Agricultural Finance Overview

Agricultural Finance

• 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.

Significance of Agricultural Finance

• 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.

Sources of Agricultural Finance

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

Classification of Funds to Agriculture

• 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.

Concessionary and Government Budget Funds

• 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 Bank Funds and Compulsory Deposits

• 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.

Credit Worthiness Analysis

• 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.

Stages of Credit Analysis

• 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.

Loan Repayment Plans

• 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.

Repayment Principles

• 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.

Agricultural Credit Policies

• 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.