Farm credit appraisal techniques for agril credit

1. Presented by :
Sondarva yagnesh M
Roll no :105
Reg .no : J1-O660-2011

2. Agricultural credit : agriculture credit is the amount
of investment funds made available for agriculture
production from resources outside the sector.
Farm finance : the amount of funds obtained from off
farm sources for use on the farm ,repayable in future
with an interest agreed to either explicitly or
implicitly

3.  Allocating larger proportion of land they own for the
cultivation of food crops for subsistence.
 Predominance of family labour utilization in production
of farm enterprise .
 risk aversion
 more demand for consumption credit
 inability to offer security due to small size of holdings

4.  Increase in agricultural production is possible only by
intensification and diversification of farming. Intensive
agriculture needs huge capita
 Farmers economic condition is subject to frequent
climatic condition , therefore, either the continuance of
cultivation of crops or making improvements on the farms
depends on the nature and availability finance

5.  Based on purpose
 Based on time
 Based on security
 Based on liquidity
 Based on activity orientation
 Based on approach
 Based on contact with farmers

6.  Production loan
 Investment loan
 Marketing loan
 Consumptin loan

7. 1. Short term
2. Medium term
3. Long term

8. 1. Secured loans
2. Personal security
3. Collateral security
4. Mortgage
(a) simple mortgage
(B)equitable mortgage
5. Hypothecation
(a) key loan
(B) open loan

9. 1. Self liquidating loan
2. Partially liquidating loan

10. 1. Sericulture loan
2 . Tractor loan
3. Orchard loan

11. 1. Individual approach
2. Area approach
3. DIR loans

12. 1. Direct loan
2. Indirect loan

13.  Three Rs of credit
 five Cs of credit
 Seven Ps of credit

14.  1. Return from the investment
 2.Repayment capacity of borrower
 3.Risk bearing ability of the borrower

15.  1. Character
 2.Capacity
 3.Capital
 4.Condition
 5.Commonsense

16.  Principle of productive purpose
 Principle of personality
 Principle of productivity
 Principle of phased disbursement
 Principle of proper utilization
 Principle of payment
 Principle of protection

17. 1. Interview with farmer
2. Submission of loan application by farmer
3. Visit to the farmers field before sanction of loan
4. Criteria for loan eligibility
5. Sanction of loan
6. Submission of requisite documents
7. Disbursement of loan
8. Post credit follow up measures
9. Recovery of loan

18. Introduction :
The recommended analytical methods for appraisal are
generally discounted cash flow techniques which take into
account the time value of money. People generally prefer
to receive benefits as early as possible while paying costs
as late as possible. Costs and benefits occur at different
points in the life of the project so the valuation of costs and
benefits must take into account the time at which they
occur. This concept of time preference is fundamental to
proper appraisal and so it is necessary to calculate the
present values of all costs and benefits

19. An understanding of discounting and Net Present Value
(NPV) calculations is fundamental to proper appraisal of
projects and programmes. A good understanding of Cost
Benefit Analysis (CBA), Internal Rate of Return (IRR), Multi
Criteria Analysis (MCA) and Cost Effectiveness Analysis
(CEA) is also essential for economic appraisal purposes.

20.  In the NPV method, the revenues and costs of a project are
estimated and then are discounted and compared with the
initial investment. The preferred option is that with the
highest positive net present value. Projects with negative
NPV values should be rejected because the present value
of the stream of benefits is insufficient to recover the cost
of the project.
 Compared to other investment appraisal techniques such
as the Internal Rate of Return (IRR) and the discounted
payback period, the NPV is viewed as the most reliable
technique to support investment appraisal decisions.

21. Using different evaluation techniques for the same basic
data may yield conflicting conclusions. In choosing
between options A and B, the NPV method may suggest
that option A is preferable, while the IRR method may
suggest that option B is preferable. However in such cases,
the results indicated by the NPV method are more
reliable. The NPV method should be always be used where
money values over time need to be appraised.
Nevertheless, the other techniques also yield useful
additional information and may be worth using.
The key determinants of the NPV calculation are the
appraisal horizon, the discount rate and the accuracy of
estimates for costs and benefits.

22. The NPW of the project can be estimated using formula
as given below
Bn = Benefits in n'th Year.
Cn = Costs in n'th Year.
n = life span of the project
i = interest or discount rate

23.  The BCR is the discounted net revenues divided by the
initial investment. The preferred option is that with the
ratio greatest in excess of 1. In any event, a project with a
benefit cost ratio of less than one should generally not
proceed. The advantage of this method is its simplicity.
 Using the BCR to rank projects can lead to sub optimal
decisions as a project with a slightly higher BCR ratio will
be selected over a project with a lower BCR even though
the latter project has the capacity to generate much
greater economic benefits because it has a higher NPV
value and involves greater scale.

24. The BCR can be calculated using the following formula

25. Example: A fish culturist has invested and got Net benefit at
the end of 1 ,2,3,4 year of fish culture in the following way:
Year Investment
(Rs.)
Net benefit Discount
factor
(12%)
Present
value
investment
Present
value
of Net
benefit
0 40000 - 1.000 40000 -
1 2000 15000 0.893 1786 13395
2 3000 20000 0.797 2391 15940
3 4000 19000 0.712 2848 135288
4 1000 16000 0.63 636 10176
Total 50000 70000 47661 53039

26. NPV = Present value of Net benefit - present value of
investment
= 53,039 - 47.661 = 5378 (+) ve
BCR or PI =
Present value of Net benefit /
Present value of investment
53,039 /
47,661
= 1.11 (more than 1)

27.  The IRR is the discount rate which, when applied to net
revenues of a project sets them equal to the initial
investment. The preferred option is that with the IRR
greatest in excess of a specified rate of return. An IRR of
10% means that with a discount rate of 10%, the project
breaks even. The IRR approach is usually associated with a
hurdle cost of capital/discount rate, against which the IRR
is compared. The hurdle rate corresponds to the
opportunity cost of capital. In the case of public projects,
the hurdle rate is the TDR. If the IRR exceeds the hurdle
rate, the project is accepted.

28. There are disadvantages associated with the Internal Rate of
Return (IRR) as a performance indicator. It is not suitable for
the ranking of competing projects. It is possible for two
projects to have the same IRR but have different Net Present
Value (NPV) values due to differences in the timing of costs
and benefits. In addition, applying different appraisal
techniques to the same basic data may yield contradictory
conclusions.

29.  The payback period is commonly used as an investment
appraisal technique in the private sector and measures
the length of time that it takes to recover the initial
investment. However this method presents obvious
drawbacks which prevent the ranking of projects. The
method takes no account of the time value of money and
neither does it take account of the earnings after the
initial investment is recouped. For example, a project
requires a €3 million investment and Option 1 returns €2
million in the first year and Option 2 returns €3 million for
the same year..

30. On this basis Option 2 is the preferred option as the payback
period is shorter but if the cash flows changed in
subsequent years and Option 1 returned €2 million
annually while Option 2 only earned €1 million annually, the
chosen option would have been incorrect. The ordinary
payback period should not be used as an appraisal
technique for public investment projects

31.  An important feature of a comprehensive CBA is the
inclusion of a risk assessment. The use of sensitivity
analysis allows users of the CBA methodology to challenge
the robustness of the results to changes in the
assumptions made (i.e. discount rate, time horizon,
estimated value of costs and benefits, etc.). In doing so, it
is possible to identify those parameters and assumptions
to which the outcome of the analysis is most sensitive and
therefore, allows the user to determine which assumptions
and parameters may need to be re-examined and clarified.

32. Sensitivity analysis is the process of establishing the
outcomes of the cost benefit analysis which is sensitive to
the assumed values used in the analysis. This form of
analysis should also be part of the appraisal for large
projects. If an option is very sensitive to variations in a
particular variable (e.g. passenger demand), then it should
probably not be undertaken. If the relative merits of
options change with the assumed values of variables,
those values should be examined to see whether they can
be made more reliable. It can be useful to attach
probabilities to a range of values to help pick the best
option.

33.  The calculation of NPV’s makes no allowance for the distribution of
costs and benefits among members of society. This is an important
drawback if the intended objectives of a programme/project aimed
at specific income groups. Differential impact may arise because of
income, gender, age, geographical location or disability and any
distributional effects should be explicit and quantified where
appropriate. A common approach to take account of distributional
issues is to divide the relevant population into different income
groups and analyze the impact of the programme/project on these
groups. Weights can be attached to the different groups to reflect
Government policy. Carrying out a distributional analysis can be a
difficult task because costs and benefits are redistributed in
unintended ways.

34. 1. Cost effectiveness analysis (CEA)
2. Cost utility analysis (cua)
3. Multi criteria analysis (mca)

35.  It is difficult to measure the value to society of public
investment in social infra structure because the outputs
may be difficult to specify accurately and to quantify, and
are not frequently marketed. In cases like these, the cost of
the various alternative options should be first determined
in monetary terms. A choice can then be made as to which
of the options (if they all achieve the same effects) is
preferable. CEA is not a basis for deciding whether or not a
project should be undertaken. Rather, it is concerned with
the relative costs of the various options available for
achieving a particular objective. CEA will assist in the
determination of the least cost way of determining the
capital project objective. A choice can then be made as to
which of these options is preferable.

36.  CUA is a variant of CEA that measures the relative
effectiveness of alternative interventions in achieving
two or more objectives. It is often used in health
appraisals. In a CUA, costs are expressed in monetary
terms and outcomes/ benefits are expressed in utility
terms e.g. outcomes are often defined in quality
adjusted life years (QALYs). This outcome measure is a
combination of duration of life and health related
quality of life. Whereas in a CBA, there is a
requirement to attempt to place a monetary value on
all benefits, CUA allows for a comparison of the
benefits of health interventions without having to
place a financial value on health states.

37.  Multi-criteria analysis (MCA) establishes
preferences between project options by
reference to an explicit set of criteria and
objectives. These would normally reflect
policy/programme objectives and project
objectives and other considerations as
appropriate, such as value for money, costs,
social, environmental, equality, etc. MCA is often
used as an alternative to appraisal techniques
because it incorporates multiple criteria and
does not focus solely on monetary values.

38.  Balance sheet or net worth statement
 Income statement or loss statement
 Cash flow statement
 Break even analysis

39.  Balance sheet indicate an account of total asset and
total liabilities of farm business revealing the
financial solvency of business
Component are :
 Assets
 Liabilities

40. Assets Liabilities
No. Items Rs. No. Items Rs.
Current Current
1. Bank Balance 30000 1 Operating loan payment 15000
2. Cash on hand 300 2
Forthcoming principal
due on long term loan
3000
3 Accounts receivables 800
4. Cocoon for sale 5000
5. Crops & supplies 3000
Total 39,100 Total 18000
Intermediate Intermediate
6. Bullock pair 6000 3 Balance of sheep loan 7000
7. Milch Animal 3000
8. Oil engine 7000
9. Bullock cart 4000
Total 20000 Total 7000
Long term Long term
10 Land, Dry land 10 Ac 80000 4 Mortgage of land 25000
11. Garden land 3 Ac 60000
12 Wet land 1/2 Ac 15000
13 Mango garden 25000
Total 180000 Total 25000
5 Net Worth 189100
Total Assets 239100 Total liabilities 239000

41.  Summary of receipts and gains minus expenses and
losses during a specified period of time.
Components :
 Receipts
 Expenses

42. Particulars Amount (Rs.)
INCOME
Cash Receipts
1 Paddy sales 30 qtl 7500
2 Sugarcane sales 16 tons 5500
3 Groundnut sales 20 qtl 12000
4 Milk sale 100 ltr. 3800
5 Broiler sale; 200 birds 10500
6 Miscellaneous income 1500
Total cash receipts 40800
Net Capital gains Income
7 Sale of purchased milch animal 2000
8 Home bred animal sale 2000
9 Machinery sale 150
Total net capital gains 4150
Changes in Inventory Value
10 Crops in inventory 6000
11 Livestock in inventory -1000
12 Total changes in inventory value 5000
Total farm income 49950

43. . EXPENSES
Operating expenses
13 Hired labour 3000
14 Hired bullock labour 4000
15 Machinery, fuel, repairs 2500
16 Fertilizers 500
17 Other crop expenses 1400
18 Livestock, machinery, veterinary and marketing expenses 1000
19 Interest on current debts 600
20 Miscellaneous expenses 700
Total operating expenses 13700
Fixed Expenses
21 Land rent 3000
22 Land revenue 500
23 Improvement repairs 4200
24 Interest on intermediate and long term loans 1,000
25 Equipment depreciation 1500
26 Livestock depreciation 1000
27 Attached farm servants wages 1000
28 Depreciation on buildings, improvements 600
Total fixed expenses 12800
Total expenses 26500
Net farm income 23450

44. Ratio analysis will explain what strength, weakness,
pressures and forces are currently at work in your business
operation farm business managers will need a full time job
accountant for the change accruing in his capital structure
and net worth as revealed in his balance sheet.
Ratio analysis of properly calculated rates can be readily
compared with :
I) firm’s past ratio in order to show trends,
Ii) ratio of other firms of similar size, large size or of smaller
size with which the manager is familiar,
Iii) industrial standards and
Iv) projected goals as reflected in plans for the future.

45. Ratio formula Best
condition
Period of
time
Indicate
Current ratio TCA/TCL >1 1 To meet immediate financial
obligation
Intermediate
ratio
TCA >1 2 to 5 To meet intermediate financial
obligation
Net capital
ratio
TA/TL >1 >5 Solvency position of farmer
Acid test
ratio
Current asset
/TCL
>1 2to 5 Adequacy of cash and income
surplus to cover all current
liabilities
Current
liabilities
ratio
Current
liability
/owners
equity
<1 1 to 2 Immediate financial obligation
against net worth
Debt equity
ratio
Total
debt/Owners
equity
<1 >5 Capacity of farmer to long term
commitment
Equity value
ratio
Owners
equity/Value
of asset
<1 Productivity gained by farmer in
relation to asset he has

46.  Summary of cash inflows and cash out flows of a
business organization in a particular period say
season or year .
Component :
 Cash receipts
 Cash expenses