State-owned development finance institution the Land and Agricultural Development Bank of South Africa (Land Bank) grew its transformational loans to R7.9-billion and maintained a strong balance sheet in the 2018/19 financial year, despite challenging conditions in the agriculture sector, Land Bank acting CEO Konehali Gugushe says.

Transformational loans as a percentage of the total loan book increased from 12% in 2017/18 to 17% in 2018/19. The bank provides interest rate subsidies, from the bank’s own resources, for development farmers to the value of R58.7-million. It posted a net profit of R130.6-million, acting CFO Yatheen Ramrup says.

In partnership with the Industrial Development Corporation, it also disbursed R356.6-million to support farmers who had been negatively impacted on by drought since the inception of the Drought Relief Facility in 2017.

While total gross loans declined to R45.2-billion from R45.6-billion in 2017/18, the non-performing loans ratio grew to 8.8% from 6.7% and its net interest margin fell from 3% to 2.7%, the Land Bank does maintain a cost-to-income ratio of 57.1%, a capital adequacy ratio of 16.4% and a net stable funding ratio of 102%.

A delay in rains and planting led to the Land Bank having more liquidity coverage than was needed and this led to a negative carry (higher costs of borrowing than returns earned), although the bank had good liquidity for the current financial year.

The Land Bank reduced its reliance on short- term funding to 50%, and was focusing strongly on controlling expenditure to maintain its financial sustainability.

However, Ramrup adds that, while it will focus on its nonperforming loans, the Land Bank is not a commercial bank and provides long-term support to farmers in efforts to rehabilitate the farms and ensure sustainable food production, with liquidation only instituted as a last resort.

This means that nonperforming loans had much greater ‘stickiness’ than those of commercial banks, and long-term support is a key part of its development mandate to ensure the agriculture sector is developed and food security maintained.

Additionally, some areas in the western parts of the country had experienced four seasons of poor rainfall over the past five years and this exacerbated the impact of the recession suffered in the sector in 2018, says Ramrup.

The focus during the current financial year would be on growing profits and driving top-line growth to complement the focus on nonperforming loans and expenditure control, as indicated by the stability of the cost-to-income ratio, says Gugushe.

The Land Bank plans to disburse R3-billion in development finance during the current financial year, with a strong focus on supporting agricultural entrepreneurs, while adhering to the principles of responsible banking to ensure the bank continues to play a role in the development of the South African agriculture sector, she says.

The Land Bank provides significant support for farmers and agricultural entrepreneurs, but it often takes time for startups to get all the necessary agreements in place and to develop sufficiently robust business plans, adds Land Bank strategy and communication executive manager Sydney Soundy.

However, the bank is implementing a digitalisation strategy to improve the speed at which it could respond to queries and requests for finance, as well as enabling farmers to use digital media or its physical branches to engage with it.

The digitalisation would also entail automation of certain internal functions to improve its turnaround times, which it acknowledged was poor and needed to be improved, says Ramrup.

“While digitalisation will not solve the problem of insufficient equity or improve the rates at which we can offer loans, we do believe that implementing a layer to integrate with other organisations and farmers will drive efficiencies and support the agricultural financial services ecosystem, such as [our] ability [and that of] farmers . . . to use third-party applications.”

Meanwhile, Land Bank nonexecutive chairperson Arthur Moloto highlights that the Land Bank and 29 finance institutions have helped to develop a comprehensive sustainability framework and principles to guide banks as part of the United Nations Environment Programme – Finance Initiative.

The Land Bank will be one of the first signatories of this sustainable finance framework on September 22, he says.