What is risk rating, why do we have to do it and what is Akiptan’s approach?

Skya Ducheneaux, Akiptan’s Executive Director explains her perspective on how Akiptan is equally balancing lender security and borrower prosperity by taking an innovative approach to traditional risk rating standards.

Risk rating and the word risk in and of itself have always bothered me. I know it’s a necessary evil within banking, but as best I can tell, some old guys hundreds of years ago said “Risk Rating - this is how we do it” and no one has revisited that concept since. When I was setting up Akiptan, I didn’t have decades of banking experience, but what I did have was real life agricultural production experience. While this may have been to my detriment from time to time as I had a steeper learning curve, it was also very much to my benefit because I didn’t operate from a place of “well this is how things normally work.” It was easier for me to challenge the finance world “norms” because they hadn’t been ingrained into me by my mentors during formal training. 

To help explain what risk rating is, I want to share a story from my early days at Akiptan. Risk rating is where, typically, a banker goes through an applicant’s 5 C’s of credit (Character, Capacity, Capital, Collateral and Conditions), pulls a bunch of ratios and numbers and then assigns the borrower an A, B, C, D, or F, rating. Sometimes it’s a 1- 4, or whatever the scale may be. Basically, a “better” rating translates to more favorable terms - specifically, a lower interest rate and sometimes even a longer period of debt repayment. The “worse” the rating, the worse the terms are. The interest rates get higher because that’s the premium a borrower pays for being deemed “risky.” That seemed weird to me, but I went on with it. I started to run through some real-life scenarios: long time ranchers, beginning producers, start-up businesses, etc. What I found was really interesting.  

This traditional risk rating system was penalizing some of the people who needed a break the most. Beginning producers, who were 18 years old with no credit and no balance sheet rated terribly in this system. They received the highest interest rates and we, as the financial institution, were ADDING barriers to their success by giving them a higher payment. Any small business with little cash flow room or equity to start with was experiencing the same thing. Another thing I discovered was that most banks that did agricultural lending weren’t reporting their ag loans to the credit bureaus, but they were factoring a producer’s low credit score (due to little or no history) into their risk rating.The more I researched, the more it seemed that this antiquated system was stacking barriers against producers. 

As a certified Community Development Financial Institution (CDFI), Akiptan must demonstrate that we are a mission-driven lender and that we are addressing the gap in access to capital. One way the CDFI Fund, the agency that certifies CDFIs nationwide, determines this is by requiring that we risk rate to show we are lending to “risky” borrowers and not just doing A-rated loans. Understandable right? But, the CDFI Fund doesn’t care what we do after we assign a risk rating. For example, we are not forced to have different interest rates for different ratings.

With all of this information, I still felt the typical way of lending to agriculture operations wasn’t right. Historically, we as lenders, had been erecting barriers with our terms, which in reality, was just us creating additional, actual risk – not just a perceived risk – for our producers. It was time to go back to the drawing board and think outside of the box. I needed to find a way to stay in compliance with our CDFI certification but also push back on industry standards. I went to Akiptan’s Board of Directors and explained my findings. I was in favor of a flat interest rate, the same for our A loans as our D loans. They agreed, and we’ve been doing it ever since. This provides capital to our borrowers through a strength-based approach, and truly allows our loan officers to operate in a system where they can help.

Character is important in this industry, and I bet on a producer’s success every time I sign a loan closing document. Agriculture is more than “just a job.” It’s a lifestyle, a livelihood, and a legacy. It’s generations of blood, sweat, and tears handed down. Failing isn’t an option for agricultural producers, and that’s why I bet on them. No one works harder than someone in agriculture, and that’s why we won’t make it harder on our borrowers by passing on terms that guarantee a struggle to success. At Akiptan, we’re going to continue to take liberties where we can and show up as a partner – not just a lender.  

To this day, the word “risk” and any variation of it will make the hairs on the back of my neck stand up. The three biggest external “risks” in agricultural lending are the weather, market fluctuations, and the lender that a producer chooses. It’s a hill I’ll die on. Agricultural producers know they don’t have control over the weather and markets, but sometimes they DO have control over where their capital comes from. 

Traditional financial institutions often believe they are supporting borrowers by offering these “risky” loans, since this has long been the industry standard. But, I think it’s time to do better! As a lender, our organization’s success stems directly from the success of our producers and their operations. So why would we make it harder for them to succeed? Norms and power dynamics be damned. If we want to truly have an impact, we need to deconstruct some of our thinking and be a bit more pragmatic about implementing solutions that are in our control. Are we standing in our own way? 

To learn more about the products and services of Akiptan visit our website at www.akiptan.org or email our team at info@akiptan.org.