|
Agricultural producers are in dire need for long-term credits - this is a proverb and byword among agro-industrial complex officials, mass media and, naturally, agrarians. Small wonder, long-term credits are requisites for production expansion, renewal of production assets and ensuring sustainable sector development. According to the Ministry of Agrarian Policy, 64% of Ukrainian agricultural enterprises need long-term credits (for 5-22 years), 16% would like to obtain mid-term credits (for up to 5 years), and only 10% would be satisfied with short-term credits.
The case for
Today, Ukrainian banks are reluctant to give long-term credits to farmers. Agricultural producers’ need in such credits is covered up to 2%. Main reasons for actual absence of rural long-term crediting is financial weakness of Ukrainian financial institutions, lack of legislative regulation of credit processes, in particular, in terms of creditor rights protection, unavailability of liquid security and specific character of agricultural production.
One of ways to develop long-term crediting is to introduce farmland mortgage. An argument in favour of land mortgage as a source of financial support to ensure economic growth in agriculture is that, according to the world practice, land mortgage credits account for 95% of farmers’ investment resource and the rest 5% are earned from land sale.
Farmland plots are considered a potentially adequate and liquid security to enable Ukrainian farmers to obtain mid-term and long-term bank credits, as 10% of this security can swallow credit resources of all the Ukrainian banks.
Experts emphasize that mortgage of such land plots will ensure development of the financial system and higher level of crediting and investment in the agricultural sector; transition to low interest mid-term - and long-term agricultural crediting; diversified stock market development through the issue of mortgage bonds; creation of conditions to integrate the Ukrainian agricultural sector in the world economic system.
According to the Ukrainian Land Code, banks can be the only holders of pledged land plots, therefore their attitude to farmland use as collateral is of critical importance. The most appropriate definition for this attitude may be “cautious”. And this is a sound position.
On the one hand, banks are interested in such collateral. Agriculture is a risky business depending on weather conditions, market situation etc. Borrower’s bankruptcy in default of a guaranteed security (for example, crediting against pledge of future crop) results in a creditor’s loss. Furthermore, a creditor, being aware of absence of a more or less developed crop and price forecast system as well as of monitoring and forecast of the foreign market situation, scared by interventions (mostly undertaken by local authorities) in the process of agricultural produce movement, will be very cautious in making decision on credit provision. Having little confidence in the borrower the creditor will either refuse credit or set a high interest, or the credit amount will be too small.
When land is pledged as collateral, risks are transferred fully or partially (when the crop is partially destroyed by elements) from the creditor (pledge holder) to the borrower (pledger). Use of land as collateral would improve credit accessibility and increase the amount of credit along with growing value of collateral (given existing bank interests) while credit interests most often would be essentially lower.
How can this be explained? First of all, land is a specific commodity that is impossible to steal or hide and is difficult to damage, and – what is, perhaps, most important, it has a practically stable price.
Of course, there are price fluctuations in the land market, but, as a rule, deviations are insignificant. Moreover, land is the main means of production in agriculture, having lost it one would not be able to continue operating in this sphere. Being in pledge and remaining pledge holder’s property land provides a benefit for the latter. Therefore, the pledger will put maximum efforts to avoid bankruptcy as in this case the subject of pledge or land will become the creditor’s property.
Thus, land as a guaranteed security would be a critical factor for the creditor to make decision on credit provision to agricultural producers.
Problems and obstacles
On the other hand, there is a number of legal and organizational problems that in the nearest future will prevent banks from using farmland plots as collateral.
First of all, the matter concerns restrictions set forth in Clause 15 of Transitional Provisions of the Land Code of Ukraine, which actually make it impossible to use farmland plots as collateral before 1 January 2005, since “citizens and legal entities being in ownership of land plots to run private (family) farm and other commodity agricultural production, and also Ukrainian citizens-land parcel (share) holders may not before 1 January 2005 sell or otherwise alienate such land plots and land shares except for barter, descent and seizure of acres for public needs”.
Even after 1 January 2005 some time will be needed to balance demand and supply in the land market that will result in real price formation for land plots, including those used as collateral.
Another obstacle can be Clause13 of Transitional Provisions of the Land Code according to which by 1 January 2010 individuals and legal entities can acquire title to up to 100 hectares of farmland. Although this area can be increased by adding legally inherited plots one can ask an almost rhetorical question: will banks work with these, relatively small land areas, and what amount of credit will be available in this case?
In this regard it is worth mentioning that most often land is used as collateral in case of buying agricultural machinery, bloodstock, elite seeds, planting stock, construction of buildings and production facilities, activities related to land tenure and protection, land plot acquisition. Thus, mortgage credit amounts must be relatively large.
At present, the share of land owned by agricultural enterprises is insignificant. Most have land shares and land plots under lease, which makes them ineligible to be used as mortgaged property. Admittedly, banks will not grant credits on the security of small land plots, for instance, several hectare land shares. Thus, the development of a system of mortgage crediting in agriculture is closely connected with the land consolidation issue.
There are also legislative impediments: we have already cited the Transitional Provisions of the Land Code of Ukraine regarding farmland ownership, according to which until 2010 the norm is maximum 100 hectares per natural person and/ or legal entity. In other words, it is problematic to expect credit secured on land property of less than 100 hectares before the set date.
Another prerequisite of mortgage crediting is that not only banks have to be able to ensure this, but first of all, debtors have to be able to repay the credits obtained. Despite of significant increase in the total amount of credits provided to agricultural producers over recent three years and some growth in production volumes, the share of unprofitable farm enterprises has remained almost unchanged: 2000 — 65%, 2001 — 56%, 2002 — 58%. This tendency will not contribute to the development of mortgage crediting in the near future since the essential condition of long-term crediting in the agricultural sector is financially sustainable and profitable agricultural enterprises.
Furthermore, now creditors, i.e. banks, are not prepared to accept, and farmers are not prepared to pledge the farmland as collateral because there are no real legal, economic and organizational mechanisms to ensure such relations. First of all, there is no land market.
Finally, the long-term financial market is unformed in Ukraine. Mortgage is a scope of financial instruments and one should not anticipate their mass acceptance shortly. And a psychological factor should be taken into account, i.e. a certain degree of mistrust in financial products, including mortgage bonds.
These and other problems do not suggest the creation in the near future of a specialized land mortgage bank for specific agricultural long-term crediting as well as actual introduction of farmland mortgage in Ukraine.
Roman Korinets, expert of NGO “Institute for Rural Development”
|
