Sluggish commodity prices and climbing expenses for farmers puts added pressure on small ag banks (banks with total assets under $500 million and at least 15% of the loan portfolio in ag production or ag real estate loans), which have significantly increased loan volume since 2012. This uptick in loan volume may be good for bankers, but it poses a significant risk to small ag financial institutions, as these institutions are more likely to use manual underwriting processes and use a more subjective analysis to credit risk.
Like ag borrowers, ag lenders can employ technology to improve efficiency, while also bolstering credit quality to mitigate risk. Today’s technology affords ag lenders the ability to efficiently calculate the creditworthiness of ag borrowers and understand the global credit risk associated with the borrower. Prudent underwriting practices are a fundamental element of ensuring credit quality. Many institutions still rely on manual data entry and underwriting processes, which can lead to errors and inaccuracies that negatively affect credit quality. However, by leveraging technology built specifically for ag lenders, your financial institution can maximize consistency and efficiency through streamlined data entry, time savings with tools like the Electric Tax Return Reader, and centralized access to all ag borrower data in a single platform for analyzing all loan types.
In addition to efficient and robust underwriting practices, Rob Newberry, Senior VP of Credit Risk Services at Abrigo, encourages ag to carefully price loans to account for the risk it is taking on. “If you are getting paid for the risk you are taking on, you will not only survive but thrive in the current market conditions,” Newberry said in a recent whitepaper, The Ag Lender’s Survival Guide.
As the FDIC noted, institutions must have strong risk identification and control practices in place. To do so, your financial institution should structure loans so that they qualify for guarantees and share some of the risk involved with the loan. Additionally, your institution needs to objectively price loans based on the risk you are taking on. By leveraging technology, your institution can take the guesswork out of assigning risk ratings and loan pricing to make more informed, sound lending decisions.
There is no escaping the headwinds that are associated with ag lending in the current environment, but there are ways to hurdle the challenges ahead. Producers are scrappy and trying new strategies for growth and efficiency, and ag lenders should do the same. The FDIC statement is an excellent reminder for ag lenders to be proactive in planning for the future and actively stress test the portfolio to maintain safe and sound loans.
From eliminating manual data entry to standardizing the risk rating process, there are numerous initiatives your credit union can leverage to ensure sufficient controls in place to underwrite loans more efficiently while maintaining – even improving – credit quality to make smarter loans.