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Proper financing of agriculture must enable and facilitate a wide range of innovative solutions that will strengthen the primary producer that is critical for fighting poverty in Bharat
Providing financial services to over 600 million people engaged in agriculture and in the agribusiness in poorer and remote rural areas, remains a huge challenge in India, even today. And unless that challenge is successfully met quickly, in the dualistic nature of our economy the disparities will continue to widen between India and Bharat. Under such a situation, financial inclusion and inclusive growth will remain lofty objectives that have no feet on the ground.
While some might argue that the growth of the microfinance sector has led to significant breakthroughs in performance, outreach, and lending volumes, this has rarely extended to low-income people in remote rural areas, dependent solely on agriculture. And, as the Indian microfinance experience suggests, financing by microfinance institutions (MFIs) has primarily tended to be consumption related; although, some of them have provided small production loans to low-income people.
In fact, you can count the number of MFIsi who have looked at agriculture financing in a serious way. And given the 2010 micro-finance crisis, it is clear that mere consumption loans can do little to financially include low-income people-let alone those involved in agriculture.
While the importance of financing agriculture to promote inclusive growth in India is well appreciated, we first need to understand why ensuring sustainable financial access for successful agriculture production and rural enterprises development has always proved difficult. The often cited constraints are, (1) high transaction costs for both (borrower) producers/enterprises and lenders;
(2) high risks faced by both of them, and especially covariance risk for agriculture;
(3) the lack of reliable production/financial data and other information with regard to rural households engaged in agriculture and rural enterprises; and
(4) financial products ill-suited to cash flows and livelihoods of the borrowers.
While the above constraints are genuine and perhaps require more than just financial access, the key point is that access to financial services can play an enabling role and help to address many of these constraints. The underlying assumption is that improving the provision of, and access to financing for agriculture can indeed prove critical not only for the success of agriculture, but is also vital for promoting inclusive growth in India as very large numbers of people are still dependent on agriculture for their livelihood.
So what can be done in a practical sense to re-engineer financing of agriculture?
For this, financial inclusion of agriculture should not be merely viewed as enhancing access to finance for primary producers in an agriculture value chain, but rather, it must be seen as a broader intervention that can, (a) help create better and enabling infrastructure in the chain;
(b) enhance competition among various stakeholders and increase choice within the chain;
(c) reduce vulnerability of producers (marginal, small and primary producers) and increase their staying/bargaining/negotiating power vis-à-vis other actors in the chain;
(d) act as a catalyst and stimulate access to productivity enhancing technology and practices;
(e) facilitate small/marginal and other primary producers to get better returns/rewards through better access to business development services (BDS) including markets;
(f) enable product, process, functional and channel improvement/upgrading in the chain, which is very critical; and/or
(g) address other constraints/challenges that small and marginal producers face and the like.
In practice, such a broader outlook with regard to financial inclusion of agriculture is likely to enable achievement of the larger development objectives, such as ensuring inclusive growth in a more effective manner.
Some of the specific aspects that such financial inclusion could focus on with regard to such agriculture financing is given below.
Overall, any efforts towards financial inclusion in agriculture must strive to improve the bargaining power of smallholder producers, while also reducing transaction costs for intervening stakeholders through promotion of truly democratic producers' groups, associations and cooperatives. Small producers will be able to effectively participate in the changing markets and establish links with new market actors (agribusiness companies, processors, exporters, chains, etc) only if they have access to basic infrastructure, quality inputs and various services, they are organised, and most importantly empowered in terms of staying power and bargaining power. All of this, of course, requires quality, innovative and vulnerability-reducing financial services of a sufficient scale, and not just the traditional micro-credit or conventional agriculture financing.
In fact, there is a clear need to look closely at most, if not all agriculture value chains in the country from the primary producers' perspective and re-engineer financing arrangements to enable and facilitate a wide range of innovative financing solutions that can reduce the vulnerability of the primary producer. I do hope that the concerned ministries and stakeholders, including the Reserve Bank of India (RBI) and National Rural Livelihood Mission (NRLM) take up this task on a war footing…that is very critical if indeed they are serious about fighting poverty and ensuring inclusive growth for large numbers of Indians living in Bharat.
iBASIX is one such rare example in India
(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).
Expanding financial inclusion to 1 crore beneficiaries in India
LeapFrog Investments has announced an investment of Rs67 crore in Shriram CCL, a pan-Indian financial services distribution business that enhances financial inclusion for the common man in India.
With the support of LeapFrog's expertise and capital, equating to nearly $15 million, the business is expected to reach 1 crore beneficiaries within a year. This landmark investment is an important step forward for inclusive financial growth in India. Shriram CCL's subsidiaries provide savings, insurance and investment products to the low-income and emerging consumer market in India.
Dr Jim Roth, co-founder of LeapFrog, said, "This investment will have enormous impact, by financing and improving cover for lakhs of financially excluded clients and their families."
Launched with US president Bill Clinton in 2008, LeapFrog is the world's largest investment fund focused on inclusive insurance and other essential financials services. The Rs60 crore fund invests in insurance and financial services companies serving 'the next billion' in Africa and Asia, the vast under-served market of emerging consumers.
India is an important market for the LeapFrog fund, with up to Rs180 crore to invest in local companies that underwrite or distribute insurance. Unitus Capital was the sole investment advisor assisting LeapFrog, while Amarchand Mangaldas provided legal representation.