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Project performance audit report on the rural enterprise credit project in Thailand

ADB (2004)

The Rural Enterprise Credit Project (RECP) approved in August 1997 for $200 million was a follow-up project to finance rural enterprises through the Bank for Agriculture and Agricultural Cooperatives (BAAC). It was intended to build on momentum from an earlier project, the Small Farmer Credit Project which aimed to improve rural incomes and employment. BAAC is a specialized institution under the Ministry of Finance providing loans to farmers, with a network reaching 92% of Thailand’s rural households. Its funding and regulation represents the country’s most important effort to support small- to medium-sized farms. RECP’s main objectives were (i) to establish about 54,000 profitable rural enterprises owned and operated by farm families by providing medium- and long-term credit; and (ii) to improve BAAC’s loan processing, supervision, and customer services for rural enterprise clients. The targeted subborrowers—one third of them expected to be women—were farm families in 44 provinces that the government identified as economically depressed. A technical assistance grant was provided to support the project and to enhance BAAC’s overall performance by strengthening its loan appraisal, credit operations, risk management, and training capacity, as well as broadening its range of customer services. The total project cost was estimated at $440 million, with foreign exchange cost from the Asian Development Bank’s ordinary capital resources estimated at $200 million and BAAC-funded local currency cost of $240 million. Subborrowers were expected to fund about 30% of the project cost. The loan was closed on 11 October 1999 with a revised and disbursed amount of $93.96 million (net of cancellation). The continuing effects of the Asian financial crisis led to the cancellation of the loan balance. Weak demand for domestic credit, BAAC’s high liquidity, declining domestic interest rates, and the commitment charge were the main reasons cited for cancellation. The loan was prepaid in August 2002. The onset of the financial crisis occurred during RECP appraisal, transforming the economic and financial environment in Thailand. The economy experienced severe contraction, loss of employment, cuts in social and rural development expenditure, and increased poverty. In this context, the amount of the RECP loan was doubled from its original amount proposed, and BAAC’s request to allow them to disburse short-term loans was accommodated. The financial crisis affected credit demand, government strategies, and lending, profitability, and repayment performance. Despite the financial crisis, BAAC was determined to fulfill RECP objectives. A recent ADB study (2004) estimated that one billion poor people—or 90% of people in developing countries—lack access to institutional savings or credit. This is a significant challenge, and projects similar to RECP that focus on poverty reduction are worth considering.

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