Russian Agricultural Bank is best at working with agribusiness

28 October 2019
Irina Zhachkina, First Deputy Chairman of the Board of Russian Agricultural Bank (RusAg), was interviewed by ‘Expert’ magazine.

“Currently EBITDA margin in agribusiness reaches 20% and higher – for example, broiler meat production earns 22%, producers in plant growing and pig breeding earn about 30%,” Irina Zhachkina said.

Expert Over the past decade Russia has built a strong agribusiness sector with a high share of import substitution, in particular in pork, poultry breeding and plant growing. Some sub-sectors have been created almost from scratch – such as livestock, turkey breeding, etc. To a large extent, this growth has been driven by creation of a functioning system of agribusiness projects financing, with RusAg acting as the key financial agent within the system. What was the Bank’s task under the State Program for Agribusiness Development?

IZ RusAg’s key task was to make agribusiness profitable. The task has been accomplished. Over the past decade, Russian agribusiness has made a breakthrough by evolving from an outsider to the leading sector in Russian economy. RusAg has driven these processes in many respects. It is an undisputed success but we have made a long journey towards it. Alongside agribusiness the Bank has overcome economic inefficiency and a downslide in output. Such difficulties have made agrarians and the Bank stronger. Currently EBITDA margin in agribusiness reaches 20% and higher – for example, broiler meat production earns 22%, producers in plant growing and pig breeding earn about 30%”.

Expert What’s the total amount of loans provided to agribusiness companies over the years of the Bank’s operation? What share do investment loans and working capital finance account for?

IZ Since the start of the State Program for Agribusiness Development in 2008 we have allocated more than RUB 7.6 trillion for the sector support. At the same time, we have always prioritized the infrastructure development, which implies investment loans. More than 30% of loans have been issued for long terms and used for investment purposes. Since the start of the National Project “Agribusiness Development” the Bank has supported about 5,200 agribusiness investment projects, either in construction or operation. These projects created 400,000 new jobs. Moreover, RusAg is itself a large employer in rural areas: about one third of total staff - more than 8,000 - work there.

Looking at our current performance RusAg’s loan book to agribusiness in 2019 has grown 9.8% totaling RUB 1.3 trillion. RusAg has provided RUB 935.6 billion to domestic agrarians, which is a 19% growth year-on-year. Under the state subsidized lending program with the interest rate capped at 5% p.a. the Bank has provided RUB 186.4 billion vs. RUB 135.6 billion as compared to the same period last year. We retain leadership in subsidized lending to agribusiness. The loans are used for seasonal field works, upgrading facilities, new construction, purchases of machinery, etc. Overall, since the start of the program the Bank has provided over RUB 517 billion in subsidized loans.

Expert Do you think the procedure for subsidizing interest rates under agribusiness loans is efficient?

IZ The new procedure under the Government Resolution No 1528 has fundamentally simplified the way agrarians can get a subsidy. This innovation will enable banks to extend loans at the interest rate capped at 5 percent p.a. and will significantly streamline the process of making state support available to agrarians. Previously, agribusiness producer had to make the interest payments in full until reimbursed through a subsidy, now a bank is in charge of negotiations with the Ministry of Agriculture, while the borrower pays only the difference between interest rates. The same rules apply under the Government Resolution No 512 which provides for interest rates subsidies on condition of increasing marketable output. RusAg became the first bank to enroll in the program and conclude the respective agreement with the Ministry of Agriculture.

Expert It is an entrenched belief that interest rate subsidies are available only for large borrowers, while SMEs are left aside. Taking into account the prevailing market interest rates at 9-10% a commercially efficient project in not feasible unless subsidies are provided. Do you have solutions for SME support?

IZ RusAg puts focus on small business development in rural areas. Our mission is to stay beside farmers and do everything so there hard work is duly appreciated.

We account for over 60% of lending to agribusiness SMEs and we see huge potential in this segment. We are proud to hold top positions in lending to small forms of ownership and partner with farmers’ community. We have worked out ad hoc products for farmers and small business, a lot of partnership programs, including for machinery purchases. For example, we have launched ‘Micro Agribusiness’, an ad hoc product for small business which features simplified approval procedure. A minimum number of documents is required to open a credit line. We also have a special solution for startup farmers – ‘Agrostartup’ – which helps borrowers get a state grant and receive a soft loan.

RusAg actively develops its partnership with ACCOR. Together with the Association we have designed ‘Money for business’ product line for ACCOR members. This offering comprises a loan for corporate borrowers for seasonal field works with a RUB 5 million cap at a subsidized rate. To make all the advantages of remote banking services available for farmers we have designed a special card with a unique design for ACCOR members. Cardholders get an additional benefit in the form of a 10% cashback for purchases and a grace period under loans of up to 55 days.

Our support to farmers goes beyond financing. To facilitate the sales of their produce and increase their brands awareness we hold an annual farmers’ food festival ‘SVOE’. Over 3 years 1,000 farms took part in this festival.

Expert The investment cycle of creating the primary industries in agribusiness market has finished. Which aspects, in your opinion, now come to the front, in the sector development? What kind of investment cycle is coming and which projects will it feature? Will new projects be more capital intensive and have shorter payback periods? Is RusAg ready for a new stage of agribusiness development?

IZ Until recently, we have indeed seen three core factors underlying a favourable investment climate: a need for import substitution, growth of consumption per capita and state support. Now, when the President has set the task of driving up exports up to USD 45 billion by 2024 the next key factor is export potential.

We need to increase agribusiness exports at competitive prices. This target requires cementing our positions in deep agricultural processing, creating logistics infrastructure, boosting production efficiency and competitiveness of products. These are the sub-segments which will attract the bulk of investments.

The Bank is ready for this new stage, since in fact we will have to once again pioneer in this area. However, we are best at working with agribusiness and this is our competitive advantage. Our expertise helps us take part in green field projects. We finance the opening of genetics centers, projects for deep processing of foodstuffs, high tech full cycle facilities.

Expert Agribusiness rankings drawn up by Expert magazine show that the most dynamic companies are those who invest in agricultural processing, new processing stages and industries. Do you prioritize financing of such projects? Do you rank such projects as more attractive than construction of new poultry, livestock breeding farms?

IZ I wouldn’t agree that we are interested only in processing leaving aside new facilities. The key parameter is a thoroughly designed strategy adapted to regional features. In some cases the foremost task is to increase agribusiness margins. In some regions the domestic agribusiness matures and shifts from a narrow specialization to vertically integrated production chains. Large enterprises aim at creating a closed cycle from farm to fork. This is very prudent strategy that will drive up profitability. We actively support such projects. And in places where demand for staple foodstuffs has not been saturated, for example, in Siberia and the Far East it is relevant to build new production sites. Some regions have a high potential in upgrading the existing facilities.

Expert In view of saturation of demand for staple foodstuffs most large agribusiness companies have actively launched export operations – almost all top ranking companies target this objective. How do you support agribusiness exports? Which projects are most attractive? What can you offer to exporters?

IZ Our clients account for one fourth of agribusiness exports. Just over a year has passed since agribusiness sector has set out towards doubling exports, and we see it is undergoing transformation. Over the past year, we have modified the ways we work, set up a vertical servicing hierarchy to support foreign economic activities and an ad hoc Competence Center. All our export support operations are governed by a “single window” principle. We are willing to share our expertise with clients as we do all the preparatory work for foreign export deals free of charge. As part of the ‘Agriexport’ campaign launched in 2019 RusAg cancelled a few fees for services for agribusiness exporters. The tariff applies to opening and maintaining accounts via remote banking platforms, FX and Rouble transfers, acting as foreign currency control agent, etc.

To deliver on the targets set by the Presidential Executive Orders signed in May 2018 we have to increase the industry efficiency. We align our credit policy with the state program tasks. RusAg as the core financial institution for agrarians is conscious of its responsibility. The Bank mobilizes expertise, estimates each project and its returns on an individual basis.

Expert Today digitalization of production, technologies and logistics in agribusiness is no less important. Digital technologies are impending. How is the Bank affected by these developments?

IZ Without a doubt, RusAg does not stand aside these developments. By mid-2020 we prepare to launch a digital ecosystem for rural small businesses. At the first stage, our ecosystem ‘Farming as a Service’ will help farmers automate priority tasks without incurring extra costs – hire staff, get veterinary care, get access to digital farm management tools. For example, according to our estimates, rural agribusinesses need 1.2 million seasonal workers a year. Our ecosystem will also help farmers promote their produce among a wide range of suppliers, incl. HoReCa segment. Our ecosystem will feature the entire set of financial services, incl. remote application for subsidized lending. It will be integrated with all services facilitating interaction with the state authorities.

Expert Speaking about remote service channels, will you renovate RusAg’s service formats overall?

IZ We are undergoing a transformation, just as agribusiness. Nobody plows with oxen anymore. Fintech is developing rapidly too. It, in the first place, impacts the accessibility of retail services in rural areas. We have introduced ‘Easy front office’ solution. This technology enables us to fit a POS into a PDA, which the Bank’s client manager can carry anywhere. You can open an account, issue a card, take a loan at RusAg based on ‘paperless’ technologies.

Expert Does the Bank plan to leave rural areas and switch to more highly marginal urban areas?

IZ When choosing geolocations we factor in not only economic efficiency but also the solution of state tasks on rural territories development. Agrarians often refer to RusAg as ‘our bank’. We also identify ourselves with rural residents and support them either directly or otherwise. There are plenty of opportunities to work and do business in rural areas, so the Bank’s presence makes sense. Our top priority is financing facilities that create new jobs.

Secondly, we help improve living conditions of rural residents. The Bank actively issues rural mortgages, and after subsidized rural mortgages are rolled out we expect residential lending to boom. Mortgage loans priced at 3% p.a. will become a good solution for buying a house for rural residents.

Currently, we service two thirds of rural population (66%). Going forward we plan to reach out to 100%. We will expand our branch network through traditional POS and remote service channels.

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