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|Innovative Financial Products for Agriculture||By P Satish, Chief General Manager, NABARD|
There is a worldwide realization of the fact that agriculture and activities allied to it like animal husbandry, forestry and fisheries have such characteristics as uncertain harvests affected by climate, wide price fluctuation of outputs, long gestation periods, low return on investment, unstable prices and poor markets for possible collateral. These characteristics make it difficult for agriculture to be financed by mainstream plain vanilla type financial products. There is a need for innovative financial products to take care of agriculture’s financial requirements.
Since the late 1990s, a number of organisations across the developing world have developed innovative approaches to financing agriculture. Some of them adopted microfinance concepts to the provision of agricultural finance, used good banking products and above all, drawn on knowledge of agriculture to enter and succeed in this market. Many of these approaches show great promise but no single approach works for all situations. Institutions are most successful when they are not rigid, apply comprehensive risk management strategies, have the freedom and flexibility to select their clientele, and are innovative and pragmatic.
In India the most significant innovation was the Kisan Credit Card (KCC), designed by NABARD and introduced in 1998-99. Initially it was mainly a passbook, but it underwent several transformations. The Card has been made flexible to include an element of investment credit and some credit for consumption purposes. To further enhance the usage of KCC, NABARD launched a pilot project to link KCC to mobile phones. A study of this pilot by the Indian Institute of Banking and Finance showed that this product enabled farmers to order and pay for their seeds, fertilizers and other inputs without moving out and save substantially on time, transportation costs and the risk of handling cash. Even for banks and input dealers, handling of cash was eliminated thus reducing their transaction costs. KCC has made a huge difference in agricultural finance as far as procedural formalities and assurance of credit to the farmers is concerned. Now we are in the threshold of converting all these cards into smart cards or mobile-based cards and Aadhaar enabled cards so that the farmers have the flexibility of using them across a wide range of banks and entities including input suppliers. NABARD has entered into a formal alliance with the Unique Identification Development Authority of India (UIDAI) and the National Payments Corporation of India (NPCI) for creating a platform that would push the biometric-enabled payments system in rural financial institutions.
Another innovation, which has the potential of bringing marginal farmers, tenant farmers and oral lessees into the formal credit fold, is the Joint Liability Group (JLG) These farmers who either do not have land ownership or have problems with their land titles were hitherto shunned by banks, and had to depend solely on moneylenders. Now with the JLG framework providing for the loans to be guaranteed by the other group members and with an element of peer pressure, avenues have opened up for the excluded and neglected farmers to get institutional credit. The JLG model, launched as a pilot in 2006-07 is now being taken up in a mission mode by NABARD. So far NABARD has extended support for promotion of nearly 3 lakh JLGs.
Inventory or warehouse receipt finance is an innovation that contributes not only directly to an increase in access to credit of producers but also indirectly to reduce the instability of inter-seasonal commodity prices. Warehouse receipts constitute an effective instrument in ensuring loan security and consequently could add to credit enhancement and transforming of poor and low- income farming households from non-creditworthy to creditworthy ones.
Supply chain financing is an innovation, which has a huge potential. A joint product of credit and other products could be instrumental in mitigating the issues of high transaction costs of small value denominated loans and the credit risk of lack of effective collateral of small farmers. The supply chain can be described as interrelated links that include production, input use, transportation, storage, processing, marketing in domestic markets and exporting to foreign markets, finally reaching the ultimate consumers. Finance can be delivered directly by financial institutions to each link in the supply chain or indirectly by one link to another that participates in the supply chain. The supply chain therefore encompasses the use of inputs such as land, labour, seeds, fertilizers and pesticides, part of which can be purchased with credit extended by other participants in the supply chain (e.g. input traders) or by credit extended by pure creditors like banks. NABARD is working on modalities to launch comprehensive supply chain development and financing pilots in respect of apple, potato, onion and tomato in select areas. Once these projects are implemented we would have replicable models for comprehensive supply chain financing in the country.
Leasing as an agricultural finance product is practically non-existent in India, while it is thriving in our neighbour, Pakistan. Leasing could be promoted as a substitute when absence or severe scarcity of long-term credit exists- as is typically the case in most developing countries, where long-term saving is scarce and consequently long-term credit is not offered by banks. Leasing is almost always practiced in respect to standard machinery and equipment that allows easy and convenient terms of the leased equipment to other lessees upon default on the leasing terms. In countries where repossession of collateralized property is complex, lengthy and expensive and therefore results in uncertain final outcomes, leasing may be preferred if the leased equipment, machinery and farm related machinery could be easily and cheaply taken away from a defaulted lessee. But a level playing field as related to property, creditors’ and leasers’ rights should be maintained to ensure optimal resource allocation as well as optimal choice and use of financial instruments.
With an increasing demand for value-added and high quality products and the need for increase of full value chain, some of the corporates have adopted contract-farming mechanism. The Contract Farming presupposes three basic agreements: market, resources and management provisions. Under market provisions, growers and buyers agree to terms and conditions for future sale and purchase of crop/agri-products. Under the resource provisions, the buyer agrees to supply selected inputs and technical advice. Under the management provision, the grower agrees to follow recommended production methodology, inputs, cultivation and harvesting specifications. Contract farming encourages market-led production of crops and generates steady income for individual farmers and generates gainful employment in rural communities particularly for small farmers, medium farmers and the landless and promotes self-reliance in general. It also benefits the buyer in terms of assured flow of raw materials, long-term commitment for supply at pre-determined prices and earns a goal for the farmer. The initial response to contract farming, though slow, has been increasing steadily with various models emerging.
Central and state governments and the banking regulator should extend necessary policy support to mainstream these innovative financial products, most of them conceptualised and piloted by the apex bank for agriculture and rural development – NABARD. If this is ensured Indian agriculture would not encounter any problems in sourcing credit in the years to come.
(The views expressed are those of the author and not of the institution in which he is employed)
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