Peru - Second Agricultural Credit Project

L-IV - / z72 Cg - / / ',X RETURN To RESTRICT E D REPORTS DESK R e p o r t N o. Tb0. 126-a I WITHIN F1U} t' IONE WEEK t=cr This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON THE REQUEST FOR A SECOND LOAN BY THE BANCO DE FOMENTO AGROPECUARIO DEL PERU March 1, 1957 FILE COPY Department of Technical Operations  TABLE OF EQUIVALENTS Peru has a fluctuating exchange rate with no official parity. Since September, 1954 this rate has been stable at 19 Soles to the dollar. US $1.00 - 19.00 Soles S/1.00 - 5.26 cents S/1 million = US $52,600  REPORT ON THE REQUEST FOR A SECOND LOAN BY THE BANCO DE FOII1TTO AGROPECUARIO DEL PERU I N D E X Page I - Introduction 1 II - The Agricultural Credit Loan of 1954 (Loan 105-PE) 1 III - The Banco de Fomento Agropecuario 2 IV - The proposed Program for 1956/57 and 1957/58 4 V - Justification of the Loan Request 7 VI - Conclusions and Recommendations 8 Annex A - Sunmmary of the Banco's Organization and Operations APPETDICES I - Medium and Long-term Credit Program under Loan 105-PE II - Balance Sheet as of September 30,1956 III - Analysis of Balance Sheet IV - Equipment Financed out of the Proceeds of Loan 105-PE  FEPOR)T ON THE rFtlT-ST FOR A S71COT LOa,N BY T1.3 Bt'iTCO DE FO,I.TO AGhC`lOFECUAiLO DLL PERU I. Introduction 1. in IMarch,1954 the Banco de Fomento Agropecuario (the Banco) applied for a series of five agricultural loans totalling 4t24 million, to be made in five consecutive years. The Bank felt at that time that it would be imprac- ticable to consider more than a two-year program. The Bank further felt that the Banco could not absorb more than US65 million over two years. A loan of this amount (Loan 105-PE) was made on November 12,1954 to cover the foreign exchange expenditures of a long-term agricultural credit program for the period October,19554 - September,1956. The Bank decided that future lending would be considered at the completion of this program. 2. On September 30,1956 the Banco had committed the entire amount of loan 105-PE and has now reouested the Pank to consider a second loan of US$5 million to cover the foreign exchange costs of a continuation of this program until September 30,1958. 3. The purpose of this report is to evaluate the merits of the new loan request in the light of the results of the first loan. There is attached as Annex A a brief surTimry of the Banco's organizatior and operations. 1iore detailed information is contained in the report (T.O. 67a of October 29,1954) w.hich was circulated to the Board at time of consideration of loan 105-PE. II. The Agricultural Credit Loan of 1954 (Loan 105-PE) 4. This loan was justified on the basis of the large and growing un- satisfied demand for agricultural credit in Peru. As a result of inadequate credit facilities, fanrers could not purchase sufficient quantities of im- ported equipment and breeding stock necessary to raise the level of produc- tivity. 5. During the twJo years October,1954 - September,1956, in carrying out the Bank-financed program, the Banco made medium and long-term credits totalling S/181 million, S/95 million (US$5 million) of which with loan funds. This is more than twice the volume of loans made for similar purposes during the preceding two years. There is attached as Appendix I a detailed state- ment showing the purposes for which these credits were made. 6. During recent years, there has been a mrrked expansion in the eco- nomic development of Peru in the fields of farming and stock-raising. This increase has been due to a number of factors, such as improved irrigation, better equipment, relaxed price controls, more effective extension work, but there is no question that the increased availability of farm credits for farm development work, as a result of the Banco's activity has contributed to the result.  III. The Banco de Fomento Agropecuario 7. The Banco was created in 1931 to assist the agriculture and stock-- raising of Peru wVhich were in serious straits as a result of the depression. It has now a subscribed capital of s/4co million, of wlhich S/2244 million is paid in. Because of the increased volume of business possible as a result of the Bank's loan, it has been able to follow a policy of decentralization by re-organizing its system of branches and agencies and granting them greater autonomy. For instance, agencies are now authaorized to grant substantial loans without reference to Lima, the amount authorized varying from agency to agency, depending on their size and competence. 8. The system of reviewing and approving short-term credit applica- tions at the Lima headquarters has also been streamlined. Three credit com- mittees have been organized, or.e each for the Coast, thLe Sierra and the Selva, with authority to approve loans of up to S/500,000 each without need for Board action. 9. Plans are now nearing completion for the organization of a Southern Zone which would include the branches of Cuzco, Puno and Arequipa and their respective agencies. This Zone, where the bulk of the population lives on small subsistence farnms, would be granted a considerable degree of autonomy. As a means of reaching more of these small farms, the Banco is organizing special "penetration centers" in the Department of Cuzco. These centers bring together extension services and credit facilities in areas not hereto- fore reached. 10. The management has remained effective and the brganizaticn of the Banco has been strengthened. 11. The Board of Directors of the Banco was, rith the exception of two cariy-overs, renewved at the onset of the new Administration in Peru in the early fall of 1956. The new members of the Board have been selected with care and include men of broad experience. 12. The financial position of the Banco has improved since the first loan was granted. Attached as Appendices II and III respectively are a current balance sheet of the Banco and an analysis of this balance sheet from the point of view of liquidity. 13. The Banco has been operating at a profit for the past seven y1ears as indicated by the followling sumemary of profit and loss statements:- (in million Soles) 19L9/50 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 Operating Receipts 9.1 12.4 24.1 33.1 41.6 0.5 60.8 Operating Costs 7.9 10.4 16.3 2b.6 31.8 38.2 46.7 Balance 1.2 2.0 7.8 _T 9 f 12.3 ZL To depreciation 0.2 0.3 0.5 2.7 3.4 3.4 4.5 To reserve for bad debt .9 0.9 5.4 4.2 5.1 7.6 9.3 Profit to Capital 0.1 0.8 1.9 1.6 1.3 1.3 0.3  - 3 1L. Receipts of the Banco have kept wxell ahead of operating costs, and operating costs per loan have gone doTin. This is significant since the Banco has reached the point where an expansion of its lending program is dependent largely on relatively costly long-term borrowing. Consequently its ability to continue operating at a profit will depend on further recluction in opera- ting cost per loan, while maintaining the quality of its loar portfolio. 15. There has been an absolute increase in the portfolio of loans in arrears following the series of poor crops in many parts of Peru during the past agricultural crop season. Being by statute a no profit-no loss organi- zation, the Banco has used most of its surplus of receipts over expenditures to increase materially its reserve for bad debts rather than paying a dividend. At September 30,1955 S/46.1 million, or 16% of the loan portfolio, were in arrears. At September 30,1956 this amouunt had increased to S/55A4 million, but percentaggewise it had decreased to lL.9%. The Banco expects the great bulk of these arrears - 82% of htich are of short-term loans - to be repaid over the next three years. Unless there are more disastrous droughts, this expectation should be realized. In the meantime, the relatively large delin- quent portfolio presents a serious burden to the Banco. Present reserves are S/h1.4 million, of xhich S/2h.9 million are reserves for bad debts, which should be adequate. 16. The portfolio of the Banco increased from S/207 million to S/225.1 million during the fiscal year 1953/54. It increased to S/289 million during 1954/55 and to S/371 million during 1955/56. The bulk of the increase during this last year was due to long-term loans, as can be seen from the following table:- Loan Portfolio of the Banco Sept.30,1955 Sept.30,1956 (in million Soles) Short-term Loans To large farms for crops 76.5 88.9 For cattle 8.1 10.0 To small farms for crops 31.8 37.5 Rubber & tropical products 6.o 8.5 Advances on existing crops 20.9 23.8 U-i; 1 Long-term Loans To large farms 15.6 23.0 For cattle 58.9 7L4.3 To small farms 11.0 12.7 Chattel & real estate 47.0 7l.7 Wool and advances 13.2 17.6 liT5, 7 -202 .3  17. During 1954/55 and 155/56 the Banco m-ade the following long-term loans under the Bank-financed program:- 1954/1955 1955/1956 7# of Loans Value # of Loans Value (in S/mill.) (in S/mill.) Irrigation 43 9.2 125 14.7 Agric. machinery 190 18.2 260 29.5 Land improvement 14 2.2 32 10.2 Livestock 205 33.5 271 32.9 Plantations 107 7.6 135 13.6 Fencing material - - 12 2.2 Processing & storage 10 2.1 13. 5.8 Total 569 72.8 848 108.9 These totals compare vith S/56 million during 1952/53. The details of the goods financed under Loan 105-PE appear in Appendix IV. IV. The Proposed Program for 1956/57 and 1957/58 18. On September 30,1956 all the funds from Loan 105-PE had been com- mitted. The Banco, therefore, in order to be able to continue to meet the demand for long-term credits has requested a new loan of USEi5 million to carry out its program for the years 1956/57 and 1957/58. 19. Machinery set up to operate the program is working satisfactorily. Farmers and stock raisers are now familiar with the mechanics of credit ope- rations and the demand for credits is steadily, increasing. The Banco, in anticipation of negotiations of a new loan approved during October and Novem- ber credit applications amounting to S/12 million to finance imports and vill soon have to make a decision wTith regard to applications under negotiation amounting to S/18 million. These applications result from the fact that there are no other long-term agricultural credit facilities in Peru. For example, according to distributors of farm machinery, 75% of wheel and 45% of crawler tractors are noTr sold through loans granted byr the Banco. The tractor fleet of Peru has been increasirng at the rate of SCO to 600 a year and is expected to continue to increase at this rate for the next several years if credits continue to be available. In the same -way demand for credits for small irrigation projects ard for land improvement work has now become very active. There are in Peru some 30 to 40 smaaU projects of a few thousand hectares each which need to be carried out, possibly with a higher degree of priority than some of the larger projects which have been under consideration by the Government for some time already. The Banco should be the source of financing for many of these smaller projects. Acceleration in the financing of such projects -would require greater resources, partic- ularly in local currency, than the Banco presently possesses, if this is to take place. The Government will have to make some decision with regard to priorities of large versus smaller irrigation projects.  -5- 20. The Banco, using the experience accumulated during the past two years, has developed a lending pro,-rai.l for the next two years which is presented in overall figures in the next table and in more detail in par.21. Actual Actual Forecast Forecast 1954/1955 1955/1956 1956/1957 1957/1958 Local Foreign Local Foreign Local Foreign Local Foreign Curr. Exch. Curr. Exch. Curr. Exch. CuIrr. Exch. -------------------(in million Soles)-----__-________ Short-tern loans 281.1 - 269.8 - 325.0 - 350.0 - Long-term loans 37.0 35.7 49.2 59.6 49.7 47.5 75.9 47.5 255.1 35.7 319.0 59.6 374.7 47.5 425.9 47.5 The resources of the Banco to meet this program would accrue from the following sources:- 1954/55 1955/56 1956/57 1957/58 Actual Actual Forecast Forecast _________ (in million Soles) --------- Repayment of short-term loans Ow,n funds 37.3 38.8 60.8 107.5 Borrowzings from Central Bank 149.6 199.5 250.0 250.0*) Repaymert of long-term loans 40.1 51.7 40.4 52.4 Capital increments 27.1 28.4 30.0 30.0 Profits (to capital) 1.0 0.1 0.5 0.5 IBRD loans 35.7 59.6 47.5 47.5 Total 290.8 378.6 429.2 487.9 Less amortization Loan 105-PE - - 7.0 IL.5 Net amount available 290.3 378.6 422.2 473.4 *) For short-term operations the Banco borrows from the Central Reserve Bank of Peru against its short-term portfolio up to an amount determined by means of yearly conitracts drawn up at the beginning of each agricultural season. The contract is nov for S/250,000,000 at 3%. 21. The funds from the proposed loar are allocated evenly over the two years of the new program, and the amount for each category is based on the average demand during the past two years. As in the case of loan 105-PE, however, it will be necessary to review the allocation periodically in the light of changing circumstances in order to ensure a continued balance between the various elements of the program.  Long-Term Program (in million Soles) Realization P r o p o s e d P r o g r a m 1954/55 & T o t a 1 1955/56 1956/1957 1957/1958 IBHD Loan Banco IBRD Banco IBTRD Banco IBRD Banco Soles $Equiv. Funds Loan Funds Loan Funds Loan Funds S/19.- 105PE 1. Irrigation a) Pumps & motors 16.5 - 8.0 - 8.0 - 16.0 0.84 - Wells & Inst.exp. - 0.8 - 1.0 - 1.0 - - 2.0 b) Reservoirs, dans, ditches, etc. 1.3 5.0 0.7 2.5 0.7 21.5(2) 1.4 0.07 24.0 2.Machines & implements 47.2 0.3 24.0 - 24.0 - 48.0 2.53(3) - 3.Land improvements - 12.4 - 15.0(1) - 18.0(1) - - 33.0 4.Livestock 21.4 45.0 11.0 1