When Thailand’s former finance minister, Korn Chatikavanij, took office in late 2008 he knew little about the Bank for Agriculture and Agricultural Cooperatives (BAAC), a state enterprise within the finance ministry’s portfolio. “When I learned upon becoming finance minister that one of my responsibilities was to chair the BAAC and attend board meetings, I said, ‘Do I have to?’,” he recalls.
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Mr Korn could have appointed a subordinate to the task, but in retrospect he is glad that he did not. “I would say, in fact, it was probably one of the most satisfying roles I had to play as finance minister,” says Mr Korn. “[The bank] is one of the most effective tools available to the government. I used to call it ‘our secret weapon’, because everybody underestimated it.”
The Democrat party, of which Mr Korn is a deputy leader, used the BAAC to launch an income support scheme for rice, tapioca and sugarcane farmers, which essentially guaranteed them a reasonable profit from their crop, after taking into account input costs and the prevailing market price. The scheme was new to Thailand’s agricultural sector, and was put in place within six months of prime minister Abhisit Vejjajiva coming to power in December 2008. It proved one of the more popular policies of the then ruling party.
“After a week, I realised I had something that would allow me to deliver services and help to the constituency most in need,” says Mr Korn of his working relationship with the BAAC.
Setting an example
Mr Korn is not the only advocate of the BAAC, which was launched in 1966 to assist Thai farmers and agricultural co-operatives. A World Bank report on the Myanmar Agricultural Development Bank (MADB) released in 2014 cited BAAC as a good role model for its Myanmar counterpart. The report suggested that if MADB followed BAAC's lead, it could become a more effective tool in providing credit to Myanmar’s financially neglected agricultural sector, which employs an estimated 70% of the country's workforce.
MADB, which falls under the auspices of Myanmar's ministry of agriculture, essentially passes out small loans of less than $100 to 1.8 million farming families to finance purchases of fertilisers and pesticides for their rice crop.
“We want Myanmar to move in the same direction as Thailand,” says Jose De Luna Martinez, a financial economist at the World Bank, which is advising MADB. “This institution should not just be supporting smallholder farmers but also larger agri-business companies and co-operatives, which will eventually help modernise the entire sector.”
The World Bank has suggested that MADB be put under finance ministry and central bank supervision, as a first step towards reforms.
BAAC, which is 99.8% owned by the Thai finance ministry, similar to most agricultural banks in the region, has a mandate to provide credit to farmers who have traditionally had little or no access to finance from the commercial banking system. Over time, the bank has expanded its credit services, from small, short-term loans to 'joint liability groups' – clusters of a minimum of five farming families held jointly responsible for payback at the risk of excluding the entire village from future loans – to medium- to long-term lending for individuals buying farm inputs.
While staying away from large-scale corporate lending, the bank has more recently diversified into loans for rural communities investing in agri-businesses, such as palm oil plantations, processing equipment and small-scale energy from waste facilities. With 1158 branches and 20,000 staff, the bank’s rural outreach is impressive, serving 5.7 million farming families.
Costly business
Its extensive network, and long-established ties with farming clients, makes BAAC a perfect mechanism for governments seeking to implement policies designed to improve rural incomes and secure political support. While agriculture accounts for less than 10% of Thailand's gross domestic product (GDP), the sector still employs about 40% of the labour force, making it a vital constituency.
In Thailand's last general election, held in July 2011, one of the campaigns of the winning Pheu Thai party was a promise to buy “every single grain of rice” from farmers at a fixed price of Bt15,000 ($450) per tonne of plain white rice paddy and Bt18,000 for higher-grade jasmine.
The so-called rice pledging scheme proved more popular than the previous income support scheme started by the Democrat party, who lost the election. But, in the end, the policy proved costly for the government of prime minister Yingluck Shinawatra, which ended up buying rice for 40% to 50% more than prevailing market prices and, over a two-and-a-half year period, accumulated $16bn to $18bn in losses from the scheme, according to government estimates.
Ms Yingluck, whose government was overthrown by the May 2014 coup, appeared at the National Assembly on January 9, 2014, to defend herself against possible impeachment relating to the scheme. She argued that the scheme was designed to boost farmers' incomes, not to make a profit and said that she had been honest and transparent in all her dealings. Many observers regard her interrogation as purely politically motivated, and a way to remove her from politics. In any case, the BAAC – the main player in the scheme – has emerged relatively unscathed.
BAAC reported a net profit of Bt9.9bn in the fiscal year ending March 31, 2014, up 8.9% year on year. Its non-performing loans (NPL) ratio was 4.1% in 2013, compared with 3.95% the previous year. Total bank assets have grown steadily since 2009, from Bt764.9bn to Bt1300bn.
Money spinner
BAAC's current president, Luck Wajanawat, has proven adept at making sure past governments’ populist schemes for farmers did not adversely impact the bank. It helps that some 87% of the bank’s capital is from the public, primarily small depositors at their rural bank branch network. “This is a guarantee in a way to the politicians that you cannot make a decision that is bad for the bank, otherwise you will create a big problem for the depositors,” says Mr Luck.
Although BAAC is obliged to carry out government policy, and is chaired by the finance minister, it is not obliged to take on liabilities that would undermine its financial stability. “As management we cannot refuse to implement a policy, but if the government would like BAAC to lend at a rate lower than the cost, then it has to subsidise BAAC,” says Mr Luck.
The rice pledging scheme, for example, set a ceiling of Bt500bn for the entire programme to be financed by public borrowing. BAAC agreed to lend the government Bt90bn from its own funds, and borrowed the remaining Bt410bn on behalf of the government. When the programme ran out of money in late 2013, after the government failed to sell the overpriced rice stocks on the market and replenish its working capital, a total of Bt92bn was owed to 800,000 farmers.
Thailand’s junta, after forming a new government, had to borrow this amount from the BAAC to pay back the farmers for rice they had sold to the government of Ms Yingluck in October to December 2013.
All these debts are essentially government debts to BAAC, not BAAC obligations. “It’s not on its balance sheet because it was not its risk,” says Patchara Sarayudh, director of bank analysis at Fitch Ratings in Thailand, which gives BAAC an AAA long-term rating. “Actually, the rice pledging scheme was good for BAAC,” says Mr Patchara, noting that BAAC charged a 2.5% service fee on transactions involving 5.8 million farmers over a two-and-a-half year period.
"BAAC made good money off its service fee charge of 2.5%, which explains why it could afford to pay its executives five- to seven-month bonuses," says Nipon Poapongsakorn, a rice industry expert at the Thailand Development Research Institute think tank.
“We didn’t overcharge the government,” says Mr Luck. “But we have the assets, the people, the branches and we used these assets to generate additional income.” Net income from fees and services reached Bt2.2bn in the fiscal year 2013, up 8.5%.
Remaining competitive
The junta-installed government has put an end to the rice pledging scheme but is providing limited cash handouts to the poorest farmers, to ease the losses from falling prices, and is pushing for strategies that encourage farmers to go into higher value-added crops, such as organic rice.
Current BAAC chairman and finance minister Sommai Phasee has also directed the management to start devising long-term credit strategies to encourage younger generation farmers to stay on the farm, a major challenge to Thailand’s agricultural sector and BAAC’s future as an agricultural bank. The average age of Thai farmers is now 51, compared with 32 only 25 years ago, according to government data. “Now we have more than 1.3 million clients who are more than 60 years of age, or about 25% of our client base,” says Mr Luck.
In an effort to keep young Thais employed in agriculture, the bank won board approval in December 2014, in principle, to initiate a 'dual loan' system, offering preferential interest rates to the designated successors of the bank’s existing good customer base to allow them to further their knowledge in agriculture or experiment with new technologies that could lead to crop innovations and improved efficiency. The loan programme will also offer a 10% rebate on accrued interest payments at the retirement age of 60, as an incentive to keep the younger generation farmers on the farm. “With this programme, we hope to gradually replace the old farmers at a rate of 100,000 a year,” says Mr Luck.
BAAC interest rates are generally lower than those of commercial banks, because it benefits from a waiver on corporate income tax, but interest rates to farmers vary, depending on annual assessments of an individual’s risk. The bank sometimes faces criticism for such policies, given its mandate to assist the poor, but management insists such arrangements are necessary.
If Mr Luck has one piece of advice for future Thai political leaders, he says it would be: “Don’t have the notion that farmers are pitiful and you have to lend to them at low interest rates. That will kill BAAC’s financial intermediary status, and will make it worse for the farmers in the long run because they will have no alternative source of financing and will have to go back to the money lenders."
