Agricultural Lending

Agricultural Loan Classification

There are no mandatory rules to direct examiners how to treat agricultural credit. Instead, each lending relationship should be analyzed to determine how its individual characteristics compare with the following key criteria:

• Is the loan performing according to its original or reasonably modified terms?

• Is collateral sufficiently liquid, marginated, and controlled to fully protect the loan in the event of the borrower’s default? (Consider the cost of liquidating collateral.)

• What is the borrower’s financial condition, i.e., liquidity, leverage, cash flow, free assets?

• What has been the borrower’s historical farming and borrowing performance?

• Are there other strengths (e.g., crop insurance, significant guarantors, and family support) not mentioned previously?

Although none of these individual criteria are determinative of the appropriate supervisory treatment of any farm loan, positive answers to most or all of them would indicate a likelihood that the loan should be “passed” by examiners. Conversely, negative answers to most or all would indicate an increased likelihood that the loan deserves some degree of criticism.

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