Credit Analysis and Economic Feasibility in Agricultural Finance

Explore the importance of credit analysis and economic feasibility in agricultural finance through topics such as return on investment, repayment capacity, risk assessment, and factors influencing repayment capacity for Indian farmers. Learn about the 3Rs of credit - Return, Repayment, and Risk, and discover measures to strengthen repayment capacity for sustainable farming practices.

• Agriculture
• Credit Analysis
• Economic Feasibility
• Repayment Capacity
• Risk Assessment

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1. LECTURE PREPARED BY - Dr. J P Singh Associate Professor (SGRRU, Dehradun ) DEPARTMENT of AGRICULTURE SHRI GURU RAMRAI UNIVERSITY, DEHRADUN UTTARAKHAND

2. Outline Credit analysis Economic feasibility tests Return to investment Repayment capacity and risk bearing ability

3. Economic Feasibility Test for Credit When the economic feasibility of the credit is being observed three basic financial aspects to be assessed by the banker. If the loan is advanced. Will it generate returns more than costs? Will the returns have surplus to repay the loan when it falls due? Will the farmer stand up to the risk and uncertainity in farming? These three aspects are known as 3Rs of credit.

4. 3Rs of credit Return from the proposed investment Repayment capacity the investment generates Risk bearing ability of the farmer borrower

5. Return from The Investment Return obtained by the farmer depend upon the decisions like. What to grow? How to grow? How much to grow? where to sell? when to sell?

6. Repayment Capacity It is nothing but ability of the farmer to repay the loan obtained for the productive purpose. Repayment Capacity not only depends on returns but also on several other quantities and qualitative factors. Y= f(X1,X2,X3,X4,X5,X6,X7, ..) Where Y= Repayment capacity X1 to X4 are quantities factors and X5 to X7 are qualitative factors. X1 = Gross return X2 = working expenses X3 = family consumption X4 = Other loans X5 = literacy X6 = Managerial skill X7 = moral characters.

7. Causes for The Poor Repayment Capacity of Indian Farmer Small size of the farm holdings Low production and productivity High family consumption expenditure Low price and rapid fluctuations in price of agricultural commodities. Using credit for unproductive purposes Low farmer s net worth.

8. Measures for Strengthening The Repayment Capacity Increasing the net income by proper organization Adopting the potential technology for increasing the production Removing the imbalances in the resource availability. Improving the networth of the farm households. Diversification of the farm enterprises.

9. Risk Bearing Ability Ability of the farmer to withstand the risk that arises due to financial loss Types of risk Production/ physical risk Technological risk Personal risk Institutional risk Weather uncertainty Price risk

10. Repayment Capacity Under Risk Deflated gross income-(working expenses excluding the proposed crop loan family living expenses + other loans dues+ miscellaneous expenditure) Measure to strengthen risk bearing ability Increasing owner s equity Reducing the farm and family expenditure Development the moral character Undertaking the reliable and stable enterprises. Improving the ability to borrow funds Improving the ability to earn and save money. taking up of crop, livestock and machinery insurances.

11. Thank you Prepared By - Dr. J P SINGH ASSOCIATE PROFESSOR DEPARTMENT OF AGRICULTURE AND AGRONOMY