January 2006, Budapest

January 2006, Budapest

Additionality of Guarantee Schemes for Agricultural and Rural Development: Lithuanian Experience

Danguolė ČukauskienėDirector, Lithuanian Rural Credit Guarantee Fund

January 2006, Budapest

Population – 3,41 millionUnemployment rate – 8,5 %, 33% of total population live in rural areasWorkforce in agricultural sector – 15,8 % of total employment in LithuaniaAgriculture, forestry and fishery accounts 5,8 % of GDP (Gross Domestic Product)

January 2006, Budapest

Banking Sector

11 private commercial banks, 87,3% of total banks equity held by foreign investors

3 major banks, market share is 71% 64 Credit Unions (credit co-operatives) Strong expansion on credit markets

(average growth of credits – 40%) Leasing activities significantly growing Average interest rates to enterprises - on

loans in LTL 5 %, EUR-3.5%.

January 2006, Budapest

Credit environment in agricultural sector

Lack of collateral (low liquidity value of assets in rural areas)

Information asymmetry Seasonality of rural businesses Relatively high risk of the sector

(dependence on external conditions, state supporting and price policy)

January 2006, Budapest

Vulnerability of agricultural sector often causes big GAPS between agricultural entities,

rural SMEs and their creditors….

….need of INTERMEDIARY between them

January 2006, Budapest

Additionality of credit guarantees

Financial – access to credits to clients who previously did not

have access to bank credits as a result of lacking or inadequate collateral;

improvements in lending conditions (enlargement of the credit size, longer repayment period etc.).

Economic – improvements in income and quality of life of the

borrowers; an increase in the amount of commercial and

economic activity in terms of employment, sales, new products developed, competitiveness, productivity and economic growth.

January 2006, Budapest

Impact of Rural Credit Guarantee Scheme

CREDIT BENEFICIARY

BANKGUARANTEE INSTITUTION

CREDIT GUARANTEE

GURATANTEE FEE

FULFILMENT OF GUARANTEE LIABILITIES

CREDIT REPAYMENT

Possibility to get credit

Risk-sharing Rural development

January 2006, Budapest

Rural Credit Guarantee Fund Established in August 1997 Legal Status – Closed Stock Company, Ltd. Share capital – EUR 1,8 mill. (Reserves EUR 13,6

mill.) State owned (100 %) The Ministry of Agriculture is in charge with

responsibility for RCGF creation and supervision State is responsible for all guarantees issued by

RCGF Each year the state sets limit of guarantee

liabilities (2005 – 81,09 MEUR (2004 – 63,72 MEUR)

January 2006, Budapest

Mission

To promote the economic and social development of rural areas

in Lithuania, providing an opportunity for business entities not having enough collateral to

receive a bank credit

January 2006, Budapest

Fund’s activities

Credit guarantees for long-term investment credits and short-term credits: Up to 70% of the

unpaid credit amount

For young farmers – up to 80% of the unpaid credit amount

Administration of the state supporting aid to guaranteed credit beneficiaries: Compensation of

guarantee fee insurance

premiums loan interests

January 2006, Budapest

Guarantee beneficiaries:

Farmers, agricultural entities Processing companies Businesses in rural areas

Rural tourism Services for rural population /hair dressers, footwear, apparel mending shops

etc./ Small and medium sized agricultural produce

processing companies /mills, bakeries etc./ Traditional crafts Other activities in rural areas, increasing people

incomes

January 2006, Budapest

Scope of activities

Geographical coverage of operations - national

Co-operation agreements with all Lithuanian commercial banks

Since 1st of September, 2005, - credit guarantees to other financial institutions - credit unions

January 2006, Budapest

Issued credit guarantees 2002-2005

0

10000

20000

30000

40000

50000

60000

2002 2003 2004 2005

Th

ou

san

d E

UR

0

50

100

150

200

250

300

350

Gu

ara

nte

es,

pcs.

Guarantees Credits Number, pcs.

January 2006, Budapest

Main Results of 2005

365 guarantee contracts (169 – 2004) About 2000 preserved and new jobs Volume of issued guarantees – 32

MEUR (16,6 MEUR – 2004) Total guarantee liabilities portfolio –

76,7 MEUR Average guarantee amount 97.719 EUR

January 2006, Budapest

Breakdown of credit guarantees according to beneficiaries

Farmers45%

Agricultural entities

32%

Processing companies

9%Rural SMEs14%

January 2006, Budapest

Conditions for good working of the scheme Banks/credit unions are positive about the structure

of guarantee scheme Additional activities to the guarantees are very

attractive to guarantee beneficiaries The Fund share responsibility with a bank as well

as guarantee beneficiary Favourable economic conditions: competition

among banks, low interest rates The instrument is an effective way of using public

money to improve effects on the agricultural sector

January 2006, Budapest

Difficulties

Relatively small farms and slow processes of land consolidation

Most of farm-owners are on retiring age (60%) No credit history Lack of confidence/trust in viability of farms Growing prices of material discourage lending

processes Bureaucratic procedures to receive bank

credits. Instead of bank credits many farmers still use suppliers’ credits.

January 2006, Budapest

Conclusions

Additionality of rural credit guarantees in Lithuania: Provide agricultural entities with access to

finance, encouraging their creation or expansion Contributes to the creation of self-employed or

salaried jobs Promotes the expansion alternative activities in

rural areas Helps to harmonize their cash flows of rural SMEs Contributes to the assimilation of structural funds

and other EU financial support

January 2006, Budapest

January 2006, Budapest

Thank you for your attention!

www.garfondas.lt