Analysis of repayment ability for agricultural loans in Virginia using a qualitative choice model

Agricultural loans issued to farmers in Virginia from the years 1980-1985 are examined to determine the factors which significantly predict repayment ability. Through a review of literature, extension meetings, conferences and informal conversation with agricultural lenders in the state, a list of financial variables and operation characteristics is compiled and analyzed. Results of the analysis are considered in terms of their immediate and potential assistance to lenders in making loan decisions.

Using data from various commercial banks, Production Credit Associations and Farmers Home Administrations throughout Virginia, a model is developed to determine repayment ability of a borrower. Results indicate that several factors are significant in determining this process. Financial ratios such as percent equity, current debt, cash flow I and cash expense-cash receipt are important in determining if a borrower will repay his loan as scheduled. A number of operation characteristics were also found significant. These include: the number of creditors of the borrower, the amount of diversification of the operation and the amount of non-farm income. The results of the study should prove to be a significant aid to lenders and implies need for further research in the loan repayment area.