Proactive Risk Management More Important than Ever for Ag Lending Industry
It’s well established that America is one of the world’s primary breadbaskets. U.S. farmers’ agricultural output outstrips all others. But American farmers prolific output has, at times, actually hurt them, rather than helped.
Unfortunately, now is one of those times. Agricultural commodity prices have taken a hit in recent months, falling in domestic and world markets due to oversupply for many products. This means, despite an abundant harvest, farmers will be earning less money for their crops. For those farmers who have taken out loans, that could result in their having difficulty repaying the note. And for a bank that extended credit to that farmer, their loan portfolio is now exposed to greater risk because of that.
According to the latest figures from U.S. Department of Agriculture (USDA), 2018 farm income is projected to fall 13 percent below 2017 levels. Overall, 2018 is expected to be the third lowest in the last 10 years, behind only 2009 and 2016. Payments from programs such as Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) will provide some help, but perhaps not enough for every affected farmer. At the same time, the USDA also reported farm debt is worsening. The 2018 debt-to-asset ratio, which had initially been expected to fall to 12.6 percent, will actually climb to 13.4 percent – the highest ratio since 2009.
Because of falling commodity prices, expect more farmers to seek loans to continue operations and to make up for smaller incomes. In 2017, banks loaned $106 billion to farmers, up 6 percent from 2016. Non-performing loans have fallen to below pre-recession levels, but bankers do admit they are starting to see the negative effects of a weaker ag sector.
In a market such as this, risk identification and proactive risk management becomes increasingly important to agricultural lenders who want to maintain the health and strength of their loan portfolios. Proper proactive risk management helps insulate a loan portfolio in worsening marketing conditions. It also frees up more money in improving markets as less money is tied up in marginal or non-performing loans.
Timely information is a key component in identifying risk and protecting a loan portfolio. This includes agriculture market-specific news and data, as well as pertinent facts and analysis of how these impact the lender and the individual borrower. However, many Ag lenders, particularly those in smaller markets, have been hampered by a lack of staff and resources, an inefficient workflow, or some combination of both. As a result, the bank’s lien management and risk mitigation efforts are not as good as the lender would prefer. Ag lenders are on the lookout for ways to improve their systems, make better use of information, lessen the risks they face when extending credit and make their systems more efficient.
Recognizing the importance of proactive risk management, many ag lenders are partnering with companies (like Lien Solutions) who offer automated lien portfolio management solutions that deliver a wide array of loan lifecycle servicing functionality. One of the most useful of these solutions is monitoring. As no agricultural loan is static, each loan in a portfolio undergoes constant change. Some see more change than others. For smaller lenders with limited staff and resources, keeping track of these changes and updating liens is a difficult task. However, without constant due diligence and revision, changes to a borrower’s status can affect the lien to such a degree that it becomes imperfect. An imperfect lien carries great risk should the borrower become insolvent or unable to repay the loan at a future date. Ultimately, in a worst-case scenario, the lender would be forced to write off the loan and thus lose those assets.
Automated solutions that enable ag lenders to monitor the liens in their portfolio and receive alerts when there have been changes are faster, more accurate and more efficient than human staff. These solutions improve a lender’s workflow and allows the bank to make better use of its resources. They also help reduce the risks associated with agricultural lending because all liens are constantly updated to reflect the most current information. An automated monitoring system provides reports and data that aid in decision making, leading to smarter loan decisions, and also mitigating risks and better protecting assets. Finally, it gives an early warning to any lien management and risk issues that need to be addressed before they become problems that negatively affect the bottom line.
Knowledge from monitoring plus action from automation is key to lien portfolio health, regardless of the business sector. Automation streamlines lien management by reducing steps or making sure that they happen without you having to do anything at all. It helps to strengthen your lien portfolio by reducing the oversights, lapses and errors and can decrease your risks.
In this time of market volatility, it’s good to know that lenders are able to access tools that can lend both efficiency and stability to their process. To learn more, please visit www.liensolutions/in-house.