Agribusiness finance approaches Experience shared by Rabobank 29 October 2012 Gerard van Empel Rabo Development
Profile Rabobank Group International financial services provider on a cooperative organisation principle - Retail banking, wholesale banking, asset management, leasing and real estate - Operating in 47 countries - 10 million customers around the world - 761 offices outside the Netherlands - 59,670 FTEs Cooperative core business - 139 independent local banks in the Netherlands - 7.6 million customers - 1.9 million members - 872 offices - 27,272 FTEs High credit rating by S&P, Moody s and DBRS 2
Key figures Rabobank Group 2011 Total assets 731.7 billion euro Net profit 2,627 million euro Return on equity 7.6% Local Rabobanks 139 Branches in the Netherlands 872 ATMs in the Netherlands 2,949 Number of clients Rabobank Group 10 million Number of clients local Rabobanks 7.6 million Client satisfaction private individuals 7.5 Members 1.9 million Countries 47 Foreign places of business 761 Number of employees (in FTEs) 59,670 Ratings S&P/Moody s/fitch/dbrs AA/Aaa/AA/AAA 3
Developments in 2011 Market shares in the Netherlands Mortgages 32% (2010: 29%) Savings 39% (2010: 40%) TIS 42% (2010: 42%) Food and agri 83% (2010: 84%) Rabobank: the leading Dutch wholesale bank Difficult market conditions reflected in increase in bad debt costs Solvency shored up in 2011 and continued robust liquidity position 4
Rabo Development within the Rabobank Group Rabobank Foundation Strengthening Communities Rabo Development Financial Inclusion Rabobank Group Rabo International F&A Banking Local Member banks Retail banking Group entities Leasing, insurance, asset mgt. Sustainable cooperative banking with involvement in the F&A chain 5
Rabo Development partner banks 2012-6
(Global) Lesson s Learned in rural banking Non purely focussed agricultural retail bank has survived without government support Rural Banks also need an urban presence Sufficient market share is essential for survival Serve all market segments in the rural space Financial inclusing starts with a current account not with a loan Increase use of IT in service delivery also in the rural areas Consolidated structures make better use of capital, and can leverage their balance sheet in financial markets Operations need to be based on efficiency Use of agents essential for rural banks to organize cash in cash out Financial institution where there is a link between capital suppliers and client base will retain better rural mission Cooperatives need to an economic instrument for its members 7
Lessons learned in agri/rural banking Agri policy banks don t work Commercial banks with rural stakeholders seem appropriate model Agri sector knowledge & organisation is basis for agri financing Segmentation comes second Monitoring is key to early anticipate on agri related risks Be close to your customer, e.g. via rural branch network Be the center of the agri network apply value chain approach Lending should be based on expected cash flows Collateral is important deterrent against default (but liquidation value is low) Be careful with going down market (e.g. smallholders) too fast 8
Main obstacles for access to finance in agriculture Farm level Infrastructure/transport Lack of affordable inputs Low prices post-harvest Lack of collateral/land title/capital Lack of financial documentation Lack of track-record Lack of understanding bank requirements Weak cooperatives Institutional level Government policies Political intervention in agri markets Lack of supporting legislation (e.g. warehouse receipt laws, contract enforcement) Bank level Lack of understanding of agriculture markets Large distance between bank branch and farmers Mismatch in financial products and sector needs High perceived risk in financing agriculture Lack of long-term funding
Segmentation of farmers Farm income (as function of skilled labourer (SK) income) > 2 * SK < 0.8-2 * SK Large farmer Medium size farmer (emerging) Key characteristics Large farmer Land Size of cultivated land is large (>500ha) Labor Mainly depending on skilled labor Technology Fully mechanized Resources Formal bank loans and/or external capital, skilled (risk) management Production Fully commercial and often dollarized Capacity Good market access, own storage logistics and access to market information Value chain Well positioned within the value chain Medium size farmer Land Cultivated land is medium sized (20-500ha) Labor Combination of family members and external labor Technology Partly mechanized Resources Limited access to formal bank loans Production Largely commercial Capacity Reasonable market access but limited access to market information Value chain Weak position < 0.8 * SK < 0.3 *SK Commercial smallholder Semi commercial smallholder = Finance gap Commercial smallholder Land Size of cultivated land is small (2-20ha) Labor Depending on family labor Technology Hardly mechanized Resources Mainly informal finance Production Semi commercial (at least one cash crop) Capacity Marketing through group structures Value chain Position depending on group strength Semi commercial smallholder Land Size of cultivated land is relatively small (e.g. < 2ha) Labor Dependence on family members for most of the labor Technology Low technology, little access to know-how Resources Limited resources (capital, skills, labor, risk mgt, etc.) Production May produce subsistence or commercial commodities, with on-farm and off-farm sources of income Capacity Limited capacity of marketing, storage and processing Value chain Are often vulnerable in supply chains
Segmentation drives financing approach Traditionally bankable Traditionally Unbankable Rabo Development Large farmer/ agribusiness Emerging farmers Commercial smallholder Relationship approach, often USD lending Retail/SME approach with agri twist lack of financials, need for benchmarking, need for technical assistance on agro & financial skills Value chain financing (e.g. out grower schemes), use FBOs for risk management and aggregation Rabobank Foundation Semi commercial smallholder Via SACCOs, coops, saving based loan schemes, etc
Value chain approach should be leading Asset Finance Farmers Coops Processors Traders Save For Loan Credit score cards Outgrower schemes Emerging farmer programs Input financing Raw Material Collection Financing WHR financing Cooperative capacity building Working Capital WHR financing Trade & Commodity Finanance Working capital
Model 1: Finance the (small) farmer under VCF Input supplier Bank Farmer Processor
Model 2: Finance the cooperative under VCF Input supplier Members Bank Cooperative Processor
Warehouse receipts financing (e.g. Tanzania) 1.Farmer deposits grains CT CP CT CP 5.Exporter receives grains from warehouse CT 2.Farmer borrow against the grains CP Loan 3.Farmer Sells grain to trader Payments CP 4.Exporter unpledges grains from bank
Key Success Factors Value Chain Financing Understanding of the sector Good relations with the suppliers and the processor/off-taker Understand historical performance of supplier and processor Have appropriate tools to assess farmers and to monitor loan performance Have a tri-partite agreement between bank, supplier and processor Set-up benchmarking model to compare performance of farmers Be sole banker to the farmer, capture all his cash! Describe VCF process, procedures and risks in a product policy accessible to commercial loan officers and credit/risk management 16