Credit appraisal for working capital finance to agricultural small and medium enterprises at Land Bank
The credit appraisal process plays a crucial role in a bank's lending function. It is part of the bank's risk management system that seeks to reduce exposure to credit risk. The main purpose of this study was to examine Land Bank's credit appraisal system with the aim of establishing the reasons for poor credit extension to agricultural SMEs, assess the relevance of Land Bank's credit appraisal process as well as to establish the strategies applied to improve this credit appraisal system and repayment of loans. This study was necessitated by the fact that SMEs in South Africa struggle to secure working capital needed to grow their businesses. Data collection was done using structured questionnaires. The questionnaires were derived from the research questions and these comprised both close-ended and openended questions. The study focused on Land Bank employees who are in the credit department and SMEs in the agricultural sector, mainly farmers who applied for credit from the Land Bank, either approved or declined. The research findings reveal that Land Bank uses relationship lending, financial statements lending and Small business credit scoring lending techniques in extending credit to SMEs. However, the financial statement technique is more predominant than the other techniques despite failure by SMEs to provide proper financial statements. It was noted that most of the loan applications were rejected on the basis of lack of financial statements, inadequate collateral, and the risky nature of SMEs due to information asymmetry and project feasibility. High interest rate was identified as the main cause for non-performing loans. These findings corroborate the literature reviewed in this study. The research recommends the establishment of a regulatory framework that seeks to eradicate constraints that hinder access to finance by SMEs. Good information dissemination systems that allow for effective credit checks on the credit history of borrowers should be in place and such systems should have sufficient flexibility mechanisms to allow for adjustments as market conditions change.