Financing Agricultural Value
Chain
Gopal Naik
Center for Public Policy
Indian Institute of Management
Bangalore
Types of firms and financing
• Financing ‘formal’ vs ‘informal’ sector
– Interest in ‘formal’ sector
• High value agricultural projects
• Integrated projects
– But, informal sector dominates the agricultural
sector
Constraints in financing
‘informal’ sector
• Cost of credit is high
– Transaction cost is high
• Small amount transaction
• ‘process’ constraints
– Default rate is high
• Higher risk
– Natural factors
– Poor management practice
– Weak risk cover
• Policy uncertainties
• Poor institutional support
Common Marketing Channel for Commodities
Coops
Producers
CA
Processing
Exporters
Primary
Wholesalers
B Secondary
Wholesalers
B
E
X
P
O
R
T
Distributors
SemiWholesalers
B
Retailers
Consumers
Problems in the current value
chain
• High cost
• Quality loss is high
– Anonymity of buyers and seller
– Absence of grading
– Number of times packing, unpacking and handling
done is high
– Handled by unskilled people
– Quality orientation is low
• Time requirement is high
• Wastage is high
• Inadequate information
Overcoming constraints
• Reduce transaction cost
– Group financing (SHG mode)
• Joint liability group
• Farmers club
– Credit rating
• Incentive schemes – KCC
– Increase credit limit
– Reduce interest rate
– Encourage financing through contract farming
– Bundle services
• Form - input supplies/output marketing
• Time/space – loan melas
Reduce risk
• Institutional support - facilitating structured
commodity financing
– Legal/policy support
• Contract farming
– Grades and standards
• Appropriateness
• Institutional mechanism
– Infrastructural support
• Network of warehouses
• Grading system
– Warehouse receipt system
• Tradable warehousing system
– Futures contract
Futures contract
Legal support
FCR Act
Institutional support
Independent regulator
Development support – efficient spot market
Regulated market
Electronic exchanges
Warehouse receipt system
Futures Market development
Options Market development
Participation of financial institution in derivatives
market
Key requirements
Changes in APMC Act
Changes in FCR Act
Grades and Standards
Tradable Warehouse receipt system
Institutional support
Market development