Lending To Farmers

[Khonwan]

Lending to farmers

I’ve had an interest (excuse the pun) in this subject for some time but would now like to open it up for general discussion amongst the farmers in this forum section (who tend to be far more sensible than many of the posters in the general section).

It annoys me to constantly read of all money lenders being referred to as loan sharks. How is this term defined? At what rate of interest is a loan considered as usury? Who does the defining? Who’s view matters? Is lending without violence, intimidation, threats (other than the explicit threat of temporary/permanent, partial/full loss of security defined in a written contract signed by all parties and duly witnessed) considered loan sharking? Do borrowers’ opinions on this subject matter? Does this issue have many shades of grey, or is it simply black & white?

Most farmers, in my area anyway, own insufficient land to farm profitably so must rent additional land. Where is the rental money to come from? Most have already committed their land titles to a bank (usually BAAC, and only BAAC in the case of Sor Por Kor title) as security for short and long-term loans. Where is the money to come from for farming inputs such as fertiliser, pesticide, fuel, and often labour? Sure, crop middlemen will often provide some inputs such as fertiliser either on credit terms or with inflated prices that incorporate their desired credit compensation…but in nearly all cases this locks the farmer into having to sell their produce at a much reduced value even though the fertiliser has cost them much more than the normal retail price.

And, what of the cash-rich farmer looking for a decent return on his money? He (or “she” but since contributors to this farming section appear to be almost exclusively male, l will continue to use the male form only) may consider buying more land (somewhat difficult in my District, which is void of land that can be legally sold since there are no titles greater than Sor Por Kor) or renting land to extend his farming. Or, he may lend his cash to farmers in the above paragraph.

A cassava farmer (since that is what I now know best these days) will spend around 850-1,000 baht per tonne of tubers to sell at usually around 2,000-3,000 baht per tonne: he can make a profit of somewhere in the region of 100-200% per annum.

“Informal sector” lending rates in my area appear to me to be predominantly 4-5% per month (48-60% per annum) but are sometimes as low as 3% per month (36% per annum) and as high as 10% per month (120% per annum). Most loans are payable annually since farmers tend to receive income only annually at harvest. Security on these loans tends to be less than AAA as collateral is almost always Sor Por Kor land that cannot be legally sold or even rented out (BAAC, being a government agency has special dispensation granted by the Thaksin government) and, furthermore, tends to be already held by BAAC. Given the magnitude of these risks, the reader may well consider that a lender could be justified in wanting more than the maximum 15% per annum allowable under Thai law.

So now we test the ethical considerations.

Cash-rich Farmer A considers the legal maximum of 15% per annum to be insufficient compensation for the risks involved and to be a much poorer return on investment compared to that available should he extend his farming by renting land. I should add that land in my area rents for 1,500 baht per rai per annum, which works out at 300-400 baht per tonne. He considers leaving his cash in the bank but dismisses this idea since his money will likely depreciate in real terms, such is the poor rate of interest. Farmer A therefore rents additional land. In consequence, Farmer A deprives a poor farmer whose only hope of financial improvement was to farm additional rented land.

Cash-rich Farmer B decides to accept the inherent risks and lends at 3% per month (a rate similar to that of many microfinance institutions in other countries). In consequence, poorer farmers have access to the required credit that allows them to increase their annual earnings even after deduction of land rental and debt servicing.

Which of these two cash-rich farmers have given greater assistance to the community?

Please join an open discussion.

[Livinginexile]

Are you a loan shark per chance?

[Khonwan]

^

Bravo, how witty. Next?

[IsaanAussie]

Khonwan,

I think both are doing what they believe is best in their circumstances. Since the BAAC is basically not lending at the moment there really is no great choice for most people other than to accept whatever terms they can get. It is that or go hungry.

I would love the chance to get a bit of farmer B's action at 3% if I could. Times are tough and farming is like any other business, it needs cash flow to survive and capital to grow. So if there are any Farmer B's out there give me a yell.

Mathematics is not a strong point with most Thais here let alone budgeting and economic analysis. I went to a BAAC meeting a few months back where most of the lending groups and individuals were completely borrowed out past their individual and group limits. I know someone who thought they had approval to borrow against Chanote land from BAAC only to be told the maximum they could have was 50,000 baht. With the recent floods still stinging the national pocket it is hard for me to see when the brakes will be taken off.

Isaan Aussie

[tingtong]

i believe everyone would like to have 3%/month return...

but as you pointed out, one of the main problem is security. for real security, like chanote, gold, a certain % of asset to lend would not be a problem, even for 1.5-2%. would it be beneficial to all? yes, surely.

and the other is being foreigner, so, even if everything is by the book, in case of default, i feel i might still be blamed by some, and that in a smaller, village community where a foreigner is outsider already, might not be a good thing.

i agree, that it seems some farmers arent too good with numbers ( most thai in general not), but they seem to be quick to borrow to limit, and then hope that when payment time comes they just escape somehow. wait, isnt that what the greek just did too?...and yeah, got halved their debt. would i want to do that with a small farmer? not. would the community expect it? maybe. after all, me the rich farang ( not true) who has the money ( a little maybe) are just wanting to ruin that poor thai guy in his own country.

nope, i feel i would be in trouble, deported, marked, threatened, if something goes sour. this is their turf, and all thai seem to ultimately throw that this is their country, and whatever you do you cant be right against a thai, even if you are ,lawfully .

maybe within family, in small scale, else i think it is a no-no.

too bad, as the return surely appealing.

[fezzy]

In our poor little village over in the west ,most the farmers will borrow from the bank in January with the intentions of repaying that debt in December and including the banks interest of 10% ,which as all farmers know is just huge percentage of the little or at best if any profit they make depending on natures generosity with drought and floods. We can also rent 1 Rai for as little as 500 baht per year but as everything does this will increase one day making it harder for farmers to break the poverty cycle.

[IsaanAussie]

The issue of repayments is not considered by most Thai people around here. They have no idea what to do to improve their lot or undertake any form of budgeting. They just keep doing what they always have and hope for the best.

Over the last few years more and more chilli is being grown in our village between rice crops. The return appears good but the costs are spiralling upwards and unless the grower is in early the market price falls quickly as more becomes available. So they then sun dry ripened chilli and store it until the fresh supplies run low and a new wave of pickup truck buyers comes along.

The few baht extra per Kg for the dried crop is already consumed by the moisture lost, hence the weight and further eroded by the accumulated interest costs. I have tried to explain this to several people who I thought would understand but all I get back is they think of it as the funds borrowed plus a mystery amount they call the tip. How much will it be? No idea, the lender will tell them "later".

Many Thais just walk away or even hide when the bank collectors come around. The loan sharks guys are a bit harder to shake off, but the point is there is little if any understanding by the general public of how bad their debt is. Many just know that they are maxed out at BAAC.

Going back to the OP's question after thinking about it again, and considering the circumstances in my area may well be different to his, neither Farmer A nor B is actually doing the community much good in the long run. At least not here in this village.

[Khonwan]

Thanks for your responses – more from others would be good – but I’d really like to open it up to examine the issues as in my OP, i.e. when does money lending become loan sharking? This Farmer B is very comfortable in his ethical choices and has been very successful for several years, but this thread was never about me, and certainly not about foreigners directly lending to Thais (as opposed to via their Thai partners; I agree with Tingtong that a foreigner doing so himself could attract unwanted trouble). Besides, a public forum is beyond the last place I would come to for advice.

From the responses so far, I gather that others would like to make 36%pa in this fashion but I would ask why? As explained in my OP you can make more by farming rented land, especially if you are lucky enough to find rents offered at only 500 baht as mentioned by Fezzy. If this Farmer B was driven only by the desire to maximise his income he could easily charge 5% per month (60%pa) and probably retain 90-95% of his portfolio but this Farmer B considers 36%pa to be expensive enough and by offering this rate has forced a couple of other Farmer B’s to reduce their rates to the same.

Isaan Aussie raises a good point by questioning how anything good can come from making credit easier for people with poor money-management skills. I agree in principle. This Farmer B tries to be selective by pruning those borrowers that are not showing signs of economic improvement – they tend to be the folks that are dysfunctionally drunk from morning through night. Most of this Farmer B’s borrowers have shown signs of development such as buying more land, rebuilding their homes, buying tractors…despite their lack of proficiency in basic arithmetic.

I agree that math skills are practically non-existent here. I taught (voluntary basis) a combined class of Primary 5 & 6 maths (in Thai language) for a month last year. I also taught English at the school for a couple of months (again free). I have told several Por Or’s (“Director of Education”: head-teacher) that they ought to commit one semester devoted to only Thai language and maths (the 3 R’s), with no English, art, sport, dancing, school closures to send teachers to new schools (this last excuse to not teach kids being the most incredible but quite frequent).

Isaan Aussie raises another good point (I appreciate your input) that “BAAC is basically not lending at the moment”. My wife has not borrowed from BAAC but she has a deposit account there; whilst speaking with our local BAAC manager last week, she was told that existing customers must reduce their total loans (short/long term) to around 100,000 baht (I think they are mostly around 500,000 baht) before they can be offered more – money at BAAC is VERY tight just now and generally not available to new customers. I’m being told that the cassava pledge scheme, which was established by the government to run to 1^st May, is being closed on 15^th April because BAAC cannot finance it beyond this date.

So, Livinginexile, when does money lending become unacceptable…become loan sharking? Is it simply at a rate that exceeds the legal rate? If yes, does that mean 20% per DAY is not loan sharking in countries that have no legal limits (there are a great many countries that set no limit)? If yes, then what about corporate loans in Thailand with a rate in excess of 15%pa? Such corporate loans are not illegal in Thai law.

What do I think? I think that unreasonable rates are usury and distasteful (that would mean in excess of 36%pa for me) but not sufficient to be described as loan sharking. There simply is no accepted definition of loan sharking but I would have it defined as lending with menace.

Any further thoughts? Anyone else?

Rgds

Khonwan

[IsaanAussie]

And I agree Khonwan with your definition. Two "collectors" armed with pistols who arrive in bell helmits on a large motorbike, as unannounced as possible early in the morning, certainly defines both menace and loan sharking. To be a loan shark you must have teeth and be prepared to use them or just be ignored.

[somo]

I guess I identify with farmer B

In normal times credit card companies charge 2-3%/month

My wife and I were owed some money we lent out interest free but it became clear we were not going to be repaid anytime soon so we ended up doing a written agreement with interest and amazingly the following year we were repaid in full.

As that borrower now had proved themselves we made a new agreement for the future.

It seems if there is no interest there is also no incentive to repay so borrowers don't repay. They actually seem to respect the lender more if interest is being charged.

We have since helped with the deposit on a tractor and for a Tuk Tuk. We give those borrowers all our ploughing and transport work so the benefit goes both ways. Both those borrowers now have better ways of making money.

We have a few others whom we have helped but all for specific verifiable reasons and with proper repayment plans.

I think that it is important to be able to see the benefits a borrower would get from a loan before making one if only because by doing so repayment is more likely. If something is mutually beneficial then surely it is a good thing.

[IsaanAussie]

I guess I identify with farmer B

In normal times credit card companies charge 2-3%/month

My wife and I were owed some money we lent out interest free but it became clear we were not going to be repaid anytime soon so we ended up doing a written agreement with interest and amazingly the following year we were repaid in full.

As that borrower now had proved themselves we made a new agreement for the future.

It seems if there is no interest there is also no incentive to repay so borrowers don't repay. They actually seem to respect the lender more if interest is being charged.

We have since helped with the deposit on a tractor and for a Tuk Tuk. We give those borrowers all our ploughing and transport work so the benefit goes both ways. Both those borrowers now have better ways of making money.

We have a few others whom we have helped but all for specific verifiable reasons and with proper repayment plans.

I think that it is important to be able to see the benefits a borrower would get from a loan before making one if only because by doing so repayment is more likely. If something is mutually beneficial then surely it is a good thing.

I congratulate you on your good management and risk assessment. Unfortunately I have heard of too few cases where this applies.

[somo]

It wasn't something we were looking for but drifted into and after that it was just a question of applying some common sense. I have since gained some valuable experience and learnt a bit about the "dawk beer" biz or however you spell it which I dont reallly want to go into here. Suffice it to say I have been called all sorts of derogatory names for taking the usual western view that one does not charge interest on loans to people you know personally. Many things in Thailand are the reverse of how we often see them and this is one. Having said that I do believe that treating people fairly does pay dividends in the long run even though the way many wealthier Thais treat others seems at times to be bordering on the obscene. There seems to be a lack of karma in action here!!

[andycrosby]

I see it another way, and yes I do a bit of loan sharking because that is what it is...It is a contract between two adults. The max interest is 15% we start at 6% then it goes up by 2 % a month compound , yes I will take your house, land, car, cows, pigs or anything else I can get my hands on. It has made me good money over the years and I do it where ever I can, I always have 2 millon out in loans at any time and I always get my money back.

As I say to them I hope you do not pay me back, as I need more land

[Khonwan]

Andycrosby, please explain what you mean by, “I do a bit of loan sharking because that is what it is”. Do you mean that you are a loan shark since you appear, by your own words, to be hoping for default in order to obtain property (or is that simply a threat?), or do you mean that all lending, legal or not, by banks or individuals, formal or informal, amounts to “sharking”? If so, why?

Do you stay within the 15% limit in order to stay within the law? If so, are you then not aware that such contracts by individuals are specifically prohibited in law to apply compounding interest? On a technical point, I assume that annual compounding is allowed but I know that it is not allowed for periods less than one year.

This Farmer B explains to all borrowers that he has no wish to acquire their property, only his interest payments (and principle at some point). This Farmer B obtains rental agreements to easily facilitate sub-renting of their land to another farmer to the extent that it covers the due interest payment in order that the borrower can regain use of his land anytime in the future upon recommencement of interest payments or repayment of the interest.

This Farmer B is delivering a much needed service to the community at a lower cost to them than otherwise available and with maximum flexibility built-in in terms of access, terms, conditions, repayment schedules, etc., whilst still obtaining a return of 36%pa.

Somo, we appear to think alike. I too have found that interest-bearing loans are repaid quicker than non-interest-bearing loans. I also find that family can make the worst borrowers.

Farmer B has found that his provision of credit makes him much more of an asset to the community and much more appreciated than his provision of dozens of computers to his local school and many other gifts to the school, temple and village many years. Farmer B has no problem obtaining willing farm labour.

[andycrosby]

Are we talking about morals, Two adults contract free to go else where end of story

I want to collect as much cash and property as I can in the next 10 years, I dont feel sorry for drunks , gamblers and if you dont take it someone else will

compound is by the year everything above board

Do I think it is lone sharking yes because I am not a bank and the interest is very high, Do i use threats No , if you do not pay I will take your property, Its not a threat its a promise

And Yes I sleep very well

[Khonwan]

Thanks, Andycrosby, for your honest and full response. I find your definition strange though since you consider yourself a loan shark simply on the basis that you are not a bank and that you charge high interest despite the fact that you say you charge a maximum of 15%pa. It is not illegal for individuals to lend (indeed, the government publishes and sells standard contract forms for this) at rates not exceeding 15%pa. Still, if that’s how you regard yourself.

I think pawnbrokers charge around 2% per month – are they also loan sharks?

Wouldn't you make more money by farming rented land? I would.

[somo]

I think the word shark is an emotive one and conjures up the picture of one species devouring

another. It is also a matter of perception. Do we live in a dog eat dog world as many believe

or is it our capacity to empathise with each other that distinguishes us. Both views have some

validity. I do know that 36% is more than 15% and if I don't have to eat anyone to get it then

I am fine with that.

I agree with the rented land idea giving better returns and I do rent some but it has become

hard to find. My tenancy of 15 rai comes to an end next year and I am reconciled to not being

able to renew or replace it. I blame it on the bloody loan sharks financing the farmers so they are able to work their own land.

[andycrosby]

I saw what you published and I have to say I do not see farmers making more money renting land and farming it than what I can turn it in to. It maybe just my area we farm 170 rai in rice and growing every year. By this I mean as a family we buy any land that comes up for sale in our area. Small farmers are getting fewer by the year and so I think there will be less land for rent as people are selling up and moving to the city for work. So were the profit may be high you will not find the amount that you need to make it worth while. plus have you taken into account the cost of labour and any machines needed.?

[Khonwan]

I am not familiar with the economics of growing rice so you, Andycrosby, may well be correct with respect to your area (I only occasionally grow a little hill rice for own use, in areas to wet for cassava). I have had 200 rai for over 10 years, 170 of which is currently cropped with cassava. Somo also confirms that farming cassava on rented land returns more than he obtains by lending. I believe that rent of Bt1,500/rai in my area seems to be more expensive than folks in other parts of Thailand have posted in other threads, yet I could make much more than 36%pa including labour and machinery maintenance (I already own all the required machinery including a couple of tractors). The only reason I don’t do so is due to my personal set of ethics. I tell myself and locals that I have no wish to be rich but that I do wish not to be poor. So, as long as my family have a comfortable standard of living and have no financial worries, I’ll do what I can to assist the community. Somo says that rental land is now difficult to find but, in my area anyway, were I to offer an extra Bt100 or so I’d probably easily rent another 100-200 rai, and still make much more than 36%pa but our friends would become poorer as we grew richer.

Farmer B went out to collect on a quite large debt (loan of Bt100,000) yesterday evening that has already past the one-year repayment date by exactly one month. He holds a legal contract with a full chanote title (land in a town) as security. He is fully entitled to now action transfer of title but does not want to. He has rescheduled payments plus compounded the interest from the original repayment date one month ago (i.e. the interest due at that date now attracts a further 3% per month until the interest, at least, is paid). The borrower, a government teacher, is immensely grateful and Farmer B will collect Bt40,500 today in full payment of interest to-date with the original loan once again be charged at only the original 3% per month hereafter. Said borrower stated yesterday that this Farmer B is the ONLY source of credit available at 3% per month and that this Farmer B is MUCH cheaper than his competitors who appear to have raised their rates recently. I can find no way to call this Farmer B a loan shark yet he would probably be labelled as such by Bangkok Post or The Nation…and by your definition.

Rgds

Khonwan

[andycrosby]

Farmer B is a great man, a noble man and we should all respect his kind demeaner...Farmer A would have taken the land, and farmer A would not do it for 36% PA - farmer A likes to work on around 100 % PA it keeps his kids in nike trainers...He is a loan shark and does not care what anyone thinks about it... but thats farmer A

[IsaanAussie]

Ok guys, can I dodge the A's B's and add a C? Me! I lent 25,000 to a local farmer and lesser sums to others under the 3 baht scheme at the advise of the wifes family. Now this was some ten years ago so hardly current. We held chanotes, had police reports and contracts but it all went haywire when those same family members didnt try to collect the monthly interest payments. I pulled the plug and maximised the return.

Now the 25K loan was repaid but not the interest due to date which amounted to some 3K. A few weeks ago the borrower turned up and wanted to know how much he owed in interest so he could have his chanote back. I didnt even know we still had it! Anyway, 3,000 at 3% per month over 10 years runs up more than 100K in total. There was no way this guy had ever seen that much money so what do I do? I told the wife to ask him for 5000 baht. Which he paid and walked away smiling.

There you go guys rip into that.....

[somo]

Andycrosby. I am confused, Above it says you charge 15% max pa. now you say you get 100% pa.

Please explain how you get to that.

[andycrosby]

Somo where did I say 15% Pa ???? start at 6 % per month next month 8% , 10% 12% 14% 15% after one year it is compound

so if there loan is not paid by 6 months the interest is 65% if it takes a year it is 140% that at the end of the year is now compound so if your loan was 100k you now ow me 240k

At this point I normally take the property still confused ????????

Tony you are a friend and a good man your words sumed it up " He walked away smiling " I would be driving round on a new motorbike

one last thing to remember people when your skint and on the plane home there are only 1% of farang that make money here I do not have any outside income Ive been here 15 years and Im worth more every year can anyone else say the same ?

[slapout]

When you go into the money lending business, its like any potential investment, profit is the name of the game. Not everyone has the mental detatchment to be successful in this type of business, just like any other.

I would not have the patientce to put up with most of the borrowers that I have ovserved here, unless I ran it like a pawn shop. I do not have or want storeage space to hold items, (doubt the Thai immigration would approve of my involvement) and 'she who knows all', is too gulliable and would probably have a write off of loans for relatives, exfriends, and anyone down on their luck. She takes in stray dogs also. Power to those who are successful at this type of business, I come from the old school, no credit cards, no debt, its worked for 30 odd years. I will note that I have not depended on farming for a living during that time, nor have I gambled more than I had in my pocket. Exceptions to the last items seem to be major dustomes for those loaning funds.

[IsaanAussie]

A bit slap on the back Slapout. A very well put position which I agree with entirely. Andy, my friend, more power to you. The old saying nice guys finish last may well be true. But this nice guy thinks like a golfer, your ball goes in the hole, life is a one up do it to yourself commodity not a race. I am definitely poorer than I could have been that much I concede.

The guy that walked away smiling had no way to satisfy the actual amount and what good would it have done me to turn his family out into the street?

[bdenner]

I don't know much about it but it appears the Government is creating a new initiative with the Siam Bank where the poorer village farmers can borrow money at very reasonable rates.

My TW attended a 2 day seminar in Udon Thani late last year conducted by the Siam Bank and with representatives from all Tambons in the Province and instructed on how to operate an extensive accountancy package (MBS and MGL -- I have no idea what they are, Each has numerous data base *.mdb styled formats in Thai). At the end of the seminar each of the participants were given the computer system they were using as well a Large Zerox Printer. They say total value was 35K Baht. TW has had to create an account for every family in the Tambon and administer the loans, she is required to email data base files (as attachments) periodically to the Siam Bank.

Thailand being Thailand the WHOLE process is duplicated on paper as well by hand just to keep the Double A paper company happy.

So hopefully the bottom line, maybe the farmers may get a better deal in the future as the scheme develops and some time in the future these outrageous loan scams will be quashed.

[IsaanAussie]

Sounds like another version of the village bank scheme of some years ago. I hope it works out but I am fearful that it will run into the same issue that BAAC has and every scheme before it. They just don't make the repayments. Any money is always spent of sanook activities and none is left for payments. I mean repaying a loan, what is the fun in that?

[oldestswinger]

Without commenting on the morals revealed relating to money lending, I think I would rather be in Isaan Aussie's position than andycrosby's given the Thais' well-known propensity to solve their anger management problems with a gun.

[Khonwan]

Actually, Andycrosby, I’ve been living here for 18 years, I have no income from abroad, and I have increased my assets each year…and without cheating the poor. This Farmer B considers your two million baht loan portfolio as chicken feed; he does extremely well whilst still retaining respect and gratitude within the community.

I am currently in Bangkok for a couple of nights. Forest fires were blazing 20 metres behind my farm house as I went to sleep in my hotel last night. I have enjoyed a good sleep in the knowledge that most of the guys in my village (2km from my house) were there fighting the fires voluntarily and without reward. That kind of loyalty matters more to me than a few more dirty shekels.

It’s been interesting talking to you here but I wouldn’t care to meet you.

[Livinginexile]

Somo where did I say 15% Pa ???? start at 6 % per month next month 8% , 10% 12% 14% 15% after one year it is compound

so if there loan is not paid by 6 months the interest is 65% if it takes a year it is 140% that at the end of the year is now compound so if your loan was 100k you now ow me 240k

At this point I normally take the property still confused ????????

Tony you are a friend and a good man your words sumed it up " He walked away smiling " I would be driving round on a new motorbike

one last thing to remember people when your skint and on the plane home there are only 1% of farang that make money here I do not have any outside income Ive been here 15 years and Im worth more every year can anyone else say the same ?

What a lovely man!

Thailand needs more people like Andy to help develop the poor village farmers. As a matter of fact I have forwarded this whole thread to the labor ministry to show them the good community work being done by some expats, I hope they heed the lesson.

Well done Andy, I hope you get exactly what you deserve, no more - no less.