiently perform its role as anapex bank for PDBs.

H. Cooperative Rural Banks (CRBs)

6.69 CRBs are generally unit banks organized primarily on a provincialbasis by farmer organizations (samahang nayons) to provide financialservices to their members. The objective is that the CRBs should operate inthe same manner as private rural banks, but be owned by farmers and be ina position to serve the farmers better.

6.70 Government should review the CRB concept and organization, whichhas proved insufficient to serve its members. By the end of September 1982,25 CRBs were in operation in 25 out of 68 provinces. Being relatively newin the banking sector, CRB operations are small: their deposits(P 11.5 million) constitute only 0.56% of the total deposits of the ruralbanking system. Government exposure in CRB's preferred stock and CBborrowings at P 87 million has been close to 60% of CRB's net loan port-folio. Subloans in arrears at P 47 million constitute 33% of the CRBsoutstanding loans at P 143 million; in seven banks, 87% of the outstandingloans are overdue. Also, the CRBs overall profitability at 1.2% of assets

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is low compared with the sectoral trend. Due to accumulated losses, equityhas been impaired in nine banks. A recent TBAC study /1 indicated thal: theCRB system operates within the framework of broad ownership, with a re]La-tively low capital base; a province-wide scope of operations; and a patern-alistic incentive structure. Since CRBs are owned by SNs, lending isnecessarily concentrated in agricultural production loans which, in view ofthe weaknesses of the supervised credit programs, tend to become overdue.Additionally, CRBs- overall resources are inadequate to carry arrearages asa result of low capitalization, low deposit generation, and insufficientequity contribution provided by the Government. Due to meager resources,wide geographical coverage, and clientele-specific activities, CRBs areunable to compete effectively with other banks. Other major problems of theCRBs include: lack of competent directors, managers and personnel to managethe affairs of the banks; lack of a branch network, which means that thebanks are far removed from their clientele; inequitable allocation ofloanable funds among municipalities and farmers; an ineffective collectionmechanism; the overriding belief among the CRB management that cooperativesneed not make a profit; and lack of coordination between the CRB managementand the member samahang nayons.

6.71 Although there appears to be considerable scope for the selectivepromotion of cooperative activities directed toward serving farmers, creditper se appears to complicate the task of building viable cooperatives.Credit, if used as a short cut in institution building, creates adversaryrelationships and opportunistic behavior, which makes it difficult for thecooperative spirit to thrive. Attention to service-oriented objectives,management systems, decision-making and participation may appear not to berewarding in the short run unless sweetened by credit or the prospect ofobtaining Government funds, but in the long run, attention to these factors

which are essential to the cooperatives financial viability should creategreat strength among cooperatives in situations where cooperatives have arole to play.

I. Institutional Performance in World Bank-assisted Credit Projects

6.72 The World Bank-s lending to agriculture and rural developmentaccounted for 45% of all Bank projects in the country and 36% (US$1 billion)of all country loan commitments. These projects were in irrigation (12),credit (11), rural development and infrastructure (7), and support servicesfor agricultural and fisheries (4) projects. Since 1971, the agriculturalcredit projects (about US$200 million) have channelled term credit throughRBs, DBP and LBP for acquisition of farm equipment, grain processing and

/1 TBAC, A Study on the Cooperative System: Focus on the CooperativeFinance Structure, October 1982.

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storage facilities and for the financing of commercial livestock and fisheryenterprises (Annex 6, Table 27). While the production objectives of theseprojects have been generally achieved, institutional performance has beenmixed insofar as, during the implementation of the projects, serious problemsof arrearages have emerged and the overall financial condition of theparticipating banks has deteriorated.

6.73 Rural Banks. Four rural credit projects (Lns. 432, 607, 1010 and1399) provided a total of US$76 million to the Central Bank (CB) for onlendingthrough the rural banking system to finance farm mechanization, irrigationequipment and rural enterprises. The projects were, however, only partiallysuccessful in introducing RBs to long-term lending. RBs were, by and large,not financially geared to undertake large-size term lending especially fortractors. While the fourth project envisaged a nationwide credit program,RBs could adequately serve only a few areas, and even then with muchinterruption. CB, through its DRBSLA, provided considerable assistance toRBs on operational and administrative matters, but the arrangements tendedto make the rural banking system overly dependent on the CB's field leveloffices even for processing individual subloans and their supervision.Rigid loan policies with regard to repayments, the levy of penal chargesfrom subborrowers and near indiscriminate foreclosure of mortgaged assetsaggravated the RBs' financial problems. The projects' institutiondevelopment arrangements and collection norms proved, by and large, to beinsufficient to promote RBs as viable institutions having regard to theiroverall operations especially under the government sponsored M-99 and othercommodity programs. In retrospect, it would appear that the CB, being anational institution, should not normally be required to deal with over1,000 rural banks on a day-to-day basis in administration of small loanssince this would undermine the flexibility and efficiency of individualbanks, so vital for successful banking. CB's regulatory authority should asfar as possible be kept distinct from its development function, given thepossibility that the two responsibilities may conflict.

6.74 DBP. The Bank has been lending to DBP for agriculture since 1971and for industry since 1975. In agriculture, seven projects (US$122.40 mil-lion) financed commercial livestock and fisheries and tree farming. Bankassistance to DBP totaled US$436 million for industry and interislandshipping.

6.75 As a means of improving DBP's organizational efficiency andfinancial management, the Bank has been providing technical assistance tostrengthen its staff training arrangements, management information system,monitoring and evaluation, computerization and the planning of its annuallending program. DBP has been responsive to the Bank efforts. However, DBPis facing major financial and organizational problems because of its intrinsicstructural and operational weaknesses; its excessive dependence on governmentequity, soft loans and high-cost borrowings; and the financial burdenresulting from its taking over some loans which were initially made by the

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Government. DBP has been used as a mechanism to finance investments forbroader, nonfinancial purposes, and many of these investments are provingnonviable. DBP loans are, in some cases, perceived by its borrowers asgovernment funds which need not be repaid. DBP consequently carries very highlevels of arrearages and is facing serious cash flow difficulties and erosionof profitability.

6.76 Although DBP, as a bank, has acquired considerable experience inproject lending and should be proud of its qualified staff, institutionally ithas found it difficult to implement its mixed responsibility to support bothindustry and agriculture and to perform both as an apex development bank forPDBs and handle retail banking. Since DBP's multi-faceted responsibilitiesseem to weaken it as an organization, there is reason to believe that itshould eventually entrust retail agricultural lending to smaller banks unlessit can become competitive in retail lending through an expanded branch net-work, greater deposit mobilization and loan policy changes. DBP may, however,continue to be an important lending agency for large-size agriculturalprojects, preferably with cofinancing with commercial banks, subject, however,to appropriate efforts to resolve its current financial and organizationalproblems. These issues should become crystallized through a more detailedreview of DBP operations, being planned by the Government.

6.77 LBP. LBP is implementing a Small Farmer Development Project whichaims at increasing productivity and incomes of small farmers through provisionof credit, coordinated delivery of technical assistance and improved infra-structure. The follow-up project is expected to be much broader in concept,involving a review of LBP-s corporate objectives, strengthening of fieldoperations and greater emphasis on infrastructure development rather thancredit per se with reduced operational costs and rural savings mobilization.

6.78 Given the institutional situation, their compartmentalized activi-ties, organizational and financial problems, and limited capabilities toprovide support to wide ranging activities through a diverse clientele, it isimportant that a national-level agency or mechanism should be evolved toprovide leadership in preparation and implementation of agriculturaldevelopment strategies and programs, with a broad-based multi-agency bankingarrangement.

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7. AN ACTION PROGRAM FOR AGRICULTURAL CREDIT

A. Overview

7.01 The Philippines' rural credit sector has in the past generallyresponded to the Government's development strategies in agriculture and hascontributed to significant increases in both production and productivity byfinancing private agricultural investment. Government agricultural creditpolicies and programs have aimed at expanding formal credit by providingcredit institutions with low-cost government funds and sub-loan guarantees insupport of the government's production objectives. Programs have beendesigned to meet the growing demand for credit arising from agriculturalprograms promoting widespread use of improved technological practices,extension support, input subsidies and price supports. Currently, however,the sector faces serious problems. The volume of arrearages has become farmore serious than can be explained by adverse agricultural developments alone.Past efforts to build a sound structure of policies and institutions have onlybeen partially successful. About 250 rural banks are incurring losses while400 others are earning only marginal profits; the Government-owned creditinstitutions have also incurred losses, and some are experiencing seriousfinancial difficulties. The potential for mobilizing rural savings within thebanking system for use in agricultural lending has been undercut by negativeor only marginally positive interest rates on deposits, and legal ceilings oninterest rates on short-term loans./l Many farmers needing credit still lackaccess to it, or cannot get adequate amounts, and funds for medium- andlong-term credit are scarce.

7.02 The Philippines' agricultural credit programs are essentiallycommodity-specific. At the close of 1980, there were 72 commodity-specificagricultural credit programs in operation: 34 for production credit and38 for medium- and long-term credit. There have been three distinctapproaches in these programs (para. 4.06): supervised credit;/2 special creditfinancing integrated production, post-harvest and marketing facilities usinglow-cost budgetary resources; and regular credit utilizing commercial funds.Short-term credit programs have been predominant, mostly for traditional

/1 Interest rate ceilings were lifted effective January 1, 1983 (para. 2.23).

/2 Under a supervised credit program, a borrower undertakes to apply provenfarm practices or a package of technology and abide by the approved farmplan and budget jointly prepared by him and the authorized supervisedcredit technician. The loan is usually disbursed without collateral.By comparison, non-supervised loans are disbursed primarily on the basisof collateral offered and borrowgers' creditworthiness.

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food crops. Foreign sources have provided a large part of the funding formediumr and long-term credit.

7.03 While the performance of these credit programs with regard totheir production objectives has been generally satisfactory, collectic,nrates have been low, thus weakening the financial institutions. This wasespecially true for supervised credit programs including M-99. In 1974,M-99 reached over 800,000 farmers planting improved varieties of rice on1.3 million ha and provided formal credit amounting to about P 1.13 bil-lion. By 1977, the Philippines became self-sufficient in rice. This was aremarkable achievement, especially in view of the fact that M-99 waslaunched at a time of sizeable domestic deficits in the production of staplefoods, necessitating excessive reliance on imported grains in a situation ofglobal scarcity. M-99 effectively addressed the problem of low productivitythrough a proven technological package in association with extension, and amajor expansion in government-supported credit which, following the agrarianreforms of 1972, was important, especially to substitute for the landlordsas a source of working capital (paras. 4.03-4.05). However, the M-99program's credit operations eventually resulted in serious financialproblems for the rural banks and PNB, which were active in financing riceproduction, and disqualified many small farmers from receiving fresh creditbesides disqualifying many rural banks from CB's rediscounting support.Among the major weaknesses of M-99 and the other supervised credit programsare: their inability to sustain credit support to the majority of smallfarmers; fragmented credit and financial services based on a singlecommodity unrelated to other farm activities; insufficient support services;excessive reliance on government extension services for subloan appraisaland collection; and high levels of arrearages and frequent relaxation inlending discipline to promote credit expansion in support of productionobjectives. As of June 30, 1982, some 340 rural banks were in arrears tothe CB under the M-99 program and 420 rural banks under other supervisedcredit programs; they are consequently disqualified from furtherrediscounting support from CB. As a result, there has been a growing shiftfrom non-collateralized supervised credit to collateralized loans, whichresults in the exclusion of small farmers who cannot offer viable security(para. 4.07).

7.04 The performance of non-supervised credit programs which providecollateralized loans to farmers and commercial entrepreneurs in relativelyhigher income groups has also been mixed. The major programs affected byserious problems of arrearages include CB-refinanced and IBRD-assisted ruralcredit projects implemented by CB through the rural banks as well as live-stock, fisheries and grain processing development programs implemented byDBP. Under these programs, over 500 rural banks stand disqualified from-CBrediscounting support, and DBP has had to drastically reduce its lendingprogram.

7.05 Against this background, the major problems in agricultural creditand the policy options to alleviate the constraints are dealt with below.

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B. Problems in Agricultural Credit

Problem 1: Limitations on Supply of Formal Credit to Farmers

7.06 A shortage of institutional credit to farmers, especially ofmediumr and long-term credit, is tending to become a constraint toagricultural development in the Philippines. Although there is no conclu-sive quantitative evidence to support this assertion, generalized evidenceexists that formal credit is in short supply (para. 3.01).

7.07 Formal financial sources now provide only about 32% of totalagricultural credit, although during the mid-1970s, following theintroduction of the government-sponsored credit programs, the share offormal credit was about 68%. In the late 1970s, however, the flow of fundsunder supervised credit decelerated due to high levels of arrearages (paras.4.06-4.08). While in irrigated areas the informal sector substantiallymet the resulting gap in production credit, in rainfed areas higher risksseem to have limited the flow of both formal and informal credit (para.3.02).

7.08 The unavailability of term credit is especially pronounced. Theshare of medium- and long-term credit in total institutional credit in 1980was only about 2% (para. 3.10). This was a problem particularly for thesmall and rural entrepreneurs. The informal sector does not, by and large,provide mediumr-and long-term credit, so that term credit is limited not onlyby the amount of financial resources available for agricultural investmentsbut also by institutional limitations.

Problem 2: Institutional Weaknesses

7.09 The major institutional constraints on the flow of formal credit,are: functional specialization among credit institutions; structuralproblems and financial weaknesses of individual institutions, includinginadequate resource availability; and high transaction costs and levels ofarrearages. These are reviewed below.

7.10 Functional Specialization./l The functional specialization ofcredit institutions in the Philippines has inhibited efficient financialintermediation, led to high transaction costs and a limited spread of risk,and restricted the range of banking services available to farmers. Examplesof functional specialization relate to the type of clientele served (smallvs. larger farmers); length of loan (short vs. long-term); type of commod-ity financed (coconut, sugar, etc.) and activity financed (production,

/1 Although the legal restrictions limiting the functions of creditinstitutions were removed in 1980, their credit operations havegenerally remained unchanged.

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marketing or processing). Rural banks, PNB, LBP, and ACA support small-holder rice and corn production (paras. 6.02, 6.14, 6.22, and 6.54) whileprivate commercial banks, DBP and PDBs finance only a selective clientele,usually medium- and large-scale borrowers. The division of clientele hasmade the operations of those banks lending to small farmers and agrar:Lanreform beneficiaries highly vulnerable. Mediumrand long-term credit foragricultural investments is provided mainly by DBP which, due to functionallimitations on its ability to mobilize resources and provide comprehensivebanking services, is unable to supply credit on competitive terms (para.6.44). Efforts to promote long-term lending by the rural banks throughCB-IBRD projects have been only partially successful because of institu-tional weaknesses and the growing ineligibility of rural banks for CBrefinancing. PNB and private commercial banks provide, on the other hand,mainly short-term loans, though they command substantial deposit resotLrcesand have considerable potential to undertake medium- and long-term financing(paras. 6.09 and 6.47). Finally, the current arrangements of entrustingcommodity-specific financing to individual banks (e.g., sugar financingmainly by PNB and the Republic Planters Bank; coconut development loans bythe United Coconut Planters Bank) serve neither the interests of the banksthemselves in view of the concentration of risks, nor of the broad-baseddevelopment of these commodities (paras. 4.08, 6.04, 6.51 and 6.53).

7.11 Structural Problems. The Philippine financial sector is urban-oriented despite significant expansion in rural banking facilities duringthe past decade. The density of banks in most rural areas is not sufficientto provide efficient, economical banking services (para. 2.07), and thissituation is aggravated by the current financial difficulties of most ruralbanks (para. 6.59). Commercial banks have no coherent long-term strategy towiden the network of rural offices; moreover, CB's branch licensing policy,which allows a maximum of only six applications for new offices at any onetime, would prevent any long-term branch expansion program (para. 6.46).Among the government banks, DBP and LBP, which have only a limited number ofoffices in rural areas, are expanding their networks very slowly due to lowprofitability in agricultural lending (paras. 6.11, 6.16, 6.35 and 6.43).

7.12 Inadequate Mobilization of Rural Savings. Private sector banksand the Government-owned PNB are active in rural deposit mobilization andhave recorded significant increases since 1973. LBP now also functions as acommercial bank and has stepped up its efforts in deposit mobilization., Ingeneral, however, the resources available for agricultural lending arelimited, inter alia, by insufficient mobilization of rural savings. Farmfamilies in the Philippines have a significant propensity to save; 13-18% oftotal income or 25-35% of each marginal peso is saved (para. 3.19). Butonly a small part of these savings goes to financial instruments, and thegrowth rate of rural deposits has lagged that of urban deposits (para.3.24). In the case of active term lenders in rural areas, the proportion ofdeposits to total resources (rural banks 31%, and government banks 6%) has

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been below the average for thrift and commercial banks (71% and 63%). Thebanks active in agricultural lending have tended, therefore, to rely onlow-cost government resources.

7.13 One of the factors responsible for the low level of savingsmobilization is the interest rate structure. Although the Government hasgenerally deregulated interest rates on savings deposits and fixed depositsand loans of over 365 days, interest rates on short-term operations under12 months were lifted only recently (paras. 3.25 and 4.26). The regulatedinterest rate ceilings on short-term loans (16-18%) did not provide bankswith a sufficient margin to offer savers and short-term depositors more thana maximum rate of 10% p.a. Since the rate of inflation was about 10%, realinterest rates on savings and short-term deposits were not positive. Forfixed deposits above two years, there is no ceiling on interest rates, andurban-based commercial banks and SMBs can offer rates 4-6% higher than thepre-reform rates (10-12%). However, Government banks and private ruralbanks operating in rural areas have generally only marginally increasedtheir interest rates, possibly because of the scarcity of investmentopportunities at relatively high interest rates. Interest rates which inreal terms are either negative or only marginally positive seem to operateas a disincentive to small savers.

7.14 Savings mobilization in rural areas has also been inhibited by thegenerally weak position of formal sector institutions vis-a-vis informalintermediaries in rural areas. Though informal lenders have expandedlending in rural areas, functionally, they are not good mobilizers ofsavings (para. 2.42). In fact, owing to distortions in the system theyfrequently operate perversely, transforming mediumrterm resources borrowedfrom the formal sector into short-term informal consumption loans. At thesame time, the limited penetration of banks into rural areas in thePhilippines limits opportunities for making deposits.

7.15 Transaction Costs. The imputed transaction costs on retailingsupervised credit are about 16% of the loan amount for private rural banksand about 26% for PNB. As the regulated interest rate on subloans tofarmers is 12% (15% for corn loans), supervised credit is often not a viableactivity for the banks. The cost of funds is small due to low-costrediscounting by CB (3%), but annual transaction costs are relatively highby including crop insurance premia (3%), administrative costs (4.5 to 6%),and default costs (4% for rural banks and 12% for PNB). PNB's default costsare especially high since, being a commercial bank, it cannot retain CBfunds for funding subloan arrearages, and uses relatively expensivecommercial funds for that purpose (para. 4.24).

7.16 For non-supervised and term loans, sufficient analytical data ontransaction costs are not available to assess the efficiency of differentinstitutions. Default costs are significant in most institutions whileadministrative costs vary in relation to subloan size, business volume,

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geographical coverage, and management efficiency. The cost of funds alsovaries with the source of funds: loans by CB from special funds provided bythe national budget are low-cost, and foreign fund sources are provided atpreferential rates. The banks earn a gross margin of 8% on CB funds foreligible loans, but cost data are not available to establish the net marginearned. By and large, banks with lower default rates are reported to earn areasonable profit on non-supervised collateralized loans (paras. 4.25, 6.08,6.41 and 6.70).

7.17 Arrearages. Government-owned or -assisted institutions, namelyPNB, DBP, LBP, and rural banks, carry heavy arrearages under agriculturalloans (paras. 6.08, 6.17, 6.26, 6.37, and 6.57). Information on privatecommercial banks' arrearages under agricultural loans is not available.Arrearages in most institutions have become chronic and are attributable todiverse factors (paras. 4.06-4.08). The arrearages situation is especiallyserious in the case of DBP, PNB and rural banks. DBP carries arrearages inas many as 116,000 of its agricultural loan accounts, representing 65% ofits total outstanding accounts (179,000). Arrears have reached P 1.1 bil-lion (US$137 million) or 60% of the amount fallen due and about 31% of totaloutstanding loans at P 3.4 billion (para. 6.37). The arrearages situationin DBP is equally serious with regard to its nonagricultural loans. PNBcarries long overdue arrears of about P 180 million under M-99 alone(para. 6.06). The rural banking system's arrearages at P 1 billion to CBhave disqualified over 500 banks (about one half of the total number ofrural banks) from further access to the rediscounting facility (para.6.57). The flow of formal credit for agriculture from PNB, rural banks andDBP consequently stands considerably reduced.

Problem 3: Limited Impact of Government Policies Affecting AgriculturalLending

7.18 The Government undertook a variety of measures to expand thesupply of credit for agricultural activities and to promote the potentialdemand for credit through programs aimed at introducing improved technologi-cal practices and extension. This also involved input subsidies and pricesupports. Some of these measures were additionally intended to support theGovernment's equity objectives. While these interventions have provedbeneficial in raising levels of productivity and production, their totalimpact has been constrained by several factors which are discussed below.

7.19 Financial Policies.

(a) Agricultural Credit Quota: Government's attempt to channelurban-based bank resources to the rural sector by requiring allbanking institutions to set aside at least 25% of their netincremental loanable funds for agricultural'credit has not haidthe intended results (paras. 4.09-4.12). In many instances, thebanks met the quota by investing in CB securities rather than

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lending directly for agriculture. Even the government-owned PNBwas unable to provide direct credit to agriculture at the expectedlevels. The credit quota policy was, in fact, not adequate interms of its design and enforcement to promote the commercialbanks participation in broad-based agricultural production orinvestment programs. This was because it was not sufficientlybacked by specific measures to promote institutional developmentwithin commercial banks so that they could undertakeagricultural lending. For this, among other things, thefollowing would have been required: expansion of the bankingnetwork in rural areas; formulation of lending strategies;project packaging and appraisal assistance; and refinancingsupport from CB for mediur- and long-term investments.

(b) Agricultural Loan Guarantee Scheme: The loan guarantee schemeinitially encouraged lending institutions to extend credit tofarmers by minimizing their risk of financial failure, but inits later phases, the scheme-s utility was restricted since theguarantee mechanism was not effective in paying off the banksclaims, as shown by the negligible proportion (3%) of guaranteepayments to amounts covered (paras. 4.14 and 4.19). Theguarantee scheme offered no relief to lending banks against baddebts arising from natural calamities nor did it provide muchrelief to the affected farmers except for restructuring theirsubloans to not more than three years. This situation arosebecause of unclear procedures to determine the extent ofdamages, and the consequent delays in processing claims. Thebanks eventually carried heavy arrearages which adverselyaffected their financial operations and viability and disquali-fied a large number of defaulted farmers from receiving newcredit.

(c) Crop Insurance. The recently-introduced crop insurance for riceand corn addresses deficiencies in the agricultural loanguarantee scheme by relieving the farmer of his responsibilityto repay the loan in the event of crop failure. However, thescheme has not been sufficiently attractive to nonborrowingcultivators who were until recently required to pay a premium of3.5%, compared to the 2% paid by borrowing farmers. EffectiveMay 1982 the premium rate for nonborrowing farmers was reducedto 2%. However, if crop insurance continues to serve thelimited objective of safeguarding the farmer's eligibility forfuture loans, without any significant impact on overallproduction or productivity, low-cost alternatives to cropinsurance will have to be explored (para. 4.20). Currently, thecrop insurance facility costs Government as much as 7.5% to 9%of the loan amount for rice and 4.5-5.75% for corn.

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(d) Low Interest Rates. It is debatable whether the low interestrate policy, especially on short-term production loans, servedthe objective of increasing credit flows. There is muchevidence that it did not (paras. 4.21-4.27). There has been asharp deceleration in use of formal credit, and most farmers nowraise production finance in the informal market at relativelyhigh interest rates. PNB and rural banks, which are the prin-cipal conduits for production credit, are slowing new supervisedcredit commitments because of negative margins on such lending.Further, although the supervised credit interest rate is 12%p.a., the imputed cost of borrowing to farmers has heen in therange of 26% to 30% p.a., comprising in addition to the base!interest rate a service charge, compulsory savings to the BaLrrioSavings Fund and other transaction costs. The effective cost ofborrowing to farmers at 30%, in some situations, has been closeto the interest rate in the informal market (para. 2.36, andAnnex 2, Table 16). The Government has since reduced farmersborrowing costs by discontinuing compulsory savings depositdeductions.

7.20 Agricultural Policies.

(a) Tenurial Reforms and Extension. Government-s efforts towardtenurial reform is proceeding rather slowly. This has limitedthe capacity of farmers who are still without legal tenure totheir land, and thus still without legal collateral, to raisecapital (paras. 5.02 and 5.03). Once obtained, credit is notalways used as effectively as it might be due to Government'ssometimes inadequate or uncoordinated extension services. Theperformance of the extension service is constrained becauseextension arrangements are commodity-specific and not yetorganized on a unified farm systems approach. The proliferationof agencies, their lack of an adequate number of trained staff,lack of sufficient mobility of extension staff, and theirexcessive involvement in credit programs, especially in subloancollection, have impaired the effectiveness of the extensionsystem.

(b) Pricing Policies. Appropriate agricultural pricing policieswhich aim to strike a reasonable balance in sharing of produc-tivity gains by producers and consumers are important to success-ful credit programs. In the Philippines, the price environmentfor agriculture improved during 1970-75 but in later years through1981, the internal terms of trade deteriorated. Additionally,the international terms of trade for agricultural productsdeclined, due in part to the second oil crisis and the fall in

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coconut and sugar prices./I A recent study by the University ofthe Philippines, Los Banos, indicated that overall economicpolicies affecting prices of outputs and inputs have created anincentive structure that favors nonagriculture overagriculture./2

(c) Government Subsidies. Credit programs have involved sizeablegovernment subsidies in diverse forms including: a low-costrediscounting facility by CB to credit institutions; budgetallocations to serve as seed money for government-sponsoredcredit programs; and government deposits, loans and equity tocredit institutions at nominal or no costs. Credit guaranteesand crop insurance have also involved large government sub-sidies. Most of these mechanisms are conventional policyinstruments deployed in developing countries to offer producerincentives and also as a means of resource transfer. In thePhilippines, however, it has not always proved feasible (i) topursue equity objectives in the context of subsidy programssince there have been no consistent operational norms based on apoverty line, and (ii) to administer subsidized credit programswith a focus on relatively poor farmers. While many smallfarmers did benefit from subsidies in the initial phases of M-99and other supervised credit programs, a vast majority of smallfarmers and rural entrepreneurs who should qualify for suchsubsidies on poverty considerations have been left outside thescope of the credit programs. Furthermore, most banks arereluctant to serve a clientele of smallholders and rural entre-preneurs who, in view of their skewed family budgets, lowproductivity, and prior indebtedness, are perceived as poorcredit risks. Credit programs seem to center increasingly onthe needs of beneficiaries who satisfy conventional loaneligibility criteria and collateral requirements where the riskof default is considered relatively low. (hIowever, as experi-ence with non-supervised credit programs has shown, loancollection performance is not necessarily linked to thecollateral available to banks.) Consequently, governmentsubsidies seem increasingly to be reaching a class of benefici-aries and institutions which do not necessarily deserve suchsubsidies on equity considerations.

/1 World Bank, "The Philippines: Selected Issues for the 1983-87 PlanPeriod," Report No. 3861-PH, June 1, 1982.

/2 Christiana C. David, 'An Analysis of Agricultural Policies in thePhilippines," February 1982.

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In addition to the various financial and agricultural policies that haveadversely affected rural finance, Government-s administrative structure, asit has evolved over a long period of time, has become unnecessarily complexand presents a formidable challenge to effective management of the economy.This is particularly a problem for the agricultural sector which is handled,at least in part, by 19 of the Government's 26 ministries. Responsibilitiesfor agriculture are scattered among 125 central and 36 regional agencies.Because there are so many bodies with specific mandates, there has been aproliferation of credit programs and insufficient coordination in theirimplementation (para. 5.29). The absence of an effective coordinationmechanism for these many agencies has thus adversely affected theperformance of the agricultural credit sector.

C. An Action Program

7.21 As noted above, the agricultural credit sector is constrained bythree general problems: (a) limitations on access to and supply of formalcredit for farmers; (b) institutional weaknesses; and (c) deficiencies inthe government policies affecting agricultural credit. The resolution ofthese problems requires actions on several fronts.

7.22 The price of credit should increasingly reflect the cost ofmobilizing savings and making those resources available to borrowers throughflexible interest rate policies. This would reduce reliance on Government'slow-cost resources and also safeguard the financial viability of creditinstitutions. Average rates will probably have to increase, but in mostsituations the rates will be far lower than those charged by the informalsector, which now provides most of the credit received by the sector.Charging an economic price for credit hurts farmers much less than having noaccess to credit. Credit subsidies need to be rationalized and phased out,if not eliminated entirely, on the basis of well-defined equity considera-tions and Government's commitment to economic policy adjustments.

7.23 The institutions now in serious difficulties will have to behelped by devising plans for reorganizations, mergers, and refinancing basedon a thorough review of their future institutional goals. The huge burdenof arrearages will have to be reduced. This will require a strong politicalcommitment to support the banks' efforts in collection of past due accountsfrom those borrowers who are capable of repayment and are defaulting will-fully. Some write-offs due to production loss or damage to productiveassets owing to natural calamities are, however, inevitable. This should bedone as part of Government's obligation to social welfare.

7.24 Credit policies must also be evolved which combine low costs,sound financial discipline, and an expanded access to funds, long-term aswell as short-term. The credit system should increasingly rely on a broadermultiagency arrangement in which diverse retail lending institutions should

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participate through structural expansion and operational reforms. Coopera-tive mechanisms to promote self-help, savings mobilization, and credit unionactivity should be encourged, with Government performing a catalyst-s role.Judicious use of the informal sector should be built into future ruraldevelopment programs involving private sector investments. Experience inmany countries shows that it is futile to try to reach all farmer groupsthrough formal credit institutions.

7.25 The changes noted above will require a number of initiatives bythe Government, including agreement on flexible interest rate policies forthe sector, changes in the corporate policies of some banks, a willingnessto write off a large volume of uncollectable debt, and the creation of anew central mechanism to support retail lending institutions and tocoordinate their activities within the framework of the 1980 Banking reforms(paras. 2.22 and 2.23). Price policies which would, as early as feasible,turn the terms of trade in favor of agriculture should also be pursued, withemphasis on benefitting the productive activities of small farmers. Some ofthese steps must be taken promptly, but the creation of a sound system ofrural credit will take several years. The recommendations which follow areintended to help point the way and assume that appropriate macro-leveladjustments, especially with regard to agricultural prices, would also beintroduced.

7.26 The principal objectives of the reforms should be to:

(a) foster competition between formal and informal lenders;

(b) complete the ongoing deregulation of interest rates to promotegreater deposit mobilization in rural areas and use of depositresources for agricultural lending;

(c) rationalize and, in phases, eliminate subsidies on credit;

(d) increase the efficiency of the rural financial market through:functional despecialization and/or financial rehabilitation ofDBP and the private and cooperative rural banks; increasedparticipation of commercial banks and SMBs in agriculturallending, especially for medium- and long-term credit; and animproved field-level credit delivery mechanism, including thestrengthening of village cooperatives; and

(e) establish an agency or a mechanism to support retail lendingagencies and to coordinate their agricultural credit activities.

These recommendations are elaborated upon below.

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Recommendation 1: Foster increased competition between formal and informallenders

7.27 The relationships between formal and informal credit institutionsshould become both more complementary and more competitive. The informalmarket currently provides over half of the total agricultural credit in thePhilippines, and is active and flexible. Government policy should aim atemphasizing the informal market's development impact. Since a sizeableshare of resources for informal lending is raised from loans provided by theformal sector, a relationship between the two sectors should be developed torationalize and monitor the use of such funds, and, as necessary, provideinformal lenders greater access to funds to support increased financing ofinputs and services sold through normal commercial outlets, which is alreadyoccurring to a limited extent. Their access to funds should be tied to anincrease in their productive lending to clients in a competitiveenvironment.

7.28 Historically, attempts to displace informal finance with formalcredit arrangements by utilizing low-cost government resources have not: beensuccessful. But despite this lack of success, continued efforts should bemade to encourage the growth of the formal sector, as the informal sectordoes not offer two other services provided by the formal sector, namely:deposit mobilization and provision of medium- and long-term credit. How-ever, for the formal sector to perform efficiently, steps should be taken tomotivate it to provide small-scale services in competition with informalfinancial intermediaries and expand access to formal finance. In particurlar, flexible interest rates (Recommendation 2) would stimulate competitionbetween formal and informal lenders. Growth of the formal sector based onarrangements in which users are charged the full cost of services isimportant to promote resource mobilization, especially through innovationsthat attract rural savings, and offer a broad range of banking servicesincluding investment credit.

7.29 Changes in other CB regulations that create barriers to entry intoinnovative finance would also increase the scope for competition betweenformal and informal finance. For example, regulations relating to creditunion or pawn shop activities should be re-examined and simplified sincethese outlets have the potential to perform as formal lending institutionsfor the poor who constitute the majority of their clients. Pawning activi-ties in suitable high value commodities, but in the context of commercialbanking operations, would give the poor a wider choice as to what they cando with their money. This would also permit the poor to enjoy expandedoptions in liquidity management and would provide a means of encouragingthem to make deposits.

Recommendation 2: Complete ongoing deregulation of interest rates

7.30 Although CB lifted the interest rate ceiling on short-term loansin January 1983, interest rates on supervised and non-supervised agricul-tural credit continue to be regulated by the terms and conditions of CB

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rediscounting facilities. These rates should now be rationalized with theaim of making them flexible enough to cover relatively larger default costsas well as, selectively, the cost of services provided by the Government.

7.31 Subsidized rediscounting should be progressively abandoned, asshould rediscounting distinctions between supervised and non-supervisedcredit. Effective July 1981, CB increased the rediscount rate for super-vised production loans from 1% to 3% and for non-supervised loans from 3% to8%, indicating a further shift from a cheap money policy. This should becontinued, with the emphasis on reducing transaction costs of financialintermediation through an improved credit delivery mechanism (Recommendation4) in order to keep interest rate increases to farmers within limits thatwould not operate as a disincentive to borrowing for productive purposes(para. 4.27). By gradually increasing the cost of CB funds to retailinstitutions, Government should promote greater use of deposit resourcesrather than low-cost government resources for agricultural lending, with thebanks assuming responsibility for resource mobilization and their lendingdecisions.

7.32 It should, however, be noted that in situations where interestrate increases tend to serve as a disincentive to borrowers while notadequately covering the transaction costs (including default risks), andthereby impairing the financial viability of the credit mechanism, continuedexpansion of formal credit may not be the appropriate mechanism to promotedevelopment objectives without relevant economic and institutional reforms.

Recommendation 3: Rationalize and phase-out subsidies on credit

7.33 The Government should review its strategies in providing creditsubsidies with a view to establishing guidelines which would ensure that thesubsidy is kept to a minimum, that it reaches the people who deserve it onequity considerations and that it serves as a catalyst in economic develop-ment until phased out through the process of economic adjustment policies.In particular, institutions which have depended on Government's low-costfunds or subsidies to safeguard their own viability and, in the main, toserve borrowers or subsectors which do not deserve the subsidy on economicor equity grounds, should review their corporate goals and operations tofocus the impact of subsidies only on eligible clients or subprojects. Inthe long-term interest of the credit system as well as the clientele it issupposed to serve, credit programs should be kept distinct from governmentsubsidies. Thus, government subsidies warranted on equity considerationsshould help promote borrowers' eligibility for formal credit and bepreferably used to support institutional development and infrastructurefacilities which help create an environment conducive to viable agriculturalinvestments (paras. 4.30-4.32).

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7.34 The phasing out of subsidies, however, is a complex issue withsocio-economic and political ramifications. Since subsidies on creditcontribute to distortions in resource allocation and also tend to be poorvehicles of poverty alleviation, the Government should set up a task forceto recommend, in the context of past experience with subsidized creditprograms, measures to rationalize and, in phases, eliminate subsidies; toassess the potential effects of removing subsidies on production, rura:Lincomes and the viability of credit institutions; and to indicate a programto minimize the adverse effects of eliminating subsidies. This task forceshould indicate, among other things, specific operational guidelines, basedon poverty norms, to identify social groups which qualify for governmentsubsidies on equity considerations and the manner in which these subsidiesshould be administered, without diluting the discipline inherent in formalfinancial intermediation and institutional viability.

Recommendation 4: Increase the efficiency of the rural financial market bybroadening corporate objectives and strengthening retail credit institutions

7.35 Phase out functional specialization or orientation among ruralcredit institutions. Functional specialization or orientation among creditinstitutions in the Philippines is not conducive to overall sectoraldevelopment. Specialization by type of clientele, commodity, or length ofloan should gradually be reformed to allow each institution to offer aspectrum of financial services to a wide range of clients. Reduction ofinstitutional specialization should lead to more efficient use of existingbanking windows in rural areas and to a more efficient allocation offinancial resources. The phasing-out process will inevitably be a slow one.First, the corporate objectives, functions and structure of the majorgovernment-owned institutions, i.e., DBP, LBP and PIB, will have to becomprehensively reviewed and suitably modified in the context of theirconsiderable institutional and financial problems. Second, most financialinstitutions are privately owned and can be expected to resist this inter-vention. Third, reduction of institutional specialization implies anextensive amount of corporate mergers and rearrangements. Such developmentsmay cause temporary disruptions, but the longer-term payoff in terms ofincreased efficiency in financial intermediation should be substantial.

7.36 Recommendations to address the particular needs of the variousgovernment-owned banks and government-assisted private institutions are asfollows:

(a) PNB: Since 1976, PNB has recorded only minimal growth in realterms in its agricultural loan portfolio. In view of its totaldependence on government extension staff, PNB's agriculturallending plans generally do not go beyond the government-sponsoredcommodity-specific programs which are often constrained by thelimitations of the extension system itself and heavy arrearages.As for PNB's traditional sugar financing, no well-articulated

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strategy is in evidence especially in the context of PHILSUCOM'splans to increase current sugar production. PNB should evolve along-term strategy for financing broad-based agriculturaldevelopment programs throughout the country and a relatedinstitutional development program (para. 6.09). Work on such aa strategy in a preliminary fashion is underway, based on a pro-posed swap of PNBEs large industrial portfolio with DBP's loansto agriculture and small industry.

(b) LBP: LBP-s responsibility to serve land reform beneficiaries forboth collection of land dues and the provision of credit should beshared by other credit institutions and Government. The collec-tion of land dues from farmers should be handled increasinglyby provincial and municipal treasury offices, and direct settle-ment of land reform payments between tenants and landlords shouldbe encouraged (paras. 6.19-6.20). And, in view of the relativelyhigh risk in lending to agrarian reform beneficiaries, it wouldbe unrealistic to expect LBP to expand its organization to ascale sufficient to serve all such beneficiaries. Other lendinginstitutions, therefore, need to become involved throughappropriate financial packages and legal reforms in lending toagrarian reform beneficiaries.

(c) DBP faces serious financial difficulties mainly because of itsheavy arrearages. In agricultural lending, DBP operates on anegative margin due to: the high cost of funds; its relativelyhigh administrative costs; insufficient staff to supervisesubloans; and functional limitations in providing a total bankingservice, especially working capital loans. Since DBP is a termlending institution and not a primary mobilizer of deposits, thecost of its domestic funds (except for government equity andloans) will generally be higher than that of deposit banks.Therefore, in mobilizing resources, it cannot be competitive withdeposit banks without low-cost government loans and subsidies.Further, if DBP continues to finance only medium and largeborrowers, especially for projects which should carry commercialinterest rates and costs, the Government's subsidies to andthrough DBP will not be justified. To address these problems,Government is reviewing DBP's existing and future role and isconsidering spinning off assets, branches and some staff.

The Government should complete a financial rehabilitation planfor DBP as soon as possible (paras. 6.43-6.44). The magnitudeof DBP-s problems with regard to liquidity, solvency and viabil-ity is so serious that without major financial and institutionalrestructuring, its capability to function as a development hankeither in industry or agriculture would stand significantlyeroded. The rehabilitation plan would involve a realisticevaluation of DBP-s portfolio and net worth; a plan for therehabilitation of subprojects; government equity contribution to

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restore DBP's solvency and viability; institutional and finan-cial arrangements to take over uncollectable or dormantaccounts; and institutional reforms to upgrade its overallefficiency. While appropriate solutions to DBP's problems mayemerge in due course, it is clear that DBP can only play alimited role in meeting overall agricultural credit needs. Abroader approach is therefore justified. The Government shouldevolve financial and institutional arrangements with the objec-tive of providing medium- and long-term agricultural credit, whichhas hitherto been provided largely by DBP, through diverseretail lending institutions (Recommendation 5).

(d) PDBs are dependent on DBP for low-cost refinancing for termlending operations. With its increasing cost of borrowing andcritical cash flcw position, DBP may find it difficult toefficiently perform its role as an apex bank for PDBs, and analternative arrangement (Recommendation 5) should be explored(para. 6.68).

7.37 Establish a strategy for rehabilitation of rural banks. Ruralbanks, through their essentially low-cost operations and wide geographicalcoverage, offer the best structure to deliver short- and long-term credit tofarmers, and to mobilize rural savings. Regrettably, over 500 rural banksare ineligible for rediscounting loans with CB, and continued poor collec-tions have eroded thne financial soundness of many of the rural banks. Sincerural banks are privately controlled, and in many cases re-flect the inter-ests of local elites, Government-s efforts to improve them will be slow.Some steps to promote or even force mergers, encourage part ownership andmanagement assistance by larger commercial banks, close down bankruptinstitutions and progressively write down arrearages - are already underway. But there is much merit in doing this as part of a coherent nationalstrategy which would indicate the various options available and acceptablefor reorganizing the rural banking system within a given time-frame. Otherconstraints to rehabilitating the rural banks are Government-s inability tocontribute significant financial resources to this effort and the desire ofthe rural bankers themselves to limit government influence to a minimum(para. 6.64).

7.38 Government recently decided to establish a special trust fund, tobe supported by annual budgetary allocations of P 150 million during1982-84. This fund is intended to be used for funding of rural banks'arrearages attributable to natural calamities under M-99 loans. However, inview of the banks' high level of arrearages, it is expected that the specialfund will have only a limited impact on improving their liquidity andeligibility for CB refinanc'ng. The rural banks' arrearages to CB amount toover P 1 billion, including M-99 (P 261 million), other supervisedcredit programs (P 313 million), non-supervised credit programs(P 173 million), and restructured loans (P 125 million). Furthermore,

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the rehabilitation measures now being carried out by CB are proceeding veryslowly, and may not be fully effective in addressing the basic problems ofthe rural banks. It is therefore recommended that the special trust fund belinked to the overall rehabilitation of the rural banking system through:portfolio analysis; realistic evaluation of equity and viability; andnegotiating specific structural reforms with individual rural banks, includ-ing the elimination of nonviable units from the system, which is vital toaccelerating the process of institutional reform (para. 6.65). As part ofthis strategy, CB should also review the need for continuing the existingban on establishing new rural banks if the rural banking system's structuralexpansion is important to promote greater competition and to bring bankoffices closer to farmers. However, future expansion in rural bankingshould come about with minimal government subsidies. In addition, financialreforms (Recommendations 2 and 3) will also be important to the healthygrowth of the rural banking system.

7.39 Cooperative rural banks (CRBs). Government should review the CRBconcept and organization, which has proved insufficient to serve itsmembers. In 1982, 25 CRBs were operating. The CRBs owned by farmer cooper-atives are established on a provincial basis to function in the same manneras private rural banks. Government exposure in the form of preferred stockand CB borrowings is close to 60% of CRB loan portfolios and about 50% oftheir total resources. Major problems of CRBs include: lack of competentdirectors, managers and personnel to manage the affairs of the banks; lackof a branch network, which means that the banks are far removed from theirclientele; inequitable allocation of loanable funds among municipalities andfarmers; an ineffective collection mechanism; the overriding belief amongCRB management that cooperatives need not make a profit; and lack ofcoordination between the CRB management and the member cooperatives (paras.6.69-6.71). A recent government decision to discontinue compulsory savingsto the Barrio Savings Fund which supplies the CRBs with working capital, wastaken for good reasons, but, in turn, may lead to further deterioration ofthe CRBs unless efforts are intensified to promote deposit mobilization andstructural expansion. At present, CRB arrearages have reached 33% ofoutstanding loans, and in seven banks, 87% of outstanding loans are inarrears. Overall profitability of CRBs is low, and nine banks have hadtheir equity eroded. While CRBs have been in operation for only about 3-5years, experience suggests that where their operations are sustained mainlythrough government/CB resources, this has not been helpful in buildingviable cooperatives.

7.40 Cooperative organizations have an important role in the socio-economic development of the countryside. However, in evolving newstrategies for cooperative development, greater attention should be paid tosavings mobilization, self-help and the service-oriented objectives ofcooperatives, especially through the strengthening of village - and

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municipal-level cooperatives and the provision of linkages with apex-Klevelcooperative or commercial organizations. While Government has recentLyauthorized village cooperatives to undertake economic and business activities,action programs based on careful analysis of farmer needs in different:geographical regions and socio-economic environments have not yet beenarticulated. Government should, therefore, draw up a phased program forcooperative development, with government assistance directed primarily toinstitutional development without which cooperative credit programs would notsucceed. Cooperative credit should commence, as far as feasible,with credit union activity, however modest, to promote self-help, busiLnessskills and the financial prudence vital for management of credit. TheGovernment should set up a task force to outline possible strategies withregard to development of cooperatives generally and those dealing withcredit in particular (paras. 5.27 and 5.28).

7.41 Encourage systematic involvement of commercial banks in med:Lum- andlong-term agricultural credit. Though private commercial banks have manysemi-rural branches, they are not systematically involved in agriculturalinvestment programs. With the introduction of the 1980 financial reforms andemphasis on mobilization of longer-term resources and deployment inlonger-term loans, it is important that the participation of commercial banksin financing agricultural investments should be increased. Though cormercialbanks have a preference for short-term lending for reasons of liquidity andprofitability, short-term loans are often extended with the understanding thatthey will be rolled over. Commercial banks have the potential, through agreater use of private resources and their large number of retail out:Lets, tosubstantially augment the supply of credit and eventually provide an effectivealternative to DBP and other government-assisted institutions in extendingterm finance for agricultural development. Agricultural lending by commer-cial banks could be done directly and/or by setting up subsidiary low-costagencies like the rural banks, or through cofinancing with existing rural,savings or private development banks. The commercial banks' role in financ-ing agriculture would have to be shifted from ad hoc lending to systematicarea and sector-wide lending in support of national growth objectives. Thiswould require: a comprehensive review of CB branch licensing regulations toestablish a strategy and incentive package to promote expansion of commercialbanking facilities in rural areas; appropriate institutional developmentwithin the commercial banks for formulating lending strategies, projectpackaging and appraisal; and permanent arrangements for providing refiinancingor rediscounting support to facilitate term transformation (paras.6.46-6.49). Also, consideration should be given to policy changes specific-ally for RPB and UCPB which provide the bulk of total credit for sugar andcoconut, respectively (paras. 6.51 and 6.53).

7.42 Develop the capacity of financial institutions in rural areas toserve the dual objective of deposit mobilization and retailing of creditbased on banker-customer confidence. To facilitate a phased program tO makethe banking system self-reliant in its agricultural operations, transaction

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costs should be reduced through measures to increase the banks volume ofbusiness and through management packages appropriate to rural areas. Suchmeasures would include: (a) a phased merger of commodity-specific creditprograms into a line-of-credit approach both at the farm level and forrediscounting facilities to banks, through active extension of theIntegrated Agricultural Financing (IAF) concept and related institutionaldevelopment (para. 5.11); (b) expanding the bank network to bring bankoffices closer to farmers; (c) forging a viable banker-customer relation-ship; and (d) improving input supplies and marketing support in order toincrease demand for credit. At the same time, deposit mobilization shouldbe encouraged by a variety of means, such as: linkage between a customer'scredit eligibility and his deposit balance; interest rate reform(Recommendation 2); and use of attractive financial instruments to bring inmore depositors. Also, greater use should be made of credit unions, withmanagement support from lending agencies, to meet the credit needs offarmers. This would encourage deposits and support the growth of viablelending mechanisms.

7.43 While there is no single approach to establish a self-sustainingcredit delivery arrangement, especially for small farmer production lending,this process should be carried through in the light of experience gainedunder IAF, LBP-s Integrated Estate Development Program and ACA's CompactFarm Clusters Program (para. 5.12). LBP's arrangements in particularprovide professional management to farmer groups and ensure timely deliveryof credit, reduce subloan documentation, improve linkages with marketing,enhance effectiveness of the extension system, and result in relativelybetter subloan collection performance (paras. 6.15, 6.18 and 6.27). PastLBP/ACA programs were sometimes constrained by the functional specializationof the institutions and emphasis on production lending without remedying theweaknesses of the supervised credit program. They could be improved throughparticipation of other lending agencies besides LBP; stronger linkages withthe national extension system; and provision of integrated rural savingsmobilization and credit delivery, based on banker-customer confidence. Thisstrategy should be backed by a strong mechanism at the provincial, regionaland national levels, to monitor the credit programs and identify the weaklinks (e.g., poor institutional structure, lack of infrastructure, insuffi-cient farm facilities, unavailability of inputs and marketing bottlenecks)to evolve a remedial action program, in association with appropriategovernmental authority. At the national level, this could be the responsi-bility of the agency or mechanism proposed in Recommendation 5.

7.44 Besides an efficient credit delivery mechanism, backed by anappropriate financial and economic policy framework, the success of a creditprogram, especially for small farmers, rural artisans and landless laborers,would depend upon the socio-economic condition of credit beneficiaries.This is particularly the case when loans are disbursed without collateral,based on the potential viability of subprojects financed, as in the case ofsupervised credit. In the Philippines, supervised credit programs operate

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in an environment in which a large number of beneficiaries, because of theirhighly skewed family budgets and fungibility of the credit provided, use atleast a share of the additional credit for activities not related to cropproduction and/or after harvest give low priority to their repaymentperformance. The misallocation of credit funds arises when borrowers offormal credit have sizeable prior indebtedness or significant unsatisfiedpriorities such as family health, education, etc. In such situations,credit institutions carry heavy arrearages which eventually affect theirfinancial viability (para.4.31).

7.45 In designing credit programs, it is important that the risks arecarefully weighed, and if the program is intended to serve beneficiaries whoare nonviable or require special assistance in the nature of socialsecurity, the cost sharing arrangements between the Government and theinstitutional sector should be worked out. Operationally, credit programsshould be kept distinct from government subsidies since credit decisionswill be at the banker's risk while government assistance should promote theviability of agricultural investments and borrowers- eligibility for credit.By and large, credit should serve the borrowers who, on the basis of theirskills, equity and the techno-economic feasibility of their projects,qualify for a bank loan while government subsidies should be directed toeligible clients on the basis of well-defined poverty norms (para. 4.32).

7.46 As for arrearages resulting from natural calamities, besides theusual restructuring of subloans based on the borrower's repayment capabili-ties, the Government should explore whether its rehabilitation assistanceprovided to the affected persons could, at least in part, be tied to theaffected person's existing obligations to banks and his future credit needs.Government should evolve suitable guidelines to make this arrangementoperational. This should help safeguard both the institutional viability ofcredit institutions and ensure additional financial support to theGovernment's rehabilitation objectives (para. 4.20).

Recommendation 5: Government should establish an agency or a mechanism toprovide support to retail lending institutions and coordinate theiractivities

7.47 In the Philippines, no single institution is equipped to performthe role of a lead agency for the agricultural sector as a whole, or tosupport and coordinate agricultural credit activities, in particular. ThePresidential Committee on Agricultural Credit (PCAC) was created to overseethe entire agricultural credit system, ensure essential coordination,undertake research and recommend policies and options to decision makers.However, PCAC is not expected to ensure the efficient day-to-day managemenfof the agricultural credit sector. Its operational arm, the Technical Boardfor Agricultural Credit (TBAC), is not organized to undertake a sector-wide assessment of development programs, institutional performance andproblems, and resource mobilization arrangements, or to provide effective

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monitoring. Even reporting specifications for banks, and collection andprocessing of information, remain within the province of the CB (paras.5.34-5.38). These limitations concerning the day-to-day roles of PCAC andTBAC constitute a major weakness in the credit system. In order to overcomethis weakness, there is a need to establish an agency or a central mechanismto provide both financial and non-financial support to credit institutions.The functions of such an agency or a mechanism would include the following:

Financial Functions

(a) Supplementing resources of the agricultural credit sectorthrough rediscounting and refinancing of short-, medium- andlong-term loans extended by retail lending agencies; and

(b) Resource mobilization for agricultural development throughmoney and capital market operations, and external assistance.

Non-financial Functions

(c) Provision of technical assistance to retail lending institu-tions in project packaging and implementation; institutionaldevelopment such as staff training; lending policies andprocedures; and evaluation of the loan portfolio;

(d) Liaison with government agencies concerned with agriculturaldevelopment; and

(e) Monitoring the impact of agricultural credit investment programsand policies at a national level.

7.48 Currently, some of the financial functions are performed by theCB. There is, however, no permanent mechanism in CB to provide, on acontinuous basis and through a comprehensive credit budgeting exercise,medium- and long-term resources in support of investments in agriculture andagroprocessing activities, through diverse retail lending institutions suchas PNB, private commercial banks, rural banks, SMBs, PDBs, SLAs, andinvestment houses. The absence of this facility has greatly constrainedterm transformation of deposit resources, especially in commercial banks.Also, neither CB nor the Government has had an effective mechanism tomonitor or oversee the overall lending strategies, performance and financialviability of individual credit institutions receiving funds from differentsources (para. 4.29).

7.49 Non-financial functions are similarly dispersed. CB's role innon-financial development of the agricultural credit sector is very limited:it has a special responsibility to provide technical assistance to ruralbanks but has little involvement in policy and operational review of DBP,PNB, LBP and private commercial and thrift banks, especially in the agricul-tural sector. There are also no effective coordination arrangements amongthe three government-owned institutions, namely, PNB, DBP and LBP.

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7.50 It is recommended that the Government consider the establishmentof an appropriate national agency or a mechanism as a means of overcomingthese problems, and providing the financial and non-financial servicesdiscussed above. This should be done in conjunction with the Government'splan for the rehabilitation of DBP and for reviewing the future role ofpublic sector organizations.

7.51 The national agency or mechanism could take one of two forms,depending on whether the Government is prepared to establish a wholly newand autonomous organization to serve the objectives noted above or prefersat this stage only to modify the existing arrangements within theCB/PCAC/TBAC set-up. In either event, it is not envisaged that CB'sresponsibility for monetary and credit policies would be reduced; in fact,CB should, in future, play a more direct and active role in supportingfinancial mechanisms for agricultural development in diverse subsectors.However, CB should not be required to deal with about 1,300 banks on aday-to-day basis in the administration of small loans or diverse creditprograms since this places an undue burden on it without enhancing theflexibility and efficiency of individual banks, so vital for successfulbanking. Also, CB's regulatory authority should as far as possible be keptdistinct from its development function, since the two responsibilities oftenseem to conflict (para. 6.73).

7.52 Given the institutional situation, their compartmentalizedactivities, organizational and financial problems, and limited capabilitiesto provide support to wide ranging activities and a diverse clientele, it isimportant that a national-level agency should be evolved to provide leader-ship in the preparation and implementation of agricultural developmentstrategies and programs, with a broad-based multiagency arrangement (paras.6.72-6.78). The proposed autonomous institution would be organizationallyseparate from CB and would take over the financial functions now beingperformed by CB, including the direct support for, and servicing of,agricultural lending operations pursuant to its lender-of-last-resortresponsibility. CB would have a strong representation on the board of thenew institution. However, the latter would have a close association withprivate and public banking institutions, which would be called upon toparticipate in its capitalization along with CB. The broader organizationis intended to enlarge the role of both private and public financialinstitutions in the rural development process through the provision ofagricultural and other rural credit, mobilization of resources and formula-tion of lending policies and programs consistent with techno-economicfeasibility standards and institution development efforts for theirefficient implementation.

7.53 If the Government is not prepared at this stage to create a newagency, the responsibility for undertaking some of the functions could beassigned to a new rural finance department within the CB. Clearly, to beresponsive to the needs of the agricultural sector and to perform a wide

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range of functions, a strong and well-staffed department would be requiredwithin CB. Toward this end, CB should, initially, establish an AgriculturalLoan Fund (ALF), similar in concept to the Industrial Guarantee and LoanFund, to provide a permanent window to extend a mediumr and long-termrefinance or rediscounting facility, in support of agricultural investmentsfinanced by all available retail lending institutions. This fund couldreceive a local resource allocation based on CB's proposed credit budgetingmechanism, supplemented by external assistance from bilateral and multi-lateral agencies. The ALF arrangement should be institutionally supportedby the proposed rural finance department within CB, to plan subsectoralstrategies, institution development in retail lending institutions,follow-up and monitoring of subloans support by ALF, and performance of themajor development functions outlined above for a national autonomous agency.The ALF arrangement should be particularly useful for broadening the role ofcommercial banks, savings and mortgage banks and investment houses inagricultural lending as well as resource mobilization for that purpose.

7.54 Other alternatives to a national agency or a rural financedepartment in CB include strengthening of TBAC, or requiring LBP to performthe role of a lead agency. However, these options may not fully respond tothe objectives and functions proposed for a national-level agency. TBAC isan operational extension of PCAC which is essentially an advisory body. Inthis role, PCAC or TBAC cannot have the authority to perform the role of amanager. TBAC's operations have been hitherto primarily research-orientedtoward design and improvement of agricultural credit. TBAC's monitoring andevaluation of agricultural credit programs has been notably weak, especiallybecause TBAC, being outside CB, has had no access to lending institutions'operations or authority to specify reporting requirements. If TBAC shouldeffectively function as a national agency, it should either be merged withCB or it should have the same authority as CB to supervise and monitor thelending operations of credit institutions. Clearly, authority as a lender-of-last-resort cannot be passed on to an agency outside CB without involvinglegal issues. In sum, if TBAC is to function as a lead agency, it should bemerged with CB to form the nucleus of the new rural finance department inCB. However, since TBAC has been a useful mechanism for independentevaluation of credit programs, its merger with CB to perform the functionsof a lead agency should receive careful consideration.

7.55 For its part, LBP is mandated to function as the financial arm ofthe Government's agrarian reform program and has a specialized clientele toserve agrarian reform beneficiaries. As such it does not have an easyaccess to other credit institutions. Any proposal to bestow a wider respon-sibility on LBP will dilute its role. Moreover, being a retail lendinginstitution, LBP may not command the authority which CB or a CB-linkednational agency would have. In addition, the objective of involving a widerange of private institutions, especially commercial banks and PNB, wouldsuffer if a retail lending agency like LBP attempts to interfere in theiroperations.

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7.56 CB should set up a task force to evaluate the feasibility of eachof these options and make recommendations on the following: legal andorganizational framework for the new agency or mechanism; its management,resource mobilization and credit functions in support of rural development;and organic links with CB, including CB's responsibility in nurturing thenew agency to discharge its functions.

7.57 Finally, the Bank believes that the utility of these recommenda-tions will be substantially augmented if they are implemented as a packageand not in isolation.

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STATISTICAL ANNEXES

Table of Contents

Table No. Page No.

ANNEX 1Table 1: Gross Value Added in Agriculture, Fisheries

and Forestry by Subsector in Current Prices . . . . . . 116Table 2: Gross Value Added in Agriculture, Fisheries and

Forestry by Subsector at 1972 Constant Prices . . . . . 117Table 3: GNP Per Capita and Growth of Production in the

Philippines and Selected East Asian countries .118ANNEX 2

Table 1: Banking Institutions - Regional Distribution of Offices 119Table 2: Regional and Subsectoral Distribution of Offices

of the Financial System ... . . . . . . . . . . . . . 120Table 3: Ratio of Deposits to Total Resources, Banking

Offices in Rural Areas, 1975-79 . . . . . . . . . . . . 121Table 4: Percentages Shares of Rural Areas in Bank Lending,

by Type of Institution, 1979-79 . . . . . . . . . . . . 122Table 5: Loan Portfolio to Deposit Ratio, Rural

Institutions, 1975-79 ... . . . . . . . . . . . . . . 123Table 6: Percentage Distribution of Loans Granted by

Institution, 1975-77 . . . . . . . . . . . . . . . . . 124Table 7: Ranking of Criteria Used by 163 Moneylenders in

Selecting Borrowers . . . . . . . . . . . . . . . . . . 125Table 8: Collateral Used on 2,153 Formal and Informal Loans

Obtained by 912 Farmers, 1978 . . . . . . . . . . . . . 126Table 9: Repayment Rates on 347 Formal and 1,700 Informal

Fully Matured Loans of 912 Farmer-Borrowers, 1978 . . . 127Table 10: Transaction Costs and Monopoly Profits of Different

Types of Moneylenders, 1978 . . . . . . . . . . . . . . 128Table 11: Classification of 163 Sample Moneylenders by Key

Business, 1978 . . . . . . . . . . . . . . . . . . . . 129Table 12: Loans Issued and Administrative Expenses of 163

Sample Private Moneylenders, 1978 . . . . . . . . . . . 130Table 13: Comparative Levels of Interest Rates on Fully Paid

Loans as Reported by Present and Past Studies . . . . . 131Table 14: Total Volume of Loans Granted to all Borrowers of

163 Private Money Lenders in 1978 . . . . . . . . . . . 132Table 15: Sources of 2,110 Loans of 912 Sample

Farmer-Borrowers, 1978 . . . . . . . . . . . . . . . . 133Table 16: Average Interest Rates Charged by Different Types

of Moneylenders, 1978 . . . . . . . . . . . . . . . . . 134

ANNEX 3Table 1: Agricultural Loans Granted for Production . . . . . . . . 135Table 2: Agricultural Loans Granted for Processing . . . . . . . . 136Table 3: Agricultural Loans Granted for Marketing . . . . . . . . 137Table 4: Agricultural Loans Granted - by Commodity . . . . . . . . 138

- 114 -

Table No. Page No.

ANNEX 3 (cont'd)Table 5: Agricultural Credit as Percent of GVA . . . . . . . . . . 139Table 6: Savings and Time Deposits in Banks (Selected Dates) . . 140Table 7: Percentage Distribution of Savings and Time

Deposits in Banks (Selected Dates) . . . . . . . . . . 141Table 8: Breakdown of Number of Savings and Time

Deposits, by Size . . . . . . . . . . . . . . . . . . . 142Table 9: Growth and Distribution of Deposits - Banking

Institutions in Rural Areas, 1975-79 . . . . . . . . . 143

ANNEX 4, APPENDIX 1: Profile of Ongoing AgriculturalCredit Programs . . . . . . . . . . . . . . . 144

Table 1: Agricultural Credit Programs/Projects, byCommodity/Level of Activity, by Category . . . . . . . 145

Table 2: Agricultural Credit Programs by Maturity . . . . . . . . 146Table 3: Agricultural Credit Programs: Sources of Funds . . . . . 147

ANNEX 5: Cooperative Structure .... . . . . . . . . . . . . . . 148

ANNEX 6:Table 1: Philippine National Bank-Resources . . . . . . . . . . . 149Table 2: PNB: Agricultural Production Loans Granted

(1975-81), by Crop/Commodity . . . . . . . . . . . . . 150Table 3: PNB: Processing and Commercial Loans Granted for

Major Agricultural Commodities and for Fisheries . . . 151Table 4: PNB: Masagana 99 Loans . . . . . . . . . . . . . . . . . 152Table 5: PNB: Collection Performance Under Agricultural Loans . . 153Table 6: LBP Resources . . . . . . . . . . . . . . . . . . . . . . 154Table 7: LBP: Long-Term Resources Position . . . . . . . . . . . 156Table 8: LBP: Agricultural Loans Granted . . . . . . . . . . . . 157Table 9: LBP: Operation Land Transfer: Implementation Progress 158Table 10: LBP: Agricultural Loans Granted in IEDP and

Non-IEDP Areas . . . . . . . . . . . . . . . . . . . . 159Table 11: LBP: Loans Granted to Farmer-Beneficiaries . . . . . . . 160Table 12: ACA: Lending Operations by Activity . . . . . .. . . . 161Table 13: ACA: Repayment Performance . . . . .. . . . . 162Table 14: ACA: Status of Loans Under Compact Farms and

Compact Farm Clusters . . . ..... . 163Table 15: ACA: Financial Operations, 1972-81 . . . . . . . . . . . 164Table 16: DBP: Agricultural Loans as % of Total Loans Approved . . 165Table 17: DBP: Analysis of Loan Portfolio, 1977-81 . . . . . . . . 166Table 18: DBP: Agricultural Lending Operations, 1975-81 . . . . . 171Table 19: Credits Granted by Commercial Banks, by Industry . . 172

-115-

Table No. Page No.

AtNNEX 6 (cont'd)Table 20: Commercial Banks' Agricultural Loans - by Commodity . . . 173Table 21: Commercial Banks' Agricultural Loans - by Activity . . . 174Table 22: Licensed Rural Banks-by Age Group . . . . . . . . . . . . 175Table 23: Rural Bank Loans: Sectoral Distribution . . . . . . . . 176Table 24: Resources of the Rural Banking System . . . . . . . . . . 177Table 25: Rural Banks' Past Due Ratio by Region, June 30, 1981 . . 178Table 26: Rural Banking System: Profitability Ratios . . . . . . . 179Table 27: World Bank/IDA Lending for the Agricultural

Sector and Rural Development . . . . . . . . . . . . . 180

-116 - ANNEX 1Table 1

PHILIPPINES


Gross Value Added in Agriculture, Fisheries and ForestryBy Subsector in Current Prices

(In billion pesos)

1972 1973 1974 1975 1976 1977 1978 1979 1980

Agricultural Crops

Paddy 2.7 3.8 4.7 5.6 6.3 6.3 7.0 7.7 9.0

Corn 1.0 1.2 1.8 2 0 2.3 2.7 2.7 2.8 3.3

Coconut, including copra 1.2 2.2 3.0 2.8 3.1 3.8 4.0 5.8 3.1

Sugarcane 1.1 1.2 2.0 2.6 2.5 2.1 2.1 2.5 2.7

Banana 0.6 0.7 1.0 1.9 2.2 2.6 3.2 3.9 4.8

Other crops 2.3 3.3 4.3 5.7 6.9 8.1 9.6 11.5 14.7

Total Crops 8.9 12.4 16.8 20.6 23.3 25.6 28.6 34.2 37.6

Livestock 1.7 2.2 3.1 2.7 2.9 3.1 3.4 3.8 3.9

Poultry 0.7 0.8 1.1 1.3 1.5 1.8 2.2 2.8 3.6

Fish 2.7 3.1 5.1 5.6 6.3 7.5 8.4 9.6 11.2

Forestry 2.0 2.6 3.3 2.8 3.3 3.7 4.7 5.1 5.3

Gross Value Added inAgriculture, Fishingand Forestry 16.0 21.1 29.4 33.0 37.3 41.7 47.3 55.5 61.6

Note: Totals may not add up due to rounding.

Source: National Accounts Staff, NEDA.

- 117 -ANNEX 1Table 2

PHILIPPINES


Gross Value Added in Agriculture, Fisheries and Forestryby Subsector at 1972 Constant Prices

(In billion pesos)

1972 1973 1974 1975 1976 1977 1978 1979 1980

Agricultural Crops

Paddy 2.7 2.8 3.1 3.4 3.4 3.8 3.7 4.0 4.1

Corn 1.0 0.9 1.1 1.2 1.2 1.3 1.4 1.4 1.4

Coconut, including copra 1.2 1.0 0.8 1.1 1.4 1.3 1.3 1.2 1.3

Sugarcane 1.1 1.1 1.4 1.4 1.6 1.3 1.2 1.3 1.3

Banana 0.6 0.7 0.9 1.3 1.4 1.7 2.0 2.1 2.4

Other crops 2.3 2.4 2.6 2.8 3.1 3.2 3.6 4.1 4.7

Total Crops 8.9 8.9 9.9 11.2 12.1 12.6 13.2 14.1 15.2

Livestock 1.7 2.0 2.0 1.7 1.7 1.8 1.9 1.9 1.9

Poultry 0.7 0.8 0.8 0.9 1.0 1.1 1.3 1.4 1.6

Fish 2.7 2.9 3.0 3.1 3.3 3.5 3.7 3.8 3.9

Forestry 2.0 2.4 1.8 1.3 1.6 1.6 1.5 1.4 1.1

Gross Value Added inAgriculture, Fishingand Forestry 16.0 17.0 17.5 18.2 19.7 20.6 21.6 22.6 23.7

Note Totals may not add up due to rounding.

Source: National Accounts Staff, NEDA.

PHILIPPINES


GNP Per Capita and Growth of Productionin the Philippines and Selected East Asian Countries

Growth Rates (% per year)GNP percap./a GDP Agriculture Industry Manufacturing Services

1979 1960-70 1970-79 1960-70 1970-79 1960-70 1970-79 1960-70 1970-79 1960-70 1970-79(US$)

Thailand 590 8.2 7.7 5.5 5.4 11.6 10.4 11.0 11.4 9.0 7.7 F"

Philippines 600 5.1 6.2 4.3 4.9 6.0 8.4 6.7 6.7 5.2 5.4

Indonesia 370 3.9 7.6 2.7 3.6 5.2 11.3 3.3 12.5 4.8 9.2

Malaysia 1,370 6.5 7.9 4.0 5.0 N/A 9.9 N/A 12.4 N/A 8.4

Korea 1,480 8.6 10.3 4.4 4.8 17.2 16 .5 17.6 17 .8 8.9 8.8

/a World Bank Atlas methodology.

Source: WDR IV - 1981. |

PHILIPPINES


Banking Institutions - Regional Distribution of Offices(December 31, 1980)

Thrift BanksSavings

Private and Total Rural Special- TotalCommercial development mortgage Stock thrift banks ized Govt

Region banks banks banks SLAs banks banks

Ilocos 99 5 10 22 37 133 4 273Cagayan Valley 30 - 1 3 4 69 110Central Luzon 121 35 18 60 113 157 7 398Metro Manila 651 31 150 57 238 30 4 923Southern Tagalog 106 63 21 64 148 220 6 480Bicol 50 4 6 6 16 82 8 156Western Visayas 99 6 8 8 22 133 9 263Central Visayas 100 5 15 8 28 76 6 210Eastern Visayas 31 1 4 - 5 53 6 95Western MindanaoNorthern Mindanao 59 - 5 11 16 70 9 154Southern Mindanao 83 4 16 9 29 66 10 188Central Mindanao 22 - 7 1 8 40 8 78

Total 1,488 Ia 154 266 251 671 1,155 92 /b 3,406 /a

/a Excludes overseas offices (13).lb Includes six regional offices of specialized institutions classified as branches.

oZ !F- m

m >4

PHILIPPINES


Regional and Subsectoral Distribution of Offices of the Financial System(December 31, 1980)

Region Banking Non-Bank Non-Bank Total No. of Densityinstitutions/a financial Thrift financial municipalities/ ratio

intermediaries institutions system and cities

Ilocos 273 41 3 317 176 13 0 1

Cagayan Valley 110 11 - 121 113 107

Central Luzon 398 127 1 526 121 435 C

Metro Manila 923 825 60 1,808 17 10635Southern Tagalog 480 127 3 610 218 28 0

Bicol 156 35 1 19 2 115 167

Western Visayas 263 105 3 371 130 285

Central Visayas 210 73 3 286 131 218Eastern Visayas 95 7 - 102 142 72

Western Mindanao 72 22 1 95 95 100Northern Mindanao 154 32 1 187 121 155Southern Mindanao 188 60 1 249 82 304

Central Mindanao 78 10 2 90 103 84

Total 3,400 1,475 79 4,954 1,564 317

/a Excludes overseas offices (13) and six regional offices of specialized government institutions.

t3

- 121 - ANNEX 2Table 3

PHILIPPINES


Ratio of Deposits to Total Resources, Banking Offices

in Rural Areas, 1975-79

(%)

Average1975 1976 1977 1978 1979 1975-79

Commercial banks 57.1 57.8 65.1 67.8 67.5 63.1

Thrift banks 65.7 72.0 70.9 73.9 7210 70.9PDBs 56.2 55.6 52.8 54.8 55.0 54.9SMBs 77.5 89.8 85.1 85.8 80.8 83.8SSLAs 66.9 71.2 70.3 71.9 71.2 70.3

Rural banks 23.7 27.2 28.4 30.9 31.2 28.3

Specialized government banks 2.2 2.5 2.9 4.5 6.3 3.7

All banks, rural areas 46.0 42.2 50.7 53.4 52.9 49.0

All banks, systemwide 36.2 37.0 39.1 39.4 41.3 38.6

Source: TBAC/University of the Philippines Business Research Foundation,Inc., "Rural Financial Markets in the Philippines."

PHILIPPINES


Percentage Share of Rural Areas in Bank Lending, by Type of Institution, 1975-79

(%)

Average AverageLoans granted growth Loans outstanding growth

1975 1976 1977 1978 1979 rate 1975 1976 1977 1978 1979 rate

KBs /a 7.8 6.2 5.6 6.8/b n.a. (4.5) 17.8 18.5 17.1 15.3 13.9 (6.0)PDBs 61.2 63.4 63.6 84.0 82.2 7.7 87.9 82.2 82.0 90.7 76.0 (3.6)SMBs 2.7 5.7 7.7 n.a. n.a. 68.9 2.1 5.9 14.0 20.1 22.8 81.5RBs 95.0 95.8 95.2 95.5 96.0 /d 97.4 97.3 97.2 97.5 97.6 /dSGBs /c 83.3 72.1 71.4 57.5 62.2 (7.04) 20.5 26.8 25.6 26.8 24.7 _478

Overall % share, t

rural areas 11.0 8.8 8.1 n.a. n.a. (14.2) 25.7 24.6 23.1 22.5 20.2 (5.8)

% contribution ofrural areas tonational output 68.9 68.6 68.2 67.9 67.8 /d - - - - - -

% contribution ofrural areas todeposits in thebanking system 28.5 25.8 26.0 26.0 23.3 (4.9)

/a Commercial banks.lb PNB only./c Specialized government banks./d Less than 1%.

Source: University of the Philippines, Business Research Foundation, Inc., "Rural FinancialMarkets in the Philippines," adapted from GB-SRO, "Regional Profile of the Banking System,"Supplement, Factbook of the Philippines, 1976-79; Annual Reports of PAB, LBP, DBP, RBs,PDBs, and CB-DER.

HD J

.ISM

PHILIPPINES

AGRICU LTURAL CREDIT SECTOR REVIEW

Loan Portfolio to Deposit Ratio, Rural Institutions, 1975-79

1975 1976 1977 1978 1979 Growth rateRural Urban Rural Urban Rural Urban Rural Rural Urban Rural Urban

Commercial banks 103.14 169.50 103.52 159.11 97.46 144.80 106.72 145.41 85.13 141.54 (4.7) (4.4)

Thrift banks 96.22 90.68 76.43 89.98 81.56 89.62 69.79 73.90 77.00 83.46 (5.4) (2.1)PDBs 154.38 102.82 132.16 152.59 128.05 143.12 119.00 168.09 122.86 167.11 (5.5) 12.9SMBs 11.35 92.70 22.41 88.05 46.80 88.50 44.08 67.63 58.14 77.91 50.4 (4.2)SSLAs 123.84 47.03 101.48 90.56 101.89 83.20 85.71 125.81 84.19 125.87 (9.2) 27.9

RBs 357.22 135.56 312.75 125.05 294.11 115.85 269.10 105.72 266.42 104.59 (7.1) (6.3)

Specializedgovernmentbanks 3,990.52 119 .18 3,551.45 149.66 3,023.75 242.31 1,829.15 224.38 1,291.90 257.13 (24.6) 21.2

Overall ratio,rural areas 145.1 146.3 129.5 119.2 122.7

Source: University of the Philippines, Business Research Foundation, Inc., "Rural Financial Market in the Philippines."

XI Atn

- 124 -

ANNEX 2Table 6

PHILIPPINES


Percentage Distribution of Loans Granted by

Institution, Total Vs. Rural (1975-77)

19 75 19 76 AL9 77Total Rural Total Rural Total Rural

Commercial banks 95.5 67.0 96.1 67.9 9 6 .2e 67 .3e

PDBs 0.1 0. 8 e 0.1 O. 9 e 0.1 1.0

SMBs 0.4 0.1 0.5 0.3 0.6e 0.5e

RBs 1.9 16. 6 e 1.4 15.0 1.3 15.0

Specialized government banks 2.1 15.5 1.9 15.9 1.8 16.2

100.0 100.0 100.0 100.0 100.0 100.0

e = estimated

Source: TBAC/University of the Philippines, Business Research Foundation,"Rural Financial Markets in the Philippines."

- 125 -

ANNEX 2Table 7

PHILIPPINES


Ranking of Criteria Used by 163 Moneylenders in Selecting Borrowers

Rank frequenciesCriteria for lending 1 2 3 4 5 6 Total Rank

Kinship tie 28 29 15 4 1 3 80 3

Good credit standing 76 30 10 - - - 116 1

Urgency of need 29 35 12 5 4 - 85 2

Good financial standing 12 16 13 7 1 2 51 4

Availability of security 4 2 6 4 3 - 19 5

Guarantor/comaker 2 3 1 1 3 5 15 6

Source: TBAC, "A Study on the Informal Rural Financial Markets inThree Selected Provinces in the Philippines," 1980.

- 126 -

ANNEX 2Table 8

PHILIPPINES


Collateral Used on 2,153 Formal and Informal Loans

Obtained by 912 Farmers, 1978

Formal Informal TotalNo. of No. of No. of

Collateral used loans % loans % loans %

Verbal promise - 1,107 61.3 1,107 51.4

Written promissory note 260 74.9 13 0.7 273 12.7

Guarantor 16 4.6 5 0.8 37 1.7

Crop lien /a and promissory note - 630 34.9 630 29.3

Land title 49 14.1 24 1.3 72 3.3

Chattel mortgage 22 6.4 15 0.8 37 1.7

Land title and chattel mortgage - - 3 0.2 3 0.1

Others - - 9 0.5 - -

/a Verbal agreements to sell the farmer's produce to the moneylender.

Source: TBAC, "A Study on the Informal Rural Financial Markets in ThreeSelected Provinces in the Philippines," 1980.

- 127 -

ANNEX 2Table 9

PHILIPPINES


Repayment Rates on 347 Formal and 1,700 Informal Fully Matured

Loans of 912 Farmer-Borrowers, 1978

Levels ofrepayment Formal Informal

(in % of the No. of Average No. of Averageamount of loan) loans % repayment /a loans % repayment

0 75 21.0 0 281 16.5 01 - 20 29 8.4 13.3 11 0.6 15.0

21 - 40 32 9.2 38.4 39 2.3 34.841 - 60 25 7.2 51.0 56 3.2 49.961 - 80 14 4.0 71.0 65 3.8 71.381 - 99 6 1.7 92.8 33 1.9 88.8

100 166 47.8 100.0 1,215 71.5 100.0

Total 347 100.0 60.6 1,700 100.0 78.5



PHILIPPINES


Transaction Costs and Monopoly Profits of DifferentTypes of Moneylenders, 1978(in % of the amount of loan)

Profit componentsTransaction cost Extra profits (loss)

Adminis- Annual Oppor- Explic-trative Risk Total interest tunity cost itly "Hidden" Totalcost premium (3) = charges of capital charged charges (8) -

(1) (2) (1$+(2) (4) (5) (6) (7) (6)+(7)

Farmer 3.04 1.55 4.59 44.83 15.00 17.71 7.53 25.24

Landlord 3.66 1.98 5.64 47.73 15.00 18.98 8.11 27.09

Palay trader 3.98 1.67 5.65 67.03 15.00 32.26 14.01 46.38

Rice miller 5.74 4.55 10.29 14.16 15.00 (11.39) 0.26 (11.13)

Input dealer 2.35 3.50 5.85 16.17 15.00 (4.99) 0.31 (4.69)

Storeowner 6.24 3.64 9.88 69.98 15.00 43.38 1.72 45.10

Full-time moneylender 3.56 2.15 5.71 17.00 15.00 (3.76) 0.05 (3.71)

Construction contractor 5.73 3.63 9.36 37.63 15.00 9.30 3.97 13.27

Handicraftsman 1.73 1.57 3.30 18.90 15.00 0.54 0.06 0.60

Professional practitioner 2.94 0.72 3.66 11.78 15.00 (6.88) 0 (6.88)

All 4.12 2.97 7.09 55.53 15.00 22.05 7.76 55.53

Source: TBAC, "A Study on the Informal Rural Financial Markets in Three Selected Provinces in thePhilippines," 1980.

- 129 -

ANNEX 2Table 11

PHILIPPINES


Classification of 163 Sample Moneylenders by Key Business, 1978

Per centPrincipal Number distributionoccupation reporting of number

reporting

New types of lenders 75 46.0

FarmerCrop culture 54 33.1Livestock/poultry raisers 8 4.9

Input dealer 13 8.0

Traditional lenders 24 14.8

Landlord/aMiller 5 3.1Palay trader 9 5.5Input dealer 3 1.8Storeowner 1 0.7Construction/contractor 6 3.7

Palay trader 32 19.6Rice miller 10 6.1Storeowner 7 4.3Full-time moneylender 5 3.1Other 10 6.1

Total 163 100.0

/a Entrepreneurs who own parcels of land on lease, and who lent totheir farmer-tenants or leaseholders in 1978. Although theselandowners are engaged in other undertakings which representtheir key business, they were classified as "landlords" sincethe same farmers interviewed for this study were their tenantsor leaseholders who borrowed from them in 1978.

Source: Adapted from TBAC, "A Study on the Informal Rural FinancialMarkets in Three Selected Provinces in the Philippines,"1980, p. 40.

- 130 -

ANNEX 2Table 12

PHILIPPINES


Loans Issued and Administrative Expenses of

163 Sample Private Moneylenders, 1978

Volume Adminis- Administrativeof loans trative Percent expenses as a

made expenses Total distri- percent of---------- ( '000) ----- … - bution loans made

Type of moneylender (1) (2) (3)=(1)+(2) (4) (5)=(2)/(1)

New types of lendersFarmer 774.0 93.1 867.2 4.4 12.0Input dealer 12,696.0 552.4 13,248.4 67.2 4.4

Traditional lendersLandlord 3,817.8 264.8 4,082.4 20.7 6.9Palay trader 891.2 76.4 967.8 4.9 8.6Rice miller 147.0 24.4 171.4 0.9 16.6Full-time money- 199.8 31.4 230.7 1.2 15.7

lender 61.4 3.6 65.0 0.3 5.9Others 84.8 9.6 94.4 0.7 11.3

Total 18,671.6 1,055.5 19,727.1 100.0 5.7

Note: Columns may not sum to totals because of rounding errors.

Source: Adapted from TBAC "A Study on the Informal Rural Financial Markets inThree Selected Provinces in the Philippines," 1980, p. 64.

- 131 -

ANNEX 2Table 13

PHILIPPINES


Comparative Levels of Interest Rates on Fully Paid Loans as

Reported by Present and Past Studies

Percent of the Averagevolume of formal interest rate

loans to total loans Formal Informal Total

Gapud (19 57/58) 25.0 12.0 126.80 98.00

Sacay (1957/58) 20.0 12.0 82.00 68.00

TBAC (1978/79) 32.0 12.0 55.53 45.20Bulacan 38.0 12.0 32.60 25.04Camarines Sur 42.6 12.0 50.67 47.00Isabela 22.8 12.0 83.33 65.75


- 132 -

ANNEX 2Table 14

PHILIPPINES

AGRICULTURAL CREDIT SECTOR REVIEhW

Total Volume of Loans Granted to all Borrowers of

163 Private Moneylenders in 1978(e '000)

Bulacan Isabela Camarines SurType of moneylender Volume % Volume % Volume %

Farmer 283.6 2.0 381.0 9.1 109.6 22.0

LandlordMiller 850.0 6.1 25.0 0.6 - -

Palay trader - - 1,419.4 33.8 35.0 7.0Input dealer - - 906.2 21.6 - -Store owner - - 170.0 4.0Construction contractor 117.0 0.8 295.1 7.0 - -

Palay trader 134.0 1.0 686.5 16.3 70.7 14.2

Rice miller 50.1 0.4 77.0 1.8 19.9 4.0

Input dealer 12,451.0 89.2 234.0 5.6 11.0 2.2

Storeowner 10.0 /a 3.0 /a 186.3 37.5

Full-time moneylender 25.0 0.2 - - 36.3 7.3

Construction contractor 24.0 0.2 - - - -

Craftsman 29.4 0.2 - - 25.6 5.1

Professional practitioner 2.8 /a - - 3.0 0.6

Total 13,952.9 100.0 4,197.2 100.0 497.4 100.0

/a Less than 1 percent.


- 133 -

ANNEX 2Table 15

PHILIPPINES


Sources of 2,110 Loans of 912 Sample Farmer-Borrowers, 1978

Percent ofnumber of Percent ofloans issued loan volume

INFORM AL 82.6 68.0

New types of lendersFarmer 19.7 13.6Input dealer 8.2 9.6

Traditional lendersLandlord 13.2 12.2Palay trader 17.5 14.8Rice miller 2.7 1.6Storeowner 1.7 0.8

Moneylender 1.3 0.4Other sample lenders 1.7 1.5Other lenders not included in sample 16.6 13.5

F OEMAL 17.4 32.0

Source: Adapted from TBAC, "A Study on the Informal Rural Financial Marketsin Three Selected Provinces of the Philippines," 1980, p. 56.

- 134 -

ANNEX 2Table 16

PHILIPPINES


Average /a Interest Rates Charged by Different Types of Moneylenders, 1978

Bulacan Isabela Camarines SurAverage Average Average

Type of moneylender interest rate interest rate interest rate

Farmer 20.91 45.94 67.30

Landlord 23.05 18.54 53.99

Palay trader 46.34 23.09 28.75

Rice miller 3.57 5.57 28.75

Input dealer 11.84 22.42 31.95

Storeowner 96.21 68.41 41.85

Full-time moneylender 3.30

Construction contractor 37.63 51.99

Craftsman 0 7.85

Professional practitioner 15.71

/a Weighted average with the amount of loan as weight.


- 135 -

ANNEX 3Table 1

PHILIPPINES


Agricultural Loans Granted for Production(f million)

1980 /a1975 19 80 (At 19T75 % increase

Commodity (At current prices) prices) (in real terms)

Food commoditiesRice 1,747 1,773 1,027 (41)Fruits & vegetables 299 2,497 1,446 484Livestock & poultry 791 3,001 1,738 220Fisheries 393 1,525 883 225Others 182 410 237 130

Subtotal 3,412 9,206 5,331 156

Export and commercial cropsCoconut 38 5 3,025 1,752 455Sugar 2,360 8,878 5,144 218Tobacco 151 451 261 173Others 110 634 367 334

Subtotal 3,006 12,986 7,524 250

Forestry 573 3,246 1,881 328Others 282 1,812 1,050 372

Total 7,273 27,250 15,786 217


Source: TBAC.

PHILIPPINES


Agricultural Loans Granted for Processing(-P million)

Old series New series1975 1980 1980 19 75 1980 1980At current At 19 75 % increase At current At 19 75 % increase

Commodity prices prices (4) over (2) prices prices (8) over (6)(1) (2) (3) (4) /a (5) (6) (7) (8) /a (9)

Food commoditiesRice 23 1,540 892 3,778 23 1,540 892 3,778Fruits & vegetables 121 432 250 107 140 766 444 217Livestock & poultry 69 1,662 963 1,295 461 2,908 1,685 265Fisheries 16 177 103 543 16 177 103 543Others 29 85 49 69 29 85 49 69

Subtotal 257 3,896 2,257 778 669 5,476 3,173 374

Export and commercialcropsCoconut 254 948 549 116 1,432 4,788 2,774 94Sugar 681 369 214 (68) 1,267 3,187 1,846 45Tobacco 202 1,181 684 238 873 2,093 1,213 39Others 66 48 28 (58) 257 585 339 32

Subtotal 1,203 2,546 1,475 22 3,829 10,653 6,172 62

Forestry 21 - - (100) 21 - - (100)Others - 3 2 - - 1,875 1,086 1,086

Total 1,481 6,445 3,734 60 4,519 18,004 10,431 131

/a Deflated by consumer price index at 193.0 (1975l100).

Source: TBAC.

PHILIPPINES


Agricultural Loans Granted for Marketing(d million)

Old series New series1975 1980 1980 1975 1980 1980(At current (At 19 75 % increase (At current (At 19 75 % increase

Commodity prices) prices)/a (decrease) prices) prices)/a (decrease)

Food commoditiesRice 326 1,869 1,083 332 326 1,869 1,083 332Fruits & negetables 174 261 151 (13) 189 264 152 (20)Livestock & poultry 27 147 85 315 334 168 97 (71)Fisbhries 83 100 58 (34) 88 100 58 (34)Others 47 39 23 (51) 47 31 18 (62)

Subtotal 662 2,408 1,400 211 984 2,432 1,408 143

Export and commercialcropsCoconut 94 144 83 (22) 4,188 485 281 (83)Sugar 5,943 714 413 (93) 5,943 769 445 (83)Tobacco 232 80 46 (8 0) 328 85 49 (8 5)Others 278 48 28 (9 0) 642 53 31 (9 5)

Subtotal 6,547 986 570 (91) 11,101 1,392 806 (93)

Forestry 1,687 209 121 (93) 1,687 2G9 121 (93)Others - 38 22 22 - 48 28 28

Total 8,896 3,641 2,133 (76) 13,772 4,081 2,363 (83)

/a Deflated by consumer price index at 193.0 (1975=100).Source: TBAC.


PHILIPPINES


Agricultural Loans Granted - By Commodity /a(P million)

1980 /b1975 1980 (At 1975

Commodity (At current prices) prices) % change

Food commoditiesRice 2 ,096 5,183 3,030 45Fruits & vegetables 629 3,526 2,043 460Livestock & poultry 1,586 6,076 3,520 122Fisheries 498 1,802 1,044 109Others 256 527 305 19

Subtotal 5,065 17,114 9,942 96

Export and commercial cropsAbaca, ramie and

other fibers 861 495 287 (33)Coconut 6,005 8,298 4,808 (80)Coffee and cocoa 68 560 324 376Cotton 46 38 22 (48)Rubber 34 127 74 118Sugar 9,570 12,834 7,436 (33)Tobacco 1,353 2,629 1,523 13Others - 49 28 28

Subtotal 17,937 25,030 14,502 (19)

Forestry 2,282 3,454 2,001 (12)Others /c 2,691 7,818 4,530 68

Total 27 ,975 53,416 30,975 11

/a New series./b Deflated by consumer price index at 193.0 (1975=100).Ic Includes, inter alia: loans extended to finance activities that support

the production, processing and marketing of agricultural products; andloans for which commodity-spe ific data are not available.

Source: TBAC.

PHILIPPINES


Agricultural Credit as Percent of GVA(P billion)

Agricultural credit Agricultural credit as % of GVAGVA For production Total For production Total

1975 1978 1980 1975 1978 1980 1975 1978 1980 1975 1978 1980 1975 1978 1980

Commodity - --------------------------------- (At current prices) - --------------------------------

Agricultural cropsRice 5.6 7.0 9.0 1.8 1.9 1.8 2.1 3.2 5.2 32 27 20 38 46 58Corn 2.0 2.7 3.3 0.2 0.2 0.2 0.2 0.6 0.3 10 7 6 10 22 9CoconvF 2.8 4.0 3.1 0.4 1.0 3.0 6.0 6.0 8.3 14 25 103 214 150 268Su7ircane 2.6 2.1 2.7 2.4 3.7 8.9 9.6 9.0 12.8 92 176 329 369 428 474Banana 1.9 3.2 4.8 } 0.7 2.9 5.6 5.6 10.9 25.5 9 22 29 74 85 130

ther crops 5.7 9.6 14.7 }

Subtotal 20.6 28.6 37.6 5.5 9.7 19.5 23.5 29.7 42.1 27 34 52 114 104 103

Livestock 2.7 3.4 3.9 } 0.8 1.9 3.0 1.6 2.9 6.0 20 34 46 59 52 125

Poultry 1.3 2.2 3.6 }

Fisheries 5.6 8.4 11.2 0.4 1.1 1.5 0.5 1.9 1.8 7 13 13 9 23 16

Forestry 2.8 4.7 5.3 0.6 1.8 3.2 2.3 2.2 3.5 21 38 60 82 47 66

Total 33.0 47.3 61.6 7.3 14.5 27.2 27.9 36.7 53.4 22 31 44 85 78 60

Source: TBAC.

I-1TtD x

PHILIPPINES


Savings and Time Deposits in Banks (Selected Dates) /a

June 30, 1973 December 31, 1977 October 31, 1978 December 31, 1980 September 30, 1981Sav- Sav- Sav- Sav- Sav-

Bank type Total ings Time Total ings Time Total ings Time Total ings Time Total ings Time

Commercial banks 6.1 4.9 1.1 18.9 12.0 6.9 22.9 14.0 8.9 35.4 20.4 15.0 41.1 22.7 18.4Thrift banks /b 0.9 0.8 0.1 3.2 2.3 0.9 4.2 2.8 1.4 7.1 4.5 2.6 6.3 3.8 2.5Rural banks 0.4 0.3 0.0 1.0 0.8 0.2 1.2 0.9 0.3 1.7 1.2 0.4 2.0 1.5 0.5Specialized banks /c 0.4 0.1 0.4 3.4 2.6 0.8 3.7 2.9 0.8 6.2 5.2 0.9 8.1 7.2 0.9

Total Amount(P billion) 7.8 6.2 1.6 26.6 17.7 8.9 32.1 20.7 11.4 50.3 31.4 18.9 57.4 35.1 22.3

Cormercial banks 3.9 3.9 0.03 7.9 7.7 0.22 8.4 8.1 0.28 9.4 8.7 0.6 12.1 11.0 1.1Tt rift banks /b 3.0 3.0 0.02 6.4 6.2 0.18 7.6 7.3 0.30 9.4 8.8 0.6 7.3 6.8 0.5 >

Rural banks 1.0 1.0 0.01 2.6 2.5 0.04 3.1 3.0 0.06 3.5 3.4 0.1 4.0 3.8 0.1Specialized banks /c 0.0 0.0 0.00 0.1 0.1 0.00 0.1 0.1 0.00 0.1 0.1 0.0 0.1 0.1 0.0

Total Number(millions) 7.9 7.8 0.06 17.0 16.6 0.44 19.2 18.6 0.65 22.4 21.0 1.4 23.5 21.8 1.7

/a Excluding marginal deposits, special savings and time deposits in rural banks, foreign currency deposits, interbankdeposits.

/b These are composed of private savings banks, private development banks and stock savings and loan associations.Tc These are composed of the Development Bank of the Philippines, Land Bank of the Philippines and the Philippine Amanah

Bank.

Note: Columns may not seem to total because of rounding errors. 0.0 and 0.00 indicate small positive quantities.

Source: National Savings for Progress Campaign, Annual Reports.

a, )

- 141 -

ANNEX 3Table 7

PHILIPPINES


Percentage Distribution of Savings and Time Deposits

in Banks (Selected Dates) /a

June 30, 1973 Dec. 31, 1980 Sept. 30, 1981Sav- Sav- Sav-

Bank type Total ings Time Total ings Time Total ings Time

Amount(% distribution) 100.0 79.4 20.6 100.0 62.4 37.6 100.0 61.1 38.9Commercial banks 78.2 63.8 14.4 70.3 40.5 29.8 71.6 39.5 32.1Thrift banks /b 11.5 10.5 1.0 14.1 8.9 5.1 10.9 6.6 4.3Rural banks 4.6 4.2 0.3 3.3 2.5 0.9 3.4 2.5 0.9Specialized banks /c 5.7 0.9 4.9 12.3 10.5 1.8 14.1 12.5 1.6

Number(% distribution) 100.0 99.3 0.7 100.0 92.9 6.1 100.0 92.6 7.4Commercial banks 49.4 49.0 0.4 41.8 39.0 2.8 51.7 47.0 4.7Thrift banks /b 38.0 37.8 0.2 41.9 39.1 2.8 30.9 28.8 2.1Rural banks 12.3 12.2 0.1 15.8 15.3 0.5 16.9 16.3 0.6Specialized banks /c 0.3 0.3 - 0.5 0.5 - 0.5 0.5 -

/a Excluding marginal deposits, special savings and time deposits in ruralbanks, foreign currency deposits, interbank deposits and deposits in non-operating banks.

/b These are composed of private savings banks, private development banks andstock savings and loan associations.

/c These are composed of the Development Bank of the Philippines, Land Bank ofthe Philippines and the Philippine Amanah Bank.

Note: Columns may not add up due to rounding.

Source: National Savings for Progress Campaign, Annual Reports.

- 142 -

ANNEX 3Table 8

PHILIPPINES


Breakdown of Number of Savings and Time Deposit Accounts, by Size

December 1979 December 1980

Savings Deposits 15,888,747 17 ,756,758e 500 & below 12,690,651 14,085,230

501 - 1,000 1,117,204 1,441,1361,001 - 5,000 1,291,736 1,531,1345,001 - 10,000 332,159 360,585

10,001 - 50,000 233,682 260,677Over 50,000 223,315 77,996

Time Deposits 792,691 1,180,348P 500 & below 48 ,863 45,882

501 - 1,000 70,747 76,0981,001 - 5,000 496,238 846,0445,001 - 10,000 96,639 118 ,286

10,001 - 50,000 56,294 62,351Over 50,000 23,910 31,687


- 143 -

ANNEX 3Table 9

PHILIPPINES


Growth and Distribution of Deposits - Banking

Institutions in Rural Areas, 1975-79(3 million)

1975 19 79 AnnualAmount % 19 76 19 77 19 78 % growth

/a share Amount Amount Amount Amount share rate

Commercial banks 5,510 82.6 6,904 8,769 10,832 12,310 74.3 22.3

Thrift banks 500 7.5 844 1,227 1,823 2,445 14.8 48.7PDBs 171 2.6 227 278 342 457 2.8 27.8SMBs 169 2.5 349 585 970 1,354 8.2 68.2SSLAs 159 2.4 268 364 511 634 3.8 41.2

Rural banks 633 9.5 795 914 1,213 1,493 9.0 23.9

Specializedgovernmentbanks 32 0.4 65 96 177 308 1.9 76.6

Total RuralAreas 6,675 100.0 8,608 11,006 14,045 16,556 100.0 25.5/b

% share, ruralareas 28.5 - 25.8 26 26 23.3 - (4.9)

/a Estimated, except for SSLAs and specialized government banks./b Annual growth rate of deposits for the entire banking system is 27.9% for

the period 1975-79.

Sources: TBAC/UP Business Research Foundation, Inc., "Rural Financial Marketsin the Philippines; Central Bank of the Philippines, "Regional Profile

/ of the Philippine ABanking System (Supplement of Fact Book of thePhilippine Financial System, 1976-79)."

- 144 - Annex 4Appendix 1Page 1

PHILIPPINES


Profile of Ongoing Agricultural Credit Programs /1

1. As of December 31, 1980, there were 72 agricultural creditprograms under supervised credit (40%), special programs (32%) and regularprograms (28%).

2. By commodity, the pattern of program distribution favored tradi-tional food crops rather than export and commercial crops. Of the 56commodity-specific programs, 37 programs are for traditional commodities suchas rice, corn, livestock, fruits, vegetables and others (Table 1).

3. Short-term production credit programs are predominant, comprising47% of the total, followed by long-term credit at 33% of the total (Table 2).Most government-supported agricultural credit programs support the objectiveof food self-sufficiency.

Geographical Distribution

4. The regional distribution of agricultural credit programs to alarge extent follows the commodity profile of the respective regions, thustobacco in the Ilocos Region, rubber in the Mindanao Region, and riceharvest facilities in the Central Luzon area. The majority of the programsare implemented nationwide.

Source of Funds

5. The bulk of agricultural credit programs utilize domestic sourcesfor funding (Table 3). Over 60% of the programs implemented by PNB and DBPutilize these banks own funds. Rural banks, on the other hand, implementgovernment credit programs using funds provided externally in combinationwith their own funds.

/1 Source: TBAC.

- 145 - Annex 4

Appendix 1Page 2

Table 1: AGRICULTURAL CREDIT PROGRAMS/PROJECTS, BYCCMMODITY/LEVEL OF ACTIVITY, BY CATEGORY

(December 31, 1980)

Commodity/activity Supervised/a Special/b Regular/c Total

Food commodities 11 11 15 37Rice and corn 5 5 5 15Fruits and vegetables 2 1 10 13Livestock and poultry 1 2 - 3Fisheries 1 3 - 4Others 2 - - 2

Export and commercial crops 7 6 5 18

Subtotal (commodity programs) 18 17 20 55

Forestry - 1 - 1Integrated area development 3 - - 3Farm mechanization/farm support

systems 3 1 - 4Cooperative development 3 - - 3Others 1 5 - 6

Total 28 24 20 72

/a Supervised credit utilizes a package approach consisting of uncollater-ized, low interest production credit, a package of recommendedproduction technology along with extension, marketing and generalmanagement services.

/b Special programs finance integrated production, post-harvest andmarketing facilities and also capital investments. Special programsutilize special seed funds from national budgetary outlays and/orforeign fund sources which are lent to farmer beneficiaries at pre-ferential rates.

/c Regular programs utilize regular bank financing outside the CentralBank rediscounting at preferential rates.

Annex 4Appendix 1

-146 - Page 3

Table 2: AGRICULTURAL CREDIT PROGRAMS BY MATURITY(December 31, 1980)

Short-term Medium-term Long-term TotalNo. % share No. % share No. % share No. % share

Food commodities 21 60.0 8 22.9 6 17.1 35 100.0Export and commercialcrops 8 44.5 4 22.2 6 33.3 18 100.0

Forestry - - - - 1 100.0 1 100.0Compact farming 3 100.0 - - - - 3 100.0Integrated area dev. - - - - 3 100.0 3 100.0Farm mechanization/farmsupport systems - - 2 50.0 2 50.0 4 100.0

Cooperative development - - - - 3 100.0 3 100.0Others 2 40.0 - - 3 60.0 5 100.0

Total 34 47.2 14 19.4 24 33.3 72 100.0

- 147 -Annex 4Appendix 1Page 4

Table 3: AGRICULTURAL CREDIT PROGRAMS: SOURCES OF FUNDS(December 31, 1980)

A. Domestic and foreign fundsDomestic /a and

Domestic funds/a forel n funds TotalNo. % to total No. % to total programs

InstitutionRBs 13 76.5 4 23.5 17PNB 23 92.0 2 8.0 25LBP 3 60.0 2 40.0 5DBP 15 68.2 7 31.8 22Others /b 2 50.0 2 50.0 4

56 17 73

B. Institutions' own funds and foreign funds

Own funds in combinationexternal sources

STDs and Redis-rediscounting Special funds/ Total Grand

Institution Own funds counting/c only foreign source programs totalNo. … (No.) ------------- No. %

RBs - - 13 - 3 16 100.0 16PNB 15 62.5 - 7 2 9 37.5 24LBP 2 40.0 - - 3 3 60.0 5DBP 15 68.2 - - 7 7 31.8 22Others - - - 2 2 4 100.0 4

71

/a Borrowings from the Government and the Central Bank.

/b Private commercial banks, PDBs, SSLAs and Thrift Banks.

/c Special Time Deposits (STDs) are funds deposited by the Central Bank withRural Banks from the funds provided by the Government to this department forlending under special financing programs.

PHILIPPINES


Cooperative Structure

PAMBANSANG LAUPUNANNG MGA KILUSANG BAYAN

(NATIONAL COOPERATIVE UNIONOF THE PHILIPPINES)

Natio,a1 Natinal Na=ion.1l

Nationa ~~~~~~~~~~~~~ ~ ~~~~~~~~~~~~~~ ~~~~~~~~~Fedrertio. of Federation of i Federstion of Fe Pdertine ofOleNaias

Lewel .fte I AoitoofCredit Copeainse Coosmers I Nsdocee SeniA opeetvpfooel. th, cooperetim ~~~~~~~~ ~ ~~~~~~~~~~~~~Crperanns Coopesatise ranzsoss

---- ------

Regional Reiional Regional Regional l i Reonal 1IReveoao Reioa Kaian C i FRettg f eortins Ftderations ofFdei.o 4

IA,el ma -9 Fedeati= ,ftt., Pmd-en S~~~~~~~~~~~~~~~~~~~~~~~~~~I edraton o

st-ret of vg Savivo Cosme Prdor =ii Ser

UnoeCredit Coe Cooperatives Cooperativn -J" L~~~~~~"

Am.elopment, . Fe po... ofKa -9,n,,a ~CwPra etirtls CopetirFanoit ennka 1t Coo perative CInsueran FSyerstions of Ftherations ofPhdlratipnpincso Federations ofoto i

K-at. ."iponan of rnga Copraieperoa. rdi ooeatv, tsso

An Samahang Nayon Cooars Copestve By Cooperrt on

Monicipal titniocipat FetoraS urceryur au o CooperativeCedtorons oovo are

Lv Federl eratieon of ec Cooperativest also join the coopCoative unions at the same pevel

t*+ CMSIS CFPI; FCo CS; PHILCUL; NorCI


PHILIPPINES


Philippine National BankResources

(? billion)

19811975 At 1975

At current prices prices/a At current prices

AssetsCash and due from banks 3.7 5.1 9.8Loan portfolio (net) 11.3 14.2 27.4Investments 2.5 1.7 3.2Other assets 0.6 2.3 4.5

Total 18 .1 23.3 44.9

Liabilities and CapitalAccounts

Deposits 6.5 9.9 19 .1Borrowings 6.0 10.4 20.1

Other liabilities 4.4 1.5 2.8

Subtotal 16.9 21.8 42.0

Capital AccountsPaid-in capital 1.0 1.0 2.0Retained earnings 0.2 0.5 0.9

Subtotal 1.2 1.5 2.9

Total 18 .1 23.3 44.9

% increase over 1975 28.7 148.6


PHILIPPINES


PNB: Agricultural Production Loans Granted, 1975-81By Crop/Commodity

(At current prices)(P 000s)

CoffeeCassava & and Livestock Misc.

Year Sugar Palay Coconut Corn Abaca Tobacco Rootcrops Cocoa Ramie Citrus Forestry & Poultry Fisheries Agri-l. Total

1975 1,407,104 474,284 61,521 65,660 198 1,958 854 2,106 - 1,522 25,894 84,277 15,777 41,384 2,182,5391976 ,300,445 275,425 44,727 32,415 1,199 600 255 1,321 60 681 22,494 53,361 13,362 36,721 1,783,0661977 882,856 202,163 17,055 20,187 61 452 59 215 528 439 854 13,231 2,986 40,252 1,181,3381978 648,114 160,445 26,985 25,492 2,424 96,111 2,628 311 93 508 4,582 25,990 4,910 22,099 1,020,6921979 1,678,462 257,769 45,443 19,912 1,418 1,286 77 840 48 - 9,164 60,473 3,813 26,852 2,105,5571980 1,625,015 250,289 40,724 29,992 23,233 28,637 2,320 1,921 27 - 34,882 246,460 3,931 27,529 2,314,9601981 1,806,428 261,229 35,638 30,959 37,070 20,742 12,132 4,043 47 - 128,332 99,476 7,344 26,954 2,470,394

ler0'

PHILIPPINES


PNB: Processing and Commercial Loans Granted for MajorAgricultural Commodities and Fisheries /a

(At current prices)(P million)

Sugar Rice (Palay) Coconut FisheriesProcessing Commercial Total Processing Commercial Total Processing Commercial Total Fishponds Deepsea Total

1975 601 4,897 5,498 3 244 247 113 72 185 12 2 141976 1 5,687 7,970 87 253 340 67 196 263 11 1 121977 161 6,484 6,645 2 824 826 15 196 211 3 0.2 3.2 e1978 823 3,692 4,515 2 420 422 33 129 162 4 0.2 4.21979 508 2,103 2,611 275 479 754 70 183 253 1 2 31980 1,338 839 2,177 428 1,793 2,221 102 272 374 0.2 4 4.21981 546 48 594 267 3,650 3,917 186 335 521 0.5 5 5.5

/a Processing loans are classified as 'industrial' in PNB records.

PHILIPPINES


Philippine National Bank: Masagana 99 Loans(November 30, 1981)

(P million)

No. of borrowers No. of hectaresfinanced financed Loans Principal Loans Loans

Year Phase (in thousands) (in thousands) released collected outstanding past due

1973 I 212.0 293.5 195.4 178.4 17.0 17.0II 105.7 144.3 101.9 94.2 7.7 7.7

1974 III 270.4 431.0 382.0 291.2 90.8 90.8T71 130.3 212.1 225.4 168.2 57.2 57.2

1975 V 161.2 266.3 320.7 209.6 111.1 111.1VI 64.2 100.2 121.5 93.8 27.7 27.7 1

1976 VII 54.0 92.3 110.7 84.5 26.2 26.2VIII 38.6 61.8 73.0 58.0 15.0 15.0

1977 IX 59.0 98.3 117.2 88.1 29.1 29.1X 37.6 61.6 74.4 62.6 11.8 11.8

1978 XI 54.6 94.1 106.9 82.3 24.6 24.6XII 37.3 64.9 80.5 64.7 15.8 15.8

1979 XIII 45.2 79.9 100.9 76.5 24.4 24.4XIV 31.3 55.7 70.7 55.9 14.8 14.8

1980 XV 36.4 66.9 84.5 61.9 22.6 22.6XVI 28.2 52.4 67.6 47.7 19.9 19.9

1981 XVII 27.4 51.6 66.6 21.5 45.1XVIII 4.0 7.2 5.2 - 5.2

Total 1,397.4 2,234.1 2,305.1 1,739.1 566.0 515.7/a

/a Percent of past due loans to outstanding loans: 91.1; data does not tally With that referred in nara- 6.06.

41 a%


PHILIPPINES


Philippine National Bank: CollectionPerformance Under Agricultural Loans /a

(P billion)

Year Agricultural Collectionsproduction loans Amount % of total loansdisbursed

1975 2.2 1.6 72

1976 1.8 1.7 94

1977 1.2 1.3 108

1978 1.0 1.1 110

1979 2.1 1.5 71

1980 2.3 1.7 74

1981 2.5 1.7 68

13.1 10.6 81 /a

/a PNB data indicates average collection at 84%.

ANNEX 6- 154 - Table 6

page 1

PHILIPPINES


LBP Resources(P million)

1975 1981

ASSETSCurrent AssetsCash & due from banks 54.32 954.49Marketable securities 649.45 802.75Interest receivable 26.15 166.12Short-term loans 3.40 1,735.50Foreign securities 58.67 -Current portion of amortization receivable 3.43 361.59Current portion of long-term loans 1.48 151.18Current portion of Gov'tbonds & other securities 60.08 42.41

Other current assets 2.39 21.11

Total Current Assets 859.37 4,235.15

Long-Term PortfolioLoans & advances:Amortization receivable 214.27 1,345.54Agricultural loans 12.90 281.80Commercial/industrial loans 4.10 439.49

Total 231.27 2,066.83

Less: Current portion (4.91) (512.77)

Total Loans & Advances-Net 226.36 1,554.06

InvestmentsEquity 135.29 264.42Gov't bonds & other securities(Net of current) 736.82 630.56

Total Investments 872.11 894.98

Total Long-Term Portfolio 1,098.47 2,449.04

Fixed Assets (net of depreciation) 22.55 144.64Other AssetsOther real properties 29.13 45.22Land purchased under R.A. 3844 69.56 35.57Sinking fund for LBP bonds 3.11 47.85

Others 13.31 1.15.84

Total Other Assets 115.11 244.48

TOTAL ASSETS 2,095.50 7,073.31


Page 2

LBP Resources

1975 1981

LIABILITIES AND EQUITYCurrent LiabilitiesDeposits (local):Government 746.64 1,708.39Private:

- Industrial 2.54 81.60- Individual 1.50 51.01

Total Local Deposits 750.68 1,841.00

Less: Deposits subject to rollover (187.00) (1,425.99)

Foreign currency deposits 58.67 594.14Short-term borrowings (dep. subs.) 63.09 971.14Accounts payable and accrued expenses 17.25 184.81Others 42.88 192.47

Total Current Liabilities 745.57 2,357.57

Long-Term BorrowingsBonds payable 191.89 980.80Others 3.43 383.09

Total 195.32 1,363.89

Add: Deposits subject to rollover 187.00 1,425.99

Total Long-Term Borrowings 382.32 2,789.88

Deferred Credits 0.53 3.54

Total Liabilities 1,128.42 5,150.99

EquityPaid-in capital 872.57 1,454.31Surplus reserves:

- Administration 13.35 -- Growth & contingencies 17.12 158.00- Sinking funds 2.36 30.81

Total Surplus Reserves 32.83 188.81

Retained earnings - 155.55Undivided profits 61.68 123.65

Total Equity 967.08 1,922.32

TOTAL LIABILITIES & EQUTITY 2,095.50 7,073.31

Total debt to equity 1.2:1 2.7:1Current ratio 1.2:1 1.8:1


PHILIPPINES


LBP: Long-Term Resources Position(P million)

1981(Dec. 31)

Domestic SourcesEquity

Paid-in capital 1,454.31Reserves and surplus 468.01

Subtotal 1,922.32

Borrowings (net of repayments)Bonds and Notes:

- LBP bonds 6% p.a. due 1992-2002 980.80- Notes payable /a 336.39

Subtotal 1,317.19

Time and Savings Deposits (subject to rollover) 1,425.99

Total 4,665.50

Foreign Sources (IBRD Loan) 46.70

Total Resources 4,712.20

Less: Loans outstanding /b & land amortization 1,554.06Equity and long-term security /c 894.98Acquired assets 45.22Fixed assets and other long-term assets /d 343.90

Subtotal 2,838.16

Resources available for disbursement 1,874.04Less: Undisbursed commitments /e 50.00

Resources available for commitments 1,824.04

/a Includes proceeds used for investment in stocks of Union Savings and Mort-gage Bank (P 140.0 m); Bancom Realty Dev. Cor. (P 12.0 m). Also includesLBP share in rural banks' trust funds, and bond portion of claims payable.

/b Medium/long-term loans outstanding as of 12/31/81 net of current portion.7T Includes investments in treasury notes, bonds and other government bonds

and securities excluding trading account securities./d Includes bank premises, furniture, fixtures and equipment, land purchased/

expropriated./e Medium/long-term loans approved but not yet released. Figures are

estimated, based on available data from Head Office lending units.


PHILIPPINES


LBP: Agricultural Loans Granted /a(P million)

Beneficiary Term 1979 1980 1981

1. Farmers Short-term 22.3 47.8 50.2Medium-term 8.2 15.8 10.8

Subtotal 30.5 63.6 61.0

2. Land Owners Short-term 4.0 3.4 2.0Medium-term 5.0 4.0 3.3

Subtotal 9.0 7.4 5.3

3. Others Short-term 0.1 0.03 0.01Medium-term 0.4 0.05 0.03

Subtotal 0.5 0.08 0.04

Total 40.0 71.1 66.3

/a Excludes marketing and processing loans.


PHILIPPINES


LBP Operation Land Transfer: Implementation Progress (Cumulative)

Unit 1972-75 1976 1977 1978 1979 1980 1 9 8 1/a

Certificates of landtransfer issued for.

Tenants '000 208.0 224.1 258.1 284.9 320.4 367.0 403.3Area 000 ha 365.9 390.4 444.9 489.2 545.2 571.8 624.1

Land valuation lbcertificates issuedby MAR to LBP:

Tenants 000 27.7 49.3 72.6 72.7 83.5 93.1 98.0Area -000 ha 39.9 70.3 111.8 139.4 160.4 179.0 189.2Cost P mln 254.6 476.5 779.7 966.7 1,114.9 1,253.6 1 327.9

Land compensatedby LBP /c

Tenants 000 11.2 16.9 46.9 62.9 80.4 89.8 95.6Area 000 ha 20.3 30.8 90.1 121.9 155.4 174.6 185.4Cost e mln 133.2 230.5 617.9 849.4 1,080.7 1,221.4 1,302.0

Farmers undertak-ing signed

Land parcels '000 n.a. 20.0 41.8 n.a. 81.3 n.a. n.a.Tenants 000 n.a. 14.8 30.9 - 6.16Area 000 ha n.a. 28.1 58.7 - 113.4Cost P mln n.a. 196.5 410.9 - 789.1

/a Up to end of August 1981.

/b Officially at 2.5 times the average gross production for the three normal croppingyears to October 1972, at official paddy prices of e 35 per cavan, but in factnegotiated according to the prevailing market prices.

/c To landowners affected by transfer, LBP has paid 10O. in cash and the balance in LBPbonds at 6% tax-free interest.

MAR - Ministry of Agrarian Reform.

Source: Land Bank of the Philippines.


PHILIPPINES


LBP: Agricultural Loans Granted in IEDP and Non-IEDP Areas(P million)

Beneficiary Term 1979 1980 1981

1. IEDP Short-term 10.8 21.0 21.1Medium-term 3.3 7.4 2.4

Subtotal 14.1 28.4 23.5

2. Non-IEDP Short-term 15.7 30.2 31.2Medium-term 10.2 12.5 11.7

Subtotal 25.9 42.7 42.8

3. All areas Short-term 26.5 51.2 52.2Medium-term 13.5 19.9 14.1

Total 40.0 71.1 66.3

- 160 - ANN4EX 6Table 11

PHIL IPPINES


LBP: Loans Granted to Farmer-Beneficiaries(1? million)

LoansAt current At 1975

Year prices prices/a

1974 0.57 0.621975 10.30 10.301976 18.44 17.361977 22.65 19.761978 16.91 13.711979 38.67 26.391980 70.39 40.781981 60.39 31.29

/a Deflated by consumer price index, 1975=100.


PHILIPPINES


ACA: Lending Operations by Activity(d million)

At 1975 prices/aActivity FY74-75 CY80 1980

Production 47.6 56.9 33.0

Commodity Purchase/Sales 5.9 1.0 0.6

Marketing 4.0 2.7 1.5

Facilities 1.1 - -

Working Capital 2.4 0.2 0.1

Total 61.0 60.8 34.5


- 162 - ANNEX 6

Table 13

PHILIPPINES


ACA: Repayment Performance(In %)

Past Due Lending Flow CollectionRatio /a Rate /b Rate /c

A ggregate Data

1978 99.5 60.3 8.0

1979 n.a. 75.1 n.a.

1980 76.5 95.2 34.6

1981 - first semester n.a. 109.4 n.a.

B. Branch Sample Data(as of Sept. 1981)

Branch A 85.4 71.4 38.0B /d 75.6 77.1 32.2C 99.4 74.6 14.8D 86.8 76.0 22.4E 73.3 74.0 41.4F 85.5 92.1 25.9G 72.5 67.7 45.9

/a Loans Past Due: Refers to production loans at branches.Loans Outstanding

lb Loan Collections: Excludes collection of prior periods.Loans Granted

Ic Loan Collections: Refers to production loans, only for branches,Loans Matured and collections on past due loans excluded.

Where: Loans Matured = Loans Past Due + Loan Collections.

/d Past due and collection rate as of June 1981: flow rate as ofDecember 1980.

Source: TBAC, "An Evaluation of the Agricultural Credit Administration:Focus on the Compact Farm Program."

PHILIPPINES


ACA: Status of Loans Under Compact Farms and Compact Farm Clusters(June 30, 1981 at current prices)

Compact Farms Compact Farm ClustersArea Loans Loans Repayment Area Loans Loans Repayment

Region No. of No. of (ha)/b Released Outstanding Rate on Loans No. of No. of (ha)/b Released Outstanding Rate on LoansCFs Farmers/a ('000…) -(Po000) ------- Matured (%) CFCs Farmers/a ('000) ---- (P'000) -------- Matured (%)

I 50 2,436 3.3 12,077.3 5,968.2 55.5 5 1,625 2.2 7,510.1 1,969.8 90.8II 26 1,266 2.4 12,122.2 2,424.5 81.6 2 1,912 2.8 16,396.3 3,901.4 88.3III 99 2,418 5.8 15,097.5 5,945.0 65.0 16 3,229 5.4 15,713.1 5,836.9 77.3Nueva Ecija 28 1,330 3.1 9,167.9 2,808.5 70.5 9 1,319 2.8 13,265.0 4,650.6 77.7IV 58 861 2.7 5,615.2 2,351.6 60 - - - - - -V 34 1,003 1.5 4,759.1 642.2 90 4 1,150 1.6 9,870.4 1,976.2 109/cVI 82 1,403 5.2 23,839.8 3,938.8 92.1 4 1,034 1.8 7,469.1 2,242.5 88.2 w

VII 74 1,939 2.4 4,244.3 1,926.0 54.8 2 307 .4 941.4 558.2 60.9VIII 42 2,121 4.3 8,491.8 2,887.4 74 2 693 1.4 3,907.7 1,540.6 85.5IX 158 4,288 8.3 18,931.1 6,134.6 72.9 3 996 1.8 8,556.0 1,957.5 90

T6tal 651 21,065 39.0 114,346.2 35,026.8 74.1 47 12,275 20.2 83,629.1 24,633.8 86.1

/a Average number of farmers served per crop season./b Average area financed per crop season.TF Collections were made prior to maturity of some loans.

Source: TBAC, "An Evaluation of the Agricultural Credit Administration: Focus on the Compact Farm Program."

- 164 - ANNEX 6

Table 15

PHILIPPINES


ACA: Financial Operations, 1972-1981

(P million)

Loans Provided by National Government 135

Loans Released 464

Loans Collected 534

Loans Receivable 144

Expenses 125

Income 106

Loss 19

Note: ACA received the Central Bank's rediscountingfacility through PNB.

- 165 - ANNEX 6

Table 16

PHIILIPPINES


DBP: Agricultural Loans as % of Total Loans Approved(d million)

(At current prices)

Real Estate,Agriculture Industry Government, etc.

% of % of % of TotalYear Amount total Amount total Amount total Amount

1976 774 32.1 999 41.4 638 26.5 2,4111977 536 19.3 1,847 66.4 397 14.3 2,7801978 509 16.7 1,908 62.7 625 20.6 3,0421979 701 15.5 3,053 67.5 770 17.0 4,5241980 648 11.8 3,566 65.3 1,248 22.9 5,4621981 793 11.7 4,701 69.2 1,299 19.1 6,793

PHILIPPINES


DBP - Analysis of Loan Portfolio, 1977-81

Number of Accounts

Number of Accounts Outstanding Number of Accounts in Arrears and as % of 0/A1977 1978 1979 1980 1981 1977 1978 1979 1980 1981

Number Number ber Num Nuer Number Number Number Number Number(-000) ('000) ('000) (-000) (-000) (-000) % (-000) Y (O000) % (-000) % (-000) %

I. By Loan Categoryxgricultural loans 21R 219 217 196 179 179 82 185 85 149 69 131 67 116 65

Industrial loans 20 22 22 23 22 16 80 17 79 11 48 12 52 13 57 7Others 38 41 52 69 82 26 69 29 67 14 27 16 23 19 23

Total 276 282 291 288 283 221 80 231 82 174 60 159 55 148 52

I(A) Head OfficeAgricultural loans 14 12 11 10 8 12 85 11 90 9 77 8 76 6 77Industrial loans 4 4 4 5 4 3 83 3 80 2 47 2 45 2 47Others 5 5 7 10 18 2 45 3 39 1 12 1 14 2 12

Subtotal 23 21 22 25 30 17 76 17 76 12 52 11 43 10 34

I(B) BranchesAgricultural loans 204 206 206 186 171 167 82 174 84 140 68 123 66 110 64Industrial loans 16 17 18 18 18 12 80 14 79 9 49 10 54 11 60

Others 33 38 45 59 64 24 73 26 70 13 29 15 26 17 27 x a

Subtotal 253 261 269 263 253 204 81 214 82 162 60 148 56 138 55 '

Total 276 282 291 288 283 221 231 174 159 148

PHILIPPINES

AGRICULTURAL CREDIT SECTOR REVIFW


Principal Outstanding & Total Arrears

Principal Outstanding Total Arrears (Principal + interest)1977 1978 1979 198 1981 1977 1978 1979 1980 1981

Peso min. S Peso sno. = Pesomsn. Y Peso .1n. % Pes jon S- Peo mln. 7 Peso join. Y Peso sin. Y Peso sin. Y Peso joln. Y

II. By Loan Qategory

Agrfcult.ral loans 2,163.9 22 2,325.7 21 2,556.9 20 2,756.7 17 3,026.8 15 605.9 56 841.9 56 898.8 61 958.4 58 1,057.1 60

Ind strial loans 5,072.1 53 5,562.9 51 6,753.1 53 8,854.0 55 11,380.4 55 316.6 29 416.8 28 343.1 24 466.4 28 431.6 24

Ot' rs 2,445.4 25 3,010.4 28 3,528.6 27 4,568.4 28 6,227.5 30 160.1 15 249.6 16 217.8 15 232.9 14 288.7 16

Total 9,681.4 100 10,899.0 100 12,838.6 100 16,179.1 100 20,634.7 100 1,082.6 100 1,508.3 100 1,459.7 100 1,657.7 100 1,777.4 100

II(A) Head Office

Agricultural loAns 484.2 7 474.5 6 568.2 5 617.5 5 612.4 4 101.8 21 100.4 16 93.1 18 99.8 16 80.8 14

Industrial IlaoS 4,755.1 64 5, 209.4 63 6, 372.8 65 8, 407. 5 67 10, 857.6 68 266.0 55 339.8 54 270.5 51 376.6 59 315.6 55

Others 2,098.8 29 2,593.4 31 2,925.4 30 3,434.4 28 4,542.7 28 116.7 24 190.2 30 162.9 31 155.2 25 175.5 31

Suhtotal 7,338.1 100 8,277.3 100 9,866.4 100 12,459.4 100 16,n12.7 100 484.5 100 630.4 100 526.5 100 631.6 100 571.9 100

II(R) Branches

Agricultural loans 1,679.7 72 1,851.3 71 1,988.7 67 2,139.2 58 2,414,4 52 504.1 84 741.5 84 305.6 86 858.6 84 976.3 81

Industrial loans 307.0 13 353.5 13 380.3 13 446.5 12 522.8 11 50.6 9 77.0 9 72.6 8 89.8 9 116.0 10

Others 356.6 15 414.9 16 603.2 20 1,134.0 30 1,684.8 37 43.4 7 59.4 7 54.9 6 77.7 113.2 9

Subtotal 2,343.3 100 2,621.7 100 2,972.2 100 3,719.7 100 4,622.0 100 598.1 100 877.9 100 933.2 100 1,026.1 100 1,205.5 100

Total 9,681.4 10,899.0 12,838.6 16,179.1 20,634.7 1,082.6 1,508.3 1,459.7 1,657.7 1,777.4 o

-I

- 168 - ANNEX 6Table 17-CIPage 3

PHILIPPINES



Share in Arrears by Activity, Head Office and Branches(In %)

1977 1978 1979 1980 1981

III. Total by Loan Category 100 100 100 100 100Agricultural loans 56 58 62 58 60Industrial loans 29 28 23 28 24Others 15 16 15 14 16

TII(A) Head Office 45 42 36 38 32Agricultural loans 17 12 10 10 8Industrial loans 84 82 79 81 73Others 73 76 75 67 61

III(B) Branches 55 58 64 62 68Agricultural loans 83 88 90 90 92Industrial loans 16 18 21 19 27Others 27 24 25 33 39

- 169 - ANNEX 6

Table 17-DPage 4

PHILIPPINES



"Total Arrears" as x of "Principal Outstanding and Arrears Interest"

1977 1978 1979 1980 1981Total Total Total Total Totalarrears arrears arrears arrears arrears

PO+AI as % of PO+AI as % of PO+AI as % of PO+AI as % of PO+AI as % of(peso PO+AI (peso PO+AI (peso PO+AI (peso PO+AI (peso PO+AImln.) (%) mln.) (%) mln.) (%) mln.) (%) mln.) t%)

IV. By Loan CategoryAgricultural loans 2,359.5 26 2,597.5 32 2,839.2 32 3,056.6 31 3,389.1 31Industrial loans 5,211.2 6 5,761.9 7 6,915.4 5 9,180.5 5 11,636.7 4Others 2,556.7 6 3,187.2 8 3,667.9 6 4,724.1 5 6,406.7 5

Total 10,127.4 11 11,546.6 13 13,421.6 11 16,961.2 10 21,432.5 8

IV(A) Head OfficeAgricultural loans 512.8 20 506.0 20 599.3 16 639.9 16 645.0 13Industrial loans 4,876.1 5 5,382.0 6 6,510.8 4 8,702.4 4 11,071.9 3Others 2,191.0 5 2,740.3 7 3,036.1 5 3,549.4 4 4,657.6 4

Subtotal 7,579.9 6 8,628.3 7 10,146.2 5 12,891.7 5 16,374.5 3

IV(B) BranchesAgricultural loans 1,846.8 27 2,091.5 35 2,239.9 36 2,416.7 36 2,744.1 36Industrial loans 325.1 16 379.9 20 404.6 18 478.1 19 564.8 21Others 275.6 16 446.9 13 630.9 9 1,174.7 7 1,749.1 6

Subtotal 2,447.5 24 2,918.3 30 3,275.4 28 4,069.5 25 5,058.0 24

Total 10,027.4 11 11,546.6 13 13,421.6 11 16,961.2 10 21,432.5 8

V. Overall % 100 100 100 100 100Agricultural loans 23 22 21 18 16Industrial loans 52 50 52 54 54Others 25 28 27 28 30

V(A) HO as % Total 76 45 76 46 76Agricultural loans 22 19 21 21 19Industrial loans 94 93 94 95 95Others 89 86 83 75 73

V(B) BR as % of Total 24 25 24 24 24Agricultural loans 78 81 79 79 81Industrial loans 6 7 6 5 5Others 11 14 17 25 27

PHILIPPINES



"Principal Outstanding Affected by Arrears" as % of "Principal Outstanding"

1977 1978 1979 1980 1981

Principal PjO affected Principal P/O affected Principal P/O affected Principal P/O affected Principal P/O affected

outstanding 'lyarrears outstanding by arrears outstanding b arrears outstanding by arrears outstanding by arrears

(Peso m) (Peso ) (Z) (Peso m) Pea (Peso s) mPes (Peso m) (P A eso ) so o m)

VI. By Loan CategoryAgricultural loans 2,163.9 1,389.5 64 2,325.7 1,610.7 69 2,556.9 1,171.5 46 2,756.7 1,189.5 43 3,026.8 1,350.4 45

Industrial loans 5,072.1 1,950.1 38 5,562.9 2,071.1 37 6,753.1 1,174.7 17 8,854.0 1,800.6 20 11,380.4 1,121.1 10

Others 2,445.4 1,756.2 72 3,010.4 2,068.5 69 3,528.6 582.6 16 4,568.4 578.9 13 622.5 870.8 14

Total 9,681.4 5,095.8 53 10,899.0 5,750.3 53 12,838.6 2,928.8 23 16,179.1 3,569.0 22 20,634.7 3,342.3 16

VI(A) ",ad Office,gricultural loans 484.2 222.5 46 474.5 245.2 52 568.2 160.2 28 617.5 129.0 21 612.4 176.8 29

Industrial loans 4,755.1 1,721.8 36 5,209.4 1,809.0 35 6,372.8 1,034.0 16 8,407.5 1,642.0 19 10,857.6 922.3 8

Others 2,098.8 1,512.1 72 2,593.4 1,786.1 69 2,925.4 448.3 15 3,434.4 386.8 11 4,542.7 539.1 12

Subtotal 7,338.1 3,456.4 47 8,277.3 3,840.3 46 9,866.4 1,642.5 17 12,459.4 2,157.8 17 16,012.7 1,638.2 10

I(B) granchesAgricultural loans 1,679.7 1,167.0 69 1,851.3 1,365.5 74 1,988.7 1,011.3 51 2,139.2 1,060.5 50 2,414.4 1,173.6 49

Industrial loans 307.0 228.3 74 353.5 262.1 74 380.3 140.7 37 446.5 158.6 35 522.8 198.8 38

Others 356.6 244.1 68 416.9 282.4 68 603.2 134.3 22 1,134.0 192.1 17 1,684.8 331.7 20

S,obtotal 2,343.3 1,639.4 70 2,621.7 1,910.0 73 2,972,2 1,286.3 43 3,719.7 1,411.2 38 4,622.0 1,704.1 37

Total 9,681.4 5,095.8 10,899.0 5,750.3 12,838.6 2,928.8 16,179.1 3,569.0 20,634.7 3,342.3

VII. P/O Overall Z 100 100 100 100 100

Agricultural loans 715

Industrial loans 53 51 53 55 55

Others 25 28 27 28 30

VII(A) HO as Z Total 76 76 77 77 78

Agricultural loans 22 20 22 1222Industrial loans 94 94 94 95 95

Others 86 86 83 75 73

VIl(B) Branches 24 24 23 23 22

Agricultural loans 79 80 17B _ 78

Industrial loans 6 6 6 5 5

Others 14 14 17 25 27

"Ml1

PHILIPPINES


DBP - Agricultural Lending Operations, 1975-81(At current prices)

1975 1976 1977 1978 1979 1980 1981No. of No. of No. of No. of No. of No. of No. ofaccounts Amount accounts Amount accounts Amount accounts Amount accounts Amount accounts Amount accounts Amount('000) (P mln.) (-000) (P mln.) (-000) (P mln.) (-000) (P mln.) (-000) (P mln.) (-000) (P mln.) ('000) (P mln.)

Cereal 16,416 244.5 15,985 284.1 12,637 252.5 9,389 207.9 5,915 278.9 5,164 152.6 6,137 218.0 1

Commercial &cash crops 6,632 77.5 6,120 99.4 6,050 822.7 5,634 126.7 4,619 205.8 5,875 145.2 7,078 176.3

Livestock &poultry 4,877 213.8 4,836 192.5 3,359 127.0 1,939 92.7 1,897 134.6 1,749 214.7 2,083 284.1

Fisheries 35,195 191.3 23,259 197.8 2,841 66.6 469 81.3 445 82.1 422 135.8 635 114.9

Total 63,120 727.1 50,200 773.8 24,887 1,268.8 17,431 508.6 12,876 701.4 13,210 648.3 15,933 793.3

At 1975 prices/a 727.1 728.6 1,107.2 412.5 478.8 375.6 411.0

/a Deflated by consumer price index, 1975 - 100. >


PHILIPPINES


Credits Granted by Commercial Banks, by Industry(P million)

Finan-Con- Public cial Con-

Agri- Manufac- struc- utili- Ser- insti- Real sump- Public

culture Mining turing tion ties vices Trade tutions estate tion sector Total

1969 1,772 93 3,656 224 172 264 7,130 1,717 248 325 788 16,390(10.8) (0.6) (22.3) (1.4) (1.0) (1.6) (43.5) (10.5) (1.5) (2.0) (4.8) (100.0)

1970 2,195 96 4,056 186 277 366 9,795 2,775 410 868 929 21,952(10.0) (0.4) (18.5) (0.8) (1.3) (1.7) (44.6) (12.6) (1.9) (3.9) (4.2) (100.0)

1971 2,514 322 5,966 227 464 498 12,001 4,830 503 1,160 339 28,820(8.70 (1.1) (20.7) (0.8) (1.6) (1.7) (41.6) (16.7) (1.7) (4.0) (1.2) (100.0)

1972 2,551 563 7,391 365 815 550 13,873 4,693 514 870 505 32,689(7.8) (1.7) (22.60 91.1) (2.5) (1.7) (42.4) (14.4) (1.6) (2.7) (1.5) (100.0)

1973 2,828 835 10,359 368 855 590 22,380 5,776 796 971 927 46,685(6.1) (1.8) (22.2) (0.8) (1.8) (1.3) (47.9) (12.4) (1.7) (2.1) (2.0) (100.0)

1974 6,070 2,388 22,535 481 830 1,178 31,680 12,473 1,144 1,499 2,025 82,303(7.4) (2.9) (27.4) (0.6) (0.1) (0.1) (38.5) (15.1) (0.1) (1.8) (2.5) (100.0)

1975 9,756 4,109 30,610 851 1,478 2,506 23,506 32,275 1,772 2,448 5,055 114,366(8.5) (3.6) (26.8) (1.0) (0.7) (2.2) (20.5) (28.2) (1.5) (2.1) (4.4) (100.0)

1976 9,140 4,357 35,142 1,592 2,236 2,968 29,247 41,560 1,680 3,188 613 131,724(6.9) (3.3) (26.7) (1.2) (1.7) (2.2) (22.2) (31.5) (1.3) (2.4) (0.5) (100.0)

Agriculture, fish-eries, and forestry /a Other sectors /a Total /a

1977 5,447 34,726 40,173(13.5) (86.5) (100.0)

1978 5,770 48,308 54,078(10.7) (89.3) (100.0)

1979 8,120 60,144 68,264(11.9) (88.1) (100.0)

1980 11,098 /b 62,538 73,636(Sept.) (15.0) (85.0) (100.0)

/a Industry groups were revised to conform with the 1977 Philippine standard industrial classification.7T Central Bank data on commercial bank agricultural lending do not tally with TBAC estimates in view of

classification differences. CB's figures, prima facie, relate to productionloans only while loansfor marketing and processing are classified under other categories.

Note: Figures in parentheses indicate percentages of the total.


PHILIPPINES


Commercial Banks' Agricultural Loans - by Commodity(P billion)

Total agriculturalProduction Processing Marketing loans

At/a At/a At/a At/aAt current 1975 At current 1975 At current 1975 At current 1975prices prices prices prices prices prices prices prices

1975 1980 1980 1975 1980 1980 1975 1980 1980 1975 1980 1980

Food CommoditiesCereals 0.1 0.8 0.5 0.1 0.8 0.5 0.1 0.1 0.05 0.3 1.7 1.5Fruits & vegetables 0.2 2.3 1.3 0.1 0.7 0.4 0.2 0.2 0.15 0.5 3.2 1.8Livestock & poultry 0.1 1.4 0.8 0.5 2.9 1.7 0.3 0.1 0.05 0.9 4.4 2.5Fisheries 0.1 1.3 0.8 - 0.2 0.1 0.1 0.1 0.05 0.2 1.6 0.6 1Others 0.1 - - - - - - - - 0.1 - 0.6

Subtotal 0.6 5.8 3.4 0.7 4.6 2.7 0.7 0.5 0.30 2.0 10.9 6.4

Export & Commercial CropsCoconut 0.1 2.4 1.4 1.3 4.7 2.7 4.1 0.2 0.10 5.5 7.3 4.2Sugar 0.7 6.8 3.9 0.1 1.8 1.1 1.0 0.1 0.05 1.8 8.7 5.0Tobacco 0.1 0.4 0.2 0.7 1.6 0.9 0.3 0.1 0.05 1.1 2.1 1.2Others 0.1 0.3 0.2 0.2 0.6 0.3 0.7 0.1 0.05 1.0 1.0 0.6

Subtotal 1.0 9.9 5.7 2.3 8.7 5.0 6.1 0.5 0.20 9.4 19.1 11.0

Forestry 0.5 2.8 1.6 - - - 1.7 0.2 0.10 2.2 3.0 1.7

Others - 1.6 0.9 - 1.9 1.1 _ 3.5 2.0

Total 2.1 20.1 11.6 3.0 15.2 8 8 8.5 1.2 0.60 15.8/b 39.6/b 22.9/b

Others (2.2) (3.1) (1.8)/b

/a Deflated by consumer price index at 193.0 (1975=100)./b Includes item "others" referring to loans for production, processing and marketing activities for which

commodity-specific data are not available.

Source: TBAC estimates, new series.

CD.~'


PHILIPPINES


Commercial Banks' Agricultural Loans - by Activity(I billion)

Agricultural loans Total loansProduc- Pro- Mar- At/a

tion cessing keting Others Total 19 75 %Year --------- (at current prices) --------- prices increase

1975 2.1 3.0 8.5 2.2 15.8 15.8

1976 4.5 4 7 6.3 1.6 17.1 16.1 -

1977 8.1 5.5 5.4 2.6 21.6 18.8 7.2

1978 10.2 6.5 6.3 3.4 26.4 21.4 13.8

1979 15.4 8.4 5.3 3.2 32.3 22.1 3.3

1980 20.2 15.2 1.1 3.0 39.5 22.8 3.2

Average annualgrowth rate 5.5

1980 loans at1975 prices 11.7 8.8 0.6 1.7 22.8

% increaseover 1975


Source: TBAC estimates: new series.

-175 - ANNEX 6Table 22

PHILIPPINES


Licensed Rural Banks - By Age Group(December 31, 1981)

Number of banks in operation for:More than

Region 10 years 8-10 years 6-7 years 4-5 years 1-3 years Total

I 57 20 15 16 13 129

II 26 10 8 9 6 59

III 105 11 3 7 - 126

IV 22 1 - - 1 24

IV-A 131 23 11 10 8 183

V 39 13 10 8 10 80

VI 61 25 18 11 12 127

VII 22 21 6 18 9 76

VIII 13 6 4 17 11 51

IX 10 2 2 - 13 27

X 16 14 7 17 14 68

XI 18 10 13 12 8 61

XII 20 8 4 2 4 38

Total 540 164 101 127 101 1,041

PHlLIPPlNES


Rural Bank Loans: Sectoral Distribution

(- million)

1975 1976 1977 1978 1979 1980

Activity Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount

Agricultural 966,218 2,117.5 679,946 1,658.8 688,579 1,799.1 790,614 2,384.8 859,020 2,950.4 824,593 3,257.3

Crops 769,283 1,454.4 519,920 1,173.0 526,529 1,248.0 597,194 1,612.0 620,329 1,936.8 554,269 1,985.9

Noncrops 196,935 663.1 160,026 485.8 162,050 551.1 193,420 772.8 238,691 1,013.6 270,324 1,271.4

Commercial 53,348 131.0 50,796 151.2 50,266 180.7 55,240 240.0 64,165 305.1 62,383 330.6

Industrial 9,369 44.9 10,326 54.6 10,004 55.5 11,044 75.6 12,720 102.1 10,835 105.5

Others 10,760 16.8 10,567 16.8 15,165 30.4 21,446 48.3 26,276 65.1 25,418 82.0

Total 1,039,695 2,310.2 751,635 1,881.4 764,014 2,065.7 878,344 2,748.7 962,181 3,422.7 923,229 3,775.4


I wI o


PHILIPPINES


Resources of the Rural Banking System(P million)

19 75 1981 1981 /a %(At current prices) (at 1975 prices) increase

LiabilitiesDeposits 773 2,116 1,096 42

BorrowingsCentral Bank 1,322 3,229 1,673 26Others 167 - - (100)

Subtotal 1,489 3,229 1,673 12

Other liabilities 61 261 135 121

Capital accountsPrivate 219 492 255 16Government 57 109 56Reserves and surplus 150 283 147

Subtotal 426 884 458 7.5

Total Resources 2,749 6,490 3,362 22

AssetsCash and bank balances 246 547 283 15

LoansAgriculture 2,203 4,874 2,525 15Commerce 84 27 0 140 66Industry 45 147 76 68Others 16 194 101

Subtotal 2,348 5,485 2,842 21

Investments and otherfixed assets 155 458 237 53

Total 2,749 6,490 3,362 22


ANNEX 6Table 25

- 178 -

PHILIPPINES


Rural Banks' Past Due Ratio by Region, June 30, 1981(% of total outstanding loans)

Past Due Ratio Overall Past DueNumber of Below 31% ratio for the

Region rural banks 20% 21-25% 26-30% and up region (%)

I 113 51 20 8 34 .22

II 58 15 8 2 33 :33

III 119 26 20 10 63 39

IV 22 10 3 2 7 :29

IV-A 177 80 34 10 53 32

V 68 46 6 5 11 24

VI 119 41 14 9 55 :35

VII 72 34 15 4 19 30

VIII 50 25 5 1 19 31

IX 24 13 4 - 7 42

X 67 34 9 1 23 34

XI 58 23 8 - 27 37

XII 39 17 5 1 16 36

Total 986 415 151 53 369


PHILIPPINES


Rural Banking System: Profitability Ratios

(%)

1975 1976 1977 1978 1979 1980

Net income before tax:paid-in capital 27.0 29.0 23.0 20.0 18.3 16.2

Net income after tax:paid-in capital 27.0 29.0 23.0 20.0 18.3 16.2

Net income before income tax:average total assets 3.0 3.0 2.0 2.0 1.8 1.5

Interest income:total income 76.0 77.5 65.0 74.0 80.5 81.1

Other operating incomes:total income 21.5 22.0 10.0 6.0 5.8 5.5

interest on deposits:total expenses 30.0 23.0 28.0 31.0 30.4 33.1

Interest on borrowed funds:total expenses 11.0 12.0 14.0 11.0 10.9 9.1

Compensation/fringe benefits:total expenses 21.0 21.0 27.0 30.0 28.3 31.4

Other expenses:total expenses 25.0 23.0 22.0 16.0 30.4 26.4

Service charges/fees:total income - - 1.0 3.0 13.7 13.4

-180 - ANNFX 6Table 27

PHILIPPINES


World Bank/IDA Lending for the Agriculttural Sectorand Rural Development (as of June 1982)

Loan or Date Amount:

Purpose credit no. signed (USs m1n)

Irrigation ProjectsUpper Pampanga Ln 637 08/12/69 33.88Aurora Penaranda Ln 954 04/30/74 9. 50

Cr 472 04/30/74 9.50Tarlac Ln 1080 12/17/74 17.00Magat River Multipurpose Ln 1154 07/22/75 42.00Chico River Ln 1227 03/23/76 50.00Jalaur Ln 1367 02/01/77 15.00National Irrigation Systems Improvement Ln 1414 05/03/77 50.00

Ln 1526 02/28/78 65.00Magat River Multipurpose, Stage II Ln 1567 05/11/78 150.00Magat River Multipurpose, Stage II Irrigation Ln 1639 12/12/78 21.00Medium-scale Irrigation Ln 1809 03/13/80 71.00Watershed Management /a Ln 1890 07/08/80 38.00Communal Irrigation Ln 2173 06/30/82 71.10

Subtotal 13 projects 642.98

Credit for Agricultural Equipment, Grain Processing,Livestock and Fisheries

Rural CreditFirst Ln 432 11/02/65 5.DOSecond Ln 607 05/27/69 12.50Third Ln 1010 06/11/74 22.00Fourth Ln 1399 04/05/77 36.50

Grain Processing, Rice Processing and Storage Ln 720 01/26/71 14.30Second Grain Processing Ln 1269 05/25/76 11.50LivestockFirst Ln 823 05/04/72 7.50Second Ln 1225 03/16/76 20.50

FisheriesFirst Ln 891 05/15/73 11.60Second Ln 1270 05/25/76 12.00

Livestock and Fisheries Ln 1894 07/15/80 45.00

Subtotal 11 projects 198.40

Financing of Rural Development and Infrastructurefor Small Farmers in Relatively Disadvantaged AreasRural DevelopmentMindoro Ln 1102 04/08/75 25.00Samar Ln 1772 12/04/79 27.00

Rural Infrastructure Cr 790 04/11/78 28.00Small Farmer

Settlement Ln 1421 05/17/77 15.00Smallholder Treefarming Ln 1506 12/22/77 8.00Small Farmer Development Ln 1646 12/21/78 16.50Rainfed Agricultural Development Ln 1815 03/20/80 12.00

Subtotal 7 proJects 131.50

Agricultural and Fisheries Support Services /bDevelopment of Philippine College of Agriculture Ln 393 10/13/64 5.86Agricultural Education and Training (4th educ. proj.) Ln 1314 03/01/72 25.00Fishery Training Ln 1786 12/18/79 38.00National Extension Services Ln 1626 11/07/78 35.00Agricultural Support Services Ln 2040 08/25/81 45.00

Subtotal 5 proJects 148.86

Total 36 projects 1,121.74

/a Included with irrigation because project is designed to protect watershed for irriga-tion.

/b A loan for a National Fisheries Development Project (Ln 2156-PH) for US$22.4 millionwas signed in September 1982.

Source: The World Bank, "Sector Operations Review: Agricultural and Rural DevelopmentProgram in the Philippines," Report No. 3796, February 10, 1982 and IBRD/IDAStatements of Loans and Credit,.

ile' philippines agricultural credit sector...

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