Appraisal of agriculture credit projects

Appraisal of agriculture credit projects Will it produce sufficient Returns to cover

the costs? Will it pay to borrow the money? Will the borrower have sufficient Repayment

capacity to repay the loan? A loan may be profitable, but the farmer still may not be able to meet the payments as they come due.

Does the farmer have the Risk Bearing Ability to carry the risk and uncertainty involved in using the credit?

Appraisal of agriculture credit projects - parameters

1. Return: The incremental use of capital

resources made available through credit must generate incremental net income sufficient to repay the amount of loan and also leave the farmer better off.

Debt to service ratio (in case of crop loan)


2. Repayment capacity:

Refers to the amount available with farmer after meeting his farm and family needs and obligations to repay the loan

Appraisal of agriculture credit projects - parameters To calculate the repayment

capacity, four things are important:a. Total farm return with creditb. The type of credit – whether self

liquidating or non-self liquidatingc. Income from other sourcesd. Family living expenses and cash

obligations

Appraisal of agriculture credit projects - parameters Net farm return with credit (A) Income with other sources (B) Family living expenses (C) Other loan instalments (D) RC = A+B-C-D RC > Amount of instalment Repayment capacity should coincide

with the date of repayment.

Appraisal of agriculture credit projects - parameters Net flow after financing

= Net flow before financing + Long term loans + Short term loans – Debt servicing of long term loans – Interest on short term loans

The net flow after financing must be a positive figure to satisfy the criterion of repayment capacity.


3. Risk bearing ability The investment may subject to a

degree of risk Cost might increase by x per cent Benefit might decrease by y per cent Benefits may start later than

anticipated Benefits may end earlier than

anticipated


Sensitivity analysis is undertaken to recalculate the return and repayment capacity

Revised net incremental income Revised net farm income

Documents

Appraisal of agriculture credit projects