Managing agricultural credit risk in the face of natural disasters: Lessons from Sub-Saharan Africa, Asia, and the Americas

This study aims to assess how financial institutions (FIs) with a sizable agricultural loan portfolio manage credit risk arising from disasters. Climate-related and other disasters, such as droughts and floods, have a significant impact on agricultural producers and pose substantial risks and costs to agricultural lenders.

It addresses lending to small-scale and medium-size commercial and semicommercial primary producers (farmers who sell part of their produce for income), not subsistence farmers. This focus reflects how financial institutions typically prioritize market oriented farmers for sustainable agricultural credit. Despite substantial evidence of the impact of disasters, there is limited information about the nature and effectiveness of measures undertaken by FIs to deal with the consequences. Nor is much known about how regulators and supervisors perceive such events, or if they consider it necessary to provide regulatory or supervisory relief (as they did in the case of the COVID-19 pandemic). Thus the study also assesses how regulators and supervisors perceive the credit risks arising from natural disasters.

Based on these assessments, the study develops recommendations for measures to help FIs better prepare for and manage the consequences of disaster events affecting agricultural loan portfolios. This study confirms that disaster events often lead to significant loan defaults and write-offs across different categories of lenders. Disaster events in this study generally refer to devastating natural occurrences that lead to substantial economic losses and disruptions of economic activities. Specifically, for purposes of rationalization across different sizes of lenders, a disaster is a natural event that leads to a notable increase in non-repayments (loans past due by one day or more, or PAR1+) in agriculture loans.