The reason to it was the official discount rate, which the National Bank of Ukraine (NBU) raised up to 18% last September. Late in January NBU infomed on the rate remaining the same, so loan programs would scarcely go down in value until seeding. Since the discount rate set up by NBU, in fact, defines the money value, this latter is rather high at the moment. “The official discount rate affects on any loan value. Borrowing costs may spiral down once the NBU eases its monetary policy”, – says Yevgen Zaigrayev, Executive Director, Corporate Business and SMEs, JSC Kredobank.
Which credit programs do banks offer to agricultural companies and individual farmers; and what’s the cost of borrowing money for seeding?
Financing of operating assets
A working capital loan is among the top- requested with agribusiness. This is a kind of credit facility, which companies use to cover purchase of seeds and fuel, maintenance of farming machinery and to meet other pressing needs as well.
In February 2019 all major and medium banks – such as Ukreximbank, Credit Agricole Bank, PrivatBank, Oschadbank, First Ukrainian International Bank (FUIB), Pivdenny Bank, OTP Bank, Raiffeisen Bank Aval, Ukrsibbank and others offer working capital loans to agribusinesses (see Table on page 30). Interests on bank loans to replenish working capital have been raised since September 2018 by 0.5-2.5 p.p. The cost of these loans runs currently to 19-25% per annum. In addition, a company would pay the front-end commission equal to 0.2-1% of the loan amount.
Normally, the bank signs a loan contract with a company for 1-3 years, but disbursements under the open credit line are made in equal shares monthly all year round. After the total credit amount is paid back, the access to the loan may be resumed in case of the revolving credit facility. If however the loan was not that kind (non-revolving credit), then the recipient would apply for a credit anew, once he needs money, and pass through the whole assessment procedure again up to final resolution of the loan committee.
Terms of the loan contracts, as stated in the banks, may vary much, sometimes, reimbursement of a credit is allowed within 1.5-2 years, but most commonly, agricultural operators are bound to repay the loan within a year.
“A working capital loan is tailored by its term to the operating cycle of a company, i.e. if the winter wheat is sown in September, while the harvesting season for it falls on August days a year later, then the loan is given to meet this schedule, for a one year term. If a company wants to hold back the harvested crop till prices are better, usually, till the spring time, we are flexible with offering so called trade stock funding, which means financing the commodity storage,” – explains Ivan Yerko, Head of OTP Agro-factory crediting program.
Criteria and rules
A company has to meet a set of criteria to be qualified for the working capital loan. The first one is a collateral available, as banks can open credit lines but against security. Most of banks accept real estate property and transport vehicles as a collateral. Other banks are ready to lend money on the pledge of equipment, farming machinery and commodities in stock. A bank deposit is another type of collateral. Many banks require a third party to guarantee the loan besides a collateral. By the way, pledging a property is not enough, the borrower has to get it insured for 0.3% of its assessed value.
Yet providing a security does not ensure the loan will be authorized. After all, the bank will scrutinize a Company’s finance statement, credit record, business reputation of owners and top-management. “The good standing of the borrower, transparent legal structure and positive credit status (if any), as well as operating revenue sufficient for the debt service are essential for us”, – states Olexander Matyushenko, Director of Corporate Business Department of Pivdenny Bank.
Also, bank officers appraise the business model of the agricultural operator, focusing on the land bank available, condition of the farming equipment, yield capacity of the Company’s farmland in prior periods. “Business resilience and transparency, the rate of return and crop stock conformity to climate area are key factors for us in making a decision on a loan extension, as well as market trends, sales prospects and relevance of technologies to the reported operations”, – highlights Svitlana Bazhenova, Head, SMEs Department of the Piraeus Bank.
By the way, banks require companies involved in crop growing to properly certify the right to rent land plots in conformity with legislation, to ensure the land bank to keep up throughout the duration of the loan contract.
“The land bank, if properly documented, first and formost safeguards the agricultural operator in the context of a “silent war” for each land share. It matters for the bank, too”, – argues Nataliya Butkova-Vitvitska, Director, Micro-,Small- and Medium size Buisness Department of the Oschadbank.
Underlying documents for a borrower to be offered a loan cover statutory records, financial statements for past three years, statistical reports, reference data on the Company’s land bank from the local council or the lands directorate; and the land rental agreement (if the farmland is a local community property), list of farming equipment, assigned to work the reported farmland, actual budget for the past marketing season and current budget forcasts.
Another facility, which may help agricultural producers to get money for seeding purposes in addition to working capital loans, is the bill avalisation. Nowadays, the note-backed lending is offered by many banking institutions, namely, Credit Agricole Bank, Raiffeisen Bank Aval, Oschadbank, Kredobank, FUIB, Alpha-Bank, Ukreximbank and others. A company can use note-backed funds to finance the seeds, fuel and pesticides purchase.
Promissory notes allow companies to get a grace period in paying for purchased products from 3-4 months up to 9-12 months. “The bank suggests to avalise the commodity-backed bills of exchange (negotiable or non-negotiable) issued to make payments for commodities relating to agricultural production or processing, including crop protection chemicals, mineral fertilizers, seeds. This facility providing the payment adjourning for a buyer and certainty in timely payment for a commodity supplier, is in high demand in Ukraine”, – emphasizes Nataliya Butkova-Vitvitska from the Oschadbank. According to her, the maximum amount avalised runs to 20 mln hryvna. The fee for avalising starts with 2.5% per annum of the issued bank guarantee amount, to be paid for the actual term of the bank liabilities by bills of exchange. On the average the cost of bills guarantee comes up to 1.5-6% per annum.
To be offered this financing, one should have a collateral, which may cover real estate property, transport or farming equipment. Occasionally, banks agree to guarantee a bill of exchange on the pledge of future harvest or so-called agrarian receipts, which are formally executed in favour of the consumables supplier.
Funding via the bill of exchange programme should be enhanced, – bankers say, – the more so as its cost is much lower than the standard loan value. There is a fine point yet: not all suppliers make a practice of selling seeds and fertilizers for bills of exchange. Some of them refuse to accept promissory notes guaranteed by ukrainian banks. “Major suppliers on the agrarian market (top-…, which account for 70% of imported items) are foreign companies (Syngenta, BASF, Bayer, ADAMA, DuPont), which are not willing to accept promissory notes avalized by ukrainian banks for insurance risks”, – states Olexander Matyushenko, Director of Corporate Business Department of Pivdenny Bank.
Financing against receipt
In Ukraine, large agricultiral producers and private farmers may use the collateral-free, signature loan facility to adjourn the payment for consumables, and not only the bills of exchange. The scheme is not complicated: a buyer draws a notarial receipt, which ensures settlement with the supplier within a specific time period. A portion of the harvested crops is supposed to cover the payment due, with the harvest expectance being stated in the receipt. The major requirement to agricultural producer is the legally certified land leasing contracts with land share owners, and the fields survey plan with data on the farmland where the harvest, promised as payment upon receipt, will be grown. One more requirement is three years market-related experience at least. The lower limit for the agrarian receipts totals 200 thousand hryvna.
Banks may accept the agrarian receipts as a collateral, when a company is applying for a loan. “According to the IFC data, not a single enforced collection by receipts has ever occurred over the time it’s been in use. In 2018, Piraeus Bank started with a product “Credit for agricultural receipts”, and this year we plan to expand this lending portfolio”, – reports Svitlana Bazhenova, Head of SMEs Department of the Piraeus Bank. Currently, agrarian receipts are acceped as a collateral by very few banks, in particular, OTP Bank and Piraeus Bank.
Bankers stress on restraints to the development of financing secured on agrarian receipts. “Up to date, there is neither a distinct mechanism to seize a collateral (put on an agrarian receipt), nor an explicit procedure to set up reserves for this kind of security”, – explains Olexander Matyushenko, Director of Corporate Business Department of Pivdenny Bank.
Oschadbank is not ready to use receipts as collateral assets for secured loans, as well, due to a registration procedure, requiring each one be bound to individual land plots, which seems rather complicated. The bank offers other kinds of loans. “The Bank provides financing under the joint program launched in partnership with the European Investment Bank and the European Investment Fund. Agrarian producers are supposed to secure only 30% of the loan, and the European partners will guarantee the rest of it. Apart from that, it is a common and practical facility, like standard loans”, – assures Nataliya Butkova-Vitvitska from Oschadbank.
Banks offer a wide range of credit facilities to agrarian operators. Options cover both direct financing such as revolving credit lines or the term lending, as well as indirect instruments like note-backed lending.