Microfinance Risk Management

An Agricultural Perspective

cropping period and the returns are generally realized
at the end of the cropping season.
Agricultural Microfinance Risk eed for optimum use of technology and
resources increases the risk: Most farmers except
Management the few progressive ones have been adopting age old
practices of farming? The extent of risks associated
Agriculture is considered to be inherently riskier than with crop production has increased in recent years as
industry due to its vulnerability to factors such as the new varieties require precise and optimum use of
inclement weather, pests, diseases and various other agricultural inputs to produce desired yield without
biotic and abiotic factors. Return in agriculture is which the probability of poor harvest is increased
generally much lower than commercial enterprise and many folds.
is characterized by seasonality and volatility. Hence Information asymmetries: It has been observed that
for any MFI agricultural microfinance is a riskier the percolation of information related to schemes,
venture compared to general and nonfarm policies, price is very poor. Access to information is
microcredit. Agricultural microfinance risk assumes an issue which needs to be resolved.
even larger proportion when the farmers are poor and Political Interference: Microfinance is generally
localized in a particular geographical location making costlier than other means of finance as it involves
them vulnerable to localized risks. In India, where a higher processing and operational cost. Hence
large number of small and marginal farmers do not Microfinance faces greater political risk because of
own the land they use for cultivation on share greater tendency of politicians to identify small and
tenancy, the lenders of such farmers tend to face marginal farmers as an important constituent to
greater risk. achieve their political and social objectives.
A political crisis in microfinance in Andhra Pradesh
in 2006: Authorities in the Krishna district closed
U n d e r s t a n d i n g A g r i c u l t u r a l down about 50 branches of two major MFIs in the
Microcredit district. The Chief Minister late Y.S. Rajshekhar
Reddy said that the MFIs are exploiting the poor
through exhorbitant interest rates and unethical
Agricultural activities are period bound and require means of loan recovery. The affected MFIs were able
tentatively longer term loans, more so in case of to open the closed branches after some time.
loans taken for the purchase of agricultural
implements. Financing poor households engaged in agricultural
Cash flow pattern dictated by the cropping cycle: activities may pose lesser risk if the source of their
The farmers have to invest money over the entire household income is sufficiently diversified.
Mitigating Microfinance Risk in
Agriculture:
Analyze the Environment: It is impossible for an
MFI to change the external environment in which
agriculture operates. So MFIs should take all the
realistic estimates of external factors when planning
for entry into agricultural microfinance. The MFIs
should primarily look into its own competencies to
handle agricultural microfinance. Organisational
structure and reach are two factors that needs to be
considered before deciding upon an agricultural micro
financial venture
Balance your Portfolio: Owing to the inherent risks
related to agriculture it is advisable to diversify the
risks with a balanced portfolio of farm and nonfarm
credit. MFIs should limit the share of their
agricultural portfolio in order to limit their exposure
to risk.
Two crops is less risky than one: In case of MFIs
which have large agricultural lending in their
portfolio it is advisable to increase the diversity of
agricultural lending which can be accomplished by
lending to variety of farm households engaged in
more than one crop or livestock.
Train Your Team: The credit officers need to be
trained in agricultural credit appraisal and
management before embarking on a programme to
expand agricultural financing.
Adopt risk based adjustments in the forecasts of crops
yield and price.
Debt capacity counts: Take agricultural credit
decision including duration and debt size based on
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debt capacity of the households rather than expected

profits.
Customize your offerings: Tailor loan disbursement,
recovery of loan, instalment and loan maturity to suit
the borrower household crop cycle and cash flow
pattern.
Establish relationships: Establish meaningful
partnership with organisations to reduce information
asymmetries and financial cost thus reducing overall
risk.
Combine credits with deposits: Some amount of
deposits is always better as it establishes a much
stronger bond between the organisation and its
customers.

Rajdeep Saikia
PGPABM
National Institute of Agricultural
Extension Management
(MANAGE)
Hyderabad

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