Credit guarantees as a tool for the development of rural areas

The financial instruments in the form of a guarantee may be implemented as part of rural development programmes (RDP) within Axis 1 – improvement of the competitiveness of the agricultural and forest sector and Axis 3 – quality of life in rural areas and diversification of rural economy. They were not, how-ever, implemented to the same degree as the financial instruments used in the area of cohesion. The reason for low absorption of the guarantee instruments was, for the most part, lack of demand for these financial instruments. The po-tential beneficiaries did not have sufficient knowledge about them and were used to funding their projects by means of subsidies. In the 2007-2013 gramming period, guarantee funds were used in the rural area development pro-grammes of Romania, Bulgaria, Italy (8 regions) and France (only Corsica). For comparison, 171 surety funds were supported under the European Regional

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velopment Fund, and 7 within the European Social Fund⁶⁰. In spite of the fact that guarantee funds provide the possibility to enhance the impact of the availa-ble capital thanks to the multiplier effect, the circulation effect in the case of the 11 existing guarantee funds amounted to 0.53 in 2013 (Table 2.6). Under only three funds, guarantees were granted for the amount exceeding their capital, achieving a small revolving effect. The multiplier effect was not achieved in the case of any operating funds. This means that capital contributed to the guarantee fund exceed the amount of guarantees granted to the final recipients. In addition, the leverage effect was recorded only in France (Corsica), Italy (Apulia region) and in Romania. It amounted to 1.47, 2.24 and 1.41, respectively.

Table 2.6. Revolving effect in the guarantee funds Member State

Source: European Court of Auditors (2015). Are financial instruments a successful and prom-ising tool in the rural development area? Special Report No 5/2015. Publications Office of the European Union, Luxembourg.

The above data indicate that the financial instruments operating in the form of guarantee funds did not effectively support the rural areas development in the period of 2007-2013.

60 European Court of Auditors (2016), Implementing the EU budget through financial instruments – lessons to be learnt from the 2007-2013 programme period. Special Report No 19/2016. Publications Office of the European Union, Luxembuorg.

It should be expected that in 2014-2020 programming period, agriculture guarantees will be used more commonly. It will be possible due to a new initia-tive of the European Investment Fund. The AGRI Guarantee project was estab-lished within the framework of the support of the rural areas development. The instrument is supposed to provide high leverage, creating greater impact on the market of the European Agricultural Fund for Rural Development and national funds. This project was created in order to support the agricultural sector devel-opment and to provide a better access to financing for farmers, agricultural enter-prises, cooperatives, micro- and small rural enterenter-prises, and entities operating in the forest industry. In addition, it supports developmental investments related to processing and introduction of the agricultural products to the market, the devel-opment of non-agricultural entrepreneurship in rural areas and forest technology.

The guarantees of the AGRI are supported within the framework of the European Agricultural Fund for Rural Development (EAFRD). The European Investment Fund is the guarantor.

The AGRI guarantees the “first loss portfolio”, which enables financial in-termediaries granting loans on more favourable terms (reduction of interest rate and/or requirements for securities) for target groups of final recipients in the ag-ricultural sector. Access to the project is possible after prior selection of finan-cial intermediaries by the EFI. The finanfinan-cial intermediary, within the framework of the AGRI guarantee, may be guarantee institutions, surety funds, financial or credit institutions, leasing companies and loan funds, as well as entities author-ized to grant credits or conducting leasing activities or issuing guarantees ac-cording to the binding law and regulations operating in the participating country.

The guarantee enables financial intermediaries to offer credits to a greater num-ber of companies through the coverage of credit risk. The guarantees within the credit portfolio covers a maximum of 25% of the losses incurred by the financial intermediaries (Fig. 2.7). As part of this initiative, financial intermediaries create portfolio of credits in the period from 3 to 5 years.

Figure 2.7. The AGRI guarantee granting scheme

Source: The new EFI AGRI guarantee facility: How it works and who can benefit. European Investment Fund, p. 6. http:\\ www.efi.org/news_centre/publications/EIF_AGRI_ guaran-tee_facility

The first project under the AGRI Guarantee was submitted in cooperation of the Managing Authority of French region Languedoc Roussillon – Midi Pyr-enees and the Commission Directorate-General for Agriculture and Rural De-velopment. Its purpose is to support the agricultural sector in the Languedoc Roussillon – Midi Pyrenees region (France)⁶¹.

61 The agri-food sector in Languedoc-Roussillon employs 9,600 people, and includes 19% of small and medium operating enterprises from the region and approximately 350 cooperatives.

In addition, the operations are run there by 29,400 farmers, production covers, above all:

cultivation of grapevine, fruit and vegetables, breeding of animals, as well as plant production (mainly wheat) and forestry. About 1,200 entrepreneurs (mainly from SMEs sector) achieve EUR 8.6 billion of annual turnover.

new credits portfolio (EUR 75 million)

80% of the credit cover-age, up to the cap rate of 25%

Contribution to the programme is EUR 15 million, selected financial intermediary must build a portfolio of new credits for the total amount of EUR 75 million.

EUR 15 million

Leverage effect 5 x = (1/0.8/0.25)

each credit would be covered in 80%

100%

25%

80%

100%