Legal basis and integration history
- The Cooperative Marketing Project (CMP) created by a bilateral agreement between the Government of the Philippines (GOP) and USAID on May 3, 1978 is the financing context for these policies.
- The CMP loan fund was integrated to the Comprehensive Agricultural Loan Fund (CALF) and transferred to the Agricultural Credit Policy Council (ACPC) effective 18 April 1989 pursuant to Executive Order No. 113 and Executive Order No. 116 dated 24 December 1986 and 30 January 1987, respectively.
- CMP funds were later transferred to the Cooperative Development Authority in compliance with Section 10 of RA 6939, placing the funds under CDA administration.
Policy, purpose, and administrative unit
- The Cooperative Finance System is designed to effectively lend and invest CMP loan and trust fund through well managed and credit deserving eligible cooperatives so cooperatives can better serve their members.
- The resolution authorizes rules and regulations to govern CFG operations for specialized handling, monitoring, supervision and servicing of loans made through Cooperative Banks/lenders.
- The CFG’s credit operations are focused on loans to cooperatives, not on lending intended as former financing or production credit to individuals.
Definitions used in the rules
- A Cooperative is a duly registered association of persons with a common bond who voluntarily join to achieve a lawful common social or economic end, make equitable contributions to capital, and accept a fair share of risks and benefits under universally accepted cooperative principles.
- A Cooperative Bank is a bank organized by cooperatives and federations of cooperatives with majority shares owned and controlled by cooperatives to provide financial and credit services to cooperatives; it includes Cooperative Rural Banks.
- A Loan Fund is the portion of USAID loan and Philippine Government counterpart funds and other sources earmarked for lending to eligible cooperatives.
- A Trust Fund is the portion of GOP funds, USAID loan or funds from other sources earmarked to expand the equity base of eligible cooperatives.
- A Guarantee Fund covers possible losses arising from uncollected loans that cannot be covered by liquidation of collaterals under the guidelines.
- The Cooperative Finance Group (CFG) is the special unit in the CDA created for specialized handling, monitoring, supervision and servicing of loans to cooperatives made through Cooperative Banks/lenders.
- Debt Equity Ratio is the ratio of term liabilities to net worth of the borrowing cooperatives.
- A Special Time Deposit is funds made available to eligible participating Cooperative Banks/Lenders to finance the loan(s) applied for by the eligible cooperative.
- Disposable Earnings is net income balance to non-cash expense items less mandatory cash deductions or appropriations for education, training, general reserve, KB guarantee fund, etc.
- Risk Asset Ratio is the ratio of a bank’s net worth to its risk assets; risk assets are total assets minus non-risk assets such as cash on hand, due from Central Bank, evidence of indebtedness of the Republic of the Philippines and Central Bank loans covered by holdout on an assignment of deposits, bank premises, furniture and fixtures and equipment (depreciated), and other as approved by the Monetary Board.
Credit policies, financing types, and trust investments
- Credit extension must follow sound lending and business principles so cooperatives prosper and grow in size, scope and service to members (Section 3).
- A loan to an eligible cooperative must be based on sound credit factors, be sufficient to accomplish the intended purpose, and have terms reasonably assuring repayment and protecting the cooperative’s credit base (Section 3).
- Applicant cooperatives must have capital contributions sufficient to meet the debt-equity ratio prescribed; term loans must be structured so total outstanding term liabilities do not exceed 2:1 debt-equity ratio (Section 3).
- CMP funding pursues a total financing package subject to loan and capital package requirements:
- Term loan amortization must be repaid from disposable earnings of the cooperatives (Section 3).
- Seasonal and commodity loans must be repaid as inventories are sold and proceeds collected, and in any event within twelve (12) months or less (Section 3).
- Trust Fund capital retirement must be paid from a capital build-up agreed to by cooperative members and incorporated in the loan agreement (Section 3).
- Each borrower must invest in the Guarantee Fund:
- 5% of advances on term loans, and 3.75% of advances on seasonal loans (except re-advance made within the year) (Section 3).
- Investments continue until the Guarantee Fund investments equal 10% of the borrower’s combined loan outstanding (Section 3).
- Guarantee Fund management and loss sharing:
- Guarantee Fund investments are made in prime securities by CDA, and interest income accrues to the benefit of each borrower (Section 3).
- Net loss on uncollected CMP program loans is charged up to 85% against the Guarantee Fund and the remaining 15% against the Cooperative Bank/Bank (Section 3).
- Losses are charged first against the investment of the delinquent borrower in the Guarantee Fund; remaining losses are charged to: (a) earnings of the Guarantee Fund, (b) USAID loan proceeds, and (c) investment of other borrowers (Section 3).
- CMP funds may be used for financing types including:
- Seasonal operating capital and commodity loans for short-term operating funds and financing inventories and receivables liquidated within twelve (12) months or less (Section 4).
- Term Loans for long term or permanent working capital, facilities and other non-current assets amortized within more than one (1) to ten (10) years (Section 4).
- Joint or Split Financing where cooperatives with outstanding loans from other programs need additional credit, allowing CMP authority loans subject to arrangements on collaterals, deferrals, and repayment programs (Section 4).
- Trust Fund Investment through preferred stocks with limits and rates:
- Preferred stock investment may not exceed 100% of paid-up capital or PHP 1,000,000.00 (Section 4).
- Preferred as to assets but not as to interest; earns interest only when interest is declared for common stocks; preferred stock interest rate is 1/5 of the rate declared for common stocks (Section 4).
- Preferred shares representing Trust Fund investment must be retired within ten (10) years in accordance with the capital build-up program, reckoned from the date of each release of capital assistance (Section 4).
Eligible lenders and borrowing cooperatives
- Participation is limited to any Cooperative Bank/Bank that meets all requirements:
- It is certified by the appropriate Central Bank departments as operating substantially in accordance with laws, rules and regulations and Monetary Board directives (Section 5).
- Its past due loans to total loans outstanding do not exceed 50% at the time of application (Section 5).
- Its risk asset ratio does not fall below 10% minimum with the grant of the loan applied for (Section 5).
- It is up to date in payment/remittance to CDA (Section 5).
- Eligible borrowers are cooperatives that qualify for CMP loans and capital assistance through participating Cooperative Banks/Banks and must meet the requirements:
- Must be registered or confirmed with CDA under RA 6938 (Section 6).
- Must operate with main business activities consisting of:
- supply of certified seeds, fertilizers and other farm inputs to members; and/or
- buying, storing, transporting, processing, and marketing of members’ produce; and/or
- a combination of input supply and produce marketing; and/or
- providing other economic services or on behalf of members (Section 6).
- At least 50% of total business must be with its members (Section 6).
- Must keep and maintain acceptable and adequate accounting records and provide financial and operating statements in approved form (Section 6).
- Share capitals earn interest at rates approved by CDA (Section 6).
- Cash interests on share capital and patronage refunds must be made only after prior CDA approval (Section 6).
Credit requirements, loan amount, and terms
- CDA evaluates cooperative creditworthiness using careful analysis of major credit factors:
- Management: responsible, competent and cooperative management and board of directors (Section 7).
- Loan purpose and terms: constructive use of the purposes defined in Section 4 to improve services to members and patrons, with terms aligned to sound credit policies (Section 7).
- Repayment ability:
- For term loans, analysis must cover adequacy of historic and projected cash flows from operating margins/retains, scheduled investments by members, and amounts available to meet loan repayments and build net worth (Section 7).
- For seasonal loans, analysis must cover proper utilization and revolving of current assets; seasonal loans must relate to financed current assets or the net working capital position supporting the loan (Section 7).
- Financial condition and operations: ability to honor obligations, continue as an effective business organization, and protect the lender against undue risks; financial analysis includes assets composition, quantity and quality of net working capital, liability currency, and net worth makeup shown by balance sheets and supporting schedules; operational analysis includes business type/volume, operating efficiency, and net earnings as shown in profit and loss statements and supporting schedules (Section 7).
- Economic environment: need for the cooperative and capacity to provide goods or services at competitive prices, including member support (direct or through coops), competition analysis, industry trends, changes in agricultural production types, government policies, and the legal climate affecting operations (Section 7).
- Loan amount determination is based on corporate needs from a feasibility study within the debt-equity ratio, but loans are granted only up to the amount needed and within the applicant’s capacity to pay and loan value of collateral securities (Section 8).
- Loan terms are fixed by loan type:
- Seasonal commodity loans: term not exceeding one (1) year (Section 9).
- Seasonal operating loans: term not exceeding one (1) year (Section 9).
- Term loans: term not exceeding ten (10) years (Section 9).
- Special term loans: term not exceeding ten (10) years (Section 9).
- Loan restructuring is allowed:
- Upon default due to fortuitous events or force majeure or other justifiable or meritorious cases, the Cooperative Bank/Bank or other lender may, with prior CDA approval, allow restructuring (Section 9).
Collateral requirements and loan value limits
- Collateral must be governed by the strengths and weaknesses of the cooperative’s credit factors and must not be used as a sole basis for extending credit; collateral must nevertheless provide reasonable protection from loss (Section 10).
- Security types required include:
- Seasonal commodity loans: secured by eligible commodities or product pledged under satisfactory warehouse receipts or other title documents or lien, and by assigned current accounts receivable arising from sale of pledged commodities (Section 10).
- Seasonal operating capital loans: secured by chattel mortgage or other first lien or revolving receivables and inventories (Section 10).
- Other loans secured by fixed assets: secured by real estate and chattel mortgage on fixed assets such as land, building, machinery and equipment including rolling stocks (Section 10).
- Loan value limits:
- Real estate security loans may not exceed 70% of appraised value of the real estate plus 70% of appraised value of insured improvements; loans require that title to the real estate be in the mortgagor’s name and free from all encumbrances (Section 10).
- Chattels loans may not exceed 50% of appraised value (costs if new); loans require that title to the chattels be in the mortgagor’s name and free from all encumbrances (Section 10).
- Where the Cooperative Bank has effective control of agricultural products given as security, loan amount may increase up to:
- 70% of marketable value for rice, corn and sugar; and
- 60% of marketable value for other stored non-perishable crops (Section 10).
- Where assigned accounts receivable arise from sale of pledged commodities to government agencies/instrumentalities and responsible private corporation/entities, the loan amount may not exceed 70% of such assigned receivables (Section 10).
Interest rates, repayment schedule, and payment rules
- Interest charges to borrowers are fixed:
- 10% per annum for seasonal operating and commodity loans (Section 11).
- 9% per annum for term and special term loans (Section 11).
- No interest is collected in advance and no service charge may be collected (Section 11).
- Interest on Special Time Deposits to Cooperative Bank/Bank is fixed:
- 5% per annum on Special Time Deposits for seasonal operating and commodity loans; and
- 6% per annum on Special Time Deposits for term and special term loans (Section 11).
- CDA sets the rate for loans made through the Cooperative Bank consistent with CMP long-term objective to provide credit at the lowest reasonable cost on a sound business basis considering money costs, reserves/expenses, capital requirements, and services by Cooperative Bank/Bank and CDA (Section 11).
- Repayment scheduling:
- Repayment is scheduled in approximately equal installments of principal and interest, monthly, quarterly, or semi-annually, unless payment plans align to approximate periods of highest borrower income or principal income availability (Section 12).
- Payment application and remittance:
- Any payment by the borrower to the Cooperative Bank/Bank must first apply to interest due and payable, with the balance to principal (Section 15).
- Collections remitted to CDA must be remitted within five (5) days from receipt; otherwise the Cooperative Bank/Bank must pay 1% per month on the amount due as liquidated damages in addition to the interest rates under Section 11 (Section 15).
Lending procedure, CFG evaluation, and loan release
- Application is filed by the eligible cooperative with the nearest authorized Cooperative Bank/Bank, submitting:
- duly accomplished application form for loan and/or capital assistance;
- project feasibility data on the object of financing;
- certificate of incumbency listing officers, their signature and address, and expiration of terms;
- board resolution authorizing certain officers to negotiate and contract for financial assistance, or if lacking board authority, a general assembly resolution authorizing certain officers to negotiate and contract for financial assistance;
- latest financial statement and operations, and audited financial statement and operations for the last three (3) years where practicable and available;
- certified copy of by-laws and articles of cooperation with all amendments;
- endorsement from the CDA Area Director (Section 13.A.1).
- Bank endorsement to CDA for Special Time Deposit:
- After positive evaluation, Cooperative Bank/Bank must file a duly accomplished application for Special Time Deposit (STD) with CDA, submitting:
- the cooperative’s application and the other requirements and board resolution authorizing negotiation/contract, investment in the Guarantee Fund, and compliance with loan agreement terms and conditions;
- board resolution approving and endorsing the cooperative’s application and authorizing officers to negotiate for STD with CDA;
- copy of financial statement and supporting schedules as of application date;
- weekly report on required and available reserves against deposit liabilities for four consecutive weeks;
- information sheet duly accomplished in CDA-approved form (Section 13.A.2).
- After positive evaluation, Cooperative Bank/Bank must file a duly accomplished application for Special Time Deposit (STD) with CDA, submitting:
- Processing and evaluation:
- CFG reviews and evaluates applications for loan and/or capital assistance (Section 13.B).
- CFG conducts field investigation to confirm actual purpose, applicant eligibility, existence and condition of offered securities, and facts needed for project viability and feasibility; its recommendations form the basis of CDA action (Section 13.B).
- Approval and notice of final action:
- CDA takes action on all applications for loans and/or capital assistance, including the Cooperative Bank/Bank STD application, and prescribes terms and conditions for covering loan agreements (Section 13.C.1).
- After CDA Board approval, CFG informs the applicant cooperative to complete required documentation (Section 13.C.3).
- Release of loan proceeds:
- CDA releases STD proceeds to the Cooperative Bank/Bank and/or subscribes to preferred shares of the applicant cooperative through the CRB/Cooperative Bank (Section 13.D).
- Cooperative Bank/Bank deposits STD proceeds in a separate bank account and releases to a special savings account in the name of the borrowing cooperative upon completion of loan documents such as promissory notes and loan agreements (Section 13.D).
- Withdrawal from the special savings account requires actual need and approval by the Cooperative Bank/Bank Manager (Section 13.D).
Uses of funds, diversion consequences, and remedies
- Loan proceeds must be used only for the purposes for which they were granted; diversion results in cancellation of the loan contract and immediate demand for repayment of released amounts, without prejudice to criminal prosecution under the law (Section 14).
- Default and foreclosure:
- If diligent collection procedures fail and forebearance is not advisable, the lender and CDA must take immediate action deemed appropriate under the circumstances (Section 16).
- The right to foreclose real/chattel mortgages, pledged commodities, and assigned assets arises from the time the borrower defaults in payment of loan amortizations or violates conditions of the loan agreement (Section 16).