Kyrgyz Agriculture Investment Forum

Transcription

1 Kyrgyz Agriculture Investment Forum Roundtable 3 on Rural and Agriculture Finance Bishkek, September,

2 Schedule Start Coffee break Closure Agenda Steps Opening: Ms Baktygul Jeenbaeva, NBKR Self-introduction of participants EBRD in the KR: Mr Arthur Poghosy Overview agricultural finance in the KR: Michael Marx, FAO Presentation Bai Tushum Presentation Ayil Bank Presentation Credit Unions Questions & Answers Debate in plenary Recommendations 2

3 Overview Brief Summary on Agricultural Credit in the Kyrgyz Republic Risk Management in Agriculture Finance Some Future Challenges Bishkek, September,

4 Agricultural Credit in the KR (1) From 2006 to 2010, total lending by banks increased from KGS bn to bn (+152%) Remarkable is the increase of lending in som (+295%) against lending in forex (89%) During the same period, NFCI loans increased from KGS 2.75 bn to bn (+662%) Share of bank (NCFI) in total loans: 58% (42%) Source: Bishkek, September,

5 Agricultural Credit in the KR (2) Agric lending by banks increased from KGS 0.37 bn to 3.35 bn (+968%) Agric lending by NFCIs increased from KGS 0.89 bn to 5.07 bn (+741%) Faster growth of agric loans than overall portfolio growth The share of agric loans in bank portfolios increased from 3.3% in 2006 to 13.8% by 06/11 The share of agric loans in NFCIs portfolios remained quite stable from 2006 to 2011 (range: 30-35%) Bishkek, September,

6 Agricultural Credit in the KR (3) As at June 2011, the combined agric portfolio of all FIs was KGS bn, or 23.1% of all loans (in KGS and forex) This ratio has increased from 8.9% in 2006, an increase of 14.2 percent points 66% of all bank loans are for duration > 1 year, (62% in the case of agric loans); most NFCI loans are short term (1-12 months) In the banking sector, loan loss provisions accounted for 10.7% of all loans, up from 3.3% in 2006 In MFIs and Credit Unions, loan loss provisions accounted for 1.6% of gross loans outstanding, down from 2.5% in 2006 Bishkek, September,

7 Agricultural Credit in the KR (4) Average weighted interest rate charged by banks for agric loans (all terms): from 29.6% in 2006 to 27.0% in 06/11 Average weighted interest rate charged by CUs for agric loans (all terms): from 25.6% in 2006 to 27.8% in 06/11 Average weighted interest rate charged by MFIs for all loans: from 33.5% in 2006 to 31.7% in 2011 and 38.5% in 06/11 Bishkek, September,

8 Some Conclusions These are comparatively good achievements, in particular of the NFCIs, but also of the banks Risks of lending for agriculture may be not as high as often seen Concern: the low level of financial intermediation in the KR: Total credit of MFIs and banks account to 18.4% of GDP only (2010) Given the structure of the economy, this level should probably be around 25-35% Bishkek, September,

9 Some Issues Is there credible demand from the agric sector that is not met by the financial sector? Spread between deposits and loans has been quite high: 18.7% points on average, which is an indicator for inadequate risk management (for period ; average weighted interest paid on all deposits and av. interest rate charged on loans, all in KGS) Do FIs have adequate risk management systems in place to address risk related to the sector? What measures would enhance the ability of financial institutions to expand solid lending? Bishkek, September,

10 Risk Management Risk management is a comprehensive approach to deal with the risks emanating from an activity by avoiding, accepting, reducing or transferring risks Distinguish: The risks in agriculture that a farmer faces (production risks, market risks, price risks), and agricultural finance risks that banks face (nonrepayment due to risks in agriculture, political interventions in markets, financial or real sector, loan waivers, social unrest, etc.) Bishkek, September,

11 Types of Risks of Banks Credit risks (our focus): Liquidity risks Interest rate risks Foreign currency risks Operational risks (e.g. mistakes and fraud) Technological risks (e.g. data loss due to fire or power failure) Product innovation risks (new products failing) Reputational risks deriving from unethical behavior Competition risks Regulatory risks (sanctions for violations of regulatory norms) Bishkek, September,

12 Risk Layering and Risk Mgmt. Strategies Bishkek, September,

13 Insurance Crop insurance: in the past, poor performance where used; highly subsidized as farmers may not be willing to pay for the real costs; high operational costs; asymmetric information leading to moral hazard and adverse selection; smallholders often excluded Index-based insurance: innovative and cost-efficient approach based on measurable events (rainfall, temperature, inundation); sustainability and broad applicability doubtful; excludes pests, diseases, etc.; difficult to define suitable index Agricultural insurance may not be immediately relevant for a majority of smallholder farmers in the near future, but worth deepening the experiments, especially where banks lend to value chains Bishkek, September,

14 Guarantee mechanisms Risk sharing through guarantee funds usually meets the interest of all concerned A normal feature in many countries (Europe, East Asia), with 1-5% of business loans guaranteed externally Poorly designed in the past, most project based interventions and many guarantee funds established by governments were not sustainable Currently, new efforts to set up proper guarantee companies: established as company limited, banks as shareholders, regulated as NBFIs, supervised by central banks, shared loss, max. coverage 50%) Additionality is difficult to show, but doubtful Still requires risk mgmt. strategies by farmer and bank Bishkek, September,

15 Agricultural Microfinance Risk Mgmt. Repayments are not linked to loan use Character-based lending techniques are combined with technical criteria in selecting borrowers, setting loan terms, and enforcing repayment Savings mechanisms are provided Portfolio risk is highly diversified Loan terms and conditions are adjusted to accommodate cyclical cash flows and bulky investments Contractual arrangements reduce price risk, enhance production quality, and help guarantee repayment Financial service delivery piggybacks on existing institutional infrastructure or is extended using technology Membership-based organizations can facilitate rural access to financial services and be viable in remote areas Area-based index insurance can protect against the risks of agricultural lending Agricultural microfinance must be insulated from political interference CGAP 2005 Bishkek, September,

16 Survey on risk management approaches of agricultural finance institutions, commercial banks and value chain actors in 9 countries (forthcoming) Item/Measure In % of FIs Agricultural practices/management capacity 100 Eligibility norms & judgment-based analysis 100 Household/Firm cash flow 92 Project analysis 92 Household/Firm net-worth 92 Local environment (price, weather, etc.) 92 Local references 92 Membership in producer organizations 75 Pre-financing and post-financing field visits 67 Centralized loan monitoring 67 Limits to agricultural sector concentration 58 Lending in kind 58 Provision/facilitation of technical advise 58 Partial guarantees 58 Loan-payment agreement with third parties/vc 50 Risk-based pricing 50 Credit history with local lenders 42 Mortgage of land or house 42 Manual credit scoring 33 Bishkek, September,

17 Survey on risk management approaches of agricultural finance institutions, commercial banks and value chain actors in 9 countries (forthcoming) Item/Measure In % of FIs Credit history with credit bureau 25 Mortgage of movable assets 25 Life/health insurance for borrower 25 Limits to crop concentration 25 Ban on financing specific crops or activities 25 Risk ratings norms 25 Crop/asset insurance for borrower 17 Limits to geographical concentration 17 Prov./facilitation of yield/weather insurance 17 Provision/facilitation of price hedging services 17 Automated credit scoring 8 Risk modeling (PD, LGD, etc.) 8 Minimum size of property 8 Specialized asset classification norms 8 Credit insurance/derivatives 0 Securitization 0 Portfolio insurance 0 Bishkek, September,

18 Other Risk Mgmt. Practices Movable property Warehouse receipts Layering loan appraisal decisions Deliverables under out-grower schemes/retention of payments at source (in value chains) Control of side selling Effective credit bureau Third party salaries as collateral Bishkek, September,

19 Survey of risk mgmt. practices of 11 FIs in MENA Region (NENARACA 2010) Category Average score in % of maximum possible Collateral management 87% Loan management 81% Loan recovery management 54% Insurance 45% Information technology 100% Governance 57% Banking business 67% Average 69% Bishkek, September,

20 Challenges & Points for Discussion In view of the variable risk management practices of FIs, do FIs in the Kyrgyz Republic have to change some of their current practices? Is there anything missing to improve access to agricultural finance? Is there sufficient credible demand for loans for agricultural purposes (from input supply to production, storage and marketing)? Do banks exaggerate their request for collateral? Can all potential clients, especially SMEs, fully comply with the requests of MFIs and banks? Is there a missing middle not being served by banks? Does the KR need a more varied framework for social organization of farmers, over and above cooperative and company limited? Bishkek, September,

21 WHAT SHOULD THEREFORE BE DONE TO IMPROVE AGRICULTURAL FINANCE, AND BY WHOM? THANK YOU! Bishkek, September,