Assessment of Bank Loans Made To the Agribusiness Sector by Moldovan Banks

The aim of this analysis is to assess the commercial bank lending situation with respect to the agribusiness sector, terms of loans to the agribusiness sector as compared to terms of loans to other sectors and availability of loans for small farmers and agribusiness companies. Data used are from public reports on disclosure of information on crediting activity, that banks prepare and make available on a quarterly basis. All of them (with few exceptions) also post the information on their web sites. Data from all of the 16 banks registered and operating in Moldova were used for this purpose. According to Moldovan bank accounting standards, loans issued by banks are classified into nine categories: 1. 2. 3. 4. 5. 6. 7. 8. 9. Loans to agriculture and food processing industry; Loans to industry and trade; Loans to power engineering and fuel industry; Loans for road construction and transportation; Loans for real estate; Consumer loans; Loans issued to the Government; Inter-bank loans; and Other loans.

To ensure better comparability and relevance of aggregate information, data from the last three industries were excluded from calculations of general average interest rates and general average amounts of granted loans and comparisons, as those loans are not typical commercial loans. They include overdrafts, overnights, purchase order financing, credit cards, loans to Government, etc. (given on very short period and high interest rates, or loans to other banks for short time liquidity observance, with very low interest rates).

Table 1: Loans issued by industry: all 16 banks

Total, 2007 Number of granted loans No. Type of loan in foreign currency 4 214 2.930 72 101 80 185 0 47 583 4.212 in foreign currency 6 1.132.291 in lei & foreign currency 7 2.697.925 Amount of granted loans (thousand lei) as % of the total in lei & foreign in foreign in lei currency currency 8 8,6% 27,2% 1,2% 0,9% 7,9% 17,1% 0,1% 22,0% 15,0% 9 9,4% 63,4% 9,5% 1,8% 4,5% 0,1% 0,0% 1,9% 9,3% 100,0% 10 8,9% 41,6% 4,5% 1,3% 6,6% 10,4% 0,1% 13,9% 12,7% 100,0% Average loan amount, thou. lei Average interest rate, % loans in foreign currency 14 10,6% 11,2% 11,3% 11,0% 11,1% 10,8% 6,0% 12,5% 11,0%

in lei 1 2 Loans issued to agriculture and food 1 industry 2 Loans issued to industry/trade Loans issued to power engineering and 3 fuel industry Loans issued for road construction and 4 transportation 5 Loans for real estate 6 Consumer loans 7 Loans issued to the Government 8 Inter-bank loans 9 Other loans Total 3 1.862 5.830 105 244 2.571 125.463 38 303 6.325 142.741

in lei 5 1.565.634 4.929.568 215.924 163.417 1.438.836 3.111.140 21.676 3.983.347 2.713.975

in lei 11 841 846 2.056 670 560 25 570 13.146 429 833

in foreign currency 12 5.291 2.605 15.960 2.193 6.791 89 4.833 1.919 5.488

loans in lei 13 18,4% 18,1% 19,5% 18,8% 16,6% 19,2% 19,5% 12,4% 19,5% 18,4%

7.632.378 12.561.946 1.149.128 221.520 543.310 16.418 0 227.135 1.118.569 1.365.051 384.937 1.982.146 3.127.558 21.676 4.210.481 3.832.544

18.143.516 12.040.748 30.184.264 100,0%

Note: total averages for columns 11 to 14 do not include last three categories of loans

Loan value to the agriculture and food processing sector make up a very small share of total loans in the nine categories: in 2007 only 8.6% of credits in lei and 9.4% of those in foreign currency of all banks were issued to this sector. Table 2 gives a picture of aggregate bank loan portfolios by sector in 2007 in comparison to 2006. Loans to the agriculture and food processing sector amounted to 14% of all loans at December 31 2007, having increased in absolute terms by 10% as compared to December 31, 2006. However, the total increase in loan portfolios was 51.7% indicating that the increase in agribusiness lending was very modest compared to the actual increase in the total lending portfolio. In fact, from almost 20% of the value of loans made in 2006 the percentage made to the agriculture and food processing sector declined significantly to 14% in 2007.
2

Table 2: Bank loan portfolios by industry 2006-2007, all 16 banks (mil. lei)
No. 1 Type of loan 2 As at Dec. 31, 2006 3 2643,4 6923,9 205,7 478,4 1502,2 1302,6 711,6 13767,8 As % of total, 2006 4 19,2% 50,3% 1,4% 3,5% 10,9% 9,5% 5,2% 100% As at Dec. 31, 2007 5 2.918,7 10.235,9 427,8 469,4 2.692,9 2.962,2 1.176,8 20.883,7 As % of total, 2007 6 14,0% 49,0% 2,0% 2,2% 12,9% 14,2% 5,7% 100,0% Increase (+) /Decrease (-), mil. lei 7 275,3 3312,0 222,1 -8,9 1.190,7 1659,6 465,2 7115,9 Increase (+) /Decrease (-), % 8 10,4% 47,8% 210,0% -1,9% 79,3% 230,0% 65,4% 51,7%

1 Loans issued to agriculture and food industry 2 Loans issued to industry/trade 3 Loans issued to power engineering and fuel industry 4 Loans issued for road construction and transportation 5 Loans for real estate 6 Consumer loans 7 Other loans Total

Source: The National Bank of Moldova, Annual Report, 2007

It is worth mentioning that the agriculture and food processing sector provides about 30% of the countrys GDP. Approximately 40% of the population is occupied in this sector and it provides 65% of the total countrys exports. Moreover, the limited lending to the agribusiness sector is not connected with a deficit of funds for providing loans. As of November 2008, the average liquidity ratio in the Moldovan banking system was 31.4%, against the minimum of 20% set by National Bank of Moldova regulations, i.e. Moldovan banks have an extra liquidity approximately 1/3 higher than the necessary minimum, but hesitate investing in the real sector in general and agribusiness in particular. Instead they prefer making inter-bank loans or placing available funds into very liquid and secure, but low profitable state securities1. Only 12 of the analyzed 16 banks made loans to the agriculture and food processing sector in 2007 and in the 3rd quarter of 20082. Eurocreditbank, Universalbank, Investprivatbank and Comertbank are the four banks that apparently did not operate in this sector at all. The most active in this sector is the Moldova-Agroindbank (MAIB), that provided almost half of the all agribusiness sector bank loans in 2007 (1.18 billion lei or 43.8% of all loans). All of the rest are far behind, with the second, Moldindconbank, with only 320.8 million lei or 11.9% in total bank loans to the agribusiness sector (Table 3, column 11). This denotes low interest from banks in providing loans to this sector.
1 2

As table 1 shows, inter-bank loans are second only to industry/trade loans in banks preferences for lending, with almost 14% of all loans issued in 2007. For 2008 latest available data for the third quarter of 2008 were used, as those for the whole year are not available yet. 3

Table 3: Agriculture and food processing industry loans issued by bank:

Total, 2007 Number of granted loans No . Type of loan in lei & foreign currency 7 0 86.430 16.483 0 142.246 128.073 Amount of granted loans (thousand lei) as % in total loans issued by each bank in foreign currency 4 0 63 227 0 15 16 in foreign currency 6 0 55.816 111.590 in foreign currency 9 0,0% 11,6% 3,2% Data not available 6 58 0 0 19 0 23.404 117.208 0 0 27.317 0 23.404 144.526 0 6,6% 19,5% 0,0% 0,0% 9,9% 0,0% Data not available 0 231 193 53 111 0 846 74 1.862 0 51 25 22 2 0 54 10 214 0 133.841 191.384 73.268 138.857 0 579.536 140.730 1.565.634 0 98.526 129.448 87.204 3.698 0 601.849 81.336 1.132.291 0 232.367 320.832 160.472 142.555 0 1.181.385 222.066 2.697.925 0,0% 15,8% 10,5% 6,4% 8,4% 0,0% 19,7% 2,8% 8,6% 0,0% 19,6% 11,5% 5,3% 0,8% 0,0% 23,2% 3,2% 9,4% 0,0% 17,2% 10,9% 5,7% 6,7% 0,0% 21,3% 2,9% 8,9% 0,0% 8,6% 11,9% 5,9% 5,3% 0,0% 43,8% 8,2% 100,0% 579 992 1.382 1.251 685 1.902 841 1.932 5.178 3.964 1.849 11.145 8.134 5291 20,1% 17,8% 16,4% 18,1% 18,4% 18,7% 18,4% 11,1% 11,2% 10,5% 11,0% 10,3% 10,0% 10,6% 1,4% 16,5% 0,0% 0,9% 5,4% 0,0% 3.901 2.021 1.438 19,7% 17,5% 10,2% as % of each bank in total agric.&food in lei & industry loans, agr. foreign currency amounts 10 0,0% 6,4% 7,8% 11 0,0% 5,3% 4,7% Average loan amount, Average interest rate, thou. lei %

in lei 1 2 3

in lei 5

in lei 8 0,0% 3,8% 9,9%

in lei 12 886 492

in foreign currency 13 5.762 1.030

loans issued in lei 14 18,7% 19,1%

loans in foreign currency 15 10,3% 10,9%

1 EuroCreditBank 2 Mobiasbanca 3 FinComBank 4 ProCreditBank 5 BCR Chisinau 6 Energbank 7 Universalbank 8 Unibank 9 Comertbank 10 Banca Sociala 11 Moldindconbank 12 Eximbank 13 Banca de Economii 14 Investprivatbank 15 Moldova-Agroindbank 16 Victoriabank Total

Despite the fact that there is fierce competition among banks for acquiring greater market share, especially among the banks from the big six (banks with assets of 3 billion lei and more: Moldova-Agroindbank, Victoriabank, Moldindconbank, Mobiasbanca, Banca de Economii and Eximbank) it seems that only Moldova-Agroindbank, and to a lesser extent Moldinconbank regard this sector as a potential source for their growth. Moldova-Agroindbank is the leader with 19.7% and 23.2% of all loan value issued to the sector in lei and foreign currency, respectively, or 21.3% on aggregate (in both lei and in foreign currency). Moldindconbank provided 10.5% and 11.5% of all issued loans in lei and foreign currency to agriculture and food industry in 2007, or 10.9% on aggregate. All of the rest have issued on aggregate far less than 10% of their loans to this sector (Table 3, column 10). One factor limiting the level of loans to the sector is the National Bank of Moldova regulations that limit single sector concentration at 25% of total loan portfolio. However, as noted above only MoldovaAgroindbank approaches that limit for the agriculture and food processing sector. Of the smaller banks, only Banca Sociala and Energbank issued on aggregate more than 15% of their total loans to the agriculture and food processing sector, while others were all less than 10%. (There are no data for 2007 for Procredit Bank and Unibank, but these are among the smallest banks and cannot add much optimism to the generally bleak conclusion that the Moldovan banking sector provides very limited credit support to this sector). However, Procredit Bank is the absolute leader in the number of loans provided to small-scale borrowers in the agriculture and food processing sector, having issued in the 3rd quarter of 2008 almost 37% of loans by number to that industry from the total of all 16 banks. This bank has also the smallest average loan size (21 thousand lei and 1.24 million lei) and accordingly, provides better accessibility for smallscale borrowers. However, interest rates are the highest as well (26% for credits in lei and 14.4% for those in foreign currency, on average) (Table 4, columns 21, 22).

Table 4: Agriculture and food processing industry loans issued by bank: 3rd quarter 2008 as compared to 3rd quarter 2007
3rd quarter, 2007 Number of granted loans Number of granted loans 3rd quarter, 2008 Increase (+)/decrease (-) 3rd quarter 2008 to 3rd quarter 2007 in the in the number of average granted in the amount of granted loans interest (thou. lei) loans rate, % as % of the total loans in in in foreig foreig foreig n in n n curre foreign curre loans curre in lei ncy in lei currency in lei ncy in lei ncy 23 11,5% 12,3% 14,4% 11,0% 11,2% 1 7 0 0 23 0 1.490 8.199 0 11,0 295 2,1% 0,1% 3,1% % -5.938 17,9% -1,3% 4,1% 1,2% 0 0,0% 0,0% 0 1 17 24 0 13 7 25 0 -1.069 26.442 26 27 28 29 30 -

N Type of credit o.

Amount of granted loans (thou. lei) as % of the total

Average loan amount, thou. lei

Average interest rate, %

Amount of granted loans (thousand lei) as % of the total

Average loan amount, thou. lei

Average interest rate, %

in foreig n curre in lei ncy 1 2 3 0 8 32 4 0 3 1

in lei 5 0 2.793 14.870

in foreign currency 6 0 32.968 863

in lei 7 0,0% 0,8% 6,5%

in foreign currency 8 0,0% 24,1% 0,7%

in lei 9 349 465

in foreig in loans loans in n foreign issued in foreign curre currency lei currency in lei ncy 10 10.989 863 11 18,5% 18,8% 12 8,3% 10,4% 13 0 9 49 347 19,0% 17,3% 1 25 0 11 1.962 6.348 5.992 19,3% 15,7% 15,3% 11,6% 10,9% 10,8% 0 115 49 13 14 0 16 8 2 0 28 0 0 0 19 12 6

in lei 15 0 1.724 41.312 7.298 10.253 31.651 0 7.896 0 33.074 38.378 43.536

in foreign currency 16 0 28.390 5.891 2.485 295 5.784 0 0 0 12.470 27.642 19.211

in lei 17 0,0% 0,4% 22,1% 6,7% 10,7% 31,6% 0,0% 7,4% 0,0% 19,3% 8,9% 8,1%

in foreign currency 18 0,0% 4,2% 7,2% 14,8% 0,1% 15,1% 0,0% 0,0% 0,0% 22,1% 13,4% 3,5%

in lei 19 192 843 21 10.253 1.266 718 288 783 3.349

in loans loans in foreign issued in foreign currency lei currency 20 1.774 736 1.243 21 21,7% 18,7% 26,0% 22,1% 21,3% 22,1% 656 2.304 3.202 22,8% 21,0% 25,3% 13,8% 12,5% 13,8% 22

1 EuroCreditBank 2 Mobiasbanca 3 FinComBank 4 ProCreditBank 5 BCR Chisinau 6 Energbank 7 Universalbank 8 Unibank 9 Comertbank 10 Banca Sociala 11 Moldindconbank 12 Eximbank Banca de 13 Economii 14 Investprivatbank Moldova15 Agroindbank 16 Victoriabank Total

0 0,0% 0,0%

-4.578 -0,4% 19,8% 3,2% 3,2% 5.029 15,6% 6,6% -0,1% 1,9%

Data not available 0 18 0 0 5 0 8.763 23.452 0 0 11.722 0 8,5% 13,7% 0,0% 0,0% 16,4% 0,0%

1.303 -

2.344 -

9,9% -

207 -

Data not available 0 42 27 11 0 15 11 7 0 44.226 49.814 21.441 0 29.437 69.825 41.945 0,0% 18,2% 9,3% 7,7% 0,0% 16,7% 18,7% 6,4%

0 73 22 2

0 4 1 -1

0 -11.152 -11.436 22.095

0 0,0% 0,0%

1.053 1.845 1.949

-16.967 1,2% 5,4% 3,6% 2,2% -42.183 -0,4% -5,3% 5,3% 1,7% -22.735 0,3% -3,0% 10,0% 3,0%

27 0 82 19 266

1 0 14 8 65

31.757 0

1.191 0

7,9% 0,0% 17,9% 2,8% 8,2%

0,6% 0,0% 30,5% 7,0% 12,9%

1.176 1.499 1.469 1308

1.191 16.599 5.514 7145

18,0% 17,6% 18,9% 17,8%

11,0% 10,6% 10,4% 10,4%

18 0 176 26 839

2 0

39.870 0

9.422 0

11,5% 0,0% 18,6% 9,7% 10,2%

8,8% 0,0% 39,2% 7,3% 12,7%

2.215 784 2.323 540

4.711 17.031 8.708 3751

21,0% 20,0% 21,8% 22,0%

11,9% 11,7% 12,5% 12,4%

-9 0 94 7 573

1 0 2 -3 49

8.113 0 15.089 32.474 105.439

8.231 3,6% 8,2% 3,0% 0,9% 0 0,0% 0,0% -

122.921 232.384 27.913 347.950 44.112 464.447

16 138.010 272.494 5 114 60.387 453.389 43.540 427.625

40.110 0,7% 8,7% 2,4% 1,1% -572 6,9% 0,3% 2,9% 2,2% -36.823 2,0% -0,2% 4,1% 2,0%

The question of access to credit is another important issue derived from the analysis. A review of the general picture (Table 1) and for each bank in particular (Table 3), indicates that banks prefer big borrowers, and respectively one can conclude that large-scale companies have easier access to bank credit than do smaller-scale companies and individual growers. Moldova-Agroindbank, which is the absolute leader and most active in the sector judging by absolute figures in amounts of loans issued, turns out to be interested primarily in large loans, with
6

an average of 685 thousand lei (approx. $65 thousand) for loans valued in lei and 11.15 million lei (approx. $1.07 million) for loans valued in foreign currency for each loan issued in 2007. Clearly, such amounts for a single loan are accessible only to medium and large-scale businesses, while micro and smaller-scale businesses usually cannot use more than $50 thousand. The aggregate average figure of loans issued by all banks to the agriculture and food processing industry is even larger: 841 thousand lei (approx. $81 thousand) for loans in lei and 5.3 million lei (approx. $508 thousand) for loans in foreign currency (Table 3). Only Procredit Bank, and to some extent Banca Sociala and Fincombank, have average loan sizes for the agriculture and food processing sector that can fit into the category of small loans (Tables 3 and 4). That testifies to the fact that competition in the bank sector is today for the big pie, i.e. big agribusinesses, while the micro and small businesses niche in that sector is largely ignored by commercial banks. One more issue pertaining to the question of access to loans relates to the cost of loans. According to Moldovan bank regulations, credit denominated in foreign currencies can only be made for payments outside Moldova, i.e. for imports. In that situation, clearly, only big companies that import can benefit from lower interest rates on loans in foreign currencies (average of 12.4% in 2008, while small businesses are compelled to take loans in MDL at 20% to 26% interest rates Table 4, col. 21, 22). This also stimulates imports to the detriment of local production. In looking also at the latest evolution of bank interest rates (3rd quarter 2008) one can also conclude that average interest rate for bank loans to agriculture and food processing industry (22.0%) is lower only than loans for transportation (22.2%) and consumer loans (22.7%) (Table 5).

Table 5: Loans issued by industry: Quarter 3, 2008 as compared to quarter 3, 2007, all 16 banks
3rd quarter, 2007 Increase (+)/decrease (-) 3rd quarter 2008 to 3rd quarter 2007 in the in the Average loan number of average in the amount of granted loans interest rate, amount, Average interest granted Amount of granted loans (thousand lei) thou. lei rate, % (thou. lei) loans % as % of the total as % of the total loans in in in in foreig foreig foreig foreig n loans loans in n n n curren issued foreign curren in foreign in foreign curren loans curre in foreign in lei currency in lei cy in lei currency in lei cy in lei currency in lei ncy in lei currency in lei cy 3rd quarter, 2008 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

No .

Number of granted loans Type of credit

Amount of granted loans (thou. lei) as % of the total

Average loan Average interest Number of amount, thou. lei rate, % granted loans

in lei 1 2 3

in foreig n curren cy 4

in lei 5

in foreign currency 6

in lei 7

in foreign currency 8

in lei 9

in foreig n loans loans in curren issued foreign cy in lei currency 10 11 12

in lei 13

in foreig n curren cy 14

Loans issued to agriculture and 1 food industry Loans issued to 2 industry/trade Loans issued to power engineering 3 and fuel industry Loans issued for road construction 4 and transportation Loans for real 5 estate 6Consumer loans Loans issued to the 7 Government 8Inter-bank loans 9Other loans Total

266 1.347

65 759

347.950

464.447

8,2% 26,5%

12,9% 63,0%

1.308 7.145 17,8% 836 2.981 18,2% 17.42 2 19,2%

10,4% 11,2%

839

114

453.389 1.632.848

427.625 2.215.479

10,2% 36,8%

12,7%

540 3.751 22,0%

12,4% 13,1%

573 84

49 105.439 357 506.707

-36.823 2,0% -0,2% 4,1% 2,0% -47.367 10,3% 2,8% 3,2% 1,9%

1.126.142 2.262.846

1.431 1.116

65,8% 1.141 1.985 21,4% 19.31 3 21,6%

27

18

52.930

313.598

1,2%

8,7%

1.960

11,3%

19

15

39.348

289.689

0,9%

8,6% 2.071

12,7%

-8

-3

-13.582

-23.909 -0,4% -0,1% 2,4% 1,4%

66 604 37.454 7 55 1.548

20 20 49 0 7 167

65.541 396.189 876.645 2.870 763.750 622.265

44.004 209.137 6.985 0 46.077 247.410

1,5% 9,3% 20,6% 0,1% 18,0% 14,6%

1,2% 5,8% 0,2% 0,0% 1,3% 6,9%

993 2.200 18,5% 10.45 656 7 16,2% 23 410 143 19,3% 19,6%

11,5% 10,8% 10,7%

39 589 40.413 3

11 40 70 0 5 291

16.469 614.186 719.101 644 53.000 913.191 4.442.176

22.753 164.155 3.341 0 11.213 235.252 3.369.506

0,4% 13,8% 16,2% 0,0% 1,2% 20,6% 100,0%

0,7%

422 2.068 22,2%

12,2% 13,0%

-27 -15

-9

-49.072

-21.252 -1,2% -0,5% 3,7% 0,8% -44.982 4,5% -0,9% 4,6% 2,3% -3.644 -4,4% -0,1% 3,4% 5,4% 0 -0,1% 0,0% 9,4% -34.864 16,8% -0,9% 6,9% 2,4% -12.158 5,9% 0,1% 3,5% 1,2%

4,9% 1.043 4.104 20,8% 0,1% 0,0% 0,3% 7,0% 100,0% 18 48 22,7%

20 217.997 21 -157.544 0 -2.225

16,1% 2.959 8,1% 13,7% -4 -51 115

13.886 6.582 12,2% 402 1.481 19,3% 963

5,7% 12,5%

4 1.663

215 - 29,0% 13.25 0 2.243 19,1% 549 808 22,8%

-2 -710.750 124 290.926

41.374 1.105

4.254.281 3.594.504 100,0% 100,0%

6.725 18,2% 11,0%

45.000 1.662

873 5.211 21,8% 13,3%

3.626 557

187.895 -224.998 0,0% 0,0% 3,6% 2,3%

Note: total averages for columns 9 to 12, 19 to 22 and 29 to 30 do not include last three categories of loans

In conclusion, relegating the commercial agricultural sector to a credit rating similar to that of household loans, while preferring to invest funds in low interest bearing inter-bank loans and state securities instead of economically productive activities, does not represent an economic development policy approach conducive for promoting the commercial expansion of this important component of the rural economy. Ion Tornea Agribusiness Development Advisor ADP/CNFA

December 12, 2008