The Agri-Agra Reform Credit Act of 2009 (Republic Act No. 10000) mandates all government and private banking institutions to allocate at least 25% of their total loanable funds for agriculture and agrarian reform beneficiaries (ARBs). Fifteen percent of the loanable funds must be allocated to the agriculture sector and the remaining 10% to ARBs.
The Agri Agra Law which was intended to increase financing to the agriculture through mandated credit has augmented the supply of credit to the sector. However, except for rural banks and cooperatives, overall compliance has been declining and has generally been below the mandatory lending requirement. Moreover, the share of alternative compliance is higher compared to direct compliance in the agriculture sector especially for UKBs. Instead of complying to the requirements, many UKBs opt to pay the penalties.
There are both supply and demand issues on agricultural financing that have to be addressed. Banks, particularly UKBs and thrift banks, do not have the expertise to assess and manage the risks associated with the agriculture sector. On the other hands, many farmers, fisherfolks and ARBs are not able to meet the eligibility and documentary requirements of banks.
With the impact of the COVID-19 pandemic and the effects of climate change becoming stronger and more severe, accessible and affordable financial services for the sector have become more urgent. To facilitate the flow of bank credit to the sector, policies must be geared towards facilitating access to much-needed capital. This note proposes the following: (i) broaden scope of alternative compliance; (ii) organize farm clusters; (iii) modernize the warehouse receipts law; (iv) increase guarantee funds; (v) strengthen agriculture insurance; and (vi) promote agriculture value chain financing.