Rural lifeline
Village Funds offer crucial support to provincial folk drowning in debt but some are calling for more cash injection as consumption and income remain sluggish. By Pathom Sangwongwanich and Pawee Sirimai
Somthawil Kuikam sells fried chicken at her street stall, as she has for 17 years.
In Nakhon Nayok province, j ust over 100 kilometres out of Bangkok, Somthawil Kuikam is selling fried chicken at her small street stall as she has almost every day for 17 years. The difference is now many of the customers have disappeared.
Her fried chicken business, her family’s major source of income, has generated lower sales since last year, resulting in a major cash crunch. Fortunately, the government’s sponsored loans, interest-free for the first two years through Village Funds, have offered her financial breathing space.
LIFELINE
“The Village Fund has helped its members a lot. I don’t know where I would get cash if the fund didn’t exist,” says Mrs Somthawil, 54, who has been a member of the Muang Community Fund and Savings Group for Production for 14 years. It is one of 59,000 Village Funds ranked Grade A or B eligible to receive the cash injection.
She was granted a 20,000 baht loan in November under the 1-million-baht loan per Village Fund scheme.
Although Mrs Somthawil is not a farmer, among the hardest hit from sinking commodity and crop prices, a spillover effect was unavoidable as farmers are among her biggest customers in a rural area.
Rice farmers, which make up over half of Thai farmers, have been affected since the collapse of the rice pledging scheme initiated by the Yingluck Shinawatra administration. Under the scheme, the former government generously set the pledging price 40-50% higher than the global market price with the aim of raising farmers’ income.
The scheme did raise their incomes, but swelling household debt was a side effect. Hoping their higher income would continue via the pledging scheme, many farmers ran up debt to buy agricultural equipment, fertiliser, pesticide, pickup trucks, motorcycles and mobile phones.
When the scheme collapsed it left them severely indebted.
Farmers were not helped by falling crop prices and the drought. Rubber growers have also suffered from tumbling prices related to the oil price slump and lower demand from China.
TMB Analytics estimated the El Ninodriven drought will cause 84.2 billion baht in damages to rice farmers for three crops, starting from the 2013-14 second crop. Rice growers in the North have been the hardest hit, losing 36.9 billion baht, followed by the central region with estimated damages of 31.9 billion.
The government’s economic chief Somkid Jatusripitak believes tepid domestic consumption largely resulted from ebbing purchasing power of low-income earners and rural citizens. Schemes designed to put money into their pockets through Village Funds and a 5-million-baht budget for every tambon in the country were launched just days after he took the helm as a deputy prime minister.
Mrs Somthawil allocated half of the 20,000 baht to fund her fried chicken business with the rest to refinance debt previously owed to a Village Fund.
To qualify for a loan, members of the Nakhon Nayok fund, who are mostly local vendors, are required to deposit between 200 and 2,000 baht a month. Borrowers must also specify the purposes for the loan, and it must be backed by two guarantors who are fellow fund members.
Street vendors find it very difficult to obtain loans from financial institutions because they require guarantors who are high-ranking civil servants, she says. This once forced Mrs Somthawil to borrow 50,000 baht from a loan shark who charged her 20% interest per day.
She even contemplated suicide to put an end to her debt problem. But Mrs Somthawil’s loan shark nightmare ended in a year with the help of Village Fund loans.
She vows never to use informal loans again because of their usurious daily interest payments.
FRAGILE STATE OF CONSUMPTION
Nareerat Bumroongsuk, a 44-year-old retail merchant in Nakorn Nayok, agrees sales volume has plunged, saying her monthly sales income was halved to 10,000 baht last year.
Despite government stimulus measures, her business remains sluggish with little hope of a turnaround in the near future, she says.
In fact, with high household debt denting consumer purchasing power and convenience stores mushrooming in the area, Mrs Nareerat estimates her monthly income is likely to drop below 10,000 baht.
She is still debt-free and her children are grown up, so she feels less of a burden.
A sales agent of a major motorcycle producer in Nakhon Nayok province who asked for anonymity says monthly sales are down to 80 units compared with 100 in the past.
She hopes to maintain this level of monthly sales throughout the year, but the motorcycle producer already cut production capacity by 5% last year because of lukewarm demand.
The government should f ocus on addressing weak purchasing power, she says.
With low-income folks stuck in debt, they often resort to loan sharks, but the high interest rates just make the problem worse.
A set of disappointing economic readings also indicated private consumption and farm income remain slow is spite of a wave of stimulus measures rolled out.
The Bank of Thailand recently reported that the private consumption i ndex expanded by 1.2% year-on-year in January, down from December’s growth of 3.9%. Month-on-month consumption registered a decline of 1.6%.
Nominal farm income contracted in January, falling by 3.7% after December’s 35.9% growth. Farm incomes contracted following a decline in the prices of rubber and cassava.
Year on year, nominal farm income fell 11% in 2015 and crop prices dipped 6.2%.
CALLS FOR MORE CASH
Mrs Somthawil wishes the government would inject more money into Village Funds for interest-free loans to alleviate locals’ financial hardships.
“The government should do more since its policy to help low-income earners is inadequate at the moment,” she says.
Despite the slow disbursement of stimulus funds, the cabinet in January approved an additional 35 billion baht to inject up to 500,000 baht into each of the 79,000 villages nationwide as part of the Pracha Rat initiative, aiming to help the rural economy.
The Fiscal Policy Office data shows 43.3 billion baht of the 59 billion in Village Fund loans had been taken out by 48,200 villages as of Jan 25. The scheme’s deadline was extended to March from the end of last year.
Bunyuen Boonsutas, a 48-year-old rice farmer who relocated from Ubon Ratchathani to Nakhon Nayok 30 years ago, makes a similar wish for more government assistance. She is still waiting for an interest-free loan approval from the local Buyong Village Fund.
Having been a fund member for two years, she is seeking a loan of 20,000-30,000 baht from the Village Fund, which imposes monthly interest of 1.5%. The fund requires its members to deposit a minimum of 100 baht per month to obtain loans.
Mrs Bunyuen also turned to a loan shark to borrow 20,000 baht, and she expects to be free from the debt within two months.
“The Village Fund has helped to alleviate the problem of informal loans. I still have cash even though revenue is not that good,” she says.
Ubol Chabathong, chairwoman of the Baan Bu-Yhong Village Fund in Nakhon Nayok, says injecting money into Village Funds is the right approach to help rural people because members can manage their money directly.
The Baan Bu-Yhong Village Fund committee whose members are elected villagers, inspects loan recipients to see if they are using their money to support their professions.
“If we find out someone has not been spending their money on what they promised, we will not offer future loans to them”, says Mrs Ubol.
She says her Village Fund has been able to maintain all of its seed money received from the government 14 years ago, recording a profit every year.
“We know how to spend money for the benefit of the people. Our strong committee means we are confident the money will not be wasted,” says Mrs Ubol.
The committee plans to spend the 500,000-baht Pracha Rat loan to construct a shop to sell agricultural products produced by members. She says low-cost fertiliser and rice seeds will be available at the shop to help members cut their costs.
Fifteen years after their establishment, Village Funds have come a long way. They have not only survived several difficult periods, including political polarisation, but have managed to get stronger, as proved by their capital base of 200 billion baht and 79,000 funds nationwide.
The next decade is a challenging period for Village Funds, says Natee Khlibtong, secretary-general of the National Village and Urban Community Fund Office.
He says they will have to transform themselves from being providers of revolving loans to villages to financial institutions for community development. Will they be up to the challenge? Mr Natee is keen to see Village Funds develop into community development financial institutions like Bangladesh’s Grameen Bank and the US Rabobank.
To facilitate the upgrade, a new bill governing community banks needs to be drafted, he says.
Village Funds were initiated by ousted prime minister Thaksin Shinawatra as a microfinancing tool for the government to inject money directly into the hands of rural people, allowing them better access to formal financial sources for investment and to shun loan sharks.
The funds, into which the government has already poured 160 billion baht seed money, use a self-governing concept under which members must ensure that borrowers pay their debt to sustain money put into the funds.
However, Village Funds have been criticised over loopholes for corruption and injection of money into non-productive projects.
With 13 million members, Village Funds have already proved they can manage the government’s money by increasing their capital by 40 billion baht from accrued interest from loans, Mr Natee says.
Only 10% of 79,000 Village Funds have failed to maintain their revolving loans or lent to relatives without asking them to pay back the due amount, he says. Inefficiency of the funds’ committees and lenient borrowing regulations are to blame for the failures.
Interestingly, more than half of the funds troubled with overdue payments are located in Bangkok and the Muang, or capital, districts of other provinces.
Rural people are more closely knit than their urban cousins, while their belief in karma has reinforced payment discipline, says Mr Natee. Money sent back by their children working in cities has also helped alleviate late payment problems. Public shaming is another reason for the low rate of late payment.
“Village Funds’ committees or members announce those with overdue payments through the sound system at fairs held in village temples, which make the debtors feel so ashamed that they quickly pay up,” he says.
The National Village and Urban Community Fund Office has filed criminal charges in 400 cases and sued another 6,000 people on civil charges, demanding borrowers pay 1 billion baht in total.
Mr Natee says Village Funds’ troubled loans are relatively low compared with those in the banking industry.
To avert problems from loans turning sour, Village Funds set aside 5-10% of earned interest income as provision for non-performing loans. The allocated amount has not reached 5 billion baht.
Until now, not a single baht from the fund has been requested to address bad loans, Mr Natee says.
Regarding additional loans worth up to 500,000 baht to every Village Fund under the government’s stimulus scheme, he says the new project will adopt the Pracha Rat initiative, in which citizens, the government and business sector work closely to push investment by borrowers to pursue sustainable development and help farmers, workers and communities secure their livelihoods.
Cooperation among the private sector, state agencies and local people can reduce risks of failed projects, he says, adding that the private sector including provincial chambers of commerce will act as mentors in giving advice about whether projects are economically viable.
“We don’t want it to become a project to which the government only injects money. Proceeds should accrue in the future,” says Mr Natee.
About 30,000 investment projects are ready to launch. They include rice mill plants and silos, ice manufacturing, herbal cosmetics and electricity-generating plants.
The additional 35 billion baht for Village Funds is expected to be available from this month.
The government l ast September approved a seven-year term loan to 59,000 Village Funds at 1 million baht each. The loans are interest-free for the first two years, while the Bank for Agriculture and Agricultural Cooperatives and Government Savings Bank, the loan sponsors, will charge Village Funds based on their financial costs plus 1% a year, or not exceeding 4% a year, for the remaining five years.
The National Village and Urban Community Fund Office requires all Village Fund members who receive loans under the 35-billion-baht scheme to open accounts at banks to allow it to monitor the progress of their investments, expenses and income.