Experts assessed the future of farmers in the event of the abolition of subsidies for concessional lending
Agriculture is traditionally considered one of the most risky industries, so it is supported by the state. It was this support that allowed Russia, in particular, to take a leading position in the world grain market. A significant role was played by the reduction of interest rates on loans and subsidies, but the system failed: the other day it became known that the Ministry of Agriculture plans to revise the terms of concessional lending. Market experts understood the causes and consequences.
“Firstly, prices are rising – for seed, for equipment, for fertilizers, for fuels and lubricants. This means that the costs of agricultural producers are also growing, and the need for borrowed funds is also growing, says Associate Professor of Moscow University. S. Yu. Witte Kirill Parfenov. – Secondly, in an attempt to curb inflation, the Central Bank raised the key rate quite significantly, which also directly affects the size of the subsidy: it should cover 80-100% of the key rate. But the volume of planned budget financing for short-term loans has decreased: last year, 22.5 billion rubles were allocated for these purposes, and 19.6 billion rubles are planned for 2022.”
In addition, the funding limits for this program have been exhausted, and the time is extremely unfortunate – spring field work is just around the corner, says the head of the Department of Entrepreneurship and Logistics of the Russian University of Economics. Plekhanov Dmitry Zavialov.
The expert explains that most of the soft loans usually go to finance the sowing campaign, so the transition to commercial lending will spur the already growing costs of farmers.
“At the same time, in the conditions of rather strict banking regulation, it is a difficult task for farmers to obtain a commercial loan,” adds Lazar Badalov, Associate Professor of the Department of World Finance at the Financial University under the Government of the Russian Federation.
The fact is, the expert explains, that it is more difficult for farmers to get a regular loan from a bank, because the risks in this business are very high and banks are trying to compensate for this with high interest rates. For example, farmers cannot provide anything worthwhile in security. And no one can predict the results of the sowing campaign either. Hence, there are difficulties in attracting funding. Therefore, if the size of subsidies is reduced, then it is unprofitable for the bank to lend.
The Ministry of Agriculture is trying to find a way out of the situation in which it is placed, recalls Parfyonov: at the end of last year, a draft regulatory document was developed, according to which it was supposed to raise the marginal rate on soft loans from 5% to 7%, and reduce subsidies to 70% of the key rate (now this figure is 80%).
“However, due to sharp criticism, the Ministry of Agriculture was forced to abandon these plans,” adds Parfyonov, explaining that this has led to the fact that the limits for this year are almost exhausted, the ministry recommends that agricultural producers apply for loans at “commercial” rates.
All this is happening against the backdrop of an increase in the cost of funding for the bank, and banks are forced to make decisions like businessmen, so they have to refuse funding, and the Bank of Russia raised the key rate to 9.5%, limiting commercial lending for agriculture even more, as debt service at a rate of 13+%, a very small number of projects will be able to. In fact, the simultaneous reduction in subsidies while maintaining a high key rate actually makes lending unprofitable for banks, and, accordingly, will limit the possibility of implementing projects.
Elizaveta Utkina, a leading corporate ratings analyst at Expert RA, explains that an increase in interest payments will lead to an increase in production costs and, as a result, will provoke an increase in food prices. In addition, an increase in interest expenses will reduce the amount of free money that could be directed by agribusiness companies to implement investment projects, which may negatively affect the development of the industry.
“Suppliers of fertilizers, materials and equipment for sowing are already feeling the consequences of the resulting financial deficit, and by autumn we will all feel them in stores,” says Parfenov.