Preferential agro-credits project poses swindling risks
14 February, 2013
Preferential agro-credits project poses swindling risks
Preferential credits to be disbursed to farmers and agriculture-related processing enterprises through the co-financing scheme involving banks, micro-financial organizations and the state-initiated Village and Agriculture Development Fund, poses swindling risks practiced by the banks during Shevardnadze’s regime. To support the agricultural sector, pundits recommend the government to set up cooperative societies based on the state-based investments rather than disbursing preferential credits based on the said co-financing scheme.
“We will continue to assist village until Georgian peasant gets strong,” Bidzina Ivanishvili,
Prime Minister of Georgia, said during his press-conference on February 5, 2013 while summarizing the 100-day-working period of the new government.
One of the key points of the village-support program is the Preferential Agro-credit Project implemented in frames of the Village and Agriculture Development Fund set up under personal initiative of Georgia’s new Premier and focused on attraction private capital. Details of the crediting Project expected to launch in this coming March are still being elaborated. What can be said for sure at the moment is that the preferential credits will be disbursed to small and medium farmers as well as to agriculture-related enterprises scattered across the country The preferential crediting mechanism is based on co-financing mechanism of the Fund and banks as well as micro-financial organizations that will be responsible for credit disbursement and pay-back completely while the Fund will be co-financing credit-rates so as to cut them down to 7-8% and even 3% - the figures that stand as something dream-rates against the backdrop of at least 30% of yield fixed on agriculture loans generally. The total budget of the agro-credit project is not clear as yet but it will be only the Fund-based money with no connection to the state budget, Ministry of Agriculture of Georgia (MOA) assures.
The preferential agro-credit scheme includes three products as following: up to GEL 5 thousand interest-free loans with no collateral back-up will be available to small farmers. This will be kind of seasonal short-term consumer credit but its target beneficiary takes not money directly but a chance to purchase agriculture-related goods [necessary for farming] within this GEL 5 thousand before the farming season starts and clear the loan when the harvest is yielded. Micro-finance organizations and dealer companies will disburse these interest-free loans.
Medium and big farmers may enjoy less than 1-year long preferential credits ranging from GEL 5 thousand to 100 thousand at 7-8% of interest for financing their capital turnover. Loans under GEL 50 thousand will be disbursed by micro-finance organizations and banks will be handling with loans starting from GEL 50 thousand and going to 100 thousand.
Long-term credits with GEL 1 million of the cap limit and at 3% of annual yield are available to small agriculture-enterprises focused on processing the primary farming/gardening product such as wineries, as well as storage, packing, cooling, green-house infrastructures and state-of-the-art farms. At least 60 enterprises in each district of Georgia [except the breakaway territories] are the target beneficiaries in 2013. Projects requiring more than GEL 1 million will be financed by Investment Fund, another state-initiated fund handling with the state assets and focused on attraction of private capital for investing large-scale projects.
More agro-credit financing details will be disclosed as soon as negotiations with banks and micro-financing organizations will be through. 6-7 partner organizations are already available, MOA informs but does not disclose names of partners as of yet. German KFW Bank will aid the agro-credit project participant micro-finance organizations.
Georgian economic analysts disapprove the said mechanism of preferential agro-credit as far as it involves the commercial financial sector [banks, micro-financing organizations and dealer companies]. The commercial sector approves the loan and appears as the main source of crediting while Fund will be co-financing only interest-rates while this co-financing scheme is pretty unclear at the moment and will be based on individual cases tentatively. Government explains that Fund does not want to hamper to banks activity and it just wants to alleviate interest rates to agriculture entrepreneurs who were overlooked by banks for high risks in the sector.
Economic analysts have the deja vu feeling. They fear that the said agro-credit mechanism does very much resemble the “kickback-loan” practiced by the notorious Agro-Business Bank founded and run by British businessman Peter Shaw during Shevardnadze’s period in 2000 before Rose Revolution. The Bank’s structure of founders was defined by memorandum concluded between Euro Commission and Georgian government and it was focused on preferential agro-loans disbursements based on similar scheme offered now by the incumbent authority of Georgia and developed a significant branch-network in regions. However by 2002-2003, 300 million of European Currency Unit (ECU) disappeared or was embezzled by Shaw as speculations go, the Bank went bankrupt and led six other banks to bankruptcy too. Nobody was punished officially. Shaw was kidnapped in 2002 and asked for USD 2 million of ransom but escaped hostage in two months successfully.
According to Ditrikh Muller, a co-founder of Georgian Investment Group, no banks are interested in delivering cheap credits to agriculture sector that bears high risks and its insurance is very complicated thing not developed in Georgia as yet.
“Banks will not go on cheap credits willingly, if they join this project they will be either under pressure or will go on corrupted deals. Say one bank-employee or someone from government close with the affair will strike a deal with a potential client to take a GEL 100 thousand at 3% for example, but only GEL 50 thousand will be given to the borrower and another half will go to officials’ pockets as a kickback like Peter Shaw practiced through his bank and no agriculture revival will ensue,” Muller said in the interview to Georgian Journal. “As to interest-free credits it is a really good idea but farmers cannot repay them in one season, it should be around 5-year long if you really want a farmer to get strong.”
Paata Koghuashvili, an agriculture sector analyst and former MP, thinks the proposed agro-credit mechanism can work only in a short-period to finance this coming farming works in spring but in a longer prospect it can bring disaster. He disapproves the idea of giving preferential credits to small enterprises as ineffective. According to him, the only remedy that can work is to establish a special agro-credit-orientated bank just like all developed countries do as soon as possible no later than this coming fall. The Bank will be founded by cooperatives and based on mutual responsibility, inter-solidarity and inter-guarantees. However the state should give the starting capital. Instead of giving preferential credits through doubtful mechanism to the said 60 enterprises that may lead to disaster Koghuashvili suggests handing over these enterprises to cooperatives incorporating farmers and agriculture entrepreneurs who found the Bank which finance these enterprises by initial capital and cooperatives will pay back both enterprises and the Bank shares from the state gradually.
“This preferential crediting will not work. Commercial banks will never take guarantees in the agriculture business, they will demand other business or liquidity assets as collaterals, this scheme duplicates the Peter Shaw’s practice that led six commercial banks to bankruptcy and all who took credits went bankrupt too,” Koghuashvili told GJ.
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