Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Why Aren’t Banks Lending To Farmers?

Lending to the agrarian sector, in addition to the moratorium on farmland sales, is hampered by two worries: high interest rates and questions about the quality of data of the State Service of Ukraine for Geodesy, Cartography and Cadastre regarding plot boundaries. Fortunately, both are red herrings.

A “businessman” represents the most actively growing branch of Ukraine’s export-driven economy, which has weathered devaluation and domestic economic downturn.

This is the description of a perfectly diversified borrower, whom banks need to emulate.

It is not enough, however, if the potential borrower happens to be an agrarian.

At the end of February 2017, loans issued to agricultural companies amounted to only UAH 50.9 billion, or 6.4% of the total amount of loans received by enterprises in the real sector.

Almost 40% of the lending, or UAH 19.6 billion, was to bridge financial gaps inherent to farm financing.

Long-term loans exceeding five years made for investment projects, equipment purchases and production expansion accounted for only UAH 11.2 billion, or 4% of the value added by agriculture in 2016.

By comparison, banks issued UAH 264 billion worth of loans in the wholesale and retail sector, and UAH 201 billion to processing facilities. The growth of both sectors lagged behind agricultural growth, posting 3.6% and 4% growth rates, respecively. The agricultural sector, despite unfavorable conditions in foreign markets, managed to post 6% growth. So, why have Ukraine’s trade and manufacturing sectors have been able to raise capital in the required volumes?

Ukraine’s agroindustry has produced record yields, accounting for one third of the country’s export earnings and 12% of GDP. It is an inspiration for all, except for bankers. Is this because farmers are unreliable borrowers?

No. This is not the case. The amount of bad loans in the sector amounted to only UAH 5.9 billion, or 12% of the total. The main factors contributing to non-performance (71%) loans in the sector was currency devaluation from 2014 to 2016.

The percent of non-performing loans in other sectors of the economy is much higher — 15% in trade, 46% in manufacturing and a whopping 52% in the financial (banking) sector.

Objectively speaking, farmers are more disciplined borrowers, but they remain unpopular.

The reason is the lack of quality collateral which they can offer financiers. Agroholdings, which can borrow funds on both domestic and international capital markets, are the exception. Moreover, in most cases they can themselves set loan conditions: rates, repayments and restructuring provisions.

For most of the sector, agrarian receipts and future harvest revenues are pledged in exchange for loan guarantees. More solid collateral would include infrastructure facilities, machinery and the agricultural land they cultivate.

Because of the moratorium on land sales, the latter cannot be used as collateral, Agricultural facilities and machinery, meanwhile, are appraised for less than their worth because they cannot be alienated from the borrower.

This creates a no-win situation. On the one hand, there is a high liquidity surplus formed in the banking system, which, due to the lack of reliable borrowers, funnel the money into deposit certificates of the National Bank of Ukraine (since the beginning of 2017, the real sector has not received loans of about UAH 60 billion), while the agricultural producers face a constant shortage of funds.

Lifting the moratorium on farmland sales would clarify the legal status of land assets and make collateral pledges (of land) more attractive to lenders.

Detractors of this view say mutually beneficial cooperation between Ukrainians financial and agrarian sectors is hampered by two factors: high interest rates and questions about the quality of data of the State Service of Ukraine for Geodesy, Cartography and Cadastre regarding plot boundaries. Fortunately, both are red herrings.

In fact, interest rates for hryvnia-denominated loans are currently 13.9%, which significantly limits the potential demand of farmers. Exactly one year ago, the rate was 20%.

Obviously, we are on a long-term downtrend of the value of money, and over the next two years the interest rate will fall below 10%, that is, to an acceptable level for small agricultural producers.

The scale of territorial differences is exaggerated. They are characteristic of all types of real estate, including areas for commercial real estate, which are taken as collateral by banks. In addition, in 2017 the State Service of Ukraine for Geodesy, Cartography and Cadastre began to correct errors in its land database.

If the farming land sale moratorium is lifted, the agrarian sector can become a solid base for restoring Ukraine's beleaguered banking system by providing huge cash benefits and stable, open credit lines on the scale needed by farmers.