All businesses involved in rural distribution face this challenge: the cost of last-mile delivery of products and services is high.
For banks providing credit to farmers, there is an additional twist: As well as issuing crop loans, they need to recover them. A dense network of rural branches assuring both functions might look like the answer,but there is a cost factor. So, India tried branchless banking with business correspondents who earn commissions for connecting village customers to banks. This has not been very successful so far: the correspondents cannot make a living from commissions based on the sale of financial products alone.
Conditions could change under a broader concept of the role of business correspondents, though. Farmers are looking for inputs and services, including crop loans, as well as links to value-chains and markets on the output side. Access to these goods needs to be facilitated. Trained rural business correspondents could step in, delivering a range of services, including credit intermediation on behalf of banks, diversifying their sources of commissions in the process. Value-chain financing concepts would apply. The correspondents would work with input dealers, equipment manufacturers and product off-takers, as well as banks, to provide relevant services to farmers. With this integrated approach, chances of loan repayment are high.
Syngenta Foundation India (SFI) and its partners work with small and marginal farmers in Maharashtra, Odisha, West Bengal, Jharkhand and AP. We partnered with IDBI Bank to introduce value-chain financing and innovations in credit delivery. The approach revolves around a type of business correspondents we call agri-entrepreneurs—talented young rural people who understand agriculture and are each trained to work with 200-300 farmers in clusters of 4-5 villages. The agri-entrepreneurs (AEs) are one-stop service providers for small and marginal farmers enabling access to four types of services: quality inputs, provision of knowledge and crop advice, links to markets and facilitation of credit. The AE model in cooperation with IDBI Bank opens up new possibilities for the delivery of farm credit under a modified business correspondent scheme.
The difference to the conventional system is that each AE also runs her or his own small business as a service provider. This strengthens the AEs’ roots and commitment to the communities they are serving. The bank provides general cash credit and Mudra loans to AEs from which input purchases from wholesalers can be financed in bulk quantities at advantageous prices and also services such as farm machinery rentals can be made possible. The crop loan is disbursed mostly in kind (agri-inputs purchased at the AE’s shop) and limited cash. This is also in line with the government’s idea of digital economy and cashless transactions. The farmers profit from an input price advantage offered by the AEs (made possible by the AEs’ volume purchases). The loans are “ring-fenced” to minimise the risk of diversion to non-agricultural purposes. Market linkages offered by the AEs facilitate loan repayment by deduction of installments from sales proceeds.
IDBI Bank has been proactive in providing loans to small farmers through the AEs. It has simplified loan application, review and disbursement procedures. The roster of customers served includes tribal farmers who do not have formal land titles or records but cultivate forest-land, based on customary rights. Because of the continuous involvement of the AEs and the ring-fencing of the loans for farming purposes, IDBI Bank has extended financial support without traditional collateral or attaching other strings. Costs are competitive from the bank’s perspective as due diligence, client monitoring and loan recovery are shifted to the AEs against fees.
Over the past year, IDBI Bank has lent R60 million to about 1,700 small and marginal farmers. Contrary to conventional expectations, there has been 100% repayment. The AEs are the lynchpin of the system, visiting farmers up to 10 times per season, providing advice and inter-mediating quality inputs and links to markets. The AEs are credible and instill trust because they are trained and hail from the very communities and settings they are serving. Trust and the cultural fit inherent in this model largely eliminate default—as long as crops are healthy and marketable surplus can be sold.
The timely availability of credit empowers smallholders to purchase agricultural inputs and shift from traditional paddy to higher-value crops like vegetables, which require greater investment. Tribal farmers in Palghar district, Maharashtra, previously earned around Rs 20,000 per year from farming. After the monsoon, they would often migrate to Thane and Bhiwandi in search of work. Thanks to the AE model and the technical advice that comes with it along with credit, many are now earning Rs 50,000-60,000 per annum from vegetable cultivation. IDBI Bank charges a 7% interest, compared to 24% or more from informal money-lenders.
After tasting the success of growing vegetables in kharif season, some farmers were keen to add a rabi crop. This required irrigation. The cost of installing combined lift and drip irrigation for each farmer group ranged from Rs 5 lakh to Rs 25 lakh, depending on the setting. IDBI Bank again took a non-traditional approach. It funded these projects for groups of seven to 40 farmers, without any collateral. For the first time ever, farmers were able to grow a second crop, mainly of tomatoes. This lifted their annual incomes to close to Rs 1 lakh per farmer.
This experience suggests that banks have a choice. One can continue going by the traditional book, demanding complicated documentation and unrealistic collateral, which—as the experience shows—still may not prevent loans from becoming non-performing. Alternatively, one can follow a more realistic partnership and business-based approach designed to respond to farmers’ needs while seeking to unleash potential. Based on our experience with the AEs and IDBI Bank, this alternative approach achieves much better results for all concerned. Farmers earn more, food security improves, young entrepreneurs are given a chance, banks develop new markets and, quite possibly, migration to cities is reduced. Last-mile issues do not need to thwart rural development if we look for reasons and ways to extend farm credit rather than looking for excuses not to.
The author is executive director, Syngenta Foundation for Sustainable Agriculture (SFSA).
Views are personal