Lecture 31

Principles of Credit - 3R's, 5C's, and 7 P's of Credit - Farm Financial

Analysis – SWOT analysis.
 The Basis of Principles of Farm credit

The Eligibility of the farmer to acquire credit

depends on 3 “R‟ s of credit, namely,
1. Returns to investment
2. Repayment capacity
3. Risk bearing ability
1. Returns to investment
• estimation of additional of returns vis-à-vis
additional costs in utilization of loan - it tests the
economic viability.
Returns to investment can be assessed in two ways
a. Comparing the returns with and without credit.
b. Comparing the change in income level before
and after the project
 Repayment capacity
• refers to the amount available with him after
meeting his farm and family needs and
obligations to repay the loan under
consideration.
a. the total farm returns with credit obtained
b. the income from other sources like rent
c. the family living expenses
 3. Risk bearing ability

• indicates how the farmer can bear risks and uncertainties

involved in using the loan.
1. Risk due to natural causes: Drought, floods, pests and diseases,
cattle epidemic, etc.,
2. Risk due to technical causes: Break down of machinery, defective
seeds or delay in transport of perishable products, etc.,
3. Risk due to social hazards: Theft, robbery, labour strike, etc.,
DEFLATED GROSS RETURN (DGR)
100 - C.V
DGR = --------------- X GR
100
• Where CV = Co efficient of variation ; GR = Gross return
 5 ‘Cs’ OF CREDIT

a) Character
b) Capacity
c) Capital
d) Condition, and
e) Commonsense
a) Character
• the moral qualities like honesty, integrity,
commitment, hard work, promptness, etc.,
which the borrower exhibits.
• people with good mental and moral
character will have a good credit character.
b) Capacity - capacity of an individual borrower
to repay loans
c) Capital - availability of money with the
farmer-borrower- net worth
d) Condition - needed for obtaining alone from
the financial institutions.
e) Commonsense - prefect understanding
between the lender and the borrower in credit
transactions
 7 Ps’ of Credit

1. Principle of productive purpose

2. Principle of personality
3. Principle of productivity
4. Principle of phased disbursement
5. Principle of proper utilization
6. Principle of payment and
7. Principle of protection
 Appraisal of Project Proposals
• Project is termed as that it is an activity for
which money will be spent in expectation of
returns and which logically seems to lend itself
to planning, financing, and implementing as a
unit.
Project Cycle
• Identification - to find potential projects -
well-informed technical specialists and local
leaders
• Formulation - Preparation and analysis -
undertake a feasibility study that will provide
enough information for deciding whether to
begin more advanced planning
• Appraisal - After a project has been prepared,
reexamine every aspect of the project plan to
assess whether the proposal is appropriate
and sound before large sums are committed
• Implementation
• Evaluation - the elements of success and
failure in the project experience
 Aspects of Project Preparation and Analysis

1. Technical aspects
• concerns the project's inputs (supplies) and
outputs (production) of real goods and
services.
• Good technical staffs are essential for this
work; they may be drawn from consulting
firms or technical assistance agencies abroad.
2. Institutional-organizational-managerial
aspects
• whether the institutional setting of the project
is appropriate
• Does the project design take into account the
customs and culture of the farmers who will
participate?
• Will the project involve disruption of the ways
in which farmers are accustomed to working?
3. Social aspects
• examine the social implications of proposed
investments.
• income distribution
• creating employment opportunities.
• the quality of life
• issue of adverse environmental impact.
4. Commercial aspects
• arrangements for marketing the output
• effective demand at a remunerative price
• Where will the products be sold?
• Is the market large enough to absorb the new
production without affecting the price?
5. Financial aspects
• budget projections that estimate year by year
future gross receipts and expenditures,
including the costs associated with production
and the credit repayments
6. Economic aspects
• NPV, BCR, IRR
 Basic guidelines for preparation of Feasibility
Report of Project
• General Information
• Preliminary Analysis of Alternatives
• Project Description
• Marketing Plan
• Capital Requirements and Costs
• Operating Requirements and Costs
• Financial Analysis
• Economic Analysis
 SWOT Analysis
• SWOT is an acronym for Strengths,
Weaknesses, Opportunities and Threats
• Strengths (S) and Weaknesses (W) - internal
factors - measure of control
• Opportunities (O) and Threats (T) - external
factors over which you have essentially no
control
1. Strengths - the qualities that enable us to
accomplish the organization’s mission.
• Strengths can be either tangible or intangible.
• beneficial aspects of the organization or the
capabilities of an organization, Examples of
organizational strengths are huge financial
resources, broad product line, no debt,
committed employees
2. Weaknesses - the qualities that prevent us from
accomplishing our mission and achieving our full
potential.
• deteriorate influences on the organizational
success and growth
• depreciating machinery, insufficient research and
development facilities, narrow product range, poor
decision-making, etc. Weaknesses are controllable.
• They must be minimized and eliminated.
3. Opportunities - are presented by the environment
within which our organization operates
• when an organization can take benefit of
conditions in its environment to plan and execute
strategies that enable it to become more
profitable.
• Organization should be careful and recognize the
opportunities and grasp them whenever they
arise.
4. Threats - arise when conditions in external
environment jeopardize the reliability and
profitability of the organization’s business.
• Threats are uncontrollable.
• When a threat comes, the stability and survival can
be at stake.
• Examples of threats are - unrest among employees;
ever changing technology; price wars and reducing
industry profits; etc.