FINANCING AGRICULTURAL VALUE CHAINS Relevance of Indian Experience to AfricaN. Srinivasan

Indian agriculture

Cultivated area 160 million hectares Large population – demand and dependency Geo-climatic differences make for crop variety Shift from sustenance to enterprise farming Organised post production processes / marketing Numerous small farmers with low resource base Low productivity, incomes Limited capacity to invest in productivity enhancement Poor market access as marketable surplus is meager Access to finance improving, but a large number of

farmers are excluded

Agricultural finance – some numbers

Number of agricultural loan accounts: 75.6 mn Amount of credit balance March-12: $151 bn Proportion of short term loans: 55% Proportion of long term loans: 45% Credit to agro-processing units: $18.9 bn Credit to GDP ratio in agriculture: 37%

Institutional share of credit - $151.2 bn (%)

Commercial Banks

Cooperative Banks

Regional Rural Banks

Total

115.1 (76%) 20.5 (14%) 15.6 (10%) 151.2

Approaches to value chain financeDirectBank lends to farmerFarmer carries out production

Production sold to buyer

Price received by farmer used for repayment of loan to bank

Most loans are provided in this manner

IndirectBank lends to aggregator/buyer

Buyer/aggregator retails loan to farmer

Farmer carries out production

Production procured by buyer

Loan repaid to bank by buyer

Price net of loan paid to farmer

Contract farming usually has this approach – recent development

A third approach

Farmer is part of a value chain with contracted supply to buyer/aggregator

Banks gives loan to farmer against assurance by buyer that loan will be repaid by deduction from product value sold to them by farmer

Farmer’s produce procured by buyer Bank loans paid by buyer on behalf of farmer from

out or produce value Farmer paid price for produce net of loan payment by

buyer

Common in Sugar and milk value chains

Value chain Differences based on final markets

Domestic market based value chains Large demand Price sensitive market Ordinary quality

standards Focus on production,

less on processing and markets

Less capital intensive Low profitability and

hence low investments

Hesitant credit flow Specialised schemes

for focus on different crops, regions and aspects of farming

Export based value chains Competitive market Quality sensitive Non-tariff barriers in

the form of quality standards

Focus on grading, processing, packing

Capital intensive High profitability and

high investments needed

Special schemes for credit

Dedicated institutions for facilitation

Challenges

For producers High collateral

requirements Product unsuitability Complex

documentation Small ticket finance

not interesting to banks

High borrower transaction costs

Farmer collectives not readily acceptable to banks

For banks to finance High transaction and

risks costs in small agricultural loans

Market risks high in agricultural value chains

Seasonal and cyclical factors

Farmer collectives under-capitalised, lack professional management

Staff skills in value chain financing low

Difficulty in marketing innovative products

Producer members: 3.18 Mn

Milk handled 13.67 Mn lpd

Cooperative Dairy value chainGujarat Cooperative Milk Marketing Federation

Cashew value chain

Tribal famers with poor quality lands Initial investment in plantations through a

project grant Farmers cooperatives aggregate members’

cashew and carry out processing Producer company investments in

processing, branding and marketing Producer company makes value-added

products

Cashew value chain – VAPCOL*

Number of farmer cooperatives

51

Number of participating farmers 15000 +

Value of sales of Cashew Rs 45 million

• Farmer Cooperatives own VAPCOL and hold its entire equity

• VAPCOL procures raw cashew and processed cashew from the farmers’ cooperatives

• Apart from the price paid, a patronage bonus and dividend on equity are also paid

Vasundhara Agri-Horti Producer Company Limited

Lessons from the cases

Small farmer livelihoods can be improved through value chains; easier to link farmers and banks in a value chain

Key role for farmers’ collectives Investments in processing Farmers collectives reduce risk perception of

banks, undertake repayment to banks from produce price

Farmers collectives retail loans to members with bulk loans from banks

Farmers’ collectives collect equity from members which is leveraged for investment in processing, storage and other infrastructure

Tripartite agreements where repayment is assured by crop procurer have been successful mechanisms of bank financing

African situation

Agriculture Very similar to India –

more work on financing, facilitating institutions and market development have taken place in India

Widely distributed small farms, low productivity, meager market surplus,

Market infrastructure weak and access to markets poor

Food insecurity persists in some geographies

Financial institution network in rural areas not strong – with exceptions

Not too many financial products in agriculture

Value chains Well organised value

chains very few Mostly in high value

crops with export markets

Many commodities exported raw, or with primary processing – higher end of value chain is not targeted in many commodities

Considerable potential to improve incomes of farmers through value chains

Productivity, quality and market orientation can bring in income addition to farms

High cost of credit, very few banks in small-loans market

What can be done

More attention to organising farmers in clusters – so that services and finance can be delivered easier

Bulking of volumes for inputs and outputs improve market access and strengthen negotiating power

Facilitating institutions to handhold farmer collectives – for both production effort and access to finance

Financial product development and increase in variety of products suitable for different value chains

Collateral substitution through trade instruments, implicit guarantees from aggregators, bulk financing of higher links of the chain for retailing to small farms – to be designed and widely adopted

Equity to be mobilised from farmers to bring down the risks perceived by banks, and increase farmer ownership of the value chain

What should be done

Policy focus to shift to outputs and markets Target Farm income through better

productivity and access to markets Support to creation of farmer collectives and

their stabilisation State support on common infrastructure,

PPPs on commercial infrastructure with long payback

Concerted effort on increasing banking network, skill sets in agri value chain financing

Design processes for sharing incomes equitably, with greater benefits to farmers

Thanks

Despite all our pretensions to knowledge and development, we owe our existence to a few inches of topsoil and the fact that it rains