Financing Agricultural Value Chain Gopal Naik Center for Public Policy Indian Institute of Management Bangalore

Types of firms and financing Financing ‘formal’ vs ‘informal’ sector –Interest in ‘formal’ sector High value agricultural projects Integrated projects –But, informal sector dominates the agricultural sector

Constraints in financing ‘informal’ sector Cost of credit is high –Transaction cost is high Small amount transaction ‘process’ constraints –Default rate is high Higher risk –Natural factors –Poor management practice –Weak risk cover Policy uncertainties Poor institutional support

Common Marketing Channel for Commodities Producers Primary Wholesalers Secondary Wholesalers Semi- Wholesalers Consumers Retailers Processing Distributors Exporters CA B B B Coops EXPORTEXPORT

Problems in the current value chain High cost Quality loss is high –Anonymity of buyers and seller –Absence of grading –Number of times packing, unpacking and handling done is high –Handled by unskilled people –Quality orientation is low Time requirement is high Wastage is high Inadequate information

Overcoming constraints Reduce transaction cost –Group financing (SHG mode) Joint liability group Farmers club –Credit rating Incentive schemes – KCC –Increase credit limit –Reduce interest rate –Encourage financing through contract farming –Bundle services Form - input supplies/output marketing Time/space – loan melas

Reduce risk Institutional support - facilitating structured commodity financing –Legal/policy support Contract farming –Grades and standards Appropriateness Institutional mechanism –Infrastructural support Network of warehouses Grading system –Warehouse receipt system Tradable warehousing system –Futures contract

Futures contract Legal support FCR Act Institutional support Independent regulator Development support – efficient spot market Regulated market Electronic exchanges Warehouse receipt system Futures Market development Options Market development Participation of financial institution in derivatives market

Key requirements Changes in APMC Act Changes in FCR Act Grades and Standards Tradable Warehouse receipt system Institutional support Market development