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There’s a tragic irony that has come to define the agrarian distress in India — the very financing that’s supposed to lift farmers out of the crisis has become the noose around their necks. Where there was once a problem of access to credit and financing, today there’s an issue of quality.
Big efforts have been made to improve financial inclusion for the agricultural sector. Here are a few noteworthy milestones in the evolution of agricultural finance in India —
Priority sector lending to vulnerable and employment intensive sectors like agriculture
Establishment of NABARD and its self-help group model of financial inclusion
Timely and simple access to credit for farmers under the Kisan Credit Card scheme
Interest subvention for short term crop loans, and
Agricultural debt waiver and debt relief schemes.
Thanks to these measures, the penetration of institutional credit has increased considerably. But widespread indebtedness accompanies this access to credit. According to the National Sample Survey data, more than 50.2% of India’s agricultural households in India are under debt.
The NSO’s latest All-India Debt and Investment Surveys (AIDIS) show that the debt-to-asset ratio of the bottom-most 10% of rural households borrowing from institutional sources was as high as 39. To pay off their institutional debt and free up their limited assets, these households are compelled to borrow from informal lenders.
This is how the countryside’s infamous debt traps are laid.
Evidently, there’s a lack of perceptiveness to the credit needs of agriculture. The ingrained aversion to risk deters lenders from meaningfully serving the sector. Which is why RBI directions like routing 18% of scheduled banks’ Adjusted Net Bank Credit (ANBC) for small farmers may have increased formal credit penetration, but the quality of the loans remains sub-par.
Lenders need to accommodate for agri risk in a way that translates into stronger agricultural portfolios, while also elevating agricultural productivity.
Major risks in agricultural lending
Unlike other businesses, agricultural production is supply-driven and not demand driven. There’s uncertainty around the output because of external factors like weather, pests, disease and adversities during harvesting.
Price and market risks
The prices of agricultural inputs tend to be extremely volatile because of global as well as local market shocks. Moreover, in the absence of relevant infrastructure, the delivery of perishables to the right markets post-production poses another risk.
There are several concerns around the productivity of institutional agricultural credit in India. Farmers may end up using it to pay off their prior debts, or for personal or household consumption. Ultimately, this could lead to poor productivity and inability to repay the bank.
Risks of loan waiver
Agricultural lending is politically sensitive. Often, farmers will wilfully default on their loans in the hopes of getting a waiver from state governments. Although lenders are compensated by the state exchequer, a culture of waiving agri loans in turn fosters a culture of poor credit hygiene.
How FinTechs can better manage agri risk
Agri FinTechs can offer data to lenders at various stages of the credit cycle to better underwrite customers and mitigate collection risks. Here's how —
Meanwhile, with their technology capabilities and deeper focus on the sector, agriculture-focused FinTechs can help alleviate risks to a certain extent. Here’s how.
The underlying asset in agri lending – the crop growing on the fields or held in warehouses – is vulnerable to quick changes in quality. Adverse weather conditions or pest infestations are hard to monitor in real time, but crucial to agri underwriting. FinTechs can channel the capabilities of remote sensing, satellite imagery, geo tagging, weather stations, sensors and drones for granular and high-frequency inputs.
These can give information about soil health, crop quality, hyperlocal weather and land boundaries. Lenders can then estimate the crop production, acreage, yield and damages. These data could also lend insight into mapping of soil and water resources. FinTechs can create a “field score” in the absence of a credit score using these insights for better underwriting.
Once the loan is sanctioned, agri FinTechs can monitor the sowing, growth and harvest stages. Discrepancies in the timelines of these events can increase visibility into the farmers’ repayment plans, based on which lenders could recall their loan or alter their collection strategy.
Price discovery & market linkage
Market linkage by way of creating farm-to-fork supply chains and e-auctions for trading can help producers discover better prices in a more transparent manner. FinTechs can provide financial services to both buyers and sellers on such platforms based on confirmed orders. For buyers, they can offer trade finance, procurement loans and import finance. For the producers, credit in the form of warehouse receipt financing and cash-flow based working capital loans.
State-of-the-art warehousing facilities offered by these companies enable real-time stock updates and undergo routine audits on the quantity and quality of the stocks. Access to in-house data on the quality of the produce makes underwriting for warehouse receipt financing accurate. This is particularly useful in financing small farmers who do not have the assets required for traditional collateral-based lending.
Agri FinTechs can tap into the power of aggregation in order to deflect risks arising from the instance of idiosyncratic default. Distributor or market linkage credit through, say, farmer producer organizations (FPOs) can help ensure that credit is accessible to all while also increasing the likelihood of repayment.
For example, a FinTech company lends to an FPO that procures produce from a number of small farmers to pay them on time despite cash flow constraints from the buyer’s end. Such a loan is underwritten based on the past business between an FPO and the buyer and future cash flow projections.
FinTechs can ensure proper utilization of credit by giving out cashless loans. For instance, they could issue virtual credit cards that could be used by farmers at the point of sale while purchasing inputs like fertilizers and seeds. The same fintech could, by facilitating market linkages, ensure that the farmer gets the best price for their produce and strengthen their ability to repay.
Agricultural financing remains firmly supported by the powers that be – whether it’s India’s banking system or the government’s policy interventions. The next tectonic shift, however, will come from players in the agri FinTech space. Although still at an embryonic stage, agri FinTech is already addressing the deep-rooted problems of risk by redefining the nature of credit products. The right support in the form of investment, tax concessions and infrastructure can help launch it into the mainstream.