Connecting farmers to banks: Agritech start-ups contribute to financial inclusion


Credit flow to rural areas will increase if agricultural products can be offered as collateral using warehouse receipts

A farmer has everything to gain when he can choose who to sell to and when to sell. Ideally, a farmer would sell when he needs cash immediately at harvest time, store the rest during the inter-crop period, and sell as the price suits him.

Money is structurally earned by producers by storing (and only storing) their harvest to get better prices. Access to storage is therefore the primary determinant of profitability. In India, the financial situation of farmers is so precarious that without credit they cannot afford to store and profit from rising prices. Thus, credit is here the other crucial determinant of profitability insofar as it allows storage.

Take advantage of credit

The government has raised banks’ lending targets for the agricultural sector every year with the aim of doubling farmers’ incomes. However, even when banks provided agricultural credit worth $168 billion in 2018-19, 50% of that credit went to medium and large farmers. Of all Indian farmers, only 30% take credit from formal sources, while 50% of small and marginal farmers cannot borrow from any source.

Constraints related to institutional design and delivery mechanisms are major contributors to the lack of sustainable rural financial institutions and markets. This leaves more than 10 million farmers dependent on informal channels, exposing them to exorbitant interest rates as they meet their credit needs each growing season.

Another challenge associated with agricultural credit has been its end use. 30-40% of the loans farmers receive are diverted to their health care needs, marriages, education costs and other non-farm uses, further impacting the efficiency of farming activities.

Holistic solutions

It is here that the role of new era tech-driven agtech players finds its relevance.

Agtechs can challenge legacy systems and create economies of scale with holistic solutions and data-driven methodologies.

With more than 1.4 crore farmers having adopted various agtech solutions, there is a clear opportunity for innovative technologies to solve scale and profitability issues.

Big data tools allow institutions to target credit more precisely, reaching better groups of borrowers and expanding access to unsecured credit.

Fintechs can now not only mitigate the risks associated with unwanted diversification, but also track the use of these funds. The growth of the cashless economy and financial technology (FinTech) is generating new ways to target and secure credit, price, manage risk, and organize agricultural value chains.

Digitizing farms with an integrated plan to create electronic commodity scales will enable the creation of agricultural stacks, building much-needed transparency in value chains. This will not only ensure transparent credit facilitation, but will also help decouple farmers from non-institutional sources where they are forced to borrow at high interest rates.

WRS as a Trade Facilitator

The warehouse receipt system (WRS) adopted by various agritechs has the potential not only to improve access to institutional credit, but also to facilitate trade for farmers.

Guaranteeing agricultural products with legal backing in the form of a Negotiable Warehouse Receipt (NWR) would lead to increased inflow of credit to rural areas, reduce the cost of credit (due to higher greater certainty of credit recovery by the bank) and stimulate other related activities, such as standardization, grading, packaging and insurance services in the agricultural sector.

Agri-fintech players also play a key role in financial education for marginalized people. This is particularly relevant for women in agriculture as they face unique challenges: limited control and ownership over assets such as land and their inability to provide material collateral for loans. Mobile money, biometric identification and blockchain can also help drive financial inclusion.

Collaborative models

These key initiatives led by agritechs and new era fintechs open up an unprecedented opportunity for collaboration between them and traditional lenders such as banks and NBFCs.

Agtechs can act as business correspondents for banks, facilitating deeper and faster credit underwriting and onboarding. Co-lending is yet another avenue for deepening credit to the agricultural sector.

These collaborative models not only help increase the reach of agricultural credit, but also make it extremely efficient in terms of interest rates.

Such models promise to capitalize on the core strengths of participating entities. Banks offer their capital at low cost, while agfintechs bring their technological expertise to reach, assess and meet the credit needs of unserved agricultural actors.

Financial inclusion is a prerequisite for ensuring social cohesion as well as the three Es- employment, economic growth and empowerment.

An empirical analysis of the relationship between financial inclusion and development shows that the Financial Inclusion Index (IFI) and the Human Development Index (HDI) tend to move in the same direction.

With agtech startups making finance available and accessible, while monitoring and encouraging its proper use, the goal of achieving higher indices of financial inclusion and human development for rural India is certainly achievable.

(The author is MD, Views are personal)

Published on

March 12, 2022


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