Circular No.DPD.FS. 164 /2002-03
24 July 2002
The Chairman and Managing Director/
The Chairman/Managing Director
All Scheduled Commercial Banks
Dear Sir,
Refinance Scheme for financing farmers in Agri Export Zones (AEZs ) under 'Contract Farming'
As you are aware, the Hon'ble Finance Minister in his budget speech for the year 2001-02, announced
formation of Agri Export Zones (AEZs) in select areas of different States. Later, it was also incorporated
in the EXIM Policy. The GoI has, so far, identified 28 zones and notified 15 of them for creation of AEZs,
to give a boost to agricultural exports from the country. Recognizing the growing importance of agri
export sector in the changed economic scenario, NABARD too has identified this as a thrust area for
extending necessary support for its orderly growth. Accordingly, it has been decided to provide refinance
to commercial banks for financing of farmers for cultivation / production of identified crops/
commodities in AEZs under contract farming. A brief write up on the concept of AEZs is given in
Annexure-I.
2. To begin with, the refinance assistance from NABARD would be available for bank financing to
farmers in the AEZs identified by the GOI for the purpose. The relevant details such as commodity,
State and districts covered and notified are given in Annexure-II.
3. NABARD refinance would be available to commercial banks under schematic approach for financing
farmers under contract farming mode either directly or through the processor /exporter. With a view to
encourage banks for financing in AEZs, it has been decided to provide 100% refinance on the eligible
bank loan under the scheme. The rate of interest on NABARD refinance is also kept at 7% p.a. with rate of
interest on bank loan to ultimate borrowers not exceeding 10.5% p.a. The salient features of the refinance
scheme are given in Annexure III.
4. The concept of contract farming is not new to the bankers as they have financed farmers associated
with sugar, tobacco, farm forestry etc., earlier. In order to improve agricultural productivity and make
agricultural products more competitive, it is necessary to integrate the farmers with the
processor/exporter in the AEZs. Needless to mention that vertical coordination through contractual
relationships has many advantages. A brief note on Contract Farming is given in Annexure-IV.
5. In case of loans for financing processing companies for investment credit for plant and machinery
which add value to agricultural crops, banks may submit separate project proposals to NABARD and
such proposals will be governed by our Circular on "Refinance for Food and Agro-Processing Units" vide
Circular No.46/ICD-07/2002 dated 26 February 2002 .
6. Banks may submit their drawal application for availing of refinance under the scheme to the respective
Regional Offices of NABARD as per the existing procedure under ARF or under schemes with prior
sanction depending on the outlays involved.
7. Banks are required to submit the progress under the scheme on quarterly basis to the respective
Regional Office of NABARD within one month of the close of each quarter. A format for submission of
information on a quarterly basis is given in Annexure-V. The first quarterly report may be submitted to
our Regional Office for the quarter ending September 2002.
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8. We shall be glad if you kindly issue suitable instructions to your controlling offices in the areas / zones
where AEZs have been identified to extend finance to farmers for the specified crops/ commodities. You
are also requested to give due publicity to the scheme among the prospective borrowers/entrepreneurs.
Please acknowledge receipt and keep us/our Regional Office informed of the action taken by you.
Yours faithfully
(S.K.Mitra)
Chief General Manager
2
Annexure I
Agri Export Zones
Objective:
1. In a fast changing international trade environment, with a view to providing remunerative returns to
the farming community in a sustained manner, efforts will be made to provide improved access to
the produce / products of the Agriculture and Allied sectors in the international market by setting up
of Agri Export Zones.
Agri Export Zone
2.
Agri Export Zones will be concerned with A to Z of agri-exports. The emphasis will be on
partnership among various agencies / systems and convergence of interventions of various agencies
like APEDA, Ministry of Food Processing Industries (MFPI), National Horticulture Board [NHB] etc.
The focus will be on increasing exports of identified commodities with economies of scale for the
benefit of all concerned. In AEZ, a package is offered to facilitate exports and induce private sector
investment.
Agricultural and Processed Food Products & Export Development Authority [APEDA]
3. The Agricultural and Processed Food Products & Export Development Authority [APEDA] working
under the Ministry of Commerce & Industry, GoI will be the nodal agency for notifying the zones in
various states as AEZs. It also monitors implementation of the projects in AEZs. In addition, it also
extends assistance under various schemes covering market promotion, publicity, supporting setting
up of quality assurance / upgradation systems, supporting for R & D for product development etc.
What does AEZ entail?
4. An AEZ will work out a strategy for end to end development of the product from farm to the
consumer. It involves in identification of farmers, ensuring availability of inputs like seeds, fertilisers,
pesticides, water, credit, power etc., determining and extension of pre-harvest technology, harvesting
technology and post-harvest technology like grading, sorting, processing and packaging, provision of
infrastructure, ensuring logistics and marketing.
5.
State Governments will identify product specific Agri export zones for export of specific products
from a geographically contiguous area and evolve a comprehensive package of services for delivery
in these zones. Such services would include provision of pre / post harvest treatment and operations,
plant protection, processing, packaging, storage and related research & development. The service
providers as well as those setting up common infrastructural facilities like sorting, grading, polishing,
packaging, cold storage, transport equipment / refrigerated vans, vapour and heat treatment plants
and X-ray screening facility shall be entitled for EPCG Scheme. Agri exporters shall be entitled for
recognition as Export House / Trading House / Star Trading House / Super Star Trading House on
achieving a third of the threshold limit prescribed for exporters of goods.
6. Therefore, the concept of AEZs, which aims to give a fillip to agricultural exports, comprises the
following :
1. Identifying a potential zone based on agro-climatic requirements for a particular crop,
2. Promoting the identified crop in that zone so that abundant raw material is available at low cost
through contract farming for processing,
3. Integrating various assistance programmes of Central and State Government agencies and
providing fiscal incentives to exporters,
4. Implementing the scheme through the involvement of private and public partnership and
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5. Integrating all activities till the produce reaches the market
7. Financing in AEZs by banks involves the following:
1. financing farmers directly for crop production under tripartite agreement,
2. financing processors / exporters who in turn would provide all inputs including the technical
know how with a buy back arrangement to farmers, and
3. financing processing companies for investment in plant and machinery. Under contract farming,
it is desirable that such arrangements should be for a minimum period of three years for being
eligible for refinance from NABARD.
8. As the technology and various agricultural practices adopted by the farmers growing the identified
commodity[ies] in AEZ may be different from those farmers growing the same commodity[ies] outside
AEZ, it may be necessary to provide higher than the normal scale of finance. The banks may ensure
timeliness and adequacy of credit support to the farmers covered under the AEZ scheme.
Annexure-II
Agri-Export Zones approved and notified by Government of India
S.No.
PRODUCT
STATE
DISTRICTS/AREA
(1)
(2)
(3)
(4)
DATE
SIGNING
MoU
(5)
West Bengal
Darjeeling, Uttar Dinajpur, Cooch Behar and 18 Sept 2001
Jalpaiguri
Karnataka
Tumkur, Bangalore (Urban), Bangalore 19 Sept 2001
(Rural), Hassan, Kolar, Chtradurga, Dharwad
and Bagalkot
Uttranchal
Udhamsingh Nagar, Nainital and Dehradun
22 Sept 2001
Punjab
Fatehgarh Sahib, Patiala, Sangrur, Ropar and 29 Oct 2001
Ludhiana
Uttar Pradesh
Agra, Hathras, Farrukhabad,Kannoj, Meerut, 7 Nov 2001
Aligarh and Bagpat
Uttar Pradesh
Lucknow, Unnao, Hardoi, Sitapur and 7 Nov 2001
Barabanki
Punjab
Singhpura, Zirakpur (Patiala), Rampura Phul, 20 Dec 2001
Muktsar, Ludhiana, Jallandhar
Uttar Pradesh
Saharanpur, Muzzafarnagar, Bijnaur, Meerut, 21 Dec 2001
Bhagpat and Bulandshahar
Maharashtra
Nasik, Sangli, Pune, Satara, Ahmednagar and 7 Jan 2002
Sholapur
Andhra Pradesh Chittor (Kuppam Food Park, GD Nellore, 28 Jan 2002
Tavanampalle, Bangarapalem, Irala, Pakala,
Palamner, Pootalpatlu, Punganur, Rama
Kuppam, Shantipuram, V-Kota, Gudipalle
Mandals)
Tripura
Kumarghat, Manu, Melaghar, Matabari and 1 Feb 2002
Kakraban Blocks
Madhya Pradesh Malwa, Ujjain, Indore, Dewas, Dhar, 11 Feb 2002
Shajapur, Ratlam, Nimach and Mandsaur
1
Pineapple
2
Gherkins
3
4
Lychee
Vegetables
5
Potatoes
6
Mangoes
7
Potatoes
8
Mango
9
10
Grapes
and
Grapewine
Mango Pulp
&
Fresh
Vegetables
11
Pineapple
12
Potatoes,
Onion
and
Garlic
Mango
Maharashtra
Ratnagiri, Sindhudurg, Raigarh and Thane
12 Feb 2002
Apples
Jammu
& Srinagar, Baramula, Anantnag, Kupwara, 18 Mar 2002
Kashmir
Badgaum and Pulwama
13
14
OF
OF
4
15
1
16
Flowers
2
Lychee
Tamil Nadu
3
West Bengal
Dharmapuri
4
Murshidabad, Malda, 24 Pargana s(N) and 24
Parganas (S)
17
Lychee
Bihar
Muzaffarpur, Samastipur, Hajipur, Vaishali,
East and West Champaran, Bhagalpur,
Begulsarai, Khagaria, Sitamarhi, Saran and
Gopalganj
18
Kesar
Maharashtra
Aurangabad, Jalna, Beed, Latur, Ahmednagar
Mangaro
and Nasik
19
Walnut
Jammu
& Baramulla, Anantnag, Pulwama, Budgam,
Kashmir
Kupwara and Srinagar,
Doda, Poonch, Udhampur, Rajouri and
Kathua
20
Flowers
Uttranchal
Dehradun and Pantnagar
21
Mango
& Gujarat
Ahmedabad, Khaida, Anand, Vadodra, Surat,
Vegetables
Navsari, Valsad, Bharuch and Narmada
22
Flowers
Maharashtra
Pune, Nasik, Kolhapur and Sangli
23
Potatoes
West Bengal
Hoogly, Burdwan, Midnapore (W), Uday
Narayanpur and Howrah
24
Rose Onion
Karnataka
Bangalore (Urban), Bangalore (Rural), Kolar
25
Flowers
Karnataka
Bangalore (Urban),Bangalore (Rural), Kolar,
Tumkur, Kodagu and Belgaum
26
Mango
& Andhra Pradesh Ranga Reddy, Medak and parts of
Grapes
Mahaboobnagar
27
Flowers
Sikkim
East Sikkim
(Orchids) &
Cherry Pepper
28
Ginger
Sikkim
North, East, South & West Sikkim
Note: SL.NO 1 TO 5 are notified zones
20 Mar 2002
5
23 Mar 2002
5 April 2002
11 April 2002
11 May 2002
30 May 2002
7 June 2002
10 June 2002
18 June 2002
1 July 2002
1 July 2002
July 2002
July 2002
July 2002
Annexure III
Salient Features of the Refinance Scheme for financing farmers in
Agri Export Zones under 'Contract Farming'
1. Objective : The scheme aims to give a boost to agricultural exports from the country through provision
of bank loans to farmers for growing identified crops/ commodities in the notified Agri Export Zones
adopting suitable technology and under contract farming.
2. Eligibility:
1. Banks may provide loans to farmers directly in the identified AEZs for cultivation / production
of the specified crops/ commodities who have entered into contract farming arrangements with
processing / exporting units under a tripartite agreement with the processor / exporter and the
financing bank [s]. The scale of finance may be separately determined by banks in consultation
with the processing /exporting units entering into contract farming arrangement with farmers. It
should be determined taking into account the need for ensuring high quality of produce for
processing and / or exporting, and / or
2. Banks may provide loans to processors / exporters directly for entering into contract farming
arrangements with the growers. The Company in turn, will provide all inputs to the farmers.
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Under contract farming, it is desirable that such arrangements should be for a minimum period of three
years for being eligible for refinance from NABARD.
3. Project Cost: The financing by banks will be mainly for production of specified crops / commodities by
the farmers. The banks may estimate the project cost for each of the proposal depending upon the
number of farmers to be financed, the type of crop / commodity proposed to be financed and other
components. There is no ceiling on the project cost for considering the proposals for financing by banks
under the scheme.
4. Margin Money / Down Payment: As per RBI norms.
5. Rate of Interest on bank loans: The banks financing farmers will charge interest not exceeding 10.5%
p.a on their loans under the scheme.
6. Repayment period of bank loan: The repayment period of the bank loan may vary depending upon
the crop/commodity and other components financed by the bank. The bank may, therefore, fix the
repayment period of loans under the scheme in a realistic manner with suitable grace period, if any,
needed under each loan sanctioned.
7. Terms and Conditions of refinance by NABARD :
i.
Eligible Institutions
All scheduled commercial banks
ii
Extent of Refinance
100% refinance on the eligible amount of bank loan.
iii
Rate of Interest on Refinance
7% p.a.
iv
Rate of Interest to be charged by Not exceeding 10.5 % p.a
banks to the ultimate borrowers
v
Eligibility Norms
Eligibility to draw refinance by banks will be determined
as per instructions issued by NABARD from time to time.
vi
Mode of Refinance
Refinance will be extended under schematic approachunder Automatic Refinance Facility [ARF] as well as
schemes with prior sanction depending upon the project
outlay and amount of refinance. For availing of refinance
under ARF, the outer limit of the project cost would be Rs.
30 lakh and the refinance limit per unit /borrower will be
Rs 20 lakh.
vii
Security
As per RBI norms
viii
Margin Money
As per RBI norms
ix
Repayment period of refinance The banks will be provided refinance as a term loan for
to NABARD
lending under the scheme repayable over a period of 3
years
x
Insurance
Adequate insurance cover shall be obtained for the entire
period of loan as stipulated by RBI from time to time.
xi
Others :
1. The banks shall satisfy themselves regarding the
economics of the project viz. financial viability,
bankability etc.
2. The banks shall also ensure that satisfactory
arrangements exist / have been made by the
company for supply of high quality inputs/raw
materials including technical know how to the
contracted farmers at reasonable charge and enter
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3.
4.
into forward contract with the farmers for
procuring the produce of predetermined quality
at mutually agreed prices. They should also
satisfy about the company's ability to provide
required transportation facilities for lifting the
produce from the farmer's fields.
When financing individual farmers entering into
contracting arrangements with processing/export
units, banks should enter into tripartite
agreement with farmers and processing/export
units
i. to ensure supply of inputs, extension service,
etc. to farmers by processing /export units,
ii. for purchasing produce from farmers by
processing /export units, and
iii. for routing the payment to contracted farmers
by the processing/export unit through the bank.
All other terms and conditions, banking
procedures and lending norms as are normally
applicable to project lending and schematic
refinance will be applicable mutatis mutandis for
financing the activity under the scheme.
Annexure -IV
Contract Farming in Agriculture
Contract Farming:
Contract Farming of different types is already in practice for certain commercial crops like sugarcane,
coffee, tea, cotton, etc., and vegetables and grains. There are a number of success stories on contract
farming such as Pepsico India in respect of potato, tomato, groundnut and chilli in Punjab, Safflower in
MP, Oil Palm in AP, seed production contracts for hybrids seed companies etc., which helped the
growers to realise better returns for their produce. Amul and NDDB for milk procurement, sugarcane
coops in Maharashtra, etc., are some more success stories of contract farming.
Main features:
2. The main features of contract farming are that selected crops are grown by farmers under a buy back
arrangement with an agency engaged in trading or processing. In India, small farmers are generally
capital starved and cannot make major investment in land improvement and modern inputs. Contract
farming is encouraged under these situations because production of small farms can be more successfully
organised through this mode.
Advantages of Contract Farming:
3. The advantages of contract farming could accrue in several ways.
1. It envisages that the farmers enter into a forward contract with the Processor / Exporter to
supply the produce at a pre-determined price, quantity and quality and the buying company also
provides necessary inputs and technology to the farmers so as to ensure a steady supply of
quality produce for processing / exporting.
2. It helps the small farmers to participate in the production of high value crops like fruits,
vegetables, flowers etc., and benefit from market led growth.
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3.
4.
5.
While in some cases of contract farming, the farmer assumes the production related risk and
transfers price risk to the company, under certain conditions, even the produce risk is also taken
care of by the company.
Risk of non-availability of raw material is reduced with assured quality supply from the farmers.
Small and marginal farmers may no longer be competitive without access to modern technologies
and support. Contract farming provides this support to these farmers.
Advantages of financing under Contract Farming for bankers 4. The advantages of financing farmers
under Contract Farming to the bankers could accrue in several ways.
 Direct link between the farmer and processor / exporter would provide relatively easy access to
market for the farmer.This reduces the cost of supervision in dealing with such accounts
 As the responsibility for timely and regular supply of high quality raw materials /other inputs
including the technology support, extension work etc., is shouldered by the processing company,
the chances of post harvest losses of Agri. / Horti. produce would be much less. This will reduce
the risk for the banks on account of various technical reasons which normally affect the
production/ cultivation of crop/ commodity concerned.
 The increased productivity, improved quality of fruit/ vegetable/ superior grains produced,
enhanced shelf life, etc., could result in realisation of remunerative prices by the farmers for their
produce. The farmer will be able to get a better surplus which may help the banks in not only
realising their loan in time but also augmenting their resources by way of deposits made with
them by the same farmers.
A word of caution on 'Contract Farming' 5. Studies of this practice have revealed higher level of
satisfaction for the farmers associated with the contract farming indicating growing demand for this
system for production of crops / commodities. However, certain precautionary measures would be
required to be taken like transparency in contracts, legal protection to contracting parties and formation
of farmers' organisation to manage their relationships with the companies as equal partners. 6. The
contract farming should have a provision for both forward and backward linkages. Unless both input
supply and market for the produce are assured, small farmers will not be in a position to participate in
contract farming. 7. For effective functioning of contract farming, it would be desirable to have the
tripartite agreement for a minimum period of three years [farmers, processing unit and banks].
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