Credit analysis

1. The technological break through in agriculture revolutionized Indian agriculture made
it capital intensive. In India, most of the farmers are in scarcity of capital which
necessitates the institutional agencies to provide required capital. Once the farmers
approach institutional agencies, the banker should be convinced about the economic
viability of proposed investment by looking at some guidelines.
Three Rs of Credits
1.Returns
2.Repayment capacity
3.Risk bearing ability
1. Returns from the investment: The bankers should have idea about extent of
returns obtained from the proposed investment. The demand for credit can be met
only when the farmer is able to generate the income. Return generated depend upon
the economic decisions such as what enterprise to take up? How to take up? How
much to grow? When and where to sell?
CREDIT ANALYSIS

2. 2. Repayment capacity
It is ability of a farmer to clear off the loan obtained for production purpose with in the
due date.
Repayment capacity depends upon several factors
Y = f (x1, x2, x3, x4……x5, x6)
Y = Repayment capacity
X1 = Gross returns from the enterprise
X2 = Working expenses (Rs)
X3 = Family consumption expenditure
X4 = Other loans due
x5 = Literacy
x6 = Managerial skill
Causes for poor repayment capacity
 Small size of the holdings
 Low level of production & productivity
 Low prices & fluctuations in prices
 High family expenditure
 Using credit for unproductive purposes
 Lack of adoption of improved technology

3. 3. Risk bearing ability: It is the ability of the farmers to generate sufficient income,
withstand all the a risks and able to repay the loan amount within due time period.
Risk can be quantified through statistical techniques such as co-efficient of variation,
standard deviation, programming models, etc.
The types of risks in farming are
1.Production risk
2.Technological risk
3.Illiteracy and Ignorance
4.Institutional risk
5.Weather uncertainty
6.Price uncertainty
Measures to overcome Risk bearing ability
1.Developing owners equity
2.Developing moral character: honesty, Integrity
3.Reducing farm and family expenditure
4.Taking up of reliable enterprises
5.Creating ability to earn and save money

4. Five Cs of Credit
1. Character: Credit character refers to moral qualities like honesty, integrity,
commitment, hard work, promptness, etc in which barrower exhibits. The people
with good mental and moral character will have a good credit character.
2. Capacity: Capacity of an individual barrower to repay the loan whenever falls due.
It largely depends upon C = f (Y)C = Capacity Y = Income
3. Capital: Implies the availability of money with the farmer barrower. It represents
the net worth of an individual.
4. Condition: Refers to the conditions needed for obtaining a loan from the financial
institutions.
5. Commonsense : This relates to perfect understanding between the lender and
the barrower in credit transactions.

5. Seven Ps of Credit
The principles of farm finance which are expected to bring not only commercial gains
to the bankers but also social benefits.
1.Principle of productive purpose: The principle of productive purpose says that
the loan distributed to any barrower should capable of generating incremental
income. The income generated from the productive assets will add to the income
obtained from farming
2.Principle of personality: Credit worthiness of the farmer makes him eligible for the
loan he desires from the institutional agencies. Credit worthiness has relevance to
personality of the individual when a barrower fails to repay the loan in the event of
natural calamities, it is a case of non willful default. A large section of farmers who
profitably uses the loan, but still falls in the category of defaulters, it is a case of wilful
defaulters.
3.Principle of productivity: The credit which is advanced not why increase the
production but should able to increase the productivity of all the factors employed in
the production.

6. 4. Principle of phased disbursement: The loan amount needs to be disbursed in a
phased manner to make it productive and bankers should ensure proper utilization
of funds. This will also helps to avoid the misuse of funds.
5. Principle of proper utilization: Barrowed funds must be utilized for the purpose
for which it is advanced and it requires suitable infrastructure or resources like
seeds, fertilizers, PPCs, better market, storage, transportation, etc. to absorb the
investment .
6. Principle of payment: This deals with fixing of repayment schedules of loan
advanced by the institutional agencies. The repayment schedule is decided based
on incremental returns generated by the investment. In case of crop loans lump
sum repayment is followed while in case of perennial crops, loan is repaid in
installments depending upon the nature of returns generated by the crop
enterprise.
7. Principle of protection: The bankers demand the security for advances they
made, other wise, the over dues resulting from non-payment of loans by the
farmers, affect the recycling of bank funds adversely. To overcome this,

7. financial institutions prefer to have safety measures like.
 Insurance coverage
 Linking credit with marketing arrangement
 Provision of finance an where house receipt
 Providing security through Deposit Insurance Credit Guarantee Corporation of
India (DICGC)
 Taking securities: banks can advance loans either by means of hypothecation or
mortgage of assets.

8. REPAYMENT PLANS
The nature of returns generated by the different enterprises decides the repayment of
credit. The different types of credit will have different repayment schedule
1.Straight and repayment plan or Lumpsum repayment plan or Single
repayment plan: The entire loan amount is cleared off after the expiry of loan period.
The principle amount plus interest is paid at the end of loan period.
2.Partial repayment plan or Balloon repayment plan : The barrower will settle the
loan amount in quarterly, half yearly or annual installments. Some proportion of
principal + interest amount is repaid and the installment amount will be increasing and
hence the name balloon repayment plan.
3.Amortized Repayment plan : Amortization means the repayment of loan is made
in a series of installments.
3.1 Amortized decreasing repayment plan: Here the principal component remains
constant over the entire repayment period while the interest amount decreases
continuously. With the fixed principal amount and interest amount decreasing, the

9. 3.2 Amortized even repayment plan : Here the annual installment over the entire
loan period remains the same. The proportion of principal amount increases
continuously while the interest amount declines gradually.
This method is mostly adopted in term loans.
Ex: Farm development loan, digging of wells, deepning of old wells, construction of
godowns, dairy, poultry, etc.
Interest
Principal
Years
Ex : Machinery loan

10. Annual installment is arrived at through the formula
i i
/2
L = B ------------- L = B -------------
1- (1+i)-n
1- (1+ i
/2)-n
L = Annual installment
B = Principal amount barrowed in (Rs)
n = Loan period (years)
i = Annual interest rate (%)
4. Variable repayment plan: The loan is repaid in different installments over the
entire loan period. During the time of good harvest, a higher installment is paid
while during the periods of low yield, lesser amount is credited to the lender. This
method is not practiced by the institutional source of credit.
5. Reserve Repayment plan : This type of repayment is practiced in areas which are
subjected to high income variability. The barrowers will not have the fear of
repaying the loan at a scheduled time. The barrowers make advance payment of
loan realized from the savings of previous year.