Krishi Voice: Amplifying Voices for Agri

Workshop on Agri Credit Problems with FPOs

Date: 4th August 2023

Key Panelists: Mr. Bhaskar, TAC – Moderator; Mr. Pravesh Sharma, NAFPO; Mr. Vilas Shinde, Sahyadri Farms; Mr. Ashutosh Vaidya, TAC; Yogesh Dwivedi, MBCFPCL.

The Agri Collaboratory (TAC) brought together an interesting cohort of participants – farmers, FPOs, agri-experts by means of an online workshop to discuss the issues of access to credit for farmers (mainly small, tenanted and women farmers) and Farmer Producer Organizations (FPOs).

Premise of the Workshop

As shared by the keynote speaker - Mr. Pravesh Sharma (former Secretary of Agriculture Dept. in Govt. of Madhya Pradesh, India representative of the International Fund for Agricultural Development, MD of Small Farmers’ Agri-business Consortium i.e. SFAC), roadblocks identified for sustainable growth and development of agriculture in India are: A) Capital crisis – credit availability through public and private investments; B) Natural Resources crisis – degradation and erosion of soil, over-use and contamination of water leading to degradation of factors of productivity; C) Human resources crisis – since farming at small scale is not a profitable venture, most youth are opting out for more lucrative and reliable sources of income; D) Marketing crisis – for most farmers the market for their produce is restricted to their own districts only, thus restricting their options with limited demand and selling options.

Summary:

With focus on the credit issue for farmers and FPOs, the panelists and participating FPOs across the country acknowledged how lack of timely and adequate credit for the small and landless farmers is a hurdle for farmers in making cultivation of crops a profitable business. With the exception of a few success stories and innovative examples to solving the credit problem for the farmers, an approach to solving issues at an ecosystem level were emphasized upon. The various challenges discussed in farmer-credit, their collective solutions and a few opinions are summarized below for a deeper understanding:

Govt. policies and their implementation on the ground:

1. Although most definitions of farmers for policies, subsidies and schemes revolves around agri-land owning individuals/HHs, more than 18% of farmers (involved in cultivating land) in India are tenanted, land-less farmers with average HH income of well below 1 L/year i.e. approximately 2.1 crore tenanted farmers. Unless there is an implementation of policy, database gathering for these tenanted farmers, the benefits intended from policies will not trickle down to a large number of the agri-population which is unfortunately also the most-needy. While Agri/revenue depts. in a few states do grant documents to recognize tenanted farmers, the exercise is sporadic at best and isn’t recognized by ELIs considering loans to farmers.
2. While loan waivers for farmers is a much awaited relief for most farmers in India, it is also a sign of failure to implement policies and regulations to make farming a sustainable profitable business in India. Since access to market, trade and policy know-how, steps to close on tech and financial disparity for farmers are still overwhelming for the small and tenanted farmers to be able to sustain profitable ventures, they often succumb to the pressures and migrate or change their occupation or depend on loan waivers from the govt. to merely sustain.
3. Farmers in most states of India are limited within their districts for selling their produce. This limits the scope of market for the farmers and their options to sell at the highest price.

Follow through on policies and schemes and the attitude of rural banks: (Credit Guarantee Scheme, Kisan Credit Card, Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Kisan Maan-Dhan Yojana, Pradhan Mantri Krishi Sinchayee Yojana, Pradhan Mantri Kisan Samman Nidhi & Restoring Interest Subvention Scheme to name a few).

1. As per the Credit Guranatee Scheme, mainstream banks and financial institutions are guaranteed by the Credit Guarantee Fund for an amount of up to INR 1.5 Cr per FPO in case of default. This allows the lenders to give collateral/mortgage free loans to FPOs. The reality however, is a thorny picture. Branches of banks and even senior regional leaders of reputed nationalized banks are unaware of such clauses of schemes and often seek collaterals.
2. A few FPOs also raised concern of banks seeking financial records for 2-3 years from FPOs to grant loans, which is a violation of the CGS norms.
3. Most rural banks have shown interest in gold loans - this often gets captured as loans for agricultural/neutral purposes. Apart from NABKISAN, NABARD and a handful of NBFCs; very few banks have product solutions for FPOs.
4. Banks have targets for priority sector lending for agri/farmer loans to accelerate growth in the agri industry. While the tenanted, landless farmers are most desperately in need of timely, adequate credit at reasonable rates, most of these loans are given to repeated debtors with agri-land holdings and other businesses. Mere qualification as a farmer due to ownership of agricultural land and a greater capacity to repay due to other businesses, siphons these loans from the pool of agricultural capital.
5. While unsecured loans in urban India are available at fingertips and within an hour of processing time, Eligible Lending Institutions (ELIs) take an average of a month to process agri-loans, at times even more. In most cases, the loans are rejected and the farmers are left with no option but to borrow from NBFCs or private money lenders at high interest rates – this is a classic case of habitual and circumstantial dependence of farmers on money lenders. In cases of approval, often the principal is insufficient and delayed.
6. High cost of financing with NBFCs leads to insufficient funds and yet higher interests to be paid by farmers.
7. Most farmers have 3-4 harvests in a year and seasons, crop type, natural resources, access to market resources make credit-worthiness a complex problem. Credit solutions offered by most ELI are not sensitive to these factors and do not take a tailor-made approach.
8. Banks in MP, CG & UP have staff shortage for such schemes at a ratio of 2 personnel for every 1000 FPOs.
9. Loans given basis turnover and not net worth, even profitability is not taken into consideration. This is impractical for most new FPOs as in aggregation marketing the turn over tends to be great but in value addition marketing the turn-over will be lesser in comparison.

Approach of the FPOs and farmers:

1. Often times, the farmers themselves aren’t aware about the eligibility criteria of the subsidies, policies that are brought in for their benefit and to safeguard their livelihood and their Lack of financial literacy for farmers.
2. Farmers receive second class treatment at banks due to their inability to fill proper documentation, lack of understanding of the banking process. This leads to farmer’s hesitancy in approaching banks for credit and reinforces the dependency on private money lenders. Some FPOs do support their farmers in filling the required documentation to break this loop.
3. In rare cases where FPOs have capital, they aren’t allowed to offer credit to member farmers. They can however extend this support through farmer SHGs. Lack of know-how and mobilization prevents FPOs and farmers from availing this boon.
4. ELIs often refrain from offering credit to FPOs and farmers due to lack of payback capacity. Mitigating of risks such as dependency on weather by availing insurance, enabling access to fair price market, upgrading the practices in trade and technical know-how are domains where FPOs can benefit the farmer.
5. More than 60% of farm laborers in India are women, however, the number of women led FPOs are significantly low. Also, women-led FPOs have lesser default rates compared to FPOs led by men.
6. A typical cultivation period for harvest is 3-4 months. In cases where farmers get credit from ELIs, they end up spending all of their money within the first month and then depend on private money lenders, traders and commission agents for further credit. Poor financial literacy of farmers is a major concern.

Though the above challenges are categorized as per different stakeholders in agriculture, the solutions are often derived through an ecosystem level approach. As the saying goes, none of us are as strong as all of us! The panelists and attendees shared a few solutions through collective approach of problem solving, shared below:

1. Standardisation of documents required by ELIs for granting agri-loans: There is a need for regulatory bodies such as NABARD to standardize the documents needed by ELIs for granting each type of loan under the central/state schemes. With separate documents sought by ELIs for similar kinds of loans, farmers are left running pillar to post to gather these documents which jeopardizes the success of such schemes.
2. Collaborative Efforts for tailor-made financial solutions for small and tenanted farmers: Mobilizing various government, private, and institutional bodies to create policy, tailor made products suiting the needs of the small and tenanted/landless farmers is crucial for ensuring accurate targeting of credit solutions. Collaboration can provide a more comprehensive understanding of the agricultural landscape and help bridge the gap between these farmers, government and financial institutions.
3. Specialized Self-Help Groups (SHGs) and Joint Liability Groups (JLGs) for Less Profitable Crops: Recognizing that certain crops are less profitable and prone to higher non-performing assets (NPAs), establishing specialized SHGs & JLGs for these farmers can allow these farmers to successfully pass through underwriting and avail the loans. A tailored approach for modeling SHGs/JLGs could ensure better financial management, support, and education, ultimately reducing the likelihood of NPAs.
4. Ecosystem Approach for Farmer Margins: Taking an ecosystem approach that focuses on increasing the margins of both FPOs and individual farmers is vital. By building on successful farming practices to improve both the quantity and quality of output will enhance the ability of the farmers to pay back the loan. We can start small and build on the progress. This way the risk of loan defaults can be minimized. This approach could lead to sustainable growth and improved repayment capabilities.
5. Leveraging FPO Network for Technology Dissemination: The vast network of FPOs connected to millions of farmers can be harnessed to efficiently deliver technology-driven solutions. This can include tools, machinery, fertilizers, and techniques for enhancing productivity and adapting to climate change, thereby increasing farmers' income and creditworthiness.
6. Financial Literacy : The Farmers are not knowledgeable and end up misdirecting the loans to their exigencies rather than the purpose for which the loan was taken. This creates issues when funds are need for agri inputs as well as at the time of repayment. The Framers need to be educated and counseled.
7. Helping the FPOs' manage their Finance and Books: Most small FPOs lack the ability to manage their operations. Ensuring proper utilization of loans and financial transparency is crucial for them . Regular guidance about managing their finances and helping them with audits, can help track the flow of funds, identify inefficiencies, and mitigate misuse of credit.
8. Debentures for Market-Linked Production Systems: Introducing debentures as a financial instrument can help FPOs raise additional funds. These debentures, linked to market performance, can attract investors who believe in the potential of FPOs and their associated farmers. This can inject much-needed capital into the agricultural sector.
9. National Database for Tenanted Farmers: As part of the above point or at least as separate exercise, establishing a national-level database that identifies tenanted farmers is crucial. This would enable the government and relevant organizations to have a comprehensive understanding of the distribution and needs of tenanted farmers. Such a database would facilitate targeted policies, financial support, and credit accessibility for these farmers.

While acknowledging the above points shared by various members of the workshop, TAC believes that the below solutions could also be helpful in solving the complex issues of agriculture in India.

• Technology-Enabled Agri-Data for Credit Accessibility: Leveraging technology to capture and utilize agricultural data such as Electronic Farm Records i.e. farm coordinates, cropping history and cycle, soil health and irrigation; Farmer details i.e. farmer ID, financial history, linkage to farm; & Harvest-business prospects i.e. crop and demand, weather updates, insurance, market linkage and access, infrastructure support, eligibility for government schemes, etc. can empower banks and lenders to make informed credit decisions rather than seeking collaterals from FPOs and farmers. This is especially important for tenanted farmers who often lack traditional collateral.
• Financial Literacy and Schemes Awareness: Promoting financial literacy and creating awareness about government schemes among farmers and FPOs is essential. When farmers understand the financial aspects of borrowing and investing, they are better equipped to manage credit responsibly and take advantage of available support. As a stand-alone exercise, this can be done effectively via rural/livelihood NGOs.

In summary, these solutions collectively address the challenges faced by FPOs and farmers in accessing credit from banks and lending institutions. They encompass various aspects such as data-driven decision-making, financial literacy, targeted support, collaboration, and technological innovation, all of which are necessary for a comprehensive approach to improving credit accessibility and sustainability in the agricultural sector.

Annexure-1

About the organizers: TAC, a non-compete, not-for-profit, agriculture think and do tank was formed in 2021; with several co-founders from diverse disciplines and partners such as Govt. of Telangana, Samunnati, Social Alpha, etc. TAC and its partners believe that the complex problems of the agricultural sector require a collaborative approach by the government, pvt. cos, SMEs, educational institutions, FPOs, SHGs and NGOs vs an independent approach by any players.

TAC with its use-case led approach, is collaborating with partners & stakeholders to solve the problem of agri-finance and availability of money/timely and adequate credit at reasonable interest rates (to small & tenanted farmers), through its project – AgCx. TAC is collaborating with various tech start-ups and govt. bodies to support digitization of data such as farmers (ID), HHs, farm lands and crops, etc. that help lenders in disbursement and recovery of loans. A key outcome of all our efforts through AgCx would be the ability to generate an efficient, authentic assessment of purpose neutral loans for small & tenanted farmers in less than 15 mins and at a mere cost of INR 50.00/-. A proof of concept for the same is being developed in a few pockets of Telangana and TAC is looking for new partners in other geographies for similar programs.

TAC’s vision is to make the Indian farmer (especially small, tenanted, land-less & women farmers) profitable, sustainable and resilient through use of digital technology; and for India to emerge as a global leader in agri-innovation.

Context: Agriculture in India through Macro-statistics

More than 60% of India’s population of 140 crores earns its livelihood through agriculture and allied activities. A total of 39.46 crore acres of land is irrigated by more than 11.8 crore farmers (i.e. agri land owners and cultivators or farm labours) to produce more than 330 million tonnes of total food grain production (as per estimate for FY 23-24 released by GoI) making it the largest ever food grain production by the agrarian country, with an estimated contribution of 18% to GDP. While growth in national agrarian production and output may have increased, the policies and schemes laid down by the govt. to improve the agricultural economy and the lives of farming households (HHs) barely seem to have made a significant dent in the landscape of problems faced by the agricultural sector in India; farming HHs are still gripped in clutches of generational poverty and conventional methods of farming.

Premise of the Workshop

As shared by the keynote speaker - Mr. Pravesh Sharma (former Secretary of Agriculture Dept. in Govt. of Madhya Pradesh, India representative of the International Fund for Agricultural Development, MD of Small Farmers’ Agri-business Consortium i.e. SFAC), roadblocks identified for sustainable growth and development of agriculture in India are: A) Capital crisis – credit availability through public and private investments; B) Natural Resources crisis – degradation and erosion of soil, over-use and contamination of water leading to degradation of factors of productivity; C) Human resources crisis – since farming at small scale is not a profitable venture, most youth are opting out for more lucrative and reliable sources of income; D) Marketing crisis – for most farmers the market for their produce is restricted to their own districts only, thus restricting their options with limited demand and selling options.

Annexure-2

SMEs & Participating FPOs:

1. Pravesh Sharma - Former 1982 batch IAS officer with 34 yrs. in service, former Secretary of Agriculture Dept. in Govt. of Madhya Pradesh, India representative of the International Fund for Agricultural Development, MD of Small Farmers’ Agri-business Consortium (SFAC), Co-Founder & Chief Executive Officer of Kamatan Farm Tech (otherwise Sabziwala).
2. Vilas Shinde – Founder of Sahyadri Farms, PG in Agricultural Engg.
3. Dr. E. Vadivel – Agri Scientist (Tamil nadu)
4. Yogesh Dwivedi – CEO of MBCFPCL (FPO in Madhya Pradesh), Director at RTRS (headquartered in Switzerland)
5. Narsimha Garu Reddy – Ex MLA, Kattangur FPO (Telangana)
6. Lakshmi Narsimha - Chairperson, Yazali FPO (Guntur, Andhra Pradesh)
7. Venkat Rasa – representative of FPO in Tamil Nadu
8. Manjunath – Shanthala FPO, rural Bengaluru & Neelamangala
9. Nipun Mehrotra - Co Founder & CEO at The Agri Collaboratory
10. Ashutosh Vaidya - Co Founder at The Agri Collaboratory
11. Bhaskar RM - The Agri Collaboratory, (add FPO name)

Annexure-3

Success Stories

A few success stories of FPOs, farmers, ELIs going above and beyond to ensure credit support to needy farmers were also mentioned, shared below:

1. Sahyadri Farms – Vilas Shinde built a grape ecosystem with 25 farmers in 2004. He relied on his experiences as a farmer to identify challenges and solutions i.e. as a small farmer it is difficult to survive in the farming business and make profitable ventures. This is largely due to overwhelming challenges in farming that are beyond small individual farmers’ capacity to overcome. He realized that farmers can no longer be focused only on production of crops but need to develop capacity and scale along the whole supply chain mechanism connecting them to consumers - post harvesting activities, market access, etc. From 2004 to 2010, they worked to take consumer expectations into account, introduce efficient practices to meet those expectations, streamline post-harvest operations and deliberated on need-based spending post-harvest. In 2011, Sahyadri Farms was established as an FPO with a clear vision to make farming profitable for all their member farmers. To deliver produce as per consumer expectations of healthy, high quality, traceable products at affordable prices, a complete ecosystem operating at scale, with high tech infrastructure along the supply chain mechanism was needed, which needed high capital. In the absence of credit through ELIs and member farmers' lack of capital due to meager incomes and hesitation, Mr. Shinde focused on creating value for farmers by targeting the European markets for premium price of products compared to domestic markets. SOPs and knowledge resources were shared with member farmers to cultivate produce as per demand in European markets which paid close to double for the produce. This also helped them evade challenges in supply chain and consumer mindset in the domestic markets. With the help of newly introduced practices, their produce per acre grew at ~800%. Profit generated from such ventures were then invested into the FPO as shares. From 2011-17, Sahyadri Farms member farmers contributed to create a capital of ~1 cr/year through their profits and this enabled them to receive loans from banks. Now, they enable their member farmers to receive loans from ELIs through Corporate guarantee in proportion to their share holdings.
2. Few successes in Andhra Pradesh where banks have given loans from 10 L to 85 L to FPOs after literacy programs on provision of schemes and their eligibility criteria were conducted by FPOs for banks/lenders at their branch levels.
3. The gaps in need of the farmers and FPOs, ease of availing schemes are filled by NBFCs that have tailored credit solutions as per farmer’s and FPO’s needs, but at higher interest rates ~16%. FPOs dealing in fruits, vegetables and milk could still sustain these interest rates due to higher margins but FPOs dealing in grain still face the wind as they have margins closer to 1%.
4. Kisan Credit Cards have addressed credit needs to a certain extent. Reference to an FPO in Madhya Pradesh, 1.05 L member farmers out of 1.8 L member farmers have KCC, the rest aren’t eligible either due to defaulted loans or not having membership of credit societies.
5. An experiment with cash flow based lending with technical and human interface, a holistic approach: An anonymous startup/rural lender is using household (HH) cash-flow assessment methods to advance investments in agriculture for rural households. An interesting mix of tech and human interface to customize the solution for the specific farmer HH. Though the initial connect between the farmers and the lender is through an app, farmer HHs are usually not tech-savvy and hence are unable to choose the best suited amongst the agri-credit options, hence the human intervention helps them overcome this hurdle.