BRAZILBrazil is a developing nation and like India is a major supplier of agricultural products with huge appetite. It holds a central role in feeding a growing population. Since 1994 agribusiness GDP has been steadily increasing with an average growth of 2% per year. So long term sustainability is critical for Brazil and the other nations across the world. Among evolving tools to promote sustainable agricultural practices, Brazil has adopted Rural Credit to support sustainability. Example to support rural credit is ABC program created in 2010. (ABC is a multibillion Reais credit line specifically dedicated to finance agricultural practices in rural areas and low greenhouse gas emission. Other credit lines are now financing complementary activities such as technical assistance and technological enhancement in rural areas.

Rural credit is an important tool for Brazil as the country faces tremendous challenges to ensure its economic and sustainable development.RURAL CREDIT IN BRAZILThe National Rural Credit System (SNCR) was established in 1965 with the purpose of providing rural credit at low interest rates thus helping producers finance agricultural outputs and machinery, as well as operating costs and product marketing. Major objectives of the rural credit policy created in 1965 remain in effect today:• Access to credit at below-market interest rates( lower then market) • The legal requirement that banks devote a portion of their checking deposits to rural credit lines • Small and family farmers benefit from even lower interest rates by targeted credit lines. These measures are aimed to reduce the resistance offered by the financial institutions to lend money to the rural sector and to create incentives for small farmers to begin credit borrowing. The amount of finance made available to the Brazilian farmers (producers and agribusinesses) under SNCR increases annually.  Rural credit has primarily financed working capital thus helping producers to pay for various crop and livestock operations (land preparation, seedling planting, weeding, and harvesting) and also for agricultural inputs (fertilizers, seeds, herbicides, animal feed and vaccines).

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The recent increase in investment credit within total rural credit may reflect the Government’s desire to finance long term investments in improved and more productive agricultural system in addition to short term inputs.SOURCES OF FINANCE FOR NATIONAL RURAL CREDIT SYSTEMThe total rural credit made available every year comprises of Public and private sources of funding through the National Rural Credit System. The below mentioned credit provision are for medium and large producers. Rural credit sourced from BNDES funds and the Constitutional funds provide the lowest annual interest of 3.5 %. They are mostly available for durable goods. Constitutional funds provide credit for working capital and marketing at 3.5 %.

Funcafe and PRONAMP (National Program for Support to Medium Rural producers) provide 4.5% interest. For financing small and family producers (at lower interest rates) in 1995 the government created the National Program for Strengthening Family Agriculture (PRONAF). It provides credit for working capital, investments for eligible individual producers, for capitalization of cooperatives formed by small and family producers. Annual interest rates varies from 0.5% to 3.

5% (depending on the amount borrowed and the activities financed). To access PRONAF credit, producers must prove their eligibility through the Eligibility Declaration document. PRONAF also offers special credit lines targeted at women, youth, forest production, agroindustry systems, semi-arid lands, agrarian reform settlements, and sustainable agricultural practices all focused on family and small farmers. In 2013/2014, PRONAF disbursed USD 7.2 billion in rural credit, which is the largest amount ever disbursed through this program and represents more than 12% of the total rural credit under SNCR disbursed for that agricultural year. In the 2013/2014 agricultural year, approximately 82% of the credit disbursed under SNCR offered annual rates between 0.5 and 5.5%.

These rates are much lower than annual interbank rates, which ranged from 8.4% to 10.9% between July 2013 and July 2014 (lower than direct bank credit rates which reached as much as 4% a month). The Brazilian government makes below-market interest rates possible through a subsid called “equalization” or matching of interest rates. As an incentive for financial institutions to operate rural credit that is attractive to producers, the Brazilian Treasury pays for the difference between the interest rates of SNCR credit lines and the market interest rates, as well as for administrative and tax costs incurred by banks.SOURCES FOR AGRICULTURAL FINANCE Although noticeably important, SNCR is not the only source of agricultural finance in Brazil. Of the amount borrowed by the agricultural sector in 2003, 72% came from sources other than SNCR. These sources include producers own resources, family loans, and finance from traders, processors, input manufacturers, and private banks.

The government created various investment vehicles to attract urban investors to finance agriculture, so banks can use urban investor funds to finance rural producers. These vehicles include the Agricultural Certificate of Deposit (CDA) and the Agribusiness Credit Note (LCA). The producers then trade these certificates with private agents for funds to finance their production. Upon contract closing, producers deliver the output or pay back the amount received.

LCA is debt paper linked to a rural promissory note issued by a bank and traded with urban investors. Producers take out a loan from a bank that (instead of keeping the promissory note) issues an LCA and trades it. Upon the note maturity, producers pay their loans to the bank who in turn pays the LCA to its holder. Compared to the subsidized low-interest-rate credit offered under SNCR, the non-SNCR sources of rural borrowing often have substantially higher interest rates and stricter repayment conditions.

In many cases, producers rely heavily on these other expensive sources of credit to finance their agricultural activities because they lack good credit history, information, and/or familiarity with bank agencies, or because they face other challenges in fulfilling low-interest rate eligibility criteria.REDUCTION OF THE GOVERNMENT’S SHARE IN AGRIBUSINESSFINANCINGThe history of rural credit in Brazil has two main meanings: • The strongest participation of the government in financing activities.• A lot of cases of payment default.

 In fact, when the 1988 Constitution promoted an amnesty for the rural debtors, a phase of “moral risk” was born, that is, several farmers resisted payment of their bills at the banks. The following tables show the total value of loans and the decrease of financing granted to farmers and cooperatives, from public resources, in the last six years. Public funds and BNDES programs still remain granted resources to agricultural activity, but the current main source of financing is the compulsory deposit of commercial banks.

Banks have to retain twenty five percent of the demand deposits in order to lend to the rural sector. Alternatively, they can deposit fifty percent of the compulsory funds at the Central Bank, without remuneration. Some Banks prefer to lend these resources to the interbank market, through the purchase of DIR (Rural Interbank Deposit), issued by the Bank of Brazil.For overcoming the reduction of government’s share in agribusiness, new tools were implemented. An important financing mean has been the direct deal between producers and suppliers. For instance, the producers buy machines, equipment and fertilizer with money from their crop, represented by a credit bond issued by them. Then, the supplier trades the credit bond in the agribusiness market.

The difficulty here is to establish a just price for the production, given the low liquidity and absence of an open market. However, the amount negotiated in this category of trade is estimated over US$ 1 billion per year. In order to permit more liquidity and transparency for this market, the government has encouraged an increase in trading with financial bonds specialized in agribusiness. The CPR (Rural Producer Note) highlights as one of the main financing tools: First, the producer goes to the Bank and issues the CPR where the characteristics of the product, like kind, quantity, date of delivery and price are registered. The Bank gives a guarantee to the bond and sells it to an investor who usually pays less than the face value, thus obtaining a discount. The market, according to the demand for this investment, establishes the discount. In last July, CPR was being traded for 85% to 90% of the face value.

The CPR can be registered in CETIP and negotiated in the secondary market through BM, giving more liquidity for trading. By being just financially liquidated, this kind of bond dispenses physical delivery. The expectation is the growth of this market, permitting a large amount of trading and long-term bonds, reducing the final cost to the farmer. On the other hand, this could be the result of the decrease in prices to the consumers in cities, improving thus, the efficiency of the economy and the welfare of people.

CHINAChina has the world’s second largest economy and the third largest military. Despite having these breath-taking numbers accompanied with the large population, it’s still not considered a developed country. Its per capita GDP remains much below the acceptable threshold.  China’s banking and financial markets have undergone significant reforms in the last two decades, its rural banking sector remains relatively underdeveloped.

To address this situation, the Chinese government has focused considerable attention on increasing access to financial services in rural areas through policy initiatives such as:• Easing market-entry requirements • Creating new incentive mechanismsImpact of Reform and Opening-Up on Rural Banking SectorChina’s ongoing process of Gaige Kaifeng (reform and opening up), which began in 1978, has been highly successful in supporting economic growth and decreasing poverty on a national level, but the gains have not been spread equally across the country. A combination of economic and social policies has resulted in a widening rural-urban income gap, with the annual per capita net income of rural households reaching just US $755 in 2009, compared with US $2,516 for urban households. In response to these inequalities, authorities in China have made rural development the focus of many recent policy initiatives.

In fact, 2010 marked the seventh consecutive year that the government’s annual Yihao Wenjian (Number 1 Document) has emphasized rural issues. This policy document is jointly issued by the Central Committee of the Communist Party of China and the State Council to highlight significant economic concerns of the State. With respect to financial services, the reform and opening up policy facilitated the development of a more market-oriented banking system. In the mid-1990s, many banks began closing branches in rural and interior regions, which were generally less profitable than branches in urban and coastal regions.

Structural issues such as incomplete interest rate liberalization contributed to the problem as banks had a limited set of tools with which to make rural banking cost effective. As a result of these structural and developmental issues, many rural residents and businesses had few options in terms of banking services and access to credit. From a policy perspective, reform of the rural banking market is a part of the government’s broader framework aimed at improving conditions in rural areas.

Despite recent progress, the total number of villages and towns in China without financial institutions was 2,792 as of end-2009; the total number of villages and towns without access to financial services was 342.STRUCTURE OF RURAL BANK IN CHINAChina’s rural banking market is serviced mainly by four types of financial institutions:• Large commercial bank• Policy bank• Postal savings bank and• Small and medium-sized rural financial institutions Of the major players focused on the rural banking market, small and medium-sized rural financial institutions collectively account for the major share of the market in terms of number of institutions. The financial institutions mentioned in the chart represents roughly 28% of China’s banking system assets.

While other banks in China operate in the rural market, they are generally not considered major players. For example, large domestic banks such as ICBC and Bank of China have operations in rural areas, but are generally more focused on pursuing other markets and business activities (especially in corporate lending, diversified financial services, and international expansion). At the same time, China’s large and mid-size banks have begun expanding their rural operations on a small scale by opening village banks and lending companies, taking advantage of recent government policies. While a small but growing number of foreign institutions such as HSBC and Citibank have recently entered China’s rural banking market, foreign banks represent only 2% of banking system assets in China and their rural operations are still in their initial stages.Development of the Rural Banking MarketGiven that the major players in China’s rural banking market are diverse in nature—in terms of target client base, asset size, relationship with central/local government entities, etc.—the government has allowed for a varied approach to reform. Overall, historical and recent policy responses have tended to focus on implementing gradual steps toward structural change and market liberalization.

Agricultural Bank of China and Agricultural Development Bank of ChinaAgricultural Bank of China (ABC) was established as a state owned bank in 1979 to provide financing for agriculture related activities. The Agricultural Development Bank of China was spun off of ABC in 1994 to become a specialized policy bank, originally focused on government procurement of grain, cotton and other goods. In the mid-1990s, as China’s Big Four banks began transitioning toward a more commercial-based lending model, ABC started to withdraw from rural areas. However, in early 2007, the central government asked ABC to refocus on rural areas, hence renewing its commitment to serving the agro-related sectors, namely agriculture, rural areas and farmers.

It began setting up pilot programs to establish and purchase shares in village and township banks. In 2009, the China Banking Regulatory Commission (CBRC) released special supervisory guidance to encourage ABC to take further steps toward setting up its rural-based Strategic Business Unit and improving its banking services to the rural economy at the county level. Following a capital injection from Central Huijin of US$19 billion in cash and the removal US $120 billion of bad assets, ABC changed its registration in January 2009, marking its transformation from an exclusively stated-owned commercial bank to a joint-stock commercial entity. ABC currently has two shareholders Central Huijin and the Ministry of Finance, each with a 50% stake but ABC has reportedly been preparing for a dual listing in Shanghai and Hong Kong before the end of 2010.Postal Savings Bank of ChinaChina’s modern postal savings system was established in 1986 through the China Postal Savings and Remittance Bureau, which was part of the State Post Bureau.

As the postal savings business grew in subsequent years, officials began to consider ways to separate the various functions of the large postal system and to provide improved oversight. In the late 1990s, China’s government separated postal and telecommunications businesses from each other and the People’s Bank of China (PBOC) raised the notion of establishing a stand-alone postal savings bank. After its founding in 2003, the CBRC supported the concept of a separate postal savings bank as a means to split the postal savings service from the main postal delivery service. In June 2006, following approval from the State Council, the CBRC formally endorsed the establishment of a separate Postal Savings Bank of China (PSBC). In March 2007, PSBC officially began operations with registered capital of US$2.9 billion.

China’s early postal savings system accepted deposits, but did not offer credit services, which resulted in an outflow of funds from rural areas. Since 2007, PSBC has initiated several pilot programs to offer rural residents more banking services. In 2008, PSBC took steps to strengthen its corporate governance structure, set up an independent financial accounting system, and operate in line with commercial bank requirements. It also expanded its micro finance services in 2008, issuing over US$8.8 billion in small deposit-pledged loans and micro loans, more than 70% of which was used in rural areas.Rural Credit Cooperative InstitutionsWhile individual rural credit cooperative institutions are relatively small, they collectively play a large role in China’s rural banking market.

Rural credit cooperatives (RCCs), which were initiated during China’s rural cooperative movement in the 1950s, originally provided financial services to cooperative members, who were generally farmers. Later, during most of the 1980s and 1990s, ABC had administrative responsibility over RCCs, which played a critical role in developing Township & Village Enterprises. In 1997, the central government decided to transfer oversight responsibility from ABC to the PBOC, due in part to rising non-performing loans among RCCs.

Although the PBOC encouraged RCCs to strengthen support services for rural areas, RCCs were often more inclined to fund projects with lower risk and higher capital returns. This exacerbated an existing shortage of institutional lending in rural areas. In 2003, the State Council issued the Pilot Program for Deepening Rural Credit Cooperative Reform to fundamentally restructure RCCs. As part of this reform process, the authorities, mainly through the PBOC, provided substantial funds to RCCs to remove and write down non-performing loans and to raise their capital levels. Over a number of years, the PBOC injected US$25 billion in special central bank bills and loans, helping to reduce their average non-performing-loan ratio to 9.

3% as of 2007 from 37% in 2002. In 2004, RCCs made an aggregate profit for the first time in roughly ten years. Authorities restructured some of the stronger RCCs into rural commercial banks (with joint-stock ownership) and rural cooperative banks (with hybrid ownership some other RCCs were merged to form credit unions at the county and provincial levels, with the latter generally responsible for administering multiple institutions. However, as of end2008, just 185 new banks, including 22 rural commercial banks and 163 rural cooperative banks, had been created through the RCC reform program, with the CBRC reporting another 4,965 institutions as RCCs.

The CBRC’s ultimate goal is to transform the remaining RCCs into viable banking entities, through further restructuring, consolidation, or another method of reform.New-type Rural Financial InstitutionsTo improve the quality of financial services and increase competition in rural areas, the CBRC changed market-entry requirements for rural banking in December 2006. The new policy promoted the development of new-type rural financial institutions, which are village and township banks, lending companies, and rural mutual credit cooperatives. To encourage both domestic and foreign firms to invest in these new type entities, the policy lowered minimum capital requirements, expanded the scope of permitted banking activities, authorized flexibility in corporate governance structures, and liberalized shareholder rules for new-type rural financial institutions.

Through end-June 2009, 118 new-type rural financial institutions had been established, attracting a variety of capital worth US$689 million, absorbing US$1.9 billion in deposits, and providing US$806 million in loans to rural households and US$1.2 billion to rural small and medium-sized enterprises. As of end-2008, foreign bank entities, including HSBC Bank, Citibank and Standard Chartered Bank had established seven new-type rural financial institutions in China.

ConclusionWith strong support from China’s top leaders, authorities have implemented a range of policies to promote increased access to banking services in rural and underserved areas. These policies have been somewhat successful in expanding the number and range of institutions serving these communities. However the Chinese government faces the ongoing and difficult task of balancing both social and commercial goals, namely to support a more inclusive banking sector and to continue the market-oriented reform process. 


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