1. Financial institutions in the agricultural sector: The Case of Aiyl Bank, Kyrgyzstan Ajai Nair, Consultant, The World Bank Expert Meeting on Managing Risk in Financing Agriculture Johannesburg, 1-3 April, 2009 The World Bank

2. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 2 Presentation Outline Institutional Overview Lending technology and process Credit risk assessment Credit risk management Delinquency management

3. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 3 Institutional Overview: Ownership and legal character Fully government owned Set up through a World Bank funded rural finance project in 2006 Obtained limited banking license in 2006 Network of 18 branches, 50 regional offices, and 33 village offices In the process of being privatized; parliament has approved sale of 67% of shares to strategic investor with rural financing experience

4. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 4 Institutional Overview: Financials US$67 million in loans Over 43,000 borrowers 87% of portfolio in agriculture Over 90% of agricultural loans for livestock Over 3/4 th loans less than $3000 PAR (90) <1%

5. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 5 Lending Technology 87% loans to individuals; joint liability groups, and legal entities Most loans have physical collateral – buildings, equipments, but not land Most loans have terms of 1 to 2.5 years Interest rates (on reducing balance) 22% on agriculture and 27% on non-agriculture

6. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 6 Lending Process Individuals desiring loans register in bank’s local office and obtain checklist of documents Visit by loan officer scheduled; loan officer does preliminary assessment of creditworthiness and provides estimate of loan eligibility Client submits loan application with all required documents Further assessment by loan officer and recommendation to loan committee Verification of documents by bank lawyer Decision by committee. Loan application to decision in around 2- 3 weeks.

7. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 7 Credit risk Assessment Four credit risk categories: Level 1: Loans below $425 Level 2: Loans between $425 and 3000 Level 3: Loans between $3000 and $15,000 Level 4: Loans above $15,000 Loans less than $425 are collateral free; provided on village council recommendation Increasingly intensive credit risk assessment for higher levels Level 2: minimum amounts of information on assets and liabilities of the borrower, a simple business plan, and information on collateral. Level 3: Additional details on assets/liabilities and business plan; information on income and expenditure Level 4: Multi-year information on income and expenditure; formalized financial statements

8. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 8 Credit risk management Documents required for all loans that require collateral: copy of land tax receipt certificate from village administration to prove local residency original title deed of asset submitted as collateral no-lien certificate from the asset registry notarized collateral agreement Insurance of assets financed not required. Tiered loan approval policy Loans below $425 in village offices Loans up to $15,000 in branches Loans above $15,000 in head-office

9. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 9 Credit risk management In person loan monitoring based on loan classification Standard loans - at least once in 6 months Loans in watch category - visit at least once every 4 months Loans in sub-standard category: visit at least once every 3 months Loans in doubtful category: visit once or more in every 2 months Provisioning policy Standard loans: 2% Watch loans (defaults <30 days): 5% Sub-standard loans (defaults 30-60 days): 25% Doubtful loans (defaults 60-90 days): 50% Losses (defaults over 90 days): 100%

10. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 10 Credit risk management Delinquency management Penal interest of 3% on delinquent loans If delinquent for 30 days, notice issued If delinquent for 60 days, recorded in credit registry Request submitted to credit committee to file claim in court Court process around 4 months and after decision, 4-6 months to liquidate collateral Less than 1% loans require court processes and dues recovered fully in around 50 % of the cases. Availability of good veterinary services reported as key non-financial factor in credit risk management Plan to increase non-agricultural portfolio to 30% by 2012.

11. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 11 Conclusions A new generation agricultural development bank in a low income country Basic banking tools and processes continues to be relevant for agricultural finance Market facilitating institutions have a key role to play in agricultural finance