Predicting the Impact of Environmental Hazards on Agricultural Loan Loss Experience in Large Banks in Sri Lanka

Running head: BUSINESS ANALYTICS RESEARCH PROJECT
Business analytics: Predicting the Impact of Environmental Hazards on Agricultural Loan
Loss Experience in Large Banks in Sri Lanka
Name of Student
Name of University
Author Note

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Table of Contents
Chapter 1: Introduction........................................................................................................3
1.1. Problem Statement....................................................................................................3
1.2. Research Questions...................................................................................................3
1.3. Background of the Study..........................................................................................4
1.4. Aims and Objectives of the Study............................................................................7
1.5. Scope of the Study....................................................................................................8
1.6. Software Tools to be used.......................................................................................10
1.7. Deliverables of the Study........................................................................................10
Chapter 2: Literature Review.............................................................................................14
2.1. Introduction.............................................................................................................14
2.2. Agricultural loan in Sri Lanka................................................................................15
2.2.1. Overview of large banks and exposure to agricultural loans...........................19
2.3. Factors that contribute to agricultural loan loss: Causes........................................21
2.3.1. Predicting Weather Patterns............................................................................24
2.3.2. Impact of environmental hazard on agricultural Loan Loss: Effect of Weather
...............................................................................................................................................25
2.4. Risks associated with Agricultural Lending in Large banks of Sri Lanka.............27
2.4.1. Innovations in weather Risk Management in Banks.......................................28
2.5. Impact of loan loss experience on profit levels of large banks of Sri Lanka..........29

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2.6. Policy and Regulatory Interventions......................................................................30
2.6.1. Loan Policy and Governance...........................................................................32
2.7. Risk Mitigation.......................................................................................................34
2.8. Global Engagements...............................................................................................36
2.9. Recommendations...................................................................................................37
2.10. Chapter Summary.....................................................................................................38
Chapter 3: Research Methodology....................................................................................41
3.1. Introduction.............................................................................................................41
3.2. Research Method....................................................................................................41
3.3. Research Philosophy...............................................................................................44
3.3.1. Justification for choosing Positivism Research Philosophy............................46
3.4. Research Approach.................................................................................................47
3.4.1. Justification for choosing Inductive Approach................................................48
3.5. Research Design.....................................................................................................49
3.5.1. Justification for selecting Descriptive Research Design.................................49
3.6. Data Collection Methodology.................................................................................50
3.7. Data Analysis Method............................................................................................52
3.7.1. Data Analysis Method Chosen........................................................................53
3.8. Population and Sample...........................................................................................53
3.9. Ethical Considerations............................................................................................54

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References..........................................................................................................................56
Chapter 1: Introduction
1.1. Problem Statement
The purpose of this research report is to predict the impact of environmental hazard on
the agricultural loan loss experience in large banks of Sri Lanka. It is essential to evaluate the
contribution of environmental hazard on the agricultural loan loss in order to identify the
possible risk mitigation solution. For this, extensive literature search and collection of data from
primary sources is essential.
1.2. Research Questions
This section of research report will discuss major research questions that this particular
research study will address. The research questions identified for this research are as follows-
1. What is the historical quantitative experience of agricultural loan losses in large banks of
Sri Lanka as impacted by environmental hazards in the last ten years?
2. How well can environmental hazard caused historical agricultural loan loss experience be
used in the prediction of future agricultural loan losses in large banks in Sri Lanka?
3. How well can knowledge management that is gathered in this predictive formula,
contribute to the developing of innovative products that enables in early identification of
nonperforming agricultural loans so that large banks in Sri Lanka can effectively mitigate
the agricultural loan losses?

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4. What are the recommendations for reducing the impact of environmental hazards in loan
loss experience in large banks of Sri Lanka?
1.3. Background of the Study
Sri Lanka is a developing agricultural country of South Asian Region, which is self
sufficient in rice, vegetables and tropical fruits. Along with that, Sri Lanka is one of the major
exporters of plantation crop products such as tea, coconut, rubber and spices. Thus, this country
largely depends on the agricultural loan from the large banks in order to sustain in their
agricultural production (Cbsl.gov.lk. 2018). An agricultural loan can be described as an overdraft
facility that is used to meet the cost of farming and cultivation is 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 scheme by Central Bank of Sri Lanka and loans from similar large banks (Laeven
and Valencia 2013). The different loan schemes offered by the central bank of Sri Lanka are
“Krushi Navodaya Loan Scheme”, “Kapruka Ayojana Loan Scheme”, “Agro Livestock
Development Loan Scheme” and others (Beck 2013). Thus, Sri Lankan government ensure
appropriate loan for agriculture. 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 animal farming, crops or purchase of agricultural tools. Minimal
documentation is required for agricultural loan in Sri Lanka (Ariyadasa et al. 2017).

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The agricultural land in Sri Lanka was estimated to be 43.69% in the year 2014. Sri
Lanka has agricultural land of nearly 27400 sq. Km (Tradingeconomics.com. 2018). Thus, the
country heavily relies on the finances that are provided by the banks in form of agricultural loan.
The approval of bank loan is subjected to a number of criterions. In Sri Lanka, there are mainly
two cultivation seasons which are Maha and Yala (Statistics.gov.lk.2018). The cultivation
seasons are named according to the two monsoon season. Since the entire farming community of
Sri Lanka is dependent on the bank loan, it is essential for the banks to analyze and estimate the
risks associated with the approval of the agricultural loans (Chisasa, J. and Makina, 2013, p. 1).
The agricultural loans that are approved for supporting the farming activities are
subjected to a number of risks (Chisasa, J. and Makina, 2013) . Identification, analysis and
addressing of these risks are essential. One of the major risks that are identified in this context
that can affect the repaying of the loans is environmental factors (Birner 2018, p 25). The loss of
crops as a result of environmental hazards can in turn result in significant loss of the banks that
are approving loans for farming activities (Birner 2018, p 50).
Therefore, it can be said that the environmental damage not only brings about significant
losses to the farmers and livestock production, it also affects the large banks of Sri Lanka. Thus,
it is essential for the banks to consider mitigation strategies for the risks that are associated with
the implementation of other project management (Beck 2013). It is essential to understand that
the risks associated with the natural disasters and environmental hazards are not under the
control of the borrowers. The banks that are lending money to the borrower needs to introduce
several reforms such as diversification strategies, collaboration with institution, regulatory
intervention and other innovative strategies for management and reduction of the risks associated
with this type of agricultural loans (Laeven and Valencia 2014).

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The research project has been undertaken in order to predict extent of the impact of
natural disaster and environmental hazards on agricultural loan and loan loss in large banks of
Sri Lanka (Birner 2018, p 50) . This will further help in addressing of similar situations in future.
The banks cannot stop providing financial help to the farmers on account of the losses faced due
to environmental hazards. The research report will identify the major impacts of the
environmental hazard on bank loss and will further predict the possibility of developing new
strategies of reducing the losses associated with lending of agricultural loans.
As per the government rules, all the large banks of Sri Lanka are entitled to provide
agricultural loans to the farmers (Cbsl.gov.lk. 2018). This is compulsory for all the large and
medium sized banks. The banking sector of Sri Lanka is well capitalized and well regulated
(Cbsl.gov.lk. 2018).. The Sri Lankan banking sector is therefore one of the fast growing sectors
in Sri Lanka. However, the loan losses from agricultural loan gives rise to a major concern
associated with the financial stability (Chisasa and Makina 2013)..One of the major reasons
behind the same can be the fact that the Sri Lanka’s banks are generally more challenges in terms
of innovation, efficiency and value added. The market of Sri Lanka remains relatively
underdeveloped and not up to the international standards (Statistics.gov.lk 2018). Coupled with
that, the natural disasters increases the amount of loses that are faced by both the farmers and the
banks that are lending them money for farming (Li et al. 2013) .
However, in the recent years, the banking sector of Sri Lanka is large and quickly
expanding in terms of coverage. Thus, it is essential for the large bank of Sri Lanka to essentially
identify the approaches and strategies that can help in mitigation of this type of risk or reducing
the risks associated with the agricultural loan loss (Beck and De Jonghe 2013, p. 5). In this
context, the different challenges associated with the agricultural lending are needed to be

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identified. Farming is a risky business and its profitability is entirely dependent on the
profitability of the crops. There are a number of reasons due to which a crop might fail. Crops
fail due to the influence of weather, which in turn influences the productivity of the same. The
decrease in productivity of the crops often results in fluctuation of prices of the crops and
reduced productivity. In these cases, the farmers fail to repay their loans mainly because the
productivity is lowered (Laeven and Valencia 2014, p 10). Thus, identification and measurement
of risk is essential in order to stop the lending institutions to reduce the losses. Apart from that,
the agricultural yields are generally uncertain, which is associated with natural hazards. Thus,
implementation of research study is quite important in order to reduce the impact of agricultural
loan losses in large banks of Sri Lanka.
1.4. Aims and Objectives of the Study
This section of research report will be discussing the purpose and main aim of this
research project. Identification of the major aims of this research project will help in easier
identification of the objectives of the study.
The main aim of this research project is to identify the Impact of environmental hazard
on the agricultural loan loss experience in large banks of Sri Lanka. The purpose of the research
project is to predict the specific risks that the agricultural sector is exposed to, in the agricultural
sector. The research aims in collection of both secondary and primary data in order to predict the
agricultural loan losses in Sri Lanka. Based on this research aims, the research objectives and the
research questions are discussed in the following sections.
Objectives of the Study