January 28, 2020
Advisory: Prudent Management of Agricultural Lending During Economic Cycles
Between 2010 and 2015, the U.S. agricultural industry enjoyed generally robust economic conditions. More recently, the industry has been experiencing low commodity prices, trade and tariff uncertainties, impacts from adverse weather conditions, and global supply and demand issues. This advisory reminds financial institutions engaged in agricultural lending to maintain sound underwriting standards, strong credit administration practices, effective risk management strategies, and appropriate allowances for losses and capital levels through the credit cycle. When agricultural borrowers experience financial difficulties, the FDIC encourages financial institutions to work constructively with borrowers to strengthen the credit and mitigate loss.
Statement of Applicability to Institutions with Total Assets under $1 billion: This Financial Institution Letter applies to all FDIC-supervised financial institutions.
- Interagency Guidelines Establishing Standards for Safety and Soundness, promulgated pursuant to Section 39 of the Federal Deposit Insurance Act, indicate that all insured institutions should have, among other things, 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.
- Lenders should work constructively with agricultural borrowers experiencing financial difficulties, including utilizing reasonable debt restructuring approaches based on long-term viable business plans.
- This FIL rescinds and replaces FIL-39-2014, Prudent Management of Agricultural Credits Through Economic Cycles, dated July 16, 2014.