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Financial inclusion of sugarcane farmers in modern-day India

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 populationiv , 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 hev 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 Karnavi , 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.)



Ramesh S Arunachalam

6 years ago

Thanks and point well taken but the focus of my article is to demonstrate the unfairness in the financial inclusion product cauurently in vogue. Surely, why should sugarcane farmers pay for mistakes by others in the tripartite contract farming arrangment! That needs to change if financial inclusion and inclusive growth are to long lasting

Utpal Jalan

6 years ago

Sugar Industry is suffering severe high handedness of GoI and State Govt.

These sugar mills are paying avg Rs 2500 cr. of annual direct subsidy to GoI through levy sugar. and are unable to generate any return on 90k Cr of capital invested in this sector.

Now solution to the issue of payment to farmers: GoI or concerned state Government can buy the sugarcane from the farmers and pay them directly. Sugar mills will buy sugarcane from govt central or state whatever political masters and govt decide. similar to waht it does in other crop.

nilesh mayekar

6 years ago

nice research.

Staggered gains likely: Weekly Market Report

Nifty to move in the range of 4,870 to 5,200

The market closed higher this week, despite weak economic indicators, snapping a five-week losing streak. A fall in GDP growth to 7.7% in the June quarter, food inflation back in double-digits at 10.05% for the week ended 20th August and slower factory output for August at 52.6-the slowest since March 2009-did not deter the market from notching a 6% gain in a holiday-shortened week. However, overall in August the Sensex and the Nifty each declined by 9%.

With political tensions easing at the Centre and hopes rising for another stimulus package to boost the sagging US economy, the market climbed up on Monday, after three days of decline. On Tuesday, the indices made higher highs, higher lows and closed higher from the previous day, shrugging off lower GDP numbers. Rejuvenated after a two-day break, the market finished higher on the last day of the week.

The Sensex gained 973 points through the week to close at 16,821 and the Nifty settled at 5,040, putting on 292 points. The Nifty is likely to see its first resistance at 5,100 and if the uptrend continues we may see gains up to 5,200. However, looking at the latest developments in the US, the indices may soon change their current direction and may fall to 4,870.

All sectoral indices closed in the positive. BSE Metal (up 12%) and BSE Realty (up 10%) emerged as leaders, while BSE Fast Moving Consumer Goods (up 3%) and BSE Power (up 2%) recorded the lowest gains.

The top gainers on the Sensex this week were DLF (up 18%), Tata Steel (up 16%), Jindal Steel (up 14%), Jaiprakash Associates (up 13%) and Reliance Industries (up 12%). ONGC (down 5%) was the sole loser among index stocks.

JSW Steel (up 19%) led the gainers on the Nifty, while Syndicate Bank, Shriram Transport Finance (up 14% each), Punj Lloyd (up 13%) and Mundra Port & SEZ (up 12%) were other gainers. There were no red ticks on the index.

The economy grew by 7.7% in the first quarter of FY11-12, compared to the 8.8% in the corresponding three-month period of the previous year. The slower growth was mainly due to the poor performance of the manufacturing sector. During the quarter ending 30 June 2011, manufacturing dipped to 7.2% from 10.6% in the previous corresponding period.

Despite the overall gloom, the government appears optimistic about 8.5% economic growth this fiscal, although the Reserve Bank of India (RBI) has projected a moderation in economic growth at between 8% and 8.5% for the year.

After a gap of over five months, food inflation was once again in double-digits at 10.05% for the week ended 20th August, and finance minister Pranab Mukherjee has described the trend as 'disturbing'. Experts suggest that the RBI may go in for another rate hike at its policy review mid-September.

The slowdown is continuing and this was confirmed by the HSBC Purchasing Managers' Index which dropped to 52.6 for August, down from 53.6 in July. The latest rate of expansion is the slowest in the past 29 months. The decline is attributed to a sharp decrease in new export business. Panellists cited a softening in global economic conditions as the main contributor to the fall in new orders.

In international news, a US regulator on Friday sued major banks, including Bank of America Corp, JPMorgan Chase & Co, Goldman Sachs Group Inc and some other big lenders, over mortgage practices that led to losses at government-owned Fannie Mae and Freddie Mac.

Also in the US, non-farm payrolls stayed unchanged in August, suggesting a pause in employment growth. It is the first time since World War II that the economy has seen no jobs created in a month. The jobless rate has been steady at 9.1%. This will worry the government of the world's largest economy that is still struggling to win over the confidence of its people on an economic recovery.


LIC feels the heat as term plan business gets competitive; plans revamp of its product

There has been stiff competition in the term plans business recently, with premiums nose-diving as insurers scramble for a larger market share. But LIC’s business in this segment is still miniscule and the insurance giant is gearing up to launch a competitive product

The Life Insurance Corporation of India (LIC) is planning to come up with a new term plan to make the premium rates competitive in the market. S Roy Chowdhury, executive director (marketing), LIC, said, "We have not sold pure term plans in large numbers and we are taking a relook to launch a new product. It will be an online and an offline product. The mortality experience has undergone changes and the new product will reflect this."

A few months ago, Aviva Life launched i-Life which is now the cheapest term plan available in the market, competing with online term plans like Met Life's Met Protect, Aegon Religare's iTerm, Kotak Life's e-preferred, ICICI Pru Life's iProtect and IndiaFirst's Anytime. LIC must be feeling the heat in the term plan competition and will soon come out with new term plan. It is not known if the premiums will come down drastically, but it would aim to make it more competitive in the market.

Consider the premium of Rs4,046 offered on Aviva Life's i-Life product compared with the premium of Rs12,650 for LIC's Amulya Jeevan that has similar parameters. (Term life, Rs50 lakh sum assured for a 27-year-old non-smoker, male, based in Mumbai for a term of 25 years.) It is hard to resist the Rs4,046 offer unless you have read Moneylife's cover story 'Online Term Plans'.

The mortality table 1994-96 is based on LIC's experience over numerous years. The new mortality tables that will be put out soon, will replace the Indian Assured Life Mortality Table 1994-96. It is expected that there will be a drop in the mortality charges by 15% to 20%, due to the higher life expectancy. But there could be an increase in the mortality rates for the younger ages due to the higher rate of accident deaths and lifestyle-related diseases.

Term life is a miniscule business for LIC and its brand value is enough to draw customers who will not settle for anything other than LIC's term life insurance.
There are a couple of other reasons also why LIC may not drastically reduce the premium rates on the new term plan. First, it may not be a pure online product that has the advantage of targeting a specific segment of net savvy, financially secure individuals, expected to lead a healthy lifestyle and also have access to better hospitals.

If the insurance company is selective in choosing customers, there is bound to be a better experience. On the other hand, LIC's customer base is across the country and is a truly heterogeneous group. The wider the group, the higher the mortality experience.

The other reason could be the level of tolerance in the claims experience of LIC. S Roy Chowdhury says, "Some insurance companies reject death and accidental death claims on technical grounds. For example, accidental death of a person crossing the road outside the zebra crossing can be a technical ground for some insurers to reject the claim."

Another company that plans to launch a new term plan is Bajaj Allianz Life Insurance Company. According to Rituraj Bhattacharya, head-market management & product development, Bajaj Allianz Life Insurance, "We will be launching a new term life product, but we should not judge solely on the price point. Some insurers have a very aggressive premium pricing for term insurance. It will impact the way claims are treated; offering so low a premium will entail stringency on claims, else it will be a loss-making portfolio."

Mr Bhattacharya asked, "How does an insurer evaluate a claim? What is the tolerance to disclosure? Is there no tolerance or reasonable tolerance to customer disclosure at the time of taking the policy? Nothing comes free. There is price to it. It will reflect in the price you offer in the product. It is not a one-year contract."

According to Deepak Yohannan, chief executive officer,, "Online term insurance has created awareness and affordability for term life insurance of higher amounts (Rs25 lakh and above) instead of remaining underinsured." On the other hand, industry experts don't see much popularity for term life insurance due to customers getting nothing back. It is a sad state of affairs that Indian customers think insurance is something purchased to grow money rather than risk protection. Bundled insurance and investment product is a big market in India. The major advantage of a bundled product is a forced systematic, long-term savings discipline.

Life insurance is a 'push' product in India, but term life insurance is hardly 'pushed' by agents. Interaction with agents reveals that term life is not even discussed in most cases. The low commission for agents due to the size of premium, as well as the Indian mentality of getting an amount equivalent or more than the premium back from the insurance company has left term life insurance the best-kept secret. It is a minority market, when compared to the endowment and unit-linked insurance plans (ULIP) market. The worst part is that a majority of customers taking endowment or ULIPs remain underinsured, due to the need for a high premium to get decent coverage.



Shaik Abdul Jaleel

6 years ago

LIC continues to live in good olden days of selling Life Insurance on the pretext of saving Income Tax & forced long term savings for the Insured, rather than for the sake of Insurance. If the Public Sector Insurer has real concern for the general public, it should come out with a Term Insurance product cheaper than that of any private sector Insurer, and prove that the private sector is interested in profits only, whereas the the Public sector is interested in Service too, if not service alone, and create a competition in the Insurance market thereby benefiting the public.


6 years ago

LIC is not introducing ONLINE term plans because there is stiff resistance from LARGE AGENCY FORCE.There are powerful groups of agents like ALICA,LIAFI etc. If LIC still goes ahead with ONLINE platform it will be MARKETING SUICIDE.


6 years ago

This clearly shows that LIC is no beter than its private peers & has realized late in the day of the merit of term insurance. Its high time they focus on the term insurance & leverage the oppurtunity in terms of making the consumer aware that this product makes sense in the event of life becoming unpredictable due to events in the last 10 years like riots, bomb blasts, terrorist attacks which the Goevernment has failed to contain.

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