Determining the Probability of Default of Agricultural Loans in a French Bank

Recently, financial institutions have developed improved internal risk ratingsystems and emphasized the probability of default and loss given default. Thedefault characteristics are studied for 756 loans from a French bank: CIC- BanqueSNVB. A binomial logit regression is used to estimate several models of theprobability of default of agribusiness loans based on information available at loanorigination. The results show that leverage, profitability and liquidity at loanorigination are statistically significant indicators of the probability of default. Asleverage increases, profitability decreases, or liquidity decreases, the probability ofdefault increases. As the length of loan increases, the probability of default alsoincreases. Finally, it is more accurate to develop a model for each type ofcollateral (activity). By developing more quantitative credit scoring models,banks may benefit from lower capital requirements while borrowers may seebetter rates where the risk of loans is appropriately priced.