The most recent BSP (Bangko Sentral ng Pilipinas) repost on the banking system’s Agri-Agra Law—shorthand for the Central Bank of the Philippines circular mandating lending to the agricultural and agrarian sectors—performance indicates shortfalls in lending by the banks to this country’s farmers and agrarian reform beneficiaries. Considering the repeated non-attainment of targets, the time surely has come for a thorough re-examination of the philosophy underlying this piece of monetary policymaking.
With the exception of a handful of agricultural industries—the sugar, coconut and rice industries are the leading examples—the Philippine banking system has been disinclined to extend credit to the agricultural sector (which includes the beneficiaries of the agrarian reform program). There are a number of reasons for this.
The most important of these reasons is related to the general creditworthiness of Filipino farmers. With the exception of the industries mentioned above—the sugar and coconut industries are thriving export industries and rice is the most basic of agricultural products—this country’s agricultural industries are small-scale, inadequately organized and geographically dispersed. Philippine banks claim to have difficulty managing—and to derive comparatively high returns from—agricultural loan portfolios. The situation, they claim, is different with lending to manufacturing sector borrowers, which tend to be large and well-structured, and to commercial-sector borrowers, which tend to be located in population centers.
Another reason is the widespread incidence of farmer-borrower inability to put up collateral for the credit being sought. In the case of the agrarian reform beneficiaries, the problem has become acute because of the unwillingness of banks – including the rural banks—to accept Certificates of Land Transfer as collateral. The mechanisms established by the government to address the problem—including the Agricultural Guarantee Fund—appear to have not been sufficiently effective in getting the banks to look positively at credit applications from farmers and agrarian reform beneficiaries. Lending to these borrowers has been considered just too risky and too cumbersome.
With this as background, the Central Bank of the Philippines—the forerunner of BSP –and the banks decided on what they thought would be a good halfway-house. If the banks were unwilling to receive and process loan applications from the agricultural and agrarian reform sectors, why not allow them to comply with the required lending-to-agriculture percentage by investing in securities evidencing loans to farmers and agrarian reform beneficiaries?
This regulatory arrangement is, in fact, what came to pass, and the banks proceeded to partially comply with their Agra-Agri Law obligation by investing in agriculture-related securities. This has been the situation over the years.
On the part of both the BSP and the banking system, there appears to have been a feeling that this state of affairs has been satisfactory. But the generally pathetic condition of Philippine agriculture—this country continues to be the world’s No. 1 leading rice importer, Philippine sugar consumers import their requirements and many of the trees of the once-mighty Philippine coconut industry are either old or decaying—indicates that the operation of the Agri-Agra Law has fallen far short of expectations. If nothing is done to correct the situation, future BSP reports will be little or no different from the one cited at the beginning of this column.
Under the circumstances, I submit that the time has come for a thorough review of the implementation of the Agri-Agra Law. In such a review, Congress should be involved for purposes of appropriate alleviatory legislation. The academe also should be involved. A committee composed of representatives of BSP, the Bankers Association of the Philippines, the Department of Agriculture, Congress and academe, to undertake a thorough review of the Agri-Agra Law, is what the situation urgently calls for.
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