Discussion Papers of the Research Centre for International Agrarian and Economic Development, Heidelberg, No. 52
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Abstract
The economic transformation had, among others, severe implications on agricultural production and the agricultural finance system. The institutions and organisations had to be adopted to the market economic system in a short period. While formal insti tutions and organisations were adjusted relatively easily, the change of the informal institutions (i.e. codes of conduct, behaviour, norms etc.) takes a much longer time frame. The state had been in a dilemma. On the one side, the funds for subsidising a gricultural production had to be reduced due to lack of budget. On the other side, it had to intervene in order to avoid a collapse in agricultural production. With the transformation the banking sector had to be re-organised. Various banking corporations are operating in the rural areas of Slovakia by now. In general, banks are reluctant to provide credit to agricultural entrepreneurs and there seems to be no competition between them. They do not make much use of their own funds, but act only if credits are guaranteed or investments are supported by external (mostly state-funded) organisations. It is argued that the state should focus its limited funds on credit guarantees and encourage banks through tax incentives to make better use of their own capital , since access to credit and not the level of interest rates is the major problem for agricultural producers.
1 Introduction
Within this paper the emphasis is laid on agricultural credit and, to a minor extent, to savings in Slovakia. Following the implosion of the socialist regime the (rural) finance system had to be re-organised in line with the market economic system while t he macro-economic situation sharply declined. Rising rates of unemployment, rapid increase of inflation, and low investments characterised the economic transformation. This process implied a serious deterioration of welfare and personal hardship of the to tal population. The agricultural sector was hit by stagnating product prices, a sharp decline of domestic demand, sharp increases of input prices, low payment morality of the down-stream sectors of agriculture and a drastic decline in state subsidies. The volume of output decreased by 30%, with a relatively more steep decline for animal husbandry. The agricultural labour force has been reduced by more than 50%. Similarly, agricultural wages increased only marginally and lack behind those of the other sect ors. However, since 1994 there is a turn-around of the economic decline. With respect to the agricultural sector this turn-around has been very modest, so far.
An efficient rural finance system is a precondition for economically viable agricultural production on the national scale. However, it is understood that even a well developed system of agricultural credit can only contribute to the overall goal of establ ishing an agricultural production system which is applying the production factors effectively and is competitive on the international level. Other factors which affect agricultural production are particularly its low profitability, uncertain ownership rig hts, ineffective land markets and the low payment morality of the down-stream sectors. Before discussing the present situation of agricultural credit, some general remarks on institutions and organisations are made and the actual state of the transformati on of the agricultural production units is described. Similarly, the developments with respect to state subsidies for the promotion of agricultural production will be dealt with, since in these days agricultural credit is interwoven with them.
2 Institutions and Organisations
The transformation process in Slovakia has been accompanied by the decline or even implosion of the former institutions and organisations. However, as it could be observed, while the formal institutions and organisations collapsed and new ones have been e stablished fairly easily in line with the market economic system, the norms, values and behaviour (or the informal institutions) of the people, including bank personnel and agricultural entrepreneurs did not change that rapidly or not even at all. The fin ance system has been copied from the market economies but it is still in the process of adjusting to the actual situation in Slovakia.
Institutions can be defined as "the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction" (North: 3). They define and limit the set of choices of individuals based on values and goals of a given society. Institutions establish a certain behaviour pattern of acknowledged actions and reactions among individuals. Institutional constraints include both what individuals are prohibited from doing and under what conditions individuals are pe rmitted to undertake certain activities. In this sense, they reduce risks in everyday life as well as on markets. They can be regarded as "the framework within which human interaction takes place" (North: 3-4).
Institutions can be both formal, such as rules that human beings devise, and informal, such as conventions and codes of behaviour. In general, in modern societies institutions consist of formal written rules as well as typically unwritten codes of conduct that underlie and supplement formal rules. Institutional constraints have to be observed by the individuals (e.g. agricultural entrepreneurs), they define their ultimate choice set and structure of incentives (e.g. under what conditions and at what time entrepreneurs exchange commodities, invest, or design organisations). In case individuals do not observe these constraints, there will be no structure in everyday life as well as in the sphere of economic interactions. This implies, once the formal rules and the informal codes are violated, punishment and sanctions have to be enacted. In short, the formal and informal rules and the type and effectiveness of enforcement characterise the socio-economic system (North: 4). Together they define the incentive s tructure of societies and specifically of economies.
A crucial distinction has to be made between institutions and organisations. Like institutions, organisations provide a structure to human interaction. Organisations are developing in consequence of the framework set by the institutions. They are the inst rumental concretizations for fulfilling, in social reality, the functions postulated by the institutional set-up. "Organizations can be looked upon as concrete instruments for keeping a social system going on the basis of institutional patterns" (Kötter: 13). To illustrate the distinction between institutions and organisations, it can be said that the family, the church, the market or banks as abstracts are institutions. The real family, a local church, a village market or a local branch of fice of the bank are organisations. Or to put it differently, the rules have to be distinguished from the players. The purpose of the rules is to define the way the societal and economic game is played. But the objective of a group of individuals within t hat set of rules is to accomplish certain tasks (i.e. "to win the game") by a combination of skills, strategy, and co-ordination. There is a permanent interaction between institutions and organisations. Their relationship is of an interdependent nature. On the one side, what types of organisation come into existence and how they evolve are fundamentally influenced by the institutional framework. On the other side, they in turn influence how the institutional framework evolves (North: 4-5).
While it is the major role of institutions in a society to reduce uncertainty, they are changing permanently, albeit in general gradually over time. Formal and informal rules are evolving and, therefore, are continually altering the choices available to h uman beings. One of the main reasons to modify the institutional framework is the fact that individuals perceive that they could do better otherwise. Organisations can be identified as major agents of institutional change. However, institutional change me ans much more than just setting up new organisations. Institutional change means a change in the state of mind in the different groups of society, it means "changing the rules of the societal game" (Kötter: 10). In this respect, it has to b e emphasised that, whereas formal rules may change overnight as the result of political and judicial decisions, informal rules embodied in customs, traditions, and codes of conduct are much more impervious to deliberate policies. It takes time and a learn ing process in order to change these (North: 6).
3 Transformation in Agricultural Production
Slovakia implemented a far-reaching transformation of the agricultural sector, which primarily comprised a privatisation and decollectivisation process. Up to 1989 collective farming (i.e. agricultural production co-operatives and state farms) was the dom inant form of agricultural production. The national agrarian policy in light of the introduction of the market economic system had to tackle three problems at the same time: (a) to identify the legitimate owners of the agricultural resources, generally la nd and buildings, and transfer them to those ("restitution"), and (b) to create rational and efficient organisations of agricultural production. While the collective farms had to be transformed, it had to be assured that the supply of agricultur al goods to the national consumers and export markets was not threatened. The levels of national self-sufficiency had to be maintained and production had gradually to be adjusted to the changing consumption patterns (Répássy/Symes: 84-87). F inally, (c) the position of agricultural production units vis-à-vis the state and the up-stream and down-stream sectors had to be newly defined, which includes, among others, the role of rural finance systems.
Private ownership of land has become the prevailing pattern. Agricultural land comes up to about 2.45 million hectares in total. In 1994, more than 80% of it was privately owned. Most of the remaining area, in general land belonging to the state and munic ipalities or land whose owners could not be identified, will be privatised in due course. However, land ownership is highly fragmented; it is estimated that about three million persons have a claim on agricultural lands, so on average a person just owns l ess than one hectare. Many of them live in urban areas. Despite this fragmented private ownership of land, only a very modest land market has been developed so far. Therefore, private ownership rights do not imply private farming. With respect to the sign ificance of the various organisations in agricultural production, the picture in 1995 looked as follows (European Commission: 26; Agrarinformationsdienst: 14):
- More than 1,000 transformed agricultural producer co-operatives cultivate about two thirds of the total agricultural land. On average they cultivate about 1,650 ha.
- About 15,000 - 20,000 private farmers cultivate about three percent of the total agricultural land. However, their number is fluctuating, i.e. some are starting new while others give up. Most of them just cultivate up to two hectares which is by far too small to ensure an adequate level of income. About 2,000 - 3,000 of them are estimated to cultivate enough land to be regarded as full-time farmers.
- About 150 state farms cover a bit less than 20% of the total agricultural land. The average farm size comes close to 2,500 ha. Most of them are supposed to be privatised by the end of 1996. In general, it is planned to privatise them as companies limite d by shares (i.e. joint stock companies or limited liability companies).
- In addition, agricultural production is already organised in form of a capital company. For the time being, there are about 200 agricultural production units organised either as joint stock companies or as limited liability companies (Ltd.). Some of the m have been set up during the transformation period in 1992, but most of them have been formed during the latter years. On average, they cultivate about 900 ha each.
In short, agricultural production in Slovakia is characterised by a bimodal pattern these days: On the one side, there are most of the private farmers cultivating just up to a few hectares each. They can be characterised as subsistence farmers which ensur e the food supply of the family with simple production methods. Some surplus is sold for cash. Only a small share can be regarded as the nucleus of viable family farms. Still, this group has to be distinguished from the hobby farmers which just cultivate a household plot (garden) for home consumption. On the other side, there are about 1,400 large size agricultural production units (i.e. transformed agricultural producer co-operatives, state farms and capital companies). These units together with a small number of large private farmers form the backbone of agricultural production in Slovakia. Due to economic and legal uncertainties (e.g. financial debts from the socialist period, finding a proper balance between ownership rights and land use rights to agr icultural land, adjusting to a competitive environment in the agricultural markets, etc.) most of the agricultural production units cannot be regarded as already consolidated. Rather it is safe to assume that the transformation of the agricultural product ion units will be an on-going process for some years to come.
4 State Subsidies for the Promotion of Agricultural Production and the Rural Finance System
Due to the general economic decline, low profitability, the still on-going changes of agricultural organisations and the difficulties in monitoring agricultural operations (high risks) bankers regarded agriculture as an unattractive sector for investments . Most agricultural enterprises had difficulties in accumulating enough cash to pay wages and the most urgent bills. There were no funds left for any re-investments. The government had to react in order to avoid a total collapse in agricultural production . Direct and indirect subsidies were made available by the government. In addition, the national and, as part of it, the rural finance system had to be re-organised in line with the market economic system. The role of the government is vital for both. It is argued that both the priority setting with respect to the distribution of state subsidies as well as the size and the emphasis of granting agricultural credits under the newly established rural finance system are highly interlinked since the start of t he transformation.
4.1 Reorganisation of the State Subsidy System with a Declining Budget
With the implosion of the socialist regime the subsidies allocated by the state budget declined rapidly since 1989. It has to be noted that the figures can only be compared with some caution since up to 1989 prices and costs were influenced by the state p lanning system. From 1989 to 1993 the state budget for subsidies declined by about 60%. Since then they were slightly increased but to a very small extent, only. Briefly, they look as follows:
Table 1: Subsidies for the agricultural sector allocated by the state budget, 1989 - 1995 (billion Csk; Sk)
| Year | 1989 | 1991 | 1992 | 1993 | 1994 | 1995 |
| State Subsidies | 17.9 | 10.7 | 7.5 | 7.0 | 7.1 | 7.2 |
However, the total sum available for subsidies in the agricultural sector is not only replenished by the state budget but also by the contributions of the various funds which have been set up since 1989 (see for more details below). The major funds which have their own sources of income through the sale of state property and assets are the National Property Fund and the National Land Fund. A certain percentage of their income is made available for state subsidies and, to a minor extent, for credits and cr edit guarantees of the agricultural sector. But these extra contributions do not seem to be that large. They are estimated to stand at around 3 billion Sk p.a. In that respect the sharp decline of the subsidies by the state budget is somewhat balanced. In total, the subsidies available for the promotion of the agricultural production (including the sums allocated for credit and credit guarantees) during the last years come up to a little bit more than 10 billion Sk (approximately US $ 350 million), annual ly. Comparing the total subsidies for the agricultural sector during the last years, including the hidden subsidies at the end of the socialist regime, their share in relation to the national GDP has declined significantly, as it is shown in Table 2.
Table 2: Agricultural subsidies as share of the GDP and per hectare, 1989 - 1995
| 1989 | 1993 | 1994 | 1995 | |
| Share of Agriculture at the GDP (%) | 9.4 | 6.6 | 7.4 | 6.2 |
| Agricultural subsidies as share of the GDP (%) | 7.6 | 2.0 | 1.8 | 1.6 |
| Amount of subsidies per 1 ha of agricultural land (Csk, Sk) | 7,254 | 3,559 | 4,047 | 4,170 |
The share of subsidies declined much more than the share of the agricultural production to the national GDP. While the total economy contracted, the agricultural sector contracted even more. In that situation, the state had less and less money available t o smooth this sharp process of adjustment. The agricultural entrepreneurs could rely on state support much less they were used to during the socialist period. During this period of transformation they had to rely on their own resources and entrepreneurial creativity.
Besides the provision of certain tax relief two major types of state support for the agricultural sector can be distinguished. Basically, there is the market support system and direct subsidies. Market support is provided in order to secure minimum prices for specific products which might include export subsidies and border interventions. Direct subsidies are granted in the form of income support to farmers in less favoured areas, input and investment subsidies and payments for certain types of services a nd activities. They make up the bulk of the expenditure on agriculture amounting to about 7 billion Sk in 1994. Nearly half of the direct subsidies are income support for farmers in less favoured areas in the form of hectare payments, ranging from 400 to 3,400 Sk depending on the quality of soil. Also for sheep and goat rearing in these regions subsidies are available (up to 600 Sk per ewe), as well as subsidies to maintain settlement in remote locations (7,000 Sk per farmer). Furthermore subsidies are av ailable for the purchase of high quality inputs (e.g. seeds and breeding animals) and for investments (European Commission: 27-30).
Various financial funds have been set up since 1989 as new organisations in order to channel the subsidies and to strengthen the focus of the limited funds available. They are administered by the Ministry of Agriculture. The three major funds are the foll owing (Green Report: 53-54; European Commission: 28-30):
(1) The market support is regulated by the State Fund for Market Regulation which has been established in 1991. Minimum guaranteed prices are applied for the major agricultural products in order to avoid a complete collapse of prices. The main instruments are intervention purchases and export subsidies. However, the volume of this fund is rather modest and declined during the last years. While the state spent about 2,135 million Csk in 1989, the fund just had a budget at its disposal amounting to 985 million Sk in 1993 and to 650 million Sk in both 1994 and 1995, respectively. The fund is mainly financed by the state budget and through profits by the sale of agricultural products.
(2) The State Fund for the Protection and Improving of Agricultural Land has been established in 1992. Its basic function is to support all types of measures, which permanently keep up and improve the natural soil fertility. It concerns the reduction of soil erosion of arable land, the maintenance and regeneration of perennial grassland as well as the construction and maintenance of irrigation and drainage systems, water reservoirs and improvement of small water flows. Again, its budget has declined significa ntly. While the government spent about 1.4 billion Csk for these activities in 1989, its financial resources came up to 0.3 billion Sk in 1995. It was planned to spend about 0.5 billion Sk in 1996 which is by far not enough to maintain soil fertility and existing irrigation systems. This fund is mainly financed by the state budget and from the National Land Fund. In addition, there is some income due to fees which have to be paid if agricultural land is converted for non-agricultural purposes.
(3) The State Support Fund for Agriculture and the Food Industry ("Support Fund") has been established in 1994. It provides long term loans at concessional rates for modernisation (buildings, equipment), for the purchase of farm land and forest land , and guarantees and interest subsidies for commercial credits used for farm investments. So far, the fund mainly supported long-term investment of agricultural machines and other equipment. This fund is one of the few whose budget has been increased duri ng the last years. In 1994 it had about 0.8 billion Sk at its disposal, although other sources have put its budget at 250 million Sk , only (OECD: 77). In 1995 the budget increased to 1.3 billion Sk. It is planned to stay at the same level for 1996, too. The Fund is mainly financed by the budget of the Ministry of Agriculture. In addition, there are appropriations from the National Land Fund making use of privatisation revenues and income from sales of state farms.
With respect to our topic the State Support Fund for Agriculture and the Food Industry ("Support Fund") is of utmost importance since it is directly linked with the rural finance system.
4.2 Transformation of the Rural Finance System
Parallel to the set-up of the various state funds for the promotion of agricultural production the financial sector of Slovakia had to be completely re-organised. As in market economies the functions of the central bank had to be separated from those of t he commercial banks. In addition, existing commercial banks were earmarked for privatisation (although not many have been so, so far), new ones were established. In other words, the institutions and organisations, or more specifically the formal rules wer e copied from the market economies. However, the economic decline of the agricultural sector did not give the banks the necessary incentives to provide credits. To put it differently, the system had been set-up, but it was not working smoothly. Banks were looking for other possibilities to make profits. Agricultural production, i.e. among both the private farms as well as the large-scale farming units, was mainly reduced to a low-input-low-output strategy, which is still characteristic today. One of the m ain reasons has been the missing access to credit which had been readily available during the socialist period.
In that situation, the government intervened in three interlinked areas, through
(a) loan guarantee programmes,
(b) investment subsidy programmes, and
(c) credit programmes.
While the various funds, particularly the Support Fund, have been important tools in these fields, the government also intervened in the rural finance systems directly. It actively supported the set-up of two banks to promote agricultural credit. Only thr ough banks funds of the Support Fund can be applied by the agricultural entrepreneurs and the three interlinked programmes be effectively implemented in light of the limited funds available.
With the split-up and privatisation of the former state bank actually all commercial banks are free to offer their services to rural customers in general and to agricultural enterprises in specific. But most of them regard this sector as too risky. Howeve r, for most agricultural enterprises (particularly the state farms and the transformed co-operatives) the General Credit Bank is still the most important source of credit. This bank split away from the former State Bank and used to be the monopolistic sup plier of financial sources to the national economy, including the agricultural sector. The majority of farms are still clients of this bank. In addition, it still manages all debts accumulated during the socialist period ("old debts"), unless th ese have been taken over by other banks. However, the General Credit Bank did (or could) not provide enough loans to smooth the drastic decline in agricultural production. Therefore, the government felt the need to actively encourage the establishment of two additional banks after 1989 in order to secure the supply of fresh money.
Already in 1990 the government supported the set-up of the Agricultural Bank. The Bank is a private shareholder company, of which shares are owned by other banks, insurance companies, the EBRD, co-operatives and the state. Although the state has only a sm all stake, it indirectly exerts control through the share holding banks and insurance companies, in which it has (majority) stakes. It provides credit to the agricultural sector out of its own funds, but predominantly in co-operation with the state funds such as the Support Fund (European Commission: 27). In 1992 the government actively promoted the set-up of the Guarantee and Development Bank. Its funds were mainly provided by the state and the national funds. In addition, some international support has been made available, e.g. from the European Investment Bank. The Guarantee Bank is administrating the Guarantee Fund. This fund secures particularly short-term credits of the commercial banks to the respective enterprises and, thus, reduces the repayment risks. In general, it covers 80% of the total sum (Green Report: 44). There is a close collaboration with the commercial banks, particularly the Agricultural Bank, since the customer gets the money through the respective bank, only.
The agricultural sector is characterised by an urgent need of fresh funds. Commercial banks regard this sector as too risky and refrain from providing any money. In 1994 about 3.8 billion Sk (or 4 billion Sk according to the OECD: 77) were provided as new credits to the agricultural producers. However, this figure is just one fourth higher than the repayment by the agricultural producers to the banks. Therefore, net inflow comes up to less than 1 billion Sk. Preliminary data reveal that credits are mostly used for operational than investment purposes, but in spite of that their amount is not enough to finance all necessary production activities. In 1994, out of the total credit sum of 3.8 billion Sk, three types of credit can be distinguished.
(a) About 1.4 billion Sk were handed out by the banks as "Green Credits" for financing short-term expenditures during the cropping year. In general, these credits are secured by the Guarantee Fund.
(b) Another 0.4 billion Sk can be characterised as medium to long-term credits since their maturity dates longer than one year. In general, these credits are secured by the Support Fund.
Both types of credit include a subsidy share since the interest rates were in general lower than the inflation rate. Only in 1995 in line with the sharp decline of the inflation rate interest rates were higher. For example, in that year the inflation rate declined to 9.9% and the customers have to pay for "Green Credits" about 12-13%, since these are secured by the Guarantee Bank. Nevertheless they are still lower than the general interest rates requested by the banks which stood at 16-17% in 19 95.
(c) About 2 billion Sk are also short-term credits under special conditions. Since 1992 there is the possibility for the commercial banks to grant credits to agricultural producers by taking the future harvest as the collateral. The farmer gets cash from the respective commercial bank against a certificate of indebtedness during spring time (Green Report: 43). The bank can deposit this certificate at the National Bank at the discount rate, e.g. in 1996 for 8%. The customer pays, as for the "Green Cre dits" an interest rate of about 12-13% (1996). In line with the modest recovery of the agricultural sector this approach has become more popular.
For the time being the picture looks as follows. There is not enough credit available. The banks shun this sector, particularly agricultural production, as too risky and there are no signs of any competition between them. Therefore, the agricultural credi t system is highly dominated by (semi-) government organisations. The short-term credits are determined by the "Green Credits" granted by the Agricultural Bank and secured by the Guarantee Bank. Similarly, short term credits are available only d ue to the backing of the National Bank. Long-term credits are only available by the Agricultural Bank, if they are secured by the Support Fund. The Agricultural Bank is also providing some of its own funds, but the agricultural production units including the agro-food sector just get about 30% of the all credits granted. With respect to the commercial banks this share is below 10%. Although no detailed split-up is available it is safe to assume that most of these credits are allocated to the agro-food ind ustries, and a small share only to the agricultural production units. In line with the modest recovery of the agricultural sector, it is hoped that banks will become more interested in this sub-sector as well and in the future some competition among them might develop.
5 Major Problems with Respect to Agricultural Credit
With the implosion of the socialist regime new institutions and organisations with regard to (rural) banking had to be established. While during the socialist period the state allocated credit through the banks to the various agricultural collective enter prises in order to ensure that the targets in food production were met, these have to be decided now by both sides (i.e. banks and agricultural production units) according to their economic needs and potentials. The economic profitability of the investmen t has to be ensured. In case of debts the state can no more bail out both the banks and the agricultural producers with fresh money, anymore. In this respect, new rules and regulations, including changed obligations have to be observed by both sides. In c ase one side is no more sticking to its commitment, sanctions have to be enacted. Otherwise the rural finance system will collapse.
Both the undertaking of an investment and its financing through credit constitute costs and involve risks. The agricultural entrepreneur should only ask for credit for those activities which look economically viable according to his plans. He will have to pay back the principal and the interest. Nevertheless, he has to be prepared that his investment will not be successful. In that case, he might have to repay through other sources of income or by selling some of the assets. In an extreme case, he might h ave to file for bankruptcy. On the other side, also the banks have to reckon with defaults of credits. They have to be prepared to share risks in writing off debts. In some cases this might be the better option in the long run than to apply for bankruptcy proceedings of the respective enterprise. Similarly, the bank personnel must be trained to recognise the economic potential of activities proposed for financing. Assuming competition among the banks, those who take higher risks might be awarded with bett er growth prospects.
Therefore, when adopting the market economic system not only the formal institutions and organisations had to be established and adjusted. Particularly the informal institutions like the respective codes of behaviour and conduct have to be internalised by the bank personnel and the agricultural entrepreneurs if the financial system will be of a lasting nature. As important as the change of rules and regulations is the "change of the state of mind". The following interdependent problem areas seem to be of the utmost importance in setting up a reliable finance system promoting agricultural production:
5.1 Assessment of credit applications
From the banks point of view credits are only granted to a company or a private entrepreneur, if the following conditions are met (Schemmann: 756):
- There are assets of the value of the required credit which can be sold easily and can, therefore, be used as collateral ('collateral indicators').
- There is a reliable repayment record from the past. The applying persons, entrepreneurs or managers used to show a good repayment morality in the past and are known to the bank personnel ('personal indicators).
- The proposed business/investment plans are viable and make economically sense. The probability of repayment is almost certain or very high ('economic indicators').
However, in these days banks are very reluctant to stick to these classical assessment criteria, only. Actually, most of them just provide credits if a fourth criteria is met, viz. the security of the credit has to be provided by the state or by one of it s organisations. Banks mostly grant credit if it is guaranteed by the Guarantee Bank (particularly for short-term credits) or the Support Fund (particularly for long-term credits). In this case there are no risks involved. But they, including the Agricult ural Bank, do not make much use of their own capital. If they do provide some funds for credits, it is for short-term credits only. In general, they hand out credit as well as subsidies with those funds which have been allocated to them by the state budge t and other external donors. In this respect, the banks adopt more the role of channelling state funds to the agricultural sector rather than of actively promoting economic growth at the local level.
5.2 Role of collateral
One reason why banks are so reluctant to provide credit is the limited availability of collateral. There are no assets which can be easily sold for cash. With regard to agricultural land, it has to be emphasised that most of the (large-scale) enterprises in agricultural production do not own the land they cultivate; they have just rented it from a large number of private owners. Even if they can offer land as collateral, banks will not accept it, although land has a certain value. But its value is based o n an administrative price which is derived on the natural fertility of that respective piece of land ("fertility points"). However, there is no market for agricultural land, so far. In case of default of repayment banks would have to keep the la nd for the time being. Therefore, land is not accepted as collateral so far. Alternatively, agricultural enterprises could offer their inventory as collateral. However, most buildings and machines are depreciated by now and their resale value is very smal l, even if their book value might be quite high.
However, with the modest improvement of the agricultural sector banks are taking the first steps in accepting land as collateral. They put its value on a very low level, e.g. at about 10% of its administrative price. This means, that, if the price of a sp ecific piece of land is set at Sk 100,000, it will be accepted as collateral up to a value of Sk 10,000. It can be assumed that land will play a greater role as collateral in the future like in the market economies.
5.3 Provision of credit
The supply of funds for credit has been very limited in Slovakia during the last years. It follows that the volume of new credits is rather modest, and those credits available have to be paid with high interest rates. After the implosion of the socialist regime interest rates for short-term credits went up to more than 20% p.a. In line with the declining inflation rate they went down to about 16-17% p.a., recently. From the side of the agricultural entrepreneurs the process of applying for credit is quit e confusing. Although the overall amount of credit is smaller than demand, there are various credit programmes available and managed, particularly, by the Agricultural Bank. There are different programmes with slightly differing focus financed by the Supp ort Fund and European, American and Japanese sources, respectively. Depending on the source of refunding the interest rates on credit vary from 5 % to the market rate of 16-17 %, annually. Similarly, subsidies can be granted up to 40% of the amount to be invested. It is evident that all entrepreneurs want to be among those who get high subsidies on their investments and only have to pay the lowest interest rates. The guidelines in participating in one or several programmes are not very specific since thei r respective objectives are overlapping. The number of beneficiaries in getting support is quite limited. For example, in 1994, the Support Fund dispensed Sk 250 million, of which Sk 175 million was as a guarantee for credits for 36 farming enterprises (O ECD: 77). It seems that most of the funds allocated for the promotion of the agricultural sector were lent to the agro-food industries and not much to the agricultural production units.
Therefore, access to credit and the prices of credit (i.e. the interest rate to be paid) depend to a large extent on good relations with the respective bank managers. While this holds true for all banker - client relations all over the world, these are ev en more important in the period of economic transformation. This relationship has to be set up over a number of years. Proven (objective) repayment records from the past (i.e. since 1990) have to be gradually established. Although there is a system of re- checks and balances when it comes to the provision of subsidised credit, the branch managers are in a powerful position to push those which they think qualify best for outside support. They significantly influence the decisions who actually can benefit fr om what programme, or in other words, about the respective credit costs. There is the danger that they might support those whom they know best and not those with the most viable business plans. Managers of large enterprises in agricultural production defi nitely know the price of a good relationship with the branch managers of the banks. The bank managers have to be associated with the production unit, or certain fees have to be paid to ensure their good will. In other words, the price of the credit does n ot only comprise the interest rate, but also the transaction costs in order to get it.
5.4 Role of debts
With the transformation of the economic system, the profitability of the agricultural sector shrank significantly. Most of the agricultural production units were not earning enough income to increase their equity position and to invest in replacement or i n modernisation of their enterprises. Most of them were lucky if they could rely on credit to finance their operations since banks were reluctant to any long-term commitments. Therefore, most of the agricultural production units were producing with their available, but more and more depreciated assets. The overall debt in primary agriculture at the end of 1993 was estimated to be about Sk 12.2 billion (OECD: 77). Two types of debts have to be distinguished:
(1) Those debts granted during the socialist period ("old debts") have been carried over with the transformation. They were not forgiven like those of the heavy industry. They are still a burden to the agricultural production units, particularly to the transformed co-operatives and joint stock companies. The only positive aspect lies in the fact that the interest rate which has to be paid on them is as low as in the socialist days (i.e. about 3.5% p.a.). However, if the transformed co-operative or business company is applying for new loans then the banks insisted on re-scheduling the old debts and interest rates jumped up to the level of those for the new ones, i.e. to more than 20% in 1992 or 13-16% in these days. Now, there are plans to transf er all "old debts" to the Consolidation Bank at an annual interest rate of 13%, in addition to the option of writing off these debts before taxes.
(2) Since 1990 new credits were provided to the primary sector, particularly for short-term purposes. The total sum of credit provided annually is estimated to be about Sk 4 billion, as discussed above. Whether all agricultural production units will be ab le to pay back their debts is doubtful. It can be expected that a large part of these debts will have to be written off by the banks, finally. It can be assumed that the state will not be in the financial position to bail out all debtors of the agricultur al sector.
5.5 Sanctions in case of default
Another factor which is preventing the expansion of credit funds to the agricultural sector is the limited possibility in imposing sanctions when it comes to default of payment. However, the agricultural production units are also concerned with this aspec t from the other side since they were paid late or never by traders and the agricultural processing enterprises. They are burdened with outstanding claims (receivables) from the down-stream sectors. From the banks' point of view, the risks in providing cr edit are quite large, and it is difficult to assess whether the client will be in a position to pay back. As it was discussed above, an economic system can only run smoothly if those who violate rules and regulations will be punished. Otherwise no long-te rm transactions and co-operation will be established.
In this respect, the most relevant points seem to be:
(1) The law enforcement, particularly after the implosion of the socialist regime, was not very strict. Private persons were buying up products without paying and could disappear. Punishments are difficult to enforce as these persons cannot be identified anymore. Therefore, there are only small chances to get some cash back or to open a bankruptcy procedure against the said persons.
(2) In addition, the payment morality of the processing factories has generally been bad. Therefore, many agricultural enterprises have outstanding claims on the down-stream sectors, besides their own debts with respect to the banks. In 1994, these claims added up to about 9 billion Sk for all agricultural production units (Green Report: 36). In this respect, it can be stated that the primary sector is providing an interest free loan to the agro-food sector. Since it is doubtful whether these claims will be finally paid at all, the primary sector is subsidising the processing units during this period of economic transformation.
(3) Not many companies or individuals have opened bankruptcy procedures with local courts, so far. The bankruptcy laws are not very precise and there is no experience in its application. Agricultural entrepreneurs are not used to legally enforce payments after a certain period of non-payment, to formally open a bankruptcy procedure with the local court and to finish it. In addition, most courts seem to be overburdened with other tasks and administrators in bankruptcy proceedings are missing. Concerning th e banks which are in the position to acquire the necessary legal knowledge additional aspects have to be mentioned. To open a bankruptcy procedure is not of much benefit to them. If they do, they are served in the third place, i.e. after the claims have b een settled with the state (taxes) and all outstanding wages (including social security contributions) for the employees have been paid.
Banks are actually more interested in keeping a credit running instead of applying for sanctions. They are not allowed to depreciate their losses due to non-repayment of credits before payment of taxes. Losses can only be written off against their own pro fits after-tax. They keep the book value of the credits in their balance sheets. Since interest income, even if not paid by the clients is taxed as if it were paid banks are primarily interested in getting the interest payments. Most of the principal is s ecured by the various funds, anyhow. With regard to tax reductions of losses, first changes of the law have been accepted by the state. Since 1996 at least debts accumulated during the socialist period can be depreciated before taxes by the banks.
5.6 Promotion of savings and of equity position
It is evident that the demand for capital is by far higher than the supply. But besides the set-up of a smooth credit system two other aspects seem to be vital in this respect; viz. the encouragement of savings and the provision of an economic environment which enables the agricultural production units to make profit and to build up their own equity position. The provision of adequate incentives for private savings was never a priority for centrally planned economies. However, without them it will prove v ery difficult to generate the necessary financial resources that the agricultural production units require in order to compete internationally. During the first years of the transformation in the early 1990s interest rates on savings were even lower than the very high inflation rate. Only recently, the banks have started to encourage savings among the population in order to enlarge their own equity capital. This is the cheapest way to get funds for borrowing. While the inflation rate declined to about 10% in 1995, interest rates on savings oscillated around 9-12%.
For the agricultural entrepreneurs it is not enough to rely on a smooth running saving and credit system. Their position will be more secure in the long run if they can produce in an economic environment which enables them to set-up their own capital base (Armbruster: 287). They have to make profits to have own funds available for investments and to be in a better position vis-à-vis the banks. Prices of agricultural products more or less stagnated whereas input prices and also food prices increased sharply. Therefore, most agricultural production units had to cut costs significantly. However, despite their relatively small number the agricultural production units are not very well organised as a lobby. This became evident when in 1994 the potatoe p rices increased rapidly due to a low harvest and a price limit for this commodity was imposed by the state. The representatives of the agricultural producers could not convince the political decision-makers that a high price was needed to improve their eq uity position.
6 Conclusions
Financial institutions and organisations in Slovakia need further strengthening in order to support agricultural entrepreneurs efficiently. Some conclusion can be deduced out of the discussions presented above. At this stage the major concerns from the ag ricultural producer's point of view will be emphasised; viz. the need for short and long-term credit at reasonable interest rates. As it was shown above two major groups of agricultural production units can be distinguished; namely private farmers on the one side cultivating small-scale farms and large-scale farm units, like transformed co-operatives and business companies on the other. The following points should particularly be stressed:
(1) With respect to short-term credits both groups are plagued with the lack of operational funds. In order to ensure the necessary short-term funds the initiative of the commercial banks has to be encouraged to provide more loans on the future harvest. E vidently, the question has to be solved which side is covering the risks in case of natural calamities. Complementarily, it has to be assessed whether a futures market on agricultural commodities can be fully implemented, making use of the example of the Budapest Commodity Exchange (Lovas: 1-9). This seems to be an additional way to provide the agricultural producers with the necessary cash during the cropping year. A commodity exchange has been set-up in Bratislava, but the futures market is not working satisfactorily.
(2) During this period of re-adjustment of the agricultural production units the state should focus its limited financial means on securing deficiency guarantees and not on investment and credit subsidies. The major problem for agricultural producers is t he access to credit and not the level of interest rates. It has to be avoided that investments are only becoming profitable and are undertaken due to any subsidies. The objective is to promote those investments which are profitable but would not be undert aken due to no or limited access to credit. With guarantee funds that access can be facilitated for agricultural entrepreneurs. The capital has to be provided by the banks. Subsdies have to be avoided. However, these guarantee funds do not imply that the banks and agricultural entrepreneurs will be relieved from any risks. They have to be liable first. The deficiency guarantees can only be of a supplementary nature, in case other sources of collateral are not sufficient enough (Hirschauer et al.: 22).
The parliament has to adjust some laws (or formal institutions) more specifically.
(3) Banks have to be encouraged to make more use of their own capital in providing credit. So far, banks are very reluctant to provide some funds due to the fact that losses cannot be depreciated before taxes. For them, any losses have to be deducted from after-tax profits. Therefore, banks must have the opportunity in case of non-payment to depreciate losses before taxes as in market economies.
(4) In addition, bank personnel and agricultural entrepreneurs must be confronted with very precise bankruptcy regulations, or to put it differently, sanctions in case of default have to be implemented. So far, no bankruptcy procedures in agricultural pro duction have been opened. Banks should have the right to file a petition in bankruptcy once there is still some net value of assets left since outstanding taxes and wages have to be covered as well.
With respect to long-term credit the agricultural entrepreneurs have to be distinguished according to their size, small-scale private farmers and large-scale enterprises:
(5) Most of the private farmers took up cultivation on their own after 1990. In most cases they cultivate an area up to two hectares. Only a few cultivate enough land to be regarded as the nucleus of full-time farmers. As the legal owners of land (and in most cases of houses, too) they can offer collateral for applying for credit in order to increase agricultural production. On the other side, banks are not prepared to provide small-scale credits. The transaction costs are too high to hand out relatively small sums and to monitor their performance. Some out of this group will have an option to specialise in labour-intensive production activities which require high quality standards or to become viable part-time farmers. However, they have to form their ow n self-help groups, including machinery pools. But appropriate organisations serving this clientele are still missing. One option would be that those who want to continue with private farming will be encouraged to form savings and credit groups. Mutual tr ust has to be established first within the groups while the financial stake might be quite small at the beginning.
There will be two effects: On the one side, private farmers as entrepreneurs will gradually get used to capital; on the other side banks will be able to cut their transaction costs. Slovakia can rely on the experience with this type of groups. During the 1st Czechoslovak Republic there were 816 credit unions, 78 farmers' mutual treasuries, 43 traders' and citizens' credit institutions and 22 city savings banks in Slovakia. It is necessary to revive this experience. In the Czech Republic first steps have b een made, already (Blaas/Buchta: 37-38). However, banks themselves are also required to search for appropriate organisational and financial innovations to address private farmers' financial service demands.
(6) Large-scale farming is still the dominant type of agricultural production in Slovakia. However, in line with the laws on privatisation and restitution, their asset base has decreased tremendously. The land they use for agricultural production is owned by private persons and has to be rented. Actually, they have limited values for collateral at their disposal, i.e. mainly buildings and equipment. Their credit needs can only approximately be assessed by the banks according to economic indicators. In thi s respect, it can be said that a network of banks is just being set-up which is supposed to serve this clientele, i.e. the organisations are already established. The informal rules of the institutions, however, are not fully adjusted as banks look mainly for collateral and external guarantee funds when analysing credit applications. The volume of credit available still depends on the volume of external commitments but not on interest rates and the economic prospects of the intended investment. Banks distr ibute external funds but do not commit their own resources. Both banks and agricultural entrepreneurs will have to pay attention to creditworthiness and to take loan repayments seriously (Csaki/Lerman: 23). So far, banks do not play a significant role in pushing for agricultural development.
The final objective should be that savings and credit in rural areas is decided by the rural population, including agricultural entrepreneurs, the rural households and the banks themselves. The role of the state should be minimal. In case there is the pol itical will to continue with the external support of agricultural production, it has to be assured that there are some mutually accepted investment support thresholds. Only if these are met by the respective agricultural enterprise external support should be provided. In this respect it has to be made sure that only enterprises are supported which have good prospects to be economically viable in the future.
Acknowledgements
This paper is based on a joint research project executed by the Research Centre for International Agrarian and Economic Development, Heidelberg and the Research Institute of Agricultural and Food Economics, Bratislava and financially supported by the Volk swagen Foundation. Most of the items discussed above are based on personal communications with various managers of large-scale agricultural enterprises and several managers of the Agricultural Bank during the period of November 1994 and June 1996. A short er version of this paper has been prepared for presentation at the workshop "A Rural Development Strategy For Slovakia", jointly organised by the University of Delaware and University of Nitra. This workshop took place 16 - 18 September 1996 in Mlynky, Slovakia. The author is grateful to Dr. Gejza Blaas and the participants of the workshop for comments on the earlier version of this paper.
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