FINANCIAL SERVICES TO
POOR FARMERS
A proper mix of instruments,
risks and rewards
By
N V Ramana
Group CEO, BASIX
Requirement of a range of
Financial Services
Lets talk beyond credit –
• Crop insurance
• Weather Insurance
• Future Price Option – Price Hedging
• Insurance needs for price difference between
contractual price & market price ( for Farmers and
Processors)
• Leasing for farm equipments
• Money transfer
• Savings
Risks in Financing Agriculture
• High dependence on weather
• Low and unstable crop yields
• Difficulty in selling harvests
• Price fluctuations
• Drought, Floods, Diseases
CONSTRAINTS IN FINANCING
Banker’s point of view
• Lack of ease of addressing issues that affect a common man;
• Banks have always feared the uncertainty about the repayment
capacity of poor, whose incomes are subject to numerous
vulnerabilities;
• Banks are not interested to provide small farmers with crop
cultivation loans as they cannot mortgage their land;
• High per unit cost of delivering financial services to the poor
– Small loan sizes
– The high frequency of transactions
– The large geographical spread
– The heterogeneity of borrowers, and
– Lack of knowledge and awareness of the products and
services
• In the absence of reliable credit information and costly
monitoring, banks fear a high default risk.
MFI –
CONSTRAINTS IN FINANCING
•
•
•
•
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Domain of banking sector- RRB/CCB
Cross subsidy of interest rate
High risk perception
Inappropriate products and procedures
Inadequate outreach of distribution
channels
• Distorted financial behaviour among
target group
CONSTRAINTS IN FINANCING –
CUSTOMER POINT OF VIEW
In many Banks/FIs, there is
 Borrower-unfriendly products and procedures,
 Inflexibility
 High transaction costs
– numerous visits to bank
– long wait of time
– payment of extra-legal money for the approval of loan
 Time-consuming process
 The requirement of a minimum balance and charges
levied, although accompanied by a number of free
facilities, deter a sizeable section of population from
opening/maintaining bank accounts.
Challenges….
• Needs aggregation of a large number of customers for
reducing transaction costs
• Inadequacy of infrastructure influencing the credit
absorption capacity
• Need for innovations in products and delivery
processes to make access convenient and affordable
• Identification and adoption of appropriate technology
• Repeated pleas for loan waiver
Redefining the Strategy!
• Creating Sustainable Livelihoods.
• Reducing Costs for borrowers
– Offering ATM-enabled credit cards convertible to smart cards
with a view to reduce transaction costs and improve customer
service.
• The use of inappropriate financial products inhibits
marginal farmer’s economic efforts, and can lead to
over-indebtedness.
– Money for productive purposes is not just enough.
– Need of wider range of services and more flexible contracts.
• Cash flow-based lending.
• Investments in technology solutions and product
development is more effective than subsidising interest
rates.
• Introduction of negotiable warehousing receipt system.
• Appropriate business facilitator and business
correspondent models for increasing the outreach.
Livelihood aspects of
Microfinance
• Beyond Microcredit – Insurance, Savings,
Money transfers, Commodity derivatives.
• Process of social intermediation and building
social capital.
• A solution for coming out of poverty with
dignity.
• A necessary but not a sufficient condition for
livelihood promotion.
Crop lending to
Livelihood Financing
• Repayments are not linked to loan use.
• Saving mechanisms provided.
• Loan terms and conditions are adjusted to
accommodate cyclical cash flows and bulky
investments.
– To suit diversified portfolio of livelihoods.
• Membership-based organisations can facilitate rural
access to financial services and be viable in remote
areas.
• Contractual agreements reduce price risks, enhance
production quality and help guarantee repayments.
• Area-based index insurance can protect against
the risks of agricultural lending.
One way forward - BASIX
initiatives and experience
• Providing a package of Livelihood Services
(including Financial & Agri Development Services)
– Utilization of group-specific lending methodologies to
increase repayments
– Portfolio limits and standard operating procedures that
mitigate BASIX’s aggregate risk
– Recovery as per cash flow
– Insuring customers’ risks to reduce BASIX’s own risk
– Collaborative Polygon
– Producer’s Groups for mutual gains
• Thereby attracting a greater amount of mainstream
capital and human resources into the neglected
sector
Inputs for facilitating
penetration of
Financial Services
• Active Banking infrastructure
• Intermediation by Community Based
Organisations and Micro Finance Institutions
• Leveraging Information technology for
– Improving efficiency
– Reducing transaction costs and
– Delivering multiple services
• E.g. e-Sagu, STEMS
STEMS not Branches!
• In the existing model we did business through
Branches (Units).
• Now, we propose to do it through
STEMS – Single Terminal Enabling Multiple
Services
– Bundling of products, thereby reducing Cost of
delivery of each service.
• A wider network for livelihood promotion
providing – with integration of micro-finance,
business development and institutional
development services, using the information
and communication technology extensively.
BASIX AS A NEUTRAL AGGREGATOR IN
THE COTTON VALUE CHAIN
BASIX
BANK
Warehouse
Receipt
LFS
•Credit,Savings,Insurance
Loan
Ag/BDS
•Seed treatment,
Border crops, Trap
crops and erecting
bird perches in the
field, Pheromone
traps, Tricho cards,
Use of Neem oil, Use
of NPV, Need based
sprayings
Farmers
Farmers
Formed into
Producer
group/MACS
NCMSL
Godowns
Ginning
Farmers
IDS
•Formation and
Strengthening of
producer Groups
Seeds,
Fertilisers,
Pesticides
Assured
Price
MCX
Trading Platform
Pressing
unitConversion
to Bales
Lint
SUMMING UP
• Requires an orchestration of different
types and sources of finance
– Bundling up of products for reduction in
costs to customer
• Financial services as one part of a
holistic approach in which all aspects of
sustainable livelihood promotion are
integrated and complement one another.
nvramana@basixindia.com
Role of MFIs promoting
Livelihoods
• Community organisation.
• Mass mobilization.
• Linking the community institutions with Croprelated developmental programmes of other
agencies.
• Providing hand-holding support to growers.
• Creating awareness of the importance of
micro-credit within the Crop growers and local
processing groups.
• Functioning as financial intermediary.
• Providing micro enterprise development
support.
Business Model
•
STEMS will be run by trained and authorised Operators, who will
eventually own the STEMS. S/he will be provided a loan for the
STEMS infrastructure by BASIX. Various services will be provided by
specialist agencies through the STEMS:
•
Financial services:
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Business Development Services
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–
–
–
–
•
Savings, money transfers– ICICI Bank
Life Insurance : AVIVA, ICICI Prudential
Livestock Insurance: Royal Sundaram, ICICI Lombard
Weather insurance: ICICI Lombard
Credit (up to Rs 10,000) by BASIX group of companies
Commodity trading - NCDEX
Input supply – Fertiliser and seed companies like NFCL
Commodity sales – ITC e-choupal
Retail consumer products - HLL E-Shakti
Consumer durables – bicycles, TVs on hire purchase by TI Cycles, Philips
Internet Kiosk services (e-mail, word-processing, rail/bus/Tirupati ticket booking,
computer training, matrimonial, photo) by the Operator.
Institutional Development Services
–
–
–
Strengthening of Self-help group and Cooperatives with accounting, rating and
registration packages
E-ducation and training, such as by Azim Premjee Foundation, NIIT
E-governance applications – respective state and district administrations
Mitigating Commodity price risk by
Using Commodity Derivatives
• Migrating farmers to cropping patterns
based on futures prices on the Exchange
platforms;
• Bringing the warehousing and
grading/standards infrastructure.