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Credit Scoring System for Managing Risk in Agricultural Loan Portfolio of the Thai Rural Financial Market

Author

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  • Songkran Somboon

    (Faculty of Economics, Maejo University, Chiang Mai, Thailand, 50290)

Abstract

The main objective of this study is to develop a credit risk management instrument of the Bank for Agriculture and Agricultural Cooperatives, an important organization of the Thai rural financial market. The paper highlights the application of the credit scoring system in managing risk in agricultural lending activities. The logit model is first developed to identify the probability of default from the economical and geographical risk factors. The results verify the payment history, collateral types, loan to value ratio, deficit irrigation, saving, land suitability, natural disasters (flood and drought) and income to expense ratio in the household are important factors in determining of the probability of default in the farmers lending. The model is tested for reliability and validity of the prediction power in discriminating the debtors. Results from the logit model are subsequently employed to formulate the credit scoring system and internal credit risk rating system with reference to the Basel II criteria. The results show how agricultural exposures can be managed on a portfolio basis which will enable the bank to diversify the risk in each of portfolio share, determine the interest rate on the basis of risk, and analyze for the minimum capital requirements and optimal returns in agricultural loan portfolio.

Suggested Citation

  • Songkran Somboon, 2015. "Credit Scoring System for Managing Risk in Agricultural Loan Portfolio of the Thai Rural Financial Market," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 22(1), pages 27-50, June.
    • Handle: RePEc:aej:apecjn:v:22:y:2015:i:1:p:27-50
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    File URL: http://journal.eco.ku.ac.th/upload/document/thai/20150922105822.pdf
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    Cited by:

    1. Unknown, 2021. "The Front-End’s Lending Decision System for the Agricultural Bank in Thailand," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 28(2).

    More about this item

    Keywords

    logit model; credit risk management; credit scoring; optimal returns; agricultural loan portfolio;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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