Agri-Credit Risk Management

8/16/23, 8:00 PM Agri-Credit Risk Management -Getting the Perspective Right | LinkedIn
Hire
Home My Network Jobs Messaging Notifications Me For Business Pr
Agri-Credit Risk
Management -Getting
the Perspective Right
Rajesh Kharche
Empowering Agriculture with Credit |Author| 7 articles Follow
Bankers' Handbook on Kisan Credit Card
May 23, 2021
Agri-Credit Risk Management
-Getting the Perspective Right
Importance of agriculture credit is well known and its

contribution in Gross Value addition is also understood well
by policy maker. This is the reason that agriculture credit is
encouraged and is mandated to all commercial banks by
regulator. There is satisfactory growth in agriculture credit
over the decade and credit deployment to sector is
improving year on year. Every year target is getting
overachieved. For 2021-22 it is targetted at Rs 16.50 lac
crore in budget. One can infer that Bankers have identified
agriculture sector as one of the potential area for lending,
despite this agriculture lending is perceived as one of the
high credit risk activity in finance.
In order to further boost the finances and explore business

opportunities in agriculture lending understanding credit
risk is important. Presently most of banks do not have
specialised Agricredit risk policies or norms to manage risk
https://www.linkedin.com/pulse/agri-credit-risk-management-getting-perspective-right-rajesh-kharche/ 1/9
in agriculture portfolio. Agriculture credit risk is treated at

par with other sector risk, however time has come to have
specialised credit strategy for risk management in
agriculture finance.
In view of the 18% requirement and its proportionate

requirement for growth vis-à-vis with advances of ANBC
(Adjusted Net Bank credit), it’s time to explore sector
specific risk management strategy for agriculture credit.
What is credit and default risk:
The Basel Committee on Banking Supervision (BCBS)

defines credit risk as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance
with agreed terms.
Credit is the trust which allows one party to provide

resources to another where that second party does not
repay immediately but arranges to return the resources at a
later date.
Credit risk therefore includes both default risk and the risk
of credit deterioration. Credit risk is generally considered to
be higher for loans to agriculture as there is the inherently
high level of risk the sector itself faces.
Why Agricredit Risk Management is Relevant:
Better risk management will boost agriculture productivity

which will help in sustainable food security for the country,
reduction in rural poverty, employment etc. Banking
institutions will benefit from improved risk management
techniques and reduce non-performing loans in the
agricultural sector this will improve their profitability.
Further, it will encourage higher credit to the agriculture
sector and thus wheel of Agricredit cycle will run efficiently.
Improving on the management of credit risk in the

agriculture would improve incomes and profitability,
expand financial inclusion, increase credit access, and
create a strong linkage between the agricultural and
financial services resulting in robust growth in the Agro-
economy. Practically all Banks uses Six-Cs to evaluate credit
applications: character, capacity, collateral, condition, credit
history and capital
Present Approach of Risk Management:

Usually all Banks have following strategies for management

of credit which treat all credit at par and consists of
agriculture credit. However, owing to nature of activity
agriculture credit requires consistent and diligent
monitoring to reduce default.
i. The Board approved credit risk management

strategy
ii. The Board of Directors regularly review credit

controls and risk management processes
iii. Comprehensive documented policies and

procedures to manage the credit risk
iv. Compliant with the Central Banks’ Risk

Management Guidelines
v. Ensure enhanced due diligence for customers

and transactions identified as risk of default
vi. Sufficient employees in the credit department

to perform their assignments effectively
vii. Robust and comprehensive training policies

and procedures to perform risk management
viii. The nature, frequency and effectiveness of

independent reviews and audits of the credit portfolio and
the credit process are adequate
ix. Robust and effective enterprise risk data

infrastructure
x. Real time information system to keep track of

the risk environment and respond adequately
Major Reasons for Default in Agri Credit:
i. Climate changes impacting crop loss or

particular activity loss
ii. Price fluctuations of commodity and final

produce
iii. Production related issues such as pests and

diseases, labour, harvesting etc.
iv. Inadequate monitoring- not monitoring at

critical stage of availability of cash flow
v. Information asymmetry- from field officials and

its interpretation
vi. Delayed action- delayed action on post field

observations or other defaulter in same village
vii. Fund diversion- Injudicious use of credit for

non-productive activities
viii. Management skill of farmer- all farmers are not

efficient in managing credit
ix. Moral hazard- mass loan waiver, agricultural

polity
x. Loan settlement- settlement of default account

in same village of regular account holders
xi. Agriculture land as collateral- Liquidity of

collateral security of Agri land is lowest is well known to
defaulter
Why Financial Institutions Not Consider Agricredit-

proposals:
i. Inconsistent cash flows
ii. Unavailable or insufficient collateral
iii. Agricultural clients are inherently riskier than

other clients
iv. Poor internal rating of borrowers
v. Higher transaction costs in serving at distant

location
vi. Poor background of borrower such as limited

education, financial illiteracy etc.
vii. Poor previous credit history
viii. Lack of banking habit
ix. Inconsistent reference checks
x. Absence of subsector specific Agricredit

policies at Bankers’ end
xi. Lack of expertise and domain knowledge of the

particular segment in agriculture at Banker’s end
xii. Risk appetite of the Banker
Why Agricredit need Customised Risk Management

Approach-
Presently industry do not have specific models to deal with

the risk associated and its possible mitigates from its
origination till completion of credit cycle. Designing early
warning signal based on data analytics, use of satellite
technology, data on field verification and its periodic
findings, trigger identification for specific activities on time.
Default risk varies from nature of activity; farmer’s
experience in the line, market conditions, management skill
of the farmers, insurance availability, agro climatic
conditions etc.
Origination, underwriting, monitoring, collection and

capacity building are the key pillars of Agri- credit and has
to be used carefully for designing early warning signals.
Following are the major agriculture activities being funded,
however risk management is handled on the line of other
than agriculture credit.
Origination: Proposal origination and sourcing strategy

based on organisational geo knowledge and activity
knowledge to be funded is the useful for efficient risk
management
Underwriting- Activity wise approach by estimating cash

inflow and outflow, timings, frequency, risk associated,
equity contribution, experience in the line, collateral
coverage, credit history etc. are factors of underwriting
which add value in credit risk management.
Monitoring- Monitoring is to be customised based on

identification of critical stages of the activity funded,
purpose of monitoring and action plan observed deviation.
Monitoring is further can be used for deepening the
relationship and cross selling. Early warning signals based
on critical findings of the field visits, use of technology and
aligning manpower will be helpful for successful risk
management.
Collection- Timely recovery is one of the function of

successful on boarding of borrower. From origination till
completions of credit cycle credibility of all factors are at
stake. If all stakeholder is not in sync with each other, the
stress is visible at this stage.
i. Crop loan- different approaches for – food

crops, commercial crops, horticulture crops etc.
ii. Dairy loans- small dairy units, mechanised large

dairy units, commercial dairy, milk processing units etc.
iii. Poultry loans- backyard poultry, layer farm,

broiler farm, breeder farms, hatchery farms etc.
iv. Hi-tech agriculture loans- protected cultivation

for floriculture, high value exotic crop cultivation, vegetable
cultivation
v. Nursery loans- vegetable nursery, ornamental

nursery, floriculture nursery, oilseed palm nursery, fruit crop
nursery, sugarcane nursery etc.
vi. Fishery loans- inland fisheries, captured fishery,

fishery in farm pond- fish, shrimp etc.
vii. Agri infrastructure loans- seed production, cold

storage, dry storage etc.
viii. Farm equipment loans- trailer, tractor, harvesters,

planters, threshers and other farm implements
ix. Agro industries loans- Pvt corporates engaged

in fruits and vegetable processing, exports, dairy, poultry,
sericulture, commodity processing etc.
x. Farmer collective loans- FPO/FPCs, farmer

collective, group farming, JLGs etc.
xi. High Value Crops loans- Pomegranate, Grape,

Banana, Vanilla, Lemon grass, Tobacco, Tea, Coffee etc. for
new crop establishment on project mode
What May Be Approach for Agricredit Risk Management:
In same market different financial institution have different

default level (NPA) of agricultural credit. This is mostly due
to:
i. Better choices of farmer as a customer and not

farmer as debtor approach.
ii. Efficient underwriting with case specific

customised consideration,
iii. Timely collection and its aligning to timeline of

highest cash inflow calender,
iv. Use of technology for data collection,

verification, processes and reduction in turnaround time
v. Farmer friendly approach in terms of

communication, genuine help in ancillary banking
requirement.
vi. Better relationship management post

disbursement by way of frequent greeting, occasional non
collection call, estimating future banking need and
servicing of them.
vii. Manpower alignment- all the verticals of lenders

to approach as one unit with least information asymmetry
on customer relationship.
viii. Pitching all possible financial product to farmer

and improving productivity of resources.
ix. Concept of family banker by estimating all

present and future banking need of all family members
x. Effective customised monitoring strategy for

collection.
xi. Trained manpower- repeated customised

specific training linked with business outcome, portfolio
quality, profitability and defined growth plan based on
performance
Some broad well-known common aspects are as below

which may not be significantly different amongst lenders.
i. Credit reference bureau
ii. Credit portfolio review
iii. The five Cs of credit
iv. Scenario analysis
v. Ratings tool based approach for customised

activities
vi. Financial statement/Banking analysis whenever

possible
vii. Value at risk
viii. Sensitivity analysis whenever possible
ix. Equity based approach for project loans
x. Default ratios based approach for particular

activity
xi. Geography based approach
xii. Portfolio diversification approach
xiii. Customised monitoring approach
xiv. Customised well defined relationship

management
(Views expressed in the article are author's own )
Report this
Published by
Rajesh Kharche 7 Follow
Empowering Agriculture with Credit |Author| Bankers' Handbook on Kisan Cre…
articles
Published • 2y
Agri-Credit Risk Management -Getting the Perspective Right Importance of

agriculture credit is well known and its contribution in Gross Value Addition (GVA) is
also understood well by policy makers. This is the reason that agriculture credit is
encouraged and is mandated to all commercial banks by regulator. There is
satisfactory growth in agriculture credit over the decade and credit deployment to
sector is improving year on year. Every year target is getting overachieved. For 2021-
22 it is targetted at Rs 16.50 lac crore in budget. One can infer that Bankers have
identified agriculture sector as one of the potential area for lending, despite this
agriculture lending is perceived as one of the high credit risk activity in finance. In
order to further boost the finances and explore business opportunities in agriculture
lending understanding credit risk is important. Presently most of banks do not have
specialised Agricredit risk policies or norms to manage risk in agriculture portfolio.
Agriculture credit risk is treated at par with other sector risk, however time has come
to have specialised credit strategy for risk management in agriculture finance.
#finance #bankers #riskmanagement #agriculture #banks #agrifinance
#Agriculture #farmer
Like Comment Share 62 5 comments
Reactions
+50
5 Comments
Most relevant
Add a comment…
SHIRISH SHUKLA • 3rd+ 2y

Underwriter AFU
Very well
Like Reply
Jagdish Kumar, Ph.D (He/Him) • 2nd 2y

Ph.D in Journalism & Mass Communications
Agritimes.co.in would like to publish the story and we would like to

invite you to write for farmers platform.
Like · 1 Reply
Load more comments
Rajesh Kharche
Empowering Agriculture with Credit |Author| Bankers' Handbook on Kisan Credit
Card
Follow
More from Rajesh Kharche
Factoring Crop Cycles for Attributes of knowledge

Aligning Production Credit in driven agriculture finance
Agriculture
Rajesh Kharche on LinkedIn
Skillsets for Bank

Agribusiness officials
See all 7 articles

Agri-Credit Risk Management - Background

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Agri-Credit Risk Management - Background

Uploaded by

Copyright:

Available Formats

8/16/23, 8:00 PM Agri-Credit Risk Management -Getting the Perspective Right | LinkedIn

May 23, 2021

-Getting the Perspective Right

Importance of agriculture credit is well known and its

In order to further boost the finances and explore business

in agriculture portfolio. Agriculture credit risk is treated at

In view of the 18% requirement and its proportionate

What is credit and default risk:

The Basel Committee on Banking Supervision (BCBS)

Credit is the trust which allows one party to provide

Why Agricredit Risk Management is Relevant:

Better risk management will boost agriculture productivity

Improving on the management of credit risk in the

Present Approach of Risk Management:

Usually all Banks have following strategies for management

i. The Board approved credit risk management

ii. The Board of Directors regularly review credit

iii. Comprehensive documented policies and

iv. Compliant with the Central Banks’ Risk

v. Ensure enhanced due diligence for customers

vi. Sufficient employees in the credit department

vii. Robust and comprehensive training policies

viii. The nature, frequency and effectiveness of

ix. Robust and effective enterprise risk data

x. Real time information system to keep track of

Major Reasons for Default in Agri Credit:

i. Climate changes impacting crop loss or

ii. Price fluctuations of commodity and final

iii. Production related issues such as pests and

iv. Inadequate monitoring- not monitoring at

v. Information asymmetry- from field officials and

vi. Delayed action- delayed action on post field

vii. Fund diversion- Injudicious use of credit for

viii. Management skill of farmer- all farmers are not

ix. Moral hazard- mass loan waiver, agricultural

x. Loan settlement- settlement of default account

xi. Agriculture land as collateral- Liquidity of

Why Financial Institutions Not Consider Agricredit-

i. Inconsistent cash flows

ii. Unavailable or insufficient collateral

iii. Agricultural clients are inherently riskier than

iv. Poor internal rating of borrowers

v. Higher transaction costs in serving at distant

vi. Poor background of borrower such as limited

vii. Poor previous credit history

viii. Lack of banking habit

ix. Inconsistent reference checks

x. Absence of subsector specific Agricredit

xi. Lack of expertise and domain knowledge of the

xii. Risk appetite of the Banker

Why Agricredit need Customised Risk Management

Presently industry do not have specific models to deal with

Origination, underwriting, monitoring, collection and

Origination: Proposal origination and sourcing strategy

Underwriting- Activity wise approach by estimating cash

Monitoring- Monitoring is to be customised based on

Collection- Timely recovery is one of the function of

i. Crop loan- different approaches for – food

ii. Dairy loans- small dairy units, mechanised large

iii. Poultry loans- backyard poultry, layer farm,

iv. Hi-tech agriculture loans- protected cultivation

v. Nursery loans- vegetable nursery, ornamental