From all the risks which can affect a bank, many authors consider that one of the most important is the credit risk. This risk of default of loans granted, when not properly managed, can affect the activity of commercial banks. Credit risk presents related features to the customer activity and it is for sure that the credit risk related to the agriculture it’s much higher than in other sectors. Given the events generating risk exposures to clients working in agriculture, there are some tools available to a bank to decrease this risks which we propose by this paper.credit risk, policies on credit risk management, risk exposures in agriculture

Ioana Sbarcea

English

Research Papers in Economics

                                                                                                                            
 
 
Studies in Business and Economics 
 
 
 
 
MANAGEMENT OF CREDIT RISKS IN AGRICULTURE 
 
      
SBÂRCEA Ioana 
 
 
Abstract: 
  From all the risks which can affect a bank, many authors consider that one of the most 
important is the credit risk. This risk of default of loans granted, when not properly managed, can 
affect the activity of commercial banks. Credit risk presents related features to the customer 
activity and it is for sure that the credit risk related to the agriculture it’s much higher than in other 
sectors. Given the events generating risk exposures to clients working in agriculture, there are 
some tools available to a bank to decrease this risks which we propose by this paper. 
  
Keywords: credit risk, policies on credit risk management, risk exposures in agriculture 
 
 
Risk can have a considerable impact on the bank or financial institution 
analyzed, the impact itself, as losses incurred direct and induced impacts, and also 
caused by the effects on customers, staff, business partners and not least, on banking 
authority. 
  Similarly, the perceived risk will mean the present value of all losses and 
additional expenses that a financial institution may suffer. This definition emphasizes 
that the exposure to risk of the financial institutions may be actual or potential. 
From all the risks which can affect a bank, many authors consider that one of 
the most important is the credit risk. This risk of default of loans granted, when not 
properly managed, can affect the activity of commercial banks. Credit risk "expresses 
the possibility that borrowers or issuers of securities do not honor their obligations at 
maturity. Credit risk may be caused by many causes, such as: the general economic 
context, unfavorable domestic circumstances of the client, over-funding or grant 
funding inadequate to the customer needs, etc. Events generating credit risk are varied 
and can occur at any time in the life of a loan. 
Also credit risk and should be analyzed in terms of activity sector, taking into 
consideration the particularities of the client’s business. 
Thus, a recent analysis of the National Bank of Romania shows that credit risk 
is different in terms of sector activity and also presents different levels in different 
periods. Thus the credit risk in different sectors of activity has remained relatively 
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                                  Studies in Business and Economics 
constant in the first quarter of 2008 compared to quarter 4 2007, with some exceptions, 
such as:  
¾  agriculture is perceived as significantly more risky 
¾  real estate, financial intermediation and construction are in some wise 
more risky 
¾  trade and tourism are in some wise less risky. 
For comparison, in quarter 4 of 2007, credit institutions believed that all sectors 
of activity, except agriculture, were less risky.  
The same situation in the second and the third quarter of 2008 shows that 
agriculture remains the most risky sector, but also in other sectors it is notice an 
increase of the credit risk (chart 1). The permanent increase in the credit risk in 
agriculture can also be associated to the increase of the amounts that were granted for 
this sector 
 
Chart 1: 
Evolution of the credit risk on the branches of activity (note: Balance short - positive 
values indicate an increase in credit risk) 
 
                   Studies in Business and Economics - 71 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
S1 – Agriculture 
S2 – Industry  
S3 – Energy  
S4 – Construction  
S5 – Commerce 
S6 – Tourism 
S7 - Transport, 
communications 
S8 - Financial 
intermediation 
S9 – Real estate 
S10 - Other services 
Credit risk presents related features to the customer activity and it is for sure 
that the credit risk related to the agriculture it’s much higher than in other sectors. 
Among the reasons for generating credit risk in agriculture would be: 
¾  the risk of default may be determined, to a greater extent than in other 
sectors, by the risk of "natural disasters" (in Romania in 2005 and 
2007 agriculture had a negative influence on GDP growth); 
¾  level of training of managers and staff performance of the companies 
active in this field;                                                                                                                             
 
 
Studies in Business and Economics 
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¾  most of those working in agriculture can not exceed the limits of 
subsistence activities; 
¾  lack of relevant historical work (many of the loan beneficiaries are 
newly established companies); 
¾  lack of a proper contribution to an investment or inability to support 
current business after finishing an investment; 
¾  lack of a consistent heritage of the agricultural companies; 
¾  collaterals, as a means of hedging credit risk, have a high degree of 
risk in terms of safety for the recovery of loans after selling them; such 
guarantees given by the entrepreneurs in agriculture are often difficult 
salable (land, the houses located in rural areas, farms) or with a high 
degree of specialization, which affects their liquidity (agricultural 
machinery). 
  Therefore, the risks associated with agriculture credits are varied and some of 
them can not be reduced or prevented.  
  Foundation of a healthy management of credit risk lies in the ability of 
management policies on credit risk to identify existing and potential risks inherent in 
any lending activities, and to limit or to reduce them. Thus, classical policies on credit 
risk management can be divided into three categories: 
¾  Policies designed to limit or reduce the credit risk  - the central bank imposes a 
maximum limit of exposure to a single debtor; 
¾  Policy on classification of assets - each asset is assigned a degree of risk 
depending on the probability of default; 
¾  Provisions policy for possible losses from loans. 
  Management of credit risk can be achieved only if there is a permanent 
monitoring of the development of clients business and of the collateral of the loans 
  Given the events generating risk exposures to clients working in agriculture, 
tools available to a bank to decrease these risks are: 
•  Setting a maximum exposure to this risky sector in order to determine 
limited losses if these risks occur; 
•  Increasing the number and value of the institutional guarantees for 
such loans, which are, less risky than mortgages on houses in rural 
areas, farms, land and collaterals on agricultural machinery; 
•  lending to companies directly involved in agricultural production has to 
be done only after the establishment of insurance policies of the future 
crops and this insurance policies have to be permanent  renewed 
•  permanent monitoring of the evolution of the business of the 
agricultural companies in order to be able to take early measures in 
case of natural events (droughts, floods and other natural disasters), 
by restructuring loans and / or by delaying the payment and interest 
rates for a period during which the company can recover. 
  In my opinion, to increase funding in agriculture, the central bank should find 
ways to increase the confidence of commercial banks for lending to this sector. This    
 
 
                                  Studies in Business and Economics 
                   Studies in Business and Economics - 73 - 
could be achieved for example by increasing confidence in securities issued by the 
guarantee funds. Better management of credit risk in this sector is vital for attraction of 
European funds for financing agriculture. 
 
References: 
 Dedu,  Vasile,  Gestiune şi audit bancar, Bucureşti, Editura Economică, 2003, p. 89.  
 Mihai,  Ilie,  Tehnica  şi managementul operaţiunilor bancare, Bucureşti, Editura 
Expert, 2003, p. 195.  
 Legea  bancară nr.58/1998, art.44, publicată în Monitorul Oficial nr.121/23.03.1998.  
 BNR  -  Sondaj privind creditarea companiilor nefinanciare şi populaţiei, 2008 
 www.bnro.ro 

bancară nr.58/1998, art.44, publicată în Monitorul Oficial nr.121/23.03.1998.

Gestiune şi audit bancar, Bucureşti, Editura Economică,

Sondaj privind creditarea companiilor nefinanciare şi populaţiei,

MANAGEMENT OF CREDIT RISKS IN AGRICULTURE

http://eccsf.ulbsibiu.ro/RePEc/blg/journl/3310sbarcea.pdf

MANAGEMENT OF CREDIT RISKS IN AGRICULTURE

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