Overview of Probability of Default
Probability of default (PD) models are a tool used by bankers and lenders to assess the likelihood that a borrower will be unable to repay their debts. PD models in agricultural lending help lenders assess and manage the credit risk associated with lending to farmers and agribusinesses.
This enables them to make more informed lending decisions and mitigate potential losses. PD models in agricultural lending work very similar to similar models used in commercial lending and consumer lending as well. However, agriculture carries unique risks which require that models be tailored to the industry.
Think of probability of default models like an algorithm: using multiple variables taken into account, the model will return a result. This result is known as the PD Score.
In agricultural lending, these formulas can range from very simple single variable formulas to complex formulas using a mix of calculus and statistical analysis.
We will break down a few examples below.
