Managing Credit Risk in Rural Financial Institutions in Latin America

This report explores the management of credit risk in rural financial institutions and provides recommendations for credit risk management techniques. The report states that:

• The issue of credit risk is of concern in rural lending and agricultural lending because of higher levels of perceived risks;
• Financial institutions that operate in rural areas face elevated levels of credit risk and need to manage it well.

The report:

• Reviews common credit risk management techniques used in a sample of Latin American financial institutions with agricultural portfolios;
• Identifies factors of successful credit risk management as measured by several key financial performance indicators;
• Examines the results of a survey of forty-two rural financial institutions in Latin America;
• Provides a detailed analysis of four intermediaries, two in Peru and two in Guatemala.

It concludes that most of the surveyed institutions see market opportunities in rural areas. However, improving the feasibility of transferring risk to third parties would improve credit risk management.The report makes the following recommendations to donors and governments:

• Provide support to rural institutions that meet minimum scale requirements in order to help them diversify credit risk, expand and innovate;
• Assist institutions that have a clear strategic commitment to the rural sector as well as competent management to upgrade their technologies, diversify and introduce risk transfer mechanisms;
• Promote mergers and acquisitions among smaller institutions;
• Promote value chain financing.