29 November 2012

Zimbabwe: Farmers Risk Going Out of Business

FARMERS who defaulted on loans from local banks risk going out of business due to the punitive penalty interest rate regimes used by some financial institutions.

Some maize and wheat farmers who failed to repay loans taken in the 2010/11 agricultural season said unfavourable weather affected their yields, but banks have declined requests for a new repayment plan. Instead, banks are attaching assets which farmers had used as security, leaving them with no collateral for further borrowings.

However, some observers noted that while some reasons being given by farmers might be genuine, it was possible that some might have misused the money.

They said some farmers have a tendency of diverting the money meant for inputs to non-productive purposes once they access the loans, thereby compromising the yields.

While the above factor can not be ignored in its entirety, the interest rates being quoted by some banks appear punitive and out of line with rational business practice.

It has been established that farmers who borrowed from banks and failed to repay their loans in full have been slapped with penalty interest rates of up to 80 percent.

Farmers who were interviewed by Herald Business this week argued that while they did not seek to have the loans written off, they were willing to negotiate a new repayment plan since they had lost some of their crop due to bad weather.

Some have also requested access to the collateral they had surrendered to access new loans, return to the field and generate funds to settle the old debts.

Apart from poor weather that reduced yields, farmers said delays in payments for grain deliveries have also forced many farmers to be in breach of their contracts.

"We are not saying that we do not want to pay but they should review the contracts. We can have a new payment plan basing on sustainability of our plans to repay," said one farmer.

"Bad apples can be found the issue should not be generalised. Some are genuine."

Analysts said while the farmers willfully signed the contracts, the penalty interest rate "is obviously irrational and excessive for purposes of just deterring deliberate defaults."

"It means, farmers who genuinely failed to repay loans due to the effect of weather on the crop and yield, might have fallen into a debt trap they may never get out of," agricultural economist Mr Eric Mvududu said in an interview.

Unfortunately, there is no law stipulating the maximum penalty interest rate threshold, meaning banks can easily take advantage of borrowers desperate for funding.

And despite the absurd interest and penalty rates attached to loans extended by local banks companies and individuals alike desperate for funding still apply for the loans.

This is partly because the majority was still to fully understand the implications of and possible outturns in a dollarised environment until they fell into a debt trap.

Mr Mvududu said in order to allow farmers to continue borrowing; Government could raise a bond and take over the debt while giving farmers time to honour their obligations.

"The problem we are having with new farmers is that the moment they get loans for farming purposes, some are diverting the money for non productive purposes," said one observer.

"Farmers will now be forced reduce quantities of recommended inputs for a given size of land. As a result, their yields are compromised and might not harvest enough."

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