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FOR OFmFCIAL USE ONLY

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Rpert No. 5514-PH

STAFF APPRAISAL REPORT

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

May 10, 1985

Projects Department

East Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank autborization.

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CURRENCY EQUIVALENTS

-US$1.0 =Pesos (P) 20.01.00 , US$0.05

P1 million = US$50,0000(as of September 1984)

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

ha = hectare (2.47 acres)Mt = metric tons (2,204 pounds)t = ton (2,000 pounds)

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ALF - Agricultural Loan FundALFPAG - Agricultural Loan Fund Policy Advisory GroupAMDAC - Agricultural Machinery Manufacturers/Distributors

Accreditation CommitteeAMMDA - Agricultural Machinery Manufacturers and Dealers

AssociationAMTEC - Agricultural Machinery Testing and Evaluation CenterCB - Central BankCBI - Central Bank InstituteDBP - Development Bank of the PhilippinesDLC - Department of Loans and Credit (CB)LBP - Land Bank of the PhilippinesMAF - Ministry of Agriculture and FoodNEDA - National Economic and Development AuthorityNFA - National Food AuthorityPCAC - Presidential Committee on Agricultural CreditPNB - Philippine National BankRPB - Republic Planters BankSES - Supervision and Examination Sector (CB)SRO - Supervisory Reports Office (CB)STD Special Time DepositTBAC - Technical Board for Agricultural CreditUCPB - United Coconut Planters Bank

FOR OMCIAL USE ONLY

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Table of Contents

Page No.

Loan and Project Summary .................. .... ............... iv

I. Background ..... .... *......... ....... *... ...... * * .... I

A. Introduction .... I............................***** *9. 1B. Economic Outlook ......... ....... ***..**.............. IC. The Agricultural Sector ......... ........... . ............ . 2D. World Bank Experience with Past Lending ................... 4

II. Agricultural Credit and Agricultural Credit Institutions ...... 5

A. Financial Sector Background .. *...... . ..... .... *. ..* 5B. Trends in Agricultural Credit ........ ..................... 7C. Agricultural Credit Institutions ... o ............ 8

= Central Bank of the Philippines ......................... 8= Private Commercial Banks .. ............ ..... .. .. . 9= Thrift Banks ....o ... .o.o. ......... ..... ...o*.... 10- Rural Banks o .......s................. . 11

G Government Banks ... ............. . o.. ... a ........ O.... 12D. Problems in Agricultural Credit .... 0 ....................... 13E. Policy and Institutional Reforms ............................ 16

III. The Project ... ... .o ................ . ....... .... .. ...... .**.. 19

A. Project Formulation ....................................... 19B. Project Objectives ....... ....... 19C. Detailed Features ............ 00 *00......... O..*... 20D. Project Cost and Financing . ......... ................. . 24E. Procurement . .............. .......... . .. ............. 26F. Disbursements ***********************.*********........ 28G. Accounts and Audit .... o....................... ............. 29

This report is based on the findings of an appraisal mission in October 1984composed of Messrs. R. Deshpand-e, D.B. Argyle and Ms. S. Kulsrethsiri (Bank)and Messrs. K. Selvavinayagam (FAO/CP) and G. Grasel (Consultant).Ms. P. Brereton provided editorial assistance.

This docnuent has a resictdoditbution and my be ued by rfepint only in the prformaneof.Ilhi offxid duti Its contents qmy not oerwie be dicosed without World Bank autborian.

: | ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .

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Page go.

IV. Project Implementation ..... *****o........................... 29

A. Credit Operations ......................................... 30- Central Bank of the Philippines ......................... 30- Participating Banks .... ...... 31- Lending Procedures and Terms ............................ 32

B. Other Project Components .................... ...... ..... .... 35C. Monitoring and Evaluation .... asse.... ....... .. *. 36

V. Benefits, Justification and Risks ............................. 37

A. Benefits and Justification .......... ................. 37B. Risks ................................................................ 41

VI. Agreements Reached and Recommendation ......................... 41

TABLES IN THE TEXT

2.1 Agricultural Loans Granted, 1979-83 ........................... 82.2 Seasonal Production Loans Granted for Agriculture, 1980-83 .... 143.1 Project Cost Snmmary .......................................... 253.2 Project Financing Plan ............. ........................... 265.1 Benefit-Cost Ratios, 1985-86 Crops ............................* 385.2 Rates of Return on Longer-Term Subloans ........ ............... 39

TABLES

1. Industrial Origin of Domestic Product at 1972 Constant Prices, GrowthRates

2. Gross Value Added in Agriculture, Fishery and Forestry by Subsector at1972 Constant Prices

3. Structure and Growth of the Financial System4. Total Assets of the Financial System5. Number of Financial Institutions, 1980-836. Agricultural Loans Granted, Summary by Institution7. Agricultural Loans Granted and Outstanding, by Institution8. Agricultural Loans Granted and Outstanding, by Commodity9. Commercial Banks: Assets and Liabilities, 1981-8410. Savings and Mortgage Banks: Assets and Liabilities, 1981-8411. Private Development Banks: Assets and Liabilities, 1981-8312. Stock Savings and Loan Associations, 1981-8413. Rural Banking System: Financial Condition, 1979-8314. Central Bank Rediscounting of Agricultural Subloans by Institution,

1983-8415. Estimated Disbursements

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ANNEXES

1. Policy and Institutional Reforms2. Indicative Project Lending Program3. Project Related Training Component4. Qualifying Criteria for Retail Bank Access to Project Funds5. Lending Terms and Conditions6. Project Monitoring and Evaluation7. Financial and Economic Analysis8. Documents and Data Available in the Project File

CHARTS

1. Implementation Schedule2. Flow of Project Funds3. Central Bank Organization4. Central Bank Organization for the Project

MAP

Network of Bank Offices (December 1983) (IBRD18786)

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PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Loan and Project Summary

Borrower: Central Bank of the Philippines

Guarantor: Government of the Philippines

Amount: US$100 million equivalent

Terms: The loan would be for a term of 20 years, including five yearsof grace, at the standard variable interest rate.

RelendingTerms: The Central Bank of the Philippines (CB) would onlend the

equivalent in pesos of US$99.5 million of the loan proceeds toqualified participating banks at market-oriented interest ratesconsistent with criteria agreed with the Bank. The foreignexchange risk would be reflected in CB's rediscount rates.Participating banks would onlend the CB funds blended withtheir own deposit funds at market-oriented interest rates. Theproject departs from previous credit programs in the Philippineswhich generally had below market interest rates and regulatedspreads to the intermediate banks. US$500,000 of the loanproceeds would be used by CB to finance technical assistancefor project-related policy studies, training and institutionaldevelopment.

ProjectDescription: The project would help foster the country's economic recovery

by: providing the agricultural sector with seasonal productionand investment credit which has been in increasingly shortsupply in recent years; establishing an appropriate institu-tional and policy framework to promote development of a finan-cially sound rural credit system; and strengthening thecapacity of rural credit institutions to mobilize rural savingsand improve the efficiency of farm credit operations. Theproject would also help increase the effectiveness of CBpolicies with regard to rural financial market development.Specifically, the project would provide funds for (a) short-and longer-term credit for the agricultural sector, (b) policy-related studies and preparation of a future project, and(c) training of project-related staff and technical assis-tance. The project responds to policy and institutional issuesidentified by the Bank's 1982 Agricultural Credit SectorReview. Project credit is expected to finance a wide range ofinvestments including annual crops; poultry, livestock andfishery development; plantation crops; agroprocessing and post-harvest faciLities; and farm mechanization.

w~~~~~~~~~~~~

The main project risk is that the agriculture sector mayrecover from its present crisis at a slower pace than expecteddespite the introduction of policies aimed at providing incen-tives for private sector investment, causing demand for projectinvestment credit to be less than anticipated. However, acontinuing review of the Government's agricultural policies isplanned under the Bank-assisted Agricultural Sector/InputsProject (Ln. 2469-PH). There is also an institutional riskassociated with CB's channeling of funds through a bankingsystem which has been financially impaired by the recenteconomic crisis. This risk would be addressed by applyingqualifying criteria to select financially viable banks forparticipation in the project, extending CB assistance tostrengthen the capacity of participating banks to undertakeagricultural lending, and establishing lending terms whichwould allow banks to determine spreads on interest rates thatwould be sufficient to cover transaction costs, including therisk of subloan default. Training in project-related skillswould also be provided to the staff of CB and participatingbanks to facilitate project implementation.

Estimatedcost:

Local Foreign Total-- (US$ million)

Seasonal Production Credit 50.0 33.4 83.4Medium- and Long-term Credit 69.2 29.9 99.1Policy Studies 0.2 0.1 0.3Project-related Training andTechnical Assistance 0.1 0.1 0.2

Total Project Cost /a 119.5 63.5 183.0

Financing Plan: /b

IBRD 36.5 63.5 100.0CB 13.7 - 13.7Participating banks 36.5 - 36.5Subborrowers 32.8 - 32.8

Total 119.5 63.5 183.0

/a Including US$16.6 million equivalent in taxes and duties.7i USAID may provide financing for this project at a later stage in parallel

with the Bank loan (para. 3.24).

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Estimated Disbursements:

Bank FY FY86 FY87 FY88 FY89 FY90-- …- US million)---

Annual 46 20 14 16 4Cumulative 46 66 80 96 100

Economic Rate of Return: Not applicable.

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

I. BACKGROUND

A. Introduction

1.01 The Government of the Philippines has requested Bank assistance inhelping the Central Bank of the Philippines (CB) to supplement the bankingsystem's resources for agricultural development in support of Government'sgoals of economic stabilization, recovery and growth. The proposed projecthas therefore been prepared to channel funds through CB to finance theseasonal production and investment credit disbursed by retail banking institu-tions for a wide range of agricultural and agroprocessing activities. Theproject is also intended to help establish an appropriate policy and insti-tutional framework for development of a financially sound rural credit system.The project differs from earlier Bank-assisted rural credit operations whichwere generally commodity- and institution-specific. It would thus facilitatea wider participation of financial intermediaries including commercial,thrift, rural and government banks in agricultural lending; provide greatergeographical and farmer coverage; introduce flexibility in the use of loanproceeds; and increase the leverage by which CB can introduce policy andinstitutional reforms.

B. Economic Outlook

1.02 Recent Economic and Financial Crisis.-1 During the 1970s, thePhilippines achieved substantial progress in economic development, with anannual average growth of 6.2X in real GDP. Since 1980, however, economicg_owth has declined sharply from 5.3Z (GDP) in 1980 to an estimated -4Z in1984. This decline is due to the prolonged international recessionprecipitated by the second oil crisis in 1979, and serious structural problemsin the economy, including excessive reliance on foreign savings for fundingpublic sector expenditures, inadequate domestic resource mobilization,inefficient industrial investments and inflexible exchange rate policies. In1983, the Philippines' balance of payments deficit worsened considerably as aresult of the adverse effects of the world recession exacerbated by domesticpolitical events which induced both capital flight and severe reduction in newcommerciaL lines of credit. In the wake of the resulting economic crisis, thefinancial sector suffered severely, as evidenced by a serious deterioration inboth the Loan portfolios and liquidity of the country's financialinstitutions.

1/ A recent review of the Philippine economy including an agenda foradjustment and growth is included in the World Bank's "Country EconomicMemorandum," Report No. 5258-PH, November 30, 1984.

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1.03 Economic Stabilization and Prospects. Since mid-1983, the Covern-ment has initiated several measures to stabilize the economy by bringing thebalance of payments deficit and money supply to manageable levels. This wasaccompanied in December 1984 by an agreement between Covernment and the Inter-national Monetary Fund (IMF) on a comprehensive program to restore nationaleconomic stability, supported by an IMF Standby Agreement for SDR 615 million.Under the agreed program, Government has undertaken, among other things, toreduce reserve money to an appropriate level in order to reduce inflation,operate a flexible exchange rate policy to contribute to export growth andrestrain imports, carry out tax reforms to increase public revenues, andincrease self-financing by public corporations. By 1987, the economy isexpected to move to a more normal growth path, with much reduced and sustain-able deficits in the balance of payments and national budget, and a moremanageable level of external debt. Real CDP during 1985-87 is thereforeexpected to increase at only a modest average rate of 2X p.a. The agricul-tural sector is expected to provide the main source of economic growth duringthis period (para. 1.10).

C. The Agricultural Sector

1.04 The Philippines' agricultural sector contributes about 22S of CrossDomestic Product, employs 52% of the totaL labor force, and now contributesover a third of the country's export earnings. Sixty-three percent of thetotal population lives in rural areas and of those employed in agriculture(19.5 million), some 161 are landless laborers. Underemployment in the sectoris high at about 60% compared to 25% in the non-agricultural sectors. Theunderemployment combined with low farm productivity has resulted in lowincomes and a high incidence of poverty, and about three fourths of thepoorest 40X 1f Filipino families live in rural areas. Income distribution isalso skewed.-

1.05 Nearly 751 of the Philippines' cultivable area of 8.5 million ha isdevoted to grains, especially rice and corn. Other important crops includecoconut (2.8 million ha) and sugarcane (0.45 million ha). The irrigated area,estimated at 1.2 million ha, is almost entirely planted to rice; rainfed agri-culture, which sustains 601 of the total rural population, is dominated bymixed farming systems where rice, corn and coconut are grown. The averagefarm size is small at about 3.6 ha for all commodities, 2.7 ha for paddy and13.6 ha for sugar. About 851 of the total number of farm holdings (2.35million) are less than 5 ha and about 402 are cultivated by tenant families.

1.06 Sectoral Performance. During the 1970s, agriculture (includingfishery and forestry) witnessed a respectable average growth rate of 4.91 p.a.compared with 6.2Z for the entire economy (Table 1). Rice production made amajor contribution to this growth (Table 2). Rice increases were facilitatedby a large irrigation investment program, adoption of high yielding varieties,

2/ The World Bank, "Aspects of Poverty in the Philippines: A Review andAssessment," Report No. 2984-PH, December 1, 1980; and "Philippines:Agricultural Sector Memorandum," Report No. 4318-PS, May 10, 1983.

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and increased use of fertilizers under the Masagana-99 credit-cum-extensionprogram. During this period, average rice yields rose from less than 2tons/ha to 2.4 tons/ha.

1.07 Agricultural export earnings increased annually by 5Z during the19709, far lower than the 12X p.a. growth in total merchandise export earn-ings. The contribution of agriculture to the total value of exports conse-quently fell from 73Z during 1970-72 to about 5O0 in 1978-80 and to about 35%in 1983.

1.08 Sectoral Issues. Though agriculture reains an important economicactivity, sectoral growth has decelerated since 1980 and actually turned nega-tive (-2.1x) in 1983 due to adverse weather, the lower average world pricesfor agricultural exports due to the international recession, and a gradualcontraction of credit to the agricultural sector. Government's past policiesand institutional arrangements may have, to some extent, prevented the sectorfrom making a greater contribution to the country's balance of payments and inrecent years contributed to the sector's declining growth. By and large,trade policies discriminated against agriculture, pricing and exchange ratepolicies negatively affected agricultural incomes, and the institutionalframework for agricultuj,l policy formulation and implemntation suffered froma lack of coordination.-

1.09 Government Strategy. To respond to the structural issues in agri-culture and the changed macroeconomic context, the Government prepared an"Agenda for Action in AgricuLture, 1984-88," outlining the policy and institu-tional reforms that would be undertaken to accelerate the pace of agriculturaldevelopment and maximize agriculture's contribution to economic recovery. Theunderlying objective of the Agenda is to gradually phase out controls andinterventions that dampen production and investment, and stifle private sectorinitiatives.

1.10 As part of the Lecently approved Bank-assisted Agricultural Sector/Inputs Project (Loan 2469-PH), Government has also undertaken to implement,within the framework of the Agenda, a core program of policy and institutionalreforms, the main thrust of which wouLd be toward: greater liberalization ofdomestic and foreign trade in agricultural products; improved efficiency andequity in production, marketing and consumption of major agricultural cotmodi-ties Like coconut, sugar, and livestock; establishment of a system for sectorinvestment planning; and increased efficiency in the operations of governmentinstitutions. On the !olicy side, progress has been generally good.Government has, by and large, adopted appropriate measures to comply with theAction Program agreed with the Bank. Some of the specific measures alreadyadopted include: the introduction of multi-tiered rice prices and anannouncement that rice price controls would be removed by October 1985; the

3/ A more detailed discussion on structural issues in Philippine agricultureis available in the WorLd Bank's "Agricultural Sector/Inputs Project,"Report No. P3860-PH, July 17, 1984 and the "Country Economic Memorandum"previously cited.

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opening up of the rice, corn and animl feed import and export trade to theprivate sector; the removal of price controls on pork, eggs and poultryproducts; the completion of draft studies on the coconut industry, sugarindustry, irrigation, fertilizer, agricultural credit and the National FoodAuthority; and a reorg nization of the ministries and agencies concerned withagricultural development. Other policy reforms now under consideration withthe Government concern the removal of differential taxes on grain imported bythe National Food Authority and private traders; adoption of a phased programof import tariff reduction for poultry products; and elimination of trade andprice controls on fertilizers. In addition, the Government and the Bank arenow discussing the recommendations of the studies completed under the project,in particular, on the coconut and sugar industries. On the disbursement side,loan availment has been less than anticipated for several reasons* First,delays in loan approval led to a low level of utilization during the 1984agricultural season which was already underway when the loan was finallyapproved. Second, the contractionary policies adopted under the economicstabilization program sharply reduced the demand for agricultural inputs atthe distribution and farm levels because of high interest rates, lack ofproduction credit and higher input prices. Third, exchange rate reformscombined with delays in the Central Bank processing of applications for use ofloan funds, have discouraged private importers from making greater use of theloan. Disbursements are, however, expected to increase rapidly as a result ofongoing commitments, streamlining of Central Bank processing procedures and arelaxation of factors constraining demand. The combined effects of the neweconomic policies being adopted under the stabilization program and of thereforms being implemented under the "Agenda for Action in Agriculture" wouldbe to create an increasingly favorable environment for development during1985-87 and thereafter.

D. World Bank Experience with Past Lending

1.11 Since 1964, the Bank has approved a total of 38 loans and credits(US$1.3 billion) for investments in agriculture, fisheries and raral develop-ment, incLuding 13 projects for irrigation development or rehabilitation and14 for various credit programs. By the end of February 1985, the agriculturalportfolio comprised 20 projects including seven projects in irrigation, six inarea deveLopment, three in agricultural credit, two for support services andone each in fisheries and the import of agricultural inputs. Bank lending foragriculture and rural development in the Philippines has, by and large,reflected the priorities and objectives set forth in the national developmentplans, with emphasis on continued self-sufficiency in rice, crop diversifica-tion, increased rural employment, and poverty alleviation. Experience inimplementing past projects has been somewhat mixed. While production objec-tives have been generally achieved, many projects, especially those for ruraldevelopment and support services, have suffered because of ineffective inter-agency coordination, delays in the provision and release of budgetary fundsand in administrative decision-making, and insufficient monitoring. Morerecently, the emphasis on expansion of the irrigation system, which accountedfor over 50Z of the Bank's past lending, has been diminishing, and a greateremphasis has been placed on rehabilitation of irrigation systems, crop devel-opment, and strengthening of support services.

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1.12 Past Agricultural Credit Projects. Previous agricultural creditoperations (including loans for crops, livestock, fisheries and agroprocess-ing) have been exclusively for medium- and long-term credit. Investmentsfinanced by these projects have been generally pr4uctive, and the completed-projects have shown satisfactory rates of return.- Of the 14 previous creditoperations, the Development Bank of the Philippines (DBP) received eight loanstotalling US$130.4 million. Although these projects emphasized DBP's institu-tional development and financial viability, DBP carried high subloan arrearsin its overall loan portfolio (including subloans not financed by theprojects) which contributed to its recent financial difficulties which havehad an adverse impact on agricultural credit operations in general. Four ofthe past credit projects (Lns. 432, 607, 1010 and 1399) provided some US$76million to CB for onlending through the rural banking system to finance farmmechanization, irrigation equipment and rural enterprises. Performance underthese projects in terms of increased production and rural employment has beensatisfactory. However, the projects were only moderately successful in pro-moting institutionaL development due to financial problems of rural banksarising particuLarly from subloan arrearages under government-sponsored creditprograms.

1.13 Some US$23 million uncommitted under the Third Livestock andFisheries Project (Loan 1894-PH) and the Smallholder Tree Farming Project(Loan 1506-PH), both being implemented by DBP, have been cancelled due toDBP's financial problems. Another ongoing project, the Small Farmer Develop-ment Project (Loan 1646-PH) being implemented by the Land Bank of the Philip-pines (LBP), has experienced institutional problems, including weak fieldoffice organization and subloan arrearages. Loan closing is due in June 1985.

II. AGRICULTURAL CREDIT AND AGRICULTURAL CREDIT INSTITUTIONS

A. Financial Sector Background

2.01 The Philippine financial sector is dominated by the banking systemwhich accounts for 60% of total assets. The sector as a whole has shownremarkable growth in recent years in terms of both resources and number ofoffices (Tables 3-5). As indicated in Table 3, financial assets grew by anaverage 9% p.a. during 1979-83.

2.02 The Philippine banking system is relatively well developed andsophisticated. It has, however, been going through a crisis in recent yearsand is now in the midst of a major transition. Over the last two decadesGovernment made a conscious effort to support and strengthen the system butits approach to this task was eclectic and resulted in excessive special-

4/ See Project Completion Reports for the Second Livestock Project(Ln. 1225-PH), the Second Grain Processing Project (Ln. 1269-PH), theSecond Fisheries Project (Ln. 1270-PH), and the Fourth Rural CreditProject (Ln. 1399-PH). Project Performance Audit Reports are availablefor Loans 1225 and 1270-PH (Report Nos. 4753 and 4222).

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ization and fragmentation of the financial market. Individual banks and bankgroups were legally allowed to lend only for particular types of developmentactivities or to narrowly defined clientele. Such specialization inhibitedefficient financial intermediation and restricted the range of bankingservices available to the population. The banking system's capabilities Lomobilize savings were also generally insufficient relative to the credit needsof the economy due to diverse factors such as interest rate policies and aninadequate bank network. In particular, the system was unable to providesufficient longer-term resources for economic development.

2.03 In response to the unmet credit needs, during the 1970s the CentralBank (CB) expanded upon its traditional function of short-term monetary man-agement and stabilization policies, and assumed a key role in the allocationof financial resources through a variety of special purpose windows, whichinvariably carried concessional, subsidized interest rates. These windowswere intended to stimulate agricultural, industrial and export production.However, access to CB funds was not generally assured, windows could be closedwith shifts in development priorities or monetary policy, and CB has hardlybeen able to provide the banks with a reasonable "lender-of-last-resort"facility on a continuing basis. The proposed project is intended to assist inproviding such a facility for the agricultural sector.

2.04 Following a joint IMF/World Bank review of the financial sector,5-various reforms were introduced in 1980 to increase competition among banksand expand the availability of longer-term credit. Most of the reforms weredirected at reducing the highly syecialized structure of the banking systemand deregulating interest rates.- These reforms, however, had only a limitedimpact because immediately after the reforms were introduced, the bankingsystem was affected by a major crisis of confidence due to the financial.failure of a prominent business house in the country, and before the sectorcould recover from this blow, its operations were badly affected by the recenteconomic crisis (para. 1.02). To date, CB has extended about P 4 billion inemergency loans to about 44 institutions.

2.05 CB's short-term policies in response to the financial crisis aim atreviving and maintaining public confidence and reducing uncertainty in thefinancial system. Through selective financial support to the affected insti-tutions and stricter supervision, CB has largely succeeded in this effort.The financial sector situatior in gradually improving and is expected to reachnormalcy as the effects of the or.-oing recovery program seep throL h theeconomy. CB is also initiating steps toward its longer-term objective ofrationalizing the financial structure and improving efficiency of financialinstitutions through prudent management and supervisory measures. Broadly,its longer-term policies focus on enhancing the effects of the 1980 reforms,

51 The World Bank, "The Philippines, Aspects of the Financial Sector,"Report No. 2546-PH, October 1979, and related background papers.

61 Interest rates on subloans rediscounted with CB are still regulated, butwould be deregulated under the project.

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merging financial institutions to eliminate unsound units, and functionallyand structurally reorganizing two government-owned banks, the PhilippineNational Bank and the Development Bank of the Philippines, which have metserious financial problems.

B. Trends in Agricultural Credit

2.06 Government involvement in the agricultural credit sector parallelsits activities in the overall financial system. During the mid-1970s, theavailability of Government-sponsored, low-cost credit provided through CB tovarious banking intermediaries expanded rapidly and replaced a significantportion of the noninstitutional credit that had formerly dominated the ruralfinancial market. Noninstitutional lenders, including private moneylenders,traders, relatives, landlords, etc., often had a comparative advantage overinstitutional sources, i.e., banks, through the integration of product andcredit markets. They traditionally supplied about 70Z of all short-term,seasonal production credit received by farmers, but they normally did notprovide two important financial services offered by the institutional sector,namely, fobilization of financial savings and the provision of medium- andlong-term credie. Development of the ruraL institutional credit sector wastherefore importanit to provide these services. In addition, a healthycompetition betwe.n institutional and noninstitutional lenders enabled therural community to secure credit on the best possible terms.

2.07 At its peak in the mid-1970s, institutional credit for agricultureprovided mainly under Government-sponsored credit-cum-extension programsaccounted for about 652 of total credit received by farmers. Government'sfirst major intervention in agricultural credit was through the provision ofshort-term production credit under the Masagana-99 program begun in 1973 tobring about self-sufficiency in rice production. Government offered an inte-grated package consisting of inputs, institutional credit to finance therelatively capital-intensive technology, technical advice from governmentextension yaff, and market opportunities through a government price supportmechanism.- In addition, Government prescribed agricultural credit quotasfor all banking institutions and extended subloan guarantees. For medium- andlong-term credit, the Government-owned Development Bank of the Philippines(DBP) financed rural development through credit, either directly or throughprivate development banks which received both equity and loans from DBP. TheGovernment also used rural banks to undertake term-lending for farm machinery,

7/ Under a supervised credit program, a farmer-borrower undertakes to adoptproven farm practices or a package of technology and abide by an approvedfarm plan and budget jointLy prepared by him and an authorized creditsupervisor. A loan is disbursed without collateral against the jointguarantee of a 4-5 member farmer group. In comparison, nonsupervisedcredit for agricultural operations implies that loans are disbursedwithout a farm plan and budget, or mandatory technical guidance andsupervision. Nonsupervised loans are disbursed primarily on the basis ofcollateral security offered, borrowers' creditworthiness, and theapparent viability of the project proposed.

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livestock, fishery development and other activities, with technical assistanceand funding from CB under four Bank-assisted rural credit projects (para.1.12). Since the late 1970s, however, the flow of institutional credit hasbeen uneven, and from 1982 onward it declined sharply due to diverse problemsof the institutions involved in the sector (Table 2.1). Although noninsti-tutional credit replaced bank lending for several years, it too has beenaffected by the country's economic crisis and credit from all sources is nowseverely limited. Since Government's strategy for economic recovery dependsto a large extent on the contribution of the agricultural sector, therehabilit&tion of the rural banking sector will be critical to providing theproduction and investment credit needed to maintain and increase growth inagricultural production, and thereby contribute to the overall economy.

Table 2.1: AGRICULTURAL LOANS GRANTED, 1979-83 /a(P billion at 1978 prices) /b

Farm Production All Activities-ov't Private X increase Gov't Private Z increasebanks banks Total (decrease) banks banks Total (decrease)

1979 3.7 11.9 15.6 25 8.4 30.9 39.3 91980 3.1 14.1 17.2 10 8.2 35.6 43.8 171981 2.7 17.4 20.1 17 8.7 41.9 50.6 161982 3.3 17.2 20.5 2 6.4 38.7 45.1 (9)1983 2.3 15.1 17.4 (16) /c 4.6 38.9 43.5 (6) /c

/a Data are based partly on best estimates of the Technical Board forAgricultural Credit (TBAC) and should be regarded as indicative. Data onagricultural loans granted by agency and commodity are provided inTables 6-8.

/b Current prices deflated by producer price index for agricultural products(1978 = 100).

/c During 1984, the supply of credit declined by a further 60Z in real terms.

C. Agricultural Credit Institutions

2.08 Almost all institutional credit for agriculture is provided by anetwork of private commercial, thrift, rural, and government-owned banks, withresource support from the Central Bank. Tables 6-8 show the amount of agri-cultural lending carried out by the various types of banks and the commoditiessupported.

Central Bank of the Philippines

2.09 Agricultural credit operations of the banking system are guided,regulated and funded by CB. For over a decade, CB has been providing refi-nance for up to 100% of subloans disbursed under supervised and nonsupervised

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credit. During 1965-83, CB provided funds for up to 90% of the rural banks'medium- and long-term Loans extended under the Bank-assisted rural creditprojec.s. CB has also been supplementing DBP's resources for its medium- andlong-term Lendpg in agriculture. In 1982, the Bank's Agricultual CreditSecto- Review -_ noted the institutional and policy deficiencies in agri-cultural credit, including the lack of an effective mechanism to monitor oroversee the lending strategies, performance and financial viability of indi-vidual credit institutions. The review concluded that, among other things,Government should establish an agency or a central mechanism to provide bothfinancial and nonfinancial support to retail lending institutions and tocoordinate their activities. Government agreed with this recommendation and,as a first step, decided that an Agricultural Loan Fund (ALF) should beestablished within CB to finance agricultural investments made by all eligibleretail lending institutions. Through the ALF, CB will strengthen its develop-mental role and will be more effective in influencing overall rural financialmarket development. Establishment of a separate agricultural development bankis not deemed necessary at this stage since a network of commercial, thriftand rural banks, acting as the principal mobilizers of savings, would be ableto provide agricultural finance.

Private Commercial Banks

2.10 The Philippine private commercial banking system comprises 28 domes-tic banks and four branches of foreign banks whi ch operate through 1,904offices spread over all regions of the country.9 Private commercial bankshave the largest share in the total assets of the commercial banking system(55%), followed by the Government-owned Philippine National Bank (PNB) (29%)and foreign banks (16%). Agricultural lending represents only 12% of thebanks' total loan portfolio but accounts for about 65% of total institutionalcredit for farm production and about 80% of all agricultural activitiesincluding processing and marketing (Table 6). By activity, 30% of privatecommercial bank credit to agriculture goes for production, 40Z for processingand 20% for marketing. Over 30% of their lending for agriculture is usuallyfunded by CB. The expansion in their agricultural lending owes much to theGovernment's agricultural credit quota policy (para. 2.07) which required allbanks to earmark at least 25% of incremental loanable funds for agriculture.This policy has, however, been only partially effective because of a provisionwhich allowed the banks to meet the quota by investing in CB securities. Asmuch as 35% of loanable funds intended for agriculture were diverted tosecurities.

2.11 More than 60% of private commercial banks' agricultural loans arefor commercial and export crops and agribusiness activities such as livestock,

8/ The World Bank, "Philippines: Agricultural Credit Sector Review," ReportNo. 4117-PH, May 1983.

9/ Government corporations have acquired a majority interest in sixcommercial banks, but a plan is now being prepared for the corporationsto divest themselves of these interests.

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poultry and fisheries; ten banks 10/ account for 70% of total lending toagriculture. Most active in agricultural lending are the two commoditybanks: the Republic Planters Bank (RPB) for sugar and the United CoconutPlanters Bank (UCPB) for coconut. Both RPB and UCPB, though registered asprivate banks, have strong policy and management linkages with 3overnment andexert an overriding influence over the two industries.

2.12 While the commercial banks' agricultural lending is predominantlyshort-term, in practice they grant short-term loans that are rolled over.They are unable to formally increase medium- and long-term lending for agri-culture be:ause of: the limited availability of longer-term loanable funds;insufficieL.t technical expertise to appraise agricultural projects; and thebanks' insistence on collateral because agricultural lending is a high riskactivity.

2.13 Table 9 shows the financial condition of the commercial bankingsystem up to June 30, 1984. During 1983, the average gross and net margins tototal assets at 4.3% and 1%, respectively, indicated a satisfactory profit-ability, but other financial parameters reflected that the system was underserious liquidity pressure. Commercial banks' past due loans increased from13% in September 1983 to 21% in 1984, at P 34 billion out of a total loanportfolio of P 160 billion (US$8 billion). Eleven commercial banks have pastdues of more than 20% of total outstanding loans. The recent increase in pastdues is attributed to the country's economic crisis.

Thrift Banks

2.14 Thrift banks comprise 8 savings and mortgage banks, 45 privatedevelopment banks, and 83 stock savings and loan associations. The 1980banking reforms abolished the functional distinction among all banks includingthe three types of thrift banks, which are now increasingly competing withother banks for business, including deposit mobilization and lending in ruralareas. The savings and mortgage banks are however currently concentrated inMetro Hanila and do Little lending for agriculture. The private developmentbanks and savings and loan associations have widely dispersed branch networks,with about 360 out of a total of 500 offices outside Metro Manila, but provideonly 2% (P 1.2 billion) of total rural institutional credit for agriculture.

2.15 Savings and loan associations lend for real estate, as well as thepurchase of agricultural machinery, trucks and small-scale enterprises. Pri-vate development banks lend mainly for sugar, coconut, livestock and fisheriesactivities. The private development banks formerly received their longer-termresources from DBP, but due to the financial problems of the latter, they nowhave greater access to CB's rediscounting facilities.

10/ The top ten commercial banks are: RPB, UCPB, Allied Bank, RizalCommercial Banking Corporation, Bank of America, Traders Royal Bank,China Bank, Far East Bank, Bank of the Philippine Islands and Citibank.

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2.16 As of August 1984, past dues as a percentage of the total loanportfolio were relatively small at 7.5X for savings and mortgage banks and 13%for private development banks, but reached 23Z for savings and loan associa-tions. Tables 10-12 show the consolidated financial condition of the thriftbanks.

Rural Banks

2.17 Since 1951, Government has actively encouraged establishment andgrowth of the rural banking system which, at present, comprises 949 banks,including 923 private family-owned banks and 26 cooperative rural banks set upby farmer organizations. Laws which limited the operational jurisdiction of aruraL bank to a municipality and its subloans to smallholders were removed bythe 1980 banking reforms, allowing rural banks to branch out and undertake alltypes of domestic banking operations. The rural banking system has a poten-tial to provide a wide range of banking services to the rural sector becauseof its predominantly private and generally capable management, wide geographi-cal coverage, proximity to rural areas, and accessibility to small farmers andentrepreneurs. Government has assisted rural banks in various ways includ-ing: subscriptions to their equity; discounting at preferential interestrates; access to special government funds; subloan guarantees; tax reliefmeasures and, recently, crop insurance linked with credit. CB is statutorilyresponsible for overseeing rural banking operations.

2.18 Table 13 shows the consolidated financial condition of the ruralbanking system. Borrowings from CB constitute about 47% of the rural banks'total resources which fund the bulk of the supervised and nonsupervisedagricultural credit they extend. Although the rural banking system's totalresources nearly doubled in the past four years, in real terms, the systemgrew by only 5.7% p.a. during 1979-83 (Table 3).

2.19 About 8oz of rural bank loans (P 4.6 billion) are extended toagriculture. Although rural banks provide only about 17% of the total insti-tutionaL credit for farm production (Table 6), because of their proximity torural areas, they provide as much as 50% of the institutional credit for riceand other cereals, largely to smallholders.

2.20 Since 1975, the rural banking system has been continuously underfinancial stress due to sizeable arrearages under government-sponsored super-vised credit programs, particularly for Masagana-99, cattle fattening andfisheries. The accumulated subloan arrearages under these and other programsfunded by CB and Government range between 30-35% of the system's aggregateoutstanding loans. Total past dues have been about 31% (P 1.4 billion) ofoutstanding loans, but increased significantly during the recent economiccrisis to 52% (P 1.9 billion) of outstanding loans. Prior to the crisis,delinquencies were due to a combination of factors including: natural calam-ities such as droughts and typhoons; the low priority given by farmers torepaying government-sponsored loans; poor selection of credit risks; over-financing; and insufficient supervision. The arrearages have resulted in thedisqualification of over 600 rural banks from access to CB rediscountingpending an improvement in their arrears ratio to conform with CB guidelinesand consequently also a large number of farmers from receiving new credit.

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Currently, P 2.4 billion or 55Z of CB's outstanding loans to rural banks arein arrears.

2.21 The rural banks have used various measures to improve their subloancollections, including imposition of penalty charges on past dues, loanrescheduling and restructuring, Legal actions, and write-offs. CB also oper-ates rehabilitation schemes for rural banks affected by arrearages, but themost common form of CB sanction against defaulting banks is the discontinua-tion of access to CB rediscounting privileges if a bank's past due ratioexceeds 25% of outstanding loans. These measures have had some impact onsafeguarding the viability of the rural banking system, but what is lacking isa sound policy framework and political will to upgrade financial intermedia-tion in the rural sector.

2.22 The profitability of individual rural banks varies widely inrelation to business volume, quality of assets and management efficiency. Forthe system as a whole, the percentage of income to total assets declined from1.7% in 1979 to 1% in 1983, while average income to paid-up capital fell from20% to 11% (Table 13), which is below the current inflation rate.

Government Banks

2.23 The three government banks, DBP, PNB, and LBP, have unique struc-tural, financial and operational problems. A task force appointed by theGovernment is currently studying the future role and structure of governmentfinancial intermediaries including PNB and DBP. Depending on CDvernment'sdecision on task force recommendations, CB would take a lead role with Govern-ment in implementing necessary rehabilitation, restructuring and institutionaldevelopment plans for PNB and DBP.

2.24 Development Bank of the Philippines (DBP). DBP was organized tolend primarily medium- and long-term investment credit and, over the years,has developed a strong field organization (5 regional offices and 56 branchesand subbranches), lending policies and procedures, and supervision arrange-ments. Although DBP's major lending activity has been in industry (85%), itgives high priority to agriculture which accounts for 12% of its loan port-folio and more than 60% of the number of subloans. DBP's agricultural lendingsupported a wide range of production activities including cereals, commercialand plantation crops, livestock and poultry, and inland and marine fisheries.However, DBP is currently facing severe problems of liquidity and solvencyresulting from low subloan collections and a large accumulation of nonper-forming assets.

2.25 Philippine National Bank (PNB). As the largest commercial bank inthe Philippines with a network of over 200 domestic branches and about 29Z ofthe total resources of the commercial banking system, PNB has been playing animportant role in financing government-sponsored agricultural credit programs.PNB is also an important lender to the sugar industry. Since 1980, however,PNB's overall agricultural lending, in real terms, has stagnated due toliquidity and institutional problems. Its major problems in agriculturallending include a high level of subloan arrearages, a negative margin onsupervised credit arrears, and excessive dependence on government extension

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staff which led to poor credit appraisal, supervision and collection. PNB'scurrent problems, however, go beyond its agricultural lending. Overall, about401 of PNB's total loan portfolio is reported to be nonperforming or affectedby defaults. A review of all major accounts is currently under way to iden-tify those that can be rehabilitated, and those tlst are no longer viable andcan be foreclosed or written off. In agriculture, PNB is limiting new subloanapprovals to essential crop financing.

2.26 Land Bank of the Philippines (LBP). LBP was established in 1963 tofinafice acquisition of landed estates and their redistribution to tenantfarmers through the Ministry of Agrarian Reform. In 1972, LBP's mandate andauthority were expanded to enable it to finance the Government's land reformprogram and undertake commercial banking activities which generate revenues tooffset a portion of the public sector costs of agrarian reform. LBP'scorporate goals accord a high priority to both expansion of its commercialbanking operations and implementation of integrated credit and extensionprograms to help increase farm productivity and incomes of land reformbeneficiaries. LBP has established a field level organization to undertakethese functions.

2.27 Between 1975 and 1982, LBP's total resources increased from P 2.1billion to P 7.9 billion owing to increased capitalization and accumulatedprofits, issue of bonds, and greater deposit mobilization. Although LBP isheavily dependent on government resources, including deposits by governmentdepartments which average over 80% of its total deposits, it is financiallystable because its operations are geared toward maintaining a highly liquidposition.

2.28 LBP's land reform receivables constitute 42% of its total loanportfolio, the losses on which are offset by profits from commercial banking.LBP's agricultural lending has been relatively small (P 0.7 billion) and isonly about 1Z of total institutional credit for agriculture.

2.29 LBP has been the implementing agency for the Bank-assisted SmallFarmer Development Project (Ln. 1646-PH). To address problems which aroseunder that project, LBP has recently drawn up an instir'ztional developmentplan, including implementation of a subloan collection plan, review of lendingstrategies, improvements in its management information system, and reorgan-ization of its agrarian sector field organization. A proposal to review landreform policies and programs is also under consideration.

D. Problems in Agricultural Credit

2.30 In 1982, the Bank undertook a review of the Philippine agriculturalcredit sector in view of the high arrearages incurred under Bank-assistedcredit projects and Government-financed agricultural cy7dit programs, and theweak financial condition of many participating banks.- A major concern was

111 World Bank, "Agricultural Credit Sector Review," Report No. 4117-PH,May 12, 1983.

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to identify the causes which make agricultural financial intermediaries exces-sively reliant on government resources and subsidies for continued agricul-tural lending. The review focused on three major problems: the limitedsupply of mediumr and long-term agricultural credit, institutional weaknesses,and deficiencies in government policies for agricultural credit. Since thatreview, another more immediate problem has arisen in the severe shortage ofseasonal production credit which, if it persists, will adversely affect pro-duction levels of many commodities and partially undermine the effectivenessof the Philippines' ongoing efforts toward economic recovery.

2.31 Availability of Seasonal Production Credit. Until recently, thesupply of seasonal production credit has not been a major constraint becausenoninstitutional sources provided about 70X of the short-term credit receivedby rural producers. However, since mid-1983 the liquidity of informal lendershas significantly declined due mainly to high inflation, which has reduced thereal value of private savings, and the sharply decreased liquidity of thebanking system which has limited the informal lenders' access to institutionalfunds. The liquidity problem arose in the wake of the economic crisis due toa massive withdrawal or diversion of deposits caused by shaken publicconfidence in the banking system; reduced availability of CB funds; andineligibility of retail banks for CB rediscounting facilities due to theirhigh level of subloan defaults. The decline in seasonal production loans bybanks between 1980 and 1983 was about 17% in real terms and was shared bydifferent commodity groups as shown in Table 2.2.

Table 2.2: SEASONAL PRODUCTION LOANS GRANTED FOR AGRICULTURE, 1980-83(P bill.on at 1978 prices) /a

Z increase X increase(decrease) (decrease)

Commodity 1980 1981 1982 1983 1983 over 1980 1983 over 1982

Rice and other cereal 1.5 1.7 1.6 1.4 (6) (13)Sugar 6.3 5.2 6.7 5.3 (16) (20)Coconut 1.6 2.3 1.6 1.4 (12) (12)Livestock, poultry,fisheries 3.2 4.1 4.5 4.3 34 (4)

Others 2.9 3.6 1.7 0.4 (86) (76)

Total 15.5 16.9 16.1 12.8 (17) (20)

/a Current prices deflated by producer price index for agricultural products(1978 = 100).

2.32 During 1984, continuing bank liquidity problems further reduced thesupply of production credit by an estimated 60% in real terms, as reflected byCB's reduced rediscounting during CYB3 and the first half of 1984 (Table 14).

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2.33 Availability of Medium- and Long-term Credit. The shortage ofmedium- and long-term institutional credit has been a continuing constraint toagricultural development in the Philippines due to: past interest ratepolicies which have not been conducive to mobilizing deposits for use inlonger-term lending; lack of a permanent "lender-of-last-resort" facility fromCB to support term transformation of predominantly shorter-term resources andthe liquidity needs of banking institutions; a relatively undeveloped bondmarket; and lack of institution building for development financing. Theeffects of the 1980 banking reforms which addressed some of these questionswere limited (para. 2.04). In addition, the financial problems of DBP, whichhad formerly been a major source of medium- and long-term credit, aggravatedthe unavailability of term credit (para. 2.24).

2.34 Institutional Weaknesses. Structural problems of the banking systemand financial weaknesses of individual institutions currently constrain theflow of formal credit to agriculture, limit the range of services offered, andlead to increased transaction costs. The Philippines' banking system remainslargely urban-oriented despite considerable expansion of the rural bankingnetwork during the 1970s. Over 30% of the banking offices are located inMetro Manila, and about 12% are in regional centers. The density of lyyalbanks is especially low in nine of the twelve administrative regions,-partly because of relatively undeveloped infrastructure and, in some regions,peace and order problems which have limited the exploitation of potentialeconomic opportunities, including financial intermediation. Private ruralbanks which have the widest geographical network outside Metro Manila (45% ofall rural banking offices) have, over a period, suffered from subloanarrearages, low capitalization, and limited deposit mobilization, which slowedthe growth of rural banking services. Continuing financial problems ofgovernment institutions have exacerbated the situation. Moreover, CB adminis-tration of branch licensing regulations lacked both a sectoral perspective anda realistic assessment of the existing bank offices' potential to expand thesupply of banking services, which prevented rural financial market developmentand active competition among banks. Many banks also relied excessively onGovernment's rather weak extension service for both subloan appraisal andcoLlection, rather than building up their own in-house capabilities toundertake these tasks.

2.35 Government Policies. The overall thrust of government policies inagricultural credit, particularly the provision of low-cost resources atregulated spreads, has not been conducive to viable agricultural lending byrural institutions. While credit-cum-extension programs with subsidizedinterest rates have generally achieved their production objectives, theyplaced heavy demands on the financial and managerial capabilities of partic-ipating banks which were often weakened and, as a result, increasingly reluc-tant to participate in government-sponsored programs. The credit programsalso failed to reach the majority of small farmers on a continuing basis sincemany farmers became ineligible for new credit due to nonpayment of pastloans. The ad hoc nature of these programs as well as the rules and proced-

12/ Cagayan, Bicol, the three Visayas and four Mindanao regions.

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ures governing them tended to undermine the financial discipline of retailbanks through often relaxed subloan collection criteria, which allowed thebanks to carry high arrearages and eventually caused them to be disqualifiedfrom new CB financing. Interest spreads available to retail banks on CB fundsgenerally proved insufficient to cover the growing default costs, andeventually the banks' subloan arrearages and defaults to CB disqualified themfrom further CB financing. All this adversely affected their liquidity.

E. Policy and Institutional Reforms

2.36 In response to these problems and the related recommendations of theAgricultural Credit Sector Review, Government and CB have agreed to implementa package of policy and institutional reforms generaLly aimed at the elimina-tion of regulated interest rates for agriculture; phasing out of governmentsubsidies on agricuLtural credit; expansion of banking services in ruralareas; initial measures to address the problem of subloan arrearages; andimproved arrangements for a continuing review of agricultural policies,programs and institutions. More important aspects of the proposed policy andinstitutional reforms are discussed below and details are given in Annex 1.

2.37 Deregulation of Interest Rates. In the past, easy access to CB'slow-cost rediscounting facility has discouraged retail banks from mobilizingdeposits, and caused CB to carry heavy arrearages in its low-cost lending. Atpresent, although interest rates in general are freely determined by banks,the CB rediscounted credit still carries prescribed spreads on subloans. Theregulated spreads tend to increase interest rates of banks which can afford tolend at lower rates while at the same time restricting agricultural lending ofthose banks which find the spreads insufficient to cover their transactioncosts and allow for a reasonable profit on financial intermediation. Underthe proposed project, CB will, therefore, introduce market-oriented interestrates on its loans to participating banks, without any regulation of spreadsto be retained by the latter (para. 4.10). In addition, CB will ensure thatinterest rates on its loans are not lower than the weighted average cost ofthe banking system's savings and time deposits, including the cost of mobiliz-ing such deposits. These reforms are expected to stimulate greater depositmobilization in the banking system, more efficient financial intermediation,increased inter-bank competition, a much broader access to credit, andincreased lending for agriculture at reasonable interest rates (Annex 1,para. 3).

2.38 Phasing-out of Government Subsidies. Government-sponsoredagricultural credit programs carry interest rate subsidies ranging from 2.5%to almost 30%, depending on the source of funds. The interest subsidy on CB'sSpecial Time Deposits pLaced with retail banks to fund these programs is alsohigh, at 14.5% to 18.5%. In addition, P 700 million from the governmentbudget are held by CB under special financing programs for, among others,disbursement at low interest rates (Annex 1, para. 7). CB and Government havedecided to phase out subsidies on credit under a program which will focus onthe following three categories: (a) credit funded from CB's own resources;(b) credit funded from Government and other resources channeled through CB;and (c) credit funded and administered by the Government outside the bankingsystem. With regard to the first category, which accounts for over 90Z of

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total institutional credit disbursed annually, CB has extended an assurancethat all of its new lending will be at market-oriented rates consistent withthe principles agreed with the Bank (para. 4.10). As for the second and thirdcategories, the Government has agreed during negotiations that it would firstundertake a review of all existing programs and formulate criteria,satisfactory to the Bank, to determine which of the credit programs mayjustify a subsidy. This review will be completed by December 31, 1985.Subsidies on special government financing programs included in category (b)(see Annex 1, Table 2) which do not meet the criteria for exceptions will bephased out by December 31, 1986. For the remaining programs under the secondcategory, and those in the third, elimination of subsidies would be completedin accordance with a program and timetable to be submitted for the Bank'sconcurrence by March 31, 1986. Government programs which do not meet theestablished criteria would be at market-oriented interest rates. Duringnegotiations, an assurance was obtained from CB and the Covernment thatsubsidies on agricultural credit would be phased out in accordance with theagreed timetable, and no new program with an interest rate or capital subsidywould be introduced for funding with CB's own resources.

2.39 Government Assistance to Low Income Croups with Inadequate Access toInstitutional Credit. WhiLe CB and Government have agreed to phase out sub-sidies on agricultural credit, there may be situations when the Covernmentwould need to extend financial assistance to less privileged, low incomegroups which currently do not have adequate access to institutionaL credit.Covernment assistance under such programs should be explicitly budgeted andaccounted for, and extended to beneficiaries identified on the basis of well-defined poverty norms and equity considerations. A study will therefore becarried out to provide guidelines to identify target groups and define ways ofassisting such groups directly by means other than credit subsidies. A taskforce, led by the National Economic and Development Authority (NEDA) and com-prising representatives of CB, the Ministry of Agriculture and Food (MAF), theBureau of Agricultural Economics (BAEcon) and academia, will complete this studyby March 31, 1986, and by September 30, 1986 Government will complete its reviewof the recommendations of the task force in consultation with the Bank.

2.40 Strategies for Expansion of Banking Services in Rural Areas. Thegrowth in rural banking services is now constrained by the financial problemsof rural and government banks which are unable to undertake any significantstructural expansion because of low profitability. Many rural banks haveeither closed or significantly restricted their operations. Past branchlicensing policies have also not been helpful in promoting a healthy growth ofthe rural financial market. To begin to address this problem, a study will beundertaken to review: the adequacy of banking services available in ruralareas; constraints to future growth of such services; options available forconsolidation, rehabilitation and expansion of the rural banking system; andthe role of commercial and government banks in expanding rural services.Indicative terms of reference are provided in Annex 1, para. 10. The studywill be completed by March 31, 1986. CB will present the findings of thereview to its Monetary Board together with a plan for necessary institutionaland financial reforms by June 30, 1986 and, thereafter, take effectivemeasures to implement the plan.

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2.41 Rediscounting, Arrearages, and Retail Bank Rehabilitation. CBrecognizes the need to develop systems, procedures and policies to permit acontinuing review of financial sector institutions, and proposes to evaluatethe content and performance of its policies on subloan rediscounting and therestructuring and rehabilitation needs of retail lending banks affected byarrearages (Annez 1, paras. 11-16). The objectives of the study are torationalize CB's rediscounting policies so that they promote greater depositmobilization and agricultural lending by rural-based banks; to reformulateschemes for subloan restructuring; and to prepare realistic programs forsubloan collections and write offs of uncollectables. Indicative terms ofreference are given in Annex 1, para. 16. The review will be carried out byan in-house task force, in collaboration with trade associations of commer-cial, thrift and rural banks. It will be completed by March 31, 1986, and IBwill present the findings of this review to the Monetary Board by June 30,1986 and immediately thereafter, initiate necessary remedial measures.

2.42 Crop/Subloan Insurance. Lenders for agricultural production andinvestment in the Philippines are faced with enormous risks because many areasof the country are typ.;oon prone; on average, 19 typhoons affect the countryannually. Government has operated a loan guarantee scheme to safeguard theliquidity of lending institutions faced with subloan defaults caused bynatural calamities. However, this scheme has not worked efficiently and isbeing phased out gradually in favor of crop insurance which presently coversonly rice and corn. Extension of insurance to other crops or activities isconstrained by several factors including the lack of statistics on which tobase actuarial studies and premium rates and the serious cost implications forCovernment. In general, government relief schemes tend to be ad hoc innature, without any assistance to institutional lenders affected by subloandefaults attributed to natural calamities. If agricultural lending is to beencouraged, it is important that Government's relief programs for thoseaffected by natural calamities include an arrangement whereby governmentassistance is tied, as far as feasible, to the affected persons' existingobligations to banks and their future credit needs. This would help safeguardthe viability of the credit institutions and ensure continued financialassistance to the affected persons. Covernment and CB will thus carry out astudy to explore possible ways of providing liquidity support to affectedinstitutions, and of expanding insurance coverage for typhoon-related damage,including a legal, organizational and financial framework to implement therecommendations. The study will be completed by December 31, 1986 by aninternationally recruited consultant with support from the Philippine CropInsurance Corporation and an interagency task force to be established in CB.

2.43 Technical Cuidelines for Project Lending. To improve subprojectappraisal by retail banks, CB intends to prepare guidelines for appraising thetechnical aspects of agricultural and agroprocessing investments. CB willalso update its Policy Manual for term lending to reflect the policy changesbeing introduced. The technical guidelines for project lending and therevised Manual will be prepared by December 31, 1985.

2.44 ALF Policy Advisory Group. CB has established in its Covernor'sOffice an ALF Policy Advisory Croup (ALFPAC) to undertake a continuing reviewof agricultural credit policies, programs and institutions in oreer to upgrade

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their contribution to and effectiveness in agricultural development, and toreflect the concerns and interests of the concerned government agencies, lend-ing banks, and trade organizations. Establishment of the ALFPAG addresses amajor institutional gap in the Philippines' credit sym/m. In the past, thePresidential Committee on Agricultural Credit (PCAC) _ a ministerial levelbody, was expected to review broader issues in agricultural credit, but itsoperational arm, the Technical Board for Agricultural Credit (TBAC), hadneither a legal framework nor organization to undertake a sectoral as3essmentof credit and resource mobilization arrangements, and to provide effectivemonitoring for policy formulation and its implementation. The ALFPAG isexpected to play this role.

III. THE PROJECT

A. Project Formulation

3.01 The proposed project has been designed in the light of experiencegained under earlier projects and the findings of the Bank's "AgriculturalCredit Sector Review" (1982) which concluded that various policy and institu-tional reforms should be carried out and that Government should establish amechanism to provide financial and other support for banks lending for agri-culture and to coordinate their activities. Government accepted theserecommendations and decided that an Agricultural Loan Fund (ALF) should beestablished within CB (para. 2.09). The proposed project was prepared withthe objectives of making ALF operational and concurrently introducing policyand institutional reforms essential for viable financial intermediation in therural sector. CB prepared the project in collaboration with governmentagencies and the trade organizations of commercial, thrift and rural banks,and with the assistance of World Bank staff.

B. Project Objectives

3.02 The project's main objectives are to: (a) help foster economicrecovery through provision of seasonal and investment credit to the agricul-turaL sector; (b) help establish an appropriate institutional and policyframework and systems to support the development of a financially snd ruralcredit system; and (c) increase the capacity of rural credit instituticns tomobilize rural savings and improve the efficiency of their farm creditoperations through interest rate reforms, reforms in CB's rediscountingpolicies, and strategies for expansion of banking services in rural areas.

131 PCAC members comprise he following: Governor of the Central Bank(Chairman); Minister of Agriculture (Vice-Chairman); Director-General ofthe National Eccnomic and Development Authority; Minister of LocalGovernment and Community Development; Minister of Natural Resources;Minister of Agrarian Reform; President of the Philippine National Bank;Chairman of the Development Bank of the Philippines, and President of theLand Bank of the Philippines.

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3.03 To achieve these objectives, the project would provide funds over afour year period for:

(a) seasonal and mediumr and long-term credit for the agriculturalsector;

(b) studies in support of policy and institutional reforms andpreparation of a future project; and

(c) training of project-related staff and technical assistance to CB.

3.04 The Bank's involvement in the project is justified in view of theneed to shift resources to agricultural activities in line with Governmentpriorities. This would be done by improving financial intermediation channelsto the rural economy and by making credit resources available for agriculturalinvestment and other activities. Although the demand for investment funds inthe economy in general is depressed, in agriculture such demand continues tobe strong. Therefore, this project and the institutional and policy reformssupported by it are expected to play a major role in the economic recovery ofthe country. The Sank's role in alleviating the supply constraint on pro-duction and investment credit is thus both critical and timely. Bank assis-tance is also justified by the project's support for the policy measures citedin paras. 2.36-2.44 which will complement reforms initiated under the ongoingAgricultural Inputs/Sector Project (Ln. 2469-PH) (para. 1.10).

C. Detailed Features

Credit Component

3.05 The project-assisted lending program will be determined by marketforces, and there will be neither an allocation of funds by crop or type ofinvestment nor any targeted borrowers. CB and the retail lending banks -juldhave a continuing dialogue on issues concerning project-assisted lending oper-ations and strategies; monitoring of subloan approvals; underlying demandforces including cost-price relationships, rates of return, and regionaldispersal of investments; and institutional capabilities of retail banks toappraise and supervise the loan portfolio.

3.06 Annex 2 gives the estimated demand for project funds and the typesof investments to be funded under the project, based on CB's assessment. Thisis based generally on the assumption that credit operations, which have beenseriously interrupted by economic difficulties since 1980-81, would resume agrowth path under an appropriate policy framework, although neither the creditvolume nor its timing can be accurately predicted. Demand for incremental CBfunds for seasonal production credit, to be disbursed during FY1986-87, isestimated at P 1,300 millio- (US$65 million). This is in line with thecountry's need for additi..AaL resources in the agricultural sector to suppor:.economic recovery and the reduced supply of both institutional andnoninstitutional short-term credit.

3.07 Demand for medium- and long-term credit, which was very low duringCY1984 due to the difficult economic environment, is expected to increase as

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the effects of the orgoing economic stabilization program and the new priceand exchange rate policies generate a favorable climate for new investments(para. 1.03). Given that medium- and long-term lending under past Bank-assisted projects averaged US$22 million equivalent p.a. during 1979-84,demand for longer-term funds under the proposed project for all types ofcredit is projected to be about US$20 million equivalent p.a., or US$80million equivalent during FY86-89. Although DBP, which was a major lenderunder past projects, may not be a major participant under the proposed projectbecause of its financial problems, commercial banks which formerly lackedaccess to CB's medium- and long-term rediscounting windows for agriculturalloans have been included in the project. The project's market-orientedLending terms are also expected to attract substantial bank participation.

Seasonal Production Credit

3.08 Project-funded short-term credit is expected to finance crop andnoncrop production including ricc, sugar, corn, cotton, vegetables, fruits,poultry, fish and livestock. The financing of seasonal production credit isessential since its considerable decline from over P 10 billion p.a. in1981/82 to just about P 4 billion p.a. in 1983/84 has adversely affected theproduction levels of many commodities and undermined the effectiveness of theongoing economic recovery program. The beneficiaries of credit extended byrural banks will mainly include small- and medium-size farmers and entrepre-neurs, while other banks would lend mainly to medium- and large-sizeborrowers. The Bank loan would fund only the incremental amount of seasonalproduction credit disbursed by CB to retail banks during FY86 and FY87 withreference to a benchmark to be agreed upon by CB and the Bank. The benchmarkwill take into account the contractionary trend of the economy and constraintsof the IMF stabilization program. The funds initially provided by the Bankfor short-term credit would be subsequently recycled through the ALF tomedium- and long-term subloans, as increased domestic resources becomeavailable for short-term lending.

3.09 The conventional distinction between supervised and nonsupervisedcredit (para. 2.07) would not be relevant to the project since responsibilityfor lending decisions will rest with participating banks whether or not theyuse authorized government technicians in subloan appraisal, as is mandatoryunder supervised credit. About 90% of the production credit funded under theproject is expected to be collateralized.

Medium- and Long-term Credit

3.10 The project would fund medium- and long-term loans channeled throughthe banking system for a broad spectrum of agricultural investments inpoultry, livestock and fisheries development, plantation crops, agroprocessingand post-harvest facilities, and selective farm mechanization. Any viablesubproject conforming to techno-economic feasibility criteria will be eligiblefor financing regardless of size. However, based on past experience, it isexpected that rural banks would lend mostly for smaller projects since nosingle subloan of a rural bank can exceed 15% of its equity which is usuallysmall (F 1-15 million). Subprojects involving subloans of P 10 million(US$500,000) or above would require CB's prior concurrence to ensure that

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these have been subjected to adequate appraisal. CB would report suchsubloans to the Bank soon after their approval. An assurance was obtainedduring negotiations that Bank approval would be required for all subloansabove P 20 million (US$l million).

3.11 Poultry, Livestock and Fisheries Development. The project isexpected to finance a broad range of enterprises in egg, broiler, pig, beefcattle and fishery production. Poultry production is 1 aidly shifting into thehands of larger commercial producers and integrators - because of economiesof scale both in terms of lower feed costs and the efficiency of feed conver-sion, which smaller enterprises cannot achieve. Profit margins are typicallysmall and volatile. Because of the highly competitive character of thepoultry industry, the project would primarily fund expansion of establishedegg or broiler operations, and only those new entrepreneurs capable of estab-lishing an economically viable operation and having the required experience inpoultry management.

3.12 The project is expected to fund investments in swine production,including breeding stock, housing units, and equipment for 20- to 200-sowoperations, as well as larger units serving both domestic and exportmarkets. With the recent deregulation of the price of pork and of corn, thebasic ingredient in swine feed, and removal of a ban on hog exports, Govern-ment has increased the viability of such investments.

3.13 The project is also expected to support ranching, feed lot opera-tions and cattle fattening undertaken directly by farmers, or by integratorsthrough contractual arrangements with groups of farmers. In support of cattledevelopment, Government proposes to release additional grazing lands for leas-ing. The dairy sector, currently undeveloped and requiring major imports,would be eligible for project funding but major investments would be contin-gent on Government's proposing a strategy for the sector's future development,including technical assistance to dairy producers.

3.14 To support fisheries, the project would fund fishponds (5 to 50 ha)in brackish water areas, including rehabilitation and expansion of existingunits, fish pens, fishing boats, and fish processing.

3.15 Plantation Crops. Project credit is expected to fund plantationcrop development, including rubber, banana, mango and abaca (Manila heomp)intended for export, as well as ipil-ipil and selected industrial tree planta-tions. Rubber development requires investments in rehabilitation and expan-sion, and improved processing. Banana exports have increased in recent yearsand an area expansion of over 70,000 ha is needed to meet the growing exportdemand. Mango production in the Philippines has been helped by the introduc-tion of modern flower induction technology, and a number of processed mangoproducts have been developed. Ipil-ipil is grown extensively, primarily for

14/ A vertically integrated operation includes production of day old chicks,importation and mixing of feeds, contracting with outgrowers andorganization of sales.

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firewood production with the leaves used as a feed supplement. Industrial useof firewood is also expanding as a result of the high cost of imported fuel.

3.16 Agroprocessing and Post-Harvest Faciliti-.s. Agroprocessing invest-ments which form an integral part of agricultural production activities wouldgenerally qualify for project credit. Agro-industrial investments with noproduction component would nonmally be funded by the Bank-assisted Small andMedium Industries Development Project III (Ln. 2169-PH). Guidelines for coor-dination between the two projects have been agreed with CB.

3.17 Grain processing investments are likely to include new rice millsand expansion or rehabilitation of existing rice and corn mills, mainly toaugment and mode -nize post-harvest facilities. There is currently an over-capacity in rice milling in some regions, while other regions need mills. Theproposed liberalization of rice trading, including the opening of rice exportsto private trade, is expected to gradually correct this situation and channelnew investments to financially and economically sound enterprises. The proj-ect is also expected to fund new capacities in feed mills in outlying areas tosave on transport costs for both raw materials and end-products. Past expan-sion of the feed milling industry has mainly taken place in Manila where thereis now overcapacity. The project is also expected to support post-harvestfacilities for storage, transport and marketing.

3.18 Farm Mechanization. The project is expected to selectively fundfarm mechanization, including power tillers, rice threshers, corn shellers andtractors. Tractors are not cost-effective on rice and corn lands but can be aviable investment for highly productive sugarcane farms. In the past, factorprice distortions including low-cost credit have encouraged excessive invest-ments in farm mechanization. However, more efficient investment in farmmechanization is now expected due to recent deregulation of the prices of manycommodities and of the peso exchange rate; liberalization of tariffs andexchange controls; and proposed deregulation of interest rates on institu-tional credit for agriculture. During negotiations, an assurance was obtainedthat by December 31, 1985, CB, in consultation with the National Economic andDevelopment Authority (NEDA), the Ministry of Agriculture and Food (MAF) andthe Bank, wilL establish minimum technical norms to be applied in appraisaland sanction of farm mechanization investments, and that CB would use theproject's inter-agency consultative arrangements to review, on a continuingbasis, both the implementation and impact of the farm mechanization programsupported by the project.

Policy Studies

3.19 The project would fund five studies in support of Government's newpolicy package for agricultural credit. The studies would: (a) defineGovernment's approach to and policies toward assisting low income groups withinadequate access to institutionaL credit (para. 2.39); (b) evolve strategiesfor expansion of banking services in rural areas (para. 2.40); (c) review CBpolicies on subloan rediscounting and retail bank arrearages and rehabilita-tion (para. 2.41); (d) explore ways to provide liquidity support to banks withloan portfolios affected by natural disasters and of expanding insurance coverfor risks associated with these disasters (para. 2.42); and (e) prepare

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technical guidelines for project lending and update CB's term lending PolicyManual (para. 2.43). The project also includes a nominal amount (US$20,000)to begin preparation of a future credit project for the sector. Terms ofreference for the reviews of banking services in rural areas and of CB'srediscounting policies and the arrearages problem (Annex 1) were agreed atnegotiations. The design and approach of studies on government assistance toLow-income groups and crop/subloan insurance were also agreed at thenegotiations, and the terms of reference will be finalized by July 31, 1985.During negotiations, an assurance was obtained that CB would complete theproject-related studies within the agreed time frame, on terms of referenceacceptable to the Bank, and based on the findings of those studies, wouldthereafter initiate remedial measures in consultation with the Bank.

Staff Training and Technical Assistance

3.20 The project would fund training to address skill-gaps of project-related staff in CB and retail banks as identified by an ongoing survey beingconducted by the Central Bank Institute (CBI). The project would fund ateachers' training program to increase and upgrade the faculty available toCBI to conduct the project-related training courses. Other training programswould include: familiarization briefings for senior staff; subloan appraisal,management and supervision courses; and accounting courses for middle-leveland operational staff. Details of training objectives and activities aregiven in Annex 3. The project would also fund, as necessary, hiring by CB ofappropriate expertise from within or outside the country to strengthen thecapability of the proposed ALF Unit (para. 4.03) and the Technical Unit of theALFPAG (para. 4.04).

D. Project Cost and Financing

3.21 The total project cost is estimated at US$183 million equivalent,including US$63.5 million equivalent or about 35% in foreign exchange andUS$16.6 million equivalent in related taxes and duties (Table 3.1). The shareof foreign exchange in the total project cost is based on the assumptionsunderlying the indicative lending program and would vary depending on theeventual composition of the lending program in response to market forces.Estimates are based on December 1984 prices and do not include physical andprice contingencies as this is a credit project.

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Table 3.1: PROJECT COST SUXXARY

Foreign Z ofLocal Foreign Total Local Foreign Total as Z of total-(peso million)--- -- (US$ million)-- total base cost

A. CreditSeasonal ProductionCredit 1,001 667 1,668 50.0 33.4 83.4 40 45.6

Medium- and Long-Term Credit 1,383 597 1,980 69.2 29.9 99.1 30 54.1

Subtotal CreditComponent 2,384 1,264 3,648 119.2 63.3 182.5 35 99.7

B. Policy Studies 5 1 6 0.2 0.1 0.3 33 0.2

C. Project Related TraininRand Technical Assistance 3 1 4 0.1 0.1 0.2 50 0.1

Total Project Cost /a 2,392 1,266 3,658 119.5 63.5 183.0 35 100.0

/a Includes taxes and duties of US$16.6 million equivalent.

3.22 The proposed Bank loan of US$100 million would contribute about 60Zof total project costs, excluding taxes, or about 55Z of total grosm costs.The Bank loan would finance 100% of the foreign exchange requirement plus 37Zof local colts which is justified because of the Philippines' current diffi-cult economic situation and shortage of counterpart funds. The remainingproject cost would be funded by CB from resources to be raised in the bondmarket (8Z), participating banks up to an average of 20%, and subborrowers(18Z) (Table 3.2). As the participating banks' and subborrowers' contribu-tions would vary by subproject, subject to a minimum of 10X each, CB hasagreed to fill any gap in project financing from resources to be raised in thebond market (para. 6.02(j)). Retroactive finance up to US$15 million isrecoumended for eligible production credit subloans approved by the ALF afterApril 30, 1985 to allow the loan to meet the needs of the 1985 planting seasonwhich begins in Kay.

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Table 3.2: PROJECT FINANCING PLAN(USs million)

ParticipatingCategory Subborrowers Banks CB IBRD Total

A. Production credit 15.0 16.7 6.2 45.5 83.4

B. Medium- andlong-term credit 17.8 19.8 7.5 54.0 99.1

C. Studies, Training andTechnical Assistance - - - 0.5 0.5

Total 32.8 36.5 13.7 100.0 183.0

3.23 The Bank loan to CB will be guaranteed by the Government of thePhilippines. Under the pool-based variable lending rate system, the Bank'sinterest rate would be subject to a semi-annual change, which if it occurswould be reflected in CB's onlending rate to participating banks. Theinterest rate on CB loans to participating banks would be market-oriented.The interest rates charged by participating banks would also be market-oriented, based on CB's interest rate, the weighted. average cost of fundsdeployed in project lending, and intermediation costs (para. 4.10).

3.24 The United States Agency for International Development (USAID) iscurrently considering a proposal from its Philippine Mission to allocateapproximately US$20 million in parallel with the Bank loan during its FY 1985(ending September 30, 1985). The USAID support would provide additionalresources for the agricultural sector during the period of economic recovery.

E. Procurement

3.25 Machinery and Equipoent. International competitive bidding (ICB)would not be feasible under the project because the size of individual invest-ments would be too small and bulking of contracts is not practicable becauseof their expected diversity and wide dispersal both in location and time.Machinery and equipment for on-farm development and farm support facilitieswould be acquired through ordinary commercial channels in which both Local andforeign firms operating in the Philippines would be eligible to participate.All suppliers are required to be accredited by CB's Agricultural KachineryManufacturers/Distributors Accreditation Committee (AMDAC). CB ensures thatonly those suppliers are accredited who have service shops and mechanics at

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strategic locations to repair and replenish machinery items.-51 Under theproject, CB would continue AMDAC which will be reconstituted to include repre-sentatives of the Ministry of Agriculture and Food (MAF) and its AgriculturalMachinery Testing and Evaluation Center (AMTEC), CB, and representatives ofthe Agricultural Machinery Manufacturers and Dealers Association (AMMDA). CBwould also set up a mechanism-for periodic consultations between AMDAC andrepresentatives of the banking industry an accreditation of machinerysuppliers. CB and MAF would annually issue, on behalf of AMDAC, a notice inmajor international papers indicating the possible composition of Philippinemachinery imports for the following twelve month period, and inviting manufac-turers and dealers not already accredited to seek accreditation with AMDAC.The notice would include specific criteria for accreditation. AMDAC willupdate the list of accredited dealers annually on the basis of applicationsreceived in response to the notice in major international papers or in thenormal course of events. Ac negotiations, an assurence was obtained that bySeptember 30, 1985, CB and MAF would compLete reconstitution of AMDAC andissue a notice indicating the probable composition of the Philippines'machinery imports during the coming year and inviting manufacturers anddealers to seek accreditation with AMDAC.

3.26 Civil Works. The majority of civil works under the project wouldalso be relatively small and widely dispersed and therefore unsuited to ICB orlocal competitive bidding (LCB). Sufficient private contractors are availablefor construction of civil works on a competitive basis through normal commer-cial channels. The project would, therefore, require participating banks toensure that civil works costing less than P 200,000 (US$10,000) would becarried out or contracted in accordance with procedures satisfactory to theBank; individual contracts costing more than P 200,000 and up to P 5 million(US$250,000) would be carried out in accordance with procedures satisfactoryto the Bank after solicitation of price quotations from at least three sup-pliers. The requirement of obtaining price quotations would, however, bewaived for subprojects in remote areas where supplier representation is insuf-ficient. Larger contracts costing more than P 5 million would be awarded onthe basis of LCB, in which foreign firms operating in the Philippines would beallowed to bid. LCB would be in accordance with standard bidding proceduresacceptable to the Bank. Civil works involving LCB are expected to amount toP 200 million (US$10 million). CB would review the compliance of partici-pating banks with procurement procedures during its periodic supervision ofproject-assisted subloans, as would the Bank during project supervision.

15/ AMDAC was established by CB under the Bank-assisted Fourth Rural CreditProject (Ln. 1399-PH) to maintain a fair and uniform price of machineryand equipment for all borrowers availing themselves of subloans under CB-assisted programs and to ensure that dealers/manufacturers are capable ofproviding sufficient after-sale services. As of September 1984, as manyas 55 importing firms and 80 local manufacturers of diverse itemsincluding tractors, power tillers, threshers, irrigation pumps, and ricemills, had been accredited by AMDAC.

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3.27 Consultants. Consultants would be appointed in accordance with theBanks' guidelines and on terms and conditions satisfactory to the Bank. About150 staff-days of internationally recruited consultants and 1,000 days oflocal consultants are required to implement project studies and provide stafftraining and technical assistance.

F. Disbursements

3.28 The Government and CB have requested that, in view of the country'sfinancial constraints, the Bank should reimburse 100% of the subloansdisbursed by rzrticipating banks for seasonal production credit up to a totalof US$30 million, within the overall reimbursement of 67% of subloan amountsdisbursed during the project period. In the current circumstances, this isconsidered justifiable. Disbursement of the loan proceeds would accordinglycover:

(a) for seasonaL production credit, the first US$30 million of the Bankloan at 100% of the subloans disbursed by participating banks andreimbursed by CB and the balance at 46% of disbursed subloans, sothat overall disbursement during the project period would not exceed67% of the total;

(b) for medium- and long-term credit, 67% of subloans disbursed byparticipating banks and reimbursed by CB; and

(c) 100% of the cost (net of taxes) of local and expatriate consultants,and of the cost (net of taxes) incurred by CB on project-relatedstudies and training.

3.29 CB would establish a Special Account in accordance with Bankguidelines to facilitate rapid disbursement of the Bank loan. Up to US$10million would be released by the Bank to the Special Account, representingabout 25% of the expected disbursements of the first project year. Bankdisbursements to the Special Account would begin immediately after loaneffectiveness. Disbursements from the Special Account would be fullyaccounted for by subloan disbursements eligible for Bank funding under theproject's terms and conditions (Annex 5).

3.30 Becaase the project would fund a large number of subprojects,disbursement for subloans would be made against certified statements ofsubloans disbursed, with supporting documentation to be retained by CB. CBwould make subloan reimbursement to eligible banks upon presentation of a setof standard documents. CB disbursements to participating banks will be in theform of Special Time Deposits (STDs). Documentation at participating bankswould be verified by CS during its usual audit of their accounts.Disbursements for consultancies, project-related studies and training would bemade against normal documentation prescribed by the Bank.

3.31 A schedule of estimated disbursements under the project and a dis-bursement profile of previcus Bank-assisted agricultural projects in thePhilippines are presented in Table 15. Project disbursements under seasonalproduction credit (which was not funded by previous projects) are expected to

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proceed rapidly in view of the country's critical need for such resources.The disbursement rate under the project for medium- and long-term credit isassumed to be US$12 million per year, which is conservative by comparison withthe US$18 million average annual disbursement under all Bank-assisted agricul-tural credit projects during 1979-84 (Annex 2, para. 3). The project would becompleted by December 31, 1989, and Loan Closing is expected by December 31,1990.

C. Accounts and Audit

3.32 CB and retail banks would maintain separate accounts for projectfunds. CB's project-related accounts, along with its other operations, wouldbe audited by auditors acceptable to the Bank. Normally, CB's accounts areaudited by the Government's Commission on Audit (COA). The accounts ofcommercial, thrift and rural banks are audited by licensed external auditorsauthorized by their respective boards of directors. Small rural banks are insome situations exempted by CB from an external audit, in which case CB exam-iners audit the concerned banks. The accounts of government banks (DBP, PNBand LBP) are audited by the COA. In addition, CB subjects all banks to anannual operations and management audit by qualified personnel or CB staff,save for exceptions granted by CB's Governor or the Monetary Board. All banksare inspected at least once every two years by CB staff to assess theiroverall financial viability and safety of deposit funds. These arrangementsare satisfactory.

3.33 CB would send to the Bank, within six months of the close of eachfiscal year, audited project accounts including statements of expenditure andthe Special Account, together with the balance sheet and profit and lossaccount and auditor's opinion on certificates of expenditure. CB would alsorequire participating banks, as necessary, to provide an auditor's opinion onwhether subloans are in agreement with the terms and conditions of projectlending. In addition, CB staff wiLl selectively review project-related sub-loans and provide a brief report on the quality of subloans and the adequacyof retail lending banks' supervision and records. The external auditors'opinions and CB examiners' reviews will be kept by CB and will be availablefor the Bank's review during supervision.

IV. PROJECT IMPLEMENTATION

4.01 CB would be responsible for project implementation. Under thecredit component, project funds would be channeled by CB to eligible banksutilizing the existing credit system. CB will determine the eligibility ofretail banks for access to funds, supervise the use of project funds, andmonitor institutional performance and the quality of the loan portfolio.Subproject appraisal and supervision will be carried out by the participatingbanks. CB will also carry out project studies, initiate policy and insti-tutional reforms, and implement the training component. Chart 1 shows theschedule of project implementation and Chart 2 shows the flow of projectfunds.

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A. Credit Operations

Central Bank of the Philippines

4.02 Organization. Chart 3 shows the organization of CB and Chart 4shows the CB organization for project implementation. CB's Department ofLoans and Credit (DLC) would be responsible for overall project implementa-tion. DLC administers CB's short-term rediscounting facilities as well as thelonger-term Industrial Guarantee Loan Fund (IGLF) which provides resources tobanks for lending to small and medium industries and has been used for threeprevious Bank-assisted credit projects (Lns. 1120, 1727 and 2169-PH). DLC'sperformance in administering the Fund under these projects has been satisfac-tory. Its loan management and accounting procedures are sound, and its staffis well qualified. Within DLC, an Agricultural Loan Fund Unit would be estab-lished to handle day-to-day matters of project implementation (para. 4.03),and an ALF Policy Advisory Group (ALFPAG) has been set up in the CB Governor'sOffice to review project credit activities and to coordinate the variousinstitutions involved (para. 2.44). DLC would collaborate with five other CBdepartments namely: Supervision and Examination Sector (SES) Departments I,II, and III which oversee and regulate the affairs of commercial, thrift andrural banks, respectively; the Department of Economic Research whichcoordinates development of CB's domestic credit and rediscounting policies;and the Supervisory Reports Office (SRO) which administers the managementinformation system for the financial sector.

4.03 Agricultural Loan Fund Unit. The Agricultural Loan Fund Unitlocated within DLC would onlend project funds and provide technical assistanceto retail lending institutions. It would be headed by an experienced Assis-tant Director responsible to the DLC Director, and organized into threedivisions (Chart 4). The Planning and Monitoring Division will determine theeligibility of banks for project funds based on qualifying criteria (Annex 4);provide guidelines to banks for subproject selection and appraisal; carry outselective end-use verification of subprojects funded by the project; monitorsubproject performance; and liaise with the ALFPAC on policy-related issuesand with CBI on the conduct of staff training programs. The Loan EvaluationDivision will process subloan applications received from retail banks andreview requests for subloan rescheduling. The Accounting, Collection andSecurities Control Division will release project funds, prepare relateddocumentation, and service loan accounts, including the collection of pastdues. The Unit would initially have about 48 staff members. As a conditionof loan effectiveness, all ALF core staff will be in place.

4.04 ALF Policy Advisory Group (ALFPAG). Overall review of projectcredit activities would be carried out by the ALFPAG which will provide a con-tinuing review of agricultural credit policies, programs and institutions;liaise with government agencies concerned with agricultural development; andcoordinate agricultural credit activities within CB's various departments.The ALFPAG would be comprised of three of CB's Deputy Covernors in charge ofdomestic operations, supervision and examination, and economic research. TheALFPAG will be assisted by a Technical Unit of staff drawn from CB, comple-mented by new recruitment to fill in specific skill gaps.

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4.05 The ALFPAG will periodically consult with various governmentagencies, retail lending banks and private sector organizations on mattersconcerning agricultural credit. For this purpose, ALFPAC would set up threeinformal advisory groups: one comprising senior representatives and technicalstaff of government ministries including NEDA, MAF and the Ministries ofAgrarian Reform (MAR) and Finance (MOF); the second comprising representativesof commercial, thrift and rural banks; and the third comprising representa-tives of commodity boards and trade organizations. ALFPAG would be able torefer relevant matters to CB's Monetary Board and the Presidential Committeeon Agricultural Credit (PCAC) through CB's Covernor. During negotiations, anassurance was obtained that the ALFPAG would have these responsibilities. Anassurance was also obtained that by September 30, 1985, the ALFPAG's TechnicalUnit would be staffed by core personnel, comprising agricultural economists,credit specialists and technicians with experience in project-type lending,and that such staff would be appropriately expanded by recruitment of addi-tionaL personnel in accordance with plans to be established in consultationwith the Bank by December 31, 1985.

Participating Banks

4.06 Qualifying Criteria. Retail banks complying with qualifyingcriteria issued by CB will have access to project funds. The qualifyingcriteria would set a ceiling on subloan arrears (past dues) and require abalanced term structure and qualified staff (see Annex 4 for details). Aparticipating bank's total subloan arrears (defined as the uncollected amountof principal overdue for more than three months) should be less than 15Z ofthe outstanding loan portfolio. Commercial banks with subloan arrears of morethan 15% but less than 202, and thrift, rural, or government banks witharrears of less than 25% will have access to project funds, subject to CB'sapproval following an institutional appraisal to ensure the financialviability of the banks. Banks not qualifying for access to project fundswould be required to upgrade their overall operations and CB will providetechnical assistance for this purpose. A bank with arrears exceeding thespecified ceilings may apply for project funds if unimpaired equity andreserves, after allowing for default risk, are sufficient to meet CB's minimumcapital requirements. Eligibility of these banks would be determined follow-ing an institutional appraisal. Banks with arrears exceeding 35% will notnormally qualify for project funds, but if considered eligible by CB on thebasis of an institutional appraisal and an established record of agriculturallending, their participation in the project would be subject to prior consul-tation with the Bank. Subloan arrears outstanding for more than a year afterthe due date may not exceed 20% of total arrears, and annual repayments ofproject subloans must be at least 70% of the aggregate amount fallen dueduring that calendar year. Participating banks would also have a balancedterm structure of assets and liabilities, with medium- and long-term subloansand other assets matched by longer-term resources, including unimpairedequity, and mediumr and long-term deposits and borrowings. CB will ensurethat participating banks retain or hire qualified staff to appraise andsupervise the ALF-assisted subloans. The project training program would helpin this regard by increasing the number of trained staff available. Anydeviation from the eligibility criteria would require prior consultation withthe Bank.

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4.07 Participation in project lending of the government-owned PhilippineNational Bank (PNB), the Development Bank of the Philippines (DBP), and theLand Bank of the Philippines (LBP) would be subject to the Bank's prior con-currence, in view of the ongoing pLans to strengthen government financialinstitutions. These banks would also have to meet the qualifying criteriadescribed above. CB and the Bank may, however, agree upon a phased appli-cation of the general eligibility criteria to government banks as a part oftheir overall financial rehabilitation and institutional development plans.

4.08 By July 31, 1985, CB would (a) inform all banks in the country ofthe project's scope and lending terms and conditions, including eligibilitycriteria for project funds; (b) notify all banks with arrears of less than 152of outstanding loans of their eligibility for project funds; and (c) bySeptember 30, 1985 prepare a plan for the institutional appraisal of commer-cial banks with arrears of more than 15% but less than 20Z, of thrift, ruraland government banks with arrears of more than 15% but less than 25%, and ofbanks which have arrears exceeding the specified ceilings, but which apply forproject funds on the basis of their compliance with CB's minimum capitalrequirements. Appraisal of priority banks would be completed by March 31,1986. However, it is expected that the banks which already satisfy thesecriteria will begin lending soon after loan effectiveness. During negotia-tions, an assurance was obtained that CB would by September 30, 1985 furnishto the Bank for review, an updated list of participating banks and the pLanfor institutional appraisal of banks expected to participate in the project,and thereafter by March 31 and September 30 of each year, furnish to the Bankan updating of such list and plan.

4.09 Based on the qualifying criteria, CB has identified 175 banks with anetwork of 600 offices in semi-urban and rural areas as currently eligible foraccess to project funds. The eligible Banks comprise 15 conu-rcial, 35thrift, and 125 rural banks. These banks have survived the current crisis andare expected to provide the initial institutional base for the project. Bankparticipation is expected to increase ai a result of CB's ongoing effortstoward financial sector rehabilitation and improved subLoan collections byretail banks following the expected economic recovery. Since commercial banksare relatively new to long-term agricultural lending, an assueance wasobtained from CB at negotiations that it would extend necessa-v technicalassistance to the counercial banks participating in the project in preparingand implementing institutional development plans commensurate with theircurrent and prospective agricultural lending operations, and that five of suchplans would be sent to the Bank for comment by December 31, 1985.

Lending Procedures and Terms

4.10 CB has prepared, in consultation with the Bank, a Policy Manual forproject lending which has been approved by its Monetary Board. The Manualprovides operating guidelines specifying lending terms and conditions, includ-ing subloan size, subborrower contribution, collateral requirements, repaymentterms, interest and rediscount rates, accounting and reporting requirements.An assurance was obtained from CB at negotiations that any modification in thePolicy Manual for project lending would be made with the Bank's prior concur-rcuce. Details of ALF lending terms and conditions are given in Annex 5; themore important lending terms are described below:

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(a) Interest Rates. Funds onlent by CB to participating banks and byparticipating banks to subborrowers will carry market-oriented inter-est rates consistent with the principLes outlined in Annex 5 whichhave been agreed witih CB at negotiations. An assurance to this effectwas obtained at negotiations. Broadly, the interest rates will bedetermined by CB and the participating banks as follows.

(i) CB's Interest Rate on Loans to Participating Banks. The interestrate charged by CB on its loans to participating banks would bemarket-oriented; will fully cover the cost of ALF operations;and will be at least equal to the average cost of the bankingsystem's savings and time deposits, zJcluding the cost ofmobilizing such deposits (Annex 5).1_/ CB may prescribedifferent interest rates for production and longer-term credit,consistent with market trends.171 The arrangement that CB'sinterest rate should not be lower than the weighted average costof the banking system's savings and time deposits is expected toencourage participating banks to fund a rising proportion oftheir loans through deposit mobilization and to increasinglypromote CB's role as the lender-of-last resort. CB will reviewits interest ratels at least on a quarterly basis.

(ii) Interest Rates on Subloans and Spreads. Interest rates tosubborrowers would be determined by individual participatingbanks, reflecting, among other things, the cost of their overallloanable funds and transaction costs of the subloan. Individualbanks would be free to determine the spread on subloans which ismost appropriate to their operations, including the weightedaverage cost of their resources deployed in the subproject, thepossible default risk on their overall loan portfolio, as well asthe characteristics of individual subloans. The spread will alsoinclude an element of profit to provide an incentive for theirparticipation.

16/ CB currently uses the Manila Reference Rate (NRR) as the main determinantof the market rate. The MRR is calculated by CB every week, based on aweighted average of the rates paid by the ten financial institutions withthe largest volume of deposit substitutes for 90-day, 180-day and 270-dayplacements. Since the MRR is not comprehensive enough to be represen-tative of the market, CB will establish a new rate/s based on principlesnoted in para. 4.10(a).

171 Based on current costs of ALF funds (17%) and the weighted average costof the banking system's savings and time deposits (18-20%), CB's interestrate is expected to be about 20%. Assuming that the interest spreads ofparticipating banks range between 5-8%, the subloan interest rates wouldrange between 25-28%. It is expected that interest rates would declineas the economy recovers and inflation decreases.

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(iii) Revisions in Interest Rates. Any revision of interest rates onCB-funds and subloans, once disbursed, would generally occursemi-annually to reflect changes in the weighted average cost ofloanable funds. Marginal changes in the cost of borrowing willnot usually initiate any change in interest rates on outstandingsubloans. Interest rates on subloans for seasonal productioncredit are not expected to change, because of the relativelyshort maturities of such credit. As a monitoring tool, however,any increase of above two percentage points over the interestrate at which a subloan was originally disbursed by a partici-pating bank would be reported to CB, with an explanation of whythe increase was necessary.

(b) Subloan Maturities. The repayment period of short-term subloanswould normally be within 12 months, except for sugar and bananaproduction which would be r'payable within 18 months. The repaymentperiod for medium- and long-term subloans would be based on thesubproject's cash flow and related to the subborrower's overallrepayment capacity. Repayment of most subloans will be in S to 10years but will not exceed 15 years, or the economic life of the sub-project, whichever is lower. A grace period may be granted forrepayment of principal based on the subproject's cash flow and theoverall financial status of the subborrower.

(c) Subborrower's Contribution. A subborrower's contribution to theproduction and investment cost of a subproject would be determinedby a participating bank on the basis of the subproject appraisal,but would not be less than 10%.

During negotiations, an assurance was obtained from CB that it will consis-tently maintain the financial viability of project operations by providingadequate counterpart funds, by reviewing and adjusting interest rates on itsloans to participating banks as necessary, and by retaining in ALF all profitsneeded to cover the cost of ALF operations, provision for bad and doubtfuldebts, the foreign exchange risk on the Bank loan and such other purposes asshall be determined in consultantion with the Bank. An assurance was alsoobtained that CB will deposit in the ALF all loan repayments by participatingbanks, and use these funds for new loans, in accordance with the project'sterms and conditions and any further arrangements as may be agreed to betweenthe Bank and CB.

4.11 Subloan Appraisal and Disbursement Procedures. Subloan appraisaland approval will be the responsibility of the participating banks, whosecapability to undertake these activities will be determined by CB under theproject's qualifying criteria (para. 4.06). Duties of participating bank loanofficers are given in Annex 6, Table 1. Seasonal production loans would bebased on production costs as derived from a typical farm plan which willindicate the benefit-cost ratio of the investment. Appraisal of medium- andlong-term loans would be based on the technical and financial characteristicsof the subproject. For each medium- and long-term subloan, a participatingbank would prepare a financial plan including the subproject's cash flow. Ascalculation of financial rates of return (FRRs) for all subloans would be

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impractical, the lending banks would caLculate an FRR for typical subprojectsin each principal activity financed. An FRR would be calculated for allsubprojects costing more than P 2 million. For a subproject to be accepted,the FRR should be consistent with the interest rate on the subLoan. CB wouldalso calcuLate economic rates of return for subloans above P 10 million andfor typical projects with subloans below P 10 million.

4.12 Supervision of Subloans. Supervision of subloans will also be theresponsibility of participating banks, which will designate specific officersfor this purpose. Banks would require subborrowers to use project funds forapproved purposes. This would be achieved through direct payments to sup-pliers of inputs and materials as practicable, and through quarterly or semi-annual field visits to subprojects as may be prescribed by CB. Follow-upreports on each visit would comment on utilization of project funds, compareactual and planned operations, review management and financial problems ofsubprojects, and make recommendations. Banks would also obtain periodicoperating and financial reports from subborrowers of medium- and long-termloans and undertake selective field visits to problem projects for assessmentof their problems.

4.13 CB's ALF Unit would conduct selective end-use verification ofsubprojects financed under the project to ensure that the banks' supervisionis satisfactory. Overall, about 20% of the subprojects financed by the proj-ect would be visited by CB staff, although the number would vary from bank tobank.

4.14 Restructuring of Loans Affected by Calamities. Restructuring ofsubloans would be admitted when loss or damage results from force majeure,i.e., typhoons, earthquakes or other calamities beyond the borrower's con-trol. Any rescheduling of maturity dates and provision of additionaL financ-ing would be subject to the prior approval of CB.

4.15 Technical Support. CB and the Government will make their technicalstaff available to banks lending under the project. Government extensionstaff are available throughout the country to advise on crop production, live-stock and fisheries. Under the Bank-assisted Fourth Rural Credit Project(Ln. 1399-PH), CB established 15 regional loan teams comprising about 50technical and non-technical staff to assist rural and thrift banks in subloanappraisal and supervision. In addition, CB has deployed some 90 agriculturalcredit supervisors in the field. These staff will continue to be available toall banks, including commercial banks, upon request. At negotiations, anassurance was obtained from CB and Government that their technical andextension staff deployed in the field would be made available to participatingbanks upon request, in assisting subproject appraisal and supervision. BothGovernment and CB may require the participating banks to pay reasonable feesfor the services rendered by such technical staff.

B. Other Project Components

4.16 Policy Studies. ALFPAG, through its Technical Unit in theGovernor's Office and the ALF Unit, will be responsible to implement thiscomponent, with assistance where necessary from Government. Agreement on the

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timing and terms of reference for the studies or their design and approach wasobtained at negotiations (para. 3.19).

4.17 Project-Related Training. The Central Bank Institute (CBI) will beprincipally responsible for project-related training, in association with CB'sDLC. CBI has excellent facilities, qualified trainers and experience inorganizing training courses. CBI is carrying out a survey which would becompleted by June 1985 to identify project-related tasks, the skills required,prevailing and prospective skill gaps, the clientele to be trained and thetype of courses suitable for providing the skills required. Approximately1,000 CB and retail bank staff would be trained during the project period. Aspart of the proposed training program, CBI would also conduct a teachers'training program in June-July 1985, using training materials to be provided bythe Bank's Economic Development Institute. If necessary, the program would berepeated in 1986 and 1988. During negotiations, an assurance was obtainedthat the training program for FY86 will be sent to the Bank for review bySeptember 30, 1985, and thereafter that the program for each fiscal year willbe sent to the Bank by March 31 of each year.

C. Monitoring and Evaluation

4.18 CB would establish a monitoring and evaluation system for project-related operations (Annex 6). The objectives of the system are to identifyconstraints, initiate corrective measures and upgrade project implementa-tion. The main components of the monitoring and evaluation system wouldcomprise: (a) regular reporting on the financial and physical progress of theproject within both CB and the participating banks; (b) annual evaluationsduring project implementation to assess performance of typical subprojects andthe project's impact on the financial condition of participating banks; and(c) ex-post evaluation of the project's credit and institutional developmentcomponents. Monitoring would be the responsibility of the ALF Unit, whileannual and ex-post evaluation studies would be undertaken by ALFPAG'sTechnical Unit or contracted to the Technical Board for Agricultural Credit(TBAC), the University of the Philippines at Los Banos, the DevelopmentAcademy of the Philippines and similar research organizations which havecapabilities to undertake such studies. The scope and methodology of evalua-tion studies will be determined in consultation with the Bank. During nego-tiations an assurance was obtained that CB, in consultation with the Bank,would prepare annual programs for the evaluation of project activities andrelated terms of reference. CB would monitor the progress of these evalua-tions, review their conclusions and use the findings in future projectlending. The first such program would be submitted to the Bank byDecember 31, 1985 and thereafter by December 31 of each project year.

4.19 Quarterly reports on disbursements, semi-annual reports on monitor-ing and annual evaluation reports would be submitted to the Bank by CB. CBwould prepare progress reports for the Bank, the form and content of whichwould be determined in consultation with the Bank. In addition, CB wouldprepare a Project Completion Report to be submitted to the Bank not later thansix months after the closing date of the loan.

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V. BENEFITS, JUSTIFICATION AND RISKS

A. Benefits and Justification

5.01 General. The proposed project would help foster economic recoveryin the Philippines through provision of seasonal production and investmentcredit which would strengthen and expand the existing production base andcontribute to increased agricultural, livestock and fishery production andrural employment. The project would also support the Government's effort toestablish an institutional and policy framework which would promote develop-ment of a financially sound rural credit system. Implementation of the policyand institutional reforms in conjunction with the project is expected to bringabout an eventual expansion of banking services available in rural areas,reduced reliance on government resources for agricultural lending, greaterfinancial discipline in Government's agricultural credit programs, and throughproject-related training and technical assistance, an improved staff capa-bility in CB and credit institutions.

5.02 The project's agricultural benefits cannot be quantified since theprecise mix of the project's lending program would depend on market forces.The project is, however, expected to help safeguard existing levels of pro-duction and contribute to incremental production in commodities such as rice,corn, livestock and fisheries, fruits and vegetables and plantation cropsincluding rubber, banana, mango and abaca. Project assistance would also beextended to sugarcane, but only existing efficient operations would besupported and the project would not increase overall production (para. 5.06).

Financial and Economic Analysis

5.03 The project's aggregate financial and economic rates of returncannot be computed since the actual mix of enterprises will depend on marketforces. However, financial and economic anaLyses of typical subprojects havebeen carried out for a series of illustrative models.

5.04 Seasonal Production Credit. Some 85Z of project-funded seasonalproduction credit is expected to be onlent for rice, corn and sugar produc-tion. The benefit-cost ratios of these investments, to be funded in 1985-86,would be satisfactory in both financial and economic terms. Details of thesecalculations are given in Annex 7, Tables 3 and 4 and their results appear inTable 5.1.

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Table 5.1: BENEFIT-COST RATIOS, 1985-86 CROPS(September 1984 pesos)

Rice /a Corn /a Sugarcane /bFinancial Economic Financial Economic Financial Economic

Production value 6,676 4,282 7,192 6,737 300 281Production cost 2,961 2,402 1,109 838 264 140Benefit-cost ratio 2.3:1 1.8:1 6.5:1 8.0:1 1.1:1 2.0:1

/a On 1 ha.7T For production of 1 picul of sugar (64 kg).

5.05 The profitability of rice and corn production in the Philippines isexpected to continue to at least 1995. The world market price of rice,currently at a depressed level of US$262/ton, is projected to increas in realterms to US$345/ton by 1990 and to remain around that level to 1995./Although the PhL'ppines has achieved a surplus in milled rice in relation todomestic demand" , Government is attempting to increase rice exports, whichaveraged about 100,000 tons p.a. during 1977-83. Government is graduallyliberalizing control over rice exports to enable private millers to enter theexport market, and has firm plans to establish export grades and to provideimproved milling facilities to raise the quality of Philippine rice which inthe past received a discounted price due to poor milling. The world marketprice for corn is projected to decline by about 10% during 1986-90 compared tothe current price of US$142/ton. This is not likely to affect the profita-bility of domestic production which Government is currently trying to improveby increasing the availability of improved seeds and technical support. Theeconomic benefit-cost ratio for sugarcane is comparable to that for rice butis far lower than that for corn. The financial benefit-cost ratio for sugar-cane is now relatively low because of depressed world market prices averagingUS$110/ton. Since sugarcane lands in the Philippines are suitable for corncultivation, Government is encouraging a shift from sugar to corn production.

5.06 The financial viability of sugar production in the Philippines isdetermined by the composite price representing the weighted average cost ofboth export and domestic prices. The export price of sugar is projected toincrease from US$118/ton in 1985 to US$186 in 1986 and to US$343/ton in1990. This increase is expected to provide increasingly remunerative

18/ World Bank Commodity Prices Forecast, December 1984.

19/ A significant shortfall in production caused by extended drought in1983/84 necessitated some rice imports in 1984; there will be someimports also in 1985 because lower levels of fertilizer application (dueto high prices) will cause decreased yields and hence overall production.

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composite prices to sugarcane farmers and would improve the financial benefit-cost ratio for an average farm to 1.3:1 in 1986 and 1.8:1 in 1990. At thesame time, national sugar production is expected to decline from 2.2 milLiontons in 1984-5 to 1.8 million tons in 1985-86 and to 1.6 million tons in lateryears in response to market forces, particularly the phasing out of marginallands from sugarcane production. The project would thus help to relieve thecurrent credit constraint and to preserve sugar production for a domesticmarket comprising 55 milLion people and for exports to the U.S. market on apreferential basis, which is expected to continue. However, the project isnot expected to increase sugar production. The major sugar financing bankshave established credit appraisal procedures to ensure that credit is extendedto sugarcane growers whose production records are satisfactory.

5.07 Medium- and Long-term Credit. The financial and economic rates ofreturn on selected subprojects reviewed at appraisal are shown in Table 5.2.Some 32 investment models prepared by CB are available in the project file.The financial rates of return indicated by CB anaLysis range between 25% to47% for poultry and livestock development (except cattle feedlots), 18Z toover 50% for plantation crops, 29% to over 50Z for agro-processing, 15% to 48%for fisheries, and 27% to 50% for farm mechanization (except tractors).Selected models were reviewed during preparation and appraisal, based onSeptember 1984 constant prices and the Bank's commodity price forecasts.

Table 5.2: RATES OF RETURN ON LONGER-TERM SUBLOANS

Financial Economicrate of return rate of return

____ ___(z)

Power tiller 36 84Tractor 25 38

Piggery: 20 sow fattening 28 48Poultry: 10,000 broilers 29 37

Banana 43 77Citru3 46 95

Fish processing 46 62

5 ha fishpond 35 393 ha fish pen 34 60

5.08 Assumptions Used in the Economic Analysis. Financial rates ofreturn have been derived by using the World Bank's commodity price forecasts(Dacember 1984), as appropriate. Illustrative models used for the financialanalysis have been adjusted for computation of economic rates of return basedon the following assumptions.

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5.09 An exchange rate of P 20 per US dollar has been used in theanalysis. Al,l goods and services have been valued at their border prices.For conmodities traded in world markets, prices at the farmgate level havebeen derived from prevailing and projected world market prices. Non-internationally traded commodities, the prices of which include locally con-tributed distortions, have been valued at border prices by applying a standardconversion factor of 0.86 to their financial prices.

5.10 The economic value of labor (family and hired labor) is estimated atits opportunity cost in terms of production foregone in alternative activi-ties. Given the prevailing conditions of underemployment and unemployment inthe Philippines, a factor of 0.5 has been used to value unskilled family andhired farm labor.

5.11 All investment costs, valued at border prices, have been included incalculating economic rates of return. Duties, taxes and subsidies have beenexcluded. Specific conversion factors have been used to convert financialcosts into economic values as follows: construction - 0.84; transportation -0.80; and electricity, gas and water - 0.80. All other financial costs wereconverted by the standard conversion factor (0.86) to derive economic values.

5.12 The financial and economic rates of return were subjected tosensitivity tests and the results are summarized in Annex 7, Table 5. Theanalysis shows that all investment models could sustain decreased benefits of10% combined with increased costs of at least 10%, and in most cases consider-ably more. Rates of return for piggery investments are particularly sensitiveto variations in costs and benefits; consequently, particular attention willhave to be paid in these subloans to achieving cost efficiencies and improvedoutput through efficient management. Since input and output cost-pricerelationships are expected to undergo significant changes in the wake ofongoing economic stabilization measures, deregulation of prices, and fluctua-tions in the peso exchange rate, the financial and economic analysis can atbest be indicative. During project implementation, CB would undertake finan-cial and economic analysis of typical subprojects on a continuing basisthrough a series of evaluation studies (para. 4.18) and keep the participatingbanks informed of the results as an input to their lending decisions. Ratesof return will also be reviewed during Bank supervision of the project toguide the composition of the lending program.

Impact of the Project on CB and on Participating Banks

5.13 CB loans to banks under the project are expected to total US$113.2million, US$51.7 millicn in seasonal production credit and the balance inmedium- and long-term loans. Participating bank subloans would amount toUS$182.5 million. Because interest rates on project subloans will be market-oriented, the project would be self-sustaining for both CB and the retailbanks. Assuming a break-even interest rate on CB funds of 18% p.a., thefinancial projections for years 1-10 show that after meeting interest andadministrative costs and assuming an exchange depreciation (see project file),CB will have a financial surplus amounting to 15% of the total outstandingbalance to cover any arrears (including bad debts) of participating banks toCB (Annex 7, Table 6). Based on a sensitivity analysis at CB interest rates

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of 15Z, 16X and 172, the break-even interest rate would be about 16.5-17Z.The extended cashflow will generate sufficient resources to repay the Bankloan and interest. Since project funds will be rolled over to finance aseries of subprojects, the project's aggregate benefits will be much largerthan those from the initial set of subprojects funded.

B. Risks

5.14 The project is being launched at a time when the Philippine,; is inthe process of implementing an economic stabilization and recovery program.Civen the uncertainties in the financial sector, CB and Government arecontinuing their efforts in support of the sector's rehabilitation andrestructuring. Against this background, two major uncertainties are assoc-iated with project implementation. The first project risk is that the agri-culture sector may recover from its present crisis at a slower pa:e thanexpected, despita the introduction of policies aimed at providing incentivesfor private sector investment, causing demand for project investment credit tobe less than anticipated. However, a continuing review of the Government'sagricultural policies is planned under the Bank-assisted AgriculturalSector/Inputs Project (Ln. 2469-PH). There is also an institutional riskassociated with CB's channeling of funds through a banking system which hasbeen financially impaired by the recent economic crisis. This risk would beaddressed by applying qualifying criteria to select financially viable banksfor participation in the project, extending CB assistance to strengthen thecapacity of participating banks to undertake agricultural lending, andestablishing lending terms which would allow banks to determine spreads oninterest rates which would be sufficient to cover their transaction costs,including the risk of subloan default. Training in project-related skillswould also be provided to the staff of CB and participating banks tofacilitate project implementation.

VI. AGREEMENTS REACHED AND RECOMMENDATION

6.01 During negotiations, agreement was reached with Government and CB onthe following:

(a) Schedules for the phasing out of agricultural credit subsidies andfor project studies (paras. 2.38 and 3.19); and

(b) Principles by which to determine project interest rates (para.4.10).

6.02 During negotiations, assurances were obtained from Government and CBthat:

(a) Subsidies on agricultural credit would be phased out in accordancewith the schedule agreed during negotiations, and no new programwith an interest rate or capital subsidy would be introduced forfunding with CB's own resources (para. 2.38);

(b) Bank approval would be required for individual subloans over P 20million (para. 3.10);

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(c) By December 31, 1985, CB will establish minimum technical norms tobe applied in appraisal and sanction of subloans for farmmechanization investments, and would review the implementation andimpact of these investments (para. 3.18);

(d) All project-related studies would be completed within the time frameagreed upon during negotiations and on terms of reference acceptableto the Bank. Based on the findings of those studies, CB wouldinitiate remedial measures in consultation with the Bank(para. 3.19);

(e) By September 30, 1985, CB and MAF would complete reconstitution ofANDAC and issue a notice indicating the probable composition of thePhilippines' machinery imports during the coming year and invitingmanufacturers and dealers to seek accreditation with AMDAC (para.3.25);

(f) The ALFPAG would have the responsibilities described in paras. 4.04-4.05. The ALFPAG Technical Unit would be staffed by core personnelby September 30, 1985 and its staff would be expanded in accordancewith plans to be established in consultation with the Bank byDecember 31, 1985 (para. 4.05);

(g) By September 30, 1985, CB would furnish to the Bank for review anupdated list of participating banks and the plan for institutionalappraisal of banks expected to participate in the project, andthereafter by March 31 and SeptLmber 30 of each year, furnish to theBank an updating of such list and plan (para. 4.08). CB wouldextend technical assistance to private coumercial banks partici-pating in the project to prepare and implement institutionaldeveLopment plans; five of these plans would be sent to the Bank forcomment by December 31, 1985 (para. 4.09);

(h) Any modification in the Policy Manual for project lending would bemade with the Bank's prior concurrence (para. 4.10);

(i) Interest rates on CB loans to participating banks and on the bankst

subloans would be market-oriented and consistent with principlesagreed with the Bank (para. 4.10);

(j) CB would maintain the financial viability of project operations byproviding adequate counterpart funds, by reviewing and adjustinginterest rates on its loans to participating banks as necessary, andby retaining in ALF all profits necessary to fully cover the cost ofALF operations, provision for bad and doubtful debts, and theforeign exchange risk on the Bank loan. CB will deposit the loanrepayments of participating banks in the ALF and use these funds fornew loans, in accordance with the project's terms and conditions andany further arrangements as may be agreed between the Bank and CB(para. 4.10);

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(k) The technical and extension staff deployed in the field by CB andGovernment would be available to retail banks, upon request, insupport of subproject appraisal and supervision (para. 4.15);

(1) The training program for FY86 wiLl be sent to the Bank for review bySeptember 30, 1985 and thereafter the program for each fiscal yearwill be sent to the Bank by March 31 of each year (para. 4.17); and

tm) CB, in consultation with the Bank, would prepare annual programs forthe evaluation of project activities and related terms of reference.CB would monitor the progress of these evaluations, review theirconclusions and use the findings in future project lending. Thefirst program would be submitted to the Bank by December 31, 1985and thereafter by December 31 of each project year (para. 4.18).

6.03 As a condition of loan effectiveness, all ALF core staff would be inplace (para. 4.03).

6.04 With the above condition, agreements and assurances, the proposedproject is suitable for a Bank loan of US$100 million to the Government of thePhilippines, for a term of 20 years including a grace period of five years.

Table I

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Industrial Origin of Domestic Product at 1972 Constant Prices Crowth Rates (Z)

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983r p

Agriculture, fishery and forestry 6.1 2.6 4.3 8.0 5.0 4.1 4.5 5.0 3.7 3.1 -2.1

Industry 12.4 5.6 8.7 10.4 8.4 6.1 8.0 4.7 4.5 2.1 0.7Hining and quarrying 7.7 0.0 0.0 7.1 13.3 5.9 16.7 4.8 0.0 -9.1 0.0Hhnufacturing 14.3 4.4 3.6 5.8 7.7 7.1 5.2 4.5 3.4 2.1 2.4Construction 9.1 12.5 48.1 32.5 9.4 1.7 15.3 4.4 9.9 3.8 -4.9Electricity, gas, water 0.0 20.0 0.0 16.7 0.0 14.3 0.0 12.5 11.1 10.0 9.1

Services 7.0 6.2 6.3 5.6 4.9 5.9 5.8 6.2 3.4 3.5 3.7Transport, comsunication & storage 11.1 10.0 9.1 11.1 5.0 7.1 2.2 4.3 4.2 4.0 1.9Trade 6.7 6.3 3.5 5.7 7.5 7.0 7.5 6.1 4.1 3.1 6.1Finance and housing 4.4 4.3 10.2 5.6 3.5 5.1 6.5 7.6 -1.4 4.3 6.8Other services 8.0 7.4 4.6 3.3 3.2 5.2 4.9 5.6 5.3 4.2 -0.8

GDP at market prices 8.5 5.0 6.6 7.9 6.1 5.5 6.3 5.3 3.9 2.9 1.1

GNP at market prices 9.3 5.6 6.0 7.2 6.3 5.8 6.9 5.0 3.4 1.9 1.3

r - Revisedp - Preliminary

Source: NEDA National Accounts Staff.

Table 2

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Gross Value Added in Agriculture, Fishery and Foresty by Subsector at 1972 Constant Prices(in billion pesos)

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Agriculture 8.9 9.0 9.9 11.2 12.1 12.7 13.3 14.1 15.0 15.4 15.9 15.0

Paddy 2.7 2.8 3.1 3.4 3.4 3.8 3.8 3.9 4.2 4.3 4.5 3.9Corn 1.0 0.9 1.1 1.2 1.2 1.3 1.4 1.4 1.4 1.5 1,5 1.4 3

Coconut, lncl. copra 1.2 1.0 0.8 1.1 1.4 1.3 1.3 1.3 1.3 1.4 1.3 1.3 *

Sugarcane 1.1 1.1 1.4 1.4 1.6 1.3 1.3 1.4 1.3 1.3 1.5 1.1Banana 0.6 0.7 0.9 1.3 1.4 1.7 2.0 2.2 2.4 2.4 2.3 2.4Other crops 2.3 2.4 2.6 2.8 3.1 3.2 3.6 4.0 4.3 4.4 4.7 5.0

Livestock 1.8 2.0 2.0 1.7 1.7 1.8 1.9 2.0 1.8 1.9 2.0 2.2

Poultry 0.7 0.8 0.8 0.9 1.0 1.1 1.2 1.4 1.6 1.9 2.2 2.5

Fishery 2.6 2.9 3.0 3.2 3.3 3.5 3.7 3.7 3.9 4.1 4.3 4.4

Forestry 2.0 2.4 1.8 1.3 1.6 1.6 1.5 1.4 1.4 1.2 1.0 0.7

Total 16.0 17.0 17.5 18.2 19.7 20.6 21.6 22.6 23.7 24.6 25.4 24.8

Note: Totals may not add up due to rounding.

Source: National Accounts Staff, NEDA.

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Table 3

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Structure and Growth of the Financial System

Real rates ofAssets (1983) growth pea.

P billion (Z) 1975-79 1979-83

Central Bank 130.1 23.7 6.9 13.9

Banking system 325.8 59.5 10.2 8.7Coumercial banks 235.0 42.9 9.5 8.0Thrift banks 16.1 2.9 24.3 8.5Rural banks 9.5 1.7 4.1 5.7Specialized government banks 65.2 11.9 11.6 12.0

Nonbank financial intermediaries 92.0 16.8 6.2 4.5

Total Financial System 547.9 100.0 8.7 9.0(Of which: public institutions) (255.3) (46.6) (6.3) (11.5)

Source: Central Bank of the Philippines.

Table 4-47-

?IUILIPZ

AGRICULTURAL CREDIT PROJECT

Total Assets of the FinancIal System(ClUlon Peso)

1974 1975 1976 1977 1978 1979 1980 1981 1982 19 83p

Central lank 21.4 26.1 29.0 29.0 38.4 51.0 65.4 71.6 91.7 122.3

Ranki gff 9Srt 54.1 69.9 79.9 95.3 121.8 154.0 188.8 219.2 269.8 318.6

Co."un:L3l Tanks 42.4 53.2 58.7 68.7 89.8 113.9 138.4 157.7 195.8 235.0Private 29.9 35.1 0.2 *2.6 56.4 70.0 85.1 96.5 115.8 134.1Covernment 12.5 18.1 18.5 18.6 22.3 28.9 34.6 40.6 53.3 60.0Foreign, bmaks - - - 7.5 11.1 15.0 18.7 20.6 26.7 40.9

Thrlft J nks 1.7 2.1 3.0 4.1 5.6 7.7 10.6 11.7 12.6 16.0Savings 1.2 rIX 2.0 2.8 3.9 5.T 7.T 7.0 5.9 7=Private development banks /b 0.3 0.4 0.5 0.6 0.8 1.0 1.6 2.6 3.7 4.5Savings & loan associatlons 0.2 0.3 0.5 0.7 0.9 1.3 1.6 2.1 3.0 4.1

- aral Tanks Ic 2.1 2.8 3.0 3.4 4.1 5.0 5.6 6.6 8.1 9.2

Specialized Gov't Banks 7.9 11.8 15.2 19.1 22.3 27.4 34.2 43.2 53.3 58.4Development lank of the Phillppines /b 6.7 9.6 12.7 15.8 18.8 i2.3 28.0 35.9 45.2 49.7Land Bank 1.2 2.1 2.4 3.2 3.4 5.0 6.1 7.1 7.9 8.5Philippine Aonna BaRak - 0.1 0.1 0;1 0.1 0.1 0.1 0.2 0.2 0.2

Ronbank Flancial Intermediaries 20.4 26.3 33.8 34.2 40.3 48.1 58.9 59.6 69.0 72.7

Insurance Co em 10.0 11.9 15.2 17.5 21.6 24.6 29.5 33.3 40.7 ;4.1vverent I-. /b 6.5 7.7 10.0 11.3 13.8 15.6 19.5 22.0 27.0 3TOMPrivate Id 3.5 4.2 5.2 6.2 7.8 9.0 10.0 11.3 13.7 13.7

wes-tent Instltutlons 6.9 10.3 13.2 14.5 16.0 20.4 25.6 23.5 25.6 25.5

Flnacall copantee /e 2.3 3.5 4. 6 5.8 6.8 9.7 11.9 12.1 12.9 12.5

nveestment companles 0.7 2.0 3.8 3.9 4.4 4.1 5.0 5.5 5.9 5.1

Others (investment bouses) /e 3.9 4.8 4.8 4.8 4.8 6.6 8.7 5.9 6.8 7.9

Trust Operations (Fund Managers) /a 2.0 2.6 3.3 0.5 0.8 1.2 1.7 0.7 1.1 1.5

Other Financial Intermediaries 1.52 2.03 2.12 1.72 1.92 1.92 2.12 2.12 1.62 1.62

Total 95.9 122.8 142.7 158.5 200.5 253.1 313.1 350.4 430.5 513.6

Ia Inludes Goverment Service Insurance Systus (OSIS) and Social Security System (SSS).

lb For 1983, as of November.

Jc For 1983, as of September.

/d As of December 1982.

/a For 1983, as of June.

P - Preliminary.

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Philippine Financial System

Nmber of rtnancial Institutione as of Yeer-End 1980 to 1983 /a

Increase (decrease) in anmber1980 1981 1982 1983 1982/83

Read Head Head -sadTotal Office Rranchas Other Total Office Branches Other Total Office Branches Other Total Office Dranches Other Total

Commerclal banks 1,48/Lb 33 1,347 319 1,699/c 34 1,452 307 1,793 34 1,554 316 1,904 - 102 9 111

Rural banks 1,1535 1,038 4 126 1,18 1,031 72 141 1,244 949 94 109 1,152 (8t) 22 (32) (92)

Spcialised Gov't banks 92 3 70 43 116 3 72 44 119 3 71 23 97 - (1) (21) (22)

Thrift banks 671 140 286 213 639 137 320 226 683 136 353 219 708 (1) (33) (7) 25 1Savings & mortgage banks 266 9 126 54 189 8 140 56 204 8 140 61 .209 - - 5 5Private dev. banks 154 44 65 73 182 45 75 79 199 45 101 72 218 - 26 7) 19Stock savings 6 loan

associations 251 87 95 86 268 84 Ins 91 280 83 112 86 281 (1) 7 CS) I

Nonbanktng institutions /d 1,554 1,340 269 - 1,629 1,377 306 - 1,683 1,480 333 - 1,613 103 27 - 130

Total 4,960 2,554 1,996 701 5251 2,5S2 2,222 718 5 SZ2 2.502 2,405 667 5.674 20 183 (51) 152

/a Includes subbranches, extension and all other offices.

/b Excludes oversesa offices.

/c Excludes overseas offices and agencies.

/d Includes financial Lntereedlaries and thrift Institutions.

Sourcess CS Fact 0ooka on Philippine Financial System.

'*6

Table 6-49-

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Agricultural Loans Granted - Sumary by Institution(P bllUion at 1978 prices) /a

1979 1981 1983Farm pro- All ac- Farm pro- All ac- Farm pro- All ac-

Agency duction/b tivities/c duction/b tivities/c ductionlb tivitieslc

Private CommercialBanksAmount 8.9 27.8 13.8 38.2 11.3 35.1% of total 57.0 70.0 69.0 75.0 65.0 80.0

Government Banks /dPNB 2.6 6.9 2.1 6.7 2.1 4.1DEP 0.4 0.7 0.5 0.7 0.05 0.1LBP 0.7 1.0 0.1 1.4 0.1 0.5

Subtotal 3.7 8.6 2.7 8.8 2.25 4.77 of total 23.0 22.0 13.0 17.0 13.0 11.0

Thrift BanksAmount 0.4 0.5 0.6 0.7 0.8 0.81 of total 3.0 1.0 3.0 2.0 5.0 2.0

Rural BanksAmount 2.6 2.6 3.0 3.0 3.0 3.0% of total 17.0 7.0 15.0 6.0 17.0 7.0

Total 15.6 39.5 20.1 50.7 17.4 43.6

/a Deflated by producers' price index for agricultural products, 1978-100; 1979-114.26;1981-125.99; 1983-155.95.

/b Represents loans exclusively for farm production activities./c Represents loans for farm production, processing, marketing and other agriculture-

related activities./d Philippine Amanah Bank has not reported any agricultural loans.

AcRICULTUAL CIZIT FbWROCT

Agricultural Loan. Granted and OuUCtadl. b, Institution( 1ll1ion at current ticee')

co,admedAverage X share "Baual aemilea

1978 1979 1930 1981 1962 1983 A419810 )PSICA Kpand.dgb PStC Expanded PCsC xinpnnded iStC I.; 7SIC -RTF 7SI Vpi4 1U!re o r tg

Loane CrentadoowerveouF

PI3 1,020.6 6,501.3 3,030.5 7,844.3 3,093.3 8,432.6 2,605.4 8,450.3 3,642.8 6,625.6 3,227.5 6,365.3 12.7 13.6 25.9 (0.4)DIP 470.6 696.6 394.3 750.4 538.7 673.3 674.7 864.1 603.6 632.8 79.7 109.4 2.1 1.1 (29.9) (30.9)LUJACA 271.5 219.6 848.2 1,062.1 71.6 831.4 130.5 1,720.0 221,3 1,224.1 207.6 743.9 1.3 1.6 (5.2) 20.7

subtotal 1,762.7 7,487.7 4,273.0 9,656.6 3,703.6 9,937.3 3,410.6 11,034,4 4,467.7 8,482.7 3,515.0 7,238.6 16.1 16.5 14.6 (0.7)

o_reial banks 7,817.8 25,848.3 10,213.1 11,796.9 13,342.6 39,114.6 17,430.9 48,116.3 17,433.5 45,826.5 17,643.6 54,670.6 64.1 75.3 17.7 16.2urol banks 2,384,8 2,384.8 2,950.4 2,950.4 3,257.3 3,257.3 3,729.9 3,729.9 4,307,0 4,307.0 4,610.3 4,610.3 16.2 6.5 14.1 14.1

Ihrift banks 421.1 454.1 480.1 527.9 642.9 706.5 805.2 898.3 1.124.5 1,437.9 1.169.7 1,285.5 3.6 1.7 23.1 23.1Private dey. bank. 97.5 117.0 123.6 150.4 170.9 203.2 215.0 263,1 407.3 579.3 330.3 400.4 1.0 0.5 27.6 27.9Savings A mortgage banks LC 65.8 79.3 79.5 100.5 96.0 127,3 116.0 161.0 162.§ 324.3 80.4 106.1 0.5 0.4 4.1 6.05SLAs 257.8 257.8 277.0 277.0 376.0 376.0 474.2 474.2 534.3 534.3 779.0 779.0 2.1 0.8 24.8 24.6

Subtotal 10.623.7 20.687.2 13,643.8 35,275.2 17,242.8 43,076.4 21,966.0 52,744.S 22,665.0 51,571.4 23.443,6 60.566,4 63.9 83.5 1.7.2 16.1

Total 12,386.4 36,174.9 17,916,8 44,932.0 20,946.4 53,015.7 25,376.6 63.778.9 27.332.7 60.054.1 26.958.6 67,805.0 100.0 100.0 16.8 13.4

lasn Outtatnding

2,837.6 7,963.4 2,943.0 10,503.6 3,157.0 9,146.5 3,806.8 10,110.2 4,790.0 11,564.4 4,987.1 12,547.0 20.3 29.6 11.9 9.5DIP 1,863.4 2,861.9 2,395.4 3,478.2 2,564.4 3,765.4 3,038.3 4,596.2 3,131.9 4,119.8 2,675.0 4.103,4 14.1 11.0 7.5 7.5LS/ACA 477.6 582.7 1,132.1 1,586.3 296.1 1,231,7 143.4 3,204.2 519.0 3,306.7 765.9 1,855.0 3,1 3.4 (15.8) 26.1

Subtotal 5.178.6 11.406.1 6,470.5 15,168,1 6,019.5 14.143.6 6,988.5 17,910.6 8.440.9 18.992.9 8.448.0 18.505.4 37.5 46.0 10.3 10.2

?tivate5_rcial banks 2,910.7 6,147.8 4,531.6 9,416,5 6,696.1 14,335.1 6,601.7 14,375,6 7,115,6 14,983,9 7,086.8 16,426.2 31.5 37.2 19.5 24.51ural bank. 3,114.6 3,114.6 3,773.8 3,773.8 4,241.0 4,241.0 4,874.1 4,874.1 5,770.7 5,770.7 6,514.8 6,514.8 25.5 13.5 15.9 15.9Thrift banks 610.6 722.7 859.6 915,6 1,013,1 1,104.0 961.6 1,124.2 1,215,9 1,364,0 1,390,3 1,563.0 5.5 3.3 17.9 16.7trivet. dav. bank. 198.7 246.4 238.8 290.1 309.6 371.1 369,9 448.9 461.9 365.5 576.5 667,1 2.0 1.2 23,8 22.0Sawin. 4 eowtgage bank. 179.5 243.9 250.6 295.1 350.7 380,1 147.9 211.3 249.6 294.1 179.6 263.7 1.2 01 t / 1,6SSLAo 232.4 232.4 330.4 330.4 352.8 352.8 464.0 464.0 504.4 504.4 632.2 632.2 2,3 1.3 2I22 22.2

Subtotal 6,635.9 9,985.1 9,125.2 14.10539 11,950.2 19,680.1 12,457,6 20,373.9 14,102.2 22,118,6 14,991.9 26,504.0 62.5 54,0 17,7 21.6

Total 11,8164.5 21.393,1 15.595.7 29,274.0. 17,969.7 33.823.7 19,446.1 38.283,9 22.543,1 41,111.5 23.439,9 45,009.4 100.0 100.0 14.7 16.0

/a The ecope of the Philippine Standard Industrial Clessification (PSIC) includes loan, purely for form production actltvitle.

Lb Expanded scope include, loans for fare production, processing, marketing and other agriculture-related *etivitice.

sa Svinge and mortgage banks.

/i Actual Is 0.05!.

la The Agricultural Credit Adalnistretion (ACA) is a nonbank government agency for the promotion of farer cooperativee a*d provision of credit to "all farmer. and land reform benefii^a-rieo. The ACA va. mrSgd with the lAnd knk of the Philippines in 1982.

Sources UAC.

-11 s ~~~~~~~~Tble 8

ARCULWTUUAL CREDIT MROJET

haricultural Loams Granted and 0utetandang. by Coamodity(P milliom at current prices)

CompoundedAverge" Z shae anmual nomlna1

1978 1983 1978W 3 z!rmf rate ()PSICt- Spandedl/b Y8IC Expanded PSIC Expaned RSIC zJp nd d

Loans GrantedFood Cmmditties

Rice 1,758.9 3,191.7 1,884.3 5,524.5 8.3 8.6 1.4 11.6Fruits and vegetables 511.3 1.834.6 1,963.4 4,459.0 7.4 6.4 30.9 19.4Liveetock and poultry 1,484.9 2,892.0 4,270.1 7,663.0 13.8 10.0 23.5 21.5SJiberies 776.2 1.865.5 2,397.1 4,855.6 6.4 5.4 25.3 21.1

Others 198.6 608.0 231.3 301.4 1.2 1.6 3.1 (13.1)

Subtotal 4,729.9 10,391.8 10.746.2 22,803.5 37.1 32.0 17.8 17.0

Export and Conwreial cropsCoconut 1,471.4 5,884.7 2,134.9 14,593.1 8.8 18.3 7.7 19.9Sugar 2,675.2 8.993.1 8,200.3 12,874.1 30.3 23.7 25.1 7.4Tobacco 200.6 1,678.2 849.4 3,042.6 2.0 4.7 33.5 12.6Otbers 393.1 1,801.9 1,086.4 3,314.0 3.2 4.3 22.5 13.0

Subtotal 4,740.3 18,357.9 12,271.0 33,823.8 44.3 51.0 21.0 13.0

Forestry 1,124.1 2,217.6 2,428.4 3.022.9 0.9 4.7 16.7 6.4Others 1,534.3 4,949.8 734.0 7,375.8 8.2 IL.O (13.7) 8.3

Subtotal Ic 12,128.6 35,917.1 26,179.6 67,026.0 97.9 99.2 16.6 13.3

SSLIAs /d 257.8 257.8 779.0 779.0 2.1 0.8 24.8 24.8

Total 12,386.4 36,174.9 26,958.6 67,805.0 100.0 100.0 16.8 13.4

Loana OatstsndingFood Consoditiss

Rica 3,093.6 4.331.7 3,494.7 5,329.7 17.4 15.3 2.5 4.2Fruits and vegetables 304.5 691.9 1,248.9 1,800.4 4.7 4.5 32.6 21.1Livestock and poultry 1,792.4 2.069.5 4,743.4 5,967.8 17.8 12.1 21.5 27.2.luberiec 636.6 837.3 1,533.1 2,241.4 6.5 4.8 19.2 21.8Others 213.1 312.2 328.6 1,840.6 1.8 2.3 9.0 42.6

Subtotal 6.040.2 8,242.6 11,348.7 17,179.9 48.2 39.0 13.4 15.8

Export and Coee rcial Crop.Coconut 1,129.0 2,207.9 1,649.6 6,309.1 7.8 11.0 7.9 23.4sugar 2,695.1 6,401.8 7,261.1 12,290.6 27.8 29.5 21.9 13.9Tobacco 159.6 889.9 148.4 1,334.0 0.8 3.5 (1.4) 8.4Others 276.8 1,109.5 1,319.2 2.216.6 3.8 3.8 36.6 14.8

Subtoteal 4.260.5 10,609.1 10,378.3 22,150.3 40.2 47.8 19.5 15.9

Forestry 455.0 570.2 629.3 767.5 3.5 2.3 6.7 6.1Others 826.4 1,738.8 451.4 4,279.5 5.8 8.6 (11.4) 19.7

Subtotal /c 11,582.1 21.160.7 22,807.7 *4.377.2 97.7 98.8 14.5 16.0

SSLAs /d 232.4 232.4 632.2 632.2 2.3 1.2 22.2 22.2

Total 11,814.5 21,393.1 23.439.9 45.009.4 100.0 100.0 14.7 16.0

/a lhe PhilLpplne Standard Industrial Classification (PSIC) includes loans only for farm productionactivities.

/b Expanded included loans for farm production activities, processing, marketing ad other agriculture-related actIvities.

/c Inc]ludes unclsaIfled LJP loans.

/d No breakdown by commodity available.

-52- Table 9

PILLIPPINES

AGRICULTURAL CREDIT PROJECT

Commercial Banks: Assets and Liabilities, 1981-84 /a(P billion)

Dee 31, 1981 Dec 31, 1982 Dec 31, 1983 Jun 30, 1984Amount % Amount 2 Amount Z Amount %

Assets

Cash and due from banks 28.99 17.0 37.61 18.9 35.81 14.8 48.33 17.9

Loans (net) 103.78 60.7 120.45 60.6 154.71 63.8 160.84 59.4

Investments 16.95 9.9 20.92 10.5 21.69 8.9 25.71 9.5

Other assets 21.19 12.4 19.88 10.0 30.18 12.5 35.78 13.2

Total 170.91 100.0 198.86 100.0 242.39 100.0 270.66 100.0

Liabilities and Equity

Deposits 80.28 47.0 97.69 49.1 120.51 49.7 123.07 45.5

Bills payable 48.77 28.5 59.03 29.7 64.39 26.6 73.30 27.0

Deposit substitutes 12.76 7.5 12.22 6.2 12.02 5.0 12.04 4.4

Others 36.01 21.0 46.81 23.5 52.37 21.6 61.26 22.6

Other liabilities 28.77 16.8 26.98 13.6 39.30 16.2 55.38 20.5

Capital accounts 13.09 7.7 15.16 7.6 18.19 7.5 18.91 7.0

Total 170.91 100.0 198.86 100.0 242.39 100.0 270.66 100.0

/a Including Government-owned PNB and LBP.

Source: Central Bank - Supervisory Reports Office and Department of Loans and Credit.

- 53 - Table 10

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Saving8 and !brtgage Banks: Assets and Liabilities, 1981-84(P milllon)

Dec 31, 1981 Dec 31, 1982 Dec 31. 1983 Jun 30, 1984Amount x Amount % Amount x Amount S

Assets

Cash and due from banks 585.4 11.7 466.0 7.9 727.2 9.8 242 3.2

Loans (net) 3,025.6 60.3 3,716.0 63.4 4,757.4 64.4 5,103 68.8

Investments 760.5 15.1 876.3 14.9 927.4 12.5 888 12.1

Other assets 648.7 12.9 811.9 13.8 979.3 13.3 1,181 15.9

Total 5,020.2 100.0 5,870.2 100.0. 7,391.3 100.0 7,414 100.0

Liabilities and Equity

Deposits 4,305.2 85.8 5,089.1 86.7 5,952.7 80.5 5,888 79.4

Bills payable 119.4 2.4 87.1 1.5 330.9 4.5 277 3.7

Other liabilities 247.4 4.9 239.6 4.1 542.5 '.3 654 8.9

Capital accounts 348.2 6.9 454.4 7.7 565.2 7.7 595 8.0

Total 5,020.2 100.0 5,870.2 100.0 7,391.3 100.0 7,414 100.0

Source: Central Bank - Supervisory Reports Office and Department of Loans and Credit.

-54 ~ Table 11

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Private Development Banks: Assets and Liabilities, 1981-83(P million)

Dec 31, 1981 Dec 31, 1982 Dee 31, 1983Amount Z Amount z mount Z

Assets

Cash and due from banks 249.5 9.5 348.3 9.5 452.1 9.8

Loan portfolio (net) 1,743.1 66.7 2,405.9 65.3 3,077.0 66.7

Investments 345.9 13.2 505.1 13.7 502.8 10.9

Other assets 277.5 10.6 426.2 11.6 581.3 12.6

Total 2,616.0 100.0 3,685.5 100.0 4,613.2 100.0

Liabilities

Deposits 1,202.6 46.0 2,019.2 54.8 2,472.6 53.6

Borrowings 842.3 32.2 923.8 25.0 1,222.6 26.5

Other liabilities 108.7 4.1 211.5 5.8 281.4 6.1

Capital accounts 462.4 17.7 531.0 14.4 636.6 13.8

Total 2,616.0 100.0 3,685.5 100.0 4,613.2 100.0

Table 12-55-

PRILIPPINES

AGRICULTURAL CREDIT PROJECT

Stock Savings and Loan Associations: Assets and Liabilities, 1981-84(t million)

Dec 31, 1981 Dec 31, 1982 Dec 31, 1983 Jun 30, 1984Amount Z Amount Z Amount X Amount X

Assets

Cash and due from banks 296 14.4 433 14.4 368 8.9 337 11.7

Loans (net) 1,320 64.1 1,847 61.7 2,933 71.2 1,888 65.5

Investments 244 11.8 399 13.3 291 7.1 269 9.3

Other assets 199 9.7 319 10.6 526 12.8 389 13.5

Total 2,059 100.0 2,998 100.0 4,118 100.0 2,883 100.0

Liabilities and Equity

Deposits 1,467 71.2 2,187 72.9 2,761 67.1 1,867 64.8

Bills payable 103 5.0 131 4.4 248 6.0 153 5.3

Other liabilities 172 8.4 194 6.5 506 12.3 355 12.3

Capital accounts 317, 15.4 486 16.2 603 14.6 508 17.6

Total 2,059 100.0 2,998 100.0 4,118 100.0 2,883 100.0

Source: Central Bank - Supervisory Reports Office and Department of Loans and Credit.

- 56 - Table 13

PRILIPPINES

AGRICULTURAL CREDIT PROJECT

Rural Banking System: Financial Condition, 1979-83m(P illion)

1979 1980 1981 1982 1983

Total Resources 4,921 5,524 6,490 7,978 9,324Loans and discounts (net) 4,075 4,573 5,347 6,510 7,472Cash and due from banks 417 469 548 696 897Investments 114 127 171 253 326Other assets 315 355 424 519 483

Deposit Liabilities 1,584 1,699 2,053 2,572 3,127Demand 27 14 25 21 24Savings 1,162 1,246 1,450 1,753 2,040Time 395 439 5/8 798 1,064

Borrowings 2,400 2,797 3,229 3,930 4,421STD-special financing 264 284 311 356 396Bills/loans payable 2,136 2,513 2,918 3,574 4,025

Capital Accounts 708 755 884 1,012 886Paid-up common stock 366 405 492 579 724Paid-up preferred stock 85 94 109 131 158Retained earnings 145 164 203 221 256Undivided profits 112 92 80 81 75

Gross Income 432 555 647 784 943Interest on loans 325 416 492 589 713Commission/service charge 62 77 77 95 108Other earnings 45 62 78 100 122

Total Expenses 350 474 556 689 847Interest on deposit liabilities 106 157 189 232 292Interest on borrowed funds 38 43 53 100 143Salaries/compensation 99 149 171 193 218Other operating expenses 107 125 143 164 194

Net Income 82 81 91 95 96Net income ratio (X) 19 15 14 12 10Net income to average paid-up

capital (x) 20 17 16 14 11Net income to combined capital

accounts (2) 12 11 11 9 9Net income to gross assets (X) 1.7 1.5 1.4 1.2 1.0

Source: Central Bank of the Philippines, 1983 Annual Report on the RuralBanking System.

_ 57 - Table 14

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Central Bank Rediscounting of AgriculturalSubloans by Institution, 1983/84

(At current prices7

Amount (P mln) Negative grwth rates (Z)1st sem. 2nd sea. 1st sem. 1st sem. 1983- 2nd sem. 1983-

1983 1983 1984 1st sem. 1984 lt sem. 1984

Government Banks

PNB 1,558 1,746 611 (60.8) (65.0)

DBP 33 41 0 (99.8) (99.8)

LBP 598 221 4 (99.4) (98.4)

Subtotal 2,189 2,008 615 (71.9) (69.4)

Private Banks

Private commer-cial banks 4,662 2,672 335 (92.8) (87.5)

Thrift banks 68 46 11 (84.1) (76.4)

Rural banks 1,627 1,573 799 (50.9) (49.1)

Subtotal 6,356 4,291 1,145 (82.0) (73.3)

Total 8,545 6,299 1,760 (79.4) (72.1)

- 58 - Table 15

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

-Estimated DisbursementsZUS$ million)

IBRD Disbursements Disbursement profilefiscal Seasonal Medium- & long-term /a for all agriculturalyear & production credit & technical Cumulative projects in thesemester credit assistance Amount Z Philippines (t)

19861st 8 3 11/b 11 02nd 30 5 46 46 3

1987--lS-t 5 6 57 57 7

2nd 2.5 6.5 66 66 13

1988_st - 7 73 73 192nd - 7 80 80 27

1989=St - 8 88 88 352nd - 8 96 96 44

1990_st - 4 100 100 532nd 62

1991_s t 712nd 78

19921st 852nd 90

1993s t 94

2nd 98

1994--lS-t 100

/a Seasonal production credit has not been funded by previous projects butdisbursements are expected to proceed rapidly in view of the Philippines'critical need for sucb resources and the proposed front loading of theBank's disbursement rate. Estimated disbursements under medium- and long-term credit are less than past annual disbursements averaging US$18 mil-lion under all Bank-assisted credit projects in the Philippines during1979-84 (Annex 2, para. 3).

/b Includes disbursements under Special Account.

-59 -ANNEX 1Page 1 of 9

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

PoLicy and Institutional Reforms

1. The following gives details of four of the more important policy andinstitutional reforms that would be carried out by CB in conjunction with theproject. These concern deregulation of interest rates on CB-rediscountedsubloans, phasing out of government subsidies on agricultural credit, reviewof banking services in rural areas, and review of CB's rediscounting policiesand the related arrearages problem.

Deregulation of Interest Rates

2. Interest rates on project-assisteu loans and subloans will bemarket-oriented and will have the following major features: (a) subloaninterest rates will be determined by banks participating in the project, andwould no longer be prescribed by CB; (b) interest spreads on subloans wiLl bedetermined by banks on the basis of their individual average intermediationcosts for their entire loan portfolio as well as the characteristics of theindividual subloans; and (c) CB's interest rates on project funds onlent toretail banks will not be lower than (i) the weighted average cost of thebanking system's savings and time deposits, including the cost of mobilizingsuch deposits; and (ii) CB's break-even interest rate on project operations,i.e., the rate which fully covers its cost of borrowing ALF funds from theWorld Bank and the domestic bond market, an element of foreign exchange risk,and project-related costs. The interest rate structure under the projectwould thus be free of any subsidies, in contrast to previous CB and Bank-assisted agricultural credit programs.

3. Objectives of Interest Rate Reform. In the past, easy availabilityof CB's cheap rediscounting facility discouraged the banking system's depositmobilization effort. The rural banking system now draws almost 50Z of itsresources from CB, which means that rural banks operate more as retail creditoutlets than as effective intermediaries between rural savers and borrowers.Even the Government-owned PNB, LBP and DBP and major commercial banks havebeen heavily dependent on CB's low-cost resources for agricultural lending.Apart from the initial provision of low-cost resources, CB also has been car-rying heavy arrearages against its low-cost loans to retail banks. Realign-ment of interest rates on CB's rediscounting facilities is thus necessary asan important step toward encouraging greater deposit mobilization. Inaddition, flexible spreads on bank subloans would increase the profitabilityof financial intermediation, and contribute to structural expansion of thebanking system, greater efficiency in resource allocation, and increasedlending to agriculture.

4. In February 1984, CB generally moved toward rediscounting rateswhich made the cost of all types of funds provided by CB to retail banksdependent on the Manila Reference Rates (MRRs) but it still indirectly

- 60 - ANNEX 1Page 2 of 9

regulated the ultimate interest rates by prescribing the spreads to be set bythe retail banks on CB-assisted subloans. Further, MRRs represented theweighted average interest rate paid by the ten financial institutions with thelargest volume of deposit substitutes on 90, 180 and 270 day placements. Assuch, they do not necessarily reflect the subloan interest rates charged byall segments of the banking system on the total loan portfolio. CB hastherefore agreed that the MRR will not be used as a determinant of the market-oriented interest rate for project-assisted subloans. The concept thatproject-assisted subloans should carry market-oriented interest rates based onthe principles stated above has been approved by CB's Monetary Board.

5. During project implementation, the interest rate structure would besubject to a continuing review since questions are likely to arise, such as:whether CB intervention through its open market operations in any waycontributes to distortions in market-oriented interest rates; are market-determined interest rates consistent with the rates of return on investmentsfinanced; and whether the banking system tends to retain excessive spreadsespecially in situations where competition is absent. These aspects will bemonitored by CB during project implementation.

6. During 1984, real interest rates turned significantly negativebecause the inflation rate was as high as soZ (see following table). Theongoing economic stabilization program supported by an International MonetaryFund Standby Agreement is expected to keep domestic inflation at a reasonablelevel and the inflation rate is expected to show a downward trend asfollows: 1985-20Z; 1986-15%; 1987 and 1988-10%. Over a period, interestrates on both deposits and loans are expected to be positive. The currentlyhigh interest rates (30-35Z) on subloans are also expected to decline as theeconomy recovers and inflation decreases.

ANNEX 1-61 - Page 3 of 9

NOMINAL AND REAL INTEREST RATES ON DEPOSITS AND LOANS

Savings andtime deposits Range of interest rates on(P billion) Savings deposits Time deposits Loans /a(at current Nominal Real Nominal Real Nominal Real

Year prices) (%) (Z) /b (X) (X)lc (X) () /c

1980 77 9-9.5 9-9.5 14-14.5 14-14.5 15-18 15-181981 86 8-12/c (5)-(1) 10.5-18 2.5-5 17-18 4-51982 105 8-12 (1)-(3) 10.5-18 1.5-9 17-21 8-121983 125 8-12 (l)-(3) 13-21 4-12 18-22 9-131984 142 10-15 (40)-(35) 15-22 (35)-(28) 21-32 (29)-(18)(Sept)

/a Relates to collaterized loans. Interest rates on noncollateralized loansare usually higher by 2-3 percentage points.

lb Deflated by changes in CPI, 1980=100. Figures in parentheses arenegative.

/c Interest ceilings on deposits, and subloans above two years were liftedin January 1981. Interest rates on short-term subloans were deregulatedin January 1983, except for loans rediscounted with CB.

Phasing Out of Government Subsidies on Agricultural Credit

7. CB and Government will carry out a plan to phase out subsidies byrealigning interest rates on credit programs. Subborrowers enjoy an interestsubsidy ranging from 2.6% to about 30%, depending on the source of funds. Theinterest subsidy on the Central Bank's Special Time Deposits placed withretail banks to fund government-sponsored credit programs is particularlysubstantial relative to the rediscounting rates (Table 1). Governmentagencies/institutions, including PNB, DBP and the Minl7try of HumanSettlements, also administer special credit programs - most of which areeligible for CB rediscounting. The low interest rates charged by theseinstitutions indicate that large interest subsidies are currently beingenjoyed by subborrowers. In addition, CB holds about P 700 million allocatedfrom the government budget for special financing programs, among other things,for disbursement at subsidised interest rates (Table 2). The government willreview these programs to determine which of the programs justify subsidy. Atnegotiations an assurance was obtained from CB and the government that therealignment of interest rates will be completed in accordance with thefollowing schedule.

1I Masagana 99, Maisagana, Food Quedan Financing Scheme, special agricul-tural relief fund (SARF), Pagkain Nv Bayan program (rice on governmentlands) and KKK programs. Repayment performance under most of theseprograms is poor, involving heavy costs to the public sector.

ANNEX 1Page 4 of 9

- - ~~~~~~~~~~~62-

PHASING OUT OF SUBSIDIES

Credit Programs Phase-Out Period

a. Credit funded from CB's own All new lending to be atresources market-oriented rates,

effective immediately.

b. Credit funded from government and Government and CB to estab-other resources but channelled through lish criteria by DecemberCB: 31, 1985 to determine which(i) programs listed in Table 2 to this of the programs under (b) and

Annex (c) justify subsidy.(ii) other programs

Subsidies on credit orogramsincluded in (b) (i), whichdo not-meet criteria forexceptions, to be phased outby December 31, 1986.

c. Credit funded and administered by- Subsidies on (b) (ii) andGovernment outside the banking tc) wdhich do not meet estab-system lished criteria to be phased

out in accordance with aprogram and timetable to beagreed with the Bank byMarch 31, 1986.

Review of Banking Services in Rural Areas

8. CB would carry out a comprehensive review of the status of bankingservices available in rural areas; constraints to future growth of such-services; options available for rehabilitation; consolidation and exparsion ofthe rural banking system; and the role of commercial and government banks inexpanding their rural services.

9. The proposed review will examine the following specific points:(a) the rationale, performance, problems and adequacy of present bankingorganizations in rural areas, particuLarly unit, branch and group bankingsystems following the traditional classification (commercial, thrift, ruraland government banks) by provinces; (b) growth and development of consolida-tions, mergers, correspondent banking and holding company relationships andtheir likely implications to, and impact on, the availability of efficientrural banking services; (c) monetary, regulatory and other legal provisionsand their role in promoting or restricting the establishment of branch andunit banks and their effects an competition; and (d) the nature and scope of

''-- ' ~~~~~~~~~~~~~~~ANNE 1- 63 - Page 5 of 9

banking services needed for countrywide agricultural development and thecapability of the present system to meet these needs. Additionally, thereview would address the following institution-specific matters: (a) Organ-izational structure. Composition, structure and staff expertise available tomeet the demand for specific banking services; (b) Banking ServicesRendered. Nature, scope and limitations on the type of services offered;(c) Policies and Procedures. Internal management policies and proceduresadopted in the performance of various banking transactions; (d) FinancialPerformance and Other Results of Operations; and (e) Regulatory Aspects.Impact of existing monetary policies, banking laws, rules and regulations inrelation to lending and investments in subsidiary undertakings, depositmobilization and access to other private and government sources of funds.

10. Terms of Reference. The study on banking services in ruraL areaswould be funded by the proposed project and carried out under the followinggeneral terms of reference which were reviewed and agreed to duringnegotiations:

(a) review the status of banking services in rural areas;

(b) identify various constraints to future growth in such services;

(c) recommend policy measures to rectify operational inefficiencies ofbank branches and unit banks, including strategies for consolidationand rehabilitation of financially distressed banks;

(d) review the performance of selected consolidated rural banks andexplore possibilities for the expansion of banking services in ruralareas;

(e) evaluate the performance and contribution of banks to ruraldeveLopment financing; and

(f) analyze and recommend alternative strategies in the monetary,reguLatory, and branching policies affecting the delivery of bankingservices in the rural areas.

Review of CB's Rediscounting Policies and the Arrearages Problem

11. CB would carry out a comprehensive review of its rediscountiiigpolicies and procedures and matters related to the arrearages problem duringthe first year of the proposed project.

12. Rediscounting Arrearages. As of October 3, 1984, rediscountingarrearages totalled P 5.2 billion, of which P 2.4 bilLion pertained to ruralbanks, P 1.7 billion to commercial banks and P 0.4 billion to thrift banks.While delinquent accounts of commercial and thrift banks represented recentemergency loans/special credit accommodations, about 64X or P 1.6 billion ofrural banks' past due accounts related to supervised credit and about 36% orP 0.8 billion to nonsupervised credit.

13. The status of rural bankst arrearages to CB is as follows:

-64 -.- xi_ 64 ~~ ~~~ ANNEX iPage 6 of 9

Amount(P billion)

Arrearages of rural banks under receivership/voluntarydissolution/liquidation/rehabilitation 0.19

Arrearages under CB-approved plans for repayment 0.84Past due for more than a year 0.59Past due for over a month to a year 0.74Past due for a month or less 0.01

Total P 2.37

14. In the case of rural banks, three types of rehabilitation measuresare presently available, as follows:

(a) Restructuring. Rural banks adversely affected by natural calamitiesare allowed to restructure their corresponding liabilities to CB foran initial period of one year, at the rate of interest on theoriginal loans. In deserving cases, a second and third restructur-ing, up to three years, is allowed.

(b) Plan of Payment. Rural banks whose rediscounting arrearages are notcaused by natural calamities are allowed to enter into a plan ofpayment for the gradual Liquidation of their past dues with CB overa period of from six months to three years. Rural banks covered bythis plan are allowed limited rediscounting of their eligible papersto the extent of 80% for supervised credit or 60% for nonsupervisedcredit.

(c) Roll-Over of CB Loans. The roll-over of CB loans, backed bycorresponding renewal of subloans, is authorized by CB's Governor ona case-by-case basis if nonpayment of dues by subborrowers isconsidered to be for reasons beyond their control. This scheme wasused in only a few cases during 1983.

15. Major causes for subloan arrearages include: reluctance to repaythe low-cost credit; delays in subproject completion; inadequate appraisal;natural calamities such as droughts and typhoons; and willful defaults bysubborrowers who perceive little reason to repay government-sponsored credit.Financial institutions have developed standard procedures for subloan recoverywhich are used as appropriate. These include: issue of lawyers' rotices tosubborrowers, followed by court proceedings; subloan collection throughgovernment extension workers, on a commission basis; and market tie-ups withpurchasing agencies. To minimize the retail lending banks' default risks,Government also operated a loan guarantee scheme which is being phased out infavor of crop insurance, which is currently restricted to rice and corn. CBstops access to new funds when retail banks carry subloan arrearages in excess

-65 - ANNEX 1Page 7 of 9

of 25% of outstanding loans (for some government programs, this limit isextended to 50%) and when they default under CB loans. While the existingmeasures are important, it is just as crucial to change the perception ofagricultural lending as a government 'dole out.' The issue is, however, adifficult one as it is wrapped in a number of political and social issuesaggravated by the current difficult economic situation. Sectorwide arrearsreduction will depend on a strong demonstration of political will.

16. The project would support interest rate reforms and developingsystems, procedures and policies for continuing institutional review by CBrather than relying merely on current procedures for rescheduling of arrearssubloans. Toward this objective, CB would evaluate the content and theperformance of its various policies with regard to subloan collection and, asnecessary, reformulate them. The study would be financed under the proposedproject, and the terms of reference, to be agreed at negotiations, would focuson the following:

(a) Plan of Payment. The plan of payment arrangements, now approvedmainly on the basis of a desk review, should be used as a tool torequire a rural bank to undertake a broader institutional develop-ment program, including exploring options for possible merger andconsolidation.

(b) Restructuring. Some conditions of restructuring of subloans, suchas requiring a prior payment of 30% of the principal plus accruedinterest due thereon, often proves counterproductive if asubborrower is genuinely affected by circumstances which warrantsimple extension of the subloan period. Similarly, exemption frouipayment of liquidated damages due to nonpayment of CB loans may notbe warranted in all cases. Further, restruc.uring of subloans or CBloans does not now involve a qualitative assessment of the concernedbank's total loan portfolio to determine whether subborrowers couldbe financially rehabilitated through extension of the loan period orprovision of additional working capital. An objective assessment ofthe overall business of the rural bank at the time of restructuringwould perhaps lead to consideration of consolidating and merging thebank with another bank. Also, some discretion could be given torural banks (other banks, where applicable) for restructuring ofsubloans without the intervention of CB staff.

(c) Rehabilitation Schemes. Past rehabilitation schemes for rural andthrift banks suffered from practical difficulties especially withregard to the capital build-up program. Current laws do not permitany individual or family to hold more than 20% of the common stockof a rural bank, generally limiting the scope for further contribu-tions by existing owners. Managements of rural banks, mostlyfamily-owned, are usually unwilling to admit any outsiders.Moreover, market response to rural bank stocks is usually limitedbecause dividend rates tend to be far lower than the return onalternative investments. The existing policies on capitalization ofrural banks should, therefore, be reviewed.

-66- ANNEX 1Page 8 of 9

(d) Rediscounting Privileges. CB rediscounting privileges tend to befar too liberal: a rural bank can borrow up to 5001 of its networth (as against 1001 for other types of banks) and 300% of itsdeposits. Sectorwide, CB's share in the rural banks' totalresources tends to be as high as 50%. Rediscounting privileges areoften restored in spite of serious problems with the quality of theloan portfolio. CB's rediscounting policies should be increasinglygeared to promote deposit mobilization and agricultural lendingusing the rural based banks' own funds, to change the psychologythat government funds need not be repaid. The focus of CB's redis-counting policies should be to ensure that its funds do not depressthe rural banks' savings mobilization effort, while penalizing themfor undue reliance on CB funds. CB should consider a system bywhich the lower the quantum of rediscounted subloans, the lowerwould be the rediscount rate that is charged. Thus, CB wouldprovide refinance up to a certain amount (say 25% of deposits) atthe normal rate and for rediscounting in excess of this amount, CBwould add a suitable premium. To contain the problem of arrearages,the rural banks' reliance on CB funds must be reduced especiallybecause arrearages on subloans extended by rural banks from theirdeposit resources are far Lower than under subloans funded by CB.

Ce) Aging of Arrearages. The past due norm used as the basis for dis-qualifying a bank for CB rediscounting privileges does notnecessarily ensure an improvement in subloan collections by theretail lending banks. In fact, with the expanding loan portfolio, aborrowing bank's past dues could continue to grow in absoluteamounts, while remaining within CB's past due norm. The past dueratio also does not show aging of arrearages, and without thisinformation the significance of arrearages cannot be measured. Thecurrent reporting systems prescribed by CB obtain no information onthe aging of arrears (beyond six months and above) from the borrow-ing banks, including rural banks. CB should, therefore, develop asuitable reporting system on past dues, including the aging ofarrearages, for regulating access of rural and other banks torediscounting facilities.

(f) Write Offs. Subloans which are not likely to be collected need tobe identified on a bank-by-bank basis, and each bank should berequired to prepare a realistic program to write off theuncollectables from the profits. This plan should be updatedannually and monitored through CB examinations and annual audit.

(g) Review of CB/IBRD Subloans. Several subprojects financed under pastCB/IBRD projects need to be rehabilitated or assisted by additionalinvestment funds or working capital. CB should monitor this on abank-by-bank basis and ensure that the subproiects are rehabilitatedand coercive action is initiated in case of willful defaults. CBshould ensure the credibility of the subloan foreclosure option.

(h) Interest on Past Dues. Interest rates on past due loans includingliquidated damages are far lover than the prevailing market rates.

- 67 - ANNEX 1Page 9 of 9

Subborrowers and rural banks therefore have no incentives to repaytheir loans. CB should, therefore, increase the interest on pastdues, to the extent admissible by law, at the time of restructuringof subloans.

r.

-68- ANEX 1Table 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Interest Subsidy to Retail Banks and Subborrowers on CB Rediscounts

A. Interest Subsidy to Retail Banks on Special Time Deposits (STDs)

Interest rate onInterest alternative source Interest subsidyon STDs of bank funds to retail banks (2-1) /d(1) (2) (3)

3.0% 21.5% 18.5%4.0% 21.5% 17.5Z5.0% 21.5% 16.5%6.0% 21.5% 15.5%7 0% 21.5% 14.5%

B. Interest Subsidy to Subborrowers

Range of interestrates prescribed ongovernment-sponsored Prevailing interest rates Interest subsidy

credit programs on other subloans /a to subborrowers (2-1)/d(1) (2) (3)

8% /b 37.9% 29.9%9% 7; 37.9Z 28.9%loZ 7; 37.9% 27.9%12% 7T 37.9% 25.9%14% 7; 37.9% 23.9%15Z 7T 37.9% 22.9%16Z 7; 37.9% 21.9%

31.4% 7; 37.9% 6.5%35.4Z _; 37.9% 2.6%

/a Weighted average for all maturities for November 1984.7; Represents CB prescribed lending rate on funds lent to retail banks under

STD./c Represents prescribed onlending rate on CB funds.7T Subsidies appear especially high now because prevailing interest rates are

currently very high.

Source: Central Bank of the Philippines.

-69 - ANNEY 169 - ~~~~~Table 2

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Undrawn Amounts from Special Financing Programs(November 30, 1984)

Program titLe (In Peso mln)

Short-term

1. Integrated Rural Financing 189.52. IAF - PVTA 6.43. ALF - NGA 10.34. ALF - NGA (BPW) 4.95. ALF - PTA .0016. ALF - MEC 3.77. ALF - Philippine Cotton Corporation 3.28. Accelerated Rice Production Fund 30.69. CIF - Rural Cooperative Bank Fund 7.510. CB - Bureau of Animal Industry 29.511. Calamity Rehabilitation Fund .00112. Loan Guarantee Fund 2.613. Bureau of Cooperative Development (CMP) 36.814. Cottage Industry Guarantee Loan Fund 24.815. Livestock Loan Trust Fund 6.616. Special Agricultural Rehabilitation Fund (SARF) 45.917. SARF - KASAKA - Out of School Youth 5.718. SARF - LIME .319. Yellow Corn Fund (Ministry of Agriculture and Food) 104.9

Subtotal 513.2

Medium- and Long-Term

20. Small Fishermen's Special Credit Fund - NFAC 1.421. Agricultural Loan Fund - NFAC 3.622. AGLF - kFAC 17.423. RA : 6390 25.124. LC - Bureau of Treasury 28.425. Fisheries Loan and Guarantee Fund 109.926. Palawan Integrated Agricultural Development Fund 2.027. MAR - Central Project Management Unit 1.428. Philippine Aquaculture Development Fund 4.5

Subtotal 193.7

Total 706.9

Source: CB.

- - ANNEX 2Page 1 of 7

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Indicative Project Lending Program

1. The project would fund short-term seasonal production and medium-and long-term credit for investments in agriculture and agriculture-cum-processing. A brief analysis of the prospective investment possibilities indifferent subsectors is presented below. An indicative lending programderived from the analysis is given in Appendix 1. Since actual lending wouldbe determined by market forces, the figures in Appendix 1 are only indicativeand represent neither targets nor ceilings.

Seasonal Production Credit

2. The project would focus on alleviating the current serious need forproduction credit by funding CB'b incremental short-term credit to retailbanks. The supply of institutional credit for farm production decreased fromabout P 15-16 billion during 1981-82 (at 1978 prices) to about P 13 billion in1983 and have further declined during 1984 because of the liquidity problemsof retail banks and government policies to reduce excess liquidity in theeconomy, which affected even priorit7 sectors like agriculture. In the past,informal sources substantially met the short-term production credit needs ofagriculture, but during 1983-84 even this source has dried up because of theinformal lenders' (tracers, and machinery dealers) reduced access to thebanking system and a serious loss in private sector savings due to high ratesof inflation. Project fundirg of incremental CB short-term credit would bemade with reference to a benchmark to be mutually agreed upon by CB and theBank. The bench mark will take into account the average amount of CBshort-term credit disbursed during CY83 and CY84 (Table 1 below) and thecontractionary trend of the economy and the constraints of the ongoingstabilization program.

- 71 - ANUEK 2Page 2 of 7

Table 1: CB REDISCOUNTS OF SEASONAL PRODUCTION CREDITFOR ACU CULTURE AND RELATED ACTIVITIES

(P billion)

1981 1982 1983 June 30,1984

Supervised CreditCommercial banks 0.2 0.2 0.1 /aThrift banks - - - -Rural banks 1.5 1.8 1.8 0.4

Subtotal 1.7 2.0 1.9 0.4

Nonsupervised CreditCommercial banks 8.3 5.9 2.7 1.3Thrift banks - 0.1 0.1 /aRural banks 1.2 1.6 1.7 0.4

Subtotal 9.5 7.6 4.5 /b 1.7

Total 11.2 9.6 6.4 2.1 /b

Total (at 1978 prices) 8.9 7.2 4.1 0.88

/a Negligible.7- Aggregate disbursements during CY84 estimated at P 2.7 billion.

Medium- and Long-Term Credit

3. Annual medium- and long-term lending of banks participating in theproject is assumed to average US$20 million and the Bank loan disbursement atUS$12 million, which is substantially below the average of US$18 milliondisbursed under past Bank-assisted projects implemented through DBP, LBP andthe rural banks (Table 2).

-72- ANNEX 2Page 3 of 7

Table 2: BANK LOAN DISBURSEMENTS UNDER PAST CREDIT PROJECTS(US$ million)

Loan FYProject No. 1979 1980 1981 1982 1983 1984

Grain Processing I 720 1.6 1.8 0.3 - - -Fisheries II 1270 2.4 5.3 2.2 - - -

Livestock II 1225 2.5 3.4 5.4 0.02 - -Grain Processing II 1269 0.3 1.5 3.3 3.2 2.8 0.4Rural Credit IV 1399 9.5 3.5 4.9 4.7 6.6 4.9Smallholder Tree Farming 1506 - 0.5 1.2 0.5 0.9 0.5Small Farmer Development 1646 - 1.2 4.4 1.0 4.5 2.4Third Livestock &Fisheries Credit 1894 - - 4.5 7.8 6.1 1.8

Total 16.3 17.2 26.2 17.2 20.9 10.0

4. During 1984, the disbursement rate slowed sharply due to suspensionof lending under DBP-based projects because of DBP's financial problems,completion of Rural Credit Project IV in June 1984, and the reduced pace ofdisbursements under the LBP project (Ln. 1646) due to subloan arrearages andeconomic uncertainties in the country. Medium- and long-term loans (largelyrepresenting roll-overs of short-term loans) granted by the banking system forfarm production activities during 1979-83 are estimated by TBAC to averageabout P 3.8 billion (US$190 million) at current prices and about P 2.8 billion(US$140 million) at 1978 prices (Table 3). During 1983, the share of commer-cial banks in medium- and long-term credit was P 5.5 billion (90% of thetotal); followed by thrift bank!, P 107 million (2%); and government special-ized banks, P 106 million (2Z).' Under earlie- Bank-assisted projects, com-mercial banks were not included as lending cheanels, and CB had no permanentrediscounting facility for medium- and long-term loans. Given the project'smarket-oriented lending terms, a substantial participation of commercial banksin project lending is expected.

1/ Source: TBAC.

ANNEX 2-73 - Page 4 of 7

Table 3: MEDIUM- AND LONC-TERM LOANS CRANTED BY THEBANKING SYSTEM, 1978-83 /a

(P billion)

CY At cdrrent prices At 1978 prices /b

1979 1.9 1.71980 1.9 1.61981 3.5 2.81982 5.5 4.11983 6.2 4.0

Annual average 3.8 2.8

/a For farm production activities.

/b Deflated by producer price index for agricultural products, 1978 = 100.

5. Demand for medium- and long-term credit is expected in major sub-sectors such as poultry, livestock and fishery development; plantation crops;agro-processing and post-harvest facilities; and selective farm mechanization.The investment possibilities in these subsectors are briefly discussed below.

6. Poultry, Livestock and Fishery Production. Current per capita beefconsumption in the country is about 2 kg p.a. and the projected deficit indomestic production by 1990 is expected to reach 186,000 metric tons (nt).The project is expected to finance 60 medium size ranching operations, keepingabout 60 cows each, and about 300 feedlots with a capacity of 50 head offattening stock each, in addition to selected smallholder cattle fatteningoperations. About 75Z of the total cattle population in the country (1.9million) is raised and fattened by small farmers on the basis of farm-grownfodder and crop byproducts supplemented by commercial feed.

7. Demand for pork already exceeds the supply, and the supply gap isexpected to grow from 37 million mt in 1984 to 76 million mt in 1987. Theproject is likely to fund some 1,200 subprojects with varying sow levelcapacity. Swine production in the Philippines is, however, vulnerable toprice fluctuations in commercial feeds which include imported corn and soyabeans. Government is actively supporting local corn production, which wouldhelp stabilize the feed prices, and has also deregulated pork prices.

8. Poultry production is rapidly shifting to larger commzercialproducers with the advantage of high economies of scale and modern productiontechnology. With profit margins usually very small and price risks high, newenterprises normally produce under contracts with feed suppliers who guaranteea minimum return. The project includes credit for both smaller and largerbroiler and egg producing units in a position to mobilize technical supportand ensure high production efficiencies.

74 -ANNEX2Page 5 of 7

9. The fishery sector has received funding under four Bank-financedRural Credit Projects (Lns. 432, 607, 1010 and 1399-PH) and three fisheriescredit projects (Lns. 891, 1270 and 1894-PH). As a result, fishponddevelopment expanded from 176,000 ha in 1977 to 208,000 ha in 1981. There isnow only a limited scope for expansion, but a large need for rehabilitation.The industry faces several major problems, including high fuel prices, diffi-cult acquisition of fertilizers, over-expLoitation of traditional fishingareas and inefficiencies in the marketing system. The Bureau of Fisheries andAquatic Resources (BFAR) in coordination with other agencies has drawn up aprogram to overcome these problems and increase fish production; more emphasisis being placed on the development of inland fisheries. While imports of fishand fish products were valued at P 288 million in 1981, fish exports (mostlyshrimp and tuna) amounted to P 1,251 million. About 90% of the fish supplynow comes from commercial and municipal fishing, but this pattern is likely tochange in the future with the emphasis of BFAR on inland fishery develop-ment. The project would support this initiative by funding investments forthe sector, including about 280 brackish-water fishponds of 5-50 ha each, some40 fishpens for fresh-water lakes, 10 fishing boats for off-shore use, andabout 80 fish processing facilities for drying and smoking.

10. Plantation Crops. Plantation crops may attract about a third ofproject lending. About 90X of plantation crop investment is expected to go torubber /citrus, banana and ipil-ipil, with the rest going to abaca andmango.-

11. Banana production is important in the Philippines, occupying morethan 60% of the area devoted to fruit crops and contributing substantially toexport earnings (US$153 million in 1982). MAF expects an expansion in thebanana area of about 77,000 ha over the next three years, of which about3,800 ha are expected to be funded by the project. Rehabilitation of bananaplantations on another 5,500 ha (or 22 of existing plantations) is alsoexpected to be financed.

12. Rubber covers about 53,700 ha, with a latex production of 54,400tons, or about 1 ton/ha. Exports of natural rubber reached 10,800 tons in1981 and are expected to grow at 5% annually. Local consumption (productionplus imports less exports) at 65,500 tons (1982) is expected to increase to105,500 tons by 1987. By MAF estimates, the area planted to rubber wouldincrease by 66Z to 95,000 ha by 1987, and the project is expected to financerubber development on some 7,400 ha.

13. Crowing use of abaca as pulp for high-quality paper and as rawmaterial for handicrafts has significantly increased demand, while technology

2/ The estimated loan demand for plantation crops does not explicity includethe needs of the coconut subsector, particularly of the larger andcorporate borrowers. Since the proposed Bank loan for the CoconutDevelopment Project, which has already been appraised, is directed towardsmaller borrowers, the proposed credit project should be able to meet thecredit needs of the larger borrowers.

ANNEX 25- Page 6 of 7

improvements have improved the profitability of abaca production. Projectlending is expected to finance about 800 ha of new plantations and rehabili-tation of 900 ha of existing plantations.

14. A number of processed mango products such as juice, concentrates,etc. have been developed to serve the export markets. To keep up with growinglocal and export demand, about 18,000 ha of mango are likely to be plantedover the next three years. The project is expected to finance development ofabout 3,100 ha.

15. In 1978, about 23,OOC ha was devoted to citrus. Since then plantinghas increased at an annual average rate of 6,000 ha and this trend is expectedto continue. Citrus is still considered a l1zxury item, but consumption can begreatly expanded if prices decrease with higher productivity. Exports of bothfresh fruits and juice are small but have a potential for expansion. Theproject is expected to support both new plantings (2,500 ha) representingabout 40% of average annual plantings, and rehabilitation of existingplantations (3,580 ha).

16. Ipil-ipil is grown extensively throughout the country, primarily forfirewood production. About 70% of all households in th.e Philippines still usefirewood, and industrial use is also oxpanding as a result of the high costsof imported fuel. lpil-ipil leaves are also used as a feed supplement. Thecrop became commercially viable with the introduction of the giant ipil-ipilvariety, one of the fastest growing hardwoods in the world. About 9,600 haare expected to be funded under the project.

17. Agro-Processing and Post-Harvest Facilities. Agro-processinginvestments expected to be financed under the project would include ricemills, feedmills and food processing facilitics. Despite some regionalovercapacities in rice milling, mills are still needed in certain parts of thecountry. Some 550 rice mills are expected to be financed under tb. project inprovinces with capacity limitations. The feedmill industry rapidly expandedduring the last decade from 40 mills in 1971 to 121 at present. About twothirds of the mills are in the Manila area while the rest are widely scatteredover the regions. The project is expected to finance construction of about 50feedmills in the outlying regions which would save on transport costs for bothraw materials and end-products. Mills would be relatively small (10-12 tonscapacity per 8-hour day). Post-harvest facilities for marketing, storage andtransport would also be eligible for financing as need requires.

18. Farm Mechanization. Power tillers, tractors, threshers andcornshellers will be the main items to be funded by the project. As most ofthe rice and corn farms are small, land preparation is predominantly done withpower tillers, both locally manufactured and imported. An estimated 9,700power tillers are currently in operation. Rice cultivation is only about 40-50Z mechanized, but this is steadily growing. The International Rice ResearchInstitute has developed a full range of equipment for small farms, most ofwhich is locally produced, but the greatest demand is for power tillers andthreshers. Efforts to intensify rainfed crop cultivation through earlierplanting, use of early maturing varieties and double cropping (the second cropmaking use of residual soil moisture) also calls for mechanized land cultiva-

- 76A- ANN 2Page 7 of 7

tion. Pilot programs propagating this farming system (Kabsaka) seem to besuccessful. Therefor2, a steadily growing demand for power tillers and otherfarm machinery can also be expected from rainfed agriculture. Based on aculti"ated area of 3.0 million ha of palay and 60 ha per year per powertiller, it is estimated that power tiller requirements over the next threeyears would be some 50,000 units (7-8 hp); of this, 8.7% or 4,370 units areassumed to be funded under the project. It is assumed that 19% (820 units)would be imported and the rest (3,550 units) locally manufactured.

19. Available information indicates a national demand for about 600tractors, of which about 230 tractors (65 hp) are assumed to be financed underthe project mainly for use in sugar plantations.

20. According to estimates of the Government's National Food Authority,rice threshing requirements for the period 1984-86 would be 1.75 millioncavans (50 kg of paddy). Given the available supply of threshers at 3,400 in1984, an additional 11,180 units would be needed, and the project is expectedto finance about 950. Similar estimates reveal a potential demand for 600cornshellers, 400 of which could be financed by the project.

21. Seasonal labor constraints, limited supply of draft animals andincreased maintenance costs of draft animals have contributed to extensive useof power tilLers for rice land preparation, although the direct impact ofmechanization on both productivity improvement and increased cropping inten-sivity has been minimal. Similarly, tractors are not cost-effective on ricelands. CB will establish, in consultation with NEDA, IRRI, and the Bank,minimum technical norms that would be applied in appraisal of farm mechani-zation investments, especially power tillers and tractors.

ANNEX 2- ' - - _ 77 _ Appendix 1

Page 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Indicative Lending Program

A. Seasonal Production Credit

% ofPesos million US$ million total cost

Rice - ni-1V 330.0 16.5 20- Local 110.0 5.5 6

Corn - Hybrid 330.0 16.5 20- Local 110.0 5.5 6

Sugar 550.0 27.5 33Other crops 238.0 11.9 15

Total with taxes 1,668.0 83.4 100

Less: Taxes 151.6 7.6 -

Total Net of Taxes 1,516.4 75.8 100

ANNEX 2- - 78 - ~~~~~~~~~~~~~~Appendix I-78- x

Page 2

B. Medium- and Long-Term Credit

Average Z ofunit cost No. of Pesos US$ total

(P) projects million million cost

LivestockPoultry

Broiler (small unit) 121,800 360 44.0 2.2Broiler (large unit) 398,100 110 44.0 2.2Layer 680,200 30 22.0 1.1

Total Poultry 220,000 500 110.0 5.5

SwineTwenty-sow operation 268,700 1,230 330.0 16.5

Total Swine 268,700 1,230 330.0 16.5

CattleFeedlot 370,700 300 110.0 5.5Ranching 757,600 60 44.0 2.2

Total Cattle 481s900 360 154.0 7.7

Total Livestock 442,100 2,090 594.0 29.7 30

FisheriesFishpond development 391,100 60 22.0 1.1Fishpond rehabilitation 187,800 120 22.0 1.1Fishpond development 2,000,000 10 22.0 1.1Fishpond expansion 501,300 90 44.0 2.2Fish processing 292,300 80 22.0 1.1Fishing boat (40 t) 1,784,100 10 22.0 1.1Fishpens (3 ha) 616,500 40 22.0 1.1

Total Fisheries 429,300 410 :.76.0 8.8 9

Plantation Crons (per ha)Abaca development 13,300 830 11.0 0.6Abaca rehabilitation 12,100 910 11.0 0.6Citrus development 17,400 2,530 44.0 2.2Citrus rehabilitation 12,300 3,580 44.0 2.2Banana development 17,400 3,790 66.0 3.3Banana rehabilitation 12,000 5,500 66.0 3.3Ipil-ipil development 8,300 7,950 66.0 3.3Ipil-ipil rehabilitation 41,200 1,630 66.0 3.3Rubber 14,800 7,430 110.0 5.5Mango 14,200 3,100 44.0 2.2Others 15,300 9,300 132.0 6.7

-lTotal Plantation Crop 14,200 46,570 660.0 33.1 33.:~~~~~~~~~~~~~~4,0 66, 331 3

ANNEX 2. 79 _ Appendix 1

Page 3

Average % ofunit cost No. of Pesos US$ total

(P) projects million million cost

AgroprocessingRicemillsNew projects 399,900 60 22.0 1.1Expansion 215,200 200 44.0 2.2

RehabilitationPower Unit 261,700 80 22.0 1.1Building 103,800 210 22.0 1.1

FeedmilJ plant-new 1,321,500 50 66.0 3.3Others 100 44.0 2.2

Total Agroprocessing 314,300 700 220.0 11.0 11

Farm MechanizationPower tiller - Local 31,000 3,550 110.0 5.5Power tiller - Imported 53,400 820 44.0 2.2Rice thresher - Local 46,300 950 44.0 2.2Corn sheller - Local 55,100 400 22.0 1.1Four-wheel tractor 482,500 230 110.0 5.5

Total Farm Machinery 61,500 5,370 330.0 16.5 17

Total Medium- and Long-TermCredit with Taxes 1,980.0 99.1 100

Less: Taxes 180.0 9.0

Total Medium- and Long-TermCredit Net of Taxes 1,800.0 90.1 100

Overall Lending Program (A + B)(net of taxes at US$16.6 million) 3,316.4 165.9

j

.,

ANNEX 3- so- ~~~~~Page 1 of 4

':r ~ ~ ~ ~ ~ ~ ~ ~~~~8 -

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Project Related Training Component

1..Central Bank Institute (CBI). CBI would be responsible for imple-menting the training component. As a part of its normal operations, CB1regularly runs training courses in central banking for CB staff and on rur'albanking and agriculture-related programs for the staff of both CB and ruralbanks. CBI also offers a three-level course to CB ezaminers on bank supervi-sion. Among the retail banks, only the Development Bank of the Philippines(DBP) has its own training institute which offers courses in developmentbanking to its staff and staff of the private development banks. Most of theother banks have no in-house training facilities except for ad hoc coursesarranged in coordination with the Bank Administration Institute of the BankersAssociation.

2. Surveyo Training Needs. Project-related staff of CR and partici-pating banks (commercial, thrift, rural and government specialized banks)would benefit from the project related training program. To implement theprogram effectively, CBI has initiated a modest (random) sample survey toidentify a broad range of tasks to be performed under the project by CB andparticipating bank staff at different levels; the training and skills alreadyavailable within the institutions; and the skill gaps which should beaddressed by the project. The survey findings which are expected to be avail-able by June 1985 will be used in the design of course modules, identificationof the clientele to be trained, the frequency of courses and the building uapof a faculty. Based on a preliminary assessme-nt, the following represents abroad outline of the component.

3. Training Objectives. The general objective of the training compo-nent is to remedy the skill gaps of officers and staff associated with project(Agricultural Loan Fund, ALF) lending in Cr and participating banks. Trainingwill be directed at three staff levels - senior, middle and operating. Thiswill be achieved through the following:

(a) pooling and training of potential trainers who will assume the leadrole in teachers' training. This is a priority activity in thecomponent. CBI will draw on the combined resources of its facultyand the faculties of other agencies with training capabilities;

(b) orienting senior level officials in ALF on policy and decision-I making requirementin of ALP lending;

(c) upgrading the skills of ALF staff in various procedures involved insubproject processing, accounting, monitoring and reporting-of ALPtransactions;

ANNEX 3-81 - Page 2 of 4

(d) training all levels of participating bank staff under the sameprogram as ALF staff, with emphasis on medium- and long-term projectlending;

(e) upgrading the skills of staff in CB's ALF Unit and its Supervisionand Examination Sector (SES) Departments I, II and III in institu-tional appraisal, leading to institutional development; and

(f) improving the subloan appraisal and supervision capabilities of CBloan teams.

4. Selection of Participants for ALF Training. Participants in thecourses will be those staff who most need the skills. CB invitations topotential candidates will include a standard requirement that candidates to betrained will be involved in ALF lending and will use the skills acquired aftertraining. Participants in the teachers training course would not only becapable of training others, but would also be in a position to continue withthe program until staff requirements are met.

5. Skills and Training Needed. Courses will be designed followingcompletion of the ongoing survey but are expected to be generally as follows:

(a) senior level officers would be given a familiarization briefing onthe decision making and policy formulation requirements of ALF inorder to augment their skills in managing the ALF loan portfolio;

(b) middle-level officers will receive additional training in loanappraisal, monitoring, accounting, and loan documentation for short-term, and medium- and long-term credit;

(c) operations staff will be trained in loan processing, collateralvaluation and custody, record keeping, bookkeeping and reporting;

(d) loan team members will receive additional training in loan andproject appraisal as well as supervision; and

(e) SES staff to be associated with ALF will be trained in conductinginstitutional appraisals.

6. Categories and Kind of Training to be Offered. Standardized modularcourses will be developed by institution, function and skill. Conceptually,the mddules would be as follows:

(a) For ALF Staff: (i) Familiarization briefing on ALF for senior levelofficers; (ii) Training in ALF operations for middle-level officersand operations staff consisting of courses in Credit Appraisal andPortfolio Management, ALF Accounting Operations, and Project Lendingand Appraisal.

(b) SES Departments I, II and III: (i) Familiarization briefing on ALF;and (ii) an Institutional Appraisal Course.

ANNEX 3Page 3 of 4

-82 -

(c) CB Loan Teams and Agricultural Credit Supervisors: (i) Familiariza-tion briefing on ALF; (ii) an Institutional Appraisal Course; and(iii) a Project Formulation and Appraisal Course.

(d) Participating Banks: Ci) Familiarization briefing on ALF for seniorofficers; (ii) for middle-level officers and operations staff: aCredit Appraisal and Project Lending Course for credit staff anl,anALF Accounting and Control Systems Course for accounting staff.-The participants will be grouped by type of institution so thattreatment of topics responds to the nature of their operations.

For manageability, the number of participants per course module will belimited to 30, except for the familiarization course which could be slightlylarger. This will provide ample opportunities for interaction and opendiscussions.

7. The teachers training course would train and develop prospectivetrainers who will be constituted into a pool to provide skills and expertiseto officers and staff of ALF units, associated CB departments and the partici-pating banks. CBI will assume a lead role in carrying out this course, andwill coordinate with other training institutions, including the AsianInstitute of Management (AIM) and the University of the Philippines at LosBanos as well as the DBP, the Land Bank of the Philippines and the PhilippineNational Bank in order to multiply the core of training staff and facilitatethe flow of participants to the course. Staff from commercial banks withagri-business expertise would also be tapped. Participants in the course willbe from CBI, government banks and other agriculture-related government insti-tutions, AIM, UPLB and commercial banks. The Bank's Economic DevelopmentInstitute would provide initial technical assistance in the conduct of thecourse.

S. Both classroom and field level training will be provided, accordingto the type of training. Classroom training will include lectures, discuss-ions, case studies and real loan situations, and analysis. Field training inproject formulation and evaluation will include project visits, data gatheringand interviews, and writing of project reports. The mode of training willvary depending on the needs of the participants.

9. Senior officers of ALF units and the participating banks wouldmainly be provided with information through lecture-discussions and openforums. For middle-level officers, training will emphasize case studies andsituations, loan appraisal, lending decisions, portfolio management andcontrol reports. For opcrating staff, training will consist of lectures andsimulation of loan appLication processing and collateral evaluation. For loanteam members and credit supervisors, a combination of lecture, discussion, andcase studies will be undertaken.

I/ The need for this course will be limited because no significant deviationis expected from standard accounting systems.

ANNEX 3

-83- Page 4 of 4

10. For SES Staff, training would mainly be by lecture and discussionson how to undertake institutional appraisal.

11. To accelerate this process, training may be done at the Central BankInstitute, at retail banks in Manila, and at regional centers, depending onthe concentration of participants.

12. Evaluation of Training Activities. The training program will beevaluated at two different stages. The first stage will involve an assessmentof trainee reactions and attitude toward training, and the extent of knowl-edge, skills and attitudes acquired from the training. The second stage willconsider the impact of training on job behavior and institutional function-ing. The evaluation of the second stage will be spread over a longer periodthan for the first stage, since the former is immediately observable while thelatter would require a longer term.

13. Training Costs. CB would fund costs of the training faculty,materials and facilities while the boarding and lodging costs of participantswill be proportionately borne by the concerned participating banks.

-84- ANNEX 4Page I

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Qualifying Criteria for Retail Bank Access to Project Funds

1. Commercial, thrift, and rural banks which comply with CB's standardcriteria including minimum capital, sound and efficient management, and asatisfactory past performance in agricultural lending (Appendix 1), will beeligible for access to the Agricultural Loan Fund (ALF), subject to thefollowing additional criteria.

Ceiling on Subloan Arrears

(a) Total subloan arrears (defined as the uncollected amount ofprincipal overdue for more than three months) should be less than15% of the outstanding loan portfolio. Commercial banks withsubloan arrears of more than 15% but less than 20%, and thrift,rural, or government banks with arrears of Less than 25% will alsohave access to project funds, subject to CB's approval following aninstitutional appraisal to ensure that the concerned bank isfinancially viable, has taken required steps to collect subloanarrears, has made adeq.ate provision for bad and doubtful debts, andhas the organizational and staffing capabilities to undertake newlending under the project (Appendix 2). CB will require banks notqualifying for access to project funds to take any additic:.almeasures necessary to upgrade their overall operations, and willprovide technical assistance to these banks for this purpose.

(b) A commercial, thrift, or rural bank with subloan arrears exceedingthe ceilings specified in (a) may apply for project funds if itsunimpaired equity and reserves, after allowing for default risk, issufficient to meet CB's minimum capital requirements. CB willdetermine the eligibility of such banks to project funds by an.nstitutioDal appraisal as in (a) above. Banks with arrears of morethan 35% will not normally qualify for project funds, but ifconside-ed by CB to be eligible on the basis of an institutionalappraisal, their participation in the project wouLd be subject toprior consultation with the World Bank.

(c) Subloan arrears outstanding for more than 12 months after the duedate may not exceed 20% of total arrears, and annual repayments ofproject subloans must be at least 70% of the aggregate amount fallendue during that year.

ANNEX 485 - Page 2

Balanced Term Structure

(d) Participating banks would at all times have a balanced termstructure of assets and liabilities so that medium- and long-termsubloans and other assets are matched by longer-term resources,including unimpaired equity, and medium- and long-term deposits andborrowings (Appendix 3).

Qualified Staff

(e) CB will ensure that participating banks retain oe hire qualifiedstaff to appraise and supervise the ALF-assisted subloans. Manythrift and rural banks as well as some private commercial andgovernment banks have developed satisfactory expertise in subloanappraisal and supervision. For banks without these capabilities theproject training program would increase the number of staff trainedin these functions.

2. In view of the unique financial and institutional problems ofGovernment banks (PNB, DBP and LBP), their participation in the project wouldbe subject to prior World Bank approval. CB and the Bank may agree upon aphased application of the general eligibility criteria to government banks asa part of their overall financial rehabilitation and institutional developmentplans.

3. Any deviation from the eligibility criteria would require priorconsultation with the Bank.

86 ANNEX 4-Appendi3 I

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Standard Criteria for Retail Bank Access to CentralBank Credit Facilities

1. Compliance with minimum capital requirements and capital bu 1d-upprograms as set by the Monetary Board for each type of bank_ ;

2. Sound and efficient management;

3. Satisfactory performance, including implementation of sound policies andprocedure., observance of pertinent laws, rules and regulations as wellas profitable operations and sound financial position based on the latestexamination reports of the Central Bank's Supervision and ExaminationSector;

4. The ratio of past-due direct and indirect loans to the bank's own stock-holders, directors and officers to aggregate past due loans should notexceed 5% based on the latest examination by the appropriate supervisingdepartment;

5. No net deficiency in reserves against deposit liabilities for the pastfour consecutive weeks based on the latest required reports;

6. No arrearages and/or emergency loans with the Central Bank as well asdelinquencies,on borrowings from various Funds administered by theCentral Bank- ;

7. No reported irregularities committed by the bank.

1/ The current norms for capital build-up will be reviewed and suitablymodified on the basis of the proposed study of CB's rediscounting

; pclicies and the arrearages problem (Annex 1, paras. 12 and 17c).

21 Subject to rehabili.ation programs approved by CB's Monetary Board.

-87 - ANNEX 4Appendix 2

PHILIPPINES

ACRICULTURAL CREDIT PROJECT

Institutional Appraisal by CB

1. Objectivess The purpose of the proposed institutional appraisalwould be to identify any major financial and organizational problems of theparticipating banks and to prepare an action plan, in consultation with thebanks concerned, for overall institutional deveLopment including viableagricultural lending.

2. Scope. The scope of the institutional appraisal would vary with thetype of institution (commercial, thrift, rural or government specializedbank). The institutional appraisa' will generally examine the following:

(a) Organization and management: Quality of management; staff strengthand staff skill gaps and need for training; plans for and methods ofrecruitment; accounting systems and internal controls.

- (b) Operating polici-.s and procedures: Effectiveness of businessstrategies and lending; and subloan collection and collateralpolicies and procedures, with particular reference to agriculturalsubprojects.

{c) financial condition and performance: Status of capitalization; termstructure of assets and liabilities; and adequacy of provisions forbad and doubtful debts, aging of arrears, loans in litigation, andoverall profitability of operatioas.

5d) Fnd-use verification: a review of subloan supervision proceduresincluding a random verification of selected subprojects.

3. Responsibility. Institutional appraisal by the ALF unit will be aspecial. task supplementary to, but not substituting for, the statutoryexamination conducted by the SES I, II and III. The institutional appraisalwould enable CB and the participating bank to form a view on what steps shouldbe taken to upgrade the participating bank's overall management and financialcondition so that the bank can continue as an effective lending channel on acontinuing basis.

4. Reportiag and Follow-up. At the conclusion of appraisal, a briefreport will be prepared by the appraisal staff actting out their findings andan action plan ag-eed with the participating bank. This report will besubmitted to the Jirector, DLC, who will make a decision on the follow-upaction needed, and whether the bank qualifies or continues to qualify forproject funds. The implementation of the actiou plan will be monitored by theALF Unit with assistance from SES I, II and III.

-88 - ANPE 4Appendix 3

PSILIPPIIES

AGRICULTURAL CREDIT PROJECT

Balanced Term Structure for Long-TermAssets and Liabilities

The long-tern assets of a financial institution, net of necessaryvaluation reserves, shall generally not exceed its long-term financialresources.

Long-term assets are:

(a) outsta'ding loans and claims with a contractual repayment period orperiod of notice of five years or more;

(b) investments in subsidiaries, majority participations, and securitiesnot registered with a stock exchange;

(c) land and buildings;

(d) equipment and other fixed assets.

Long-term resources are:

(a) equity;

(b) liabilities (vithout savings deposits) with a contractual repaymentperiod or period of notice of five years or more;

(c) 40X V of savings and time deposits;(d) bonds and debentures with a maturity of five years or more;

(e) 40X 1V of bonds and debentures with a maturity of less than fiveyears;

(f) 40% 1V of the provisions for pension claims and of other long-termliabilities; and

(g) 10 V of all other liabilities.

1I Percentages to be reviewed by CB's Economic Research Department inconsultation with the Bank.

ANNEX 5

-89- Page 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Lending Terms and Conditions

1. Purpose of Subloans. OnLy subprojects in agriculture, agriculture-cumo-processing, and rural enterprises wherein the potential for increasedproduction or increased efficiency in related marketing and processing areclearly established wilL be eligible for project financing. An indicativelist of subprojects eligible for ALF funding is shown in Appendix 1.

2. Qualifying Criteria for Participating Banks. Retail banks whichconform to the qualifying criteria established by CB in consultation with theBank would be eligible for access to project funds (Annex 4).

3. Loan Size. Generally not to exceed P 10 millioz. (US$500,000).However, this limit-may be increased for specific subprojects, with priorconcurrence of the Central Bank.

4. Interest Rates:

(a) CB-ALF Loans to Participating Banks. The interest rate on ALF loansto participating banks shall be market-oriented and shall not belower than the following:

(i) the weighted average cost of borrowing ALF funds, CB's ALF-z-elated administrative costs and an element of foreign exchangerisk;

(ii) the weighted average cost of the banking system's savings andtime deposits including cost of mobilizing such deposits.

(b) Participating Banks' Loans to Subborrowers. The interest rates onsubloans supported by the ALF will be flexible and determined byindividual banks on the basis of CB's interest rate for ALF funds;the veighted average cost of its own resources deployed in thesubproject; and the average intermediation costs including possibledefault costs on its overall loan portfolio as well as the charac-teristics of the individual loan. However, the spreads retained byindividual participating banks over the ALF funds A-re expected to beinfluenced by the following:

(i) CB shall notify semiarnually and in consultation with repre-sentative organizations of co ercial, thrift and rural banks,the lowest effective (reference) spread at which the partici-pating banks would lend under the ALF to its more establishedclients;

(ii) CB will in turn monitor the spreads retained by a participatingbank on the ALF-funded subloans to ensure that these are

-90- ANNEX 5Page 2

consistent with the prevailing market rates for subloans ofcomparable maturities, size, and risk and do not tend to beexploitative or non-conducive to viable private sector invest-ments. Based on this monitoring, CB wilL hold, if necessary,periodic dialogue with individual or groups of participatingbanks, to explore ways to reduce their intermediation costs asmay be necessary.

(iii) Any revision in interest rates on CB funds and subloans wouldgenerally occur semiannually to reflect the changes in theweighted average cost of loanable funds. Marginal changes inthe cost of borrowing will not usually initiate any change inthe interest rate. Interest rates on subloans for seasonalproduction credit, once fixed are not expected to changebecause of relatively shorter maturities of such credit. Formonitoring purposes, any proposal to increase the subloaninterest rate by more than 2% over the rate at which thesubloan was originally disbursed would require a specificreport from the participating bank to CB explaining thecircumstances in which the proposed increase was necessary.

5. Subloan Maturities:

(a) Short-term subloans shall be payable within a period of 12 monthsexcept for sugar and banana production which shall have maturitiesof not more than 18 months. Repayment of mediumr and long-termsubloans will be based on the subproject's cash flow and related tothe subborrower's overall repayment capacity. Repayment periods formost medium- and long-term subloans will be between 5 and 10 yearsbut will not exceed 15 years or the economic life of the subproject,whichever is lower. Indicative repayment periods for eligiblesubprojects are shown in Appendix 2.

(b) Grace periods may be granted for repayment of principal based on thesubproject's cash flow and the overall financial status of thesubborrower.

(c) Mediumr and long-term loanL shall be amortized in periodic install-ments as may be fixed by a participating bank. Amortizationpayments to ALF will follow the same schedule as payments by thesubborrowers to the participating banks.

6. Collateral. Subloans will be secured by coLlateral consistent withcurrent banking practices and CB regulations. The coLlateral for the ALF loanshall be assigned to the Central Bank.

7. Subborrower's Contribution. A subborrower's contribution will bedetermined by a participating bank on the basis of its credit appraisal, butin no case shall be less than 10%. The subborrower contribution may be incash or in kind including the monetary value of family labor but shall excludethe cost of land used in the subprojects which will be financed exclusivelyfrom the subborrower's own resources and would constitute a collateral for thesubloan.

91 - ANNEX 5Page 3

8. Participating Bank Contribution. CB funding of a participatingbank's subloan shall not exceed 9OZ.

9. Rescheduling/Restructuring of ALF Loans. A participating bank maysecure rescheduling of repayments due to CB by submitting a specific proposalat least 15 days prior to the due date of the CB loan(s). The bank may alsoprovide, depending on the need and subborrower's repayment capacity, addi-tional financing for the purpose of rehabilitating the subproject. Bothrescheduling of maturity dates and the provision of additional financing shallbe subject to prior approval by CB and generally limited to the economic lifeof the asset financed.

10. Consortium. Subloans financed by two or more participating banks ona consortium basis shall be eligible for the ALF facility provided that theshare of each participating bank does not exceed 15Z of its net worth. Theconsortium shall designate a lead bank to administer the subloan in accordancewith ALF rules.

11. End-Use Verification. A participating bank will be responsible forsupervision of the subloans, including end-use verification and monitoring ofsubproject performance and shall require subborrowers to submit auditedfinancial statements, duly audited in the case of corporate borrowers, afterthe end of each calendar year until the loan is fully repaid.

12. Reporting Requirements. Participating banks will furnish the CBwith all reports and other information which CB may reasonably request onALF-financed subprojects.

ANNEX 5

- 92 - Appendix 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Subprojects Eligible for ALF Assistance

1. ALF facilities would include seasonal production credit for selectedagricultural commodities (for a period and up to an amount to be determined byCS, in consultation with the Bank) and medium- and long-term credit for fixedassets (excluding land) and permanent working capital. In principle, ALFwould fund investments in agriculture, mainly production and production-cum-processing. Any possible overlap with the the Bank-assisted Small and MediumIndustries Development Project (Ln. 2169-PE) which primarily funds industrialinvestments would be addressed on the basis of guidelines agreed between theBank and CB. Subject to these guidelines, the following provides anindicative, but not exclusive, list of medium- and long-term investmentprojects eligible for ALF assistance. The subprojects would include those forthe establishment of new, or expansion and rehabiLitation of existing enter-prises which are appraised by participating banks as technically feasible,financiaLly viable and economically justified.

(a) Poultry and Livestock Develop-ent. Facilities and initial workingcapital for the following subprojects: poultry; swine; backyardcattle breeding/fattening, dairy, goat raising; draft animals andimplements; integrated processing facilities; transport; and egggraders/sorters.

(b) Fisheries Development. Fishing boats, including gear and equipment;fishponds and fishpens; refrigeration and canning facilities; fishdrying and smoking facilities; and initial working capital.

(c) Plantation Crop Development. Development and rehabilitation of thefollowing plantations: abaca, citrus, ipil-ipil, rubber, mango,banana, coconut and other plantation crops as may be approved by CB.

(d) Agroprocessing and Post-Harvest Facilities. Solar and mechanicaldriers; shellers; rice and corn mills; feed mills; storage facili-ties; refrigeration and cold storage.

(e) Farm Mechanization Equipment and Machinery. Power tillers;tractors; power sprayers; haulers/transport; seeders; threshers; andlight and heavy trucks, primarily for transport of agriculturalproduce.

(f) Other Projects as May be Approved by CB. CB shall determine thefeasibility of financing other categories and include them underthis program, in consultation with the Bank.

ANNEX 5Appendix 2Page 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Subloan Maturities

1. Subloan maturities would be based on the subproject's cash flow andrelated to the subborrower's overall repayment capacity within the economiclife of the subproject, and in each case shall not generally exceed thefollowing, including appropriate grace periods:

(a) Farm implements with four-wheel tractors and power tillers as primemover:

(i) With prime mover - the loan term applicable to the primemover, usually up to seven years;

(ii) Without prime mover - four years;

(iii) With prime mover purchased at an earlier date - four yearsor the remaining term of any subloan received for thepurpose of financing the prime mover, whichever is greater;

(b) Other farm implements - four years;

(c) Light machinery - up to 20 HP - four years;

(d) Heavy machinery - over 20 HP - seven years;

(e) Lighttheavy trucks - five years;

(f) Irrigation pumps and engines - five years;

(g) Piggery project - seven years;

(h) Poultry project - seven years;

(i) Cattle breeding/fattening and draft animals projects - ten years;

(j) Goat raising - seven years;

(k) Complete development of fishpond - ten years;

(1) Fishpen financing - three years;

(m) Fishing boats up to 40 gross tons - ten years;

-94- ANNEX 5Appendix 2Page 2

(n) Fishing gear and equipment:

(i) With fishing boat - ten years; and

(ii) Without fishing boat - seven years;

(o) Rice mill - ten years;

(p) Development of plantation crops - up to fifteen years;

(q) Plantation crop, processing and marketing facilities:

(i) Storage facilities - up to ten years;

(ii) Transportation - up to four years;

(iii) Stripping machine - up to three years;

(iv) Baling Press - up to ten years;

(r) Permanent working capital - five years;

(s) Other items: to be determined by CB in consultation with the Bank.

ANNEX 695s Page 1

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Project Monitoring and Evaluation

A. Monitoring

1. Objectives. Project monitoring would help identify constraints andimprove implementation of the project through provision of information to CBand the management of participating banks. Monitoring should enabLe CB andthe banks to initiate actions to remedy project implementation constraints andto upgrade loan appraisal, delivery, control and repayment. Monitoring wouldthus be an integral part of day-to-day operational management. Main areas tobe covered would include: status of disbursements under subloans, physicalachievements under the subprojects; the operational results of representativeinvestment projects; financial performance of participating financial insti-tutions and the micro/macro economic sectoral situation relating to projectinvestment. Accordingly, CB would call for progress reports from the partici-pating retail banks and consolidate those reports for review by CB and theBank. On the basis of information receivcd, CB would prepare monitoringreports as described below.

2. Quarterly Progress Report on Subloan Disbursements.!' CB vouldrequire this information from the participating banks to claim reimbursementfrom the World Bank. The progress report would separately show disbursementsboth for seasonal production credit, by type of commodity and participatingbank, and for medium- and long-term credit, for permanent working capital andagricultural and agroprocessing investment.

3. Semi-Annual Monitoring Report This report will be prepared for theproject's credit and institutional development activities by the ALF Unit'sPlanning and Monitoring Division. Each report will consist of a narrativesection highlighting the main achievements and problems encountered during thepast six months of project implementation and listing actions and recommenda-tions proposed to resolve them. The following tables will be attached tothese sumnmaries.

(a) Credit Component

- Processing of investment loan applications; loan amountsapproved and disbursed by activities, term and bank;

- Physical achievements of subprojects financed;

I/ CB may increase the frequency of progress reports on subloandisbursements to facilitate expeditious withdrawals of the Bank loan.

ANNEX 6-96- Page 2

- Collection performance on project loans classified by bank andby age for both production credit and term loans;

- Loan supervision activities of ALF and participating bankstaff.

(b) Institutional Development

- Organization of ALF Unit and recruitment and/or assignment ofpersonnel;

- Financial status of participating banks and institutionaldevelopment for project implementation;

- Progress in rehabilitation program for both participating banksand potentially eligible banks;

- Progress in training of ALF and participating bank staff;

- Major ALFPAC reviews and recommendations.

These reports will be submitted to the Bank within two months fromthe end of the six-month period.

4. Annual Financial Statements and Institutional Appraisal. Certifiedcopies of the following financial statements relating to ALF and retaillending banks will be submitted to the Bank by ALF annually not later than sixmonths after the end of the accounting year of the respective institutions.

- ALF statement of income and expenses;

- ALF balance sheet;

- ALF cash flow statement;

- Annual Report on rescheduling/restructuring of loans under theproject;

- Audit Reports of ALF and project accounts;

- Institutional appraisal of participating banks conducted by ALF;

- Annual reports of participating banks, including income statementsand balance sheets, and subloan collection performance, as may beindicated by the Bank.

5. Annual Surveys. The focus of the annual surveys will be on anassessment of operating results of representative investment projects in asectoral context as well as the impact of project lending on retail lendingbanks. The methodology and sample size would be prepared by the CB-EconomicResearch Department and TBAC or any other suitable agency. The assessment ofthe impact of project lending on the financial condition of the participating

_ 97 - ANNEX 6Page 3

banks will be based on income and cash flow analysis. These statements wouldbe used to ascertain whether financiaL objectives are being met and provide abasis for remedial actions.

6. Monitoring by Retail Lending Banks. Monitoring of subloans will bethe responsibility of the lending banks which would designate an officer formonitoring the various stages of the loan cycle as presented in Table 1attached. Lending Banks should also ensure that separate subsidiary books andreporting arrangements are maintained for ALF-related accounts.

7. Reporting Forms. Specimen reporting forms will be prepared by CB,in consultation with the Bank.

B. Ex-Post Evaluation

8. Ex-Post Evaluation Reports. The ex-post evaluation should assesssubproject costs and benefits and the impact of project lending oninstitutional development. Analysis of the participating banks' proiect-related accounting would be central to this evaluation. This analysis wouldquantify the financial and economic benefits of subprojects, including thesubproject's profitability to the bank's net worth.

9. Evaluation should also verify lending models, comparing the actualoperational results of the representative investment projects with projectionsmade at the time of appraisal. The report will comment on whether theexpected results are being achieved, surpassed or not being achieved and willanalyze the causal factors.

10. Ex-post evaluation will be done by DLC in association with CB'sEconomic and Research Department and TBAC. A project completion report willbe prepared by CB or an agency nominated by CB.

-98- ANNEX 6Table 1Page 4

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Functions of Participating Bank Staff

Subloan Seasonal Loans Medium- and Long-Term Loansprocessing Function Responsibility Function Responsibility

Appraisal Analyze loan appraisal Loan Analyze sumaary of Seniordocuments submitted Officer work of loan staff. Officerfor approval. Random Random check oncheck all applications. appraisal procedures

used and timetaken.

Delivery Summarize loan records Branch Time less cri- Creditby type and activity. Managers tical than seasonal SupervisorsCheck timeliness of loans. Monitoringinput supply with should concentrateextension staff. on ensuring approved

inputs are available.

Utilization Regular systematic Credit Regular visits to Creditptogram of visits Supervi- check that capital Super-to borrowers. sors expenditure on farm visors

improvement is inaccordance withtechnical recommend-ations.

Repayment Regular summry of Loan Check progress of Projectrepayment status of Officers annual loan repay- Accountsall accounts. Check and ment installments. Staff withprogress of marketing Branch Cross check with help ofagents and liaise with Managers seasonal finances Creditextension. to assess surplus. Supervisors

_ 99 _FANNEX 7Table I

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Principal Input and Output Prices

Economic /bUnit Financial la 1985 1990

Pesos -- -

InputsConcentrate feed kg 3.00 2.80 2.80Salt supplement kg 1.20 1.00 1.00Feed bag (50 kg capacity) one 2.50 2.15 2.15Piggery feed kg 4.20 3.60 3.60Fish fry: Sugpo piece 0.45 0.40 0.40

Bangus piece 0.25 0.22 0.22Organic fertilizer at 550.00 473.00 473.00Inorganic fertilizer - Urea at 5,180.00 4,850.00 6,060.00Fish feed at 2,200.00 2,070.00 2,070.00Chemical pesticides gallon 360.00 338.00 338.00Sacks one 3.30 2.80 2.80Agrlcultural labor ad 25.00 12.50 12.50

OutputsBeef kglliveweight 21.60 27.00 27.80Broiler bird 3.50 4.40 4.40Feed bag 1 2.50 2.15 2.15Chiken manure kg 0.18 0.15 0.15Fattener kg/liveweight 21.00 18.10 18.10Weanling head 440.00 378.40 378.40Culled sow kg/liveweight 19.00 16.40 16.40Fish: Sugpo kg 125.00 107.50 107.50

Bangus kg 18.00 15.50 15.50Dried fish kg 24.00 20.64 20.64Smoked fish kg 30.00 25.80 25.80Marine fish kg 18.00 15.50 15.50Banana kg 2.60 2.24 2.00Citrus kg 7.22 6.21 6.60Mango one 1.20 1.00 1.00Coffee beans kg 45.00 5.81 6.40Rubber - cuplumps kg 8.00 11.00 13.80Abaca - fair grade kg 5.40 4.60 4.60

good grade kg 6.40 5.50 5.50excellent grade kg 7.70 6.60 6.60

Ipil-Ipil: Leaf air dry mt 650.00 559.00 559.00fuelwood at 280.00 240.80 240.80

Palay (unmilled rice) kg 2.65 2.76 3.85Corn kg 3.86 3.18 3.40Sugar (processed) kg 4.75 4.46 7.70Abaca fibercraft: Shopping bags piece 25.00 21.50 21.50

Placemats dozen 70.00 60.20 60.20

/a Financial prices reflect those prevailing at the time of appraisal, suitably updatedto December 1984.

/b The economic farugate prices for internationally traded comodities have been derivedfrom vorld prices projected by the Economic Analysis and Projections Department. WorldBank, January 1985. For internally traded items, the economic prices have beenderived from the financial prices using the standard conversion factor, and areassumed to remaln constant for the duration of the project.

ANNEX 7

- 100 - Table 2

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Conversion Factors Used in Economic Analysis

Standard conversion factor........................................ 0.86

Capital goods..................................................... 0.86

0.85

Electricity, gas and w.................... ............ 0......... 0.800.80

CoDnstruction .....De........................... .................... 0.84

Shadow wage rate - rural agricultural labor (Pesos/day) ........... 12.50

Exchange rate (US$ equivalent) ......................... ........... 20.00

-101- ANNE 7TabUle 3

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Benefit-Cost Ratio of Palay and Corn, 1985-86(P/ha)

Irrigated palsy Hybrid cornFinan- Finan-cial /a Economic cial /a Economic

Gross value of production lb 6,676 4,282 7,192 6,735Production cost 2,961 2,402 1,109 838Benefit-cost ratio 2.3:1 1.8:1 6.5:1 8:1

Production CostsSeeds/planting materials 233 150 101 95Hired labor 532 266 232 116Family labor - 270 - 113Fertilizers and chemicals 1,635 1,585 585 470Fuel and transportation 63 50 28 22Irrlgatlon fee 94 81 - -Lease rental - - 25 22Land tax and interest on land 40 - 38 -amortization

Interest on production loan /c 364 - 100 -

Total Production Cost 2,961 2,402 1,109 838

/a Based on a Bureau of Economics Survey of July-September 1983, projected to1984 using inflation rates of 18% (July-November 1983) and 232 (November1983 to Septeuber 1984).

/b Palav yield assumed at 3.1 mt/ha, corn at 2.0 at/ba; expenses In kindrelating to landlord's share, harvester's share, thresher's/sheller'sshare and ±ease rental are deducted from production value to arrive atgross production value. Such deductions amount to P 1,539 for palay andP 528 for corn. The prlce of palay and corn (1984 price In 1985 constantvalue) is as follows:

Palay Corn

Pinancial price 2.65/kg 3.86/kgEconomic prlce 1.70/kg 3.61Jkg

Palay was valued using export parity prices and corn at import parityprices.

/c Interest on production loan taken at 20% p.a. on 702 of the financialcosts of productlon.

-102 - T 7Ta ble 4

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Benefit-Cost Ratios of Sugar, 1985/86(PIpicul)

Financial /a Economic /b

Production value /c 300.0 281.0Production cost 264.0 140.0Benefit:cost ratio 1.1:1 2.0:1

Production CostsPreparation, planting and

cultivation /d 48 4Fertilizer application Id 22.8Harvesting/milling /d 43.6

Total Direct Cost 114.8 85.4

Production cost /e 231.5 140.0Interest on seasonal loans If 32.4 -

Total Production Costs 263.9 140.0

/a Based on "Sugar Production Financing Program," October 1984, a report pre-pared by Republic Planters Bank in consultation with the Bank appraisalmisslon.

/b 1984 economic price of sugar in 1986 constant value.Tc Derived from composite weighted average of export and domestic prices for

sugar which Is projected at between P 250-350 per picul./d Labor component is assumed at 50% for farm size 1-49 ha, 302 for farm size

50-99 ha, 202 for farm size over 100 ha and 40% for average farm. Ashadow-wage factor of 0.5 for labor and standard conversion factor of 0.86for other costs are used to derive economic values. Fertilizer valued atborder prices at farm-gate level derived from prevailing world marketprices.

/e Based on 19B3 national average of planters' share of production cost at612 and updated to 1984 using an inflation factor of 1.23.

If Interest on seasonal loans assumed at about 30% on 70% of the costs ofproduction.

PHiILIPPINES

AGRICULTURAL CREDIT PROJECT

Sensitivity Analysis of Longer-Term Investments

AllEase All costs Benefits Benefits costs +102 Benefits

estimate +102 +10% -102 benefits -10% lag one year

Financial Rates of ReturnPower till1er 36 31 42 30 24 24'Tractor 31 27 35 27 23 23Piggery: 20-sow fattening 28 20 36 20 12 16Poultry: 10,000 broilers 29 24 35 23 18 19Banana 43 36 51 23 18 20 Citrus 46 43 50 43 39 36Fish processing 46 37 55 36 28 255-ha fishpond 35 30 41 29 24 233-ha fishpen 34 26 43 25 17 19

Economic Rates of ReturnPower tiller 84 72 .96 71 61 44Tractor 38 32 41 32 26 25

*Piggery: 20-sow fattening 48 35 61 33 22 22Poultry: 10,000 broilers 37 31 43 31 25 24

* Banana 77 67 88 65 55 40citrus 51 47 54 47 43 39Fish processing 62 52 74 51 41 335-ha fishpond 39 33 45 32 27 253-ha fishpen 57 41 67 35 23 26

LA 4

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Projected Financial Statement for the Project

Statement of Income and Expenses /a(million pesos)

Project years: 1 2 3 4 5 6 7 8 9 10

Income - Interest earnings /a 79.77 236.25 351.31 428.01 466.36 466.36 466.36 466.36 466.36 466.36

ExpensesIBRD commitment fees 12.00 8.44 4.22 1.41 Interest ExpensesIBRD loan /b 41.00 130.63 184.06 231.25 300.00 290.00 270.00 250.00 230.00 210.00Local financing /c 9.98 23.63 35.13 42.80 46.64 46.64 46.64 46.64 46.64 46.64 0

Subtotal Interest Expenses 50.98 154.25 219.19 274.05 346.64 336.64 316.64 296.64 276.64 256.64

Administrative expenses /d(Net of fixed assets

investment) 3.50 4.32 5.24 6.07 6.68 7.21 7.79 8.41 9.09 9.81Fixed assets amortization 0.10 0.10 0.10 0.10 0.10 0.18 0.18 0.18 0.18 0.18Provision for bad debts /e 8.86 25.91 30.17 38.69 25.91 51.82 51.82 51.82 51.82 51.82Foreign exchange loss /f 0.00 0.00 0.00 0.00 0.00 46.67 46.67 46.67 46.67 46.67

Total Expenses 74.44 193.02 258.93 320.32 379.32 442.52 423.09 403.72 384.39 365.12

Net Income 4.33 43.23 92.38 107.69 87.04 23.85 43.27 62.65 81.98 101.25

/a Based on CB interest rate of 181 p.a.7Tb Interest rate assumed at 9.5X p.a. for years 1-3 and 10% p.a. thereafter.7-F Interest rate on local funds assumed at 15% p.a.

d Administrative costs based on CB estimates.7i The provision for bad debt builds up to 15% of the outstanding loan portfolio in the tenth year.7T For assumptions regarding local currency devaluation, see Project File.

ANEXu 7Table 7

PRILIPPINE

A*RICULTURAL CREDIT PROMCr

Prolected Financial Statment for the Project

State6ont of Conditlon(million peos)

Project years: 1 2 3 4 5 6 7 8 9 10

AssetsCsuh & deposits 32.80 100.0O 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00Other llquid investewnts - 2.04 124.69 271.17 384.22 303.83 247.77 209.08 199.72 189.63

Loan Portfolio /aProductlon loans 681.12 1,107.95 1,107.95 1,107.95 1,107.95 1.107.95 1,107.95 1.107.95 1,107.95 1,107.95Nidium-term loans 102.27 315.54 528.41 741.48 741.48 741.48 741.48 741.48 741.48 741.48Long-term loanm 102.27 315.54 528.41 741.48 741.41 741.48 741.48 741.48 741.48 741.4J

Subtotal loans 886.36 1,738.64 2,164.77 2,590.91 2,590.91 2.590,91 2,590.91 2590.91 2,590.91 2,590.91

Less:Provision for bad debt R.86 34.77 64.94 103.64 129.55 181.36 233.18 285.00 336.82 388.64

Net Loans 877.50 1,703.86 2,099.83 2,487.27 2.461.36 2,409.55 2,357.73 2,305.91 2.254.09 2,202.27

Fized assets 0.50 0.50 0.50 0.50 0.30 1.40 1.40 1.40 1.40 1.40Less cumulative

amortization 0.10 0.20 0.30 0.40 0.50 0.68 0.86 1.04 1.22 1.40

Net Fixed Assets 0.40 0.30 0.20 0.10 0.00 0.72 0.54 0.36 0.18 0.00

Foreign exchangeadjustment account - 200.00 200.00 200.00 700.00 653.33 606.67 560.00 513.33 466.67

Total Assets 910.70 2.006.20 2,524.72 3,058.54 3,645.58 3,469.43 3,312.70 3,175.35 3,057.33 2,958.57

Liabilities and Equity

LiabilitiesIBRD /b 800.00 1,750.00 2,125.n0 2,500.00 3,000.00 2,R00.00 2,600.00 2,400.00 2,200.00 2,000.00Local borrovings 106.36 208.64 259.77 310.91 310.91 310.91 310.91 310.91 310.91 310.91

EquityPaid-in equity - - - - - - - -

Accumulated profits 4.33 47.57 139.95 247.63 334.67 358.52 401.79 464.44 546.42 647.66

Total Liabilitiesand Equlty 910.70 2,006.20 2.524,72 3,058.54 3,645.58 3.469.43 3,312.70 3.175.35 3,059.33 2,958.57

/a Production credit io given for an average one-year period and io rediaburued upon collection. Yadium-term lnvestentcredit makes up half of the Initial disbursements for investment credit and han an average four-year term includlng one-year grace period. Long-term Investment credit sakes up the other half of the initial disbursements for investment cre-dit and has an average seven-year term, includlng two years of grace. Both medium- and long-terp investment credit areredisbursed upon CD receipt of repayment by participating banks.

/b IBRD loan disbursements assumed at US$40 million in year ; US$30 milllon in year 2; USSIS million In year 3; and S15villion in year 4. Fstimated disbursement profile per text Table 15 would result in disbursement different from thatassumed here. Nowever, any changes In the disbursement profile will not affect the profitability of projectoperation. Loan amortization is 20 years including 5 years of grace. Principal repayment will be in 10 equalsenlannual installments starting In the fifth year. In the cashflow analysis fitures reflect year-end sunmaries.Therefore, IBRD loan amortization appears as annual repayments at year-end.

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ANN-I 7-106- Table 8

PHLIPPnES

LRICIILTURAL CREDIT PROJECT

Projected Pinancial Starement for the Project

Sources and Uses of Funds( illion pesos)

Project years: 1 2 3 4 5 6 7 8 9 10

Sources laNet income plus non-

cash expenses 4.33 43.23 92.38 107.69 87.04 23.85 43.27 62.65 81.98 101.25

Amortization 0.10 0.10 0.10 0.10 0.10 0.18 0.18 0.18 0.18 0.18Plus:

Foreign ex7changeloss - - - - - 46.67 46.67 46.67 46.67 46.67

Provision for baddebt 8.86 25.91 30.17 38.69 25.91 51.82 51.82 51.82 51.82 51.82

Subtotal Cash fromOperations 13.30 69.24 122.65 146.48 113.05 122.51 141.94 161.31 180.64 199.91

IBRD loan drawdcarn 800.00 750.00 375.00 375.00Local borrofing 106.36 102.27 51.14 51.14 - - - - - -

Subtotal NewBorrowings 906.36 852.27 426.14 426.14 - - - - -

Total Sources 919.66 921.52 548.79 572.62 113.05 122.51 141.94 161.31 180.64 199.91

UsesLoan amortization /b

IERD - - - - - 200.00 200.00 200.00 200.00 200.00LocalLy financed - - - _- -

Subtotal LoanAmortization - - - - - 200.00 200.00 200.00 200.00 200.00

Net subloandisbursement 886.36 852.27 426.14 426.14 - - - - -

Capital expenditures 0.50 - - - - 0.90

Net changes incurrent assets 32.80 69.24 122.65 146.48 113.05 (78.39) (58.06) (38.69) (19.36) (0.09)

Total Uses 919.66 921.52 548.79 572.62 113.05 122.51 141.94 161.31 180.64 199.91

/a Repayment of project loans to participating banks would be redeployed in new loans, and therefore has not beenshorn separately.

lb Cumulative net income from ALF operations vould be sufficient to repay the IBRD loan, including the expectedexchange risk.

-107 ANNEX 8

PHILIPPINES

AGRICULTURAL CREDIT PROJECT

Selected Documents and Data Available in Prolect File

Section A Central Bank Project Preparation Documents:

A.1 CB Committee Report on the Proposed Agricultural LoanFund (ALF)

A.2 Agriculture and Rural Development Institutions, CropProduction and Marketing

A.3 Review of Financial Institutions and Central Bank CreditPolicies

A.4 Review of Ongoing Agricultural Credit ProgramsA.5 Organization and Operational Policies to Implement

Agricultural Loan Fund ArrangementA.6 Supplementary Information on Credit Demand and Financial

Sector OperationsA.7 Farm Models and Financial AnalysisA.8 Initial List of Retail Banks Qualified for Project

ParticipationA.9 Central Bank Notes on the Proposed Policy and

Institutional ReformsA.10 CB - Department of Loans and Discounts, Annual Report

1983

Section B Selected Working Papers and Tables Prepared byPreparation/Appraisal Missions

B.1 Investment Prospects in Selected SubsectorsB.2 Commercial, Savings and Thrift Banks: Financial

Condition and OperationsB.3 Analysis of Subloan ArrearagesB.4 Financial and Economic Analysis of Selected SubprojectsB.5 ALF Cash Flow Analysis and Statistical Data on Rural

Banks and Agricultural CreditB.6 ALF Operating Guidelines, Project-related Training

Component; and Monitoring and Evaluation

PHILIPPINESAGRICULTURAL CREDIT PROJECT

Implementation Schedule

CALENDAR YEAR 1985 '966 4987 19U6 1989MAJOR PROJECT ACIMTIES _ _ -

QUARTER 1 2 3 4 4 2 J 4 I 2 J 4 1i 2 3 4 1 2 3 4.

A CREDIT PROGRAMAppoint Care Stofl tor ALF Unit & ALFPAGTechrtica Unit

Appoint Additonal Persone for ALFUnit & ALFPAG Technical Unit _ 1111 Pfel IIIII _i_IJ 1Ed71 lLIi lii gll flill ii

Reconstitute AgrIultural MtochineyManufocturers & Deals AccrediationConmritee

Isse Notice cn Machinert Imports &Accreditation d Deo"_

Inform Retail Bonks of Po)ecrts Scope. LendingTerim& Conditions&EligbilltyCrteria liii l 1 liii Illl 1 Rollo l_iEi l77ll 7dL _EE lilH lEEiE SEJE E

NotWy Retail Banks vIth hrears Less Than 15%ol Their Eligiblity Is_I1 IiIi gII oil I I I l I ""lll I 1 I I I11IIIII gioi I1111 .I.. gIIl

Ptepare Institutonol Approlst Plans & UndetakeInstitutiono Apprassaix PriortyBanks _mi il _iii _ _ii; 1dSEE JEEi lii 1EESI liii EJEE mill

Estobith Mtnimum Technical Norms for FormMechonzatIon Invesftmnts & Review Impbi-mfntation dFormMechanizationProgarm 1_li lilli 111 liii l11 llii llog le ii. Sll 1111 lill lfel lii Illli loan lllI

Prepare Institutioal Development Plons tar CommIrciat Banks l _ i _1 oll_ _oil I _ ___.

roject Monttorng by ALF co

Establish Program & Undeteoke EWvcuo lionStudies & Surveys lii l lollh lii _ lii liii liii o 1 oglel l ll liii

Subboan/CB Loon Dsbursements _ _ _i i l___End Use Verfation d Subloans byv CB &Retoil Bank _

S. POUCY STUDIESEstfobshCnteria for Subsidy Plase-out & Folow up l ll l ml_i rlllSt of Assislance to Low ncome Groups &Follow-up some lmll illegi

Study on Expanslon d Banking Services In RuralAels &Folow-up _ _ _ _vlI i oi ii g g ioo li i imem gl ll illui lmll Ii1 iimill lmmll lil

Review dCB RediscountingPdlles & Fc4!owvup l_l _ _ _ s liisi lill liii YSss iiirg mm.. isss un alii 11111 1Study on Crop/Sublcan Insurance liii l S 1S11YPropare Technical Guidelines far Prolect Lending& Update Policy Monual Ol ier

C. STAFf TRAININGComplefe Suey d oming Needs & Caxnucttechers Training PForom

Preparo TraIing ProgamConnduct training Couses for CB & Retail Bank

Stant i _ _ _ _ _ _ _ _ _i__ l mmii ""' I;Legendi

etuActual Implementation d Project ActMry mi dddE Fallow-up Action toContinue or ActMts Subject to RevIewVJorld BorJk-27282

-109 CHART 2

PHIUPPINESAGRICULTURAL CREDf[ PROJECT

Flow of Prject Furn

IB Lonn

ca.Aoc,jtwoILoan Fund l~~~~~~~~~l

j Rald~~eorIr%ta 8anks

N'.

Logen o

SubwcrW#In to

_._ ~4._

r,etdi dankL Combtrid, rural & govrnet spckiIzed bonim

WoWd Boar-27144

- 110 -

CHART 3

PHIUPPINESAGRICULTURAL CREDfT PROJECTCentral Bank of the Philippines

Organzation

Ofic f ebil SR Of¶ OGl l|

Fund CifOtm flcs eprteg litC 'o. Ririy werI evre

IF I Unit I

I OillceoIIhe I f imeothe I ffcectle I fcfc fIt IG overnclOrk Dep GIvernor Depdiy Governor DepyGov r IeputD Gpue r0o

(AmorcSector I (Ineo notWonal c oowl(D rd Ah~S111ctlveMi (Sr,ld MOfl

Opelotions Secto) Opetollom Sector) MalgSlrt Sewtor) FEz otirUon Sector)

-d rrel Q ||Mnt Impodrt&Drod Commodity Clot-G Dep ortmentGo o

onim~ ~ io ffc

DscormenofDpatmnEconomfic ResearCh

(Doescnl ) SEoreign Mxoncg O- Deeamr D

Depa ~ ~ Dpo

Econiomic Rese=c(111"_ernottVA) Foreign SES

hltongement orErderiDo DeEre&

Invest_ ent ACCO irtt

'CeErL Dov_. La Unionl & locloErOri

World Bonk-26MP

PHILIPPINESAGRICULTURAL CREDIT PROJECT

Central Bank Organization for Project ImplementationCentral Bank of the Phllppines

Monetarv or

|Presientiol Comtnittee _____- _______=on Agricut-ol- - - - - ---- -.

AL.F Policy Deputy DoetiOpernotA4visoy Group - eseac ector s o ectIcoert Examinat Lpeion Sd&

BC - Speciol Asoant Special AsAistont CatoGoemr to GoCeMr InsZitut]

(Technical Staff)

ID.r ctor DLDecta ctcs -DE

Deportment of SES Dep_L ntsrnEconmicRsearh - o n & C-recitLI&

CONSILTAT1M MECI1ANIS.

Governffwt Commod6ity Boords Trode Orgni&ofi Arsson DinectorAgwncbs & Trodeo tbnsod Retail ALF Unit

OfgonzotlonW Bonks

DiPrtsslonol Ch| Plolamirg & Adc$untls I!

1 95oto 1 96ptStaff Suppor tf vot staff1

World 13ank-27143

IBRD 18786)- (IAll IAItIIN 4II INIII INCI 120 1W4-

HY t(1 (H;lAl'IIK'AL Itl' I)NS

NCR %All l.AlA llAl NII ILIX-L, VI Wt-%IIFtNVt'IAYAS -

I IIOOOSNOIIE3d AkianA|V i 3'i Ca p PHILIPPINES

-?0- 4M/in5|u 1l A1llu AGRICULTURAL CREDIT PROJECT 7'-,.UfI , NiegiruOcc.dnatalLaUn.t VI1 %I RAI VLISYAS- NETWORK OF BANK OFFICES

t I 'u. %VALU bohtI - 0 MAJOR CITIES_dIun 4; SU,pr, 112 O AIRPORT S

Capyan VIII A%II-k% VISN'ASA 264 - ROADSKAlsngaApayao -I N -rth"Smanr A5 RAILWAYS1 Iael. 11? Wtm I, s.r., '1.2.- "r PROVINCIAL t3OUNDARIESi-UI 411 L .ta4Smwn -a - A - REGIONAL BOUNOARIESIuiv" V. cAY * Leyt e - INTERNATIONAL BOUNDARIES

: Ouirrno .3 Sawulhtrn Leayt. Loong ) , II I N I RAL LUZOIN IX WI Si I RN MIANUTAt 102 COMMERCIAL BANKS

NuevuEcija ZamlwwmderlNorte l 11 THRIFT BANKS] TaVbei.' ZOdtshnq n4 Se f SPECIALIZED GOVERNMAENT BANKS

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