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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?

jael-mccarty
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Appraisal of agriculture credit projects

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  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)

  3. 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

  5. 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.

  6. 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.

  7. 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

  8. 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

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