Agricultural Lending

Advance Rates

Advance rates should consider the cost or other estimate of current value of the collateral pledged, along with its useful life, depreciation rates, and vulnerability to obsolescence. Because of the highly specialized nature and occasionally large fluctuations in the value of much farm collateral, advance rates should include a reasonable margin of protection against unanticipated adverse events. When such margins are not available in the primary collateral, banks frequently obtain additional, secondary collateral.

In cases in which a bank offers terms that are more liberal than its policy or practices normally would permit, the bank should have a process to identify, approve, document, and monitor the exceptions. Moreover, to gain the maximum benefit from such a process, it should provide data, not only on individual exceptions, but also on the aggregate level. Such aggregated data can provide a more complete picture of risk in the portfolio and reveal weaknesses in the underwriting process, or in the policy itself, that may need to be addressed. Because agriculture portfolios often constitute concentrations, exception monitoring takes on heightened importance as a means to control credit risk.

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