Information Technology and Credit Scoring At Agricultural Banks in the Northeast and Eastern Corn Belt
LaDue, Eddy L.; Cuykendall, Charles H.; Stokes, Jeffrey R.
Advances in information technolo gy and data processing are rapidly changing the methods of communication and transaction processing procedures used by commercial banks. Banks that are able to make use of this technology should be able to provide better service to customers and/or provide the same services at lower cost. It may also allow banks to change how they do business in ways that will be beneficial to both their customers and their stockholders. Agricultural businesses will be well served by banks only if rural banks adopt and make appropriate and effective use of these new technologies. One of the handicaps of lending in rural areas, and particularly in lending to farmers, is the geographical separation of businesses. Farms are often located considerable distance from a bank’s offices. This distance hampers person to person communication and makes transfer of documents slow and costly. Information technology provides opportunities to speed and reduce the cost of such communications. Thus, technology offers the opportunity to improve efficiency and reduce costs. However, rural areas also often have lower quality phone service and generally no cable service. Also, many farm operators do not have state of the art computer systems. This implies that the short run value of modern information technology in dealing with agricultural portfolios may be more limited than a straightforward assessment of the theoretical possibilities would suggest. In addition, the cost of adopting new technology is high and tends to be a similar over a wide range in bank size. Smaller rural banks may find not have enough offices or business over which to spread the development costs. Within this environment, bankers must decide whether to delay adoption of new technology in light of the possibly limited short run benefits or move ahead aggressively in the hopes of gaining a competitive advantage over rival lenders. Or, they may be forced to move ahead to just stay even with the competition. If information technology is viewed as a new distribution channel for traditional banking products and services, rather than new products, a bank’s decision is one of the optimal timing for, and speed of, adoption of technology, rather than a decision of whether to adopt or not. The objective of this research is to identify the extent of adoption of information and processing technologies by Northeast & Corn Belt Region banks that lend to rural and agricultural businesses. First, we describe the survey procedures used to collect the data. This is followed by: (1) a description of the characteristics of the surveyed and responding banks, (2) a discussion of the level of use of various new technologies by rural banks, (3) a detailed description of design and use of credit-scoring models by banks, and (4) some conc lusions.
Charles H. Dyson School of Applied Economics and Management, Cornell University