The European bank for Reconstruction and Development will spend $23 million this year to encourage banks to accept warehouse receipts as collateral for agricultural loans.
EBRD issued Aval Bank a $10 million line of credit last year to finance domestic agricultural companies who would use warehoused agricultural commodities as collateral.
Earlier this year, EBRD prolonged an agreement with Aval and provided the bank with an additional $3 million.
EBRD will also provide Ukrsotsbank with a $10 million line of credit by the end of the year. A warehouse receipt is a security, evidence that a firm owns goods stored in a warehouse.
Viktor Marchenko, the EBRD’s country coordinator of financial projects, said the deal with two Ukrainian banks is part of a pilot project to help speed up development of a warehouse receipts system in Ukraine, and increase agricultural financing.
Today, Ukrainian farmers desperately need working capital for planting and harvesting, but banks are reluctant to provide sufficient financing because of high seasonal risks, unpredictable prices, the absence of liquid assets that can be used as loan collateral, and most farmers’ minimal credit history.
By encouraging commercial banks to develop a warehouse receipt system as a more secure form of collateral, the EDRB aims to make credit resources available to a wider range of agricultural companies, Marchenko said.
“Agriculture can be very profitable, but it’s a very risky sector,” said Ukrsotsbank Kyiv branch deputy head Andrey Onistrat.
“We would prefer to finance more reliable borrowers.”
“But with resources from the EBRD, we are obliged to loan to agricultural businesses,” he said, adding that the project “brings banks and farmers together.”
Ukrsotsbank will provide its clients with loans at interest rates of between nine percent and 11 percent.
The average interest rate for loans in hard currency amounts to 16 to 18 percent. For loans in national currency it is up to 45 percent, Onistrat said.
In the past, farmers have been hampered in obtaining loans.
The law on grain, approved by parliament in August 2002, introduced the warehouse system to Ukraine.
However, to ensure that the system works, a number of steps need to be taken, Marchenko said, including a certification that would licence warehouses, a guarantee fund, and a state register.
“Our work with the banks is just the first step,” Marchenko said.
“We want to ensure that the banks and their clients are ready to work with receipts when the system is launched fully.”
Marchenko said that if the warehouse receipts system works well, the EBRD would significantly increase its agricultural financing.
Quoting EBRD Ukraine director Kamen Zahariev, APK-inform said on Oct. 22 that EBRD could increase financing by $80 million to $100 million.
“If the legislation is improved, and if the insurance and warehouse receipts systems are functioning properly, it will reduce the banks’ risks and will lead to increases in financing,” Zahariev said.
Establishment of the warehouse receipt system could also help stabilize agricultural prices.
Aval is now the country’s largest agricultural lender, Marchenko said.
Viktor Horbachev, head of Aval Bank’s loan department, said that the bank has provided agricultural businesses with 5,000 loans this year, totaling Hr 850 million, or 17 percent of the bank’s loan portfolio.
The main borrowers, he said, are traders and products processors, although the project is aimed at farmers.
“We have chosen the bank’s most reliable partners among traders and agricultural products manufacturers, in order to minimize risks,” Horbachev said.
“Unfortunately, there aren’t many solvent borrowers yet among Ukrainian farmers, but the situation is improving.”
Horbachev said that to finance businesses, Aval used double warehouse receipts.
“It’s a type of transitional document that isn’t a fully valuable security yet, but it provides the bank with more financial security.”
Marchenko said that EBRD, which directly lends only to large borrowers, cannot finance small businesses directly.
It uses local banks with wide regional networks as intermediaries.
But Marchenko did not exclude the possibility that, in the future, EBRD could start financing large farmers directly, in consort with local banks.
