Technical Assistance Consultant’s Report

PUBLIC

Project Number: 49386-001

February 2023

Republic of the Philippines: Financial Inclusion

Framework Strengthening

Prepared by:

Virginio P. Jamon
Agriculture Finance Specialist

This consultant’s report does not necessarily reflect the views of ADB or the Government
concerned, and ADB and the Government cannot be held liable for its contents.
Implementing Agricultural Value
Chain Financing (AVCF):
Guide and Toolkit for Banks
 ABBREVIATIONS

ACPC – Agricultural Credit Policy Council

ADB – Asian Development Bank
AVCF – Agricultural Value Chain Financing
BSP – Bangko Sentral ng Pilipinas
DA – Department of Agriculture
LC – Lending Conduit
FPPB – First Philippine Partners Bank
1VB – 1st Valley Bank
MSCB – Metro South Cooperative Bank
– New Rural Bank of San Leonardo,
NRBSLI
Inc.
NGO – Non-governmental organizations
– Producers Savings Bank
PSBC
Corporation
RMB – Rizal Microbank
SFF – Small Farmers and Fisherfolk
VC – Value Chain
VCA – Value Chain Analysis
 Table of Contents

Executive Summary

Defining AgriculturAL Value Chain Financing (AVCF) 6

Some Basic Concepts 6
How does Value Chain compare with Supply Chain? 7
What are the Various Types of AVCF? 8

Developing a Toolkit for AVCF 9

Why is there a need for a Toolkit? 9
How was the Toolkit developed? 10
Who are the target users of the Toolkit? 11
What are the Contents and Limitations of the Toolkit? 11

Implementing AVCF: A Toolkit for Banks 11

MARKET SCOPING: Selection of Commodity 12
ASSESSMENT AND ANALYSIS OF THE COMMODITY VALUE CHAIN 13
DEVELOPING THE AVCF PROJECT/LOAN PORTFOLIO 18
AVCF Loan Assessment and Approval. 24
Loan Monitoring 27

Proposed AVCF Team Structure Within Banks 28

Need to Assign Dedicated AVCF Loan Officers 29
Description of Desired AVCF Loan Officers 29
Roles and Responsibilities of the AVCF Loan Officer 29
Required Adjustments in the Job Description of Loan Officers 30
Suggested Distribution of Time of Loan Officers 30
Ensuring Sustainability 31

Risks in Implementing AVCF 31

Annex 1. Sample Potential Sources of Information for the Value Chain 33

Mapping 33
Annex 2. Data and Information Requirements for VCA 35
Annex 3. Examples of Value Chain Maps Preliminarily Developed by the Pilot Banks 38
Annex 4. Guidelines in the Conduct of Preliminary Assessment/Initial Sales Call 40
Annex 5. The 5 Cs of Credit in AVCF 43
Annex 6. Assessment of Business Plan 45
Annex 7. Role of Government Agencies in Promoting AVCF 47
Annex 8. Sample Loan Proposal 49
 I. EXECUTIVE SUMMARY

1. Agricultural Value Chain Financing (AVCF) approach is described in this Toolkit as an

information-based lending methodology that enables banks to identify and mitigate credit risks in
lending to agriculture, in general, and to small farmers and fisherfolk (SFF), in particular. Use of
AVCF approach helps banks to determine acceptable collateral substitutes and focus less on the
use of hard collateral. The quantity of information to be generated via Value Chain (VC) mapping
and VC analysis will enable banks to structure loan packages at minimum lending costs and at
reasonable level of risks involved.

2. The following is a simple illustration of the agricultural value chain financing framework.
The framework adopts 3 key principles on which the AVCF approach and processes are anchored:

3. The following guide questions are used in the conduct of value chain analysis and mapping
for specific commodities:

i. What are the core processes in the value chain?

ii. Who are the actors involved in these processes and what do they do?
iii. What are the flows of product, information, and knowledge in the value chain?
iv. What is the volume of products, the number of actors and jobs involved in the
value chain?
v. Where does the product (or service) originate from and where does it go?
vi. How does the value change along the chain?
vii. What types of relationships and linkages exist?
viii. What types of services are feeding into the chain?
ix. What is the location and position of the poor in the value chain?
x. What key constraints exist at various levels in the value chain and what
are the potential solutions to those constraints?
xi. How do products, information, and knowledge flow through the value chain?
6

4. The following are some emerging features of AVCF loan facility proposals generated under
the AVCF Pilot Project:

(i) Preferred loan size is minimum of P10 million per account.

(ii) One loan account entails combination of three (3) loan packages: i) procurement of
fixed assets for post-harvest and/or processing needs; ii) obtaining of working capital
for enhancement of trading capacities, and iii) availing of production loan for the
assurance of reliable supply of agricultural materials.
(iii) Suggested loan maturities shall be determined based on cash flows but not to exceed
more than five (5) years.

5. The strongest actor in the value chain is the preferred borrower. Such actor is the Anchor
Firm/Coop or Agripreneur. The partner SFF shall be “grafted in” in the overall loan proposal. With a
strong partner, risks inherent in the value chain maybe managed using any of the following schemes:

(i) Co-borrower arrangement,

(ii) Build-Operate-Transfer (BOT) “hybrid” scheme,
(iii) Contract growing deal, and
(iv) In-house/on-the-job technology-based training program.

6. There shall be dedicated agricultural loan officer (ALO) per branch/geographical area.
He/she shall have a P100 million maximum loan amount to be supervised at any given time. The
ALO shall be empowered to:

(i) analyze data generated from VC mapping;

(ii) prepare and develop AVCF loan package based on credit risks identified in VC
mapping; and
(iii) present/defend loan proposals to approving authorities.

7. The transition from present bank realities to the required AVCF-based lending system would
entail the following:

(i) Buy-in from the bank owners/senior officers.

(ii) Mentoring of designated ALO up to the time that half of the targeted P100 million
portfolio load is achieved.

II. DEFINING AGRICULTURAL VALUE CHAIN FINANCING (AVCF)

A. Some Basic Concepts

8. Agricultural value chain is defined as the sequence of value-adding activities (e.g.,

processing, packaging and distribution) from production to consumption of a specific agriculture
commodity or product. Additional transformation is provided to agricultural products from input
suppliers to agricultural farms and ultimately to consumers’ tables.
 7

9. The chart below shows a sample value chain map of abaca. The map shows the various
activities and actors involved in each activity/process within the chain.

Figure 1. Sample Value Chain: Abaca

Note: encircled numbers refer to the number of operators.

B. How does Value Chain compare with Supply Chain?

Supply chain = supplying products (creation and distribution of product)

Value chain = delivering value (marketing and servicing a product)
Source: Starbucks, Complete Guide to Value Chains

10. AVCF is described as the variety of financial services provided by financial institutions to
businesses and stakeholders within the agriculture value chain. The financial service may target one
or more businesses and/or stakeholders in the chain. More often, financing is provided either to
individual stakeholder/s and/or partnerships within the chain.

11. AVCF adopts the following key principles:

(i) Conduct of Value Chain Analysis (VCA) is fundamental to AVCF. Data and information
relevant to the commodity value chain are collected and used to assess and analyze the
commodity value chain. These information provide a clear picture of credit risks inherent in
a particular commodity/enterprise.
(ii) Credit risks are evaluated using the data generated from the mapping and analysis of the
commodity value chain.
8

(iii) Security agreements (other than the usual hard collateral) are developed and formulated to
mitigate risks. Possible measures/strategies to fully cover the credit risks are identified.

12. Relevant data and information to identify and mitigate credit risks are determined and
identified through the conduct of a VCA which is fundamental to the implementation of AVCF.

C. What are the Various Types of AVCF?

13. Value Chain Financing provides different loan packages for various stakeholders in the value
chain. For agriculture, AVCF generally comprise of a package of loans for the following: (a)
production, (b) working capital, and (c) acquisition of fixed assets.

14. Financial institutions may also consider the following types of financing using the AVCF
principles and methods.

15. These types of financing may be provided to any of the following examples/types of
agriculture value chains:

16. The Buyer-driven model seemed to be prevalent and believed to be a “good risk” by most
financial institutions.

17. Please view the following AVCF-related YouTube Animation.

https://youtu.be/oqR6SV8ma_8
https://youtu.be/zBtnKPEo1mM
 9

III. DEVELOPING a Toolkit for AVCF

A. Why is there a need for a Toolkit?

18. Agriculture financing is one of the major focus areas under the National Strategy for Financial
Inclusion (NSFI). To encourage banks to provide financing for the agriculture sector, the Bangko
Sentral ng Pilipinas (BSP) issued Circular No. 908 (Agricultural Value Chain Financing Framework)
in 2016. The circular promotes value chain financing (VCF) as a sustainable approach for banks to
finance the agricultural sector. Most banks, however, have given tepid support to the adoption and
implementation of the circular. A number of banks expressed that they have already adopted or are
already adopting the VCF approach in their lending operations1.

19. In view of the general reluctance of banks to adopt the AVCF approach, the BSP with support
from the Asian Development Bank (ADB) launched the Agricultural Value Chain Conference in May
2017. The Conference brought together the key stakeholders in agriculture financing and discussed
various ways by which banks can participate more intensively in financing the agriculture sector. The
Conference, among other things called for a more detailed study on why there is very little interest
among banks to engage in AVCF.

20. In response to the call, ADB commissioned a study entitled: “Financial Inclusion Framework
Strengthening -Financing Agricultural Value Chains” in October 2018. The study primarily aimed at
determining why there is very little interest among banks to adopt the AVCF despite the issuance of
Circular 908 in 2016. Results of the study showed and emphasized the need for a capacity building
program that will enable and encourage banks to promote, adopt and institutionalize AVCF. The
study further showed the need to build awareness and improve the capacities of banks to recognize
AVCF as an innovative approach to increase their agricultural loan portfolio and provide enhanced
credit access of SFF to institutional credit.

21. Following are the highlights of the results of the study:

1 Some of the banks expressed this during the launched of the AVCF pilot program which was held at the Bangko Sentral
ng Pilipinas in September 2018.
10

22. To implement the key recommendations of the study, an action research project was
implemented by the ADB in collaboration with the BSP. The action research project was
implemented to develop the financing ecosystem for selected and established commodity value
chains and demonstrate how participants, particularly the smallholders, can be better supported and
benefit from the AVCF approach2. Technical assistance was provided to participating pilot banks3 in
the following areas: (a) commodity value chain analysis and mapping; (b) product development; (c)
required structural and organizational changes; (d) policies, processes, and procedures to be
adopted; and (e) development of market for AVCF.

B. How was the Toolkit developed?

23. The Toolkit was developed using key approaches, processes, and procedures for the
effective implementation of AVCF. The experiences and lessons learned in the implementation of
AVCF in the six pilot banks were incorporated to ensure that the recommended processes and
procedures are based on local conditions and current situation of Philippine banks.

24. The general objective of this Toolkit is to provide banks with procedural guidelines in the
adoption of the AVCF approach for agriculture lending. The specific objectives are to: (a)
demonstrate viability and promote bank adoption of AVCF by building capacities of partner banks;
(b) determine and identify specific requirements for implementation of AVCF; and (c) provide
relevant tools that could be used by banks that will engage in AVCF.

2 Banks participated in the pilot on a voluntary basis and were selected based on a set of criteria that were developed in
coordination with the BSP and the line agency providing support to the selected value chain.
3 Six pilot banks were selected for the implementation of AVCF. The experience and lessons learned are discussed in a
separate case study.
 11

C. Who are the target users of the Toolkit?

25. The target users of this Toolkit are the following: (a) loan officers of banks to be specifically
designated as AVCF Champions; and (b) senior bank officers in charge of loan approvals.
D. What are the Contents and Limitations of the Toolkit?

26. The Toolkit provides a detailed elaboration of the AVCF mechanics within the perspective
and certain institutional realities of the pilot banks. It also provides an anticipation of future scenario
for banks that will engage in AVCF-based lending. This includes a discussion on the necessary
human resource complement for implementing the AVCF.

27. The development of this Toolkit is based on the lessons learned and best practices gained
from mentoring the pilot banks from late 2019 up to end 2021. To make this truly helpful, this Toolkit
should be continuously updated based on the progress of coaching work.

IV. IMPLEMENTING AVCF: A Toolkit for Banks

28. The implementation of AVCF is anchored on the following key principles:

(i) Conduct of Value Chain Analysis (VCA) is fundamental to AVCF. Data and information
relevant to the commodity value chain are collected and used to assess and analyze the
commodity value chain. These information provide a clear picture of credit risks inherent
in a particular commodity/enterprise.

(ii) Credit risks are evaluated using the data generated from the mapping and analysis of
the commodity value chain.

(iii) Security agreements (other than the usual hard collateral) are developed and formulated
to mitigate risks. Possible measures/strategies to fully cover the credit risks are
identified.

29. Based on these principles, banks may implement and adopt the AVCF approach using the
following framework. Each of the steps under the framework are discussed in this section.
12

Figure 2

A. Market Scoping: Selection of Commodity

30. The first step to be undertaken by any bank wanting to adopt the AVCF approach in lending
to agriculture is to select the commodity it wants to focus on.

Figure 3. AVCF Market Scoping and VC Analysis

 13

31. Market scoping involves the selection of commodity that banks intend to finance using the AVCF
approach. Selection of commodity is based on specific criteria that is determined by the concerned bank.
The bank may consider the following criteria: i) growth potential and competitiveness; ii) prospects for success;
iii) poverty reduction potentials and social benefits; iv) outreach and v) other program related aspects as
shown below. Depending on the bank’s appetite and priorities, the bank may assign weights to each of the
criteria to select the commodity it will focus on.

32. The growth potential of a particular commodity VC is considered the most important criterion. To
assess this criterion, banks may need to determine the following: (a) scope for expansion of production and/or
scope for value addition thru processing or product improvement, (b) clear competitive advantage of the VC
vis-à-vis competitors, (c) availability of sufficient technological and managerial support for the VC, and (d)
access to infrastructure, qualified labor force, raw materials, services and the like.

33. Poverty reduction potential as another criterion is also considered vital. This criterion may be
assessed based on the following parameters: (a) potential to improve livelihoods of target sector (integration
in the market); (b) potential for employment creation; (c) relevance to the poor, social inclusion and
participation of SMEs; (d) within the framework of national and regional strategies; and (e) potential for labor
intensive technology.

34. Aside from the prospects for success and outreach (i.e., the number of farmers that would benefit),
the following additional program related aspects may also be considered in the selection of commodities: (a)
adoption and enforcement of production protocols; (b) enforcement through close supervision of farm
technicians; (c) availability of buy-back arrangements; and (d) presence of institutions willing to provide value
chain financing.

B. Assessment and Analysis of the Commodity Value Chain

Preparatory Stage

35. Upon selection of the commodity/ies to be financed using the AVCF approach, concerned bank loan
officers may start looking for projects and project ideas. Initial ideas normally emanate from any of the
following:

(i) What bankers already know. What is needed is to validate what one has already perceived as “good
idea”. Validation may come from various sources. Annex 1 shows a list of secondary information that
are available from different sources (e.g., DA documents pertinent to World Bank project).
(ii) Long-standing clients or existing borrowers and/or depositors of banks. These also require probing
and validation because even long-standing clients might influence the bank towards the wrong
direction.
(iii) Marketing activities of loan officers. In a typical credit cycle (as presented below), “good” ideas might
evolve as loan officers do marketing. This is when the business sense of loan officers is most needed.
At this stage, loan officers should be able to spot or discern what would “click” as far as bank
management is concerned.
(iv) Credit investigation and background checks. In some cases, “good” ideas may also emerge as loan
officers do bank, credit and supplier checks and initial assessments.
14

36. The AVCF approach encourages a more proactive approach where, instead of relying on walk-in
clients, loan officers go out, seek clients, and conduct interviews. The loan officers should go out, seek clients,
and conduct interviews. The initial interview happens during the first personal contact with the client. The loan
officer gets impressions and possible “good” ideas as the prospective client shares information on his/her
enterprise or as he/she explains the purpose for the requested loan. The initial interview is the beginning of
the loan officer-customer relationship. As the relationship evolves into a higher level of trust and confidence,
the clients might give “good” referrals which can be considered as prospects for the next round. They can also
be additional sources of “good” ideas for the loan officers.

Value Chain Analysis (VCA) and Mapping

37. The VC mapping begins with a review and collection of secondary information. In some cases,
secondary data might not be available. Agri enterprise data that is needed by banks for risk assessment is
usually very limited. There is also limited and incomplete data and information on technology and marketing.
In cases like this, banks may use data and information from government agencies, such as Department of
Agriculture (DA), Department of Trade and Industry (DTI), BSP, Philippine Statistics Authority (PSA) (even
government financial institutions (GFIs) like Land Bank of the Philippines (LBP)).

38. Data Generation. As mentioned earlier, AVCF is information-based lending. Data generation is an
absolute necessity. There are two (2) types of information needed: (a) borrower-related information, and (b)
project or enterprise-related information.

a. Borrower-related information. This includes information about the borrower which is usually gathered
through the usual credit investigation/background investigation. This may include information about
borrower’s sources of income previous credit history and other information that indicates repayment
capacity.
b. Project or enterprise-related information. This includes data related to the project or enterprise itself
(e.g., revenue streams, specific market of product, financial statement of the enterprise). Results of
value chain mapping and analysis will also form part of this information

39. Many agripreneurs do not keep financial data related to their enterprise. In this case, some banks do
“financial reconstruction” from whatever records the agripreneurs keep. This is resorted to especially if the
loan officers have an accounting background or with contextual experience on the enterprise to be financed.
To do a thorough analysis, it is ideal to have 3-year financial statements (i.e., Balance Sheet, Income
Statement, Cash flow Statement). Of the three statements, the income statement is mostly available but in
most cases only one year (and predictably understated) is available. In this case, the loan officer needs to
conduct additional interviews with the agripreneur.

40. Value chain analysis and mapping of a specific commodity looks at the roles of existing chain actors,
supporting actors and the policy environment. It also looks at the current challenges in the value chain,
opportunities for improving efficiencies and benefits to the actors involved. Prior to identifying the issues and
opportunities, AVC analysis requires the collection of key information related to the commodity value chain.
Annex 2 shows the type of data and information needed for VCA.

41. The following steps are undertaken in the conduct of VC analysis and mapping.

Step 1: Mapping the core processes in the value chain. The identification of all core activities
in the value chain is the basis of financial assistance. Every commodity has different activities
that are peculiar to its nature. The bank should discern which of the activities are really core
or central within the context of the value chain. The following is an example of a value chain.
 15

Step 2: Identifying the main players involved in the process. The next step is to identify the
main players in every core activity. At this stage, it is important to identify the gender of the
individuals involved in a specific activity within the chain. Determining whether an individual
involved in a specific VC process is a male or a female is important in designing the relevant
terms and conditions of the appropriate loan package. For instance, mobility of women
engaged in the VC process may need to be considered in designing the loan repayment
terms (i.e. terms, modality and forms of payments accepted). The identified individual/player
in each of the processes will be the objects of Credit Investigation and Background
Information (CI/BI) of the bank.

Step 3: Mapping flows of products. Following the identification of actors is the determination
of product flows. The bank should have a clear picture of the production transformation
process that takes place in every core activity. This step involves the identification of products
at each stage of the process – i.e., the transformation from raw material to intermediate
materials and to final products. This is done for both the input and output processes.

Step 4: Mapping knowledge and flows of information. The bank should know not only
product transformation flows but should also be familiar with the knowledge/information flows
as well. Of particular interest here is the price trends of the commodities at each activity in
the chain.
16

Step 5: Mapping the volume of products, numbers of actors and jobs. The mapping of
product volume/actors will give banks information about the scale or magnitude of
transactions in the chain. The number of male and female actors in a specific activity within
the chain should also be determined. The different circumstances and constraints faced by
either a male and/or female actor in the chain are important considerations in the formulation
of the loan package. Information on the volume of products and the number of actors in the
chain also gives ideas as to whether there are potentials for scaling up and/or expansion that
warrants efficiency and/or economies of scale.

Step 6: Mapping the geographical flow of the product and services. The VC map also shows
the product flow (volume, margin, number of actors) at different geographical or locational
dimensions. This step will give banks information regarding specific locations where banks
may set up cash capture mechanisms for the loan repayment. This is especially important
for commodities with extensive or far-reaching geographical flows.
 17

Step 7: Mapping the value at different levels of the chain. One very important element of
VC mapping is determining the monetary value of each core activity/actor throughout the
chain. This is important to ensure the overall viability of the whole chain and to determine the
repayment performance of VC actor-borrowers.

Step 8: Mapping services that feed into the value chain. Banks need to determine all
available support that would ensure good quality agriculture loan portfolio. This step will
provide the bank relevant information regarding support services that will help VC players
become more viable and eventually have good repayment capacity. This step will help banks
identify sources and cost of potential support services to the various actors and activities in
the chain.

Step 9: Mapping constraints and potential solutions. Prior to making the decision to lend (or
not to lend), banks should put in place “Plan B” measures or any fallback strategies to avoid
the occurrence of past due accounts. This is most relevant in inherently high risk agriculture
finance.
18

Annex 3 provides some examples of value chain maps of specific commodities.

C. Developing the AVCF Project/Loan Portfolio

Developing the AVCF Pipeline

42. Like traditional loans, it is good to develop a pipeline for AVCF. This involves the pre-
qualification of prospective borrowers, especially those identified through referrals. The attempt to
pre-qualify will help determine the following preliminarily: (a) borrower’s creditworthiness, and (b)
cursory look at the financial viability of the enterprise to be financed. To save costs and time, projects
in the pipeline should have a high chance of becoming “booked loans” at the latter stage.

43. A typical pipeline of prospective accounts may be categorized as “hot”, “warm” and “cold”:

i) Those in the “hot” category are those with (a) complete reliable financial data, (b)
perceived as “viable or to be viable” initially, and (c) with assets for possible collateral
to address any potential risk.

ii) Those in the “cold” category are those that are the exact opposite of those in the “hot”
category, i.e., (a) no reliable financial data; (b) unviable at the first assessment; and
(c) no asset for collateral and no alternative means to address risks.

iii) Those in the “warm” category are those with (a) incomplete data but relevant data
can eventually be gathered to warrant good appraisal, (b) those with “collateral-short”
situations but the proposed project has the capacity to generate cash flows to mitigate
risk, and (c) those with doubtful viability but bank loan can make the project
sustainable. The risk appetite of the bank will determine the final categorization of
accounts.
 19

44. The pipeline of AVCF projects may be further validated using secondary information from the
LGUs (e.g., Municipal Planning and Development Office) at the local level and from Negosyo
Centers of DTI and the (DA) at the national and regional level.

45. Conducting Sales Call. Using the list of potential projects in the AVCF pipeline, loan officers
may conduct a sales call. The Sales Call is the initial contact/interview of prospective borrower
(AVCF discourages relying on walk-in clients). The sales call enables the bank/loan officer to (a)
conduct a preliminary assessment of the project to be financed, and (b) validate whether the
requested loan amount is appropriate. At this stage, the loan officer may perform a preliminary
project assessment focused on the following: (a) market potential, (b) technical viability, (c)
management competency and (d) financial sustainability. Annex 4 provides some guidelines on the
conduct of preliminary assessment.

Designing the AVCF Loan Package

46. From the list of projects in the pipeline and the results of the sales call, the loan officer should
be able to identify specific projects/enterprises that can be financed by the bank. At this stage, the
loan officer is ready to prepare and design an appropriate loan package.

Figure 4. Development of the AVCF Portfolio

20

47. The loan proposal should not merely be a reiteration of facts from VC mapping but should
now include analysis and eventual loan recommendations for action by the Credit Committee.

48. Identification of Credit Risks. While banks reckon with many types of risks (e.g. credit risk,
foreign exchange risk, market risk, operational risk, interest rate risk and reputation risk), the primary
focus of AVCF is to identify and manage credit risks using the data and information generated during
the VC mapping and analysis. Credit risks, as most bankers know arises from either of the following:
(a) insufficient project appraisal; (b) non-compliance with loan policies; (c) concentrations of credit;
(d) lack of internal control; and (e) insufficient monitoring procedures.

49. The AVCF approach addresses the risks resulting from insufficient project appraisal which
most often results from the following: (a) loan appraisal is incomplete and not rigorously done
because of hard collateral as proxy to information, and (b) loan appraisal is done by head-office
based credit analysts and not the bank loan officer who is on the ground and familiar with the data
and information relevant to the commodity value chain to be financed.

50. AVCF is essentially risk-based lending with emphasis on the use of information generated
from VC mapping. As such, data generated from the VC mapping and analysis should be used to
identify, measure, monitor and control risks.

51. The information requirements under a typical risk-based lending procedure, approximate the
data produced under AVCF. Compared to other risk-based lending approach, AVCF relies more on
primary data. About 30% of data needed for AVCF is based on secondary data gathered from various
sources (e.g., industry/commodity profiles of DA, DTI, and other government agencies).

52. The matrix below shows an example of “risk events” and “risk drivers” formulated based on
the results of VC mapping.
 21

53. The risk events/drivers generated from the VC analysis provide banks a more complete and
concrete picture of the level of risks associated with a particular loan proposal. The following guide
may be used to determine the impact (i.e. whether minor, serious or critical) of an identified risk
event.

A thorough analysis of credit risks validated by VC information provides banks with several options
on how to tackle risks without immediately resorting to the comfort of using hard collateral. Upon
determining the risk impact of the identified risk event and driver, the following risk management
strategy may be used as a guide for banks in designing the relevant loan proposal.
22

54. Depending on their risk appetite, banks may determine acceptable risks. Specific strategies
may be adopted and incorporated in the loan proposal to control, mitigate, avoid or transfer the risks
identified.

55. Following are some strategies and arrangements that may be adopted to mitigate and/or
control the identified risks:

(i) Co-borrower arrangement – this is an arrangement where the farmer and the buyer (e.g.,
aggregator, anchor firm) co-sign a promissory note based on mutually agreed terms of
reference. Farmer and buyer have joint liability on the loan. Loans are used for
production thus proceeds are released to the farmer. Buyer agrees to the arrangement
on the premise that farmer sells the produce to him.
(ii) Build-Operate-Transfer (BOT) “hybrid” scheme - this is an arrangement where the
anchor firm/agripreneur leases the farmland of the farmer for a period of time within which
the anchor firm pays the following to the farmer: land rental, wages for farm labor and
bonus profit sharing. The borrower is the anchor firm/agripreneur who also shoulders
the production cost.
(iii) Contract growing – this is an arrangement where the farmer is the supplier of the product
and the anchor firm as buyer. This is a usual arrangement for poultry.
(iv) In-house/on-the-job technology-based training program – this is an arrangement that can
be used for hi-precision agriculture (e.g., high value vegetables) wherein the farmer
undergoes training on appropriate farm practice and technology for a specific period of
time. The farmer uses the training certificate as endorsement to a bank for possible
credit assistance.
56. Formulation of the loan package. After the conduct of a rigorous VC mapping and
identification of credit risks, banks should be ready to structure/package a loan with high degree of
confidence that the loan will not turn sour. For agriculture, it is suggested that at the very least, AVCF
loan packages are combination of loans for production, working capital and fixed assets.

57. Based on the experience with pilot banks, typical AVCF loan proposals have the following
features: (a) loan amount not less than P10M, (b) combination of production, working capital and
fixed asset loans, and (c) blend of financing short- and long-gestating commodities.

58. In formulating a loan package, the gender of the borrower should be considered in the design
of the terms and conditions of the loan. When female borrowers have mobility constraints, the bank
may consider the use of agents close to the female clients for loan releases and loan repayments.
Use of digital platforms for loan releases and repayments are also strongly encouraged.
 23

59. To ensure that the loan package is tailor-fitted to women entrepreneurs involved in the value
chain, the following should be considered in designing an AVCF loan package:

Terms and Conditions Key Gender Considerations

Eligibility and collateral requirements Acceptance of women-owned assets such as
jewelry

Allowing women to apply without the husband’s

signature

Documentary requirements can easily be

generated by women (e.g., identity cards,
documentation of collateral requirements etc.)

Acceptance of collateral without requiring for men’s

signature

Application procedures Application forms are appropriate to women’s

literacy level, language and normal spheres of
activity

Application procedures encourage women to

improve financial literacy and extend normal
spheres of activity
Repayment schedules and interest rates Repayment schedule is appropriate to the
patterns of income available from women’s
economic activity in the value chain or their
household cash-flow patterns, thereby allowing
borrowers to repay their loans on time

Repayment schedules, grace periods and other

loan characteristics allow women to maximize
their productive investments from the loan

Use of digital platforms for loan repayments

Size of loan Loan amounts are tailored to the size of the
economic activity in the value chain, so that
24

Terms and Conditions Key Gender Considerations

women have the confidence to apply, particularly
when they first enter the financial system

Loan amounts are large-enough to enable women

to increase their incomes significantly or to invest
in key productive assets in their own names
without undue risk

Use of digital platforms for loan releases.

Source: Based on the gender audit checklist provided for in Mayoux, Linda and Hartl, Maria. Gender and Rural
Microfinance: Reaching and Empowering Women, Guide for Practitioners, IFAD, 2009.

60. Use of Collateral in AVCF. AVCF is not necessarily collateral-free lending. Projects to be
financed using the AVCF approach should be able to generate sufficient cash to pay loan obligations.
Depending on the risk appetite of banks, AVCF loan proposals may include collateral. Concrete
data and information on the nature and scope of credit risks gathered through the meticulous data
gathering espoused by AVCF would enable banks to allow a higher appraised value of the collateral.

61. The loan proposal may also include availment of the guarantee facility provided by Philippine
Guarantee Corporation (PhilGuarantee) particularly for collateral-short borrowers. For agriculture-
related projects, PhilGuarantee provides an 80 percent cover for a minimum amount of guarantee
fee.

D. AVCF Loan Assessment and Approval

Figure 5. AVCF Loan Assessment and Approval

 25

62. Preparing the Credit Appraisal Report (CAR). The loan officer prepares the Credit Appraisal
Report (CAR) after a thorough conduct of credit analysis. The CAR template is only a representative
version of the supposed contents of typical loan proposal to the Credit Committee.

63. The CAR templates highlight two (2) important components of loan proposal: (a) Credit
worthiness of loan applicant based on expanded analysis of the 5C’s of credit in the context of the
AVCF approach, and (b) Financial viability of the enterprise to be financed based on the analysis of
the following:

(i) management competency,

(ii) technical viability,
(iii) market potential, and
(iv) financial sustainability.

64. Following are some pointers relevant to the preparation of CAR:

(i) BRIEF: Loan proposals should range from 3 to 10 pages at the most.
(ii) BALANCED: Loan proposals should be unbiased. Adverse information should also be
included to ensure that the Credit Committee gets all the information needed for loan
assessment.
(iii) RELEVANT: Only essential and pertinent information should be included. Excess technical
information should be avoided.
(iv) ACCURATE: All information should be accurate stating the source, particular industry from
which market information were quoted from.
(v) CLEAR: Keep sentences and paragraphs clear, short and succinct for easy understanding.
26

65. Evaluation of AVCF loan proposals. Assessment of AVCF loan proposals still revolves
around the 5 C’s of credit (i.e. character, capital, capacity, condition and collateral). AVCF, however
offers improvements by expanding the analysis of the 5 C’s to also consider the 5 C’s of the other
actors in the value chain. Annex 5 provides a more detailed description of how the 5 C’s of credit is
used in evaluating an AVCF loan package.

66. In some cases, banks may require a Business Plan (BP) as a requirement regardless of the
loan amount (AVCF-initiated loan accounts may entail a minimum loan amount of P10 million). The
BP contains the needed information for the bank to evaluate the management, technical, market,
and financial aspects of the project. Annex 6 shows a sample assessment of a BP.

67. Using the AVCF approach, banks may lend to collateral-short but still credit worthy projects.
If the results of VC mapping show that the proposed project has the capacity to generate sufficient
revenues to pay for the loan, then the bank may proceed to provide credit assistance. This may be
the case especially for a long-term client either as a borrower and/or valued depositor.

68. To accommodate good projects, some banks may adjust the loan value from the standard
50% to 70% of the appraised value of the collateral.

69. Approval of AVCF Loan Proposals. AVCF offers no additional enhancements on the credit
approval process of banks. Approval of AVCF schemes shall follow the credit approval system that
is already in place in the bank. However, the use of “peer review” or collegial discussion of loan
proposals both at the Branch and at the Head Office is suggested for AVCF loans. The loan officer
involved in VC mapping and in loan packaging/evaluation should preferably be present in all fora
where his/her proposal is tackled and or discussed. In view of the loan officer’s knowledge of the
VC concerned, his/her presence during discussions on the AVCF loan proposal would inform and
facilitate favorable decision by the approving authorities.

70. Collegial Discussion of Loan Proposals. Customarily, the Credit Committee (branch or
head office) handles all loan approvals. For traditional loans, there is very minimal collegial
discussion of loan proposals because approval of accounts is mostly based on the adequacy and
quality of collaterals offered by the proponents. Collegial discussion of AVCF loans both at the
branch or head office level is recommended because AVCF-initiated loan proposals are anchored
on the merit-based information gathered and less of collateral. Thus, collegial discussions between
and among peers would be helpful in assessing loan proposals. Following are some of the areas
for discussion:
 27

71. Loan Releases. Loan releases follow the configuration of pre-approved Farm Plan and
Budget (FPB). The FPB must therefore be detailed in all technical protocols (e.g., how many bags
of fertilizer/when needed) and corresponding cost items. Timing venue of loan releases should also
take into consideration the gender and gender-related circumstances of the borrower. For instance,
mobility and time constraints of women-borrowers should be considered when loans are released.
Use of digital financial services may also be considered in the release of loans.

E. Loan Monitoring

72. It should be emphasized that information gathering is a continuing process. It should continue
even after the loan is granted. The loan officer should remain tenacious in data-gathering if she/he
wants an agriculture portfolio with minimal problematic accounts.

73. AVCF highlights three (3) inter-related activities in credit administration: (a) loan monitoring,
(b) problem recognition, and (c) identification of remedial measures.

Figure 6 AVCF Loan Monitoring

74. Monitoring of the AVCF loan. AVCF believes that “almost all causes of loan failures
have identifiable signs lurking early on but not recognized by unmindful loan officer”. Based
on the experience of better performing banks, only “1% can be attributed to loan failures due
to bad luck. Hence, loan officers should always be vigilant of “red flags”. Loan officers
should be cognizant of the following:
28

75. Problem Recognition. Frequent visits to the client and intimacy of rapport between loan
officer and his/her clients will give the former tell-tale signs of any impending problems. The figure
below shows where the red flags would likely spring out:

76. Identification of Remedial Measures. If problems still transpire despite being wary of red
flags, the banks have two (2) remedial options: (a) soft measures or (b) hard actions.

V. Proposed AVCF Team Structure Within Banks

 29

Need to Assign Dedicated AVCF Loan Officers

77. As described in the preceding sections, AVCF departs from the traditional method of lending.
As such, banks that are seriously considering AVCF as part of their lending operations should assign
dedicated AVCF Loan Officers. AVCF loan officers will be personally responsible for the size and
quality of the AVCF portfolio. He/she generates his/her own clients, does credit processing (from
first interview to appraisal) up to monitoring and remedial management (if need be). The loan officer
is the principal and key officer in the implementation of the AVCF methodology.

Description of Desired AVCF Loan Officers

78. The AVCF Loan Officer should have the following qualifications:
(i) High level of analytical and business administration skills
(ii) Results-oriented and efficient
(iii) Innovative problem solver

79. Loan Officer is answerable to the following persons:

(i) Branch Manager - loan officer is part of overall branch operations
(ii) Head of Credit Department - for the management of individual loans portfolio and
achievement of monthly, quarterly and yearly AVCF targets
(iii) Branch Accountant - balancing loan accounts and compilation of loan returns

80. Professional Ethics of Loan Officers

(i) Do loan appraisal based on professional techniques e.g., analysis of financial ratios
(ii) Never be a beneficiary (direct/indirect) of client’s credit
(iii) Process/extend credit to clients that are compliant with the lending policies and
procedures of the bank

Roles and Responsibilities of the AVCF Loan Officers

81. To develop and maintain good performing agricultural portfolio resulting in branch profitability
and customer satisfaction, the AVCF loan officer should engage in professional loan origination, loan
appraisal, monitoring, and evaluation.
Main Duties
(i) Regularly review arrears rate of his/her loan portfolio and initiates plans/strategies to
maintain good quality AVCF loan folder
(ii) Make strategic recommendations to the branch/credit department/approving
authorities (CreCom).
(iii) Do loan proposal presentation and defense before the CreCom
(iv) Implement the CreCom decisions

General Operations
(i) Do marketing of bank loan products and services and develop wide market of clients
(ii) Through first interviews, conduct preliminary assessment of potential clients by
asking about (a) appropriateness of requested loan amount and (b) cursory view of
the viability of project to be financed.
(iii) Validate and analyze the financial (balance sheet, income/cash flow statements) and
personal data of the proponent
(iv) Strictly and continuously update arrears to ensure proper utilization and recovery of
loans
(v) Periodically review bad and doubtful accounts
30

(vi) P repare weekly,

monthly, quarterly, semestral, and yearly reports

Required Adjustments in the Job Description of Loan Officers

82. The current terms of reference of loan officers requires adjustment to suit the AVCF
framework. The first change is that the loan officers should do credit analysis/evaluation. They
should do work beyond simple collection and assemblage of loan documents needed by the
designated Credit Analyst of the bank. In addition, the time spent in “marketing” should be reduced
to allow more time in credit evaluation. To justify this adjustment, the AVCF-generated loans should
have the scale/size that warrants cost efficiency. The loans should be about P10M. This sample
loan size will necessitate a thorough credit analysis.
83. In essence, AVCF recommends the following basic functions of Loan Officer:

(i) Promotion and marketing of AVCF to potential clients

(ii) Credit appraisal
(iii) Follow-up and monitoring

Suggested Distribution of Time of Loan Officers

Figure 7
 31

84. Marketing. The Loan Officer is expected to spend 1 day a week (20% of his/her time) in the
field identifying agri clients of the bank based on the selection criteria discussed earlier. The Loan
Officer should have the discernment as to who are the potential “good” clients. The Loan Officer
should be able to select the “good” clients during the first contact or interview. This explains why it
is imperative for the bank/loan officer to visit the site where the business operations of the proponent
is located. AVCF proposes to define target groups and develop the corresponding marketing strategy
for such target groups clearly and carefully.

85. Credit Appraisal. This activity should be done using a thorough investigation and analysis of
the financial statements. This requires the accounting background of loan officers. It is suggested
that 60% (3 days per week) of the loan officer’s time is spent for credit appraisal.

86. Monitoring. The Loan Officer should prepare regular schedules for client visits once the loan
is granted. The visits should focus on the progress of the project financed to identify early “red flags”
for prompt action.

87. The three (3) functions proposed for AVCF loan officers are inter-related. They should all
contribute to the overall objective of increased profitability and decreased costs. The loan officer acts
like a “relationship manager” because he/she is with the client from first contact up to the time when
loan is fully repaid (although there is possibility of re-loan).

88. Figure 8 below illustrates the “omnipresence” of loan officers all throughout the loan cycle.

Figure 8. Role of Loan Officer in the various steps in the loan cycle

89. To maintain the quality of the AVCF portfolio, the Loan Officer should avoid the following:
(i) No geographical concentration
(ii) No sector concentration
(iii) Total portfolio should not be concentrated to small number of clients
(iv) No concentration of commodities

Ensuring Sustainability

90. Banks should always be cognizant that the AVCF way of credit granting gives importance to
the principle: do not grant loan if there are hesitations as to the morals or financial capabilities of the
proponent even if the proposed collateral appears sufficient.

Managing Potential Risks in Implementing AVCF

91. Considered as a risk-based lending approach, AVCF identifies, measures and manage the
risks associated with a specific AVCF loan proposal. While AVCF loan proposals are based on the
results of value chain analysis and mapping that considers the role of the various actors in the chain,
VCs can be complex and expose key stakeholders in the chain to different types of risks. In addition,
incomplete value chain maps and analysis may lead to inappropriate and poorly designed financial
instruments for VC actors. Some secondary data may not be available or if they are, the concerned
loan officers conducting the VC analysis may not know where the source of information is.
32

92. Some of the risks that may be encountered when implementing AVCF are the following:
price, production and market risks. To ensure a sustainable AVCF, these risks should be
appropriately managed.

93. Price and market risks arise from variability of price of produce and the lack of market for the
produce in the value chain. While this may be addressed in the contracts between the concerned
actors in the value chain (e.g., anchor firm and the SFF, or aggregators and SFF), large price
variabilities are often not covered. Also, some actors in the value chain (e.g., large aggregators and
anchor firms) are usually not inclined to include guaranteed prices in the contract. In the same way,
market risks arise when the quality of products involved do not meet the requirements of the other
actors in the value chain.

94. Production risks include the loss of produce arising from unexpected perils brought about by
natural hazards such as typhoon, flood, drought. While pest and diseases are risks that could lead
to production loss, this can be managed through the use of good agricultural practices. Production
risks resulting in loss of produce affects all actors in the chain and therefore also impacts on AVCF.
Production risks that are not taken into consideration in AVCF design can lead to unsustainable
AVCF and may discourage financial service providers to continue engaging in AVCF.

95. The foregoing risks can be mitigated using any of the following: (a) promotion of sustainable
and good agriculture practices, (b) risk sharing between actors in the chain, and (c) risk transfer
through appropriately designed crop and agricultural insurance.
 Annex 1 33

Annex 1. Sample Potential Sources of Information for the Value Chain

Mapping

1. PSA Data

2. DA Quarterly Bulletin
34 Annex 1

3. LGU Regional Plan

 Annex 2 35

Annex 2. Data and Information Requirements for VCA

The following data and information may be gathered and collected for the commodity to be
subjected to Value Chain Analysis. This is only a list of information that would be useful for VCA.
Only relevant data for a specific VC maybe gathered. Some information are macro in nature and
maybe gathered from secondary sources. Relevant local data should also be collected since this
will provide information on the commodity VC in the area where the borrower is located and from
which most of the VC actors are located.

Data and Information Needed Units

MARKET POTENTIAL AND TRADE

Volume of worldwide production MT
Volume of production in the PHL
Share of worldwide production by PHL
Value of worldwide production
Value of production in PHL
Share of ww production value by PHL
Other major producers worldwide and market shares
Annual growth rate of production value in PHL %
Annual growth rate of production volume %
Annual growth rate of producer prices %
Volume of worldwide demand Tons
Value of worldwide demand $
Annual growth rate of worldwide demand %
Volume of regional production Tons
Volume of regional demand Tons
Value of regional demand $
Volume of domestic demand/consumption Tons
Regions Primary production VC
Value of domestic consumption $
Extent of trade with USA? tons
Volume of export from US Tons
Volume of import to Philippines Tons
Value of import to Philippines $
Current Production Volume tons
Current import volume Tons
Current import value $
Import volume growth rate %
Current export volume Tons
Current export value $
Export volume growth rate %
Comparative advantage? Y/N
36 Annex 2

Data and Information Needed Units

CURRENT STATUS OF THE COMMODITY
Average land holding size avg ha
Average productivity Tons/ha
Average revenue per hectare avg Pesos/mo.
Average net returns per hectare avg pesos/ha
Average production cost per hectare avg Pesos/mo.
% of women's participation in primary production % men/women
% of women's participation in value added work in the VC % men/women
% of women's participation in sales/marketing in the VC % men/women
% of women owned enterprises in the value chain % men/women
what are the barriers to entry in the VC (land, equipment, Semi-qualitative
technology, financing requirements) assessment
Environmental impact of VC activity (water resources, soil, etc.) high, medium, low
qualitative
Is there potential for increased cooperation in the value chain?
assessment
Is infrastructure sufficiently available to maximize potential of VC?
Are financial services sufficiently available to support VC? In which
stages/points of the VC?
% of primary producers that are poor in VC
Potential to increase income of poor actors in VC
Share of the export or market price by each actor in VC (farm gate
prices as % of consumer price)
Estimated # of households that depend on that VC
# of provinces participating in value chain #
Post-harvest losses %
qualitative
Climate Vulnerability
assessment
qualitative
Security vulnerability
assessment
qualitative
Market stability (variability in annual prices?)
assessment
Proximity to high value opportunity in product space ordered distance
PRIVATE SECTOR PARTICIPATION
Market value and potential of the proximate product space
Infrastructure intensiveness 1-5 scale?
# of firms(by size micro, small, medium and large) #
# of employees #
Percent of raw material locally sourced %
Value added %
Value add potential Describe
Source/ Name of
Government commitment? On focal list (e.g. DTI, DA)?
Focal List
 Annex 2 37

Data and Information Needed Units

Is cluster organized and inclusive (comprehensive, free/open
Y/N
membership, present in rural areas)?
Is there a cluster-developed roadmap? Y/N
Status of roadmap implementation? Describe
Anti-competitive policies? (Legal restriction, quota, subsidy, etc.) Describe
38 Annex 3

Annex 3. Examples of Value Chain Maps Preliminarily Developed by the

Pilot Banks

Note that each bank has its own interpretation of VC mapping. Some did the plotting of maps but
without VC map. Other banks attempted to produce both VC map and corresponding VC analysis.
Most banks are not conscious that they are already doing VC mapping when they do their
traditional CI/BI. They become aware of VC mapping as prescribed by AVCF when they do CI/BI
not only of their prospective borrower but also of other chain actors who are not borrowers.

Illustrated below is the VC Map of Coop Consolidated Bank (partner of Metro South Coop Bank
in Mindanao). The bank conducted their own version of VC mapping for adlai in Bukidnon and
Misamis Oriental. Based on the sample VC map shared by AVCF, the bank validated which core
activities/actors were present in the adlai value chain in the target areas. The bank meticulously
conducted field interviews of various sources of information that can help the bank identify credit
risks related to adlai financing. The interviewees include tribal communities in Bukidnon.

VC mapping of Producers Bank for vegetables. The bank conducted VC mapping in the
vegetable areas in Nueva Ecija. The bank realized that vegetable farming in the targeted areas
is done only as “in-between” rice cropping, and therefore one short cycle per year. This partly
explains why the vegetable value chain particularly in Pantabangan (Nueva Ecija) is in “infancy”
stage.
 Annex 4 39

Illustrated below is the equivalent VC mapping of Rizal Microbank. It is multi-commodity

and was the result of several field interviews conducted with the end view of identifying a
long list of commodities which may be considered for financing.
40 Annex 4

Annex 4. Guidelines in the Conduct of Preliminary Assessment/Initial Sales Call

The preliminary assessment should be done within a period of an hour (in order not to bother the
prospective borrower unreasonably). The real and more comprehensive assessment should be
done at a later time. The first contact/sales call is to merely find out whether the loan request by
the prospective borrower will prosper into full-blown loan proposal4 with very high probability of
loan approval.

For greater productivity, the sales call should only be done with the “hot” prospects listed in the
pipeline (maybe with “warm” prospect at times but never with “cold” ones). Hence, the loan
officers should make sure that the pipeline contains at least 80% “hot” (for them to hit their loan
targets).

Preferably, senior officers of the bank or branch should conduct the sales calls. Agri-based small
and medium entrepreneurs prefer visits by highly-esteemed branch managers or managers
accompanied by loan officers. Most accounts marketed by managers are believed to be “sure”
accounts.

Bank staff should conduct as many sales calls as possible. Bank experiences show that for every
40 sales calls, only 10 accounts are actually subjected to bank review but only one account
prospers into an approved account. Hence, the more sales calls conducted, the more uptick the
number of approved accounts.

To make sure that the first contact with prospective clients is productive, it is useful to have a
short questionnaire. The following questions may be used by the loan officer of the bank:

4
Some banks call this as Credit Review and Appraisal Memo (CRAM) or Loan Approval Memo (LAM).
Annex 4 41
42 Annex 4
 Annex 5 43

Annex 5. The 5 Cs of Credit in AVCF

In AVCF, the 5C’s of credit is “stretched” to include other parameters not considered in the
traditional bank appraisal process. The discussion below points out how the value chain
methodology improves the assessment of character, capital, capacity, condition and
collateral.

In addition to the above figure, the VC approach also includes the assessment of the
character and management savvy of suppliers, producers and other actors in the value
chain. In other words, the character assessment is not limited to whoever is the borrower
alone. It also includes the assessment of other actors/enterprises in the value chain who
interact with the prospective borrower.

AVCF puts less emphasis on the capital of the borrower alone. It focuses more on the
capitalization of all actors within the chain.

AVCF prescribes the expansion of assessment to include the overall financial health,
competitiveness and growth potential of the whole value chain. The reason for this is the
logic that the individual borrowing capacity can be strengthened if the borrower is
integrated into a strong value chain.
44 Annex 5

The loan package should be adapted to the value chain. AVCF emphasizes the need to
consider specific financing needs of the other actors in the value chain as well. This
strategy can improve the overall bankability of the chain.

The challenge to banks is how to make use of cash and commodity flows in lieu of or to
enhance traditional collateral. Normally, the strongest actor in the value chain has
properties which are acceptable as collaterals. Hence, the banks still prefer to require hard
collateral despite presence of “soft” collaterals or collateral substitutes.
 Annex 6 45

Annex 6. Assessment of Business Plan

Banks may consider the following points in assessing a Business Plan:

• Management- Most agripreneurs are already “senior citizens”, hence, the concern for
succession. This is the most distinctive apprehension of banks. It is observed that
there is a tendency for most agripreneurs to claim that they have addressed the
succession issue of the enterprise, but upon probing the next successor/agripreneur
comes not from the immediate family but from the extended family. This is a potential
risk that might have negative impact on the repayment capacity of the enterprise
because immediate family members are perceived to be more truthfully concerned
with the viability of enterprise.

The next lookout related to management is the business background or the Personal
Entrepreneurial Competencies (PEC) of the agripreneur. An agripreneur that runs an
enterprise well will result in better loan repayments.

Another item related to management is the in-house capacity building activities of the
agripreneur. One question that would help a loan officer to evaluate the management
capacity is: Do you have training (formal/informal) activities that will enable your
staff/labor do their job better? This is most common in food processing projects.

• Technical Viability. This is most relevant in projects that involves machineries (e.g.,
agri driers in yellow corn, cooking equipment in chili/red pepper processing, tunnel
vent/multi-tier system in broiler production). The most critical aspect is the
determination of feasible normal capacity of machines. This determines the
performance efficiency of machines that would ensure “success”. The projected
volume of production should match the capacity of the machine to be financed.

• Market. Evaluation of the market is new to some bank staff because this requires use
of secondary data. Certain level of analytical skills is also required to have a
respectable opinion on the market potential of the project at hand. Market analysis
should not be confined to the forward-backward linkages (i.e., adequacy of inputs and
outputs). Further analysis on price trends, competitiveness of the product, need for
promotions, and other aspects of marketing mix should also be conducted.
46 Annex 6

• Financial Feasibility. Evaluation of Business Plan should include the following: i)

risk analysis; ii) clear picture of the project costs e.g., Farm Plan and Budget (FPB)
and iii) (c) realistic assumptions in sales growth and increase in expenses, etc.

In determining financial feasibility, the following caveats should be considered: i)

predisposition of some loan officers to “tinker” with the Cash Flow Statement to
generate a favorable financial picture that merits approval (and consequently hit loan
targets) and ii) tendency of banks/loan officers to be conservative. They prefer to
use the low-end figures in the financial statements as basis of decision to lend (or not
to lend). Low-end figures may not necessarily reflect the true conditions of the project
proposed to be financed.
 Annex 7 47

Annex 7. Role of Government Agencies in Promoting AVCF

48 Annex 8
 Annex 8 49

Annex 8. Sample Loan Proposal

COVER SHEET
Project Information
Conduit Bank: Borrower: BONFAC
Metro South Cooperative Bank Loan Amount: P15,000,000
Date Requested: October 18, 2021

Project Objectives
Over-all Objective:
To set up a cash crop - permanent crop plantation establishment project that shall
develop 100 hectares of farmlands in Batangas into highly productive and efficient
plantation crops by applying a cooperative-farmer profit sharing and re-investment
scheme wherein the portions of the revenues generated by the cash crop are used
to establish the long gestating permanent plantation crops

Specific Objectives:
1. To establish 30 hectares of sustainable drip-irrigated onion production systems in
two years
2. To establish 70 hectares of Ultra High-Density Planted (UHDP) mangoes utilizing
cooperative profit shares from the onion production

Expected Outcomes
1. Thirty (30) hectares drip-irrigated farm producing onions annually with a grain relay crop
2. Seventy (70) hectares Ultra High Density Planted (1,660 trees per hectare) Guimaras
variety mangoes trained and trellised with a maximum height of 7 feet per tree.

TABLE OF CONTENTS
Executive Summary…………………………………...…………………………………. i
BONFAC Cooperative ………………………………………………………………….. 2
Project Description ……………………………………………………………………… 3
Introduction/Background……………………………………………………… 4
Overall Purpose ………………………………………………………………. 5
Specific Objectives……......………………………………………………….. 6
Project Flow / Work Plan ………………………………………………………………. 7
Management System …………………………………………………………………… 8
Project Site and Beneficiaries …………………………………………………………. 9
Financials ................................................................................................................ 10
Attachments ............................................................................................................ 12
Land Management Agreement ................................................................. 13
Management Contract .............................................................................. 14

A 100-HECTARE PLANTATION DEVELOPMENT PROJECT APPLYING THE CASH CROP –

PERMANENT CROP PLANTATION ESTABLISHMENT SCHEME (CC-PCES) WITH A 30-
HECTARE DRIP IRRIGATED ONION AS THE PRIMARY CASH CROP ENTERPRISE
50 Annex 8

EXECUTIVE SUMMARY

The Batangas Organic and Natural Farming Agri Coop (BONFAC) shall implement a 30-hectare
Drip Irrigated Onion Production (DIOP) project. The DIOP shall be the cash crop component in a
Cash Crop-Permanent Crop Plantation Establishment Scheme (CC-PCPES) to develop 100
hectares of highly efficient and profitable annual and permanent plantation crops. The DIOP
project shall also be the basis for a possible P15,000,000 loan from Metro South Cooperative
Bank (MSCB) under the ANYO Program of the Agricultural Credit Policy Council (ACPC). The
said loan proposal is being initiated within the framework of the Agricultural Value Chain Financing
Project of Bangko Sentral ng Pilipinas (BSP) and Asian Development Bank (ADB).

The DIOP project shall adapt the East-West Seeds Philippines production protocol and contract
Netafim Philippines to install the drip irrigation systems designed for onions. Both companies shall
provide after sales technical services.

The DIOP project is proposed to be a cooperative-managed and -controlled project.

The expected DIOP-generated revenues shall be reinvested to develop the permanent plantation
crops in the other 70 hectares of the total 100 hectares targeted. BONFAC might consider entering
into a Land Management Agreement (LMA) with identified farmers/landowners for the plantation
crop. The term of the LMA shall be a period of 5 years or until the plantation establishment costs
have been recovered by the Cooperative.

A dedicated buyer or consolidator shall purchase 80 percent of the total onion production at the
harvest time after the onion bulbs have been cured and are ready for storage. The BONFAC shall
retain 20% ownership of the total onion production which shall also be stored along with the
inventories of the consolidator. These coop-owned onions shall be purchased by the consolidator
less logistics costs at a pre-determined month in the off-season period of the year. Current
distributor prices in the month of purchase of the coop-owned cold stored onion volume shall
apply.

BONFAC shall appoint a Technical Team (Noramiben Agri-Solutions) to provide overall technical
management oversight services. The BONFAC shall have a contract with the Team detailing the
terms and conditions of the service agreement.

THE BATANGAS ORGANIC AND NATURAL FARMING AGRI COOPERATIVE

The Batangas Organic and Natural Farming Agri Cooperative is one of the country’s highly
successful cooperatives in the country. Good management and the cooperative benefit systems
for its members have remain as the hallmarks for its steady growth up to the present as a robust
and well-established cooperative.

PROJECT DESCRIPTION

INTRODUCTION

Onion imports in 2018 had reached 108,080 Metric Tons at an estimated value of Php 1.17B. It
is a staple part of everyday meals of the Filipinos and is therefore constantly in demand.
Traditionally, onions are grown in Nueva Ecija. Now some parts of Region 4 are also producing
onions. However, the crop is seasonal and planted only during the last quarter of the year owing
to the crop being photosensitive (will form the bulb only under short day length – 11 hours or less).
 Annex 8 51

Commercial traders buy the onion harvests at relatively low farm gate prices and store them in
cold storage facilities to sell at a premium price during the lean months of the onion supply.
Cheaper onion imports are supposed to stabilize onion prices during the lean months. However,
prices remain high and only the onion importers and first tier distributors gain the advantage in
profits from imported onions. The Filipino average consumer shoulders the higher costs pf onions
most months of a year.

DRIP IRRIGATION TECHNOLOGY

Drip irrigation technology basically means delivering irrigation water through a series of special
plastic pipes with specialized outlets of droplets directed into the individual plants in a farm field.
Optimum soil moisture is always maintained that improves and even accelerates the growth and
development of the plant. Furthermore, liquid chemical fertilizers or organic emulsions can be
added into the irrigation systems to deliver precise amounts of fertilizer to the individual plants,
thereby ensuring continuous plant development. The overall result is an improved plant care that
is expected to result to optimized yields, thus better profits.

THE DRIP IRRIGATED ONION CROP RELAY STRATEGY

The drip irrigated onion production is expected to produce optimum yields. The farmgate prices
would be expected to be low since all onion farmers are harvesting simultaneously. However, the
additional volume per hectare is expected to compensate for the low prices. Furthermore, a
certain percentage of the crop may be cold stored to take advantage of premium prices during
off-season months.

The BONFAC shall identify or consolidate an aggregate area of 30 hectares farm lands from its
members in Barangay 1, Batangas. This site is adjacent to a river that shall serve as the drip-
irrigation water source. An initial 20 hectares of the identified area shall first be established in the
first year of the project. On the following year the next 10 hectares shall be established to total 30
hectares of drip irrigated onions. After the onions are harvested, rice (or other crop deemed fit)
shall be planted into the same onion furrows. The rice (or other) crop shall be able to utilize
residual fertilizers from the earlier onion crop. At the same time the rice (or other) crop shall break
any possible onion pest build-up in the soil. This farming system mimics the Nueva Ecija traditional
onion relay farming practices. Other crops, however, may also be considered as relay crops.

THE DRIP IRRIGATED ONION CROP RELAY STRATEGY IN THE AGRICULTURAL VALUE
CHAIN FINANCING PROJECT

The drip irrigated onion crop relay strategy can establish a sustainable profitable onion production
enterprise that can generate sufficient revenues to be able to pay the loan from MSBC within five
years. In addition, the DIOP can be scaled up progressively, as BONFAC can decide to seek
bank financing for additional drip-irrigated onion production projects.

As part of the project design, the cooperative portion of the revenues generated from the drip-
irrigated onion production shall be re-invested by the cooperative to develop the succeeding 70
hectares of Ultra-High Density Guimaras mangoes. Other permanent crops like the PCA coconut
hybrids or selected PCA varieties for the fresh coconut market may also be considered. For this
proposal, however, the Ultra-High Density planted Guimaras mangoes shall be the permanent
crop to be established. Other annual crops such as vegetables and ubi can also be established.
52 Annex 8

THE DRIP IRRIGATED ONION PROJECT FLOW

Proposed Implementation Scheme

Land Management Agreement (LMA)

In case there is no cooperative-owned farm property, the Batangas Organic and Natural
Farming Agri Cooperative might consider entering into a Land Management Agreement
(LMA) with all the farm members and owners of a select 100-hectares in a Barangay in
Batangas that shall be included in the 100-hectare production area. The basic scheme of
the LMA is that BONFAC shall apply for a loan from the MSCB as an accredited lending
conduit of Agricultural Credit Policy Council (ACPC) for the establishment of initial 20
hectares of drip irrigated onion production system. The BONFAC shall have complete
management control of the operation of the proposed100-hectare project area throughout
the duration of the LMA, which shall be five (5) years for the drip-irrigated onion production
and another five (5) years from start of planting of the mango seedlings, and, which shall
be immediately renewable for another 5 years.

Cash Crop – Permanent Crop Plantation Establishment Scheme (CC-PCPES)

Under a possible LMA scenario, the farmers who own the onion farmlands shall receive
30% of the profits from the sale of the onions starting on the second crop and until the
term of the project. For the first year, the farm land owners shall receive P 25,000 per
hectare from the income of the first year’s onion crop. The remaining profits from the onion
sales shall be in favor of the BONFAC and shall be re-invested as a loan to the involved
farmers for the development of 70 hectares of Ultra High Density Planted Guimaras
Mangoes (UHDP-GM). The farmers for the UHDP-GM and other permanent plantation
crop shall enter into a Land Management Agreement (LMA) with the BONFAC for a period
of five (5) years, to commence on the year of planting. The LMA transfers complete
management control of the farm lands until the new plantations have been fully paid from
the sales of the mangoes and/or fresh coconut or copra.

Transfer Scheme for Fixed Assets

The ownership of the drip irrigation system shall be transferred in the name of the
BONFAC after the loan principal is fully repaid. The onion farmlands that would have been
dedicated to the DIOP shall always have priority use of the drip irrigation system.
Furthermore, the BONFAC shall always keep the amount equivalent for the expenses for
the 30-hectare drip onion production ready every start of the onion production season.
All other assets shall be owned by the BONFAC unless the cooperative decides to
transfer these other assets to other parties. However, during the pendency of the loan
facility, all of the project’s fixed assets shall be assigned in favor of the ACPC through the
Metro South Coop Bank that shall serve as the conduit bank for the loan. The bank shall
exercise financial control on fund releases and loan repayments until the loan is fully paid
for.

Capability Building of the Cooperative

In order to develop the technical management capabilities of the BONFAC, selected

persons recommended by the cooperative shall be part of the farm operations and project
 Annex 8 53

management. Knowledge transfer from the project management to the selected BONFAC
person shall occur at every stage of the DIOP. Scheduled teaching sessions on proper
onion production monitoring and evaluation shall be conducted to train farmers and the
personnel that shall take-over the production systems after the term of the project.

The same is also expected to the case with the UHDP Guimaras mango plantations.
Involved BONFAC farmers, as well as, recommended BONFAC personnel shall learn how
to manage the plantations properly, as plantation development progresses.

Profit-sharing Strategy Under LMA

The farmers with their farmlands planted to the DIOP and BONFAC shall share the net
profits of the DIOP project on a 70:30 ratio in favor of the BONFAC. The sharing of profits
shall commence from the second year to the fifth. The farmers, however, shall get P25,000
per hectare from the proceeds of the onion profits after the sale of the first year’s harvests.

The farmers with their farmlands that will be planted to the UHDP-GM and PCA Coconut
hybrids shall be also share the net profits on a 70:30 ratio, also in favor of BONFAC.
However, the 70 percent share of the cooperative shall be used to pay for the cost of
establishing the new plantations and their upkeep. The profit sharing shall be terminated
upon liquidation of the plantation establishment costs. BONFAC shall have exclusive
marketing rights for the sale of the produce of the UHDP Guimaras Mango plantations
even after the financing for the mango plantation establishment had been liquidated.

Planting Program of the CC-PCPES – DIOP - UHDP Guimaras Mangoes

The planting plan for the Drip Irrigated Onion Production, the Philippine Coconut Authority
Coconut Hybrids and the UHDP Guimaras Mangoes is shown below. The possibility of
planting outright the 30 hectares of UHDP will depend on the availability of retained
earnings from the DIOP. Ubi production will also be integrated as the retained earnings
shall permit it.

Profitability of the Drip Irrigated Onion Production

The profitability of the Drip Irrigated Onion Project is the platform on which additional
farmlands can be developed into highly efficient and productive permanent plantations.
The table below shows the potential earnings that shall accrue in favor of the BONFAC,
54 Annex 8

which it shall reinvest to develop new Ultra-High Density Planted Guimaras Mango
plantations.

Cash Flow of the Drip Irrigated Onion Production

The Cash Flow of the Drip Irrigated Onion Project is shown below. The projected cash
inflows from the earnings of the onion project are expected to be able to support the cash
expenditures necessary to develop new Ultra-High Density

Guimaras Mango Plantations.

 Annex 8 55

Project Benefits

The BONFAC 30-hectare Drip-irrigated Onion Production Project coupled with a 70-hectare Ultra
High-Density Planting of Guimaras mangoes plantation establishment project will achieve a
sustainable and efficient annual onion production system and a highly productive mango
producing plantations that shall generate high levels of income for the farmers of the cooperative.
In detail, the benefits of this project are the following:
1. The DIOP-upland rice (or other crop) relay farming system shall result to a sustainable
onion production system, wherein onion production is optimized through the drip irrigation
technology.
2. The upland rice (or other crop) relay crop to follow the onion harvest optimizes fertilizer
utilization by absorbing residual fertilizers left in the soil from the onion crop, while
breaking potential pest and disease build-up in the onion production farms.
3. BONFAC through the Technical Oversight Team, shall provide the technical and
professional management that can ensure proper implementation of the DIOP-UHDP
GM.
4. Managerial skills and operations knowhow can be readily transferred to the selected
personnel of BONFAC that can prepare them to manage their own production projects.
5. Estimated manpower requirement of the project is expected to employ more than 150
farm workers for five months during the onion cropping season.
6. Farmer members whose lands are utilized for the project are assured of their fair share
of the net income, on top of the available work almost throughout each year.
56 Annex 8

7. The installation of the 30-hectare drip-irrigation systems shall usher in a precise farming
development in the location of the DIOP – UHDP GM, as farmers shall experience first-
hand the impact on productivity of these irrigation systems.
8. The UHDP Guimaras Mango plantations where trees are planted closely, trained onto
trellises and regularly pruned and maintained at maximum height of 7 feet are expected
to employ an additional 70 to 100 regular farm workers brining in an estimated 200 or
more households benefitting from the DIOP-UHDP GM Project.
9. The expected high profits from both the drip irrigated onion farms and the UHDP
Guimaras mangoes shall dramatically improve the standard of lives of the farmer
stakeholders.
10. The regular inflows of the net share of the farmers are expected to generate additional
economic activities in the community enhancing further their livelihood opportunities.
11. BONFAC shall become a consolidator of onions and high-quality mangoes, the latter
leading towards the export market.

Conclusion

The proposed 100-hectare DIOP – UHDP Guimaras Mango Plantation Development Project is
expected to produce 700 to as much as 1,000 tons of red onions with an estimated value of from
P18,750,000 per annum. It shall require more than P5,300,000 value in labor that shall benefit
directly most of the small farmland owners and the farming community members. Under LMA.
scenario, the profit share of the farmers from the onion during the five-year term of the project is
at P1,274,400 per year. The average farmer share per hectare is P42,000 per onion crop.
Including the potential work from the onion project, the benefit that each farmer may enjoy shall
be around P80,000 to P200,000, depending on his farmland area. The impact on the standard of
living for each farmer household is going to be dramatic.

The project shall open to BONFAC new inroads in the onion industry and the possibility of
exporting Guimaras mangoes to our nearby neighboring countries, such as Japan, Korea and
China. With the support of the Metro South Cooperative Bank and/or other similar funding
institutions, spearheading the new-player role in the onion industry and in the mango export sector
will be an achievable task for BONFAC. Expanding both the Drip Irrigated Onion Production farms
and the Ultra High-Density planted Guimaras Mangoes shall be a reasonable expectation in the
future for BONFAC.