Once saddled with a huge volume of non-performing loans, the farming credit system has strengthened under the supervision of a state-backed agricultural bank.
Taiwan’s agricultural finance system has evolved considerably since the early 2000s when it was burdened with a large volume of non-performing loans (NPLs). The dire state of Taiwan’s rural finances at that time compelled then-President Chen Shui-bian to warn in December 2002 that without reform, “the life savings of farmers and fishermen may disappear overnight,” adding that “the government cannot turn a blind eye to the situation.”
The NPL problem derived from an underdeveloped rural finance system as Taiwan had no national agricultural bank prior to 2005. Rather, the credit departments of the farmers’ and fishermen’s associations – the financing platform for Taiwan’s farmers, fishermen, their households, and agricultural enterprises – were largely responsible for agricultural finance. In 2004, these credit departments were the only banking facility in 93 of Taiwan’s 309 townships, according to government data.
Farm loans comprised the majority of their lending operations while the main source of their lending funds was the deposits of their members and families. Three state-owned banks – the Land Bank of Taiwan, Taiwan Cooperative Bank, and the Farmers Bank of China (acquired in 2006 by Taiwan Cooperative Bank – were required to accept deposits from the credit departments of farmers’ and fishermen’s associations when those entities had excess funds.
Most of the individual credit departments were small-scale, had a limited business scope, and were located in remote areas. Once Taiwan liberalized its banking sector in 1991, allowing the establishment of new commercial banks, the credit units had difficulty competing. Unable to offer employees the same salary and benefits as a bank, they found it hard to attract strong talent. “The credit departments lacked professional managers, especially those knowledgeable about risk management,” says Hsu Wei-wen, director general of the Bureau of Agricultural Finance (BOAF) at the Council of Agriculture (COA).
Meanwhile, corruption became a serious problem. Woo Rhung-jieh, a professor of agricultural economics at National Taiwan University, noted in a July 2004 report on Taiwan’s agricultural finance system that farmers’ associations were able to “interfere easily in the operation of credit departments.” According to Woo’s report, “the internal auditing system in most credit departments is not sound enough to prevent corrupt practices from happening.” Furthermore, most profits of the credit departments were channeled to fund “other activities of the associations,” which made it difficult to improve their fiscal condition.
In a 2007 opinion piece for the Taipei Times, DPP legislator Lin Shu-fen wrote that at the beginning of that decade one-third of the roughly 300 association directors “had a history of corruption.” According to Lin, NT$900 million (US$27.6 million) of the money that Taiwanese farmers had saved in their associations’ credit departments was “lost” by their directors through “high-risk loans.”
Turmoil in the Taiwanese financial system in the 1990s also weakened the fiscal condition of the credit departments. In the first half of 1995, volatility in Taiwan’s capital market led to a liquidity shortage, prompting panic runs on some of the weakest credit departments. Depositors began to lose confidence in them, causing their market share to decline.
With the onset of the Asian financial crisis in 1997 and later the bursting of the dot-com bubble in 2001, the credit departments plunged deeper into the red, notes Hsu of the COA. According to NTU’s Woo, from 1996 to 2004 the credit departments’ market share of deposits decreased from 11% to 7%. Over that same period, loan market share dropped from 6% to 3%, the rate of return on capital fell from 0.8% to 0.3%, and NPL rates rose from 8.6% to 15.5%.
Sowing the seeds of reform
In a bid to reform Taiwan’s agricultural finance system, the Chen Shui-bian administration outlined a five-point consensus in November 2002. The program sought to give the COA sole supervisory authority over the farmers’ and fishermen’s associations’ credit units, establish a national agricultural bank, expeditiously pass an agricultural finance law, ensure that deposits in the credit departments are protected, and finally to make the agricultural sector more competitive.
The Legislative Yuan passed the Agriculture Finance Act in 2003, which put the credit departments of farmers’ and fishermen’s associations under the supervision of the COA’s BOAF. The Bureau is responsible for supervising agricultural finance institutions and planning agricultural loans.
The BOAF established the Agricultural Bank of Taiwan (ABT) in 2005, creating a two-tier agricultural finance system by placing the ABT above the credit departments of the farmers’ and fishermen’s associations. The government holds a 49% stake in the bank, while farmers’ and fishermen’s associations hold the remainder.
“We help the credit departments to be profitable,” says ABT president Cheng Cheng-mount. “They then can use the profits to help farmers, such as by funding scholarships or providing emergency aid.” He notes the ABT has taken about NT$1.75 trillion in deposits from the credit units since 2005, from which they have profited handsomely thanks to the one-year time deposit interest rate the ABT pays them. “This is like a subsidy to them – it’s a very stable return and much higher than the savings deposit interest rate,” Cheng notes. In contrast to most banks, which use the bulk of their funds for lending, the ABT focuses on treasury activities in its asset liability management to generate the cash flow necessary to pay interest on those deposits.
In addition, the bank has played an important role in reforming the credit departments of the farmers’ and fishermen’s associations so that they function more like professional financial institutions. It integrated the operations of the 300-some farmers’ and fishermen’s associations and their more than 1,160 credit departments, and strengthened auditing by enforcing the same assessment standards applied to commercial banks. And perhaps most importantly, it implemented stricter criteria for loan applications. “We supervise them to do the right thing – to use their profits to write off the NPLs,” Cheng says. “If the NPL ratio of a credit department is too high, we restrict their business.”
Another important function of the ABT is to organize syndicated loans, Cheng says. “Before the establishment of the Agricultural Bank of Taiwan, credit departments of farmers’ associations couldn’t lend to borrowers outside of their town. We can organize a syndicated loan that allows an individual credit department to lend to borrowers anywhere in Taiwan.”
Over the past decade, reforms to Taiwan’s agricultural finance have been effective, observes Hsu of the COA. Government data shows that the NPL ratio of farmers’ association credit departments fell to 0.5% in January 2016, compared to 17.7% in January 2004. Over that period, deposits increased by NT$472 billion (US$14.5 billion) to more than NT$1.76 trillion (US$53.9 billion), while loans rose NT$4.47 billion (US$137 million) to NT$1.1 trillion (US$33.7 billion).
Having brought the credit departments’ NPL problem under control, the ABT is looking to expand the scope of its business with an eye on the global market. Last December, it took a step in that direction by establishing an offshore banking unit (OBU) to help local farmers sell their products internationally. Once the international banking department begins operations, it will provide agricultural businesses with “one-stop banking services” such as foreign currency-denominated loans and letters of credit.
Industry experts say Taiwan’s agriculture sector needs foreign exchange services given its high volume of trade. In 2014, Taiwan’s agricultural exports totaled US$5.2 billion, while imports reached US$15.5 billion. Farmers say they could export more if they had better financial support from the government.
Meanwhile, the ABT plans to set up branches in both Hsinchu and Chiayi this year, giving it a total of five branches nationwide (the current three are in Taipei, Taichung, and Kaohsiung). All of its branches are authorized foreign exchange banks.
ABT President Cheng says the bank will seek approval from the Financial Supervisory Commission to begin operating its OBU this year. The OBU will help agricultural firms pursue international expansion, he explains, noting that Taiwanese fish farmers do a big business in Southeast Asia and Taiwanese orchid growers are active in China. These entrepreneurs want to increase the size of their overseas investments, but at present cannot secure funding from the ABT, which currently can only fund investments in Taiwan. “Once we have an OBU up and running, we can provide the agricultural sector with more substantive support as it pursues international expansion,” Cheng says.