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The promise of FinTech has been that of access and inclusion. However, one area that’s arguably been ignored the most so far is providing access to financial services including formal credit to India’s 90-150 million farmers. Can the recent boom of FinTech companies and opening up of banking services finally ease the friction in agricultural supply chains and improve the livelihoods of the last-mile stakeholders in the sector?
If there’s ever been a time for reform in agricultural financing, it’s now. Agriculture is India’s past, present and future but its current state is precarious. Despite producing bumper crops every season, farmers are getting poorer and getting caught in the cycle of crushing debt and poverty.
It’s incredibly complex to surmise the breadth and depth of various issues and determinants at play in the agricultural sector but one thing is clear. An easier access to cheap credit could really help improve the day-to-day life of farmers.
While the average size of a farm has reduced from 2.3 hectares to just 1.08 hectares in the last four decades, there’s strength in numbers and collectivization. This is why the Indian government launched Farmer Producer Organizations (FPO) back in 2003.
An FPO is simply a collective of farmers, and this collectivization allows them to, among other things:
Improve their bargaining power to access financial and non-financial inputs and services, technologies
Reduce transaction costs
Tap high value markets
Enter into equitable partnerships
Coming together in an FPO is especially beneficial to smaller farmers who can retain their land rights and improve production and procurement.
FPOs tread a rocky road
However, the success of FPOs has been checkered at best. Under the latest guidelines, the government will provide financial support of up to INR 18 lakhs to new FPOs for the first three years. But according to experts, new FPOs need this support for at least 5-7 years to stabilize, and existing organizations need access to credit at lower rates in order to remain viable.
This lack of access to finances is perhaps one of their most major roadblocks. Apart from the government’s promise of INR 18 lakhs, the Small Farmers’ Agri-Business Consortium provides a credit guarantee scheme for collateral-free lending - but this is only available to producer companies that have a minimum 500 shareholder membership. Other legal forms of FPOs (e.g. cooperative societies) are not covered, leaving a large chunk out of the ambit of this guarantee.
When it comes to bank lending, traditional lenders have little knowledge on the workings of FPOs, market linkages and working capital cycles.
Moreover, they usually require collaterals and at least three years of balance sheets for credit risk assessment - FPOs don’t have the manpower for such documentation and in many cases, have no collateral to show.
Lending to FPOs is also characterized by restrictions on the quantum of loans available, geographical limitations, information asymmetry and intense risk averseness. In addition, the scale and seasonality of FPO lending makes little business sense for banks to service.
Here’s the good news - a new crop of FinTechs - known as agri-FinTechs - have come up in the last few years and are working to solve FPOs’ credit access woes. Partnership between the two is the only way forward, and it opens up possibilities for a variety of innovative and customizable financial options for the latter.
Different ways in which agri FinTechs can enable access to finance for FPOs
Market linkage procurement loans
Due diligence is carried out on the trade and capital history between the FPO and the buyer. The market linkage loan is then sanctioned based on past and projected cash flows. Once sanctioned:
The agri-FinTech directs the FPO to execute an agreement with the buyer and incorporate ESCROW in order to facilitate financial transactions
The bank account is created in the name of the FPO but transaction rights remain with the financial institution
The FPO procures and aggregates the produce from farmers and requests the agri-FinTech to pay its farmers directly
The aggregated produce is then sent to the buyer
The buyer repays to the ESCROW account that enables the agri-FinTech to deduct the loan amount and transfer the rest to the FPO’s account
Simply put, warehouse financing refers to a form of financing in which borrowers (manufacturers, or in this case, FPOs) take loans using their goods, commodities, or produce as collateral for the loan. The collateral is held by a third party on behalf of the lender.
Agri-FinTechs in particular can leverage Artificial Intelligence (AI) to assess the quality of the FPO’s produce, grade and store the same, and then provide farmers with a digital balance that can be used for borrowing purposes. When the produce can be sold at the best price, agri-FinTechs can connect FPOs with markets and potential buyers.
Insurance products for the agricultural sector must be tailored to a distinct set of risks. Agri-FinTechs are in a unique position to leverage the technology at their disposal to collect data and customize insurance in line with factors such as precipitation, wind speed, and even sunlight. They can then use this data to determine the possibility of such risks materializing and offer premiums accordingly.
Alternative data underwriting
AI and ML-powered models can monitor crops in real time, and statistical models using satellite imaging can forecast yields. Agri-FinTechs can provide FPOs with remedial solutions based on these forecasts which will help improve yields, enable repayments, and improve credit-worthiness.
What’s more, some new-age platforms are also leveraging digital footprints and device data to better underwrite agricultural credit. As alternative underwriting models for the sector continue to develop, agri-FinTechs could also collaborate with stakeholders such as agricultural research institutes and value chain aggregators to further strengthen their risk assessment processes.
Smart partnership and building technology-driven ecosystems has the potential to bring efficiency and prosperity to India’s agricultural sector, which has long been plagued by problems of low yields and debt traps.
Steps have been taken in the right direction, but there are only a few players in the space - and a larger, more broad-based effort is needed from both the lenders as well as the FinTech firms to solve agricultural financing problems.
A lot of this isn’t likely to happen through just product innovation, it would need innovation across distribution, outreach and advisory services that can be tied together into delivering a high-touch value proposition to the farmers and FPOs, all year round.