Ajai Nair, Consultant, The World Bank

1. The World Bank Risk Management by banks financing agriculture and rural enterprise: African and Asian ExperiencesExpert Meeting onManaging Risk in Financing AgricultureJohannesburg,1-3 April, 2009 Ajai Nair, Consultant, The World Bank

2. Presentation Outline • Study framework • Key Research Questions • Institutions Studied • Findings • Conclusions • Way Forward Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

3. Study Framework • Cover major institutional types - Commercial banks, Development finance institutions, and supply chain organizations • Include only institutions with relatively large agricultural portfolios • Understand the policy environment and business model • Understand credit risk assessment and credit risk management. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

4. Key Research Questions • Agricultural Credit Risk Assessment • What information is used to assess credit applications? • How important is agricultural domain knowledge? • Is credit-risk quantified at the loan-level and at the portfolio level? • Does credit risk influence terms of credit? Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

5. Key Research Questions • Agricultural Credit Risk Management • Are collateral substitutes used? • Do lenders facilitate access to risk mitigation services for borrowers? • How diversified is the credit portfolio – within the agricultural portfolio / total portfolio? • Are risk transfer mechanisms used? • Are any special asset classification and provisioning mechanisms used? Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

6. Institutions Studied: 5 countries; 15 institutions • Malawi: OIBM, MRFC • Zambia: Stanbic, Barclays, Dunavant, Cropserve • Kenya: KCB, Equity, Coop Bank, AFC • India: ICICI, HDFC, SBI, Basix • Thailand: BAAC Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

7. Institutions Studied: 5 countries; 15 institutions • 8 Commercial Banks • 2 international and 6 national banks • 7 traditional commercial banks and 1 microfinance bank • 4 provide retail services to small farmers; 4 provide to retail services to large farmers and agribusinesses • 1 apex bank lending to cooperatives • 4 Development Finance Institutions • 1 agricultural development bank • 2 agricultural finance corporations • 1 microfinance finance company • 2 Supply-chain finance providers • Produce buyer • Input supplier Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

8. Institutions Studied: 5 countries; 15 institutions Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

9. Findings: Commercial Banks (8) • Credit Risk Assessment • Small Loans • Approach 1: Parametric (2) • Approach 2: Parametric + outsourcing (2) • Large loans – traditional financial ratio analysis - (all). • 3 banks use credit bureau for large farmers • 1 uses bio-metric identification of all borrowers • 5 banks use grading; only 1 uses risk modeling Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

10. Findings: Commercial Banks (8) • Credit Risk Management • All banks lending to small farmers use collateral substitutes (4) • Tiered loan approval authority • Diversified loan portfolios – agricultural loan portfolios 10 to 40 % • 1 bank bundles crop insurance; 1 bundles credit-life insurance. • 6 banks use risk-based pricing for large loans; none for small. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

11. Findings: Development Finance Institutions (4) • Credit Risk Assessment • All use credit norms and judgment-based process; household and activity financials considered. • 3 use joint liability groups as primary lending channel. • Only 1 uses credit grading. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

12. Findings: Development Finance Institutions (4) • Credit Risk Management • 3 use joint-liability as collateral substitute; 1 uses no collateral for all loans • 2 bundle credit life insurance; 3 piloting or selling index insurance but not bundling. • 1 provides BDS services • 3 use risk-based pricing. • All well diversified geographically; 2 have well diversified loan portfolio between sectors. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

13. Findings: Supply chain Organizations (2) • Credit Risk Assessment • Very little credit assessment by commodity buyer providing services to small farmers. • Traditional financial analysis by input supplier. • Credit Risk Management • No collateral required by commodity buyer. • Fully secured loans by input supplier Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

14. 4 Innovations • Parametric credit risk assessment • Outsourcing of credit risk assessment to agents who share credit risk. • Tripartite lending arrangements – produce buyer, lender and borrower, with and without credit risk sharing. • Fee-based agricultural and business advisory services. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

15. Conclusions • Lending to small farmers at scale requires non-traditional credit assessment systems • Lending to small farmers requires use of collateral substitutes, but not other elements of microfinance. • Successful agricultural lenders have domain expertise in agriculture at both loan officer and senior levels • Little risk quantification and use of insurance or other financial risk-management tools. Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

16. Some questions • Is biometric identification a feasible basis for developing national credit bureaus? • Can risk-modeling be used to quantify, optimize, and price credit risk of agricultural loans/portfolio? • Can financial institutions finance agricultural and business advisory services to reduce credit risk? Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg