RISK AND RISK MANAGEMENT OF RURAL AND AGRICULTURAL FINANCE
(MD. IBRAHIM KHOLILULLAH, DEPT OF AG.FINANCE, BAU
When discussing rural finance in Bangladesh, the foremost issue that merits mention is that loans to agriculture are generally offered only by specialized agricultural banks, since commercial banks and microfinance institutions largely refrain from financing the sector. There are many reasons for this, the most important of which is that this finance is strewn with risks, some of which the state is most likely to address. Hence, the governments hold ownership of these banks and their capital, and finance and support them.
Agricultural banks are exposed ...view middle of the document...
Banking risks have not hampered commercial banks from widely practising financial intermediation, because they have invented many tools and measures to tackle them. Climatic risks have made banks reluctant to enter the rural finance business because they are beyond control, complicated, unpredictable and costly. For this reason, agricultural banks have been established and owned by the state. This practice was initiated first by many developed countries and then by developing countries. It was based on the assumption that agriculture was important and needed financing, and that the state was more financially capable of incurring the cost of agricultural risks.
Some explanations of the two kinds of risks and the methods of dealing with them are provided below.
The financial sector in all its aspects faces many risks, which have increased in intensity over the last decade. This may be a result of the abrupt changes in the economy and operating environment, especially with the emergence of new technological products, due to new practices and market requirements. Consequently, the economy requires new products and policies, and hence new risk management measures.
The primary discussions of governments and Central Banks regarding banking risks focused on the adequacy of capital, which is the first line of defence in the protection of banks from insolvency in case of exposure to the many banking risks. In this regard, international discussions were held to develop guidance and agreements for the banking industry. For Banking Control and Supervision and later Committee were formed to deal with this matter in detail at a global level. The Agreement works to reduce risk in the banking sector with a primary focus on three major areas: minimum capital requirements, supervision and market discipline. While these areas address some key banking risks that are relevant to all banks and countries, neither address primary risks related to agricultural finance.
The Committee for Banking Control was established at the end of 1974. Its objective was to formulate consolidated rules for banking control for the banks’ guidance, rather than compulsory adherence. In the late 1973s, the Committee started to pay attention to capital adequacy, aiming at reaching definite controls that would lead to the strengthening, soundness and stability of the world banking system.
Despite the early adherence to later resolutions by the banks in developed countries, it has not achieved the aim of these resolutions nor prevented bankruptcy. Consequently, these countries suffered from deep financial crises that hit the financial markets in 2008 and 2009, which led to the close-down of more than 80 banks in Bangladesh alone and negatively affected the largest banks. The latter was rescued by huge government support.
MEASURES OF RISK MITIGATION IN THE PRINCIPAL BANK FOR DEVELOPMENT AND AGRICULTURAL CREDIT
The plan for structuring PBDAC was drawn up by the experienced bank...