In some ways, financing arrangements today penalise the small producer for mistakes of other parties. There is an urgent need to make financial products for low-income people client-sensitive and responsive 

Even as the search for a microfinance law to enhance financial inclusion continues, there are very small things, which if done, can stabilise the inclusion of a large number of low-income people (farmers) and prevent them from getting excluded again.

Let me start with an example and I hope that commercial banks and (any) microfinance institutions (MFIs) involved in this space attempt to redress the same. I also hope that the Reserve Bank of India (RBI) looks into this issue so that the tripartite contract farming products become more sensitive to the needs of low-income clients and are indeed fair to them. And while the problems described affect all farmers, the effect on marginal/small farmers is much higher as they do not have diversified sources of income.

Specifically, I take the case of sugarcane farming, and illustrate the need for available financial products to be made more client-sensitive and responsive. Financial inclusion of sugarcane farmersⁱ  is typically undertaken through contract farming in India, with tripartite agreements between banks/MFIs, sugar factories and clients. While the banks/MFIs are the real drivers of this financial inclusion arrangement, often, the sugar factories, which provide the inputs and technical assistance, also play an important role.

Consider a marginal sugarcane farmer like Ramaiah (in Madurai district) who has 2 acres of land. The story of Ramaiah symbolises what a typical small sugarcane farmer goes through. Ramaiah was financially included when the cane supervisor in a major sugar factory approached him in 2007 and asked him to grow sugarcane in 1.5 acres of his 2 acre land with a perennial well. Under this supposedly inclusive tripartite contract farming arrangement (between farmer, sugar factory and bank), the factory was to supply the inputs, provide technical assistance and buy back the sugarcane; the bank to provide the loan for buying the inputs, including seeds and fertilisers and the farmhands to cultivate the crop and earn returns.

Ramaiah was a small farmer who grew vegetables and the family labour of four people was sufficient to get out the vegetables in time and to the nearby town market. While Ramaiah did not make much money from vegetables the year around, there was at least one season in a year where he would reap bumper returns-due to marriages being plentiful, lower produce coming to the vegetable market during the period of heavy rains in October/November and other factors.

Ramaiah was clearly sold on the sugarcane idea suggested by the cane supervisor of a sugar factory, who had argued that the sugarcane crop (and intercrop of onions) could help him generate handsome returns. But alas, that was not to be and Ramiah's experience with sugarcane farming, as that of many (small/marginal) farmers across the country, is one of complete disaster.  Having received a bank loan, he barely managed to get any money, post harvest from the first sugar crop. The ration crops were bigger disasters in subsequent years, and today, the bank is proceeding against him for recovery of dues and he is excluded from the financial system, as are many others like him who took to sugarcane farming.

What are the causes for this? Ramaiah says that the whole tripartite (financial) inclusion arrangement is structured against farmers, like him, for several reasons.

FIRST, the sugarcane setts (seeds) supplied to him (as part of the loan) were over-mature and hence, germinations were low and a lot of gap fillingⁱⁱ had to be done. Ramaiah asks, why should I pay for gap filling  when poor sugar setts were supplied by the sugar factory in the first place?ⁱⁱⁱ  

To understand this, consider the following example. Normally 35,000 sugarcane setts can be planted in this area of acre. Assuming a germination of 60%, the farmer will have to gap fill the remaining 40% setts again, if he/she is to get a decent yield. The population is the key to getting a good yield; but to maintain population^iv , the farmer has to gap fill and often unilaterally bear the cost. And more often than not, for a variety of reasons beyond the farmer's control, the setts supplied do not germinate fully.

As part of the arrangement in contract farming, the farmer gap fills the sugarcane setts (in case of poor germination) and he/she bears the cost of poorly germinating seeds, which is typically added to the loan. Thus, the farmer bears the burden despite the fact that poor germination often occurs because poor setts were supplied by the sugar factory {mainly due to supply of more than mature setts, or immature setts, or setts from a ratoon (2nd cycle) sugarcane crop and often caused by factors beyond the farmer's control}.

Please note the fact that the cost of gap filling is always invariably borne by the small producer, even if poor seeds (setts) have been supplied by the sugar factory. The sugar factory is the key player here because it decides which farmer's crop will go for seed, when it will be cut and supplied and the like. Therefore, under the tripartite financial inclusion (FI) arrangement, the onus for the quality of setts (seeds) is almost entirely that of the sugar factory.

A SECOND reason Ramaiah mentioned was lack of fertilisers, microbes (like Rhizobium) and tonics on time, which means that there are huge delays in fertiliser application. Ramaiah argues that, as he found out later, while the complete loan interest ticks away from the date of signing the agreement with the bank/sugar factory, the supply of ingredients (included in the loan) by the factory is neither on time, nor of specified quality. He argues, time is of essence in sugarcane farming and when that critical time is passed, no matter how much extra fertiliser is given, the growth of the crop will falter. He also complains he had to do extra weeding before the late fertiliser application as weeds had grown again in the intervening period.

A THIRD issue he mentions is that sugarcane must be cut at the appropriate time, and here again, there are delays in cutting orders from the sugar factory. In his case, he argues that the cane was cut when it was overripe, and hence, there was a huge loss to him. He argues that undesirable practices prevail here and those who pay money get their cutting orders earlier.

A FOURTH reason is the aspect of cut cane being lifted after significant delay, as a result of which the cane weight comes down and there is loss to the farmer. He argues that nefarious practices in transportation effectively increase the lead time from when the cane is cut, to when the cane is transported and delivered to the factory. In his case, the cut cane was allowed to lie on the ground for over two days and this meant moisture loss (and perhaps sugar content) as a result of which there is considerable weight loss and consequent yield and revenue loss for the small farmer. In fact, he cites that this is a very serious problem for small farmers as the contractors arranged by the sugar factory for transporting the cane from the farmer's field to the sugar factory insist on bribes/bata and 'bakshish' to lift the cane. If farmers do not comply, they leave the cut cane to dry in the field and this can seriously reduce the yield and resultant return for the farmers.

Likewise, there are many other instances of problem situations in sugarcane cultivation, where marginal/small farmers are hit quite badly, the larger point is just a simple one-the financial product is simply not sensitive to the needs of the small farmer and it perhaps even penalises him/her for the 'wrong doing' of other parties. Poor seed supplied by the sugar factory could cause lower germination, but gap filling cost is always that of the farmer. The machines in the sugar factory could have been stopped (due to failure/fault) and as a result, the cane of the small farmer cannot be unloaded and thus, not weighed at all-there are many cases, where the small farmer has lost almost 50% of weight and resultant revenue because of lorries not being weighed for 3/4 days.

Now, despite all these (manmade) odds, the small farmer/producer has to repay the loan with interest. And if he^v cannot, he  becomes 'untouchable' and gets excluded from the formal system, often never to get re-included again and left to the mercy of 'infamous' money lenders. And more often than not, MFIs/banks use the joint liability group mechanism to ensure that the loans taken get paid by guarantors-even when the yield from the sugarcane crop is reduced (due to the unfair actions of other stakeholders) and thereby, income from the crop is insufficient to pay off the loan.

What needs to be noted here is that the interest on the loan starts ticking from when the agreement is signed and/or seeds are supplied to the farmer, whereas the payment is made to the farmer at least three to four months after the crop has been harvested and supplied to the sugar factory. And when you factor the delays in supply of fertiliser, cutting the crop and/or lifting the cane to the factory, you realise that the sugarcane farmer is a modern day Karna^vi , who is killed many times before the loan (Arjuna) overwhelms him.

In some ways, the above financing arrangement is outrageous as it penalises the small producer for mistakes of other parties in the arrangement, which reduces yield and revenue. The fair thing to do would be ensure sharing of the risk and costs among the three parties-producer, sugar factory and financier. This will enable alignment of incentives and ensure that there is congruence in all actions and inputs.

In fact, Ramaiah's case and that of other similar small farmers/producers has tremendous implications for financial inclusion in this country.

•  Financial inclusion is a necessary but sufficient condition for better livelihoods. Those who attempt to include the poor and disadvantaged must also pay attention to other factors and risks that can result in the included being ultimately excluded again. This is a very significant lesson for those arguing for financial inclusion of poor-through livelihood financing-as a means rather than an end.
   
•  Finance (livelihood or micro-credit), as it currently exists, is not fair to the client or small producers. Hence, finance must focus on quality servicing and attempt to be sensitive to clients' needs and design/deliver products that are fair and useful to them. More of improper finance could only be disastrous and this is one of the main reasons as to why we see a cycle of inclusion and exclusion among low-income clients. In fact, that is why newer programmes are perhaps being initiated time and again, from the days of the erstwhile Integrated Rural Development Programme (IRDP) and the present financial inclusion drive and the National Rural Livelihoods Mission (NRLM).

•   Much more than financial inclusion needs to be done to ensure that farmers (and small producers) who put in efforts, make the investment and take the risk, actually get rewards and returns commensurate with their efforts, investment and risk. If this becomes the goal of financial inclusion, then, properly delivered enabling services will automatically become a part of the whole financial inclusion agenda. This indeed has significant implications for the design of the wider financial inclusion programme and/or the NRLM in terms of what they are doing and what they should be doing. I hope there is honest introspection in this regard and programmes are tailored accordingly to meet the needs of low-income farmers and producers.

As a beginning, the RBI and the NRLM could take up the cause of low-income sugarcane farmers and producers who perhaps number over 40 million in India-a single client sensitive financial product would ensure that a large number of low-income people are indeed prevented from getting excluded. And the same analysis to ensure fairness to clients can be initiated with a variety of livelihood-related financial products for low-income people. These rather than any interest rate subsidy or subvention or loan waiver would serve the cause financial inclusion and inclusive growth better. I hope that the RBI and the NRLM focus on ensuring fairness in financial access which is very vital to creating and sustaining inclusive growth in modern day India.

  ⁱThere are said to be over 40 million Sugarcane farmers in India and another 50 million people are supposedly dependent on this industry for their livelihoods.
  ⁱⁱThis would include cost of the replacement seeds and labour for planting these.
  ⁱⁱⁱThe sugar factory has control of the sugarcane setts supplied as it cuts the standing sugarcane from (other farmer) fields specified as sugar setts (seeds).
  ^ivFor example, 35000 sugarcane setts are typically planted in an acre. Each sett has 2 eyes and this makes it 70,000 eyes in 1 acre of land. Each eye grows to become a shoot weighing approximately 1 kilo in 11/12 months, depending on the variety. If 70,000 eyes germinate (100% germination) and each of them reaches 1 kilo in 11/12 months, then the farmer gets a yield of 70 tonnes per acre. If there is 60% germination, then the yield is 42 tonnes per acre (70000 setts x 60% germination x 1 kilo = 42 tonnes) and so on. Therefore maintaining the sugar sett population, at a high and optimal level, is very crucial to getting a good yield.
  ^vThis is true for all types of small producers including silk weavers in Kanchepuram or Malda/Murshidabad, different kinds of artisans across India, fishers in the south Indian peninsula and several others about whom I will be writing in the future.
  ^viIn Mahabharat, a great Indian epic, after Arjuna (of Pandavas) kills Karna (with the Kauravas), he tells Lord Krishna, I am so sorry that I killed my brother. Lord Krishna says that Karna died many times before and what Arjuna did was to merely send a last arrow. Karna was also considered as the epitome of sacrifice and loyalty. The metaphor is used here to show that there are many places where unfair practices do the equivalent to included Indian sugarcane farmers and thereby makes them default on their loans and get ultimately excluded.

(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.)