Wednesday, March 28, 2012

SCOPE OF FARM FINANCE:


Farm financial management involves the farm as a whole for taking financial decisions. Indeed, the term farm financial management refers to the acquisition and use of financial resources in the individual farm-firm together with the protection of equity. Capital earnings are very crucial to the farm-firm as greater proportion of farm earnings are required to pay for the purchased inputs on the one hand and also for meeting the increasing amounts of consumption expenditure due to the rising population on the other.

Financial management has both “macro” and “micro” aspects. The “macro-financial management” pertains to the overall aspects of finance, i.e., various sectors of the economy, agriculture, industry, lending institutions, rural and urban society, etc while “micro-financial management” mainly confines to the farm finance with a view to manage the individual farm-firm. In fact, the macro-financial management includes those aspects of finance which provide the overall frame work in which the individual farm-firm also functions. Since Indian agriculture and livestock is capital intensive, the farmer’s dependence to lending institutions so as to supplement the farm-finances has considerably risen. Thus, the lending institutions together with society set the overall framework in which the individual farmer has to manage his finances.

The relationship of farm finance with the production, marketing and consumption aspects of Agricultural and livestock economy determines its scope. Farm assets are partly available in the beginning balance sheet and partly supplemented through lease or hiring in. Quite often, additional assets are also purchased through savings along with or without borrowing. These farm assets in conjunction with labour, management and appropriate technologies produce farm commodities of which partly retained for family and farm requirements while partly available for sales. Moreover, the farm enterprises combination depends mainly upon farmers’ home requirements, availability of market infrastructure, etc. These farm produced commodities on medium and large farms are stored which though involve storage costs yet generate higher returns by selling in lean periods and also help in liquidity management.

Some farmers sold their farm produce for cash or for “receivables” that may be liquidated within a year or carried forward to the ending balance sheet. Farm inventories, receivables and cash provide liquidity which ultimately helps in taking decisions pertaining to production, marketing or consumption. Yet, the cash generated through marketed surplus can be used for repaying old debt, meeting current consumption and other social obligations and the remainder goes for savings. These farm savings are either used for the purchase of assets or for hiring in the nonfarm capital assets, both with or without credit. It ultimately provides the ending balance sheet.

Agricultural and livestock finance possesses its usefulness to the farmers, lenders and extension workers. The economic principles of farm financial management facilitate in obtaining control over capital and its efficient use. The investment analysis pertaining to income, repayment capacity and risk bearing ability determine the amount of capital a farm business can profitably and safely use. Hence, the farmer can determine his credit worthiness and can put forth his loan application with confidence to lender.

The knowledge of lending institutions, their legal and regulatory environment helps in selecting the appropriate lender who can adequately provide the credit with terms and related services needed to finance the farm business. The cash flow analysis helps the farms in determining the period wise quantum of loans needed and cash surpluses generated which can be used for repayment purposes, i.e., it reduces the interest burden and also checks diversion of farm earnings towards non-productive uses. These farmers can also take the temporal investment decisions with the help of capital budgeting.

The lenders not only earn the profit from their loaned funds rather also want to minimize the risk of loss from their loan advances. The principles of agricultural and livestock finance may help lender in assessing the borrower’s credit worthiness (who has applied for loan) and determining the quantum of loan to be lent safely. The lender may also enhance the repaying capacity of the borrower either by participating in his production planning and management or by adjusting the time period of loan repayments.

Livestock finance provide exposure to the extension worker about the structure and functioning of lending institutions which in turn helps him to guide the borrower to choose the cheap lender in acquisition of credit. Besides, he can also advise on most efficient use of credit, i.e., to maximize the returns to limited capital finance.

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