Capital needed for rural development
Small towns across America are losing business because existing and potential businesses cannot obtain financing for startup and expansion.
“Potential employers cannot expand because of their inability to qualify and/or secure credit in amounts sufficient to meet their needs,” says Bastrop, La., Mayor Clarence Hawkins. “Long-term, fixed-interest credit must be made available to revitalize these [rural] areas if they are to remain viable.”
Rural towns do not need to grow at 2.1 percent like they did in the 1970s. They merely need to keep pace. But since those halcyon days, growth has been meager: 1 percent in the 1980s and 1.5 percent through 1993 – rates that are now falling, according to the Federal Reserve Board. Most of the present gains are going to tourist towns and areas with some connection to nearby big cities.
The weak growth in rural loans is used as evidence to suggest there is a correlation between lack of capital and the slowing rural economy. Studies show that when loans to rural areas increase, employment figures jump; consequently, when they fall off, so do job opportunities.
The message: Innovative ways to extend more credit must be found. That will solve at least some of the problems of rural America. Still, that is not the only answer. “It is likely that many factors, including fundamental changes in the industries important to rural America lie behind those trends,” says Mark Drabenstott, an economist at the Federal Reserve Bank of Kansas City in Missouri.
The long legacy of policy initiatives in the agricultural credit market are useful here, Drabenstott says.
Chartering new institutions to extend credit is efficient and effective, he says, while expanding credit through direct government loans or subsidies is often costly and bureaucracy-intensive.
The Farm Credit System, for instance, competes with commercial banks and life insurance companies to give farm borrowers more alternatives at cheaper interest rates. The credit system could be broadened to include some types of rural business loans, according to Drabenstott.
This approach would be inexpensive to taxpayers because the federal government would play the role of catalyst while building on existing market institutions.
Another idea, says Jeff Plagge, president of the First National Bank of Waverly, iowa, would be to provide rural areas with access to secondary markets. Such markets allow lenders to pool certain types of loans and sell off pieces of those loans to investors. That is how the mortgage industry expands financing to homeowners and decreases risk to shareholders.
But mortgage-backed securities are unique because they are backed by at least 200 different loans of not more than $100,000 each. Thus, investor principal is rarely at risk. Business loans, conversely, might run as high as $5 million, a substantial risk in any loan pool. Community bankers say that risk could be overcome by requiring larger pools and investment-grade ratings.
While the challenge facing both the public and private sector remains finding new ways to bring more start-up capital and long-term financing to meet the needs of rural America, one thing is worth noting, says Ron Shaffer, a community development economist at the University of Wisconsin. “I’m not aware of any financial institution that has failed in the past 30 years because it has invested too much in local small business,” he says.
That, of course, cannot be said of banks whose portfolios consisted largely of credit extended for commercial office buildings and certain foreign governments.