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RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS. - Godwin Ehigiamusoe Managing Director LAPO Microfinance. OUTLINE. Introduction: Limited credit to agriculture and Agribusiness. Contributions of small-holders and agribusiness Risk generating factors in agricultural lending
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i. Absence of infrastructural facilities constrain efficiency of agribusinesses and farmers
ii. Investment in provision of infrastructures constrain the level on return on investment and growth of agribusinesses
iii. Lack of infrastructural facilities hinder effective monitoring by lending institutions thus resulting in credit risk
Weak capacity of owners and managers of agricultural projects and agribusinesses could put borrowed funds at risk of default. Failure of funded businesses as a result of poor management puts loan asset of lending institutions at risk
This refers to the risk associated with the structure and composition of the loan portfolio
Common portfolio risk factor is concentration of sizeable proportion of loan assets in either in particular economic activities (eg cassava ) or in specific geographical areas (eg one region/state).
Operation risk arises out of inadequacies of persons, operational procedures and equipment and informational management systems involved in services delivery.
Operational risk could result from: late, incorrect and incomplete reports; poor client screening and poor portfolio management procedures.
Serial disbursement of approved loan amount helps borrowers to manage their cash-flow and thereby prevent misapplication of loans. The approved amount is disbursed in instalments. For example, if N200, 000 is approved for a farmer, an estimated amount for first series of activities as land preparation, purchase of seeds and other farming inputs. 60% of the loan amount in this case N60, 000 can be disbursed to the borrower. The balance of 40% or N40, 000 could be disbursed well into farming season for activities as weeding and harvesting.
While it is not appropriate to require repayment of equal instalments from farmers it is however possible to adopt modified installmental repayment. Borrowers are required to make regular repayment of total amount of 30% of the loan amount and due interest during the farming period. Repayment of this proportion of the loan amount could be made from non-form activities. The outstanding amount which is 70% is required to be made at harvest.
Establishment of sub-branches
Such sub-branches bring services closer to
targeted communities with minimal cost. Simple
operations in the sub-branches are carried out
by few staff largely drawn from the locality.
Natural disasters as floods and droughts are beyond the control of borrowers and the lending institution. These risks and others which include fire out breaks are transferred to insurance companies. In Nigeria there is National Agricultural Insurance Company (NAIC),
Small-holders require support to be able to properly utilize borrowed amounts as well as earning adequate returns on their efforts. Such support includes creation of access to improved seedlings, modern farming techniques, inputs, storage facilities and marketing channels.
Lending institutions must have clear and appropriate credit policies and guidelines. Issues as client identification, loan application appraisal, loan approval and monitoring procedures must be properly outlined. This is to avoid actions with negative consequences for repayment performance. Credit staff must be able to assess debt capacity of potential borrowers.
Monitoring is crucial to success in agricultural lending. This consists of loan utilization monitoring and consistent assessment of performance of credit staff. An important aspect of monitoring is loan utilization. Credit staff must ensure that borrowers utilize borrowed funds in intended projects.
Effective Portfolio management system is essential in managing credit risk. There is need for efficient management information system for effective portfolio and delinquency management. If key portfolio quality indicators as ratio of non-performing loans and arrear rates are not correctly determined and properly managed, the lending institution is exposed to credit risk.
Lending institutions must formulate policy for portfolio diversification. Periodically credit staff must assess the current of portfolio concentration. Limits must be set for portfolio concentration along sectors, regions, loan sizes and types.