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The World Bank

The World Bank. Financial institutions in the agricultural sector : The Case of Aiyl Bank, Kyrgyzstan Ajai Nair, Consultant, The World Bank Expert Meeting on Managing Risk in Financing Agriculture Johannesburg, 1-3 April, 2009. Presentation Outline. Institutional Overview

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The World Bank

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  1. The World Bank Financial institutions in the agricultural sector:The Case of Aiyl Bank,KyrgyzstanAjai Nair, Consultant, The World BankExpert Meeting on Managing Risk in Financing AgricultureJohannesburg,1-3 April, 2009

  2. Presentation Outline • Institutional Overview • Lending technology and process • Credit risk assessment • Credit risk management • Delinquency management Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  3. Institutional Overview: Ownership and legal character • Fully government owned • Set up through a World Bank funded rural finance project in 2006 • Obtained limited banking license in 2006 • Network of 18 branches, 50 regional offices, and 33 village offices • In the process of being privatized; parliament has approved sale of 67% of shares to strategic investor with rural financing experience Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  4. Institutional Overview: Financials • US$67 million in loans • Over 43,000 borrowers • 87% of portfolio in agriculture • Over 90% of agricultural loans for livestock • Over 3/4th loans less than $3000 • PAR (90) <1% Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  5. Lending Technology • 87% loans to individuals; joint liability groups, and legal entities • Most loans have physical collateral – buildings, equipments, but not land • Most loans have terms of 1 to 2.5 years • Interest rates (on reducing balance) 22% on agriculture and 27% on non-agriculture Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  6. Lending Process • Individuals desiring loans register in bank’s local office and obtain checklist of documents • Visit by loan officer scheduled; loan officer does preliminary assessment of creditworthiness and provides estimate of loan eligibility • Client submits loan application with all required documents • Further assessment by loan officer and recommendation to loan committee • Verification of documents by bank lawyer • Decision by committee. • Loan application to decision in around 2-3 weeks. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  7. Credit risk Assessment • Four credit risk categories: • Level 1: Loans below $425 • Level 2: Loans between $425 and 3000 • Level 3: Loans between $3000 and $15,000 • Level 4: Loans above $15,000 • Loans less than $425 are collateral free; provided on village council recommendation • Increasingly intensive credit risk assessment for higher levels • Level 2: minimum amounts of information on assets and liabilities of the borrower, a simple business plan, and information on collateral. • Level 3: Additional details on assets/liabilities and business plan; information on income and expenditure • Level 4: Multi-year information on income and expenditure; formalized financial statements Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  8. Credit risk management • Documents required for all loans that require collateral: • copy of land tax receipt • certificate from village administration to prove local residency • original title deed of asset submitted as collateral • no-lien certificate from the asset registry • notarized collateral agreement • Insurance of assets financed not required. • Tiered loan approval policy • Loans below $425 in village offices • Loans up to $15,000 in branches • Loans above $15,000 in head-office Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  9. Credit risk management • In person loan monitoring based on loan classification • Standard loans - at least once in 6 months • Loans in watch category - visit at least once every 4 months • Loans in sub-standard category: visit at least once every 3 months • Loans in doubtful category: visit once or more in every 2 months • Provisioning policy • Standard loans: 2% • Watch loans (defaults <30 days): 5% • Sub-standard loans (defaults 30-60 days): 25% • Doubtful loans (defaults 60-90 days): 50% • Losses (defaults over 90 days): 100% Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  10. Credit risk management • Delinquency management • Penal interest of 3% on delinquent loans • If delinquent for 30 days, notice issued • If delinquent for 60 days, recorded in credit registry • Request submitted to credit committee to file claim in court • Court process around 4 months and after decision, 4-6 months to liquidate collateral • Less than 1% loans require court processes and dues recovered fully in around 50 % of the cases. • Availability of good veterinary services reported as key non-financial factor in credit risk management • Plan to increase non-agricultural portfolio to 30% by 2012. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

  11. Conclusions • A new generation agricultural development bank in a low income country • Basic banking tools and processes continues to be relevant for agricultural finance • Market facilitating institutions have a key role to play in agricultural finance Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

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