3 Crucial Aspects of Risk Management in Banking
The 1980s saw a farming crisis that resulted in bankruptcies and defaults which left the nation’s wallet $4 billion lighter. In 2014, the state of California sought to create a new statewide water management system that would protect groundwater by instituting Groundwater Sustainability Agencies who would assist in generating sustainability plans for basins. Earlier this year, the American Bankers Association (ABA) shared:
“Despite the global economic slowdown in 2020… total agricultural lending by U.S. farm banks remained strong at $98.6 billion…”
Over the last forty years, the agricultural industry has seen shifts in productivity, profitability, and viability. With these changes, came new changes in lending within the industry. For farmers and Farm Creditors alike, risks come with uncertainty. Today, implications of risk are crucial to account for.
Meanwhile, technology has progressed and become an integral part of life. Risk management in banking works double time in supplying financial institutions with actionable info and making users feel more secure in their loans and investments.
What does risk management in banking look like?
This article will review the three most crucial facets of risk management.
Defining Risk Management in Banking
At its core, risk management in agricultural finance is the process of proactively assessing and planning for risks in parcels and portfolios that lead to financial risk for the lender or bank. This leads to developing plans that will help minimize the risks.
Farm Creditors that prefer a proactive approach instead of reactive measures know that as data acclimation and visualization software become more accessible, so does the streamlining functionality of their operational risk management processes. When financial institutions have the right information, it boosts confidence in decision-making.
The 3 Crucial Aspects of Risk Management in Banking:
1. Un-siloing the disparate risk datasets
When making decisions, obtaining all necessary information that would help reach the desired conclusion unlocks success and growth potential.
Things become inconvenient if the information is not readily available due to costly acquisition or the time it takes to be procured. Siloed information and data that are costly and time-consuming to acquire are blockers to lending and valuation processes. Much of the data used for due diligence in banking can be old and inoperative. In a world where time and fluidity are currency, putting the most up-to-date data and analytics into the hands of finance professionals will arm them with a stronger risk management workflow and a competitive advantage.
Methods of traditional risk management in banking can take businesses several weeks to just gather the data, let alone get in their hands. Now portfolios and specific parcels can be analyzed in real-time, alongside local events. With the use of risk management tools in banking that utilize data acclimation, information that is traditionally kept apart can be analyzed together.
2. Acclimating first-party loan and borrower financial data with the un-siloed data
When it comes to ag financial professionals, one of the ways risk management in banking appears is in the form of being able to actively manage large portfolios in a condensed fashion, which in turn makes it easily accessible.
Bringing proprietary financial data with third-party analytics means maintaining robust and timely statistics.
On the topic of agricultural advancement, Dr. shared,
“The ability to attract and retain talent will be a key in the decade to come. Highly skilled individuals will be critical to interface with technological advances for maximum productivity of farms and ranches in rural areas…The traditional low-interest rates and extended terms with government, private and cooperative funding will be prominent. Microloans, small startup funding, and extended working capital terms for growing businesses and those in value-added markets will be required and will stretch the boundaries of some traditional agriculture financing programs.”
As we move towards the future, ag fintech continues to become a highly sought-after asset that will help shape the future of the agriculture industry. The ABA reported that the banking industry had amounted to 1.1 million small farm loans that were valued at $71 billion by the end of last year— and of that $71 billion, almost $17 billion came directly from 744,000 microloans. These statistics call for Farm Creditors to make sure they have the means of enticing the next generation of agricultural entrepreneurs.
3. Geospatially viewing a loan portfolio with the acclimated
Agricultural finance professionals have a long list of data to review on any given day. From appraisals to underwriting, borrower and loan data all are complex to manage.
When data relating to a specific portfolio is used in conjunction with un-siloed data, the outcome is an easy-to-follow method of delivery.
In a study conducted by neuroscientists at the Massachusetts Institute of Technology, they discovered that “the human brain can process entire images that the eye sees for as little as 13 milliseconds.” When we see data in the form of visuals, that information is easy to break down and reformat into respective concepts.
The human brain is capable of processing images at a speed that rivals computers, but it doesn’t stop there; while processing the information presented in a visual, the human brain is also simultaneously making several various deductions and conclusions.
Banks can see their portfolios and relevant risks on a map.
Inputting all the pieces in a loan portfolio together geospatially, professionals are enabled to view things from a different perspective, literally. Parcels can be assessed in real-time, supporting the need to dive deeper for analytics and develop a clearer picture from what might have been too muddied to be practical.
The Bottom Line
When changes are presented in an environment, the key is adaptability. The evolution of human nature has directly impacted the development of technology because human needs and values change as time goes on. We visualize and create tools that make what was once impossible, possible.
Lending in agriculture has radically changed, and finance professionals require risk management tools in banking that fit their needs today.
Risk management is built directly into the core of GIS Connect. Helping lenders realize what they might be missing between the lines by showing them. GIS Connect is fintech that leverages the power of data acclimation by integrating first-party financial data with third-party data. The software allows for the exploration of parcels and portfolios by clicking directly on the map. Financial institutions can directly and securely upload their own data while cross-referencing alongside data AQUAOSO collects.
In late 2021, world leaders gathered in Glasgow for COP26, better known as the UN’s climate change conference. With over 25,000 attendees meeting to discuss the efforts needed to address climate change, themes of sustainability, renewable energy and the reduction of...
With real-world impacts like rising global temperatures, climate change is one of the biggest risk factors agriculture faces today. NOAA reported that 2020 was the second warmest year and the EPA explains a consistent increase of 0.16°F in average surface temperature...
Ag banks and Farm Credits, enable agribusinesses to attain the financing they need in order to execute functions like harvesting and planting, as well as buying new equipment and combat overhead costs. They allow farmers to operate by engaging in a relationship with...