Agricultural Micro Finance Risk Management

Microfinance Risk Management An Agricultural Perspective

Agricultural Microfinance Risk Management Agriculture is considered to be inherently riskier than industry due to its vulnerability to factors such as inclement weather, pests, diseases and various other biotic and abiotic factors. Return in agriculture is generally much lower than commercial enterprise and is characterized by seasonality and volatility. Hence for any MFI agricultural microfinance is a riskier venture compared to general and nonfarm microcredit. Agricultural microfinance risk assumes even larger proportion when the farmers are poor and localized in a particular geographical location making them vulnerable to localized risks. In India, where a large number of small and marginal farmers do not own the land they use for cultivation on share tenancy, the lenders of such farmers tend to face greater risk.

cropping period and the returns are generally realized at the end of the cropping season. eed for optimum use of technology and resources increases the risk: Most farmers except the few progressive ones have been adopting age old practices of farming? The extent of risks associated with crop production has increased in recent years as the new varieties require precise and optimum use of agricultural inputs to produce desired yield without which the probability of poor harvest is increased many folds. Information asymmetries: It has been observed that the percolation of information related to schemes, policies, price is very poor. Access to information is an issue which needs to be resolved. Political Interference: Microfinance is generally costlier than other means of finance as it involves higher processing and operational cost. Hence Microfinance faces greater political risk because of greater tendency of politicians to identify small and marginal farmers as an important constituent to achieve their political and social objectives.

A political crisis in microfinance in Andhra Pradesh in 2006: Authorities in the Krishna district closed U n d e r s t a n d i n g A g r i c u l t u r a l down about 50 branches of two major MFIs in the district. The Chief Minister late Y.S. Rajshekhar Microcredit Reddy said that the MFIs are exploiting the poor through exhorbitant interest rates and unethical Agricultural activities are period bound and require means of loan recovery. The affected MFIs were able tentatively longer term loans, more so in case of to open the closed branches after some time. loans taken for the purchase of agricultural implements. Financing poor households engaged in agricultural Cash flow pattern dictated by the cropping cycle: activities may pose lesser risk if the source of their The farmers have to invest money over the entire household income is sufficiently diversified.

Mitigating Microfinance Risk in Agriculture: Analyze the Environment: It is impossible for an MFI to change the external environment in which agriculture operates. So MFIs should take all the realistic estimates of external factors when planning for entry into agricultural microfinance. The MFIs should primarily look into its own competencies to handle agricultural microfinance. Organisational structure and reach are two factors that needs to be considered before deciding upon an agricultural micro financial venture Balance your Portfolio: Owing to the inherent risks related to agriculture it is advisable to diversify the risks with a balanced portfolio of farm and nonfarm credit. MFIs should limit the share of their agricultural portfolio in order to limit their exposure to risk. Two crops is less risky than one: In case of MFIs which have large agricultural lending in their portfolio it is advisable to increase the diversity of agricultural lending which can be accomplished by lending to variety of farm households engaged in more than one crop or livestock. Train Your Team: The credit officers need to be trained in agricultural credit appraisal and management before embarking on a programme to expand agricultural financing. Adopt risk based adjustments in the forecasts of crops yield and price. Debt capacity counts: Take agricultural credit decision including duration and debt size based on

Page 2

debt capacity of the households rather than expected profits. Customize your offerings: Tailor loan disbursement, recovery of loan, instalment and loan maturity to suit the borrower household crop cycle and cash flow pattern. Establish relationships: Establish meaningful partnership with organisations to reduce information asymmetries and financial cost thus reducing overall risk. Combine credits with deposits: Some amount of deposits is always better as it establishes a much stronger bond between the organisation and its customers.

Rajdeep Saikia PGPABM National Institute of Agricultural Extension Management (MANAGE) Hyderabad Agribusinessfocus.blogspot.com