1. FINANCING AGRICULTURAL VALUE CHAINS Relevance of Indian Experience to Africa N. Srinivasan

2. Indian agriculture  Cultivated area 160 million hectares  Large population – demand and dependency  Geo-climatic differences make for crop variety  Shift from sustenance to enterprise farming  Organised post production processes / marketing  Numerous small farmers with low resource base  Low productivity, incomes  Limited capacity to invest in productivity enhancement  Poor market access as marketable surplus is meager  Access to finance improving, but a large number of farmers are excluded

3. Agricultural finance – some numbers  Number of agricultural loan accounts: 75.6 mn  Amount of credit balance March-12: $151 bn  Proportion of short term loans: 55%  Proportion of long term loans: 45%  Credit to agro-processing units: $18.9 bn  Credit to GDP ratio in agriculture: 37% Institutional share of credit - $151.2 bn (%) Commercial Banks Cooperative Banks Regional Rural Banks Total 115.1 (76%)20.5 (14%)15.6 (10%)151.2

4. Approaches to value chain finance Direct  Bank lends to farmer  Farmer carries out production  Production sold to buyer  Price received by farmer used for repayment of loan to bank Most loans are provided in this manner Indirect  Bank lends to aggregator/buyer  Buyer/aggregator retails loan to farmer  Farmer carries out production  Production procured by buyer  Loan repaid to bank by buyer  Price net of loan paid to farmer Contract farming usually has this approach – recent development

5. A third approach  Farmer is part of a value chain with contracted supply to buyer/aggregator  Banks gives loan to farmer against assurance by buyer that loan will be repaid by deduction from product value sold to them by farmer  Farmer’s produce procured by buyer  Bank loans paid by buyer on behalf of farmer from out or produce value  Farmer paid price for produce net of loan payment by buyer Common in Sugar and milk value chains

6. Value chain Differences based on final markets Domestic market based value chains  Large demand  Price sensitive market  Ordinary quality standards  Focus on production, less on processing and markets  Less capital intensive  Low profitability and hence low investments  Hesitant credit flow  Specialised schemes for focus on different crops, regions and aspects of farming Export based value chains  Competitive market  Quality sensitive  Non-tariff barriers in the form of quality standards  Focus on grading, processing, packing  Capital intensive  High profitability and high investments needed  Special schemes for credit  Dedicated institutions for facilitation

7. Challenges For producers  High collateral requirements  Product unsuitability  Complex documentation  Small ticket finance not interesting to banks  High borrower transaction costs  Farmer collectives not readily acceptable to banks For banks to finance  High transaction and risks costs in small agricultural loans  Market risks high in agricultural value chains  Seasonal and cyclical factors  Farmer collectives under- capitalised, lack professional management  Staff skills in value chain financing low  Difficulty in marketing innovative products

8. Producer members: 3.18 Mn Milk handled 13.67 Mn lpd Producer members: 3.18 Mn Milk handled 13.67 Mn lpd Cooperative Dairy value chain Gujarat Cooperative Milk Marketing Federation

9. Cashew value chain  Tribal famers with poor quality lands  Initial investment in plantations through a project grant  Farmers cooperatives aggregate members’ cashew and carry out processing  Producer company investments in processing, branding and marketing  Producer company makes value-added products

10. Cashew value chain – VAPCOL* Number of farmer cooperatives51 Number of participating farmers15000 + Value of sales of CashewRs 45 million Farmer Cooperatives own VAPCOL and hold its entire equity VAPCOL procures raw cashew and processed cashew from the farmers’ cooperatives Apart from the price paid, a patronage bonus and dividend on equity are also paid Vasundhara Agri-Horti Producer Company Limited

11. Lessons from the cases  Small farmer livelihoods can be improved through value chains; easier to link farmers and banks in a value chain  Key role for farmers’ collectives  Investments in processing  Farmers collectives reduce risk perception of banks, undertake repayment to banks from produce price  Farmers collectives retail loans to members with bulk loans from banks  Farmers’ collectives collect equity from members which is leveraged for investment in processing, storage and other infrastructure  Tripartite agreements where repayment is assured by crop procurer have been successful mechanisms of bank financing

12. African situation Agriculture  Very similar to India – more work on financing, facilitating institutions and market development have taken place in India  Widely distributed small farms, low productivity, meager market surplus,  Market infrastructure weak and access to markets poor  Food insecurity persists in some geographies  Financial institution network in rural areas not strong – with exceptions  Not too many financial products in agriculture Value chains  Well organised value chains very few  Mostly in high value crops with export markets  Many commodities exported raw, or with primary processing – higher end of value chain is not targeted in many commodities  Considerable potential to improve incomes of farmers through value chains  Productivity, quality and market orientation can bring in income addition to farms  High cost of credit, very few banks in small-loans market

13. What can be done  More attention to organising farmers in clusters – so that services and finance can be delivered easier  Bulking of volumes for inputs and outputs improve market access and strengthen negotiating power  Facilitating institutions to handhold farmer collectives – for both production effort and access to finance  Financial product development and increase in variety of products suitable for different value chains  Collateral substitution through trade instruments, implicit guarantees from aggregators, bulk financing of higher links of the chain for retailing to small farms – to be designed and widely adopted  Equity to be mobilised from farmers to bring down the risks perceived by banks, and increase farmer ownership of the value chain

14. What should be done  Policy focus to shift to outputs and markets  Target Farm income through better productivity and access to markets  Support to creation of farmer collectives and their stabilisation  State support on common infrastructure, PPPs on commercial infrastructure with long payback  Concerted effort on increasing banking network, skill sets in agri value chain financing  Design processes for sharing incomes equitably, with greater benefits to farmers

15. Thanks Despite all our pretensions to knowledge and development, we owe our existence to a few inches of topsoil and the fact that it rains