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Impact of Credit Risk in Farm Planning in Chiang Mai Valley, Thailand: A Multiperlod Risk-programming Analysis of Credit Reserves
Dissertation Abstract:
A theoretical model indicates that credit risk affects farmers ' debt use and thus, firm organization. An empirical model is set up to test the hypothesis from the theoretical model. This examined how credit ava ilability to individual fanners, as evaluated by their lenders, responds to changes in past levels off arm income. Effects of resulting cred it risks on optimal farm portfolios, including credit reserves, were then evaluated with different degree of risk aversion coefficients.
Data used in this study were obtained from primary and secondary sources. The historical data series offarmers' income and credit supply were elicited from the individual bo rrower's records and approved loan request forms. Five lenders and 259 borrowe rs were selected as samples. Farmers were classitied into the following groups: severe loss, moderate loss, average conditio ns, moderate gain, and favorable gain based on farm income experienced by the farmer in the preceding year. Thus, the likelihoods associated with the gain and loss conditions were derived using income risk parameters. Results of a two-way analysis of variance, where farm income risks were treated as treatments and lenders as blocks, indicated that: 1) credit appears to be linearly related to past farm income at the five percent level of significance; 2) capital credit has a higher variability than operating credit; and 3) capital credit is more sensitive to change in past farm incomes. These results were consistent with the hypothes is that farmers' credit is positively correlated with changes in farm income level, although the correlation appears stronger for capital credit than for operating credit. That is, risks associated with credit availability for capital purchases appear to add more to farmers' total portfolio risk than does credit for operating expenses.
Credit responses suggest that lenders generally exhibited flexibility toward rescheduling debt payments from low return years to succeeding ones. However, lenders tend to favor capita expansion after the loan repayment reschedules were met and farm protits were at an average level or there was gain condition of past farm income level. Nevertheless, restricting capital credit was a favored means of financial control by lenders for those fann e rs who were in a loss condition of farm income.
This study a lso evaluated the impact of cred it risk in portfolio analysis . A multi period risk-programming model of a representative farm in Chiang Mai Valley was constructed to measure the impact of credit risk on the expected utiIity maximizing portfolios of well-defined classes of risk averse farmers. The risk-programming results obtained were consistent with the anticipated responses. Model results with and without credit risk were also contrasted. Inc luding credit risk took fuller account ofthe overall risk position offanncrs. When credit risk was included in the analysis, 1) the average level of the credit reserve increased faster, and the use of capital credit and expansion of farm growth were more rapidly eliminated from optimal plans as the risk aversion coefficient increased; and 2) for a given level of risk aversion, the average level of the credit reserves for both credit lines were generally much higher. These results were consistent with the hypothesis that more credit risk bring slower growth, greater cred it reserves, and some idling of resources. These results support the view that credit risks should be considered in farm management.