Agricultural Finance Overview

Study Notes

Agricultural finance involves studying, examining, and analyzing financial aspects of farm businesses.
It plays a critical role in financing agricultural activities in both developed and developing nations.
Funding sources include different countries, national and international formal and informal institutions.
Access to agricultural finance (credit) depends on various factors, including the farmer's repayment ability and plan, and other determinants.

Agricultural finance is vital for a country's agro-socio-economic development, both macro and micro-level.
It strengthens farm businesses and increases productivity of scarce resources.
Farmers can purchase needed inputs like fertilizers and plant protection chemicals, combining them with new seeds to increase crop productivity.
Utilizing new technologies purchased through farm finance helps boost agricultural productivity.
Efficient farm finance reduces regional economic imbalances and inter-farm wealth variations.

Agricultural lending depends on financial resources.
Funding sources include farmer savings, capital markets, government budgets, central bank refinance facilities, and international borrowing.

Funds to agriculture can be categorized as formal financial institutions, semi-formal, and informal financial intermediaries.
Formal financial institutions include funds at commercial terms.
Informal financial intermediaries include NGOs, and informal financial institutions.

Bilateral and multilateral development agencies provide loans and grants to agricultural financial intermediaries.
Government budgets in developing countries also provide funding for agricultural lending.
Funds can be granted at concessionary or commercial rates.

Central banks, and associated institutions, also act as significant creditors for agricultural finance.
Governments in many countries use taxes and budgets for agricultural loan programs.
Governments enforce compulsory deposits to raise funds for agricultural investment.

Creditors assess an individual or company's ability to meet debt obligations.
Loan applications are evaluated based on repayment history, credit score, asset availability, and liability consideration.
Several firms develop rating systems to determine a company's credit worthiness.
Creditworthiness considers the ability to pay current debt on time.

The analysis of creditworthiness involves determining current creditworthiness and predicting future trends.
It considers current financial and accounting data, and future prospects.
The specific economic environment and forthcoming changes are essential factors.
The analysis focuses on the applicant's management skills, loan repayment ability, and interest/charge implications.
Information about the applicant's current business activity and capital availability informs loan decisions.
Essential factors include the correspondence between the extended credit and its need, as well as the speed of fund circulation.
Stages in the process comprise collecting and analyzing data, assessing the credit risk, and checking the reliability of the information.

Long-term capital investments are typically repaid in installments (annually, semi-annually, or monthly).
Repayment techniques include equal total payments (amortization), equal principal payments, or consistent payments over a specified period.
Some loans might involve a final balloon payment for the unpaid balance.

Loan payment calculation depends on interest rate, payment timings (e.g., monthly, quarterly, annually); loan duration, and the loan amount.
Calculating payments, remaining balances at specific dates, and interest/principal portions are essential for proper loan planning.

Typical procedures require borrowers to provide collateral (land, equipment, or crops) for loan security.
Old policies' objectives revolved around accelerating the adoption of new farming technology by peasant farmers through working capital provision.
Newer policies aim to establish a self-sustaining rural financial system that mitigates loss dependence on external funding.
The ability of farmers to provide collateral influences the success of institutional credit schemes.
Policy objectives often focus on bridging short-term cash shortages for small farmers, offsetting disincentive effects, and linking credit to agricultural outputs.
Rural financial systems need self-sufficiency rather than relying on external funds.