In a typical rural setup, households need a sizable expansion of credit for investing in agriculture and cushioning seasonal fluctuations in earnings. However, the use of high-yielding varieties, fertilizers and other improved inputs entails higher capital deployment.
Since cash flow and savings for the majority of households in rural areas are small, farmers and even agrarian reform beneficiaries tend to heavily rely on credit for other basic consumption needs like food and education. They also need access to financial institutions that can provide them with lower credit rates at more reasonable terms compared with traditional moneylenders that only place them in debt traps. This is where the rural banks step in.
Admittedly, in spite of the presence of rural banks in most rural communities and their best efforts to reach out to the poor sector, many Filipinos still feel the need for financial institutions tailored to meet their particular situation. That is not to say that rural banks have not been doing their job. In fact, rural banks are present in more than 60 percent of areas nationwide, which only shows that they are socially and economically significant niche players in the Philippine banking system. The rural banking industry remains an important cog in the Philippine financial system, especially in rural communities.
Besides the usual servicing of deposits and withdrawals, rural banks have been established to help farmers through the various stages of production, from buying inputs to marketing their products. Likewise, rural banks exist to provide adequate and timely credit to farmers to help them achieve the desired level and quality of output. And unlike informal credit markets, rural banks charge lower interest rates.
As rural banks extend credit to farmers, they absorb all the risks involved in these farmers’ endeavor. However, through a risk management tool introduced by the Department of Agrarian Reform in partnership with the Philippine Crop Insurance Corporation and the Department of Agriculture (DA), dubbed as the “Agrarian Reform Beneficiaries—Agricultural Insurance Program (ARB-AIP),” agricultural risks are evened out, including the potential consequences of natural disasters, to make any possible losses bearable.
Officially launched to facilitate sustainable access for ARBs and ARB households for their on-farm and non-farm enterprises, this insurance program is designed to lessen the cost of borrowing by ARBs where the cost of crop insurance is subsidized by the government and not shouldered by the borrower.
The ARB-AIP program has an initial appropriation fund of P1.0 billion for CY 2013, which will exclusively be used to finance the premium subsidy for agricultural insurance coverage of farm investments of ARBs.
On top of this insurance program, the rural banks welcome the idea of becoming conduits of rural financing to aid in the government’s loan target for this year.
Recently, a P1.336 billion loan program under the Agrarian Production Credit Program was created to finance the production and enterprise projects of 35,431 agrarian reform beneficiaries who are not yet eligible for any formal means of obtaining credit.
Throughout the years, we have seen how the agricultural sector, particularly the farmers, have rescued our economy from collapse. Raising their living standards is decided largely by priority and investment. One of the many ways to achieve this is by enhancing farm productivity and sustainability.
By boosting the agriculture sector, which contributes a fifth of our total gross domestic product, rural banks become active partners in increasing national income and also in providing jobs and support to tens of thousands of families and to almost one-half of our labor force.