Philippines - Second Rural Credit Project

e - RETURN TO REPORTS D:)ESK RESTRICTED WITHIN FLE COY Report No. PA-4* ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TERNATIONAL DEVELOPMENT ASSOCIATION PHILIPPINES SECOND RURAL CREDIT PROJECT May 2, 1969 Agriculture Projects Department  CURRENCY EQUIVALENTS US$ 1.00 = Pesos 3.90 Peso 1 US$ 0. 25 Pesos 1, 000 = US$ 256.40 Pesos 1, 000, 000 = US$ 256, 400 WEIGHTS AND MEASURES Metric System ABBREVIATIONS. ACA - Agricultural Credit Administration AGLF - Agricultural Guarantee and Loan Fund APC - Agricultural Productivity Commission BPI - Bureau of Plant Industry DBP - Development Bank of the Philippines NDP - National Gross Product PNB - Philippine National Bank RB - Rural Bank RCPCC - Rice and Corn Production Coordinating Council  PHILIPPINES SECOND RURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY .... . . ................... i I. INTRODUCTION . . . 1 . . . . . . . . . . . . . . . . . . . . II. BACKGROUND . . . . 1 . . . . . . . . . . . . . . . . . . , . A. General . . . . . . . . . . . . . . . . 1 . . . . . . . B. Preser.t Situation in Agriculture . . . . . . . . . . . . 2 C. Irrigation . . . . . . . . . . . . . . . . . . . . . . 3 D. Agricultural Extension and Research . . . . . . . . . . 3 E. Agricultural Credit . . . . . . . . . . . . . . . . . . 4 III. THE RURAL BANKING SYSTEM . . . . . . . . . . . . . . . . . . 5 A. Organization . . . . . . . . . . . . . . . . . . . . . . 5 B. Financial Resources and Operating Results . . . . . . . 6 C. Management . . . . . . . . . . . . . . . . . . . . . . . 7 D. Credit Functions . . . . . . . . . . . . . . . . . . . . 7 E. Impact of First Rural Credit Project (Loan 432-PH) . . 8 IV. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . 9 A. Description . , . . . . . . . . . . . . . . . . . . . . 9 B. Project Area . . . . . . . . . . . . . . . . . . . . . . 11 C. Cost Estimates , . . . . . . . . . . . . . . . . . . . . 11 D. Proposed Financing . . . . . . . . . . . . . . . . . . . 12 E. Disbursements . ................... 13 F. Procurement . . . . . . . . . . . . . . . . . . . . . . 13 G. Organization and Management . . . . . ... . . . . . . . 13 E. Auditing . . . . . . . . . . . . . . . . . . . . . . . 14 I. Lending Policies, Terms and Criteria . . . . . . . . . . 15 V. PRICES, MARKETS AND FARMERS' BENEFITS . . . . . . . . . . . 16 Rice . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Swine, Poultry and Fish Products . . . . . . . . . . . . . . 17 Sugarcane . . . . . . . . . . . . . . . . . . . . . . . . . 17 Farmers' Benefits . . . . . . . . . . . . . . . . . . . . . 17 VI. BENEFITS AND JUSTIFICATION . . . . . . . . . . . . . . . . . 18 VII. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . 19 This appraisal report is based on the findings of a mission composed of Messrs. F. Knobel, M. van Gent (Bank) and P. Lucani (FAO), which visited the Philippines in August/September 1968, and who all contributed to the report with Mr. Knobel having primary responsibility'.  ANNEXES 1. Number and Size of Farms 2. Production, Imports and Exports of Main Agricultural Products - Tables 1-3 3. The Rural Banking System - Table 1 - Consolidated Balance Sheet Table 2 - Consolidated Profit and Loss Account Table 3 - Costs and Returns of Lending Operations Table 4 - Loans Made by Categories Table 5 - Loans Made by Size and Terms Table 6 - Loan Portfolio Table 7 - Loans Made Classified as to Security Table 8 - Total Resources, Loans, Deposits, Borrowings, Capital Accounts and Yearly Growth Table 9 - Summary of First Rural Credit Project (Loan 432-PH) 4. The Central Bank - Table 1 - Annual Balance Sheet Table 2 - Annual Profit and Loss Statement Table 3 - Farm Project, Development Plan 5. Phasing of Investment Costs and Foreign Exchange Component 6. Cash Flow Projections of Receipts and Disbursements - Table 1 - The Central Bank Table 2 - The Rural Banks Table 3 - Bank Loan PH-432 7. Cash Flow Projections of Farm Development Enterprises - Table 1 - 5 Ha Irrigated Rice Farm, 2-Wheel Tiller Table 2 - 25 Ha Rice Farm, 45 HP Tractor Table 3 - 25 Ha Sugarcane Plantation, 65 HP Tractor Table 4 - 5 Ha Rice Farm, Pump Irrigation (Not Mechanized) Table 5 - 3,000 Layer-hen Poultry Farm Table 6 - 20 Brood-sow Swine Farm Table 7 - 1 Ha Fishpond Table 8 - Fishing, up to 5-ton Boat 8. Financial Rates of Return of Farm Development Enterprises 9. Economic Rate of Return for the Project 10. Importation of Farm Machinery, 1964-1967 OIRGANIZ.TION CEART MAP  PHILIPPINES SECO9D RURAL CREDIT PROJECT SUMMARY i. The Central Bank of the Philippines has requested a Bank loan to help finance the continuation of a rural credit project that began in 1965 when Loan 432-PH was granted for US$5 million. ii. Approximately 2,500 small farmers were beneficiaries under the first project (Loan 432-PH). The bulk of the loan funds was used for pur- chase of agricultural equipment, principally 2-wheel and 4-wheel tractors. Preliminary information indicates that investments made for mechanization, combined with a high level of production inputs of new high yielding seed varieties, fertilizer and insecticides, resulted in net gains in income of 25-30% and improved the net worth position of farmers by 20-25% after one to two years. iii. The second project would be a three-year lending operation, again administered by the Central Bank, through about 200 rural banks selected by the Central Bank. The project is designed to provide medium and long-term credit to approximately 6,500 farmers for the following main purposes: - farm development - machinery, processing and storage facilities, irrigation schemes; - livestock development - poultry and swine enterprises; and - fisheries development - fishponds, boats and equipment. iv. The! principal beneficiaries would be small farmers who roughly could double their net annual income over a five to seven-year period. A principal feature of the project is mechanization of land preparation which permits more intensive utilization of land resources, resulting in higher annual production and savings in costs. The economy would benefit from an incremental annual production of paddy rice of about 185,000 tons, sugarcane 45,000 tons, and poultry, pork and fish products of about 20,000 tons. In- creased rice production would assist the country toward its goal of achiev- ing self-sufficiency and, together with the increased livestock, fish and sugarcane production, would result after full development in an average annual net improvement in the foreign exchange position of about US$13 million due to import substitution and increased exports. v. Total project cost, estimated at US$25 million, would be financed by the Bank loan 50% (to cover foreign exchange component), Central Bank 30%, participating rural banks 10%, and farmers 10%. In the first project farmers were expected to participate with 30%. This ratio was found to be too high and had to be reduced to 10% after one year of operations; additional re- scurces were provided by a Goverment Fund.  - ii - vi. The Central Bank would lend its funds and on-lend Bank funds, other than a small amount required for technical services, to selected rural banks at a blended interest rate of 7% (assuming a Bank interest rate of 6.5%) on amortization terms similar to those granted by rural banks to farmers. Loan terms to farmers would range from three to ten years at 12% interest per annum, including a grace period when appropriate. Surplus funds derived from the amortization of Central Bank loans to rural banks and not required for amortization of the Bank loan would be relent by the Central Bank to rural banks for further agricultural development under similar terms and procedures. vii. The second rural credit project is suitable for a Bank loan of US$12.5 million to the Central Bank of the Philippines, to be guaranteed by the Republic of the Philippines, for a term of 14 years including a grace period of four years.  PHILIPPINES SECOND RURAL CREDIT PROJECT I. INTRODUCTION 1.01 The Central Bank of the Philippines has applied to the Bank for a loan to provide medium and long-term funds to rural banks for the financing of agricultural development. This would be a se6ond loAn to the Central Bank for this purpose. In 1965 the Bank made a loan (432-PH) of US$5 million, which had been fully disbursed by the end of 1968. 1.02 The total investment proposed under the second project would be about US$25 million, for which a Bank loan of US$15 million has been requested. The request did not include a proposed ratio of participation by the Bank, the Central Bank, participating rural banks and farmers, although the intent was that at least 60% of project cost would be financed by the Bank loan. The Bank after reviewing the application and appraising the project, found that the Central Bank would have sufficient surplus fund8 from the turn-over of the first loan and the proposed second loan plus other resources to make pos- sible a reduction of the Bank loan to US$12.5 million, which would cover the foreign exchange component estimated at 50% of total project costs. The Central Bank would relend the proceeds of such a loan to qualified rural banks to augment their medium and long-term lending capacity to agricultural pro- ducers for approved development purposes. 1.03 This appraisal report is based on the findings of a mission led by F. Knobel and composed of M. van Gent and P. Lucani (FAO), which visited the Philippines in August/September 1968. II. BACKGROUND A. General 2.01 The Republic of the Philippines comprises over 7,000 islands (see Map), of which 11 account for nearly 90% of the total land area of about 30 million ha. Of this about 11 million ha of land can be used for agricultural purposes, approximately 10 million ha are commercial forests, and the other 9 million ha are non-productive. 2.02 The population, currently estimated at 35 million, is increasing at an annual rate of 3.2%. Agriculture employs around 60% of the total labor force, produces some 32% of NDP, and originates production which accounts for about 85% of total exports. The average size of farming operations is small with around 80% of the farm units under five ha (Annex 1). Also the ratio of tenancy to number of farms is high, being in the range of 50% and as high as 90% in some of the most densely populated areas of Central Luzon. Goverment is encouraging, through its Land Reform Program, the conversion of share- croppers into leaseholders preparatory to becoming landowners.  -2- B. Present Situation in Agriculture 2.03 In most of the Philippine agriculture traditional farming prac- tices are stili being used, but modern agricultural methods are more and more applied. Farmers in many areas have quickly adopted the new high yielding rice varieties, together with the required cropping practices (better land preparation, fertilization, and disease and pest control). These varieties were introduced by the International Rice Research Institute at Los Banos and Government research programs, and promoted under the Government 's rice and corn program. Increasing use of tractors for faster land preparation and the shorter growing cycle of the new rice varieties have permitted double crop- ping in one year and triple cropping over two years under irrigated condi- tions. Farmers in large rice growing areas, however, are still using water buffalo for land preparation, resulting in slower land preparation and lim- iting opportunities for double cropping. On the other hand, double and triple cropping cannot be introduced if adequate irrigation facilities are not avail- able. Production of corn, sugarcane and coconut are also beginning to profit from mechanization and other modern cultivation practices. 2.04 Out of the country's total cultivated area of 8.3 million ha in 1967, about 6.1 million ha are devoted to food crops. Of these, some 3 mil- lion ha produce rice, the country's main crop, and 2 million ha produce corn. Industrial crops are grown on 2.2 million ha, of which coconuts with 1.6 mil- lion ha, sugarcane with 315,000 ha and abaca 1/ with '200,000 ha are the most im- portant. Fish production in terms of tonnage is almost twice the production of meat and poultry, taken together. l 2.05 Average crop yields are still low by world standards and consider- able areas of cultivable land are underutilized. Modern practices have dem- onstrated their capacity to produce considerably higher yields, i.e., 3.5-5.0 tons of paddy rice per crop ha (national average: 1.3-1.5 tons), 2 tons of corn per ha (national average: 0.7 tons) and 60 tons of sugarcane per ha (national average: 46 tons). Constraints on mechanization and on the mope rapid adoption of modern farming methods include the lack of credit to pur- chase equipment and difficulties in fully exploiting both old and new irriga- tion schemes. 2.06 The Philippines was near self-sufficiency in rice in 1968 and ex- ported limited quantities of rice. According to a survey of the Department of Agriculture and Natural Resources, total estimated paddy (rough rice) production in 1968 would be around 4.2 million tons. This represents an in- crease of about 7% over the 1967 production compared with an average annual increase of 1.6% over 1960-1967. As the area devoted to rice production has remained about the same, the increase in rice production is mainly attrib- utable to higher yields per ha. In the priority areas, where the efforts of the Government are mainly concentrated, yields per ha are estimated to have increased by about 7.5%, passing from 1.44 tons/ha in 1967 to 1.55 tons/ha in 1968. 1/ A fibe:, obtained from the leafstalk of a banana, native to the Philippines.  -3- 2.07 8wine production contributes about 60% of the total fresh meat su:pply of 340,000 tons, and is increasing. Ilnports of about 100,000 tons of meat are still necessary to meet demand (Annex 2). Poultry and egg produc- tion is also presently insufficient to meet ifiternal demand in spite of the increase of the chicken population from 49 million in 1963 to 67 million in 1967. Beef production has remained constant for several years at around 22,000 tons per year. The cattle population could be increased considerably as there are vast underdeveloped pasture lands available, and grazing under coconut plantings offers possibilities for development. 2.08 Fish is an important protein food in the Philippines. Consumption is about double that of meat. The Fisheries Commission estimates that about 65% of requirements are produced in the country. Production methods are inefficient. The Government has prepared a four-year development program, which covers both inland fishery (fish ponds) and coastal (fore-shore) fish- ing. C. Irrigation 2.09 In most agricultural areas there is a pronounced dry season that prevents year-round cropping. Short dry periods of a few weeks also often occur in the rainy season. Irrigation, therefore, in addition to being re- quired to permit year-round cropping in areas with a pronounced dry season, may also pay off by offsetting the unfavorable effects on production of dry spells that occur in the rainy season. This would be the case for the Upper Pampanga River project presently being considered for Bank financing. In addition to Government-supported irrigation schemes there are many small private gravity and pump irrigation systems. 2.10 Total irrigated area for rice approximates 750,000 ha in the rainy season, of which only around 350,000 ha are irrigated in the dry season, per- mitting two crops the year-round on this hectarage. However, few of the exist- ing gravity irrigation systems can provide an assured regulated water supply. When the Upper Pampanga River project is completed, about 70,000 additional ha would be irrigated year-round instead of only during the wet season. Statistics on the irrigated area in the Philippines, based on different as- sumptions of what is full and supplemental irrigation, and on different es- timates of privately irrigated area vary considerably. The above figures are in accordance with those given in the Bank's Economic Report of May 1968. Water rights are only required for open watercourses; use of groundvater is not regulated and no licenses are required for installation of wells. D. Agricultural Extension and Research 2.11 The Rice and Corn Production Coordinating Council (RCPCC) under the Executive Secretary of the President is the main policy making body for food production. Because of its success in increasing rice production, the Council has expanded its scope of activity; in addition to rice and corn, it is giving high priority to all food crops and also to fruits, fish and livestock.  - 4 2.12 Extension services to farmers are provided by the Agricultural Productivity Commission (APC) under the Office of the President and by the Bureau of Plant Industry (BPI) under the Department of Agriculture and Natural Resources. Both agencies are organized on a provincial level and work under the supervision of the provincial RCPCC Director, who usually is either the Provincial Director of APC or BPI. Technicians of other agencies, such as the Presidential Arm on Community Development, the Bureau of Soils, and the Bureau of Animal Industry occasionally provide extension services to farmers. 2.13 Basic research is conducted by the College of Agriculture, Uni- versity of the Philippines at Los Banos. In 1964 an IBRD Loan (393-PH) of us$6 million was granted to the University of the Philippines to help finance buildings and equipment required for a five-year research and educational development program at the College of Agriculture. Contributing in a most significant manner toward increased rice productivity in Southeast and South Asian countries is the research and extension work being performed by the International Rice and Research Institute at Los Banos. Research is also done by the Bureaus of Plant Industry, Animal Industry, and Soils, of the Department of Agriculture and Natural Resources at several stations distrib- uted over the country. Several four-year agricultural colleges and lower level vocational school3 provide practical training in agriculture and do a limited amount of research work, E. A ricultural Credit 2.14 Agricultural credit is available from both government and non- government institutions. Government institutions include principally the Philippine National Bank (PNB), the Development Bank of the Philippines (DBP), the Central Bank and the Agricultural Credit Administration (ACA). Related to this category are some 380 rural banks which are partly (45% on an average) Government owned. Abotut 40 private commercial banks and 25 private development banks represent most of the non-goverment sources of institutional credit. As a whole, both government and private financial institutions are active lenders in the agricultural sector. The PNB and DBP grant 35-40% of their total annual lending volume to agriculture, the rural banks 80%, the ACA 100%, and thf! private commercial banks 155. Total agri- cultural credits granted by thetse institutions in 1967 amountred to, nearly Y2.5 billion (US$640 million). Non-banking institutions including fertil- izer dealers, farm machinery suppliers, shopkeepers, marketing and processing firms, landlords and private money lenders still provide a substantial and important amount of rural credits, particularly in regions of high tenancy. 2.15 The PNB is the oldest and largest bank in the Philippines; it began operations in 1916 and holds about 35% of the total resources of the entire banking system. PNB tends to limit its agricultural financing to the commercial size farms and plantations, as exist for sugarcane and coconuts. Though it does some financing for development, most of its lending is for seasonal production inputs, processing and marketing. The DBP ?rovides me- dium and long-term credit for the development of a wide range of agricultural  - 5 - enterprises. It extends production credit only to its borroweirs where needed to complement development credit. Loans made by the rural banks have been almost entirely short-term and principally for production, processing and marketing purposes. The ACA finances productIon and marketing cooperatives but, where no viable cooperative exists, it makes direct loans to farmers under the country's rice self-sufficiency program and in declared Land Reform Distric-ts. It provides short-term credit for the smiaLl farmer which amounted to r31 million (us$8 million) in the 1967/68 crop year for 56,000 farmers. This would be an average loan of 9550 (US$135) per farmer. ACA expects to double its volume of lending in 1968/69. 2.16 The Central Bank provides an important amount of revolving credit to banks by re-discounting loans made for the production, importation of inputs and distribution of agricultural products. Breakdown of this financing by sector was not available except that the rural banks in 1967 received 973 million (U8$18 million) most of which would bf' for farm credits. Except for the rural banks (para 3.04) re-discount terms are 80% of the face value of the paper for rice and corn at 4% interest per annum and for minor products at 7% interest for terms not to exceed 270 days. 2.17 Prevailing interest rates from institutional sources are 8-12%. Noteworthy is the growing recognition of the value of a supervised credit approach combined with technical services to the borrowers. The effective cost of credit from suppliers of agricultural inputs is 15-18%, and is much higher from traditional private lenders. A small farmer might borrow five sacks of rice in kind for seed or consumptive purposes but would repay with six sacks when he harvests his rice crop in 3-4 months time, thus paying the equivalent of 60-80% per annum. Availability of credit at reasonable terms for production and development purposes is still inadequate to meet the demand, especially for the small agricultural producer. III. THE RURAL BANKING SYSTEM A. Organization 3.01 The Rural Banking System (rural banks), through which the proposed loan would be channeled, reflects the culmination of some fifty years of Government-sponsored efforts to establish a banking system that would provide a uorkable solution to the age-old credit problem of small farmers. On June 6, 1952, the Rural Banks Act was enacted into law (Republic Act No. 720). The philosophy of the Act is to combine private and public capital in about equal proportions to serve as "seed-capital" for the establishment of a sys- tein of country-wide rural banks which would extend credit on reasonable terms within the reach of small farmers, small merchants, cooperatives and rural in- dustries. A uniqueness of the Rural Banking System is its ability to mobilize private capital and blend it with Government support. The Act provides, inter alia, that in the event government financial support is needed, Government may purchase preferred stock in a rural bank in an amount equal to the fully paid subscribed capital of the private shareholders. Today, in the whole Rural Banking System, Government holds 45% of the total capital stock and private stockholders the other 55%.  - 6 - 3.02 Rural banks are private banks created by authorization of the Monetary Board. They are supervised by the Central Bank through its Depart- ment of Rural Banks. See Organization Chart and Annex 3 for detailed in- formation. There is no intervention by Government except that when a bank is in distress, financial and managerial support is provided. Rural banks are required to report regularly to the Department of Rural Banks on their finan- cial condition, operating results and lending activities. Periodic inspec- tions are made by well trained and qualified inspectors and examiners of the Department of Rural Banks, who also make annual financial audits. Each bank must submit its annual budget to the Department of Rural Banks for approval. There are some 380 rural banks now operating as compared with 18 in 1953, and new banks are opened almost monthly. See Annex 3, Table 8 for yearly growth of rural banks. B. Financial Resources and Operating Results 3.03 As of December 31, 1967, resources (assets) principally in the form of cash, loans and investments aggregated 9409 million (US$1C5 million), resulting in an increase of 70O0 during the last 10 years, 1958-1967. Paid- up capital consisting of Y67 million (US$17 million) of privately held common stock and 054 million (Us$14 million) of Government held preferred stock amounted to 9121 million (US$31 million). Surplus and reserves amounted to 937 million (US$9.5 million) thus giving the Rural Banking System a favor- able net worth ratio of around 35%. Deposits, largely savings, have in- creased steadily. Some of this is due to the establishment of more banks, but more is attributable to the growing number of rural depositors for banks already operating. Deposits nearly doubled from P79 million (US$20 million) in 1965 to 9142 million (US$36 million) in 1967. These resources materially enhance the lending capacities of the rural banks since the legal reserve requirements are only 6-10%, depending on the nature of deposits. See consolidated balance sheet, Annex 3, Table 1. Also of importance to the proposed project is that by regulation of the Central Bank, rural banks cE,n have up to 30% of their deposits in medium and long-term loans. 3.04 Rural banks can rediscount short-term (270 days) credit paper with the Central bank at 2% for banks in operation less than two years and at 3% for those over three years. This is a preferential rate accorded to rural banks as the rate for other private commercial banks is 5.75-7% except for credit used for the production of the two high priority crops, rice and corn, for which the rate is 4%. Total rediscount of short-term credit paper is limited to 20% of paid-up capital plus surpluE and reserves., and a rural bank is ineligible if its past due loans exceed 20% of its loan portfolio. Thv rural banks lend at 12% thus giving them a spread of 9-10%. The spread for medium and long-term loans under the proposed project would be 5% for funds provided by the Central Bank and Bank loan. These favorable spreads enable the rural banks to build adequate reserves and to operate with a satisfactory rate bf return on invested capital. The spread of 5% on the portion of each loan made by rural banks to farmers out of funds borrowed from the Central Bank (representing 89% of the total amount of each loan to farmers - para 4.21) .s a source of additional income to rural banks and is sufficient incentire  -7- to rural banks to provide 11% of each loan out of their own resources. More- over, rural banks have experienced that medium and long-term lending under the first project increased short-term demand as weli as savings resulting frcm higher net farm income. 3.0)5 Of the 369 banks oper4ting in 1967, 85% re'Alized a net income. The rates of return on private stockholders' investment (paid-up common stock) ranged from 1-25% and averaged close to 8%. The rural banks must annually set aside from net earnings an amount (determined by the Central Bank) so that sufficient reserves may be accumulated within ten years to redeem the Government owned preferred shares of stock. Seventeen banks, or less than 5%, were classified as "distressed" at the end of 1967; four of these were in liquidation, and the others were under close management by the Department of Rural Banks. The amount of past due loans (almost entirely short-te:m) ranges around 16% of gross loan portfolio, or about one-half the national average for all banking institutions. The Department of Rural Banks deter- mines the amount of reserves that should be carried by a bank for bad and doubtful accounts based on its financial audits, taking into account the age of delinquencies, collectibility and collateral position. C. Management 3.o6 Rural banks operate independently of one another under boards of five to eleven directors, who must be Filipino citizens and shareholders of voting stock. (Government has no voting power through its preferred stock.) The key officer is the bank manager who is appointed by the Board subject to the approval of the Central Bank. He is the operating head of the bank and is responsible for the general management of its business affairs. He is assisted by a. staff of 10-20 persons. Each bank has one or more inspectors who examine borrowers' operations, establish the value of collateral and service loans. Final action on all loan applications is vested in the Board of Directors, but this can be delegated to the manager up to V1,000 (US$250), and to a credit committee above rl,000 to V5,000 (US$1,300). 3.07 Another unique aspect of the Rural Banking System is the mobil- ization of local personnel who, after varied periods of training and supervi- sion, have beten transformed into good bankers. Previous training and profes- sional experience for many might be as lawyers, teachers or certified public accountants, and some outstanding managers are women. Overall, the perfor- mELnce on the management level has been good. D. Credit Functions 3.08 Rural banks make short-term loans to farmers cultivating up to 50 ha for the usual purposes such as: production costs, small equipment, purchase of animals, poultry and fish for breeding purposes; to small merchants for purchase of merchandise; to small industries for labor cost, raw materials and marketing; and to cooperatives for production, processing, storage and marketing of the products of their members.  3.09 Medium and long-;t!rm agricultural loans may be granted by approved banks (para 4.20) for purchase and improvement of land; purchase of machinery, fishing boats and equipment., construLction of facilities for li-vestock pro- duction; developmenl; of irrigation schemes; construction of on-farm storage and processing faciliti.es, qnd purchase of breeding animals. Loans to indus- trial and commercial enterp.r:,J.,es can be made for purchase and improvement of land and. construction of facilities. Abouit 80% of the rural banks' loan port- folio is in farm loans. Unwitil t,he advent of the first rural credit project (Loan 432-PHI), less t-.)an 503 medium-term loans wfere granted, reflecting a scarcity of funds and *t bwr profitabil:itir since the rate of interest could not exceed 9Sea This -sas e Zed to 12%e under the first proiect, Detailed figures on lending on w;ions are given in Annex 3 Tables 14-7. E. Im.acto._f First f;uyad, Credit ProJect (Loan -132-PH) 3.10 The first Banki L1oEui of US$',' >nillion assisted in meeting the in- creased credit requirements for agricultural development; in 1965-1968. Loan funds were channeled to SomV 140) rural banks wno relent the funds to about 2,500 farmers f'or purchasee of farm max-biriery ir, rpgel:ion umping units, and construction of poultry z,in ana fisiier,- enterprises. Nearly 2,000 farmers purchased 2-wheel wlJ.king ti:lers and 4-wheel tractors Tith related acces- sories, utilizing 8O3 cr the Loaii for t1nese :..nlvestments. Close to 200 farm- ers re2eived about ,% of t-h:ie r,o&n for the development of poultry, swine, and fishery enterprises ane, the otherl 5. was used by about 275 farmers for devel- opment of pump irrigatir-J Tielses Two-thirds of' tile Loan funds were used by slightly over 100 rural basLn:ksn Luzon Region where smRll farms and high ten- ancy predominate and rice `. 'the most lnpOIrant crop, The balance of the Loan funds, wTere about eqLua'll 1Vsed by 1t,iral banks in the Visryas and Mindanao Regions ( Annex 3, TabM -,1 ; 3.11 Investments mAdf fo,r mlechanization a,id, irrigation development have been timely and profitable - caus;ing an increasing change in fanning prac- tices toward more intena:`ve crorping Survey information, conducted by the Central Bank, Department ,9f Rural Banks, covering a random sample of 319 proj- ect borrowers in 11 provinceai shows that through an investment input for mechanization combi.ned -with a high level of production inputs of better yield- ing seed, fertilizer, inse oici.des and herbicides gross croD production (rice, corn, sugarcane) was inc:rea;3d around 40,, giving the farmer a net gain in income of 25-30% and an. increase in net worth of 20-25%` over one to two years. Information on changes in pork; poultry and fish production -s too limited to be meaningful, but the Department of Bural Bunks will continue to evaluate the impact of the first Loan as wel.l as the proposed second loan. 3.12 Overall, the 2,500 beneficiaries have received satisfactory financial benefits attri.butable to. - savings in costs o.P nroduction with mechanized land preparation as compared to the traditional systeims based on the use of animal draft power; - use of tractors for custom (hire ? work.  -9 - - increased output due either to new land put under cultivation or to groving a half crop more per year (land can be ready for planting in a much shorter time); and - aouble cropping in the case of irrigation development in rice fields. 3.13 Furthermore, it was noted that as regards loans for mechanization, additional cash income derived from custom plowing enabled several farmers to satisfy their financial obligations to the rural banks well in advance of the terms. The number of past due loan installments is minimal (20 out of approximately 2,500 loans) but, since the bulk of the loans was made in 1967/68, it is too early to make an assessment or repayment history. 3.14 Under the first Loan it was expected that the project cost would be financed approximately IBRD 60%, participating rural banks 10% and farmers 30%. Initially, lending operations were slow due to the inability of many prospective farmer-borrowers to make a contribution of this proportion and the reluctance of rural banks to divert financial resources from short-term operations into longer-term credit. Many banks considered that a spread of 9-10% on rediacounted short-term credit paper with the Central Bank, even though limited to 270 days, was more profitable than a spread of 5.5% on medium- term loans under the Project. The farmers' expected contribution of 30% proved to be too high as it would need to be usually in cash because the type of investment made by them (principally purchase of machinery) was not suitable for a farmer's contribution in labor or kind. Consequently, it was agreed between the Borrower and the Bank to supplement the contribution of rural bEnks and farmers by using funds from an Agricultural Guarantee and Loan Fund (AGLF). This Fund, established in 1966 by Government, provided V29 million (US$7.4 million) to be used mainly to finance short-term credits to increase rice and corni production but could be drawn upon to support the Project. Pre- liminary figures show that total participation in financing project costs averaged 55% Bank, 25% AGLF, 14% farmers, 5% rural banks, and 1% machinery dealers (Annex 3, Table 9). IV. THE PROJECT A. Description 4.01 The proposed project would be for three years and would be a con- tinuation and expansion of the agricultural credit program financed under Loan 432-PH. It would consist of an agricultural credit operation designed to provide medium and long-term credit facilities through qualified rural banks to about 6,500 farmers for the purchase of farm machinery, production, processing and storage facilities, the development of small irrigation systems, and the development of poultry, swine and fishery enterprises. 4.02 Financing for farm machinery would include tractors and accessories such as plows, harrows and rotovators, and equipment for spraying, dusting,  - 10 - harvesting and drying operations. Also included is construction and equipment of on-farm storage facilities, particularly for rice operations. The finan- cing of private irrigation works would be mainly for purchase of pumping equipment and motors, construction of wells and distribution works, and land levelling. 4.03 Finance for fishery development would include the construction of fresh and brackish water fishponds, purchase of small-size fishing boats (up to about 5 tons) and their equipment for fishing. Financing of poultry and swine enterprises would include the construction of buildings, facilities, and initial laying or breeding stock. 4.04 Service vehicles for the field technicians are also provided in the project. This will permit credit technicians to assist farmers and rural banks in the preparation and supervision of farm development projects (para 4.15). 4.05 The following table gives the estimated scope and blend of the project by major investment items: Total Cost Items Number of Units (Pesos Million) Farm Development (Principally purchase of equipment) 2-wheel tillers 2,000 14.0 4-wheel tractors, 45 hp 1,600 38.4 4-wheel tractors, 65 hp 550 17.6 Irrigation pumps 1,500 7.3 Subtotal 77.3 Buildings and Equipment for Livestock Development Poultry farms 200 4.8 Swine farms 200 5.0 Subtotal 9.8 Fisheries Development Fishing boats and equipment 1:0 2.3 Fishponds i 2,500 (ha) 7.5 Subtotal 9.8 Technical Services (Service Vehicles) 50 0.6 Total 97.5  B. Project Area 4.o6 The project would be carried out in three principal agricultural regions: Luzon, Visayras and Mindanao (see Map). The Luzon Region is princi- pally Luzon Island which is the largest and most important island (42,000 sq mi). Also, it is the oldest in land settlement, highest in population density, highest in tenancy and is the "rice bowl" of the country. Trade, industry, communications, business and finance revolve around iinila. The Visayas Region would include principally the islands of Panay, Negros and Leyte. Thkey are characterized by a diversified agriculture - rice, sugarcane, corn and other crops. Land tenure is mixed but farming operations on an average are of a larger scale than in Luzon. Iloilo on Panay, Bacolod on Negros, and Tacloban on Leyte are the principal trade and business centers. The Mi.ndanao Region is Mindanao Island which is the second largest island (37,000 sq mi) in the Philippines. Its growth. and development have been rapid since the end of World War II - having large areas of unused land and forests and deposits of valuable minerals. It is now the leading area in coconut pro- duction, although agriculture is quite diversified with rice, corn, ramie, abaca, pineapple and livestock being important products. Mindanao enjoys a fEvorable climate, is free of typhoons, and the rate of land tenancy is low. The provincial capitals of Davao and Cotabato are the principal trade and business centers. 4,07 It is estimated that 200 rural banks, or nearly 50% bf the present total number of banks, would be eligible to participate in the project. The distribution would be similar to that experienced under the first project and would be about 125 banks in Luzon Region and 30-35 banks in each of the Visayas and Mindanao Regions (see Map). C. Cost Estimates 4.o8 Total project costs are summarized in the following table together with the foreign exchange component. Cost estimates are based on the expe- rience in the first loan as well as on estimates derived from similar types of developments financed by other governmental and private sources. Equivalent in Investment Pesos (Million) US$ (Million) % of Total Category Local Foreign Total Local Foreign Total Expenditure Farm development including machinery and facilities 31.1 46.2 77.3 8.0 11.9 19.9 79 Livestock devel- opment 8.6 1.2 9.8 2.2 0.3 2.5 10 Fisheries devel- opment 9.0 0.8 9.8 2.3 0.2 2.5 10 Technical services - o.6 0.6 _ 0.1 0.1 1 Total Project Cost 48.7 48.8 97.5 12.5 12.5 25.0 100 Note: Figures are rounded.  - 12 - The foreign exchange component is estimated at about US$12.5 million. Further details on phasing of investment costs and percentage of foreign exchange com- ponent by investment category are given in Annex 5. D. Proposed Financing 4.09 The project cost of US$25 million equivalent would be financed as follows: Farm Livestock Fisheries Technical Source Development Development Development Services Total/a UhSM)T% (U7YS) US$MY (%T (US$M) (%) lUS$M) (%) IBRD 9.9 50 1.3 50 1.3 50 0.1 100 12.5 50 Central Bank 6.o 30 0.8 30 0.8 30 - - 7.5 30 Rural Banks 2.0 10 0.2 10 0.2 10 _ _ 2.5 10 Farmers 2.0 10 0.2 10 0,2 10 - - 2.5 10 Total 19.9 100 2.5 100 2.5 100 0.1 100 25.0 100 /a Figures are rounded. The Bank loan, which would be channeled through the Central Bank, would provide 50% of total project cost. The Central Bank would contribute 30%, partly from the surplus principal funds derived from the first loan and proposed second loan and partly from Government funds, participating rural banks would contrib- ute 10% and farmers 10%. iFarmers' 10% contribution towards the coset of each investment project would be a minimum consistent with the objective of reach- ing the smaller farmer. Some farmers, especially the larger, may be able to contribute a higher percentage and rural banks would seek a larger contribution where the individual farmer's resources would permit this. Each participating rural bank would enter into a credit line agreement with the Central Bank describing terms and conditions under which rural banks would obtain Bank and Central Bank funds. Assurances to this effect and as to participation in project costs were obtained during negotiations. 4.10 The modified (compared with first loan, para 3.14) proposed finan- cial participation is a reasonable assessment of the financial capabilities of the Central Bank, participating rural bankf,., and farmers to share in the project cost. In view of the large demand on their available resources to fulfill the high short-term credit demand, a 10% contribution of rural banks is acceptable. The Central Bank would have surplus funds derived from prin- cipal repayments by participating banks not required to amortize the first Loan (432-PH) and the prcposed second loan, i.e., because of the differences in lending terms. It is estimated. that these sources (Annex 6, Tables 1 and 3) would yield about one-half of' its contribution required during the disbursement  - 13 - period. The other half would come from Government appropriations, which in 1968/69 amounts to f21.3 million (US$5.4 million), to replenish the AGLF fund. Together these sources would provide t29.1 million (US$7.5 million) towards thes cost of the project. The Central Banks's contribution of 30w would be satisfactory. E. Disbursements 4.:L1 Disbursements from the Bank loan account would be made to the Central Bank against '56% of the amount of farm loans (50% of project cost) disbursed by rural banks upon documentation submitted by the Central Bank. Documen- tation of disbursements certified by Central Bank project technicians, would be retained on file at the CentraJ Bank, or a designated local depository (para 4.16). Disbursement for tec'hnical services (service vehicles) would be for the CIF cost as shown in supporting documents. Full disbursement of the Bank loan would be achieved within a period of three years. See Annex 5 for phasing of investments. F. Procurement 4.12 As in the case of the first credit project, agricultural machinery and equipment, including irrigation equipment, engines for fishing boats and fishing equipment would be purchased locally from firms representing major international manufacturers, who maintain branches and dealers in all the principal towns throughout the Philippines. Competition between these firms is keen and services and repair facilities are satisfactory. The firms submit their selling prices regularly to the Department of Rural Banks, Central Bank, which advises rural banks and farmers on prices and mark-ups (see Annex 5 footnote). Under these conditions farmers are allowed to choose the firm they prefer for their purchases. 4.13 Sufficient private contractors are available for construction of farm buildings and boats. Building materials, including lumber and cement, are produced in-country. Likewise for farm machinery, farmers and fishermen are permitted to choose the contractor for construction and supplier of equip- ment. The size of individual contracts is too small to make international competitive bidding practicable. The purchase of service vehicles would be through local competitive bidding in accordance with the procedures agreed upon with the Bank. G. Organization and Management 4.14 The Central Bank would be responsible for administering the pro- posed loan and supervising all operations under the project (see Organiza- tion Chart). Considerable experience has been gained under the first project which makes it desirable to streamline and decentralize most of the operations under the second project.  - 14 - 4.15 Decentralization would include assignment to field headquarters by Central Bank of its technical staff (supervised credit technicians) respon- sible for the preparation and supervision of farm development plans and the use of a farm plan development form (see illustrative form Annex 4, Table 3) which would give a complete picture of the financial viability of each farm plan and a random sample of actual results achieved. Assurances to this effect were obtained during negotiations. 4.16 The practice under the first project was to send all credit instru- ments to the Central Bank, Manila for processing and loan committee action. In the future decentralization would include the approval of all loans by par- ticipating banks. After the loan papers have been completed and disbursements have been made by participating banks, the appropriate documents would be forwarded to a branch office of the Central Bank or other financial institution for safe keeping and examiination by an accredited loan officer of the Central Bank. He would review the loan documents and loan disbursements made by participating rural banks, and would then send an approved schedule of loan disbursements to the Central Bank, M4anila. This schedule would be the basis of remittance by Central Bank to the rural banks for the appropriate amount of its (Central Bank) contribution and withdrawal from the Bank loan account. Assurances that these decentralized lending operations would be introduced were obtained during negotiations. 4.17 The Department of Rural Banks, Central Bank, has nearly 500 person- nel. of which about half are in the Examination and Supervision Division. The Department has increased its agricultural staff from 25 at the beginning of the first project (1965) to 90 agriculturists. With the experience gained and better utilization of their time (para 4.15), this number should be ade- quate to handle the increased volunie of work for the second project. A few more fishery specialists may be required but, in the interim, techriicians from the Philippine Fisheries Commission can be called upon for assistance. The technicians, who are classified as Supervised Credit Technicians, are well accepted by the rural banks and enjoy a good reputation. The adminis- trative services will be strengthened as required. H. Auditing 4.18 Auditing procedures are satisfactory. As required by law, an annual financial audit is carried out by the Department of Rural Banks of each rural bank to determine the soundness of its credit operations. In addition, rural banks are required to submit annual financial statements of income and ex- penditures and balance sheets to the Central Bank. Special examinations Of rural banks are made as often as necessary to control the operations of those banks which have operational difficulties or management problems. 4.19 In summary the organization and management aspects of the partici- pating rural banks have been tested under the first Bank Loan, and have nroved successful. The staff of thV Department of Rural Banks, Centrl Bank, is capable and competent to deal with and supervise the rural banks.  - 15 - I. Lending Policies, Terms and;Criteria 4.20 The Central Bank would continue to select the rural banks to partic- ipate ih the lending program as in the first credit project. Criteria of selec- tion (see Annex 3, para 23) to be applied would include: (i) Character, capacity and integrity of officers; (ii) Past performance with respect to the soundness of investments and compliance with the law and regula- tions and generally accepted banking practice; (iii) Soundness of financial position as based on liquidity position, adequacy of equity and profitability; (iv) In operation for at least two years; (v) Rediscounting facilities with the Central Bank not withdrawn within the past year; and (vi) Assessment of the demand for the type of loans envisaged under the lending program as well as the willingness and financial capabilities of a rural bank to contribute at least 10% of project cost. Assurances to these conditions were obtained during negotiations. 4.21 The Central Bank would lend its funds and on-lend Bank funds to qualified rural banks at a blended interest rate of 7% per annum (assuming a Bank interest rate of 6.5%) on the basis of 50-30 ratio of financing proj- ect costs by Bank and Central Bank respectively. The interest rate on farm loans by rural banks would be 12%. This would give the rural banks a spread of 5% on funds borrowed from the Central Bank and, given their financial re- sources, this spread would be reasonable. Participation in loans to farmers wouLd be equivalent to 56% Bank funds, 33% Central Bank funds and 11% rural banks funds. Amortization terms for Central Bank loans to the participating banks would be the same as for those granted by the banks to the farmers (para 4.22). This would give the Central Bank a closer administrative control over the relending program envisaged during the term of the proposed loan (para 4.23). The cost of project technicians would be paid by the Central Bank out of 'Lts interest earnings on funds lent to the participating banks. The Central Banks would bear the foreign exchange risk on the Bank loan. During negotiations assurances as to these terms and conditions were obtained. 4.22. Participating rural banks would receive and evaluate the loan appli- cations, assess the creditworthiness of applicant-borrowers, inspect the offered security to determine its collateral value, assume the commercial credit risk of loans made, and would provide short-term production credit when needed. All loans would be approved by them but would be based on farm development plans recommended by Central Bank supervised credit technicians who would also supervise the implementation of farm development plans. The payment terms would be geared to the cash projections of the farm development  -6 _ plans. The maximum aggregate medium or long-term loan that may be granted to a single borrower is 10% of Et bank's paid-ulp capital plus surplus, except when specifically permitted by the Central Bank, in which case it may be increased to 15%. Terms of farm loans would range from three to ten years, the average being around six years, and would include a grace period when needed. Loans would be made to owner-operator and leasehold farmers cultivating up to 50 ha. The latter are in Central Luzon region where the Land Reform Program has converted about one-third of the tenant farmers from sharecroppers to lease- holders. A leasehold contract gives land tenure at a fixed annual rental. Assurances were obtained as to these terms and conditions during negotiations. 4.23 During the term of the Bank loan (14 years), the Central Bank would relend principal repayments received from rural banks not required to amortize the proposed Bank loan. This together with Central Bank contribution would increase the lending program by about r120 million (US$30 million) or more than two times the amount of' the proposed Bank loan (Annex 6, Tables 1 and 2). Assurances with respect to the relending program were obtained during nego- tiations. V. PRICES WkFEPETS AND FARME1S' BEEFITS Rice 5.01 Prices for paddy rice at warehouse fluctuate around ?365 (US$95) per ton. This is the floor price at which the Government, through the Rice and Corn Administration (RCA) stands ready to buy clean, dry paddy at 14% moisture content. This price assures efficient producers a reasonable profit and is at about the level of world market prices. A price of V365 (US$95) per ton for paddy rice is roughly eouivalent to the f.o.b. price, Bangkolk, of Thai white rice, 5% broken. Prices for this grade varied from US$136 to US$163 per ton betwteen 1961 and 1966 and. rose to US$206 per ton in 1967. The long term equilibrium price is estimated at US$140 per ton. 5.02 The RCA's policy is to procure paddy rice through private bonded warehouses, farmers' cooperatives (FACOMAS) and, in certain areas, 'through direct purchase only in the qjuantity needed to support paddy prices, and to accumulate a reserve stock a(dequate to take care of contingencies, rice price stabilization and eventual e:-ports. Payments to farmers are effected on the basis of warehouse receiluts issued by a bonded warehouseman. In 1967/68, about 10% of total paddy pro3duction was procured by the RCA, 4% by the farm- ers' cooperatives and 54% by private traders, while the rest of the production remained on the farms for self-consumption. The RCA price support policy in the country has been effective, notwithstanding some financial difficulties, especially in the second ha:Lf of 1968. The network of buying stations prps- ently covers almost the whole country. 5.03 In view of a possible but small exportable surplus of rice in the coming years, RCA is exploring foreign markets. Prospects, at least for the short term, appear good as Philippine rice can be produced at competitive  - 17 - prices. A few test exports have shown that quality standards must be improved. For 1968 and 1969 RCA will handle all exports and it is enforcing a strict quality control at its warehouses. Swine, Poultry and Fish Products 5.04 Marketing of swine andl poultry products is organized by private brokers and middlemen who buy directly from the farmers. Prices of these products have shown a constant upward trend from 1960 to 1967. Since no organized marketing network exists, problems could eventually occur for large size production programs. Marketing of fish is traditionally handled by middlemen or by the fishermen, who sell directly on the local markets. Pro- duction of meat anid fish is increasing at about the same rate as local demand with imports remaining at the same level since 1962. Sugarcane 5.05 At present about 40% of Philippine sugar production goes to the domestic market and about 60% to the United States under a quota agreement which expires by the end of 1971. For several years total sugar production has been around 1,850,000 short tons and requirements for domestic consumption (735,000 short tons in 1968) made it impossible to fulfill the U.S. quota (1,416,000 short tons for 1968). A sugar production council and a sugar quota board coordinate between Government, planters and millers and agree on quotas for domestic and export production and on domestic prices. The plant- er's share of the mill price is generally about 60% while the remainder is the miller's share. Farmers' Benefits 5.06 Analyses of expected financial benefits to farmers have been made on the basis of several illustrative types of development enterprises that could be expected to be financed under the proposed project (See Annex 7, Tables 1-8). These analyses show that substantial increases in net annual income would be derived from investments envisaged under the lending program of the proposed project. For instance, farmers operating 5 ha rice farms (fully irrigated) with an investment in a two-wheel power tiller could increase their annual net income from about V2,000 to r5,000 (US$500-US$1,300); and that farmers operating 5 ha rice farms (not mechanized) but with pump irriga- tion development could increase their annual net income from about ?600 (US$150) to t2,000 (US$500). While these figures are only indicative, they show th&t ample benefits can be achieved. Largely, this would be attributable to farster and better land preparation through mechanization. The following table compares the net income before and after development that could be realized by farmers participating in the project.  -18- Net Income /- (Pesos '000) Before After New Equipment Develop- Develop- Annex 7 Farm Enterpri_se _ or Development ment ment Table 1 5 ha irrigated rice 2-wheel tiller 2.2 5.1 Table 2 25 ha irrigated rice 4-wheel tractor, 45 hp 11.1 24.9 Table 3 25 ha dryland sugarcane 4-wheel tractor, 65 hp 13.7 22.6 Table 4 5 ha rice, not mechanized irrigation pump o.6 2.2 Table 5 3,000 layer-hen poualtry new development - 15.5 Table 6 20 brood-sow swine new development - 12.4 Table 7 1 ha fishpond new development - 1.0 Table 8 5-ton boat (20 man crew) new acquisition - 5.6 /a After operating costs and before debt service. The financial rates of return to the beneficiaries of the project would be high- ranging from about 30-65% (in one case 100%). See Annex 8. VI. BENEFITS AND JUSTIFICATION 6.01 The direct benefits from the project would derive from the increase in output expected principally as a result of mechanization (from loan bene- ficiaries and farmers who hire mechanized services), irrigation development, and of development of poiltry, pork and fish production. Mechanization and irrigation would primarily affect rice production in line with the Government's policy directed towards intensification of rice production in the most favorable areas, thus progressively releasing marginal rice lands for other uses. On- farm mechanization of sugarcane production would contribute toward meeting the country's increasing domestic demand and its export requirements. The increased production of rpoultry, pork and fish products would serve as a substitute for imports. Total annual incremental increase in production of these products during the life of each farm development project, ranging from 6 to 10 years, is summarized in the following table:  - 19 - Incremental Product Production Gross Value (Tons t0)(? million) (US$ million) Rice 185.0 65.7 16.8 Sugarcane 45.0 21.4 5.5 Poultry (meat) 0.6 1.2 0.3 Eggs 6.o io.6 2.7 Pork 3.5 7.0 1.8 Fisli 8.o 7.3 1.9 Total 113.2 29.0 6.02 After allowance for the foreign exchange component of production inputs and the proposed Bank loan (equivalent of 100% of foreign exchange cost of proJect investments), the total net improvement in the foreign exc]aange position as a result of import substitution and exports would average about M50 million (US$13 million) annually after full development. 6.03 As with other agricultural projects which rely for a large part of their success upon credit to and participation of small farmers, a quantitative assessment of the overall benefits cannot be made with accuracy. The economic rate of return would be high since at the present stage of farming practices in the project areas the simple additional inputs involved produce incremental outputs of relatively high value. The internal rate of return to the economy bas,ed on the incremental net value of increased production after reflecting the cost of technical and administrative services performed by the Central Bank and rural banks, and capital costs for project investments would be about 35% (Annex 9). VII. CONCLUSIONS 7.0:L The proposed credit program is sound and economically justified. Returns on the investment both to farmers and to the economy as a whole would be very favorable. 7.02 The Department of the Rural Banks in the Central Bank and the par- tic:Lpating rural banks are experienced and capable of handling the increasing volume of operations. There is an effective demand for medium and long-term credlit in the rural areas to be served by the participating rural banks. 7.03 The project is suitable for a Bank loan of US$12.5 million to the Central Bank of the Philippines, for a term of 14 years including a four-year grace period. The loan would cover about 50% of total project cost. May 2, 1969   A N N E X E S   ANNEX I PHILIPPINES SECOND RURAL CREDIT PROJECT Number and Size of Farms, in the Philippines Size of Farms Number Percentage ihectares) less than 1 249,773 1 - 5 1,506,459 69.5 5 - 10 289,730 13.4 10) - 50 116,997 5.4 100 and above 2,819 0.1 Total 2,165,778 10000 Source: 1960 Agriculture Census of the Philippines   ANNEX 2 Table 1 PHILIPPRIES SECOND RURAL CREDIT PROJECT Output of Main Agricultural Products ('000 metric tons) Ca t e g o r y Crop Years 1966 1967 1968 - Food Crops Palay (rough rice) 14,073 4,094 4,363 (yield per ha/kg) (1,310) (1,323) (1,378) (cultivated area, 1,000 ha) (3,109) (3,096) (3,166) Corn (shelled) 1,380 1,1435 - (yield per ha/kg) 655 ( 662) - (cultivated area, 1,000 ha) (2,106) (2,167) - Export Crops Copra 1,485 1,1418 - Sugar (centrifugal and muscovado) 1,460 1,619 - Pineapple 168 208 - Fishery Products Marine Fisheries 612 713 _ Fishponds 614 65 - Meat v Swine 240 279 Poultry 32 35 - Beef 22 22 - 1/ Preliminary estimates. 2/ Dressed weight. Source: Bureau of Agricultural Economics.   AMNEX 2 Table 2 PHILIPPDIES SECOND RURAL CREDIT PROJECT Value of Agricultural Imports (US$ Million) Commodity 1962 1963 1964 1965 1966 Cereals 87 105 123 155 123 Coffee, tea 28 59 66 95 53 Dairy 2 2 3 4 3 Meat and Fish 31 19 24 26 29 Tobacco 18 16 18 19 24 Textile fibres 29 26 23 22 25 ANNEX 2 Table 3 Value of Agricultural Exports (US$ Million) Commodity 1962 1963 1964 1965 1966 Coconut products 168 2b4 2147 270 280 Sugar 132 160 171 1l7 lhi Abaca 28 38 33 26 22 Fruit and vegetables 14 11 13 15 12 Tobacco 12 13 17 16 12 Forest products 128 179 178 194 2h4 Source: Statistical Bulletin - Central Bank.  I  ANNEX 3 P H I L I P P I N E S SECOND RURAL CREDIT PROJECT The Rural Banking System A. History 1. l pTe present Rural Banking System is 16 years old. The Rural Banks Act_ was approved June 6, 1952, and the first bank organised was The Rodriguez Rural Bank, Inco It was inaugurated in Pasig, Rizal, December 11, 1952. Quoting from Section 2 of the Act the purpose of Congress in adopting the Rural Banks Act was as follows: "To promote and expand the rural economy in an orderly and effective manner by providing the people of rural communities with a means of facilitating and improving their productive activities and to encourage cooperatives,' 2. The Rural Banks Program is the culmination of almost half a century of government sponscrsd efforts to provide a lasting credit system readily available at reasonable terms to the small entrepreneur producer in agriculture, industry and comnmerce. Some 15 legislative measures had been adopted by Government between 1907 and the passage of the Rural Banks Act in 1952. Among these measures were those authori- zing the establishment of pre-war agricultural banks, cooperatives, marketing agencies and rural banks. Most of these credit institutions failed largely because of lack of trained personnel and absence of rediscounting facilities. 3. The growth rate of the Rural Banking System has been steady and impressive. From a beginning of 18 banks chartered in 1953 it has expanded to some 380 banks now operating in nearly all of the provinces. Also it is of interest to note that the Central Bank has 600 applications pending for new banks. The rate of expansion expressed in terms of resources, deposits, loans and capital accounts is summarized in Table 8. Since the beginning the Rural Banking System has extended Y1.6 billion (US$410 million) in rural credits through 2.3 million loans. In 1967 it granted about 364,000 short-term loans and about 2,700 medium-term loans for a total amount of /335 million (US$86 million). 1 Republic Act No. 720 and amendments.   ANNEX 3 Page 2 B. Special Features and Privileges 4. To overcome the past difficulties of developing a durable rural credit scheme, the Rural Banks Act embodies these important features: i. The matching of private investm nt by Government counterpart capital assistanceJ up to a 50-50 ratio; ii. Full management of a rural bank by the private stock holders (common stock shares); i.i. Training of bank personnel by the Central Bank; iv. Continuing supervision examination of the manage- ment and financial operations of each bank; and v, Rediscounting privileges with the Central Bank. 5. Other important privileges which rural banks enjoy are: i. Exemption of rural banks with net assets not exceeding t1 million (US$257,000) excluding government counterpart capital from the payment of all taxes, fees and charges whatever nature and description; ii. Exception from sharing in the cost of maintaining the Department of Supervision and Examination of the Central Bank; iii. Technical assistance in the form of organizational and promotional services; and iv. Farm advisory service to rural banks and their borrowers. The main reason for the above privileges is to give rural banks a strong incentive for undertaking the economic objectives of the Rural Banks PrograoJ C. Organization 6. Rural banks are stock corporation, organized with a board of directors of 5-11 members who must be Filipino citizens and shareholders of voting common stock. The executive officers are the president, 2/ Non-voting preferred stock shares which bear maximum dividend rate of 2%.   ANNEX 3 Page 3 vice-president, manager, treasurer or cashier, and secretary. The manager, who often is the president, carries out the policies of the board and administers daily bank operations. Most rural banks are established and capitalized by close family groups. The number of stock holders usually is between 10 to 20 persons, though a few banks have more than 100 small stockholders. Generally the staff is 10-20 employees, many of whom may be related. This closeness has had the tendency to narrow the base for capital formation and management, but on the other hand, it has successfully achieved the mobilization of local capital and human resources. D. Adninistration and Supervision 7. Rural banks are chartered by a Certificate of Authority from the M.onetary Board of the Central Bank. The Department of Rural Banks of the Central Bank supervises their operations. Supervisioral functions and services are varied and extensive - all without cost to the rural banks. When a bank is organized, following a feasibility study by the Department, initial and follow-up training is given the officers and key personnel by the Institute of Rural Banking Division which is within the Department. Varied agricultural advisory services, organizational and promot;ional services, research and accounting servi- ces are also provided. Periodic inspections are made to assure com- pliance with rules, regulations and policies in addition to an annual financial audit. See Chart for organizational stracture of the Lepartment of Rural Banks. E. Credit Functions 8. Rural banks can make loans to the following types of borrowers: i. Small farmers owning or cultivating not more than 50 ha of land; ii. Small merchants, operators of rural industries or enterprises whose capital investments do not exceed 125,000 (US$6,400); iii. Operators of essentialJ/rural industries or enterprises regardless of the amount of capital involved; and iv. Cooperatives of small farmers and merchants. Producers of livestock and poultry, and fishermen and fishpond owners are considered "farmers". 1/ Deemed essential if the goods pro'duced ere those ordinar.ly purchase- 1-i the low inrome groups arc ace usef>A or nece;zcry i- iheir daiLJv ecunno.v ac I `cLtie:3.   ANNEX 3 Page h F. Types of Loans, Purposes and Terms 'hort-Term 9. Short-term loans, not to exceed one year, may be granted to iarmers for the usual production purposes: - seeds, fertilizers, weedicides, insecticides, harvest- ing and marketing of products, - purchase of animals, poultry and fish for breeding purposes, - minor farm improvements and repairs, and - current taxes and irrigation charges. Short-term loans for 120 days may be granted to small merchants for pur- chase of merchandise for resale, and to small industries for 180 days for labor, raw materials and marketing. The interest rate is 12% per annum. Loans may be renewed for half of the original period provided the reason is meritorious, and the interest and 30% of the original loan are paid. Medium and Long-term Loans 10. With the prior approval of the Director, Department of Rural Banks, Central Bank, a rural bank may grant medium and long-term loans, provided its unimpaired capital plus savings and time deposits total not less than 1200,000 (US$51,000) and provided its unimpaired capital is riot less than 1100,000 (US$25,000). The amount of medium and long-term loans may not exceed 30% of a bank's total savings and time deposits. ThMey may be granted for such purposes as: - purchase of farm land, - improvement of agricultural, commercial and industrial real estate, and - acquisition of agricultural or industrial machinery, tools and other equipment needed for operations, and breeding animals. Loans with maturities of more than one year but not exceeding five years Ire considered medium-term, and those with maturities of more than five years are considered long-term. Usual loan terms are three to seven years but a maximum period of 20 years is allowable for the purchase of farm land. The maximum aggregate loans which a rural bank may grant to a borrower is 10% of its unimpaired capital and surplus except when permitted by the Central Bank, in which case it may be increased to 15%. The maximum interest rate is 12%, and loans are amortized annually   ANNEX 3 Page 5 unless the borrower elects to pay in monthly, quarterly or semi-annual installments. The amount of loan shall not exceed 70% of the appraised value of the land and improvements if Torrens Title can be fvrnished and not more than 50% without Torrens Title. The loan value of movable property, e.g., machinery, livestock, shall not exceed 50% of the appraised value. Supervised Credit Program 11. The first rural credit project (Loan 432-PH) comes under this program of the Department of Rural Banks. Well qualified agriculturists are selected and trained to work as supervised credit technicians, assist- ing farmer-borrowers in the preparation and analysis of the financial viability of farm development projects. Although rural banks make independent inspections, chiefly to determine the collateral value of any required loan security, the farm plans are the basis for approval of loans and subsequent supervision by the supervised credit technicians. These technicians devoted about 70% of their time to the first project and worked the other part of their time on short-term production loans made by rural banks from the Agricultural Guarantee and Loan Fund (AGLF). It is envisaged that this supervised credit program would be continued for the proposed second rural credit project. Final action on all loan applications lies with the board of directors. However, the board may delegate to the manager the power to act on loan applications up to Y1,000 (US$255) and to the credit committee those from a.,001 to p5,000 (US$1,275). All in excess of Y5,000 must be acted on by the Board. G. Financial Resources 12. The Rural Banking System continues to show an impressive growth rate. In the 3-year period, 1965-67, total assets increased nearly 50%; deposits increased 80% and net worth 30%. At the end of 1967 aggregate assets were h408 million (US$105 million) of which about 80% is represen- ted by net loan investments; paid-up capital stock nl2l million (US$31 million), of which 55% is common stock owned by private investors and the other 45% is preferred stock held by Government. 13. Reserves in the form of surplus, undivided profits and reserves for retirement of preferred shares and contingencies increased over 15% annually during the 3-year period, 1965-1967. At the end of 1967 total reserves aggregated ?37 million (US$9.5 million). When added to paid-up capital stock of 121 million (US$31 million), the Rural Banking System has a strong net worth ratio of around 35,'. 14. By regulation of the Central Bank, rural banks must set aside from net savings a certain amount determined by Central Bank such that sufficient reserves may be accumulated within ten years to redeem Govern- ment owned preferred stock. This is required before payment of dividends on common stock as well as allowance for the 2% dividend that Government's   AI= NEX3 Page6 preferred stock carries. In practice the Government has not called for payment of its preferred stock nor dividends. :L5. Rural banks augment their short-term lending resources through a rediscount mechanism with the Central Bank. Prevailing rediscount rates, established by the Monetary Board, are 2% for banks in operation less than two years and 3% for those in operation over two years. Agricultural and industrial paper is limited to 270 days and commercial paper to 180 days. Total rediscounts are limited to 20% of paid-up capital plu,s surplus and reserves and a bank is ineligible if its past dlue loans exceed 20% of its loan portfolio. 16. A rural bank may borrow from the Development B^'k of the Philippines (DBP) repayable in 10 years at 2% interest p_;.. annum, against any security which. may be offered by stock holders of a rural bank, provided: i. that the Monetary Board is convinced that the resources of the rural bank are inadequate to meet the legitimate credit requirements of the locality wherein the rural banks operate; ii. that there is a dearth of private capital in the said locality; and iii. that it is not possible for the stockholders of the rural bank to increase its paid-up capital. The experience has been that few loans have been obtained from DBP because it has not had the financial resources to grant such loans. L7. Savings and time deposits are an important source of loan capital -to the rural banks. Total deposit liabilities nearly doubled during the 3-year period, 1965-1967 from P79 million (US$20 million) to 1142 million (US$36 million). Interest rates are fixed by the Monetary Board. Today, the maximum rates are 5 3/4% compounded quarterly on savings deposits and 5 3/4-6 1/2% on time savings in accordance with a schedule of 90 to 360 diays or more. See Table 1 for condensed statements of financial condi- tion, 1965-1967. H. Operating Results 18. Overall, the profitability of rural banks has been good. In 1967, 85% of banks made an operating profit. The rate of return on the private stockholderst investment (paid-up common stock) ranged from less than 1% to 25% and averaged close to 8%. Only 17 banks, or less than 5% of total, were classified as "distressed banks". Four of these were in liquidation, and the others were under close supervision management b- the Department of Rural Banks.   AI'UEX 3 Page 7 19. The amount in past due loans, almost entirely short-term, ranges around 16% of gross loan portfolio, or about one-half of the national average for institutional lenders. 20. The system of financial audit conducted by the Examination and Supervision Division of the Department of Rural Banks, Central Bank, ensures that adequate reserves are maintained for bad and doubtful loan accounts. The audits include, inter alia, a detailed examination of the age of delinquency, probability of payment and collateral value of the security. The Central Bank then determines the amount of reserve that must be carried by each bank against its gross loan portfolio. The net balance is shown as the net loan investment in the balance sheets. Each bank must submit a weekly trial balance to the Department Df Rural Banks which gives further control over the provision of needed reserves. 21. Table 2 gives the detail of income and expenses, and Table 3 shows the costs and returns of lending operations in actual terms and percentages. The percentage of income is high (around 12%). The average cost of funds is low (slightly less than 2.5%). Administration and other expenditures account for about 6% of total loan portfolio. Mhe rate in 1967, 5.7%, was the lowest in the history of rural banks, operations. A continuing decline can be expected as the banks on the whole are well staffed and capable of handling larger volumes of business without an appreciable increase in administrative costs. Net income fluctuates around 4%. H. Management 22. Though few of the rmanagement level had banking experience prior to operating a rural bank, the overall performance has been good. Previous training and professional experience may have been as lawryers, School teachers or certified public accountants and it is noteworthy that some outstanding managers are women. Quite commonly the owners of a rural bank are a related family group and key personnel might have close family- ties. The training programs conducted by the Institute of Rural Banking Division Department of Rural Banks, together with close and continuous supervision, have been effective in transforming non.-career banking people into bankers. I. Qualifications of Participating Banks 23. Under the first credit project, rural banks were authorized by the Central Bank, upon recommendation of the Department of Rural Banks, to participate in the project. A qualified bank was designated on the baeis of these criteria: i. character, capacity and integrity of officers;   .e-ut, u3 ii. past performance with respect to the soundness of its investments and its complianc:e with the law and regulations and generally accepted banking practice; iii. soundness of its financial position as based on liquidity position, soundness of loan portfolio, adequacy of equity and profitability; iv. in operation for at least two years; and v. not denied rediscounting facilities with the Central Bank within the past year. It is expected that the above criteria would be applied under the proposed second project. However, it was noted by the mission that not all quali- fied banks (134 out of 177) participated in the first project, and that the participation of many was nominal. It is believed that the Central 'Bank should fully assess the farmer demand for credit to finance the types of development projects envisaged under the project; and, furthermore, that the approval of a rural bank to participate should also reflect its management and financial capabilities to actively participate in the project. J. Decentralization of Project Operations 24. A principal concern of participhting banks un'ler the first project has been the time required to process a loan and the need to often 'hand-carry loan documents to the Central Bank, Manila to get action. The requirements and loan papers are voluminous and cumbersome. Streamlining and simplification could be achieved by decentralizing the approval of all Loans to the banks, reducing the number of requirements for compliance, shortening loan document forms, eliminating unnecessary copies, and the use Df branch offices of the Philippine National Bank (PNB) as depositories for valuable loan papers. PNB has a country-wide distribution of 60 branch offices and acts as trustee for the Central Bank for cash and security reserves required of the rural banks. 25. Further efficiency could be gained by assignment to field head- quarters of the supervised credit technicians responsible for preparation and supervision of farm development plans made under the proposed project. This would achieve a sizeable improvement in their output and would also result in substantial savings in administrative costs for the Department of Rural Banks. Under the first project it was the practice to bring the technicians to Manila every 30 days for about a week of "reporting", and then issue new travel orders. This practice was to enable the tech- i.icians to receive a per diem allowance while away from headquarters but wbich would cease after being at a station for more than 30 days. The transportation cost to Manila and the per diem allowance have been substa2- tial, as well as reducing a techniciants productivity by about 25'%   92CCND RIRn CREDITFPROJECT RURAL BANKS ~(Pesos N.) Consolidated Balance Sheet as at December 31, 1965-67 1965 1966 1967 ASSETS Net loan portfolio 221.? 261.1 333.0 Cash and due by banks Cash in hand 5.5 5.9 7.3 Checks and other cash 1.1 1.3 1.9 Due from banks 15.6 23.9 31.3 Due from Central Bank 7.2 2.8 Subtotal 29.4 33.9 43.6 Other Assets Investment in bond 10.0 6.9 6.8 Accounts receivable 0.9 1.0 1.1 Bank premises (net) 6.5 7.4 8.1 Furniture fixtures 3.2 3.2 3.5 Traisportation equipment 1.0 1.2 1.4 Stationery and sepplies - - - Assets acquired in settlement of loans 5.3 7.6 9.6 Leasehold improvements 0.2 0.2 0.3 Other assets 0.8 0.9 1.4 Subtotal 27.9 28.4 32.2 Total 279.0 323.4 408.8 LIABILITIES Demand deposits 3.5 3.8 4.2 Saving deposits 72.2 90.7 112.5 Time deposit 3.0 6.h 25.2 Due to banks 0.2 1.5 4.4 Cashier's check 0.1 - 0.7 Notes payable (rediscount) 68.1 70.3 79.1 Dividend payable 0.6 0.4 1.0 Accounts payable 1.5 1.7 1.6 Loans payable - - 1.4 9.0 Inspection fees 0.1 0.1 0.1 Unsecured interest & discount 7.9 9.8 11.4 Other liabilities 0.2 0.h 1.5 Total 157.4 186.5 250.7 NETWORT Capital stock coumon 52.8 60.1 67.1 Capital stock preferred 44.3 47.5 53.9 urplwu 5.1 6.o 6. Undivided profits 8.4 8.4L 11.0 Res. for retirement of preferred shares 9.9 13.7 17.9 Res. for contingencies 1.1 1.2 1.8 Total 121.6 136.9 158.1 Total Liabilities and net worth 279.0 323.4 408.8 Source: Department of Rural Banks   IL 'X 3 PHILIPPINES SECOND IPLMLAL ChEDIT PF.OJECT a 2 RURAL BANKS Consolidated Profit and Loss Accounts, 1965-67 (Pesos M.) 1965 1966 1967 Income Interest Agricultural loans 21.7 24.2 29.1 Industrial loans o.6 0.6 0.8 Commercial loans 1.6 1.7 1.8 Commodity loans - - - Other loans & advances 0.1 0.2 0.4 Commissions 0.1 0.5 1.2 Other earnings 1.2 1.8 2.5 Total Income 25.3 29.0 35.8 Expenditures Salaries 6.4 7.6 8.6 Travel expenses: (Directors) 0.2 0.2 0.2 (Offices employees) 0.2 0.3 0.3 Advertising 0.1 0.1 0.2 Stationery, supplies 0.4 0.4 0.5 Postage, telegraph, etc. 0.1 0.1 0.1 Light, water 0.1 0.1 0.1 Rent 0.3 0.3 0.3 Depreciation 1.1 1.3 1.4 Organization expense 0.1 0.1 0.2 Employees welfare expense - - - Other operating expense 3.5 4.2 5.2 Subtotal 12.5 14.7 17.1 Interest on deposits 2.6 4.3 5.3 Interest on borrowed money 1.1 1.2 1.9 Total Expenditures 16.2 20.2 24.3 Net Income 9.1 8.8 11.5 Total Expenditures and Net Income 25.3 29.0 35.8 Source: Department of Rural Banks   ANNEX 3 Table 3 PHILIPPINES SECOND RURAL CREDIT PROJECT RURAL BANKS Costs and Returns of Lending Operations, 1965-67 (Pesos Million) 1965 1966 1967 Average loan portfolio 213.4 236.8 299.4 Income Interest 24.O 26.7 32.1 Other Income 1.3 2.2 3.7 Total Income 25.3 28.9 35.8 Percentage of Average Loan Portfolio 11.9% 12.2% 11.9 Expenditures Interest on Ileposits & Forrowed Funds 3.7 5.5 7.2 Percentage of Average Loan Portfolio 1.7% 2.3% 2.4a Administration and Miscellaneous 12.5 14.8 17.' Percentage of Average Loan Portfolio 5.9% 6b20 5.7% Total Expenditures 16.2 20.2 24.3 Percentage of Average Loan Portfolio 7.6% 8.5% 8.11,0 Net Income 9.1 8.8 11.5 Percentage of Average Loan Portfolio 4.3% 3.7% 3.3% Source: Department of Rural Banks.   ANNEX 3 PHILIPPIIES SEaOO1 RT W PROJECT RMUL BAN Loans Mm By Categories, 1965-67 Catgoz b 1965 16 1967 11ibar Aount Ihr Amount Nubor Amunt rw J (N soaLI) Tr= (PeosM.) TMT (Pesosa') AORICULTUL LOANS 1. Short Term Crop Production 226.9 156.3 240.5 183.0 260.6 220.9 Livestock 44.6 28.8 43.0 29.3 52.6 44.9 Poultry 16.1 13.5 15.14 15.5 8.6 9.6 Fish 10.6 12.4 12.7 16.5 14.7 21.3 Others 6.5 _47 4. 0 2 _,3 7.1 Slabtotal 3014.7 215.7 315.6 247.5 342.8 303.7 AGLFV/ Production - - - 20.5 10.4 Marle ting/Coodity ' 0.6 o Subtotal - - - 21.1 11.2 ADCR/ - - - 0.2 0.1 2. Ibdium and Long Term Ordinary 0.2 1.4 AGLF Acqaisition of Far0 M?chinery & Implanant - - - _ 0.9 4.9 Irrigation Sy-tem 0.1 0.4 Subtotal - * _ 1.0 5.3 CB/IBRD Acquisition of Farm Machiary & Iuplenta - - - - 1.3 11.9 Develop_nt of Small Private Irrigation Syte - - 0,2 1.0 Subtotal _ _ _ 1.5 12.9 ADCR Acquisition of Farm Machinary & Implemnts - - - - - 3/ 0.1 Developont of Smll Private Irrigation System - * - _ 0.1 Subtotal - . . .. 0.1 0.2 Total Agricultural Loans 30k4.7 215.7 315.6 247.5 366.9 334.9 CO)MERCIAL LOANS 31.0 34.5 28.3 36.6 28.1 40.7 IMDUSTRILL LOANS 8.2 9.7 7.9 10.3 8.2 12.0 OTHER LOANS J-2. 1.1 3.7 1.1 4.5 1.6 Subtotal 43.1 45.3 39.9 48.0 40.8 54.3 GRAND TOTAL 347.8 261.0 355.5 295.5 407.7 389.2 1/ Agricultorel Ouarantee and Loan Fund. 2/ Agriltural Develoupnt Couucil for Risal. 3/ Less than 100. i Source: Departiment of Rural Banks - Central Bank.   hAni\E 3 Table 5 PHILIPPINES SECOND RURAL CREDIT PROJECT RURAL BANKS Loans made by Size and Terms 1965 1966 1967 Noe Amount No. Amount No. Amoi:Xlt (Pesos ) (Pesos ) (Pes Loan Size Up to 100 35,107 3.0 32,774 2.8 35,603 2.3 101 to 200 75,991 13.6 70,876 12.7 73,644 '3-0 201 to 500 114,552 44.1 113,982 43.5 125,767 14?.,' 501 to 1,000 56,547 47.5 61,963 51.4 70,961 5&.', 1,001 to 2,000 52,437 93.5 57,725 100.9 73,251 127.,) 2,001 to 5,000 10,739 37.2 14,445 49.4 21,944 73.9 Over 5,000 2,444 22.2 3,766 3b.9 6,568 65.2 Total 347,817 261.1 355,531 295.6 407,738 389.2- Toan Terms Within 120 days 48,455 51.7 45,992 55.1 49,813 67.3 Within 180 days 24,982 21.2 29,387 28.0 46,803 43,L Over 6 months 274,380 188.2 280,152 212.4 311,122 278.8 Total 347,817 261.1 355,531 295.5 407,738 389.2 ',ource: Department of Rural Banks   ANNEX 3 Table 6 P H I L I P P I N E S SECOND RURAL CREDIT PROJECT Loan Portfolio of Rural Banks (December-31) (Pesos million) 1965 1966 1967 Agricultural loans 167.4 198.5 259.4 Commercial loans 10.8 11.9 13.5 Industrial loans 3.8 5.0 5.5 Commodity loans - 0.1 -2 Other loans and advances o.6 1.2 2.7 Past due items 36.6 41.7 49.6 Loans in litigation 5.4 6.7 7.2 Total loan portfolio 224.6 265.1 337.9 Reserve for bad and doubtful accounts 2.9 4.0 4.9 Net loan portfolio 221.7 261.1 333.0 Total past due items 30.6 41.6 49.6 Percentage of total portfolio of Past-due items 16.3% 15.7% 14.7% Past-due items and loans under litigation 18.7% 18.2% 16.8% I/ Less than AC0O,000 Source: Department of Rural Banks   ANtNEX 3 Tabl e 7 PHILIPPINES SECOND RURAL CREDIT PROJECT RURAL BANKS Loans made - Classified as to Security 1965 i966 1967 No . Amount No . Amount No . Amount (Pesos M) (Peso-s M) (Pesos 14) Real Estate Mortgage 207,933 192.2 227,847 228.1 251,241 297.24 Chattel ilortgage: - Growing crops 21,228 10.7 19,519 12.2 41,772 26.8 - Farm animals 36,196 7.1 34,4418 6.4 40,285 7.5 - Farm equipment 373 0.8 241 0.3 1,344 24.1 - Other guaxaraties 41,372 29.3 35,175 26.2 28,293 23.5 Bank Deposits 2,792 1.7 2,798 1.7 3,386 3.1 Pledge of stored crops 1,430 1.9 1,232 2.0 2,063 3.4 Unsecured 36,2493 17.24 324,271 18.6 39,3514 23.4 Total 347,817 261.1 355,531 295.5 407,738 389.2 Source: Department of Rural Banks   ANNEX 3 Table 8 PHILIPPINES SECOND RURAL CREDIT PROJECT Total Resources, Loans, Deposits, Borrowings, Capital Accounts, and Yearly Grouth The Rural Banking System, 1953 - 1967 (Pesos Million) Year Loans Out- Borrow- Capital!/ No.- . December 31 Resources-/ standing Deposits ings Accounts Bansi 1953 2.4 2.0 C).2 2.1 1.J 1954 4.4 3.8 0.3 0.3 3.6 1955 7.9 6.5 0.7 (.9 5.8 1956 18.4 15.4 2.2 3.0 11.6 W 1967 34.7 28.2 6.7 6.4 19.5 ICt 195B 49.6 40.8 11.2 10.9 24.7 1959 60.3 48.2 18.1 9.7 29.6 13" 1960 75.2 58.5 24.7 1:L.1 35.6 161u 1961 105.3 82.4 33.8 18.5 47.4 l S_ 1962 140.4 109.9 41.3 29.5 63.6 221.! 1963 185.5 145.6 55.0 42.4 80.0 2!o 1964 245.8 201.5 64.7 68.7 102.0 283 1965 279.0 221.7 78.7 68.1 121.6 309) 1966 323.4 261.1 100.8 70.3 136.8 33.t 1967 408.8 333.0 140.2 80.3 158.1 367 Jj/ Cash, loans, government securities and miscellaneous assets 2/ Paid-up common and preferred stock, surplus, undivided profits and reserves ..rirce: Department of Pural Banks   ANNEX 3 Table 9 PHILIPPINES SECOND RURAL CREDIT PROJECT Summary of First Rural Credit Project (Loan 432-PH) (July 31, 196b) Lj. Participating Rural Banks Authorized to participate 177 Actually participated. 1'9 By Region: Luzon 101 Visayas 22 Mindanao Loans made by Category - Bank funds Number Amount Perce(t. (Pesos M) Tractors and Tillers 1,901 17.0 8, Farm Implements 38 0.2 I. Swine, Poultry and Fish Enterprises 191 1.3 t Irrigation Systems 268 0.9 ' Total 2,398 19.4 100 Loans mad.e by Participation - Total Funds Source Amount Percen' (Pesos M) Bank 19.4 5h' CB/AGLF 8.6 25 Rural Banks 1.8 5 Farmers 5