Agri financing: The next era of evolution for agriculture
India’s agriculture sector is by far one of the largest employers in the country. With more than 50 percent of the working population associated with agriculture in one form or another, the overall contribution to India’s GDP is only a meagre 18 percent.
These recent estimates indicate that the sector is performing way below its potential. It exposes the lack of new-age reforms, which are required to meet the demands of today. Unfortunately, it is directly leading to the wastage of food, among other issues.
With the rural areas depopulating significantly and urban agglomeration accelerating, the agriculture sector is yearning for more liquidity and the introduction of modern practices. Doing so will reduce the carbon footprint and bring much-needed respite to the underprivileged segments of the farming community.
For a significant period, capital flow into the sector had been restricted due to archaic warehousing and distribution practices, lack of financing options, and minimal presence of commodity exchanges. Only an overhaul of predated techniques can turn the sector around.
To uplift farm businesses and make them a part of India’s growth story, the country needs to embrace fresh ideas and the integration of technology. Several agritech firms are disrupting the system as we speak, and giving a fillip to their efforts through regulatory changes holds the potential to bring prosperity to the sector.
The current state of Agri Financing in India
Several agricultural experts and emerging agribusinesses have lamented for many years about the lack of financing opportunities in the sector. As of today, the agri financing requirement of conducting private trade in the country is close to $95 billion, a far cry from what is currently being achieved under the existing regulations and infrastructure.
The deficit in formal financing has a debilitating impact on the growth prospects, as farmers and distributors are often excluded from lending through reasonable interest rates, as their creditworthiness is assessed based on their record.
The status quo not only impacts commerce and trade activities but also undermines the overall efficiency of the agri ecosystem. On receiving additional capital, farmers will be able to allocate resources for implementing best practices, which could, in turn, generate better agricultural output and financial returns.
Moreover, quicker transactions and money transfer within the supply chain could speed up processes like food distribution and warehousing, which secures the food grains from wastage and rotting in badly maintained facilities.
Formal financiers and role of capital markets
Predominantly, the sources for formal financing in the agri sector centered on all of India’s major and lesser-known banks and Non-Banking Financial Companies (NBFCs). However, small-time farmers and farm labour continue to rely on informal sources of lending even to this day. People are often forced to seek traditional or informal lenders, either due to lack of access, knowledge, or non-eligibility for loans owing to their credit profiles.
The informal system is very damaging for the welfare of farmers, as lenders charge exorbitant rates of interest. In the absence of modern agricultural practices, it becomes almost impossible for borrowers to repay their debts in time. Plans for modernisation or refurbishment of farm equipment under such scenarios are destined to fail due to peoples’ inability to clear large debts.
Even in the case of banks and NBFCs that offer reasonable rates of interest, the likeliness of ample savings and profit-making has been marginalised due to the land ownership trends, water scarcity, and the effects of climate change. Over the years, the arable land area per farmer has been on the decline, thereby reducing their ability to diversify, adjust crop cycles, and bring flexibility. Like every other middle and lower-income aspirant, even the farming community deserves to secure their futures by exploring alternate financial opportunities.
While the rest of India enjoys the fruits of stock market returns, the agri sector has thus far not tapped into the stock markets to the extent imaginable.
Recent developments in the agri commodities exchanges are a step in the right direction. While Agri futures contracts existed, the emergence of forward contracts as an alternative could bring a refreshing change to the system.
Securitised debt instruments in agriculture and the future
The most common investments by those who are risk-averse are fixed deposits, debt mutual funds, etc. Investors seeking higher-returns go for equity capital markets, cryptocurrencies, and the likes.
Agri-commodities Securitisation (Securitised Debt Instrument, SDI) is an emerging asset class linked with commodities trading for investors. Securitised agri-commodities are backed by physical commodities’ inventory lying in the warehouse of a company issued in the form of Pass-through Certificate, or PTC.
The annual commodities physical trading market is at $100 billion, of which only 5 percent has access to institutional credit, and it underlines the scope for institutions and retail investors alike.
Agri SDI instruments offer a coupon to investors, both institution and retail, in the range of 10-11 percent which is somewhere between fixed deposit on one side and high risk/ return products on the other side. The stability Agri SDI offers, as well as higher returns compared to fixed deposits and debt mutual funds, is indicative of its place.
On average, fixed deposits offer anywhere between 4-6 percent returns, and debt mutual funds fall in the range of 7-8 percent. Commodity investments usually bring returns to the tune of 10-11 percent. While these investments are seen as safe investment avenues, there is need to create awareness about potential of investing in agri-commodities.
Some agritech firms introduced SDI last year, and they now have plans set for 2021 as well, covering a host of agri commodities that were not covered under the futures contracts. Until recently, SDIs were available largely for commodities like gold, and purchases of vehicles, etc., and the changes will only bring more liquidity into the system, which could then be used for upgrading warehouses and agricultural supply chains.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)