A proper mix of instruments, risks and rewards

FINANCIAL SERVICES TO POOR FARMERS

By

N V Ramana

Group CEO, BASIX

Requirement of a range of Financial Services

Lets talk beyond credit –• Crop insurance• Weather Insurance• Future Price Option – Price Hedging• Insurance needs for price difference between

contractual price & market price ( for Farmers and Processors)

• Leasing for farm equipments• Money transfer• Savings

Risks in Financing Agriculture

• High dependence on weather

• Low and unstable crop yields

• Difficulty in selling harvests

• Price fluctuations

• Drought, Floods, Diseases

CONSTRAINTS IN FINANCING Banker’s point of view

• Lack of ease of addressing issues that affect a common man; • Banks have always feared the uncertainty about the

repayment capacity of poor, whose incomes are subject to numerous vulnerabilities;

• Banks are not interested to provide small farmers with crop cultivation loans as they cannot mortgage their land;

• High per unit cost of delivering financial services to the poor– Small loan sizes– The high frequency of transactions– The large geographical spread– The heterogeneity of borrowers, and– Lack of knowledge and awareness of the products and

services• In the absence of reliable credit information and costly

monitoring, banks fear a high default risk.

MFI – CONSTRAINTS IN FINANCING

• Domain of banking sector- RRB/CCB

• Cross subsidy of interest rate

• High risk perception

• Inappropriate products and procedures

• Inadequate outreach of distribution channels

• Distorted financial behaviour among target group

CONSTRAINTS IN FINANCING – CUSTOMER POINT OF VIEW

In many Banks/FIs, there is Borrower-unfriendly products and procedures, Inflexibility High transaction costs

– numerous visits to bank – long wait of time – payment of extra-legal money for the approval of loan

Time-consuming process The requirement of a minimum balance and charges

levied, although accompanied by a number of free facilities, deter a sizeable section of population from opening/maintaining bank accounts.

Challenges….

• Needs aggregation of a large number of customers for reducing transaction costs

• Inadequacy of infrastructure influencing the credit absorption capacity

• Need for innovations in products and delivery processes to make access convenient and affordable

• Identification and adoption of appropriate technology

• Repeated pleas for loan waiver

Redefining the Strategy!• Creating Sustainable Livelihoods.• Reducing Costs for borrowers

– Offering ATM-enabled credit cards convertible to smart cards with a view to reduce transaction costs and improve customer service.

• The use of inappropriate financial products inhibits marginal farmer’s economic efforts, and can lead to over-indebtedness. – Money for productive purposes is not just enough.– Need of wider range of services and more flexible contracts.

• Cash flow-based lending.• Investments in technology solutions and product

development is more effective than subsidising interest rates.

• Introduction of negotiable warehousing receipt system.• Appropriate business facilitator and business

correspondent models for increasing the outreach.

Livelihood aspects of Microfinance

• Beyond Microcredit – Insurance, Savings, Money transfers, Commodity derivatives.

• Process of social intermediation and building social capital.

• A solution for coming out of poverty with dignity.

• A necessary but not a sufficient condition for livelihood promotion.

Crop lending to Livelihood Financing

• Repayments are not linked to loan use.• Saving mechanisms provided.• Loan terms and conditions are adjusted to

accommodate cyclical cash flows and bulky investments.– To suit diversified portfolio of livelihoods.

• Membership-based organisations can facilitate rural access to financial services and be viable in remote areas.

• Contractual agreements reduce price risks, enhance production quality and help guarantee repayments.

• Area-based index insurance can protect against the risks of agricultural lending.

One way forward - BASIX initiatives and experience

• Providing a package of Livelihood Services (including Financial & Agri Development Services)– Utilization of group-specific lending methodologies to

increase repayments– Portfolio limits and standard operating procedures that

mitigate BASIX’s aggregate risk– Recovery as per cash flow– Insuring customers’ risks to reduce BASIX’s own risk – Collaborative Polygon– Producer’s Groups for mutual gains

• Thereby attracting a greater amount of mainstream capital and human resources into the neglected sector

Inputs for facilitating penetration of

Financial Services

• Active Banking infrastructure

• Intermediation by Community Based Organisations and Micro Finance Institutions

• Leveraging Information technology for – Improving efficiency– Reducing transaction costs and – Delivering multiple services

• E.g. e-Sagu, STEMS

• In the existing model we did business throughBranches (Units).

• Now, we propose to do it through STEMS – Single Terminal Enabling Multiple Services– Bundling of products, thereby reducing Cost of delivery of

each service.

• A wider network for livelihood promotion providing – with integration of micro-finance, business development and institutional development services, using the information and communication technology extensively.

STEMS not Branches!

LFS•Credit,Savings,Insurance

Ag/BDS•Seed treatment, Border crops, Trap crops and erecting bird perches in the field, Pheromone traps, Tricho cards, Use of Neem oil, Use of NPV, Need based sprayings

IDS•Formation and Strengthening of producer Groups

Farmers Ginning

BASIX AS A NEUTRAL AGGREGATOR IN THE COTTON VALUE CHAIN

LintPressing

unit- Conversion

to Bales

Farmers

Farmers

MCX Trading Platform

NCMSL Godowns

Formed into Producer

group/MACS

BASIX

Warehouse Receipt

BANK

Loan

Assured Price

Seeds, Fertilisers,Pesticides

SUMMING UP

• Requires an orchestration of different types and sources of finance– Bundling up of products for reduction in

costs to customer

• Financial services as one part of a holistic approach in which all aspects of sustainable livelihood promotion are integrated and complement one another.

nvramana@basixindia.com

Role of MFIs promoting Livelihoods

• Community organisation.• Mass mobilization.• Linking the community institutions with Crop-

related developmental programmes of other agencies.

• Providing hand-holding support to growers.• Creating awareness of the importance of

micro-credit within the Crop growers and local processing groups.

• Functioning as financial intermediary.• Providing micro enterprise development

support.

Business Model• STEMS will be run by trained and authorised Operators, who will

eventually own the STEMS. S/he will be provided a loan for the STEMS infrastructure by BASIX. Various services will be provided by specialist agencies through the STEMS:

• Financial services: – Savings, money transfers– ICICI Bank– Life Insurance : AVIVA, ICICI Prudential– Livestock Insurance: Royal Sundaram, ICICI Lombard– Weather insurance: ICICI Lombard– Credit (up to Rs 10,000) by BASIX group of companies – Commodity trading - NCDEX

• Business Development Services– Input supply – Fertiliser and seed companies like NFCL– Commodity sales – ITC e-choupal– Retail consumer products - HLL E-Shakti– Consumer durables – bicycles, TVs on hire purchase by TI Cycles, Philips– Internet Kiosk services (e-mail, word-processing, rail/bus/Tirupati ticket

booking, computer training, matrimonial, photo) by the Operator. • Institutional Development Services

– Strengthening of Self-help group and Cooperatives with accounting, rating and registration packages

– E-ducation and training, such as by Azim Premjee Foundation, NIIT– E-governance applications – respective state and district administrations

Mitigating Commodity price risk by Using Commodity Derivatives

• Migrating farmers to cropping patterns based on futures prices on the Exchange platforms;

• Bringing the warehousing and grading/standards infrastructure.