How to Effectively Prevent Risks in Agricultural Product Pledge Financing

In the underdeveloped agricultural regions of China, the “financing difficulty” faced by small and medium-sized enterprises remains an important factor restricting economic development. As a new type of financing method, agricultural product pledge financing provides a new pathway for alleviating the “financing difficulty” of small and medium-sized enterprises in agricultural regions. However, due to the constraints imposed by the biological attributes of agricultural products, combined with the influence of market and price factors, how to effectively control the credit risks existing in the process of using agricultural products as pledge collateral has become an issue that must be resolved at present. This paper takes the agricultural product pledge financing credit business of Anda City and Qinggang County under the jurisdiction of Suihua City as an example to analyze its risks and control measures.

The Development of Agricultural Product Pledge Financing and the Risks That Exist

Anda City and Qinggang County under the jurisdiction of Suihua City are located in the central-western part of Heilongjiang Province. Anda City administers 10 towns with an agricultural population of 300,000, while Qinggang County administers 12 townships with an agricultural population of 350,000. Situated along the Northeast Shelterbelt, their total agricultural output values in 2014 were 6.55 billion yuan and 6.51 billion yuan respectively. They are typical counties that are half agricultural and half pastoral, while forest coverage has been increasing year by year. In recent years, the People's Banks of the two counties (cities) have actively guided financial institutions to carry out financing business using grain, forest trees and other agricultural products as pledges, effectively broadening the financing channels for small and medium-sized enterprises. Since 2013, rural credit cooperatives have issued two agricultural product pledge loans for grain, forest trees and other products totaling 40 million yuan, resolving the shortage of working capital for two agriculture-related trading enterprises. However, some problems were also encountered during loan disbursement that urgently need to be resolved. Through investigation and analysis, the risks currently constraining the development of agricultural product pledge financing business mainly fall into five aspects.

Management risks arising from the biological attributes of agricultural products. Due to the biological attributes of agricultural products, they are susceptible to natural disasters, biological damage, enterprise management and other factors, which bring great difficulties to bank supervision and risk control. Once natural or man-made damage occurs, it will directly cause the destruction of the financial institution's collateral, creating loan risks.

Market risks in the value assessment of agricultural product pledges. Since China has not yet established an agricultural product value assessment mechanism, and financial institutions lack professional and technical personnel for agricultural product value assessment, financial institutions currently assess the value of pledges such as grain prices only by referencing current market prices, and it is difficult to make reasonable assessments for products with longer life cycles such as forest trees. When market supply and demand fluctuate and prices fall or products become unsalable during the pledge period, the liquidity of the pledged assets declines, creating certain hidden risks in bank loan collateral.

Lack of involvement of insurance compensation and third-party guarantee mechanisms. Due to the instability of agricultural product collateral, some insurance and guarantee institutions with professional qualifications are unwilling to provide insurance and guarantees for enterprises during the financing process, resulting in a lack of third-party mechanism involvement in risk sharing for financial institutions' agricultural product pledge loans.

Policy risks in forest tree product pledges. In recent years, Suihua City has confirmed the ownership rights of forest tree products, and some forest tree property rights have been allocated to farmers. Since most forest trees in Anda City and Qinggang County are located in the Northeast Shelterbelt and fall within the category of windbreak and sand-fixation forests, the national forestry department stipulates that they must not be logged within the specified time period and must not be used as pledges for borrowing from financial institutions, which has also constrained the development of agricultural product pledge financing business.

Countermeasures for Preventing Agricultural Product Pledge Financing Risks

The first threshold of agricultural product pledges must be strictly controlled. Agricultural products involve products from agriculture, forestry, animal husbandry, fisheries and other industries. In loan review, when selecting agricultural product pledges, first, products with strong liquidity, short enterprise processing cycles and small price fluctuations must be selected; second, agricultural products that are easy to store and not prone to deterioration should be chosen. From the actual financing situation in Anda City and Qinggang County, selecting corn and soybeans as collateral effectively avoided management and market risks.

Close attention must be paid to market changes in agricultural product pledges. Once agricultural product pledges are selected, close attention must be paid to market information on the agricultural product pledges, and market price changes must be monitored at all times to provide information support for enterprises to earn maximum profits, and to minimize bank credit risks by controlling risks caused by fluctuations in the agricultural product market.

The term of agricultural product pledge loans must be strictly controlled. The loan term should be reasonably determined based on the biological attributes of the agricultural product pledges themselves and the normal patterns of market purchase and sale, to prevent risks arising from overdue storage or market misalignment of processed products.

Supervision of agricultural product pledges must be strengthened. First, supervision of financing enterprises should be strengthened. Enterprises should be urged to strengthen the infrastructure construction of storage facilities and safety equipment for pledges; second, financial institutions should designate specific personnel responsible for supervision. Responsibility should be assigned to specific individuals, various risk disposal plans should be formulated, and the safety risks of agricultural product pledges should be controlled in real time.

Agricultural product collateral assessment institutions should be established and improved. First, local government agricultural management departments should establish agricultural product assessment institutions, formulate unified assessment procedures and standards, establish a linkage mechanism with the futures market, monitor agricultural product prices in real time, ensure the fairness and authority of agricultural product value assessment, and provide services for financing between enterprises and financial institutions; second, financial institutions should also introduce professional talent to carry out the assessment and management of agricultural product pledge values.

The introduction of third-party guarantee and compensation mechanisms should be coordinated. To effectively prevent agricultural product pledge financing risks, financial institutions should coordinate with relevant professional insurance and guarantee intermediary institutions to establish good mutual assistance and cooperation relationships, so as to reduce and diversify the risks of agricultural product pledge loans.