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Risk Management by banks financing agriculture and
rural enterprise:
African and Asian Experiences
Expert Meeting on Managing Risk in Financing Agriculture
Johannesburg,1-3 April, 2009
Ajai Nair, Consultant,
The World BankThe World Bank
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Presentation Outline
Study framework
Key Research Questions
Institutions Studied
Findings
Conclusions
Way Forward
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Study Framework
Cover major institutional types - Commercial banks, Development finance institutions, and supply chain organizations
Include only institutions with relatively large agricultural portfolios
Understand the policy environment and business model
Understand credit risk assessment and credit risk management.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Key Research Questions
Agricultural Credit Risk Assessment What information is used to assess
credit applications?
How important is agricultural domain knowledge?
Is credit-risk quantified at the loan-level and at the portfolio level?
Does credit risk influence terms of credit?
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Key Research Questions
Agricultural Credit Risk Management Are collateral substitutes used?
Do lenders facilitate access to risk mitigation services for borrowers?
How diversified is the credit portfolio – within the agricultural portfolio / total portfolio?
Are risk transfer mechanisms used?
Are any special asset classification and provisioning mechanisms used?
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Institutions Studied: 5 countries; 15 institutions
Malawi: OIBM, MRFC
Zambia: Stanbic, Barclays, Dunavant, Cropserve
Kenya: KCB, Equity, Coop Bank, AFC
India: ICICI, HDFC, SBI, Basix
Thailand: BAAC
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Institutions Studied: 5 countries; 15 institutions
8 Commercial Banks 2 international and 6 national banks 7 traditional commercial banks and 1 microfinance
bank 4 provide retail services to small farmers; 4 provide
to retail services to large farmers and agribusinesses
1 apex bank lending to cooperatives
4 Development Finance Institutions 1 agricultural development bank 2 agricultural finance corporations 1 microfinance finance company
2 Supply-chain finance providers Produce buyer Input supplier
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Institutions Studied: 5 countries; 15 institutions
Agrl Loans (in US$ million/billion)
Agrl Loan as % of Total Loan Portfolio
Number of Agrl Borrowers
93 44 NA
86 100 25,000
71 11 NA
64 9 NA
23 19 35
22 41 142,536
14 9 100,000
6 100 325
5 100 100,000
4 35 67,300
1 7 1,100
12 90 5,680,000
8 10 5,600,000
4 10 NA
1 11 165,430
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Findings: Commercial Banks (8)
Credit Risk Assessment
Small Loans
Approach 1: Parametric (2)
Approach 2: Parametric + outsourcing (2)
Large loans – traditional financial ratio analysis - (all).
3 banks use credit bureau for large farmers
1 uses bio-metric identification of all borrowers
5 banks use grading; only 1 uses risk modeling
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Findings: Commercial Banks (8)
Credit Risk Management All banks lending to small farmers use
collateral substitutes (4)
Tiered loan approval authority
Diversified loan portfolios – agricultural loan portfolios 10 to 40 %
1 bank bundles crop insurance; 1 bundles credit-life insurance.
6 banks use risk-based pricing for large loans; none for small.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Findings: Development Finance
Institutions (4)
Credit Risk Assessment
All use credit norms and judgment-based process; household and activity financials considered.
3 use joint liability groups as primary lending channel.
Only 1 uses credit grading.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Findings: Development Finance
Institutions (4)
Credit Risk Management 3 use joint-liability as collateral
substitute; 1 uses no collateral for all loans
2 bundle credit life insurance; 3 piloting or selling index insurance but not bundling.
1 provides BDS services
3 use risk-based pricing.
All well diversified geographically; 2 have well diversified loan portfolio between sectors.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Findings: Supply chain
Organizations (2)
Credit Risk Assessment Very little credit assessment by
commodity buyer providing services to small farmers.
Traditional financial analysis by input supplier.
Credit Risk Management No collateral required by commodity
buyer.
Fully secured loans by input supplier
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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4 Innovations Parametric credit risk assessment
Outsourcing of credit risk assessment to agents who share credit risk.
Tripartite lending arrangements – produce buyer, lender and borrower, with and without credit risk sharing.
Fee-based agricultural and business advisory services.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Conclusions Lending to small farmers at scale requires non-traditional credit assessment systems
Lending to small farmers requires use of collateral substitutes, but not other elements of microfinance.
Successful agricultural lenders have domain expertise in agriculture at both loan officer and senior levels
Little risk quantification and use of insurance or other financial risk-management tools.
Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg
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Some questions
Is biometric identification a feasible basis for developing national credit bureaus?
Can risk-modeling be used to quantify, optimize, and price credit risk of agricultural loans/portfolio?
Can financial institutions finance agricultural and business advisory services to reduce credit risk?