agriculture value chain financing in india

8/13/2019 Agriculture Value Chain Financing in India

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Introduction to Agriculture Value Chain Financing in India:Value chain finance (VCF)VCF is typically defined as flow of financing within a sub-sector,

among various value chain stakeholders, for the specific purpose of getting product(s) to

market(s). Such a definition mandates relationships and commensurate exchanges between value

chain stakeholders through vertical and horizontal linkages as well as coordination/cooperation

and competitive mechanisms. This is very different from the mere provision of conventional

financing, where one of the chain stakeholders (for example, a specific firm/entity and often

primary producers) gains access to financial services independent of other stakeholders.

Value chain finance can contribute to meeting the growing need for agricultural finance and

investment in response to greater consumer demands for more processed or value added

products. Traditionally, most regular banks and microfinance institutions have avoided rural

finance since this is perceived as risky and costly, with cash flow requirements that are irregular

and difficult to manage. Banks shy away from the high transaction costs and risks related to

agriculture such as crop failure, diseases and market fluctuations. Also the lack of physical

collateral is a restriction, and the risk of political interference that can damage the repayment

behaviour of the rural clientele is high. The aim of this note is to understand the:

1) Different nodes in value chain, and2)

The potential to finance these nodes.

Looking at value chains

Unpredictable weather, dodgy infrastructure, volatile prices, low status, little support: despite all

these problems, millions of farmers, traders, service providers and other micro-entrepreneurs still

manage to deliver fresh food every day to urban consumers, export produce to distant markets,

and stay in business. That reflects their resilience, creativity and huge entrepreneurial potential.

That potential becomes fully clear if we look at the value chains that link farm production to

rural trading and other sectors of the economy. These chains show that farmers do not operate in

isolation, but are part of a wider system. The small scale businesses of asset-poor farmers at the

beginning of the chain are intimately connected with larger businesses of traders, food processors

and supermarket chains at the end. Below is an example of a simple value chain:


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Chain supporters:

Flows of finance, information and services are not limited to the actors within a chain. Often

other individuals and institutions are involved, surrounding the chain actors. We call these

chain supporters(Figure 2). Chain supporters may provide various financial services to the

chain actors. These supporters include government agencies, moneylenders, savings and credit

groups, microfinance institutions, banks, equity funds, and so on. Chain supporters may also

provide a wide array of non-financial services: input supplies, farm labour, transport, grading,

processing, storage, packaging, advertising, research, training, advice, organization, and so on.

Chain context

The chain actors and supporters operate within a context that includes the larger economy,

currency exchange rates, government economic policy, and governance, tax, regulatory and legal

frameworks. This context may help the performance of the chain, for example by promoting a

transparent, stable macroeconomic policy. Or it may hinder it by imposing restrictions or

allowing corruption to flourish. The context may also include influence by advocacy movements

(for example NGOs that work on environmental or social issues) and by social structures (for

example traditional hierarchical structures in a community).

The potential to finance these nodes:

Input suppliers

These provide farmers with seeds, chemicals, fertilizer and equipment, plus perhaps training or

in-kind credit (such as a loan of fertilizer). Various types of input suppliers exist: big foreign-

owned firms, large national companies, small-scale local retailers, farmer groups, cooperatives or

public bodiesall with different financial needs.

Farmers

Farmers, their families and hired workers manage the crops or animals, and are involved in post-

harvesting practices and marketing. During the production season, they often lack working

capital to buy seeds and other inputs, or to hire workers to plough the land, sow, irrigate, weed

and harvest the crop and to care for the animals. In addition, few farmers have investment capital

to buy equipment such as ploughs or draught animals, or to invest in irrigation, terracing or farm


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buildings. So the farmers finance needs include loans to pre-finance the crop, and prompt cash

payment for their crops after harvest (or even beforehand).

Farmer organizations

Cooperatives and farmers associations have been oneway of delivering credit to farmers, with

loans often tied to farm inputs and machinery. However, like other semi-formal institutions, co-

ops suffer from flawed administrative controls, lack of independent decision-making,

inflexibility and high administrative costs. Apart from such loans, co-ops face various other

financial needs. They need to cover their administrative costs.

Traders

The traders need working capital to optimize their turnover and keep transaction costs down.

They also need longer-term investment capital so that they can buy a vehicle, build a warehouse,or pay for equipment to weigh or grade a product.

Processors

Small-scale processors may also lack the working capital they need to buy bulked products from

a farmer group or trader. They often lack the money to invest in equipment, leading to losses,

lowering quality, and pushing up the cost of processing. They typically need access to medium-

term loans and the ability to lease equipment. Commercial banks are becoming involved in

lending to such processors.

Wholesalers and exporters

Wholesalers often manage credit relations in two directions: they provide money to trusted

traders so they can buy on their behalf, and they may provide products to retailers on credit,

expecting to be paid after the retailer has sold the goods. In this way, wholesalers often act as a

bank for other actors in the chain.

Financial Assistance Schemes:

In India largely the financial assistance is provided by the Central and State Governmentinstitutions. The key financing institutions for this purpose can be identified as Banks, National

Cooperative Development Cooperation, Ministry of Food Processing Industries (MOFPI),

Agricultural and Processed Food Products Export Development Authority (APEDA), Ministry of

Agriculture, National Horticulture Board.

A) Following are some of the financial assistance schemes designed by APEDA:


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1) Scheme for market development: The scheme has been formulated largely forpackaging development, to conduct surveys, studies, consultancy and data base up

gradation, for export promotion and market development.

2) Scheme for infrastructure development: Establishment of common infrastructurefacilities by APEDA or any other Government or Public Sector agency like Airport

Authority of India or Port Trust etc. Assistance for purchase of specialised transport

units for animal products horticulture and floriculture sector. Assistance to

exporters//producers/growers/Cooperative organization and federations for

horticulture and floriculture sector.

3) Schemes for Quality Development: Assistance of installing quality management,quality assurance and quality control systems such as ISO series, HACCP, TQM,KOSHER,BRC,GAP, Organic Certification and ERP based traceability etc. including

consultancy, quality improvement and certification etc.

4) Schemes for research and development: Assistance for technology developmentthrough R & D efforts with research institution under Government/Public Sector.

5) Transport assistance scheme6) Inland Transport Assistance Scheme for North East Region of India7) Marketing development assistance scheme

B) The following are financial assistance schemes designed by the Ministry of FoodProcessing Industries:

1) Mega food parks scheme: The primary objective of the MFPS is to provideadequate/excellent infrastructure facilities for food processing along the value chain

from the farm to market. It will include creation of infrastructure near the farm,

transportation, logistics and centralized processing centers. The main feature of the

scheme is a cluster based approach. The scheme will be demand driven, pre marketed

and would facilitate food processing units to meet environmental, safety and social

standards.

2) Scheme for upgradation of the quality of street food: The Ministry of FoodProcessing Industries is taking initiatives to ensure that the hygiene and quality of

food that is consumed in the streets is not compromised. At the same time it is


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essential to see that the concerns associated with the street food vendors are also

addressed.

3) Scheme for modernization of abattoir: Has a budget provision of 32.5 crs to set up 10abattoirs.

4) Scheme for R&D: MFPI extends financial assistance as grant in aid to variousinstitutions/universities, public funded organisations, and recognized R&D labs, in

public and private sectors to promotre demand driven R&D in the field of food

processing sector for product and process development and improved packaging.

5) During 11thFive Year Plan the Ministry is planning to provide assistance for settingup of about 270 FPTCs, organize 750 EDPs and facilitating need based professional

development training programs. In addition about 55

Universities/Colleges/Institutions would be assisted for creating infrastructure

facilities for degree/diploma courses in food processing.

C) Under NCDC,financial assistance is provided for the following purposes:1) Margin money to raise working capital finance (100% loan)2) Strengthening of share capital base of societies (100% loan)3) Working capital to regional/state level marketing federations (100% loan).4) Term loan for creation of infrastructural facilities like godowns, cold storages,

equipment financing, purchase of transport vehicles, boats and other tangible assets

5) Term and investment loan for establishment of new, modernisation/expansion/rehabilitation/diversification of agro-processing industries.

6) Subsidy for preparation of project reports/feasibility studies etc.D) The following schemes are provided by the National Horticulture Board:

1) Development of Commercial Horticulture through Production and Post HarvestManagement of Horticulture Crops

2) Capital Investment Subsidy Scheme for construction/ expansion/ modernization ofCold Storages/Storages of Horticulture Produce

3) Technology Development and Transfer for promotion of Horticulture4) Market Information Service for Horticulture Crops5) Horticulture Promotion Service


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References:

1) http://www.microfinancegateway.org/p/site/m/template.rc/1.26.7854/2) http://nhb.gov.in/3) http://mofpi.nic.in/ContentPage.aspx?CategoryId=12694) http://mofpi.nic.in/guidelines/hrd_policy.pdf5) http://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.

htm

6) KIT and IIRR. 2010. Value chain finance:Beyond microfinance tor rural entrepreneurs.
http://www.microfinancegateway.org/p/site/m/template.rc/1.26.7854/http://www.microfinancegateway.org/p/site/m/template.rc/1.26.7854/http://nhb.gov.in/http://nhb.gov.in/http://mofpi.nic.in/ContentPage.aspx?CategoryId=1269http://mofpi.nic.in/ContentPage.aspx?CategoryId=1269http://mofpi.nic.in/guidelines/hrd_policy.pdfhttp://mofpi.nic.in/guidelines/hrd_policy.pdfhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes.htmhttp://mofpi.nic.in/guidelines/hrd_policy.pdfhttp://mofpi.nic.in/ContentPage.aspx?CategoryId=1269http://nhb.gov.in/http://www.microfinancegateway.org/p/site/m/template.rc/1.26.7854/

agriculture value chain financing in india

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