Vietnam Agriculture Finance Diagnostic Report Financial Inclusion Support Framework —Vietnam Country Support Program © 2019 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This report is a product of the staff of the World Bank Group. It is part of a larger effort by the World Bank Group to provide open access to its research and make a contribution to development policy discussions around the world. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this report are those of the authors and do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission maybe in violation of applicable law. The World Bank encourages the dissemination of its work and will normally grant permission to reproduce portions of the work promptly. All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org Photo Credits: Panos Varangis & Juan Buchenau FINANCEMENT AGRICOLE EN HAÏTI Table of Contents Abbreviations and Acronyms.................................................................................III Acknowledgements.................................................................................................. V Executive Summary............................................................................................... VII 1. Introduction............................................................................................................ 1 2. Landscape of Agriculture Finance .....................................................................5 2.1 Agriculture Sector Overview................................................................................. 5 2.2 Key Agricultural Products and Value Chains ................................................. 11 2.3 Access to Finance for Farmers and Agribusinesses .................................... 14 3. Supply of Agriculture finance............................................................................ 17 3.1 Overview of Agriculture Finance Market..........................................................17 3.2 Key Market Players, Products, and Lending Performance......................... 18 3.3 Other Mechanisms to Support the Provision of Financial Services to the Agriculture Sector.........................................................................................26 3.4 Collateral and Credit Enhancements .............................................................. 27 4. Key Public Sector Instruments for Agriculture and Agriculture Finance...31 4.1 Support to the Agriculture Sector..................................................................... 31 4.2 Support to Agriculture Finance.........................................................................32 5. Key Constraints and Challenges..................................................................... 39 6. Recommendations..............................................................................................41 References................................................................................................................51 Annex 1. List of Key People Met During the Mission.......................................... 53 Annex 2. State Bank of Vietnam Classification of Credit to Agriculture and Rural Development....................................................................................... 57 Annex 3. Agricultural Insurance: Experiences and Lessons from Latin America ....................................................................................................... 59 LIST OF TABLES Table ES. 1 Summary of Key Challenges and Corresponding ........................... XI Table 1. Annual Sector Growth Rates, 2011–2016...............................................4 Table 2. Subsector Share of Gross Output in Vietnamese Agriculture, 2000–2017 ..............................................................................................................6 Table 3. Average Labor Intensity and Intermediate Costs of Production of Selected Commodities, 2014.............................................................................7 VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT I Table 4. Composition of Agriculture and Agricultural Growth by Vietnam’s Regions..................................................................................................................... 8 Table 5. Role of Agriculture in Rural Areas of Vietnam, 2006–2016............... 9 Table 6. Key Agriculture Finance Policies........................................................... 35 LIST OF FIGURES Figure 1. Account Penetration in Vietnam............................................................2 Figure 2. Percentage of Adults Who Borrowed from a Financial Institution....3 Figure 3. Vietnam: Growth in Agricultural Value Added, 1995–2017 ...............5 Figure 4. Farm Size Distribution in Vietnam, 2014............................................. 9 Figure 5. Sources of Income of Rural Households in Vietnam, 2010–2014....10 Figure 6. Agriculture’s Contribution to Rural Household Income by Region, 2002–2012..............................................................................................................10 Figure 7. Job Portfolio of Rural Households by Region, 2014............................ 11 Figure 8. Vietnam: Agri-Food Exports, 2005–2015...........................................12 Figure 9. Agriculture Lending Portfolio and Composition, 2013–2017...........19 Figure 10. Comparison of Loans for Production and Processing/Trading Per Crop...................................................................................................................19 Figure 11. Share of Total Lending to Agriculture and Rural Development Among Different Types of Financial Institutions............................................. 20 Figure 12. Share of Short Term and Long-Term Loans by Institution Type.....21 Figure 13.Cooperative Model That Better Links Members with the Market .32 Figure 14. Premium and Compensation Rates in the Agricultural Insurance Pilot Program........................................................................................................ 37 Figure 15. Key Elements of an Action Plan to Promote Agricultural Insurance .............................................................................................................. 44 Figure 16. Segmentation of Farmers................................................................... 48 LIST OF BOXES Box 1. Crop Receipts in Brazil................................................................................27 Box 2. Case study of a value chain firm—Loc Troi Group................................. 29 Box 3. Developments in Crop Insurance ............................................................. 38 Box 4. Key Principles of an Efficient PCG Scheme............................................. 43 Box 5. New Technology Applications in Agricultural Insurance...................... 45 Box 6. Sicredi Financial Cooperative System of Brazil..................................... 46 Box 7. Good Regulatory Practices to Support Agent-Banking Activities.......47 TABLE OF CONTENTS Abbreviations and Acronyms Agribank Vietnam Bank for Agriculture and Rural Development APEC Asia-Pacific Economic Cooperation ARP Agriculture Restructuring Plan BIDV Bank for Investment and Development of Vietnam Coopbank Cooperative Bank of Vietnam GDP Gross Domestic Product GSO General Statistics Office ha Hectare IPSARD Institute of Policy and Strategy for Agriculture MARD Ministry of Agriculture and Rural Development MB Military Bank MFI Microfinance Institutions MOF Ministry of Finance NPL Nonperforming Loan ODA Official Development Assistance p.a. Per Annum PCF People’s Credit Fund PCG Partial Credit Guarantee Petrolimex Vietnam Petroleum Import/Export Corporation SBV State Bank of Vietnam SCG Savings and Credit Groups SHB Saigon Hanoi Commercial Joint Stock Bank SME Small-and Medium-Size Enterprise VBSP Vietnam Bank for Social Policies VCA Vietnam Cooperative Alliance VDB Vietnam Development Bank VMUCC Vietnam Women’s Union Central Committee VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT III IV Acknowledgments This report was prepared at the request of the State Bank of Vietnam by a World Bank team led by Panos Varangis (head, agricultural finance) and including Juan Buchenau (senior financial sector specialist) and Rong Chen (economist). Sergiy Zorya (senior agricultural economist) carried out the analysis in the agriculture finance market overview. Alwaleed Alatabani (lead financial sector specialist), Trieu Quoc Viet (senior financial sector specialist—task team leader), Nguyen Hong Hanh (financial sector specialist), Vu Thu Hang (financial sector specialist), and Le Thi Phi Van (consultant) also contributed to the report. Bui Thi Phuong Nga (program assistant) provided operational and logistics support. The authors visited Hanoi, Vietnam and conducted field trips to three provinces (Lâm Đồng, An Giang and Đồng Tháp) in November 2017. The visits aimed to gain first-hand information of the demand and supply of agriculture finance. Several institutions met during the visits shared information that was critical in preparing this report. These include the State Bank of Vietnam (SBV), the Ministry of Finance (MOF), the Ministry of Agriculture and Rural Development (MARD), the Institute of Policy and Strategy for Agriculture and Rural Development (IPSARD), the Vietnam Bank for Agriculture and Rural Development (Agribank or VBARD), the Vietnam Bank for Social Policies (VBSP), the Credit Information Center (CIC), and the National Secured Transaction Registry. A selected number of private commercial banks, insurance companies, producer cooperatives, and federations of cooperatives, as well as agribusinesses also shared information—a full list is included in annex 1. Information in the report reflects discussions during the meetings with these institutions, as well as with smallholder farmers and agri-businesses. The report was prepared under the Vietnam Country Support Program of the Financial Inclusion Support Framework, an initiative of the World Bank supported with funding from the Netherlands and the Bill and Melinda Gates Foundation. The team owes particular appreciation and wishes to thank the representatives from the State Bank of Vietnam, various Ministries and institutions, various public and private companies, including public and private banks, and individuals the team met, for their valuable time and all their efforts to facilitate the work that led to this report. The team wishes to thank the World Bank Group Vietnam team, and Steve Jaffee (lead agriculture economist) and Ajai Nair (senior financial sector specialist) for their support. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT V VI Executive Summary Agriculture remains economically and socially important in Vietnam despite agriculture’s declining share of gross domestic product (GDP). The share of primary agricultural activity in the GDP has fallen to 13 percent, compared with more than 30 percent two decades ago. The active labor force in agriculture remains as high as 45 percent. However, agriculture is still very important in some regions such as the Central Highlands and the Mekong River Delta. The agriculture sector’s growth rate has been trending downward since 2010, which calls for a search of new sources of growth to meet the growth target of 3 percent per year in the Agriculture Restructuring Plan (ARP) for 2017–2020. Agriculture finance in Vietnam has to address two fundamental challenges: (a) facilitating financial inclusion and (b) supporting the transformation and growth of agriculture. From the perspective of financial inclusion, Vietnam has been advancing in providing basic financial services. According to the World Bank Findex 2017 data, account penetration (percent of people with an account at a financial institutions) is relatively high for women and young people but still low among rural populations. Lagging significantly among all populations is the use of digital financial services such as mobile money; most payments continue to be in cash. The level of access to basic credit outperforms neighboring countries per Findex data. Credit is still constrained, with land being the main, if not the exclusive, collateral. Vietnam continues to rely heavily on state financial institutions, such as the Vietnam Bank for Agriculture and Rural Development (Agribank) to finance agriculture. However, the provision of basic financial services depending heavily on state financial institutions may have its limitations in financing the continued growth and transformation of agriculture in Vietnam. Per decision No. 899/QD-TTg on the Agriculture Restructuring Plan (ARP) in 2013, Vietnam has embarked on an agricultural transformation track. Its priorities are moving from agricultural production to increasing value addition in the agricultural value chain, as well as shifting from resource-intensive to technology-intensive agricultural growth. Agricultural restructuring aims to transform agriculture into a dynamic sector with consolidated land, improved food safety, higher value addition of production and commodities, and better VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT VII resilience to climate change. On November 16, The demand of farmers and agribusinesses for 2017, the ARP was updated, per Decision No. financial services is changing because of agricultural 1819/QD-TTg, building on lessons learned during transformation: A large proportion of smaller farm the first five years of implementation, to accelerate households rely on nonfarm activities for household agricultural transformation and modernization. income, which requires a wider range of general financial services to support not only the agricultural The farming sector remains highly fragmented. activities but also the other household needs and About 70 percent of farms operate on less than 0.5 activities. At the same time, income from other hectare (ha) and only 8 percent nationally have more sources may also be used to some extent to finance than 2 ha. Meanwhile, the level of organization of agricultural activities. In addition, as farmers become farmers is low, especially for those outside of the rice more specialized and commercial due to the ongoing value chain. Under the Vietnam Cooperative Alliance agricultural transformation processes, a larger (VCA), there were 11,688 agricultural cooperatives amount of financing granted over longer terms is serving more than 4 million members at the end of needed to support the increased scale of production 2017. Both the fragmented production and the low and processing. Agribusinesses also need more and level of organization of farmers impose challenges on affordable credit and other financial products to agricultural transformation to large scale commercial adopt advanced operation infrastructure to generate production. It also makes the sector vulnerable to higher value addition. climate change. In 2016, saltwater intrusion in the Mekong Delta and droughts in the Central Highlands In spite of the growing and more sophisticated demand, diminished the growth of agricultural GDP to 1.4 access to finance by farmers and agribusinesses percent, compared to 2.4 percent in 2015 and 2.9 is far from satisfactory. According to the World percent in 2017, two years with less hazardous Bank Enterprise Survey 2015, agribusinesses weather events. have the highest percentage of firms identifying access to finance as a major constraint compared A research report by the Institute of Policy and to firms in other sectors, such as manufacturing or Strategy for Agriculture and Rural Development service. Farmers’ access to credit is constrained (IPSARD) (2016) finds that investment growth by, among other things, gaps in financial literacy, in agriculture enterprises lags compared to other collateral constraints, and the weakness of farmer sectors. Most agriculture enterprises are small organizations. Beyond improving financial literacy with constraints on (a) connecting to farmers, (b) for smaller and poorer farmers, there are also gaps accessing market information, and (c) building in financial literacy among more commercial and information and knowledge on technical barriers transitional farmers, and there is a need to promote and international trade regulations. The use of new financial skills beyond basic financial concepts and technologies is limited by agriculture enterprises, instruments, such as in the areas of risk management, with reportedly 75 percent of these enterprises using insurance, leasing, and financial solutions focused outdated machinery. Furthermore, most agriculture on promoting hi-tech and climate-smart agriculture enterprises are not familiar with the benefits of being (World Bank, 2015a). In addition, serious issues classified as hi-tech agribusinesses or the licensing with both the availability and valuation of collateral process. Therefore, while modernizing agriculture obstruct farmers’ access to credit. Real estate enterprises implies a potentially high demand for (“red book” land use right) remains the most-used credit, the small-scale of these enterprises and their collateral in agricultural lending. Last but not least, limited access to information on technology could farmers’ organizations do not play a significant role constrain such demand. in intermediating finance given weaknesses in their EXECUTIVE SUMMARY VIII management, unreliable accounting practices, and costs, and make financing agriculture financially inability to provide collateral in most cases. unsustainable. Furthermore, coordination between different government entities on implementing these On the supply side, the financial sector has not been policies is limited. able to serve as a strong underpinning propelling the acceleration of the agricultural transformation As a consequence of public interventions, lending to process. The supply of financing mainly concentrates the agriculture sector is concentrated in a few public on poverty reduction and financial inclusion through financial institutions, with Agribank and Vietnam relatively simple credit offerings that usually Bank for Social Policies (VBSP) playing a dominant target the bottom of pyramid groups. Informal role. State banks account for around three-quarters lending is still prevalent in rural areas. There is of market share in agriculture credit. The ongoing a limited supply of diversified and sophisticated reforms of those public financial institutions, such financial products and services, such as leasing, as the equitization of Agribank, is critical to level warehouse finance, receivables and contracts, the playing field for a more commercial supply of insurance, and guarantees, to fulfil the dynamic financial services to support agricultural activities. demands of farmers and agribusinesses experiencing Entities such as the People’s Credit Funds (PCFs) agricultural transformation. also prominently serve agriculture, though they have limited reach, with most entities being rather small Meanwhile, the supply of financial services for and relatively unsophisticated, providing only a few the agriculture sector faces a high level of public services to farmers. Other private commercial banks policy intervention, ranging from interest rate caps are entering the agricultural finance market, but tend on short-term loans to a series of credit policies, to focus on large agribusinesses or farmers with most prominently, Decree 55, which promotes large-scale production and low risks and prioritize uncollateralized lending, and the corresponding financing trade. circulars. The implementation and results of the current agricultural finance polices are not being Vietnam’s government has endeavored to reduce appropriately monitored. Only limited statistics are the perceived high risk of the agriculture sector available and not much in terms of evaluating a through public-risk management mechanisms such policy’s impact, particularly on the group of farmers as partial credit guarantee schemes and agricultural a policy aims to help. Scattered empirical evidence insurance pilot programs. Those mechanisms did not indicates that in practice the impact of various credit achieve expected results, largely due to design flaws. policies is limited given (a) insufficient resources However, there is reason to revisit such mechanisms to provide reimbursement or subsidy to financial and improve their design and implementation institutions that are required to provide lower than modalities. As can be seen from experiences in other market interest rates (below breakeven) to the groups countries (for example, Colombia, India, Mexico)1 targeted by different policies, (b) limited instruments addressing risks through guarantee schemes and for risk sharing and unclear implementation agriculture insurance can be instrumental in attracting guidelines, and (c) the unrealistic expectation that private sector finance to agriculture. Furthermore, banks will lend to the groups targeted by different the acceptance of flexible types of collateral, such policies requiring lower levels of collateral. as inventories or other types of moveable collateral, Below-market interest rates create distortions in could reduce the reliance on real estate (land use the allocation of resources, impose growing fiscal rights) for finance. 1 Annex 3 and Varangis et al. (2017). VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT IX In addition, a few specific areas that are of great the efficiency and impact of various credit policies importance to agricultural finance still require an with special attention to the relaxation of collateral enabling regulatory environment to guide the market. requirements, as well as the financial sustainability In particular, there is a lack of regulatory framework of the credit supply (that is, the impact of interest specific to commodity collateralized lending such as rate caps on both demand and supply for agriculture warehouse receipt financing. Commodity inventories credit); (b) redesign and strengthen the available are used in Vietnam as collateral, but this practice risk management instruments, including partial is generally limited to large agribusiness processors credit guarantees and agricultural insurance; (c) using stock monitoring services, due to the lack of a support the reform of public financial institutions to systematic way to regulate and license warehouses. ensure a commercial supply of agriculture finance and enhance the capacity of other types of financial Vietnam also lacks adequate agent banking institutions (for example, private banks, PCFs) to guidelines or regulations, a situation that impedes fulfil their potential to serve the agriculture sector; the uptake of agent banking activities, which in (d) create an enabling environment to reduce the other countries have shown a great potential for operating cost of delivering credit and financial reducing the cost of delivering financial services services through alternative delivery channels such to farmers and other groups living in remote areas. as agent banking and digital financial services; (e) Similarly, digital financial services have very limited adopt legislation to support commodity collateralized penetration, and the government is trying to use lending such as warehouse receipt financing and the the lessons from three pilot programs to develop a use of construction and other infrastructure on land regulatory framework that could allow the broader to serve as collateral; and (f) conduct a nationally adoption of digital finance. representative survey across subsectors of agriculture The assessment of both supply and demand for to capture the changing demand of farmers and agricultural finance, together with an examination agribusinesses for financial services under the of the enabling environment, reveals a series of agricultural transformation process. The key challenges that limit the development of agricultural challenges and corresponding recommendations are finance. To ensure sufficient financial support to summarized in table ES.1. Specific actions for each transform and restructure agriculture, we suggest recommendation are detailed in the recommendation that the government (a) carry out an analysis on section of the report. EXECUTIVE SUMMARY X Table ES.1. Summary of Key Challenges and Corresponding Recommendations Challenges Recommendations Effectiveness of Credit Policy Interventions The low interest-rate cap reduces financial institutions’ • Carry out an analysis of the efficiency and impact of incentives to lend to the agriculture sector and results various credit policies with special attention given in favoring low-risk customers. to relaxation of collateral requirements, as well as the financial sustainability of the credit supply. In practice, adoption of various credit policies is low due to insufficient resources to ensure • Examine the impact of interest rate caps on reimbursement or subsidy, limited instruments for lendwing, particularly to smaller farmers, and risk sharing, and unclear implementation guidelines. also on the supply of credit. In spite of Decree 55, which promotes • Consider the elimination of an interest ceiling uncollateralized lending, real estate (land use right) for agriculture lending to create incentives for remains the most-used collateral in agricultural financial institutions to lend more intensively. lending. • Allow and promote more flexible forms of collateral such as structures (e.g., greenhouses) and equipment/machinery, as well as invoices, contracts, and receivables Efficiency of Public Risk-Management Instruments There are two main types of credit guarantee funds: • Reevaluate and redesign the risk management the national credit guarantee fund managed by the instruments of the partial credit guarantee scheme Vietnam Development Bank (VDP) and the city/ and agricultural insurance program by imbedding provincial level credit guarantee fund. Both types of a market element to ensure their sustainability. credit guarantee fund face operating or funding issues. • Come up with suitable institutional and Challenges observed in the pilot agricultural implementation arrangements for such schemes. insurance program include a low level of understanding of the risks in the agriculture sector, especially risks affecting aquaculture; limited available data to design insurance products; weak linkage between credit and insurance; and low level of financial literacy among farmers about sophisticated financial products. Supply: Capacity of Financial Institutions (Public and Private) Agribank and VBSP account for more than half • The partial equitization process of Agribank should of overall lending to the agriculture sector. Their be conducted with the goal of both maintaining reform is critical to leveling the playing field for its original mandate and improving efficiency a more commercial supply of financial services and profitability. Strategic measures should be to agriculture, and, especially, to commercial taken to enhance the corporate governance, risk agriculture. Agribank has started the partial management, systems development, and quality of equitization process, which will have a profound service of Agribank, while avoiding mission drift impact on the commercial operation of the of the institution during the equitization process. agricultural finance market. Also, government policies should allow Agribank to operate with more commercial criteria. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT XI Supply: Capacity of Financial Institutions (Public and Private) (continued) Private commercial banks lack qualified staff, • Support capacity building, especially risk appropriate tools, and methodologies to evaluate management, product design/development, and and manage risk in lending to the agriculture sector. business development of financial institutions, Financial products and services provided are not to further unlock private financing resources to diversified enough to meet the dynamic demand of serve agriculture restructuring and transformation agribusinesses and farmers undergoing agricultural (including the diversification of income by transformation. smallholder farmers). • Promote the design and undertaking of other sophisticated financial products such leasing, insurance, and commodity-based lending. The development of PCFs is hampered by the small • Integrate PCFs into larger pyramid structures size of these entities that results in a low level of (see the example of Sicredi in Brazil, see box professionalism on their boards and staff, which 6, section 7) to which they can outsource some further limits their capacity to diversify services important functions such as accounting and and achieve economies of scale. While a formal information technology, audit/control, reporting second-tier integration structure exists (Coopbank), to the authorities, and training of boards it does not yet provide the types of services that and staff. these entities would need to be able to respond to a more sophisticated demand. • Closely monitor the ongoing project by Développement international Desjardins, and if necessary, consider providing long-term financing to well-performing PCFs. Enabling the Regulatory Environment A lack of regulatory framework specific to • Adopt legislation to support commodity commodity collateralized lending, together with collateralized lending. the existence of only few warehouses that can issue trustworthy and accredited warehouse receipts and the absence of a collateral management company, create obstacles for the development of commodity collateralized lending in Vietnam. There is no regulatory framework guiding agent • Create an enabling environment to reduce the banking activities, which is essential to engender operating cost of delivering credit and financial trust and set operation standards to ensure the services through alternative delivery channels success of this new delivery channel of financial such as agent banking and e-money/digital services, thus fulfilling its potential to serve clients financial services. in remote areas. Regulations to support using construction and • Adopt legislation that facilitates the use of structures on land as collateral are needed. construction and structures on land as collateral. EXECUTIVE SUMMARY XII Demand: Landscape of Agricultural Finance The farming sector is highly fragmented. • Continue endeavors on land consolidation Agricultural production is vulnerable to climate and adopt climate-smart agriculture practices change and remains risky. Agricultural restructuring to promote large-scale agricultural production aiming to address those issues needs the support of on a sustainable basis (commercially diversified and sophisticated financial products and and environmentally). services. • Conduct a nationally representative survey to better understand the changing demands of farmers and agribusinesses for financial services along the agricultural transformation trajectory. The financial literacy of farmers has gaps. Though • Promote financial skills beyond basic financial commercial farmers have basic knowledge of concepts and instruments, such as in the areas financial concepts or products, their understanding of risk management, insurance, leasing, and of more sophisticated financial instruments, which financial solutions, focusing on promoting hi-tech is important to support the transformation of and climate-smart agriculture among commercial agricultural production, is limited. and transitioning farmers. Agricultural cooperatives face various challenges • Strengthen the accounting and management such as weak managerial capacity and small capacity of farmer organizations and scale, which limits them from playing the role of agricultural cooperatives. integrating farmers into the value chain for better access to finance. Note: Agribank = Vietnam Bank for Agriculture and Rural Development; Coopbank = Cooperative Bank of Vietnam; PCFs = Peoples’ Credit Funds; VBSP = Vietnam Bank for Social Policies. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT XIII XIV 1. Introduction In its current state, agriculture finance in Vietnam has three main objectives: promoting commercial agriculture, supporting social protection programs, and providing direct subsidies and grants. Agriculture finance supports not only commercial agriculture but also low-income farmers and rural households. This mix of social and commercial objectives in agriculture and rural finance by its nature has relied on state financial institutions and various government funds and programs. Starting with the lens of financial inclusion, Vietnam has shown moderate improvement over the past years. The percentage of adults having an account at a financial institution increased from 21.4 percent in 2011 to 30.0 percent in 2017, though it remains on the lower end compared with neighboring countries (Figure 1). Zooming in to subgroups, rural and poor populations who are mainly involved in agricultural activities especially lag behind in this regard, while females and young adults are at almost the same level or even slightly higher than the national average. It has also to be noted that mobile banking is in its infancy, with only 3.5 percent of adults having a mobile account. Vietnam ranks 30 among 62 countries, measured by a World Bank benchmarking tool Enabling the Business of Agriculture Finance indicator¸ due to a lack of regulatory framework to support innovative ways of delivering financial services, such as mobile banking, agent banking, and the use of inventories as collateral. Though account penetration in Vietnam is far from satisfactory, the statistics on obtaining credit are encouraging. The percent of adults who have borrowed from a financial institution is 20.6, which is higher than the East Asia and Pacific regional average and the lower middle-income country average (figure 2). The government’s tremendous endeavors to support credit provisioning, especially to the bottom of pyramid groups such as farmers or fishers, through state banks such as the Vietnam Bank for Agriculture and Rural Development (Agribank) and the Vietnam Bank for Social Policies (VBSP) contribute to this high level of obtaining credit. The independent consultancy firm Nexus, in its Review of Vietnam’s Agro Finance Policies, Directives and Public Schemes (Nexus, 2013), has pointed out that agriculture finance, dominated by public financial institutions and social protection schemes, serves not only commercial purposes but also social welfare since farmers and rural households generally belong to the low-income population. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 1 Figure 1: Account Penetration in Vietnam 90 35 80 30 at a Financial Institution (Percent) 70 Adults Having an Account 25 (By Subgroups) in 2017 60 50 20 40 15 30 10 20 10 5 0 0 ia hin a ia ine s d m fic er ults ale 0% ral bod C nes ilip ilan tna aci e) ow e Ad Fem rest 4 Ru Ca m Ind o Ph Tha Vie & P m L m ng sia nco nco You Po o a st A High I d d le I E g in Mi x c lud (E 2011 2014 2017 Source: Findex, 2017 (World Bank 2018). Though account penetration in Vietnam is far However, there arise questions on the efficiency from satisfactory, the statistics on obtaining credit and sustainability of this government-led are encouraging. The percent of adults who have poverty-reduction approach to financing. borrowed from a financial institution is 20.6, which Limited data are available to quantitatively is higher than the East Asia and Pacific regional examine the efficiency of the huge amounts of average and the lower middle-income country fiscal resources channeled to support public average (Figure 2). The government’s tremendous financing. Nevertheless, it cannot be denied that endeavors to support credit provisioning, especially private financial resources are not sufficiently to the bottom of pyramid groups such as farmers or utilized and worth further tapping. More fishers, through state banks such as the Vietnam Bank important, the current agricultural transformation for Agriculture and Rural Development (Agribank) as envisaged in the Agriculture Restructuring and the Vietnam Bank for Social Policies (VBSP) Plan (ARP) from primary agricultural production contribute to this high level of obtaining credit. The to further value-added agricultural processing independent consultancy firm Nexus, in its Review and trading, calls for adjustment of the financing of Vietnam’s Agro Finance Policies, Directives and approach to meet the dynamic financial demands Public Schemes (Nexus, 2013), has pointed out that of farmers and agribusinesses experiencing agriculture finance, dominated by public financial agricultural transformation. institutions and social protection schemes, serves not According to an Institute of Policy and Strategy only commercial purposes but also social welfare for Agriculture and Rural Development since farmers and rural households generally belong (IPSARD) (2016) report on attracting and to the low-income population. INTRODUCTION 2 promoting investment in the agriculture sector, under the dynamic economic restructure process, the agriculture sector in Vietnam has reached this agriculture finance diagnostic report focuses a stage in which further growth from primary on assessing the current financing approach to agricultural production appears more difficult, promote the agricultural transformation process. requiring new sources of growth from higher The report is organized as follows: chapter 2 presents value-added agricultural activities. In contrast the landscape of agriculture finance, including an to the stagnant agriculture sector, the industry and overview of the agriculture sector, key agricultural service sectors continue to show strong growth (Table products and value chains, and current state of access 1). This offers conditions for needed restructuring to finance by farmers and agribusinesses. Chapter of the agriculture sector, such as land consolidation 3 assesses the supply side of agriculture finance, as farmers migrate out of the agriculture sector for through providing an overview of the agriculture better and more opportunities in other sectors. On finance market and examining key players and the other hand, it also opens a window for other their lending performance and services provided. opportunities of financing. A 2016 World Bank Chapter 4 discusses key public support to agriculture study (Sergiy and Jaffee, 2016) on agri-food jobs in and agriculture finance and highlights a variety of Vietnam has shown that wages now account for a credit policies as well as public risk management significant proportion of rural households’ income. instruments. Chapter 5 identifies key challenges that Increasing nonfarm sources of income could help are constraining the growth of agriculture finance. them finance their agricultural production.2 And last, Chapter 6 makes key recommendations in responding to the challenges. Given the urgent need to revamp the financing approach to support agricultural transformation Figure 2. Percentage of Adults Who Borrowed from a Financial Institution Cambodia Vietnam Indonesia Thailand East Asia & Pacific (excluding high income) Philippines China Lao PDR Lower Middle Icome 0% 5% 10% 15% 20% 25% 30% Source: FINDEX, 2017 (World Bank 2018). 2 According to discussions with IPSARD staff, about 70–80,000 hectares (ha) out of 120,000 ha of the coffee rejuvenation program have been financed without bank credit. By late 2017, only 6 percent of the funds for the coffee rejuvenation program had disbursed over the past five years. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 3 Table 1. Annual Sector Growth Rates, 2011–2016 2011 2012 2013 2014 2015 2016 Agriculture 4.2 2.9 2.6 3.4 2.4 1.4 Industry 7.6 7.4 5.1 6.4 9.6 7.6 Service 7.5 6.7 6.7 6.2 6.3 7.0 Source: World Development Indicators (World Bank, 2017). 2. LANDSCAPE OF AGRICULTURE FINANCE 4 2. Landscape of Agriculture Finance 2.1 Agriculture Sector Overview Agriculture3 remains an important part of Vietnam’s economy, despite its relative decline during the last decade and the slowing of its growth rate. In 2016, agriculture accounted for 13 percent of gross domestic product (GDP), 45 percent of jobs, and 20 percent of exports. For comparison, the food processing industry accounted for 14 percent of GDP but only 5 percent of jobs. During 1995–2005, the agriculture sector grew by 4.2 percent per year on average, halving to 2.1 percent during 2010–2016 (Figure 3). The agricultural growth rebounded in 2017 to 2.9 percent, but the declining trend seems to prevail, calling for a search of new sources of growth to achieve the 3 percent growth target set in the ARP for 2017–2020. Figure 3: Vietnam: Growth in Agricultural Value Added, 1995–2017 6 5 Annual Growth (Percent) 4 3 2 1 0 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201 201 201 Source: For 1995–2014, World Development Indicators (World Bank, 2017); for 2015–2017, General Statistics Office. 3 The agriculture sector consists of annual and perennial crops and livestock, fishery, and forestry products. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 5 In addition to slowing, agricultural growth has per year. In recent years, however, the growth become more volatile in recent years. Some of rate of paddy production has flattened, pointing to this recent volatility is the result of more extreme reaching the production possibility frontier by many weather and increasing production volatility, farmers. Many farmers in the Mekong Delta produce which affects many farmers’ income and cash more than 20 metric tons of paddy per hectare flow. Climate change is becoming more and more in one year, and it is hard to imagine a significant apparent in Vietnam. Temperature increases in increase in production from this high baseline. Vietnam have averaged 0.26 degrees C every As nonpaddy crops are less equipped with public decade since 1971, twice as much as global average irrigation infrastructure, their production tends to be (CIAT, 2017). Per the initial report of Vietnam more volatile. to the United Nations Framework Convention Within Vietnam’s agricultural sector, the pace on Climate Change issued in 2014, the sea level and pattern of growth has varied considerably along the coasts of Vietnam has risen by more among different subsectors. While the annual than 20 cm over the past 50 years. Annual rainfall growth of paddy production was only 2.8 percent decreased in the north and increased in the south, from 2000 to 2014, aquaculture grew at a very leading to different patterns of drought across impressive 8.5 percent during the same time frame, agro-ecological zones. Severe saltwater intrusion although the bulk of this growth took place in in the Mekong Delta and serious droughts in the the period up through 2007. Since then, capture Central Highlands in 2016 provide clear example fisheries have had to contend with partially depleted of the adverse impacts of climate change on near-shore fisheries, while the shrimp aquaculture agricultural production—they caused agricultural industry faced large losses of production in 2012 GDP to decline by about 1 percent compared to and 2013 due to disease. Livestock production the years with less hazardous weather events. grew at 4.5 percent per year during 2000–2014, Some of this volatility also reflects a lesser and this production was quite volatile, in large part dependence on paddy, which is largely irrigated due to disease outbreaks, plus volatility in the costs and usually shows more stable production rates of animal feed and the prices of meat, especially than other crops. In the past, a large chunk of pork. Despite challenges, the share of livestock and agricultural growth was driven by the intensification aquaculture in gross agricultural output gradually of paddy production, that is, adoption of high- increased from around 20 percent in 2000 to more yielding varieties and a shift to two to three crops than 30 percent in 2017 (Table 2). Table 2: Subsector Share of Gross Output in Vietnamese Agriculture, 2000–2017 2000 2005 2011 2015 2016 2017 Crops 66.7 60.4 56.2 54.0 52.8 52.3 Livestock 13.5 14.7 16.1 19.1 19.8 19.6 Capture fisheries 9.9 8.7 8.2 8.9 9.0 9.2 Aquaculture 5.6 12.6 16.3 13.8 14 14.3 Forestry 4.2 3.5 3.2 3.1 3.3 3.3 Sources: General Statistics Office and FAOSTAT. . 2. LANDSCAPE OF AGRICULTURE FINANCE 6 Farmland use in Vietnam is becoming increasingly it is still only pursued slowly, constrained by the need diversified, even if paddy continues to account for change in production masterplans, adjustments in for more than half of total cropland, and new irrigation infrastructure and practices, and additional farmland mainly goes to nonpaddy crops. This is public extension and other services to switch to other driven by the shifting diets of the rapidly growing crops that are often lacking. The second constraint middle class in Vietnam4 and the rising global is little interest among many small farmers to move demand for Vietnamese products (World Bank, out of paddy and learn new production technologies 2016). In 2000, paddy was harvested on 7.7 million and practices. Most farmers in Vietnam are part- ha, accounting for 63 percent of total harvested area. time farmers operating on less than a hectare of In 2014, it accounted for 55 percent of harvested land, with two to three additional nonfarm jobs, area. The decrease was due to the expansion of total so they tend to prefer to produce paddy, which is harvested area, from 12.2 million ha in 2000 to 14.3 less labor intensive and less costly to produce than million ha in 2014. The largest area expansion was higher value commodities. This leads to the third seen by vegetables, cassava, rubber, and coffee. constraint: the intermediate costs and often even labor requirements of producing nonpaddy crops While agricultural diversification has been are usually much higher than that of paddy (Table underway, its speed and depth are constrained by 3). Higher production costs require more working several factors. The first one is the difficult legal capital, which is in short supply at affordable interest process of converting designated paddy land (fixed rates in Vietnam. Note that table 3 does not show at 3.8 million ha) into land for perennial crops or initial investment costs to start new crops, which can aquaculture ponds. Conversion of paddy land into add up to US$1,000/ha for perennial trees. other annual crops has been recently simplified, but Table 3. Average Labor Intensity and Intermediate Costs of Production of Selected Commodities, 2014 Paddy Coffee Pepper Mango Citrus Shrimp Fish Revenue (in thousand VND/ha) 39,133 111,871 174,556 227,459 246,811 112,521 150,639 Intermediate costs (in thousand VND/ha) 15,776 45,052 40,087 78,237 54,650 53,035 188,811 Value added (in thousand VND/ha) 23,357 66,819 134,469 149,223 192,161 59,486 -38,172 Total labor input (person days/ha) 130 216 353 225 492 117 951 Sources: IPSARD’s estimate based on 2014 Vietnam Household Living Standards Survey (VHLSS). Note: ha = hectare; VND = dong. 4 The middle class in Vietnam grew from 50 percent of all people in 2010 to 70 percent in 2016 (2016 VHLSS). Since 2014, an average of 1.5 million Vietnamese joined the global middle class each year. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 7 Another contextual point about Vietnam’s agricultural output and more than 80 percent of its agriculture is its regional differences. Several agricultural exports. regions, including the Red River Delta and the A large majority of Vietnam’s farms remain two Central Coast regions, have seen their rates very small, with less than 0.2 ha, and farmers of growth lag over most of the period since 2000 have little incentive to become professional full- (table 4). The Red River Delta, for instance, has time farmers. In 2014, such farms accounted for seen an absolute decline in value-added agriculture more than 40 percent of all farms nationally and in four years during 2009–2013. Urbanization and above 60 percent in the Red River Delta (Figure 4). industrialization are the main drivers of economic About 70 percent of farms operate on less than 0.5 development there. The Central Highlands region ha and only 8 percent nationally have more than 2 has witnessed the most rapid and sustained rates ha. Such a small farm size, which leads to the low of agricultural growth. The Southeast has also value of collateralized assets, with farmers lacking seen higher-than-average growth. Commercial tree professionalism and skills constraining the access of crop development has underpinned this growth in these farmers to commercial finance. both regions, together with expanding livestock development in the Southeast. The Mekong Delta Farmers with the smallest farm sizes usually region, which accounts for about one-third of value- have multiple sources of income from different added agriculture saw growth taper off between jobs. In Vietnam’s rural area as a whole, the reliance 2009 and 2013 due to some disruptive events in the on agriculture among rural households is declining. aquaculture subsector and declining rates of growth The share of households classified as “agricultural” in value-added rice. Among regions, Vietnam’s two households declined from 71 percent of all rural rice bowls—the Mekong and Red River Deltas— households in 2006 to 58 percent in 2016 (Vietnam have experienced the slowest pace of agricultural Agricultural Census 2016). Only 49 percent of rural growth since 2009. Three regions, the Mekong households in 2016 reported their leading source Delta, the Southeast, and the Central Highlands, income to be from agriculture, compared to 68 now account for about 60 percent of Vietnam’s gross percent in 2006 (Table 5). Table 4. Composition of Agriculture and Agricultural Growth by Vietnam’s Regions Rate of Growth in Agricultural Share of National Value-added, %, in Constant Prices Value-added Agriculture (%) 2000–2013 2000–2004 2009–2013 2000 2013 National 3.6 3.9 2.8 100 100 Red River Delta 1.2 1.9 0.3 20 14 Northeast 4.4 3.4 5.7 9 10 Northwest 4.5 4.7 4.2 2 3 North Central Coast 2.5 3.0 1.2 11 9 South Central Coast 2.9 3.1 1.7 7 6 Central Highlights 8.7 8.5 8.6 6 11 Southeast 4.6 4.0 5.6 12 14 Mekong Delta 3.5 5.0 1.1 33 32 Sources: IPSARD calculations based on General Statistics Office data. 2. LANDSCAPE OF AGRICULTURE FINANCE 8 Figure 4. Farm Size Distribution in Vietnam, 2014 100 1 5 8 10 10 14 90 20 80 20 21 32 70 34 32 11 60 Percent 31 45 50 18 40 26 62 30 59 19 20 40 38 28 10 15 0 Red Northern Mountain North Centre and Central South East Mekong River Delta and Midlands Central Coast Highlands River Delta Farms < 0.2 ha Farms with 0.2 to 0.5 ha Farms with 0.5 to 2 ha Farms > = 2ha Source: VHLSS 2014. Note: ha = hectare. Table 5. Role of Agriculture in Rural Areas of Vietnam, 2006–2016 2006 2011 2016 Number of rural households 13,768,472 15,343,852 15,990,000 Agricultural households (%) 71 62 58 Rural households with leading income from agriculture (%) 68 57 49 Sources: Vietnam Agricultural Census 2016 (General Statistics Office, 2017).. Vietnamese rural households increasingly rely 37 percent of average rural income, up from 32 on nonfarm sources of income, which helps them percent in 2010 (Figure 5). The income from finance their agricultural production. Between self-employment in agriculture made up 30 2004 and 2014, the share of rural households percent of total income, followed by income relying entirely on nonfarm income and wages from owned nonfarm businesses, either formal increased from 22 percent to 32 percent. At the or informal. same time, the share of rural households relying The pace of the shift in income sources has varied only on income from agriculture declined from 23 substantially across the country. Significant percent to 19 percent. The vast majority of rural declines in agriculture income have occurred in households have multiple sources of income. the Red River Delta and the Northern and Coastal Wages are the largest single income source for Central, regions which have been experiencing a rural households. In 2014, they accounted for VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 9 stagnation or decline in agriculture income (Figure Figure 5. Sources of Income of Rural 6). There has been less change elsewhere, with Households in Vietnam, 2010–2014 agriculture remaining the leading income source in the Mekong Delta, Central Highlands, and 20,000 Midlands and Northern Mountains. In 2014, the income from agriculture accounted for about 40 18,000 percent of total per capita income in these parts of the country (Figure 7). 16,000 Ethnic minorities are the most dependent on Per Capita (VND Thousand) 14,000 agriculture, with less diversified job portfolios. They accounted for 15 percent of total population 12,000 in 2016, but represented 73 percent of all the poor in Vietnam. Few ethnic minority farmers are trained 10,000 or have skills to get jobs outside of farming, and more than 75 percent of them do simple jobs. Ethnic 8,000 minority farmers’ lower level of skills, together with their access to more marginal agricultural land and 6,000 their limited participation in most aspects of high- value agriculture, is responsible for their lower 4,000 agricultural productivity and incomes. These farmers 2,000 require special attention and tailored programs to 2010 2012 2014 lift their agricultural productivity, including better access to finance. Ethnic minority farmers usually Remittances Crops Livestock & Fisheries Transfers have fewer assets that can be used for loan collateral Own Business Wages Other and often lack land user certificates and titles to Source: IPSARD’s estimate based on 2014 VHLSS. access commercial loans. Figure 6. Agriculture’s Contribution to Rural Household Income by Region, 2002–2012 80 Shares of HH income in Percent 70 60 50 40 30 20 10 0 elta and nd nds st lta Hs Hs rD nds tains rn a tral hla uthea De ralH nH e e i g So ng Ru a Riv l a Mid Moun r t h No tal Ce n l H eko Urb Re d ntra M ern o as Ce N orth C 2002 2012 Source: IPSARD’s estimate based on 2012 VHLSS. Note: HH = households. 2. LANDSCAPE OF AGRICULTURE FINANCE 10 Figure 7. Job Portfolio of Rural Households by Region, 2014 25,000 Per Capita (VND Thousand) 20,000 15,000 10,000 5,000 Red River Midlands and Northern and Central Southeast Mekong Delta Northern Coasta Highlands Delta Mountains Central Other Transfers Remittances Wages Own Business Livestock & Fisheries Crops Source: IPSARD’s estimate based on 2014 VHLSS. In summary, agricultural diversification has been agri-food exports increased from US$9 billion to underway, characterized by less dependence US$30 billion (figure 8). In 2017, total agricultural on rice and the emergence of nonpaddy crop exports increased further, to US$36 billion. Vietnam production, livestock, and aquaculture subsectors. now has more than US$1 billion in trade for eight However, the difficulty of land consolidation and different commodities (or commodity groups), and little interest from farmers in the conversion due it ranks among the top five global exporters of each5. to upfront investment related to technology or soil Vietnam’s farmers have responded exceptionally preparation impede the speed and depth of the well to the opportunities provided by (a) a growing agricultural diversification and restructuring process. global demand for agricultural raw materials and Meanwhile, a variety of constraints to growth include both staple and higher value foods; (b) Vietnam’s the sector’s high vulnerability to climate change, entry into the World Trade Organization and into small scale of production operations underpinned various trade agreements; (c) an improved domestic by inflexible land market regulations, and low environment for business and investment; (d) the professionalism of a large proportion of farmers. country’s diverse agro-ecological conditions; and (e) Vietnam’s favorable geography near rapidly 2.2 Key Agricultural Products and growing middle-income countries. Particularly Value Chains impressive is the recent increase in export of Over the past two decades, Vietnam has emerged, horticulture products—from the very low values seemingly out of nowhere, as a major supplier in in the 2000s to above US$3 billion in 2016. In international agricultural commodity markets. 2017, the export of dragon fruit alone exceeded Both the scale and the breadth of this trade have US$1 billion. been very impressive. From 2005 to 2015, total 5 These commodity groups include rice, coffee, pepper, rubber, cashew nuts, cassava, fishery products, and horticulture. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 11 Figure 8. Vietnam: Agri-Food Exports, 2005–2015 30,000 25,000 Export Values (US$ Million) 20,000 15,000 10,000 5,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Meat Dairy Products Tea Prep of Ccereals, Flour, Starch Cassava & Cassava Products Vegetables & Fruits Pepper Cashew Nuts Rubber Coffee Rice Wood & Wood Products Fishery Products Source: General Statistics Office, 2016. Yet the picture of Vietnam’s agri-food trade is not agri-food exports, food accounts for only about 10 all positive. Most of Vietnam’s expanding export percent. Addressing these weaknesses would require subsectors have failed to take full advantage of the more public investments in food safety, changes market opportunities for generating increased value in the state management to facilitate environment- and, in some cases, failing to have a transformative friendly production practices, closer collaboration impact on the farmers and communities that serve as between farmers and agribusiness, and availability their foundations. Vietnam has been cost competitive of more flexible finance products along the value when it comes to crop-based commodities but they chains, which are currently largely missing. were sold at a discount as a result of several factors, Irrespective of the above weaknesses, Vietnam’s including (a) issues related to lower or inconsistent agricultural export performance has been quality or food safety; (b) the incidence and perceived impressive. It was largely possible due to the risk of contract nonfulfillment by Vietnamese increased professionalization of farms and a suppliers; (c) real or perceived risks regarding the greater interest by large foreign and local firms in environmental footprint of Vietnamese commodities; agribusiness. More and more farms in Vietnam adopt and (d) intense competition among Vietnamese sustainable farming practices such as “Three Gains exporters, which has enabled international buyers and Three Reductions”6 and “One Must and Five to negotiate prices downward. In the structure of 6 The “Three Reductions, Three Gains” (3R3G) project targets rice farmers in the Mekong River Delta region to reduce use of seeds, nitrogen fertilizer, and pesticides, while improve farmers’ health and protect environment. 2. LANDSCAPE OF AGRICULTURE FINANCE 12 Reductions”7 in paddy production, in production with an average of 14 members per group by of vegetables, fruits, livestock and aquaculture the end of 20178. These groups, which are in most products, and organic production. Increasing cases engaged in agricultural production and numbers of farms are organizing into collaborative marketing, are less formal but also more flexible than groups and cooperatives to achieve economies of agricultural cooperatives. scale and enter contract farming arrangements with With annual sales exceeding US$3 billion, Vietnam food processors and exporters. It is worth noting that is one of the world’s leading rice exporters. the organization of smallholder farmers is still at an The Mekong Delta accounts for more than half of incipient stage. Agricultural cooperatives or farmers’ national production and 90 percent of exports. Rice organizations face severe challenges, such as weak production in Vietnam is highly fragmented. Most management, unprofessional accounting practices, production is carried out on a small scale by small and a lack of supervision. farming households, without wide adoption of Vietnam has a large number of agricultural production and sale cooperation models. There is a cooperatives and production groups engaged in distinction between subsistence-oriented production agricultural activities, mainly activities related to and commercial production. Of the 9 million rice the provision of inputs and other extension services. growing households, about 300,000 households According to the Vietnam Cooperative Alliance account for most of the country’s exports, indicating (VCA), there were 21 agricultural cooperative greater concentration in commercial rice production. unions, with 11,688 agricultural cooperatives Vietnam is the world’s largest Robusta coffee serving more than 4 million members by the end of producer, accounting for nearly 60 percent of 2017. There are around 2,020 crop cooperatives, 536 global Robusta exports. Vietnam features the livestock cooperatives, 120 forestry cooperatives, world’s highest yields (annual yields of about 1.5 510 aquaculture cooperatives, 340 clean water and million tons) and annual exports (US$2.67 billion), sanitation cooperatives, and 6,100 cooperatives with which provide benefits to more than 460,000 multiple purposes. Agricultural cooperatives are farmers and more than a million seasonal workers. currently transforming by providing more marketing Coffee production in Vietnam comes almost entirely and value-chain related services to members instead from smallholder farmers who own approximately of limiting themselves to the provision of basic seeds 1 ha of land in the Central Highlands region. Most or fertilizers. While important players, agricultural of the coffee farmers manage the majority of cooperatives are reportedly hampered by low levels farming activities through family labor (with the of managerial capacity, weak accounting, and small exception of harvesting). With weak presence of size. Most of the agricultural cooperatives are too local collectors and a lack of farmer organizations dispersed and underfinanced to promote linkages in or agricultural cooperatives to organize the production and trading. aggregation and selling activities, farmers usually Increasingly, smallholder farmers are organizing sell directly to exporters. But the supply chain stays themselves in the form of “collective production efficient due to high competition between locally groups.” VCA reported the existence of 80,000 such owned and multinational exporters. Coffee quality groups that serve more than a million members, during recent years has met international standards. 7 The “One Must and Five Reductions” is a technology package that recommends the use of certified seeds, and reductions in seed rate, nitrogen application, pesticide use, water use, and post-harvest losses. 8 Interviews by World Bank mission team with VCA in November 2017. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 13 However, raw coffee with a low market price encouraged to join agricultural cooperatives and accounts for 89 percent of total coffee exports, then associate with input providers, processors, resulting in low total export value of coffee sector. and traders. By the end of 2016, the sutchi catfish culture, by continuously targeting high productivity Domestic production of cashew nuts reached and quality, enlarged the area of sutchi catfish culture 345,000 tons in 2015, with an export value of to 5,050 ha with an output of 1.2 million tons and US$2.5 billion. It is worth noting that cooperation an export value of US$1.71 million (an increase of among farmers and between farmers and enterprises 13 percent over 2015) and continued to maintain is not established; it is difficult for cashew growers the status of the leading country in export of sutchi to access credit. Due to the advanced domestic catfish in the world. processing capacity and the muted supply response of local farmers, partially due to conversion of The growing share of the livestock sector was a cashew areas to black pepper and fruit trees, Vietnam major contributor to the expanded operation of increasingly relies on the import of raw cashew nuts, medium- and large-size farms. Since the mid- mainly from Africa, to process them. Imported raw 2000s, the number of households raising fewer than cashew has accounted for about half of exported 10 pigs has declined by 39 percent while the number processed cashew in recent years. Production of raising 50 or more has increased 80 percent. Similarly, rubber was 1,017,000 tons in 2015, with an export in the poultry sector, only a small proportion of value of US$1.53 billion. China is still the largest medium and large farmers were involved in contract importer of rubber from Vietnam (Ministry of farming arrangement with processors, while most Agriculture and Rural Development, Department of rural households keep the production small scale and Crop Production, 2017). a side agricultural activity (World Bank, 2016). Among agricultural subsectors, crops still Overall, the agriculture sector has become account for the majority of output value; increasingly diversified and integrated into however, significant growth has been observed global value chains, with more smallholders in aquaculture. Key aquaculture species include joining modern food value chains to serve brackish-water shrimp, sutchi catfish, and tilapia. demanding local and global customers. Farmers According to the Ministry of Agriculture and Rural are increasingly eager to join cooperatives and turn Development, Directorate of Fisheries, by the end into rural entrepreneurs and high-tech farmers. of 2015, the total area for shrimp culture nationwide With agricultural value chains becoming more reached 680,000 ha (the Mekong delta region sophisticated and complex, flexible and affordable alone accounted for 621,000 ha, equivalent to 91.2 financial instruments are required. percent) for a total yield of nearly 630,000 tons (the Mekong delta region accounting for 484,000 2.3 Access to Finance for Farmers tons, equivalent to 81 percent). An estimated and Agribusinesses 320,000 households and farms remain active in the Access to finance for smallholder farmers in Mekong Delta shrimp aquaculture industry, either Vietnam is limited. According to the FINDEX 2017 on an intensive or extensive basis. That said, shrimp data (World Bank 2018), 24.6 percent of rural adults growing and processing are becoming increasingly have an account at a financial institution, compared integrated there. to 30.0 percent nationally and 68.7 percent for rural Currently, the provinces are actively developing adults in East Asia Pacific countries (excluding high the value chain of sutchi catfish. Farmers are income countries). Only 2.3 percent of rural adults 2. LANDSCAPE OF AGRICULTURE FINANCE 14 have mobile accounts9 (e-wallet), lower than the (using its own resources). Nevertheless, almost already very low national average of 3.5 percent. half of agribusinesses use banks to finance working Though 50.9 percent of rural people borrowed capital, and 26.7 percent of their working capital money over the past year, less than half of those is financed by banks, at a level higher than that of borrowed from formal financial institutions. The enterprises in other sectors. At the same time, it others resorted to informal channels such as family, should be noted from the previous section, that friends, or private informal lenders. Overall, 23.9 smaller rural households have other sources of percent rural population borrowed from a formal income to finance their agricultural activities, thus financial institution. 9.7 percent of rural population needing or relying less on credit from financial and borrowed to start, operate or expand a farm or nonfinancial providers. On the other hand, medium business in 2017, higher than the percentage of 8.2 and larger commercial farmers are more specialized in 2014. Findex 2014 data shows that among those and need financing to grow and transform their who worked in agriculture, only 3.1 percent have business. Most credit tends to be short term (under purchased agriculture insurance.10 a year) and there is a limited supply of longer-term credit to invest in equipment, machinery, and long- Access to finance is the single biggest obstacle term assets needed for business expansion. enterprises face in operation and expansion according to business owners and top managers Agricultural cooperatives have limited access polled in the World Bank Enterprise Survey in to credit from credit institutions due to the lack both 2015 and 2009 (by 22 percent and 25 percent of collateral and effective business plans. Only of firms, respectively). Specifically in the 2015 one-third of cooperatives can access credit, with survey,11 agribusinesses had the highest percentage an average loan size of 100–500 million VND of firms identifying access to finance as a major (an equivalent of US$5–23 million). Very few constraint compared with firms in other subsectors cooperatives involved in value chains can obtain of manufacturing or service. Almost all loans to loans in the amount of 15–20 billion VND. Banks agribusinesses require collateral (93.4 percent), and other financial providers face constraints in similar to the collateral requirement level for firms in lending to these entities as in many cases they cannot other sectors. However, agribusinesses are required rely on the financial information these entities can to provide 2.7 times the loan amount as the value of provide and, also, because these entities in many collateral (or loan amount is only 37 percent the value cases cannot provide the collateral needed to back of collateral). This is significantly higher than that up a loan as their assets are rather small. To deal with for general businesses, which usually are required to this situation, farmer organizations often provide pledge twice the value of loan amount (or 50 percent collateral owned by their individual members to loan to value of collateral). With the difficulties of obtain loans, which is suboptimal and may create accessing finance, the majority of agribusiness’s moral hazard. investments (56.7 percent) are financed internally 9 This is the percentage of respondents who report personally using a mobile money service in the past 12 months. Since Vietnam’s current legislation does not have either a definition of or regulation for “mobile accounts,” the number refers to the usage of e-wallet. 10 The most recently available Findex 2017 (World Bank, 2018) data doesn’t provide data on the percentage of the rural population that has purchased agriculture insurance. 11 In the World Bank Enterprise Survey 2015 in Vietnam, business owners and top managers in 996 firms were interviewed from November 2014 through April 2016. Thirteen percent of those firms are involved in the food sector. Statistics referred to below are representatively weighted. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 15 16 3. Supply of Agriculture finance 3.1 Overview of Agriculture Finance Market “Agriculture credit” referred to in this report encompasses loans for agricultural production, as well as loans for agricultural processing and agricultural trading. Vietnam’s agriculture sector is moving from raw agricultural production to a value- added agricultural value chain. This definition helps reflect and capture lending for all stages of the agricultural value chains, ranging from production, to harvest, processing, sales, and so forth. The State Bank of Vietnam (SBV) provides data on credit to the agriculture sector and rural development. Key categories taken into consideration as agriculture credit in this report include crop production, livestock, aquaculture, fishing, forestry, and purchase/process/preserve/consume agricultural, aquaculture, and forestry products. A full listing of loan purposes identified by SBV as credit to agriculture sector and rural development is included in the Annex 2. As of 2017, the total outstanding loan portfolio to agriculture and rural development was 1,310,832 billion VND (around 56.7 billion USD), accounting for over 20 percent of total loans outstanding to the economy.12 Excluding credit to rural development such as construction of rural roads or electricity stations, credit specific to the agriculture sector reached 734,489 billion VND, with a significant increase of more than 30 percent from 2016Those loans have served almost 3 million households (out of 16 million rural households, see table 6) and more than 70,000 businesses or cooperatives. More than two thirds of the credits to the agriculture sector were short-term. Noncollateralized loans account for 16.8 percent of the total outstanding loan portfolio to agriculture and rural development. Data from the SBV indicate that the average nonperforming loan (NPL) ratio of the credits to the agriculture sector in 2017 was below 2 percent, similar to the level observed over the past five years. The low NPL ratio can be attributed mainly to three reasons: (a) financial institutions tend to only lend to less risky clients, such as large agribusinesses with sound business plans or commercial farmers doing relatively large-scale farming; (b) “red book,” the land use right 12 Consolidated credit data reports obtained from SBV, 2013-2017. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 17 certificate, is the most widely accepted and almost sole account for the largest share (25 percent), followed collateral accepted by financial institutions. Farmers by coffee (19 percent). It’s worth noting that loans and owners of agribusiness repay loans cautiously to for cashew production are minimal at 2 percent of avoid the risk of losing the land that is considered all crop production loans. Nevertheless loans to an essential part of household assets; and (c) a state- support processing and trading of cashew products owned asset management company, Vietnam Asset are 8 percent of all agricultural processing and Management Company, helps financial institutions, trading loans, with a total amount of 14,684 billion especially state-owned banks, recover defaulting VND. Vietnam has been the world largest cashew loans. Among the subsectors within agriculture, nut exporter since 2006. With production of 400,000 aquaculture with its vulnerability to disease and tons of cashews per year and processing capacity natural disasters, has shown the highest NPL ratio. of 1.2 million tons, it has been dependent on raw Aquaculture loans have relatively high NPL ratio. cashews from other countries. About two thirds of Loans to support catfish breeding had a NPL ratio of the demand for processing are imports, mostly from 4.1 percent and the highest percentage of debt with Africa, especially Côte d’Ivoire. adjusted terms at almost 9 percent in 2016. During 2013–2017, loans to the livestock sector and 3.2 Key Market Players, Products, agriculture processing and trading experienced a and Lending Performance significant increase, which is consistent with the Lending to the agriculture sector has been booming growth of these sectors. Loan portfolios concentrated in a few public financial institutions. on livestock and agriculture processing and trading According to the most recently available data from have more than doubled in five years, from 86,740 to SBV, public financial institutions contribute almost 183,643 billion VND, and 77,335 to 320,171 billion three-quarters of the total outstanding loan portfolio VND respectively (figure 9). Loans to agriculture on agriculture and rural development. Agribank processing and trade account for the largest share of holds a dominant position, with approximately the total agriculture lending portfolio, mainly due to half of the market share. In contrast, lending from the large size per loan. Though the total loan amount private commercial banks only accounts for 20 for crop production has increased over the years, its percent (figure 11). Distribution of market share share in the overall agriculture lending portfolio has among public and private financial institutions has declined from 28 percent in 2013 to 22 percent in been similar to the level of year 2017 over the past 2017. The aquaculture sector has enjoyed the lowest five years. Nevertheless, it is worth noting that the level of increase on total loan amount, and its share agriculture lending portfolio of private commercial has declined from 9 percent to 4 percent. The share banks has been expanding rapidly, with a growth of lending to the forestry sector remains low, around rate higher than that of public financial institutions 1 percent over the past years.13 recently. People’s Credit Funds (PCFs) also stand out with a 4 percent share of the total lending to Among the crop production subsector, loans agriculture and rural development, especially taking to coffee producers have the largest share (25 into account its relatively small scale. Additionally, percent), followed by loans to food crops and all types of financial institutions provide both short- rubber (figure 10). However, within agricultural term (less than one year) and medium- and longer- processing and trading, outstanding loans on paddy term (more than one year) credit to agriculture. purchasing, processing, preserving, and trading Most recently available SBV data from October 13 Consolidated credit data reports obtained from SBV, 2013-2017. 3. SUPPLY OF AGRICULTURE FINANCE 18 Figure 9. Agriculture Lending Portfolio and Composition, 2013–2017 350,000,000 300,000,000 250,000,000 VND Million 200,000,000 150,000,000 100,000,000 50,000,000 0 2013 2014 2015 2016 2017 Crop Production Livestock Aquaculture Fishing Forestry Agriculture Processing and Trade 100 29 80 42 39 41 44 2 60 9 2 2 Percent 1 4 5 5 33 6 4 40 31 27 29 25 20 28 22 22 22 22 0 2013 2014 2015 2016 2017 Crop Production Livestock Aquaculture Fishing Forestry Agriculture Processing and Trade Source: SBV as of December 2017. Note: Lending statistics to forestry is not available in 2013. Figure 10. Comparison of Loans for Production and Processing/Trading Per Crop (Outstanding Loan Portfolio Size by 2017) 60000000 50000000 40000000 VND Million 30000000 20000000 10000000 0 Food Coffee Rubber Pepper Cashew Sugar Cane Tea Fruits Production Processing and Trading Source: SBV as of December 2017. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 19 Figure 11. Share of Total Lending to A Bank, Saigon Hanoi Commercial Joint Stock Agriculture and Rural Development Bank (SHB) and the Cooperative Bank of Vietnam Among Different Types of Financial (Coopbank) hold 40 percent of the outstanding credit portfolio to the agriculture sector. To foster the Institutions agricultural lending activities of these entities, SBV helps refinance those banks when natural disasters are followed with significant NPLs. As an additional incentive, SBV reduces the reserve ratio by 1 percent for those banks. The nonbank credit institution industry reflects various country-specific features. In particular, microfinance lending (including facilities offered by MFIs and VBSP) is partially intertwined with the system of local government through the involvement of the Peoples’ Committees and socioeconomic organizations such as the Women’s Union, the Farmer’s Union, the Veterans Association, and State Agriculture Bank (Agribamk) Non-agriculture State Banks the Ho Chi Minh Communist Youth Union. Those Private Commercial Banks PCFs institutions help identify and approve potential Other borrowers and assist with supervising the repayment and management of their facilities. Source: SBV, data as of Dec 2017. Note: Agribank = Vietnam Bank for Agriculture There are a number of credit institutions that and Rural Development are not supervised under the Credit Institutions Law 2010. These include various nongovernment 2017 show that private financial institutions have organizations providing microcredit (for example, more than 60 percent of their outstanding lending the Capital Aid Fund for Employment of the Poor, portfolio in agriculture and rural development as Capital Aid Fund for Employment of the Poor short-term (figure 12). Overall, the majority (57 (CEP); Binh Minh MFI), rotating savings and credit percent) of the credit to agriculture and rural areas associations, and different types of moneylenders is for less than one year, which may be insufficient (such as pawn shops). The system of nonbank credit to meet famers’ or agribusinesses’ demand institutions is further complemented by VBSP, for long-term investment loans during agricultural which is a state-owned institution and excluded transformation. from prudential regulation and supervision exercised by SBV. The main institutions providing financial services to rural areas are Agribank, VBSP, the network of PCFs, and other microfinance institutions 3.2.1 Agribank (MFIs). Agribank focuses on middle-income and Agribank is the largest bank in the country high-income clients in rural areas, while VBSP, MFIs, in terms of assets, capital, customer base, and and PCFs focus more on low-income clients and the network coverage. With more than 2,300 branches poor. Agribank and VBSP have leading positions, and transaction offices throughout all parts of the representing together 55 percent of the sources of country, it has by far the largest network of bank rural credit as of December 2017. Agribank, Bac branches in Vietnam. Large branch networks in rural 3. SUPPLY OF AGRICULTURE FINANCE 20 Figure 12. Share of Short-Term and Long-Term Loans by Institution Type 80 70 60 50 60.2 Percent 73.2 40 30 54.9 52.7 56.8 39.8 45.1 47.3 43.2 20 10 26.8 0 Private Public Financial PCFs Others Total Commercial Banks Institutions (Agribank, VBSP etc.) Short Terrm Long Terrm Source: SBV, data drawn in Oct 2017. Note: Agribank = Vietnam Bank for Agriculture and Rural Development; PCFs = People’s Credit Funds; VBSP = Vietnam Bank for Social Policies. areas help it stay close to target clients and develop an increase of 15.6 percent from the previous year, long-term and trustworthy relationships with farmers. with an NPL ratio of less than 2 percent. Other With a mission to support agricultural and rural relevant data include a capital adequacy ratio of development, Agribank now serves more than 4 11.05 percent, before tax profit of 4,186 billion million farming households. The long-standing stable VND, and a short-term fund/long term lending ratio clientele is of great value to Agribank. Agribank of 36.3 percent. originally specialized in lending to households in The Ministry of Planning and Investment has rural areas and small- and medium-size enterprises proposed that Agribank be equitized by 2020 as engaged in agricultural or nonagricultural enterprises, part of the restructuring of the financial market. but now the bank has expanded its branch network to This initiative is a very important step considering the cities to seek greater market shares in the urban Agribank’s strategic position in the agricultural segment of small and medium enterprises. lending market. Its partial privatization (equitization) In spite of recent endeavors to penetrate urban can be expected to enhance the conditions for areas, Agribank has also been trying to keep a more commercial operation of the agriculture its commitment to agricultural and rural finance market. The equitization aims to achieve development. It has signed interagency agreements liquidity and improve the operating efficiency of with the Vietnam Farmers Association Central Agribank, while gradually liberalizing the banking Committee, Vietnam Women’s Union Central sector and encouraging foreign investment. Committee (VMUCC), and others, to boost the Agribank is currently adopting measures on human investment in agricultural restructuring and clean resources and information-technology systems to agriculture. The 2016 Agribank annual report improve operating efficiency and actively looking shows that it is the single largest lender supporting for a strategic investor. To be successful, it will be agricultural and rural development. The amount of important that the partial privatization of Agribank outstanding loans to agriculture sector in 2016 was be accompanied by a reform of agriculture finance 514,154 billion VND (74 percent of total portfolio), public policies. The reform will ensure that VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 21 subsidies (interest rate subsidies) are channeled Among the 3 million poor and near poor transparently and that Agribank is allowed to households in Vietnam, about 2.5 million determine its own prices for the products based households have loans with VBSP. The total on its cost and market conditions. To make it more current asset amount of VBSP is 171 trillion VND attractive for outside investors, the equitization (around US$7.5 billion) of which the majority is of agricultural banks such as Agribank is often loans. Clientele include poor households, near poor accompanied by restructuring plans focusing on households, farming households that do not have areas such as (a) improving corporate governance; access to water supply and sanitation facilities, (b) improving management; (c) upgrading systems, ethnic minorities, and traders. VBSP currently serves such as information technology, management 8.3 million customers, most of which are rural. The information, and risk management; (d) upgrading purpose of the loans varies across different credit human resources systems, policies, and functions; programs. More than 70 percent of the loans provided (e) improving operations, focusing in particular on by VBSP serve production and business purposes, 15 improved quality and speed of serving clients; (f) percent are for construction of clean water facilities reviewing product offerings and revenue creation and environmental sanitation projects, nearly 10 products and services; (g) improving operating percent support school fees for students, and 5 percent efficiencies (targeting a lower cost-to-income ratio) support housing construction and other purposes. Treasury revenue and fees generated from payment 3.2.2. Vietnam Bank for Social Policies services are minimal. Its main source of income VBSP was established to respond to the still comes from lending. VBSP plans to diversify government’s mandate to differentiate commercial services and products such as saving, payment, and credit and policy credit and establish a dedicated transfer to clients in the future.14 channel to provide financial support to targeted VBSP’s current average loan size is 25 million social groups. Its establishment followed Decision VND (around US$1,000) with the maximum loan 131/20002/QĐ-TTg dated April 10, 2002, by the amount at 50 million VND (around US$2,000). prime minister. VBSP has an extensive network The maturity of agricultural loans is in line with nationwide, with branches in almost all communes, agricultural production and can be as long as 5 years and acts as the government’s credit-provision facility depending on the needs of farmers. For a number and offers credit directed by policy. VBSP is fully of purposes, the loan maturity can be extended to sponsored by the government and is duty free, ring- 20 years (for example, loans to afforestation and fenced from the state budget, and free from insured forestry projects). The interest rate of loans disbursed deposits, it also does not have to maintain a reserve by VBSP is 1.2 percent per annum (p.a.) for ethnic requirement ratio. Apart from the 15 percent of minorities, and the maximum lending rate is 9 capital provided by the state budget, VBSP mobilizes percent p.a. for small- and medium-size enterprises a large amount of funds from domestic and foreign (SMEs).15 The average interest rate for all credit organizations and individuals, issues government- programs is 6 percent, and the cost of credit is guaranteed bonds, and receives 2 percent deposits approximately 4.3 percent institutional wise. Current from the state-owned credit institutions with the overdue debt ratio is 0.4 percent, with restructured interest payment paid by VBSP. debt at 0.41 percent. 14 Data obtained during mission meetings in November 2017 15 According to Decision 750/QĐ-TTg dated June 01, 2015, of the Prime Minister and Decision 34/QĐ-HĐQT dated April 26, 2014, Decision 71/QĐ-HĐQT dated August 03, 2015, of VBSP. 3. SUPPLY OF AGRICULTURE FINANCE 22 Loans are disbursed directly to households, though implement those projects. Total loan disbursement VBSP also entrusts some tasks within the lending amount for the 352 projects is around 54,000 billion process to four sociopolitical organizations16 , by VND so far. establishing savings and credit groups (SCG) Agriculture and rural development is one of consisting of 5 to 60 members living in the same the three strategic sectors covered by the VDB area. In the lending process, the SCGs are entrusted state investment credit provided by VDB. Those by the VBSP to collect monthly interest and deposits investment credit loans cover aquaculture projects, from members and conduct some other tasks in projects on plant varieties, animal breeds and forest the lending process, while individuals still have tree varieties, and projects related to livestock and the responsibility to repay the principle loan. The poultry slaughtering, as well as investment projects SCG is not responsible for repaying the loan when in industrial salt production. In the case of investment the borrowers fail to do so. Each SCG has its own credit, lending interest rates for each period are set by management board consisting of two people (the the Ministry of Finance (MOF) from 0 percent p.a. head and deputy head) selected by its members. The (for canal solidification program) to 15 percent p.a. operations of the group are subject to the direction, (for other projects).17 In the case of relending ODA monitoring, and inspection of the Commune People’s funds, credit terms depend on sub-loan agreements, Committee and trusted sociopolitical organizations. relending authorization contracts signed with VBSP pays fees to the entrusted socio-political the MOF. According to the investment law, from organizations and commissions to the SCG’s January 2017, VDB is no longer to provide loans Management Board. to cooperatives. 3.2.3. Vietnam Development Bank Responding to the constraints of getting access The main duty of the Vietnam Development Bank to finance after the financial crisis, VDB started (VDB) is to mobilize and receive capital from providing guarantees for SMEs borrowing from domestic and foreign organizations to implement commercial banks in 2009. The government investment and development credit for the state. provided VDB with 450 billion VND to establish the Sources of capital include the state budget, funds from guarantee fund. The guarantee covered 100 percent of capital markets domestically and internationally, and the loan amount, which could not exceed 90 percent ODA (official development assistance). Supporting of the cost of the project or production and business agriculture and rural areas remains one of its focuses plan. The guaranteed loan for the implementation of as detailed in the Strategic Development of Vietnam the production and business plan does not require Development Bank through 2020, with a vision collateral. The fee to obtain guarantee was 0.5 towards 2030. percent p.a. of the guarantee amount, which is borne VDB currently provides loans to 352 projects by the guaranteed party, but not by the guarantor. in the agriculture sector under two forms: Disputes between VDB and commercial banks arose state investment credit and relending ODA on the contingency of payment when loans become funds. Different types of institutions, including overdue. The guarantee facility was discontinued social groups, SMEs, and state-owned enterprises after a few severe disputes. 16 Women’s Union, Farmer’s Union, Youth Union and War Veteran’s Association. 17 Before 2012, lending interest rates remain unchanged for the whole lending period; from 2012 to May 2017, lending interest rates change based on disbursement schedule; from May 15, 2017, until now, lending interest rates apply to the project’s outstanding credit upon the interest rate adjustment. Loan terms of 5–15 years will be applied to a loan with maximum value of 70 percent of fixed assets of the project. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 23 3.2.4. The network of People’s Credit Coopbank, which operates as a public Funds and the Cooperative Bank commercial bank serving PCFs, individuals, and of Vietnam firms, currently plays the role of integrating and PCF, a form of financial cooperative, was founded supporting the PCF network. Activities in this in 1993 to provide financial services to communes. regard include the standardization of procedures and By 2016, there were more than 1,177 PCFs in over reporting and the provision of a refinancing facility, 10 percent of communes, serving approximately as well as the operation of a stabilization fund. As 1.7 million members, of which about 50 percent are of today, PCFs make little use of the refinancing considered to be from lower-income households. facility due to cost considerations (they can access The Central People’s Credit Fund (CPCF) was financing from members at a lower cost than they established and operated as a central institution of can from Coopbank). Coopbank has initiated a pilot the PCF which supports the PCF network. PCFs have program to provide larger loans to clients of PCFs been following the basic principles of cooperatives using a syndicated loan approach, which appears to (self-help and mutual support) with less than 15 be promising. Coopbank could, in addition, probably percent of their capital funded from external sources play a bigger role in supporting the PCF network if it (mainly from the Central People’s Credit Fund). were to offer longer-term financing to these entities at competitive rates. The network of PCFs has expanded rapidly throughout Vietnam in the past two decades. Coopbank currently receives support from a Currently, the total outstanding loan portfolio to project financed by the Canadian government agriculture and rural development from PCFs and executed by Desjardins International. account for 4 percent of total lending in this area by The project, which was launched in 2017, aims to all types of financial institutions. About 70 percent increase the capacity of Coopbank to provide support of current PCFs’ total outstanding loan portfolio to and oversight services to PCFs. PCFs are then agriculture and rural development are short term. expected to provide financial products and services The PCFs located in rural areas have important that are adapted to the needs of rural and agricultural advantages in terms of their close relationship with clienteles in a profitable and secure manner. The and knowledge of their members, which allow them project intends to pilot an approach to strengthen 75 to design adequate financial services and to show a PCFs before scaling up to the whole sector. Another certain degree of flexibility toward their members, technical support project—Project for Digitalization especially in cases of distress. of Microfinance—sponsored by MedLife fund, also assists the PCF system in developing digital In spite of these advantages, the development financial products. of PCFs is hampered by the low level of professionalization of their boards and staff The Cooperative Development Assistance Fund and, also by their small size, which limits their in Vietnam addresses the difficulty of accessing capacity to diversify their services and to credit by cooperatives. The Cooperative achieve economies of scale. In addition, PCFs face Development Assistance Fund system is present constraints to their growth as they do not have access in 47 out of 63 provinces and cities with a total to longer-term funds that would enable them to serve operational capital of 1,663 billion VND. It supports18 their members’ demands for investment loans. and contributes to improving the management 18 According to Decision No. 23/2017 / QD-TTg dated June 22, 2007, of the prime minister amending and supplementing some articles of Decision No. 246/2006 / QD-TTg dated October 27, 2006, the establishment of Cooperatives Development Assistance Fund and issuance of regulations on credit guarantee operation and post-investment interest support from the Cooperative Development Assistance Fund. 3. SUPPLY OF AGRICULTURE FINANCE 24 capacity of the Cooperatives Union of cities and 3.2.6. Bank for Investment and provinces. At the same time, the Cooperative Development of Vietnam (BIDV) Development Assistance Fund assists cooperatives Established as the Bank for Construction of Vietnam and cooperative unions through investment loans, in 1957, BIDV was equitized in 2012 and officially credit guarantees and post-investment interest transformed into the Joint Stock Commercial Bank support. However, the operations, performance, for Investment and Development of Vietnam. and outreach of the Cooperative Development According to the BIDV 2016 annual report, as of Assistance Fund is unclear, as information was not December 2016, its total outstanding loan portfolio collected during the field trip for this diagnostic. reached 751,448 billion VND, an increase of 17.85 percent from 2015, making up 13.6 percent of 3.2.5. Microfinance institutions the lending sector’s market share; NPL ratio was The vast majority of MFIs serve a relatively small controlled at 1.95 percent. Its outstanding loan number of clients, ranging from a few thousand to portfolio on agriculture and rural development 20,000 people, the exception being the Tao Yeu May currently accounts for 16.90 percent of its total Fund, which serves more than 73,000 clients and lending portfolio, a slight increase from around CEP with about 193,000. The loan portfolio is also 13.76 percent in 2013. Meanwhile, 86.86 percent of relatively small, about US$1–3 million on average, BIDV’s outstanding loan portfolio on agriculture and except for Tao Yeu May, with US$21 million, and rural development is short-term, a level higher than CEP, with over US$44 million. The loans granted that of other commercial banks (for example, SHB by these institutions are mainly in rural areas and currently has 59.81 percent of loans on agriculture mostly for women (who make up nearly 94 percent and rural development being short-term). of all borrowers), while the average loan size ranged from US$150 to US$400. Interest rates range from 0.5 BIDV mainly targets medium- and high-income percent to 2.5 percent per month, at an average of about farmers in agricultural lending. Most of the loans 1 percent per month. Most of the MFIs are not under are working capital, and the average loan size is 1 the supervision of the SBV, except the Tao Yeu May billion VND and can go up to 9 billion VND. BIDV Fund and CEP. usually charges an interest rate of 6.5 percent p.a. on loans related to agriculture and rural development. While a large number of MFIs endorse the mission Most of the loans are collateralized with the red book to serve rural lower-income households, the land use right certificate. Simple procedures and limitations on mobilizing enough voluntary savings reasonable interest rates are the main reasons that and investments from the private sector impede farmers borrow from BIDV. In the BIDV Dong Thap their growth. This further leads to their dependence regional branch, 68 percent of its total portfolio is for on concessional funds from nongovernmental agriculture and rural development, with an NPL ratio organizations and international donors. In addition, there lower than 1 percent.19 is a lack of competition in the MFI market, with VBSP being the dominant player (Vietnam Microfinance Working Group 2013). 19 Interviews by World Bank mission team with BIDV in November 2017. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 25 Apart from granting direct loans for rural and MB intends to enlarge its network to further agriculture development, BIVD also provides meet the needs of clients, especially in remote loans to refinance existing agricultural loans areas. However, there are regulatory obstacles from through a network of 37 financial institutions SBV to expanding the physical branch network. (including 9 local PCFs) with the revenue of MB is seeking branchless banking as a solution by 33,734 billion VND (accumulated from 1997 partnering with Viettel, Vietnam’s largest mobile to 2017). It serves as a wholesale bank for World network operator. Under the collaborated Bank Plus Bank’s agricultural borrowing projects, including program, a customer who is both a Viettel subscriber Rural Financing Project I, II, III and Vietnam— and a MB account holder can utilize services such as Sustainable Agriculture Transformation (VnSAT) money transfer, account checking, money deposit/ Project (World Bank, 2015b). withdrawal, and payment at transaction points of Viettel, which are more widely present across the 3.2.7. Military Bank (MB) country, especially in rural areas. So far, there are MB is one of the leading joint stock commercial 3.4 million subscribers on mobile accounts, among banks in Vietnam. According to the MB 2016 which 3 million are new account openers. Having annual report, as of December 2016, its outstanding less reliance on a retail branch network contributes loans reached 150,738 billion VND, up by 24 to MB’s net interest margins and overall profitability, percent since 2015 and with an NPL ratio below 2 which are higher relative to its local peers. percent. Short-term loans are usually provided to enterprises with an interest rate from 6.5 percent to 3.3 Other Mechanisms to Support 8 percent, and medium- and long-term loans up to the Provision of Financial Services five years are provided to individuals with interest to the Agriculture Sector rates of 9 to 11 percent. For loan sizes below 100 million VND, loans are provided by Mcredit, the Agent banking consumer financing company jointly established In addition to the Bank Plus Program MB with a consumer finance company and a Japanese piloted with Viettel, SBV has conducted two bank, Shinsei Bank.20 other pilot programs exploring the agent banking MB provides loans to support aquaculture, model through Vietcombank and Vietinbank coffee, cashew, and agribusiness development. respectively. Vietcombank has been partnering with Currently agriculture loans account for 13 percent Momo, the flagship brand of start-up M-Service, to of the total lending portfolio, with an NPL ratio of provide e-wallet and payment solutions. The Momo 1.3 percent, lower than the NPL ratio of the total e-wallet has a network with 3,000 transaction points, lending portfolio. Strict selection of clients ensures and customers are able to transfer and receive funds the low NPL. Red books and receivables are the and pay for a wide range of services, though the main collaterals accepted. A limited network of MB service is mainly focused on airtime top up for now. locations imposes challenges on disbursement and Vietinbank is trying to collaborate with Vietnam collection of loans and limits its provision of other Petroleum Import/Export Corporation (Petrolimex) financial services in rural areas. to use Petrolimex gas stations as agents to provide financial services. 19 Interviews by World Bank mission team with BIDV in November 2017. 20 Interviews by World Bank mission team with MB in November 2017. 3. SUPPLY OF AGRICULTURE FINANCE 26 These pilot agent-banking models help extend the 3.4.1 Commodity Collateralized Lending reach of commercial banks to underserved clients, The implementation of a sound and reliable but the expansion to accommodate unbanked commodity collateralized lending system can help customers is limited. Except for services of bill banks develop financial services among small- payment, transfer, and cash in/out, agents of and medium-size farmers, while also allowing commercial banks such as Viettel stores or gas farmers to extend the sales period of modestly stations cannot conduct account opening or loan perishable products beyond the harvesting assessment in the pilot programs. Though agents season. In addition to farmers using commodities can collect documents related to those actions, as a collateral for lending, such a system enables current know-your-customer provisions require traders, processors, and exporters to access liquidity the activation of bank accounts be done in person. when they need it most: the time they make their Moreover, the lack of an overarching regulatory purchases and hold inventories before processing or framework to guide the market and engender selling. Furthermore, pledges of future crop, such as trust among market players impedes agent- the CPR system in Brazil (box 1), enable farmers to banking activities from growing. access loans to purchase inputs (pre-harvest finance). The large production volume of various commodities, 3.4 Collateral and Credit as well as dynamic domestic and exporting markets, Enhancements make Vietnam suitable for the development of Findings from field visits have shown that commodity collateralized lending. However, the virtually the only collateral accepted by financial use of commodity collateralized lending, including institutions in Vietnam is the red book land use warehouse receipt financing, is very limited in Vietnam. rights certificate for all types of borrowers, There is no specific legislation adopted to facilitate be it producers, input providers, processors, commodity collateralized lending. According to a World or traders. As mentioned, this form of collateral Bank benchmarking tool—Enabling the Business of has proven to be very effective in Vietnam. While Agriculture, which examines the enabling regulatory other forms of collateral are also available, they are environment across countries, Vietnam received a score rarely used. of 0 on the Enabling the Business of Agriculture Finance Indicator sub-indicator warehouse receipts. Box 1. Crop Receipts in Brazil Crop receipts are pledges of future crop production (preharvest finance) for farmers to access credit by pledging their future crop. A good example is the crop-receipt system in Brazil. Although there are benefits to having such a system, it requires a large number of preconditions, since the pledge is on collateral (the future crop) that does not exist at the time of granting the loan. So, there are a lot of risks that need to be managed for banks to be comfortable with lending against such future crop pledges. Usually such systems require crop insurance, price hedging mechanisms, and so forth, to reduce such risks. Most beneficiaries of crop receipts in Brazil tend to be medium- and larger-size commercial farmers. With all these preconditions, crop receipts are not very common outside Brazil, although recently there are some efforts to pilot crop receipt programs in certain large grain markets in Eastern Europe and Central Asia. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 27 Under the warehouse receipt financing approach, innovative financing to Tan Long, one of the largest farmers, traders, processors or any other owners animal feed inputs trader in Vietnam. Financing of commodities can deposit their commodities in under a collateral management agreement provides licensed and inspected third party warehouses. liquidity or risk mitigation solutions to banks for The warehouses issue a warehouse receipt, which then their loans to the agriculture sector against warehouse allows the depositor to use the receipt as collateral to receipts. This structured financing would allow Tan borrow from banks. Banks provide funding at some Long to improve efficiency by eliminating reliance discount of the value of the warehouse receipt to on other intermediaries to issue letters of credit. account for the storage and financing costs, as well as other factors such as price volatility history, the 3.4.2 Value chain finance robustness of the system, or the trust they put in the alue chain finance offers additional solutions warehouse operator. When the depositor sells the to traditional models by providing customers receipt and therefore the underlying crop in storage, with input supplies and short-term finance. The the bank must be paid first by the buyer, prior to value chain finance linkages may reduce the risks releasing the receipt, which can then be presented of lending to agriculture by addressing information to the warehouse alongside payment of storage asymmetries and facilitating loan repayment (box costs and fees to have the inventories delivered to 2). In Vietnam, domestic financial institutions rarely their new owner. Several countries have warehouse accept receivables between buyers and producers as receipts systems including India, Mexico, Colombia, collateral. Meanwhile, it is not uncommon for input Argentina, Brazil, Tanzania, South Africa, and Ghana suppliers to provide in-kind credit to farmers. This (Giovannucci et al., 2000). imposes great credit pressure on input suppliers who not only rely on themselves for credit but also serve The closest system to warehouse receipt financing as a credit source for farmers, especially smallholder is stock monitoring agreements or collateral farmers. Based on mostly anecdotal information, management agreements, in which several value chain finance (that is, lead buyers/firms mostly private banks use inventories in warehouses financing farmers they buy from) does not seem that belonging to the borrower as collateral for lending. prevalent in Vietnam, and it is usually found in well- Such banks post their staff in these warehouses to organized high-value agricultural produce chains oversee the inventories pledged. Given the risks of (high-value fruits and vegetables, high-quality rice, financing inventories on borrowers’ own premises, and so forth). In such value chains the linkages banks do only this for existing good clients. between the lead firm and the farmer is strong and However, such arrangements impose costs, as there the lead firm could capture the input and/or cash is no third-party inspection system, so the banks advances at the time the farmer delivers. Most, if not rely on their own staff to do the inspection. The all, such credit is in kind (inputs) and for the specific lack of dedicated third-party collateral management crop production needs of the lead firm. companies, coupled with the lack of a legal and regulatory system, creates inefficiencies for banks to IFC’s Financial Institution Group Advisory use commodities as a collateral as they need to rely team in the East Asia and Pacific region has on their own resources to manage the collateral they analyzed opportunities for financing agriculture finance, usually in warehouses belonging to already crops in the Central Highlands and the Mekong credit-worthy clients. Delta, two of the most dynamic regions for agriculture in Vietnam. It aims to identify new The International Finance Corporation is partnering opportunities and ways for banks to finance key with a strong local bank (VP Bank) to provide value chains. In the Central Highlands, most of 3. SUPPLY OF AGRICULTURE FINANCE 28 Box 2. Case Study of a Value Chain Firm—Loc Troi Group Loc Troi Group is a leading agricultural manufacturer and service supplier in Vietnam with a sustainable value chain from research and production to processing and trading. Loc Troi provides seeds, pesticides, and fertilizers for farmers and follows up with support on techniques, drying, and storage. After harvesting, farmers sell the products to Loc Troi Group and use the proceeds to repay inputs gained. It is worth noting that most of the sales payments are in cash due to farmers’ preference. No interest is charged on those input credits, and the maturity is approximate four months, in line with the rice production cycle. Contracts are signed between farmers and Loc Troi Group to ensure the selling. Three types of contract are available: prefixed price, market price at harvest, and upside share between fixed and market price. The fixed price option is mainly applicable to the exclusive rice variety produced by Loc Troi, and the upside share option is the most popular one. On average, 1 to 2 percent of farmers break the contract with side selling, and they will be excluded from further collaboration with Loc Troi. Meanwhile, Loc Troi uses its contracts with exporters to obtain loans from financial institutions, but only foreign ones, which exposes the firm to foreign exchange risk. the potential for agriculture finance is in the Dak considerable opportunities to finance smart-climate Lak region with coffee, pepper, cashew, and rubber agriculture, promoting the use of technology being most promising on the perennial side, while to ensure sustainable production systems, that maize, cassava, and vegetables draw attention preserves and improves soil and water quality. amongst seasonal/annual crops. Pigs and poultry are Medium and large farmers are already looking to important within the livestock sector. In the Mekong invest in such technologies. Value chain finance is Delta, while rice and basic grains are still dominant, not being implemented currently; however, banks increasingly fruits and vegetables and shrimp, could explore collaboration with processors of followed by aquaculture, provide opportunities for high-quality fruits and vegetables, particularly now finance. On average, fruits generate 6 to 8 times that processors are targeting high-quality markets more net income/hectare compared to rice. (Europe, Japan, and the United States). Fruit processors (mango, durian, and dragon fruit) 3.4.3 Collateral registries and credit bureaus are expanding exports of frozen fruit to Japan and There is a collateral registry in operation for Europe and require investment to upgrade their both incorporated and unincorporated entities in equipment (freezing and fruit processing equipment, Vietnam.21 It is unified geographically and by asset labs to detect chemical concentrations, cold type, with an electronic database indexed by the warehouses); there are more than 300 processors debtor’s name. The database is centralized for the in the Mekong Delta and investments vary from entire country, although registration can be made at US$50,000 to US$300,000, which poses interesting three regional centers for registration of transactions lending opportunities for banks. There are also and assets. 21 This only refers to collateral registration of movable assets other than aircraft and ships at the registration center for transactions and assets of the National Registration Agency for Secured Transactions. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 29 The 2015 Civil Code stipulates methods, and Environment of the province or city directly procedures, rights, and obligations of related under the central government. parties in dealing with collateral. The 2015 Civil The public credit bureau, the Vietnam Credit Code does not limit the type of assets that can be used Information Center, covers 41.8 percent of the as collateral; whether it is acceptable or not depends adult population, complemented with private on credit institutions. The registration centers for credit registries covering 14.8 percent of the adult secured transactions and assets under the National population. Data from banks and financial institutions Registration Agency for Secured Transactions including PCFs, provincial financial investment conduct the registration of notices of security companies, MFIs, and women development funds are interests in movable property, including agricultural collected and distributed. Information from retailers, products, except for ships and aircraft. Cars and utility companies, and government programs are not motorbikes account for 80 percent of registered included in the database. Firms’ and individuals’ movable assets at the center. Use of agricultural data, both positive and negative data are distributed. products or equipment is limited. Perennial crops Banks and financial institutions can access borrowers’ do not fall within the competence of the center. The credit information online. Borrowers have access to registration of land use rights and assets attached to their data in the public credit bureau but not private land as collateral is done by the Land Registration credit registries. Office under the Department of Natural Resources 3. SUPPLY OF AGRICULTURE FINANCE 30 4. Key Public Sector Instruments for Agriculture and Agriculture Finance 4.1 Support to the Agriculture Sector In June 2013, the prime minister approved MARD’s Agricultural Restructuring Plan (ARP) through Decision no. 899/QD-TTg. The plan calls for a shift in sectoral goals beyond physical (output or trade) targets to include a broader set of indicators related to the “triple bottom line”22 of sustainable development. It lays down a set of core principles to guide the sector’s development, the most significant of which are that agriculture will be market led and consumer driven, rather than state directed and production led, and the government’s role will shift from being the primary investor/service provider to being the facilitator of investments and services provided by the private sector, community organizations, research institutions, commercial banks, and others. The roles, approaches, and expenditures of the state in the sector will be restructured to help realize the goals for sustainable agricultural development and rural transformation. A series of policies and regulations were adopted to ensure general strategic planning of the ARP as well as the development of specific sectors. Some of the initiatives are not designed to stimulate agriculture finance but indirectly impact agriculture finance, especially through shifting dynamics on the demand side. Decision No. 1895, approving the agriculture development program of hi- tech application, shifts the agriculture sector toward modernization and large-scale productivity, which requires the support of financing resources, especially long-term finance. Resolution No. 30/NQ-CP and Decision No. 738/ QD-BNN-KHCN further endorsed the commitment. Currently there are 29 high- tech agricultural zones in 12 provinces and cities, with 23 agribusinesses having obtained the hi-tech certificate. Enterprises who have received hi-tech agriculture certificates receive preferential policies on taxes, such as reduced tax when importing certain equipment. Agribusinesses are unfamiliar with the criteria of qualifying for hi-tech agriculture projects, and the procedures for obtaining a hi- tech agriculture certificate to enjoy relevant preferential policies remain unclear. These uncertainties impede the take up of hi-tech agricultural practices, which are of great importance for agricultural restructuring in Vietnam. 22 Triple bottom line refers to performance evaluation based not only on financial returns but also on social and environmental impacts. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 31 Cooperatives have been undergoing a process 4.2 Support to Agriculture Finance of restructuring under Cooperative Law 2012. In addition to operating the public banks MARD, together with VCA, are actively promoting mentioned above, the government of Vietnam has the new agricultural cooperative model that enables undertaken a wide variety of actions to foster an agricultural cooperatives to accumulate capital, affordable supply of financial services. These are improve business infrastructure, and build described in the following sections. There is a high close linkages between smallholder farmers level of public intervention to stimulate agriculture and markets (figure 13). Cooperatives can play finance in Vietnam. Policies and programs largely an important role in building a tight value chain, focus on the provision of credit by (a) directly binding which is a necessity for the further development financial institutions to provide low-cost credit to the of value chain finance. However, Cooperative agriculture sector through a variety of credit policies Law 2012 fails to provide specific provisions on and programs and (b) addressing the perceived high either the method or procedure for the transition risk of the agriculture sector through risk management of cooperatives into other forms of entities such instruments to indirectly incentivize lending to as businesses and cooperative groups or principles the agriculture sector. The variety of credit policy of capital and asset handling during the transition interventions adopted can be categorized into groups, to serve as basis for the MOF to provide proper including relaxation of collateral requirements and instruction on capital/asset handling. interest rate caps, as well as sector-specific interest rate subsidies. Risk management instruments include public credit guarantee schemes, as well as the pilot agricultural insurance program. Figure 13. Cooperative Model That Better Links Members with the Market Market Market Relation Inputs Satisfying Products and Services for Capital Contribution Members Cooperative Owner Clients Overall Demand for Products and Services Member Member Member Member Member Source: Dr. Nguyen Minh Tu, Head of the Cooperative Department, Ministry of Planning and Investment, 2015. 4. KEY PUBLIC SECTOR INSTRUMENTS FOR AGRICULTURE AND AGRICULTURE FINANCE 32 4.2.1 Credit Policy Interventions The low interest rate cap squeezes the possible Decree 55/2015/ND-CP dated June 9, 2015, profit margin, reducing significantly the incentive on credit policy for agricultural and rural of financial entities to provide their services to development, replacing Decree 41, lies at the the targeted clientele. In the case of Vietnam, center of various credit policies and programs lending rates of 6.5 percent are below even the (table 6) targeting the agribusiness community cost of funding for financial institutions, which and farmers, with the aim of contributing to makes lending unprofitable to such agriculture agricultural restructuring. The decree raises the clients. The negative impact of interest rate caps on level of lending without collateral. Individuals, agricultural lending is compounded by the fact that households, collectives, home businesses, and farm such lending usually entails comparatively higher owners can borrow from 50 million VND up to 3 risk and operating costs. To deal with these effects, billion VND depending on the purpose. Projects private financial institutions normally avoid short- with high-tech applications and value chain linkages term lending to agriculture unless they are able to are particularly encouraged, allowing borrowers increase their revenues through cross-selling of to obtain a loan without collateral up to 80 percent other products or unless they can obtain funding at of the value of such production. The decree also a subsidized rate (for example, Brazil, Colombia, provides requirements for debt rescheduling when and Mexico). Entities mandated to serve agricultural natural disasters or epidemics happen. In practice, clients subject to interest rate caps in many cases also financial institutions still require the red book restrict their lending to low risk customers wanting land use right certificate as collateral, but do not larger loans to reduce operational and risk costs, thus document this procedure to circumvent the policy. leaving out clients wanting smaller and riskier loans. So, in theory such loans are without collateral, but The cap on the short-term interest rate could also be in practice the borrowers have land rights at stake if one explanation for the concentration of short-term they fail to repay. Such uncollateralized loans also loans among two public banks: Agribank and VBSP. appear to be top up loans to borrowers who already In addition, different interest rate subsides have relationships with banks and have their land use target specific commodity production such as rights (red book) already pledged to such banks. paddy, coffee, and shrimp, or other aspects of the Maximum lending interest rate (or interest rate agriculture sector including hi-tech agriculture cap) is a policy tool that has been widely used and value chain finance. A value–chain-based by the government of Vietnam. The interest rate lending scheme was piloted from May 2014 to May cap for short-term dong loans are granted to the five 2016 under SBV Governor’s Decision No. 1050 / QD- top-priority sectors including agricultural and rural NHNN for 28 enterprises in 22 provinces and cities. development, exports, support industries, small- A total of 31 agricultural projects were implemented, and medium-size companies, and high-technology among which eight agricultural production lines enterprises. The most recently adopted Decision across five regions applied high technology. The No. 1425/ 2017/QD-NHNN set a maximum lending initial lending rates for projects under the pilot interest rate of 6.5 percent p.a. for commercial banks lending program were 7 percent p.a. for short-term and 7.5 percent p.a. for PCFs and microfinance lending, 10 percent p.a. for medium-term lending institutions on short-term loans less than 12 months. and 10.5 percent p.a. for long-term lending. These The requirements were further tightened compared rates were adjusted down to 6.5 percent, 9.5 percent, with the maximum lending interest of 11 percent p.a. and 10 percent p.a. for short-, medium-, and long- in 2013. term lending respectively. The loan amount was VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 33 decided based on negotiation between clients and systemic risks, thus incentivizing more financial commercial banks and had to be less than 90 percent institutions to enter the market. Vietnam has been of the project value. In case the clients fell short on trying to leverage guarantee mechanisms to reduce collateral, banks could grant unsecured loans given the individual credit risk from the perspective of they controlled the cash flow of incoming payments lenders. It has also piloted agricultural insurance to farmers. programs to deal with systemic risks imposed on the agriculture sector, such as vulnerability to natural In contrast to the strong advocacy of hi-tech disaster or disease. agriculture to support large-scale and modernized agricultural production and processing, the Guarantee financial resources to support the development Partial credit guarantee acts as a partial substitute in this regard is minimal. Financial institutions are for conventional collateral, where if the borrower “encouraged” to lend to hi-tech agriculture projects fails to repay, the lender can get partial repayment even though they are not familiar with the preferential from a guarantor. This guarantee scheme shares policies regarding credit terms or lending conditions. credit risks with the partner financial institutions in Meanwhile, financial institutions are reluctant to exchange for the guarantee fee. There are two main enter the market given the potential high risks of types of credit guarantee funds in Vietnam: (a) the those projects without any additional interest rate national credit guarantee fund for SMEs established subsidies or financial support. by VDB with state budget support of 300 billion VND in 2007 and (b) the city or provincial level Overall and in practice, the effectiveness of these Credit Guarantee Fund for SMEs. credit policies seems to be relatively limited because (a) the resources to ensure reimbursement or Both credit guarantee funds face operating or provision of interest-rate subsidies are reportedly funding issues. The credit guarantee fund under the insufficient to cover the actual demand (making it VDB covers 100 percent of the loan amount and the necessary for public banks to bear the cost of the fee to obtain a guarantee is 0.5 percent, not borne by lower rates to their customers); (b) the difference commercial banks but channeled to lending projects. between the ceiling and the commercial rate The full coverage of loan amount by guarantee borne by financial institutions curbs their profits and the low fee cost can easily lead to moral and therefore discourages them from lending hazard from financial institutions by overlooking to the agriculture sector; (c) banks rarely make risk management of guaranteed loans. Severe use of the lower collateral requirements as they disputes between VDB and commercial banks arose have a strong preference for collateralized loans on the contingency of payment when loans become with land rights (red book); (d) there are only overdue, and the government suspended the credit limited channels to share risk, therefore financial guarantee fund. institutions usually lend to projects with low risks; With regarding to the city or provincial level credit and (e) the implementation guidance is perceived guarantee fund, though Decision No. 58/ 2013/QD- as unclear, including a vague definition of “hi- TTg provides legislative endorsement encouraging tech” agriculture. Table 6 provides an overview of the establishment of funds, some provinces currently the main policies applied to agriculture finance. still face difficulties with limited provincial budget revenue to support the establishment and operation 4.2.2 Public Risk Management Instruments of those funds. It should also be noted that regional It is important to “de-risk” agriculture finance funds often are exposed to concentrated risks such as by addressing both individual risks and localized problems (for example, production, price, 4. KEY PUBLIC SECTOR INSTRUMENTS FOR AGRICULTURE AND AGRICULTURE FINANCE 34 Table 6. Key Agriculture Finance Policies Area of focus Policy name Target sector Key provision Collateral Decree 55/ 2015/ND-CP; Overall agriculture sector Individuals, households, collectives, home businesses, and farm owners can borrow from 50 million requirement VND up to 3 billion VND depending on purposes Circular 10/ 2015/TT-NHNN implementing Decree 55/ 2015/ ND-CP Interest Decision No. 1425/ 2017/QD-NHNN Five top-priority sectors Maximum lending interest rate of 6.5% p.a. for financial institutions and foreign bank branches and rate cap of agricultural and rural 7.5% for PCF and microfinance institutions development, exports, support industries, small- and medium-size companies, and high-technology enterprises Interest rate Decree 89/ 2015/NĐ-CP; Interest rate subsidy for fishing If building a new steel boat, the owner can borrow up to 95% of the boat value from a commercial subsidy industry bank with interest rate of 7% p.a., of which owner pays 1% p.a., government supports 6% p.a.; In Decree 17/2018/NĐ-CP case of newly made wooden boats, the fishermen are limited to a maximum loan of 70% of the boat value with interest rate of 7% p.a., of which boat owner pay 3%, government supports 4% p.a. Decision 540/2014/QĐ-TTg Credit policy for shrimp and Shrimp and catfish farmers facing difficulties can be eligible for temporary debt rescheduling for catfish farming a maximum of 36 months; lenders may not impose overdue interest on restructured loans and should prioritize the collection of principal first, collection of interest later; exemption or reduction of interest. Decision 68/ 2013/QD-TTg Loans spent on buying machines Support 100% of commercial loan interest rate for the first two years, 50% for the third year for and equipment to mitigate post- loans spent on buying machines and equipment to mitigate post-harvest losses. harvest losses Letter 3227/NHNN-TD; Lending policy for coffee Lending policy for coffee replantation in the Central Highlands provinces. Clients replanting coffee can replanting in the Central borrow up to 150 million VND/ha, for up to eight years, and the grace period to pay back the principal and Letter 1685/VPCP-KTTH Highlands provinces the interest is 4 years; clients grafting coffee plants for improvement can borrow up to 80 million VND/ha, for up to four years, the grace period to pay back the principal and the interest is 2 years. The interest rate applied in the grace period is set by the SBV but it shall not exceed 7% p.a.; the resources for the replanting loans are supported by the SBV through refinancing. Resolution 30/NQ-CP; Interest rate subsidy to promote The government assigned SBV to instruct commercial banks, mainly state owned, to use at least 100,000 hi-tech agriculture billion VND from clients’ deposits to lend to those operating in hi-tech applications or clean agriculture, with Decision No. 738/QĐ-BNN-KHCN; suitable interest rate. Annual interest rate is from 0.5% to 1.5% lower than normal commercial interest rate Decision No. 813/QD-NHNN with the same term. Decision 1050/ 2014/QD-NHNN Value chain A value chain-based lending scheme was piloted Nam Định, Đồng Tháp, Cần Thơ and An Giang provinces. Maximum interest rates are charged on applicable projects. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 35 market access, and so forth) that impact many or most with heavy subsidy support. Poor households borrowers at the same time. Therefore, designing received subsidies of 90 to 100 percent of the the credit guarantee fund in a way to ensure its premium amount from the government, near-poor sustainability in the long run is as an essential households 80 to 90 percent, non-poor households issue to ensure the success of the program. 60 percent, and large-scale groups or enterprises 20 percent. Premium ratios for rice, livestock, Insurance and aquaculture products were respectively The National Agricultural Insurance Pilot 2–5 percent, 3–4 percent, and 7–15 percent. Program was conducted from 2011 to 2013 The compensation ratios for rice and livestock per Decision No. 315/QD-TTg, targeting three were 19.0 percent and 23.3 percent respectively, sectors: rice, livestock, and aquaculture. A total while the compensation ratio for aquaculture of 236,396 households (76.5 percent were poor reached 309.8 percent, resulting in significant households, 16.8 percent near-poor households and losses for participating insurance companies 6.7 percent normal households) participated in paddy (figure 14). No significant natural disaster happened insurance; 60,133 households (84.1 percent were during the pilot program, which is one factor to bear poor households, 9.8 percent near-poor households in mind when applauding the low compensation and 6.1 percent normal households) participated ratio for livestock and crop. in animal insurance; and 7,487 households (27.4 Rice insurance was based on an index calculated percent were poor households, 4 percent near-poor by average communal yield over the past three households and 68.6 percent normal households) years.23 Compensation was paid to farmers when participated in fishery insurance. A top-down the communal yield was 10 percent lower than the approach was adopted for the National Insurance index yield. The compensation amount was the Pilot Program. BaoMinh and BaoViet were the difference between the yield and 90 percent of the two insurance companies participating in the pilot index yield. Reportedly some farmers complained program, with reinsurance provided by Vietnam about experiencing a loss, but the communal yield National Reinsurance Corporation and SwissRe. An was higher than the 90 percent of index yield, thus in-depth assessment of the pilot program is beyond no payment was made. In such cases, it seems that the scope of the present diagnostic report. Also, since perhaps they may not have understood the product it is not clear what the objectives of the pilot project well, believing that it was for actual losses rather were, it is challenging to make any judgement as than based on an index. Basis risks (the difference to whether the pilot was successful. Should the between average yields and actual) should not government find it useful, it could initiate an in- be significant in rice due to the homogeneity in depth evaluation of the pilot program. In the absence production practices and conditions. The calculation of an in-depth evaluation, the following information of the communal yield is done by the General has been obtained about the pilot program. Statistics Office with district level reporting to the Farmers had difficulty paying the premiums, and provincial government. the participation of non-poor households in the Loss risk management for livestock products insurance project was low. More than 75 percent of (cow, buffalo, chicken, and pig) is challenging as the participating households were poor households 23 Participating communities were selected by the province governments compliant to Decision 315/QĐ-TTg dated January 3, 2011. If the region only had hamlet/cooperative-based actual productivity statistic data, the insurance unit was hamlet/cooperative. 4. KEY PUBLIC SECTOR INSTRUMENTS FOR AGRICULTURE AND AGRICULTURE FINANCE 36 participating households are mainly small-scale the aquaculture production activities vulnerable. and scattered. The damage assessment was done at Insurance in aquaculture makes sense when it the individual level. Insurance companies relied on is combined with improved pond management local animal health authorities to decide the damage. practices (to lower the incidence of disease) and There were also difficulties with declaration and good monitoring systems by insurance companies. verification of epidemics for compensation. In many The main challenges observed in the pilot regions the epidemics were not at the scale eligible program include insurance providers’ low level of for declaration to the provincial People’s Committee; understanding of the risks in the agriculture sector on the other hand, the locals also refrained from and especially in aquaculture, limited capacity to declaring epidemics, therefore reaction to epidemics monitor those who purchased insurance, limited mostly stopped with identification. The identification available data to design insurance products, of epidemic becomes more difficult when new weak linkage between credit and insurance, and diseases emerge, as declaration relies purely on a low level of financial literacy (understanding of clinical symptoms without lab testing. insurance) among farmers. Agricultural insurance Most of the participating households (more is not attractive to credit institutions as it significantly than 95 percent) of the aquaculture insurance increases the interest rate, and credit institutions were non-poor households. Extensive, improved usually restructure defaulted agricultural loans when extensive, semi-intensive and intensive practices natural disasters happen and try to recoup money are the main practices in the aquaculture sector. in the long run. In addition, embedding insurance Insurance products are only provided to improved into the value chain was not widely adopted, with extensive and above practices. Inefficient water few examples where input suppliers or large buyers resource management, as well as a lack of sensor provide insurance and share the cost of insurance with systems to monitor the conditions of ponds, make farmers. Higher risk farmers also demand insurance Figure 14. Premium and Compensation Rates in the Agricultural Insurance Pilot Program 250 350 300 200 VND in Billion 250 Percent 150 200 100 150 100 50 50 0 0 Rice Livestock Aquaculture Premium (Billion VND) Left Axis Compensation Ratio (%) Right Axis Source: MOF, 2014. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 37 (but do not want to pay the full premium) while low usually is more effective when bundled with other risk farmers do not value insurance, which leads to products and services (credit, technical assistance, an adverse selection problem that makes insurance access to inputs and markets, and so forth) so it adds more expensive. Nevertheless, there may be ways more value for the insured parties. Governments to improve on the existing pilot by better targeting, can promote insurance through improving data/ designing, and implementing the right insurance information systems, financial education, risk products for targeted farmers, livestock producers, management awareness raising among farmers, and aquaculture producers that reduce moral hazard and well designed and targeted financial support for and adverse selection issues. Agricultural insurance insurance premiums (box 3). Box 3. Developments in Crop Insurance Crop insurance is a way to mitigate the risks to farmers and agribusinesses of lower production due to climatic events and other causes (for example, pests, crop diseases). Crop insurance can be traditional (based on individual farm loss assessments) or index based using weather, area yield, or satellite imagery as triggers for payments. Index insurance has been around for some time now and is seeing applications in various countries in Africa, Asia and Latin America (https://www.indexinsuranceforum.org/). Index insurance has been used to protect farmers and agribusinesses from bad crops due mostly to adverse weather (for example, droughts, excess rainfall), but also has been used for protection of vulnerable people’s assets and income from weather shocks and even government budget exposure to disaster risks. The main trends are • Increasing applications and designs of insurance products for various purposes, for example, to protect farmers’ and agribusinesses’ losses due to weather risks; for social safety net purposes in case of natural disasters, which for rural people include droughts; and to hedge government expenditures when disasters happen. • A second trend is more and better data and new technologies, from satellites to drones to terrestrial measures that significantly improve the accuracy and granularity of weather observations for specific locations. This enables a more accurate assessment of losses and the design of better insurance products. • Third, due to climate change there is increasing awareness amongst various stakeholders, public and private sector, in emerging economies of the need to develop crop and livestock insurance products. • Finally, there is increasing recognition that programs to develop crop and livestock insurance would need to be accompanied by measures to reduce exposure to climatic risks in agricultural and livestock sectors. 4. KEY PUBLIC SECTOR INSTRUMENTS FOR AGRICULTURE AND AGRICULTURE FINANCE 38 5. Key Constraints and Challenges Assessment of both the demand and supply sides of agriculture finance, together with an examination of the enabling environment, reveal a series of challenges that limit the development of agriculture finance, preventing its significant potential to support agricultural restructuring from being unleashed. The key constraints and challenges are summarized below. The farming sector is highly fragmented. About 70 percent of farms operate on less than 0.5 ha and only 8 percent nationally have more than 2 ha. Such small farm sizes, which lead to the low value of collateralized assets, and a lack of professionalism and skills constrain the access of these farmers to commercial finance. Small-scale farming practices make households rely on various nonfarm activities for income. Farmers then need credit not only for agricultural activities but also to support other household needs and activities. In addition, a range of diversified financial products such as saving, payment, leasing, and insurance are not reaching farmers. Agricultural cooperatives face difficulties due to lack of collateral, low managerial capacity, weak accounting, and small size. These difficulties impede cooperatives from fully playing their role in integrating smallholder farmers into a tight value chain, which is a necessity for value chain finance. Furthermore, as value chains become more sophisticated and complex, more flexible and affordable financial instruments are required. Agricultural production is vulnerable to climate change and remains risky. Extreme events such as drought in the Central Highlands, heavy rainfall and flooding in south Vietnam, and increased saltwater intrusion in the Mekong Delta threaten aquaculture, imposing great challenges on the already vulnerable agriculture sector. Without addressing the perceived high risk of agricultural production, there remains little incentive for financial institutions lending to the market. The governments’ efforts in a partial credit guarantee scheme and an agricultural insurance pilot program did not achieve the expected result of reducing risks, mostly due to imbedded design flaws in those instruments. There are gaps in the financial literacy of farmers. The financial literacy of smaller and poorer farmers has, though there are cases in which informal money VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 39 lenders confuse farmers with nominal low daily or to the agriculture sector is critical to unlock monthly interest rates and annual effective interest financing resources to support the agricultural rates, which sneakily increase the cost of credit to restructuring process. farmers. Most of the commercial farmers have a Serious issues with both the availability and basic knowledge of financial concepts and products. valuation of collateral are obstructing farmers’ However, their understanding of more sophisticated access to credit. Regardless of Decree 55, which financial instruments is inadequate. For instance, promotes uncollateralized lending, collateral is still their limited understanding of the benefits of exclusively limited to real estate (red book land agricultural insurance products constrains them from use rights) in agricultural lending. Meanwhile, using insurance as an effective tool to manage risks agricultural lands tend to have a low distressed in agricultural production and operation. market value. In addition, poor enforcement of The supply of agriculture finance faces high-level collateral and the lack of a secondary market for policy intervention, exemplified by the various collateral further leads banks to underestimate credit policies discussed previously. However, the farmers’ assets for use as collateral, thereby reducing in-practice absorption of various credit policies the credit available to farmers. Though the red book is low due to insufficient resources to ensure collateral has proven very effective in Vietnam, other reimbursement or subsidies, limited channels for forms of collateral, such as agricultural equipment risk sharing, and unclear implementation guidelines. and commodity inventory, are rarely used. Coordination between different government entities Vietnam has tried to build an enabling regulatory on implementing those policies is minimal. No environment to support the financial sector by cost-benefit analyses were done to examine the adopting various regulations centered on credit effectiveness of those policies due to limited data institutions. However, a few areas that are of great available. importance to agriculture finance are still missing Given the high level of policy interventions, legislation to guide the market. A lack of regulatory lending to the agriculture sector remains framework specific to commodity collateralized highly concentrated in a few public financial lending together with the existence of only a few institutions, mainly Agribank (VBARD) and VBSP. warehouses that can issue trustworthy and accredited Other private commercial banks tend to focus only warehouse receipts, as well as the absence of a on low-risk, large-scale farmers or agribusinesses to collateral management company, create obstacles maintain low NPL ratios. PCFs target low-income for the development of commodity collateralized households but they need more long-term capital to lending and warehouse receipt financing in Vietnam. meet members’ demands for investment loans, while In addition, there is no regulatory framework at the same time they must develop a professional guiding agent-banking activities, which is essential board and management team. Learning how to to engender trust and set operation standards to ensure incentivize and equip other private commercial the uptake and growth of this new delivery method banks to provide credit and financial services of financial services, thus fulfilling its potential to serve clients in remote areas. 5. KEY CONSTRAINTS AND CHALLENGES 40 6. Recommendations 6.1 Assess the Sustainability of Various Credit Policies As a central suggestion, we recommend that high priority be given to the assessment and reform of the various credit policies that support the agriculture sector. The implementation of various agriculture finance polices is not being appropriately monitored and only limited statistics collected. Also, there are no impact assessments to ensure that policies meet the intended objectives and reach the targeted beneficiaries. Key elements to be taken into consideration in the assessment include whether the policies have reached targeted clients, whether enough incentives are provided to financial institutions, whether the budget is sufficient to cover a certain subsidy, and whether the policies are sustainable given situations of financial institutions’ profitability and the status of the budget. Especially with regards to Decree 55, which is at the center of various credit policies, the limitations to the use of installations on land as a collateral for loans significantly reduces the capacity of farms and agricultural firms to access financing, since onsite investments oftentimes exceed the value of the land on which they are built. While there seem to be efforts underway to address this issue, it is recommended that the government (a) take the necessary regulatory steps to allow the use of such installation as collateral and (b) define the way in which such installations (and the corresponding pledges) are registered and managed. In addition, government has been emphasizing the role of hi- tech agriculture in promoting the agricultural transformation. The credit policy to support this subsector has to be revised in a way that (a) removes confusion among financial institutions with clear and detailed guidance on credit terms or lending conditions and (b) reduces the risks of lending to this subsector with supportive risk management mechanisms. Revise the policy on interest rate caps. A World Bank policy research paper (Maimbo et al., 2014) has found various negative effects of interest rate cap across countries, such as a withdrawal of financial institutions from the poor and underserved (as in the West African Economic and Monetary Union countries and Nicaragua), an increase in unofficial and predatory lending (for example, in Japan and the United States), a decrease in the licensing of new lending institutions (as in Bolivia), an increase in the total cost of the loan through additional fees and commissions (as in Armenia, Nicaragua, and South Africa), and a decrease in VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 41 product diversity (as in France and Germany). Instead for loans to SMEs more broadly, which can include of imposing an interest rate cap on the financial sector, agriculture as one of the targeted sectors amongst alternative options can reduce interest rates in the others, but there are also PCGs specific to agriculture. long run, together with other beneficial effects such There are numerous such guarantee systems for SMEs, as increased consumer protection and better access including in agriculture, around the world that have to finance. Increasing competition in the microcredit been instrumental in promoting credit, particularly to sector through allowing various types of financial smaller agribusiness SMEs and smallholder farmers, institutions to provide a wide range of products on including FIRA in Mexico; FINAGRO in Colombia; flexible terms has had the effect of reducing interest the SGR system in Argentina, Chile, and Spain; FGC rates in, for example, Bolivia. In addition, promoting a in Angola; a guarantee system operated by the Rural credit bureau to help reduce information asymmetries Development Department of the Central Bank in that result in higher risk premiums and high interest Sri Lanka; and the Credit Guarantee Corporation of rates for farmers. It is important to include information Malaysia, amongst several others. from retail stores, utility companies, and other The government could consider reintroducing institutions that have data on farmers, who are mainly a national credit guarantee scheme for SMEs an unbanked population. (including agriculture) as many other countries Last, coordination between the MOF, SBV, in the region have (for example, China, The and MARD could be enhanced to engender Philippines, Malaysia, Thailand). The reintroduction synergies that promote financial solutions for needs a different design following international agricultural transformation. Given the variety of good practices to make the scheme effective and actions that are needed to strengthen the operation financially sustainable (box 4). of the market for agricultural financial services, we With regards to city- or provincial-level credit recommend that a steering committee including at guarantee funds, we suggest a review should be least the entities mentioned above be established conducted on their feasibility, operation efficiency, to coordinate an action plan for reform that the supervision, and management. The government may government of Vietnam may decide to implement to consider replacing the current city or provincial level ensure smooth coordination. If appropriate, such a credit guarantee funds with a new national level coordination function could be assigned to the Inter- one as mentioned above. A well designed national ministerial Steering Committee for the Agricultural partial credit guarantee fund usually proves to be Restructuring Program. more efficient and cost-effective than scattered regional ones. Limited provincial budgets, as well as 6.2. Strengthen Public Risk- exposure to local concentrated risks on production or Management Instruments price, constrain local credit guarantee funds’ ability Public risk-management instruments should to fully play its role. be evaluated and redesigned to address the perceived high risk of the agriculture sector, thus In terms of the agricultural insurance market, incentivizing private financial institutions to enter we suggest that in the future the agricultural the market. Partial credit guarantees (PCGs) aim to insurance sector differentiates commercial absorb part of the default risk of the borrower. By insurance products and insurance products that providing this level of comfort, financial institutions serve social protection purposes. Commercial would increase credit supply to credit-constrained insurance products should be promoted in a package firms and farmers. PCGs often provide coverage with advanced technology support and better access to credit to attract clients. We suggest that commercial 6. RECOMMENDATIONS 42 Box 4. Key Principles of an Efficient PCG Scheme A review conducted by World Bank on various PCGs (Varangis et al., 2017) globally found the key principles of an efficient PCG scheme. To begin with, it is important to establish an independent legal entity. The entity should be equipped with adequate funding resources, proper regulatory framework, sound corporate government, and effective risk management. PCGs should have clear and transparent eligibility criteria and qualifications for targeted beneficiaries (firms, SMEs, farmers, and so forth), lenders (participating financial institutions), and credit instruments eligible for coverage. Importantly, guarantees should be partial, less than 100 percent, thus providing the right incentives for borrowers and lenders. The most common coverage found is usually in the range of 50 to 70 percent. Guarantees should also adopt risk-based pricing to cover the cost of risk and administration costs. The typical range of guarantee fees is between 1.5and 2.5 percent p.a. of the outstanding balance of the loan. PCGs should adopt efficient and transparent claims-processing management but at the same time should provide enough incentives for lenders to apply vigorous loan collection procedures. PCGs should be subject to rigorous financial reporting requirements and should disclose nonfinancial information related to their operations. insurance cover only certain kinds but not a wide insurance products. Mandatory requirements on range of risks. Subsidized insurance products should insurance avoid the adverse selection issue. The be provided in an appropriate level to avoid moral link between insurance and credit should be hazard with relatively high triggering points for further strengthened but not necessarily through claims payment. Insurance for social protection the mandatory requirement of credit institutions to should target specific farmers and rural households, bundle loans with insurance products. Regulations usually poor and most exposed to climatic risks. could allow banks to register insurance as a form Such insurance should target catastrophic events of collateral, or assign lower risk weight and lower that generate substantial losses to income. This level of provisions for an insured loan. Partnerships insurance should be part of a broader government between insurance companies, financial institutions, scheme for financing disaster risks (recovery and and large buyers can be helpful in promoting the prevention) in Vietnam. The government can replace uptake of agricultural insurance products, while existing mechanisms of compensating farmers benefiting all participating parties by addressing during catastrophic events with insurance-based risks. Governments should work to incentivize the mechanisms. Such schemes are prevalent in various uptake of insurance products. Initiatives include, but countries in Latin America, such as Mexico, Peru, are not limited to, collecting and providing data for the and Uruguay. This way, insurance mechanisms are design of insurance products and linking agricultural employed to transfer the risk the government has vis- insurance to the broader system of disaster-risk finance à-vis catastrophic losses in agriculture. in Vietnam. Insurance could help increase the chances of getting Developing agricultural insurance requires credit and potentially lower interest rates. But banks adopting a comprehensive package of policies tend to encourage adverse selection by only requiring and developing a specific action plan in five key insurance products to be bought by high-risk areas (a) data, (b) outreach, (c) risk financing, (d) farmers who usually are not covered by commercial product design and development, and (e) enabling VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 43 environment (figure 15). The implementation of Systems that collect agro-climatic information and the action plan would also involve private sector conduct risk mapping to assess varied risks across participation. regions would also be beneficial to generate better understanding about risks for insurance companies. MOF and MARD are currently drafting a decree Such systems, usually housed in a special department on agricultural insurance. With the new draft within the Ministry of Agriculture, are now quite decree allowing insurance companies to provide prevalent in several countries, particularly in Latin agricultural insurance products on a commercial America (please refer to Annex 3 for detailed basis, insurance companies should also improve lessons on agricultural insurance in Latin America risk management capacity by (a) having greater and the Caribbean region), including Argentina, access to data from government entities to design Brazil, Colombia, Paraguay, and Uruguay as some appropriate and well-priced products; (b) developing examples. During 2017-2018 there was a World an advanced monitoring system especially for the Bank technical assistance project facilitating better aquaculture sector; and (c) exploring other initiatives risk management, but it only covers public (macro and collaborations with international reinsurance level risks) and residential assets. Expanding partners to manage risk. Agriculture insurance the scope to the agriculture sector would help companies only had three years of data to design the improve the risk management capacity of the entire rice insurance products in the pilot program, which agriculture insurance sector. is far from sufficient to design well-priced products. Figure 15. Key Elements of an Action Plan to Promote Agricultural Insurance Data Outreach Risk Featuring Collect Link To Social Safety Nets Public Sector Reinsurance Audit Link To Credit Manage Premium Subsidies Promote Coinsurance Pool Finance Awareness Building Financial Support Support Product Design and Development Enabling Environment Product Development and Pricing (Short Term) Institutional Framework Legal Framework Technical Support for Insurers (Long Term) Consumer Protection 6. RECOMMENDATIONS 44 In addition, recent advanced technologies such services in remote areas if, among other things, (a) the as remote sensing and satellite images to monitor new shareholders consider this segment of the market to flood or pasture can also be applied in designing or be potentially profitable (which has implications for the managing insurance products (box 5). Moreover, type of shareholders to invite); (b) options are assessed regional-level collaboration such as building to maintain or enhance the profitability of remoter regional-level databases would be beneficial to service points (see also the discussion on agent banking promote the agriculture insurance market. In Asia- below); (c) the entity is allowed to price its products Pacific Economic Cooperation (APEC) year 2017, according to its costs (which relates to the aspects on Vietnam chaired the APEC Financial Ministerial interest rate caps and credit policies mentioned above); Meeting in which disaster risk financing and and (d) steps are undertaken to increase the efficiency insurance solutions were highlighted as a crucial of operations through a variety of means. Without area of financial cooperation in agriculture financing. these steps, the risk of mission drift or the institution abandoning good customers is very high. 6.3. Enhance the Capacity of Public At the same time reforms are needed to make and Private Financial Institutions Agribank more attractive to private and strategic On the supply side, the ongoing reforms of public investors. Such reforms would need to include financial institutions, such as the equitization of (a) enhancing corporate governance, focusing Agribank, are critical to ensure a level playing field on independent board members; (b) enhancing in the agriculture finance market. The equitization risk management and internal audit committees process of Agribank should be conducted by and functions reporting directly to the board; balancing the maintenance its original mandate with (c) strengthening risk-management systems and higher efficiency and profitability. As the experience in considering investments in management-information other countries such as Greece, Guatemala, Mongolia, and information-technology systems; (d) improving Tanzania shows, such processes can be carried out in loan monitoring and collection procedures to maintain a manner that maintains the orientation of the bank so low NPLs; (e) improving client management and it serves its traditional clientele and even expands its client service processes to enhance speed and quality Box 5. New Technology Applications in Agricultural Insurance Viettel’s smart agriculture department offers three main types of services tailored to the agriculture sector, including product tracing, farming environment monitoring, and information on weather and natural disasters. It uses remoting sensor systems to monitor conditions of a pond and send environment monitoring information (PH, oxygen, salinity) to farm owners. This information can also be used by insurance companies. BaoMinh is currently cooperating with SwissRe and the Vietnam National Reinsurance Corporation to design a new rice insurance product by using satellite images to estimate the yield for claims assessment. The costs related to the use of the technology are borne by the sponsor of the project. The product is index based at communal level. A lack of granularity in available data made it impossible to deploy the product at the pilot stage at a reasonable price. It has been agreed among participating parties to allow for a reconciliation between estimates by satellite and the data collected by the local government entities, should there be significant divergences. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 45 of client service; and (f) reforming the public policies To grow the services of PCFs, they need to be surrounding agriculture finance to enable Agribank integrated into larger apex-like structures to which to determine the prices of its services considering they can outsource some important functions such market conditions, costs, and the availability of any as accounting and information technology, audit/ subsidies. In fact, good examples of state agricultural control, reporting to the authorities, and training of banks, such as in Mexico, Morocco, the Philippines, boards and staff (box 6). In Vietnam, such support Thailand, and Turkey, are often associated structures seem to be either absent or operating with good corporate governance, good on an informal basis. While Coopbank provides systems to manage risks, and operating some treasury, financing, and guarantee services on commercial terms. (stabilization fund and deposit insurance fund), it does not provide the whole range of services that It is also essential to build capacity, especially would be needed to help develop the potential of this risk management, at other private financial sector. While some of these issues may be addressed institutions to fulfil their potential to serve the by the program that it is initiating with support from agriculture sector. Technical assistance should be the Canadian government, a more comprehensive provided to train staff with appropriate knowledge strategy may be needed to help develop the potential and skills and equip the institutions with the of this sector. tools and methodologies needed to lend to the agriculture sector on a sustainable basis. Under the proposed apex-like24 structures, Understanding the risks of agricultural production the relation between PCF and Coopbank and managing the risks of lending to the agriculture (or eventually other apex entities) would be sector is key. Meanwhile, support is needed to help strengthened. Apex entities would provide access financial institutions develop other sophisticated to funding for larger loans and new services (for financial products such leasing, insurance, and example, debit cards) and distribution channels commodity-based lending to meet the dynamic (for example, nonbank agents or mobile banking) demand for financial services by farmers and to enhance the capacity of PCFs. At the same time, agribusinesses undergoing the agricultural apex entities can help streamline operations and deal transformation process. with regulatory requirements (for example, through Box 6. Sicredi Financial Cooperative System of Brazil The Sicredi Financial Cooperative System of Brazil is a network of 113 cooperatives that owns a bank, Banco Cooperativo Sicredi. The three-tiered system operates in 10 Brazilian states. Today it serves about 3.5 million members. The bank acts as an intermediary between financial markets, third- party financial institutions, and the cooperatives it finances. The Sicredi system dates back to 1902, when Brazil’s first credit cooperative was founded. Being of rural origin, the system and its affiliated cooperatives are today one of the most important providers of financial services to smallholder farmers. While Sicredi has diversified its services to also serve urban populations and nonagricultural businesses, it maintains a strong focus on serving smallholder farmers, to whom it can offer, thanks to its financial strength and diversification, a full range of services, including long-term loans, insurance, and a variety of deposit and transfer services. 24 The cooperative apex organization helps unit cooperatives, provide necessary support to members and promote the development of the entire cooperative sector. 6. RECOMMENDATIONS 46 unified core banking systems). The strengthened minimum standards to qualify as an agent, scope of relationship enables PCFs to become better providers services provided by agent, and exclusivity or non- of financial services for their members. exclusivity of relationship between agent and banks. 6.4. Create an Environment that A prerequisite to fostering commodity Supports the Development of collateralized lending is comprehensive Agriculture Finance legislation to provide transparency and clarify An enabling regulatory framework is needed the rules governing the system by defining the to reduce the operating cost of delivering rights and responsibilities of all parties involved. credit and financial services through In addition, a competent authority designated alternative delivery channels such as to oversee the operation of the warehouses is agent banking (Box 7). Agent banking provides cost- important for a strong commodity collateralized effective solutions that promote agricultural financing lending system. In the case of warehouse receipts, from both the supply side and the demand side. It the existence of a public registration system for lowers the cost to banks by avoiding establishing warehouse receipts with detailed records of the physical banking infrastructure to unbanked areas, warehouse receipts helps increase transparency and it provides farmers with more economical options in the system and minimize fraud. Performance for getting access to financial services as they do not guarantees, such as requirements that operators need to spend out of pocket to reach a bank branch. A must file a bond with the regulator, pay into an regulatory framework guiding agent-banking activities indemnity fund, or insure the warehouse and the is essential to engender trust and set operation standards goods inside, reduce a bank’s risk in lending against to ensure the uptake and booming growth of this new stored commodities and increase user confidence in delivery channel for financial services. This will help such lending, including for the establishment of a agent banking to fulfill its potential to serve clients in warehouse receipt system. The development and remote areas. Important regulatory aspects include promotion of third-party collateral management Box 7. Good Regulatory Practices to Support Agent-Banking Activities A World Bank benchmarking tool—Enabling the Business of Agriculture, developed an agent-banking indicator measuring the strength of agent-banking legislation. Good legal and regulatory practices include but are not limited to the following: clear rules on minimum standards to operate as an agent, provisions allowing agents to provide services for multiple financial institutions, permission for agents to provide a wide range of services, financial institution liability for agent actions while providing financial services on the institution’s behalf, and requirements for financial service providers to reduce fraud by monitoring and reporting on the actions of their agents. Tanzania issued the Guidelines on Agent Banking for Banking Institutions in 2013 regulating agent banking activities. Minimum standards to qualify as an agent to provide financial services on behalf of a bank have been established. Moreover, the guidelines allow agents to provide a wide range of services and establish the bank’s liability for the acts of the agent. By doing so, it provides customers with relevant safeguards and addresses the potential customer’s reticence about using the agents’ services. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 47 companies would also assist banks in monitoring activities to finance agriculture production. Thus, inventories that they use as collateral for loans. they need credit not only for agricultural activities but also for nonfarm activities. Commercial farms 6.5. Better Understand the Demand demand a wider variety of and more targeted and of Farmers and Agribusinesses sophisticated financial services to support their for Financial Services agriculture production and manage their household A systematic segmentation of farmers based financial needs. on their degree of commercialization and ties A nationally representative survey would to value chains (loose vs. tight) is the first step be helpful to reflect the changing financial to understanding financial needs of farmers. demand of farmers and agribusinesses across Following a CGAP (Consultative Group to Assist subsectors of agriculture under the agricultural the Poor) publication in 2013 (Christen & Anderson, restructuring process. Farmers rely heavily on 2013), the recent debate has refined the segmentation nonfarm activities to generate household income, toward closer linkage to income sources of households and at the same time try to diversify farmland usage (figure 16). A great percentage of farmers in Vietnam by converting some land to nonpaddy crops. Both are transitioning farmers with a high level of nonfarm farmers and agribusinesses have to adopt advanced income, such as wages gained from off-farm farming practices or hi-tech infrastructures to activities. Meanwhile, in key agricultural regions like maintain agricultural production’s resilience during the Mekong Delta and the Central Highlands, there climate change. Agribusinesses need to upgrade are significant numbers of specialized commercial operation lines to generate increased value to further farmers who are intensive shrimp producers, succeed in the international commodity market. All rice producers with contracts, or specialized these changing features of agricultural production coffee farmers. or business operation enlarge the scope of financial The demand for financial services and products needs of farmers and agribusiness. An in-depth varies across different farming segments. survey can help financial institutions offer accessible Subsistence farms require financial products to and affordable financial products and services, such save and borrow mainly to smooth their income as leasing, insurance, and guarantees, to fulfil the and deal with emergencies. Transitioning farms dynamic demands of farmers and agribusiness usually use their income generated from off-farm experiencing agricultural transformation. Figure 16. Segmentation of Farmers Importance of farm sales (Agriculture Sales/Total Agriculture Income) Low High Low Subsistence Farms Specialized Commercial Farms Importance of Nonfarm Income (Nonfarm Income/Total Transitioning Household Income) High Diversified Commercial Farms Farms Sources: AGRA 2017. 6. RECOMMENDATIONS 48 It is still important to enhance financial literacy institutional management and operation should be among farmers and enhance the capacity of incorporated as a key element in technical-assistance farmer organizations. Financial literacy programs or capacity-building programs. We also suggest should always be an important element of a that a scheme should be introduced to ensure that financial inclusion framework. Implementation of cooperatives are audited. Meanwhile, collateral those programs can be joint efforts between public should not be limited to land use rights but also and private sector. Financial institutions should include a production plan for farmer organizations. be required to disclose the full cost of credit (for Last, coordination between the MOF, SBV, example, annual effective interest rate) when and MARD could be enhanced to engender lending to farmers and enhance their understanding synergies that promote financial solutions accordingly. It would also be beneficial to encourage for agricultural transformation. Given the players along the agricultural value chain to use variety of actions that are needed to strengthen cashless payment methods, such as when traders the operation of the market for agricultural directly deposit payment to farmers’ accounts. In financial services, we recommend that a addition to the improvement of financial literacy, steering committee including at least the entities farmers should also be informed of technological mentioned above be established to coordinate advancements to increase efficiency of production. an action plan for reform that the government Moreover, further actions should be undertaken of Vietnam may decide to implement to ensure to strengthen the accounting and management smooth coordination. If appropriate, such a capacity of farmer organizations (especially coordination function could be assigned to the cooperatives). Technical assistance on business Inter-ministerial Steering Committee for the development for these institutions is important. The Agricultural Restructuring Program. introduction of technological advances that facilitate VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 49 50 References AGRA (Alliance for a Green Revolution in Africa). 2017. Africa Agriculture Status Report: The Business of Smallholder Agriculture in Sub-Saharan Africa (Issue 5). Nairobi, Kenya: Alliance for a Green Revolution in Africa. Agribank. 2017. Agribank 2016 Annual Report. Hanoi, Vietnam. BIDV (Bank for Investment and Development of Vietnam). 2017. BIDV 2016 Annual Report. Hanoi, Vietnam. Christen, Robert Peck, and Jamie Anderson. 2013. “Segmentation of Smallholder Households: Meeting the Range of Financial Needs in Agricultural Families.” CGAP focus note: No. 85. Washington, D.C.: World Bank Group. CIAT (Climate Smart Agriculture in Vietnam). 2017. Vietnam Climate Smart Agriculture. Unpublished Report. General Statistics Office (GSO). Vietnam Agricultural Census 2016. Hanoi, Vietnam. Giovannucci, Daniele, Panos Varangis, Don Larson. 2000. “Warehouse receipts: facilitating credit and commodity markets. A Guide to Developing Agricultural Markets and Agro-Enterprises.” Washington DC: World Bank Group. IFC (International Finance Corporation). 2010. “Central Highlands & Mekong Delta Value Chain Analysis.” Washington, D.C.: World Bank Group. IPSARD (Institute of Policy and Strategy for Agriculture and Rural Development). 2016. “Report on Development the Draft Decree on Mechanisms and Policies to Attract and Promote Investment in Agriculture Sector.” Hanoi, Vietnam. Maimbo, Samuel Munzele, Henriquez Gallegos, and Claudia Alejandra. 2014. “Interest Rate Caps Around the World: Still Popular, but a Blunt Instrument.” Policy Research working paper No. WPS 7070. Washington, DC: World Bank Group. Ministry of Agriculture and Rural Development, Department of Crop Production. 2017. 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Internal Project Appraisal document Washington, D.C.: World Bank Group. for a Sustainable Agriculture Transformation Project in Vietnam: PAD 1168. Washington, D.C. Sergiy, Zorya and Steven Jaffee. 2016. “Agri- Food Jobs in Vietnam.” Washington, D.C.: ———. 2015c. The Global Findex Database 2014. World Bank Group. Washington, D.C.: World Bank Group. Varangis, Panos, Jean Saint-Geours and Juan ———. 2015d. Enterprise Survey database Vietnam. Buchenau. 2017. “Using Commodities as a Collateral Washington, D.C.: World Bank Group. for Finance (Commodity Backed Finance).” ———. 2016. “Vietnam Development Report Washington, D.C.: World Bank Group. 2016: Transforming Vietnamese Agriculture: Varangis, Panos, Mazen Bouri and Juan Buchenau. Gaining More from Less.” Washington, D.C.: 2017. “Partial Credit Guarantee Schemes to Promote World Bank Group. Agricultural Finance.” Washington, D.C.: World ———. 2017. World Development Indicators. Bank Group. 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REFERENCES 52 Annex 1: List of Key People Met During the Mission State Bank of Vietnam Mr. Tran Van Tan, Deputy Director General, Department of Credit Policies Mr. Nguyen Tu Anh, Deputy Director General, Monetary Policy Department Mr. Le Trung Kien, Deputy Director General, Banking Supervision Agency Mr. Cao Van Binh, Deputy General Director, Credit Information Center Mr. Nguyen Van Tuyen, Division Head, Payment Supervision Department Ms. Nguyen Thanh Tung, Division Head, Department of Credit Policies Ms. Lan Anh, Department of Credit Policies Mr. Tuan Anh, Statistics and Forecasting Department Ms. Pham Thuy Duong, International Cooperation Department Ms. Nguyen Thi Thanh Trang, International Cooperation Department Ministry of Finance Mr. Nguyen Viet Hung, Division Head, Banking and Financial Institutions Department Mr. Bui Thanh Hai, Deputy Division Head, Insurance Supervision Agency Ms. Le Thi Thuy Vân, Insurance Supervision Agency Mr. Dung, Banking and Financial Institutions Department Ms. Hien, Banking and Financial Institutions Department Ministry of Agriculture and Rural Development Ministry of Agriculture and Rural Development Ms. Nguyen Thi Hong, Director General, Planning Department Mr. Phan Tieu Long, Planning Department Mr. Tran Gia Long, Planning Department Ms. Pham Thi Tuoc, VnSAT project Ms. Nguyen Thuy Nga, Planning Department VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 53 Mr. Nguyen Kim Chien, Department for Division Officer, Dong Thap Branch Science and Technology Mr. Vo Thanh Hai, Treasury and Planning Mr. Pham Quoc Sinh, Department for Division Head, Dong Thap Branch Collective Economy and Rural Development Mr. Bui Thanh Quang, Director, Mr. Pham Duc Thuan, Center for Information An Giang Branch and Statistics Mr. Nguyen Vinh Thanh, Corporate Banking Mr. Nguyen Viet Hien, General Department for Division Head, An Giang Branch Disaster Prevention and Control Mr. Phan Dinh Quat, Deputy Head, Households and Individuals Division, An Giang Branch Institute of Policy and Strategy for Agriculture and Rural Development Vietnam Development Bank Mr. Nguyen Do Anh Tuan, Director General Mr. Nguyen Chi Trang, Ms. Pham Thi Ngoc Linh, Director, Deputy General Director Science Management and International Mr. Dang Vu Hung, Deputy Director, Cooperation Division Development Policy Department Ms. Truong Thi Thu Trang, Director, Division of Strategy and Policy Study Vietnam Bank for Social Policies Vietnam Bank for Agriculture and Mr. Nguyen Duc Hai, Deputy General Director Rural Development Mr. Phan Cu Nhan, Director, Communication Ms. Nguyen Thi Phuong, and International Cooperation Department Deputy General Director VIETINBANK Ms. Nguyen Thi Thu Ha, Deputy Director, Ms. Phung Thi Huong Giang, Lending Product International Cooperation Department Department, Retail Banking Division Ms. Tran Thi Minh Thai, Deputy Director, Financial Institutions Department TECHCOMBANK Ms. Nguyen Thi Thai, Deputy Director, Ms. Do Diem Hong, Executive Vice President, International Cooperation Department Head, Financial Institutions Mr. Le Van Chien, Deputy Director, Ms. Nguyen Thi Khai Phuong, Senior Lam Dong 2 Branch Relationship Manager, Development Financial Mr. Hoang Xuan Tuat, Director, Institutions, Dong Thap Branch FINANCIAL INSTITUTIONS, Mr. Chau Van Hieu, Deputy Director, WHOLESALE BANKING Dong Thap Branch Cooperative Bank of Vietnam Mr. Ho Van Nguyen, Corporate Banking Mr. Nguyen Thac Tam, Deputy Division Head, Dong Thap Branch General Director Mr. Hoang Xuan Tiep, Corporate Banking Ms. Nguyen Thanh Hanh, Manager, ANNEX 1: LIST OF KEY PEOPLE MET DURING THE MISSION 54 International Relations & Project Ms. Nguyen Thi Thanh Thuy, Deputy Director, Management Department An Giang Factory Saigon Hanoi Commercial Joint Stock Bank Ms. Tran Thanh Nhan, Deputy Director, Ms. Bui Tuyet Hanh, Director, Corporate An Giang Factory Banking Management and Development Center LOC TROI GROUP Ms. Luu Thi Minh Hai, Manager, Credit Mr. Phan Ba Ngoc Phuong, Product R&D Department, Personal Banking Financial Controller Product R&D Mr. Nguyen Hoang, Deputy Director, Center Crop Production Ms. Phan Thi Thu Ha, Vice Director, Credit Mr. Nguyen Phi Bang, Deputy Head, Policy and Monitoring Division Finance Division Ms. Le Thi Yen, Acting Director, International Mr. Doan Minh Truong, Officer, Relations Department Finance Division Mr. Duong Van Chin, Chairman, Dinh Thanh BAO VIET INSURANCE Agriculture Research Center Mr. Hoang Xuan Dieu, General Manager, Agricultural Insurance Project CREDIT INFORMATION CENTER BAO MINH INSURANCE Mr. Nguyen The Nang, Deputy General Director Mr. Ho Hai Dang, Deputy Director of Project Insurance Department Vietnam National Reinsurance Corporation Mr. Yves-Daniel Cochand, Deputy Chief Executive Officer Ms. Nguyen Thi Thanh A, Manager—Public Sector Business LIEN PHUONG PCF Ms. Tinh, Chairwoman Ms. Ngoc, Chief of Internal Control Ms. Hoa, Chief Accountant ANTESCO Mr. Quach Thanh Binh, Deputy Director VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 55 56 Annex 2 : State Bank of Vietnam Classification of Credit to Agriculture and Rural Development I Ordinary loan (divided by industry) 1 Crops 1.1 Food 1.2 Coffee 1.3 Rubber 1.4 Pepper 1.5 Cashew 1.6 Sugar cane 1.7 Tea 1.8 Fruits 1.9 Other 2 Raising livestock and poultry 3 Aquaculture: 3.1 Catfish 3.2 Shrimp 3.3 Other 4 Fishing 5 Produce, purchase, process, preserve, consume salt 6 Import fertilizer Purchase, process, preserve, consume agricultural, forestry, and aquaculture products (including purchasing, processing, 7 preserving, consuming agricultural, forestry, and aquaculture products in trade village) 7.1 Agricultural products, in which: Food Coffee Rubber Pepper Cashew VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 57 Sugar Cane Tea Fruits Other 7.2 Forestry products 7.3 Aquaculture products, In which: Catfish Shrimp Other 7.4 Sea products 8 Plant, care for and improve forest 9 Develop rural business, in which: Purchase, process, preserve and consume agricultural, forest, and 9.1 aquaculture products in trade villages 9.2 Produce construction materials, pottery, porcelain, and glass 9.3 Small mechanicals and handicrafts 9.4 Rural construction and transportation 9.5 Other 10 Inland irrigation construction 11 Investment and construction of rural infrastructure 11.1 Construction of rural roads 11.2 Construction of electricity station 11.3 Construction of other rural infrastructure Industrial production, trade and provision of nonagricultural 12 services in rural areas 13 Consumption in rural areas 14 Other ANNEX 2 : STATE BANK OF VIETNAM CLASSIFICATION OF CREDIT TO AGRICULTURE AND RURAL DEVELOPMENT 58 Annex 3: Agricultural Insurance: Experiences and Lessons from Latin America Agricultural insurance is available in most of the countries of the Latin America and Caribbean region, and the insurance market is quite well developed in terms of premiums and products. The public sector plays an important role in supporting agriculture insurance via premium support (for example, Brazil, Colombia, Mexico, Uruguay), dedicated reinsurance (for example, Brazil, Mexico), and investments in data and climatic information systems (for example, Argentina, Brazil, Colombia, Mexico). However, the penetration of insurance is uneven, as most insurance is used by medium and larger commercial farmers, and it is focused more on standardized products. Increasingly though, agricultural insurance in the Latin America and Caribbean region is developing more tailored products for commercial farmers (that is, revenue insurance) and at the same time, several governments in the region already have or are looking to set up and support catastrophic insurance programs to provide income support for poor smallholder farmers (who have limited capacity to purchase insurance). These catastrophic insurance products are of interest to governments to transfer their fiscal risks associated with such catastrophic and weather events, improving public expenditures for agriculture emergency programs. Mexico, Peru, Brazil, and Uruguay for example,, have set up programs to cover catastrophic losses (for example, losses of production of more than 50 percent at a regional level) for smallholder farmers that replaces previous ad hoc and ex-post programs to compensate such poor farmers when catastrophic losses occur. In another case, the government of Uruguay, with help from the World Bank, has purchased weather-related hedging instruments to protect its exposure against climatic risks (lack of rainfall in this case). Argentina and Colombia are seeking to do the same. It is interesting to note that in Peru, the payment of compensation directly into farmers’ bank accounts has made it possible to bring into the formal financial sector tens of thousands of poor farmers who previously had no relation with the formal financial sector. Thus, catastrophic insurance for poor farmers is contributing significantly to financial inclusion in the rural areas of Peru. VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 59 Key challenges ahead lay in four aspects: • the dependence of agriculture insurance • There is also a need to use technologies to reduce programs on a government budget could expose transaction costs involved in the provision of such programs to the risk of not having sufficient agricultural insurance. Such technologies often resources in the future, stalling the development involve the use of mobile phones and digital of the agriculture insurance market. Thus, there payment platforms. is a need to better target government resources • Agricultural insurance programs need to for insurance to the most vulnerable farmers provide sufficient incentives for farmers to and focus on catastrophic risks where there is invest in climate-smart agriculture practices to a clear role for the public sector, leveraging reduce production and weather risks, bringing private sector resources as much as possible, an integrated management of agriculture risks particularly in the development, design, and (insurance is not a silver bullet for helping distribution of insurance products. farmers deal with every risk). In several • There is an ongoing need to improve countries (for example, Argentina, Brazil), the infrastructure, human resources, and insurance programs complement programs technology used for agriculture insurance. In to promote investments in climate-smart particular, the need to set up suitable systems to agriculture, linking such efforts to credit and measure, monitor, and map agro-climatic risks emergency response. is of paramount importance. ANNEX 3: AGRICULTURAL INSURANCE: EXPERIENCES AND LESSONS FROM LATIN AMERICA 60 VIETNAM AGRICULTURE FINANCE DIAGNOSTIC REPORT 61