Financial and credit support of agricultural production: the main problems and solutions

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FINANCIAL AND CREDIT SUPPORT OF AGRICULTURAL PRODUCTION: THE MAIN PROBLEMS AND SOLUTIONS

V. S. Lebid

Postgraduate, Vinnytsia National

Agrarian University (VNAU)

В. C. Лебідь,

аспірант, Вінницький національний аграрний університет, м. Вінниця

ФІНАНСОВО-КРЕДИТНЕ ЗАБЕЗПЕЧЕННЯ СІЛЬСЬКОГОСПОДАРСЬКОГО ВИРОБНИЦТВА: ОСНОВНІ ПРОБЛЕМИ ТА ШЛЯХИ ЇХ ВИРІШЕННЯ

In the article it is identified and analyzed major problems of financial and credit support of agricultural production, which are caused by special characteristics of industry and by a number of features that are inherent in this area. It is analyzed crediting of enterprises of the agricultural sector of Ukraine during 2010-2014. It is determined as positive and negative trends in financial and credit support of agricultural production in Ukraine. We offer basic solutions to these problems. To overcome them it's justified to stimulate long-term loans, to encourage financial decentralization in rural areas and to increase the flow of investment in agricultural production.

У статті визначаються та аналізуються основні проблеми організації фінансово-кредитного забезпечення аграрного виробництва, які зумовлені як специфікою галузі, так і рядом особливостей, що притаманні цій галузі. Наводиться аналіз залучення кредитних ресурсів підприємствами аграрного сектора України за 2010-2014рр., визначаються як позитивні, так і негативні тенденції фінансово-кредитного забезпечення аграрного виробництва України. Пропонуються основні шляхи вирішення даних проблем. Для їх подолання виправдане стимулювання довгострокових кредитів, фінансова децентралізація на селі та збільшення надходження інвестицій в аграрне виробництво.

Keywords: agricultural production, financing, financial and credit provision, bank lending.

Ключові слова: аграрне виробництво, фінансування, фінансово-кредитне забезпечення, банківське кредитування.

Formulation of the problem. The sector of agricultural production is an intensive area, which, moreover, is characterized by considerable duration of the production cycle and by a significant period of rotation of funds. This requires the selection of stable resources, which is defined by the ensuring of the production cycle on quality, technologically high level. One of such resources is bank lending. However, the existing mechanism of financial and credit support of agricultural production does not meet resource efficiency and competitiveness of the industry. Domestic agricultural production sector does not receive adequate state financial support, and one of the problem is attracting investment.

Analysis of recent research and publications. Various aspects of the financial and credit mechanisms for ensuring of the development of agricultural production were studied and continue to be in the focus of a wide range of outstanding scientists. Among them are significant research portfolio of Ukrainian scientists, like V. Andreychuk [1] A. Gudz [2] M. Demyanenko [3] J. Lupenko M. Malik [5] S.Onysko [9] P. Sabluk [10] P.Stetsyuk [12] A. Shubravska [13].

However, there are much of unexplored and controversial issues that need to expand of research processes and mechanisms in the field of financial and credit support of agricultural production, especially in the context of adapting general theoretical basis for production and financial specifics of agricultural activity.

Article purposes. The article deals with the main problems of financial and credit support of agricultural production and the main ways to overcome them.

Description of the main research. Appropriate financial and credit resources are the key to ensuring of the success of the agricultural production, address socio-economic issues of rural development. Retrospective analysis shows that today in Ukraine stable foundations of financial and credit support of the agricultural sector and territories are not developed. As a result, the financing has chaotic, haphazard character. Each year,it is reduced budgetary expenditure on rural development. In addition, the financial and economic crisis, the devaluation of the hryvnia, unfinished war in eastern Ukraine make it almost impossible to expectate of increased expenditures from the state budget.

The current situation in the financial and credit support of agricultural production indicates for a need of mechanism's transformation of financial support and looking for new tools adequate to the current situation.

Studies show that the financing of the agricultural sector in some countries is ensured by attracting additional loans of banking institutions, that were not brang into action in Ukraine because of some problems in bank loaning of farming enterprises, namely:

* increasing of financial risks caused by the loaning (in the long term can lead to loss of financial stability and even solvency);

* lack collateral liquidity of borrowers;

* high interest rates on loans;

* long procedure considering the possibility of a loan;

* impact of season on agricultural production and dependence on climatic conditions;

* decline of soil fertility and increase their erosion;

* unstable financial and political systems;

* inability to obtain credit for the creation of agricultural enterprises "from scratch" [12].

There is also such problem of attracting loans, that along with farms that have some access to credit in the agricultural sector, are also exist small farms that are involved in agricultural activities. They have a large part of agricultural lands and produce over 67% of agricultural production and therefore also in need of credit. The point is that the existing principles of monetary policy in Ukraine is discriminatory towards households. It is necessary to form in Ukraine such credit policy that will support equal access to credit for those entities that have active business activities and will ensure of compliance with all principles of lending.

In general, according to scientists for the period 2010 - 2014's a positive increase in credit enterprises of the agricultural sector was in Ukraine. There is a cyclical trend of flow of credit to the sector. In 2014 their volume was close to the level of 2010 and amounted to 10.9 billion UAH. There is a number of companies that received loans. In 2014 there were 2,267, which is 1.3% more than in 2010 [7].

Fig. 1. Loans to agricultural enterprises of Ukraine for 2010-2014.

(by terms and types of curency)

Source: developed by the author based NBU Bulletins for 2010-2014. [6]

In time structure (fig.1), the share of short-term (1 year) loans increased by 49.4% in local currency (the largest of their volume was in 2014 -167,2 mln. UAH.), the share of medium-term (1 to 5 years) increased by 42.9% (most of the volume was in 2014 - 188.2 million. UAH.), while it was not a high demand on the long term credit (over 5 years) for the analyzed period (most of the volume in 2014 - 39.4 million. UAH.) [6].

Agricultural enterprises can not use loans offered by banks because the minimum time credit for agricultural sector must exceed 6 months, however, most of the short-term loans are issued for a period of 2 to 4 months, which is not economically justified for the agribusiness.

Also high interest rates of comercial banks don't allow agricultural enterprises to use credit resources. Average interest rates on loans granted to agricultural enterprises are different depending on the region and during the period 2013-2014 varied within 22-25% annually in local currency. Average rate on an annualized basis for new loans to agricultural enterprises (excluding overdraft) in 2014 increased by 3.54 percentage points a year in local currency and by 1.9 percentage points foreign currency compared to 2013 (fig.2) [6].

Fig. 2. Interest rates on new loans to agricultural enterprises of Ukraine (2010-2014)

Source: developed by the author based NBU Bulletins for 2010-2014. [6]

However overdue loans in agriculture increased in 2014 to 64.4% or 2.1 billion compared to 2010 and reached 5.5 billion UAH. The last three years it stopped issuing credit subsidies on farm software [6].

But it can not be positively assess the operating principles of lending to agricultural enterprises for the period, because it was not be taken into account amount of running agricultural enterprises which were able to obtain loans. Large farms, which have a high degree of coverage of bank loans, received more than 80% of total loans. stimulate term loan decentralization

The source of financial security entities serve as an investment. However, the volume of their involvement, especially foreign, in the agricultural sector is not sufficient. Official statistics shows that investments in the agricultural sector dynamics are increasing. However, in their overwhelming majority this investment involve large agricultural companies and holdings. Instead, small and medium-sized agricultural enterprises, households do not have such opportunities. [13]. That is why there is a need to develop new principles of investment policy. Investment policy is defined as a set of activities that are carried out by state in the form of establishing the scope and structure of investments in the sector of use, and sources with the need to improve their technology level [11, p.243].

The creation of conditions is equally important for real long-term loans with state support, providing opportunities for farmers to use loans for 10-15 years with a rate of 10% per annum. The main directions of development of agrarian sector lending are: formation of credit infrastructure and improvement of credit mechanisms, namely the implementation of secured transactions using mortgage and mortgage bonds; increasing of guarantees repayment of loans by establishing a system of state registration of real estate, including land, development and evaluation of insurance, use of collateral, improving the mechanism of insurance of financial risks of commercial banks; improving the mechanism of state support of agricultural enterprises through the mechanism of reduction of interest rates on loans. The bulk of investment in fixed assets undertaken by all sources of funding should be aimed at the modernization and efficient use of production capacity of agricultural production.

One of the areas of ensuring profitability may be the increase in prices for agricultural products. Of course, such a move can not be considered as such, which will welcome by society because it will lead to increased poverty and social injustice. However, at constant prices will increase the number of unprofitable agricultural enterprises and farms. Increase of profitability as increase of price will push to the flow of financial resources for the development of the agricultural sector and rural areas. It could compensate population spending through the introduction of mechanism subsidies. Moreover, the products generated in the agricultural sector are important in its order of magnitude higher.

Conclusions and recommendations

In summary, we note that the analysis of the current state of the industry gives reason to believe that it lacks the financial resources available or attracting credit resources or using equity. The latter one is subject to restoring production facilities. To achieve the desired increase in profitability of economic activity we should focus on an efficient and adequate conditions of management of each individual subject of credit resources. Operating principles of financial and credit support of the agricultural sector and rural areas do not provide adequate their development. During the years of independence the state, the mechanism of credit support for agricultural sector was not created perfect . This problem is solved only slightly due to partial compensation from the state budget in interest rates on loans to commercial banks and only for big farmers. For banks, small farms are less important clients than large farms that take significant amounts of credit. Consequently, access to credit usually have the big agricultural enterprises. Farm financing activities mainly at the expense of own funds are a significant brake on the industry.

Agrarian sector is not favorable for investment climate. As a result, the agricultural sector is not involved in the investment. To solve the problems of investment for sustainable development and intensification of agriculture in Ukraine need to: to increase and to ensure the proper use of funds for state support of the agricultural sector, to take steps to overcome disparities in interbranch economic relations and to create conditions for their alignment for ensuring profit in agricultural farm. Solving the problems of proper financial and credit support requires improving rural credit policy, the essence of which is to reduce interest rates and stimulate long-term loans.

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