Farm loans: Stepping stone or trap?


It is widely accepted that farmers’ access to financial resources is one of the key success factors to promote agricultural development. In fact, the Thai government has established many specialised financial institutions to serve such a purpose.

The basic idea is to grant loans to farmers to support their agricultural production, and at the same time, reduce their reliance on informal lenders who normally charge much higher interest rates.

Farmers, who had been indebted, should be better off with these loans and, in theory, should be able to manage their debts better than before. However, in some cases, what actually happens is that the total debt for each household barely decreases and, on the contrary, has a tendency to increase further.

The case that we would like to share is maize farming in the northern province of Nan. We had a chance to interview some maize growing households who have remained indebted.The problem started when the farmers decided to adopt maize as their crop of choice. One of the reasons behind this is that maize is easy to produce. It does not require constant attention to grow and it also requires much less water than other plants.
Moreover, there are many bulk-buying businesses which are willing to support the production process as well as the transportation of products from farms to their premises. They have offered farmers contract farming, a system in which growers are often given seeds, fertiliser, insecticide and many other inputs to help with maize growing. Then, at the end of the harvest season, their delivery trucks come to get the maize produced at the farms.

This “support” does not come without a cost. The seeds, fertiliser, insecticide and others are often charged to the farmers. Once the trucks come to collect their produce, the “buyers” will deduct a total amount that the farmers owe them from money that the farmers are supposed to receive for the products sold. The maize growers, as a result, have become trapped in a situation in which the one who supports their production is also the one who buys their products.

In this case, the farmers do not have the power to set or negotiate prices which puts them at a disadvantage. They have been forced to receive less than they deserve. In fact, the income they receive from each cultivation is not enough to cover the costs of the maize production itself.

As a result, the farmers have begun to use switching loans to stay in the business. Those who are still indebted have to find a way to get more loans to invest in the next cultivation. They either try to borrow money from the government’s specialised financial institutions (if they still have good credit) or have to borrow from informal lenders to cover the interest rate payment of the debts they owe to government banks. They have to do this to ensure that they maintain a good loaning status so they can take out further loans.

This whole thing is not sustainable because the farmers’ loans are not used to invest in actual farming activities that will create meaningful profit. The use of money from one lender to pay debts owed to another lender only solves an immediate, short-term problem but creates a bigger, long-term financial difficulty in which farmers become increasingly indebted.

One farming household told us that their initial loan was taken out 20 years ago for an amount of only 20,000 baht. Right now, the loan has grown to a total of 600,000 baht. Sooner or later, they may be unable to seek more loans to pay the interest of this upwardly spiralling debt and end up having to default on their payments.

The vicious cycle of indebtedness is not only caused by the farmers’ own decision to engage in a series of loans but also by the state policy that allows financial institutions to grant loans to borrowers without applying strict criteria on their repayment ability. This policy has let many farmers plunge into a cycle of indebtedness.

Additionally, income insufficiency from the agricultural products has also forced them to rely on third-party support, such as contract farming which guarantees the volume of products to be purchased. Even taking this route, they still do not earn enough to live a decent life.

We believe that giving greater access to loans is one of the first steps to promote agricultural development. However, more measures are needed to ensure its success. For one, the government should make efforts to empower farmers to be more self-reliant by expanding their access to market opportunities. This will result in farmers having higher income leading to opportunities to free themselves from indebtedness instead of being left at a disadvantage and being exploited by capitalists.

In addition, specialised financial institutions should redesign their lending policy to ensure the financial sustainability of the borrowers especially in terms of better debt management among the farmers.

Nonarit Bisonyabut is a research fellow, Pontakorn Vorapamorn and Saranchana Thitisawan are researchers at the Thailand Development Research Institute (TDRI). Pornpawee Leerapongkul is a student from Thammasat University. She is an intern at Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

First published in Bangkok Post on Wednesday July 25, 2018