asian development bank pcr:tha 31058 project completion
TRANSCRIPT
ASIAN DEVELOPMENT BANK PCR:THA 31058
PROJECT COMPLETION REPORT ON THE
RURAL ENTERPRISE CREDIT PROJECT (Loan 1540-THA)
IN
THAILAND December 2001
CURRENCY EQUIVALENTS
Currency Unit – Baht (B)
At Appraisal (July 1997)
At Project Completion Review(September 2001)
B1.00 = $0.0316 $0.0226 $1.00 = B31.56 B44.17
ABBREVIATIONS
ADB – Asian Development Bank BAAC – Bank for Agriculture and Agricultural Cooperatives BDO – business development officer BOT – Bank of Thailand DMP – debt moratorium program MIS – management information system MLR – minimum lending rate MOF – Ministry of Finance p.a. – per annum PCR – Project Completion Report RECP – Rural Enterprise Credit Project SFCP – Small Farmer Credit Project TA – technical assistance
NOTES
(i) The fiscal year (FY) of the Bank for Agriculture and Agricultural Cooperatives ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends.
(ii) In this report, "$" refers to US dollars.
CONTENTS
Page BASIC DATA ii MAP v I. BACKGROUND 1 A. History 1 B. Scope of Operations 1 C. Relationship with the Asian Development Bank and Other Lenders 1 D. Rationale for the Asian Development Bank Loan 2 II. IMPLEMENTATION 2 A. Lending Policies 3 B. Characteristics of Subloans 4 C. Implementation and Internal Operations of Subprojects 4 D. Operational Performance of the Bank for Agriculture and Agricultural Cooperatives 6 E. Financial Performance of the Bank for Agriculture and Agricultural Cooperatives 9 F. Financial Statements and Ratios 10 G. Covenants 11 H. Performance of the Asian Development Bank 11 III. TECHNICAL ASSISTANCE 11 IV. EVALUATION 12 A. Loan Appraisal 12 B. Implementation 13 C. Project Impact 13 V. CONCLUSIONS AND RECOMMENDATIONS 14 A. Conclusions 14 B. Recommendations 14 C. Lessons Learned 15 APPENDIXES 16
BASIC DATA
A. Loan Identification 1. Country Thailand 2. Loan Number 1540-THA 3. Project Title Rural Enterprise Credit Project 4. Borrower Bank for Agriculture and Agricultural Cooperatives 5. Executing Agency Bank for Agriculture and Agricultural Cooperatives 6. Amount of Loan Original: $200,000,000.00 Revised: $93,958,618.56 (net of cancellation) 7. PCR Number PCR: THA 671 B. Loan Data 1. Appraisal - Date Started 10 July 1997 - Date Completed 20 July 1997 2. Loan Negotiations - Date Started 13 August 1997 - Date Completed 15 August 1997 3. Date of Board Approval 18 September 1997 4. Date of Loan Agreement 29 September 1997 5. Date of Loan Effectiveness - In Loan Agreement 28 December 1997 - Actual 26 November 1997 - Number of Extensions None 6. Closing Date - In Loan Agreement 26 November 2002 - Actual 11 October 1999 - Number of Extensions None 7. Terms of Loan - Interest Rate Variable - Maturity 15 years - Grace Period 4 years - Repayment Terms Semi-annual 8. Terms of Relending - Subloan Amount Not to exceed B5,000,000 - Interest Rate for Subloans Not less than an amount adequate for the borrower to recover its costs of funds, intermediation costs, foreign exchange and interest variation risks, and operating costs
9. Disbursements a. Dates - Initial Disbursement 28 November 1997 - Final Disbursement 17 November 1998 - Time Interval 11.8 months - Effective Date 26 November 1997 - Closing Date 11 October 1999 - Time Interval 22.8 months b. Amount Disbursed $93,958,618.56 C. Implementation Data 1. Number of Subloans 65,193 2. Distribution of Subloans by Purpose
Purpose
Number of Subloans
Amount (Baht million)
1. Working Capital 43,160 3,251.2 2. Food Processing/Preservation 538 60.9 3. Milling Machine/Plant 256 31.2 4. Grinding/Crushing Machinery 36 3.3 5. Marketing Transportation 898 116.2 6. Assembly/Grading Machinery 306 33.6 7. Selling Fingerlings/Seedlings 294 27.2 8. Building/Warehouse 2,742 277.5 9. Mixing/Curing Machinery/Plant 46 6.7
10. Woodwork 219 17.7 11. Cottage Industry 154 13.2 12. Weaving/Sewing Machinery 309 24.2 13. Tractor/Land Preparation 2,321 333.8 14. Harvesting/Threshing 727 173.9 15. Services Transportation 795 147.7 16. Others 12,392 1,040.6
Total
65,193
5,558.9
3. Distribution of Subloans by Region
Region
Number of Subloans
Amount (Baht million)
1.
Northern Region
25,434
1,945.5
2. Northeastern Region 17,813 1,287.4 3. Central and Eastern Regions 8,794 770.7 4. Southern and Western Regions 13,152 1,555.3
Total
65,193
5,558.9
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4. Average Size of Subloans
Range Number of Subloans
Aggregate Amount (Baht million)
Over Baht 1,000,000
2
2.7
Over Baht 500,000 123 80.6 Over Baht 400,000 206 94.2 Over Baht 300,000 292 100.7 Over Baht 200,000 1,371 330.9 Over Baht 100,000 17,100 2,290.9 Over Baht 50,000 29,600 2,031.7 Less than Baht 50,000 16,499 627.2
Total
65,193
5,558.9
D. Data on Bank Missions
Name of Mission
Date
No. of
Persons
No. of Person-
days
Specialization of Members
Loan Reconnaissance 1
30-31 Jan 1997
2
4
a, b
Loan Reconnaissance 2
10 Mar-3 Apr 1997
3
70
b, c, d
Loan Fact-Finding
17-28 May 1997
5
41
b, c, e, f, g
Appraisal
10-20 Jul 1997
3
21
b, h, i
Review 1
12-15 May 1998
1
4
j
Special Project Administration
16-18 Sep 1998
2
6
b, k
Review 2
11-19 Mar 1999
1
9
b
Project Completion Review
12-29 Sep 2001
3
39
g, c, k
E. Related Loans Loan No.
Date of Agreement
Amount
664-THA: Agricultural Credit Project
7 May 1984 $50,000,000
787-THA: Brackishwater Shrimp Culture Development Project 30 Sep 1986 $11,110,0001423-THA: Small Farmer Credit Project 14 Mar 1996 $50,000,000 _________________ a-manager, b-senior financial analyst, c-staff consultant/agricultural economist, d-staff consultant/credit specialist, e-
senior programs officer, f-environment specialist, g-project economist, h-senior control officer, i-programs officer, j-senior project analyst, k-assistant project analyst
iv
v
I. BACKGROUND
A. History 1. The Bank for Agriculture and Agricultural Cooperatives (BAAC) was founded as a state-owned bank in Thailand in 1966 to provide financial services to farmers and farmers’ associations. It also supports activities and invests in ventures to develop agricultural knowledge to increase the income and improve the quality of living of farmers and their families. BAAC has emerged as the dominant source for rural financial services with an outreach of 5.12 million clients (91 percent of all farm families) and branches in 76 provinces and 877 districts. B. Scope of Operations 2. The clients, 80 percent of whom are borrowers, are individual farmers (3.55 million) and members of agricultural cooperatives and farmers’ associations (1.57 million). As a licensed specialized bank, BAAC provides a range of deposit products and can borrow in money markets and issue bonds. BAAC finances agricultural production and agriculture-related as well as nonfarm enterprises owned by farmers, i.e., those with more than half their income derived from agriculture. At the end of fiscal year (FY) 2001, BAAC had mobilized B215 billion of rural savings and had B244 billion of loans outstanding. 3. Under Government directives BAAC extends nonfinancial services to raise agricultural productivity, reduce production costs, and expand marketing opportunities. It is also developing electronic databases for main crops. BAAC has helped establish agricultural marketing cooperatives and supports them for bulk purchasing of inputs and produce marketing. Most of the BAAC clients are members. The Thai Agribusiness Company, part-owned by BAAC, provides collective purchasing and marketing power at the national level. BAAC pledges farm produce and provides loans against these pledges. C. Relationship with the Asian Development Bank and Other Lenders 4. External assistance to BAAC has declined in recent years with BAAC’s ability to mobilize local resources. The nature of assistance has also shifted from agricultural financing to portfolio diversification, microfinance, and institutional strengthening. The Agricultural Credit Project, approved in 1983, was the first Asian Development Bank (ADB) loan to BAAC.1 The ADB-funded Small Farmer Credit Project (SFCP)2 and the Rural Enterprise Credit Project (RECP)3 catalyzed enterprise financing. Related technical assistance (TA) developed enterprise financing4 and risk management skills.5 An ongoing ADB-funded TA6 is supporting institutional restructuring. 5. The Japan Bank for International Cooperation and Kreditanstalt für Wiederaufbau supported agricultural financing for small farmers. BAAC received assistance from the United States Agency for International Development for agriculture development and silkworm projects.
1 Loan 664-THA: Agricultural Credit Project, for $50 million, approved on 6 December 1983. BAAC was the
executing agency for Loan 787-THA: Brackishwater Shrimp Culture Development Project, for $11 million, approved on 11 September 1986.
2 Loan 1423-THA: Small Farmer Credit Project, for $50 million, approved on 16 January 1996. 3 Loan 1540-THA: Rural Enterprise Credit Project, for $200 million, approved on 18 September 1997. 4 TA 2524-THA: Institutional Strengthening of BAAC, for $500,000, approved on 16 January 1996. 5 TA 2953-THA: Strengthening Project Loan Appraisal and Risk Management of BAAC, for $600,000, approved on
19 December 1997. 6 TA 3355-THA: Restructuring of Specialized Financial Institutions, for $3 million, approved on 21 December 1999.
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The World Bank and the International Fund for Agricultural Development supported medium- and long-term agricultural lending. The World Bank’s ongoing TA (para. 41) aims to assist BAAC in institutionalizing the expected revisions in prudential norms for specialized financial institutions. The German Agency for Technical Cooperation is piloting microfinance delivery at two branches. 6. At the end of FY2001, project-related external borrowings (Appendix 1) were only 7.1 percent of the total liabilities and equity. BAAC’s operations are predominantly funded by deposits, which constitute 70 percent of the total liabilities and equity, and local borrowings. D. Rationale for the Asian Development Bank Loan 7. The Eighth National Economic and Social Development Plan (1997-2001) recognized that low income in the rural sector arises from low land and labor productivity. The Government, therefore, sought to upgrade agricultural technology, encourage high-value crops and livestock, increase agricultural productivity, and help farmers to diversify into new enterprises. One of the key constraints in promoting rural enterprises was the availability of medium- and long-term loans. Accordingly, the BAAC Act was amended to enable the financing of rural enterprises owned by farm families.7 The SFCP was the first ADB project in support of BAAC’s rural enterprise lending, and its implementation was considered successful.8 BAAC emerged as the most appropriate agency to promote rural enterprises in view of its (i) country-wide network, (ii) significant outreach, (iii) in-depth knowledge of farm families’ income patterns, and (iv) ability to adapt products and services to client demand. These provided the rationale to continue ADB support to BAAC for the expansion of its enterprise loan portfolio. 8. Similar to the SFCP in objective, scope, and design, the RECP was expected to build on the momentum by expanding BAAC’s enterprise loan portfolio toward creating employment in line with the Government’s efforts to improve the living standards of the rural people. A loan of $200 million to BAAC for the RECP was approved by ADB from its ordinary capital resources on 18 September 1997 for onlending to enterprises. Specific objectives of the RECP were to (i) provide term loans to 54,000 rural enterprises, including 20,000 new and 34,000 existing enterprises owned by farm families; and (ii) improve loan processing, supervision, and customer services by BAAC for its rural enterprise clients. An advisory TA (footnote 5) was approved to complement the second objective. The RECP became effective on 26 November 1997 and was due for closing on 26 November 2002, but was closed about three years ahead of schedule on 11 October 1999 after 47 percent utilization. BAAC requested the closure due to weak credit demand, high liquidity, and the higher interest cost of ADB funds.
II. IMPLEMENTATION 9. Financial Crisis. The RECP was approved within a month of the International Monetary Fund Stabilization Program that aimed to reestablish fundamental conditions for growth in view of the regional financial crisis (the crisis) that erupted in 1997. The RECP implementation occurred when the economy, compared with its pre-crisis level (1996), experienced severe contraction, per capita income declined, and nearly two million urban workers lost their jobs. Public expenditure on social and rural development was slashed. The crisis increased rural
7 Rural enterprises include both agriculture-related and nonfarm enterprises. Agriculture-related enterprises
include small-scale processing of agriculture produce and byproducts into semifinished and finished goods, production and supply of agricultural inputs, agricultural marketing, and provision of agricultural services.
8 PCR 29614-THA: Loan 1423-THA: Small Farmer Credit Project. February 2001.
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poverty and widened the income gap. Rural unemployment doubled. Remigration of family members and decline in remittances to villages stretched the resources of farm families. 10. Coping strategies to weather the crisis became the priority. Repayments to banks were affected, the banking industry experienced credit contraction, and the credit demand shifted to short-term loans whereas the RECP emphasized term loans. Cognizant that financial sector weaknesses aggravated the crisis, BAAC preferred to limit its term loan exposure and obtained ADB’s consent to provide short-term and working capital loans under the RECP. In view of the rising rural poverty across the country, the initial project area of the 44 poorest provinces was extended to cover all provinces except for Bangkok and five surrounding provinces. The crisis and its response affected lending policies, subloan characteristics, and repayments. A. Lending Policies 11. BAAC provides short-, medium-, and long-term loans. Short-term loans have maturities up to 1 year and are provided mainly for agricultural production, farm produce pledges, and cash credit facilities. Medium-term loans are those with maturities between 1 and 5 years, and are primarily for purchasing machinery and livestock. Long-term loans have maturities up to 20 years, and are generally for tree crops, enterprises, and to refinance old debts. No minimum loan amount requirement applies. BAAC can lend secured loans up to B15 million to individuals. Loans above this limit must be approved by BAAC’s board. BAAC provides loans to individual farmers (90 percent of the portfolio) and wholesale loans to agricultural cooperatives and farmers’ groups. Appraisal of individual loans considers collateral, cash flow, rate of return, and repayment record. Wholesale loans are based on the financial and institutional status of the borrowing entity. Full collateral is required for individual loans, but loans with joint liability are also available to farmers. Delinquency is managed through individual as well as group-based monitoring. 12. Loans are further classified into normal lending, special project lending, and government- sponsored projects. Normal loans originate from internal procedures. Special project loans are either BAAC’s own initiative, such as to develop a new product type, or in pursuance of government policies. For loans under government-sponsored projects (about 12 percent of the portfolio at the end of FY2001), BAAC receives partial or full refinance facility and a service fee. Most of these loans are meant to rehabilitate lost production. Specific borrower selection criteria and lending procedures apply for special projects and government-sponsored projects. 13. The lending interest rate is linked to client classification based on repayment record. Since February 2001, the prime (AAA) clients pay the minimum lending rate (MLR) of 8 percent per annum (p.a.). For other categories the rates are: MLR+1 percent p.a. for very good (AA); MLR+2 for good (A); MLR+3 for the general category i.e., those with overdue or new clients; and MLR+3+3 for defaults without reasonable cause. Defaults due to natural calamities do not affect the classification. For agricultural cooperatives the MLR is 6 percent p.a. BAAC lowered the MLR twice during the RECP to maintain parity with the interest rate in the banking industry. For subloans less than B60,000 a 1 percent service charge was applied under the RECP. 14. Debt Relief. The Government announced a three-year debt moratorium program (DMP), effective 1 April 2001, ostensibly to ameliorate rural indebtedness due to the crisis. The DMP covers nearly half the BAAC clients and one third of the loan portfolio. All farmers with less than B100,000 in loans outstanding are eligible for (i) Option 1: suspension of principal and interest repayment for three years, or (ii) Option 2: reduction of 3 percentage points in the lending interest rate for three years. Out of the 2.37 million eligible farmers, 2.25 million (95 percent) joined the DMP, and the rest will join soon. Farmers selecting Option 1 are ineligible for BAAC
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loans for three years. Those under Option 2 are eligible for new loans and credit upgrades that will further reduce their interest costs. Nearly one sixth can win free insurance cover up to B100,000. Due to these incentives, 49 percent of eligible farmers chose Option 2. An additional one percentage point interest up to B50,000 of savings has been offered under both the options. The Government will compensate BAAC for the loss of interest income due to the DMP. B. Characteristics of Subloans 15. Number and Size. It was expected that 54,000 subloans would be disbursed with an average of B257,140 per subloan. At the close of the RECP, B5.56 billion had been disbursed to 65,193 subloans with an average of B85,270 per subloan. Out of this, 17,777 subloans with an outstanding amount of B1.67 billion, or 30 percent of the disbursements, are current (Appendix 2: Tables A2.1 and A2.2). The number of subloans was 21 percent higher while the average amount was one third of the appraisal estimate and the average subloan size under the SFCP.9 The reason for the smaller than expected average subloan was the preference for short-term and smaller loans during the crisis. Short-term subloans constituted 66 percent of all subloans. As specified in the appraisal report, BAAC and subborrowers contributed 55 percent of the subproject cost, and nearly 61 percent, or 39,767, of subloans were to BAAC clients with existing enterprises and the rest to clients with new enterprises. 16. Geographical and Sector Distribution. While the RECP had no region–based disbursement allocation, about 65 percent of the subloans were in the relatively poorer North and Northeast regions (Appendix 2),10 as the initial project area covered the 44 poorest provinces. Subloans have been classified into 15 enterprise types and grouped into four broad categories: small manufacturing (29,140), services (15,780), marketing (13,952), and food processing (6,321). Small manufacturing subloans include furniture, weaving, and sewing. Most of the subloans classified as warehousing, building, assembly, grading, and others are related to the marketing of processed farm produce. Services subloans include tractor, transport, harvesting, and threshing. 17. Income Distribution. The average annual net income of the subborrowers was B140,000 p.a., out of which B79,000 or 56 percent was from farming.11 This is considerably lower than B250,000 for the SFCP subborrowers. The average land holding size of the subborrowers is about 3.3 hectares which is below the national average of 4.0 hectares. The average age of subborrowers was 41 years. The lower income and land holding of the subborrowers and the smaller subloan size compared to those under the SFCP indicates outreach aimed more towards smaller farmers under the RECP. C. Implementation and Internal Operations of Subprojects 18. The Mission visited 50 subprojects, reviewed subproject files covered by previous BAAC studies (footnote 11), and discussed subproject implementation at BAAC branches, provincial
9 Comparison with the SFCP and references to the SFCP Project Completion Report (footnote 8) have been
made, as the RECP is essentially a follow-on project. Aspects that have not changed since the SFCP Project Completion Review Mission, have, in some instances, been maintained to present a self-contained document.
10 Regional poverty incidence Northeastern (37.5 percent), Northern (32.2 percent), Southern (21.5 percent), Central Plains (16 percent), and Bangkok Metropolitan Region (3.4 percent).
11 (i) BAAC. 2000. Project Completion Report of ADB Loan 1540-THA: Rural Enterprise Credit Project. Bangkok. Sample size: 215 subprojects; (ii) Thailand Development Research Institute Foundation. 1999. An Evaluation of BAAC Rural Enterprise Project. Bangkok. Sample size: 94; and (iii) BAAC. March 1999. Annual Evaluation Report of ADB Loan 1540-THA: Rural Enterprise Credit Project. Bangkok. Sample size: 94.
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offices, and the head office. The effect of the crisis varied with subproject type. While subprojects relating to construction (e.g., brick making) were adversely affected, small food processing enterprises were relatively less affected. Those procuring raw materials from the immediate vicinity and selling in niche markets fared well. Most of the subprojects, though, operated below their rated capacity due to depressed demand. Nevertheless, the weighted financial internal rate of return and economic internal rate of return of subprojects12 were 17 and 21 percent, respectively; and for successful subprojects, 26 percent and 33 percent. Representative subproject profiles are in Appendix 3. 19. Subprojects are essentially family-operated units with semiskilled and unskilled labor inputs. During the crisis the ability to adjust to price, cost, and demand was the key success variable rather than the quality of the machinery or technical competence of the owner manager. Experience and familiarity with the business was, therefore, crucial. Subprojects in general did not experience cost overruns. Delays due to slow completion of legal formalities, civil works, and procurement and installation of machinery were not observed. 20. Successful subprojects were also characterized by (i) strong complementarity with farm production; (ii) business process and technology consistent with subborrower capacity; (iii) subborrower motivation and commitment; (iv) little competition in the area for the produce or services; (v) quality consciousness, especially among food processors; (vi) lower debt service burden due to large equity contribution; and (vii) other income sources to meet transient cash flow problems. Irrespective of the subloan status, subborrowers generally had no plans for increasing output levels in the immediate term. Therefore, short-term subloans to maintain output level to meet debt service and fixed costs were the stated priority for the majority. Unlike during the SFCP, BAAC was more conscious of the working capital needs of the subprojects. 21. The main reasons for subproject failures were weak appraisal and indifference of the subborrowers. BAAC staff were unable to analyze subproject risks, ignored multiple borrowings that compounded the risk, and relied only on collateral coverage. Unsuccessful subprojects that targeted local markets found smaller than expected markets, and those that aimed to sell outside the provinces faced unfavorable product prices. Indifference of the subborrowers stemmed from the expectation of the DMP and the leniency of BAAC in enforcing credit discipline. Other factors include (i) overinvestment in plant and machinery based on unrealistic projections; (ii) inability to position subprojects for a low demand scenario; (iii) little, if any, experience of subproject activity; and (iv) unforeseen and unavoidable expenses (e.g., illness) that reduced family labor inputs. Despite the problems, most of these subprojects are potentially viable and can be restructured with greater subborrower commitment. Subprojects run a low risk of failure on technical or managerial grounds. 22. About 80 percent of the subprojects are considered successful. On average, the annual income of the subborrowers increased by 45 percent (compared with a without-subproject scenario) instead of the appraisal report estimate of 50 percent, and helped diversify sources of family income.13 Field observations confirm that most subborrowers, being long-standing clients, received repeat loans from BAAC’s own sources. The subprojects created about 75,000 jobs, at an average investment of B110,000 per job, that provide work for the unemployed urban workers who remigrated to rural areas during the crisis and for the partly employed family
12 Based on the analysis during the Project Completion Review Mission and previous studies (footnote 11). 13 The positive impact of the RECP on employment and changes in occupation of the clients were also noted by
IES 2001-04: Impact Evaluation Study on ADB’s Rural Credit Assistance in Bangladesh, People’s Republic of China, Indonesia, Nepal, Philippines , Sri Lanka and Thailand. 2001.
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members. The preponderance of short-term working capital subloans to ongoing enterprises led to fewer than the appraisal report estimate of 127,000 jobs being created. 23. Most of the subborrowers live in extended families where the working age members contribute in the household farm and nonfarm activities. The intensity of participation of the family members, particularly women, positively correlates with the quality of management of the subprojects in general. Women were more aware than their spouses of subproject cash flows and viability. As in the case of the SFCP, field visits indicate that women managed 40 percent of the subprojects and actively participated in another 40 percent. Collateral requirements favor loans to be taken in the name of the head of the family, therefore, only 27 percent of the subborrowers were women, compared to the appraisal report expectation of 33 percent. As farm families have more than one source of income, the women often took charge of the ongoing farm or nonfarm activity to enable other family members to take advantage of RECP subloans, and also helped in the management of the new enterprises. For relatively poorer farm families in the North and Northeast regions, this served as a significant risk mitigating factor. Accordingly, some BAAC branches consider the skills and potential contributions of family members while appraising subprojects. D. Operational Performance of the Bank for Agriculture and Agricultural
Cooperatives
1. Organization, Management, and Staffing 24. The Government, through the Ministry of Finance (MOF), owns 99.9 percent of the common shares. BAAC is governed by the BAAC Act. The Board of Directors, headed by the finance minister, consists of 15 members. An executive committee headed by the president and a team of five senior executive vice presidents are responsible for day-to-day management. The senior-management team comprises 14 senior vice presidents who head 14 departments and offices (Appendix 4). Each department and office consists of functional divisions headed by a director. Functional responsibility is delegated to provincial offices, and 90 percent of the 12,754 staff are placed in 1,474 branches and field offices. BAAC is audited by the auditor general and supervised by the Bank of Thailand (BOT). BOT prudential norms though are not yet applicable. 25. BAAC has a five-year rolling plan cycle and annual plans linked to annual budgets. The objectives of the corporate plan include demand-based services; good governance; sustainability of BAAC, its clients, and the environment; and strengthening farmers’ institutions. While well intentioned, these objectives transcend normal banking functions. Institutional stress is apparent, as BAAC strives to balance the competing considerations with little control on product pricing. The systems and procedures that once served BAAC well14 now struggle to meet multiple challenges due to adverse economic conditions and changing customer demand. 26. BAAC’s institutional strengthening efforts are incremental and inadequate due to the insufficiency of internal resources. The key challenges are in the area of management autonomy, credit risk management, asset and liability management, and segregation of financial and nonfinancial services. Strengthening of the management information system (MIS) is the critical underpinning for institutional strengthening. BAAC has an extensive MIS with four systems that deal with different aspects of financial and portfolio management. However, these systems largely stand alone in the absence of a standardized platform and centralized data
14 The World Bank, Washington. 1997. Rural Finance: Issues, Design, and Concepts. September 1997.
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management core. This diminishes real time and relational database capabilities and restricts analytical reporting. Client information at branches remains underutilized. 27. The Government’s influence on BAAC’s operations is inevitable. While not a negative factor in itself, lately the distinction between government ownership and management has weakened. Government directives largely ignore BAAC’s capacity to implement them without undermining its sustainability and image as a bank. Having set the mandate, the owners need to allow BAAC autonomy to set its strategy, achieve its objectives, and present the true costs.
2. Personnel Administration
28. The Human Resources Management Department and the Human Resources Development Department discharge personnel-related functions. BAAC has simplified job descriptions for all grades and a transparent performance appraisal system to reward staff. BAAC staff are committed and diligent, though their salaries (based on Government pay scales) are lower than in the banking industry. The human resource development plan aims to meet the skill gaps in financial management, diversified banking services, and information technology.
3. Lending Operations a. Processing of Subloans 29. Business development officers (BDOs), formerly credit officers, appraised subloans. Disbursements were made at the branches without any delays. The main criteria for granting subloans were (i) good repayment record, (ii) collateral coverage, and (iii) adequate net income from the subproject to meet repayment obligations. Cash flow analysis for short-term subloans and internal rate of return for term subloans were used in appraisal. Rigorous analysis was observed for term loans involving larger amounts. While BDOs are familiar with the financial aspects of the appraisal, they are unable to assess potential markets for products and services in the absence of any database or linkages with business advisory services. 30. The subloan appraisal was better than during the SFCP. This is because of the wider dissemination of appraisal skills provided under ADB TAs (footnotes 4 and 5) and most of the subborrowers being long-standing clients. BAAC branches were conscious about the working capital needs of the subprojects and made provisions for such loans from their own resources till short-term subloans were permitted under the RECP. However, field visits indicate that branches had difficulty in assessing the impact of subloans on revenue flows of existing enterprises. Branches and BDOs with weaker appraisal skills relied on collateral and past repayment record. This, however, did cause problems in some cases (para. 21). Consolidation and analysis of data on subproject implementation can significantly enhance appraisal quality.
b. Maturity of Subloans
31. The appraisal report allowed the subloan maturity to be consistent with subproject implementation and debt service capacity. The maturity of short-term subloans, 66 percent of all subloans, were up to 1 year, and those of the term subloans vary from 3 to 12 years. More than 90 percent of the term subloans mature between 5 and 8 years. Term subloans do not have any grace period, and the first installment is due at the end of the first year. By the end of FY2001, 47,416 subloans, constituting 73 percent of all subloans and 70 percent of the amount disbursed, had been repaid. Of the remaining 17,777 subloans, 9,598, or 54 percent, are being
8
repaid on schedule (Table A2.3, Appendix 2). However, 8,179 subloans (46 percent) had arrears, most of which represent delayed repayment in anticipation of the DMP.
c. Administration of Subloans
32. Subloans were classified as agriculture-related loans and were appraised, approved, disbursed, and managed at branches. Disbursements were usually made within two weeks of filing the loan application. All the RECP subloans were disbursed over a 16-month period or at a rate of 4,074 per month. Monitoring and administration of subloans were mainstreamed through the respective line departments (Appendix 4). The MIS recorded the subloans with an identification tag that is deactivated after full repayment. Branches were informed on the procurement procedures to be adopted by the subborrowers. Procurements were made by subborrowers either from registered contractors or BAAC-approved outlets. The Fund Management Division of the Financial Management Department ensured that TA inputs were administered to coincide with the disbursements, conduct impact assessment, and inform ADB of implementation issues.
d. Environmental Aspects
33. As with the SFCP, support for small-scale enterprises was consistent with local resource endowment. Adverse impact on the physical environment was negligible. The Rural and Environmental Loan Division reporting to a senior vice president mainstreams the environmental concerns. Lists of ineligible enterprises are continually updated and the review of compliance of environmental guidelines is an integral part of the annual audit. The BDOs are environmentally conscious. The Mission noted advice to a subborrower to regularly de-slug the waste ponds to stop the wastewater from overflowing into the public waterway. Subborrowers, though, consider compliance with environmental standards as a burden. A revised environmental guideline developed with ADB assistance were awaiting BAAC approval at the time of the Project Completion Review Mission.
e. Project Monitoring 34. Branches maintain computerized subborrower and subproject data. BDOs visit subprojects and update subloan files. Problem subloans are also analyzed at branches in the presence of subborrowers to amicably address issues. BAAC was advised to adequately classify subloans to avoid the difficulties encountered in monitoring the SFCP subloans. The subloans were accordingly classified into four broad categories and 15 enterprise types. As the current MIS operating platform cannot provide real time relational portfolio information, the corporate office and the provincial offices could assess portfolio quality only after a time-lag. Dissemination of such analysis to branches took additional time, as only selected branches are online. BAAC hopes that upgrading the MIS will enhance monitoring and risk management. RECP impact assessment was also constrained by limited sample size and inadequate analysis. 35. The data fields in subloan files do not adequately capture pre-subloan production, sale, and profitability. In addition, many subborrowers do not maintain financial records despite having the ability to do so. This is the key constraint in subloan monitoring. The workload of BDOs, who are expected to monitor 450-600 clients each, also affected subloan monitoring, which requires more frequent interactions than agricultural production loans. However, the workload factor has been offset, to an extent, because of subloans to ongoing enterprises and improvements in appraisal quality.
9
4. Subloan Repayment 36. By March 2001, 73 percent of the subborrowers had fully repaid their loans. The repayment rate for the ongoing subloans at 72 percent of the amount due as of March 2001 is marginally higher than the repayment rate for all BAAC enterprise loans at 70 percent, but lower than the overall repayment rate (farm and nonfarm) at 78 percent (Appendix 5). The delayed repayments by ongoing subloans (paras. 21 and 31) was primarily to take advantage of the impending DMP. Subloans are adequately covered by collateral. E. Financial Performance of the Bank for Agriculture and Agricultural Cooperatives
1. Size and Quality of Loan Portfolio 37. At 31 March 2001 the net loan portfolio of B244 billion (Table A6.1, Appendix 6) was about 3 percent of the aggregate bank credit and half of the rural credit. The portfolio grew at an average annual rate of 9 percent over the last five years. The Northeast region accounts for 31 percent of the portfolio, followed by North (28), South and West (25) and the Central and East (16). Of the portfolio, short-term loans account for 40 percent, medium-term loans 23 percent, and long-term loans 37 percent. The average outstanding loan size is about B60,000. The disbursements during FY2001 at B154 billion was 5.5 percent more than FY2000. 38. BAAC’s pre-crisis repayment record has been good at 87-90 percent of the demand. The arrears have been small and BAAC has been successful in gradually collecting the arrears, leading to very small eventual losses. However, the crisis led to a nearly 10 percent point reduction in the repayment rate. The repayment rate for FY2001 at 78 percent is a marginal increase over FY2000 at 75 percent. The aggregate arrears of B34.4 billion at 31 March 2001, a 1.2 percent decline over FY2000, is 14 percent of the outstanding loans. Of the total arrears, 35 percent was due for up to 1 year, 60 percent for more than 1 year but less than 5 years, and 5 percent for more than 5 years (Appendix 5). Cumulative loan loss provision at B28.8 billion, appropriated from earnings as well as received from MOF, is 84 percent of the arrears. 39. Measures to improve repayment performance initiated prior to the DMP include restructuring of 86,850 loans with genuine problems and waiving of penalty interest on prompt repayment of arrears. Delayed repayments due to the DMP was the single most important factor for the less than satisfactory improvement in repayment rate; other causes include (i) unfavorable economic conditions, (ii) an increase in rural household expenditure due to the return of unemployed urban labor, (iii) volatile commodity prices, and (iv) weak appraisal and monitoring at some branches. While no firm figures are available, it is estimated that 10,000 RECP subborrowers with an aggregate outstanding of B500 million have also joined the DMP. 40. BAAC will receive B6 billion p.a. from MOF to compensate for the loss of interest income due to the DMP. While this covers the immediate financial impact, the burden will be unbearable if the repayment of the principal amount is delayed after the DMP. Expectation of periodic debt relief is most likely to influence repayment behavior, as the DMP has erased the distinction between borrowers with good record (the majority) from willful defaulters and those that have benefited from rescheduling. Intensive monitoring of DMP loans, need-based rehabilitation support, and savings mobilization may mitigate some of the risks for BAAC.
10
2. Provisioning for Bad Debts 41. The income recognition and provisioning for bad debts by BAAC remain at variance with the BOT criteria. BAAC provides 10 percent p.a. of the arrears and accrual of interest is recognized up to 360 days of arrears, while the BOT requires commercial banks to stop interest accrual at 90 days of arrears and provision: 20 percent for substandard; 50 percent for loan losses; and 100 percent for write-offs. Notwithstanding BAAC’s small eventual loan losses, the need for BAAC to adopt prudential norms that reflect the true portfolio quality is gaining acceptance. MOF and BOT are reviewing the World Bank TA report on Strengthening Supervision of Specialized Financial Institutions (para. 5) that recommends (i) full on-site inspection by 31 December 2002 based on upgraded prudential standards, (ii) training of BAAC and other institutions to facilitate the adoption of the standards, and (iii) the eventual adoption by September 2003. Concurrently, portfolio and financial audits of BAAC based on BOT prudential standards for commercial banks and international accounting standards are scheduled under the ongoing ADB TA (footnote 6). Provisioning guidelines for DMP loans are awaited. F. Financial Statements and Ratios15 42. BAAC’s total assets increased from B207 billion in FY1997 to B309 billion in FY2001 (Table A6.1, Appendix 6). During the same period equity and reserves increased from B12 billion to B22 billion. The deposits at B215 billion constitute 70 percent of the total liabilities and equities, followed by borrowings at 17 percent. Borrowings have successively declined with a corresponding rise in lower cost deposits. 43. While the profits of BAAC nearly doubled in FY2001 (B536 million) compared with FY2000 (Table A6.2, Appendix 6), its profitability is very thin with return on equity of 2.39 percent and return on assets of 0.17 percent. BAAC operates on a very narrow spread (Appendix 7) due to the downward revision of the MLR and recurring foreign exchange rate losses. The MLR affected profitability by not differentiating between loan terms even though the costs of raising long-term resources are higher. The capital adequacy ratio at 31 March 2001, based on BAAC’s income recognition and provisioning norms, was 8.45 percent. 44. Nearly 70 percent of the B39 billion of foreign exchange borrowings are unhedged, two thirds of which are in US dollars and the rest in Japanese yen. Large unrealized foreign exchange losses have been incurred since the floating of baht in 1997.16 BAAC has alternated between realizing the losses in the year they are incurred in line with international accounting standards or understating the year’s losses by amortizing them. During FY2001, the six-month floating interest on the ADB loan was 6.7 percent and the foreign exchange loss charged to the income account was B1.9 billion. Unless MOF were to pay out the foreign exchange exposure or refinance them into baht, the best BAAC could do is to strengthen foreign exchange monitoring capacity. No foreign exchange borrowings have been made since FY1998. 45. On the one hand BAAC benefits from government guarantees and relaxed reserve, taxation, and prudential norms. On the other hand, it is expected to provide nonfinancial services, such as for marketing and farmer training, and is required to provide loans at interest rates that equate to the MLR in the banking industry, notwithstanding the higher transaction
15 Based on the audited financial statements of BAAC. Application of internationally accepted prudential norms and
accounting conventions could alter the financial results. 16 For the RECP, a swap arrangement at the market rate was applied by BOT. However, due to increased risk
perception in a floating rate regime, BOT stopped providing such hedging services.
11
costs and covariant risks in rural finance. During FY2002–FY2004, BAAC disbursements are expected to be one third less than in FY2001 due to the ineligibility of clients under the DMP (para. 14) for new BAAC loans. The resulting significant income decline during the period will only be partially offset by the cost control measures such as reduction in the rate of salary increase, merger of provincial offices, and recruitment only for replacement vacancies. G. Covenants 46. BAAC did not comply, or did not fully comply, with covenants relating to repayment rate, interest rate on loans, benefit monitoring and evaluation, revision of loan loss provisioning norms, and design and implementation of a financial MIS (Appendix 8). The deliberate withholding of amounts due in anticipation of the DMP resulted in a lower than covenanted repayment rate of 80 percent. BAAC continued to apply an average cost-based pricing structure that did not fully factor in the foreign exchange risks of the ADB loan. As a result, depending upon the client classification (para.13), the RECP subborrowers paid lending interest rates similar to other BAAC clients. Subloan monitoring was affected by the MIS inflexibility, insufficient data analysis, and inadequate small sample size as well as by the analytical rigor of the impact assessment study. Application of stricter prudential standards for BAAC, including for income recognition and loan loss provisioning, is being considered by MOF and BOT under the World Bank TA (paras. 5 and 41). The proposed plan for adopting the revised standards, however, exceeds the RECP duration. The covenant relating to the design and implementation of a financial MIS has been partially complied with. Although the design has been completed and installation commenced in 2001, bankwide implementation is not yet complete, in part due to resource constraints. Time available for compliance was considerably reduced by the loan cancellation (para. 53). H. Performance of the Asian Development Bank 47. No inception mission was fielded because the RECP was similar to SFCP in design (paras. 7 and 8) and BAAC continued as the borrower and the executing agency. ADB undertook three review missions in 1998 and 1999, including one special loan administration mission, during which the impact of the crisis on the RECP, including the slow pace of disbursements, was reviewed. The recommendations included expansion of BAAC’s lending to viable entrepreneurs in other provinces and the financing of working capital subloans (para. 10). ADB maintained dialogue with BAAC and concurred with the loan cancellation request in view of factors external to the RECP, primarily the lower cost of local resources compared with the ADB loan, and the recurring foreign exchange rate losses (para. 53). BAAC’s liquidity was considered adequate for the much lower than expected enterprise financing needs. ADB did not accede to BAAC’s request for a waiver of commitment charges. 48. Missions focused on issues encountered during SFCP implementation such as those relating to monitoring and appraisal. Missions met a cross-section of staff and visited selected subprojects to obtain first-hand assessments of subborrowers’ implementation experience. The importance of environmental awareness and systematic subloan monitoring were continually emphasized. Nevertheless, benefit monitoring evaluation remained weak. ADB’s performance in administering the RECP is considered satisfactory.
III. TECHNICAL ASSISTANCE 49. A stand-alone TA (footnote 5) was provided to enhance subloan appraisal and supervision, risk management capacity, training capacity, and provision of diversified banking
12
services. The TA enabled BAAC to (i) test and adopt a medium-term development proposal for client advisory services and environment due diligence procedures, (ii) enhance risk management procedures, (iii) implement skills-focused participatory training techniques as well as a long-term business plan for a BAAC training center, and (iv) develop a long-term business development strategy. The TA-financed short courses, workshops, and seminars were attended by 1,071 people from the top management, senior staff, and branches (Appendix 9). Although the TA led to better appreciation of international best practices in risk management and appraisal, the potential impact can only be fully realized by upgrading the MIS. The full benefits of the TA could not accrue to BAAC due to the earlier than envisaged loan closing. 50. BAAC also built on the foundation of the TA (footnote 4) piggy-backed to SFCP which supported training courses on investment analysis, environmental awareness, and foreign exchange risk management. Dissemination of appraisal skills continued, in some cases in conjunction with the RECP. However, skills imparted were only partially put in practice. For instance, the repayment schedule and cash flows were often inadequately coordinated.
IV. EVALUATION A. Loan Appraisal 51. Distribution of Loans. The number of subloans were more than the appraisal estimate, even though the RECP was canceled mid-way. This deviation is attributed to the large number of small short-term subloans due to the reluctance of the farmers to make capital investments during the crisis. Learning from the restructuring of banks and finance companies affected by the crisis, BAAC restrained portfolio expansion particularly for term loans to new enterprises and preferred relatively less risky short-term subloans. 52. Quality of Appraisal. The appraisal report provided a strong justification to expand and diversify farm family income through rural enterprises and to enhance BAAC’s enterprise financing capacity. The financial and institutional analysis of BAAC undertaken during the SFCP was adequately updated. SFCP implementation was critically assessed and monitoring and appraisal of subloans were noted for specific attention during the RECP. Emphasis on capacity building for enterprise financing was reiterated. To strengthen BAAC’s viability, the appraisal report appropriately recommended higher loan loss provisioning, a reserve fund to meet part of the foreign exchange risk, and 1 percent service charge for subloans. BAAC was also advised to hedge foreign exchange exposure. The appraisal report continued with the covenants that were not complied with, or only partially complied with, during the SFCP such as those relating to environment, lending interest rates, and repayment rate. The following are areas in which the appraisal report could have been better:
(i) It could have strengthened the demand side through support for training of farmers to equip them as owners and managers of the enterprises.
(ii) While the inflexibility of the MIS vis-à-vis subloan monitoring and evaluation were recognized, no support was built-in to adequately address the issue.
(iii) As with the SFCP, additional measures required to facilitate and enhance the
access of women to financial services were not explored.
(iv) Likely risk factors due to the crisis could have been noted, particularly when a stabilization program was concurrently being negotiated by the Government.
13
B. Implementation 53. Conceptualized before the crisis, the RECP did not reflect crisis factors. Its implementation, though, had to contend with severe contraction of the economy. The per capita income in 2000 was nearly 8 percent lower than pre-crisis level. Rural poverty increased from 14.9 percent in 1996 to 21.5 percent in 1999, or 3 million more poor. The continued low real output of the agriculture sector also affected farm families. The cumulative and continuing effects of the crisis eventually led to the cancellation of RECP for the following main reasons:
(i) Credit Contraction. Reflecting weak demand, the net domestic credit contracted for three consecutive years beginning in 1997. While BAAC’s loan portfolio did not contract, its enterprise disbursements declined on average by 17 percent p.a. during 1997-2000, triggered by reduction in enterprise-related machinery and transportation subloans. BAAC’s enterprise financing in FY2001 was half that of FY2000.
(ii) High Liquidity. Client confidence and competitive deposit products ensured that BAAC’s monthly net deposits remained positive. This, along with loan repayments enabled BAAC to meet disbursements, reserve, and liquidity requirements. BAAC’s borrowings have successively declined since 1998.
(iii) Interest Rates. Interest rates have declined compared with pre-crisis levels. The time deposit rate of 3-6 months came down from 9.75 percent in December 1996 to 3.75 percent in December 1999. During the period, BAAC’s average cost of funds fell from 7.3 percent to 5.5 percent. Over the same period, the MLR declined from 13.0 to 9.0 percent. In March 2001 the cost of funds and MLR were 4.2 percent and 8 percent, respectively. Compared to this, the cost of the ADB loan was 9 percent, i.e., 6.3–6.9 percent in US dollar terms plus a 2 percent reserve for foreign exchange loss. ADB commitment charges added to the cost.
54. In addition, the subloan information available at the branches was insufficiently collated for monitoring and analysis. Inadequate maintenance of operational data by subborrowers affected subloan follow-up. Some subborrowers did not exhibit the commitment and capacity to implement the subprojects, among others, due to multiple business interests. The success rate of subprojects was affected by weak linkages with business advisory services. C. Project Impact 55. The impact of the RECP has been positive in spite of being implemented during the crisis, and despite loan cancellation and regressive credit policies. Like the SFCP, the RECP (i) encouraged the establishment of new enterprises and strengthened ongoing enterprises in the relatively less developed regions, (ii) raised subborrowers’ income by an average of 45 percent, (iii) created about 75,000 new jobs, and (iv) enhanced the rural enterprise financing skills of BAAC. The institutionalization of enterprise financing skills will aid the portfolio diversification catalyzed by the RECP. The enterprise portfolio of BAAC was 4.5 percent of the outstanding loan at the end of FY2001 compared with 1.2 percent five years earlier. The RECP provided opportunities to women to own about one fourth of the subprojects and play an active role in the majority. The increased income has benefited the local economy. The RECP also promoted the diversification of farm income sources, introduced farmers to business culture, and upgraded technology and skills in rural areas. Full loan utilization could have enhanced the impact with greater number of subprojects, more employment, and wider spread of enterprise culture.
14
V. CONCLUSIONS AND RECOMMENDATIONS A. Conclusions 56. The RECP outputs were proportionate to loan utilization. The cancellation of the ADB loan was due to factors external to BAAC control. The RECP promoted enterprises, created jobs, enhanced income, and helped reduce regional disparities. BAAC exhibited maturity in responding to shifts in demand for enterprise financing, which augurs well for the long-term development of the enterprise portfolio, reduction of portfolio concentration risk, and access of small farmers to enterprise financing. Despite an overall weighted average score of 1.8 out of 3, the RECP is rated as partly successful (Appendix 10) due to concerns for BAAC’s sustainability.
(i) Relevance. The RECP is consistent with the Government’s aim to diversify the rural economy and achieve equitable development through decentralization and regional dispersal of economic activity. The RECP’s rural focus, private sector support, and gender and environmental concerns are consistent with ADB’s thematic and country priorities. (Highly Relevant, 3)
(ii) Efficacy. RECP financed more than the expected number of subprojects and
enhanced BAAC’s capacity for enterprise financing. These outcomes contributed to dispersal of economic activity and increased farm family income. Employment generation, though sizeable, was below appraisal estimates. (Efficacious, 2)
(iii) Efficiency. The subprojects achieved a weighted economic internal rate of return
of 21 percent. BAAC effectively responded and coordinated with ADB to deal with the effects of the crisis on the RECP. (Efficient, 2)
(iv) Sustainability. BAAC’s sustainability is unlikely in the medium term in view of
the significantly lower disbursements (para. 45) over the next three years and the high probability of loan accounts under the DMP resurfacing as bad debts. (Unlikely, 0)
(v) Institutional Development and Other Impacts. The RECP helped build
enterprise loan appraisal skills. Subprojects created economic opportunities for women and had no adverse impact on the environment. By creating employment opportunities, the RECP assisted the Government’s poverty reduction efforts. However, loan cancellation limited the potential positive impacts. (Moderate, 2)
B. Recommendations 57. BAAC is operating in an economy that has yet to fully recover from the crisis. Changing customer needs, inadequate autonomy, and moral hazard driven by political expediency, all external to BAAC, have set up a challenging environment for the medium term. The following recommendations, in addition to those described in the SFCP Project Completion Report, are aimed at improving BAAC’s sustainability:
(i) The findings of the diagnostic review and the portfolio and financial audits under the ongoing ADB TA require serious consideration to develop an institutional restructuring plan. MOF should provide resources to implement the plan.
15
(ii) Good governance can be strengthened by separating ownership from management, appointing independent directors, adopting internationally acceptable accounting standards, and ensuring audit by reputed agencies.
(iii) Upgrading and adapting prudential norms applied to BAAC will further strengthen
good governance. MOF and BOT, in consultation with BAAC, should expedite the finalization of these norms. BAAC may have to be re-capitalized to comply with the upgraded standards.
(iv) The single most important factor for BAAC’s sustainability is the repayment of the
principal amount after the DMP, for which BAAC should:
(a) continue efforts to maintain contact with clients, support their rehabilitation, and encourage them to save regularly;
(b) continually update loan files to facilitate return to normal bank–client
relationship after the DMP;
(c) consider loan accounts covered by the DMP as doubtful debts and make provisions to the extent possible; and
(d) expedite MIS upgrading to enhance credit risk management.
(v) BAAC should be enabled to lend to nonfarmers for enterprises, including
microenterprises. C. Lessons Learned 58. The following lessons, in addition to those in the SFCP Project Completion Report, can be applied to future projects:
(i) Development finance institutions should be required to hedge foreign exchange
positions, the expertise for which should be provided along with ADB loan. ADB’s LIBOR-based lending modality facilitates hedging foreign exchange risks.
(ii) The anchor for relending and on-lending interest rates should be a variable local
benchmark that is transparently determined.
(iii) Along with credit lines, guarantees (either full or partial) and other instruments consistent with the stage of the development of the financial sector in the particular country should be considered.
(iv) Assessment of the factors that could affect availability of internal resources and
demand for credit should be undertaken during loan appraisal.
(v) Gender outreach goals facilitate the participation of women in economic activities. Supportive project inputs must accompany gender outreach goals.
(vi) Policy reforms, in addition to being covenanted, should also be linked and
coordinated with the reforms being promoted by other lending agencies.
16
APPENDIXES
Number
Title
Page
Cited on (page, para.)
1
External Sources of Financing
17
2, 6
2
Subloan Characteristics
18
4,15
3 Subproject Profiles 20 5, 18 4
Organization Chart
30
6, 24
5 Repayment Rate and Age-wise Classification of
Arrears 31 9, 36
6
Financial Statements
32
9, 37
7 Revenues, Expenses, and Net Profit as a
Percentage of Average Loans Outstanding 34 10, 43
8 Compliance with Loan Covenants 35 11, 46 9
Training Program
42
12, 49
10
Project Rating
43
14, 56
EXTERNAL SOURCES OF FINANCING
Source
Amount of Loan
(million)
Amount Received (million)
Amount of Loan Received in
(B million)
Outstanding as of 31 March 2001
(B million) 1.
Japan Bank for International Cooperation
¥ 83,081.00
¥ 62,703/51
12,626.90
15,413.87
2.
International Bank for Reconstruction and Development (World Bank)
$ 86.40
$ 86.40
2,093.41
3.
United States Agency for International Development
$ 5.23
$ 4.55
92.84
102.66
4.
International Fund for Agricultural Development
SDR 18.75
SDR 18.75
473.24
142.59
5.
Asian Development Bank
$ 260.00
$ 145.22
5,339.51
6,279.94a
6.
Kreditanstalt für Wiederaufbau
DM 25.00
DM 25.00
381.27
7.
Financieringsmaatschappij voor Ontwikkelingslanden
NLG 7.50
NLG 7.50
99.63
7.12
8.
Other Foreign Exchange Loans (Non-project)
¥ 10,303.79
$ 312.91
¥ 10,303.79
$ 312.91
2,427.43 8,042.31
3,741.95
12,702.66
Total
31,576.54
38,390.70
a Loan 787-THA: Brackishwater Shrimp Culture Development, Loan 1423-THA: Small Farmer Credit, and Loan 1540-THA: Rural Enterprise Credit. Source: Bank for Agriculture and Agricultural Cooperatives.
Region
Northern Region 95 20,362 18,143 1,391,683 7,196 533,500 25,434 1,945,546
Northeastern Region 54 14,176 12,366 897,016 5,393 376,192 17,813 1,287,384
Central and Eastern Regions 6,942 592,351 1,852 178,342 8,794 770,693
Southern and Western Regions 16 4,650 10,856 1,269,268 2,280 281,423 13,152 1,555,340
Total 165 39,188 48,307 4,150,319 16,721 1,369,456 65,193 5,558,963
Note: Figures may not add up to totals in some columns due to rounding.Source: Project records.
Region
Northern Region 25,434 1,945,546 15,537 1,048,976 9,897 896,570
Northeastern Region 17,813 1,287,384 13,629 919,208 4,184 368,175
Central and Eastern Regions 8,794 770,693 7,725 647,000 1,069 123,693
Southern and Western Regions 13,152 1,555,340 10,525 1,269,819 2,627 285,522
Total 65,193 5,558,963 47,416 3,885,003 17,777 1,673,960
Source: Bank for Agriculture and Agricultural Cooperatives.
(B'000)Disbursed Disbursed Disbursed
(B'000)Number ofSubloans (B'000)
Number ofSubloans
Number ofSubloans
SUBLOAN CHARACTERISTICS
1998 1999
Table A2.1: Subloan Disbursements by Year
Total1997Number of DisbursedSubloans (B'000)
Table A2.2: Financial Status of Subloans as at 31 March 2001
Number ofSubloans
Amount(B'000)
Ongoing Loans
Subloans (B'000) Subloans (B'000)
Fully Repaid LoansNumber of Amount
DisbursementNumber of Amount
Appendix 2, page 118
Number of Number of Number of Number of Number ofGroup Subloans Amount Subloans Amount Subloans Amount Subloans Amount Subloans Amount
AAA (Prime) 4,536 412,714,249 1,806 145,630,109 253 36,471,350 707 83,714,615 7,302 678,530,323 AA (Very Good) 234 30,899,157 68 9,776,395 16 3,756,254 114 15,682,801 432 60,114,607 A (Good) 1,123 109,309,824 420 41,361,765 68 7,892,955 253 35,357,726 1,864 193,922,270 Ba 4,004 343,646,672 1,890 171,407,118 732 75,572,156 1,553 150,766,470 8,179 741,392,416
Total 9,897 896,569,902 4,184 368,175,387 1,069 123,692,715 2,627 285,521,612 17,777 1,673,959,616
a Clients with overdue in the previous year or with restructured loan.Source: Bank for Agriculture and Agricultural Cooperatives.
Number of Number of Number of Number of Number ofRange Subloans Amount Subloans Amount Subloans Amount Subloans Amount Subloans Amount
<60,000 5,038 173,172,252 2,011 59,181,547 569 21,082,476 1,227 44,134,241 8,845 297,570,516 60,001-150,000 2,516 202,659,224 1,191 89,380,626 173 14,890,896 669 60,946,883 4,549 367,877,629 150,001-300,000 1,772 301,594,210 739 122,700,708 216 40,338,619 545 101,070,642 3,272 565,704,179 300,001-500,000 403 122,343,363 151 46,033,734 76 24,228,494 139 48,739,903 769 241,345,494 500,001-1,000,000 160 85,752,591 86 42,405,115 33 20,187,230 47 30,629,943 326 178,974,879 1,000,001-5,000,000 8 11,048,262 6 8,473,657 2 2,965,000 16 22,486,919 >5,000,000
Total 9,897 896,569,902 4,184 368,175,387 1,069 123,692,715 2,627 285,521,612 17,777 1,673,959,616
Source: Bank for Agriculture and Agricultural Cooperatives.
Southern and
Eastern Regions Western Regions
(as of 31 March 2001, in baht)
Southern andCentral and
Table A2.4: Loans Outstanding, Classified by Loan Size(as of 31 March 2001, in baht)
Table A2.3: Loans Outstanding, Classified by Rating of Farmer Client
Total
Northern Region Northeastern Region Eastern Regions Western Regions Total
Northern Region Northeastern Region
Central and 19Appendix 2, page 2
Appendix 3, page 1
SUBPROJECT PROFILES A. Oil Palm Collection Center (Successful)
1. Subborrower 1. The collection center (Center) is owned by Phuang of Chonghuacheng Village in Surat Thani District in southern Thailand. Phuang is 52 years old and his family includes his wife, two sons, a daughter-in-law, and a grandson. His wife and elder son assist him in his farm business while the younger son is studying in a nearby college. Phuang is the head of the village and receives a monthly allowance of Baht (B) 2,100 from the Government. 2. Phuang has a 16 hectare (ha) oil palm holding which annually yields 240 tons of oil palm fresh fruit bunch. In addition, he has 5 ha of rubber and 2 ha of coffee in cultivation. His total asset base is about B8.3 million, comprising land (B6.0 million), house (B600,000), retail shop (B200,000), and the Center (B1.5 million). Phuang’s annual income from both farm and nonfarm sources prior to opening the Center was about B500,000 per annum (p.a.). Phuang has been a client of Bank for Agriculture and Agricultural Cooperatives (BAAC) since 1987. His previous loans were for oil palm and rubber cultivation.
2. Subproject 3. The concept of the Center came from a palm oil mill, located 60 kilometers (km) from the village. The mill preferred to buy fresh fruit bunch in bulk rather than from individual farmers and suggested Phuang to collect the product from farmers for transportation to the oil mill. The Center also guides the farmers to harvest oil palm at maturity to avoid wastage due to immature or overripe crop.
4. Phuang obtained a B220,000 five-year loan for the construction of the Center in 1999. The subloan was less than 15 percent of the total subproject consisting of a 15-ton truck (B600,000), weighing scale (B500,000), warehouse and office (B400,000), and land preparation and sundries (B150,000). This subloan represents less than 3 percent of Phuang’s assets. He has made repayments on due dates. The outstanding loan amount at 31 March 2001 was B110,000. Phuang has three other ongoing loans from BAAC for oil palm planting (B220,000), fruit cultivation (B110,000), and retail shop and home improvement (B500,0000).
3. Commercial Aspects and Financial Performance 5. Farmers harvest oil palm and bring it to the Center. Farmers are paid the oil mill price less B100 per ton, which represents the margin for the Center. The Center operates for about 250 days a year and handles about 7,500 tons of fresh fruit bunch p.a. The with-subproject annual income is B920,000 p.a. compared with the without-subproject income of B500,000 p.a., an increase of 184 percent. The financial internal rate of return (FIRR) and economic internal rate of return (EIRR) for this subproject are 18 and 28 percent, respectively. The annual net income of B370,000 during the subloan period is projected to increase to B430,000 after the subloan is fully repaid.
20
Appendix 3, page 2
4. Social and Environmental Impact 6. Although the Center generates considerable income, Phuang regards the Center as a service to the community since no one else in the village has the resources to set up such a Center. He is also in a position to obtain better prices for the farmers. Phuang has used the subproject income to purchase land. Mrs. Phuang is more knowledgeable about the finances of the Center and takes all the key business decisions. She also manages the retail shop adjacent to the Center. This subproject has no negative environmental impact.
5. Factors Contributing to the Success of this Subproject 7. The following factors have helped make this a successful subproject:
(i) in-depth knowledge of the business processes and cycle;
(ii) correct demand and supply assessment;
(iii) diversification into related farm and nonfarm activities;
(iv) demonstrated managerial ability and active participation of family members;
(v) leadership and organizational capacity to obtain better price for farmers;
(vi) the subloan represents about 15 percent of the total subproject cost and the enterprise cash flow can comfortably accommodate principal and interest repayments; and
(vii) proper subloan appraisal and follow-up by BAAC.
B. Pick-Up Truck for Transportation of Farm Produce (Successful)
1. Subborrower 8. Sanan of Kachatan village in Surat Thani District in southern Thailand is 50 years old. His family includes his wife and three children, one of whom has recently graduated from college and is teaching in a nearby town, while the other two are still in school. Sanan has a 6 ha rubber plantation with 2 ha in production and 4 ha of immature trees. In addition, he is planting fruit trees on his 3 ha abandoned paddy land. His total assets before the subloan are valued at B550,000, consisting of land (B400,000), house (B100,000), and cattle (B50,000). Sanan’s pre-loan annual income from farm and off-farm sources is estimated at B100,000 p.a. Sanan has been a client of BAAC since 1990. His previous loans were for rubber cultivation.
2. Subproject 9. In 1998, Sanan took a long-term subloan of B250,000 to purchase a pick-up truck, as he encountered frequent difficulties in transporting farm produce and also saw business opportunity in providing transportation services to neighboring farm households. The total cost of the pick-up truck was B400,000. This subloan represents about 45 percent of his assets. The main cost items are the pick-up truck (B300,000) and sundries and spare parts (B100,000). The subloan was repaid ahead of schedule.
21
Appendix 3, page 3
10. Sanan’s business has since prospered. In 2000, he obtained another enterprise loan from BAAC for B300,000 to start a retail shop. He also sold his cattle and invested in the retail shop. The shop is managed by his wife and has a daily turnover of about B2,000. In 2001, Sanan borrowed B150,000 from BAAC for rubber planting. His total assets have doubled over the last three years and is currently estimated at about B1.2 million, comprising land (B600,000), retail shop (B300,000), house (B100,000) and pick-up truck (B250,000). The outstanding loan to BAAC at B300,000 represents only 25 percent of his total assets.
3. Commercial Aspects and Financial Performance
11. The pick-up truck is used to transport rubber from his and neighboring farms. The truck rents for B300 per trip and on average makes two trips a day or about 500 trips p.a. The gross and net income from the pick-up truck is B150,000 and B100,000 p.a., respectively. The FIRR and EIRR for this subproject are 17 and 27 percent, respectively. The annual net income during the subloan period is B20,000, projected to rise to B100,000 after the loan is fully repaid. The with-subproject annual income is B300,000 p.a. compared with the without-subproject income of B200,000 p.a., or an increase of 50 percent.
4. Social and Environmental Impact 12. Sanan has invested the additional income to expand the retail shop and to pay for his children’s education. The pick-up is also used to transport goods for the retail shop, but this has not been considered in the FIRR and EIRR analysis. Income from the subproject has enabled Sanan to venture into fruit farming, a lucrative enterprise in southern Thailand. Sanan has employed two workers to tap and maintain rubber trees. These workers are not paid wages; instead they receive 50 percent of the gross output from the rubber holding. The subproject has no negative environmental impact.
5. Factors Contributing to the Success of the Subproject 13. The following factors have helped make this a successful subproject:
(i) locating a business opportunity;
(ii) understanding the cost and benefits of the investment;
(iii) complementarity with ongoing farm and nonfarm activities of the household and of the neighbors;
(iv) active participation of spouse in managing the business;
(v) employment generation within the local community; and
(vi) the subloan represents about 60 percent of the total subproject cost and the enterprise cash flow can comfortably accommodate principal and interest repayments.
22
Appendix 3, page 4
C. Salted Duck Egg Production (Successful)
1. Subborrower 14. This enterprise is owned by Hong of Narai Village of Surat Thani District in southern Thailand. Hong is 60 years old, her husband died in an accident four years ago. Her daughter, married to a policeman, works as a teacher and assists Hong in managing the subproject after school hours. Hong has a 2 ha rubber plantation which produces 4.5 tons of cup lumps annually. Her son operates this rubber holding. Her total assets are valued at about B800,000, comprising land (B500,000) and house (B300,000). Her annual income from both farm and nonfarm sources before the subproject was about B30,000 p.a. Her husband was a member of BAAC for 12 years and had taken small loans for home improvement and children’s education. These loans were repaid.
2. Subproject 15. In 1999, Hong took a medium-term enterprise subloan of B50,000 to build a small shed to sell salted duck eggs. The subloan represents about 6 percent of household assets. The total subproject cost is B130,000. The cost items are land improvement (B100,000) and building (B30,000). The owner’s equity of B80,000 is 60 percent of the subproject cost. Hong has been repaying the subloan on schedule and had a loan outstanding of B34,000 at 31 March 2001. In July 2001, on the advice of her friends, she joined the debt relief program of the Government. She is now keen to opt out of the debt relief program, as she finds no difficulty in meeting the repayment obligations and wants further credit to expand the business.
3. Commercial Aspects and Financial Performance 16. Hong purchases 3,000 duck eggs a month at B2.4 per egg, paddy ash, and salt. She also purchases special soil from a nearby hill supposedly to give a unique flavor to the eggs, which has made the salted eggs produced in the area famous throughout the country. Water and salt is added to the special soil and the duck eggs are rolled into this mixture and then coated with paddy ash. These eggs are then kept for 15 days before being sold. To consume these eggs, the outer layer is removed and the egg is boiled. For frying, the eggs need to be kept only for 7 days. The mature eggs are packed in boxes of 8 and 17 and sold at an average price of B4.5 per egg. Hong is very particular about the quality of her product. 17. The FIRR and EIRR for this subproject are 24 and 23 percent, respectively. The smaller EIRR is due to the imputed cost of family labor with a standard conversion factor 1.2. The annual net income of B50,000 during the subloan period is projected to increase to B63,000 after the completion of the loan repayment. The with-subproject annual income is B123,000 p.a. compared with the without-subproject income of B60,000 p.a., an increase of 205 percent.
4. Social and Environmental Impact 18. Hong has used the income from the subproject to improve her house. The demand for salted duck eggs is very strong, but supply of fresh eggs is limited. The demand for fresh duck eggs by the subproject has prompted others in the area to raise ducks. There is no negative environmental impact from this subproject.
23
Appendix 3, page 5
5. Factors Contributing to the Success of the Subproject 19. The following factors have helped make this a successful subproject:
(i) knowledge of the enterprise;
(ii) correct demand assessment;
(iii) participation and support of family members;
(iv) diligent quality control;
(v) the subloan represents about 40 percent of the total subproject cost and the enterprise cash flow can comfortably accommodate principal and interest repayments; and
(vi) motivation to succeed, as the subborrower wants to opt out of the debt relief
program to enable further borrowing for expansion. D. Paddy Threshing Machine (Successful)
1. Subborrower 20. The paddy threshing machine is owned by Nuwan of Koprasat Village in Surin District in northeast Thailand. Nuwan is 54 years old and his family includes his wife, a son, and a daughter. His son works with him in the farm and operates the paddy threshing machine. Nuwan has a 5 ha rice farm, which produces about 15 tons of paddy annually. He owns half the paddy land and the rest is rented from the neighbor. He also has four head of cattle. His assets are worth about B1.1 million, consisting of land (B900,000), house (B150,000), and cattle (B50,000). His annual income before the subproject was about B60,000 p.a. Nuwan has been borrowing from BAAC since 1987. His previous loans were for paddy cultivation.
2. Subproject
21. In 1999, Nuwan borrowed a medium-term enterprise loan of B60,000 to finance the purchase of a used paddy threshing machine priced at B90,000. This loan represents only 6 percent of his assets. The idea for the machine came from his cousin, who owns a similar machine in the adjoining province. He is repaying his loan on schedule and had an outstanding debt of B24,000 on 31 March 2001. In July 2001, he opted for the debt relief program and his interest rate on the outstanding balance is currently only 5 percent, as compared with 8 percent earlier.
3. Commercial Aspects and Financial Performance 22. The business essentially is threshing paddy for self and for other farmers in the locality. Nuwan receives 25 kilograms (kg) of paddy valued at B150 for every ton of paddy threshed. The machine can thresh about 8 tons of paddy per day and is operated daily during the two-month paddy harvesting season. The FIRR and EIRR for this subproject are 13 and 27 percent, respectively. The annual net income of B17,000 p.a. during the subloan is projected to increase to B32,000 p.a. after the loan is fully repaid. The with-subproject annual income is B92,000 p.a. compared with the without-subproject income of B60,000 p.a., an increase of 150 percent.
24
Appendix 3, page 6
4. Social and Environmental Impact 23. Nuwan is utilizing the income from the subproject to build a house for his son. There is no negative environmental impact of this subproject.
5. Factors Contributing to the Success of the Subproject
24. The following factors have helped make this a successful subproject:
(i) complementarity with household farming activities; (ii) little competition, as there are only two such machines in the village; (iii) participation and support of family members; (iv) willingness to spend money on maintenance to ensure efficiency; (v) the subloan represents about 65 percent of the total subproject cost, and the
cash flow can comfortably accommodate principal and interest repayments; and
(vi) cautious approach toward expansion, as the borrower apprehends that one or two more threshing machines in the village could affect business prospects.
E. Rice Noodle Enterprise (Successful)
1. Subborrower
25. Chelon Wanme of Nong Tak Village in Surin District of southern Thailand owns this subproject. She is 49 years old and her family includes four school children. The owner has 6 ha of rice land, which produces 15 tons of paddy p.a. Total household assets are valued at about B500,000 and Wanme’s annual income before the subproject was estimated at B100,000 p.a. Wanme has been a client of BAAC since 1984. Besides the subloan, she has a short-term loan of B50,000 for paddy production.
2. Subproject
26. In 1999, Wanme took a long-term (five-year) enterprise loan of B72,000 to build a small workshop located behind her house. Wanme is familiar with noodle making since her parents also operated such a unit. There is only one similar enterprise in her village. The subloan represents about 15 percent of the total household assets. The total subproject cost of B184,000 consists of land (B50,000), building (B50,000), and machinery (B84,000). Wanme is repaying on schedule and has an outstanding debt of B48,000 on 31 March 2001. She joined the debt moratorium program and is currently repaying her loan at the subsidized interest rate of 5 percent p.a.
3. Commercial Aspects and Financial Performance 27. Wanme purchases about 20 tons of broken rice annually at B10 per kg. This works out cheaper than the rice from her own farm, which sells for B15 per kg. The broken rice is ground into powder and cooked before being forced through a small mesh to shape as noodles. The noodles are then tied into small bundles for sale to retail shops and restaurants. The four
25
Appendix 3, page 7
workers employed by Wanme can produce about 300 kgs of noodles per day or about 42 tons p.a. Wanme takes due care to maintain good quality. The FIRR and EIRR for this subproject are 34 and 74 percent, respectively. The annual net income of B80,000 during the subloan period is projected to increase to B100,000 after the loan is fully repaid. The with-subproject annual income is B200,000 p.a. compared with the without-subproject income of B100,000 p.a., an increase of 100 percent.
4. Social and Environmental Impact 28. Wanme has utilized the income from the subproject for home improvement and to finance her children’s education. Savings are deposited with BAAC. The subproject has no negative environmental impact. The wastewater is discharged into her paddy field.
5. Factors Contributing to the Success of the Subproject
29. The following factors have helped make this a successful subproject:
(i) complementarity with household farming activity;
(ii) little competition, as there is only one such machine in the village;
(iii) quality consciousness; and
(iv) the subloan represents about 40 percent of the total subproject cost, and the cash flow can comfortably accommodate principal and interest repayments.
F. Fertilizer Warehouse (Unsuccessful)
1. Subborrower 30. Batom of Sichaikran Village in Surat Thani District in southern Thailand initiated this subproject in 1999. Batom is 51 years old and his family includes his wife and two sons of schoolgoing age. As the administrative head of a subdistrict he receives an allowance of B3,200 per month from the Government. He owns 10 ha of rubber plantation, 2 ha of fruit orchard, and 2 ha of ponds used for rearing tiger prawns. His total assets of B1.2 million consist of land (B1 million) and house (B200,000). His annual income before the subproject was B200,000. He has been a BAAC borrower since 1989 and currently has three ongoing loans.
2. Subproject 31. In 1999, Batom took a long-term loan of B340,000 to construct a large warehouse costing B1.3 million with the objective of selling fertilizer to neighboring farmers. The subloan is about 30 percent of his total assets and his own equity is three fourths of the subproject cost. The warehouse is about 200 square meters and is currently used both for storing fertilizer as well as a retail shop. Recently, he has added a small fuel distribution hut next to the warehouse.
3. Commercial Aspects and Financial Performance 32. Currently, Batom is defaulting on all his loans: four to BAAC and two others to the Ministry of Agriculture and Cooperatives. His BAAC loans were for tiger prawn farming, working capital, medical loan, and for the subproject. Loans from the Ministry of Agriculture and
26
Appendix 3, page 8
Cooperatives were taken in 1994 for a cattle-rearing project and for agricultural restructuring. Batom claims that all the imported cattle died and he is seeking debt forgiveness. The aggregate loan outstanding is about B800,000 or about 25 percent of his current asset. 33. The subproject was hit by sharp decline in fertilizer demand. In fact, demand estimate of 1,000 ton p.a. for 2001 is way above the 240 tons sold in 2000. The vegetable farmers, the major customers, are buying directly from the fertilizer wholesaler. Batom is not in a position to bargain for lower prices from the wholesaler since his volume of purchase is small. Hence, he cannot compete aggressively with other dealers in the surrounding areas. The retail shop business is generating a sale of B4,000 per day instead of the expected B10,000 per day. In addition, Batom has to pay about B10,000 per month for the treatment of his wife, who is suffering from a kidney disorder. Education expenses for his children is B4,000 per month.
4. Social and Environmental Impact 34. The subproject had a negative impact on Batom’s income. While all the loans are well covered by his assets, eventually he may have to sell his land to settle the loans. No negative environmental impact was noted from his farm and off-farm activities.
5. Factors Contributing to the Failure of this Subproject 35. The following factors led to the failure of the subproject:
(i) demand assumptions were optimistic;
(ii) investment in warehouse was more than required;
(iii) weak appraisal, despite poor repayment record BAAC provided additional loans;
(iv) inability of his wife to support the management of household enterprises; and
(v) significant medical expenses.
G. Cement Bricks And Pillars (Unsuccessful)
1. Subborrower 36. Sukom, the subborrower, is a resident of Panan Village in Surat Thani District in southern Thailand and owns 3 ha of rubber smallholding of which 1 ha is planted with lemon trees and 2 ha is unused. His total household assets are valued at about B3.2 million comprising of land (B2.5 million), house (B300,000), and a cement brick factory (B400,000). Annual household income before the subproject was B100,000. Sukom is a first-time BAAC borrower although his father is a BAAC member for over 20 years. Sukom is 31 years old and his family includes his wife, two children, and his father.
2. Subproject
37. In 1999, Sukom took a long-term enterprise loan of B120,000 to establish the subproject. Having worked for a similar enterprise he felt confident of his ability as well as the potential of the subproject. The subloan was less than 5 percent of his assets. The subproject cost of
27
Appendix 3, page 9
B300,000 included land (B50,000), building (B100,000), cement mixer and frames (B150,000). Sukom’s own investment at B180,000, is 55 percent of the total subproject cost.
3. Commercial Aspects and Financial Performance 38. The business consisted of purchasing cement, steel, stone, and sand for building bricks and cement pillars. In the initial stage, the workshop was able to produce about 50,000 cement bricks and 300 three-meter house pillars annually. The bricks were sold at B3 each and the pillars were priced at B500 each. His gross income was B300,000 p.a. and his net income was B150,000 p.a. Sukom employed two workers. He also rented a 10-ton truck for B100,000 p.a. for transporting the bricks and pillars.
39. In mid-2000, Sukom was caught carrying unauthorized timber. The truck was confiscated and he had to pay a B10,000 fine and B100,000 for the release of the truck. The truck company thereafter refused to rent him the truck. Sukom claims that without the use of a truck, his business has become noncompetitive and his profit margin has been reduced by 50 percent. Currently his gross sale is only B15,000 per month, leaving him a net income of B5,000 per month or B25,000 p.a., as the enterprise operates for five months in a year. Sukom has failed to meet the repayment schedule.
4. Social and Environmental Impact 40. The subproject has had a negative effect on Sukom’s income and credibility, largely due to his own conduct. The employment generated by the subproject could not be sustained. BAAC has asked him to sell his land either to repay the loan or to buy a used truck to enable him to return to full operation. There are two similar enterprises in the neighboring villages, which are doing well. The subproject did not have any negative environmental impact.
5. Factors Contributing to the Failure of the Subproject 41. The following factors led to the failure of the subproject:
(i) activities not consistent with operating a legitimate enterprise; (ii) borrower’s despondency and lack of motivation;
(iii) weak subloan follow-up and counseling by BAAC; and
(iv) lack of active attempt to restructure the subproject.
H. Silk Weaving (Unsuccessful)
1. Subborrower 42. Sutima resides in Ban Chanloan Village in Surin District in northeast Thailand. Sutima is 34 years old and lives with her husband and three daughters. She has 1.5 ha of paddy land, which produces about 4 tons of paddy annually. Her husband sells pork to supplement household income. Household asset is valued at about B800,000 comprising land (B500,000) and house (B300,000). Annual income from both farm and off-farm work before the subproject was about B30,000 p.a. Sutima has been a client of BAAC since 1996 and has repaid the previous paddy production loan of B30,000.
28
Appendix 3, page 10
2. Subproject 43. In 1999, Sutima took a working capital loan of B15,000 from BAAC to purchase inputs required to weave silk dress material on her old wooden weaving machine. Each 2-meter piece of woven silk material can be sold for B800, and she aimed to make 5 pieces per month. This would give her a net monthly income of B2,000. Sutima received training in silk weaving. However, immediately after obtaining the subloan Sutima gave birth to an autistic child who required her full attention and expensive medical care. In 2001, she had twin daughters. The prospect of her returning to silk weaving for the next five years is remote.
3. Commercial Aspects and Financial Performance 44. Sutima abandoned the idea of silk weaving and gave the weaving machine and materials to her aunt. The aunt uses the weaving machine, but does not require the weaving materials purchased with the subloan. The contractor who purchases the silk dress materials insists that supplies provided by him be used. Sutima’s aunt is paid on a piecemeal basis, which works out to be B100 per day.
4. Factors Contributing the Failure of the Subproject 45. The following factors led to the failure of the subproject:
(i) unforeseen circumstance and expenses;
(ii) the net return is very low at about B15 per hour; and
(iii) weak appraisal by BAAC, as it should have been aware of the practice of contractors providing the supplies.
29
1. Program and Budget Division 1. Audit and Inspection Division 12. Monitoring and Evaluation Division 2. Audit and Inspection Division 23. Public Relations Division 3. Audit and Inspection Division 34. Technical Services Division 4. Audit and Inspection Division 45. Secretariat Division 5. Audit Planning and Development Division
6. Computer Audit Division
1. Loan Planning Division 1. Farmer Institution Loan Division 1. Government Secured Loan 1. Fund Management Division 1. Banking Division2. Farmer Loan Division 2. Farmer Institution Business Division 2. Financial Business Division 2. Cash Operation Division3. Rural and Environmental Loan Promotion Division 2. Office of Land Fund 3. Savings Promotion Division Division 3. Office of National Agricultural 4. Office of Islamic Bank Fund
Credit Administration Board4. Agricultural Mutual Relief Fund Office
1. Organization and 1. Network Division 1. Special and Asset 1. General Affairs 1. Human Resource 1. Human Resource 1. Branch Administration Division 1 Methods Division 2. Computer Accounting Division Planning Division Development 2. Branch Administration Division 2 BAAC2. Systems Innovation System Division Division 2. Legal Affairs 2. Personnel Division Division 1 3. Branch Administration Division 3 Provincial Division 3. Application 2. Financial Division 3. Welfare and Labor 2. Human Resource 4. Branch Administration Division 4 Office
Software Accounting 3. Premises Relations Division Development 5. Branch General Administration Division Division Management Division 2 Division4. Information 3. Management Division 6. Loan Quality Development System Division Accounting 4. General Services Division
Division Division
BAAC = Bank for Agriculture and Agricultural Cooperatives.
Banking
ORGANIZATION CHART
POLICY AND PLANNING GROUP INTERNAL AUDIT GROUP
Policy and Planning Department Audit and Inspection Department
LOAN GROUP SPECIAL ACTIVITIES GROUP FINANCIAL MANAGEMENT AND BANKING SERVICES GROUP
President
Board of Directors
Development
Department
Branch Administration
WORK SYSTEM ANDTECHNOLOGY GROUP
Department
Human Resource
Department
Organization andMethods Development
Department
InformationTechnologyDepartment
AccountingDepartment
Department
Department Department
SUPPORTING GROUP BRANCH ADMINISTRATION GROUP
Loan Department
Department
GeneralAdministration Management
Department
Human Resource
Government SecuredFarmer Institution Loan TreasuryIndividual Farmer Loan
Appendix 430
31 Appendix 5
Lending Categoryb FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 Short-term 88.09 89.77 86.85 81.26 83.18 86.67
Medium-term 84.57 84.89 78.35 67.90 65.38 66.69
Cash credit lines 86.25 87.22 82.47 74.87 76.27 80.08
Long-term for refinancing 59.64 50.75 41.03 27.65 23.94 24.78prior debt
Long-term for investment 78.13 79.03 70.20 58.25 59.22 67.77in agriculture
Loans for agriculture related 91.60 90.19 81.90 68.63 68.97 69.66activities (enterprises) of which for subprojects 71.87 Overall 86.07 87.17 82.61 74.67 75.06 78.22
1 year 34.82 years 21.93 years 19.7 4 years 13.25 years 5.26 years 2.57 years 1.28 years 0.59 years 0.3
10 years 0.7
a Collection as percentage of amount due. b For individual farmer loans. c As percentage to total arrears for individual farmer loans. Source: Bank for Agriculture and Agricultural Cooperatives
Table A5.1: Repayment Ratea
Table A5.2: Age-wise Classification of Arrearsc as at 31 March 2001
REPAYMENT RATE AND AGE-WISE CLASSIFICATION OF ARREARS
Item
A. AssetsCash 83 165 229 397 741 760 893 1,275 1,549Deposits with Commercial Banks 3,869 7,419 4,701 7,296 5,022 2,623 8,919 2,694 1,690Other Deposits, Payments in Transit 218 80 199 60 31 78 57 66
Total Cash and Bank Deposits 4,170 7,664 4,930 7,892 5,823 3,414 9,890 4,026 3,305Securities:
Government Bonds 5 840 1,036 110 3,270 25,430 32,300 30,580 21,173Other Securities (e.g., promissory notes) 3,130 7,190 11,400 5,717 8,190 2,500 15,324
Total Cash and Investments 7,305 15,694 17,366 13,719 17,283 28,844 42,190 37,106 39,802Loans Outstanding:
Farmer Clients 66,137 75,608 97,680 127,243 162,640 177,545 198,962 217,690 242,861Agricultural Cooperatives 6,892 7,493 8,305 10,747 14,242 15,759 16,354 15,473 16,053 Farmer Associations 193 191 169 180 183 172 173 184 166Other Loans 5,224 8,320
Total Loans Outstanding 73,222 83,292 106,154 138,170 177,065 193,476 215,489 238,571 267,400 Less: Loan Loss Provision 3,296 3,679 3,754 3,640 5,100 7,664 10,980 15,109 23,685 Net Loans Outstanding 69,926 79,613 102,400 134,530 171,965 185,812 204,509 223,462 243,715Accrued Interest Receivable 3,073 3,775 4,093 4,918 6,414 8,404 10,578 9,279 8,638
Account Receivables 772 10,431Equity Investments 16 25 25 26 100 125 123 123 123Less: Provision for Possible Losses 10 31Net Equity Investments 16 25 25 26 100 125 123 113 92Fixed Assets (Net) 2,656 3,002 3,319 4,758 5,200 5,429 5,204 4,977 4,925Other Assets 1,988 7,219 5,301 5,258 6,041 6,796 2,684 972 1,327
Total Assets 84,964 109,328 132,504 163,209 207,003 235,411 265,289 276,680 308,930B. Liabilities and Equity
Deposits (from public) 37,343 52,218 68,770 91,164 126,271 132,172 165,007 180,564 214,742Interbank Accounts 11,713 7,556 7,570 7,137 3,981 3,611 45Total Deposits 49,056 59,774 76,340 98,301 130,253 135,783 165,052 180,564 214,742Accrued Interest Payable 758 885 1,053 1,640 2,376 1,957 1,411 1,304Government Scheme Creditors 10,369 10,165Borrowing 26,265 34,642 37,875 42,277 52,741 79,614 67,157 60,283 53,183Other Liabilities 2,429 5,621 7,279 11,660 10,203 10,948 13,412 3,499 7,068
Total Liabilities 78,508 100,922 122,547 152,238 194,836 228,720 247,577 256,126 286,462Shareholders' EquityShare Capital 3,745 4,958 6,205 7,500 8,953 9,382 11,172 22,768 25,444Supplementary Capital from Government 834 1,034 1,034 1,034 1,034 1,034 10,034 34 34Reserves 102 186 310 458 533 622 693 735 820Retained Earnings 2,526 2,797 3,090 3,067 3,498 3,641 2,737 2,900 3,179Deferred Foreign Exchange Gain/(Loss) (1,728) (1,551) (1,670) (2,082) (2,853) (9,003) (7,954) (6,918) (8,010)Surpluses on Grants Received 977 982 988 994 1,002 1,015 1,030 1,036 1,001
Total Shareholders' Equity 6,456 8,406 9,957 10,971 12,167 6,691 17,712 20,554 22,468 Total Liabilities and Equity 84,964 109,328 132,504 163,209 207,003 235,411 265,289 276,680 308,930
Source: Bank for Agriculture and Agricultural Cooperatives.
FINANCIAL STATEMENTS
Table A6.1: Balance Sheet(baht million)
FY1996FY1995FY1994 FY2000FY1999FY1997 FY1998 FY2001 FY199332 Appendix 6, page 1
A. IncomeInterest IncomeLoans:
Client Farmers 6,673 8,608 8,970 12,182 15,401 19,704 21,187 19,768 16,907Farmer Cooperatives and Associations 663 673 698 793 929 1,191 1,723 1,497 1,160
Total Loan Interest 7,336 9,281 9,668 12,975 16,330 20,895 22,911 21,264 18,067Bank Deposits 188 152 189 191 172 124 203 78 49 Government Securities and Notes 156 244 668 579 1,014 2,040 2,393 1,444 1,780
Total Interest Income 7,680 9,677 10,525 13,745 17,517 23,058 25,506 22,786 19,896 Less:
Interest Expenses OnDeposits 3,358 3,584 4,301 6,652 8,279 9,605 10,296 6,055 4,707Borrowing 1,068 1,877 2,110 2,599 2,877 5,222 5,321 3,987 3,488
Total Interest Expense 4,426 5,461 6,411 9,251 11,156 14,827 15,616 10,042 8,195Losses from Exchange Rate Fluctuations 169 321 136 190 151 557 550 1,983 1,979Other Expenses 23 76 50 54 62 163 27 31 15Total Expenses 4,618 5,858 6,597 9,495 11,369 15,547 16,193 12,056 10,189
Net Interest Income 3,062 3,819 3,928 4,250 6,147 7,512 9,313 10,730 9,707Other Income 267 602 706 1,182 1,346 1,607 1,663 1,225 1,127
Total Income 3,329 4,421 4,634 5,432 7,494 9,119 10,976 11,955 10,834
B. Operating ExpensesPersonnel Expenses 1,618 1,812 2,163 2,588 2,889 3,310 3,909 4,094 4,323Provision for Loan Losses 414 441 29 441 1,609 2,779 4,842 5,672 3,752Depreciation 280 327 380 461 543 600 616 592 568Other Expenses 352 907 938 849 1,003 1,054 1,406 1,316 1,655
Total Operating Expenses 2,664 3,487 3,510 4,339 6,045 7,742 10,773 11,674 10,298
Net Profit 665 934 1,124 1,093 1,449 1,377 203 281 536
FY2001
Table A6.2: Income Statement
FY1998
(baht million)
FY1997 FY2000FY1999FY1993 FY1996FY1995FY1994 33 A
ppendix 6, page 2
Item Variationa
1. Interest earned on loans 10.04 9.77 10.46 10.97 9.67 10.18 7.49 (2.18)
2. Interest earned on deposits with other banks 0.15 0.1 0.06 0.07 0.02 0.08 0.01 (0.01)
3. Miscellaneous earning 1.36 1.41 1.82 1.97 1.23 1.56 1.22 (0.01)
Total 11.55 11.28 12.34 13.01 10.92 11.82 8.72 (2.20)
4. Cost of funds 7.34 6.8 7.78 7.75 5.48 7.03 4.22 (1.26)
5. Operating cost 3.97 4.19 4.32 5.15 5.31 4.59 4.27 (1.04)
Total 11.31 10.99 12.1 12.9 10.79 11.62 8.49 (2.30)
6. Net profit 0.24 0.29 0.24 0.11 0.13 0.20 0.23 0.10 a Increase (decrease) in FY2001 over the five-year average. Source: Bank for Agriculture and Agricultural Cooperatives
FY1999 FY2000 Average1996-2000
REVENUES, EXPENSES, AND NET PROFIT AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
FY2001FY1996 FY1997 FY1998
Appendix 734
35 Appendix 8, page 1
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
A. Particular Covenants
Article IV Section 4.01 (a)
The Bank for Agriculture and Agricultural Cooperatives (the Borrower) shall carry out the Project with due diligence and efficiency and in conformity with sound administrative, banking, financial and environmental practices.
Complied with.
Article IV Section 4.03
The Borrower shall maintain records and accounts adequate to record the progress of the Project and of each subproject (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Borrower.
Generally complied with. Although subproject details are available at branches, only the transactions and loan balances are recorded regularly in the Borrower’s centralized computer system for bankwide analysis. As such, customer analysis and portfolio analysis customer-wise is difficult. Additional data has to be collected for specific analysis, which is both time consuming and costly.
Article IV Section 4.04 (a)
The Borrower shall furnish to the Asian Development Bank (ADB) all such reports and information as the ADB shall reasonably request concerning the Loan, the Project, the subborrowers, the subprojects and the subloans; the administration, operations and financial condition of the Borrower; and any other matters relating to the purposes of the Loan.
Complied with.
Article IV Section 4.04 (b)
The Borrower shall furnish ADB quarterly reports.
Complied with.
Article IV Section 4.04 (c)
Promptly after the loan closing date or not later than 6 months after the closing date, the Borrower shall submit to ADB a Project Completion Report.
Complied with.
Article IV Section 4.05 (a)
The Borrower shall (i) have its accounts and financial statements audited in accordance with appropriate auditing standards; (ii) furnish to ADB within 9 months of the close of the related fiscal year (a) certified copies of audited accounts and financial statements, and (b) the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreement, all in the English language; and (iii) further related information as ADB shall from time to time reasonably request.
Complied with. Separate audits were conducted and the auditor's opinion obtained on the Loan from 29 September 1997 to 31 March 1999.
Article IV Section 4.06
The Borrower shall enable ADB’s representatives to inspect any subborrower, any subproject, the goods financed out of the proceeds of the Loan, and any relevant records and documents maintained by the Borrower.
Complied with.
36 Appendix 8, page 2
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
Schedule 3 Para. 5
B. Imprest Account Immediately after the effective date, the Borrower shall establish an imprest account at a commercial bank acceptable to ADB.
Complied with.
Schedule 4 Para. 1 (a)
C. Project Implementation Within one month from the effective date, the Borrower shall establish a Project Management Unit (PMU) under the Office of Technical Services and Planning. The PMU shall be headed by the Vice President in charge of the Monitoring and Evaluation Division and the Program and Budget Division.
Complied with. A Project Management Committee for Environment Conservation Credit Projects was established in December 1997. The Committee was chaired by the Executive Vice President in charge of the Office of Technical Services and Planning. The Fund Management Division (formerly the Program and Budget Division) was responsible for the Project.
Schedule 4 Para. 1 (b)
The PMU shall include representatives from the Borrower’s Credit Department, Regional Branch Administration Departments, Monitoring and Evaluation Division of the Office of Technical Services and Planning, Training Division of the Human Resource Management Department, and Program and Budget Division.
Complied with. Committee members included representatives from Regional Branches Administrative Department, Computer Department, Project Development Division, Training Division, Technical Services Division, Monitoring and Evaluation Division, and Fund Management Division.
Schedule 4 Para. 1 (c)
Within 3 months of the effective date, the Borrower shall establish a Credit Department in the Head Office, which shall be staffed with qualified and experienced credit officers. The Borrower shall restructure its branches by establishing specialized credit evaluation units to carry out more detailed subproject appraisal and supervision.
Complied with. The Borrower restructured its organization from April 1998. Under the Loan Group, an Individual Farmer Loan Department was created, which was responsible for credit operations.
Schedule 4 Para. 2 (a)
1. Relending Terms; Subproject Financing Arrangements The Borrower shall: (i) relend Loan proceeds in baht to eligible subborrowers at an interest rate which shall at all times be not less than an amount adequate to provide the Borrower recovery of its cost of funds, intermediation costs, foreign exchange and interest variation risks, and operating costs; (ii) align its interest rates to market interest rates for its medium term loans (1 to 3 years) and long-term loans (more than 3 years) to agriculture enterprises in rural areas; (iii) use not more than 10 per cent of the Loan proceeds finance subloans exceeding B2 million; (iv) not finance any subloans exceeding B5 million; (v) evaluate proposed subloans in accordance with its established practices,
Partly complied with. During the Project period, the lending interest rate was based on minimum lending rate comprising cost of funds, operating costs, and margin (also refer to Schedule 4, para 16 on page 7 of this Appendix). The foreign exchange risk premium relating to the ADB loan for the Project was not fully factored in the lending interest rate considering the broad socioeconomic context of an unprecedented financial crisis. Instead, losses were charged to income statement as per the procedure approved by the Ministry of Finance. From February 2001, the lending interest rate varied between 8 percent and 12 percent per annum depending on the credit
37 Appendix 8, page 3
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
supplemented by discounted cash flow and debt service analysis wherever necessary; and (vi) maintain comprehensive credit files on all subloans in accordance with its customary procedures.
rating of subborrowers. There were no subloans exceeding B2 million. Subloans were evaluated in accordance with the Borrower's established practices including cash flow and debt service analyses. Suborrower information is available at branches in accordance with the Borrower’s customary procedures.
Schedule 4 Para. 2 (c)
The Borrower shall use at least 30 percent of the Loan proceeds to finance new enterprises.
Complied with.
Schedule 4 Para. 3
2. Subloan Agreement Each subborrower shall enter into a subloan agreement with the Borrower, the terms and conditions of which shall include, but not be limited to: (i) subloan maturity shall be consistent with the project implementation period and debt service capacity of the relevant subproject; (ii) grace period shall be consistent with the expected subproject cash flow; (iii) ordinary and penalty interest rates shall be determined by the Borrower on a commercial basis and shall not be less than the rates offered by the Borrower on its ordinary loans for similar activities which utilize other sources of funds; and (iv) the repayment schedule shall be consistent with the expected subproject cash flow, where possible at quarterly or shorter intervals.
Complied with.
Schedule 4 Para. 4 (a)
3. Subborrower Selection Criteria Subborrowers shall: (i) be registered as a client of the Borrower pursuant to its standard registration procedures; (ii) have a satisfactory overall financial condition; (iii) have a satisfactory credit history and not have any currently rescheduled borrowings or have defaulted on any previous loan (except due to natural calamity); (iv) be able to provide the security typically required by the Borrower; (v) be able to contribute at least 20 percent of the relevant subproject cost in the form of equity (including equity in kind); (vi) be able to maintain appropriate financial records of income and expenditure for the Borrower’s periodic inspection; and (vii) comply with the requirements of applicable environmental laws and regulations and undertake appropriate environmental improvement measures concerned, including reduction of waste emissions, and installation of energy saving technology.
Generally complied with. In some instances, subborrowers did not keep records of income and expenses.
Schedule 4 The Borrower shall use its best efforts to ensure Generally complied with.
38 Appendix 8, page 4
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
Para. 4 (b) that women are given priority access to subloans, and that at least one third of the Project beneficiaries are women.
Schedule 4 Para. 5
4. Subproject Selection Criteria Subprojects shall: (i) have small-scale processing of agricultural produce into semi-finished or finished goods and the production of agricultural inputs or provision of agricultural services as one of its primary activities; (ii) be located in the designed Project area; (iii) be technically, managerially and environmentally sound; (iv) comply with applicable national and local environmental laws and regulations; (v) have a projected cash flow and subproject implementation plan for the subloan maturity period demonstrating the financial viability of the enterprise; and (vi) have projected net cash income from the operation of the subproject equal to a minimum of 1.5 times the required debt service.
Generally complied with.
Schedule 4 Para. 6
5. Excluded Subprojects The Borrower shall not utilize any of the Loan proceeds to fund the purchase of land or land-use rights, tobacco-related projects, wood processing project which use timber from virgin or primary forests, or any refinancing of existing obligations of the Borrower.
Complied with.
Schedule 4 Para. 7
6. Benefit Monitoring and Evaluation (BME) The Borrower shall monitor the financial and economic aspects of the Project and evaluate the socioeconomic benefits of subprojects. BME procedures shall be in accordance with its current procedures for agricultural enterprise lending and with ADB’s Guidelines on Benefit Monitoring and Evaluation (A Handbook for Bank Staff, Staff of Executing Agencies and Consultants, March 1992).
Partly complied with. Monitoring of socioeconomic aspects was difficult due to inadequate baseline information on subborrowers. However, additional studies (Annual Evaluation and Project Completion Report undertaken by BAAC) based on random sampling was carried out to analyze the socioeconomic impact of the Project.
Schedule 4 Para. 8
Project implementation shall be monitored through standard financial accounting practices describing disbursement of funds, as well as the collection of data on normal client registration and credit application forms of the Borrower. This data shall be summarized on a yearly basis for subborrowers under the Loan and shall: (i) describe the major socioeconomic characteristics of subborrowers; and (ii) classify subborrowers by
Complied with.
39 Appendix 8, page 5
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
subloan size, subloan type (medium and long term) and the use of funds.
Schedule 4 Para. 9
Benefits of the Borrower’s lending under the Project shall be assessed through a study of selected subborrowers to be undertaken by the Borrower’s Monitoring and Evaluation Division. Such study shall evaluate a randomly selected sample of 2 percent of the subborrowers. This study shall: (i) concentrate on estimating the effects of subloans on income generation, increasing the productivity of labor or assets and employment creation; (ii) generate standard measures of economic impact (such as cost/benefit ratios, net present value and internal rate of return); and (iii) where possible compare expected financial and economic returns with those actually achieved. The sample used for this study shall also be stratified by region, loan size, subloan type and major activity undertaken.
Generally complied with. However, only 0.5 percent of the subborrowers could be evaluated due to the large number of total subborrowers financed by the Project. BAAC was though confident that selected sample was representative and the evaluation results are consistent with their own assessment of the overall rural enterprise portfolio.
Schedule 4 Para. 10
6. Environmental Aspects The Borrower shall: (a) ensure that subprojects comply with the requirements of all applicable environmental laws and regulations and use environmentally friendly technology;
Complied with.
(b) ensure that the environmental protection of natural resources and the choice of appropriate environmental technologies are included in subproject designs and that such designs are utilized during implementation;
Complied with.
(c) within 3 months from the effective date, create an Environment Unit reporting to a Senior Vice President, which shall be responsible for formulating policies, disseminating best practices to branch officers and overseeing environmental aspects of subprojects financed under the Loan;
Complied with. A Rural and Environmental Loan Division under the Individual Farmer Loan Department has been created.
(d) give due importance to environmental issues during subproject appraisal and supervision, and reflect such policy in its five-year Corporate Plan for the period 1998-2002; and
Complied with. Consistent with all BAAC loans the subprojects are required to meet the Government’s environmental criteria. BAAC has also started a ‘Green Bank’ initiative to mainstream environmental awareness within the organization. A revised and upgraded environmental guideline is likely by end of 2001.
(e) establish an in-house capability charged with
Complied with.
40 Appendix 8, page 6
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
increasing environmental awareness among the Borrower’s staff and subborrowers, and for developing a capability within the Borrower to undertake summary initial environmental examinations for environmentally sensitive subprojects as part of its subloan application procedures.
Schedule 4 Para. 11
7. Financial Matters The Borrower shall maintain a total collection rate for the Project, calculated before subloan rescheduling, of at least 80 percent.
Not complied with. Repayments were delayed by subborrowers in the expectation of the Debt Relief Program.
Schedule 4 Para. 12
With regard to its overall operations and before the closing date for withdrawals from the loan account, the Borrower shall (i) develop clear guidelines concerning the eligibility of potential clients for policy and subsidized loan operations; and (ii) design and implement an improved chart of accounts and a management information system, in order to identify the costs of such operations to the Borrower and to improve cost recovery from the Guarantor of such operations.
Partly complied with. The design of a financial management information system has been completed and system installation commenced in 2001. Bank-wide implementation is, however, expected to take two years. BAAC also has a functional Credit Information System, Financial Information System, and Credit Analysis System. However, these systems are not adequately coordinated for real time analysis. BAAC is cognizant of the inadequacies in the present management information system and is finalizing a proposal for installation of a ‘Core Banking System’ for streamlining and integrating the entire information architecture.
Schedule 4 Para. 13
The Borrower shall continue to ensure the cost recovery and sustainability of small and cooperative loans of less than B60,000 each by imposing, as necessary, non interest charges, including service charges.
Complied with during the Project period. A service charge of one percent was imposed on all loans to ensure the cost recovery and sustainability of small loans of less than B60,000. From February 2001, lending interest rate applied to all loans vary between 8 percent and 12 percent per annum depending on the subborrower’s credit rating.
Schedule 4 Para. 14
Within 12 months from the effective date and in consultation with ADB, the Borrower shall conduct a study to determine whether to adopt a policy of not recognizing as income the interest accruing after six months on loans for rural enterprises for which the payment of interest is overdue by more than six months.
The Ministry of Finance and Bank of Thailand have yet to decide on the prudential norms appropriate for the Borrower. World Bank technical assistance for ‘Strengthening Supervision of Specialized Financial Institutions’ is facilitating the process. The report of the consultants, currently being reviewed, has recommended a full on-site inspection by 31 December 2002 based on the prescribed
41 Appendix 8, page 7
COMPLIANCE WITH LOAN COVENANTS
Reference
Covenant
Status
standards, followed by training on the adoption of the standards, and the eventual adoption of the recommended standards by September 2003.
Schedule 4 Para. 15
The Borrower shall modify its loan provisioning policy by fully providing for bad and doubtful loans within five years, instead of the current practice of ten years.
Not complied with. The Ministry of Finance and Bank of Thailand are currently reviewing the prudential norms appropriate to the Borrower as well for other specialized institutions. Technical assistance for the purpose provided by the World Bank is ongoing. Revised prudential norms are expected by mid-2003.
Schedule 4 Para. 16
The Borrower shall create a reserve fund to be used exclusively for meeting losses arising from exchange rate variations. Each year during the term of the Loan, the Borrower shall credit into the fund an amount equal to 1.5 percent, or such greater percentage as would be required to cover the anticipated exchange rate losses, of the total amount of outstanding loans. At the end of year, the Borrower shall make adjustments for the actual gains or losses to the fund during such year.
Complied with during Project implementation. A reserve fund for foreign exchange losses was set up and an amount equal to 2.0 percent of the loan outstanding was provided for 1997 and 1998. The Office of the Auditor General, however, recommended that the Borrower apply the market rate to loans outstanding at the end of the fiscal year and to realize the gain/loss from exchange rate variations in that operating year.
Schedule 4 Para. 17
The Borrower shall maintain for each fiscal year an equity risk-adjusted assets ratio of not less than 1:12.5 (8 percent) as required by the Basle Accord on International Convergence of Capital Measurement and Capital Standards.
Complied with. As of 31 March 2001, the capital adequacy ratio was 8.45 percent as per the prudential norms applied to BAAC. The ratio will be below the required threshold if prudential norms prescribed for commercial banks by the Bank of Thailand are applied.
Participants Duration Resources/Venue
A. Risk Management Course1. Statistics for Risk Management (Pre-course) 27 Apr 1999 2. Concept and Theory Apr and May 1999 3. Practice Aug 1999
B. Business and Banking Management Course(8 batches) 196 Dec 1999 to Sep 2000 Chulalongkorn University
C. Asset and Liability Management(19 batches) 780 Jul to Oct 2000 BAAC in-house experts
42
D. Supervision and Monitoring(2 batches) BAAC provincial
directors 62 Feb 2001 Learnet International Co. Ltd.,
Thailand
E. Study Visit on Crop Insurance Scheme BAAC management officials and Government officials
6 Jun 2000 Philippines
Total Participants 1,071
ALCO = Asset and Liability Committee; BAAC=Bank for Agriculture and Agricultural Cooperatives; TA= technical assistanceSource: Bank for Agriculture and Agricultural Cooperatives.
BAAC provincial directors, assistant provincial directors, branch managers, credit development officers, and fund management officers
Support staff of BAAC's ALCO and section chiefs of the Loan Department
TA Consultant and resource persons from Chulalongkorn and Thammasat Universities
TRAINING PROGRAM(TA 2953-THA)
BAAC branch managers
Course TitleNumber of
Participants
Appendix 9
Appendix 10, page 143
A. Relevance1 Relevance of project preparation to project output at the
time of approval Yes2 Relevance of project output to achievement of project goals and purposes at the time of approval Yes3 Priority in the context of the developing member country's (DMC's)
development strategy at the time of approval Yes4 Priority in the context of Asian Development Bank's (ADB's)
development strategy for the DMC at the time of approval Yes5 Priority in the context of DMC's development strategy at
the time of evaluation Yes6 Priority in the context of ADB's development strategy for
the DMC at the time of evaluation Yes7 Priority in the context of one or more of ADB's strategic
objectives at the time of evaluation Yes8 Appropriate changes made at mid-term review/other
reviews to make the project more relevant Yes
Percent of subcriteria that met assessment 100%
B. Efficacy1 Achievement of most project physical outcomes No Due to the crisis the outcomes 2 Achievement of most project intangible outcomes Yes were less than intended.3 The likelihood of project outcomes leading to project goals Yes
Percent of subcriteria that met assessment 67%
C. Efficiency1 Efficiency of investments: EIRR > 12 percent Yes2 Efficiency of process
- Manner of ADB's internal processing of the project Yes- Organization and management of executing and implementing agencies Yes - Effectiveness of project management No Weaknesses in monitoring- Efficiency in recruiting consultants and other procurement Yes- Timely and adequate availability of counterpart funding No For capacity building
Percent of subcriteria that met assessment 67%
D. Sustainability1 Availability of adequate and effective demand for project While the performance on
services and products No some of the subcriteria is 2 Probable operating and financial performance of the positive, sustainability is
operational entity No unlikely in the absence of an 3 Probability of the existence of appropriate maintenance enabling environment. Inadequate
policy and procedures No autonomy, weakening repayment4 Probability of funds availability for continued operations, ethics, debt moratorium,
maintenance, and growth requirement No and narrow operating 5 Probable availability of skills to continue projec Yes margins are major adverse 6 Probable availability of appropriate technology and factors. Resource crunch is
equipment to operate the project N/A likely in case the repayment rate
PROJECT RATING
Table A10.1: Assessment of Project Achievements in Meeting Subcriteria
RemarksCriterion/Subcriterion
Appendix 10, page 2 44
7 Probable availability of the enabling environment in which remains low after the debt moratorium.the project is operating at the time of evaluation No
8 Government ownership and commitment to the project No9 The extent to which the operation affects the environment
and renewable or nonrenewable resources Yes (+)10 The extent to which community participation and beneficiary
incentives are adequate to maintain project benefits N/A
Percent of subcriteria that met assessment 25%
E. Institutional Development and Other Impacts1 Institutional development impacts
- The people's informal norms and practices N/A The impacts were limited- Institutional or organizational strengthening No due to loan cancellation - Institutional skill levels and capacities No after only 47 percent utilization.- Participatory attitudes of the society N/A Full benefits of the technical
2 Other development impacts assitance could not be captured. - Impacts on poverty Yes (+) - Impacts on the environment Yes (+)- Impacts on social organization N/A - Impacts on enpowerment of women Yes (+)
Percent of subcriteria that met assessment 60%
Table A10.2: Assessment of Overall Project Performance
100%
Relevance 20% Rating of Component 3.0Weighted Score= 3.0 = Highly Relevant
Efficacy 25% Rating of Component 2.0Weighted Score= 2.0 = Efficacious
Efficiency 20% Rating of Component 2.0Weighted Score= 2.0 = Efficient
Sustainability 20% Rating of Component 0.0Weighted Score= 0.0 = Unlikely
Institutional Developme 15% Rating of Component 2.0and Other Impacts
Weighted Score= 2.0 = Moderate
Overall Rating =PS Weighted Score 1.80
Scoring criteria: Over 75 percent = "3", over 50 percent up to and equal to 75 percent = "2", over 25 percentup to 50 percent = "1", 25 percent or less = "0."
Rating criteria: if score>2.5 then "Highly Successful (HS)," if 1.6 =<score=<2.5 then "Successful (S),"if 0.6=<score=<1.6 then "Partly Successful (PS)," and if score<0.6 then "Unsuccessful (US)."
If any criterion has a rating of less than 1, the rating would be downgraded by one level.
Criterion Weight
Criterion/Subcriterion Remarks