Financing Agri Value ChainIndian Experience

March 16th 2007

‘Prajápatye Kasyapáya déváya namah.

Sadá Sítá medhyatám déví bíjéshu cha

dhanéshu cha. Chandaváta hé."

Translation:

Salutation to God Prajápati Kasyapa. Agriculture may always flourish and the Goddess (may reside) in seeds and wealth.

Channdavata he."   

Theme

Post Independence Government extended the World War II Grow More Food Campaign

Social Responsibility to Business Opportunity :Changing Perception of Banks

Credit Reach remains a Huge Challenge, across the value chain

Corporates Taking a huge plunge in offering value adds to the Value chain.

Evolution of Structured Credit

18331860

19041950 1975

Nov 19791990-2007

Land Improvement

Loans Act- consolidated

Law intended to provide

advancement of Agriculture

Land Improvement

Loans Act- consolidated

Law intended to provide

advancement of Agriculture

Tacavai’ loansfrom the land

revenue collected

(British Govt)

Tacavai’ loansfrom the land

revenue collected

(British Govt)

Enactment of Co-operative

Credit Societies Act- to meet short term credit

Enactment of Co-operative

Credit Societies Act- to meet short term credit

Primary Agriculture Co-

operatives Societies formed

Primary Agriculture Co-

operatives Societies formed

Regional Rural Banks

(RRB) formed

Regional Rural Banks

(RRB) formed

CRAFICARD recommends

formations of a separate Apex bank for agri

credit: NABARD

CRAFICARD recommends

formations of a separate Apex bank for agri

credit: NABARD

14 Major Commercial

Banks ,Nationalised

14 Major Commercial

Banks ,Nationalised

Innovative Financial Models

targeting Farmers

Innovative Financial Models

targeting Farmers

Current Status1969

Micro Finance/Financial Inslusion

Micro Finance/Financial Inslusion

NABARD

Co-operative BanksSCHD Comm. Banks

( 88)Regional Rural Banks

(133)

Short Term Structure Long Term Structure

SCBs ( 29)

Branches (823)

DCCBs(367)

SCARDBs(19)

Branches (1219)

PCARDBs(755)

Branches (12407)

PACS( 92000 Approx)

Branches (689)

Metropolitan Branches(6)

Urban Branches (348)

Semi-Urban Branches (1875)

Rural Branches (12084)

Metropolitan Branches(8507)

Urban Branches (10006)

Semi-Urban Branches (12633)

Rural Branches(20449)

Institutional Structure- Agriculture & Rural Credit in India

Extension services

Over the years financial institutions are exploring innovative ways to reach the entire value chain

Credit Delivery Channels

Increasing exposure

Technology

Structured Finance

Insurance

Hedging

Integrated Services

Agency Tie ups

Farmer

Aggregation of Farmers

exposure

Bundling , it along with lending

Securitisation,Portfolio buyouts

Commodity Boards as conduits

New delivery channel

Focus on Cash Flows

Providing value adds

MFI/SGH/Cooperatives

Customized Products to stakeholders across the value chain

Contract Seed Growers

Dealer

Seed Company

Distributor

Farmer

Contractual agreement

Credit sales

Preferred distributors

Lending against offtake contract

SEEDS

Lending against stop sales agreement

Term lending/ WC

Short term lending against liquid collateral

Crop loans

Credit

Credit/ forward contract

Farmer

Wholesaler

Village level CA

Mandi/ Warehouse

Miller

Warehouse Receipt

Warehouse Receipt

Spot market price

EDIBLE OIL

Vendor bill discounting

WR finance

Crop loan

Credit Flow to Agri & allied Activities

           Crs($ Bln)

Agency 1998-99 1999-2000 2000-2001 2001-02 2002-03 2003-04

Cooperative Banks

15,957.00 (3.59)

18,260.00 (4.10)

20,718.00 (4.66)

23,524.00 (5.29)

23,636.00 (5.31)

26,959.00 (6.06)

RRBs 2,,460.00

(0.55) 3,172.00

(0.71)4,220.00

(0.95)4,854.00

(1.09)6,070.00

(1.36) 7,581.00

(1.70)

Commercial Banks

18,443.00(4.14)

24,733.00 (5.56)

27,807.00 (6.25)

33,587.00 (7.55)

39,774.00 (8.94)

52,441.00 (11.78)

Other Agencies -

1,030.00

(0.23)82.00 (0.02)

80.00 (0.02)

80.00 (0.02) -

Total 36,860.00

(8.28)47,195.00

(10.61) 52,827.00

(11.87)62,045.00

(13.94)69,560.00

(15.63) 86,981.00

(19.55)

Total O/s Bank Credit

1,757,497.00 % of Credit

394.94

Non-food 1,714,396.00 98% 385.26

Food 43,083.00 2% 9.68

Agri & Allied 1,86,533.00 11% 41.92

As of Jan 2007 Rs.Crs USD/ bln

Transaction Cost

Distribution network Paper work

Low technology penetration

Credit delivery platforms need to be developed to reach the masses

Legal Issues

In case of default no legal recourse

High Risk Charge

To cover the credit risk, premiums are charged.

Low Profitability

Despite the spreads, lending often remains unviable

Prohibitive costs

Prohibitive costs

Expensive Credit

Need for viable Credit Delivery Model

Diversion of Funds

Diversion of Funds

Non Deliveryof Crop

Non Deliveryof Crop

Farmer Payment RiskFarmer Payment Risk

Price RiskPrice Risk Yield RiskYield Risk

Crop RiskCrop Risk

Corporate Payment RiskCorporate Payment Risk

Liquidity Constraints

Liquidity Constraints

No Sale Trans.by Farmer

No Sale Trans.by Farmer

Risk Elements

… with varied risks

Need for a Holistic Development Approach – along the Agri Value Chain

Consumer Orientation

Farmer linkages

Action steps

Financial Services

Market Linkage

Research & Extension

Regulatory

Refo

rms

Infra

structu

re D

evelopm

ent

Credit

Delivera

nce

Innovativ

e Busin

ess Modelin

g

Commodity Trading

Agri Infrastructure & Logistics

Mark

et

Develo

pm

ent

Pri

ce

com

peti

tiveness

Str

eam

lined s

upp

ly

chain

Production Production Handling & Mrktg.

Handling & Mrktg. Processing Processing Wholesaler Wholesaler Retailer Retailer

Insura

nce at vario

us stages

The hand that feeds is shrinking, and if it is not

supported any further, it will soon become extinct