Agricultural Lending FCS FSA LIC Credit With Liquidity Transaction Risk

Agricultural lending refers to the financing provided by professional financiers for the agricultural business. Conventionally the commercial banks have financed agricultural businesses but nowadays a lot of other organizations are also funding agricultural businesses. They are the Farm Credit Systems (FCS), the Farm Service Agency (FSA), Life Insurance companies and any other financing organizations.

The commercial banks would provide agricultural lending for seasonal business and also for the agricultural infrastructure like machinery and buildings that are of a more permanent nature. The loan repayment depends on the profits earned. The bank also provides a kind of a salary to the farmers for sustenance. However, owing to the diversity in production, the farmer requirements and technology differences, the bank lending has to take some risk. The banks offer loans in a consolidated manner.

The Farm Credit System (FCS) consists of co-operative institutions that are administered by the Farm Credit Administration federation. The loans are given out in the form of bonds. The creditors sometimes grant the credit jointly and it is insured by the Farm Credit System Insurance Corporation. This type of lending has been popular in the agricultural real estate market. The Farm Service Agency is also known as the Farmers Home Administration, Department of Agriculture that takes care of federal agricultural lending programs. It provides loans for rural development and housing. Recently it has started financing small time and support needing farmers.

The Life Insurance companies do agricultural lending to corporate agricultural businesses that amount to a lending amount of a minimum of $ 1 million. The other lenders are people from the family, the landlords and captive lenders like equipment providers, seed companies and retailers. Since agriculture is a business with variable output, the risks involved form the lenders point of view are many. In general terms the risk is the prediction of any actual or expected loses that a loan provider has to undertake in the event of any forecasted or unforecasted and untoward incident.

There are different types of risks identified in the agricultural lending process. They are namely credit risk, risk due to rate of interest, liquidity issues, costs, foreign exchange and transactions, compliance, strategy and reputation issues. The credit risks are influenced by the general weather conditions, market prices and the policies of the government. The others are concentrations and limited purpose collateral factors. Liquidity risk becomes a reality where agricultural output depends on a few crops.

Transactional risks take place when the business and related documentation is not understood properly or adequate information is not provided resulting in mistakes. The agricultural lending risk due to reputation is another big problem. The bank may be vulnerable to reputation problems if the company that it finances does anything wrong or even if the bank takes some legally right but harsh step on any particular borrower. Occ