The Financial Early Warning System in the Small Farmer Loan Portfolio of the Bank for Agriculture and Agricultural Cooperatives
Keywords:
financial early warning system, small farmer loan portfolioAbstract
The objective of this study was to develop the financial early warning system in the small farmer loan portfolio of the Bank for Agriculture and Agricultural Cooperatives, a crucial organization among Agricultural Financial Institutions in Thailand. A logit model was developed to identify the warning signs concerning loan default (the probability of default) based on leading economical and geographical risk factors. The model was tested to ascertain the validity of its predicting power in terms of discriminating between debtors. The results of the logit model are subsequently employed to formulate the probability capabilities of the default model, the financial early warning system assessment of each debtor, the credit risk rating model, the financial early warning system status within the small farmer loan portfolio, the expected profits before expected loss equations, and the average of the risk adjusted returns on capital equations. The results show how exposure can be managed on a portfolio basis, which will enable the Bank for Agriculture and Agricultural Cooperatives to recognize the warning signs of default, diversify the risk and allocate the risk adjusted return on capital for each share within the portfolio, conduct analysis to determine interest rates on the basis of risk, calculate capital charges for each debtor and ensure the optimum interest rate structure extant in the small farmer loan portfolio.
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