Agricultural lending

Lending to farmers is particularly challenging. It has been a concern of governments for a long time as they recognise the importance of agricultural development in their economies. Banks, however, are wary of dealing with small farmers as they perceive this to be high risk and likely to reduce the quality of their loan portfolio. Newer microfinance institutions, anxious to extend their activities in rural areas, also worry about how to lend safely to farmers.

This self study guide is aimed at loan officers in financial institutions which seriously wish to engage in agricultural finance and manage this in such a way as to avoid loan losses and an increase in non-performing assets. It takes the reader through the loan cycle from application, to appraisal, disbursement and recovery, giving examples of how to deal specifically with farm households. The final lesson is aimed at more senior personnel who have responsibility for setting overall lending policies and managing the whole loan portfolio.

The lessons are based on the Agricultural Production Lending toolkit published by FAO and GTZ in 2004 and written by Bankakademie Micro Banking Competence Centre.


Lesson 1: The challenges of agricultural lending

The objective of the first lesson is to increase your awareness of the particular risks and costs associated with agricultural lending and the important characteristics that an agricultural loan officer needs.

Lesson 2: The importance of agricultural knowledge

The objective of this lesson is to examine the agricultural loan cycle, typical loan products and ways of building up knowledge of agricultural markets and good customers.

Lesson 3: The loan application

The objective of this lesson is to remind the readers of the key factors in loan analysis – character, capacity, capital, collateral and conditions - and see how an initial screening process and loan application form contribute to providing this information.

Lesson 4: The field visit

The objective of this lesson is to look at the importance of the field visit in processing a loan application and see how data can be collected to assist in the analysis of repayment capacity, character and trustworthiness, capital position and collateral availability of loan applicants.

Lesson 5: Loan appraisal

The objective of this lesson is to look in detail at the analysis of repayment capacity and how to appraise information collected about an applicant's character, capital and collateral position. The process of cash flow and balance sheet analysis is examined and key interpretation ratios are introduced.

Lesson 6: Loan approval and follow-up

The objective of this lesson is to examine in detail the steps that follow loan appraisal, including the approval process, setting loan terms and conditions, loan disbursement and loan monitoring. There are different strategies that a financial institution can follow in each of these phases but the general principles outlined here are widely applicable.

Lesson 7: Managing late repayments and loan defaults

The objective or this lesson is to examine the role of preventive strategies and show how immediate and effective action as soon as any repayment is late can significantly reduce default rates. It discusses the importance of an integrated approach to reducing default and looks at the question of rescheduling.

Lesson 8: Loan Portfolio Management

This lesson is designed for more senior loan officers or branch managers who are responsible for the lending policies and overall performance of their institution. It describes the types of risks that may affect the whole loan portfolio, explains how to measure loan portfolio quality and introduces various management measures that can be taken to actively control portfolio risk.

  • Author/editor: Bankakademie; adapted by J. Heney
  • Type
  • Language English
  • Year of publication2011
  • File lesson 8