Predicting the Impact of Rainfall on Paddy Harvest and Agricultural Loans in Sri Lanka
Added on 2023-01-20
99 Pages36298 Words69 Views
CMM799 MSc Project (BA)
Predicting the impact of rainfall on paddy harvest and its ultimate effect on
agricultural loans in banks in Sri Lanka
MSc Business Analytics Research Project
Student ID# 2017030
RGU# 1616183
Predicting the impact of rainfall on paddy harvest and its ultimate effect on
agricultural loans in banks in Sri Lanka
MSc Business Analytics Research Project
Student ID# 2017030
RGU# 1616183
1
CMM799 MSc Project (BA)
Abstract of the Research
The research study is based on the significance of agricultural production in Sri Lanka
and study also depicts the related tools and technology used in the production of agriculture. The
aims of the research along with the problem statement of the company has been shown in the
research study. The risk mitigation of the company has been depicted in the conducted research
analysis. The topic of the research is based on the prediction of the impact related to rainfall on
paddy harvest and its ultimate effect on agricultural loans in banks in Sri Lanka. In the research
methodology of the company, the past and the future forecast of the company has been analyzed
as per the requirement of the topic. The main focus of the research is based on the factors
influencing the agricultural production of the company by considering the significance of rainfall
in the production process. Impact of the rainfall in paddy harvest and its effect on the agricultural
loan and further been depicted in a detailed manner in the agricultural production of the country.
The Key Abbreviations are the following:
GDP – Gross Domestic Product
CBSL – Central Bank of Sri Lanka
FAO – Food and Agricultural Organization
MT – Metric Ton
CMM799 MSc Project (BA)
Abstract of the Research
The research study is based on the significance of agricultural production in Sri Lanka
and study also depicts the related tools and technology used in the production of agriculture. The
aims of the research along with the problem statement of the company has been shown in the
research study. The risk mitigation of the company has been depicted in the conducted research
analysis. The topic of the research is based on the prediction of the impact related to rainfall on
paddy harvest and its ultimate effect on agricultural loans in banks in Sri Lanka. In the research
methodology of the company, the past and the future forecast of the company has been analyzed
as per the requirement of the topic. The main focus of the research is based on the factors
influencing the agricultural production of the company by considering the significance of rainfall
in the production process. Impact of the rainfall in paddy harvest and its effect on the agricultural
loan and further been depicted in a detailed manner in the agricultural production of the country.
The Key Abbreviations are the following:
GDP – Gross Domestic Product
CBSL – Central Bank of Sri Lanka
FAO – Food and Agricultural Organization
MT – Metric Ton
2
CMM799 MSc Project (BA)
Contents
Chapter 1: Introduction (10 p)................................................................................................4
1.1. Problem Statement..............................................................................................................4
1.2. Research Questions.............................................................................................................4
1.3. Background of the Study.....................................................................................................5
1.3.1. Importance of agriculture in Sri Lanka.........................................................................5
1.3.2. Importance of agriculture loans in Sri Lanka...............................................................5
1.3.3. Importance of this study...............................................................................................6
1.4. Aims and Objectives of the Study.......................................................................................8
1.5. Scope of the Study...............................................................................................................8
1.6. Software Tools and Databases to be used............................................................................9
1.7. Deliverables of the Study....................................................................................................9
1.8. Content Outline of Main Chapters.......................................................................................9
Chapter 2: Literature Review ( 20 p)....................................................................................12
2.1. Introduction.......................................................................................................................12
2.2. Paddy as a main agricultural produce in Sri Lanka............................................................12
2.3. Brief overview of agricultural practices and climatic conditions related to paddy.............12
2.4. Agricultural loans in Sri Lanka and the Asian region........................................................13
2.5. Factors that contribute to agricultural loan loss: Causes....................................................16
2.6. Predicting Weather Patterns........................................................................................19
2.7. Impact of environmental hazard on agricultural Loan Loss...........................................20
2.8 Innovations in weather risk management in Banks.......................................................22
2.8.1 Risk Mitigation..........................................................................................................22
2.8.2 Global Engagements..................................................................................................24
2.9. Chapter Summary..............................................................................................................24
Chapter 3: Research Methodology (5 p)...............................................................................26
3.1. Introduction.......................................................................................................................26
3.2. Method Outline..................................................................................................................26
3.2.1 Overview of steps in the methodology............................................................................26
3.2.2 Proposed formula.............................................................................................................29
3.3. Research Philosophy.........................................................................................................29
3.3.1.Justification for choosing Positivism Research Philosophy..........................................31
3.4. Research Approach............................................................................................................31
CMM799 MSc Project (BA)
Contents
Chapter 1: Introduction (10 p)................................................................................................4
1.1. Problem Statement..............................................................................................................4
1.2. Research Questions.............................................................................................................4
1.3. Background of the Study.....................................................................................................5
1.3.1. Importance of agriculture in Sri Lanka.........................................................................5
1.3.2. Importance of agriculture loans in Sri Lanka...............................................................5
1.3.3. Importance of this study...............................................................................................6
1.4. Aims and Objectives of the Study.......................................................................................8
1.5. Scope of the Study...............................................................................................................8
1.6. Software Tools and Databases to be used............................................................................9
1.7. Deliverables of the Study....................................................................................................9
1.8. Content Outline of Main Chapters.......................................................................................9
Chapter 2: Literature Review ( 20 p)....................................................................................12
2.1. Introduction.......................................................................................................................12
2.2. Paddy as a main agricultural produce in Sri Lanka............................................................12
2.3. Brief overview of agricultural practices and climatic conditions related to paddy.............12
2.4. Agricultural loans in Sri Lanka and the Asian region........................................................13
2.5. Factors that contribute to agricultural loan loss: Causes....................................................16
2.6. Predicting Weather Patterns........................................................................................19
2.7. Impact of environmental hazard on agricultural Loan Loss...........................................20
2.8 Innovations in weather risk management in Banks.......................................................22
2.8.1 Risk Mitigation..........................................................................................................22
2.8.2 Global Engagements..................................................................................................24
2.9. Chapter Summary..............................................................................................................24
Chapter 3: Research Methodology (5 p)...............................................................................26
3.1. Introduction.......................................................................................................................26
3.2. Method Outline..................................................................................................................26
3.2.1 Overview of steps in the methodology............................................................................26
3.2.2 Proposed formula.............................................................................................................29
3.3. Research Philosophy.........................................................................................................29
3.3.1.Justification for choosing Positivism Research Philosophy..........................................31
3.4. Research Approach............................................................................................................31
3
CMM799 MSc Project (BA)
3.4.1. Justification for choosing Inductive Approach...........................................................32
3.5. Research Design................................................................................................................32
3.5.1. Justification for selecting Descriptive Research Design..............................................33
3.6. Data Collection Methodology............................................................................................33
3.7. Data Analysis Method.......................................................................................................34
3.7.1. Data Analysis Method Chosen.................................................................................35
3.8. Population and Sample......................................................................................................35
3.9. Ethical Considerations.......................................................................................................35
Chapter 4: Requirement Analysis ( 5 p)...............................................................................37
4.1. Overview of Requirement analysis....................................................................................37
4.2 Requirements Analysis Process..........................................................................................37
4.3 Elicit Requirements............................................................................................................37
4.3.1 Factors which influence the agricultural production (Rainfall)........................................38
4.3.2 What impacts will the changing rainfall patterns have on the patterns of the crop?.........39
4.4. Research Requirements.....................................................................................................39
4.5. Data Gathering and Preprocessing.....................................................................................39
4.6 Chapter Summary...............................................................................................................41
Chapter 5: Design of the Solution ( 15 -20 p)........................................................................42
5.1. Introduction.......................................................................................................................42
5.2. Design Steps......................................................................................................................42
5.3. Details of the Solution Design...........................................................................................43
5.4 Theoretical Rationale of Design Solution...........................................................................45
5.4.1 Structure of Multivariate Regression Model....................................................................45
5.4.2 Objective of the Multi-Variate model..............................................................................45
5.4.3 Detailed Discussion of the Theoretical Rationale of the Model.......................................46
5.5 Chapter Summary...............................................................................................................49
Chapter 6: Implementation ( 5 -10 p)...................................................................................50
6.1. Introduction.......................................................................................................................50
6.2 Visualization.......................................................................................................................50
6.3 Descriptive Statistics..........................................................................................................53
6.4 Data Preparation from modelling.......................................................................................54
Chapter 7: Testing and Evaluation ( 5 -10 p).......................................................................57
CMM799 MSc Project (BA)
3.4.1. Justification for choosing Inductive Approach...........................................................32
3.5. Research Design................................................................................................................32
3.5.1. Justification for selecting Descriptive Research Design..............................................33
3.6. Data Collection Methodology............................................................................................33
3.7. Data Analysis Method.......................................................................................................34
3.7.1. Data Analysis Method Chosen.................................................................................35
3.8. Population and Sample......................................................................................................35
3.9. Ethical Considerations.......................................................................................................35
Chapter 4: Requirement Analysis ( 5 p)...............................................................................37
4.1. Overview of Requirement analysis....................................................................................37
4.2 Requirements Analysis Process..........................................................................................37
4.3 Elicit Requirements............................................................................................................37
4.3.1 Factors which influence the agricultural production (Rainfall)........................................38
4.3.2 What impacts will the changing rainfall patterns have on the patterns of the crop?.........39
4.4. Research Requirements.....................................................................................................39
4.5. Data Gathering and Preprocessing.....................................................................................39
4.6 Chapter Summary...............................................................................................................41
Chapter 5: Design of the Solution ( 15 -20 p)........................................................................42
5.1. Introduction.......................................................................................................................42
5.2. Design Steps......................................................................................................................42
5.3. Details of the Solution Design...........................................................................................43
5.4 Theoretical Rationale of Design Solution...........................................................................45
5.4.1 Structure of Multivariate Regression Model....................................................................45
5.4.2 Objective of the Multi-Variate model..............................................................................45
5.4.3 Detailed Discussion of the Theoretical Rationale of the Model.......................................46
5.5 Chapter Summary...............................................................................................................49
Chapter 6: Implementation ( 5 -10 p)...................................................................................50
6.1. Introduction.......................................................................................................................50
6.2 Visualization.......................................................................................................................50
6.3 Descriptive Statistics..........................................................................................................53
6.4 Data Preparation from modelling.......................................................................................54
Chapter 7: Testing and Evaluation ( 5 -10 p).......................................................................57
4
CMM799 MSc Project (BA)
7.1. Introduction.......................................................................................................................57
7.2 Autocorrelation: ACF and PACF.......................................................................................57
7.3 Mean Absolute Percentage Error- MAPE and Root-Mean-Square Error-RMSE................58
7.4 Change Point......................................................................................................................58
7.5 Prediction...........................................................................................................................60
7.6 Review of professional, social, legal and ethical issues......................................................61
7.7 Test Plan.............................................................................................................................62
7.8 Original objectives versus objectives achieved...................................................................63
7.9 Chapeter 6 & 7 Summary...................................................................................................64
Chapter 8: Conclusion...........................................................................................................74
8.1 Overall Conclusion.............................................................................................................74
8.2 Recommendations and Future Work..................................................................................75
References...............................................................................................................................76
Appendices
Appendix 1: Data Master Summary.........................................................................................83
Appendix 2: Main R Codes used..............................................................................................84
Appendix 3: Web-scraping Data Extraction Using BluePrism of Irrigation Water Level Data 86
CMM799 MSc Project (BA)
7.1. Introduction.......................................................................................................................57
7.2 Autocorrelation: ACF and PACF.......................................................................................57
7.3 Mean Absolute Percentage Error- MAPE and Root-Mean-Square Error-RMSE................58
7.4 Change Point......................................................................................................................58
7.5 Prediction...........................................................................................................................60
7.6 Review of professional, social, legal and ethical issues......................................................61
7.7 Test Plan.............................................................................................................................62
7.8 Original objectives versus objectives achieved...................................................................63
7.9 Chapeter 6 & 7 Summary...................................................................................................64
Chapter 8: Conclusion...........................................................................................................74
8.1 Overall Conclusion.............................................................................................................74
8.2 Recommendations and Future Work..................................................................................75
References...............................................................................................................................76
Appendices
Appendix 1: Data Master Summary.........................................................................................83
Appendix 2: Main R Codes used..............................................................................................84
Appendix 3: Web-scraping Data Extraction Using BluePrism of Irrigation Water Level Data 86
5
CMM799 MSc Project (BA)
Topic: Predicting the impact of rainfall on paddy harvest and its ultimate effect on
agricultural loans in banks in Sri Lanka
Chapter 1: Introduction
1.1. Problem Statement
The purpose of this research report is to predict the impact of one identified
environmental hazard i.e. rainfall, on the agricultural loan loss experience in banks of Sri Lanka.
It is essential to evaluate the contribution of rainfall on the agricultural loan loss in order to
identify the possible risk mitigation solution. For this, extensive literature search and collection
of data from secondary sources is essential.
1.2. Research Questions
This section of research report will discuss major research questions this particular
research study will address. The research questions identified for this research are as follows-
1. What is the historical quantitative experience of loan losses as represented by Non-
Performing Loan ratio in banks of Sri Lanka in the last twenty years (1998 to 2017)?
2. What is the historical quantitative experience of agricultural loan losses, as a percentage or
ratio in banks of Sri Lanka as impacted by rainfall in the last ten years (2008 to 2017)?
3. How well can rainfall caused historical agricultural and total loan loss experience related
to paddy cultivation be used in the prediction of future agricultural loan losses related to
paddy cultivation in banks in Sri Lanka?
4. How well can knowledge that is gathered in this predictive formula, contribute to the
developing of innovative loan products and other risk mitigants against the agricultural
loan losses related to paddy cultivation?
CMM799 MSc Project (BA)
Topic: Predicting the impact of rainfall on paddy harvest and its ultimate effect on
agricultural loans in banks in Sri Lanka
Chapter 1: Introduction
1.1. Problem Statement
The purpose of this research report is to predict the impact of one identified
environmental hazard i.e. rainfall, on the agricultural loan loss experience in banks of Sri Lanka.
It is essential to evaluate the contribution of rainfall on the agricultural loan loss in order to
identify the possible risk mitigation solution. For this, extensive literature search and collection
of data from secondary sources is essential.
1.2. Research Questions
This section of research report will discuss major research questions this particular
research study will address. The research questions identified for this research are as follows-
1. What is the historical quantitative experience of loan losses as represented by Non-
Performing Loan ratio in banks of Sri Lanka in the last twenty years (1998 to 2017)?
2. What is the historical quantitative experience of agricultural loan losses, as a percentage or
ratio in banks of Sri Lanka as impacted by rainfall in the last ten years (2008 to 2017)?
3. How well can rainfall caused historical agricultural and total loan loss experience related
to paddy cultivation be used in the prediction of future agricultural loan losses related to
paddy cultivation in banks in Sri Lanka?
4. How well can knowledge that is gathered in this predictive formula, contribute to the
developing of innovative loan products and other risk mitigants against the agricultural
loan losses related to paddy cultivation?
6
CMM799 MSc Project (BA)
1.3. Background of the Study
1.3.1. Importance of agriculture in Sri Lanka
Sri Lanka is a developing agricultural country of South Asian Region, which is self-
sufficient in rice, vegetables and tropical fruits. The economy of Sri Lanka is heavily dependent
on agriculture as this form the prime occupation of the people. Most of the rural population of Sri
Lanka is engaged in Agriculture and it contributes significantly towards Gross Domestic Product
of the Country. As per recent estimates, the country main product is paddy along with rice which
are also used for exporting in order to generate more revenue for the country. Along with that,
Sri Lanka is one of the major exporters of plantation crop products such as tea, coconut, rubber
and spices in the Asian region. As per the 2017 Annual Report of Central Bank of Sri Lanka,
agriculture as an economic activity contributed LKR 1,024 Billion to the overall GDP of LKR
13,289 Billion. Further the same report shows that agriculture as an economic activity employs
2,140 Million persons out of 8,208 Million total labor force of the country. (Table 56 of CBSL
2017 Annual Report). Therefore undoubtedly, agriculture represents a key economic activity of
the country.
The economy of Sri Lanka is highly dependent on agriculture and it is noted that
agriculture effectively contributes to the gross earnings of the economy. It is also to be noted that
Agricultural sector provides significant contribution to the employment needs of the economy.
The agriculture sectors accounted for 27 percent of the labor force; manufacturing 28.3 percent;
and the service sector 44.7 percent. This effectively shows that the agricultural sector has an
important role to play in the economy of Sri Lanka. According to estimates maximum
contribution to the GDP is from the agriculture sectors (5.3 percent) and the same is derived
from agricultural crop paddy. In terms of employment, agricultural sector accounts for 70% of
the workforce in rural areas. Therefore, it can be established that agricultural sector is an
important part of the economy in Sri Lanka.
It is a known fact that annual rainfall in most part of Sri Lanka has always been irregular
and this is the main reason that it has been difficult to predict the climate. Rainfall has become
something that is difficult to predict and droughts and floods have become a common feature of
the climatic of Sri Lanka. This has severely affected the fertile land and caused excessive water
in the soil or loss of nutrients which makes the soil lose its fertility. This is the main reason due
to which the agricultural sector has suffered significantly and has not been able to meet the loans
obligations resulting in bad debts. This in turn has affected the financial sectors and is considered
to be the main reason as to why banks are unwilling to support agricultural sector in Sri Lanka.
Out of the agriculture economic activity, the main crops that lead the contribution to GDP
are growing of tea, coconut and paddy (Table 2.1 of CBSL 2017 Annual Report). Paddy as a
cereal crop is cultivated in many districts of the country, wherein the top 10 paddy cultivating
CMM799 MSc Project (BA)
1.3. Background of the Study
1.3.1. Importance of agriculture in Sri Lanka
Sri Lanka is a developing agricultural country of South Asian Region, which is self-
sufficient in rice, vegetables and tropical fruits. The economy of Sri Lanka is heavily dependent
on agriculture as this form the prime occupation of the people. Most of the rural population of Sri
Lanka is engaged in Agriculture and it contributes significantly towards Gross Domestic Product
of the Country. As per recent estimates, the country main product is paddy along with rice which
are also used for exporting in order to generate more revenue for the country. Along with that,
Sri Lanka is one of the major exporters of plantation crop products such as tea, coconut, rubber
and spices in the Asian region. As per the 2017 Annual Report of Central Bank of Sri Lanka,
agriculture as an economic activity contributed LKR 1,024 Billion to the overall GDP of LKR
13,289 Billion. Further the same report shows that agriculture as an economic activity employs
2,140 Million persons out of 8,208 Million total labor force of the country. (Table 56 of CBSL
2017 Annual Report). Therefore undoubtedly, agriculture represents a key economic activity of
the country.
The economy of Sri Lanka is highly dependent on agriculture and it is noted that
agriculture effectively contributes to the gross earnings of the economy. It is also to be noted that
Agricultural sector provides significant contribution to the employment needs of the economy.
The agriculture sectors accounted for 27 percent of the labor force; manufacturing 28.3 percent;
and the service sector 44.7 percent. This effectively shows that the agricultural sector has an
important role to play in the economy of Sri Lanka. According to estimates maximum
contribution to the GDP is from the agriculture sectors (5.3 percent) and the same is derived
from agricultural crop paddy. In terms of employment, agricultural sector accounts for 70% of
the workforce in rural areas. Therefore, it can be established that agricultural sector is an
important part of the economy in Sri Lanka.
It is a known fact that annual rainfall in most part of Sri Lanka has always been irregular
and this is the main reason that it has been difficult to predict the climate. Rainfall has become
something that is difficult to predict and droughts and floods have become a common feature of
the climatic of Sri Lanka. This has severely affected the fertile land and caused excessive water
in the soil or loss of nutrients which makes the soil lose its fertility. This is the main reason due
to which the agricultural sector has suffered significantly and has not been able to meet the loans
obligations resulting in bad debts. This in turn has affected the financial sectors and is considered
to be the main reason as to why banks are unwilling to support agricultural sector in Sri Lanka.
Out of the agriculture economic activity, the main crops that lead the contribution to GDP
are growing of tea, coconut and paddy (Table 2.1 of CBSL 2017 Annual Report). Paddy as a
cereal crop is cultivated in many districts of the country, wherein the top 10 paddy cultivating
7
CMM799 MSc Project (BA)
districts contributed 78% of the total production of the county in 2008, which proportion in the
year 2017 was 73%. (Department of Agriculture www.doa.gov.lk accessed March 2019).
1.3.2. Importance of agriculture loans in Sri Lanka
The agriculture sector is considered to be the most important sector in Sri Lankan
Economy and its is due to the fact that Sri Lanka has a vast majority of fertile lands and potential
to cultivate a large variety of crops (Laeven and Valencia 2013). The main problem which the
sector faces is related to fall in profitability from the cultivations and also the financing
requirements which the farmers requires for the cultivation. A large proportion of agricultural
cultivation activities is supported by various loan and financing schemes provided by banks and
financial institutions. Therefore, agricultural loans provided by banks for cultivation, is an
important economic activity. (Cbsl.gov.lk. 2018). An agricultural loan can be described as a
financial facility that is used to meet the cost of farming and cultivation activities associated with
agriculture and business (Beck and De Jonghe 2013, pp 2). These types of loans are mainly low
interest loans that farmers generally avail to run their cultivation and farming businesses
efficiently. Since Sri Lanka is a developing agricultural country, it increasingly relies on the
special loan schemes provided by banks and financial institutions. The different loan schemes
offered are “Krushi Navodaya Loan Scheme”, “Kapruka Ayojana Loan Scheme”, “Agro
Livestock Development Loan Scheme” and others (Beck 2013). Thus, Sri Lankan banks ensure
appropriate allocation of loans for agriculture, while meeting the business demands as well as
regulations of Central Bank of Sri Lanka which require all banks to provide at least 10% of the
loans to agriculture sector (Cbsl.gov.lk. 2018). According to the schemes and the rules of the
loans, the farmers need to repay their loans after harvesting and selling their crops. Agricultural
loans in Sri Lanka can be availed by all the eligible farmers to fund the seasonal agricultural
operations and similar activities, which include farming, crops or purchase of agricultural tools.
The loans are offered to the agricultural sectors are always offered with low interest rate so that a
promotion is provided to the agricultural business which supports the entire economy. The
country is also engaged in international trade which effectively supports the needs of the
economy (Ariyadasa et al. 2017). The loans are provided by the banks with a high risk as the
crops may be hampered due to bad weather conditions which would affect the banks as it would
mean loss of loans. This has been a factor which has led to downfall of major banks operating in
the country.
The agricultural land proportion in Sri Lanka was estimated to be 43.69% in the year
2018. Sri Lanka has agricultural land of nearly 27400 sq. km (Tradingeconomics.com. 2018). In
Sri Lanka, there are two main cultivation seasons namely Maha and Yala
(Statistics.gov.lk.2018)). The cultivation seasons are named according to the two monsoon
seasons. A substantial proportion of farmers depend on financing and credit methods extended
for cultivation. Therefore, it is essential for the banks to analyze and estimate the risks associated
with the granting of the agricultural loans Chisasa, J. and Makina, 2013, p. 1).
CMM799 MSc Project (BA)
districts contributed 78% of the total production of the county in 2008, which proportion in the
year 2017 was 73%. (Department of Agriculture www.doa.gov.lk accessed March 2019).
1.3.2. Importance of agriculture loans in Sri Lanka
The agriculture sector is considered to be the most important sector in Sri Lankan
Economy and its is due to the fact that Sri Lanka has a vast majority of fertile lands and potential
to cultivate a large variety of crops (Laeven and Valencia 2013). The main problem which the
sector faces is related to fall in profitability from the cultivations and also the financing
requirements which the farmers requires for the cultivation. A large proportion of agricultural
cultivation activities is supported by various loan and financing schemes provided by banks and
financial institutions. Therefore, agricultural loans provided by banks for cultivation, is an
important economic activity. (Cbsl.gov.lk. 2018). An agricultural loan can be described as a
financial facility that is used to meet the cost of farming and cultivation activities associated with
agriculture and business (Beck and De Jonghe 2013, pp 2). These types of loans are mainly low
interest loans that farmers generally avail to run their cultivation and farming businesses
efficiently. Since Sri Lanka is a developing agricultural country, it increasingly relies on the
special loan schemes provided by banks and financial institutions. The different loan schemes
offered are “Krushi Navodaya Loan Scheme”, “Kapruka Ayojana Loan Scheme”, “Agro
Livestock Development Loan Scheme” and others (Beck 2013). Thus, Sri Lankan banks ensure
appropriate allocation of loans for agriculture, while meeting the business demands as well as
regulations of Central Bank of Sri Lanka which require all banks to provide at least 10% of the
loans to agriculture sector (Cbsl.gov.lk. 2018). According to the schemes and the rules of the
loans, the farmers need to repay their loans after harvesting and selling their crops. Agricultural
loans in Sri Lanka can be availed by all the eligible farmers to fund the seasonal agricultural
operations and similar activities, which include farming, crops or purchase of agricultural tools.
The loans are offered to the agricultural sectors are always offered with low interest rate so that a
promotion is provided to the agricultural business which supports the entire economy. The
country is also engaged in international trade which effectively supports the needs of the
economy (Ariyadasa et al. 2017). The loans are provided by the banks with a high risk as the
crops may be hampered due to bad weather conditions which would affect the banks as it would
mean loss of loans. This has been a factor which has led to downfall of major banks operating in
the country.
The agricultural land proportion in Sri Lanka was estimated to be 43.69% in the year
2018. Sri Lanka has agricultural land of nearly 27400 sq. km (Tradingeconomics.com. 2018). In
Sri Lanka, there are two main cultivation seasons namely Maha and Yala
(Statistics.gov.lk.2018)). The cultivation seasons are named according to the two monsoon
seasons. A substantial proportion of farmers depend on financing and credit methods extended
for cultivation. Therefore, it is essential for the banks to analyze and estimate the risks associated
with the granting of the agricultural loans Chisasa, J. and Makina, 2013, p. 1).
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