VI. SOCIO-ECONOMIC ASPECT
The corporation has the responsibility to file and pay taxes to the respective government agencies, Bureau of Internal Revenue (BIR) for public information purposes showing transparency and accountability.
The facilitation of a clean environment and effective environment protection is a fundamental aspect of good business operations. Gapas Lending Corporation recognizes that its business activities have an impact on the environment, both globally and locally. Therefore, it is a policy to minimize the impact of the operations on the environment.
The corporation is committed to pollution prevention through the ongoing identification and control of those significant environmental impacts associated with our activities. These include:
* Carbon dioxide emission
* Water consumption
* Paper consumption
* Waste management
* Electricity and space air conditioning
* Lending activities
* Supplier and subcontractor control
The corporation is committed to a process of continuous improvement of environment performance through:
* Implementing the policy by setting objectives and targets and developing environmental programs. * Measuring environmental performance on an ongoing basis and using this information to regularly review policy, objectives, targets and the allocation of resources. * Educating and training employees involved in both operations and lending in order to help them considered the environment in all aspects of their work. * Encouraging, guiding and supporting staff to act in accordance with the Company’s Environmental Policy. * Working with suppliers and sub-contractors to minimize their environmental impacts. * Reviewing environmental risks associated with lending.
* Auditing and monitoring operational environmental risks and reviewing practices if necessary. The corporation is committed in complying with all relevant environmental legislation. It is also committed to supporting environmental initiatives in the society, the economy and the business community where it operates.
c. The Risks of Agricultural Lending
As in any lending – borrower relationship. There is a general problem of moral hazard that is the result of specific personal characteristics and decisions of each individual borrower. In this regard, farmers do not differ from any other borrower group in terms of information, incentives, monitoring and enforcement problem associated with the lending process.
Firstly, it is obvious that the lender does not have the same information as the borrower. The latter knows exactly his/her management capacity and how the loan will be used. The lender does not know the potential borrower to such an extent. In rural financial markets, information about low income loan application is particularly difficult to obtain.
Secondly, even if the loan applicant frankly shares all relevant information for the credit decisions, his/her future actions cannot be fully predicted. Therefore, it is crucial for financial institutions to apply incentives so that borrowers behave in such a way that repayment is assured.
Thirdly, the farmers may decide to change his/her economic behavior, invest the money elsewhere or simply move to another part of the country. Many subsidized agricultural credit programs tried to manage this risk by imposing very costly regular monitoring of the borrowers. Finding cost-efficient methods of monitoring borrowers is a particular challenge in agricultural lending.
Fourthly, if the borrower does not repay in time, the company must enforce the loan payment. In traditional lending, collateral is used to compensate for the potential loan loss. Traditional collateral, however, is rarely available from small farmers. Also, legal procedures to use collateral are often cumbersome and costly. Designing enforcement in an efficient way is another challenge to control loan loss risk.
However, there are other risks beyond the general behavioral risks of a borrower. This second category of loan loss risks is associated with the agricultural sector or agricultural production. It refers to the factors external to the farmer’s repayment attitude.
Farming is a risky business. Crops may fail, weather influences the productivity, sales price fluctuate and difficult to predict when the crop are planted. If productivity is lower than expected, farmers may not be able to repay loans. These risks and many other of agricultural risk will need to be identified, measured and actively managed in order to avoid the company to turn away from this clientele. In this section we will outline the various external risk categories that need to be taken into account in agricultural lending.
Production and yield risk. Agricultural yields are generally uncertain, as natural hazards such as the weather, posts and diseases and other production calamities impact on farm output. Even slight changes in weather conditions – less rain than usual – can seriously impact on farm production. Pests and diseases may spread quickly, leading to a loss of part or all of the crop’s produce. The soil quality of the plots as well as their location also significantly influence productivity and yield risk.
Experienced farmers know the specific risk profiles for their agricultural products and try to manage these risks. Strategies applied by many small farmers include diversification of products to outweigh the risk of losing all production. Many small farmers can be considered as risk-averse, i.e. not venturing into new crops in which they are, as yet, inexperienced.
Weather impact is managed through various approaches. For example, irrigation systems may limit the risk of drought. Greenhouse production – among other benefits – can limit the risk of frost damage and increase overall productivity significantly. On the other hand, however, modern farm technologies can also increase the risk exposure of a farmer if they are poorly managed.
Approaches to the management of the risk of pests and disease include the use of insecticides or other chemical products. Animal illness and mortality can likewise be managed through vaccination and strict hygiene precautions. Contacting agricultural extension services or veterinarians for advice may also complement the farmer’s personal knowledge and experience in production and yield rate.
For all these risk management techniques, the experience of the small farmers is the core requirement for good result. Risks of inappropriate management forms a part of the production risk. Accordingly, prudent lending decisions need to be based on an assessment of the management capacity of the farmer.
A particular feature of the seasonality risk is the fact that if in a given season part of or the full harvest is loss, new planting often has to wait until the start of the following season. In addition, funds for investing in agricultural inputs for a new production cycle may not be available. Satisfying the repayments scheduled for the current seasonal loan may become impossible, if other sources of income cannot be mobilized.
Price and Market Risk. Price uncertainty due to market fluctuations is particularly significant where market information is lacking or scanty, or where markets are imperfect – features which are prevalent in many developing countries. The relatively long period of time between planting a crop or starting livestock activities and the realization of farm output implies that market price may change from what has been projected. This problem is particularly relevant for longer term agricultural activities, such as perennial tree crops like cocoa or coffee, as several years lie between planting and harvest. Price fluctuations may be particularly severe in export markets.
Over production, however, may also considerably influence domestic market price. In many countries, price uncertainty has increased with liberalization of agricultural marketing. Private buyers rarely fix a blanket- buying price prior to harvest, even though inter-linked transactions for specific crop have become more common. These arrangements always involve the setting of a fixed price or a range of price prior to planting. Market risk also includes the potential losses involved in marketing agricultural produce. Transportation, as has been pointed our earlier, is a major challenge in many rural areas. Substantial losses may also occur due to lack of appropriate storage facilities. Lower quality of badly stored produce may also reduce price.
Lack of Diversification. Price and market risk, as much as production and yield risk, is higher for farmers concentrating on a single crop or livestock activity. Accordingly, many farmers apply risk diversification technique alongside risk mitigation technique to reduce these risk. Complementing market- oriented production with subsistence farming is one particular safety – net arrangement, which provides survival measures ones yield, production, price and market risk diminish the profit made. Small farmer’s annual income still often depends to large extent on one main crop. This is particularly challenging if harvest are no more frequent than semi- annually. This situation turns even more difficult if the plot is very small. Accordingly, an alternative strategy for diversification is the generation of additional income between seasons by engaging in off-farm activities.
While diversification of agricultural production is a commonly applied technique, the resulting effect on reducing income insecurity is insufficient. Small farmers very often have long history of going through bad years when cash income came close to zero, and good years, in which only a small surplus was generated. As income risk directly translate into the potential performance of an agricultural loan, the lack of sufficient diversification and risk mitigation remains a major challenge with agricultural lending. Many farm household incorporate in their overall diversification strategy also non-farm activities. This is particularly important for farmers that are engaged in high-risk agricultural production, i.e. face a continuous threat of droughts or floods.
Lack of collateral. Most small farmers possess little to no assets. Even fewer small farmers possess land title or goods which are traditionally used as loan collateral; by banks. The most accepted asset for use as loan collateral is land because it cannot be removed but can generally be transferred at a specific market price. Small farmers land, however, may also be unavailable or costly to obtain. Finally, land registration is often imperfect in many countries. In order to respond to these constraints, lenders often need to find alternative forms of collateral (such as livestock and equipment, even though they may incur higher risk). Other technique, one of which is promoted in this toolkit, concentrates on preventive measures in securing loan repayment. These approaches put less emphasis on the provision of collateral by basing the loan decisions on detailed appraisal of the applicant. In addition, loans should be designed in such a way that they stimulate repayment, i.e. by providing access to higher amounts of future loans in case of timely repayment or the possibility to obtain parallel loans.
Personal guarantees are also often applied as an alternative to ”real” collateral. Group guarantees are also used in agricultural lending. These approaches are based on the functioning of social control, mutual trust and joint liability. In this toolkit we will focus, however, exclusively on individual feature to be found in many developing countries.
Political Risk. Political influence I agricultural markets are common feature to be found in many developing countries. Price intervention in agricultural markets, for example, is popular, as low foods are in the interest of urban consumers. For example, abolishing price ceilings for basic food products in former socialist state has led to severe social unrest. Accordingly, stabilizing these prices has been a common feature of political intervention in many countries. On the other hand, fixed price for agricultural produce are also frequently used political tool to ensure a certain level of income for smallfarmers.
Policy changes and state intervention can also have a severe damaging impact on rural financial market. Agricultural lending has long-standing history of political intervention and distortion, which substantially contributed to the disinterest of commercial lenders in this business. Promising debt relief is a common feature of populist political campaigns. But well- intentioned credit programs for specific target groups and regions can also substantially distort prudent agricultural lending efforts.