by Chanida Chanyapate Bamford*
One of the outcomes of the economic crisis in Thailand has been a closer public scrutiny of the issue of who should have the right to be bailed out by public funds. It has become apparent that apart from losing the 500 billion baht in loans that were extended to ailing financial firms, the government now stands to lose another 1-2 trillion baht after closing down 56 firms and becoming responsible for the liquidation of their assets and liabilities. All because the previous government had passed a law that provides a 100% state guarantee for all depositors.
Among the most vocal protestors of this process of nationalization of private debt (which is running alongside an IMF-promoted policy of privatization of state assets) are the 5 million farming households who are indebted to the state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC) to the tune of 400 billion baht. With the decline of all major agricultural produce prices to levels below production costs this year and the current extensive damage of farmland by floods which will effect the prospects for next year's harvest, their voices are becoming louder. They are asking the government why they are expected to shoulder the losses themselves and still pay back their BAAC loans promptly when the circumstances of the losses, as anyone can see, are beyond their control. The injustice seems plain.
The general public perception is, as stated by the BAAC, that "the agricultural sector has not been very sensitive to the impact of the economic crisis; on the other hand, it has helped absorb the impact on other sectors to a certain degree." However, "there are constraints in the structure of production and productivity, that is farmers are engaged in only a few varieties of crops without much change, with lower productivity levels than other countries."
A local BAAC official boasted that while customers of commercial banks were going bankrupt, BAAC customers still survived the economic crisis because they are mainly small debtors. The figures provided by BAAC on non-performing loans (NPLs) confirm this. BAAC NPLs total only 15-16% of the loan portfolio compared with an average of 30-40% for commercial banks, even though this represents an increase of 60% when compared to the years before the crisis.
A 'Debt-Bonding' Process
The same official reported that in his sub-district, where most farmers are engaged in growing baby corn on contract for export, the average BAAC loan per household was 60,000 Baht. It is well known that 20 Baht out of every 100 Baht loan is used for purposes other than agricultural production, but officials have good relationships with the customers and are conciliatory toward their needs. Overdue loans account for only 6.8% of the total, which implies that growing baby corn is still viable even with lower prices. In another sub-district where farmers try everything such as garlic and white, red and green onions, the overdue rate is higher at 14%.
The sub-district chief, however, told a different story. At the time when the BAAC loan is due, most farmers do not have the cash to pay back. The usual practice is to take another loan at a higher amount so that they can pay back the old loan principal plus the 12% interest and still have some cash left to spend, particularly to cover the expenses of sending their children to school. He noted the danger in such increasing indebtedness, but said that families with children of schooling age do not have much choice. Another village chief in the same sub-district, though, pointed to the current proliferation of washing machines in people’s homes after televisions and refrigerators as an example of increasing consumption which is accompanying increasing indebtedness.
In fact, the usual practice reported by farmers is to take a loan from local loan sharks at 5-10% per month interest rate to pay back their BAAC debts when they become due in March of every year. They then wait a couple of months to get new loans from BAAC for the next planting season. This is then used to pay back the loan sharks. This, of course, makes it even less likely that the BAAC loan will be used to improve productivity.
Apart from the fact that BAAC’s interest rates are usually slightly lower than commercial banks’ rates, and much lower than the going local informal rates, farmers want to keep on its good side because of the condition that a new loan will not be given unless the old one is paid back. More importantly, a good customer can get a larger loan every time he pays back promptly. This probably explains why a survey carried out by two academic institutes in 1998 and 1999 found that 75% and 80% of BAAC customers believe their household conditions have improved since their joining BAAC loan schemes.
A local BAAC official was asked whether he thought there was a chance farmers could get out of debt. "Being in debt is a natural thing, you can get out of it when you die," he answered. This is because the BAAC has ensured that debtors become members of funeral clubs, thus effectively making debtors insure their BAAC loans. When the debtor dies, family members receive a lump sum of money. This is intended to cover not just the funeral costs, but the outstanding BAAC debt as well.
Worrying Trends
A study by the Office of Agricultural Economics, Ministry of Agriculture and Cooperatives, clearly shows the trend of debt accumulation among farming households. During the 30 year period from the first to the sixth National Economic and Social Development Plans (1961-1991), the average amount of debt per farming household increased ten times, just about the same level as the increase of net income per household. The debt increase, however, continues at a higher rate of 40-60% a year from 1991-1999, while available figures from the same source show that the average net income from agriculture per household actually decreased by 6% between 1992-1997.
The study looked into the impact of the economic crisis on the farmers' capacity to service their debt by comparing the average assets and liabilities per household between the 1995/96 and 1998/99 farming seasons. This study found that the ratio of agricultural assets to liabilities decreased by 47% within two years, which is in line with the impact on other sectors of production. This is based on the fact that while household assets decreased by about 20% during this period, the amount of debt increased by 50%. The Office of Agricultural Economics expressed a warning that if this trend continues, the agricultural sector will face insolvency like businesses in other sectors. They were concerned that this will have a long-term impact on the country's agricultural productivity because "unpayable accumulated debt is a barrier to productivity improvement as the opportunity to seek new resources to improve productivity for this sector is limited".
Another worrying trend is the increase in the reliance on informal creditors. Before the crisis, statistics showed that 91% of farmers’ loans are from formal institutions; in fact, reducing farmers’ dependence on loan sharks was one of the achievements claimed by the Bank for Agriculture and Agricultural Cooperatives. After the crisis, however, the proportion of informal sector debt rose to 17% of the total debt.
A Bank Is a Bank
In the context of these worrying trends, however, the Bank of Agriculture and Agricultural Cooperatives seems to be changing its conciliatory practice towards their clients. At the local level, one official reported that they have been receiving orders to ensure their lending adheres more strictly to rules and regulations and to resort to legal action when necessary. Many farmers who gathered at a recent seminar on public debt and farmers’ debt, while joking about how they jumped every time a visitor appeared at their doors, were apparently under a great deal of stress. One woman, a single mother, narrated how she was hounded by BAAC officials to pay 15,000 baht which was a part of a group guarantee for one member who had defaulted while she herself had trouble paying back her own 10,000 baht loan. One man took a 10-year loan contract to replace cassava with a rubber plantation and managed to pay back 200,000 baht so far. But his loan principal of 400,000 Baht had accrued another 430,000 Baht in interest; with lower rubber prices, his prospects of clearing his debt burden were indeed dim. What made him rather bitter about this situation was that the cassava replacement scheme was funded by a grant from the European Union, which the BAAC turned into interest-bearing loans. Thus, farmers alone are responsible for the risks involved while the BAAC reaps all the benefits in the form of interest.
The BAAC has certainly been a successful bank throughout its 33 years of operation. It was able to utilize low-interest (less than 1%) loans from the Japanese government to build up its capital and turned into a full-fledged bank currently with 60% of capital coming from customers' deposits. Its 600 branches are housed in modern buildings and a work force of 13,000 strong have become the epitome of prospering capitalist institutions in the rural landscape to many of its debtors.
From a theoretical perspective, higher levels of farmer indebtedness point to a higher level of investment in agricultural production, which should be ‘a good thing’. Many businesses go into debt to expand; progressive, commercial agricultural production would fall into the same pattern. Agricultural credit has been the government’s instrument to stimulate adoption of new technology which, according to plans, should increase yields and, therefore, raise farmers’ income from the sale of products. From the business point of view, the ratio of farmers’ assets to liabilities, at 20.86 in 1998/99 cultivation year, is not problematic; in fact, an academic confirms that it still shows a fairly high level of financial security according to accepted standards.
At the policy level, BAAC announced expansion in 1999 of its credit line "in support of the government’s policies of accelerating economic recovery through increasing the productivity of the agricultural sector, reducing unemployment in the rural areas, including credit extension to the non-farm sector, in order to increase the income of the farming households" while at the same time maintaining "appropriate levels of financial stability, liquidity and profit margins". Its vision is to transform itself into a "Green Bank", whatever that means.
The Real Costs of Credit
A large proportion of BAAC loans were one component of agricultural extension packages for particular new crops and technology that the government wanted to promote and experiment with. In these cases, loans were often given, not in cash but in inputs (seeds, fertilizer and insecticide), although repayment always had to be in cash. However the majority of these extension projects failed in the three decades of such agricultural credit policies. Only through farmers’ concerted and continued pressure on the government to recognize its responsibility for the failures did it seriously consider writing off the 10 billion baht debt for projects as cashew nuts, sericulture, bamboo shoots and beef and dairy cattle. This, however, has not stopped the government from building BAAC loans into extension projects, most recently into projects funded by a 600 million dollar loan from the Asian Development Bank, that was negotiated as part of the restructuring process after the 1997 economic collapse. There are reasons to believe that the government is effectively transforming its ADB loan into farmer debt.
In terms of farmers’ income from agricultural production for which credit has been extended, there seems to be no report available on any follow-up or assessment of the direct effect of credit policies on debtors’ agricultural income. It is granted that a bank is not normally required to monitor their customers’ earnings as long as the loans are being repaid. But apart from macro-level statistics showing a decline in average net income from agriculture from even before the crisis, the growing number of protests against falling prices of produce this year testifies to the desperate position of the majority of farmers. It is common sense that to be able to pay back debt, farmers have to earn a profit at least equal to the interest that they have to pay on their investment, which means 9-12% for most farmers. Some agronomists doubt that soil fertility levels in the poorer parts of the country could ever achieve this, even under the best of conditions, and current newspaper reports indicate that farmers are operating at a loss in all major crops: rice, corn, rubber, sugarcane and cassava. With the economy still stagnant after the recession, non-farm income, which used to see farmers through the year of borrowings and repayments, has shrunk by as much as 20% according to some estimates. This removes a rural cashflow ‘cushion’ and exacerbates the debt problem.
In this economy, farmers have virtually no control over market prices, either for inputs or their produce. What they produce, however, has been very much influenced by government policy, which has consistently promoted cash crops, many targeted at the export market. These crops typically require higher levels of input than traditional subsistence crops, increasing the farmers’ need for credit to finance each production cycle. Once enmeshed in the debt net, it is extremely difficult for farmers to extricate themselves. One bad harvest, or collapse in crop prices, can produce a debt crisis.
What is worse that over the long-term, the high-input agriculture promoted by government policies reveals long-term environmental problems. Repeated application of pesticides increases the likelihood of pest resistance, leading to even greater use of pesticides and/or crop losses, i.e. higher costs and/or lower income. Artificial fertilizer (often provided in lieu of cash as part of a BAAC loan) can often reduce long-term soil fertility. Agriculture in many parts of the country is approaching an environmental crisis.
Many farmers therefore have expressed an interest in moving towards low-input agriculture, based on indigenous crops, self-reliant systems of pest control, soil fertility conservation and water conservation, and production primarily for home consumption rather than for the market. The means for achieving this in the major agro-ecological conditions in Thailand are now well known, the result of work by ‘guru’ farmers and NGOs, rather than by government agencies.
However, many farmers find that their existing debt is an insurmountable barrier to conversion to sustainable, low-input, or organic farming systems, which at the beginning cannot guarantee them sufficient cash income to repay their debt. Ironically, by linking credit to misguided extension projects, by giving credit in the form of artificial fertilizers and pesticides, and by promoting agriculture that is almost exclusively oriented to production for the cash economy, the Thai government, through the BAAC, has been the major architect of the current crisis in the rural economy and environment.
The one thing that the government-conceived rural credit system has been without doubt most successful is the total integration of rural households' production and consumption patterns into the market-oriented cash economy. The least the government could do is to repair the damages is to allow those enlightened farmers to start anew a life without debt and provide appropriate support for truly sustainable agricultural systems to take root and grow.
* Chanida Chanyapate Bamford is a senior associate with Focus on the Global South Thailand programme