Question

****This is for BA 343 Need this by tonight and it must be 150 words****

Loan pricing is a key managerial control variable for agricultural lenders. Loan pricing directly affects, and is affected by, bank profitability, competitor relationships, customer relationships and ultimately shareholder value. Pricing is often benchmarked solely on competition. However, to remain viable over the longer-term, a lending institution needs to establish loan pricing policies that adequately compensate the institution's shareholders for the costs and risks of making loans. Pricing objectives should be established to meet the institution's strategic and marketing objectives.

**Discuss the importance of loan pricing and profitability analysis for managers in agribusiness**

Answer 1

Collective impact of financial strain in agriculture, deregulation of interest rates in financial markets and enhanced information systems for lenders have brought considerable changes in credit assessment, risk appraisal and pricing policies in agricultural lending. Loan evaluation at the consumer level is nowadays getting more importance and loan pricing policies are gradually more customized with the risk factors of individual farm borrowers.

Thus for instance nowadays lenders classify borrowers into various risk categories and associate high interest rates with great risk classes. These changes in the scale of risk evaluation and the kind of lender's response have facilitated the appropriate assessment of the relationships existing among the lender's credit evaluation, terms of financing and borrower's business performance.

An extensive selection of worksheets, scoring methods and assessment systems are deployed by agricultural lenders varying from comparatively straightforward check sheet approaches based on judgment and individual evaluations to facts and figures based credit scoring by utilizing the financial information.

Regardless of the precise approach the most essential and fundamental perception is basically the same in all these assessment approaches and that is to effectively and efficiently recognize, determine and consider the crucial variables which indeed should facilitate to reveal borrower's credit value and then cumulate all the outcomes into an overall credit score.

Lenders' price responses in the analysis facilitates to develop an efficient and effective internal control mechanism which enables to encourage growth if the credit worthiness is supportive and guides to build identical capital structures over a period of time under the deterministic circumstances of this study.

Expansion of the analysis could facilitate to evaluate the effects on farm financial performance of correlations that exist between diverse risk attitudes of borrowers and lenders as articulated through the credit scoring model and revealing the effects of options in risk administration for agri-businesses with varied structural features.

Further improvement of the credit scoring mechanism and pricing gaps could facilitate to customize the pricing models with different farm situations and lenders. In any case including credit-scored pricing in farm planning models and in loan analysis is considered to be a very crucial and significant step believed to be consistent and reliable and based on the emerging practices of agricultural lenders.