Criteria for Evaluating Borrowers' Repayment Potential

Abstract

HE agricultural industry has experienced developments in the past 20 years that have made capital in general, and more specifically nonowned capital, increasingly important as a factor in production. Total agricultural production in the United States has continually increased in the past 20 years even in light of declining labor (man-work-hours) and a fairly constant supply of agricultural land [1, 4]. Current projections give no indication of a reversal in these trends. Therefore, we have reason to believe that agriculture will continue to become more capital intensive [5, 6]. Only 20 years ago farmers spent less than 50 percent of their gross farm income on purchased inputs whereas today 70 to 80 percent of their gross income is spent on purchased inputs and the projection is for this figure to increase [3]. Since it is highly probable that capital accumulation on most farms will not keep pace with the capital needed to purchase advanced technology, external sources of financing in the form of credit will become increasingly important [6]. As credit becomes an increasingly larger portion of the agricultural capital base, the allocation of such in the most productive and efficient manner becomes paramount in importance. Hence, the objectives of this study are (1) to determine relevant variables for evaluating loan applications and develop indicators for determining the success or failure of a potential borrower and (2) to examine changes in the above variables over a period of time to determine trends or characteristics which would provide some guidance in identifying potential repayment difficulties.