The role of relationships in lending to farmers : a study from the loan officer’s perspective

Abstract: There have been significant changes in the agricultural sector during the past 20 years (Jordbruksverket, 2008). The development of today is towards deregulation and adaption to global market conditions. As farmers try to adapt to the changed and more competitive market conditions investments are often necessary (LRF Konsult et al, 2012). Loans to agriculture and forestry businesses have increased to record levels and debt has doubled over the past years. The financial turbulence of the past years has contributed to an increase of the meaningfulness and willingness of the banks to be able to understand and handle risks associated with agriculture and forestry (Breiding, 2010). Handelsbanken has during the last five years made a major expansion in the segment of farm and forestry clients. When assessing finance to farm businesses, it can be a costly and complicated process for the loan officer to find the right objective information; therefore the personal contact and relationship between the loan officer and the credit applicant is a very important factor in the credit evaluation process (Akhavein et al, 2004). Yet little is known about how the relationship is established and which factors affect the relationship (Hedelin & Sjöberg, 1992; Bruns 2003). The farm- and forestry division of Handelsbanken is interested in investigating how the relationship between the bank and its clients is established and what factors are influencing the relationship. The purpose of this study is to investigate how loan officers establish an understanding of applicants' personal character in the loan application process, and how that understanding together with the personal relationship that is formed between the loan officer and the credit applicant affects the credit evaluation. The approach of this project is explorative. According to Kvale (1997) the aim of an explorative study is to search for new dimensions of the unit of analysis. The reason for choosing an explorative approach of the study is that there has not been much research about the lending relationship between loan officers and farmers (Lindstrand, 2003). This study consists of a theoretical framework where data was collected in order to obtain a general understanding about relationships and the problems and solutions associated with lending relationships. In order to obtain a deeper understanding of the characteristics of the relationship in the credit evaluation process, literature that describes the problem associated with lending relationships is studied. A case study including interviews with 16 loan officers working at Handelsbanken were conducted in March and April 2012, in order to collect data for studying the relationship between loan officers and farmers. The conclusion that can be drawn from this study is that the loan officers establish an understanding of applicants' personal character in the loan application process by being interested in the credit applicant and his business. This creates legitimacy for the loan officer and he receives the credit applicants’ approval, which creates trust in the relationship. A relationship built on trust leads to improved communication between the loan officer and the credit applicant. The good communication can increase the flow of information, which leads to the establishment of a mutual understanding. This understanding between the parties decreases the problems of information asymmetry in the credit evaluation process, which makes the process more efficient and viable in a long-term perspective.