Finance Model - Rural Development - Lecture Slides, Slides of Human Development

Download Finance Model - Rural Development - Lecture Slides and more Slides Human Development in PDF only on Docsity! A New Rural Finance Model Docsity.com CONTENTS Introduction  Theoretical Framework  Background A New Rural Development Model  Banrural: What Went Wrong?  Strategic Alternatives  The New Model Financiera Rural  What is Financiera Rural?  Results After Two Years of Operations Lessons Learned and Challenges Ahead Docsity.com A New Rural Finance Model Docsity.com BANRURAL Inefficient Operating Structure: system of 13 regional banks operating as “independent” entities Operating costs above operating income Distorting, subsidy-based first-tier operation “Unlimited” access to public funds allocated by Congress No risk-management strategies Unsustainable non-performing loan ratio No strategic planning Political pressure and moral hazard; no payment culture among customers Inadequate supervision from authorities; negative incentive structure What Went Wrong? BANKRUPTCY Docsity.com THE CONTEXT “Rural” refers to localities of 50,000 or less inhabitants. 61% of extremely poor families live in rural areas.* *Data as of 2004. World Bank estimates, using the ENIGH 2002. Spacial Dispersion Covariance Risk Seasonality Ethnicity Issues No Integrated Prod. Chains No Access to Financial Svcs. Poverty Migration RURAL SECTOR CHARACTERISTICS Mexico’s Rural Sector Docsity.com What is Financiera Rural? Docsity.com Development bank focused on agricultural activities Funding through “unlimited” access to loans from the Federal Government Operated as a subsity manager, with a high ratio of non- performing loans Inefficient cost structure; operating costs over 100% of operating income Defficient risk management New Development Agency focused on rural productive projects Legally banned from taking deposits, loans or market funding. Must maintain endowment value over time to sustain operations Operates with credit processes that apply international best practices. Has spread payment culture among clients Efficient cost structure Best risk management practices Banrural Financiera Rural COMPARATIVE ANALYSIS Financiera Rural vs. Banrural * The Mexican Government received a USD 505 million IBRD loan for the creation of Financiera Rural. Docsity.com * “Rural” refers to locations with up to 50,000 inhab. M EX IC A N G O VE R N M EN T Structural Transformation of Rural Credit Creation of a Rural Financial System FR Supports any productive activity in the rural area Supports the creation and consolidation of Rural Financial Institutions Financial Resources Training and Advisory Services Technical Assistance Agriculture Forestry Fishing Tourism Commerce Pr od uc tiv ity Q ua lit y of L ife Mission and Vision FINANCIERA RURAL Docsity.com FINANCIERA RURAL Decision-Making Processes CREDIT COMMITTEE RISK MGMT. COMMITTEE OPERATIONS COMMITTEE • Top Management • Independent Members • Central Bank • Ministry of Finance 12 Members of the Board, Incluiding the Ministries of Finance and Agriculture, the Central Bank and several Agricultural Organizations. Organizational Structure with 6 Operational Units, 6 Regional Heads and an independent Risk Management Unit; all report to the CEO. Docsity.com RURAL DEVELOPMENT AGENCY Initial Endowment of USD 1.72 billion** USD 1,534 Mill. Credit* USD 79 Mill. pre-operating expenses USD 49 Mill. Technical Assistance Supervised Rural Financial Intermediaries Informal Rural Credit Institutions Individual Rural Producers Technical assistance for credit enhancement and the creation of RFIs Credit *Of the initial USD 1.6 billion, USD 46 million could be used for the acquisition of Banrural assets (other than loans). ** Provided by Congress. FINANCIERA RURAL An Integral Model Docsity.com Rural Financial Intermediaries • Credit Unions (Uniones de Crédito) • Financial Cooperative Associations (Sociedades Financieras Populares*). • Thrift Cooperatives (Sociedades Cooperativas de Ahorro y Préstamo*). • Depository Warehouses (Almacenes Generales de Depósito). *Governed by the new law for popular savings and loans (Ley de Ahorro y Crédito Popular) Other Organizations • Agribusinesses • Non-regulated financial intermediaries • Microfinance organizations • Local producer organizations FINANCIERA RURAL Second-Tier Customer Base Docsity.com Establishment Sustainable Development Individual Producers Unsupervised Credit Organizations Supervised Rural Financial Intermediaries A Z FR’s Credit and Technical Assistance to Develop Institutional Capabilities FINANCIERA RURAL The Road to Intermediation Docsity.com Main Achievements After Two Years of Operations FINANCIERA RURAL Docsity.com ---Banrural------- --------Financiera Rural--------- Source: Financiera Rural. p/Programmed 800 459 837 1,020 Avg. 2001-2002 2003 2004 2005p/ TOTAL CREDIT USD Million Docsity.com 2 0 0 4 - 2 0 0 5 96 N um be r o f C re di ts 150,485 163,878 2004 2005 OCT Nr. OF CREDITS 8.9% US D M ill io n 837 902 2004 2005 OCT 7.8% CREDIT AMOUNT CREDIT THROUGH RFIs 73 118 2004 2005 OCT 62% US D M ill io n CREDIT EVOLUTION Docsity.com CREDIT 2 0 0 4 - 2 0 0 5 96 LOAN PORTFOLIO 688 947 2004 2005 OCT US D M ill io n 37.6% LOAN RECOVERIES 460 740 2004 2005 OCT 60.9% 2.9% 2.6% Financiera Rural’s credit has reached 15% of total financing to Mexico’s rural sector, using its own resources and applying its own interest rate policies. Most credits have benefited producers with anual income below 140,000 pesos (USD 13,084). Over 387,000 producers have benefited directly from loans that average 62,000 pesos (USD 5,794). Docsity.com STRUCTURE 12 206 6 96 Banks Branches Regional Centers Agencies BANRURAL FINANCIERA RURAL OFFICES N um be r o f E m pl oy ee s 3,459 1,061 BANRURAL FINANCIERA RURAL 69% PERSONNEL US D M ill io n 293 79 BANRURAL 2002 FINANCIERA RURAL 2005 OPERATING COSTS 73% Comparative Efficiency Docsity.com “i. hh Lessons Learned and Challenges Ahead ® Docsity.com Macroeconomic reforms, although necessary, have not been enough to correct existing disparities and market imperfections in rural areas. A new approach to rural development is based on an “integral” vision that goes to the micro-level using a “down-up” approach to ensure the success of entire production chains. Unsuccessful past Government experiences which targeted rural credit development through directed, subsidized credit are being replaced with a new model, where: The Government acts only as a facilitator for market forces to operate efficiently. Subsidies are used only to build producer capabilities and to support the creation of financial intermediaries. Government development institutions have to be profitable in order to ultimately reduce poverty. A New Rural Development Model LESSONS LEARNED Docsity.com Continue to strengthen the rural financial system in order to gradually pull out of the first-tier. Maintain the value of FR’s endowment over time, through self-sufficient operations. Tailor FR’s programs and products to a dynamic rural sector. Differentiate interest rates based on tier and risk level of clients. Diversify client base into non-agricultural activities. Improve human resource management. Foster the relationship and coordination with other government entities and international institutions. Find alternative liquidity sources (loan securitization). CHALLENGES AHEAD Sustainable Growth of Financiera Rural Docsity.com