The existing financial infrastructure in India has not been able to meet the key financial needs that arise along agricultural value chains. As a result, many agri intermediaries and farmers are either left un-served or underserved due to the lack of timely access to institutional finance via agri-loans. This is where financing agriculture becomes imperative.
Current State of Agri Financing In India
Timely and sufficient availability of finance is a prerequisite for the growth of any sector, and financing agriculture is no exception. However, the challenges in accessing finance have hampered the growth of this sector specifically. The existing financial infrastructure in India has not been able to meet the key financial needs that arise along agricultural value chains.
Without access to credit, most smallholders are restricted to farming, trading, processing practices that result in low productivity levels. Most agri stakeholders still have limited or no access to them.
Challenges for Agri Sector
The farm sector is fraught with inherent challenges which make it unattractive for formal financial institutions. Farming is a cyclical business that follows cropping seasons, and the farmers are always exposed to the vagaries of nature, such as droughts, floods, or diseases beyond their control. Though the land is the most preferred form of the collateral asset, problems like the title and property rights and smaller loan amount make the liquidation process of land an extremely expensive and arduous task.
The smaller ticket size of farm loans makes its servicing an expensive affair for the financial institutions. This is further complicated because farmers, especially women and young ones, do not have formal ownership of their lands and have little to offer in collateral. This makes them vulnerable to money lenders, which can be extremely risky for a resource-poor farmer since the loans are charged at very high interest rates, contributing to increasing challenges of indebtedness.
Role of NBFCs in Financing Agriculture
Despite these challenges, Agri services & credit has been steadily emerging as a key component in the agricultural commodity ecosystem. Agri-focused NBFCs, self-help and savings and loan groups, and microfinance institutions have come up largely in recent years providing much-needed institutional finance via agri loans to the farm and ancillary sector.
RBI-regulated agri-focussed NBFCs are helping agri intermediaries in meeting working capital, other operational hurdles in a big way. These firms come with in-depth knowledge of the agri-commodities business cycle. Their collateral flexibility and speedy disbursals enable them to offer a competitive value proposition procurement model coupled with funding to their clients.
Agri-focused NBFCs have added another dimension to the agriculture ecosystem by providing financing agriculture solutions against warehouse receipts of agriculture commodities. Also, agri-focused NBFCs in the transformation of the agriculture sector are not restricted to working capital finance. In addition, such firms enable clients to meet their different needs through finance against collaterals such as real estate, commodities and other financial assets.
The advantage of agri-focused NBFCs lies in their ability to sanction and disburse loans efficiently and quickly. These firms adopt a hassle-free process with minimum paperwork for faster disbursal ensuring customer satisfaction.
Agri Sector – What’s Ahead?
Currently, India’s Agri financing sector is undergoing a paradigmatic shift with more and more agri members using warehousing receipts to meet their working capital requirements for the next season and consumption needs after the harvest season.
Instead of selling, they deposit their produce in a professionally managed warehousing service provider, which issues them a warehouse/storage receipt. Farmers take the receipt, which has all the necessary details like quality and quantity of the product, to the bank or agri-NBFCs that offer a credit facility against that receipt.
Faced with multiple challenges, Indian agriculture today is at the cusp of transformation. There is an urgent need to modernize the post-harvest management of farm produce. Financing agriculture through warehouse receipt, self-help and savings and loan groups, and microfinance institutions can provide us a great opportunity to turn this challenge into a great accomplishment.
