Romania Rural Finance Reform Rodrigo Chaves, Saul Schor, and Susana Sanchez September 22, 2004 Study and Reform Supported ...
Main messages A combination of very sound economic analysis (the Study “Financial Markets, Credit Constraints, and Investm...
The Study provided a diagnosis of the performance of financial markets (formal and informal) in Romania, using various dat...
The Study found that financial markets perform rather poorly in three key dimensions Access to finance is limited and the ...
The Study suggested a detailed government strategy to correct the observed shortcomings of rural financial markets 1.  Pha...
Through a mixed of instruments, the Bank has supported the implementation of the reform agenda to improve access to financ...
Actions to improve the movable assets framework and retail capacity have also being supported Movable assets Retail Capaci...
Rural Finance Project: US$ 80 million (APL) – 4/2001 Objective: promote economic growth and reduce poverty through the pro...
Lessons learned: Rural Finance Project: US$ 80 million (APL) – 4/2001 <ul><li>To avoid delays in implementation, the desig...
Movable assets reform <ul><li>WB financed the preparation of the law and its regulation as well as the creation of an elec...
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  • Thanks for the opportunity to talk about the ….. I prepared this presentation with Rodrigo Chaves and Saul Schor, who co-authored the Study on Romania rural finance and directed or participated in the design/implementation of the WB operations emerging from the Study.
  • The Study provided the data and analytical tools needed to design rural financial markets policies and to support the dialogue between the Government of Romania and the World Bank. It developed an agenda for reform to increase the availability of financial services in Romania’s rural areas to be supported through different World Bank operations in the last five years. The approach used was to: Assess the performance of financial markets in Romania’s rural areas Identify any constraints to deficiencies in performance Prepare an agenda for improving access to finance, including supply and demand side issues d) Support that reform agenda through different WB operations
  • ACTIVITES TO BE FINANCED 1. Credit Line Facility Terms and conditions of Rural Credit and Leasing Facility: Subsidiary loans (Government to PFIs): Maturity: 12 years with 18 months grace on principal and interest Interest rate: 6-month USD-denominated LIBOR + World Bank spread (0.50%) + Government Spread (0.30%) Maximum amount: Based on assessment of each PFI Sub-loans and leases (provided on market terms and conditions): Maturity: 8 years with 12 months grace on principal and interest Interest rate: Determined by each PFI (no cap) Maximum amount: $1 million for sub-loans; $4 million for leases Collateral: Determined by PFI Currency: USD or Romanian Lei Micro-loans (provided on market terms and conditions): Maturity: 3 years Interest rate: Determined by each microcredit service provider (no cap) Maximum amount: $7,500 Collateral: Determined by each microcredit service provider Currency: USD or Romanian Lei Eligible PFIs. Well-managed private banks, leasing companies, and microcredit service providers (NGOS, private entities) registered in Romania and that meet established financial eligibility criteria. Eligible sub-projects. Sub-projects to be financed by the project are productive investments, including investment and working capital, in all sub-sectors of the rural economy, including agriculture, services, and industry Eligible sub-borrowers. Majority privately owned legal entities or physical persons of Romanian citizenship that are (a) domiciled/residing in rural areas or (b) engaged in activities typically related to the rural economy. 2. Lending to banks to finance the cost of eligible goods, works, and incremental costs incurred in developing new or improving existing branches in rural areas. 3. TA and training in best practices retail banking and microfinance methodologies. 4. TA to develop a legal and institutional framework more conducive to rural finance Warehousing receipts system Examine options to reform accounting and fiscal treatment of leasing Establishing of credit bureaus Examining options to reduce risk of rural credit transactions by improving the quality of insurance services Public awareness activities
  • To avoid delays in implementation, the design of financial intermediary facility needs to be sensitive to the needs and practices of the private agents involved. In particular, procurement and disbursement procedures, prior review of sub-loans, and credit characteristics need to incorporate the normal commercial practices of the agents involved.   Do not underestimate the need for careful and intensive management, monitoring, and supervision by the WB.   A well-functioning PMU, staffed with competent personnel, is essential for project implementation.   Strong commitment to and ownership of the project by the Government are key ingredients to effective policy coordination across the sectors related to rural finance (for example, in the financial, private, and agricultural sectors).
  • Title VI of Law No. 99 of May 26, 1999 and GR No. 802/1999 provided the legal framework for the movable assets reform. Authorized operators The Commercial Bank of Romania (Banca Comerciala Romana S.A.) The Chamber of Commerce and Industry of Romania and Bucharest The Ministry of Public Finances The Romanian Bar Association The National Union of Notaries Public from Romania
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    1. 1. Romania Rural Finance Reform Rodrigo Chaves, Saul Schor, and Susana Sanchez September 22, 2004 Study and Reform Supported by the WB
    2. 2. Main messages A combination of very sound economic analysis (the Study “Financial Markets, Credit Constraints, and Investment in Rural Romania”) , with adjustment lending and investment lending aimed at reforming the entire sector worked in this case. <ul><li>The results in terms of access to credit are simply impressive as measured by: </li></ul><ul><ul><li>The number of transactions registered in the movable assets electronic archive (600k+) in only 4 years. </li></ul></ul><ul><ul><li>The impressive growth of formal sector credit (from private banks as the state banks were pulled out) to agriculture (greater than the rate of growth of ag GDP). </li></ul></ul>
    3. 3. The Study provided a diagnosis of the performance of financial markets (formal and informal) in Romania, using various data sources <ul><li>Analyze geographical coverage of the distribution network for financial services (banks and credit cooperatives) in 1997 </li></ul><ul><li>Identify who uses financial services and under which conditions </li></ul><ul><li>Assess the demand for loans and measure the extent of credit constraints (unsatisfied demand) </li></ul><ul><li>Evaluate whether credit constraints influence investment behavior </li></ul>Supply side data Rural survey data (Households and enterprises) The Study also identified constraints to financial development
    4. 4. The Study found that financial markets perform rather poorly in three key dimensions Access to finance is limited and the demand for credit is low <ul><li>About 20% of rural households and enterprises reported any borrowing. </li></ul><ul><li>Only 1% of rural households borrowed from private banks, compared to 14% of enterprises. </li></ul><ul><li>About 36% of rural households had financial savings, compared to 100% of enterprises. </li></ul><ul><li>Only 9% of localities had branches from private banks. </li></ul><ul><li>About 70% of households and 51% of enterprises did not demand loans </li></ul>Limited access hinders investment in rural areas <ul><li>Mitigating credit constraints would have a small impact on the number of households making investments and the amounts invested, but a much large impact for enterprises. </li></ul>Failure to allocate funds to agents with better investment opportunities <ul><li>Lenders allocated substantial portions of rural credit to enterprises with negative net incomes (30%) and which have negative gross cash flows (40%). </li></ul>
    5. 5. The Study suggested a detailed government strategy to correct the observed shortcomings of rural financial markets 1. Phase out directed credit subsidies to agriculture, minimizing distortions in rural financial markets 2. Privatize state-owned banks Tackle first the supply of credit (movements along the existing demand curve) A. Overhaul Government policies and direct interventions 1. Improve the legal framework for using collateral to secure transactions 2. Regulate non-bank mutual financial intermediaries B. Financial infrastructure C. Improve the ability of the financial sector to provide retail financial services
    6. 6. Through a mixed of instruments, the Bank has supported the implementation of the reform agenda to improve access to finance Privatization of State-Owned Banks Interest Rate Subsidies Non-banks <ul><li>NBR started supervising and regulating credit cooperatives in 2002 </li></ul>Condition for Board approval for the Rural Finance Project <ul><li>Subsidized credit programs for the rural and agricultural sectors were eliminated in 2001 </li></ul>Private Sector Adjustment Loan in 1999 supported actions to prepare BA for prompt privatization <ul><li>Banca Agricola (Romania Agricultural Bank) was sold to Raiffeisen in 2001. </li></ul><ul><li>Other state-owned banks have been privatized in the recent years (e.g., BCR) </li></ul><ul><li>Plans are underway to privatize CEC </li></ul>WB operations involved Actions
    7. 7. Actions to improve the movable assets framework and retail capacity have also being supported Movable assets Retail Capacity Other Rural Finance Project Financing available to develop technologies and physical infrastructure (branches) to provide financial services in rural areas Rural Finance Project Elimination of VAT on interests accrued by non-bank lenders Trust Fund for preparation of Rural Finance Project <ul><li>Law and regulation enacted in 1999 </li></ul><ul><li>Electronic filing archive for security interests in operations since 2000 </li></ul>WB operations involved Actions
    8. 8. Rural Finance Project: US$ 80 million (APL) – 4/2001 Objective: promote economic growth and reduce poverty through the provision of financial services Critical Board Conditions <ul><li>Dissolve all existing directed credit programs and all government funds financing agricultural and rural credit </li></ul><ul><li>Eliminate VAT on interests accrued (as opposed to earned) by non-bank lenders on their loans </li></ul>Activities eligible for WB financing <ul><li>Credit line facility for on-lending WB funds to enterprises and individuals domiciled/residing in rural areas or engaged in activities typically related to the rural economy. </li></ul><ul><li>Lending to banks to finance the cost of eligible goods, works, and incremental costs incurred in developing new or improving existing branches in rural areas. </li></ul><ul><li>TA and training in best practices retail banking and microfinance methodologies. </li></ul><ul><li>TA to develop a legal and institutional framework more conducive to rural finance. </li></ul>
    9. 9. Lessons learned: Rural Finance Project: US$ 80 million (APL) – 4/2001 <ul><li>To avoid delays in implementation, the design of financial intermediary facility needs to be sensitive to the needs and practices of the private agents involved. </li></ul><ul><li>Do not underestimate the need for careful and intensive management, monitoring, and supervision by the WB. </li></ul><ul><li>A well-functioning PMU, staffed with competent personnel, is essential for project implementation. </li></ul><ul><li>Strong commitment to and ownership of the project by the Government are key ingredients to effective policy coordination across the sectors related to rural finance (for example, in the financial, private, and agricultural sectors). </li></ul><ul><li>After project restructuring, project implementation has improved: </li></ul><ul><ul><li>Three banks and 2 leasing companies are disbursing credit in rural areas </li></ul></ul><ul><ul><li>Two banks have applied for financing to expand branches in rural areas </li></ul></ul><ul><ul><li>Three NGOs are providing microcredit services throughout the country </li></ul></ul><ul><ul><li>About US$6 million has been disbursed through the credit and leasing facility and disbursements are increasing steadily </li></ul></ul><ul><ul><li>Credit to agriculture increased 36% in real terms in 2000-2003 </li></ul></ul>
    10. 10. Movable assets reform <ul><li>WB financed the preparation of the law and its regulation as well as the creation of an electronic filing archive for security interest. </li></ul><ul><li>The new legal regime, approved in May 1999: </li></ul><ul><ul><li>Expanded the range of property that can served as collateral </li></ul></ul><ul><ul><li>Created a system to establish priority among creditors in collateral </li></ul></ul><ul><ul><li>Required that the ranking of priority depends only on the time of filing a notice of the security interest in an Electronic Archive </li></ul></ul><ul><li>Electronic (Internet) filing archive started operations in December 2000 under the supervision of the Ministry of Justice. It provides on-line access to register and retrieve information. </li></ul><ul><li>Five operators, working with 380 agents, are authorized to register certificates of deposit as collateral in the electronic archive. </li></ul><ul><li>About 620,000 entries as of mid-Sept 2004 </li></ul><ul><li>The public has free access to the electronic archives to search and view specific entries. </li></ul>World Bank Operations
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