Additionality of Guarantee Schemes for Agricultural and Rural Development: Lithuanian E xperience

1. Additionality of Guarantee Schemes for Agricultural and Rural Development: Lithuanian Experience Danguolė Čukauskienė Director, Lithuanian Rural Credit Guarantee Fund January 2006, Budapest

2. Population – 3,41 million • Unemployment rate – 8,5 %, • 33% of total population live in rural areas • Workforce in agricultural sector – 15,8 % of total employment in Lithuania • Agriculture, forestry and fishery accounts 5,8 % of GDP (Gross Domestic Product) January 2006, Budapest

3. 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

4. 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

5. Vulnerability of agricultural sector often causes big GAPS between agricultural entities, rural SMEs and their creditors…. ….need of INTERMEDIARY between them January 2006, Budapest

6. 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

7. Impact of Rural Credit Guarantee Scheme GURATANTEE FEE CREDIT BENEFICIARY BANK GUARANTEE INSTITUTION CREDIT GUARANTEE FULFILMENT OF GUARANTEE LIABILITIES CREDIT REPAYMENT Possibility to get credit Risk-sharing Rural development January 2006, Budapest

8. 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

9. 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

10. 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 aidto guaranteed credit beneficiaries: Compensation of guarantee fee insurance premiums loan interests Fund’s activities January 2006, Budapest

11. 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

12. 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

13. Issued credit guarantees 2002-2005 January 2006, Budapest

14. 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

15. Breakdown of credit guarantees according to beneficiaries January 2006, Budapest

16. 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 bankas 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

17. 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

18. 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

19. Thank you for your attention! www.garfondas.lt January 2006, Budapest