Improved Agri-Agra Law a win for the economy



WHILE everyone is understandably distracted by the baffling chaos that has erupted over the supply of sugar, there has been a significant policy accomplishment that should be highlighted. One of the 110 laws that lapsed into effectivity at the end of last month was Republic Act (RA) 11901, or the “Agriculture, Fisheries and Rural Development Financing Enhancement Act of 2022,” which corrects most of the flaws of the previous version of the Agri-Agra Act, and broadens support for agriculture, agribusiness, and micro, small and medium enterprises (MSMEs) in general.

The main goal of RA 11901 is to improve access to financing and financial services for rural communities and businesses, particularly MSMEs. It does this by amending the provision of the previous law RA 10000, or the “Agri-Agra Reform Credit Act of 2009,” which specified that banks must set aside 15 percent of their loanable funds for agricultural borrowers and 10 percent for beneficiaries of the agrarian reform program. Under the new law, these specific mandates have been eliminated; instead, banks must set aside 25 percent of their loanable portfolios for the agriculture, fishery and agrarian reform sectors combined, and are given greater flexibility to choose which borrowers to fund.

In addition, banks that are unable to meet the new 25-percent mandate with direct loans can compensate for it by investing in agriculture or agribusiness debt and equity instruments, financing the agricultural value chain, or providing agribusiness loans for agricultural or other related community-building projects.

To ensure that banks' lending activities are legitimately in line with the new law's goals, it defines acceptable alternatives, including agritourism; digitalization of agricultural activities and processes; rural public infrastructure; initiatives to improve livelihood skills; programs to promote the health and wellness of rural communities; and financial assistance for green initiatives that contribute to equitable and sustainable economic growth and environmental, social and governance projects.

In a statement following the bill's lapsing into law, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla commented that, “The new Agri-Agra and Rural Financing Law has been a priority legislative measure of the BSP since it considers the requirements of rural community beneficiaries from a holistic perspective, taking into account their evolving social networks and complex needs.”

We would anticipate that the biggest criticism against RA 11901 will be the removal of the 10- and 15-percent lending mandates, as this change may be regarded as giving banks more leeway to avoid lending to farm smallholders and agrarian reform beneficiaries. However, Medalla's comments implicitly acknowledge the shortcomings of the 2009 law. By imposing those specific lending requirements, the law severely limited banks' ability to prudently manage risk, on the one hand, and actually prevented financial assistance to a large part of the broader agricultural sector. Banks were placed in an impossible position in terms of balancing their responsibilities for meeting the agri-agra lending thresholds and meeting standards for keeping nonperforming and risky loans to a manageable level. As the consequences of failure to meet the latter responsibility are much more severe and far-reaching, the banks were never able to meet the lending mandates.

Under the new law, by contrast, even if the banks take a conservative approach and limit direct lending to small, risky agricultural borrowers, what they do as an alternative will still directly benefit those in the agri-agra sector. Better infrastructure, better access to markets, and improved management and technical capacities help those individual farmers and small enterprises increase their productivity and incomes more sustainably than simply subsidizing their low-value, subsistence-level livelihoods, which is what the unintended result of the 2009 law amounted to.

That being said, the task of the BSP and concerned government agencies now is to ensure that the new 25-percent mandate is being properly followed by the banking sector. The excuses for not following it have been removed, and banks have been provided a wide range of options to lend to true value-adding enterprises and endeavors. From the banks' perspective, the new law should not be viewed as an imposition, but rather a pathway to a new range of potentially lucrative business opportunities that will help boost the agricultural sector and the economy as a whole.

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