Farmers Slowly Begin to Master Loans
If you have never applied for a loan, it is probably only a matter of time before you do. Personal and commercial bank loans, commonly used by most everybody in the United States and Europe, are becoming common place in Ukraine as well, including for business development loans. Agriculture is no exception.
Stanislav Khomich, an Odesa farmer, has been involved in the agricultural business for 5 years. Like many farmers in southern Ukraine, he grew grains and sunflowers. Then in 2003 he decided to diversify his crop and planted 5 hectares of tomatoes. By 2005, with assistance from the USAID-supported Agricultural Marketing Project (AMP), his tomato acreage increased to 22 hectares. But Khomich needed additional money to buy agricultural machinery, fuel and chemicals, and to cover labor costs if he was to cultivate his fields most efficiently. A bank loan seemed the only way to get capital funds he needed.
The total worth of the machinery he could offer as a collateral reached no more than 60,000 UAH. Most banks would have only agreed to extend a maximum loan amount of 25,000 UAH. However, with help from the USAID-supported Development Credit Authority program, implemented by NADRA bank, he was able to secure a loan for 50,000 UAH.
Loans to farmers are still a rare practice in Ukraine. There are several factors that impede loans development in this business sector. On the one hand, a land moratorium imposed until January 1, 2007, prohibits farmers from using land as collateral. Also, farmers generally find the process of obtaining credit quite inconvenient. In addition, due to the numerous documents required in a loan application, the review and decision-making processes can take a long time.
From the banking perspective, agricultural loans are still viewed as an unattractive undertaking because of numerous bad deals in the late ‘90s and early 2000s. In general, the agricultural business in Ukraine is still perceived as risky and unreliable. A majority of private family farmers manage smaller farms and usually need only moderate amounts of loan funds. These smaller farms are often remote and scattered throughout the oblasts; hence, banks accrue significant transport expenses when conducting their analysis and later auditing the business. In addition, loan officers and specialists usually have little experience and/or knowledge in this industry and do not really understand the costs and returns from different agricultural enterprises. Furthermore, agricultural insurance is undeveloped in Ukraine and as a result there is a greater risk for farmers to lose their harvests and fail to repay loans.
Today agricultural producers generally no longer have only themselves to rely on. In some southern and central regions of Ukraine a USAID special program called "Agro+" is working for rural entrepreneurs, including farmers. Thanks to this program, farmers obtain access to credit more readily. The USAID-supported Micro Lending Project in Ukraine provides technical and financial assistance to banks working within the framework of this program, and Agricultural Marketing Project’s target clients, who are small and medium farmers are also being included.
In 2005, AMP jointly with Nadra Bank tried to improve the agricultural lending situation in Odesa oblast. Last year Nadra Bank granted loans worth $82,500 to eight farms located throughout the oblast under the assistance of the Loan Specialist working in the Odesa AMP office. Next season, the number of loans granted by Nadra Bank in Odesa oblast to farmers is expected to double.
Mr. Khomich was due to repay the loan he had obtained by the winter, but the bank had its money right after the fall harvest. While many banks are still hesitant in granting money to farmers, and farmers are still reluctant to apply for loans, the positive example of the cooperation between Mr. Khomich and Nadra Bank is an encouraging sign in the development of the agricultural credit sector.