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r 1This report was prepared for use within the Bank and its affiliated organizations.They clo not occelot responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

1NTERNJATIONAL BANK FOK RECONISTRUCTION AND DEVELOPMENT

IN TEkNATIONAL DEVELOPMEN T ASSOCIA TION

RURAL CREDIT PROJECT

REPUBLIC OF THE PHILIPPINES

October 25, 1965

Projects Department

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CURRENCY EQUIVALENTS

1 peso = U. S. $0; 2561 IVS dolan r = v 3= 9Q1 rmillion pesos = U.S. $256, 0001 miilion U. S. dollars= 3, 900, 000

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Rg'uAL CREDIT PROvn-CT

TABLE OF CONTEI'NTS

Page No.

A. General ........ . , ........ 1B. Agricultural Production ...1.......1C. 'Farm Supporting Services ......................... eo. 2D. Irrigation ............ 2E. Current Agricultural Practices........................ 3F. 'Farm Incomes ............. 14.G. 'Current ]Rural Credit Facilities.o.................... h

III* THE PROJECT. 6 .............

A. Description... ...... , * , 9* C **** .*****9**o* 6B. 'Loan Ad7inistration 7C. 'Lending Policies and Procedures.....o...e u r..... s... 8D. Finance........ . .. ** * *9, 9E. Disbursements..... ........... * , ... **0 * ... O.... 10F. 'Procurem.nnts...... ............... .. 10

TV. BENEFTTS AND JTUSTTFTIATION. ........ ...... I.............. 11

V. CONGLUSTONS AND REGOMMNDATTONS .. 12

1. Numiber 'f 'ar:-s by Size in the Phil_ppinesj 19602. Agricultural Land Utilization and Production in the Philippines(1962-63)3. Farm. and Supportin.g Serices4. Importation of Selected Farm Machinery, by Type, 1959-1963,*-_-. The Ru5ral Banking Systeon+m6. Sunmary Terms and Conditions of Agricultural Loans7. Lo- ns TVT^de byi Categories n

8. Loans Made by Sizeo, T o M-.V A- t'1 - 4 N -AI -~ 4--. -. 4-,,~ 9.~-J~-L~ 1ZLL~ Loar ad VW C a.LL"

10. Loan PortfoLio of Rural Bankslle CosLiat-1LOj.Uaed Bja-lalce Shleet, as atlu Decer,ILbUer 3112. Consolidated Profit and Loss Accounts13. Costt- and Returns of Lending YperatWons

REPTUBLIC OF ThrE PHILIPPINES

RURAL CRELDtIT PRUIECT

SU1BARY

i. The Central Bank of the Phil:ippines has asked the IBRD for a loanto finance an agricultural credit project.

ii. ThLe project is a two-year lending operation of the Central Bankadministered through selected private rural banks and designed to providemedium and 'long-term credit to farmers to purchase farm machinery and developsmall private irrigation systems. An IBRD loan of US$5 million has beenrequested whiich wouLd cover about 60 per cent of total farm. irivcst-l2cfnt .million). Rural banks would contribute from their own resources a miniriLmof' lt per cent of this cost and farmers would contribute the balance.

iii. While the actual mix of investments to be financed under the projectcannot be accurately determined in advance, it is estimated that about 6'Dper cent of the IBRD loan may be used for minor irrigation schemes involvingmainly purchase of low lift pumps, motors and equipment for wells and con-struction of irrigation canals. The tbalance of the loan would be used tofinance machinery imports for land preparation and sundry farm uses. Lendingwould be restricted to farmers cultivating not more than 50 ha. and, inexceptional. cases, to farmers cooperatives. Farmers and individual contractorsundertaking custom work for land preparation and other agricultura1 purposeswould also be eligible.

iv. It is est,imated that about 80 rural banks located in areas of highaaricultural potential would be qualified to narticipate in the imnplementationof the project. The central bank would be responsible for their supervision.Its Department of RFural Banks is adequately staffed, has already had consider-able experience in the field of rural credit administration and enjoys theconfidence of both the eovernment and the rulral bqnks. Appraisal of loanapplicationis and supervision of loans to farmers would be the responsibilityof the rural banks. However the Department of Rural Banks woul1d reviewapplications submitted for financing under the project and provide rura-L bankswith the training, guidance arnd f-arm advry ces required for soundl administration of the scheme. The lending risk would be borne by the ruralbanks, but the centr-al bakr would bear the exchange r4sk associated withservicing the IBRD loan.

v. The Central Bank would charge rural banks interest at 6 l/2%. Inorder to provide the incenrtive for rural bariks to participate in the project,the maximum permissible ratp of interest on medium and long-term loans tofarmers will be increased from its present level of 9 per cent to 12 per cent,the rate currently practiced for short term agricultural loans. The resultingspread (5.5 per cent) wo-uld be adequate to cover the costs of administrationincurred by rural banks.

vi. Procurement by farmers would be through normal trade channels.There are some twenty machinery distributors in the Philippines and competitionamong them is keen. Service, repair and training are available. Rural bankswould disburse the loans directly to the machinery suppliers or contractorsalthough, for civil works, payments might be made to the farmers concerned.

vii. The economic justification of the project is based on savings derivedfrom utilization of farm machinery as compared to animal power and on theexpected net increase of the value of agricultural output resulting fromirrigation. The return on tvnical investments to be financed under the loanis about 20 per cent for wheel tractors and 30 per cent for irrigation works.The pronect has beer resianed we.ll within conservativelv estimated creditneeds.

viii. The Central Bank together with selected rural banks constitute anappropriate charnel for IBRD fiunds. The rtn'rn-it. is suiitab ±hle for an TRnTf loanof US$5 million for a term of 12 years, including a grace period of 3 years.

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I. INTRODUCTION

1. T he Central Bank of the Philippines has applied to the IBRD fora loan to provide medium and long ter-m funds to rural banks for thefinancing of agricultural development.

2. The total investment proposed under the project is aboutUS$8.3 million equivalent for which an IBRD loan of US$5 million has beenrequested. The Central Bank would relend the proceeds of such a loanto selected rural banks to augment their medium and long term lendingcapacity to producers for approved development purposes.

3. An IBRD mission, including Messrs. Courbois, Wilson and Lohappraised the project in May, 1965. Negotiations with representativesof the government and the central bank were held in IWashinpton inOctober, 9L65. The following report, to. which Messrs. Takahashi,Picciotto and Favilla cantrilutod, is based on the findings of theappraisal mission and information supplied by the Philippine author-ities, business establishm-ents and resea-rch institutes.

II. BACKGROUND

A. Gneral

1.~ ~ ~ ~~~- 'Th 2nlk;r h- Dh;1;nn; n,zc- ^rnsomr n n Q ir- 7 nnn; Q :rinAcF-I o sV' -~ tiwJAS-_ v ± J. | -- 1tx± J ' w Is w-- -z

of which eleven account for about 90 per cent of the total land area ofabot+ 30 - 4 114i I-+n h aes Abo-u 11 mi14 or. hecaes no a lite 1 m4n-

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than one-third of the land can be used for agricultural purposes. Thepopl-'ationr, curretly estim,,ated at sligh,ty over 0 million, is increa,ingat the high annuaL rate of about 3.2 per cent. Some 6 million personsm_ ol1-+ 4n pe ce-4 -P +, 4-1^ - 1- force are_ engage-1 4- --- ;-14-- Iv Wvo H -_as U v_ I 41 01s ULMcu Wv w OI aK IO kc; LI s 6L6UU w ss aSL R C D .

occupations. The agricultural census of 1960 showed that out of 2,165,778ICa r,,s about,,4 80 peBr cenr,t were 'less than I hectares 4- size /A----- 1).

B. Agricultural Production

5. About one-third of the national income and about 60 per cent ofall exports (US$727 million in 1963) originate in agriculture. However,imports of meat, dairy, fish, cereal. products and other minor agricultulralproducts exceeded US$100 million equivalent in 1963.

6. Land use and production data are summarized in Annex 2. About55 per cent of the cropland or about 6 million hectares were devoted tofood crops, of which 3 million hectares were devoted to rice production

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and almost 2 million to corn. The princ:ipal comnmercial crops were coco--n.uts (1.l "illionr hectares), sugar cane (+r)nn abara(182,000 hectares) and tobacco (97,000 hectares)*

C. Farm Supporting Services

7. The principal government agencies responsible for implementingagricuiturui puolcy are the Department of AgrlcuLt-u<e a,d Natural Reso-arcesand the Agricultural Productivity Commission (Annex 3). There are alsomore than 20 other organizations involved in varying degrees. Mlny CUMIL-

petent technical experts are employed. in the various agricultural agenciesDut their efficiency and effectiveness have been restricted by the lackof coordination and shortage of funds. In order to promote better coopera-tion and efficiency, Congress is considering a bill to create a top levilagency, the Rice and Corn Development Authority, to draw up and carry olta rice and corn development program. The new agency would supervise andcoordinate: the activities of all agerncies and organizations performingfunctions relating to the production of rice and corn.

'3. The colleges of agriculture attached to various universitiesthroughout the country, in addition to providing undergraduate and somepost-graduate training, also undertake research and demonstration workto supplement that done by governmerit institutions. The University of

the Philippines' College of Agriculture at Los BaIfos has a well establishedreputationo The Ford and Rockefeller Foundations have given to the CollegeUS$6 milli.on in grants. In addition,, an IBRD loan (393-PH) of Us$6 millionwas granted in 1964 to the Republic of the Philippines for the College tohelp finance builc1ings and equipment recluired for a five-year researchand educational development program. Progress on the project is satisfac-tory. Overall, there is a considerable amount of research, demonstration

and extension work: being undertaken. The effectiveness of farm supportingservices has been limited by the conservatism of the small farmer and bythe lack of credit needed to imolement improved farming practiGes.

D. Irrigation

9. In most agricultural areas there is a pronounced dry season whichprentson+c rary'roundrl eonnnincr A,4rjf+-iann1y-r 'zher+. Arnr nmrin-irv of n f_rw

weeks frequently occur at critical periods in many areas. These have EL

depressing effect+. on y-roIedsA. TIr-rigan , +.hefr in adri+tn +o hei.ngc

required to permit year round cropping in areas with a pronounced dry season,is also d drlng cica +r spells tha 'nn occur in the rairay

or regular crop season in all areas. There are three types of governmentsqpported irriga+vion develop7. t in the+ PhFip;ies 01tr4 4r+,r iri ra+vlon

schemes constructed and operated by National Irrigation Administration(MT"), -o.ru.--l rTr,.g ation -- c-- onst.s.c- and + orated byr n-tsies

of farmers with technical and financial assistance from the Government,,

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and Pump Irrigation Systems under the conlyo1 of the Irrigation ServiceUnit (ISU) of the Bureau of Public Works.- Less than 30 per cent of thericeland is under Irrigation. Total irrigated area is showrn in the tabLebelow:

System Hectarage

National Gravity Irrigation 317,431

Communal Irrigation System 4553000

Pump Irrigation System 60,000

Private Schemes 27,000

Total 859,431

10. While there is a very great need and demand for irrigationfacilities, the establishment of new government constructed or assistedschemes has been severely restricted by the lack of funds. There is con-siderable scope for small private schemes both to complement the largergovernment supported schemes and to provide emergency watering on indi-vidual farms. Such schemes have proved highly economic wihere, as iscommon in the Philippines, there is abundant water which has to be liftedonly a few meters.

E. Current Agricultural Practices

11. Compared with the wealth of knowledge from research, agriculturalmethods lag far bhhind. The prrinini1 dlraft- nnimal - the water hiiffalo -

is slow and does not permit efficient land preparation within the timel.m.its-set by cl.m.atic conditions As a result land is often poorly prepreddespite the small size of farms. Large areas are often left idle, and rnanyopportunities of producing second rcrs on the snme area are lost thrnughinability to prepare the land in time.

12. The adoption of fertilizers, disease and pest control measuresand use of Ymproved crop varieties als beer. slow. Small farers are con-servative and lack resources to finance new inputs. Moreover, optimumret-urns frm the use of fertilizers a-nd improved varieties are largelydependent on the level of soil moisture maintained. WIithout irrigationfarm.ers are un.willMhg to risk the additional outlay nvolved -in fert- izers,pesticides and improved seeds even when they have the necessary funds.

1/ It is the intention of the Governrrent to put all public irririation systemsunder the Uirectior, of NIA.

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:13. The overall result is that yields of all crops are low by world~L~LM4.dLU~ ddIL 00L±~±UId.U± -> WI. "Uu_.LLVd.L)J..; J.d.IJUS d.LE LI1UE±1L,±±± U11vest,ardardos Cad cosdral-rast o c -'tJ.i-V1be lands- are- unde-utilized.-

Improvement of this situation requires the adoption of mechanization andU-th pro v±Zi.LUoL o.f LPLgL±aWion faciL.L±±U4ts,, au Least or- bupYpJ.LrlueLa-IY -a- LrUidJ.L0.r4

i4O The use oI farm machinery is at present very- limited. Te 1960Agricultural Census of the Philippines shows that only about eight thousandtractors wrere used for agricultural production compared to some two milliondraft animals. Since that time, approximately eight hundred tractors havebeen imported annually on the average, and this has been barely sufficientto cover normal replacement needs. There is considerable scope for im-proved implements and mechanization. The more advanced farmers workingaith modern machinery and implements and efficient management consistentlyproduce 2.5 - 3.5 metric tons of rice per hectare compared to the nationalaverage of 1.2 - 1.5 metric tons per hectare. Similarly, mechanization.to permit timely and efficient cultivation has resulted in corn yieLdstwo to three times the national average of about 650 kg per hectare.

F. Farm :ncomes

15. A recent shady by the Rural Banks Department of the Central Ba3nkand the Agricultural Credit & Cooperative Institute of the University cf thePhilippines has covered some 400 farms in areas serviced by 20 rural beLnks.The areas cropped individually ranged from 5 to 7 hectares for rice farms,3 to 7 hectares for sugar cane farms, 7 to 15 hectares for coconut planta-tions and up to 7 hectares for tobacco farms. In most cases there was somesecondary cropping of corn, vegetables, fruits and rootcrops. The stuclydisclosed that the gross annual crop income averaged from Y3,500 (US$897)to A.000 (US$.'L025) with farm expen.ses averaging about V1.'00 (US.b38h'iAdditionally, however, annual income from livestock averaged about Y90()(TJRS210) ner farm while family income was further aupmentpd from non-farmsoureces by amounts ranging from /,500 (US$385) to py4,000 (US$1,025).r-1;-her, the st-dy showed +ht=i-'-it-i -w--sva; W-K>-s s-

and that approximately half of them clesired, and would be able to service,l0ddQ 0f the LJdI-J for w_ich TDL ±nnD ±I..c-ngU_ _.ha been 1que O

G. Current Rural Credit Facilities

16. Various banks and non-bank-ing institutions in the Philippinesprovide rural credit to the agricultulral producers. The banks include ruralbanks, Development Bank of the Philippines, Philippine National Bank, andprivate development banks. rhe non-tbanking institutions include fertilizerdealers, farm machinery suppliers, landlords, shopkeepers and marketing andprocessing firms, Private money lenders also play an important role inextending rural credits. Overall, credit facilities have been short ardgeared essentially to the short-term credit requirements of the large

co1Wuerc1al'i producers arilu plaULal- ns1O jJrVcUL.Eir eUpoUl-. U1ropsC. iiTe soucesof medium and long term credit initiated or sponsored by the Government,Vhilte thtuy have incrsd.OU, haVe bleien clJJ UU totid.sfy uIorLy a. por.LtUIi of. theu

demand for rural credit.

177. Over the years the Government has attempted to establish a creditsystem especially suited to the small. farmerst requirements. rIost suchattempts have failed as a result of mismanagement, lack of trained person-nel and insufficient capital as well as the considerable difficultiesinherent in the distribution of credit to small farmers. The rural banks,however, have been an outstanding suc:cess. Rural banks are private bankssupported by the Government and opera.ted under the supervision of thecentral bank. They have succeeded in mobilizing a sizable volume ofrural capital which otherwise would have been diverted from agriculture.

18. The Department of Rural Banks of the Central Bank makes an annualfield exantination of rural banks by specially trained examiners and specialinvestigations are made in case of irregularities. Rural banks must alsofurnish periodic information on their operations and financial positionto the Department of Rural Banks.

19. As of May 31, 1965, the Department of Rural Banks had a staffof 388, half of whom are examiners. There are 24 agricultural techniciansattached to the Department. An additional twenty-one are now being trainedat the College of Agriculture of the University of the Philippines.

20. The rural banking system includes about 300 rural banks. Atpresent it, is the most convenient and accessible source of short term creditto commerc:ial farmers farming less than 50 hectares of land. During thetwelve verxs of operations ending Dec-ember 31, 196L, the system has grantedabout 1.6 million short term loans amounting to over Y900 million (US$230million). Of this. 77 ner cent went to small farmers and the balance tovarious categories of rural people, artisans, small industrialists and mer-

chants. r!m-rentiy-. loans to farmers number about 303;.000 and amount toabout V201 million out of total loan<s of about 354,000 loans amounting toabout V2)(; milliorn (Ust63 million). T he rural banking system, however,has hardly entered the field of medium and long term credit. Such opera-tiors were startP.d in 1963 but as of the end of 196h onlv eleven banks hadextended a total cif about 400 medium and long terms loans amounting toabout+. I. million nTT.II1L. 0T MajorA obstacMles harv been the shortager of'

suitable financial resources, mediua and long term interest rates (9 percent) l owI 4U,- sh thar .rt - (12 per cent ) and rel-t'.nce of *lra lbanks to enter a new field of credit involving more risks and difficultiesL4han shIor4t 4erm, 4--Jn. Th . s- -rSdiwm a l t t rate

to 1.2 per cent together with increased technical assistance and guidanc:efromt ueu lepar',merit of -± I-Ral Bar -s w-:'l go a& way in facilitatingrural bankst entry in the field of agricultural development lending.

III. THE PROJECT

A. Description

21. The project is an agricultural credit operation designed to pro-vide medium and lorLg term credit to farmers to purchase farm machinery andto develop small private irrigation systems. The project would cost aboutUS$ 8.3 million andL an IBRD loan of U'S$ 5 million has been requested.

22. T'he Central Bank would be the Borrower. The proceeds of the loanwould be used to provide advances for medium and long term loans to farmersmade by selected rural banks for approved purposes. Lending would berestricted to farmErs cultivating not more than 5O hectares and in a fewexceptional. cases to farmers cooperativese Farmers and individual contrac-tors nirreritlv und(-rtak; ng, eiutom work for landi nrpnaration woni i alsno hbeligible.

23. The farm machinery to be acquired with loans would be mostly forIn prl pcErion - nl plouhi"" ng ,I +i vir +.a ,ryli hn%rj- vn, I ntmlee I ingc andrl ri +.dith-

ing and would comprise both hand and wheel tractors and attachments. Farm;pl ement-s for -p-a.ing -mowi , 1-ar v.stir.gI, sryin A and dt nr.all

farm equipment for various agricultural producers would also be eligibleP -o 4-U M._i_. _- -1F __4 tl 4 v _ rA_n _ 4..LL L ±.L11 LA....L16 -A.LUt:J. U11t± P±1UJtGU t 1LxU X A1Ci.L1% U UtJJ. LLV LjUJt;I1U V'. ' V.LVr.te

irri,-ation would irLvolve mostly low li-ft pumping equipment, motors andspare partZs, eqquipmLUenit of wells, cUQ15Uructiu1l of canals and land leve±itng.While the actual composition of lending cannot be accurately determined inadvance, it is expected thatj about 60 per cent oI projectu costs -would befor irrigation works and the balance for agricultural machinery and implements

24. tinder single cropping conditions wheel tractors would be financedonly where the farmed area is 40 hectares or more. Under doubile croppingor where outside custom work is undertaken, this area might be reduced toabout 25 hectares. Under single cropping, hand tractors would be financedfor farms of about 8 hectares. This size would be reduced to 5 hectares orless under double cropping. These limits of minimum farm size as criteriafor financing of mechanization are based on the economics of tractor use.

25. Evidence of the demand for finance of the type proposed wasestablishedL by the survey mentioned in paragraph 15. In addition, therural bankers claim they have more loan applications for such purposesthan they can finance. Four hundred thousand farms ranging from 5 to 50hectares in size are clients or potential clients of rural banks and offerpotential for economic mechanization and irrigation. Farm machinery dealers

advise that; they cannot meet the demand for farm machinery on credit andtha-t the tight credit conditions prevailing over recent years have limitedsuch sales.

26. The size of the IBRD loan is much less than the estimatedfinancing requirements of the agricultural sector for investments in farmmachinery and private irrigation. In requesting a loan of US$ 5 millionthe Central. Bank has considered that the limited experience of rural banks in

medium ancl long term credit and their need for guidance in this field isa l,L,iting factor to a larger lending progr.-tArL Another factUor pointing tUo

the desirability of a relatively small scale start with the program is theneec of mizany siai-]l farm-ers for technLcal assistance to utilize farm machin-er7. and develop irTigated cultivation on a sound basis.

B. Loan Administration

27. The Central Bank would be responsible for administering the IBRDloan and for the direction and supervision of all operations under theproject. It has the confidence of both the Government and rural banks,Although it has restricted its operations to the rediscounting of shortterm loans made by rural banks and has no experience in investment loans,it possesses a staff capable of both initiating and expanding suchoperations. It also has considerable experience in dealing with and super-vising rural banks, Two departments of the Central Bank would be involvedin the administration of the IBRD loan and the implementation of the pro-gram: the Department of Rural Banks and the Department of Loans and Credit.Assurances have been obtained that the Central Bank will expand its techni-cal agricultural staff to handle the increased volume of medium and longterm loans under the project.

28. The Department of Rural Banks would review loan applicationssubrnitted by the Rlural Banks, from the technical, financial and economicviewpoint and prepare in each case a summary evaluation report and recom-mendations. It would provide training and guidance and farm advisoryservices for rural. banks and eventuaLly farmers. It would be responsiblefor the general sulpervision of all operations of rural banks under theproject. The Department of Rural Banks is adequately staffed with aboutliOO nersonnel as at Mav 31; 1965. These intlude 2ar airhulturists fortechnical assistance to rural banks, who will be stationed in the fieldsoAldrl-iti nna-1 rrii-rtiuIrnI t-nia nre noi b tninwi n t. atic~ h nGllge

of Agriculture of the University of the Philippines.

29. The Department of Loans and Credit would be responsible for thebanking aspents o- the lending operations and for furnishing informn+ionon the credit records of rural banks.

30. A Special Loan Committee would be established composed of theAdirec-tors of 4 4he above-,.er.tior.e dearr.nt rf 4-Cnta 17al s"t~LL A .~'.L iU JJ L V.'3 '.LJ V JIL 1± k~L'JL U 'ACJC.L ILCuILLuo 'J.~ Z ~L WZ~J t J.JO..LU 4. uf

the Deputy Governor as Chairman. The commrittee would make loandec:isions n thle bsisDL oJ.L applt c Jion OdU JJUJ.pUporin docuIILts and

the project evaluation report and recommendation of the Department ofn tnlVRJ.K D.±±k .

31. Supporting services would be provided in accordance with the RuralBanks Act under which appropriate agencies of the Government, in cooperationwith the rural banks. are reouired to Drovide farmers with advice on farmmanagement and proper use of credit. When necessary, the Central Bank wouldcall on the assistance of the field agents of the Commission on AgriculturalProductivity, the Bureaus of Soils and of Plant Industry, the IrrigationS_rsvnp Unit, and the: Agriculturnl Credit Admini5tration.

32 Te-)nq ton In finnpric undpr the nrn iAct wcnfl i be thnos made onlrby rural banks authorized by the Central Bank upon recommendation of the

nepar-tment of RUrl BRnnks- Fnctors which woulld he taken into considerationin the selection of participant rural banks would include 1) character,capac.ity and integrity of officers, 2) the past performance of the ruralbank regarding the soundness of its investments and its compliance with thelawTUT and regu1ations and generally accepted banklng practice, 3) the sound-ness of its financi.al position as based on the liquidity position, soundnessof the loan portfolio, adequacy of equity and profitability. To be eli giblefor participation in the project, the Central Bank requires that rural bankssho-d have been in op ion for at 1-st -tw yeas and sould not ha.-been denied rediscounting facilities with the Central Bank wlithin the past

year because ofA theULC abok) VeIIU-n,nLtioneuId factJors. L t wase ±lmaU t about 80

rural banks located in areas of good development potential may qualify withinuite period of tU.ie programL

C. Lending Policies & Procedures

33. Applications for loans would be filed by the farmer with theparticipating rural bank nearest the project to be financed. The applica-tion would give details of the applicant's farm and its operation, purposeof the loan and collateral security cffered. Acceptable collateral wouldinclude a first mortgage on unencumbered immovable titled property in whichcase the loan would. not exceed 70 per cent of the average appraised marketvalue or a chattel mortgage or pledge of movable property in which case theloan would not exceed 50 per cent of the appraised current market value.

34. I'he rural. bank would process loan applications received, inspectcollateral offered as security, evaluate the actual need and prospect forthe intended investment, paying capacity and character of applicant, ancarrangements for carrying out any civil works. It would also ascertainproposed machinery suppliers' warranty on training, servicing and spareparts. It would submit the applicat:Lon, together with pertinent loandocuments, duly approved by proper authorities of the rural bank to theCentral Bank.

35. T'hese submissions would be evaluated bv the Department of RuralBanksof the Central. Bank and considered by the Special Loan Committeereferred to in naragranh 30. If anproved. the Central Bank would lend 60

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per cent of the amount of investment to the sponsoring rural bank for reLerdn-ing to the applicant. The rural bank from its own resources would financea minimum of 10 per cent of the cost of the project and the farmer wouldfinance the balance. The rural bank would disburse direct to the supplierof the machinery being purchased by the loan or, for civil works costs,directly to the contractor or to the farmer after satisfying itself thatthe borrower had contributed his share of the cost.

36. Loans advanced by the Central Bank would be at an interest rateone p(er cent above the rate paid on the IBRD Loan. They would be repayableto the Central Bank in accordance with the amortization schedule of theirrelending. The rural banks would assume the commercial credit risks oftheir loans. Deta:iled information on the rural banks is given in Annexeos5 to 13.

37. The term of repayment of loans made by rural banks under the pro-ject would vary according to the goods to be acquired, but would averageabout five years. Amortization term for loans for small implements wouLdbe up to 3 years, for machinery up to 7 years and for irrigation equipmeitup to 10 years, inc:Luding a two year grace period. Repayments would be byannual installments in single crop districts and semi-annual installments indouble crop districts. On the basis of a 5.5 per cent IBRD lending rate, a1 per cent mark up bY the Central Bank and a 12 per cent relending rate tothe ultimate borrower, the rural banks would have a margin of 5.5 per centfor exnenses and nrofit. In view of the sml1 scale and risks of ruralbanks operations, t,ne proposed spread is justified. There would be noabsolute- ceiling on indi vidinal loans-

D. Finance

38. The program cost and the proposed source of finance may be roughlyestimated as follois:

So-urce of FinanCe Totli In- Percentagevestment

(US$ million)

Farmers 2.5 30

Rural lbanks 0.8 10

IBRD 5.0 6o

8.3 100

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39. Although rural banks may require farmers to put up 30 per centof the cost of the investment and provide only 10 percent of their own re-sources, they can Ealso finance a part of the farmerst share if the farmerhas sufficient security. In any case, the rural banks and farmers to-gether would find it difficult to out up more than 40 percent. The amountwhich can be financed through the Central Bank out of proceeds of the IBBDloan would be limited to 60 per cent of the cost of the project.

40. The term of the IBRD loan would be for 12 years, including athree-year grace period. This would provide flexibility and enable theCentral Bank to relend part of the funds not required for servicing theIBRD loan too the rural banks for agricultural development loans. Theforeign exc hange component is estimated at about US$3.3 million, or about70 per cent of the IBRD contribution. This percentage refers only to theoriginal lending of the IJS$5.0 million loan. As repayments are relent bythe Central Bank, new projects would be financed involving additional out-lays in foreign exchange. Thus, the total foreign exchange outlaysfinanced over the life of the loan may well exceed US$5.0 million.

E. Disbursements

41. The loan would be disbursed for expenditures incurred for approvedloans under the project within two years of the date of the loan. The IBRDwould disburse amounts equal to disbursements made by the Central Bank torural banks for loans to farmers for the purposes eligible under the program.Actual invoices supporting the statements of expenditures by farmers woLldbe retained on file at the Central Bank and would be available for inspectionb;y project supervision missions.

F. Procurements

42. (redit would be made available for approved purchases by farmersthrough normal trade channels. A nurmber of well-known international farmmachinery manufacturers are represented by distributors in the Philippines.The larger firms have reasonable spare parts and servicing facilites, butsome of the small distributors are deficient in these services as a con-senuence of their low volume of business. Two of the larger suppliersconduct training courses for operators.

43. Imports of farm machinery are subject to a 20 per cent importduty (US imnorts are subiect to a nreferential rate of 18 ner cent) and.a 1.7 per cent special tax based on CIF value. These, with the additionof wharf hnndrling charges. reult in a TI1S1OO GTF value hbGnming a landedcost of US$130. A sales tax of 7 per cent is payable on landed cost andri ntorn mar'k 11p amcnnt. toA aproxiinrtp n 25 Inper nt.

l. The ultimate borrowers of the IBPn loa-n wouild be free to selec.ttheir own choice of make, provided the spare part and servicing facilitieso f the di st ributor are sati sfact;ory. As a gesture of t hei r support of the

- .1 -

proposed project, the Agricultural Machinery Dealers Association has agreedto negotiate an agreement with the Rural Banks Association to provide thatthe services of the machinery suppliers would be made available to ruralbanks for the reconditioning and resale of foreclosed machinery.

IV. BENEFITS AND JUSTIFICATION

5. 1 l'l bnfits fo this pro,et ca,nnot be accu ely asn

since the actual mix of capital investments which will be made under theloarn cannot be 4 determined in advrance. Morever, actual beneflts c l d var

considerably, depending on the capacity of the farmer and the productiveefficiency of the particular farm. 'owever, considerable savings in pro-duction costs per unit, increased prof'itable utilization of land, higherJ.Le-LUU J pIUUUUV ., V.Y alIU gr-d t:JLI- pJL U Uagains L ,11 tct±L IuU-u L, can ueexpected. Reliable studies carried out by the University of the Philippinesand the Bureau of Agricultural EconomIics Survey indicate that the rates ofreturn on f'armers' investment have been of the order of 30 per cent forp-unipar ng irllgation and 20 per cent foI tractors.

We. raradoxically ior a country wnere over 60 per cent oI the popula-tion is engaged in agricultural pursui-ts, the Philipppines is not even self-sufficient in its staple foodstuff - rice. Tne degree oI dependence onirnports of livestock products is even greater, nearly US$35 million in 1963.Since current yields are low in relation to world standards and the areaof additional cultivable land is limited, increased output will dependlargely on the improvement of production levels of land now being farmed.Research and demonstration have shown that this is both teclnically andeconomically feasible by the adoption of more modern farm techniques and.the extension of irrigation facilities.

47. Both supplementary and second crop irrigation are extremelyprofitable. Operation and maintenance costs for supplementary irrigationon a typicalfarm are estimated at about US$9 (pesos 35) per hectare ascompared to an average increase in production of rice valued at currentfarm prices at about US$47.50 (pesos 190). Operation and maintenance costsunder full irrigation range from US$20) (pesos 80) to US$35 (pesos 140) ascompared tc) increased rice output estimated at about US$135 (pesos 54Lo).The net profit may average US$80 per hectare, as against an investment costper hectare of about US$200.

48. 'he higher cropping intensities possible with irrigation cannotbe fully realized without mechanization which is required for land clearing,levelling and better and more timely land preparation. Despite under-employment in rural. areas. seasonal labor shortages currently exist and canbe expectecl to increase as farmed areas and cropping intensities areincreased. Mechanization wrill be required to meet these peak labor re-quirements. Moreover, the cost of land preparation by tractors or tillersis cheaper than by animal-drawn equipment, because of the high costs ofhired labor. A recent study of the (College of Agriculture of the Universityof the Phil.ippines estimates the cost of land preparation as follows:

- 12 -

Large Tractor US$140. per hectare

Hand Tractor 18.5 "

Buffalo 27.8 i t

Custom operators are currently doing soil preparation operations at ratesranging from US$15 to 17.5 per hectare under very profitable conditions.

V. CONCLUSIONS AND RECOMEENDATIONS

h9. There is an urgent need for increasing the supply of medium andlong term agricultural credit, particularly for financing small privateirrigation development and purchase of farm machinery.

50. The rural banks, because of their wide geographical coverage,close contact with their borrowers, access to technical assistance forappraisal and sunervision of loans and exnerience in dealing with farmers.are a suitable channel for making loans to end-users under the project.The Denartment of Rural Banks of the Central Bank is exnerienced in thesupervision of rural banks operations and has the competence to overseethe nroner use of the TBRTn loan=

51= The _ronei't is suitable for an IBRn loan of US$5 million to theCentral Bank of the Philippines, repayable in 12 years, including ath-ree-year grace nperiordl

October 25, 1965

A7nTr1%r I

NUMBER OF FARMS IN THE PHILIPPINES, 1960 A

Size of Farms(Hectares) Number Percentage

Less than 1.0 24Y9,773 11.5

1.0 - 5.o 1,506,459 69.5

5.0 - 10.0 289,730 13.4

10.0 - 50.0 116,997 5.4

100.0 and above 2,819 0.1

2.,165,778 100.0

1/ SOURCE: 1960 Agriculture Census of the Philippines.

ANNEX 2

AGRICULTURAL LAND UTILIZATION AND PRODUCTION

IN THE PHILIPPINES (1962-1963) -

C R 0 P S HECTARAGE PRODUCTIONQuantity va-Lue

1000 Has. 1uuu lvrv P1000

Food Crops

Paddy 3,161.3 3,967.0 948,830Corn 1,949.5 1,272.8 188,402Fruits and Nuts (except

citrus) 366.0 1,005.6 129,h19Citrus 29.1 62.1 15,413Root Crops 264.4 1,360.4 121,077Vegetables (except orions

and potatoes) h7.7 151.9 39,313Onion h.9 15.2 5,137Irish Potato 2.5 15.1 5,933Beans and Peas 68.8 31.3 16,365Coffee 42.0 32.9 47,453Cacao 9.7 3.4 9,908Peanuts 19.4 11.1 4,483All other food crops 11.6 45.1 8,196

T o t a 1 5,976.9 7,973.9 1,539,929

Commercial Crops

Coconut 1,392.3 1,555.6 587,081Sugarcane (centrifuga:L

and .muscovado) 258.8 2,030.6 473,138Abaca 181.9 127.8 61,403Tobacco (native and

Virg:inia) 971h 67.6 63j246Ramie 3.2 5.4 3,223Rubbhr 18.2 5 2Maguey 2.9 2.4 556Kapok 296 1.2 LooCotton 0.1 0.1 15

T o t a 1 1,957.4 3,795.9 1,194,877

TOTAL - PHILIPPINES 113 1 69.8

:L/ Bureau of Agricultural Economics.

AMPT1~Y 3A

FAPLI ANTD cMM2PWPOT:- SVIT(UCES

1. The Department of Agriculture and Natural Resources includesthe -reauof Sols, lant, ILnduks.ry, An4-l IuT.A-4- A-gr4c 'tura

Economics, Lands, Forestry and Mines in addition to the Fisheries Com-_ms __:o a the _eo__est alt _ A _:init _ ration _ t -4 __ _J _ _ -

IILLO;J.LI IU U IIU aV,L 1'U Lt.U1; nu a.ev; t::<;ssas'|1 .&-VJt.LUO slt d ;O > BC2 1::>dUIs X 11

istrative supervision over the Abaca Corporation, Abaca DevelopmentBoard., Coconlut and Tobacco Ad'mi 'istrations, and the Sugar insti-t -e.

2. Thle Bureaul of Plant Industry operates research farms through-out the country where it carries out varietal trials and experiments anddemonstrations in farming techniques and undertakes plant breeding todevelop improved varieties. It conducts certified seed schemes coveringrice cnd corn under which it supervises the production of seed producedfrom parent materia:L supplied by it, purchases the production from thegrower, and distributes it at subsidized prices to commercial growers.The Bureau is also responsible for demonstrating the use of pesticidesand insecticides and undertakes spraying and dusting of crops for farmers.

3. The Bureaui of Soils carries out soil surveys and to date hascovered 49 provinces on a reconnaissance basis. It provides a soil test--ing service for farmers and recommends appropriate fertilizer mixtures.It is currently cooperating in a UN Special Fund Soil Fertility andResearch Project under which field trials are being laid down to deter-mine optimum fertilization of different crops on the various soil types.Additionally soil conservation demonstration projects are being carriedout and a soil conservation advisory service is provided farmers by theBureau.

4. The Bureau of Animal Industry in addition to providing animaladvisory services to farmers, operates stock farms where experiments onbreeds, crossbreeding, feeding, pasture development and animal husbandrytechniques are carried out. Clinical veterinary services are given sur-rounding farmers from the stock farms. The Bureau imports livestock andsells the progeny bred on its farms to commercial stock farmers. It isnow commencing artificial insemination services at selected centers. Itis currently establishing a dairy farm in the Sorsogon Province where inaddition to producing and processing the milk produced on its own farm,it wi'll serve as a milk collection center for nearbv commercial farms.The Bureau is co-manager of the UN Special Fund Dairy Training and Re-search Institute Projectat Los Banos and additionally cooperates in ex-perimental work with the Animal Industry Department of the University ofthe Philipnines College of Aericulture.

The Agricnultural Productivitv Commission is the former Bureauof Agricultural Extension which was reorganized and renamed in 1964 under

Page 2

the Land Reform Code. It has a wide c overage working throughout the pro-.t4 nces f -rotm nr-rh Offics -in ec±nuh r- egiorn TTn nAM+Arnn +to nrovid-ing

general advisory services to farmers on irnproved farm management practices,the Commiss on responsible for^ pr .o , fTa .. rwco i t v-

ates demonstration plots on farms featuring improved cultivation, planting,c-re of crv, an.d ha.vest4ng tech ,iques ed coerates wi+h. . h. Agricul+ura

Credit Administration in determining and providing the government suppliedcredAit+ ------irer.e of s .,. 1

farm-.er. The Co.,lss i-n was the- c---rdin+4v

authority for the recent crash rice production program under which the com-bine resour-ces of t;he Bureaus of Plar.at It-dusty ar.U io.LL, U1th t8A ±LLuLtdt±Al

Credit Administration and the Commission were concentrated to promote in--creasedu rice productin during thle ury seaUson. Tlhe CUMMiLs;ibOII L nLow p-lEac-ing emphasis on its activities under the Land Reform program but is concur-re.uvly pvovLUii1g advisory services Lo farmers outside those areas to theextent of its available resources. Many competent agriculturalists are tobe found in Commission's ranks but limitation oI funds severely restrictthe effectiveness of the Commission's activities.

ANNEX 4

IMFORTATION OF SELECTED FARl.I .ACHINERY, by TYPE, 1959-1963

_ 1 5 9 _ 1 19 6 0 ___ 1 19 1 1962 1 1 9 6 3lQuantity Value IQuantity!I Value I Quantityl Value lQiantityl Value !Qiantity! V5 ue

__.______ l_'No~~____ ''PesosL 0F' Pesios)! ) (.l(-OB Pesos)- (oj) l FOS Pesos) !(o I 'FOB PesosL

Aqriculture machinery& aPpiiZI_. _j , sf-aeL-

soil: Plows, cultiva-tors & harrows 2,668 350,434 346 208,935 3,586 405,077 3,678 1,C38,219 7,717 2,528,916

Plow, cultivator andharrovs parts - 154,738 - 149,0)85 - 190,323 - 384,204 - 770,449

Tractors, wheel t.yoe 572 2,128,776 297 2,290,274 102 L,168,716 262 2,371,788 918 7,904,961

Tractors crawler type 118 ,ao4, 294 178 3,308,786 147 2,339,575 205 7,305,731 1,137 53,327,0554

Tractor parts anctaccessories - 5,489,241 - 8,083,629 - 9,876,259 - 16,163,025 - 21,592.632

Cultivating machinery& equipment, n.e.s. - 45,943 - 96,804 - 255,995 - U-71,2C0 - 761,428

Sub-Total 10,173,426 14,137,513 14,235,945 28,434,167 86,885,440

AQrcultura1 machinerv ani

apoji_arj;es for ha Llvesting,threshinqg &sortinq:

Rice threshers 170 7,758 18 54,830 53 30,312 14 5,354 52. 11,133

Rice hullers & cleaners 7 3,969 7 15,B92 2 1,156 3 85,470 4 4,124

Rice htuller g cleanerparts - 359,120 - 52,854 . 83,224 - .12,296 - 63,L76

Mowiers (including lavwnmowers) 16 13,651 49 48,392 1 2 25,822 56 43,672 45 40,178

Io'.:er narts - .17,876 - 14,232 - 45,163 - :30,044 - 35,442

Agricultural combine 1 12,945

Agricultural combine rarts - 15, 5,43

Other machir.e:rvo hafrst-ing t4resh.nns ortq - 199,140 - 584, 357 -- 91,373 - 658,306 105 250,080

Sub-Total 60'1 ,14 770, 57 277,050 8.3,142 432,521

GPAi;! TOIAL 10,774,940 14,908,070 14,512,995 29,629,309 87,318,'061

Source: Foreir,n Trade Statistics of the Philippirnes, B3ureau of the Census and Statistics, Manila.

a .n\l W-Y ':

2J4I U.LJA.1 'JX ±LlJ. L LIU.". LJJ.

RURAL CREDIT PROJECT

TheC LLUfdI n naleit-i g y E iem

.1.. Thie establ±risnment, organizau.tion WiU U ptrato.LU Uo thiA RuraIL DdaLUz

(R.B.) are governed by Republic Act No. 720 of 1952 and regulations setforth by the Monetary Board of the Central Bank of the rnilippines.

2. Rural Banks are private commercial country banks intended to pro-mote and expand the rural economy and to encourage cooperatives mainlythrough extension of credit facilities at moderate cost. The law and re-gulations restrict their credit activities to loans to rural people ofmodest means and to cooperatives among the same people. These have notusually acce!ss to ccmmercial banks. The law emphasizes that in the grant-ing of loans, rural banks should give preference to the applications offarmers whose cash requirements are small.

3. The Rural Banks Act was enacted after a long period of failuresof Government operated or sponsored credit systems to provide rural peopleand especially small farmers with adequate credit facilities and to operateunder sound financial conditions. It stimulates private initiative andmobilization of private capital through various incentives. Management isentirely left in the hands of private investors despite extended Govern-ment assistance. In exchange for Government assistance, operations of theRural Banks must be made in conformity with the law and the directions ofthe Monetary Board of the Central Bank. In addition, Rural Banks are underthe strict supervision of the Government through the Central Bank.

h. Incentives given by the Government to stimulate establishmentand facilitate operations consist of:

a. subscription by the Government of preferred non-voting shares equivalent to the paid in capitalof private shareholders:

b. exemption of rural banks with net assets not ex-ceeding P1 million (US$256,000) excluding governmentcounterpart from the navvment of taxes. public feesand charges;

c. exemption from sharing in the cost of maintain-ing the- Department of Sunpervisinn nnd Eaminationof the Central Bank;

Atr1m%t'V to

Page 2

d. rediscounting of eligible papers at preferen-tial rates which range at present from i of1 percent to 2< percent;_/

e. technical assistance and training facilitiesIfor t.ueE Iuuval vnwKrs anu eIjpIoytees, farm ad-visory services to rural banks and borrowers,supervision.

Statutory Activities

De Rural Banks are empowered to extend loans to small farmers, mer-chants and industralists and cooperatives of these. For the purpose ofthe Rural Bank Act, small farmers are farm owners or tenants oiming orcultivating less than 50 hectares of land under production. Producers oflivestock and poultry are considered to be farmers. Loans or credits canbe made for a wide range of purposes both production and consumption; regu-lations are restrictive regarding amounts and terms of loans. Rural Bankscan extend short-, medium-, and long-term loans. With prior written per-mission of the Monetary Board, Rural Banks may perform various commerciaLbanking functions: (1) accept savings, time, demand and current deposits;(2) act as collection agents and correspondents for other financial insti-tutions; (3) act as trustees over estates or properties of small farmersand merchants. They may also rediscount their eligible agricultural com-mercial and industrial paper up to 80 percent of its value, with any bankunder conditions fixed by the Central Bank.

6. Under special conditions, the Rural Banks can borrow from theDevelopment Bank of the Philippines (DBP) loans repayable in 10 years withinterest at 2 percent. For lack of special funds the DBP has extendedonly very few loans of this type. In case of emergency or when a financialcrisis is imminent the CB may give a loan to any rural bank. In normaltimes it may rediscount against paper evidencing a loan granted by a ruralbank to any of its customers which can be called within 270 days. Underan amendment to RA 720, the Rural Bank Act, rural banks have been empoweredto borrow on a medium- or long-term bEasis for the purpose of implementing anation wide program of agricultural and industrial development funds thatthe Central Bank or any Government financing institution shall borrow fromthe IBRD or other international foreign lending institution. Rural bankscannot perform the following operatiorLs: issuance of letters of credit,buying and selling of foreign exchange, dealinz in gold and silver bullion.

Oraanization - Suoervision

7. Rural banks are organized in the form of stock cornorations. TheMonetary Board authorizes their creation on the basis of investigations andrecommendations m-ade by the Denartment of Rural Banks of the Central Bank.There is no government intervention in the management despite the govern-ment finAnrcial support_

l/ For R.B. which have operated less than 3 years: ½ percentFor R.B. which have operated between 3 and 5 years: lV percentFor R.B. which have operated over 5 years: 2½ percent

AWT\T,TtV E'ANNpI, I

Page 3

8. Supervision of Rural Banks is the responsibility of the Depart--ment ofp Rua BankI o the Cen ral Bank. It u ulL±y uUu1cniLb (f WJ.lua4l

field examination by especially trained examiners and special investiga-tgo zi coLzlecFon;¢ih uestioned transactionis or irglites. EuaL 'LbU.LVI iL11 UUIJect-L .ull tvULui Li~ LU-L1U Li W Ij±u~ J 1 UI.U±L L±Lb* IU

banks must also furnish periodical information on their operations andfinancial position which are cref-ully reviewed by the Department of' RuralBanks.

9. The functions of the Department also include the training bothfor Board members anld staff of rural banks, provision of farm advisoryservices to the banks and borrowers, elaboration and issue of informationalmaterial, preparation and holding of annual workshops for the rural bankers.

10. As of iviay 31, 1965, the staff of the Department of Rural Banksnumbered 388. About half are examiners. The Department is building up astrong agricultural division in order to provide increased technical ser--vices to the rural banks and borroTwers. The number of agricultural tech-nicians attached to the Department is 24 and 21 are under training at thecollege of agriculture of the University of the Philippines. A number oithem will be stationed in the country in order to be readily available forassistance.

Lending Policies and Procedures

11. A summary of terms and conditions of loans is given in Annex 6.

Expansion and Activities of the Rural Banks

12. As of May 31, 1965, about 12 years after the first rural bankwas inauguriated, there were 294 rural banks. They are mainly concentratedin central 'Luzon, bult the rate of expansion over other areas is gainingmomentum.

13. Details oJ1 their lending operations for the 5 years ended Deceri-ber 31, 196h, are g:Lven in Annex 7 (loans made by categories) 8 (loansmade by size and term) and 9 (loans made by security). Loans made aremostly to small farrmers (about 85 percent in number and about 81 percentin amount). Over these years, the increase in agricultural lendingoperations has been almost 3 times in number and 4 tines in armount. Theaverage size of agricultural loans has increased steadily, it remainshowever extremely small P665 (U.S.$166) in 196h). Loans are made formultiple purposes, raostly payment of crop production expenses includingusualLv livine exnenses of the farm families. and to a smaller extentpurchase of draft animals, and payment of expenses related to poultry andfish raisinp. Terms of loans range mostly between 6 months and the sta-tutory limit of one year. About 53 percent of loans in number and over70l nprePnt :in moint-. are seRicredi hy real nronertv mortgaPe, the othermost frequent secur-ity is a chattel mortgage.

AiM1' "

Page 4

14. In 1963 and 1964 the Central Bank authorized eleven rural banksto extend medium-term loans. Only about 400 such loans were made for anamount of about P2.1 million (U.S.$o.6 million). The small expansion ofthe operations is due to a shortgage of adequate resources and their lowprofitability since the rate of interest on medium-term loans must notexceed 9 percent as against 12 percent for short-term loans.

Loan Portfolio and Financial Position

15. Details of the loan portfolio of rural banks as of December 31,1960 to 1964 is given in Annex 10. Overdue loans and loans in litigationare increasing steadily in absolute value, but their percentage of the totalportfolio is relatively steady at 13 percent, a moderate level, consideringthe ty.pe of operations made. The rural banks have incurred few losses re-sulting from defaults; the Central Bank's opinion is that on the whole theloan portfolio of rural banks is very sound.

16. Condensed consolidated balance sheets and profit and loss of therural banks for the last five years to December 31. 1964, are given inAnnexes 11 and 12. Almost all banks are in a sound financial position.As at December 31. 196h, their sources of capital were about as follows:

In Percent

Common stock and reserves 21

Pref erred stock 16

flpnos;ts 28

Redisceount with Central Bank 31

Others

Tot.al 100

17. The profit-b 1+ o +%rf many- rnnr hbn1r< is exceollen't. Thi hw

ever, rests considerably on the Govermnent's support and especially itssubsci-enn

4n+4 ly + nvmprfer.red s,+ockl ony .4.1 *irich no dir,iAer ha,n ,ye+ beeny n".

4

and rediscounts at extremely favorable rates.

18. Annex 13 gives details of costs and returns involved in the ruralbWank operallions. he percentage of income is hign (around 12 per cent);the average cost of funds is very low ranging from 1.11 per cent to1.21 per centi. Administrative and other expenditures account for about7 to 8 per cent of the average portfolio with a marked trend to decrease.These high percentages reflect the small size of loans and their short term.

NNA I'AT-

REPlruBLnIC OFr 'rnLm PHn-"2PILIS

RURAL BANKS

SU1IMIARY TE8.! AND COND.TIONS OF AGRICULTUlRAL LOANS

Short Term Medium-Long Term

Eligible Farmers owning or cultivating as tenant or lessee notBorrowers more than 50 hectares of land dedicated to agricultural

production.

Farm cooperatives.

Purposes of 1. For various farm expenses; 1. Purchase of farmLoans to land improved orFarmers 2. For purchase of seeds, fer- unimproved to be

tilizers, draft animals, im- devoted to agri-plements and equipment, hire cultural produc-of work animals, equipment tion;and implements;

2. Land improvement;3. For purchase of animals,

poultry, fish for breeding 3. Acauisition of ma-purposes, and for minor re- chinery, tools andpairs. construction or im- eqninment neededprovements in the farm or in the farm.fishpond npcessary and nro-per to maintain or increasethe nroductivitv. and topay current taxes and irri-pation fees~.

Amount 1. Production of non-perishable 1. Not more than 50products not more than 30 to percent of the50 percent of the value of amount necessaryproduction of the previous to finance theyear according to the crops. expenditures.

2. Perishable products, live- 2. Absolute limit:stock, poultry, fish not VlO,000.more than 30 percent of thevalue of production of theprevious year.

Page 2

Short Term Medium-Long Term

A"~ln+ q+n" "a+oioc + rn"c nv+.n+ i^r nnArvIlzV^ v J * 6 - atiVn

TContinued) marketing of farm produce:n o I JI it at ILo n;J

I. Stored crops under contlrol4. " VIJ. 'AL p. s4J Wun%± £.kJIU '

of Rural Bank: up to 70percenru 0I ar,k-et, viallue,

Security Chattel mortgages of the crop Chattel mortgage on ma-Requirements for which the loa. has been chinery or land mort-

granted and any additional se- gage and any other ad-curity no requAred by P,ur.nl A-+ina sncuri

Bank.

Period of Max: 1 year. No extension can 1. Medium term forLoans be graL3e. un'less a substntial parcase of .ar

payment is made. No more than machinery, equip-2 extensiorIS can be grlnted. merit and imple-

ments: up to 5years.

2. Land improvementup to 10 years.

3. Purchase of farmland: up to 20years.

Release of By installments in accordance with the farmers' needs.Loans Direct payment to suppliers whenever possible.

Loans to Co- 1. Loans to be reloaned to Same as above.operatives members;

Purposes 2. Purchase of supplies forre-sale to members.

Other Same as for farmers whenever applicable.Conditions

Interest For all loans. Maximum: 12 per- M4aximum: 9 npercentRates cent per annum or 1 percent per per annum.

monit.h. Tnterest mqv be col-lected in advance.

Rep anent Usually in lump sum at the Usually in yearly in-maturity. stallments unless the

borrowrer elects to paymore frequently.

REPUBLIC OF TH.I PHILIPPINES

RURAI BANKS

LOANS IMADE 13Y CATIE3ORIKS

- .960 116 - 9 3--16Number / Amlount Number2a9 1 AmDtintb/ Number I/Amolnt NuNmber Anmount ;/ Numbera/ Amountb,

AgricuLtural loans

Commnodity loans - - 13 91 5

Crop production 72.533 35,455 98,606 L9,841 123,499 68,155 209,938 127,189 274,990 18.3,357

Livestock 10,708 3,572 15,503 5,178 22,c39 8,117 16,014 6,9( 2 11,395 5,670

Poultry 7,246 3,o75 lo,',86 5,150 12,766 7,317 7,112 4,5'17 5,001 .3,728

Fi sIh 3,176 3,057- 4, 618 4,325 5,230 5,337 4,229 4,333 4,011 4,449

Others 8,921 5,670 14, 413 9,74 16,523 12,360 - - 7,759 4,112

Sub-total 102,584 50,829 143, 7?26 73,968 180,C070 101,390 237,297 143,OUJ1 303,156 201,316

CormmerciaLl loans 25,968 16,367 29,95) 20,281 30,553 22,287 33,530C 26,7'78 35,,688 33,761

IndustriaLl loans 3,357 2,707 5,156 4,226 6,532 5,0±82 7,835 7,252 9,220 9,282

Other 6,709 1,312 8 612 1,032 7,757 1,743 7,o05 1,716 5,856 1,485

Sub-total 36,034 20,386 h3,722 26,339 h4,842 29,512 O1L8,iL 35,746 50,76L L4,528

G,rand total. 138,618 71,215 167,14 L_100,307 224,912 130,902 285,711 178,787 353,920 2L5,84L

Notes: a) Number of loansb) Amount of 1 oans i n -honusnrI p--

REPUBLIC OF TME T'HILLIPINES

RURAL BANKS

LOANS MADE BY SIZE

( in thousand pesos nls;othordisc statcd)

Loans Size=(in _ ps)1960 1.961 196S2 1963 1964

up to 100 27,6140 2,115 36,1420 2,8142 3LI,611 2,786 12,9146 3,309 1414,836 3,469

101 to 200 314,772 6,056 146,671 8,127 56,726 9,919 66,679 1.1,677 81,617 114,469

201 to 500 146,659 17,191 60,782 22,3614 76,531 28,232 914,808 35,192 113,583 142,1430

501 t) IOOC) o16,689 13,537 23,252 18,917 29,505 23,919 10,15L4 32,821 52,514O 43,166

1001 tio 2000 ) 20,255 314,912 31,165 514,6147 47,7214 83,934

12,838 27,682 19,580 L1,838

2001 tio 5000 ) 6,2214 21,730 8,089 27,661 11,382 38,1485

Over 5000 560 14,631 714o 6,219 1,060 9,14014 1,570 13,480 2,238 19,891

139,158 71,215 187,14148 100,307. 2214,912 130,902 285,711 178,787 353,9720 2145,81414

LOANS MADE BY T3RM

Withir, 30 398 3147 532 14Q6

iithiri 60 ].,176 726 2,379 997

Withirn 90 3,2014 1,579 3,963 1,967

within 90 L,,778 2,652 6,5,7L 3,370 5,194 3,820 L1,001 2,8148

120 31i,1485 18,1492 140,007 23,38L4 140,617 26,006 148,533 3L1,55C0 55,762 147,666

180 1 6,9142 6,969 214,628 10,3314 214,283 12,6149 28,758 1L6,383 32,939 22,0149

Over 6 m. 82,953 L13.101 115.939 63,219 15L ',18 88;I,27 a014 iC.1 1', 965,2'717,129

139,158 71,211 187,l4148 100,307 22h,5112 130,902 285,711 1'78,787 353,920 245,841

REPUBLIC OF THE PHIIIPPINES

RURAL BANKS

LANS MADE. - CL-ASSBF]ED ALS TC SECURI1M

-- - O1 1'5 i .1952

NurnberJ Amount]2/]mberL/ AviountL/ Number2" Amouriti/ Nuniber2/ Amountl? I Nuumber-I/Amount_.'

Real estage mortgage 77,081 51,631,5 99,623 72,5;80 120,122 93,966 149,400 128,198 18'7,723 177,270

Chattel mortgage -

(a) on growing crops 11,886 3,144 :14,277 4,3118 18,970 6,259 25,567 9,423 38,585 14,655

(b) on rLa-u arailas 9,,33 4 1,197 1t6,784 2, 383 21,721 3,311 35,989 6,032 41,936 7,571

(c) on farm equipment 281 272 2131 2 78 468 457 1,578 1,293 5,102 3,638

(d) on other guarantees 16,662 8,735 20,677 11,603 26,976 :15,612 31,198 20,288 34,295) 24,'585

Bark deposits 1,822 564 2,31 959 2,968 1,370 3,259 1,642 3,1: 1,,8

Ploadge of stored crops 587 736 969 1,C072 1,177 1,3:39 795 1,378 :1,35:2 1,5938

Unsecured 21, 05 4, 936 32,4l36 7,]14 32,510 8,588 37,925 10 5 1,81S 14,639

T'otal 139,158 71,215 187,4h48 ]L00,307 224,912 130,902 285,711 178,787 353,920 245,841,

Notes: a) I!lnber of loansb) Anounts rnf loans in tho>=sani pesos

REPUBLIC_F T'HE PHILIPPINES

LOAN PORTFOLIO OF RURAL BANKS

in p esos

As of December 31…1961iy lt6 1 9- - 196 1_9__3l9--

Agricultural loans 42,1182,383 60,2L4O,487 82,599,861 113,717,85L 158,877,527Commercial loaLns 5,275,412 6,619,353 6,85'0,L39 9,24795.L7 Ll,L55,597Industrial loaLns 1,1415,l16 2,120,061 3,050,131 3,786,539 4,164,887Commodity loans - - 36,671 It9,639Other loans and advances 1485,:364 696,700 821,391 896,194 1,061,461Past-due items 8,'999,899 12,841,077 16,623,710 17,756,3L8 ;25,064,409Loans in litigation 9'2 884 1,068,650 lp324,076 1,7'9,675 2,9106 030

Total loan portfolio 59,601,358 83,586,328 111,306,279 147,213,736 203,529,911Reserve for baLd and doubtful accounts l 094,227 _ p025,208 1,3 6317 168L3 2,035,15

Net loan portfolio 58,'507,131 82,381,120 1C9,937,6l42 1L5,573,923 201,494,757

Detail of past-due items

Agricultural loans 6,961,936 10,078,191It rl % of riet ioortf'olio (16,38) (16,73)

Commercial loans 1,514,335 1,868,163 *- not available -

Industrial loans 295,252 590,948Other loans 228,376 303,775

Total past-duc items 8,999,l399 12,841,077 16,62-3,710 17,75 6,318 25,064,b09

Percentage of tota portfolio of

1) past-due items; 12.6 15.L 1L.9 12.1 12.3

2) past-due items andl loans umderlitigation 13.9 16.7 16.1 13.3 13.7

ANNEX 11

RFErUBIC OF THIr, F,SIL3PP'NES

RtiRAL BANKS

CONSOL3DAT-ID 9ALAINCE SHEWIT AS AT DMC8MBER 31

in thouisand pesos

1958 1959 - 3960 1961 1962 1_963 _ 19_6_-

ASS'ITS

Net loan portfolio 40,537.6 48,149.2 58,507.1 82,381.1 109,937.14 1l5,573-.' 201,6964.8

Cash and due by banks

Cash in hand 1,107.3 1,602.9 1,820.2 2,171.5 2,6h8.0 3,928.6 i,2`L.3Checks and other cash 162.2 342.9 331.5 504.4 1,235.1 889.5 975.5Due from banks 1,882.6 2,239.1 3,571.8 6,005.7 8,392.1 11,213.7 l0,695.3Due from Central Bank 958.8 154 5.1 2,034.4 2,816.5 3,516.8 5,183.9 5,689.1

I,010.9 5,730.0 7,757.9 11,1398.1 15,792.0 21,215.7 21 1.26.2

OTH ER ASSE.'S

Invest.ment bond 2,150.5 2,633.8 3,909.4 4,871.5 6,110.4 8,225.8 8,53L.6Acco:.nts receivable 160.1 256.6 280.6 423.1 Is03.6, 31,3.5 658.9Ehnk premises (niet) 831.6 1,281h.9 1,722.7 2,467.3 3,586.6 L6,375.8 5,76,.8Furniture f'ixtures 780.7 1,193.8 1,579.1 1,520 1,'3'13.2 2,201.5 2, 763.9Transportation equipment - - - 679.0 583.5 803.9 935'.5Stationery and supplies 62.0 88.8 109.6 129.3 139.7 174.1 .5Assets acqLired in settlement

of loans 329.7 599.6 1,L01.3 1,286.8 1,613.2 2,091.7 3,163.0Leasehold lmprovemrants 166.1 13il.0 1610.6 123.1 108.6 147.6 205.1Other assets 190.1 206.6 115.1 132.2 256.8 366.0 863.7

6,49.1 6,397.7 _ 8,913.0 l,10.3 1,o675.6 1,729.9 22,_75.d

Total assets 6'9,597.6 60,276.9 75,183.0 105,289.5 1160,6105.0 105,519.5 265,796.8

LIABFLIT IS

Demand deposits 366 826.8 855.6 1,213.5 1,6915.5 2,397.6 2,210.5Saving deposits 10,686.2 16,673.3 23,(34.2 31,625.6 38,153.7 50,897.A 60,221.1Time deposits 370.2 615.6 788. 996.8 1,325.3 1,696.8 2,308.9Dule to banks 98.6 69.7 300.9 597.2 L,8.3 225.4 219.2Cashier's c-eck 1S.5 35.4 50.6 13.2 3u.2 93.13 89.3Notes payahle (rediscounts) 10,931.9 9,707.2 11,077.9 18,529.5 29,L5'j.3 62,646.5 68,675.1Dividend payable 13(.7 163.7 192.6 257.6 191.6 281.7 126.6Accoulnts payahle 739.1 636.8 736.1 1,132.8 1,13b.9 1,363.6 1,616X.1Loans payable 205 181.5 158.o 106.5 86 50 35Inspection fees 27.0 36.8 53.1 58.9 62.7 81.8 102.2Unseciured initerest and discount 1,500.1 1,762.6 2,272.8 3,282.5 6,b36.9 5,889.6 7,766.0Other liabiLities 12.4 19.5 50.9 53.8 67.5 132.2 136.5

26,862.7 30,722.9 39,568.7 57,863.7 76,812.9 105,558.6 113.783.5

Capital stock common 13,117.6 16,263.9 20,622.9 26,599.3 30,769.7 37 752.5 I,S9,0i.1Capital stock preferr-ed 9,332.5 9,956 10,717.7 16,662.6 23,533.1 28,868.8 36,996.1Surplus 100.3 1,389.9 1,661.8 1,737.3 1,61.8 2,775.7 L.013.LUndivided profits 1,816.7 1,227.5 1,657.2 2,308.4 6-,390.9 5,562.5 7,375.5Reserves for retiremnent of

preferred shares 265.4 486.5 1,048.1 1,681.3 2,672.0 6,367.2 6,8$2.9Reserve f'or dividend!; on

preferred shares 6.3 - - -

Reserve for contingericies 98.1 230.1 306.6 637.1 5136.6 631i.L 831.324,734.9 29,556.0 7 35,6 3 67,625.8 63,592.1 79,961.1 10(2,031.3

Total liabilities 49,597.6 60,276.9 75,183.0 105,289.5 160,605.0 185;519.e 21,r;791,-8

ANi EX 1.2

REPUBLIC OF THE PHILIPPINES

RURAL BANKS

CONSOLIDATED PROFI'T AND IDSS ACCOUNTS

in pesos

1960 1961 1962 1963 196L

INCOME

Interest

Agricultural loans 5,036,883 6,783,623 8,913,078 12,554L126 17,7hh,016Industrial loans 1l5.881. 23L,L65 326,181 L38,07L 563,186Commercial loans 747,826 886,138 1,O014,607 1,169,695 1,462,694Commodit.v loans - - 3.827 215 1-087Other loans and

advances lOj213 117j280 163913 209j62J 168j233

Sub,-Total 6008 610.41tz"-r(}-a~~~~l 6,030,803 8 ~~~021,561.2 606 114 371,75il i2,939,.216

Go.mmiss.ions 17,805 35,728 29,720 Q3,170 85,595Other e:.trnings 531,832 625,067 683,137 855,511 1,156,785

To';ai Inl ome 6,61O,L L 0 8,682, 301 11X13L,6 15,270,L3 21,181, 596

VYPENDIOT'TTP Q

Sal- riscF 2 9,-7 19 , 5 2 71,5L2 3,01 9, 0 1 (91. 1,212,711I ~ )'L,I ' j C L4 ,)) ),L±- - -LI

Travel expenses:L4 I,637) 85,55)UU 713)U8 9L07,5 14,L4

(Offices employees) 87,683 :112,,796 130,286 l57,226 211,791Advertising 39,iLS 78,2 50 62,901 79,759 101,895Stationery, supp:Lies 151,58l L79,640 205,591 257,359 331,546Postage, telegraph, etc. 397,630 4-446 53,872u 2LL4 86,237Light, water 27,578 37,65L4 45,224 62,877 8b,056RD e, nt +-135,8-2 161,102 183,o6L 210,995 2 r4,581Depreciation 352,483 44O,2L9 520,383 67L,032 939,088Org. exp. 23,115 16,561 35,338 30,295 87,58iEmployee welfare exp. 10,080 12,021 15,517 16,85L -Other uper. exp. 762,817 1,166,61 , 351,510 1, 981,282 2,966,602

Sub-TeCl 3,801,039 L ,)11,2 6 5)71L,797 7,' i50,77)A 104,i13,06LInteres t ornL deposit 62b,254 8 7 4, 942 1,014,602 1,477,049 2,02b4,005Interest on borrowed money 37,808 45,857 67,524 98,026 440,392

Tota:l Eypenditures 4,467,131 5,832,045 6,796,923 9,125,809 12,877,b61

Net 'Income 2,143,309 2,850,256 14,337,840 6,ThAL,586 8,30!s135Total Expend:i.tures& Net Inzofne 6,610,4Lo 8,682,301 11,134h763 15,270,435 21,181,596

_~~~~~~~~~~~~~. I

ANii. 13

REPUBLIC OF THE P]HILIPPMS3S

RUHAL BAN-KS

Costs and Returns o.f Lending Operations

1 9 6 o 1 9 6 1 1 9 6 2 1 9 6 3 1 96 h. . . . . . . . . .(amounts in P'OOO) . . . . . . . . . .

Average loan portfolio 54,308.9 71,59:3.8 97,446.2 129,259.9 175,371.8(Percentage) (100) (10() (100) (100) (100)

I N C O M E

Interest 6,030.8 8,021.5 10,421.6 1h,364.2 19,939.2(Percentage) (1.j4 11.21 (O.695 (tl.ll) ( 11.36Other income 579.6 8h0.8 718.2 896.9 1,2L2.4(Percentage) (1.03) (0.92) (o.74) (o.69) 0-71)

Total Income 6,610.4 8,862.3 11,139.8 15,261.1 21,181.6(Percentage) (12.17) (12.12) (11.43) (11.80) (12.07)

E X P E N D I T U R E S

Tnterest, on deposits &borrowed funds 666.1 920.2 1,082.1 1,575.1 2,46h.4

(Perentage __ 22) (1.28) (1-I) (1.22)/Administrative & varied

exnenditures 3,81.0 AM)91t!2 5j71J 8 7-550.- 1),II13.1(Percentagel) o7°) ( 6 (5.86) (5.8h) (5.93)

Total axpenclitures 4,467.1 5,830.4 6,796.9 9,125.9 12,877.5(Percentage) (8.22) (81)) (6.97) (7.06) (0.3h)

Net IncomeI 2,T3.3 2,85:L.9 h3h2.9 _2

(Percentage) (3.95) (398) (h-46) (4)7h) (h.73)