Background
The Cooperative Marketing Project was created by virtue of a bilateral agreement between the GOP and the USAID on May 3, 1978 to improve and develop the cooperative marketing structure of the Philippines by providing agri-based marketing cooperatives with adequate financing, managerial capabilities and technical expertise in order that they might better serve the production, input supplies and marketing requirements of about 90,000 small farmers.  The nature of CMP financing is not former financing or production credit but rather financing of cooperative institutions.  It sought to be able develop a "sound and dependable finance system lending to (the eventual establishment of) an apex bank for cooperatives.   A total of P57,941,500.00 was made available to the project, both for the USAID loan proceeds and GOP counterpart.

In line with Executive Order No. 113 and Executive Order No. 116 dated 24 December 1986 and 30 January 1987 respectively, 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.

The CMP funds were later transferred to the Cooperative Development Authority in compliance with Section 10 of RA 6939. Thus, the CMP funds are now under the administration of the CDA.

SECTION 1.       The Cooperative Finance System is specifically designed to effectively lend and invest the CMP loan and trust fund with well managed and credit deserving eligible cooperative so that they could in turn efficiently serve the needs of their members.

The following rules and regulations are hereby promulgated to govern the operations of the Cooperative Finance Group (CFG) when it lends and invests the CMP funds to eligible cooperatives thru banks, primarily Cooperative Banks.

SECTION 2.       Definition of Terms - Unless otherwise specified, the following terms used in these Rules and Regulations mean:

a)      Cooperative - a duly registered association of persons, with a common bond of interests, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.

b.      Cooperative Bank - A bank organized by cooperatives and federations of cooperatives, the majority shares of which are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives.  The term "cooperative bank" shall include Cooperative Rural Banks.

c.       Loan Fund - That portion of USAID loan and Philippine Government counterpart funds and other sources earmarked for lending to eligible cooperatives.

d.      Trust Fund - That portion of GOP funds, USAID loan or funds from other sources earmarked for the purpose of expanding the equity base of eligible cooperatives.

e.      Guarantee Fund - A fund established to cover possible losses arising from uncollected loans which cannot be covered by the liquidation of collaterals in accordance with pertinent provisions of these guidelines.

f.        Cooperative Finance Group (CFG) - A special unit in the Cooperative Project Development and Assistance Division, Cooperative Development Authority (CPDAD/CDA) created for the purpose of providing specialized handling, monitoring, supervision and servicing of loans to cooperatives made through Cooperative Banks/lenders.

g.      Debt Equity Ratio - Refers to the ratio of term liabilities to the networth of the borrowing cooperatives.

h.       Special Time Deposit - Funds made available to eligible participating Cooperative Banks/Lender to finance the loan(s) applied for by the eligible cooperative.

i.        Disposable Earnings - Refers to the balance of net income to its non-cash expense items less mandatory cash deductions or appropriations for education, training, general reserve, KB guarantee fund, etc.

j.        Risk Asset Ratio - Refers to the ratio  of a bank's networth to its risk assets. Risk asset is defined as to 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 the 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.

SECTION 3.       General Credit Policies -

a.      The extension of credit shall be consistent with sound lending and business principles so that the cooperatives may prosper and grow in size, scope and quality or service to their members.

b.      A loan to an eligible cooperative shall be based upon sound credit factors. It should be in an amount sufficient to accomplish the purpose for which it is intended and provide terms and conditions which reasonably assure repayment and protect the cooperative's credit base.

c.       Applicant cooperative must have capital contributions sufficient to meet the debt-equity ratio prescribed under these guidelines.

d.      Term loans that may be granted to an eligible cooperative shall be such that its total outstanding term liabilities would not exceed a debt-equity ratio of two is to one (2:1).

e.      The Cooperative Marketing Project Fund shall pursue a policy of providing a total financing package for eligible cooperatives subject to loan and capital package provided that:

1. The amortization of the term loan component must be repaid from disposable earnings of the cooperatives;
   
   
2. Seasonal and commodity loans shall be repaid as inventories of financed commodities and products are sold and proceeds collected, but in any event the loan shall be repaid within a period of twelve (12) months or less; and
   
   
3. The retirement of the capital assistance (Trust Fund) component must be paid from a capital build-up agreed to by the cooperative members and made part of the loan agreement.

f.        Each borrower shall be required to invest a 5% out of advances on term loans and 3.75% out of advances on seasonal loans (except re-advance made within the year) in a Guarantee Fund established to cover losses arising from uncollected loans which cannot be covered by the liquidation of collaterals.  Each borrower is to make investments at the above rates until such time as the amount of investments in the Guarantee Fund equals 10% of the borrower's combined loan outstanding.

The funds are to be invested in prime securities by the CDA and the interest income shall accrue to the benefit of each borrower.

Any net loss suffered from uncollected loans granted under this program shall be chargeable up to eighty five percent (85%) against the guarantee fund and the balance of fifteen percent (15%) against the Cooperative Bank/Bank.  Losses shall first be charged against the investment of the delinquent borrower in the Guarantee Fund.  Any remaining losses will be charged against (a) the earnings of the Guarantee Fund (b) USAID loan proceeds; and (c) the investment of other borrowers.

SECTION 4.       Types of Financing - Cooperative Marketing Project (CMP) funds may be utilized for any or a combination of the following types of financing:

a.      Loans, Purposes:

1. Seasonal operating capital and commodity loans may be extended to provide short term operating funds and to finance increase in inventories and receivables that shall be liquidated within a period of twelve (12) months or less.
   
   
2. Term Loans may be granted for long term or permanent working capital, for facilities and other non-current assets payable on amortization basis within a period of more than one (1) to ten (10) years.

b.      Joint or Split Financing:

A number of cooperatives which have loans outstanding from the other cooperative financing programs may need additional credit.  Loans may be made to these cooperatives provided satisfactory arrangements can be made with the other lenders; for dividing collaterals, deferrals where necessary, appropriate repayment programs, etc. so that loans made under this authority can be granted on a sound basis.

In some cases, cooperatives rent operating facilities owned by LBP.  In the event that it is determined to be desirable, arrangements might be made whereby the borrower may acquire such facilities by issuing preferred stocks to the CMP for the purchase contract to be paid out of a separate program for repaying regular loans, or on a long term loan purchase contract. Split financing will be involved and should be allowed on the condition that satisfactory arrangements can be worked out with the LBP and/or CDA.

c.       Trust Fund Investment:

Investment in preferred stocks of cooperatives not to exceed 100% of their paid-up capital or P1,000,000.00 may be made to supplement equity capital owned by members in order to provide an adequate capital base to support the regular term and seasonal loans that may be granted.  Preferred stocks shall be preferred as to assets but not as to interest and shall earn interest only when interest is declared for common stocks and shall earn at a rate of 1/5 of the rate declared for common stocks.

The preferred shares representing Trust Fund Investment in the capital stock of a cooperative shall be retired within a period of ten (10) years in accordance with the capital build-up program of the eligible cooperative to be reckoned from the date of each release of capital assistance.

SECTION 5.       Authorized Lenders - Any Cooperative Bank/Bank that meets all the following requirements may be allowed to participate under this program:

1.      It must be certified by the appropriate Departments in the Central Bank supervising the same as operating substantially in accordance with laws, rules and regulations and directives of the Monetary Board;

2.      Its ratio of past due loans to total loans outstanding does not exceed 50% at the time of application;

3.      Its risk asset ratio should not fall below the 10% minimum requirement with the grant of the loan being applied for;

4.      Must be up to date in the payment/remittance to CDA.

SECTION 6.       Eligible Borrowers - Cooperatives eligible to avail of loans and capital assistance from the CMP through participating Cooperative Bank/Bank under this program are the following:

a.  Cooperative which meet/agree to meet all the following requirements:

1.      Those registered or confirmed with the Cooperative Development Authority under RA 6938.

2.  The main business activities are:

a)    The supply of certified seeds, fertilizers and other farm inputs to members;

b)    The buying, storing, transporting, processing, and marketing of the produce of members;

c)    A combination of the supply of farm inputs and the marketing of the produce of members;

d)    Providing other economic services or on behalf of the members.

3.      At least 50% of the total business of the cooperative must be with its members.

4.      Keeps and maintains acceptable and adequate accounting records and provides financial and operating statements in approved form.

5       Share capitals shall earn interest at rates approved by the Cooperative Development Authority.

6       All declaration of cash interests on share capital and patronage refunds shall be made only after prior approval by the Cooperative Development Authority.

SECTION 7.       Credit Requirements - The Cooperative Development Authority may grant credit on the basis of careful analysis of, but not limited to, the following major credit factors:

a.      Management - A cooperative seeking or obtaining credit should have responsible, competent and cooperative management and board of directors.

b.      Loan Purpose and Terms - The purpose shall be for a constructive use, as those defined in Section 4 to further improve the cooperative's services to its members and patrons. The terms shall be in accordance with sound credit policies.

c.       Repayment Ability -

1.      Term Loans - The determination of repayment ability requires thorough analysis of the adequacy of historic and projected cash flows arising from operating margins, or retains out of payment for products, or from scheduled investments by members or retains out of payment for products, or from scheduled investments by members that will be available to meet loan repayments and build networth.

2.      Seasonal Loans - The determination of the repayment ability for seasonal loan requires an analysis of the cooperative's ability to properly utilize the loan and revolve its current assets.  A seasonal loan should be related to the value of the current assets being financed or to the net working capital position margining or supporting the loan.

d.      Financial Condition and Operations - Sound financial condition and operations require the ability of the borrowing cooperative to honor obligations, to continue as an effective business organizations and to protect the lender from undue risks in case of adversity.  Financial analysis include the evaluation of the assets and their composition, the quantity and quality of net working capital, currency of liabilities and make-up of the networth as evidenced by balance sheets and supporting schedules.  Operational analysis includes the evaluation of the type and volume of business, operating efficiency and net earnings as represented by profit and loss statements together with related schedules.

e.      Economic Environment - An analysis of the economic environment should be made of the need for the cooperative and its ability to provide goods or services to its members at competitive prices.  The report should include an analysis of members support, either direct or through the coops, an analysis of competition, industry to trend, any changes in the type of agricultural production, government policies and the legal climate in which the operations are conducted.

SECTION 8.       Amount of Loan - The amount or size of loan/financial assistance is determined according to the corporate needs of an applicant based on the feasibility study submitted which should be within the debt equity ratio provided in these guidelines, but such loan shall be granted only to the extent of the amount needed which should be within the applicant's capacity to pay and the loan value of its collateral securities.

SECTION 9.       Terms of the Loans -

a. The periods shall be adopted to the kind of loan applied for:

1. Seasonal commodity loan shall have a term of not exceeding one (1) year.
   
   
2. Seasonal operating loan shall have a term of not exceeding one (1) year.
   
   
3. Term loan shall have a term of not exceeding ten (10) years.
   
   
4. Special Term loan shall have a term of not exceeding ten (10) years.

b.      In case of default by a borrower arising from fortuitous events or force majeure, or in other justifiable or meritorious cases, the Cooperative Bank/Bank or any other lender may, with prior approval of the Cooperative Development Authority, allow restructuring of the loans.

SECTION 10.    Collateral Security: Loan Value - The type and amount of collateral required should be governed by the relative strengths and weaknesses of the cooperative's credit factors.  Collateral should not be used as a sole basis for extending credit but it should nevertheless be sufficient to provide the lender reasonable protection from loss in the case of adversity.

a.      Whenever necessary and to assure reasonable safety, loans shall be granted with collateral security, such as:

1.    Seasonal commodity loans shall be secured by eligible commodities or product pledged under satisfactory warehouse receipts or other title documents or lien and by assigned current accounts receivable when arising from sale of pledged commodities.

2.    Seasonal operating capital loans shall be secured by chattel mortgage or other first lien or revolving receivables and inventories.

3.    Loans shall be secured by real estate and chattel mortgage on fixed assets such as land, building, machinery and equipment including rolling stocks.

b.      Loan Value:

1.      Loans against real estate security shall not exceed seventy percent (70%) of the appraised value of the respective real estate security, plus seventy percent (70%) of the appraised value of insured improvements, and such loans shall not be made unless title to the real estate, free from all encumbrances, shall be in the name of the mortgagor.

2.      Similarly, loans on the security of chattels shall not exceed fifty (50%) of the appraised value (costs if new) of the security, and such loans shall not be made unless title to the chattels, free from all encumbrances, shall be in the name of the mortgagor.

3.      Where the Cooperative Bank has effective control of the agricultural products given as security, the amount of loans may be increased to the extent of seventy percent (70%) of their marketable value in the case of rice, corn and sugar, and sixty percent (60%) of the marketable value of other stored non-perishable crops.

4.      Where the assigned accounts receivables arose from sale of pledged commodities to government agencies/instrumentalities and responsible private corporation/entities, the amount of loan shall not exceed seventy percent (70%) of such assigned receivables.

SECTION 11.    Interest Rates -

a.      Interest at the rate of ten percent (10%) per annum for seasonal operating and commodity loans and nine percent (9%) per annum for term and special term loans shall be charged to the borrowers.  No interest shall be collected in advance and no service charge are allowed to be collected.

b.      Interest to be charged Cooperative Bank or other lender on Special Time Deposits shall be five percent (5%) per annum on seasonal operating and commodity loans and six percent (6%) per annum on term and special term loans.

c.       Notwithstanding provisions in a and b above, it should be the long term objective of CMP to provide the types of credit needed by eligible borrowers at the lowest reasonable cost on a sound business basis, taking into account money costs, appropriate and necessary reserves and expenses, capital requirements, and services provided by Cooperative Bank/Bank and CDA.  Loans made through the Cooperative Bank shall bear such rate or rates as may be determined by the CDA.

SECTION 12.    Loan Repayment Schedule - Repayment shall be scheduled in approximately equal installments of principal interest, monthly, quarterly or semi-annually, except in cases where payment plans have been granted so arranged as to fall due on the approximate periods of borrowers highest income or when the principal income of the borrower is available.

SECTION 13.    Lending Procedures -

A.      Application for Financial Assistance

1.      Any eligible cooperative seeking financial assistance under this program must file with the nearest authorized Cooperative Bank/Bank the following:

a)    Duly accomplished application form for loan and/or capital assistance;

b)    Project feasibility data on the object of financing;

c)    Certificate of incumbency, listing of officers. their signature and address and expiration of terms;

d)    Board resolution authorizing certain officers to negotiate and contract for financial assistance or where Board does not have such authority, then a general assembly resolution authorizing certain officer to negotiate and contract for financial assistance;

e)    Latest financial statement and operation; audited financial statement and operation for the last three (3) years where practicable and available;

f)     Certified copy of by-laws and articles of cooperation together with all amendments thereto; and

g)    Indorsement from CDA Area Director.

2.      Upon proper positive evaluation of the application for  loan/or assistance submitted by a borrowing cooperative, the Cooperative Bank/Bank shall file a duly accomplished application for STD with the CDA together with the following:

1. Application for loan and/or capital assistance of the cooperative together with the other requirements and the board resolution authorizing certain officers to negotiate and apply for loans, to invest in the Guarantee Fund and to abide by the terms and conditions of the loan agreement developed.
   
   
2. Cooperative Bank/Bank board resolution approving and endorsing the cooperative's application and authorizing its officers to negotiate for STD with CDA.
   
   
3. Copy of financial statement and supporting schedules as of date of application.
   
   
4. Weekly report on required and available reserves against deposit liabilities for four consecutive weeks.
   
   
5. Information sheet duly accomplished, in form approved by CDA.

B.      Processing and Evaluation - Cooperative Finance Group shall review and evaluate the application for loan and/or capital assistance.  Field investigation shall be conducted to determine the actual purpose of loan and/or capital assistance, the eligibility of the applicant, the existence and condition of the securities offered and gather facts necessary to determine the viability and feasibility of the project. Recommendations made in the report of the CFG shall be the basis for the action of CDA on the loan application.

C.      Approval/Notice of Final Action -

1.      The CDA shall take appropriate action on all application for loans and/or capital assistance together with the Cooperative Bank/Bank application for STD and shall prescribe the terms and conditions of the covering loan agreements.

2.      Upon approval by the CDA Board, the Cooperative Finance Group shall inform the applicant cooperative so that they could complete the required documentation.

D.      Release of Loan Proceeds - The CDA shall release the proceeds of STD to the Cooperative Bank/Bank and/or subscribe to preferred shares of the applicant cooperative thru the CRB/Cooperative Bank.  The Cooperative Bank/Bank shall then deposit the proceeds of STD in a separate bank account and release the same to a special savings account in the name of the borrowing cooperative upon the completion of the loan documents such as promissory notes, loan agreements, etc.  Withdrawal from the special savings account shall be subject to actual need and approval by the Cooperative Bank/Bank Manager.

SECTION 14.    Uses of Funds Borrowed, Diversion - The proceeds of a loan shall be used for the purposes for which it was granted; if used for other purposes, the contract of loan shall be deemed cancelled and the lending institutions shall immediately demand repayment of the amounts released, without prejudice to the criminal prosecution of the borrower under the law.

SECTION 15.    Application of Payments: Remittance to CDA -

a.      Any payment made by the borrower to Cooperative Bank/Bank shall first be applied to the interest due and payable; the balance, to the principal of the loan.

b.      Collection from the borrowing cooperative shall be remitted to the CDA within five (5) days from date of receipt, otherwise, the Cooperative Bank/Bank shall pay an amount of equivalent to one percent (1%) per month on the amount due as liquidated damages in addition to the interest rates prescribed under Section 11.

SECTION 16.    Default; Foreclosure - In cases where diligent collection procedures fail and where forebearance is not deemed advisable, the lender and the CDA shall take immediate action deemed appropriate under the circumstances.

The right to foreclose real/chattel mortgages, pledged commodities and assigned assets arises from the time the borrower defaults in the payment of the loan/amortizations or violates any condition of the loan agreement.

Adopted: 22 May 1992

(Sgd.) EDNA E. ABERILLA
Chairperson