Credit Risk Management Techniques Used by the Banks of Southern Punjab for the Management of Highly Correlated and Localized Risks in Agricultural Finance

Abstract

Purpose: Agricultural is an important sector in economy of Pakistan.  Agriculture plays significant role in economic development of Pakistan.  Its contribution to GDP is about 23% and approximately 60% of our total population lives in the rural areas and most of them earn their livelihood from agriculture.  Due to green revolution rapid changes have been occurred in production technologies and methods have been changed.  Too much capital is required to adopt these methods and technologies but small formers cannot afford them.  They need finance for production and investment purpose.  The small former has very limited ability to agricultural finance for both production and investment needs and they are facing shortfall of credit. Banks hesitate to award agriculture credit because of higher credit risk.  The main purpose of this research paper is to find out the credit risk that faced by the banks of Southern Punjab Pakistan and risk management techniques used by the banks of Southern Punjab Pakistan.

Methodology: In this research paper quantitative study on credit risk faced and its management techniques used by the bank of Southern Punjab is being made.  Standard questionnaire is used for the collection of data on credit risk and its management techniques from the banks.  A sample of 45 banks branches from 17 banks that award agriculture credit was taken from two districts (Bahawalpur and Rahim Yar Khan).SPSS software is being used for the analysis purpose.  The Frequency distribution was used for analysis.

Finding: The findings of this research article are that 82.2% of banks have faced the situation of credit risk in which farmers failed to pay back the credit to bank.  53.3% respondent considered the production, price and policy risk together affect all the farmers in a particular geographical area. 35% considered willfully rejection risk as important risk that arises due to individual farmer.  Sixty percent respondents use the crop insurance for the management of production risk. 48.9% bank used no technique for the management of price risk. 75.6% respondent’s views that improvement in laws and policies on land ownership will help in credit risk management.  Sixty percent respondent does not insure the life of farmer.  77.8% use collateral management for the management of willfully rejection risk.  According to 75.6% respondent fire/theft insurance of agricultural asset will help to manage this risk.

Value: The value of this research paper is that it gives us idea about the credit risk faced and it management techniques used by the banks of Southern Punjab Pakistan.  It also gives us idea about the credit risk management techniques which are being used in the world but not in the Southern Punjab.

Research Implications: The research implications of this paper are to increase the understanding of factors which are basis for credit risk in agriculture finance and its management techniques used by the banks of Southern Punjab. .

Paper Type: Research Paper

Keywords: agricultural Finance, credit risk, credit risk management techniques in agricultural finance, crop insurance, highly correlated risk, localized risk, price smoothing.