The same trend is reflected in the Ministry’s March and April 2010 proposals stipulating for a radical reduction in the list of strategic enterprises and joint-stock companies, for the development of the institution of independent directors (consolidation of this concept in the RF Law on JointStock Companies, the introduction of the institution of a self-regulating organization of independent directors, the imposition of a maximum term of independent directorship (5 years), the establishment of a corresponding consultative council of experts at the RF Ministry of Economic Development), and the introduction of alterations to the normative legal acts regulating a number of aspects of the development of the State’s position as a shareholder.
CREDITING OF PEASANT (INDIVIDUAL PRIVATE) FARMS ON LAND MORTGAGE CREDITING OF PEASANT (INDIVIDUAL PRIVATE) FARMS ON LAND MORTGAGE N.Shagayda The expansion of crediting on land mortgage is envisaged by various legislative acts and state programs of agricultural development. But in practice cases of such crediting of not only peasant (individual private) but also of corporate farms are very few. The situation is due both to the general economic conditions and to the specific factors. Its analysis shows that at present land cannot serve as a commonly used collateral for peasant (individual private) farms.
Peasant (individual private) farms (hereinafter referred to as PFs) have more difficulties in accessing credit resources as compared with corporate farms due to the lack of available collateral. At the same time actually all of them own land that could be used as a loan security. Since 2005 there is a legislative basis for extending loans on agricultural land mortgage. In order to foster such practice in 2006 it was included in the Priority national project “Development of the agrifood sector” in the framework of supporting smallholder farming. But shortly after that the binding of such lending to smallholder farms discontinued since the crediting on mortgage was incorporated in the State program for agricultural development and regulation of agricultural and food markets in 2008–(hereinafter referred to as the State program). But in practice cases of granting mortgage loans not only to PFs but also to corporate farms are very few. For instance, in the period from January 1, 2006 to January 1, 2009 Rosselkhozbank issued only 222 credits on farmland mortgage to the total amount of 7 billion rubles although as different from other banks it gets state funds for this purpose.
203 more credits to the total amount of 3.7 billion rubles were extended in 2009. In 2009 credits on land mortgage accounted for only about 1% of all credits granted in the framework of the State program.
Credits on mortgage of land plots are extended by many banks. But these are mostly plots under buildings that are also pledged as security. Bank survey showed that cases of such crediting are few although banks regard land as one of the possible collaterals.
The share of PFs and household farms in the total amount of mortgage loans issued by Rosselkhozbank to agricultural producers of all types is less than one half1. An implicit evidence of that is also the average size of extended credits: while at the start of the Priority national project it didn’t exceed 7 million rubles (then principal borrowers were PFs), by January 2009 it surpassed 31 million rubles (since most credits were extended to corporate farms). In the crisis 2009 the average size of credits fell down to 18 million rubles.
So, on the one hand, there is a need for mortgage credits, but on the other hand, PFs do not take such credits. There are common hurdles to the spreading of agricultural land mortgage in farms of different organizational and legal types. The principal of them is the lack of the very object of mortgage – a land plot. It certainly exists physically; there are entitling documents issued in the course of land reform2. But plots do not meet the requirements set to collateral. Banks require that an applicant submit documents confirming his property rights to the plot that beginning from 1998 are issued by bodies authorized to register titles to land and transactions with it. It’s impossible to get such documents by simply submitting certificates issued to owners before 1998 although they “…have equal legal force with entries in the Unified State Register of Titles to Real Estate and Transactions Therewith”3. To obtain a certificate of 1998 pattern one has to enter information on earlier acquired title to his land plot in the United State Register. In its turn, to do that one has to collect all documents to the plot including cadastre passport. Although the Cadastre Chamber does not doubt that a 1 V.N.Khlystun. Crediting on land mortgage: opportunities and barriers. Theses of report at the Russian agrifood forum. September 23, 2008.
2 The most part of PFs were created before 1995.
3 As stated in Paragraph 9, Article 3 of Federal Law “On enforcement of Land Code of the Russian Federation” of October 25, 2001.
RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES farmer cultivates his own land plot, in compliance with its regulations it issues passports indicating that “the plot area is declarative and needs more precise definition when establishing boundaries”.
The title registration bodies do not accept cadastre passports with such notes and require documents stating the exact area of a land plot that one cannot get without boundary definition works. A farmer is thus forced to pay from 3 to 7 thousand rubles per hectare for such works, to lose time (from 3 to 6 months) and to make up to 10 visits to different offices that work not each and not full day. One more problem common for agricultural producers of all types is the problem of evaluating land plots since the market of land in the country has not formed as yet. Appraisers charge a high price for their work and establish the value of land plots by “either spinning it out of thin air or basing on cadastral estimate” the exactness of which is also questionable.
There are also hindrances specific for PFs:
1. Unclear legal status of an individual farmer. At present there are PFs registered as legal bodies; PFs whose heads are registered as individual entrepreneurs; PFs the heads of which are equated with individual entrepreneurs. The Federal Law “On peasant (individual private) farms” regulates relationships only in the latter. All other forms of PFs are not subject to regulation by this law despite being quite legitimate. Therefore, it’s not clear how can one take decisions on accepting their land as collateral, what is the responsibility of farm members, etc. There is a risk for a bank that in case the land is subjected to distress, the decision on its mortgage can be contested since the procedures of decision making in two of the three currently existing forms of PFs1 are not established. If land is offered as collateral by such problematic (as regards their legal status) farms, it’s easier for a bank to decline their applications.
2. High share of non–operating PFs. The Agricultural Census revealed that only 51.7% of PFs were engaged in production activities.
3. Disproportionate distribution of PFs by regions. 25% of currently operating land–based PFs in Russia are situated in Dagestan, Kabardino–Balkariya, North Ossetiya, Ingushetiya and Chechen Republic2. But they cannot mortgage their land since its privatization in these regions is forbidden and land remains state property.
4. The level of education of PFs’ members hindering wider use of mortgage. About 24% of PFs’ heads have higher education and 32% – special secondary education3. As different from corporate farms, PFs do not have specialists who could day after day enquire about terms of mortgage credits, then update documents on land plots, evaluate and ensure them, negotiate with banks, register mortgage agreements. An individual farmer is normally engaged in agricultural production and has no workers available for such purposes: the number of employed in 80% of PFs and farms of individual entrepreneurs ranges from 1 to 4 persons4. Besides, case studies show that in order to mortgage his plot for receiving a loan a farmer has to visit not the local bank office in his district but the oblast affiliate of “Rosselkhozbank”. So, the complicated procedure of mortgaging agricultural land, the high share of PFs’ heads having only secondary education, the lack of workers available for going through the mortgage credit formalities and the remoteness of bank offices are additional hindrances to the development of land mortgage in PFs.
5. Low activity of PFs in obtaining credits. This activity was estimated by calculating the share of farms–borrowers from Rosselkhozbank5 in the total number of regional PFs engaged in farming6.
This indicator depends not only on financial sustainability of PFs in a region but also on their need for credits, the capability of farm heads to go through the required formalities to obtain a credit, credit availability, etc. Only in one region of the Russian Federation – the Jewish autonomous oblast – 2/3 of operating private farmers use credits. In 7 oblasts almost 1/3 of PFs use credits (Tomsk, Astrakhan, Vologda, Tula, and Kursk oblasts and the Khakass Republic). In 20 regions of Russia the share of PFs benefiting from credits ranges from 10 to 20% of their total number. In other regions of the country not more than 1 out of 9 private farmers or individual entrepreneurs uses credits. In the 1 Hereinafter the term “PFs” refers to all forms of such farms.
2 All–Russian Agricultural Census of 2006. Rosstat.
5 Rosselkhozbank. Data on crediting in the framework of the State program.
6 All–Russian Agricultural Census of 2006 – www.gks.ru.; Rosselkhozbank.
CREDITING OF PEASANT (INDIVIDUAL PRIVATE) FARMS ON LAND MORTGAGE Central Federal District the lowest indicator of involvement in the system of crediting is observed in Moscow oblast – only 1.7% of PFs registered there as operating in the course of the recent Agricultural Census obtained credits1. The situation is similar in Leningrad oblast – only 4% of operating PFs are participating in credit schemes through Rosselkhozbank.
6. Size and specialization of farms. Over 17% of PFs have no land at all. The size of 37% of farms having land is less than 10 hectares2. Altogether, 64% of PFs have either no or not more than 20 hectares of land. Meantime, in 20 Russian regions the average size of a land plot that can serve as collateral is over 30 hectares. PFs specialize mainly on crop production: over 80% of them have no or not more than 3 heads of livestock. It’s not rational for such farms to buy a separate tractor or to build production premises, i.e. they don’t need much capital investments calling for mortgage credits.
7. The structure of land used by PFs. Agricultural land mortgage could be encouraged by a high share of land owned by members of PFs or transferred to PFs as legal bodies3. But according to data of Rosnedvizhimost [Russian real estate agency] only 21% of land assigned to PFs is owned by their members and about 10% – by PFs as legal bodies. The remaining land rests in state ownership (about 41%) or in property of outside owners (28%). This means that less than one third of land used by PFs can serve as loan collateral4.
8. Liquidity of land in case of distress. The scarcity of information about demand for agricultural land prevents from assessing its liquidity. Meantime the rate of liquidity determines the attractiveness of collateral for a bank. However, the liquidity of agricultural land can be estimated indirectly by comparing the area of land not demanded by farm producers with the area of land used by PFs in each specific region of the Russian Federation. Non–demanded lands are share–owned land plots whose co–owners failed to transfer their titles and lands of liquidated PFs and corporate farms. The more such lands, the lower liquidity of land plots mortgaged by PFs. Only in 9 regions of the Russian Federation (most of them in the Southern Federal District) the area of non–demanded lands is not big – its ratio to the area of land used by PFs is below 10%. In 15 regions it does not exceed 25%.
In the remaining Russian regions the area of non–demanded lands relative to the total PFs’ land is rather large implying that the liquidity of a potential collateral – agricultural land – is not high.
9. Collateral value of land plots. In case of no demand for land it usually bases on the cadastral value of a plot. Besides, banks additionally cut it by 30%5. Estimates of collateral value of land plots owned by PFs or its members (according to methodology used by Rosselkhozbank) show that in regions of the Russian Federation its average amount is above 200 thousand rubles and exceeds thousand rubles in 16 of them. So, only in these 16 regions an owner can mortgage his plot and get a credit sufficient for buying an ordinary tractor MTZ–82. In all other regions the credit will allow to finance only non–capital expenditures and so in most cases its usage won’t be rational. The comparison of an average amount of credits received by PFs in 20086 with the collateral value of their land plots showed that private farmers used other property for mortgage7. Only in Rostov oblast land plots can serve as collateral for getting credits since their average collateral value is above the average amount of credits received by PFs in 2008–2009. In two RF regions – Krasnodar kray and Saratov oblast – a land plot can secure up to 75% of the received credit while the rest should be guaranteed by other property items. In all other Russian regions the collateral value of land plots is many – dozens and hundreds – fold below the average amount of credits received by PFs.
So, one can conclude that land can provide individual private farmers with access to capital– purpose credits only in a limited number of cases. For most of them it cannot yet serve as a real loan collateral.
1 This can mean that some PFs were recorded as operating although they were created not for the sake of production activities but in order to obtain land plots that could be later sold or used for recreation. The evidences of that are the small size of farms (8.5 hectares – one of the lowest indicators in the country) as compared with land availability in the region and the low average output per farm.