Post on 11-Jan-2016
A New Rural A New Rural Finance Finance ModelModel
The World BankDecember 5, 2002
CCONTENTSONTENTS
IntroductionIntroduction
Theoretical FrameworkTheoretical Framework
BackgroundBackground
A New Rural Development ModelA New Rural Development Model
Banrural: What Went Wrong?Banrural: What Went Wrong?
Strategic AlternativesStrategic Alternatives
The New ModelThe New Model
Financiera RuralFinanciera Rural
What is Financiera Rural?What is Financiera Rural?
Results After Two Years of OperationsResults After Two Years of Operations
Lessons Learned and Challenges AheadLessons Learned and Challenges Ahead
IINTRODUCTIONNTRODUCTION
Basic premise: an efficient, well structured, regulated rural Basic premise: an efficient, well structured, regulated rural financial market facilitates economic growth and reduces financial market facilitates economic growth and reduces poverty.poverty.
T h e o r e t i c a l T h e o r e t i c a l F r a m e w o r kF r a m e w o r k
Government Intervention• Directed Credit• Subsidized i-rates• Debt Forgiveness• Restructurings
Evolution of Rural Credit as Public Policy…
Disappointing Results
Financial Systems Approach
Useful, but InsufficientMacroeconomic Reforms
Non Interest-Rate, Targeted Subsidies
Structural distortions & regional disparities remain in rural sector
Government as facilitator of market forces
Improvement in Producer & RFI Capabilities
IINTRODUCTIONNTRODUCTION
The History of The History of Mexico’s Rural Mexico’s Rural Credit BanksCredit Banks
1926 1975 2002 2003
First public bank focused First public bank focused on agricultural on agricultural development, development, Banco Banco Nacional de Crédito Nacional de Crédito Agrícola, S.A.Agrícola, S.A.
Rural Credit Bank Rural Credit Bank ((BanruralBanrural) to unify ) to unify existing agricultural and existing agricultural and rural state banks. Ceased rural state banks. Ceased operations in 2002.operations in 2002.
On December 26, 2002, On December 26, 2002, Congress passed a law Congress passed a law authorizing the creation of a authorizing the creation of a new development agency: new development agency: FINANCIERA RURAL (FR). FINANCIERA RURAL (FR).
July 1st July 1st FINANCIERA FINANCIERA RURALRURAL started started operations.operations.
A New Rural Finance ModelA New Rural Finance Model
BBANRURALANRURAL
Inefficient Operating Structure: system of Inefficient Operating Structure: system of 13 regional banks operating as 13 regional banks operating as
“independent” entities “independent” entities
Operating costs above operating incomeOperating costs above operating income
Distorting, subsidy-based first-tier Distorting, subsidy-based first-tier operationoperation
““Unlimited” access to public funds Unlimited” access to public funds allocated by Congressallocated by Congress
No risk-management strategies No risk-management strategies
Unsustainable non-performing loan ratioUnsustainable non-performing loan ratio
No strategic planningNo strategic planning
Political pressure and moral hazard; no Political pressure and moral hazard; no payment culture among customerspayment culture among customers
Inadequate supervision from authorities; Inadequate supervision from authorities; negative incentive negative incentive structure structure
What Went What Went Wrong?Wrong?
BANKRUPTCY
TTHE HE CCONTEXTONTEXT
““Rural” refers to localities of 50,000 or less inhabitants.Rural” refers to localities of 50,000 or less inhabitants.
61% of extremely poor families live in rural areas.*61% of extremely poor families live in rural areas.*
*Data as of 2004. World Bank estimates, using the ENIGH 2002.
Spacial Dispersion Covariance
Risk
SeasonalityEthnicity Issues
No Integrated Prod. Chains
No Access to Financial Svcs.
Poverty
Migration
RURAL SECTORCHARACTERISTICS
Mexico’s Rural Mexico’s Rural SectorSector
20022002
GO
VT.
BU
DG
ET C
ON
STR
AIN
TS
PRESENCE OF SUSTAINABLE FINANCIAL INSTITUTIONS
MA
RK
ET D
EV
ELO
PM
EN
T
POLITICAL CONTEXT
New Development Agency
Corporate Governance
MARKET FORCES ALONE WERE NOT ENOUGH TO ACHIEVE THE PUBLIC POLICY OBJECTIVE OF RURAL DEVELOPMENT
Strategic Strategic AlternativesAlternatives
Restructuring / Recapitalization
RREDIRECTING EDIRECTING SSTRATEGYTRATEGY
A New Rural A New Rural Development Development
ModelModel
NEW
RU
RA
L D
EV
ELO
PM
EN
T M
OD
EL
Government as a Facilitator
SustainableRural
FinancialSystem
Eff
icie
ncy+
Pro
fita
bilit
y+
Socia
l D
evelo
pm
en
t =
Su
ccess
Poverty Reduction Through Self-Sustainable Institutions
Rural Development Agency with “private bank” practices
Credit: Emphasis on service & “down-up” approach to product design
Subsidies: Temporary. Only directed to improving producer & RFI capabilities
No differentiated regulatory framework vs. private banks
What is Financiera Rural?What is Financiera Rural?
Development bank focused Development bank focused on agricultural activitieson agricultural activities
Funding through “unlimited” Funding through “unlimited” access to loans from the access to loans from the Federal GovernmentFederal Government
Operated as a subsity Operated as a subsity manager, with a high ratio manager, with a high ratio of non-performing loansof non-performing loans
Inefficient cost structure; Inefficient cost structure; operating costs over 100% operating costs over 100% of operating incomeof operating income
Defficient risk management Defficient risk management
New Development Agency New Development Agency focused on rural productive focused on rural productive projectsprojects
Legally banned from taking Legally banned from taking deposits, loans or market deposits, loans or market funding. Must maintain funding. Must maintain endowment value over time to endowment value over time to sustain operations sustain operations
Operates with credit processes Operates with credit processes that apply international best that apply international best practices. Has spread payment practices. Has spread payment culture among clients culture among clients
Efficient cost structure Efficient cost structure
Best risk management Best risk management practicespractices
BanruralBanrural Financiera RuralFinanciera Rural
CCOMPARATIVE OMPARATIVE AANALYSISNALYSIS
Financiera Rural Financiera Rural vs. Banruralvs. Banrural
* The Mexican Government received a USD 505 million IBRD loan for the creation of Financiera Rural.
* “Rural” refers to locations with up to 50,000 inhab.
MEX
ICA
N G
OV
ER
NM
EN
T
Structural Transformation of
Rural Credit
Creation of a Rural Financial System
FR
Supports any productive activity in the rural area
Supports the creation and consolidation of Rural Financial Institutions
Financial Resources
Training and Advisory Services
Technical Assistance
Agriculture
Forestry
Fishing
Tourism
Commerce Pro
du
cti
vit
yQ
uality
of
Lif
e
Mission and Mission and VisionVision
FFINANCIERA INANCIERA RRURALURAL
Grant credit to rural producers, directlyGrant credit to rural producers, directly[1] or organized in or organized in informal credit organizations, as well as rural financial informal credit organizations, as well as rural financial intermediaries, through:intermediaries, through:
Products, programs and services designed to suit the Products, programs and services designed to suit the specific specific needs of needs of the rural sector the rural sector
The use of commercial bank branches for the The use of commercial bank branches for the dispersion of dispersion of funds and the reception of paymentsfunds and the reception of payments
Promote the creation, development, strenthening and Promote the creation, development, strenthening and organization of Rural Financial Intermediaries (RFIs), organization of Rural Financial Intermediaries (RFIs), providing training, advisory and technical providing training, advisory and technical assistance servicesassistance services
Provide training, advisory services and technical assistance Provide training, advisory services and technical assistance to producers for the better use of creditto producers for the better use of credit
[1] Even thouth currently Financiera Rural operates in the first tier, as well as the second, in the long term it expects to serve only as a second-tier lending institution.
FFINANCIERA INANCIERA RRURALURAL
ObjectivesObjectives
• Six Regional Coordinating Areas• 96 Local Agencies (Branches)• Corporate Offices in Mexico City
FFINANCIERA INANCIERA RRURALURAL
Geographical Geographical DistributionDistribution
FFINANCIERA INANCIERA RRURALURAL
Decision-Making Decision-Making ProcessesProcesses
CREDIT COMMITTEE
RISK MGMT. COMMITTEE
OPERATIONS COMMITTEE
•Top Management•Independent Members•Central Bank•Ministry of Finance
12 Members of the Board, Incluiding the Ministries of Finance and 12 Members of the Board, Incluiding the Ministries of Finance and Agriculture, the Central Bank and several Agricultural Agriculture, the Central Bank and several Agricultural Organizations.Organizations.
Organizational Structure with 6 Operational Units, 6 Regional Organizational Structure with 6 Operational Units, 6 Regional Heads and an independent Risk Management Unit; all report to Heads and an independent Risk Management Unit; all report to the CEO.the CEO.
RURAL DEVELOPMENT AGENCY
Initial Endowment of USD 1.72 billion**
USD 1,534 Mill. Credit*
USD 79 Mill. pre-operating
expenses
USD 49 Mill.TechnicalAssistance
Supervised Rural Financial Intermediaries
Informal Rural Credit Institutions
Individual Rural Producers
Technical assistance for credit enhancement and
the creation of RFIs
Credit
*Of the initial USD 1.6 billion, USD 46 million could be used for the acquisition of Banrural assets (other than loans). ** Provided by Congress.
FFINANCIERA INANCIERA RRURALURAL
An Integral An Integral ModelModel
Rural Financial IntermediariesRural Financial Intermediaries
• Credit Unions (Uniones de Crédito)Credit Unions (Uniones de Crédito)
• Financial Cooperative Associations (Sociedades Financieras Financial Cooperative Associations (Sociedades Financieras Populares*).Populares*).
• Thrift Cooperatives (Sociedades Cooperativas de Ahorro y Préstamo*).Thrift Cooperatives (Sociedades Cooperativas de Ahorro y Préstamo*).
• Depository Warehouses Depository Warehouses (Almacenes Generales de Depósito).(Almacenes Generales de Depósito).
*Governed by the new law for popular savings and loans (Ley de Ahorro y Crédito Popular)
Other OrganizationsOther Organizations
• AgribusinessesAgribusinesses
• Non-regulated financial intermediariesNon-regulated financial intermediaries
• Microfinance organizationsMicrofinance organizations
• Local producer organizationsLocal producer organizations
FFINANCIERA INANCIERA RRURALURAL
Second-Tier Second-Tier Customer BaseCustomer Base
RISK MARGIN
OPERATING COST
INFLATION
Average: Cetes + 5 pp
Interest Rate
Components
FFINANCIERA INANCIERA RRURALURAL
Loan PricingLoan Pricing
Conception of the Project
CommercializationOf the Product
Before GrantingCredit
1. Business and Market Plans
FR C R E D I T
Specialized Technical Assistance and Training
CREDIT ACCOMPANIMENT
*Payment of 70% of the service cost, with an upper limit of USD 3,300 per item. Total support up to USD 19,600.
FFINANCIERA INANCIERA RRURALURAL
Credit Credit EnhancementEnhancement
Establishment
Sustainable Development
Individual Producers
Unsupervised Credit Organizations
Supervised Rural Financial
IntermediariesA Z
FR’s Credit and Technical Assistance to Develop Institutional Capabilities
FFINANCIERA INANCIERA RRURALURAL
The Road to The Road to IntermediationIntermediation
Main Achievements After Two Years of Main Achievements After Two Years of OperationsOperations
FFINANCIERA INANCIERA RRURALURAL
---Banrural-------
--------Financiera Rural---------
Source: Financiera Rural. p/Programmed
800
459
837
1,020
Avg. 2001-2002
2003 2004 2005p/
TTOTAL OTAL CCREDITREDIT
USD MillionUSD Million
Financiera Rural vs. Financiera Rural vs. BanruralBanrural
96
%
48.0
2.6
Banrural2002
FROct
2005
NON-PERFORMING NON-PERFORMING LOAN RATIOLOAN RATIO
-1.67
9.42
NET INTEREST NET INTEREST MARGINMARGIN
MMAIN AIN IINDICATORSNDICATORS
Banrural2002
FROct
2005
%
EFFICIENCY RATIO*EFFICIENCY RATIO*
623
45
%
Banrural2002
FROct
2005*Operating Costs / Operating Income (Margin + Commissions + TradingNet Income before training and technical assistance to RFIs and Repomo on non-loanable assets.
45
7.5
Banrural2002
FROct 2005
OPERATING COSTS / OPERATING COSTS / NET LOAN PORT.NET LOAN PORT.
%
206
96
0% 3.5
RETURN ON EQUITYRETURN ON EQUITY
FR 2004 FR 2005e
Financiera Rural vs. Financiera Rural vs. BanruralBanrural
PPROFITABILITYROFITABILITY
Banrural2002
Banrural June 2003
-32.8
-97.6
%
e/ Expected
2 0 0 4 - 2 0 0 52 0 0 4 - 2 0 0 5
96
Nu
mb
er
of
Cre
dit
s
150,485
163,878
2004 2005 OCT
Nr. OF CREDITSNr. OF CREDITS
8.9%
US
D M
illion
837
902
2004 2005 OCT
7.8%CREDIT AMOUNTCREDIT AMOUNT
CREDIT THROUGH CREDIT THROUGH RFIsRFIs
73
118
2004 2005 OCT
62%
US
D M
illion
CCREDIT REDIT EEVOLUTIONVOLUTION
CCREDITREDIT
2 0 0 4 - 2 0 0 52 0 0 4 - 2 0 0 5
96
LOAN LOAN PORTFOLIOPORTFOLIO
688947
2004 2005 OCT
US
D M
illion 37.6%
LOAN RECOVERIESLOAN RECOVERIES
460
740
2004 2005 OCT
60.9%
2.9%
2.6%
Financiera Rural’s credit has reached 15% of total financing to Financiera Rural’s credit has reached 15% of total financing to Mexico’s rural sector, using its own resources and applying its Mexico’s rural sector, using its own resources and applying its own interest rate policies.own interest rate policies.
Most credits have benefited producers with anual income below Most credits have benefited producers with anual income below 140,000 pesos (USD 13,084).140,000 pesos (USD 13,084).
Over 387,000 producers have benefited directly from loans that Over 387,000 producers have benefited directly from loans that average 62,000 pesos (USD 5,794).average 62,000 pesos (USD 5,794).
SSTRUCTURETRUCTURE
12
206
6 96
Banks Branches Regional Centers
Agencies
BANRURAL FINANCIERA RURAL
OFFICESOFFICES
Nu
mb
er
of
Em
plo
yees
3,459
1,061
BANRURAL
FINANCIERA RURAL
69%
PERSONNELPERSONNEL
US
D M
illion
293
79
BANRURAL
2002
FINANCIERA RURAL2005
OPERATING COSTSOPERATING COSTS
73%
Comparative Comparative EfficiencyEfficiency
Nr.
Of
Cou
rses
TRAINING COURSESTRAINING COURSES
368
1,242 1,371
2003 2004 2005 OCT
13,650
46,111 46,481
N
r. O
f P
rod
ucers
2003 2004 2005 OCT
TRAINED PRODUCERSTRAINED PRODUCERS
TTRAININGRAINING
Specialized Specialized Technical Technical
AssistanceAssistance
34183
339
2003 2004 2005 OCT
CONFERENCES AND SEMINARSCONFERENCES AND SEMINARS
Nr.
Of
Pro
du
cers
PARTICIPATING PARTICIPATING PRODUCERSPRODUCERS
95,881
2003 2004 2005
10,28339,395
Nr.
Of
Con
fere
nces
Nr.
of
Insti
tuti
on
s
SUPPORTED ENTITIES IN SUPPORTED ENTITIES IN TRANSITION TO BECOMING TRANSITION TO BECOMING
FORMAL RFIsFORMAL RFIs
47
138
2004 2005 OCT
53
00
N
r. O
f S
up
port
s
2004 2005 OCT
NUMBER OF “SUPPORTS” NUMBER OF “SUPPORTS” GRANTEDGRANTED
151
TTRAININGRAINING
Creating a Rural Creating a Rural Financial SystemFinancial System
Lessons Learned Lessons Learned
and Challenges Aheadand Challenges Ahead
Macroeconomic reforms, although necessary, have not been Macroeconomic reforms, although necessary, have not been enough to correct existing disparities and market enough to correct existing disparities and market imperfections in rural areas.imperfections in rural areas.
A new approach to rural development is based on an A new approach to rural development is based on an “integral” vision that goes to the micro-level using a “down-“integral” vision that goes to the micro-level using a “down-up” approach to ensure the success of entire production up” approach to ensure the success of entire production chains.chains.
Unsuccessful past Government experiences which targeted Unsuccessful past Government experiences which targeted rural credit development through directed, subsidized credit rural credit development through directed, subsidized credit are being replaced with a new model, where:are being replaced with a new model, where:
The Government acts only as a facilitator for market The Government acts only as a facilitator for market forces to operate efficiently.forces to operate efficiently.
Subsidies are used only to build producer capabilities Subsidies are used only to build producer capabilities and to support the creation of financial intermediaries.and to support the creation of financial intermediaries.
Government development institutions have to be Government development institutions have to be profitable in order to ultimately reduce poverty.profitable in order to ultimately reduce poverty.
A New Rural A New Rural Development Development
ModelModel
LLESSONS ESSONS LLEARNEDEARNED
Continue to strengthen the rural financial system in order to Continue to strengthen the rural financial system in order to gradually pull out of the first-tier.gradually pull out of the first-tier.
Maintain the value of FR’s endowment over time, through self-Maintain the value of FR’s endowment over time, through self-sufficient operations. sufficient operations.
Tailor FR’s programs and products to a dynamic rural sector. Tailor FR’s programs and products to a dynamic rural sector.
Differentiate interest rates based on tier and risk level of Differentiate interest rates based on tier and risk level of clients.clients.Diversify client base into non-agricultural activities. Diversify client base into non-agricultural activities.
Improve human resource management.Improve human resource management.
Foster the relationship and coordination with other Foster the relationship and coordination with other government entities and international institutions. government entities and international institutions.
Find alternative liquidity sources (loan securitization).Find alternative liquidity sources (loan securitization).
CCHALLENGES HALLENGES AAHEADHEAD
Sustainable Sustainable Growth of Growth of
Financiera RuralFinanciera Rural
A New Rural Finance Model
The World BankDecember 5, 2002