Credit Risk Models for Managing Bank’s Agricultural Loan Portfolio

In this paper, we have developed a credit scoring model for agricultural loan portfolio of a large Public Sector Bank in India and suggest how such model would help the Bank to mitigate risk in Agricultural lending. The logistic model developed in this study reflects major risk characteristics of Indian agricultural sector, loans and borrowers and designed to be consistent with Basel II, including consideration given to forecasting accuracy and model applicability. In this study, we have shown how agricultural exposures are typically can be managed on a portfolio basis which will not only enable the bank to diversify the risk and optimize the profit in the business, but also will strengthen bankerborrower relationship and enables the bank to expand its reach to farmers because of transparency in loan decision making process. * Address correspondence to Arindam Bandyopadhyay, Assistant Professor (Finance Area), Room No. 3203, National Institute of Bank Management (NIBM), Kondhwe Khurd, Pune 411048, India. Tel. 00-91-20-26716451. Email: [email protected]. The author would like to thank Dr. Asish Saha (Director, NIBM), Dr. K Ramesha, Dr. A U Gadewar for extremely helpful comments and suggestions. The author is also thankful to Mr. N Narasa Reddy for all his help.