Letter notes challenges facing ag lenders from impact of tariff uncertainty, bad weather, low prices

Strong underwriting and other practices are urged for banks and other financial institutions lending to farmers and other agriculture interests by the federal insurer of bank deposits Tuesday in a letter.

The Federal Deposit Insurance Corp. (FDIC) stated in its Financial Institution Letter (FIL-5-2020) that the U.S. agricultural industry – after “robust economic conditions” from 2010-15 – has lately contended with “low commodity prices, trade and tariff uncertainties, impacts from adverse weather conditions, and global supply and demand issues.”

The agency’s letter said the FDIC urged banks and other insured institutions to engage in “sound underwriting standards, strong credit administration practices, effective risk management strategies, and appropriate allowances for losses and capital levels through the credit cycle.”

The agency said it encourages banks to work “constructively with borrowers” experiencing financial difficulties to strengthen credit and mitigate losses.

The letter also highlighted that:

  • All insured institutions should have a system of effective internal controls, appropriate loan documentation practices, prudent underwriting practices, and a system of ongoing credit and asset quality reviews.
  • Agricultural lenders should maintain prudent risk management practices that focus on a borrower’s cash flow and repayment capacity. Lenders should also carefully consider, but not overly rely on, collateral positions and credit enhancements.
  • Management should identify and effectively manage credit concentrations. Strong risk identification and control practices should be in place as credit risk profiles elevate.
  • Lenders should consider and monitor key cyclical and economic factors before and after making credit decisions.
  • In working constructively with agricultural borrowers experiencing financial difficulties, lenders should utilize reasonable debt restructuring approaches based on long-term viable business plans.

Advisory: Prudent Management of Agricultural Lending During Economic Cycles

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