Re-engineering financial inclusion in agriculture is key to promoting inclusive growth

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.

  •  Repositioning agriculture and rural life - This calls for priority focus on access to finance in agriculture in terms of investment credit, risk mitigation products and finance for infrastructure, including watershed, extension services, quality inputs, standardisation and the like.
  • Promoting innovation, competitiveness and growth of agribusiness - Competition enhancing finance for players in various agriculture supply chains (mainly, middle level) and especially for other kinds of intermediaries (like producer organisations). This apart, there could be specialised financial arrangements for re-structuring of such supply chains and the like.
  •  Strengthening agricultural health and food safety systems - It is critical to do this in terms of inputs, processes and infrastructure and ensure that various standards are adhered to. Finance for infrastructure is important here and offers a great opportunity.
  •   Introducing appropriate technology and innovation for modernisation of agriculture and rural life - Again, innovative financial products can play a major role here in bringing technologies from lab to land in a successful manner and facilitating their wide scale adoption by small producers and farmers.
  • Strengthening existing agriculture and rural communities - Enhancing the staying and bargaining power of small and marginal farmers is going to be very critical. Thus, finance for reducing vulnerability and risks of small producers would be most useful and this alone will enable them to participate fully as stakeholders and demand and get their due. This would include a range of post-harvest financing arrangements, including warehouse receipts.

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).

1 decade ago
It is wellkown , how the agricltural loans are andvanced by the banks .No body is serious to know the reasons of poor recovery of these loans as all the stake holders are party to it, then who will enquire.For recovery of previous loans further 2-3 times more loans are advnced.If a person has not been able to repay the earlier loan , how will he be able to repay the double/tripple amount ? The end is also known to all.......For solution detail comments may be invited.
Save agriculture, farmers from the clutches of.......Nothing is impossible.
tarun lakhanpal
Replied to ErMCAggarwal comment 1 decade ago
The recovery of agriculture loan has becone an uphill task over a period of last five years. The main reason of poor recovery is availability of many channels of credit at the doorsteps of farmers and lower rate of interest as compared to other loans. It is well establised rule that the recovery level will go done once the rate of interest is low as compared to all loans. That is why recovery level in cooperative bank is low as compared to commercial banks in case of agriculture loan and long term credit investment. Govt.needs to ponder on this issue and do something for revival of cooperative credit instiutions in the country which are otherwise backbone of farmers

1 decade ago
In our country the main concetration is on bollywood and cricket which are non produtive .The media is also busy for these two activities.Atleast one special chennel be earmarked for agriculture and allied activities to acquaint the farmers and non-farmers covering 65% population in rural areas for their livelihoods.The various development programes with success stories may be shown
Nagesh KiniFCA
1 decade ago
With the Industrial growth plumeting to a dismal one third of last year, the service sector -IT stuck with slow down in the West, garment and other exports sliding now if agriculture is not accorded top priority and revived, God help the Country. Fortunately, the Rain Gods this year have been considerate and we can look forward to a good harvest.
With the Indian cricket team doing badly in both the tests and ODIs and BCCI Secretary conceding to the misgovernence, the Hon. MOA should forget cricket and ought to do concentrate to do something concrete and positive for agriculture as a whole and not only for sugar and grapes for wine from Baramati.
As it is the onion farmers of Nashik are on the warpath with a 72 hour Rasta Rokho on the Mumbai-Agra Highway.
1 decade ago
It should also be mendatory for the grocers/ration card shop to open the account in bank.Tn case of refusal the local panchayat /food supply deptt, can do it very easily.
prashant n
1 decade ago
Financial inclusion will be successful only if the last mile is integrated into the chain.,

Eg: Landless labourers are disbursed the NREGA payouts electronically into their bank accounts.
But, when they go to the village grocer/ration shop, they have to pay in cash, as the village grocer/ration shop does not accept the payments electroncially !!!
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