Groupe de la Banque mondiale · Working Paper (Numbered Series)

Non-interest costs of lending and borrowing agricultural short-term credit (a field investigation in two case-study areas in Mexico)

1 novembre 1980 Mexique Banque mondiale

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SDF65 DO:!"ESTIC Fnk';CE STUDIES :--lO. 65 NON-INTEREST COSTS OF LE~DI~G fu1D BORROWING' AGRICULTURAL SHORT-TERM CREDIT (A FIELD INVESTIGATIO~~ IN THO CASE-STUDY AREAS IN MEXICO) By THYRA A. RILEY 1.1e views presented in this paper are solely those of the authoT and do not neces<)arily reflect the official opinions of the World Bank or its affiliates. .. November 1980 Public a,ld P:-iva~e 7i::lance Division Development ECC;10';;lics Department Development Policy Staff TABLE OF CONT"E..'1TS Summary Part One- Ba.c:<ground r. The Study li, The Distribution C£ Credit Services: A :'iacro Analysis 17 A. Di.stributiOll of Credit Services of Banco :'iacional De Credito Rural (BNCRl 20 3. Dist:'i'bution of Credit Services Supported by Fideicomisos I::1.stituidos En Relacion Con La Agricultura (FIRA) Through Private Banks Zg C. Distribution of Noninstit1..\tiona.t Credit Sel."Vic!!s • 3-:1: Part Two-The P·.oductive Environment and the Appropriateness of the Credit System to That Env-:ronme!lt m. A Generalized. Macroanalysis of the P:.-oductive Environment in the Agricultural Sector of Me."tico • 39 rv. Appropriateness of the E:::.sting Credit System t.o the n-oductive Environment 43 A. Charact!...dstics of t!le Existing Credit System 3. Wed.kness.es of tl::,e Credit Systec . Par~ Th..ree-A Generalized Framework- The Costs of Lending and 3or:'c,wl..."lg v. Costs cf Lending and t~e Supply 0: C!'edit-....A Generalized F... acework A. The Cost 0 f Funds 49 3. The Costs of _-1.dministradc::n 50 C. !..csses D1.te to Defaul; 52 D. ~isk Cla.sse s . 53 _. Credit ~at:'oning (Con tinuedJ '1'1. The Demr'c:d for Credit <"nd the Costs Jf Bon-o wing- A Generaliz.;:.i Framework 57 A. Productive Potential and Ini.tial Sndowment 57 B. Costs of Bon-owing . 64 Part Four-Transaction Costs for Ler.de!"S and Bon-owe!"3 The Evidence from the Field Study VII. Programs to Reduce Costs of Lendi:u~ to Small Farmers Fid.~icomisos Instituido3 En R~lacion Con La Agricultura (r"'1RA} • 68 .\. Effectiv~uess of FmA .-\.r:tivities to Incease the Supply of l'nstitutional Credit to P:-oductores De Bajc~ l'ngresos (PBI) . 7? B. T!'ansaction Costs for Commercial BaJu<;'s in Lending to Lo"" -Income Farme:-s (PBI) • 84 vw.. Banco Naciona~ de Grf'!dito Rural (BNeR) --The Governmen~-3upport~d Ag7icultural Credit System. IX. Transaction Costs f..)r Informal L.;nd~!'S 107 x. Borrower Transaction Costs and the D""mand for Production Credit 113 XL Borrower Transaction Costs--A Quantification wit!! Respect to Free Cash Flow 123 Bibliography 134 Ag:dcultural ',?roduction b ~Iexir.:CI has, :rver the years, shown a severe a.:ld ~'egular decline in its rate of gro",7th. ~evert=eless, sooe regions have e:qlerienc~ :.ncre?ses. The ~()rtbwest, :.l'ort.!:l Central, a:.nd Pacific ~or6 r:.:gk'Ils showed growtb ':ates of 35.9 Fercent, 2.0.4 percent, imci 2.0.4 percent ;;esp~ctlvely b the period 196.5 to 1976, even though the averagp.: rate oi g:owth L"l Mexican agt'iC".lltul'e as a whole in t~.t p,=riod ;t;'as crily Zo.l percent. The myriad of institutions established to solve or ameliorate the problems of the agriC"..tltura), sp.<.:tcr include ,3. set of public credit institutions t!-lat have evolved into the Banco Nacional de C:edit ~ural (BNCR), and a set of t..-ust fu:r:.ds establis1ed in the Bank of ~Iexico to offer incentives anc. subsidie!:: to encourage private bank lending in ue agric.l.lt'..ll"al sector--Fundc Institudos en Relacion con ;a Agricultura (FmA) • . A regic"Ll-b:'-region analysis of their c::edit services reveals an inter esting pattern of distribution. BNCR and FIRA credit activi.ty has bee:l .JII ::eavily co::;r:centr:lted i.::::. the Nort!1west, Nort!1 Cent::'ai, cnd Northeast :.-egicns--tl::st :s, b t.~ose areas which have extlerienced the highest rates 0 f • of 3NCR c:·edit. Recovery rates tor 3NC:a credit avp.:."age as ;,igh J.S 92 percent in the )l'oruwest :egion and as low as 41 percent in ~he ?e."'1insula and other areas of low production. T:J.e conclusion dl'<!wu from t!lis analysis, and t:aced cut at the mic::-o level, is t!1a t gene!'Dus c:-ed.it assistance produces goed :esult.;: (in terms bot!:! of production and of :ecovery) in areas -;vhere the productiv~ ini:-astructuxe is favorable, especially where ~igation facilities a.:e good and where there IS access to commercial outlets a::ld oppor-::unit:es. necessary infl'astr-lctuIe is not yet in place credit dces :lot ccnt!'ibute to imIlrQ'1ed productivity: and recovery rates are ~ow. In Chapter 'Ill \ve undertak.e to ::1as51fy ~he ?roduC"~:ve envi:::-cn::nent i."'1 ter::l'.s of farmers' potentia.:. to absorb cedit produc':ively and repay it. 1':"115 :;p.llows us to foc..ls our analysis on :::,ow ·.vell the present c:e<iit and subsidy "syste::u is ada!Jted to the !JrQduc~ive environment L"'1 ter:ns of encou::agbg , . d . ., e:ow::1 3..--: !i1:'OCluctlvlty. T:1e cl.assi::caticn also ::.elps us to answer :he question: 'llbat ~~d ;;....' rl level of subsidy would allo':": us t:> design a c:,edit system t:"at would :'aV't-;; '" . pti:nal eifeet on produc::t.;.C:l.? In Cbaptel." II! '.ve have classified far:ners m L~ree categories: 1. Large J.!1d ::nedium commercially viabi.e far=ts with 3.ccess to subsidized private bank credit or oificial bank credit. Their level of profitability L'i sue:" that they could repay c!'edit at the market rate of bterest and offer aci,e1:J.uate collateral to b.:: 0: ::2.inimal risk to the ban!<''t. ' For t:"e :::lost part. t:::ese farms are already producing optimally a."1d c~uld continue to do so without access to suD!Jidized c:redit. Z. P!".:,fitable smw far::lers with limited access to commercial credit. The limitaticns on tlleir access are la:gely the product of market distortions sucll as information costs for the banks and mterest rate ceil1.-:gs l:..1.at lead to c:redit rationing. They need policies t::'at will stimu!a~e ~stit':.1tions to offer l~em c:::edit. T::J.e farms often have untapped econon:;ic 'E:lOtential that could be developed with minimal teclmical assistance in . addition to Gedit. 3. Fa.rmers whose C..L.-rent enterprises are not profita!Jle, :oakmg ~b.em t :=eligible fo:" . :=0'0 -'foduction ~ c=~it under sta."'!da.rd ba1!k appraisal ~ ~racti~es. :::-:ey possess, ::e'lert!leless, t.~e ~e(:essa.ry :ixed produ~ti'Je mputs 3 L.J. te!"!.!1S of quillt:, of land and size of £~::J a.-;d apiJropriate climatic conditicr.s, whle!!, if coobined ·.vith acc:::ss to ::.;;proved seeds~ !e!'tili::er the:;e tax ms to ':lecome C10l'!;! productive. 4:. Farmers who are not abJe to make a ~n"o fit and '.vho need btensive special prograItlS of tec!::lical d.SS1StanCe and help i:::l developing suppor .:.. ... fra.:,tructure sucb. as erosion con t:-04 adequate roads to aid ... g L commerciali::aticn, etc. T.c.eir development neeas d.~'..)::~' '1. lop$!-term nattU'e. Credit should be considered a supplement to ~hQ$e other ?rograms. ::1. Farmer.! '.vho are not able to ::nake a profit and have litHe potential for development because of tb.e severelv negative c:::nst..1"3.lr.ts imposed by t::eir ~1roductive env'ironoent--e.g., ext:'eme ...dis::l~ mini.fu.. e:-.:t:emely peor soil due to severe e!'Osion, etc. Their cash needs should :,e ?rov~ded t'::"-ough mcome ~'1d subsistence :nai:::ltenance assistance. From oy observations, t!le e:dst:ng credit syste m has not ta..i<en .\ suffic.:ent!:T i.::l.to account these diife:-ent classes of fU'cers. 7:'!is has led to! (1) a poor differentiation among the sel""1i.ces c:edit bstitutions perform and ... g c:::edit tne classes of ::armers they serve; (2) confusion ;:,etween e:-.::er:di. and givi::g of de'7e:onment •• goals and ~,o ?!an to phase out subsidj,,)s :0: certab classes of :ar:ners who are able to ?ay :narket :ates :or c:'edit a~d as :;a.n..":.s are willi."lg to oi:e:' c::edit to ce:taik low-dsk lligh-profit :arme::s, ·.viuout t!1e subsidy i::cE::l.t:ve; a::.d (-4:) :ncomplete :es~arch i.."lto productive tec!::..:liques tllat eQuId be adapted to the conditions :aced by far:n~rs, especially in :-ainied agriC'J.l ture. L.ow productivity ~d !ow income limit both the demand for a:::d the supply of C:!:'ed.i t • .m Chapters 'If and VI -:ve look at the theoretical i:amework for the deter:nination of supply and demand for crodrl. On the supply :i:u", <J,) emphasi::e tb.at the cost of f'.lIlcis, costs of adntinist:-~t:ion {U:i.dud~::-,g. ?dmini strar.ive costs tllat result in :!sk :-eduction), ,-"'. :md t::'e cost of losses due to default lead Q. profit-oriented c:::edit institution to define an optimal set of risk classes to \vniQ it 'lrm offer credit at the ceiJ.i:lg :-ate of interest. ?roW: ma."dci::::ation requires that the -:eilin.g rate of interest be equal to or greater tbar. the marginal cost. Ii it is r:.at, the ban.1e;. reduces the size of t!le loan granted to t!1e more cost!y client until marginal cost is equal to the ceiling rate of i:lterest. T.::lls :ramework seems to :It the patter::: of cl"edit ::oationing en the part of ?rbate ":lanks in Mexico. In Chapters VII, VIII, and IX we qu;mtif7_speci!ic costs :0 banks of e>ffering cedit to sr::lall farce::'s and cOI:lpare&ose costs to t.~e subsid.ies. - In general, 7le find tllat for private banks, subsirt",-efforts btended ~o lead to g-:eatly inc::,eased le~cibg .. :0 s=:.all farmers ::ave '::::een i.."lacie'Juate and often 5 inappropriately applied--par'tly as a result of faulty p?l'Jgra:n planning and partly because of efforts by ?anks to minimize costs ';vith a consequent rationing of c:::edit. The specific conclusion::; reached are as follows: 1. Reimbu."'Sement of Erivate banks for the costs of t!!chnical assistance. Banks are re:':ll?ursed indi:::ec'tly, in terms c;f a percentage (3 :0 6 pert: en t) of their active low-mcome farmer (FBI) portfolio,. rather than directly fer the actual costs of maintaining the e::ttra staff. Consequently, to keep their costs of ~required" technical assist"ln<::::t'."low, bar:k:: ':~nd ') sel"Vice the larger and less risky leans that can be handle'a' ';;If a miniJJlal teclmical sta:! rather than smaller individual loans that entail greater risk and require more supervision. T::J.is, of course, runs counter to tbe intent of the PBI progrz.m. 2. The guarantee of credit whJ.U farmer collaterz.l is inadequate to secare the bank in C2.se of defaults. The R'l1arantees do not have as important a subsidy effect as they might because of the costs involved in administering them. We detail the costs for individual banks interviewed, as well as fer banks in generaL Because of the problems involved in liquidati..'g guaran ':ees, ban..4;.s have tended ;:lot to expand credit to more :'1sky c:edit subjects• 3. . T-"le ci.isccunt mechanism. T:lis 'vas :ntend\d ':0 offe'!' a source of funds for e:tpandi..,g PSI c:::-eciit activities on the part of private ba.."lks, but it ha') led instead to the predominant use of ban.lts' own resourCE':3 in PBI production c:::,eciit operations. This behavior- 1S explained by the :ac: that t..lte use of their O\vn .'csources enables banks to concentrate the~ tecllnic:ll1 identificatio~ and evaluation ac~ivities Ivithln a given clientE'le group so as to fulfill the::- statutory obligation to place 2.4 percent of their total deposits in lending activii:y witl::. PBls. After fulfilJ.:.ng this ob~:ga tion, they do not have to continue to eX!land their lending efforts, as would be the case if they were to disco1.\Ilt loans--which would have the effect of constantly red.ucing their fulfillment of the obligation. Using bank funds also allov;rs the banks to maximize their profit margins, as will be demonst:::-ated. C05ts are also pre!2ented for Ba.nl"1ual. We crmclude, however, that 3anr.ll'al operates more as an institution which channels social subsidies than as a c:::'edit institution, justIfying high levels of cost for staff and bad loans. A poor delineation of its social and development objectives has contributed to its weakness as an agent for promo ting de;velopment in the agricultural . sector. .,. ~ .Utbough it was impossible tu quantify ~!'ansact:on c~sts for informal :er::iers since they 'nere un?1ijting to ..aLl.;. to met their t!'a."lsaction costs in lending to s;nail farmers are clearly insignificant. T::l.e ::loneylende:: :"a3 a - I strong co~t advantage at low volumes because he is able to n~a..:':l) aliminate the cc~ts of adoinistration and tl1C :isk of deiault. HiGh interest rates in the informal mark.et appear to result from the ;nelastic demand of borrowers rather than from transaction ~osts. Inelastic demand exists on t!le part of small-farmer clients because they either have ';"10 cost-eHective altenative credit source or nave no alternative at all because of their past cedit rating with the official bank. Small-farmer demand for credit is il :l1:'1::::ti.c.:D... ni ·,(H ilh.ral farm endowment ar.i productive potential, including t.."ie degree of uncertainty tb.e farmer faces and his attitude toward becll'ing :.-i,sk. and (2.) the farmer's <!ccess to alteoative sources of credit and his costs of borrowing ;:.ba1f e and beyond the rate of interest he must pay. The concept of initial endowment sheds light on farmer demand for credit beca1.:..~e it indicates the far::Der's ability to generate savings in ternally, thereby aeterm:r.ing his demand for exZernal sources of capi t3.1--i.e., c:redit. Vlhe.n we ~roj€'ct productive potential, we can evaluate the farmer's potential for growth and ?rt::ductive investment through tile use oi .:redit. L.,itial endowment also c.eter:nines tlle smail farcer's attitude toward bearing risk, and tllerefore his demand for c=edit. It was my experience t!!d.t this ?las an important factor in a far:ner's decision to demand 0= ;:,.("t to demand credIt. T:J.e more u::;.certain the expected vutC("lme of productive activity, and/or the ::nore risk-averse the farmer, the less likely he would be to demand credit {except from friends} in anything less than an extreme E\met-genCj. Tn other woro...s, tlle more valuable 3. f....r:ner·s ability to get a loan from a given source, the less likely he would be to :.-isk :"is "credit rating. It Of cou.""Se, t."lis risk 15 ::ouch greater for a subsu:Hence i':U'mer, and facilities. Chapter X, which deals with costs of bono wing, includes a long qualitative disc:.ssion of the way -:erta:';l kinds of costs cor!"elate \'lith certain hr:ner characteristics, both .for private banks and :01" the BhC.~. Transaction costs for a typical :ar:ner on rainfed land receiving credit for the f5rst ti:ne are quantified and broken into two categori~s: (1) non- quantifiable psychological b,alTiers to borrowing suo as the far:ner's percep tion of tl1e accessibility ot pr!vate bank credit or his perception of the u..,fainess_cI Cl"Op i:lsurance t'equirements, etc., a"ld (2) direct costs to the -III far:ner sueb as the costs of cOr:"uption and the cost'S of getting to the ba.'"l.i:-: to transacf.,a loan. '.Vhile t~e first category of transaction costs m~y reduc~ the demand for c =d.it oy some farmers to zero, the CQS':S in the second category have an effect depending on the productive and cash flow characteristics of the farm ~.nterprise. For example, a :armer might be able to providp. for the family subsistence and to repay the principal and inte-rest of a !oan of a ce:;:otain size, but be unable to aiford the same size loan once fi"'ted tr:m.saction costs are added. This is demonstrated in a detailed examination of the Casll flow of a typical Me:dcan t:l:l.ize producer. have three consequences: 1. They can ::oa..r.:e subsidized institutional c::.'edit nearly as expensive or more exp<mSi7e than cedit from an informal source. 2. ney make credit so costly as to btl b:accessible even for farmersnho mal" have the pote..Tltial and the desir'~ to benefit h-om tecb...."lological innovations. . 3. They ov~rburden :he debt capacit7 ::If t::'e farmer to su~h an e:o:.tent that repayment oecoilles more ciiific..llt, especially in a '. P001'':C::.'OP year. 10 PART I BACKGROUND - - ! - - -

... It 11 L THE S11JDY From Au.gu.s~ 12. through N'.Jvember 1, 19i9, I conducted a field ir.vestigation in Mexico under the JPO":lsorship of the Public.: and Pri'1atQ Finance Division of the Development Economics Department and the Latin American <.:cd Caribbean Projects Divi!:.ion. The purpose of the investigation wa.s to evaluate the extent to which formal and informal financial institu- Hons \vere meeting the cedit requirements of small. loIT"mCOilrE: r<il'~:e~~ •. I interviewed bank officials in charge of agricultural development in both private and public finandal ir..stitutions, as well as about 50 small farmers belonging to the following categories: (1) Those who have access to cedit f.:om any source and who can produce efficiently (i.e., with inputs and macilinery to optimize output) ?lithout credit aseistance; (2) Thos-e ?lho need credit to produce efficiently and who get ("!'edit from financial institutions eithe~ public or ?I'ivate; - (3) Those ?lho need c:-edit and bol":'oW :10m :lolfi.""l:!ititutional sources: . - , " (4) Those who ::leed c:-edit and ~ave no access to c!'edit; 12 (5) Those wr"o do not need credit because of their poor productive conditions, and have access to c:.-.gdit. The purpose of t;"e project was to examine to what extent small farmers are able to obtain production credit. The broad questions for which answers were sought were: What is the production credit coverage for small farmers, and what determi:t::- '! both the intensity (amount of credit) and the extent (among various classes of farmers) of the present coverage? How can production credit facilities be expanded;· and -;qha: are. tl!::: preseJ.:l.t constraints? To arrive at testable trends and hypotheses the following .relationships ?tel''!! examined: Relationship between farm/loanee characteristics and the access to (supplv) , use of (demand). and source of credit. The objective was to uncover implicit patterns of c:::-edit rationing ~ the part of financial institutions and also to determine what farm/loanee characteristics are .. associated with access to, use oi, and source of c:'ecHt. The followbg variables were examined: age, sex, educatior., literacy, other :lonagiC'..u tliral occupations of the head of the household, ?ast c:::cp e~perience (yields, natu:::-al disasters), siz~ of land holdings, tenure conditicns,!proposed use of loan, :ar::o assets, farm cash flow, and net debt position of the far::o/loa::ee. 7hc field investigation allowed me to observe the significance of each in deter!llioing who has access to c'!'edit and from what source, and "nho desires to '.!Se credit from the sources to ~blCb. he has access. As the project is to u.se a transaction c:ost framework in analyzing the deter!llinants of supply of and demand for credit by small farmers, t.i.e following cost relationships were examined: and costs of default correlate with farm/loanee c!laracteristics? !nan institutional framework with interest rate ceilings, sectoral reserve requi::e ments, subsidies of bank sertices for certain l.)an clients, and restl"ictions on the passing through of unsubsidized charges tl) farmers, how ~s the pattern of bank lending to smail farmers affected? Relationship between farm/loanee characteristics and costs of bar- rowing. How do the size of non-interest C')S"CS as a percent of total .. borrowing costs and as a perc~nt of the loan amonnt cOI'l'elate with farm/loanee characteristics? Non-j;nterest borrow:ng cost.s that were ' observed -.vere divided into two categories: .. costs that ::::ust be paid and c:)sts associated with incc:lv~!!ient - 4'an te!'ms t!lat !'equired ::0 d.irect payment. The first category i=.cluded the cost oE co:::npulsory crep inSUl"' 14 ance, travel CO!3ts, and the cost of bribes or cOI'l'uption. The second category included the cost of untimely loans, the opportunity costs of time lost during the loan negotiation period, the duration of loa.."lS, the infle:d bility of repayment sc.bedules and means of payment, and the costs of acquiring information as to how to obtain a loan. Also evaluated as to their importance were the positive values associated with free tecb.nical assis tance and access to subsidized inputs that came \vith a loan. While tbe first set of transaction costs increased. the price of the loan and reduced t..~e demand for it, the second category did not necessarily lncred:::ic-tbecost dra loan directly, but raCler introduced a Ps;Tchological'i:ianit!'~·, ,\'l,some farme1."S.' minds ?lhich, though unquantifiable-; was real in that it reduced the demand for loans. Tne field work was conducted. in two case study areas. The first was Y1orelia, Mk:"oacan, an area characterized in :::cajor part by subsistence and noncommercial farm/househo!d units, and by rainfall patterns, soil quality, topography, and average plot sizes that :::cake it an economically marginal agriC'.llt~al region. :lle second was Celaya, Guanajuato, an.. overzll more established productive agricultural region, characterized by a good deal of commercial farmmg tllat supplies cajor vegetable processing a."ld packing industries in t!:e are-a. T."le contrastiI:g regions 'Rere c.~osen to allow me to observe wheL~er regions with greater pre¥nt and future income potential attracted a greater va:iety of financial institutions (and why), deS?ite government efforts to even out access ta c:oedit far tmall farme!"$ through out the count!"y. I concentrated my int~rviews in both areas '"vith farm~J:'S in the rainfed dist::ticts established by the Department of Agric.J.lture. ~,1any of these f<U'lIlers, however, did have ,lccess to irrigation facilities as a :-esult of their own pt'ivate bvestmt"nt, having tapped excess water from a nearby irriga tion district (watE:r to which they had access on an intermittent, noncon trolled, and no-charge basis) or as a result of public investm.:m" ~ ,:i~U irrig<l.tian warks by the Department of • .{griculture 1..ICci"d::.' Unidades de Riego (UDERALJ, A comparison wa:i made between those with irrigation facilities Ci.nd those without to discover t.1.e importance of irrigatian as a determinant of demand fOl' and access to c!"edit. The :lpproacil in t.!:lis report is ~descrlptiven and "exploratory" rather e::.an a more focused, rigorous testing of causal hypotheses. There appears to be a great deal of interest on the part of the two sponsoring Divi sions--t..1.e Public and Private Financ~ Division of the ,Development Eco !lomics Depart::nent and the Latin Americal"l and Caribbean Projects Di-.,i'" sion--in a comprehen!lVe assessment of cost l'elatianships between various " credit bstitutioml ana smallholder low-income far::ners. This ::-eport 0 ffers - extensive ~vidence Ol';;he above-iesc:-ibed relationships. 16 II. T:.-lE DISTRmUTION OF CREDIT SERv"ICES: A :N!ACRO .4.....'l.U YSlS Tne czedit system in Mexico has developed to support other govern ment efforts in the accomplishment of two principaJ objectives: (1) improvement of overall growth and development of th~ agricultl.1.ral sector to meet dome Jtic food needs and production for export; (2) improvement of income and quality of life in the agriC'..lltural sector. cCllcems are as follows: --From 1945 to 1955 agriculture eX?erienced a 6 percent average annual increase in oUqlut; _..In 1955-1965, average growth diminished to -t.Z percent aDnually, but remained above the population rate of growth of those years; --In 1965-1975, growth fell to 2.1 percent, below tlle population rate .. of growth duri~ that period. '! .. - !et I Ii T.1e share of agricultural productioI:l in the gross national p~'Oduct dec:::eased f:rom 16 percent in 1968 to 9 percent in 1976; agric'..llt'.lral e~orts dec:eased £rom 65 percent of total exports in 1960 to 23 percent in 1976. If one separates crop from livestock ?roductio~ the growth situation was even :!lore bleak. Crop production growth dropped £rom a.."l annual average of 7.3 percent in 1945-1965 co less than 1 percent in 1965-1975. Basic foedstuff c:rcP$ showed significant declines in relation to agricultural sector mbsis tence food needs. Growth in corn production diminished. from an a:nnual average of 10.4 percent in 1960-1965 to -0.3 perce:lt in 196':;.-,l-nGjgrQwi::.h" in bean production dur'ing t.~e same periods declined from an average of.10~4 percent to 0.9 percent and wheat from 12.5 percent to 4.5 percent. 11 A region-oy-region analysis i:ldicates that the lion's share of the stagnation in agricultural production oCC'lll':'ed in t!Je state of Tamaulipas and in the Gulf l"egion where t."le rate of growth of production per hectare during 1965 to 1976 declined an average of 29.2 percent and 8.7 percent, respectively. The regions that showed outstanding growt."'1 in production per hectare were t2le Northwest, Noru Central, and Pacific North, which respectively showed rates' of growth of 35.9 percent, ZO.4 percent, and ZO.4 perce.."lt over t.~e 1965 to 1976 period. The figures are taken from a docuI:lent presented to t2le World Ba..'"l.1.c tafin American and Caribbean Agric.J.1tural Projects Divi.sion propos I i::.-? a . J. t: lal ?la.."l 0 f Sl.'PPort for the Develop::nent 0 i aai.'lfed Agrt c, , ~. 18 Among a myriad of institutions established to solve or subsidize a\vay t!:le growth and inccoe problems in t!:e agriC".lltural sector we:'!! a set of public credit !::lstitutions that later evolved into the Banco ~acional de Credito Rural (BNC:a) and a set of t....ust funds, Fandos bstituidos en Relacion con la Agricultura (F1.I<.A) , established in the Bank of Mexico to oifa incentives and subsidies that would encourage the commercial ban.l.ts to e~and their credit and technical services to agriculture. Along wiCl the general effort to promote agricultural credit activities on t.'1e part of private banks, F1RA began an effort to target bank activity on Productores de Bajos Ingresos (PBD -~mall, low-income producl!l:'~, especially "ejida \ tarios" aI:.d private holders ?1it!l "ejHatario characteristics," who without . e.""ttensive subsidies ';Q'ould not be considered appropriate credit subj~'.::·;!'I. L1.e theory behi:c.d the establishIl'lent of these institutions ';Q'as that inadequate saving in the agricultural sector, together with ignorance of impr'.?ved productive techniques, acted as constraints on the adoption of :lew tech nclogy such as improved seeds, fertiliZer, insecticides, rneci1anization, etc. Alleviation of the sar.ngs ccnstraint by Claking capital available L1.rough subsidized credit, combined ~with technical assistance to farmers, would improve productivity and enable the aCC".lmulation of the capital necessary to maintain growth. I 10 A. DISTRIBUTION Of' CREDIT SERviCES OF BAZ'rco NACIONAL DE CREDITO RUR.-\L I'BNCR) A survey of credit mark.et coverage on the part of BanrJ..l'al sb.ows t!lat its activity included over Z6.9 percent of harvested land area in 1976 and 2.4.6 percent in 1977 (see Table '0. A high volume of Ba.:c..ru.ral's credit activity is concentrated in :oegiolU having an above-average development of ~ig::\"tjcm.., f,acilities 1 ann .... t::::::...~.; ~.i::.~ value of agTicultural production is far. above the national avera".:e Table 11). Specifically, in the agriC"..llv.ual years of 1976 and 1977, it financed aD. average of 38.2 percent and 35.32. percent of b:arvested land :n the North';vest, Nort~ Central North, Northeast, and Padfic North. (T'ne::;e regions correspond to Northwest, North Central, and Northeast in Table n.) In these regions an average of 75.7 percent, 47.5 percent, and 58.5 percent of all harvested cropland is irrigated as cocpared to a national average of 30.5 percent. The average value of production per hectare of harvested c:op land in those three regions during 1976 is respectively 515,982. pesos, , .. $9,2.88 pesos and S6,317 pesos as compared ~o t!le :lational average of 57,980 pesos (see Table l! and Table ill). 20 :'A3LE Ilal. SIS7~L~ BANCO NACIDNAL OE CR.EDITO RURAL (Cl.usificuion of b.ar7<nted land area !I and San.runl c~it ?uticipatiot'l duzoill.P the agricuJ. tt:ralYfiUofl976) . Thousands of liec!ares Sance. '! Supuficiel Tota.! Rainied !:rigat-.d Nortbw~t n.arruted Land. AreA al 317 .0 Z7.0 ,:;11.0 Accmited Land. a.:rea-~ 397.6 ,,7.0 s/ 370.6 Puticipation (%J -.8.1 100.0 46.9 North Ha.rvuted Land. aHa a.1 1,103.0 767.0 336.0 Accmitad. Land. uea-):,1 ~30.1 36,.0 6S .1 P 'rticrpation (}'OJ 39.0 47., ,0.3 Nortl1 Centra.\ n.arr"~ed J.;t.Zld Ul!!a AI 1,'Z.~.0 857.0 367.0 Accredited 1uo.d Ul!!a-~ 350.5 109.7 2,40.8 Puticip~ti~ (%J ZS.6 1Z.3 6:').6 Nertheut Huve5ted Land. un aJ l,61Z..0 1,04-0.0 572.0 Acc:l:"«iited land. Ul!!a-!1/ "91.3 301.3 190.0 P:ll'ticip~tion (%J 30.5 2,9.0 33., Pacific NOl'tI1 Huvested land Ul!!a aJ l,OU .0 378.0 634.0 Acc:l:"«iited l.a..i:Id ue"-)y ....8.0 197.3 Z50.7 Puticipation (%1 ..... 3 5Z..Z. 3~·.; West Ha.rvested Land. uea aJ 1,641.0 l,Z76.0 363.0 .';cc..-edited WId Ul!!11-.2/ "S7.4 "Z.0.1 37.1 ?:u'ricipation W.l IS.7 17. Z. 10., Central. iiar'l'H"ed Land. uea aJ l.S75.0 934.0 641.0 Acc~itad. land area-)y 313 .3 Z41.9 81.-2 Puticipation (;:'oj ,0.5 z.s.9 12.7 Pacific South r...a.l:'Vt1!S"ted l.a:!ld Utl'a aJ 1,·U8.0 1,096.0 nz.o Acaedited WId area-~ 388.9 66.9 nz..o s./ Puticipatton (%) ,1.-' 6.1 100.0 C411tl'al Soutl1 Ha.n'~st ed Land. Ul!!a aJ 1,358.0 1,152..0 206.0 Accredited land. a.n1ll1l "Z6.S 209.6 11., Puticipatian (%) 16.7 18.Z. 3.3 Gu.l! r.arvi!5ted land area al 1,3"5.0 1,307.0 38.0 .-I.ce:-~ited land. Ill'ea-3.1 . Participation (%) 177.Z 13.2. 16Z.3 U.4 1·L9 39.Z. Peninsua I:':arveste<l !.and lLl'e~ aJ 108.0 -lOO .0 3.0 .-I.ce:-e<iited land. areall 4506.0 Z46.0 8.0 s/ Participation (0/.) :6Z..5 61.5 100.0 !st.:lmus ! . liarvested land uea aJ 1.!:!" .0 1,094.0 140.0 Acc:~ited !.and uea-!?I ,u7.4 192,.0 35.-2 P articipatiot'l (%) -18.-11 17.6 ZS.3 70 tal: n.arrested land Al'ea al 14, H7.0 10,3208.0 ';.·H9.0 Ac:::oedited land uu-!?I 3,91Z.3 20,336.1 1,636.20 ?artic:pation ('ra) :6.9 ZZ./i 37.0 :ictes: v ~fol::oacion .-\)'it"O'OeC"Juia 1977. Office of Agric'.llt-.ual E:c(''"\oo::!ics- iJnucr S"c:et1>.rf of A~iC'.11t'.lr'!! l..'ld C"per1tions, S..-\"R.H. "2.1 ?epol"u of :he Deputment :Jf Education a:ld ?-esults·-OWce ?t ?~a.ns and Operatioru·-Credit Operation.. sf 7then accredited area i.s i"l'ea~er til= ::arve,ted !.and 3.:'.ea.. ~"e :i~..1%'es !lave :,een <l.lIsumed tlqual. TABLE Ilbl. SIST:!MA 3ANCO NACIONAL DE CREDr!O RURAL (Classification of harvested !a.nd UeJI. 01/ a.nd 3.aJl..t'UraJ. c:edit parliC:ipatiou dul:'~ the agriC'J.l tunl 78U -:If 1977) Th~ds of Hectares 3a.nc:os y Su:perficies Tota..!. i'tainied !rrtiated. Northwest Harrested l.u:d ar-ell 3./ i98.i 17.2. 181 • .5 .-\.c:c:edited land. a~a 11 400.'1 11.2. S:! 383.7 Pudcfpatior. (%) 50.2. 100.0 ~9 .1 North Ha.rrested lalld a~a '-' 1.068.1 n4.1 344.0 Acend.it ed land. ~s. '1' 464.1 39VJ is .1 Participation (%) ~3.5 54.3 ZO.9 Nort.!1 Central Harrested !and ana '-' 1,ZZ6.0 951.1 214.9 Acend.ited lalld ana-!' 336.3 218.6 111.1 Puticfpation ;%l 27 ... 23 .0 oi2.8 Northea..st Harrest:ed. !and area 3./ 1,125.'1 1,141.3 5H.6 Act::l"1!l'dited land ~a-!, 480.2 209.5 270.1 Putic:tpation (%) Z7.8 18.4 -i6.3 Pacific: North Harrest:ed WId area '-' 1,456.1 1:07,0.5 177., Acc:ndited land. UK-,9.1 440.1 23Z.1 Z08.0 PVticfpation (%) 30.Z 34.2 26.8 Wast <i.arrest:ed. land ~a 1'1 1,187.2. 1,502.9 284.3 Acc::eC.ited land. area 11 243.2 193.2 50.0 Pvdcfpation (%) 13.6 1Z.8 17.6 C411tral Harrested WId a.~a '-' 1,870.6 1,2.95.1 SH.9 AcC'edited. WId a~a 11 31.5.1 235.3 . to ... PvticfpatiQll (%) 17 .4 18.2. 15.1 Pacific: South Harrested lar.d area '-' 1,615.8 1,302.1 313 .1 Accredited. land area-!, 468.3 341.6 lZ.6.7 Particfpation l%) 29.0 2.6.2. 40.5 Central South Kuvested. WId a:~a aJ 1,331.6 1,097 .1 U4.5 Acc:'edite:i lalld uea.1.1 229.3 211.4 17.9 Putic:tpadon (%1 11.2. 19.3 1.6 GulL Harrested land. a~a aJ 1,336.8 1,299.6 37.2. Acend.ite<i land arM-:::" 154.3 152. ! 2.2. Participation (%) U.S "II. i !L9 Peninsula Harrested b.nd aMIl aJ 373.4 362.:) 10.8 Acend.ited land. il.na.-!I 209.1 207.7 2..8 PuticipatiQll 1,%) 56.2. 51.3 18.5 IsthtllWJ }:U"I'ested land 'l~a '-' 1,509.3 1,393.2 ! 116.1 ~ .. Ace-edited !a.nd. an&1.1 216.0 20:),0 10.0 PutidpatlOll i%) 14.3 a.s 8.6 Tota..!.: Harvuud land a~a al • i6,100.1 11 ,767.0 4,333.1 Acc~it~ :and a.~A'"'":i 3,969.3 2,618.::' 1,351.1 Participation (%) 24.6 ZZ.::. 31., :<0 ees: !! In forcuc:o:l A«MOeCl.!aria 1977. O£!ke ~f AgriC'.l!tural Eecnomks-- Under S~c:-eeU? ~i ."-!.-r!C'.ll:ure and Opera.tions, 5.":'.. ?.<i. ?/ Reports ~f :=e Jeput:nent :;ll :::Jucat:on and :l.~sults-Of!ic!! ,f P!'UlS ami Operatic:n.s--Credit Operation. sf W'!len acc~1!di:ed a.rt!a ls srea ter :ban harvestad land area, :,.'1e !lg'J.res have been aSSU:::led equal. TABLZ !!. Va.lue of ~du<:tic.n per :!ectue Percent of Irrigated of Harvested C.:ool.anlJ. :0 Total I '..!:.oul\a·i'\ds 0 f lle~sl Region :!arvested C.:opland !I Irrigated ?"ai.l:ie<i Tota.! No r <:..:!w est 7S.60 aJ 17 .1~96 01 9.47 '::11 15.982 NorC:t 3aja. Ca:; tomia. 99.l - 18.8 5.83 18.7 South 3.tO.ja. Ca.'ll,:H:'::lill. 99.~ ,4.71 01.9"1 Z4.698 :'!ayuit Sinaloa ,,1.5 60.4 Q7.3 18.J, 15.55 6.7 4.31 1.z.3 11.3 • ! ~ Sonora 17.329 7.43 17.06 i North Ce:ltl."al 47.~ aJ 17.36'" 1.~67 'EI 9.288 I Coalnli.L3. 77.T 16.46 1. 10 13.102 Clib.UabUil Dura:.tl/i0 32.4 n.1 58 • .5 1/ 11.4 z.o .146 ,.56 1.10 1.387 7.375 l Nortb.elUt 7.675 '01 4.5 '::11 6.317 Neuva !..ten 53.'T 9':Z'S 4.38 ~.984 Tamatillpas 6.... 0 7.,2, 4.60 .5.65 C elluaJ. No... C:t 30.38 aJ 15.38Z 01 4.ZZ9 hi 7.81. Cu lim a 62.7 - 'i7"':"O'r - r:m 11..49 GUlI.lI&juato 37.2. 15.351 3.g0", .:l.102 Guerrero 8.7 10.4 S.U9 5.69 Jali:sco 9.8 ,0.108 6.·.n7 7.75 ~ic.boa.ca.n 2,6.9 14.58 3.426 6 ... 2 Quf.reuro 37.0 14.848 1-.619 6.49 Cell trlLi 'nest :1.4 a.J 14.3423 'EI 1.5n bl 5.708 .-\gwuc:Uientu 41.1'r 10.46i --::ra 7.19 San Luis Potosi 13. 'f 12..9 2,.346 4.ZZo Z.lcatecu 9.4 13.06 1.205 Z.33 Centra.! 18.1 aJ 16.05 '01 5.13601 1.2 !:)isuito :edual ""S:'! 9':TI 'ii":"Q9 6.4 Hidalgo 2,4.9 10.016 2.165 5.6 ~e."tico 2,0.06 16.377 6 .138 7.09 More1o$ 38.3 2,0.856 10.945 14. -;' 43 ... ..,.., .... ?'.leoUi. 12.8 13.038 4.076 :l ........ ~ TIaxcala. 7.3 9.:14 3.608 4.105 GlU! -50utb. 5.04 aJ 11.14 '01 8.1927 bl 8.61 CliapiLl: 2:3 207.3 - 1r:o-- l2o.OS Oaxaca 13.·l 5.346 5.994 5.9 Tabaseo .46 2,2.35 S.73 8.79 Verac='.lz 4.0 13.:'59 7.32.7 7.7 ?enlruula. 4.3 aJ 13.2.2. .'2l 3.320690' 4.03 C.1cpec.!:l.e n , Il.iS :;:r- 6.73 Cuint:u:a ::<'00 ,L6 11.72 ".09 3.11 ¥'.!catan 1.4 14.46 3.6Z 3.7 soc:aCZ: .~uuio S:stad~ :ico de La ?rod'.lcdon Agricola de \05 Sstados t1l:idos de ~teltico. OHice;of AgJ."ie-.tit'W'al Ec?!lo::rlics. 5eaetU"( of Ail'io.;it·.l::-e .u:d. ',l{ater ?.uoW'ces, 1977. : <.1 Simple ","'e~3.g!. lil Average 'I'aJu~f ?roduc~ioll per b.e<:!ue, weighted "'...el'age• •!;" ,'. ~:."~ f~~' ri '., °LL6t ·fl::t:'fJt~·:'"U .I;'t)"M t"'1JII :tJH)fl1:'P"V ,0 AJ"'~J:J;l~ '.:'f'nJfJun~ ,IJIIJftl1T1='P"V )0 n='~J10 ';;;;;i;i1 ;;r. ,;;Pi«ii ~';Fri~l ~nt aft '1;:;:;tj~v w-,,;:;;iiF;;';:j 'ri :;Ii ;;:;ii~r-i;:~ ~J.;"tiV :~:nlnn~ _~~. ~ _._~ __ o _._._ ••• _ _ 0. II .. I I r -"! ~ OO"c" L"r 71'1"r 9,.'t' ,11'('1" tor:SI1I'7 1I0t'«1 ;n'lt? tt\~' to? H~'¥ "fOl".Hl},. .!. £" ,,"r. (.,/'7 U'II 7n'07' '/(((,(, 911("01 1Lt'llt ZR6'9{ oM'1 ""'H f"u .. ,unO (.n', {t''1 £''1 SL9'£H:" sIr ~~J 09.'''9 197' 9L (tR'ot ~ :lIP;1ftttlf':) I:<~."' 'L'" (.,.' M•• fO'. (,?7W' [ n'n (.o~'r.sf' ? 'II."ft ;>6'1'SI£ M,t'SI ""l"!H~'I:t~1 "" t~', t"L LH'L M?'1I1 ?IS'6SA:; O~C~1.6'L 9tll'?'111 ?<;L'oH', OO['tOI'1 ?~.''1t 1UJ:"'I"J:1" ') 'I~'7 6L"1I U"iI S('H ~I t' LIIO':r 1100' ~'Ii)'l LOt't1 H(' ttl 1H''If7 ,{.o', C''U~JI''l''.;. 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"""01 ?61'II" ' j "It'us', tn'olt (S9'tt' O:'U,:1}1 1("'1 U~'9' ,a' '(S' [ (,9" 'Its (,t't 9''j S?I'l '110'.,1 'n'uti" .7t'~'1'i Lf-O'S/.f', 7f9'I1.{ ItS'1?7 10l'U "~I"r!l1 ~~":2 (,S'I "''I 60', U'(, n('IM 'l?S'U' IIt'~2 (.II(,'II( HC"l "S9', ',"'U 1'L 'tt'S 0;0''11 ,,.'.??' fI !oRS'01l'1 ""7'IH', Hf'(,Rf I~JtH:t:J ~~""" 1':.. :n.,.. :"I"7. .C:J Q(,L'OI U'l ~n't 'WU 9tL'O?{''l US'ItO" (,0;" (.to', 11.'9<6 ('119''1t' lU'6! ~ Q . (S'. 'hl~t 'Ia'l 6'n ltO' 8<;-:-', IIn·t?~ tllS'H? IH'<!.{ ?"t'ln 5''''(; '~tni"1 «:~fq ""~ ?I1'H (.t" L ,?' L?t",. S(,/.'U','I ,?r'O? HI'HII', tllll'IIS' '1L?'1I8 If"l? .,,.,u:r"P~f"It'v lIot's U.s" f1H't' tIIt'tnl.'. \,1S' (.?' , 19R' £!,1' I II??' SM" 'ttl"M IJI'''t''''~) ~''"'nlI 8~I'(. (,t'? 61'1" IIl1'tl lOl'l'll', "~'2~' IIS'l'6tll SOI"LI ott',1t S?O'?? n,t',;u:"," t::.,'~ SS7't n', nt'[ rll"US'9 [90'.?S'? OH'II00'f 6(l'HO', lo{'nL U(,'H1 u"~Ulm':-J1'" ~",,~...I IS' '"' 9(1'[ st'L Lot', 1101'02 IIL1'tW'" ,,('?l6', SU'?IO'( LU'SSS' , S9.'lO.', 710' (SI o,;')<u"r N -. t6t'(S n.J~JJ:'Ion!) ~ SB(, 'I 6?"S (.(1"S 0.'0' '1lL'Off-'( lIS'16W''len'6.S H7'tI!' os,',,<; ~f'J" • 701" SO"( LH"SI (,U'?t'" f?'1' (:(It'l 'i~O' •• I'!i It.' SoIl' , 'itt"n no'tt{ " ",p'lf"u...n!) S't "t'7' tQV'. 20' LI U,'?",', OSI'Ot< t.II' 'lot' I S'IL'I(' Ofl'6t ~I!S'2R "tunn:J ;>II'L ~n'. I lilt '~I ?II!' 11':0' f{ tOt' M,t' J 1I(,'1.76·~ '''''Its til ton ,IJIIJlu:r:> ("1';' , S9'S 0'1" U't ''It'66,'9 667'S?O' ( l?O',.£l'( (,U'U"I 6l6'S"" OOA'H. t" fh l""Ul"'l. 71 '1' HIli'? !I('. 'Ifl"(, H,t'L??" 170'0(,. nt'tt", ~st'lfl S'~'11t L6t''/7' ,tll"'n'l Jl'Af1:'N Llr'? H?'t ~<;'II"?6'L In'Ht'1 t''''Ll' t('S'H~ l"" at U'''U ~'. 'It!' OZ ,,(,.~(,,( nl'S9. ,(,f'tlf 9tt',. S I n"".. lnu 1,9f'LI Hf'L 'I'" tu'"" nz'lto'{ (.t'''' Llf't 'S'l t'LI 6LL''I('0'S tlO'HI" '17L',I)(,'( (96'6B'I lIO' 97. :S<,"ll Pf'l t IJl"Htltt::1 Sf' f, ,0" fI 'l'L'1 ?"'?I 'iSS'(?(,'1 OllZ', (, SIIr':'LII', oM' 'Ill HL"S "t'H' 'HU'I"'":" !lAt' (, L?(,'I 'II" LI till' ?(,J' II ~ (,f, , III£' , Or.t"fI! S?II'II~S t"Jltt!l:) '11 JU N '1;)'1.1 61{'tl ?OS· nil' {, S6{' Sit SZS'SI S'1(,'~'IS "JOHfl$ H'l n't ""UII'6 o(.,,'s;s Rt9'[ ('II 1['" <;<;I'S' '10'96t'l' 9St'tt{,', IIL2'19"~' <;'(',("1 lll('n. {OO'U? .fI'''H~S st', fl'b ! ' '1 .'~I t.:.t'61L't '1It'f~S' I LS9'S?!" Ht't(" H7"f.l V6"U Ip"AoN ... 'n't 11(,'1' "l L6'6 It't'l SC1('H", (,6( Wf"9t" I (S"',,. 0" nt'91" 'S 'J!I~:) 'II 1;'{ L'" U'S "81 ?~7'I""t 17to' (, .. {'lSI' •Hs'nl lot'l {tl'on 'N 'llI":.1 "II 0"6 9S~''1I11'O( (1'f' n;.'. lU'?6'I ,st' t1I~', ,4tZ1I'Ulf.lof1 N 1'6'<;' '1M'"t' ---~--~ .---.---.--- -~-.~. --------.-~--- .. tr O fl:"l f1 f'H lJ,t ,"'OJ. I"""l~lf r~I~"p" ,"I".!. PM1"1"U r~I"!lp" J~I.':'J.__.,_ J'.:~'-'!!!1'"_ __r-"_I~II!UI. ft:lJI,,"'), - ._.' t'rt<:~rl jn ;~"'~"'""~.r" , tn.... "';J ;0 ~r;;:;t..~j - (<c:t J "'l:':"'O ,I') :ltl,,-.o\. "J fIIJP,:!;'t1l ,~rt n"!l"'''rn.tf"f I" ::1"1"'1\ 1"'''' rn,<IIIaA.Jrtl JO ,,:uv t!"! 1:JnrnJ~' uOI1:Jnrfuff ,n ;Jt'1"" :'~JI'J:'tAV r",r:tfJ.I'f ,n :'tap" ft I" nf1">t .~-~~ -.~. -- - -'" - .. '1lf.l 'jIOl!J:111 },!T '1'''1111' I/fIY', 0:'1.1,;''111111'11 or, tIOI.I.V'~:1I1 NI NOI.I.:1IH101101 ,.10 '1n"VIl 'lIIil"mV.!, In the :"est of t!le COu.:l.t:y, ~1;.e average pro'Slortion of 3an..."Ul'al participation in· total harvested c!'opland., exclu,ding tl:.e Peninsula, is 18.6 percent. In these areas, the average proportion of in-igated to to tal harveste<l. land is 15.9 percent and Ll:le average value of produc~ion per hectare is ,s6,.J:65 pesos. T.'le interesting exception is Peninsula, a 17ery peo;;:' agric..lltural region, where only 4.3 percent of the harv~sted c~apland is irrigated and the financing for 62.5 percent of its total harvested. la::::.d..f~m Banr..lral. Taking the country as a whole, SamuraI in 1976 financed appro:d mately 250 pesos of each 1,000 pesos of agrio.llt'.ual ?reduction (i1lcluding crops which received no credit finanC:ng). The regic..nal pattern once again emerges: t..~e pl"oductive ·.egion in the Northwest, most heavily supplied with irrigation facilities, received far above the national average, 32.6 pesos per 1.000 pesos of agricultural production, and the North-Central region received 3,50 pesos of credit per 1,000 pesos of production. At:.!1e other e."tt::-eme, the poorer regions of Centro and Golfo-Sur received 156 and 134 pesos of c:-edit respectively ?et' 1,000 ?esos of agrlc..1ltural production. Agab, the P!".ninsula is the e::tception, ::'!ceiving 976 pesos per 1,000 of production (see Table ~n. I L\.3LE I"v. 3.-\~m"C?.':"':'" C~j,ZDrr ?E?- $1,000 PESOS OF AG?..!C:':TI':J'?..L ._-_._----_.__._---- PRODC'C~:ON I all c:ops ~cludi:'.g :'.::r::fi:1anced ?-egic.n Pesos --------_._---_._-----_. --_._-----_._- Northwest 326.00 ::Iorth Cantral 350.00 Northeast 2.41. 00 Central Nort.i. 236.00 Cel'ltr3.1 West 234.00 Centr:tl 156.00 Gull-South 134.00 Peninsula 976.00 SOURCE: Yates, Paul L., El Ca:nno ~lexkanc. Caba1li!o. S.A., 1978, p. 875. On a ~ationwic!e basis, :ecovery Ot Banr..l:ral credit a-.,eraged 70 percent in 1972.-1976. It \Vas as high as 92 perc:mt in ue Northwest ::egion during the 1972.-1976 period (in :"'''''!'igated areas it averaged 93.5 percent, and in rabfed a't'eas 77.1 perce..·"lt). In the Pe!lin~lla and Gulf regions it fell to about 40 percent (..,1, 1 percent in ran fed farmland en the Penbsula). (See Table V.) The conclusion to be drawn from this pattern of public bank C!'edit activity is that credit is :elatively ::lost abu:;J.c.ant in two regic;:".S: in the . Nort.'l';qest where p::-::c... .lctivity tends to be aboye average, ?enl.'"lsula :egion where productivity :5 ' :ar below the national average. and in the Generous aid appears to correlate "'lith good :esulti,:n ter::Js 0 f ?roduc~i'l'ity as ?Yell as :ecovery b :hose areas where PfOc.uct:ve infrast:-ucture, eSfle 26 cially irrigation facilities and acc. oS to comt::lerdal outlets and opport'..u::.i ties, is favorable. In ~ose areas where the :lecessa.t7 inirastrocture for i;.:apro\y~d produc!ivity is not yet in place, credit does not appear to contribute to productivity and recovery rates are low. TA,ELE V. RECOVERY RATES OF ENCR-FINAJ.'fCED CROP PRO DUCTION, 197(.-1976 (antlual averages) Irr:gated Rainfed .'\reas .Areas Average Northw~5t 93.5 17 .1 9(. North 71.7 33.6 n." Central North 73. i 5Z.C 78 Northeast 67.8 57.7 65 Pacific North 88.4 N.A.. 88 Ocddente 50.6 43.3 46.9 Central 60.5 2Z.0 50 Pacific Souu 74.6 47.1 64 C&1ter Soutl:l 64.6 50.8 56 Gulf 44.5 36.2 40.4 Peninsula N.A. 40.8 40.8 Isthmus N.A. 56.0 56 SOURCE: §tudv of Recovery Rates for PrinC!l'al Crops, Published by t!le Banco Nacional de Credito Rural, S.A., Office of the Sub director Gener-al for Credit and Office of Plannin~ and Statis tics, 1977. If we observe ilie r~lation between agric.lltural production a.."1d c:-~dit. we find further evidence that t.he patter:l of public credit coverage is 1; 1 peso diminishing in productivity ove:- ti:tle ratter than inc·easing. L"1 195 1 of Sa..'1r.lJ:'al c::-edit fi::1auced 6.16 !-esos of ~g::k.llEural production. By 1975. 1 peso of credit financed 2..56 ?esos of ,'l.~icuitural pndU:ction , . ;see Table \1). TABLE VI. PESOS OF AGRICULTUR.U PRODuCTION PER PESO OF CREDIT 1950 (Census) S 6.16 1970 (Census) S 2..2.1 1970 (Direccion General de Economia Agricola) $ 3.13 1975 (Direccion General de ECC':lomia Ag-ric::ola) S 2..56 SOURCE: Yates, P3.11l L, E1 Cam"Oo "MeXlc3.ll0, ~texico: Ediciones el Caballito, S.A., 1978, p. 891. B. DISTRmUTION OF CREDIT SERV!CES SUPPORTED BY FIDEI ~~ . COMISOS lNSTI'IUIDOS EN RELACION CON LA.AGR!OLir:.L'1JRA (F!RA) THROUGH PRIVATE BANKS Tn 1973 a set of independently endowed and operated t.""t!St funds was established in the Ban.k:. of Me.~ico to encourage L'le expansion of private bank activity in the agricultural sector. nis is Fidekomisos I:o.stituidC"s en Relac~on con la Agricultura (FIaA). There are two separate institutions within FIR.-\ d.esigned to support private bank. ag-rk..tltUfal lending. E1 Fondo de Garantia y Fomento Para la" .-\gricultura, Ganaderia y Agricultura (FONDO) oifers a discount service enab~ing bank.s to discount 1...'-p to 90 percent of the value of production loans and ". up to 80 percent of the value of invest::nent loans ::Dade to row-income - proaw:ers (PBI). (T:le definition of PBI is iiberal. ~L~A regulations in. fact allow the great :najodt7 of farmers to qualify fer some fo1':O of support :ro::D ?IR.-\. This issue 'nill be disC'..lssed :..'1 grea ter detail i:1 C~a'Pter ~rrr~) 2.3 .'\J::!other fund! El Fondo Especial de .~istel'lcia Tedlllica '! Garantia 'i?ara Creditos Aqropec.larios (FEGA), serves to encourage participation of priva!e banks in the financing of agricultural activities by (1) guaranteeing tbe recovery of agric..1ltll.ral credit in cases where tbe personal property of the producer does:::ot offer significant collater~ and (2) reimbursing either partially or totally the direct costs 0 f tecb:nical assistance. As will be discussed in more detail in Chapte:r VII, FIRA was intended to offer subsidies to private banks to reduce the .costs of risk, information, and administration in e:ttending agricultural c:redit. T:'1e distribution of private bank activity exhibits much ~'le same regional pattern as t!lat of official bank· activity. As Table \u indicates, the bulk of private bank credit activity discounted with FIRA has been concen trated in the wealthiest agricultural region of the country. The Northwest region accounted in 1975 for 38.9 percent of all FIRA short-term production credit discounts. The !'l!!:lainder of the country's regions eac.'l received less A than 15 percent of total FIRA discounts. Tnel'e is mu,ch less concentration of FnL\ discounts in investment credit, however. The distribution of t~e latter showed a marked shift bet\vee~ 1967 and 1975. Whereas in 1967 the :-.l'oruHvest and NOl':!:east received ZS.5 and 2.0.2. percent respectively of total FIRA investment credit discaUIlfs, by 1975 the Central West and Gulf South received 20.3 a::d 27.6 percent respectively, while the Northwest and ;'Tort~east :~ceived 12..3 a."':.d 1 1.8 pel'cent. , TABLE VII. CHEDIT DISCOUNTED WITH FlDEICOMISOS INS'fITUIDOS EN llELACION CON LA AG11ICULTURA (FlHA), 1967 AND 1915 __________n ___• _ _ _ _ -.----~- ----------------~ .. ~.. ... -.-~ Short-term Production Credit Inve~tmcnt Credit Millions Millions of Pcsos Percent of Pesos Percent 1967 1975 1967 1975 1967 1975 1%7--1(ffS- Nation 301.0 Z,OZ8 100.0 100.0 473.8 l,472. 100.0 100.0 Northwest 181.1 789.5 60.0 38.9 12.1.0 304.0 l5.5 ll.3 Northcentral 7.7.5 2-19.7 9. k lZ.3 49.3 l86.1 10.4 11.6 ,,> C) ' theast • "'N or 2.4.6 Z74.5 8.1 13 .5 45.9 Z9Z.7 20.2 11.8 Cen tr aI-nor t h 3.6 108.4 l.l 5.3 lZ.5 114.3 l.6 4.6 Central-west l8.7 314.1 9.5 15.5 15.6 503.0 16.0 ZO.3 Central 15.3 64.Z 5.0 3.l 40.2. 2.15.9 8.5 8.7 Gulf-South 2.0.5 US .1 b.B 11. 1 7 ~.b bBl.Z 15. I 2.7.6 Peninsula 0.3 2.5 0.1 Q .1 'f 7 73.8 1.6 3.0 -~- --------~----- --. -,---",--" ----------- TABLE Viii. FIHA-GUARANTlmn CaEDlT BY REGIONAL 01"FICE, 1973-1979 (1n thou::;amls uf pe:>o::; ant! percen l!:i) -- -~. -- -.-.,,~ .. ~--- -,----.--"----.. - ... ----~-- - .. --.----~ .. -----~-,-.--- ----- - ._ ....,.- ---~ Jan-Aug Hcghlll 1973 1974 1975 P)76 1977 1978 1979 Toti.ll NOl'lhwe::;t 5,295 2.S,153 165,641:1 317,154 471,42.'1 82.1,976 856,367 2.,596,017 ti" 5.4 18.3 24.0 40.6 38.5 45.6 50.0 41.0 North 37,781 Z8,488 79,874 52.,971:1 118,12.6 104,468 1Z4 ,3HZ 5·16,097 ':"f. , .. H I •• /39.0 18.5 11.9 6.S 11.34 5.8 7.2. B.6 Nol'lhca::;t 5,55'1 11,110 107,330 118,212. 173,839 2.46,52.4 325,602, ')U8,I71 ~f) 5.7 7.2 15.6 15.1 16.7 13.7 19.0 15.7 We:>! '16,817 15,152 95,268 79,795 117,391 2.39,441 172,976 nfl,tHO ,,/ ,II 17.3 9.8 13.8 10 .2. 11.3 13 .3 10.0 11.7 Central 4,52,4 5,910 59,365 134,579 U5,2.55 Z06,51O 91,380 617,52.3 v.' 'v 4.7 3.S 8.6 17 .2 11.1 19.8 5.0 9.B ,J South 4,194 48,ZI~ 88,134 40,971 91,194 80,856 65,399 418,966 <:.~ 31.3 12..8 5.2 8.7 7.7 3.B 6.7 GIlt.:1'rero MidlOi.lcau 4,677 4,703 5,078 10,277 3,Z23 2.5,607 ZO,372 74,137 % 3.0 0.7 1.3 0.3 2.4 1.2 1.2 Southeast 10,180 12.,325 80,416 Z1,01O 17112.49 53,172. 47,852 248, ZO·1 ~,f. lO.5 8.0 11.6 3.4 1.6 5.1 2..7 3. () Yllcatan Pcuiul>ula 7,712. N/A 8,375 zn. 3,516 2,3,978 8,033 51,BB6 'Yv 7.9 1.2 10.3 .J.3 2..3 0.46 0.8 To t.d 96,')14 154,059 699,488 ~/H,2,48 1,117"i.'17 I,B62.,5l8 1,712,363 6,277 ,841 ----.. -~---.----- ------------ --~--- -_. - -----~-.~.,-- .. ---- .i • . Unlike Baru:ura.l, ?r1vate ban.1{. activity in the Peninsula region has not improved signif:cantly ever time i:-om a minimal level. T'.a.e distribution of guarantees offered by F'EGA exhibits a similar regional character, as does the pattern of Fm.A's discount activity. While the share of guarantee activity in t!te Nortb.west region has shown dynamic growth over the years, other regions of the country have shown no consistent pattern of change. Ta.ble IX indicates :11at t11e pattern of !"eimbursement for tec.!mical assistance activity is ::::Ot M b.ighly sk.ewed as are the patterns of discount and guarantee activity. The Northwest region does, 11owever, receive a disproportionate s~~ 0: total subsidized credit services from FmA. From this aggregate analysis of the distribution of credit services, we ',vm find substantiating ?atterns in private bank cost minimization beh.:;.vior with respect to differential transaction costs among various classes of loan .. clients. . We will in a later section !:!:tamine how FIRA subsidies have reduced! the costs for commercial banks of 'Orocessing loans for cert3.U:!. classes of bor:::"'}\vers, allowing t::.e oan.1{.s ,0 - expand coverage among farmers '.'116 a - ... ... 32 •.. 'I 'tiiWll.IE IX. PAYMENT OF HElMBUUSEMENT Fon TECHNICAL ASSISTANCE, 1')73-1')7'), BY n EGlON (In thOU!:iulUi:> of peao:; and percent:;) ------- ------------ ------~- ... ---------~- - - - - - - , - .. . ~ ~ Jan-Aug Hcgioll 1973 ~974 1975 1976 1971 1978 11)79 Total --~- --_. ----~-~--- ----~---.- ~-.-----'----- Northwc!:it 150 ~89 I, Z55 7,560 lZ,144 15,5')1 101 37,01)0 % 19 4 14 30 )8 27 ·H 1.3 North 4.71 2,683 642 3,634 8,267 6,063 104 21,870 ~/" 61 38 7 15 13 11 -!2 13 Northeast 700 1,270 3,243 12 ,623 9,742 27,578 '!1. 10 14 13 19 11 11 West 20 1,24.8 2,618 6,Z42 6,523 16,651 % 1 i4 II 9 12. 10 Ceniral 5')5 591 1,156 5,82.9 7,439 43 16,253 % ') 7 7 9 13 11 10 w f..,J South 774 1,167 3 ,OZ.! 11,705 6,530 23,200 % 11 13 Il 18 Il 14 Guerrcro- MichodCdn 154 166 13l 1,479 ;:. ,357 1,171 6,459 % lO l l b 5 l 4 Southeast 1 ,6l5 l,065 1,275 5,550 l,515 13 ,030 % 13 l3 5 8 4 8 Yucatan Peniusula 128 538 3:;5 380 869 2. ,2AO '}b 2 6 1 1 2 ! ----------_. NOTE: Dashes indicate insignit'icant amounts• • till broader range of productive characteristics. There are still significant ccncentraticns of activity, however, because of the limitations govening the liquidation of these subsidies and because of limit:l.tions on t!:le amount of subsidies available. Tnese problems limit the opportunities for the banks to minimize costs, and lead to continued credit rationing, altnough to a less serious degree than if there were no subsidies. c. DISTRmUTION OF NONINSTITUTIONAl. CREDFI' SERVICES In Mexico there exist essentially two noninstitutional sources of c!,eQit: (1) :'Ural u.su.ry lend eM and (2) mutual interest lenders-i.e., commercial or industrial enterprises that lend to support activities 7lhicb. will produce inputs for their processing or business activities. Wealthier farmers and 'acompradore5~ (crop buyers) in a given area often lend to poor farmer.s who face productive conditions making them ineligible for official or private bank credit, or "'fho are excluded by bank . policies. For example, Banrural cannot lend to farmers who have c=~d~t that is unpaid for whatever reaso~ q,r to farmers who are ineligible for crop ! insurance from the government -insurance organization because t~e inci - dence of crop failure in their zon.is actuarily :00 high to allow insurability, or to far:o.ers who produce perishable vegeta.ble crops for which there is n.o guaranteed market as 6ere is for grain crops. Some farmers want credit for 06er than productive or product i.:m 'Purposes; 0 thers desire less credit than the amount they must take under the strict quotas of the official bank. The farmers who t".J.r:l to noninstitutional sources of credit tend to be very pOOl." c::edit ;:-lsks, and they face a monopolistic c::edit source. The loans they receive tend to be short-term at intenst rates ranging from 3 percent to 5 percent per rnont!l, depending on the ri::;k to the lender in terms of the on the farmer's access to alter-lative sources of credit, i.e., friends or oth<!:l.' moneylenders. Although some farmers use this credit to buy productive inputs, the size C?f the interest rate limits the size of the loan and thereby the size of any investment t!lat might be undertaken to impro"e the farm. These loans are usually repaid with crops.. .-\nother form of usury lending takes place between farmers who have a distaste for certain costs involved in using bank c::edit, and voluntarily incur t1:te high interest costs of infor'::lal loans. For example, some farmers =efuse to pay for Ct'op inSW'ance, a necessity for "ejidatarios" (communal farmer.; who by law have no title to their land and thereby cannot use the rand as collateral for a loan). The C:'op insurance system ha~ a reputation for corr'-lption, and a poor redemptiin record. Some farmers also encounter corruption among the low-salaried :3a.nrural c!'edit· 0 ffkials, who demand some form of payment to "facilitate" receipt of credit. Information and transportation costS involved in obtaining bank credit are high for some rarmers. Some farmers refuse to bor::ow from the official bank but cannot ohtain an adequate amount of credit from a private bank to fill their needs because of credit rationing at the ceiling rate of interest. These farmers must suppleme:!lt fo.mds received from the private bank with funds from ::loninstitutional Jources; they usually face interest rates at the low end of the ran~~" :a'ound 3 percent per month, and usually repa';r with crops. and the acomprador reimburses himself for the costs of harvesting--i.e., the use of day laborers and machinery plus profit-by paying the farmer below- market prices far the crop. The acomprador takes advantage of the farmer's desire for convenience, a common shortage of cash around barve.,t time to pay peons, and the dsk that be may be unable to sell at a better rate in other ma't'kets that often b1.ty only from certain contracted sources. Selli'tlg to CONAS'0PO, t!le government agenCJ that pays a guaranteed price to any ~.nd all seilers, oft~n involves penalties fOJ: defects in quality, payment by check rat!ler ttan in cash., and tl"an'Portation costs. Paying an acompradcr :lilvoids these problems and risks. .! In SCII:8 dist!':'cts the provision of commercial credit is more forma • lized; pad:ing or processi=.g houses will contract with farmers at a guaran teed ?rice to insure tlle supply and quality of a certain c:,op. /,",,.~ "','- '1 l;:~.!' li In some areas, moneylenders and acompradores appeared to Of! l.Iy far the :najor sources of credit. The mol''! marginal Lhe productive conditions in terms of providing for subsistence needs, t!le higher t..'1e reliance on u:"'"Ul'ious informal credit sources. The distance to credit administration centers is also a determining fac':or in the use of usurious infor!Ilal credit. Dependence 011 u.sury credit from <lcompradores and moneylenc.ers tends to diminish the fin<:ulcial c..nd mbsistence capacity of the recipients over time. On the other handt in the more productive commercially offered credit, soLllcti..mes combined '!!litJ: :·oc?-;O,i,.-;al assistance. is llSed to improve t.he productivity of farming and the quality of Cl"ops, thereby increasing tfle economi-:: capacity of the fU!Ils • . p:~lF .. :,-, ";~/~:'" ?ART !i: TI1E PRODUC1."!VE ENVIRONMENT AJ.'iD mE GENERAL APPROPRIATENESS OF THE CRZDIT SYSTEM TO lHAT ENVIRONMENT m. A GDlERALIZED )AACROA.I.'l'ALYSIS OF TEE PRODUCTIVE ENvm.ONMENT IN mE AGRICULTUR_-\L SECTOR OF ~1EXICO This section will e;~amine thE: kind IJf credit subjects whom the e~isting c:-edit system is designed to serve. Knowing to whom credit goes and for \vhom it is intended makes it possible to evaluate the appropriate kind and level of subsidy. 'There are many classifications of farmers, based on land s1:e, income, crops, etc., but for t1lis purpose it seems appropriate to classify farmers according to ilieir potential to productively absorb and repay c:edit. Sue: a classification will allow us to determine the appropriate kind and level of st:bsidized services that would be necessary to enable a "potential" c::.-:!dit subject to become an actual credit subject. An important part of this discussion must be focused an ::tow subsidies can be ~sed to develop productive and economic potential so that the subsidies can be reduced over time as farmer productive development takes place. I came ~in contact wit!l five ::<:i:lds of agricultural economiC uhits in ~[e:dco. The five classifications are here defined with respect to the appropriateness of the credit system to their proauc1:.fve c.1:aracteristics. Large and :cediu!:l cam:ne:ocia.!.ly 7iable !ar:oers ·.vi.t~ access ~o ..i<:. c:-eciit. subsidized ?rivate bank or official bar T.~ese far:::::e!'s ::eed :10 39 subsidies to be appropriate commercial bank credit subjects. Thei: level of profitability is sucb that they could repay credit at the market :oate of interest and they offer adequate collateral to be at minimal risk to the banks. For the ::lost part these farms already are producing optimally. and could contiIlue to do so even wit!lout access to subsidi::ed credit. Z. Profitable small farmers y wit!::. some limited access to com mercial credit. The limitations en their access are largely the result of market distortions, such as information costs fot' tlle banks. O~ bt~'l,'1"~t.1~te ceilbgs that lead to credit rationing. These farmers need no special program of assistance because they are profitable; however, they may have untapped economic potential that could be developed witb. minimal tecbnical assistance. They do not have sufficient assets to _seC'..ll"e a loan wit.!l a bank under traditional collateral policies. 'I"!:ey need policies that -"ill stimulate credit institutions to offer credit to them. 3. Farmers whose C".ll':"ent enterprises ar~ not profitable, making ,hem ineligible for crop proo.~ction credit given st.:mdard bank appraisal practices. Tney do, however, possess tb.e :lece~sary f:'''ted produc!ive fuputs Y !."l ~'1fe::tico, a small far:::J is officially defined as 100 hectares of irrigated land or ZOO hectares of rainied land. This is far greater tha."1 tb.e average small faro hecta.reage! 'lIhic!l is :::ttOund : 0 to 15 ~ec~ares. it :.n terms of qUality of land and size of faro and appropriate cli:n!dc conditions whicil, if combined with acces~ to improved seeds, ferti1i7,er, ::nacb.inery, insecticides, and technical assistance in using them, could enable them to become proiitable and appropriate credit subjects. 4. Farmers who are not profitable and who need illten~ive ..-pedal prcg1;'ams of tech:lical assistance and infrasn-uctural developo.ent Cll'S!S-' tance, such as the use of a land leveler to correct ser!cus drainage problems, protection against erosion, the building of roads, etc. ,to become profitable credit subjects iliey will require a long-term Fr::l<:essi::.l-:iudfrig i.:ltensive subsidies and supervision. These far:oers should not be considered bank , credit subjects but rather recipients of technical and infrastructural a..'lSlS 'tance along with a component of credit offe!'ed at concessionary teres. Over time the level of the subsiclies would be ex-pected to diminish as proaucthdty and profitability improve. 5. Far:oers '.vho are not profitable and who have co potential to .. '::lecom'! credit subjects at any level of subsidy. ' This class of far-::ne!" t'1Pically works an ext:!"emely small plot of poor-quality land (minifundista) in an environr::ent 0 i inadeouate rainfall and insufficient basic infrastl"".!c -! ~ural services suc.h as roads, marke!s, and irrigation. T'ne physical resources at tb.eir ciis"Oosal. even if they were""fullv utilized, ~ inadeQ 1.late for even a . . . ~.. <I ... subsistence standard of living. For oost, off-far::l laoor is t;"e pr:mar7 ., :ioUZ'ce of income. T:lu class of farcers should not, even L"l t!le long run, be cunsid.ered appropriate "c::edit subjects." Their need for cash should be satisfied by t.1.e ?rovisicn of income or subsistence maintenance assistance. .. rV'. A.PPROPRI.A.TENESS OF T:-fE EXISTING CREDIT SYSTID.-{ TO TIiE PRODUCTIVE ENv"".ffiONMENT In general terms, t1::.e e:'Cisting agricultural credit system is designed to alleviate t!le credit diffiC'..llties caused by the land reform that established tilt! ejidal farming system. l! This system gives farmers no ~an.sfe!"able title to the land they ';;Tork, leaving them without t!le collateral to seC'..ll:'e bank credit. The land reform wo fragmented farmland into uneccnomically small production units. Over the years, moreover, the government has increasingly granted :::.:arginally productive ejidal farmland as a. result of demographic presSltres. In addition., the rural population SUH'f!:./:"3 fZi5·J.:.:1·v~t'j low levels of education and technical experience. A. ttACTERIsnCS OF 'mE EXISTING CREDIT SYSTEM CHA... The credit system has a :lumber of features that were designed to encourage agricultural development: a special program for low··income farmers -- "productores de: bajos' ing'!"esos" (PBU --in 1- L.I:(A to encourage the 1.1 T."le ejid~s were established in 1910 as part of the land reform by which larfe concentrations of privately held land were appropriated by the govetnment a:J.d gi'1en to landless peasants in the rural secto..... They wer! :lot given transfe:::-able title to the la:J.d. This was seen as a means of:preventing farmers from losing or selling their land, as well as preve.!11i:ng a !'eC'..!..~~nce of the ld....d of concent::ation of landownf!r s!1ip that had occur:-ed in previous centur~es. cb.anneling of c::'edit by private banks to other tb.an cO::lCT'l~rdal farmers through str.)D.g interest rate subsidies on fu."1ds borrowed by the banks and a ceiling on interest rates to farmer::;; a :eserve requirement that force~ the baIl.ks to lend to small noncommercial farmers; the establishment of FEG.-\ in ':IRA to reimburse banks for the costs !nc..u ,:,ed in offering technical assistance to low-i:lcome farmel"S in the PEl prngrlim; establishment of t.!:le guarantee program in FEGA to insure from 60 to 80 percent of credits offered by banks to farmers without the necessary collateral to fully secure t.heir loans; "ejidatarios," colonists (farrn.l?!rs "1h'::",;~ "\v~ n~t yet legally received their grant of land), and private "minifundistas" -:vhose productive ccnditions resemble t!lose of ejidatarios lDu.:>t be organized into eccnomi cally viable productive units before being eligible to :eceive credit. T.:le National Bank of Rural Credit, intena.ed to serve the special credit ;leeds of a poor agriC'.lltural population, offers tec.!mical assistance, subsidized inter est rates. access to subsidized technical inputs~ crop insurance, and easy acc-:!ss to credit for virtually all classes of farmers in rural ~re:tic:J from tb.e commercially viable to the poorest farmers with the least produc!lve potential. B. WEAKNESSES OF THE CREDIT SYSTD1 ~ W-:!aknesse! in t~e desig:'l of the c:-edit system can be seen ::1 . t.tre foilowli:g areas: 1. Poor diffe:-entiation of farme!"S as to their present and future potential to use credit profitably and repay it; 2.. Poor differentiation of c:-edit bstitutions as to the services perfo':med and the class of farmers served; 3. Confusion between c:-edit and income maintenance efforts; 4. Improper definition of development goals and phasing au,·A subsidies; ~. Incomplete research into productive techniques that can be adapted to the productive conditions faced by farmars, especially in rainfed agriculture. Low productivity and income limit both the demand for a..,d supply of credit. T."le consequence of these weaknesses is ~at subsidies for farm inputs, services, ,a.."ld credit have been icproperly' 6a.rneled and in some cases regressively applied. On the supply side thh; has meant failure to acllieve an expanded ,. dist:'ibution of credit. The costs of supplying c::edit (especially :cr '$:.e private oa"1..~s) to certai., classes 0 f farmers ~ave :lot oee:1 adeq\1ateiy ,.,. reduced by the existi:lg f-Jrms of subsidy. T:1.e result has been c:-edit =at:on~ in some cases, ar..d in others failure to reac.!l tbe targeted populations at all. The recipients of subsidies ha'/e very often been farmers ',,,ho did not need them. This is especially t..-ue of private bank credit. On the demand side, tl:e farmer often fails to request credit, services, and assistance because he recognizes ilie limitaticn3 of his productive capacity. Tne clinging to traditional practices is llot just a matter of ignorance or lack of incentive; it often reflects thecapacitj of the farmer s lar.d and productive capabilities. In 'Mexico, th~ r:.~'CesSary servll..'l!iil .~O:\ modeoize production are often not available unless credit is requested; and even when credit is provided., the services :cay not be available in the appropriate ferm and intensity. A second consequence of the existing agricultural credit system is that c'!'~i: when given often does not lead to a significant improveme.'"lt in production because ilie credit does not flow to farmers 71ho could bene fit :rom it but to farmers who are producing at tbeir potential and don't really need subsidi:ed credit. Also, tb.e credit often :s ;'lot accompanied by adequate development farmerfborrowers. .~ services in ilie case Paul Lamartine Yates s:ays in .. of _certam ~;} Camno classes ~te:dcano! of II "Production c::,edit tends :0 be a circular process rat~. tha.'"l a spi::-al to a .'llgner !e·lel--i.e.~ rather tban event"Jally arri'ti.::"l.g at a toct i::1 his produc tivi.ty -:Q'here he can finance his own seeds, fertilize!", etc., (the farmer) must always borrow. He still has n-t received the aid necessary to achieve a position that ,;vould permit him to pay !..""Om his own savings for his costs of nroducti:::-:;. :'. as not to have to continue '* • to nav .. .. interest to a bank. 1 The final cC::lsequence of the improperly designed credit system is high rates of default. This has oCC'oll'red primarily because of the problem of stagnant productivi.ty. Ba:n:ru.ral, in particular, is facec. with this problem because of its confusion between proper credit S1lJ::.-j'l!~t3i!i.ndfarmers who ate not capable of !"ep~ying cedit but do need financial aid. In the following sections we ·Rill disc.lSS the p1"!sent constraints en t.t.:.e expansion of production credit and how these might be removed so as to expand both the extent (among classes 0 f borrowers) and the intensity (amounts of cedit used) of credit ::narket cove. age. The analysis will be carried out in a transaction costs framework, proposing that the costs of supplying or demanding oedit, and inappropriate or inadequate subsidies ,"0 leduce those costs, gover::t the extel'lt and intensity of the coverage of credit . ::nark.!ts in the :V1exican agTicultul'al sector. The farmer classification described above will be used to discuss the different costs ir.volved 4'"1 su,?plyi.l"lg credit to different classes of borrowers. Different fOl'::::ls and levels of subsidies a:e necessary for eac!l class of fv-::cer, ::nd some far~e!' classes are inappropriate credit s~bjects :or SO::::le ~i."'!a;:lcial institutions_ FARTm A G ENERAllZED FRAMEWOR.r<. THE COSTS OFLENDDlG A.J.'JD SOR.l1..QVrrNG· .. V. COSTS OF LENJJING AND T'dE SUPPLY OF CREDIT--A Gi01ERALlZED FR.-\..\tiEW'OR:<' In. gen~ral, the costs of granting c:-edit are divided into three main categories: tile cost of funds; the costs of administration; and the losses due to default• .-\. T:-IE COST OF FUNDS T'ae main sources of bank funds are equity capital, deposits, loans and rediscount3 f'\"OlD the central b~ loans from other financial and nonfi::lan c-:'al instir.ltions, and issues of bonds. ::it the case of commercial banks, deposits f:oom the public are the most ir:::::portant source of funds. There are three r:::lain classes of deposits: (a) current accounts which ordinarily earn no interest; (b) savings account.';, from which the depositol" can withdraw r.:mds on demand; and (c) various ., types a f term accounts. The average cost of a bark's total resources is a weighted average of t'::'e cost of each type of fun~ ,'lith the rela~ve importance of each as the ·;veight. The opportunity cost of gI'a:lting credit is ::lot ::lecessarily equal to L'le cost of t!le total ;:esources collected by the bank as defined above. Rather, it tS t::'e retur.l the bar..k can ea:o in alternative uwest:I!ent::, On any loan, tberefore, the ba..nk. must expec', to earn at least the return it can get f!'C'::.tl using the money in some ot.her way. The government, of course, can manipulate the opportunity cost of funds by introducing mandatory reserve :.-equu-ements that make the alternative non-loan investments more or less pro fitable. B. 7HE COSTS OF ADMINISTRATION The costs of administer.ng a loan include the costs of acquiring inior:::lation about the borrower and of dedding about his loan application, as 'Rell as the costs of recorcting, disbursing, supervising, and collecting the loan. 'These operating costs can be divided mto , two classes: (1) the casts of merely handling the loan, recording, and disbursing, and (Z) risk-reducing .. casts--i.e., costs du-ected at :educmg ::b.e probability of e:r:-or involved i:l the acquisition and use of iiifor::::laticn b c.ecisicn-maki:lg, and the costs of supervision and collection. ,. -,., 'on} Tnese costs are considered fixed because the tice and personnel costs associated with recording, disbursing, and Uqt:.idating a SIO loan are the same as for a $10,000- loan. T..e costs pe::"' ?eso loaned are substantially higher for a small than for a larger loan. Risk-r( :ucing administ:oative costs, on the other hand, are not inde ?endent of losses due to default. The more resources spen'; in the evaluation and supervision c~' bo~wers and their loans, the more efficiently the bank can select its clients and thus reduce its losses !:.;·otn default..' Since risk-reducing activities are expeIlSive and tend to show di;.Jinish ing ret',Jrns, the banks usually select an optimum point in ter:ns of the trac.e off between risk and administl"ative costs. This optimum appears to be t,1.. ... cb.ief 7ariable determining the extent of banks' loan acti7ity md the nu::nber of classes of borrower.! to "'hom thl!Y are "»illing to extend cl"edit. 1I 11 Clat;.dio Gonzalez-Vega, The Iron Law of bterest Rate Restricdons. unpublished dissertation, Stanford" 'GniversitY1 Department of Econo :::::lies, Chapter VI. 31 C. ;.055.'25 DUE TO DIT AULT The probability of default on a given loan is determined oy to; variables: (1) t:_~ farmer's a!Jility to repa7; and (2) lile far=:er's willingness to repay. y Abllity to repay a loan is a function ~£ (l) the outcome of productive activity financed with the loan; (2.) whether t..'1at activity is the only activity en which the farmer depends for incoce; (3) owner3hi'p of fixed assets acceptable as collateral; a...ld (4) the ability to present a co-signer to the banlt. If t.he ba."'lk: operates wit!l narrow financial margins, or if bank policy so dictates, the eval:.:.ation of mortgageable property may be the cnly risk- reducing activity that it can afford in determining ability to repay a loan. T."'lUS the allocation of loans will be heavily influenced by the ~ype of sec.ll'ity Ciffered. This behavior penalizes small farmers who usually ha\'<;, few assets ":0 offer as sec..:.rity on loan~ and are often :eluctant to )...1iedg~ them for fear 0 f losing them in case of c:op failure. G<"'rdan Donald, Credit for Small Farmers L."l Develoning COu.:ltl'ies, Westv!ew P!'e~s, Boulder, Colorado, (19i6), p. 137 • .! 52 D. :s.rS:K CLASSES Loans to some classes of iarme!"'S are riskier t:lan to ot!J.e!"'S, because of the nature of tb.eir pl:'Qductive activitr, thE:: type of assets that they offer as collateral, etc. ~.lat is, tb.e expected " ;lue of the loss from default on a loan of given size varies for far:.:Jet"$.; ii.t'ierent classes. These class cb.aracteristics should be identified and distinguished. The iniormation-gailiering process is costly and will usually fall along the lines of least information cost to the bank.s. C::h..,,~eJ' . will b:.! distmguished according to: 1. Differences in tb.e objective pl:'Qbability distributions 01 farmers' ability to repay loans, i.e., differences in' the riskiness of the productive activity aJ.:d in the amount of collate:al offered. For instance, certain c:-op:s :oay be ::-iskier or may have a lower expected income distribution attacb.ed to !.!lem tb.an 0 ther c::ops. y 2. Differences tn tb.e stock of prior information that the bank ;". ;sesses on borrowe!'S and on tb.e projects to be financed. T'.o.ese dif ferenc'E!s u!:"llally arise from differences in the extent of pre';,ious ccntacts - - • - ~I Gonzalez-Vega, ibid. 33 between the bank and L1.e far:::ers! i:l former loan repayment ':listories, etc. The costs of i:lformation about old borrowers or clients are less ban for ~e\v borre '.vers. 3. Differences in the technological ability of the bank to digest and e"aluate various types of information and to use them in decision-making. The lack of specific expertise on the part of essentially urban-based fi::lancial i:::tstitutions when operating in agricultural credit markets makes the process of evaluation initially very ,::.:,,,,tly.·'Y CREDIT RATIONING Profit maximization on the part of the ban...~ requires that marginal costs be equated to marginal r~venue. This results in different interest l:'ates reflecting different l:'isk pre miu:Il!!l ! as well as in different costs of administration to equalize margins for t..~e smaller with the larger, for the ::nora risky with t.he less risky farmer or oor:-ower. Risk premia are normally charged in order to build up a rese"/;! to cover tb.e losses due to default. '!':lis a!1ows more fle.:tibility to t.'le bank as -!/ Alan:t. Roe! "Some l..1.eor' Concer:1i:lg the Role and Failings of Financial Inter':llediaries in Less Developed Countries," Domestic F:nance Studies, :io. 50! Public and P!'ivate FL.,ance Division, Development Economics Department, World 3ank. to the :isk class of far!I:er to \vhich it can lend. In the absence of this fle~ibility, b~'<s lend C"Illy to the least ri.sky farmers or ration cl"cdit to the more risity bono we:-s. Credit rationing occurs when the 1:Jank. grants a loan of a smaller size thou: the loan demand.ed by the farcer at the rate 0 f in terest c.!:larged. Profit maximization l"equires that the ceiling rate of interest be equal to or gre.,:.ter than the marginal cost. Ii it is not, the bank rt!~u"Z>1l. t'a"_ 'ii':!;~ of the loan granted to the ::nore costly client until m~b'1\. r:.o'~ is equal to the ceiling rate of interest. Gonzalez-Vega, in The Iron-Law of Interest Rate Restrictions, ~z aptly observed that "nle subsidy effect of the reduced interest rate, as the ceiling becomes more restrictive, and the associated rationing effect of the dici.r.lishing loan size affect the farmer's ~et income in opposite dir~tions. Interest !"ate ceilings (1) increase a far:ner's net income if he is not rationed becaus,! he receives the bene fit 0 f the full subsidy; (2) may increase or :educe t!le far:::er's net income when he is ::-ationed, depending on the relative ::nportance of t."!e subsidy transfened vis-a-vis the reduction in !.he ',8 size:of :b.e loan; (3) reduces the net income of the loan to zero, when tlle far~ is e:tcluded from the portiolio of the formal credit instit"..ltion. I: is the far:::er -;v 1: 0 is completely rationed who !"eceives :10 1:.ene:it of the subsidies." Gonzal<!z-Ye!5'a cOQcluded that inte:-est r'3te !"estl'ictions have regressive incooe implications, allowing t!le ,vealt.'lier al'1d more productive farme!"!J to l:'eali:z:e even ;p'eate!" income gai:ls whHe the poor become poorer as L'ley are e::tclud.ed from the positive income eifects of L"1e subsidy intendeci. for them. To the extent that invest:::nents to promote teclmical cb.a.uge are often "~umpy" and indivisible, rationed farmers may be excluded from the possi bIlity of using credit to attain a higher Jev,.l'l~' t-t\}j~:':'t,;.y itY'. VI. T.:-!E DD-L-\J.'lD FOR CREDIT AND TEE COSTS OF BORROW1NG--_~ GENE.."tt..ti..IZED FR.-\.ivlEWOR...,,:{ In general, be demand for produC'tion credit is related to: (1) the farmer's ?roductive potential and initial endowment, i:nclud~ the degree of uncertainty he faces and his attitude towa.rQ. bea.ring risk, and (Z) in the case of borrowing froc a given lender as opposed to another, the farmer's access to alternative sources of credit and his costs of borrowing (in adclition to be rate of interest he must pay). _~. PRODUC'ITlE POTENTIAL AND INI'!lAL ENDOW~ENT _~ farmer's initial endowment of physical resources, together with the productive potential of that initial endowment, determine the possibility for the profitable use of credit resources. Productive potential of a farmer's set of resources is determined by the nature and e.'l:tent of t.'le farmer's ~nowledge and skills, the farmer's ability to identify profitable opport'l.l.Pities and to select the best among them, the amount and quality of facily labor _can tl"ibutions, the size and quality of C"..lltivable land, the use to which the !land is best suited, t.he imorovecents and stro.lctures that have been added to ,=it, access to ir::igaticu :acilities, access to :'Gads, access to -::::Jark-ets for » ..L"1puts and outputs. and the prices ccufronti.."1g tlle farmer for both his inputs and his outputs. V"-hen ';qe define a far:::er's initial endowment and. the degree of e.'~:ploitaticn at that i:l1tial endo\vment, we can consider Fernande='s concept of the "economic capacity" of the farm enterprise. l! This ccmcept is interesting in terms of farmer demand for credit because economic capacity determines t!le farmer's ability to ~enerat(.l savings internally, thus det... r- mining his demand for external sources of :apital, namely c:-edit. When we project productive potential in future yeal'S, we can examine the fa.r!ller's potenti,,-l for growth and produc.tive investment through the use of c:-ed.it. Fernandez y Fernandez tells us that efficiency is achieved when the intensity of input use is commensurate with the. ~(.{~acit7' 01' m:! land to produce at its opti::'lal level and to repay· ~~, C''1!s~. of tl:\~~:':H'\:!~til:i·ent. 2ecause of financial const:-aintsf an enterprise could produce at a lower level and be less profitable than necessary given the "capadtyn of the farm enterprise. The importance of access to ext~rnal finance depends on the extent and ;;p~cific na-:ure of the e:t:sting opportw:dties for growth. Access to e;~ternal SOUl'ces of finance may be of limited importance, i.. soce drcum st::nces where the ,[i!rmer's own saving!> activities '.vould suffice for th~ y ~a;:r.on Fernandez y Fernandez, Una Estructera ~stitudcnal Ideal Para el Credit ,"l.ltticol~ ~!'!:tico D. F.: Edicion de ""~ut!', (1977). 58 at!a:nment of ?roductive efficiency. In general, this means t.:J.<l.c in a higcly pl"oducti',e enterprise, where the ratio 'faiue of nroduction minus costs of 'Oroduction costs of inputs is high--i.e., where high output per unit of land can be obtained '.'lith relatively low costs resulting in high profits for the enterprise--ilie :leeds for external finance may be limited. On the other hand, for a marginally productive enterprise where fertility and other factors limit the produc tivity of the lan~ the a.bove-mentioned ratio i.:.o ,:::.{'!;~~, low in the absence of innovations. Often these enterprises do not g~erate profHs sufficient to invest in innovations (improved seeds, irrigation facilit:es, etc.) which would allow t~em to acl:.ieve gl'eater productivity and income. On t!le other han~ the farm enterprise may be constrained by obstacles to ?roductivity (e.g., bOOly slopiog and eroded land) whic!l Camlot be easily overcome wit~out a hea.vy invest'!:lent (terracing and drainage). Let us look. at three classes of farmers in te!'ms of their demands for credit. The economically submarginal far:ner we '.'li11 call ~tl'aditional"; the ., pro fitable farmer, \vith or without future potential to erploit the capacity of his l;:;nd, we will call the "modern farmer"; a..,d t..'le farmer who cp,'!!rates a 1 large profitable farm enterprlse we will calJ the "commercial farmer. !! Traditional AgEiculture. Farmers bound by traditional ag!'iculture have in general exhausted all profitable opp or tu."'l it ies to invest :.n the ::;0 :ech-::liques of Frouuct10n available to t.1.em. The -:::larginal ::'ate of reN;::,. to investment is so lo~v th.at tne!'e is little or no incentive to save cr !nvest. 7:'"!ere is therefore no incentive to seek external f:.::ranc:.ng. Although the potential for development and growth in traditional agriculture is severely limited by the pOOl' quality cf the initial endowment of factors ot production, traditional a.griC'..llt~·re :::cay often have pote11tial for development if t.~ere were a program of public investment in resea::ch and in infrastr.1ct'JJ:e projects such as e1'<'sion controL, draina.!!;e teeacing, etc. Until these invest::nents are :::cade, however, the role of external financing :nay be limited to supplement~ subsistence neals or general cash flow IDa4l3.gement. There also exists within submarginal agric..llture a class of farms that can be oade profitable by shifting to outputs more appropriate to the capacit7 of tbe land and other initial endowments. ~is can. be ac~ieved with the assistance of c~edit and tec.!:mical assistance. A common example in :vfexico of SUC!! a traditional unit with potential is farms in arid regions w'here livestock raising is a profitable alternative to !i\lb5is~ence a..g=ic~lture • •-\."lother graup of farmers -;vithtq sU!:lmarginal agr!C'.llt'..ll'e ::ave :10 ?otemial -:::: ac..~ieve profitable prcclucti,::!\j t..1.eir ::l.eed for e:t!e!'nal c:::edit is pur~ly to support subsistence. 60 ·Nitb.in ::noder.l ag!'ic..lltu.re t!lere exist two subtypes of far:!Jer: (1) tb.ose wioout potential fer i::nproV'ement in productivity and income, a.nd (2.) :!lose who have potential for i::nprovement in productivity and incume. Both are profitable, ear:n.ing varying degre;!!s of income after their costs of production are subtr":l.(:ted. Boo subty?.::==, are appropriate c::,edit subjects and have a need for c:-ed:t. Th~ c!'edit needs of the first may be limited to ::ash manage me!lt. J:./ The c!'edit needs of the second may :l.l.d(Jinc.l.ude caplta.i. Cu':~::;r~~t in technological it:l provements. Credit c an be v'!'.f'1 important in the process 0 i tec.:m.ological c.a.nge. H Innovation usually incr'!!ases cash !'equ~ments. The importance Y Farmers have cash flow problems arunng from the seasonal deficits and surpluses inherent in the biological c.."1ara.cteristics of farming. P:-oblems of finance arise in la.--ge part from a seasonal c:cle of production imposed on a largely non~easonal or steady pattern of total consumption. Pr'::)duc:tion in a..griculture takes place relatively steadily t:h.roughout the yeru:. P::-oduction inputs also tend to be required either steadily throughout the year or at times other tha.""t harvest. T".:~us provision for consumption and produc~.ic:n requires either saving from past harvests or bOl"!'1)wing agains:: a futu:'e harvest. H Michael G. G. Schluter, The Interactior.. of Credit and Unc!!!'taintv in Deter!IliniI:.g Resource Al:ocatirm and Income!! on Smail Farms in Surat District. India, Occasicnal P3.per No. 68, Department of . .\.gricultural Economics, Cornell University (1974'. Ronald !. McK~=c:l, ~tonev and Ca'Oital :::'1 Economic Develo'O:nent, The Brook.ings Institution (1973'. I 61 of access to credit inc!'eases ','lit;. the indivisibility of l!lputs. Sven ·,vhen the inputs are fairly divisible, credit is important if a combination of 'larious highly complementary inputs is :necessary for their efficient use. Ir th.e absence <: f suificie."lt finance, technolog-.cal change may be slowed, its adoption may be distorted, and/or it r.:lal be accessible only to a few larger br::ners. But th.e need for c!'edit is not universal. Se 7er~.t "t.... djel:;,~.l . '"'.'iI,V~, reported significant teclmological change in the absence of credit, either because far:ners were able to generate t.'leir own savings or because the in1:lUts were divisible. In some cases new teclu:.ology ..:an be :inanced tllrough postponement of consumption, partiC'.llarly in the case of larger far:ners. For smaller farmers, aJ:d especially when the farmer's consumption is supplied from his own c:op, savi.ng :nay be possible only at considel."able sacrific e. -t:/ Scbluter, ibid. LOI,<:tr:-rmilk also found that "large farmers,' i.e., those holding over 50 ac:t.", have significantly more fertilizer pe!' acre of dwarf wheat than the smallest farmers, i.e., those with 2.5 to 7.5 ac:::-es. Rodlin argued the lack.' of c::edit does not appear to be a limiting constraint on the abilit7 of farmers with small holdings i."1 Hazala District (Pakist:m) to adopt new, high-yielding varieties of seed, since they:apparently have same income from local employment and iI:lmigrant~mittances. Max Kea.rns Lowder:nilk, Diffusion of Dwa::£ Wbeat Praduction Tec!mology in Pakistan's Punjab, Unpublished Ph.D. DissertatiSln, COr.lell University (1972); Refugio I. Rodlin, A ~1ic:o-Economic,.-..nalvsis of Small 'Holder Response to High-Yieldbg Varieties of Wl!eat in Pakistan. Unpublished ?h.D. Dis:iertation, ~,lichigan State Univ~!'sity (1971). 62 Corr::rne:-cial Agriculture. CotI:I:le:-cial agric.llt:u-e is cllarac:erized by 'l.."'l ample generation of income and an intensive ~se of inputs--part1y becat:.Se of t!le cbeapness of labor. TNben outside capital is ~sed, especially when it can be attained at subsidized rates of interest, it often only substitutes for tb.e farmer's OW'll resources. This substitution allows the far!ller to use !lis OW'll resources to fund marginal projects that ':Vould :lot be likely to satisfy a bank's lending citeria. 'C'ncertaintv and Far!ller Attitudes Toward. Risk In addition to deficits t!ley can foresee, farmers :nust also deal with difficnlties t.t.:.ey cannot fo~see, suo as crop failures, illness or death in be fa::nily, and market a;:.d price problems. These risks :nay ::.-educe i.r.t::ome in a particular :' ear well below t!le average. Farmers ';vho are close to the ::nargin of subsistence find it difficult to provide for such OCCUl'l"ences; :towever. ma.'"lY studies have shoW'll that the poorest of :ar:rners manage to maintain liquid reserves in t~e form of c~!'h S".lbs·;itutes suc:i as gold or jewels. L'"l :,lexico, a-'"lll:lals are a common source of !'eservc liquidity, particular1y pigs, cows~ and cickens. I ~ 0.) ..\ccess to credit is a potential :eserve. Ba.i<::er 2! has observed t!lat c,:,:=di t can be a reserve if it is :10 ( us ed. In this 'lie w, access to c:e<.ii t is an asse t possessed by the far::r"~r. It was my experience, as predicted in the literatur~, that the :eserve motivation was an important factor in a farmer's decision to demand or not to demand credit. The more uncertain the e:tpected outcome of productive activit',,, and/or the more risk-averse the farmer, the less likely he would b~ to demand credit (except from friends), except in an e.'tt:'em<!",!:.-eJ;s,:,tc,'1-" Put in other wo4"cis, the more uncertain the e:-qlected outcome of prod~1r'~~7~ ac-:ivity, and/or the more risk-averse the iar:ner, the more valuable !lis ability to get a loan from a given sot:.l'ce a.:ld the less li~e11 he would bE: to abuse his "<.red-it rating" (his access to this source of reserve) by faili:::.g to repay the credit if he had the ability to repay. B. COSTS OF BORROWING For small farmers i:l less-ieve!c!,eU c::untries, the only source of c!'~it that :neets the citerion of being a. rese!"7e--that is, of being readilv . ! -, 3/- II» Chester B. Baker, "Ro!E' of Credit in the Economic Develop. ment of Small Farm Agriculture," ir Small Farn:er Credit. Analvti.cal Papers, A. L D., Spring ~e"!ie':l1 0: Small Farmer Credit xix, .-\gency :or bternational Development (1973), pp. 41-70. con',er~';;'le ;.uta cash--is c:,edit from a moneylender. Despite low i.:lte:est :'3. tes, fermal c1'edit :s less flexible and t~us less valuable as a :.-esarve. T:~i.s is largely because of the :loninterest costs of bOr::'owi:Jg, suc!l a,; the time and cost involved in the appllcat;on process, the time and c.::'=': of ac;uiring ;:::t:;;cessary documents, etc. Alt!lCiJ.gh government regula tions in 'Mexico prevent ban.lts f:::-om 6arging tees to small farmers (a traditional for:::J of Gedit rationing i::t the presen ~ oi interest-rate ceilings), ace':" costs· :emain. These include costs of t:-avel to negotiate loans as well as to pick up sevenl drafts of c:::-edit during the course of the production cycle. of ('"-::~"?' i:::lsurance, of the requirement that small farmers be organized in!conomi cally viable u.nits of production beior~ being considered credit subjects, of t!Je aquisition of land title papers, of corr'l."Ption, of acquisition of infor:na t:on as to the possibility of obtaining a loan from a fOt'!:lal source, of unti:c:ely loans, of limitations on the use of a loan, and of penalty interest r-ltes for late payment. These !lave all incl''!3.sed ~~e costs of for:na: c!'edit to soal! far:ners and have reduced their demand far formal credit. 7".:!e :esults of t!le study in Mexico indicated ~~at t!1ese nonmterest costs, esp<!c::ally ~e cost of. in:;urance and the cost of corruption, were 50 to unacceptable in some far 'lll e::-:'l , m~=ds that they pr'!!ferred not to bon-ow i:::-Or::l the only accessible source of for::aal c!'edit r 3a.C!!:"'..ll'a!. despite the interest . rate subsidy given. The costs appeared to be based~m ~earsay and perceptions, ~oweV'er, rat.~er than on pe::1-to-paper calculations. ~ 65 1':lere appeared to be ruinimal demand f::-o r:::l smail farmers for com mercial bank c:-e<iit, because that form {)t c:::"edit '.vasperceived :0 be inaccessible. Leans that did occur appeared to be ::"it~ated by t.'l.e ba.."1ks, wnic.;' offered c:::-edit to farmers deemed appropriate ban.~ subjects. The advantages of obtaiDing technical assistance wert! not sufficient to ,Jutweigh the ccsts mentioned above, partly because of the recognition on the part of the! fa-:mers that the tt!cl:micai assistance offered was inadequate (a result of greatly insufficient staff). Fer other farmers, of course, the po!l!tlbl:4;:~' ,,(, r.~h~i;ing cedit at ::>. rate 0 f interest that enabled them to barre,; ade.,,!uate capital to invest in necessary inputs more than outweighed the cost'i of obtatn.;ng it from a fer mal sotl:'ce. Some farmers demanded. credit to assnre 4lCCe5S to subsi,· di= ed i.:lputs suo as fertilizer rer a loan of a given size, he 'lverage costs of borrowi.'lg tend to be highe.\.: for the smaller farm~r t!lan fur !he large!" or better-established farmer. Tee large!' far'Oer lives closer to the bar.k's office and IlSU<1.11y comE:; to tc~ for other !"e3.son~ as well. He usually has his own car '')r t:"Uck 1 and does .nOt have to depend en public t:'3.n-<portation. He already :~::J.OW5 t.!le requirements f01: getting a k,a;n; he already possesses the land certifications ~d extenal audits required; and, given his oy:-all political ar:.ci scdal inHue::lce. ::'e has to pay less r::loney lr. bribes CL'1d U!ldergo less tim e-CCllSUnli::lg red tape. 66 PA,RTIV TRANSACTION COSTS FOR SUFPLIE1:'tS OF CREDIT- EVIDENCE FROM mE F'I:E:LD sruDY .. VII. PROGRA~lS TO REDUCE COSTS OF LENDING TO SMALL F A.RMERS--FIDEICOMISOS mSTITUlDOS EN RELACION CON L-\ AGRICULTURA (FIRA) Lending profitably to small enterprises of any sort, whet!ler agricul taral or industrial., is a long-run proposition for most financial institutions, public or private, because of the risks involved. Sc::-eening and control procedures have to he developed to minimize ris.k.s; lac.1t of information and records in the agricultu.:al sector necessitates the provision of supporting services such as teclmical assistance for evaluntion f super-vision, and train- i.::l.g of loan recipients. The evidence from studies of small-<5cale eni:el'pll'w-'!;s generally shows that risks a:Jld administrative cosu a.re initiaHy high (as a percentage of lending volume) but may fall over the long run as t!le i:lstit'..ltion gains experience. The idea of the gove:mment subsidy programs is to absorb the initial costs and risk; their aim is also to offer incentives to encourage th~ expansion of the private sector's involvement. Institutional reluctance to engage in lending to the agricult'.J.:'al sector i:l ge ~eral. and to low-inco me farm eu specifically, is a. c omsequence 0 f the tran!:action costs cited. above; these cannot be passed on to t.;'e loan recipients in the form of higher interest rates or fees without reducing demand for loans to zero. Le t U!'i examil::.e the mean:::; by whicb Fidekomisos m.,stituidos en Relacion con la :\gt'icultura (FIRA), estc.blished in ilia Ba.'l..~ of :vfexico, has atte~pted to ~~-:.,urage commercial bank short-term production c!'edit lending; sp\!:ci£ically to small low-income farmers, subsidizing costs of risk and adminisaation. Two separate institut:ons -;Vltbin FE,-\, are designed to support private bank lending to agriC\\lttll'e. El Fondo de Garantia 1 Fomento Para la Agricultura, Ganaderia y Avicultura (FONDa) offers a discount service by annually, a:::ld the l:luimum rate of interest that can be charged to the producer is 14 percent. Up to 1,000,000 !lesos (approximately $45,450 dollars) can be lent in this way. Tne gross :nargin, as$lml.ng a 90 percent disCClllut for the lending institution, is ther!l!.tore .90 x (.14-.12.) +.• 10 x (l1--cost of inter.:vllly gene!'3.ted funds). A rough average estimate of t!le internal cost of ftmds is .055 to .060; therefore the gross margin would be .90 x .02 .... 10 x .06 :II .018 + .006 '" .0186. r!le discount syste:n is designed so that the greater the bank's participation in the loan, the gr'!a ter t..1.e gross ::cargin available for profit or to absorb oU:.er costs. For instance, ~f only 70 percent of a lo~an is discounted, the equation is .70 x .02 .;. .30 x .06 = .OH: ... . 018 = .032 ~ the g:oss margin bet"Reen C:Jst of funds and iote!''!st rate .. chargp.d would-be .032. or 3.2. percent c:J::npared to .0136 or 1.36 percent ·.vne:J. 90 percent of t!le loan is discounted.. This :::.oargin, according to FONDa :egulations, is to cover all costs of recovering the money, inspec tion :md evaiu3.tio- costs, and any other e::tpe:nse. l:l cases of default, the institution is empowere<l. to 6argl~ penalty rates of interest u:\ltil the loan is paid or recover~d.. The Bank of Mexico short-circuits the optimizing behavior for com mercial banks to ge t tb.em to participate in its PBI program by requiring that 2.4 percent of all commercial bank deposit!5 be dep03ited in a special reserve entitled Creditos de Habilita.cion oA~do y/o Refaccionarios a Ejidatarios 0 Campes!nos de Bajos rng~esos a a :a:mpresa.s Agroindus tl"iales. 1/ These :-eservcs ear:l 5 percent, less t!lan the cost of the funds to the financial institutions. 2/ If a bank uses these :-eserve funds for PBI loans it has an opportunity to 6arge 14 percent. ...uthough the gross margin ear::ed en PEr lending is substantially smaller ~an tb,at ea..r:led in com mer cial lending, tb.e alternative is even less desirable given the reserve obligation. Fonda offers complementary se1"\'ic::es to the banks to !J.elp in t..'1e identification of projects; it provides tecl::nical assistance (as protection to ..fI 1r Planning Division of .: J..,."<.A, LineamientosBasicos del ?!-og:a..... a de ':-' Productores de Ba.ios mqt'esos {October 1979J . Ibid.. • iO banks as w'ell as to FIRA's funds) in supervising ~e evaluation of applica tions for credit, and it guarantees up to 60 percent of production or investment loans that cannot be insured by t.'le gover!l::::lent c:,op insurance organization. El Fonda ::::Special de A.sistencia Tecnka y Garantia para Creditos Agropecuarios (FECA) serves to (1) guarantee the repayment of agricultural credit to private banks in cases when the personal property that the producer offers as collateral is not sufficient (0 co~e:rilie margins ::equired the authorized c::.-edit); and (2) either partlally or totally reimburse the direct costs of technical a.s3istanc~. This service is offered to private banks and covers an average of 3 percent of tht! annual ac-:ive portfolio of credit that has been authori:ed to receive reimbursement for tedmical assistance costs. b. special circumstances, at the judgment of the Technical Com::nittee of FIRA, this support can rise as high as 6 percent of the active ?ortfolio of PBl loans. 'd/ Ba.'"lk of :'vlexico, S.A.., Circular Numbel" Ii 47 /72, Reference ~uI:lber 42., December 29, 1972, Rules of Ope:ation of the T:ust Special Fund for Technical Assistance of Guarantees for Agricultural and Livestock. Credits. ~ 1 I • None of these ser\lices canies a charge for the participating institu tion; rather, they reduce the costs of infor-::nation and risk and tb.e costs 0: technical s~rvice5 of administration and trairing which the ba:..lks are expected to provide as part of their special partir::~paticn in a lending prog::am to low-income farmers. T'ne objective of offering these subsidies and service~ to the banks has been to allow banks (at low cost) to improve their e.~erience and informa tion base with a new class of credit subjects. "Reembolso" for costs of hiring tec!mical assistance staff was intended to a'J.owu<!!'!:pcniLg: ..:;i"u1rect would maintain old clients out of their own resources and continue to t!xpand their activities with new clients whose greater costs of ~isk and adll"inistra t:on would 1:e subsidized by FONDO and FEGA. A. EFFECTIV'ENESS OF FlRA ACnvrrmS TO INCREASE T::::::: SUPPLY OF INSTI'!'OTIONAl. CREDIT TO PRODUCTORES DE BAJOS rNGRESOS (PBn,. '. T'ne analysis of this section will be directed to disco\i'E!ring how weil tbese prograr::ls !lave '.qorked. 5.'as ~:!:!e supply of c:-edit to s:nall low-income . farlner! been improved? Vrr.at constraints remain? The activities of FIR_\ have been extl'emely ef:ective :'n inc::easing private bank participation in tb.e agricultural sector. By 1978, discounted activity with "low-income ~ producers had increased from 0 to 2,592..7 cillion pesos (S117.8 million). This amount represented 14 percent of total discount activity by FIRA in 1978. Loans to larger producers had grown to 15~9Z6.7 mjllion pesos IS723.9 million} over the 23 years since 1956, representing 86 percent of total FIRA discounts in 1978. These sums do not include loans fro n.l the banks' own resources {see Figu.."'1!! D. Whereas FIRA was originally intended to :eUeve the inid1"tOation a.,d ::-lsk constraints of lending to larger producers who would, ~~profit;!,bl~' credit subjects in any case, tb.e PBI program was intended to involve banks in a development effort of t!le agriC'.1ltu.ral sector. FIRA's planning division has stated, in. Linea:nientos 3asico5 del Programa de Productores de Baios bgresos, that the purpose of the PBI program is to increase agricultural credit to the ejidatarios, cotCUIleroS, and minifu::dista private landholders. Tae Bank of Mexico was to act as "a trust whose goal is to e:<elS:Ute a - program of development t::.at increases productivity and improves t!le , income of farmers b poorly developed zones with minimu:n in.il'astrucrore . and potential resources that Qake possible tb.ese objectives. 'T The subsidiza tion oi tec.:mical assistance costs and of guarantee services by FEGA, tb.e provision of tecbnical support staff to assist t::'e '::Jar:..ks ~ iden_tification ar:.d !::-aining activity, and t!1e c:::crdi::laticn '.vit.;' otb.er goVe!':l:ne!lt !hgencies that 73 ~ F/(i 1m E L AMOUNT OF D1SC:OIINTlm r.HlmJ'!' AND NlIMBEH Ol~ RRi'H~FU-:JAnlr.:~ ~t I OF DISCOUNTED CHEDIT (Short-krm Production Credit and Lohg-lerm Investment Crt:dit) .' . i :~'. ',I i " ,! '" " Uendidilrie::l 19711U • Amount of Discounted Credit :(' 1 i :; nn uy -0; '!'otah by Period n !Total:.l Period I BIjl91J n I /''::' I II 1974 . " . '. 191:ilH] 6 '1(.1).9 197.a J!~ (ZJ Iii" 1,Ii/l 1I lllJ 9 IWI ,E..o;;,','J:'-- -~~~~ == , tl ( ---- 1978 , .; I, .; r 11~ljI~- II , I .;. I. . I', " :. ~l.O Ir JI) 1900 .". , I" I ,'/,','i6~.' i/////// /,','//.J~--2.1;;::"::=1 )98III-':'i_"';-"':";'-'~-"':'--"'---,,-,,--.~-." Ilf,',. '11/ 1 1111"',1' _ ' 4110 1_,0 III II,,"" •• ----~- ---- ',<. , I , ,I I I 'I I "" I I I 'I #" I ~ ====10-,'.====:: 19t12 "2~_~ 11",1/1",58";,,11,,,,1"/' I,' '~., 1,11,1 'I','JI"','"I, ,'t': I.--+---tl-~,--·,t-i.........;...4----iI---!---+--f---: 000 ·i. l5l 000 :.00 000 2!.O 000 llOOOO \J) 000 100000 "()OI) 20 000 . S 000' »GC,.i ;;1 ~1~ 11' JIJ 000 4!l 000 !O 000 OJ 000 10000 &0 ( f. Thousands of Producers ,'~ .~ , Millions of Pe:sos ~" . --J F- '-=t p P f M ':-Middle- ami High-income producers ~ I" :r !I, i , -{:. P P B I --LOW-Income pro,lllcers might be of assistance i.n developme!lt efforts w~re inte!lded to bear a ::::Jajor ?art of the C::lsts oi the c.evelopment a.ctivities in which t.."-le banks were expected to participate t:::,,'''':)Ugh the!:::- credit ~fforts with ?:3Is. As we s.hall see, these subsidy efforts have been inadequate arId axe often inappropriately applied-partly as a result of faulty prograc pla.::ming, and partly as a result of cost :ci!limization efforts and consequent credit rationing behavior on tb.e part of tb.e banks. Let u.s look. at the problems that 'ha"le led to a :cisapplication of subsid5es on a program-by-pl"Ograc basis. 1. Reimbursement for tb.e costs of tech.!lical assistance Banks are reimbursed indirectly in terms of a percentage (3-6 percent) of their active PBI portfolio rather than directly for the ac~al c::sts of :caintaining t."e extra staff. The consequences can be seen ill the following exa::nple. One bank hires one agriC'.lltural tec!l:rician to ~erve 10 l.arger far:::lers. each 0 f whom receives a 10 ,000 peso loan. A."lother bank hires five agrlC'.lltu.ral tec!u:.icians to serve 20 scall far:ners, each of whom l"'!!ceives a 1,000 peso loan. If t:!:.e subsidy :s 1 percent of t:!:.e aooU!'!t lent, both banks 't :-eceive a g:-ant of 1,000 ?esos. i5 T.:le CO.::it of hiring the tec!micians is five times greater for the second bank than for ·he first, and the !lumber of farmers reac..~ed--an objective of the ?rcgram-is ten times greater. Given the type of sub5idy c!lOSci11 ~owever, both banks receive the same "incentive. ~ In such circumstances, any bank would find ~t more pro fitable to behave like the first bank and give preference to larg(!r farmers. 'I:le str.lct'.ll:'e of the subsidy is blefficient and does not lead to t!le intended development activity. a s the first bank. TIlis is shown by the following observations: much -- Altb.ough since 1975 the average cop production loan amount per individual (PBI.) has ranged between 1,000 and 2,000 dollars, banks have lent primarily to groups of farmers (the law requ~s that farmers be organized in economically viable units of prcduction), allowing them to grant loan amounts averaging ~O,OOO-44,OOO pesos, the equivalent of S18,000-520,000. The average group consists of 14 farmers, and t!le average amount of land financed per lean has been 64.5 hectares of primarily irrigated land. i/ TI::u.s b2.nks have lent primarily to PBI borrowe!' units ';t1hose productive ca-pacity 4/ Data gathe~d! from ban.."- dOC"..lmentation and interviews 71ith four banks cost involved i:l PBI activity. Specific data are held ccn!:'den" tial. could absorb and :epay larger lo<Uls~ allowing t.i.e bar_lI:.s to minimize t!leil" administrative b;u-den. --Initial PBI activity ....as with clients for whom tb.e banks financed inf=ast..""Uctural investments, especially well digging and the purc!l.ase of pumps :or irrigation. T.:lese old clients have become the -.:o,'\in :ecipients of shcrt-t<!l'm production loans. Their cl1a::acters and repayment histories are bown to the banks, and t!ley posse::fS an inuasuucture that assures less variance to. the outcome of their productive activity "!.J:.d. ~.:tu:; iess risk tor t!le banks.. 'TIlese clients need a ctinimum of training and 'n"p~:"'l'uion; :led .. require a uinimum of evllu.ation on the part of the lending instit".ltions. --Clients have tended to be concentl:'ated within an easy travel rad!us of bank offices, and in more productive districts where there ar-e basic :ufrastructure and access to -:ommercial outlets. The average distance f:,om tb.e hanks' main distl:'ict office:s is ZZ kilometers, the equivalent of 13.43 :::llles ':'1ith a range of i to 60 kilometers (4.2 to 36 miles) . .. -Tne number of tec.!mical staff hired to servlc;! the ?SIs by the average regiocal office of the four banks interviewed ....as four, and they had _ to deal witb. hundreds of loan recipients and portfolios of billions of pesos of ! c:r-edit, bOt!l investm.ent and production c:::"edit. Their primC'-y fU:.:lction was ... . to :dentify and evaluate potential PSI c!'ed:it subjects, to s'-"'Pervise activities ... I I :;Jerioroed 71itb. the loans, and to assist in loan collection. b. other WQI-cis, tb.eir activity tended to be primarily to reo.uce risk and the cost 0: c.efault. rne training and development activitif:s that the prograo was intend~d to p'l:'omote had fallen by the waysid~, since it . .v as not profitable for the banks to hlre staff in order to engage in such activity. This choice of PBI clientele has been permitted i::l part by the generous income ceilings and ma."timum loan amounts alia loVed by FIRA under the PBI prog'l:'am. The maximum production loan is the equivalert of almost ,s45,OOO, and the income ceiling is ~net annual individual inc·)ttle up to 1,000 times t!le highest legal minimum rural daily salar:r estabu.:;i:ll!d In the Republic. ~ ?! That tur::lS out to be t...1.e equi::"alent of a net income o! S6,136, a huge income in a cou.nt:'y whose average !,ross rural income is less than the eql.uvalent of a thousand dollars. Z. The guarantee of credit when farmer collatel:'al is inadequate to secJ.re the bank in case of default" FEGA guarantees up to 30 perc!!.'lt of the value of credit to PSIs when - adequate collateral is not otherwise available. The guarantees do :lot have ! Planni."lg Di'l:sion of FI..~.\, Lineamentos 3asicos del ?:-ogr3.::::;a de !t P::-oductores de Baios bgresos (October 19(9). 73 as important a subsidy effect as they ::light because of ~he costs im ad:ninistering them. F::-st, in cases of default, payment of the guarantee entails cC!l.siderable redtape and delay. The !"'.ara::ltee is !?aid only if the deiault is :lot due to ci!'C'..:.mstances wit!lin the cont::ol of t-i.e hor.:-owe::- or tlle institution. Tae institution is at fault if it has provided "inadequate" su!-,ervisiol"l, training, He. As we have seen, efforts to :.::o.inicize costs of ::tiring :echnical staff have !ed :nost banks to offer a ClinlmUm of tecb......ucal assistance to their clie!lts.. Because the burden 0: prooi is placed on ~lle banks~ :-esulting in considerable paperwor~ payn::ent of guarantees has sometimes taken !:.lore t.hrul a. year. This entails bc:oeased costs. fer t!le bank, as well as loss of use of its funds. Second., in case of default, the credit institution must formulate a program to reCCVe:l:' the funds il:. coordination with the F1RA field office ;:..nd with t~e participation of t!le c::editee. It must send periodic reports to t!le central office of FIRA on the f.rrogress of the borrower." in repaying hi3 loan. Any money repaid is distributed betw~~ the lending bstit':lt:on a:ld FIRA commensurate with the proportion of risk each assumed initially. For e."t<-.nple, if t!le l~nding i:stitution has been reim bursed for gO percent 0 f' t!J.e deEaulted loan, FEGA -:vill receive 80 pe!"cent of all ::::laney recove:-ed. The rec~vc"" effort ~ld its pa?et'work are, of ccurse, c~stly to the lending 79 The subsidy ei:e':t oi ~e guarantee program is thus substantially :-ecuced by these proble::ns. :;.ank, offid2..'!s interviewed did !lot regard the guara..,tee program as insurance of real value t but only as a "possible" backup in case of dnfault. The banks h<l'1e accordingly offered c-:edit to clients presentmg 3..5 1ittl~ risk as po~ible, thereby reducing c.heh- n~~d to depend on the guar~.ui;t;~. From the inception of the guarantee program in 191'2. '.;.ntil December 1978, only 64 million pesos (2.9 milllr.n dollars) had bee:l paid ;.n '=3.~s of default. '..' his represents onlv 1.4 percent of the' 4.5 billion pesos (Z07 roillion dollars) of guara.tlLt:'~l ·-;-::':'t~"i:t .. ~uthorized. nf"~'~" ';ount, 12.8 million pesos wer-e :ecovered ;;..subsequer.t loan :esc.heduJ.in.,?-,., ;';"is fig1.1l'e represents 20 percent of FEGA pay-::nents. !:l part t~e figures l:':)flect tr!"! ~ow rate of default '1n loans; PBI c-:edit subje-::ts tend not to be '1ery risky. I:c. part, howevert ttl! f!~s t:ilay represent the diffic.llt7 ilie bank!; have 1:l attaining ?aY'.llent of guarantees (se'! Table Xl. 3. The discount mec.ha.nism .. hltezesting, though somewhat ur.expected, 'has t!le predominant use of bank I'esourct.!s ir" PEl p~·.)d'.lcticr. credit .cpera:ions rather than resources ,. :,y tlle fact tbat it ~..,abled. banks to concentrate ti.~h- t}'..b:lical, identifica t:on, and evaluaticn :esources 7lithin a given clientele group sc as to '::ulfill 80 TABLE X. GU ARAN'TI'ES, ?AYMENTS, A."I'D RECC~IES TO DECEMBER :n, 1978 ( C".utlula t i ve) (l) (Z) (3) i·U (i) (6) (7) (81 Relfiollal :3/11 (5/3) Cffic" GuUUlt.... % r a7trl.tnts % Recoveries % % % Total "t565.388 ii.:.£!" 1Z .840 ...hi -lQ. ~orth ~o Torreen 66,941 ZI8,73Z 1.5 ".8 51:? 4.173 0.9 0.5 no 158 Z.S 1.2 0.8 1.9 55.9 3 8 , Cbibuahua 96,n4 Z.l I t Saltillo 39,118 0.9 300 0.5 0.3 ~rorthwut HerlIlosillo Muicall Ob~al 16,311 14,726 167,504 0... 0.3 3.7 659 azo 0.1 1.3 1Z8 1 0.5 . 15.6 t Mocltis 949,648 ZO.3 10,5U 16 •.j, ... 2.77 33.3 1.1 .w.6 Cu.l.Iacm 589,963 lZ .9 lZ ,·610 19.3 3,385 3).3 Z.1 31.3 L.a.?&:: 1,378 0.0 :t~t!l_st TalIlpico Ma talIlon:lS Z61,'50 l.u ,530 5.7 3.1 17.. 3,183 0.3 ... 5 855 6.7 v<'~ Z.Z 1" ....... '6.S Moat1t1'2'1tY lZ" loU Z.7 Venew:. 13l,....7 Z.9 ZS6 0 ... .... rJ .J' , ,.z. . .j,1J , •• M • ~est Guad. a.J.a j Ull 355.16.. 7.8 1Z,153 18.9 1,983 15..5 3 ... 16.6 Colima 163,:aO 3.6 Z,6Z7 ".1 "14 3.Z 1.0 15.7 Tepic ..5.690 LO 3,935 6.1 ZOZ 1.6 8.6 5.1 Central Celaya ..09,703 9.0 1,714 Z.7 7.. 0.) 0 ... ".3 Quel'ltua 10,579 O.Z 1,613 Z.6 15.3 PadNca 18,064 0.' Z.ac:atecu 66,Dl 1.4 .~ucallentes 13,166 0.3 Z55 0 ... 1Z1 0." 1.9 47 S.L? 8,370 O.Z South P..1ebla lZS,67Z Z.8 ~ 0.7 0.3 O.Z TIucw 7,196 O.Z .u8 0.7 6.1 To luc II 3,963 O.z. Cuer:a?aca lZ6,1~ Z.8 Z,U4 3.5 ZZl 1.. 1.8 9.8 .. Ouaca 85,60Z. 1.9 Gt'O.-Mici1 Morella 33,7uS 0.7 1,058 1.7 105 0.8 3.1 9.9 Acapulco 19,997 0 ... 949 1.3 38 0.3 ~.7 4 Southeast VilLaherlIloA. 86,71Z. 1.9! c\cayt.lCan 93,9t10 Z.l Z,.JOl ... 1 z.a 0.,_ M Tt1Xtla Gt%. ?!tllinsula C"crpec:lle ~1erida Ciletumu 19,000 6,Z65 :7,989 19,5:tq 0.1 .. 0 ... O.ol • 310 791 0.5 l.Z 13 0.1 1.0 .. loS [ th.eir reser'V'e obligation to plac~ 2.4 ?ercent of t1:eir total deposits :n le~ding activit: wi6 PBL<;- After fuUmL"'lg their reserve obligation t~ey would not ~ave to continue to expend resources to eXlland those lending efforts, as would be t.b.e case if they were to discount loans! thereby constantly reducing their fulfillment 0: the reserve obligation. An addi tional incentive to use bank. :-atller than FIR.-\. resources is the ma.~imi::ation of o~erating margins. Whereas t!le gross margin obtainable by operating with bank resources which cost 5.5 to 6.0 percent would be .085 (i.e., .14-.053) to .08 (i.e., .1-l.-.06) ilie margin obtai:::d:!1.a__ ~v operating with ?1R.-\.'s resources is only .02 percent (i.e., .14-:.12). TIlls phenomenon explains wh: a large amount of PBI lending activiq is :lot recm'ried in FIR.-\. :-ecords, since FlRA !las information only en discounted activity_ Because of tr.~ long-ter!!l nature of inve!lt::Jent loans, however, this for:n of lending to ?BIs tends to be discoll.'1.ted wit!l FE.A. in order to free \..1> bank resourcee• .\lthocg!l it was diffic.llt to document this pattee .:>f private bank behavior on a nationwide basis, I ;vas able to seC.lre ~he following dec.lme:lt at the state FIRA ot:ice in Celay~ Guanajuato. I confirmed a similar patten of p,:ivate bank ':le!l 1101.' " with the regional FIRA. office in Morella. In ~{orelia, however th(' ~a:.. .. ern was confirced bv the implications of tlle docJ.ments provided :-ather than by explicit evid~!:(;e. 32 T.~5LE XI. AUTSORI,>cD G U .-\R.-L"l'TEES AND SOURCES OF FU'N"DS (1979) (In millions of pesos) F1P..A Bank Institution Funds FUllds Banco Mexicano, S.A.. Investment Credit ZO .15 Production Credit 16.209 Total 36":44 36.44 Bancomer, S••~ Investment Credit -t.81 Production Credit 8.76 Total f3:57 4.81 8.76 Banco del Centro, S.A Investment Credit 0.67 Production Credit 1.41 Total 20.08 2..0l:r Banamex., S.A. Inves::ment Credit 3.31 Production Credit 31.45 Total 34.76 3.31 31.45 B.LC.S.A.. Investment Credit Production Credit 0.17 Total O,,1i 0.17 Total Investment Credit Z8.94 Production Credit 58.08 Total 87.0" 44.73 4:20.2.9 Table XI shows iliat three private banks operating !:l Celaya-Ba.n::om~r, 5.A_. Banco del Centro, S.A., ar.d Banamex. S.A. (Ba.:lcO '. Internacionaf del Cent:'O and 3anco Me:dcano are mi~ed companies with government pets as 51 pe!'cent of ~!lei.r ope!'ating equit7)--disc::lunt enly I 33 investment c=edit '.vit;" FrR.\ and use their own !"~sources for t!:leir !:ihort term produc~ion c::.-edit activity. ?or instance, in the case of Bancocer. with. a total of .J:.S 1 := "lion pesos of ~ara.nteed invest:nent credit, 4.31 million pesos was discounted with i-m.A (e~act!y the amount of guaranteed investment c::edit); and 8.76 (e:~actly the amount of guaranteed short-term c::edit) was loaned f::om bank resources. In Morelia., t.."t~ doc.lmentation included t'No tables. One was a income fu::ners (PBI) i::l terms of total and discounted investment c=edit. A seccr'.:. table, showing total and discounted short-term credit, was not broken down by PBI and PDA. When I requested a brea.ltdown I was given an explanation confirmi:n.g the patter.:!. e"-ridenced in Celaya--that priva~e banks tend to operate wi.th. their own resources so as (1) to fulfill their leg'!! rese:ve :equil'ement as quid:.ly a.."! lJossible and (Z) toopticize the margins on c=edit activities ?:itb. low-income farmers• 3. TRANSACTION COSTS FOR .. COM~iE?,CL-\L B.-\NKS Dl LENDING TO LOW-INCOME FARMERS 'PBll T:~e followi!1g cost infor:::::.ation (su::nnari::ed in Table xrn is based on • interv!.ews d.one i:i C<!laya a.,d Morelia wit."t tb.e central offices a:::.d the area • offices of thre€ of the la...-gest commercial banks in Mexico. T.1.e :lames of the banks will not be disclosed as the inforlllation was given in ::Jnf:d.ence. The distinguishing oara;::teristic of Bank A is its adherence to a very conservative lending polle:. The director of its Agric.lltural D~velopment . . P;:ogram was most vehement in his resentcent of the gover.:!r:lent-imnosed obligation to participatei:l subsidizi::l.g a .rural development ef:crt. Rural developmeut, b his opinion, was :lot a prop<:r doma.:.n for an instit·.ltion whose goal is cost lllmimization and profit maximi:.;;a.tion. H~ felt that only to those far!Ilers 7Jb.o .~epresented least cost to the bank, i.e., those catty~ tJ:e least :isk. of default and needing the least amounts of training and supervision. As "Re shall see, tllis bank spends significantly :::lore on tedmic2.l staff bvolved :n identification, evaluation, and supervi.sion work with PBI c:::-edit subjects thc'.n either of the ot..1"e: two baaks. The loss f=om default for Bank A beior~ and after liquidation of t!~e FEGA guarantee is significantly lower than for the otlle:- banks. Although Bank A is larger tha::l the other two, since the inception 'Jf the FEGA guarante~ pogn.Ill b 1973 it has guarant.!ed only 6S'~,{)32 uousand pesos of c:oedit to PEls as compared to 2,287,327 thou::;and pesos for Bank B and l,z'59,Z85 thousand pesos for Bank c. T.lese figures i:ldicate tbat Bank A's clients possess collaterable assets' t!:lat largely obviate :!:.e ~eed for governmentg''.lara:ttees. Rowe"er, ~.S percent of '?a:I'.k ,-\'5 FEGA-guara."1teed' c:redit :"as undergone d<!fault a:ld 55 eventual FEGA liq'..lidarion since 1973, while enl? 0.3 p~rcent of FEGA-guaranteed c=edit for both Bank B and C has required FEGA liquidation {see Table xm. TABLE XII. GUAR....i llTEED CREDIT BY BANK Total Amount of Percent Total Amount Guaranteed Credit Liquidations Guaranteed Liquidated to (Pesos) by FEGA Total Ba.:>..1t A 680,032,,000 10,836,320 1.6 Bank B 2.,2.87,32,7,000 19,CC1.,60z., . 0.3 " Bank C 1,2.59,2.85,000 10 I 7,32.,,193 J.a' Bank A operates almost 100 percent wIth its own funds in PEl lending. Only a miniscule amount of its PBI loans are discounted with FIRA. Of its total discounts with FlRA in 1978,4,92,1.5 million pesos, only approxim'itely 401,";'00 pesos "'ere discounted. for PBI clients--less than .01 percent. y This a;Jows Bank A to maximize its gross operating margin, since its own .. funds are c heaper than those discounted ?1i~,:t . . FffiA, and to fu!!Hl its' reserve ocligation with the Bank of Me:'Cico by concenc-ating its efforts on th,e class of PBI client ~ith whom it can most effectively ::nini~ze costs. • 6/ Bank of ~Ie:'Cico, - S.A., FIR.-\.. Otlerations from!lt1anuarv to December 1973. 86 BaIlk B :::'as been lauded for the size and aggressiveness of its ?BI program. T.:le \lrogralJl's growth and caseload pel' technical assista."'lt is as follows: TABLE XlII. BANK B Avenge Portfolio Number of A:.:tlount Handled .~OU!lt of Permanent per Technical Credit (Pesos) Tecldcal Staff Assistant 1973 5,052.,902.00 4 1,2.63,2.2.5.50 1974 62. 7750,754.75 2.6 '2.,4:13 ,490.56 1975 2.55,800,000.00 82. 3,119,512..19 1976 508,733,490.03 108 4,710,495.27 19i7 655,974,9Z7.52. 12.2. 5,376,843.66 19i8 72.7,734 ,389.06 159 4,376,947.10 Although the amoWlt spent on t~clmical staff to serve PBI clients is ::noderate, 5.6 percent of t.:ll! contracted loan portfolio with PBI in t 978 as compared to 7.76 percent for Bank A and 4.1 percent for Eank C, the bank shows aggressiveness i.:l its total loan operations with PEI--72.7,734.39 t~ousand pesos as compared to 198,051.2.4 :1:ou.sand pesos for Bank A, even :.."tough '3ank A, in total assets, is muc!l largt!r. Although its operations are significantly lower than these for Ban.1t C, t~:i:; is la.oogely because of the . mixed public and private ::lature of Bar;.k C's ownership which requires that it participate to a la...ger ex~ent in sodal prog:'ams t~at aa7e go-q-ernment blessing. Bank '3 ~ generously used tIle discotl.:lt services a."'ld the ;roa:antee services of FEGA, to eX::land - . its ?EI ac:ti-.tities.It 37 r Bank C is .a :::1i.ud bank, funded and operated ;vith both public and pri"1ate capital. It appears to have placed a large amount of its own resources in PEl loan activity while being, u:llike Bank. At aggressive in its e::tpansion of new toan activity with PBL Its total contracted. loans with PBI i:r;. 1978 amounted to 94Z t 055.9 thousand pesos; 6.0:'; percent of that amount was discounted with FIRA. It is the most conservative of the three banks in offering technical assistance to PBI bOl':'Owers. Only -l.l percent of its portfolio is spent on technical staff, and eac.h staff member must supervise an average of $7,246.58 thousand pesos of credit as compared. to 54,576.94 thousar.d pesos and 3,300.85 thousand pesos for Banks B and A respectively. During my stay in M:e.'tico, Bank. C was in the process of negotiating certai:l modifications in the accounting basis wit!l FEGA by which it ?lould be reimbursed. for its costs of technical assistance. The conclusion of these negotiations (which at that time aW2.ited final approval by FEGA) consisted . of the following provisbru: I:l addition to being rej~ursed 3 :;Jercent 0: :.he average annual active . ' Oortfolio of loans wit!l PEL . the bank ;vould be reimoursed as follows: 88 (1) For eac!l percentage point above 50 ?e~cent of total PEI lending whi6 ·.vas invested in. lo::g-term invest:nent loans the bank would ":.ie reimbursed an additioD,;ll 0.1 percent of the value of its total PEI loan portfolio. (2) 100 percent of t!:e cost of personnel and equipcent devoted to the prolIlotion and opening 0f new zones of operation would be ~imbursed; (3) 50 percent of its expenditures for initia.l;;:,~~,:z), d,m,cludmg the costs of salaries1 living allowances, and other per~o,nn,p.l mtpenses, would be reim bursed. (4) 50 percent of the costs of training in specialty areas for personnel involved. in the PBI program, i:lcluding salaries and other personnel expenses, would be reimbursed. ~e total of all this is in TlO case to exceed 6 percent of the annual average of the :nonthly ac!ive portfolio of ?BI loans. .. Independently of ~ese C03ts of technical assistance, the FONDO was to cover 100 perc,,-~,~ . of all expenditures on courses of t:-aini::g for tec!:nical assistance stat: o=g' anized az:rl offered bv the bank. ' 39 ; - . . The purpose of the CeIl t;, .. .:t was to provi.de direct bce.ctives to t.!:.e ban-It to offer development services that under the present subsidy syst,~m are not cost-effective for the bank. 1'1le costs of certain st::U't~.Ip pro~a!lls and train..ng offer no short-term possibility a f income to the ban.lt. The provisions of the contract are intended to support the dev'!lopment of such. services. The following table summarizes the portfolio information for the t.1'l.l':ee banks. . 90 • TABLE >:rv. 1978 m THOUSANDS OF PESOS Bank A. Bank B Bank C 1 Portfolio of contracted loans '.villi PBI 198,051.24 727,734.59 942,055.9 ., . Number of tec!mical staff hired to attend PBI loan activity 60 159 130 l/Z Case load per tedmical staff in pesos 0 f con trac!ed loans 3,300.85 4,576.94 7~246.5a 3 Amount of discount activity with FtRA for PBI 401.4 95,306.19 57,037.6(: 3/1 Percent of total portfolio dlscounted 0.2 13.09 6.05 4 Amount of guaranteed IOa:n!l 120,696 649,z'26 435,585.0 4;1 Percent of total portfolio guaranteed by FEGA 60.9 89.21 46 5 _-\.mount d liquidated guarantees 5,845.38 12,191.06 6;766.95 5/4 Percent of total guarano:eed loans liquida.ted 4.8 1.87 1.55 /6 " Total cost of t~c.!urical staff applicable to PBI 15,381.423 40,709.1 38,7(.6.2 6/1 Percent of contracted loans ?lith PBI 7.76 5.6 4.1 :// Amount of cost of technical staff applied for reimb'..tl'5ement 10,004.09 21,295.85 n.a. 7/6 Percent of cost of technical staff subsidized by FEGA .. aut!loriz ation 65 52.3 ~a. 3 Lictuidations of autb.orized rehn bursement ~ 4,641.29 n.a. ~.a. - ,! 8/1 Percent liquidations/total ;Jortfolio ~ 2.3 n.a. - ::l.a,,;. 8/7 ?p.rcent lilluidations/cost 30 n.a. 9 n.a:. .. :,rOTE: ::.a. =not available. !I As of October 1979 fo]" costs lnc:,eascd duri..."lg 1978. 91 \lUI. BANCO NACIONAL DE CREDITO RUR~-\.L (B?JCR)--T:-:l:E GOVER:;p'-.1E1'IT-SUPPORTED AGRICULTURAL CREDIT SYST~il Until 1975, t.hree agric.lltu:cal credit banks, t!le Banco Nacional de Credito Agricola, Banco Nacional d.e Ct"edito Ejidal ~d Banco Nacional Ag:::opec.lario, gave c:-edit for agricultural and live!:ltock production and b.elped to finance !lejidatarios~ and small landowners. A Presidential decree of ,july 5, 1975, merged the three banks into the Banco Nacional de Credito Rural. Twelve regional subsidiary banks of the BNCR were created. using the existing structure of seven. regional 1an...~,::' J.lliliated. ·,qith tae Banco Nacional .-\.gropecuario and four regional subsidi2.ri'l":"!c G'! lEe:i5'anco Nadonai de Credito Ejidal. The aim of the merger was to eliminate overlapping financial services, improve the ";hamleling of funes and loans into the .. agric.llt".lral sector, and improve the coordination between the government departmen ts c::mcer:'!ed with agric.llture on the one hand, and t.>te national agricult".lral credit system on the other hand. Tne BNCR, or Ba.nrural, has two pri:lcipal objectives, 'nnich. are reflected in its operational 5truc~~! (1) the efficient, timely 6anneling of . credit to promote productive investment. i:l tile countryside; ~lld (2) the organization and training of 3.g-.:ic..11t'..1ral producers, especially "ejiCatar~o$!" "communeros," "colonos," and "mbifu.."ldista " priva.:e la,\'ld!lolde::s. so as to improve t!::.eir participation i:l the development of the country. This is t;::ebe . ac!lieved. trou.gh better e~'Ploitation of natural re~ources and available Operationally t.!lis tra.Nlates into tJ:~e follo·,vi.:lg principal functions: 1. Regular b.:m.king 0Fd:atio:;:.s, 'Rhic!:l. are :nainly shcrt- and. long- term loans :01' prima- j productior.i and Z. Special oporatk;;I'J, des\gned ~o support :lormalcredit operatiolls by inc:easing the proauctivity of ~orrowel's. r.o.I"_"le: JPl.!cltJ: operati('lns include ill±:astruct'...ll'e projects, trainin;S, and technical assistance. Alt!:l.ouRh this type of fin3.Ilcing is treated as credit in tb.e accot.:llts, it is in practice hea.ily s1.lb"idi.:ea '::1' tak.e~ l:he :o~m of grants, 'Rith low and nil recoveries. The lIlain financial chl1l'1\ct~ris~k £ Banrural is its ::'eavy losses. ~e losses stec f=()ro th<! low I':lte of debt recover{ {60 pe~:t;ent} and the very high admiu.i:ltrativE:! expense~ " T".:l~ ~ollowing tables show t.he recover! :-ecor~ for Banrural's credit operations, broken down by for::l 0: c:'!d~t a:ld o:y region. r.:le :-egior:.al breakdown in Table XIV show;.; that average rec:Jve:"r l."ates are as low as 2.9 • per-:ent i:l tba region of ~:'I! Gulf a:ld as ::tigh as.l .. perc~::.t :n t.'le highly productive ~-Iort!J.'Rest :eg~on. As t.'ese figures suggest, a good deal 0 f credit 93 r is given ".it!lout ;,oegard to the ccc:nomic capacity or ?ote:ltia1 of t!lc :f!cipient faroers but r.:::ore as a social t:::ansie!" or grant. ~ fact, ZS ?erc:ent I l I of all 3NCR le~di::.g is ir:lmediately l!."a:l.Sler!"ed as a !oss into L'le ~come t statement. due to the !ligh :ate of bad debt:;. 11 TABLE XV. BNCR: RECOVERY R...\ TES OF REGIONAL BANKS IN 1973-1976 ~' (In percent) Average Type of Credit 1973 1914 1975 1976 1973-1976 Northwest 89.6 93.1 90.9 North 70.3 51.3 2.9. ·t 87.3 42.3 Celltral North Northeast 61.2. 63.6 54.1 5~·.O :>1' .7 Pacific >Tortb. 93.6 91.8 37 .9 86.3 69.9 West 51.6 27.2. 11 .3 Center 79.2 59.1 42.7 43.6 49.3 Pacific South 76.6 68.5 64.5 64.5 65.7 Central South -1-3.9 55.0 31.2. 30.2 36.3 Gulf 53.5 33.0 23 .b 51.9 29.1 Peninsular 36.8 65.6 53, 9 42.2 49.3 Isthmus 61.0 -1.5.4 64.2 59.3 a/ Based ':lIt data :e'Col'ted bv tb.e regional :'ank.s~-inco.:nplete :"'"1 some -::ases. SOURCE: Banco Naciona1 de Credito Rural, Plan of Recove:d,es and Ooen tinns for 1977. . 1/ SUllervision Summa...j, Fifth Livestock and Agricultural Credit Project, International Bank for Reconstruction and Development. P!'Oject Officer: R. Milford; Loan Officer: V. Freeman, 3/ il/76. TABLE XV!. BNCR: R':':COVERY RATES FOR CREDITS GIVEN IN 1973-1976, BY TYPE OF CREDIT (In percent) Average. Type of Credit 1973 1914 1975 1976E! 1973-1976 Shar"C-term . .\ .gl'ic.ll tural Credit 49.7 70.8 60.S 63.2. 61.9 S:ilort-term Livestock C:edit 68.3 59.0 41.2. 37.0 43.3 Other S:ilort-term Credits 2.6.3 73.4 59.0 43.1 53.1 Total Short-Term Credits 50.9 69.8 57.6· ?i::: A 59.8 Long-Term Credits 73.6 57.8 71.5. 71.6 69.7 Total 52,.5 6e.S 58 .~ 61.7 60.5 -------------------------..- --- SOURCE: Banco Nac::'onal de Credito Rural, Plan of Recoveries and O'Oerations , for 1977. General expenses as a percentage of income, exdud.i.:lg government subsidies, were as follows: ?:.I 1975 1976 1977 .. 107.4 157.8 145.7 ... y Ibid. - , w .. 93 The BNCR emplcys al::rJUt 21,000 people. .~pproltimately 52 percent deal wit." "administrative matters~; 9 percent are in management; 16 percent are field persoIl!l.e1 engaged in iden.ification, evaluation, and supervision ser'li.ces for c::edit recipients; and only 22 percent are field personnel who provide training and organization 3ervices for the farmers. T.nese proportions are unexpected considering t!le mission of Banrural. It is fairly dear that Banrural serves the non-c::edit-related but politically important function of offering employment in a country plagued by high une mp1oyment. Th.e result, however, of overstaffing :.s that the COSt oi :>,a:rf~ a!) d... ?ercentage of new loans is as follows: ;975 1976 1977 10.8 16.3 12.1 In gener~ Banr.J.l'al does not operate as a cost-minimizing, proiit :na.."dmizing banking institution. Instead, its credit operations give priority to certain political and social objectiv"ls. A sur::c:rJ.r7 of the BNCR income statement shows that about 80 percent of its income is drawn· from government subsidies and not f::om ban..l<ing operations: It Q' ,0 1975 1976 1977 Incom~ (in percent) 100.0 100.0 100.0 Ex.cluding subsidies 14.7 20.7 19.8 Subgidies 35.3 79.3 80.2 Interest earned as a percentage of: Interest paid 86.2. 85.2. 118.5 Total income 10.3 18.8 18.2. The main subsidies are as follows: tal 25 percent of all !lew c.:edits given in a current ye;,.,;..~ b:y_t_h,p. " BNCR, e:tcept those discounted '.vit...'l FiRA; (b) 20 percent of all medium- and long-term credits discoUllt~d with FIR.A: :d Subsidies for losses due to changes in the rates of exchange; :d) Subsidy for net a.nc.ual operating losses; (e) Subsidies for the purchase of capital goods; (f) ~bs~dies fo!' ad:::nini$tra tive e:t'penses, including t.b.e full ccst 0 f . audit and consulting fees; 97 (g) Subsidies to cover the difference bet\veen paid and ea:t":led interest; (h) Various subsidies !:.egotiated in an individual '.vay for 5pr!cific :leeds·ll Given these fact::; a di:~cussion of Banrural's costs as a determinant of tb.e supply of c:oedit is inappropriate. The fact remains that Banrural s'-1ppUes over 60 percent of all i:::lstitutional agricultural cedit in Mexico. Therefore, it is important to'Ulaly:"!e the cilaractf'!:ristlc:S of those farmers who have access 'Co and who u.,e BNCR. credit in order to determine how to improve the delivery of t:r.at c:oedit for t:r.e accomplishment of stated social and economic obje<:tives. Two objectives of the federal government are the improver::1Emt of the distribution of income in t:r.e agriCUltural sector and t:r.e general improve ment of rural productivity and income. A "9'ariety of institutionalized and highly subsidized SerVlc!!$ have been introduced into the cou::rtryside for the pt.lr?ose of redistributing inccm.., and generally inc:oeasing ::::tcome-producing capacity among the first t"lil'O gt'oups in the follo"ving classification. :Y Ibid. Lev G!fleral da Credito Rural. 98 (l) Subsistence far:::ners ".V!:o have very few :oesources, bot!l economic and i:J.irast:::ucrural. nis category is c!:1aracteriz ed by coiniiundism. (2) Small farmel"S whose productive resources possess greater poten tial, who have access to minimal iniraJtr.J.cture, a..o.d who use t:;:-aditional product've tecilnologies. (3) Small farmel"S with ample productive resources and access to tec.b:colcgies that allow them to de-elop modem systems of production. The !int two groups are the objects of ;;he ?:-ocluct'ores de Baja:>' h~sos pro~rram in FIRA, and t!le target of BNCR c:;.-~it. We have seen that the prh'ate banks tend to cream off t!:e best prospects !rom t!le third category, lea.ving t!le others as the principal clientele of the BNCR. The first and second groups possess 96.1 percent of all agMC'.J.ltu.:ral propel:.' ty, 5'" percent of cultivable land, 30 percent ox the land area with access to il':'igation facilities, and 'Z.4.9 percent of the value of agricultu:al mac.!linery. , Taey consume almost 30 percent of their own production and . account ret' 46 ?el"ce:c.t of t!le COIlnt:;'s total agricultural production. Ie, c(.¥utrast, the ~ird group owns 3.3 percent of t.~e agric..' dtural property, {o3 percent a£ t!le c.1l1tivable land. 70 pe:ocent of t':"e i!-=ig¥ed 99 farmland, and 75.1 percent of the value of agricultural machiner?; but it sells 93 peJ;'cent of its praduction, and accounts for 54 percent of total agrkultural production. 'iI To accomplish the ends of redistributing income toward the first two grOU?3 and of generally inc::easmg t!leir income-produci:lg capacity, a variety of institutionalized and highly subsidized services have been int.-o duced into the cour.tryside. Three of these institutions, whicll will ~e dis~l~ed uelow, have complemented the activities of the B'NCR. The: are Com!,~ia :,-r~du~de Subsistendas Popu.lar1!!S (CON.~SUPO), which guarantees and in some cases subsidize! the sales of certain basic iood crops. Otbel!' government- supported crganizations offer subsidies on production inputs suo as ferti liz <"!r, insecticides, and improved seeds. The theory of these subsidies is that the real income of farmers will inCl'1!!a5e if agricultural prices increase faster than the costs of production and the cost of living. l.-:.e following c-~ar: shows the contribution that these subsidies have made in terms of the diffe::ence between farmers' real income and their costs• .\.n important. problem of income generation i;;l the :u:a1 sec-:or is that .(I of com:::::~rcia1ization. The groeat majority 0 f far!ilers -:qho !lave a su.."Plus Planning Division of FIR A, Lineamientos sitcos del ?:-oductores de 3aios t"'l.gresos (October 1979). 100 "" ~.~I_.m .~~~~ -I" r I 1\ - ~ -- -- - -- ----- ..... ................... 11 +/ I ; t . I -I I • ,r /1 1\ • /,,,/'r) .! .." j ).( ~ / ~l= ,"" :;,..a' "''''~ ,,/ ,;' . _ _ _ f'" .--J' ". crop to sell must deal \vit..i. "particulares" or "acaparadores," who profit from farme~sr inaccessibility to markets by comil:g to farms, purchasing c::,ops at low pricss, and later reselling them. T::le warehouses established by Conasupo were btended to offer farmers an alte!"native outlet at a guaranteed sale price. U~fortunately} the warehouses have been widely and u:tevenly dispersed, and quality controls on the purchased c~ops have been very stringent, resulting i.:l use o! the warehouses by only about 10 percent of the small fa4'me~5. b. fact, the partiC'.uares who have traditionally e:'tploited t!le farmers make up a significant part of CONA.SUPO clientele. Li.1,;.ew~se, the subsidized productive i.:lputS frequently oi'fered th~w:::b\ the c:::edit system have benefited only a small propozotion of the small farnlers for whom they were intended. Only those farmers who work land and have productive conditions fa.voring the profitable use of :.oore c05tly ~ew tecb.nology inputs can benefit from the use of subsidized input:l.. The guaranteed prices offered by CON A.SUPO are an important factor considered 'oy the bank in the evaluation of a farmer's ability to repay a loan. Farmers' access :0 subsidized inputs is also assumed by th,e bank in allocating quotas of credit. The assu::Ilptions, intended to make credit ;:Dare affordable, have left many_ farme:s--espedally the fil5t sroup described -,II abovs-largely unassisted smce t!':.ey have low access to CCNAStJPO pur c.!'lasi:lg ?7arehcuses and canni-t benefit from t.!'le use of more costIy new inputs. 101 Tne second organization is the Aseguradora Nacional A'tricola '!. Ganadera. S.A. L·\}lAGSA}. T:le IntegI'al Agric.lltmal and Livestock. Insurance Law decrees that no short-te:-Ill production or long-term inv~st- ment credit can be authorized unless an application for insurance has been made to cover the credit. Insurance coverage, however, is available only in those regions a.nd for those crops that do not represent a.n !.Uldue actuarial risk fer the insurance company. Put in other wOt'ds, those farUlers '.vho live in marginal or unfavorable asriC'.lltural regions and face a high probability d losiug a significant pro~ortion or all of their cop are not eligible to be ir.sur~ and therefot'e have no access to BNCR credit. ~" .\lthcu;t·· d:'ese farmers ought to be pr.t:le candidates for a dlwrg-eQf oCC'.J.patinl". ":',~(' mfrastructural assist3.!lce--i.e., land terracing, erosion cout:"Ol, etc.--they are largely ignored because of their inaccessibilit-y to normal institutional cannels~f assista."lce, namely the c:edit system. The third org3.!li::ation is La Direcdon General de Produccion y Extension :\.gricola (DGPE-~). Its primary purp.,se is to offer tecb..nical assistance and naining and to promote :lew techniques of production. Although Banrural has its own tecb.nical staff, .. it is insufficient to offer effective service t.:> the vast :::,u::::lbers of potential and existing credit subjects. The DGPEA is intended to supplement the activities of the ENCR .$1 in the a.reas of c::,edit promotion, training, and technical assistance. There:s 6/ . Lev Gene:-al de la .-\se!iuradora Nac:onal A~1"icola "1 Ga."ladera. S•.-\.. 102. little dispute as to t..'le importa:lce of tec!l::licai pe:::sonnel in promoti:lg :lew tec.b.Iliques of production and consequent growt:: a:ld develop:nent. :Out tb.e prov-ision ()f this perso.mel i:l ~,{e:tico, according to ::ny obse:::vations and inte:::views ',vit!l farmers, ';Vas 'H!.ry poorly coordinated and inadequate. .~ a.vernge of eight ejidos were visited by each technical peZ'SOn, '.vhile all agrO!eci t.."tat an ideal :oatio would be one teClico per 1-3 ejidos depending on the si%e of the ejido. Added to ~e burden of un....-ealistic caselcads are the ::norale problems of low pay, inadequate provision for transportation (::nany tecnicos were obliged. to u.se their own ca.~:or e=t~e'i~jr"1;x1 work and were reimJursed witb. :Sl'eat it!'egularityj some ';I1ho were unable to afforti their own cars, ';Vere largely ccnfbed to work in the immediate :!rea of t~e zonal office) a.ld the recalcitrance to r:.ew ideas th~y often encountered among the 'campesinos. ~ In summary, a very important orga."l of gove::''lment efforts to promote growth, :ievelopment, and the capacity to productively invest and repay credit among agriC'..lltural producers suffe!"S from severe problems of inade quata fur.ding and inadequate coordination with simi1a~ tecr.nical services offered from the BNCR . .. .-\.OOther organization t.1.:.at complements tb.e use of c-=edit L"l a less speciEc:;vay :s .atstimto Nacional ce Invest::gacicnes Ag-rlcolas ("'IT..1.), -.vhic.!l per!or::::lS' agric..llt:.::.:al :oesea:c!l :n de',eloping a.:ld improving prod.ucHcn of L03 c:,ops and livestock. In the last 2.0 years, agrlc..lltural research ha:::; been prin-.:ipally concenL-ated in ll'1'igated areas a.nd in commercial ,-...ops other than corn a.I:d wheat. Alt..'1.ough rainfed agriculture embraces !Dore than 75 percent of all c..tltivable land and 69 percent of all BNCR c~edit, ar.d faces entirely different productive conditions than ir.:igated c.J.ltivation, it has :eceived minimal attention :n INL~ researc:t activities. 7J Research and C::.e promotion vi new tedlniques are an important ::nechanism in the l:rIlprovement of p:ociuctivit;7, income, and the capacit;7 to use and repay credit. !it!1:le absence of tec!mological cbange, the user..l.l..::less of credit is limited. Ccndusions The activities of the BNCR must be analyzed in conjunction 7ol'itb. uvse of a network. oi gover.:lment organi:z:ations and of programs to improve ?rodc.cthrity, income, and income dist:dbut1on in the agricultural sector• .. I./ Document presented to ti'le World Bank Lat:n America a...· ld Caribbean Agricultural Projects Division proposing a NatiO.:l.3.1 ?lan oi Scpport for the Development of Rain£ed Agrk.llture. 100l Th;:se efforts have suffered from a failure ~o distinguish among the three categories of agriC'.1ltural producers descibed above, and :heir ;:ondi tior:.s of production, and froU! a failure to clarify the kincls of programs they need. 'While the first category (commercial £arme::s) and the cream of the second category (farmers with potential) have acceS3 to commercial banks, the average farme":' from the second category and all the subsistence Earmers have been dependent on the BNCR £:;1' institutional credit. The provision of institution?J cedit to t.::Ie 3ub!' 'tence fa.r~er ~as oeell of dt:.bious value, as i.r!dicated by the low recovery rates. Often these farmers are offered credit despite the high uncertainty of their prodt!ction, especially in rainfed areas. For some farmers receiving c::edit, t..'1e low productivity of their land virtually insures default on their ?ayments. Once t.'1ey iava defaulteli. they fall into the categr;ry of "cartera venc~da" and are ~~eUgible to receive further credit until their previous c:edit has been repaid. ',linen payments are past due, interest charges are increased an ex~a 2. percent to 16 percent, and these "intereses morator:os" con tinue to accumulate u:o.til t..'1e credit is paid.. Little effort !.S made in the BNCR to restru-::t'.ll'e c::-edit in C~ of default. For marginal far::::ie-~ the likelihood of acquiring the resou:ces to repay credit ?lus aCC".1mulated inte!'!!st is 7ery . small. .-\5 a :o!!sult. every year 40 percent of BNCR credit red~ents lose 105 access to all except inior:nal sou.:.-ces of cedit. T:lis loss of access ofter, results i1' being ignored b-f govem::nent extension and i:::l.i=c st:"'J.crure :;,:n"o g:ams 'l:uch as l.and leveling, drainaf"e con:e-ction, soil erosion cont=ol., az:d te-::.!mical assistance. This category of farmer is Fraperly the subj:'-::: of more appropd"l.te subsidy systems. Some, who have little economic poten tial, should receive ou t:ight grants. Others should receive intensive technical assista."lce and development aid, and perhaps short-ter::n loan" a::> long-term credit --allowing repayroeut CiS the development process pro gresses and income lmproves. 30th farmers and Ba.n.r..:..ral suffel' f!"ota the confusion ·~et";7,::t!ll c:-edft suhjects and the subjects of other forms of subsidies and assi-tanc~. FaJ'mers who need intensive tec!mical ~ista':lce to i.I::;::prove ;l1-oductivitl and income ar~ not truly assisted by subsidized intp.t:est :oates or subsidized inputs if ;:hey have not developed the capacity to ',.;..e those :nPllts to repay c:-edit. 3anrural ·... m continue to fall shol''i: of its goal of improving income and its dist:-ibution in the agric..l ltural sector if it gives c-:edit without ot.i.er forms of assistance where there is a lack of means to productively use and repay that c:-edit . . 106 IX. TR_~.NSACTIO~ COSTS FOR TI-iFOR:.,U.L LE~DE..~S In ~fexico the~ are three types of bformal lenders: (1) friends, relatives, ::leighbors, and local meroants who ::!lake small loans cr give small c~dits without interest c.barge for the pu.roase of inputs or for consump tiOll ~eed.s; (2) professional coney lenders ~d coneylender t"Jc::!s :,uc~ as larger, more well-to-do farmers (some well-off far:ners sharec:-op their l~d, usi.""1g .he proceeds of the shared c:.-op as reirnburseruent for ~'t provisicn 0 f inputs and Ian:! use); and (3) com:c::le~'cial ccncerns t!lat consist of ~wo g!"oups: (a) those ~'1ho contract with J. h.l"~~.r (a:ld 0(£1"'I"."'.:L· 2It.::J:J.t;.cil' to ?u.r6ase a c:-op at: a conttact~d price, and (b) "acaparadores" or ~7'!~;"lSiT-·t~~"'·· lizers" ~ho oifer produc!icn loans at the far::l gate. Principal and interest on these loans is reFaid in kind with the har-vested GOp. Tne c.'"targes on t!lese loans are considered \.!sur:ous a"!d can rise as high a.'J 100 percent Ot t:'e value of the loan. _~lt.b.ough little is laown about the aggregate aeount of such inforeal lending or its distribution among types of lenders, one would pro!Jably be safe in sayir.g t.b.at i::lfol"mal lenders supply ::lost of t1:e credit in rural Gedit .. markets. T.-:e small farmer has very limited al.:cess to institutional c:,edit~ as we haire seen--because t!:te private banks 1:'ation it o!." e:tclude him altcgether, because previous default has !D2.de him ineligible for c:'eciit f:-oe 107 the government ban.~ '::lecause cf certain tra:nsaction costs of bQ!,,!,o';'Z=~ (to b~ disc..lSsed later), 0: because of the smalbess of the loan or its nonproduc tive purpose. The informal lending process alakes no provision for the economic development of the bar.ower. ~fost loans are used to fmance short-term consumption, and the i:::lformal t:larket is poorly adap ted for' firlancing substantial :nedium-te!'m investments. Although I found no indication of mortgaging and consequent foreclosure en,. land or property in ca.!'1"'.·-:;;3 delinquency, a process that in some cCJuntlies reduces delinquent farmers to destitution, I oosel"'1ed instances of severe impoverishment because of the high interest rates farmers had to pay in the absence of alternative sources of credit. Ii a. farmer ';Vas producing at a subsistenc~ level, suo borrowi.ng not only reduced his ability to save but also cut into his subsistence or else enmeshed him in a vicious circle of depend.mce on usurious <'''!'edit to supply his subsistence needs. The Nat'.lre of Transaction Costs for Informal Lenders :b Mexico: monerlende::'s and acaparadores operate outside the law. However, they are se!&'om if ever prosec.lted beca!.~.se farmers depend on " t.~e::n and because govemment agents l:'ecogni::e the :'lec:!ssity of that source of fba:lce to many farmers. ! found it, :ies;:>ite at-:empts! i:npossible to 108 interview openly and ~onestl7 a !lloneylender or acaparador. T.'le comments in this section are based en infcrmation gat.'1ered from far!l'lers who used sucb. credit. For the infor=al lender, the transaction costs, as described for i::.stitutionallenders, appeared to be minimal. Administrative costs seem nearly :til fot' the moneylendat'. He carries on business f::om his home, farm, or store, and purcb.ases nO special plant or equipment fer his le:cdi:lg operations. While mstitutional lender'S employ. c.hauffeurs? and extension agents, the in!ormallender empkys only himself. 'Nheo ~e needs information, he goes to the farm and makes his own inspection. T!lere is ::Ilucb. debate as to the importance of risk of default as a cost to the inf.:J1'!l'lal lender. Some economists, such a.'l Millard Long}j and 30ttomly y emphasize:!le hazards of ·.veather and pric-ss ::o.nd the resulting . y 11il1ard Long, "Interest Rates and t.b.e Structure of Agricultural Credit 11a.rkets t ~O:dord Economic p~ (July 1968), pp. 2.75-288. 2.1 Anthony Bottomly~ "The Premium for Risk as a -)eter!!'lwant of -! ,,, Interest Rates in Underdeveloped Rural Areas," Quarterly Journal of 2ccnomics (Nove:::lcel: 1963), pp. 63i -6..1 j . 2 '!t, 109 risks faced by ::loneyle!:'ders ?Those incomes a:e closely tied to those of their small far:er clients. C~arles :lishet, 21 on the other hand~ depreclaces the importance of default cost~ st'!'essbg that informal lenders are in a ::lucb better position t!len lendi:li institution:l to judge the c=edi tworthlness of their local borrowers and to aring pressure on them to pay up. My impression from farmer bterviews was tbat the moneylender held t=emen d.au.s value :01' tbe far!IlE':r as a reserve source oi funds. Only under the :::lost dire circu:ostances ?1ould he risk. that .relatio:n.s.hip. Moreover, 10a."lS tended to he rather small and carefully adjusted to the farmer's ability to repay. the eccnomic environment b ",hien the moneylenci'!:t operat~s. In other ·:vords., ~hey are llsually low. Some might argue t!lat given the low 701uQ,e of loans fro.:1 inicrmal lenders, any t=ansaction cost incur:-ed would t"!nd to represent a large percentage of tht.! total volume. i:t appears, however, that the moneylender has a strong cost advantage at low 1rolumes because he is able to nearly eliminate the costs of ad:ninist=ation and \'If ::isk of default; moreover, by operating ·;qiU ::'i5 own :1.U1ds, he d"Jes !lot have to depend an expensive 3/ 4,ba.rles ~. ~isb~t, 'Interest Rates and Il::lperfect Competit:'on :n the Nunformal Credit ~.!arket of Rural Cllile, ~ Econo!:lic Deveiooment and C!l.lltural C1lange (October 1967), pp. 73-90• • ... :10 borrowed capital. !:n the Mexican count:'yside, high interest rates in the informal t::"arket appear to result from tb.e inelastic demand of borrowers who either ha-.;-e no cost~fiective alter-ative or have no alternative at all because of tb.eir past credit .:ustory wiL'l the official ba..:o..k. Fot' these iar::ne!'5, infot'mal lenders ::"old a monopolistic pO;;5ition and e.:'Cercise monopolistic price disc~etion. Interest rates for certain classes of borrowurs differed s..'IotarplJ from interest rates for others. The more inacc~ssible an "ltllt:rn~;tive SV;";':Ci" ~£r.~,edit for a given borrower, the higher :us interest :ate. Particularistic ties between informal lenders and borrowe:e'!'S fo.J.rilier reduce the: competitive opport'".mities available to the small farmer. Tabil! XvlI summarizes the cb.aracterist'ies of informal loans, of their lenders, and of the borrower clientele. , . 111 ~'"='~~' ,,,'I,I,.j,. TA lIl.t:: X Vii, ellAIl ACTJ::HISllCS 010' IN.-OHM AL LOANS, LJ::tmI£IIS, ANI) •.IoJUWW I£l!S ----·-1'I -I--~------~ -_.,-,----- ---------r---- I J::ICeClive A",.u,,-I M.uiwuu> Pari'"'''' fur Which to I.. for Ill., I l.e ... lcr luleru.t Hille Cal!',lcr.. 1 Slu: of Loan Form of tooln h AVdil"Lle ---~ F:i.md~, ... -. Ilclll"huu, .- -- "---~.'---~~--------. ij'J4 nonc ' - - - 1 ----_.------.---- v"ry IilllaU -::;;1~'lUnlh 10011" '1e"r, -, "o"~:"'l'tiuu, l.ro<lUC-1 --.--------.-- rcldiy,,", 10e,,1 or wl;,,"cvcr I''')lm".. t ~-'-I' nU:let,anl» 1.. jJO~ iL ~t! II -----------1 MOlleyiclldcr" 16'Y.--(,O% !l_"": dCl,,,,,,liul:t wi hrm"p.' Lcc~II~1) of blUh inler",,1 cu,,>ulnpli..... l'ru.llIcl i,bilily 10 repay. rdl"~, i~rm"rti pilt 1.1 ecimn: of II.e cjlJ,,1 wilhu, l 0:: 1 mOlllh ... I.. _yult:lll II. "Mltlell farmers ce"C of crop failllre, roll du 1101 0 wn lIu:ir /:. nd, o'/eu .. ~" po"..iLlc .. lid I __________,_____J__________ C<>l1uuercia t ICllllero ',in lereal 1,,,ld Is dlUer- e""lrilct 10 jlurdlluc ulOrli!di:"a r.l&llllol l.Ie ul)ed a~ CUHd leul -------1------ ------, f'Jr pUrdlillie 01 IlIpu'" "a..Uy oltl ailled crop cycl", Ii lI\oullul ",-"duct iUIi ..md olllcnill CIiCC between farm sale Ihe hane~lel! croj' villue oi etOI' "ud RllIr"- .. ' v aluu of crop --J\.c'i,;.u:a,rore;----- i -31l')lo-=-100~---I--agree'nent 10 purcliase --ror piu-cll.illieonnpu~r-c.:opcycre;T moii-IJ\ii--, pr,,;J':cllcln,coiisull,V: Ihe barve.:.led crop 111 c"'"" of crop failure, .w!l-overa arc 1>o":>iLI,, lIud euiJ'{ oi.tl"iue<.i. . ------ --------, .-. ACt:CSii 011 Ihe Pan or Ihe Far,"er to Otll'" Farmeu' He"lIonlil 101 U.. e of 11,b :>CU/C': o~ II iuiltill or Opcrdlioll o( Ihe l."lIder 1'-' So"rc,,:; of Credit Olher InformaL s.,urce --,- -.-------- ----- ver'j low "'Kcepl to iIloncylell,Jer:lllnd bee.l'II::'c 01 "mall tll.1l of loall, Ilurl'0lo<: of 10AJl, jillra-ejldo or wilhin cxlend".llIcillhhorlioodj 5 ! a cal,,,r.,,1 urell produetlv" dl..rdclerlatlc:. of Ihe [ilrmer, 1};.~r"o" .. 1 conl.,,;1 and u,fuUUJI!ul\ aLllll1 IlUrfow, lu.. cce""ll.tilil y 40 JurmilllOOurceli bec,"I"" of very lIul,orl"..1 lrall"actioll cOMhi or bec ..u&" o! ·carlera v::ud.t,," ..Ialull oil ill prelllo~11.l b",n ----------_.._, very low ext:epl 10 fderub, rel"Uves, or .a ... " ail aLove aCdl'"...d"rclI !l0od cUllvelli"ncc. 110 lIee'J to harv",,1 crul'- or ---- - - - - - - - - - -dblallcc~ -- 50 1<111; wllhin eany Ir"''''l'orl 10 ---'"'~-'-- ..., - - - -----_._--- Inll"l'url Iti llrovl"lon o! lIIarl,,,, and Kllaunleed price market without ril.lo.illU (luOllily ucl<!rioralillll til purchao.cd crol' very blV "",c"I,1 10 Ulolleyl""d"u, friend", I' iallle all alHIYe 50 "lIIj within "''''iy 1,....~I'0rl "!"Iallce» lu .. cigllhor~, rclalJve~, and locallll"rclianb /'.lark,,1 withoul ri~"'ill1! (Iuality t!clcriur"!ion of Im";"a,,e'" Cr<:J> ___,___..______. 1__- . ________ ,_.. __________,_____ _ - .. ------~-~---- .. x. 30R..ttOWER TR.-\~SACnON COSTS AND mE D2v1A."l'D FOR PRODUCTION CREDIT We have discus;ed how ?,toductive potential, including the uncertainty and :-isk h::.volved in pl:Oduction, and non-interest co:;ts of bOl"rowing, '1ary among far:oer clas:3es and determine 6e demand for crec.i'i:. In gene:al, the ;1atu.re of cash flow from productive activity--t.'lat is, tl':.e level of cash unobligated after paying costs of pr-oduction and costs of providing for family :leeds --determines (l) the ::lee<i for c!'e<iit and (2.) the abilit." to rep4y cedit. EvaluatiI:.g the farm enterpr.se before c::edit is :;;ranted gives 'J.!3 t:le following 6't'id: - 1'.1' ad. i t icmLl Modem C(ll:tl Cl II! !'Cial Agric:'Ultun Atiri=1t~ A.s:ri c:'Ul tun With Po tlUl ti&l WithOlolt ?otlu'1ti&l With ?otenti:ll I Withgut ?otaatil1l iNHd x (Cub (01' CrMit X XlC.uh fJo .... and CQlUW:Dp X I X (Cu.h flow) flo or) tiem) - l_ I ~~ Elity to RJ!pay I X I X ~J =::~:=-.- An indic ated earlier, farmers i:! traditional ag:,¥:ulture are excluded fro t!l receiving credit because of tlleir inability to :::eytay, though t.l;.ey :!Jay have !J!> !.he potential to use credit productively and pl'Ofitably. Some 'moden~ profitable fa:mers may be e;"(cluded f!'om the possibility of rec"!iving credit because of financial market imperfections. y 30th the ::node!":.l a..!ld ~e comme:cial fal."mer t howevert are profitable and have the ability to repay c-:edit. Those "" ho already use a..!l efficient ::nh of i:lputs to opti::ni: e production are classified as 'being -.vitbout potential to improve production further. Tneir demand for c::-edit is more b the nature of cash-flow management. Ii we assume that the provision of c-:edit is accompanied by produc tion-il:cl'easing tec.h.nologlcal in:lovations suo as i:::rproved seeds, fertilizer, :lew' c::opping techniques, etc., then t!le traditional fab.. ller with potential ;:oay !lave the abilitr co :epay c-:ed.it. The ::nodern fa:t'~~r ,.h~lpotential ;:nay also want c:::,edit to i::nprove his productive and illcome-generating In a credit system "hich has the objective of optimizing production and developing productive capacity, the a.mount of (:-:edit granted should be deterr:nined 'by (1) t!le need for capital a."'ld inputs to optimize production and income, a..!ld (2) the ability to repay--that is, t!le amou:c.t of free cash remaini:n.g for the farmer after payment of all other obligations." bother 'Nord~ the amount of c::-edit granted -;I1ill depend on the capacit; of the far::::! enterprise to absorb credi~ produc':ively and to repay it. y Roe, ~~. bte~st and non-interest costs of recei7ing credit, especially when t.'1ey reS'..u: in an out-of-poc..~et expense, reduce tlle amount at bee cash flow av<,.i1able for repayment of credit. Interest plus ::.cn-Lute:-est costs of credit ::cc::-ease t.!le :ate of return on a given investment required to repay t.!le ':::edit and associated c~sts. High costs of credit, like high rates of • interest, impose minimum requirements in rates of ret'..lr.:l that simply eXc!'J.de man;r alternatives tbat would be economically useful for t.'le farmer as well as for tlle national eccnomy. cost of bor=owing on th(~ demand of small f3r=ae!'3 £(Jr credit and on their ability to repa.;r it. In. this a.Ilal;rsis we will utilize a framework de'lised by J. D. Von Pisc!:lke .')£ the World Bank. His approac.h is based 011 tlle following c:a.iC'J.lations: 1. The Fl'~ Cash Flow Calculation. This consists of e:iti=aati:lg expected gross bcome to be ear.led by the iuvest=aellt supported by ilie 100.::.:1, subtracting ilie exper..ses of prod'lction, tb.e expenses 1nC'Url"ed in borrowmg, and the expenses of providi:lg for family subsistence. T:'1e free cash How cal .. ' tk ~ is intmded as a measure of how IIlUCb. money could be available aiter pa;rIIlent of expenses. 2.. Adjusting for the Bad Year. T.'1is ccnsists of calculating free cash flow for a typical bad year. ?or farme!'s operating under rainied conditions, the major problem is unpredictable rainfalL While t.!::.ere 'ffill be great 'lat"iation in the :esulting frr'e cash flow Hgure for the rainfed farmer, variation for a fumer operati:lg wit;" irrigation ',vi.ll be minimaL 3. Minimum Ret.lavment Catlacitv. T::lis is based on the adjusted f:.-ee cash flow figure. It is intended to permit calculations by either farmer or credit insti.tution of the loan amount t.l:1at the :<u'm~.!:' would be ;l:.,le fr:> •• repay under ::he worst conditions (assuming, of cou,:se, ,,villingne!s to repay on t.!::.e part of tb.e farmer). Given the risk aversion of farmers as well as of c:.-edit institution~ this is an important calculation. Witb this :ninimum repayment capacity calc..llation it is fairly easy to ::.nd t..":e !'ign':: loan amount, given the interest and non-interest costs. Before quantifying these costs, lel: us establish !lew and why certain t:-ansaction costs correlate with farmer oaraci:eristics. :'::ccnomists have 0 if ered various explanations for t..'1e low levels 0 f demand for instit'..:tional credit by low-income :ar':lle!'s. Some a!"gLle that most poor larmers do nOt seek formal c:edit because tb.ey lack profitable investment oppol"tU!lities. Ot!lers a.5'Ue tl1at they do ~ot :.tnow ~ow to obtain 116 access \'0 formal credit sou.rces. Adams and Shahjahan, y argue tll:lt the ::loninterest :rannction costs of bor~wing play the deter-::::lini:l.g role in '""hether a farmer (1) demands institutional c::-edit and (2) 'Rhether he cllcoses to demand c::-edit hom an institutional source ::::-ather than from an infor'!llal source of loans. The purpose of this section of t.i.e paper is to present t.i.e results of my field study in Me:'tlco. The study sought to establish correlations between farmer characteristics and tr3.llSaction costs inc'J.:;:.ed in.. bono wing &om private b<Ulks, the public ban..1t., and informal sources. The farmer charac te.;; istics t.vhicll. were ide:ntined were: sex, age, literacy (ability to :-ead and ?r.'ite) , status in household, ;?rincipal oCC"..Ipation, distance of faro from ::learest credit administ::ation center, '/alue of farm assets, whet.her or not :'le !lad ever made a loan request. source to -;vhich he had ::!lade t1le loan request, ';vhether the application had been accepted or ::::-ejected, size of farm. property, and net cash income from far:n production. The transaction cost vcu-iables, quantified in eacll. case, vqere: application fee, costs of obtaining :1ecessary do C"..l::nents, costs of t::ips to negotiate and ::eceive credit, increased subsistence costs due to t::ips a=.d stays in town, and gifts to c:,('!dit officials (1<;ltended to determir:.e the rele<7ance of corrtlption or bribes). Dale W. Adams, Harlan Davis, and Lee Bettis, "Is Inexpensive Credit a Bargain fer Small Farmers? The Recent Brazilian Experience, ~ Inter America."'l Economic Affairs (Summer 19i2) and Dale "Iv. Ada::::ls~ "T:ansacticn C':)sts of. BOr."owi~: .-\ Review of t..;'e Evidence," Warburg • Paper, Ohio State University; Mirza Shahjahan, Agrlc..lltural FL."13!lce i., =:ast Pakistan•.~iatic Press (Daccd., 1968). P:-1vate Ean.'cs Some stl1d.ies suggest :hat in !.he presence of i.nterest rate ceilings !.hat limit be adjustment of interest rates to reflect fJ..rcer risk c..~aracteristi:::s, banks rati,'ln credit by adjusting non-interest costs. One would e=tpect then to find a range of traruaction costs associated with a range of farmer c..~aracteristics. Unfortunately, this did not hold in tb.e case of commercial banks. 'There was nO direct relationship between farmer c..':laracteristics and magnitude of transaction costs in obtaining a loan from a cO!!:lIDeJ;"c,ial bank. Farme: characteristics determined access to bank cre<iit. Access or nou access to cedit determ.ned. whether tb.ere werp or were not transacticn costs. For a farmer who had no access to c:edit, transaction costs obviously l!lcluded distance and lack of information. .-\.5 his inaccessibility was readily perceived by the farmer, tb.ese costs were s~ldom inC.lr:red. .~.ccess to commercial bank creo.it is a. f..ll'!ction of ilie following farmer cha:acteri:;tics: 1. . Dbcs.nce from a P'SI c!"edit _adoinistration center. Only small farmers (PBD whose farms lie .... itnin a radius of 35 miles (60 kilometers! of a credit adobistration center uat is set up to offer loa.:c..:l to ~'SI are able ~o receive a loan from a private bank. There we::e :10 sucn faciL.',,::s i::l • • 11 a Morella. In Celaya. ac.ly one commercial bank of tbe five in t!1at tcwn (Bank B a..s desc!bed i:l C~apter v!D \vas offering ?3I loar:.s. In eac.'l case the nearest town offermg credit to PEls wa:: ~wo to two-ar:.d-a-nalf ~ours away in an area of productive :armland and !ligh-income crops. z. ;:arm assets• .~ets representi::lg 165 percent of tbe value of tb.e loan were used as collateral. b fact, t::.el'e was evidence that farm assets were undervalued by 6e ban..~ as a protection against def.':1ult. 3. E:rnerience witll cedit. Most farmers receiving credit from commercial banks had !lad previous loan t.!."t'J?erience. ~ew credit subj~ts were handpicked by a te6nical evaluation team f:-om the bank., sometimes with the help of FIRA tecl:nical field staif. Both old and :leW ct'eci.it customers l."eceive1:! Vlr':Ually t.."'e same treatment b'om the banks. Of t..1.e farmers :"1.at I interviewed who had had access to private bank credit, eacb had been :dentified as an appropriate bank subject and carefully sc:uti::lized by t..1.e evaluators. T..::!e cnly t:ansaction costs t.'ese fal'mers incurred were c~sts of travel--gasolbe, etc. Usually t..'1.ey had :easons to be in town a tiler than ~:'.'ansacting t..'1.e loan, ar:.d some had homes in t ...., wn. There was no delaj . in obtaining credit usually; there may have b~n delays for the bank b. processing documents with FlRA, but the bank. u.sually le:;:,.t to t..'1.e farmers on a t:mely basis sbce t!:.e paperwork was a trar.sacticn betwee::l t.'e bar.k ~d It :s''!.R.!.. There we:e :!o penalty inte:est I."ates :or late paymerIt of loans, and 119 ::10 diffie,lIty in obtaining dce.nnentation of asset ownershiF -;vuk!l was usually reacHy available. FIR--\. laws prohibit charging far::::lers a:r:.y fees other t!lan those costs ine.ll"reti in case of default. Therefore, all farmers Ylith access to credit faced similar and insigni:icant tra"·lsaction costs, ~xcept for the cost of travel, whicl:l was determined by ilie cost of gasoline as a function of distance rat!:e~ than by farmer characteristics. Thus, in the case of private banks, farmer access was determined by traditional bank .policies wi.th regard to valu3 of assets, value of :let cash income, experience and ability of the farmer, proximit'7 to the c::edit adm:bistration center--i.e., factors t!lat :ninimize:: t~an.sac':.ion costs to the banks. For farmers who were identified or established as appropriate bank. subiects, the costs of h'ansacting credit were minimal. T'.o.e formal application ccnsisted of little ::Dare than one or two lines stating the desire for and purpose of credit, with the si.suat:ure of the applicant. Other doe.lments were prepared by the bank. and presented to the farmers f'Jr sig-...a tu:'l!. 3an.r.lral ! In t.he case of the official banl" 'a much 'Nider variety of far!ne-::-s ha'le access to credit. Few have sig::lific~ far::n assets, few ~ave "profitable" 120 fa.r:::t'l enterprises in ;:,!:e sense of ear:ling a significant positive margin of cash income. Some l;'".! up to two or two-and-one-hdf h.ours from t.he nearest Banrul'al branen. :vIany are subsistence fa.r::oe::s, who do not ::'ave i...'"I'igated land and -;vho thus :ace g!"eat c'!'op ri~ks. Of tb.ese cb.a.racteristic~ those that I found to correlate wi.th the transaction costs of !'eceiving c::-edit were as follcws: Distance frOCl nea~st C'!'edit administration ce!:lter. The more remote the oppQrt'..mity cost of time ~llent in travel, the uigher the cost of subsistence whe.n red tape cau.ses a delay :-e<l.uir~ the farmer to remain ill tOWIl, and the more likely the OCCW'l"ellce of C0u'Uption on the part of bank officials.. Si'!lilarly, t!le more remote t::J.e farmer' from the bank br-ane::', t.~e stronger are likely to be the (unquantifiable) psyc..ltological ba.r:iers against instituticnal c::.-edit. This ::nay be a result of strow-; ~ies with an ir:.farmal source of credit. as wel1 as distr..lst of govemoe:nt offkials and the new tecllnic;.ues t!'l.C? in troduc e.... . 3a..a.rtll'al brancl:es tel'!d to be :-elatively spa.rsely scattered throughout the c::Junt::y. Alt..""ough ~ey are much more accessible to farmers t!'l.a..'"1 I :;::r:vate Jar.ks, t!ley still :oe::lair:. la-rge1y inaccessible to :::lany farmers. b ~21 soce areas, l..lIIpaved roads :!lake t=avel to ~o'WU very diifiC".11t during tbe rainy season. Banrural has a ttempted to overcome t'::::e ~Jroblem 0 f distance by sendmg out "inspectcrt;!s de campo" to promote it.:! services. This l1as ?lorked well in terms ot ge tting iniormation to farmers about credit and how t:) obtain it, even in r~mote areas. Eanrural b.as also beg'JIl to offer cl'edit to cove:t' travel costs, called. "netes.. .. (Although this reduces tb.c initial out of-pocket costs to the farmer, it still must be :oepaid.) l.:le inspector will follow up on farmer interest in receiving c.edit :7. prepari::g all application and contractual doc..lmentation and bringing it ~o the farmgate for signature by tlle members of !:be credit society. l..1.e tl'ansaction costs incuned by the farmer because, of distance =:om tb.e bank oCC'.lr after the credit is granted, 'during its administ..""aticn. Credit is received in stages as tb.e production process proceeds. l.:le farme:::o oay have to ret'..tr:l to town four to six times to pick t.1' his funds. This dces :-lot include times when he must retUl"'!l because of delays. Ma..."11 farmers have reduced these costs by giving power ~o ~..ae "co~misa.riado "--the cb.airman of their c::edit society--to ~i-::::":' up and cash c:-edit c.hecks. In many cases, t'::e 'cct:lmisariado re--..p lires payment for tbese services--sotnetimes as much as 10 percent of the credit received. The cost of this payment may be used as a pl'oxy;for tb.e t:-ansaction costs of t~avel, opportunity costs of time, etc., ::hat !<,ould have been L"lcur=ed i£ L~e far':!ler had t!"ansacted 1:115 O'.vr! ,. business.. ... 12.2 £,ar...... er -;vealtll. As proxied by 'falue of far::n assets or net cash flow, farmer wealth cor:-elates :::egatively with costs of cOr!'t."Ption. The ;!lore ?lcll-to-do the farmer, the less lik.ely he is to be forced to ";Jay corrupt officials. Access to other sources of funds is determined by farmer wealth, and (lisa correlates negatively with. costs of corruption. ?r~vious eX"Oerience or loan ac!ivitv \vith Banrural. This correlates negatively with the costs of obtaining necess.ary dOC'.1mentation. The main documentation requizemenu are for first-time bO!:l'Ower3 only. Suh"!t!G,ue1t ._.. 10a..'l!S :-equire only an application delinea ting the amount of credit requested and the land area proposed. for investmtmt. DOC'.1ment requirements fo!:' ejidatarios and comuneros are as follows: 1. ?:.-oaf from the Delegation from the Agl'arian Refo1"!I1 that the land is legally held., and the date of the presidential :.-esolution granting the ejiJalland. If possible, a :cap of the ejido or commune shculd be a:mexed. ... OJ A listing of the ejidatarios include-.i in the ejido. . 3. An application equivalent called the Act,.1 de AsaI!lblea whic':l authorizes members of the ejido to apply for credit. Tuis also deiineat~s tbe alllOu.'"lt of C'~'.iit programmed for investment, the land area prograomid. cr • t!le amount 01. credit requested for an investment credit. • 123 4. For invest::nent credits to be used for land clearing, digging of wells, or ~!l.e capture and '.ltilization of superficial water, t.:le :::.eceSSal7 ?ermits ::::lust be obtained from the :elevant gover:lment agency. No eiidatario in a urovisional sta.Qe of uossession of his land can receive orod:1ction c:::edit. ~~~~,~-.~~~~~~ For private landholders, the d.ocumentation requirements are even mere strinsent. They include: 1. Titles of property and assets offered as collateral.;;'art:lers who are colonos ::nust present proof of legal possession of t.J.:.e land. These titles a:-e mortgaged by the bank., and physically held until the credit is r~paid. 2. l..ast r~c eipt 0 i parmen t 0 f property tax. 3. 3alance sht:et of Cle business of the applicant. .,t,. Three bank. or commercial references. :;). DOC'J.::nentat'ion s.~owing ~ater :ig~ts ~hen the :arm proper~' is wit.,il1 an irrigation district. 12.-1 6. For livestock enterprises, patent c.oc.1mentation for t!le bra:lding iron.. 7. For investment credits for land clearing, well digging, and the capture and utilization of surface water, the appropriate permits must be presented. 8. For personal property other than land used as collate~ sales receipts a t the Plll'c.!:las.e must be presented proving property ownership. 9. For a privata landholder 71b.Ose property is .::qual too...· ~ess than the maximum ejidal grant of land, nO mortgages are requi.:-ed. L."'lsurance costs. Cro~ in~'W:'ance costs correlate negatively W'iL"t fa.r::lel' wealth, farm assets, and cash flow. Crop insurance is !'equired for all farmers without collateral receiving cr1l!dit from Banrural. The cost of bsurance per hectare is the same for all farmers in a given ac~arial zone, varying among zones according to productive and climatic condicions. F3.1':ner~ in a zeoe wael:"!! conditions ar'!'! adverse are likely to have lower production and lower r'!'!venue anc! to have accumulated fewer assets, and are more likely to be requjr~ to insure their 6redit. '. Thus, the poorer the farmer, the larger the crop insurance premium_will be in r'!'!laticn to !lis free cash. - fu ::::la:lY cases the c::::st cf i::1.surar.cc is outweighed i:l t.t:.e :ar::::ler's ::::lind by the :leed to pa7 for a service that he feels is (I} un£al!'ly and corruptly administe:ed and (Z) protects the bank rather oan the iar=er. 3/ L.'1US, -:vnile crop i:lsuran:::e should offer him a reduction in t!:l.e dsl, he undertakes when he accepts credit, it does not appear that way to the farmer. To tb.e far:ner, risk is an unqt::.antiiiable though real cost oi accepting credit. The :ese::"'1e 'falue of credit is veJ:1 imp-:Jrtant, especially to a marginal farmer. The failings of AJ.'1 AGSA, combined with the inile."tibility of Banrural i.::J. :esnucturing debt in cases of default and. in cllargi:ag ?~l'\31tyjnterest rates until cl·ed.it is paid, all contibute to the psychological cost of risk, especially for marginal and. subsi.<;tence farmers. 1I Crop insurance administration has three c:.haracteri!:tics that far':!lers find unacceptable. 1. In case of partial crop loss where the value of the surviving c!'Op is adequate to repay the credit, the crop i.ru.uranc:e cO.:::lpany (.-\~AGSA) will not i:ldemnify the bank and the farmer will be liable to Banrural for repayment of the credit even if repayment means an impossible :-eduction in his subsistence level as it often will when the loss is severe. 2. In case the crop dce~ not begin to grow because of drought, flood., poor seeds, or any other reason even though beyond t~le control or :esponsibility of tb.e farmer, AN AGSA will not bdemnify and tb.e far:::ler will ::-I!main liable to Banru.ra1 .. 3. fu cases where indemnification is called for, ANAGSA has a reputation for undervaluing the lost crop. In many cases, bribes are required by the insurance inspectors before they will offer a fair valuation of tlle lost c!'op. 1, _0' Cr~dit delay. T.n.ere?i7as an inverse correlation between past '::lank e~e::ience and production ;oregone because c:zoedit was :lot available at the time needed. Delay in receiving cedit tended among the far:::ers that I interviewed to be a function of docu:oent requirements. These costs were incurred only by first-time use:-s of cedit. Another negative factor was the !"equireme.."1t that farmers organize il'lto "eccnomically viable" units of production to qualify for credit. Although thi!S ?i7as unquantifiable as a cost, it played' Q;(;. L!:;'FIo~·t?;l",t,rQle in the choic~ of some fal'::ners between an institutional source of credit or an :.nicr'!'Ilal source or none. The requil'ement of organization into cedit societies made each iar!:ler responsible for the debts of a whole group. If one, two, or three farmers defaulted, the whole group beca:oe ineligi':lle to receive £ur6er cedit until the to tal c::,edit received by tbe gl"Cup had been repaid. ':"0 cany farmers tbis was unacceptable. I" wI H x:. 30R.:o..OWER TRANSACTION '':';OSTS--A QUANm'1CATION WITF! RESPECT TO FREE CASH FLOW ~c;::." :;::urposes of this illust:ation, I have chosen to dellneate income, ,r~"t?c.\:nses, and nen-inte%"est costs of borrowing from Banrural for a smali ~:.:)hhtr maize far:ner possessiTlg six hectares {approximately ten ac!'es} of ::u~,t. who farms under l'ainfed conditions. 2:e :oepresen ts the average :.in\f\mdista ~downer or "ejidatario' with whom I came in contact. In ;Qt~utia4 ~is land ranges from medium to good. Lack of capital and ;~:::ar~ve~ farming inputs and techniques limit his ability to fully e~loit the ;::-O,!I.1.:!:v'?! ?otential of his la!ld. Farm size is a limiting factor on t..~e m.:ol':nation en labor costs a!ld other costs of p1:'Oduction was based en ;::~er","lews with individual farmers and corroborated ?lit!l Banrural records. ::.'l,fi':\U'al cedit 3.r:.d associated costs were used. Information about non ;;:'t~~$t costs of credit ?las provided by farmers a.nd field personnel in .. !."1 tbe following table, specifk figures are calc.11ated as follows: Free ''':~h Flow is deiL"1ed as the difference bet-;qeen 'Total Receipts a!ld T o t a l ! ~Qndit';U'es. Expenditu;~s include outlays for bot!l production and family ::~s..n :lpt:'o:l. Total RecdJpts are ~e total a::nount of coney received ::::-0;:1 ':::'1 ~le of farm produce. Total Expenditu=es are oe ar::ou."1t of :!laney ~~~llt ic: ~::e proc.uc!icn ::: C".l!'rent output. T2ey do ::ot i::1clude e~er:di- :'';':,,!~ en capital iter=s. 128 Normal Sad "feu "feu -------------------------~~e-C-e-l-n-t3------------------------- a lue of ?!>oducrioll it Six ;"e<:tarct with threo tens Qf m:Li:e per he<:tue @ 52...330 ?etsOs per ton (med.i.an :ural price rlK:eiveci in 19781 (0.5 tOIlS per he<:tU1t in a oad YllUt S50,6~ S 3, .. 90 Value ot Receipu b:Qm Other Service; (C.uh U1d. Non-cubl Off-lann labor (3 months, Z. family membltN. ° il pesos PII!' day in ... iOO<!. yeu; in a bad. yeu they work -l. mon wi !! 19,ZOO Off-tum rellliu:ll.JlCK, lI'Speeially !..--om older dlild.ran U,ooo 12. ,000 Othu nCflipts (s.aJ.e of animals or =i.l:nal products) 12.,000 12. ,000 Value ol Fall'lJly I..&bor C.:atributed to Fann ~ducticm .91 17,Z.;:0 3,010 106,260 60,300 33,918 16,094 Z10 ZlO Rental of maclliri,uT 6,900 2. ... 50 !nputs (!Ulods, fertill:u, tnsoectic:desl 9,648 ~,8Z4 17,2;:0 3,610 E.:I;penditu:res foil' Nonproductive Activity 66,600 58,100 'laJue ol cOll.sumptiO%l. b:Qm Qan'ftt (3 to 5 kilos ol com pel' dayl 5,100 5.100 Food p1.ll"e!la.'I4Id (100 ?"Os pel' dayl 36,500 36,SuO E! C!othes 17,000 10.000 :! Sc1::.ool upe!'.MS 5,000 5,000 E! 30 me :nm tellJlJ1c If 1,50·) Con t::i:lienc:iu 1,500 1,500 100,576 7-&,194 5,684 -3,394 sf y Foil' :x:tmitund.i$u. sub.iste:lce fiIZtDers in MexiCo, off-fum employment, at least OIl t!:UI! put ol some :x:temben of the family, is " common .~ source of supplltmelltal income:. Oep.,1:IdinIJ on the ineoce of the fum or its adeqlJ.ll.CY ill ~erttls of :::tHt~ !ood. roequircments. this off-fum laboz cm &ecOWlt for u ml.u:!l_u 50 or?O percent of t!\ce rumer's :~_ tal ... '1..1 UUlWlI sub,istence requirements. So u to attribute a 7alue to family-<::c::::l:n.tttd labor, yet to uoid O'I'entstlmat~ t!:.:: ..c'wU cub eX'p.ndit'J.rIt o! the fum entel'prise...e have induded ~It ulue of t!le labO!' ooth as a receipt Ilnd as U1 exj)etlse. 011 ... subsistence rum, !Jlmily labor :lor!:1a11y :ollstitutu 100 percent of all labor. ~ In bad. years, t!le !u!:1er is unable :0 rep!.y ~':.e :::cney :,e ~as 'oor.o.,..~j and spent on PrQductiol1. :"0 :::take !lncis meet, c!lildr~n U'e itept cut ~i sc1:l001. consumption is reduced, and ?urchase3:l! acenities sue;" as c:o thes, etc., iilr'! ! oregon/!. 129 Transaction costs~ as s~own :.:t t.'le following example, :-educe the ~\mount of net free cash available to tbe farm enterprise. Tn eifect, tr;\.;l.5action costs increase the mini::num margin ~etween expenditures and :-~~renues, hence the productivity' 0: a given i.::lvestment required to justify thtl costs (interest and non-interest) of using credit. All transaction costs u:Had in this example assume that the borrower has no Pt:evl0us record 'Rlth 13aJ:l.r\lr:11 or e:cperience in soliciting cedit. COSTS OF CREDIT bterest costs of c::edit S 3,333.8 (S-4.560 pesos of cedit per hectare for rai.nfed con pro C\l.ction using fertilizer and improved seeds; interest at 14% ~er annum ove!' ::he eight-man U crop cycle) :.ron-Tn terest Costs of. Credit Application fees C~:lts of obtaining documents 100 C.:lsts of trips to negotiate and receive c::-edit (bus!a.re) :;0 Increased subsi:stence costs due to trips and stays in town 400 GUts to credit official.. (10% of c::edit given, ~r 5466 per hectare) (approximately) 3,000 OllpOl:'t'tUlity cost of time !! o tllsu:ance ($300 per hectare) 1,800 Credit Society·-administrative costs (.55 per hectar~) 330 Total ~on-Tn.terest Transaction Costs 5,680 Tot~l L"lterest a:r:.d )lon-Interest Costs of Credit 9,018,8 ' ~ ----- --------..-------------_.- ..... ~ Cpportunity cost of time is valued at zero given U::lderemployment and Li.e fact tJ:!.at loans are usually negotiated before tbe c'!"op cycle 3.ctually b~ms.! 130 Tnere are essentially t";Vo c~aracte:-istic bon"ower transaction costs: 1. N'on-quantifiable psycholol!ical bar:iers. nese are factors that inhibit would-be borrowers f:oc approaciling ba:o...'<:s ~d that lower the demand for c:::edit. Tilese costs are often w::.quantifiable though reaL Examples are the perceptions of small fal'!!'le!'s that they have no access to pri7ate bank. c:edit, or their perception that c:-op insurance is unjust. Other icportant factors would be: --the risk of default and the resulting loss of access to formal ~c!leap" sources of credit. As shown in the calculation for a ''bad year," t:.e f::ee cash genera'!:ed is insufficient to meet family subsi'2tence :leeds, roue.1- less to repay interest and non-interest costs of c::edit; -- minimum quotas set on the amount of c~dit available, which the frmer may perceive as leading to overinvestment because production wiil :lot inc:ease sufficiently to allow repayment. Z. Di::ect costs to the farmer, as delin.eated 3.cove. VJbile the Erst type of transaction cost :::lay reduce the dema."ld for credit for so:::::!e farme!'s to =ero, direct costs to the farmer reduce tbe IJ demand for credit (as well as t.i.e supply) accordbg to tile productive a.nd 13 J cash f:ow cbaracteristics of the far!I1 ente::t>rise, For examp~e, a farme!" ::!light not be able to afford tbe fixed t=ansaction costs incurred in credit t:'an.sactions and still be able to provide for t..i.e family subsistence and repay t.i.e c:edit. As the amount 0 f h<.>.rvested land area increas{"s, or as the amount of productio'C. per unit of lat:.d increases, or as the price per ten of production increases, the smaller will be the proportion 0 f t=ansaction costs to net £:& ee cash and :!It:: smaller th~ barrier to c=edit for the farmer. This ptoportion becomes negligible as we reaC!:l the commercial fa.>:mer. Out-of-:Jocket costs arE'! less burdensome fol:' t!:le farmer who has a cash income tba:n for a subsistence farmer who must covel' out-of~pocket costs "':t'f reducl."lg his consumption, wor!d.:o.g off the farm, ::educing e:-;pendi ture on scheol erpenses for children, etc. For the transitional farmer, :lonproductive expenses such as transaction costs reduce the amount of free cash that can be devoted to productive investment. 3aorural primarily serves marginal farmers who have no a,:-:ess to commercial b~tc c:edit and whose ....ly Q" alternative SOUl"ces of credit are • ::::::oneylenders and acaparadores, The.:nigh interest rates of the lat:a'!!' are so Du:densome that far::ners borrow sp~ingly, usually for :1onproduc~i'le pur poses, and are seldom a.ble -:0 borrow a.mounts sufficient to allow innovation '"" in productive techniques. T.::le high. non-interest costs of bOn"owinlS from institutional SOurces by ~e small :narginal fa.r=:ler do three thin~s: 1. They cz.n !Ilake subsidized institutional credit nearly as costly or more costlv to the small farmer borrower t!::.an c::-edit from an informal source. For instance, let us assume t.."lat the farmer is faced \vit."l the full a.r::-ay of non-intere!t and ~ansacticn costs as cited in the above example, including the "costs of gifts to credit otficials. rt The total cost of the credit is approximately 9,000 pesos on a lOaD of apPl"oxirnately 30,000 pesos. 'E.,p"' .. , costs amount to about 33 percen ~ of tbe value of tbe loan as compared to approximately 36 ?el'ce!lt :nterest in :.!le case of some informal loans. This of course does n()t include the ::lonquantifiable psycbological costs of getting t!lat loan. Z. '!:ley ma!-te c::edit so costly as to be inaccessible even for. ::.;.r:ne~s who may have the :,;otential and the desire to benefit from ~<:,cl-.nob~ical innovations. 3. They ove:ol.J.:"'C.en t..":e debt capacity of ~t!1e fa.::ner to 5UC~1 an extent that repayment of cl"eeit becomes more diffic.llt, especially in a POOl' crop year. 133 BraUOG RAPRY Bal<er, wester B., "R~le Ot C:eci.it b t!::.e Economic Development oi Small Farm Agriculture," Scall Fal'!!le!' Credit .\na!vtical ?auers, A. L D. Spr.ng Review 0 £ .Smail Far!::ler Credi: XIX, Agency f'Jr !!aernational Development (1973), pp. ·-U-70. Banco de Mexico, S. A., :':~1!ltG: aeglas de Oue:adondel Fideicomisos Fond" Esoecial de J ..si!lterc~a Tec::llca v Garantia para Creditc Agro'Oecuarios, Circular Nuo. 1H j jiZ (2.9 n'eciembre de i nil. Banco de Me.'dco, S. A.., .-\sunto: Nuevas ~l'asas de L-1teres nara Cfedito Refaccionaros, Circular Num. 1833/78. Banco de Mexico, S. A., Informc An~ (1978). Denald, Gorden, Credit for Small Farmers. in.. p~veloping C0l1.l?-.t;:.k5.~ \>!::;<-:>~:.. ... view Special Studies in Social, Political, and ubilomlc Development, Boulder, Colorado: Westview P:-ess t me. (1976), Fern.a:ldez y Feoandez, Ramon, Una Estr..lctura Institucionel Ideal nara el Credito Agricola, Mexico, D. F.: Edicion de Aut:' (1977). Fordo do Garantia y :omen.to para 12. Agric.1.ltura, Ganaderia 7 Avic.llt'.lra, Ley General de Credito Rural, ~tfexico OS. (1976) FIRA, Division de Planeacion, Lineamientos B<tsicos del P:-oqrama de ?roci.uc!2,res de Bajos Ingresos (October 1979 J. .. Caracteristicos 7 Finalidadi!~ de Los Fondes Instituidos en Relacion :SIRA 'con La Agricultura en ::l Banco de ~exico., Mexico, OS. (1978). Gonzalez-Vega, Claudio, "The Iron i.aw of Interest Rate Rest :.;tions," unpLblished disse:otation, Stanfol'd University Scllool of Economics, under the directiC'll of Ronald!' ~1cKi:mon. Gonzalez-Vega, Claudio, "1:tere!t Rate Policies and Small Farmer Cr~~dit Prognms ill LDC's," Small t'~...;:m'!!' Credit Analvtical Fa;:)ers. A. L n. Spring Review of Small Far::a~r Credit XlX, Agency for International Oevelcp::aent (1973). Long,'\'UUard. "Interest Rates ard. the Structure of Agl'icultU!'al Credit ~arkets," Oxford Econoolc !'aoers (july 1968), pp. 275-238 • ... Lowdermilk, ytax Kear.l:3 t Diffusion of Dv: d.rf W"heat ?!"cduction Tec~ology in Pakistan's Punjab, unpubl:'ihed. Ph.D. dis::le:nation, Conell Univer sity, Ithaca, New York (1972.). :'1cKi.nnon, Ronald L, :vioney and Canital i::1 Ecollomic Development, \Vashington, D.C.: "J.""t.le Brookings Institution (1973). ;'Iisoet, Cha:des T., "Informal Lenders as S.,.ppliers oi Development Credits :0 Small Farmers in Developing Countries: Attractive or Deceptive Alternative, Smail Farmer Credit.: Informal Credit, A. I. D. Spr.ing 7:teview oi Small Farmer Cr~it XV, Agency for Intenational Develop .:nen t (1973). >iisbet, Charles T., "Interest Rates and Imperfect Competition in the Nonformal Credit 'Market of Rural Chile." Economic Development and Cultural Charuze JOctober 1967}, pp. 73-96. . Rodlin, Refugio L. A :vtic:o-Economic Analvsis at- S:::ral1J;,tcl.d:!:r. ReS'00!l~, tn.,·· High-Yielding ila:deties of Wheat in ',Vest Pak.ista~, unpubl.ish.ed Pb..D. , dissertation, Departmen t of AgriC".lltural Economics, Midligan State University, East I..ansiug (1971). Roe, Alan R., "Some Theory Concerning the Role and Failings of Financial Intermediation in Less Developed Countries," Domestic Finance Studies No. 50, ?ublic and Pt-ivate Finance Division, Development Economics Dep~tment, 'I"he World Bank. Scllluter, Michael G. G., The Interaction of Credit and Uncertaintv in Qetermining 8.esource Allocation and Incomes on Smail F:u .;'5 in Surate District. India. Occasional Paper No. 6B, D'!partn1e:;):;-or Agriculttu'al Economics, Conell Univenity (1974:). Sclliuter, Michael G. G., "The Role of Cooperative Credit in Small Farmer Ado'Otion of the New Cereal Varieties in India.," Smdl Farmer Cr~it in South Asia, '.;\. L D. Spring Review of Smail Farmer Credit X; Agency for International Development (Hi3). Sc;:luter, Mi6ael G. G., and :Meilor, John W•• "New Seed Varieties and t!le Small Farm," ECC::lomic a..-z.d P"litical Weeklv. Review of~i£.llture (~farch 2.5, 1.972). . 'jf Sec:::-etaria d.e Agric.lltura y Operacion, Direccicn General de Etonomia Agricola, Informe Estadistico: El Uso de Fel'tilizantes en las Qistl'!tos de R~••-'>..no .-\gric;,la 1976-1977. ,. 135 Secretaria de .-\gric.lltu.ra y Recusos Hidraulico5. gesultados de la Enouesta Na.dona} Sabre ?:-oduccion de :Viai:l:. Sergo. Tl"igo. Debada. Ajonjoli. Algodcn ••.\no:: " Sova, CicIo ?:imavera-iierano (1976). Secrctaria de AgriC'..l!t"-:.ra y rec..ll'SOS Hidraulicos, DG EA A.nuario Estadistico de la Produccion Agricola de los Estados UnidQs :vlexicanos (1977). Secr~taria de Programacion y Presupuesto, Informacion Basica pua La Toma de Decisiones en El Sector Agricola (l979). Sen, Jalit K., "Social Psychological Cor.elates of Acl.cption of AgriC'.lltural Innovation" ~ .Behavioural Sources and Community Develo'Oment, rr (March 1968). Shahjahan, Muza, Agricultt.:..ral FmAnce in East Pakista.n, N'e\v York: ~icGraw-Hil1 (1968). Supervi~ion Summ8.l'Y, Fifth tivr.!stcck and .-\gric..11tural Credit Project, International Ba.nlt for Reconstruction and DevelopIllent, P~je<:!t Officer. R. :VUt:orcl; Loan Officer, V. Foreman. 3/11!i6. Yates, Paul Lamartme, El CatOno :vrexicano, Ediciones :vie:dco, D" F.: E1 Caballito, S. A. (1978). ., ~

Informations clés

Organisation Groupe de la Banque mondiale

Type de document Working Paper (Numbered Series)

Date d'adoption 1 novembre 1980

Pays Mexique

Source Banque mondiale