Lending limits and the availability of credit to agricultural borrowers

Abstract

<p>Over the past three decades, the market share of farm debt owed to commercial banks has declined sharply. One of the potential reasons for the loss in market share is related to the legal lending limits on the maximum that banks can loan to individual borrowers;The purpose of this study is twofold: (1) to develop a simple theoretical market model that incorporates and investigates the effect of legal lending limits on the availability of credit to agricultural borrowers; and (2) to provide empirical evidence of this phenomenon;In the development of the theoretical model, an excess loan demand equation is formed, in which the effects of lending limits and such factors as average farm size and prices paid and received by the farm sector are investigated. To empirically test the effects of these variables on excess loan demand, a statistical model is developed which modifies the theoretical model by employing agricultural banks' responses to a survey undertaken by the Federal Reserve Bank of Chicago concerning lending limits. The question posed to the banks asked: "Compared to five years ago (end of 1974 compared to end of 1979), is the number of actual or potential farm customers in your area whose credit needs exceed your bank's individual legal lending limit higher, lower, or unchanged?";Bank survey response is then used as a 0, 1 dependent variable (0 if the response is less, or no change in the number of farm customers, and 1 if the response is more farm customers) and is regressed on a bank's eligible capital account, average farm size in the area serviced by a rural bank, market value of agricultural products sold in the area serviced by a rural bank, agricultural production expenses in the area serviced by a rural bank, utilization of capacity of farmland in the area serviced by a rural bank, and a dummy variable for bank type to see if differences exist between unit and branch banks;The results show that eligible capital account and the dummy variable for bank type are highly significant in explaining bank survey response. The agricultural-production-expenses variable is also found to be significantly related to bank survey response, but none of the other variables reflecting farm credit requirements are found to be significant.</p>