Farm Borrowing Made Easier by Agency Guarantees
WASHINGTON - The Russians are coming again in search of agricultural loans, and the search is getting easier.
With the U.S. Commodity Credit Corp. offering to guarantee loan principal and part of interest payments, veteran lenders to the former Soviet Union are again loosening their purse strings, and banks that have never participated in the program are testing the waters.
The funds are needed. The Russian government recently reduced its estimate for the 1992 grain harvest yet again, and Russian farmers are refusing to sell their grain to the state at current low prices, according to the ITAR-Tass News agency.
Coverage Was Thinner
Last year, American banks were reluctant to lend to the former Soviet states. The Commodity Credit Corp., which guarantees agricultural loans, was covering 98% of principal and up to 4.5% of interest. Bankers saw that as insufficient in a period characterized by coup attempts, rebellions, and massive demonstrations.
"Banks had stopped lending," said Gene Bovee, senior vice president at CoBank-National Bank for Cooperatives, Denver. "We were having a difficult time assessing the risk." CoBank specializes in lending to agricultural cooperatives.
Commodity Credit Corp. tried to assuage these concerns this year by shifting to a 100% principal guarantee at 52-week Treasury bill rates. Banks that had been involved in the program in the past are lending more.
Still, making the loans is not without risk, because to make a respectable return, banks must charge more interest than the agency guarantees.
While banks are reluctant to disclose exact figures, one lender said that current interest rates run at the six-month Libor rate plus one-quarter to three-eighths point.
As of July 2, member states in the Commonwealth of Independent States had been offered $1.8 billion in Commodity Credit Corp. loan guarantees, along with $600 million earmarked for Russia and $110 million for Ukraine, according to Rebecca Broeking, an information specialist with the Foreign Agriculture Service.
"I would say the 100% guarantee had a tremendous effect," said Mr. Bovee, whose company is the largest lender in the program.
The Russians saw an immediate change when the new guarantee level was announced.
Open to Banks in U.S.
"There was a queue of banks to provide us with this financing," said Oleg Enoukov, deputy representative at Vnesheconombank.
The program is open to any bank with a U.S. presence, except those from the country to which a loan is being made, according to agency officials.
The American units of European-owned banks have been picking up most of the loans. To date, the only American banks to get involved are CoBank and, on a more modest level, the First National Bank of Chicago.
The 100% guarantee "made it easier for us," said Paul McGonagle, senior vice president and head of international risk management at the First National Bank of Chicago, which also made loans under the old guarantee program.
But the bank has ended its involvement. "It's not so much a risk issue as it is a return issue and a balance-sheet issue," Mr. McGonagle said.
Other American banks are considering making loans to the former Soviet republics.
"Of course, with a 100% guarantee it is much easier to do business," said a Bank of New York Co. spokesman. "When it was 98%, we just didn't have the appetite for the exposure."
Ms. El-Faizy writes for the Medill News Service.