President Arroyo has signed a new law improving access by the agricultural and agrarian reform sectors to financial services, thereby promoting rural development.

Republic Act No 10000, or An Act Providing for an Agriculture and Agrarian Reform Credit and Financing System Through Banking Institutions, was signed by the President last February 23.

The Agri-Agra Reform Credit Act of 2010 amended Presidential Decree 717 or the Agri-Agra law to facilitate increased credit to farmers and spur productivity.

The new law mandates banks to lend 25 percent of their loanable funds to the agriculture sector – 15 percent for agriculture stakeholders and 10 percent for agrarian reform beneficiaries.

The law, a consolidation of Senate Bill 3431 and House Bill 6095, revised the alternative modes of compliance to investments that directly benefit small farmers, fishermen, and their cooperatives.

To comply with the law alternatively, financial institutions can buy government securities, open special deposit accounts with accredited rural financial institutions, provide rediscounting on eligible agriculture, fisheries and agrarian credits, and provide lending for construction and upgrading of infrastructure including farm-to-market roads.

Banks are also permitted to use their investments in the Agro-industry Modernization Credit and Financing Program (AMCFP) to comply with the law.

The old Agri-Agra Law allowed modes of compliance for financial institutions such as investments in government bonds and development loans for education, hospitals and socialized housing.

RA 10000 also provides stiffer penalties for banks that fail to lend to the agriculture sector. The law imposes a penalty equivalent to 1 percent of the amount that the banks failed to comply with.

A portion of the penalties on banks’ noncompliance and under-compliance will go to the Agricultural Guarantee Fund Pool (AGFP) and the Philippine Crop Insurance Corporation (PCIC) to cover loans to farmers.

As of November 2009, the loanable funds of the banking sector reached P2.27 trillion, which meant that lending to agri-agra should have reached over P500 billion while loans to small and medium enterprises must have amounted to P227 billion. But loans extended to agriculture sector only stood less than P350 billion.

Several banks have protested the mandated lending to the agriculture sector, saying there was little demand for credit from farmers and that having other forms of alternative compliance is necessary.