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Accounting for loan amount and credit rating when calculating lifetime value of agricultural lending relationships

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Author Info

  • Michael A. Gunderson
  • Brent A. Gloy
  • Eddy L. LaDue

Abstract

Using empirical default probabilities and profitability distributions, a simulation model is developed to identify the long-term value of relationships among differing credit rating and loan amount groups. According to the results generated from a set of lending relationships, agricultural lenders are pricing low and moderate credit rating customers such that similar long-term values are found among the groups. Also, large loan amount relationships generate more dollars of lifetime value. The large relationships, however, earn fewer dollars of lifetime value per dollar of loan amount among risk peers. Implications are also drawn for the retention rates of existing customers.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 66 (2006)
Issue (Month): 1 (May)
Pages: 109-123

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Handle: RePEc:eme:afrpps:v:66:y:2006:i:1:p:109-123

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Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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Related research

Keywords: Agricultural lending; Lending relationships; Lifetime value;

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Cited by:
  1. Farley, Travis A. & Ellinger, Paul N., 2006. "Factors Influencing Farmers’ Preferences for Lender Attributes," Proceedings: 2006 Agricultural and Rural Finance Markets in Transition, October 2-3, 2006; Washington, DC 133080, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.

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