Financial institutions need to bet on technology to overcome the challenges of financing in agribusiness

Agribusiness is an activity with a high demand for capital, especially in Brazil. In most cases, the producer even needs to benefit from the financial resources to buy inputs and machinery and, thus, start the production of the next harvest.

Until a few years ago, the rural credit market was highly concentrated in the hands of public institutions, but little by little this scenario has been changing. Increasingly, this activity has awakened a greater engagement of private banks and other companies, due to a more accurate perception of the risks in the sector, which is derived from the technological improvement of data analysis, in addition to economic policies that favored the activity as a all.

Basically, the act of financing something depends on a resource available in cash. When lending it to the interested customer, it is necessary to have an understanding of the destination of the resource, that is, to manage, monitor and validate the risk of that operation. In agribusiness, this process is much more complex, because it is, in most cases, distant and correlated to imponderable variables, with little available and/or structured data.

One of the risks involved is that of image or reputation. In this facet, among others, is the socio-environmental risk, which is included in the worldwide ESG agenda (acronym in English for “Environmental, Social and Governance”). As it has co-responsibility for the producer's action, the entity that finances it must be aware of acts that may harm social well-being and the environment, such as working in conditions analogous to slavery and deforestation, respectively. This risk also comes up against legal and non-legal issues that need to be followed, such as impeding areas embargoed by Ibama (Brazilian Institute for the Environment and Natural Resources), overlapping with Conservation Units, among other criteria contained in the guidelines of the rural credit, the MCR, released and managed by the Central Bank.

More recently, in September 2021, one of the most imponderable risks entered the scene through Resolution nº 140 of the Central Bank, which discriminates against social and environmental impediments and, additionally, opens the door to a new entrant, the climate impediment.

Monitoring crop performance (performance risk that impacts credit risk) is also an important mission for those who provide resources. Unexpected events can occur in the field at all times, from drought and excessive rain that can completely damage a crop, even the appearance of a pest capable of delaying the production harvest. These problems become even more delicate in portfolio analyses, after all, the weather is a risk that can have a comprehensive impact, geographically speaking. Therefore, spreading risks is a determining factor for agribusiness financers.

As a result of this challenging scenario, financial institutions increasingly need to resort to digital solutions, which use remote sensing, data crossing and non-obvious modeling, to solve the problem, which has a wide range of knowledge, techniques, methodologies and tools. In fact, being far from the producers is perhaps the basic challenge to be overcome by the banks that finance them. Even relatively simple issues can become more difficult to be resolved if the organizations that finance the sector do not have efficient digital platforms at their disposal, such as the evaluation or valuation of the constitution of guarantees with real estate.

Today, therefore, technology is the most recommended way for banks to manage the field comprehensively, digitally and remotely, initiating a cycle that is monitored before and throughout the loading of the financing agreement. Through it, data can be collected by financial institutions in an automated way, making the information reach the decision makers in the correct way.

The truth is that agribusiness still has a lot of room to grow in Brazil. By reducing risks for the financial sector (we cannot forget the insurance sector and the capital market), technology also creates opportunities for even groups with a smaller credit portfolio to have the chance to make resources available to the market. in a safe way, which is the most recent case of the new courageous adventurers (derived from Venture) of agro, the Fintechs. Undoubtedly, with more players financing the area, the perception that Brazil is the country of agribusiness will be even stronger.

*Lucas Tuffi is commercial director at Agrotools, the largest digital platform for corporate agribusiness in the world