MicroSave Market-led solutions for financial services Comparative analysis of prospects for...

MicroSaveMarket-led solutions for financial services


Comparative analysis of prospects for delivering sustainable agricultural finance, expanding agricultural market opportunties & promotion of disadvantaged small farmers and MSMEs

Presented By:

Manoj K. Sharma

November, 2012


2

Sustainable agriculture development – Key for economic development

Asia (Developing)

Sub-Saharn Africa

Near East and North Africa

South America

Central America/Caribbean

Pacific (Developing)

All developing countries

World

361243

50654

12427

3908

3698

829

432759

446117

No. of smallholder farms

2005 2010 2015 2018

Worldwide Projected Food Consumption (2005-2018,'000 Kilotons)

Wheat

Coarse grains

Rice

Oilseeds

Vegetable oils

Beef

Pork

Poultry

Dairy

Note: Categories not exhaustive (e.g., does not include sugars)

2000 2005 2010 2015 20201.2 1.3 1.2 1.2 1.2

4.9 5.2 5.6 6 6.3

World Population(2000-2020, billions)

More Developed Regions Less Developed Regions

Indicates thata. Sustainable

agriculture will be key for economic development

b. The sector needs more financing – GRANTS and CAPITAL INVESTMENT to meet the requirement of the population with higher purchasing power than ever

c. Technological intervention to ensure that small farmers are viable and contributes significantly

65% of total population

directly dependent on

agriculture


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What ails small-holder agriculture?

Skewed market linkages and the consequent poor price realisation

Lack of access to credit by smallholders leads to sub-optimal inputs and methods, and to lower productivity

Tomato Potato Cabbage Cauliflower Banana Price paid by end consumer (Rs. per kg) 8.20 12.00 9.00 9.50 12.00

Price received by farmer (Rs. per kg) 2.00 6.60 5.00 5.50 4.00

Price realization by farmer (as % of end consumer price)

24 55 56 58 33

Percentage mark up (price paid by end consumer to the price received by farmer) 310 82 80 73 200

Aggregation is a solution which can provide a better bargaining power and access to credit and quality input


4

Agriculture finance – The transformative potentialStructural changes in Agriculture from subsistence to commercial requires supportive market enabling greater role of financial services

Level of market orientation

Farmer’s objective

Subsistence systems

Food self-sufficiency

Semi-commercial systems

Surplus generation

Commercial systems

Profit maximization

Market Frictions• Information

costs • Transaction

costs

Financial markets and institutions

Financial functions • Facilitate

exchange of goods and services

• Allocate resources

• Facilitate risk management

• Mobilise savings

Channels to growth• Capital

accumulation• Technologica

l innovations

Economic growth


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Value Chain – Agricultural Finance Linkage

Input supplier

Producer/farmer

Aggregator

Processor

Wholesaler

Retailer

Consumer

Actors

Short term credit financing

Input financing (on kind payment or in-cash)

Short term working capital loan

Purchase in credit and repayment after sales to retailers

Input supplier

Producer/farmer

Aggregator

Processor

Wholesaler

Retailer

Consumer

Actors

Bank/FI

Bank/FI

Bank/FI

Bank/FI

Bank/FI

Bank/FI

Short term working capital loans for inventory

Equipment financingWorking capital loans

Short term working capital loansSavingsInsurance

Working capital

loansBank

guaranteeLetter of

credit

Working capital

loansEquipment

financing

Working capital

loans for inventory

Without external finance With external finance


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Four key drivers of sustainable value chain finance modelSustainability of small farm

holders through diversificationAvailability of support servicesfarm extension, finance, market

information

Contractual Agreement between value chain players

Participatory Business Model engaging small farm holders

1

3

2

Value Chain players

4

Value Chain players

Spot market based relationshipContracts based relationship

Informal trust based relationship

Multi-activity chain

actor

Simple chain actors

Market linked chain

actors

Specialised chain actors

Act

ivit

y

Management

Input suppliers Farmers/Producers

Transportation, storage and processing

Wholesale and retail

Agri production supportAgri food industry

support

Agri-logistics and processing support

Producer driven

Buyer driven

Facilitator driven

Integrated


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Agribusiness MSME financing, constraints and way forward

1. Small sizes and unregistered formats, very little documentation, accounts not properly audited, incomes are suppressed, and a general state of records2. Weak organisational capacity, geographical isolation and lack of basic business skills3. Complexity of businesses – agro-based MSMEs are complex to assess. Different from traditional business finance by the banks

1. Agriculture perceived as low-margin business by financiers

2. Lack of availability of products that meet the needs of appropriate, adequate and timely credit

3. Lack of a robust business model, flexible products and delivery processes

4. Lack of appropriate risk-mitigation measures and mechanisms

5. Lack of infrastructure such as bank branches at the ‘last-mile’

6. High cost of credit coupled with lack of collateral and collateral substitutes

7. Limited access to equity capital

Bor

row

ers’

lim

itat

ion

sF

inan

ciers’ limitation

sLess than 20% of commercial lending in Asia is financing agriculture


Integrating Mobile Money in Agriculture Value Chains – Value chain payments through mobile banking

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One of the commercial banks in India, through its Rural Finance Division is focussing on increasing its presence in rural markets by structured interventions in agriculture value chains. Low cost of transactionHigh security of the transactionsSolving the “last mile” problemSeamless integration of buyers and sellers Reduced leakagesEnhanced immediacy and increased frequency of the transactions Improved economics for value chain playersAccountability


9

Kisan Credit Card: Most affordable and accesible agricultural finance product in IndiaInitiative: Started by the Government of India, Reserve Bank of India (RBI), and National Bank for Agricultural and Rural Development (NABARD) in 1998-99 with an objective to help farmers access timely and adequate credit

Product feature in sync with the requirement of Small Farmers

Revolving cash credit facilityCard valid for 3 to 5 years subject

to annual review. Credit limits could be enhanced annually

Conversion/re-scheduling of loans

High uptake by farmers. About 100 million KCC distributed since

inception


10

ITC e-choupal – ICT initiative of ITC to provide a market access to small and marginal farmers (1/2)

TOWN

Samyojak

Choupal Saagar

VILLAGE

Farmer

Sanchalak

Transactions

Information(e.g., Price Discovery)

Knowledge (Customize

d)

PAN-INDIAN

Extension servicesInput

FMCG goodFinancial services

The Model

Collaboration with 160 partners

A USD 900 Million Venture


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Wheat

Soybean

Soybean& Wheat

Coffee

Aqua

Wheat

Soybean

Soybean& Wheat

Coffee

Aqua

ITC e-choupal – ICT initiative of ITC to provide a market access to small and marginal farmers (2/2)

Milestones Current status since inception in 2000

Plan for 2012-13

States covered 9 15Villages covered 40,000 100,000e-choupal installations 6500 20,000

Empowered e-farmers 4 million 10 million

A hub and spoke model for procurement of various

commoditiesGrowth


Hariyali Kisaan Bazaar: Corporate initiative to provide 24x7 support services to farmers

Agri-Services 24X7 technical

support Critical last-mile

delivery Subsistence farming

to technology led commercial farming

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A typical Hariyali Bazaar

Typically operates in the catchment area of 25-30 kms

Caters to agriculture holdings of about 60,000 to 80,000 acres

Covering 15,000 to 20,000 households

RetailingFarming ProductsHousehold Products Insurance servicesFarm Fuels

Farm Output buy-backSimple Procurement-

At harvest time a farmer can directly sell to Hariyali depending on the storage facilities of the Hariyali outlets


13

Potato Value Chain Finance – Innovative model for financing through front end integration

Operational Standalone Value Chain Finance Model (Most Prevalent)

Integrated Finance Model

Stakeholder Mapping and Stakeholder Risk Analysis

The outcomes:Risk sharing and insulation to

market fluctuationsStreamlining of operations and

discipline in arrangement Increased creditworthiness of the

systemBetter follow up and speedy

recovery of loansBetter Management Information

System (MIS)


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Key Lessons for Africa

Integrate supply of adequate and timely finance with value chains: Government, Donors and investors will have to support nascent value chains till such that that they grow and are able to attract commercial banks and entities

Design of financial products: Financial products that are poorly designed are of limited use to the value chain players and severely limit the growth of the sector.

Technical assistance and financial literacy for smallholders and SMEs: Extension services for smallholders and management support for SMEs will strengthen individual players as also the overall value chain.


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Key Lessons for Africa

Backward and Forward linkages and Market Access: Markets are key to value realisation for all the players in the chain. The linkage of the chain to the market will determine the price realisation and hence the revenue that will flow to different players down the chain

Preventing Information Asymmetry: African countries can try and address the problem of information asymmetry by utilising information technology to enable value chain players to get access to real time information on markets.

Integrating Mobile Money with Value Chains: Mobile money has immense potential to smoothen the flow of value across the chain, in real time and at a lower cost than conventional banking and/or cash transactions. Coupled with ICT based information dissemination, such a model can address some of the challenges of flow of value across the chain.

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