Accounting for loan amount and credit rating when calculating lifetime value of agricultural lending relationships
Michael A. Gunderson
Brent A. Gloy
Eddy L. LaDue
Using empirical default probabilities and profitability distributions, a simulation model is developed to identify the long-term value of relationships among differing credit rating and loan amount groups. According to the results generated from a set of lending relationships, agricultural lenders are pricing low and moderate credit rating customers such that similar long-term values are found among the groups. Also, large loan amount relationships generate more dollars of lifetime value. The large relationships, however, earn fewer dollars of lifetime value per dollar of loan amount among risk peers. Implications are also drawn for the retention rates of existing customers.
Agricultural lending, Lending relationships, Lifetime value
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