Appraisal of agriculture credit projects

1
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?

2
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)

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Appraisal of agriculture credit projects -
parameters

• 2. Repayment capacity
• Refers to the amount available with farmer after
  meeting his farm and family needs and obligations
  to repay the loan

4
Appraisal of agriculture credit projects -
parameters

• To calculate the repayment capacity, four things
  are important
• Total farm return with credit
• The type of credit whether self liquidating or
  non-self liquidating
• Income from other sources
• Family living expenses and cash obligations

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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 AB-C-D
• RC gt Amount of instalment
• Repayment capacity should coincide with the date
  of repayment.

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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.

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Appraisal of agriculture credit projects -
parameters

• 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

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Appraisal of agriculture credit projects -
parameters

• Sensitivity analysis is undertaken to recalculate
  the return and repayment capacity
• Revised net incremental income
• Revised net farm income