Objective
This is an executive summary of a brainstorming session between TAC and iSPIRT to achieve the following:
- Collate issues related to Agri credit (and more broadly in rural finance) across perspectives; establish key linkages between various parts of the crop cycle, impacting rural finance.
- Draft a “problem statement” and break it into nano components.
- Brainstorm possible out-of-the-box solutions for the issues discussed.
Shortcomings in the Agricultural and Agri Credit Sector
Despite having the highest percentage of arable land, India is grossly underutilizing its land, water and human resources and has low productivity compared to several countries.
I. Incomplete definition of farmer
The definition and view of a farmer often excludes those involved in poultry farming, pisciculture, animal husbandry, dairy and horticulture. Within crop cultivators itself, there is a necessity to further understand that the farmer’s challenges vary based on agro climatic zones and types of crops, rainfed or irrigated farm, amounts of rainfall, soil type, weather, to name a few.
II. Limited cash flow for farmer
The farmer requires cash across all stages of the crop cycle but has access to cash only during certain months. Often farmers have maximum access to cash at the sowing stage of the crop cycle, (which is also the least cash intensive period) but are cash-strapped to finance post-harvest processes (access to mechanisation, cash for labour, warehousing).
III. Agri-chain heavily contingent on price fluctuation and market forces
The entire Agri value chain, and the success or failure of the farmer is greatly dependent on price and market fluctuations. The farmer is never a lone actor but is always affected by the greater issues in the Agri supply chain. The following factors determine price:
- Quantity and Quality: dependent on weather, input quality, technical advice, water availability.
- Access to open markets: exploitation of the farmer by local traders and local loan providers.
- Time of sale: price fluctuations based on time of arrival of crop in the market.
- Contract cultivation: closed loop; from start to end of the Agri chain, price often pre-determined.
- Access to market prices: options within a 50Km distance.
IV. Existing credit in the system flows toward large, profitable farmers
Lenders are caught in the loop of repeating lending to the same set of borrowers owing to reliable credit history, and ability to repay. 70% Agri loans go to the large, profitable farmers at the top of the pyramid however 84% of Indian farmers are medium and small and do not have access to sufficient or timely credit. Often Agri input is provided by the middlemen/distributor on credit which affects the smaller farmer.
Why do small and marginal farmers not have access to credit instruments?
- Accumulation of previous unpaid loans
- Poor / incomplete paperwork (40%)
- Lender does not trust repayment capacity (29%)
V. Glacial credit request processing
The farmer often requires NOC / no encumbrance certificate forms from all neighbouring banks for the loan to be processed. This paperwork is time consuming and sometimes incomplete, leading to delay in accessing finance.
VI. No products available for personal credit requirement
A farmer needs money throughout the year for household expenses and hence a part of Agri loans disbursed – especially if processed late and granted post sowing cycle – are often utilised for personal use owing to the seasonal nature of agriculture. There is often minimal understanding of this fact by lenders.
Key Takeaways from Discussion
Aspirational Cash-Flow Lending Story: The Vision for 2025
Selvam, a rice farmer with a two-acre farm near Madurai, requires a loan amount ahead of the agricultural season. He approaches a digitally trained entrepreneur in his village with his details (crop, land, income, identity, etc). Much like a LIC agent / independent financial advisor, this digitally trained village level entrepreneur (VLE) enters the Selvam’s details including crop, livestock, background etc. with his consent into the system and accesses pre-approved templates from various lending institutions: Axis, IndusInd, HDFC, Samunnati, etc. He helps Selvam understand their products, and choose a few options, based on best fit with requirements from all options. Upon selecting the correct product, the VLE submits the application on a digital platform. Within half an hour, Selvam closes the loan, and links insurance. Everything is coordinated by the VLE who not only aggregates information but also ensures technical advice is provided and is paid by Selvam for his efforts. Multiple sellers compete for his business in a digitally enabled process.
While the actors and their roles may be the same in the above approach, what is unique is the nature of engagement. Farmer is now participating in the formal economy. Through this model we are trying to make the VLE work for farmer and play a central role as an entrepreneur. Unlike an LIC agent selling a policy, the VLE is paid by the farmer to find the right solutions as his agent. He will start representing a larger ecosystem.
VLE touches different nodes: a) Multiple service providers, b) access to cheaper capital & c) advisory providers.
Outcome: A Funnel is created to capture transactions through a formal channel and in building a digital footprint & farmer profile. Farmer is now part of the larger economy and has access multiple options of market (due to dis-aggregation)
I. Cash Flow Lending as an Alternate Approach
Incorporating a cash-flow based lending system (which currently does not exist in agriculture) will allow for a gradual credit rating to build over time. The key elements of the cash flow lending model are:
- Tenant Farmers
While collateral-based lending favours farmland owners, the cash flow lending model focuses on the “farmer” rather than the “owner” and works for both – landholder farmer and tenanted farmers.
- Assessment and Creating a Digital Identity for farmer
Replicating an account aggregator model for data portability, using an Agri Data Exchange for creating an Agri data marketplace with the farmer at the centre; digitising the farmer’s land records are needed.
- Insurance
This model automatically connects to the farmer’s already existing insurance or enables insurance to the extent of the loan taken with recourse to the lender.
- Linkage to markets / Mandi
Market linkages will be democratised making it easier for the stakeholders to seamlessly trade. Price discovery, supply & demand mapping will bring in transparency and build trust among the eco system players.
- VLE
VLE could be an independent entity and can be aligned to an FPO. He will be the center of the ecosystem that we are trying to build.
The enabler, VLE, will ensure lender-borrower best interests are maintained and serves as an agent for the farmer. Technology will have to be used to ensure that the VLE does not develop vested interests. Now the incentives are being aligned and the costs associated are streamlined across VLE, farmer and the service provider.
We can leverage the VLE model to retired army jawans and post office workers who have a closer proximity to the villages.
- FPO
The local collectives like SHGs, cooperatives, FPO’s to be empowered with technology and support to reach the individual farmer, through the VLE to enable the cash flow lending model.
- DBT Linkage
Visibility of the DBT inflow from government inflow to the farmer is an important facet of the cash flow lending model.
- Warehouse storage and receipts
This will enable the farmer to store his produce and sell it when the prices are higher and at the same time make available finances to repay previous loans and have funds for the next crop.
- Retail Digital rupee
We can start thinking about leveraging RBI’s initiative of using digital e-rupee for direct procurement with input sellers, service and advisory providers.
II. Creating a range of loan products
There is a need for a range of loan options available in the market so a farmer can select the best suited loan option based on interest and repayment cycle. Ideally the loan products accrued by each farmer should be customizable at a software level; this will require a base infrastructure to guide the same.
III. Design a credit rating system of farmers & providing specific and relevant ri-financial advice
The advantages of the cash flow lending model are that it helps formalize largely invisible “tenanted” farmers, avoids the need for precise assessment of farmland and linkage to govt records, enables ability to provide funds to farmers in a timely manner, is process driven, and enabled by a digital platform. The target for this innovation should be small-scale, high-risk farmers, with inbuilt income growth potential.
Next Steps
Further consultation within the Industry and the Govt. are needed to flesh out and strengthening of this narrative is now needed for a successful model. It should be piloted in a sub-district with the potential to demonstrate revenue / productivity gain through cash injection and the suitable choice of crops.
Participants
- Sharad Sharma, Co-Founder, iSPIRT Foundation
- Anil Kumar SG, Founder and CEO Samunnati Financial Intermediation & Services Private Limited
- Nipun Mehrotra, Founder & Ceo, The Agri Collaborative (TAC) – Convener
- Ram Kaundinya, DG National Seed Federation of India, Ex-Axis Bank board, Ex- MD, Advanta
- Ravishankar A, Ex Madura Microfinance, Ex Centre for Good Governance, AP
- Vineet Saraogi, Volunteer, iSPIRT
The Agri Collaboratory 