Repayment Plans for Term Loans in Agriculture

Repayment of term loans (medium and long-term loans) differs from short-term loans due to their partially liquidating nature. These loans are recovered in installments based on the nature of the asset and loan amount.

Types of Repayment Plans for Term Loans

a) Straight-End Repayment Plan / Single Repayment Plan / Lumpsum Repayment Plan

• Entire loan amount is repaid at the end of the loan tenure in a single payment.
• Interest is paid annually, but the principal is repaid in one lump sum at maturity.
• Suitable for loans where income generation occurs after a long period (e.g., orchards, timber plantations).

b) Partial Repayment Plan / Balloon Repayment Plan

• Loan is repaid partially over the years with smaller installments initially.
• A large final payment (balloon payment) is made at the end of the loan period.
• Suitable for projects where major income generation occurs in the final years (e.g., long-gestation crops, livestock farming).

c) Amortized Repayment Plan

• Loan is repaid in a series of installments that include both principal and interest.
• Two types of amortized plans:

a) Amortized Decreasing Repayment Plan

• Principal amount remains constant, while the interest decreases over time.
• Result: Annual installment amount reduces over the years.
• Suitable for machinery and equipment loans, as maintenance costs rise over time.

b) Amortized Even Repayment Plan (Equated Annual Installment Method)

• Equal annual installment over the entire loan tenure.
• Principal increases gradually, while interest declines over time.
• Used for farm development, well construction, poultry, dairy units, and orchard development.
• Formula for annual installment (I):

I = B×I / 1−(1+i)⁻ⁿ  

Where:

• • I = Annual installment
  • B = Loan principal
  • i = Annual interest rate
  • n = Loan period in years

d) Variable Repayment Plan / Quasi-Variable Repayment Plan

• Borrower pays different installment amounts each year based on income availability.
• Larger payments in good harvest years and smaller payments in poor years.
• Not commonly used by institutional lenders.

e) Optional Repayment Plan

• Borrower has an option to pay an additional amount towards the principal along with regular interest payments.
• Provides flexibility in repayment based on income flow.

f) Reserve Repayment Plan / Future Repayment Plan

• Used in areas with high variability in farm income due to climatic risks.
• Farmers make advance payments from previous years’ savings to avoid default in bad years.
• Benefits:
• Protects the banker from loan defaults.
• Helps the borrower maintain credibility.