Credit Rationing Under Asymmetric Information and the Fund of Guarantees for Agriculture and Forestry

There exist many different programs for government support of agricultural credit around the world. Many of these programs are specified for special purposes such as the support of environmentally friendly farming, or for the support of young farmers. But a great proportion of the government money for the support of agricultural credit goes to general programs aimed just at financing agricultural activities. In a majority of these general purpose programs of government support for agricultural and small business credit in the U.S.A. and Western European countries, there is the condition that these programs are intended for borrowers who do not qualify for ordinary commercial loans. In some of these programs the applicant for the subsidized loan has to show that his loan application was rejected by a commercial bank. The government support for agriculture is in this way strictly targeted toward the most disadvantaged farmers. The Czech programs administered by the Fund of Guarantees for Agriculture and Forestry (Fund of Guarantees) are in sharp contrast with this approach of targeting credit support. Of course, there exist a number of conditions to determine the eligibility of a farmer for support by the Fund of Guarantees. Primarily, in order to be considered for support, the agricultural enterprise has to have settled all the restitution and transformation liabilities, and there are further conditions elaborated in the program guidelines "Pokyny pro poskytovani garance a dotace prostrednictvim," PGRLF (1994). However, there is no special emphasis on targeting the support towards a special group of farmers, who are rejected by commercial banks. The aim of this paper is to provide the possible theoretical rationale and justification of such a nondiscriminating policy and of the credit guarantee approach to government support of agricultural credit markets