State policies are converging in this direction and in this context, access to capital is one of the paramount conditions:

Some of the information presented in this report was provided by the experts present at the inter-ministerial working sessions formed by Ministry of Agriculture- Ministry of Foreign Affairs Rural Credit Guarantee Fund - General Secretariat of the Government, which were also attended by representatives of the leading microfinance institutions in Romania, in order to identify equitable solutions to facilitate lending to small and medium-sized farms in Romania. We thank them for their support. Introduction It can be said that agriculture in Romania is undergoing a process of professionalisation and market adaptation. Gradually (with very small steps), farm structure changes in only one year, between 2010 and 2011, the proportion of farms sized 1-10 ha came down from 32.3% to 30.3% and the share of farms with a size between 10 and 100 ha increased from 15.5% to 17.6% 1. Through the National Rural Development Programme (RDP) on subsistence farms were spent, or will be spent in total 468 million Euros, a significant sum, which is aimed to support 80,000 households. Unfortunately, the granted support amounted only to 1,500 euros per farm for three or five years. In the form in which it has been spent, it did not have the efficiency that we intended. I think 1,500 euros for a subsistence farm will not help it become productive, but will only prolong the agony. We want to develop farms of an average size, belonging to families, which we define by law in collaboration with producer associations. (Ministry of Agriculture) State policies are converging in this direction and in this context, access to capital is one of the paramount conditions: It is estimated that currently, approximately 40% of active farmers in Romania do not have direct access to financial services, and for those who do have, low absorption capacity and the high cost of borrowed capital represent important competitive disadvantages when compared to farmers in other member states. The majority of small producers, whether registered as a legal person or not, do not fit the banks attractive client profile: the sectors profitability is relatively low, and the entities which apply for credits are predominantly start-ups that do not hold a record of banking operations or material guaranties. The use of land and other agricultural assets as bank guarantees is negatively affected by the increased price volatility. Until now, the beneficiaries of the National Rural Development Programme in Romania could access the guarantees granted through European funding schemes and by the end of this 1 Data from the Rural Credit Guarantee Fund 2

financial programming period it is possible to benefit from interest subsidies on investment measures. What happens, however, with farmers that want to bridge the gap and upgrade from subsistence farming to economic sustainability, but do not have the means to apply with projects for the National It is estimated that the subsidy covers about 28% of the cost of setting up cultures in Romania. Rural Development Program and who would need several thousand euro to finance their crops? A possible solution comes from microfinance, a viable complement for the banking sector to finance agriculture in Romania. This report assumes that we must use all the tools that the EU has to offer in this respect. The present study reviews the main instruments the state has adopted until now to support the financing of small and medium farmers and comes up with proposals for their improvement. I. Agriculture financing by banks The interest of financial institutions in the agricultural sector in Romania has greatly increased after the EU accession, which brought access to European funds: while in 2008 loans for agriculture, forestry and fishing amounted to 5.818 million lei, at the end of 2012 these accounted for 12.069 million lei, therefore recording an increase of over 100 %. 2 Even so, in relative terms, this sum represents less than 4 % of the total loans granted in the economy, a premise which is insufficient for the transformation of agriculture into a strategic sector for Romania, as stipulated in programmatic documents. The majority of small producers, recorded or not as a legal person, does not fit in the attractive profile of bank clients: the profitability of this sector is significantly smaller than that of other activity fields, the entities that apply for loans are most of the time at start-up level and are not able to present a track record of banking operations or loans and do not possess any material guarantees (or present low liquidity in a period of crisis i.e. real estate). The use of property and other agricultural assets as material guarantees for banks is profoundly affected by price volatility. 2 National Bank Monthly Bulletin, December 2012 3

From the stance of the farmer, the administration costs of the loan are/ can be in some cases too high compared to the loan value. Types of loans granted by the banking system: a) Pre-financing subsidies (bridge loans) -the easiest to obtain, they are granted on the basis of presenting a receipt from the Agriculture Payment and Interventions Agency (APIA), and proving the related guarantees. E.g.: at CEC Bank the financing decision is granted within maximum 2 business days after presenting the receipt. b) Co-financing projects from European funds c) Loans for the setting up, maintenance and harvesting of agricultural crops I. SAPARD Pre- Accession Funds and the Farmer Program The first EU funds offered for agriculture in Romania were the SAPARD Pre-Accession Funds. With the objective of stimulating the absorption of funds dedicated to agriculture, the state founded a program which is considered even today a success and a model of good practice: the Farmer Program. This program consisted in the establishment of a 680 million lei credit fund for the SPARD beneficiaries, from the national budget. The program offered co-financing loans with a 5 % interest rate, with a period of reimbursement of 10 years and a grace period of up to 5 years depending on the purpose of the investment. Also, through the guarantee funds, the credit guarantees where ensured in proportion of 100 %. The results were very good, and the figures speak for themselves: Before establishment, the share of SAPARD funds absorption was 47 % and actual payments accounted for 29% of the total. After the emergence of the Farmer program, the absorption rate rose to 93% and that of payment rose to over 80 %. The number of submitted projects through the Farmer Program was 1015. 3 3 MADR Data 4

Also, the state also intervened through a guarantee scheme. By insuring a portion of the risk and also by additional monitoring of the entrepreneur and the project, the guarantee funds have allowed credit institutions to expand their client portfolio in a hard-to-reach sector due to high costs (monitoring and provision). From a different perspective, the advantage for beneficiaries was the shortening of enforcement proceedings associated with the standard guarantee contracts (mortgage), which implies supplementary costs and also a longer period of processing the case file. This guarantee structure for the SPARD program was managed by the Rural Credit Guarantee Fund IFN- SA (FGCR) and the National Guarantee Fund for Small and Medium Enterprises. (FNGCIMM). In this guarantee scheme from the MADR budget, for the SAPARD program 39.000.000 lei was allocated to FNGCIMM, which granted guarantees worth 204.078.139 lei, and FGCR was allocated 123.000.000 lei, for which they offered guarantees amounting to 990.727.883 lei. II. Financial engineering instruments support agriculture in the current programming period After the EU accession, the agriculture guarantee scheme was maintained; the institution that managed these funds was FGCR. The guarantees offered by FCGR may sum up to a maximum value of 2,5 million euro and they cover a maximum 80% of the total value of the credit offered to the beneficiary from the funding institutions. Recently, a new instrument that supports European funds absorption in agriculture was submitted to the European Commission for approval: subsidizing loan interest for the beneficiaries of the NRDP investment measures. This measure appears in the 11 th proposal of amending the NRDP, which was approved on 22 nd February by the NRDP Monitoring Committee (Decision number 33 from 01.01.2013). The amendment provisions are: Amendment H: Amending the National Program for Rural Development by altering Chapter 5.2.7 - introduction of a interest subsidy system with financing offered from NRDP Legal Basis: Article 71 (5) of Commission Regulation (EC) no. 1698/2005, Articles 49, 50-52 of Commission Regulation (EC) no. 1974/2006 The interest subsidy scheme would be managed by the Rural Development and Fisheries Payment Agency (APDRP) and will be applicable to beneficiaries of measures 121, 123, 312 and 5

313 which concluded / are in the process of concluding financing agreements with APDRP and opt for getting a credit with subsidized interest under the conditions provided in this section. The interest subsidy will be set at the reference rate announced, quarterly, by the Commission. The total amount of interest subsidy (VTSD) will be calculated as follows: VTSD = VD - VR Where VD = volume of total interest owed by the beneficiaries to the financing institution And VR = total interest amount calculated according to the reference interest rate A clear example: For a loan of 10.000 lei applicable at bank interest, i.e. 12%, the equivalent of 1,200 lei per year, the beneficiary will only pay interest of 5.25 % (in January 2013) - the equivalent of 525 lei per year, and the Ministry of Agriculture will pay from European funds the difference of 675 lei per year, for the entire funding period. APDRP will apply a capitalization system of annual installments representing the subsidy for the interest corresponding to the credit approved by the bank as follows: a) APDRP pays the full sum amounting to the interest corresponding to the 1 st year of the credit at the rate level requested by the bank; b) APDRP pays the bank in the second year, the amount of monthly interest calculated at the rate of interest charged by the bank, without exceeding the total amount of the subsidy; c) In the third year, the remaining difference to be paid from the interest subsidy is transferred to the bank proportionally to the period remained for outstanding loans until the end of 2015, as the beneficiary pays the interest that falls in his obligation; d) The equivalent of monthly installments determined ex-ante and the remaining payment after 31 December 2015 shall be capitalized and paid by APDRP to the banking institutions account before this date and will be considered as eligible expenditure under the NRDP. From the farmer s perspective, as a beneficiary of European funds in accordance with the above mentioned measures, the process would go as follows: The beneficiary would submit to the bank the grant contract concluded with APDRP and APDRP will present two 6

repayment options: one with subsidized interest and one with unsubsidized interest calculated at the reference rate announced by the EC, with deferred payment of the interest of 2 years. For loans up to 20,000 Patria Credit does not require warranty but only guarantors with certain revenues and up to 5,000 lei, moral guarantors. The NRDP amendment contains other important provisions on agriculture: -Extension of warranty coverage available until the end of 2015 (compared to 2013; as it was until now); -Introducing the possibility of guarantees offered from national sources - letters of banking guarantee issued by commercial banks with the purpose of granting advanced payments to carry out projects funded by the NRDP, with the aim of avoiding bottlenecks that can occur in the implementation process of the program; III. Microfinance - the missing link Microfinance is a less visible domain compared to the traditional bank loans, although it covers an important segment of the market that, given the structure of agricultural holdings in Romania, should be supported. The schemes presented above are insufficient because they address only beneficiaries of investment measures from the NRDP, and do not support those trying to get out of the semi-subsistence level and who are in dire need of financing working capital, which entails lower value loans. Especially in the difficult years for agriculture, with unfavorable conditions (drought /flood etc.), high loan demands comes from the production area, less from the investment side. It so happens that when the majority of small and medium agri businesses have the greatest need for not very great liquidities, banks, by the nature of their work (offering higher value loans) actually choose to retire. Microcredit, as defined by the EC, stands for a loan under 25,000 offered to support the development of micro-enterprises and self-employability. 4 It has a dual impact: an economic one, as a means of creating income generating activities and a social impact, as a means for social inclusion and thereby, financial inclusion. Their approach a more unconventional one, if 4 http://www.european-microfinance.org) 7

compared to classic banking, but one that is often more efficient for the beneficiary: they have a physical presence in the territory which means that lending decisions are taken not just relying on some numbers in a balance sheet, but sometimes also by going to households, talking to people, identifying their needs and the prospective earnings of the investments to be made. This approach is very beneficial for micro-finance institutions: the default rate of loans offered by micro-finance institutions is very low - around 1%. However, this "grassroots approach comes with a whole range of additional costs - with logistics, with financial instruction, with consultancy on business plans - costs that are not negligible. These translate into interest rates that can exceed bank loans levels- rate stands at around 15%, but can reach even 25%. At this point IFN borrows credit from international financial institutions at an interest rate of 8%! The commission for guaranteeing loans offered to clients of microfinance institutions, with predilection those without legal personality, is 3.8 %. This explains why out of the 29 financial banking institutions which have bilateral agreements with FGCR, only two are microfinance institutions. MFIs cannot afford contracting guarantees through FGCR. A means of resolving this deadlock would be declaring this commission national aid. Microfinance institutions active in rural areas should be able to access a refinancing fund, either focused strictly on microcredit for investment or on supporting production. This financial facility should have a technical assistance component - a farmers entrepreneurial education financial sub-fund, for which microfinance institutions could enter into partnerships with NGOs or other institutions whose activities involve training, consulting, community animation in rural areas. The necessity to support microfinance institutions is justified by the trend shown by FGCR data: In 2012 the number of beneficiaries of the guarantee fund increased exponentially the figure is 4 times bigger than in 2011, while the average value of a security portfolio decreased dramatically (by 82%). From these developments it can undoubtedly be concluded that the funding needs of farmers came from ensuring small working capital. 8

Conclusions and recommendations Given the current best practices in the Romanian agricultural sector, the state of property division and perspectives of the associative movement, the needs and potential of the market, we consider that credit guarantee schemes and microfinancing tools are absolutely essential and highly required by thousands of small and medium farmers. The main recommended measures the state should take in order to support [micro]credits in Romania are: Creating a fund dedicated to micro financing, for which both banking and non-banking institutions would be eligible; Granting interest rate subsidies on loans for co-financing projects implemented with EU funds, granted by both banking and non-banking institutions; The Rural Development and Fisheries Payments Agency (APDRP) should accept comfort letters issued by Micro financing Institutions on behalf of farmers applying for financing out of the NRDP; Declaring the guarantee commission through the Rural Credit Guarantee Fund as state aid for loans offered to farmers through microfinance institutions in order to decrease the interest rate; Creating an appropriate legislative framework for creating state or mixed funds (publicprivate), with the participation of producers and private insurers through which to attract European funds available in the next programming period for crop insurance, supporting the establishment of mutual credit institutions in rural areas; In order for micro-credits price to be lowered, it would be appropriate for microfinance institutions to be able to access a Romanian capital fund (thus eliminating currency risk costs), dedicated to refinancing MFIs which grant loans in rural areas, focusing on investment microcredits or strictly on supporting production activity (possibly from the funds returning from the Romanian Microfinance Scheme). Also, microfinance institutions should be eligible to access, in partnership with the entities to which they traditionally address, funds dedicated to information activities, community facilitation and incubation of agricultural associations, business plans consulting. By the nature of their work and significant presence in the territory, they know the real needs and can lead to the accomplishment of the new RDP s vision for integrated development in agriculture. 9

This financial facility [investment fund/ loans for non-banking financial institutions) may have, in addition to the refinancing component, a technical assistance component - sub-fund for farmers financial and entrepreneurial education -, similar to the one included in the Jasmine program. 10

This report is published under the "Rural Development through enterprise and association" - initiated and funded by the RAF and developed in partnership with PACT, CIVITAS, CSDF, CMSC, CRPE and CEED. The contents of this report do not necessarily represent the official position of the RAF and the consortium members. The opinions expressed do not automatically position all experts affiliated CRPE or other institutions and partner organizations. Credit foto cover: Money tree by Kkays2 via stockfreeimages.com CRPE may 2013 Romanian Center for European Policies Ştirbei Voda. 29, 2nd Floor Bucharest office@crpe.ro Tel. +4 0371.083.577 Fax. +4 0372.875.089 For more details visit www.crpe.ro 11