Difference between revisions of "SPIS Toolbox - Credit Policy: Risk Analysis"

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=== '''<span style="color: rgb(135, 150, 55);">3. Credit Policy: Risk Analysis</span>''' ===
  
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= Credit Policy: Risk Analysis<br/> =
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[[File:SPIS-in-India.jpg|thumb|right|300px|SPIS in India (Source: Lennart Woltering)]] Every SPIS demands a specific solution with changing cropping pattern and the use of a comparatively newer technology like solar.<br/>
  
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Every SPIS demands a specific solution, since it combines a new energy providing technology with irrigation and cropping systems which can be manifold in its combination.<br/>
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Therefore, there are no standard “off the shelf” solutions, and hence a thorough loan analysis is an important step, especially when starting with this loan type.
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Therefore, there are no standard “off the shelf” solutions, a thorough loan analysis is indispensable, especially when starting with this loan type.
 
  
 
Typical '''financial advantages '''when changing to solar powered irrigation could be:
 
Typical '''financial advantages '''when changing to solar powered irrigation could be:
  
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*higher profitability when introducing high value crops and higher degree of irrigation efficiency;
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*Higher profitability when introducing high value crops;
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*reduced and stable current energy costs due to change in energy source (no transport costs or risks for supply of fuel or lubricants);
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*Lower and more stable energy costs due to change in energy source (no transport costs or fuel/lubricant supply risks);
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*environmental friendly technology (avoid water losses, use of water saving technology, prevent diesel pollution, etc.) can give access to subsidized funds or grants.
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*Environment friendly technology (avoid water losses, use of water saving technology, prevent diesel pollution, etc.) can give access to subsidized funds or grants.
  
 
SPIS, being based on agricultural activities, follow specific liquidity patterns, such as:
 
SPIS, being based on agricultural activities, follow specific liquidity patterns, such as:
  
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*irregularity, seasonality;
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*Irregularity, seasonality;
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*farming-household mix;
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*Farming-household mix;
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*several cash generating activities;
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*Several cash generating activities;
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*system risks (climate, weather, pest, disease, prices).
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*System risks (climate, weather, pest, disease, prices).
  
 
This requires specific agri-lending tools. Thereby the following risks should be considered:
 
This requires specific agri-lending tools. Thereby the following risks should be considered:
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'''Financial Risks'''
 
'''Financial Risks'''
  
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*High initial capital investment requirements lead to higher credit risks resulting in longer repayment periods and higher interest rates for clients comparing to alternative energy sources;
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*High initial capital investment leads to longer repayment periods and higher interest rates for potential borrowers and thus higher credit risks compared to alternative sources. Other specific risks associated with agriculture.
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*Financing agriculture as such has specific risks.
 
  
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'''Technology Risks '''(see the following modules'''DESIGN''', '''SET-UP''', '''MAINTAIN''' for further details).
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'''Technology Risks '''(see the following modules&nbsp;'''[[SPIS Design|DESIGN]]''', '''[[SPIS Set Up|SET UP]]''', '''[[SPIS Maintain|MAINTAIN]]''' for further details).
  
 
*High value cropping and water saving irrigation technology is needed;
 
*High value cropping and water saving irrigation technology is needed;
 
*Pumps have to be “oversized” in order to meet peak water demands;
 
*Pumps have to be “oversized” in order to meet peak water demands;
 
*Management capacities to handle the technology should be available;
 
*Management capacities to handle the technology should be available;
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*Daily operating hours are limited;
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*Daily operating hours are limited leading to low asset utilization if not operated properly;
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*Feasible PV-generator and pump dimensioning implies orientation towards low pressure output;
 
 
*Suitability of location for SPIS;
 
*Suitability of location for SPIS;
 
*Construction risk;
 
*Construction risk;
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*Over-use of water threatens long term cultivation as well as the environment.
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*Overuse of water threatens long term cultivation as well as the environment.
  
 
'''Framework Risks'''
 
'''Framework Risks'''
  
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*Long term availability of water and good groundwater management is indispensable; (see '''SAFEGUARD WATER'''module)
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*Since water is available at very low cost, long term availability of water and good groundwater management is indispensable; (see '''[[SPIS Safeguard Water|SAFEGUARD WATER]]&nbsp;'''module)
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*People involved – loan officers, producers, (gender!) technology and service providers, agricultural advisors;
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*People issues leading to delay in disbursal of subsidy, reluctance to lend or adopt solar pump technology etc.;
 
*Theft or misuse.
 
*Theft or misuse.
  
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== Outcome / Product ==
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=== '''<span style="color: rgb(135, 150, 55);">Outcome/Product</span>''' ===
  
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*Credit risk policy, considering thorough single case assessment, adequate portfolio management and pro-active closing of the information gap.
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*Credit risk policy considering the profile of the potential borrowers and adequate portfolio management.
  
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== Data Requirements ==
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=== '''<span style="color: rgb(135, 150, 55);">Data Requirements</span>''' ===
  
 
*Specifics to agri-lending liquidity patterns of borrowers;
 
*Specifics to agri-lending liquidity patterns of borrowers;
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*Asset structure of borrowers (potential for collateral);
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*Asset structure of borrowers (potential for collateral), especially land;
 
*Cropping patterns and profitability of crop types (alternative markets and water availability);
 
*Cropping patterns and profitability of crop types (alternative markets and water availability);
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*Organization & management reliability (see '''MAINTAIN'''module);
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*Organization & management reliability (see '''[[SPIS Maintain|MAINTAIN]]&nbsp;'''module);
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*Technology risks (see '''DESIGN''' module);
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*Technology risks (see '''[[SPIS Design|DESIGN]]''' module);
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*Re-financing options for the region.
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*Refinancing options for the region.
  
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== People / Stakeholders ==
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=== '''<span style="color: rgb(135, 150, 55);">People/Stakeholders</span>''' ===
  
 
*Management of financial service providers;
 
*Management of financial service providers;
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*Research and training institutions (e.g. environmental agency).
 
*Research and training institutions (e.g. environmental agency).
  
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== Important Issues ==
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=== '''<span style="color: rgb(135, 150, 55);">Important Issues</span>''' ===
  
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*Consider SPIS specific risks with respect to their longterm financing requirements, technological implications (cf. '''DESIGN'''module), environmental impact (cf. '''SAFEGUARD WATER'''module) and framework conditions.
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*Consider SPIS specific risks with respect to their long term financing requirements, technological implications (cf. '''[[SPIS Design|DESIGN]]&nbsp;'''module), environmental impact (cf. '''[[SPIS Safeguard Water|SAFEGUARD WATER]]&nbsp;'''module) and framework conditions.
 
*Assume manifold SPIS settings - there is no “off the shelf” loan analysis.
 
*Assume manifold SPIS settings - there is no “off the shelf” loan analysis.
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*Minimizing risks can result in potentially high(er) transaction costs for all parties involved, compared to conventional pumping systems.
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*Generally, minimizing risks can often lead to high(er) transaction costs (except in a community based system) for all parties involved, compared to conventional pumping systems.
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<br/>[[File:SPIS-in-India.jpg|thumb|center|600px|SPIS in India .]] &lt;/div&gt;
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[[Category:Tools]]
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| {{Back to SPIS Toolbox 2}}
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[[Category:Powering_Agriculture]]
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[[Category:SPIS_Module]]
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| {{Back to Finance}}
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| {{Next Chapter}}[[SPIS_Toolbox_-_Credit_Policy:_Select/develop_Suitable_Financial_Instruments|►Go to the Next Chapter]]</span></span>
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|}{{SPIS Reference}}

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3. Credit Policy: Risk Analysis

SPIS in India (Source: Lennart Woltering)

Every SPIS demands a specific solution with changing cropping pattern and the use of a comparatively newer technology like solar.

Therefore, there are no standard “off the shelf” solutions, and hence a thorough loan analysis is an important step, especially when starting with this loan type.

Typical financial advantages when changing to solar powered irrigation could be:

  • Higher profitability when introducing high value crops;
  • Lower and more stable energy costs due to change in energy source (no transport costs or fuel/lubricant supply risks);
  • Environment friendly technology (avoid water losses, use of water saving technology, prevent diesel pollution, etc.) can give access to subsidized funds or grants.

SPIS, being based on agricultural activities, follow specific liquidity patterns, such as:

  • Irregularity, seasonality;
  • Farming-household mix;
  • Several cash generating activities;
  • System risks (climate, weather, pest, disease, prices).

This requires specific agri-lending tools. Thereby the following risks should be considered:

Financial Risks

  • High initial capital investment leads to longer repayment periods and higher interest rates for potential borrowers and thus higher credit risks compared to alternative sources. Other specific risks associated with agriculture.

Technology Risks (see the following modules DESIGN, SET UP, MAINTAIN for further details).

  • High value cropping and water saving irrigation technology is needed;
  • Pumps have to be “oversized” in order to meet peak water demands;
  • Management capacities to handle the technology should be available;
  • Daily operating hours are limited leading to low asset utilization if not operated properly;
  • Suitability of location for SPIS;
  • Construction risk;
  • Overuse of water threatens long term cultivation as well as the environment.

Framework Risks

  • Since water is available at very low cost, long term availability of water and good groundwater management is indispensable; (see SAFEGUARD WATER module)
  • People issues leading to delay in disbursal of subsidy, reluctance to lend or adopt solar pump technology etc.;
  • Theft or misuse.

Outcome/Product

  • Credit risk policy considering the profile of the potential borrowers and adequate portfolio management.

Data Requirements

  • Specifics to agri-lending liquidity patterns of borrowers;
  • Asset structure of borrowers (potential for collateral), especially land;
  • Cropping patterns and profitability of crop types (alternative markets and water availability);
  • Organization & management reliability (see MAINTAIN module);
  • Technology risks (see DESIGN module);
  • Refinancing options for the region.

People/Stakeholders

  • Management of financial service providers;
  • Public entities promoting or/and subsidizing SPIS initiatives;
  • Associations of producers / potential borrowers;
  • Market analysts/consultants;
  • Technology providers;
  • Service providers;
  • Research and training institutions (e.g. environmental agency).

Important Issues

  • Consider SPIS specific risks with respect to their long term financing requirements, technological implications (cf. DESIGN module), environmental impact (cf. SAFEGUARD WATER module) and framework conditions.
  • Assume manifold SPIS settings - there is no “off the shelf” loan analysis.
  • Generally, minimizing risks can often lead to high(er) transaction costs (except in a community based system) for all parties involved, compared to conventional pumping systems.


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