Agricultural Lending Research Articles

Socio-economic aspects of bank lending to agriculture

The article is devoted to the socio-economic aspects of banks ' activities in relation to agricultural lending. The contextual background of the study is the social significance of agriculture for the country in terms of food security and the formation of a stable standard of living of the population. The purpose of the study was to reach the essential understanding of the social aspects of the Bank's activities by considering the social functions of the Bank in the lending process. The article considers the composition of credit subjects and gives a brief description of them. The activity of the State as a regulator of credit relations and a full participant in lending is emphasized. The essential understanding of the bank 's social functions in the context of solving the state 's social task of financing agriculture through the mechanism of concessional lending has been expanded. Conclusions are made about the leading role of the state in the formation of the mechanism of interaction between the Bank and the borrower with the strengthening of social functions of the Bank.

Do remotely-sensed vegetation health indices explain credit risk in agricultural microfinance?

• Agricultural lenders face the risk of delayed installment payments, especially in years with severe weather conditions. • Remotely-sensed vegetation health indices are negatively correlated with credit risk. • Credit risk is explained, to a large extent, by these vegetation health indices. • The explanatory power of the vegetation health indices increases in the upper quantiles of the distribution of credit risk. • Index insurance based on vegetation health indices is likely to be helpful for lenders, and in turn, to improve farmers’ access to credit. Farmers’ vulnerability to adverse weather events, which are likely to increase in frequency and magnitude due to climate change, is a major impediment to a sufficient credit supply. Smallholder farmers’ access to credit is, among other factors, crucial for productivity and output growth. Index insurance could help lenders to compensate for lacking installment payments in years with severe weather conditions and, thus, is considered to accelerate agricultural lending. Using a unique borrower dataset provided by a Microfinance Institution (MFI) in Madagascar, we analyze whether remotely-sensed vegetation health indices can explain the credit risk of the MFI’s agricultural loan portfolio. Therefore, we utilize sequential logit models and quantile regressions. More specifically, we consider the remotely-sensed Vegetation Condition Index, Temperature Condition Index and the Vegetation Health Index as independent variables at the individual branch and the aggregated bank level. These indices are available globally and can potentially enhance the effectiveness of index insurance by reducing basis risk (imperfect correlation between the index and the underlying exposure), a major drawback of index insurance. Moreover, we consider loan- and socio-demographic variables of the borrowers as additional independent variables. Our results show that the credit risk of the MFI is explained, to a large extent, by the vegetation health indices. Moreover, the results from quantile regressions show that the explanatory power of the vegetation health indices increases with increasing credit risk. Thus, utilizing remotely-sensed vegetation health indices for index insurance designs might be particularly valuable for MFIs to hedge the credit risk of their agricultural loan portfolio. Facing lower default rates, MFIs could reduce interest rates. Remotely-sensed index insurance could therefore enhance access to credit, contributing to sustainable development in the study region.

Bank Lending and Monetary Transmission: Does Politics Matter?

Combining bank-level data with information on interest rate subvention, the paper documents an expansion in agricultural lending and a reduction in interest costs even under tight monetary policy, in the presence of political intervention. The magnitude of the impact is asymmetric across periods of monetary expansion and contraction. The analysis highlights the importance of the government in the functioning of the credit market and uncovers a political channel of monetary transmission.

Determinants of agri-lending in Kenya

PurposeThe purpose of this paper is to examine the factors that influence financial institutions’ lending to the agricultural sector in Kenya.Design/methodology/approachThe paper employs a panel data of 15 licensed financial institutions (commercial banks and deposit-taking microfinance institutions) from 2011 to 2016. The random effects and ordinary least squares panel corrected standard errors estimation techniques are employed to estimate the effect of liquidity, size, equity, lending rate (LR), type of financial institution and non-performing loans on agri-lending.FindingsThe results indicate that only 3.9 per cent of loan portfolio of the sampled financial institutions were advanced to the agricultural sector over the study period. From the panel regression analysis, the paper finds agricultural credit risk to reduce lending to the agricultural sector while size, LR and type of financial institution were observed to significantly increase agricultural lending. Compared to 2011, agri-lending was also observed to have declined between 2012 and 2015.Practical implicationsThe findings highlight important indicators for enhancing lending to the agricultural sector in Kenya and other emerging economies.Originality/valueAs far as the authors are concerned, this presents the first empirical evidence on the determinants of agri-lending by financial institutions in Kenya.

Technology and Small Business Lending: A Case Study

Community banks are more able than their larger, more bureaucratic competitors to meet clients’ unique demands. This adaptability is evident in their growing market share in small business and agricultural lending, which often require distinctly structured loans. Community banks are active in the communities they serve and, therefore, have a deeper understanding of client needs. Smaller community banks do not have the vast resources to market and develop financial technologies often offered by their larger, bigbank competitors. The purpose of this paper is to determine how technology usage impacts small business lending and profitability at community banks.

Impact of Credit and Investment Resources on the Productivity of Agricultural Sector

The current state of financial provision of agriculture in Ukraine is generally unsatisfactory; therefore, the problem of financing the agrarian sector of the economy in the form of lending and investing appears. The purpose of the article is to assess the impact of external financial support of enterprises in the form of lending and investing on agricultural productivity, as well as an assessment of the risk of overdue loans in the regional section of the agrarian sector of the Ukrainian economy. It is investigated the dependence of income (proceeds) on sales of products, proceeding from the needs of agricultural lending in ensuring the efficiency of its economic activity. Thus, lending and investing in agriculture contributes to increasing sales volumes and revenue (sales) growth from sales, as well as stimulating the development of agrarian enterprises, but the correlation between the analyzed indicators is insignificant. The evaluation results indicate a significant risk of overdue loans to agrarian enterprises for all regions of Ukraine, due to low technical efficiency and high level of delinquency. Significant differentiation of regions according to the level of technical efficiency has been revealed, which may indicate significant reserves of its increase. At the same time, it was found that the interest rates on agricultural loans are not a decisive factor for delays in loans granted to enterprises. In order to improve the situation, it is necessary to increase the volume of external financing and the link density between the parameters: lending – investment – the growth of production and sales, which will allow the formation of a functioning environment, taking into account the possibilities of optimizing costs in each region of the state. Key words: risks, lending, investment, agriculture, risk assessment, agrarian enterprises.

Влияние экономического кризиса на кредитование сельского хозяйства Краснодарского края

Влияние экономического кризиса на кредитование сельского хозяйства Краснодарского края

An intergenerational farm transfer: when to start handing over the reins?

This case illustrates a challenging management decision faced by the family farm: when should they bring the younger generation to the farm full-time? Under consideration is a critical trade-off between the firm’s growth and transfer tax implications that drives the farm transfer decision. Industry practitioners and students are asked to use the results of the intergenerational farm transfer simulation model to evaluate this trade-off and provide an effective recommendation. The case can be used as part of succession/estate planning workshops attended by agricultural producers, farm managers, agricultural lenders, as well as in Master’s level courses in agricultural finance and farm management.

Political interference and crowding out in bank lending

I provide novel evidence on the real costs of political interference in bank lending. Analyzing staggered state elections in India, I show that politically motivated increased bank lending to farmers before elections crowds out lending to manufacturing firms. These lending distortions are larger where farmers have more political weight and where incumbents have more influence over banks. Reduced bank credit forces manufacturing firms to cut production and operate at lower factor utilization. I also provide evidence suggesting politically motivated increased agricultural lending before state elections contributed towards excessive indebtedness of farmers and a subsequent costly bailout in 2008.

Implementing natural capital credit risk assessment in agricultural lending

AbstractAgriculture has critical impacts and dependencies on natural capital, and agricultural lenders are therefore exposed to natural capital credit risk through their loans to farmers. Currently, however, lenders lack any detailed guidance for assessing natural capital credit risk in agriculture and are challenged by the fact that the relevant material risks vary considerably by agricultural sector and geography. This paper develops a natural capital credit risk assessment framework based on a bottom‐up review of the material risks associated with natural capital impacts and dependencies for Australian beef production. It demonstrates that implementing natural capital credit risk assessment is feasible in agricultural lending, using a combination of quantitative and qualitative inputs. Implementation challenges include the complexity and interconnectedness of natural capital processes, data availability and cost, spatial data analytical capacity, and the need for transformational change, both within lending organisations and across the banking sector.

Impact of Credit Demand on the Productivity of Rice Farmers in South West Nigeria

Employing cross-sectional data from 360 rice farmers selected from three states in South West Nigeria, the study analyzes the impact of credit demand on the productivity of rice farmers. An Endogenous Switching Regression Model (ESRM) that accounts for both heterogeneity and sample selection biases were used to estimate the impact of credit demand on rice productivity in South West Nigeria. In addition, a Tobit regression model was employed to measure the level of participation of rice farmers in the credit market. The result of the first stage (probit model) of the ESRM revealed that household assets, access to service, climate variables, regional variables, and transaction cost are statistically significant in influencing farmers’ credit demand decision. The results of the second stage of the ESRM indicate factors such as household assets and access to service were statistically significant in explaining variations in rice productivity among participants and non-participants in the credit market. Furthermore, the results of the Tobit model showed that the farmers’ location income from rice farming experience, interest rate, and distance to the source of credit are statistically significant determinants of the amount of credit received. These findings suggest that facilitating farmers’ access to credit will improve rice productivity. Therefore, it is imperative for government and development partner to work together in order to improve the conditions for suitable agricultural credit access to rice farmers, especially a review of interest rates. A necessary addition should be developed to the assistance already being provided under Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) in the form of loan guarantees and other risk-sharing incentives, such as a regulatory environment that supports the modern contractual obligations that are characteristic of well-functioning agricultural financing. This would not only contribute to the intensification of rice production in Nigeria to meet its increasing rice demand, but also improve rice farmers’ productivity and their households’ incomes.

ПРЕИМУЩЕСТВА ПРЯМОГО СУБСИДИРОВАНИЯ ПРОЦЕНТНОЙ СТАВКИ ПРИ КРЕДИТОВАНИИ АПК

ПРЕИМУЩЕСТВА ПРЯМОГО СУБСИДИРОВАНИЯ ПРОЦЕНТНОЙ СТАВКИ ПРИ КРЕДИТОВАНИИ АПК

Factors affecting choice of banks for agricultural lending in rural areas

Factors affecting choice of banks for agricultural lending in rural areas

СТАН I ПРОБЛЕМИ РОЗВИТКУ БАНКІВСЬКОГО КРЕДИТУВАННЯ СІЛЬСЬКОГОСПОДАРСЬКИХ ПІДПРИЄМСТВ УКРАЇНИ

Досліджено теоретичні аспекти надання банківських кредитів підприємствам сільського господарства. Розкрито специфіку проблем, з якими стикаються учасники ринку банківського кредитування аграрної сфери в Україні. Акцентовано на тому, що в аграрному секторі традиційні перепони на шляху активування банківського кредитування доповнюються низькою якістю застави, високою ризикованістю агробізнесу, неефективністю кредитної політики, неврахуванням специфіки галузі тощо. Їх усунення передбачає симбіоз управлінських рішень багатьох суспільних інституцій. У цьому руслі важлива подальша імплементація ухвалених державою програмних документів з отримання часткової компенсації відсоткових ставок за залученими кредитами і поліпшення кредитного клімату. Досліджено динаміку обсягів і структури банківського кредитування сільсьгосппідприємств. Попри розвиток партнерських форм залучення позикових коштів, банківське кредитування перманентно слугує драйвером розвитку вітчизняних сільгосппідприємств. Свідченням цього є прискорене зростання обсягів кредитів, виданих таким підприємствам порівняно з кредитуванням підприємств інших секторів економіки. Доведено зміцнення позицій галузі сільського господарства на ринку кредитів та їхній позитивний вплив на виробництво сільгосппродукції. Протягом 2010—2016 рр. збільшення банківського кредитування на млрд грн призводило до збільшення виробництва продукції сільськогосподарськими підприємствами на 82 грн/га, усіма господарствами – на 57 грн/га. Економетричний аналіз виявив, що зміна ВВП України на 78,1 % залежить від зміни кредитування сільськогосподарських корпорацій. Якщо кредити сільгосппідприємствам терміном на п’ять років збільшаться на 1 млн грн, то можна очікувати збільшення обсягу ВВП у середньому на 0,164 млрд грн. Окреслено напрями поліпшення кредитування сільсьгосппідприємств, серед яких: застосування дієвого стратегічного напряму кредитної політики банківських установ – аутсорсингу; державна фінансова підтримка за рахунок компенсації кредитних ставок для аграріїв; розвиток кредитної кооперації.

Mapping Stress in Agricultural Lending

Repayment rates for farm loans have declined every quarter since the second quarter of 2013, suggesting heightened stress in agricultural lending. If repayment rates continue to decline?and the outlook for the agricultural sector remains downbeat?agricultural banks could become less able to lend to creditworthy farm borrowers. Thus, declining repayment rates could lead to adverse outcomes for agricultural banks, farmers, and the rural economies they serve. {{p}} Cortney Cowley uses data from the Federal Reserve Bank of Kansas City?s Ag Credit Survey to model and map areas with the highest probability of stress in agricultural lending. She finds that the largest increase in stress over the past decade occurred in 2016. She also finds that lower crop revenues, lower off-farm income, lower farmland values, lower concentrations of farm earnings, and higher interest rates are associated with higher stress in agricultural lending.

The Basel accords, capital reserves, and agricultural lending

PurposeThe safety and soundness of financial institutions has become a leading worldwide issue because of the recent global financial crisis. Historically, financial crises have occurred approximately every 20 years. The worst financial crisis in the last 75 years occurred in 2008–2009. US regulatory efforts with respect to capital reserve requirements are likely to have several unintended consequences for the agricultural lending sector—especially for smaller, less-diversified (and often, rural agricultural) lenders. The paper discusses these issues.Design/methodology/approachSimulation models and value-at-risk (VaR) criteria are used to evaluate the impact of capital reserve requirements on lending return on equity. In addition, simulations are used to calculate the effects of loan numbers and portfolio diversification on capital reserve requirements.FindingsThis paper illustrates that increasing capital reserve requirements reduces lending return on equity. Furthermore, increases in the number of loans and portfolio diversification reduce capital reserve requirements.Research limitations/implicationsThe simulation methods are a simplification of complex lending practices and VaR calculations. Lenders use these and other procedures for managing capital reserves than those modeled in this paper.Practical implicationsSmaller lending institutions will be pressured to increase loan sector diversification. In addition, traditional agricultural lenders will likely be under increased pressure to diversify portfolios. Because agricultural loan losses have relatively low correlations with other sectors, traditional agricultural lenders can expect increased competition for agricultural loans from non-traditional agricultural lenders.Originality/valueThis paper is novel in that the authors illustrate how lender capital requirements change in response to loan payment correlations both within and across lending sectors.

“FUND” LENDING AS AN EFFECTIVE TOOL OF STATE SUPPORT FOR FARMERS

The article is devoted to the topical problem of the development of agro-industrial complex, in particular, the development of the novelty model of agricultural lending. Experience of crediting of agriculture inRussiasince 1992 till now is considered. We provide a critical approach to the assessment of the current system of agricultural credit, which requires the presence of another economic incentive — the budget subsidy. Our purpose was a comprehensive author’s study of the problems of applying the practice of preferential agricultural lending, as well as the development of proposals aimed at improving the system of state support for the agricultural credit system. The methodological tools of the research include comparative methods of analysis, as well as analytical methods of cognition. We carried out the analysis of the models of crediting of farmers applied for the specified period and the main problems in practice of their application. As the most effective model of farmer’s lending defined “fund” model, used from 1997 to 2001. The main drawback of this system is the fragmentation of property interest in the subject of agriculture in a single loan obligation. The author developed a new system of agricultural lending, based on the “fond” model of the 90s. Its distinctive feature is dual targeting — for in economic entities (small and large businesses) and credit institutions (banks and credit cooperatives), while at the same time with maintaining a high level of state control (which is provided by a single source of credit resources — the state). The results of the study can be used in the development of both individual credit measures of state support for agricultural producers, and in the preparation of the State program of development of agriculture and regulation of markets of agricultural products, raw materials and food.

Asset concentration in the US agricultural balance sheet: a relative information approach

PurposeOver the past four decades, real values of farm real estate and the share of assets on farmers’ balance sheets attributed to farm real estate have increased. The purpose of this paper is to examine the factors that explain the concentration of the US agricultural balance sheet around a particular asset, farm real estate, and the extent to which the degree of asset concentration varies across United States Department of Agriculture production regions.Design/methodology/approachState-level data from 48 states and entropy-based inequality measures are used to examine changes in asset distributions (real estate vs non-real estate assets) both within and between regions over time.FindingsThe agricultural balance sheet is found to concentrate into real estate in the USA over the period 1960-2003 with the rate of concentration varying across production regions. In some regions, the concentration is mainly due to changes in real estate prices, while in other regions concentration is also driven by changes in real estate holdings or changes in total factor productivity.Originality/valueThis study formally estimates the degree to which the concentration of balance sheet items can be explained by the observed changes in farm real estate prices relative to observed changes in agricultural factor productivity or changes in farm real estate holdings. The computed regional differences in asset concentration and its main drivers have implications for changes in equity and solvency positions of farmers as well as agricultural lenders’ risk exposure.

Explaining weather-related credit risk with evapotranspiration and precipitation indices

PurposeAlthough the microfinance sector in developing countries has seen an impressive development in recent years, many small-scale farmers in rural areas are still undersupplied with capital. One of the main reasons for this undercapitalization is the exposure to weather risks. Weather index insurance is assumed to bear high potential for accelerating agricultural lending. The index design hereby is of particular importance. The purpose of this paper is to estimate the influence of evapotranspiration and precipitation indices on the credit risk of farmers in Madagascar.Design/methodology/approachThe authors base the analysis on a unique borrower data set provided by a commercial microfinance institution in Madagascar and weather data provided by CelsiusPro. In this context, evapotranspiration and precipitation indices both at aggregated bank level and at branch level are identified and their influence on credit risk of small-scale rice farmers is estimated.FindingsThe results show that the weather-related part of the credit risk of farmers can be better explained by an evapotranspiration then by a precipitation index. The precipitation index underestimates the weather influence on credit risk especially during the harvesting season. The results suggest a potential for weather index insurance which is based on an evapotranspiration index. The results are of similar importance for developed and developing countries.Practical implicationsThe results suggest that, should insurance be considered as an appropriate risk management instrument for the farmers or the bank, weather index insurance has the potential to mitigate a certain part of the credit risk. The authors also find that the focus on precipitation-based index insurance products would underestimate the weather influence on credit risk. Furthermore, the results suggest that insurance products should be tailored to branches to be most effective.Originality/valueTo the authors’ knowledge, this is the first study that compares the explanatory values of evapotranspiration and precipitation indices in general and for the credit risk of small-scale farmers in particular.

ПРОБЛЕМЫ И НАПРАВЛЕНИЯ СОВЕРШЕНСТВОВАНИЯ КРЕДИТОВАНИЯ АГРАРНОГО ПРОИЗВОДИТЕЛЯ

Цель: разработать предложения по совершенствованию кредитования аграрного производителя в современных условиях хозяйствования. Обсуждение: процессы кредитования сельхозтоваропроизводителей сегодня претерпевают значительные изменения, что связано с рядом субъективных и объективных причин. Направления совершенствова- ния кредитования должны нивелировать отрицательное влияние от- дельных факторов внешней и внутренний среды сельхозпредприятий. Современный механизм аграрного кредитования требует активной поддержки государства. Использование субсидирования ставки кре- дитования как инструмента государственного воздействия на кре- дитные процессы также должно быть гибким и адекватным изменяю- щимся условиям функционирования предприятий аграрного сектора. Результаты: на основе выполненных исследований предложены две группы мероприятий: одна из них касается совершенствования про- цесса аграрного кредитования, а другая содержит мероприятия, на- правленные на совершенствование механизма государственной под- держки аграрного кредитования в форме субсидирования.