The Taiwan Banker

The agricultural finance systems of Japan, Korea, Germany, and the Netherlands have complete upper and lower levels. Looking back at the history of credit and Taiwan’s farmer’s associations, however, the top tier was previously served by Cooperative Bank, Agricultural Bank, and Land Bank. It was not until May 2005, when the Agricultural Bank of Taiwan was established, that Taiwan’s dual-tier agricultural financial system was completed. After its establishment, the Agricultural Bank was tasked with absorbing transfer deposits from the farmers’ associations and utilizing their funds. In 2008, however, hit by the global financial crisis, it faced large losses, leading to criticism. Assisted by regulators and farmers’ associations, over the course of its 15 years of history, the Agricultural Bank has undergone capital increases and decreases, and has continued to progress forward despite the challenges.Establishment of a dial-tier system Taiwan’s system of farmers’ associations includes the grassroots associations, county-level associations, and the National Farmers’ Association. In the past, only the grassroots associations provided credit; the county-level associations and National Farmers’ Association provided economic, insurance and promotion services, but not credit. In the early days, in contrast to Japan and Korea, the surplus credit funds of the farmers’ associations were mainly deposited in Cooperative Bank, Farmers Bank of China, and Land Bank.In 1995, the failure of some of the farmers’ associations triggered a series of runs, resulting in a systemic crisis in the agricultural finance industry; the NPL ratio climbed to 16.23% in 2000. 36 credit departments with negative net worth were subsequently taken over by Resolution Trust Corporation (RTC), some being ceded in general to the then-provincial farmers’ associations (now the National Farmers’ Association), and others to commercial banks. As a result, the National Farmers’ Association now has a credit department, and the credit departments have gradually been revived.The transfer of the credit departments to banks credit department aroused suspicion and uneasiness by farmers and the staff of the farmers’ associations; meanwhile, the Financial Services Bureau of the Ministry of Finance (the predecessor of the Banking Bureau of the Financial Supervisory Commission), the regulator at the time, adopted hierarchical management in order to limit the NPL ratios of the farmers’ associations. In addition, after the farmers’ demonstration of November 23, 2002, the National Conference on Agricultural Finance was held, and a consensus was reached on an agricultural finance system and unification of its supervision. As a result, the Agricultural Finance Law came into effect in January 2004, and the credit departments of the farmers’ associations were transferred to the Agricultural Committee of the Executive Yuan (predecessor of the current Ministry of Agriculture), with the establishment of the Bureau of Agricultural Finance (predecessor of the current Agricultural Finance Agency).The biggest change in Taiwan's agricultural financial institutions was the promulgation of the Agricultural Finance Law in 2003, whose most significant implication was the full regulation of agricultural finance. Second, supervision of agricultural finance was transferred from the Ministry of Finance to the Bureau of Agricultural Finance of the Agricultural Committee, fully unifying supervision of agricultural finance. 2005 saw the establishment of the Agricultural Bank, formal establishing the dual-tier system, a milestone in Taiwan’s agricultural finance. The bottom tier consists of the farmer’s associations, while the top tier is the Agricultural Bank. Currently (as of July 2023), there are 311 credit departments and 844 branches of farmer’s associations in Taiwan, located in towns and villages of all sizes. The Agricultural Bank provides capital financing and consulting services.Losing and adding capital At the time of its establishment, the Agricultural Bank had NT$20 billion in capital, 49% of which was contributed by the government and 51% by farmers’ associations at all levels. Its total deposits were NT$ 95.57 billion (99.14% of which were fixed deposits), total lending was NT$3.07 billion, return on assets was 0.12%, return on net worth was 0.40%, net profit margin was 7.55%, after-tax earnings per share were NT$ 0.03, and number of regular employees was 102 (at the end of 2005). By the end of 2008, its deposits amounted to NT$ 383.36 billion, including NT $376.29 billion of transfer deposits from the farmers’ associations, or 98.16% of the total; demand deposits accounted for 0.75%. Thus, the Agricultural Bank plays the role of the upper-tier financial institution; its deposit structure is quite different from that of general commercial banks. Ever since its establishment, effectively allocating its large deposit base to generate revenue and return it to the farmer’s associations have been a challenge.The Agricultural Bank’s investments in Lehman Brothers bonds and CDOs and CBOs issued by E.SUN Bank were not immune to the declines in market value in 2008, incurring NT$ 9.97 billion in losses before tax, impacting the capital structure of the Agricultural Bank, and attracting much criticism from the media. In the face of these losses, the bank organized a capital reduction of NT$ 10.11 billion in 2009 as well as a cash infusion of NT$10 billion. At that time, the government assisted in the process by accompanying and visiting farmers' associations at all levels and shareholders of agricultural businesses across the country, organizing seminars to explain the situation. Finally, a consensus was reached, with the government contributing NT$4 billion in capital, and the farmer’s associations NT$6 billion.Following this difficult period, the Agricultural Bank grew steadily. Its total assets grew 9.3 times from NT$ 118.18 billion at the end of 2005 to $1.093 trillion in 2022; its discounts and lending grew 13.2 times from NT$ 3.07 billion to NT$ 404.79 billion; and its deposits and remittances grew 8.7 times from NT$ 95.57 billion to NT$ 832.78 billion (Fig. 1) After the crisis, the Agricultural Bank gradually adjusted its asset structure and utilized its capital to purchase public bonds, corporate bonds, and long-term equity. As shown in Table 1, its ROA and ROE were -2.28% and -69.83% respectively in 2008, but have grown steadily since then; but the bank is less profitable than general commercial banks due to its conservative operations. Its ROA and ROE in 2022 were 0.08% and 2.62%, respectively, compared with 0.64% and 9.19%, respectively, for the overall sector. Its NPL ratio was 1.42% in 2013 and 0.07% in 2022, demonstrating the quality of its assets. However, this year, in the face of the interest rate hikes in the US and investment losses in bonds, in order to improve its capital adequacy ratio, it also organized a capital infusion of NT$ 4.5 billion. The functions of the bank include accepting transfer deposits from farmers’ associations, and consulting on their business development. Article 23 of the Agricultural Finance Law stipulates that it receives transfer deposits from the credit departments of farmers’ associations; Article 31 of the same Law stipulates that at least ¾ of their surplus funds be transferred to the Bank. As of July 2023, it had NT$ 767.122 billion in transfer deposits, accounting for 34.49% of its total deposits from credit departments, indicating that they rely heavily on the transfer deposit system of the Agricultural Bank for money not lent out.The Agricultural Bank also provides consulting, financial audit and rating, performance evaluation, and assistance to farmers’ association in clearing non-performing assets to improve their profitability and expand their business. It also provides joint credit facilities together with farmer’s associations. In September 2009, it started promoting syndicated lending, and organized a total of NT$ 18.920 billion in loans in 2022. It integrates the credit services and channels of farmers’ associations to provide 1,356 collection services, including national pension insurance premiums, water, telecommunications, credit card, gas, and cable TV bills, with a total of 286.5 million collections to the end of 2022, amounting to NT$ 792.4 billion.The Agricultural Bank spun off its information sharing department, and established Agrifinance Information Service Co. (AFISC) in 2019 to take over construction and maintenance of the Shared Agricultural & Fisheries Association Accounting System commissioned by the National Agricultural & Fisheries Financial Information Center. AFISC currently has 176 member organizations, including 15 county and city and 717 business offices, with a total of 6.73 million accounts under management to the end of April 2023.Moving past difficulties to become more competitiveAs the Agricultural Bank continues to develop, the public expects it move to past its challenges and improve its functions. Because the bank receives transfer deposits, its capital structure is completely different from that of ordinary banks. Japan’s centralized agriculture and forestry development model demonstrates how it can enhance its profitability by cultivating relevant skills, diversifying its international investments, optimizing its asset portfolio, and diversifying its risks.Although 176 farmer’s associations have joined AFISC, there are 311 such credit departments nationwide, and a lot of room still exists to complete system integration. Thus, it is urgent to accelerate integration of the Shared Agricultural & Fisheries Association Accounting System to utilize the benefits of the dual-tier banking system through development of new financial products, innovations, and strategic alliances. Third-party payment platforms, as well as risk management within the system, will help enhance the overall competitiveness of the system.In addition, standing at the upper echelon of the agricultural finance system, it must develop agricultural supply chain finance to strengthen supply of capital to agricultural startups, gaining an understanding of core suppliers as well as their upstream and downstream partners. Overseas banking units (OBUs) are also needed for internationalization, giving full play to the financing function of agriculture.The Agricultural Bank has been in existence for 18 years. Unlike in countries such as Japan and Germany, whose agricultural finance systems have been in place for more than a century, and which have complete foundations and in terms of regulations, systems, and businesses, by the time it was established, Taiwan was already over-banked. Thanks to government policy support and the consensus of farmer’s association shareholders, it survived massive losses in 2008 and has continued to grow steadily over the past 15 years. It will continue to act as an upper-tier institution, working with the credit departments of grassroots farmers’ associations to realize synergy and economies of scale, jointly creating a sustainable system of agricultural finance. The author of this article is a professor at the Department of Banking and Finance, Chinese Culture University