Platform to Create Shared Value in Agribusiness
Key Issues and Solutions in Agri-finance
Analysis of questionnaire responses and interviews of
bank and agribusiness leaders on agri-finance
January 29, 2013
Agri-finance Collaboration Meet
Table of contents
A. Bank and company priorities by type of collaboration
B. Key issues and solutions in agri-finance
C. Key issues and solutions in value chain and warehouse
receipt financing
D. Key issues and solutions in building BC networks with agrodealers
E. Meeting agenda
F. Background
Banks and companies responding to the questionnaire
Banks
• Axis Bank
• HDFC Bank
• ICICI Bank
• SBI
• Yes Bank
Companies
• Coromandel
• ITC
• Mother Dairy
• StarAgri
A. Bank and company priorities
by type of agri-finance collaboration
4
Banks view warehouse receipt financing, value chain
financing and agro-dealer networks as means to reduce
costs and risk and increase outreach in agri-finance
Mechanism, business model
Direct lending to farmers by bank
branch staff
Lending to farmers in
collaboration with value chain
agribusinesses and/or strong
producer organizations
Lending using distribution
systems of input supply
companies, agro-dealers as BCs
or BFs
Providing warehouse receipt
financing directly to farmers
Offering crop or weather
insurance to farmers as agent for/
in collaboration with insurance
companies
Promise in reducing
costs, increasing
profitability
Promise in
reducing risks
H
3
H
0
H
0
M
M
1
M
L
1
L
H
M
4
0
L
H
0
H
M
4
1
H
4
M
L
3
4
L
0
3
L
0
M
1
L
1
2
3
0
3
2
M
1
L
3
H
2
H
M
1
M
1
1
4
M
H
M
Five participating banks responded to the questionnaire
H: High M: Medium L: Low
L
H
1
H
L
0
1
L
0
M
1
H
4
M
L
0
H
1
M
L
L
5
H
1
Promise in
achieving major
outreach
L
3
0
1
2
1
5
Crop and weather insurance for farmers are
considered important to banks and agribusinesses
Importance of crop and/or weather insurance to banks and to agribusinesses
Banks
1
2
3
4
5
6
7
8
9*
10
* Average score for all five banks
Main changes needed to make crop and/or weather insurance accessible to farmers:
Changes needed
Crop Insurance premium should be reduced
Government support required for the sector
Crop Insurance Premium for small and medium farmers
should be borne by respective state government
Claim settlement efficiency needs to improve
Crop insurance should be customized, flexible and bundled
with the loan
Financial institutions
SBI
SBI, ICICI
ICICI, HDFC
Axis
6
Banks are interested in pursuing a range of agri-finance
collaborations with value chain agribusinesses, agro- input
suppliers and dealers, and storage companies.
Banks
Areas
Axis
HDFC
ICICI
SBI
YES
Value chain financing with
agribusinesses
Value chain financing with
producer organizations
BC models with agro-dealers
Financing of agro-entrepreneurs
Financing of working capital
Financing of fixed investments
Warehouse receipt financing
Crop or weather insurance
7
Companies are interested in pursuing
collaborations with banks in a range of areas
Companies
Areas
Coromandel
ITC
Mother Dairy
StarAgri
Bank financing of farmers in
company’s value chains for
working capital
Bank financing of farmers for fixed
investment requirements
Use of company agro-dealer
system to provide farmers with ag
credit as bank BFs or BCs
Financing of strong agro-dealers
in company’s distribution network
Financing of agro-entrepreneurs
which are value chain integrators
Financing of company’s working
capital requirements
Warehouse receipt financing for
farmers
Warehouse receipt financing for
traders
8
B. Key issues and solutions in agri-finance
9
Key issues in agri-finance
Key issues in agri-finance
High
costs
•
•
•
•
•
•
•
•
•
•
High
risks
•
•
•
•
Overall
constraints
•
•
•
•
Small loan size makes agri-lending expensive. HDFC Bank, SBI, ICICI Bank
Customer assessment, issues in selection. HDFC Bank, Yes Bank
High transaction costs with cash collections. HDFC Bank, ICICI Bank
Profitability, particularly in lending to small farmers. HDFC Bank
Cash-based transactions cumbersome. HDFC Bank
Issues of cost, productivity and ROE on manpower for agri-lending. Axis Bank
Add-on costs charged to farmers, e.g. bribes, procurement fees. Axis Bank
Limited branch outreach. Axis Bank, Yes Bank, ICICI Bank
Need to check end use of loans. ICICI Bank
Agri-finance lending is risky, weather and market risks. HDFC Bank, Axis Bank,
Yes Bank, ICICI Bank
Tendency for defaulters to infect agri portfolio in the area. SBI
Fraud, loan default. HDFC Bank
Difficulties with tangible collateral, mortgage and title documents. HDFC Bank,
SBI, Yes Bank
Low claim settlement efficiency. HDFC Bank
Lack of investment credit. SBI
Private banks are at competitive disadvantage due to interest rate subsidies,
subventions for public banks. Axis Bank, Yes Bank
Farmers’ unfavorable perception of private versus public sector banks. Axis Bank
Corporate inertia, layers. HDFC Bank
Key solutions in agri-finance
Solutions in agri-finance
Reducing
costs and
improving
efficiency
• LT strategies to collaborate with corporates and farmers, particularly value
chain financing, for cost-effective outreach. HDFC Bank, SBI, Yes Bank
• Strong IT enabled services to reduce costs, turnaround time. SBI, Axis
Bank, ICICI Bank
• However, some banks have found that IT solutions do not significantly
reduce human intervention, required for due diligence. Yes Bank
• Ensuring improved turnaround time. HDFC Bank
• Reduce collection costs with corporates deducting from farmer payments.
HDFC Bank
Reducing
risks
• Have a strong MIS on client repayments and sales to enable timely action on
repayment issues. HDFC Bank, SBI
Building
effective
overall
strategy
• Work with all three models: value chain financing, agro-dealers as BCs,
warehouse receipt financing. SBI
• Progressive bank management. HDFC Bank, ICICI Bank
• Build own field force as well as with intermediaries. Yes Bank
• Consider subventions for private banks or remove for public banks. Yes
Bank
C. Key issues and solutions in value chain and warehouse
receipt financing
12
Issues and solutions in value chain financing
Key issues in value chain financing
• Unstable corporate value chains, lack of loyalty of farmers to corporate value
chains. HDFC Bank, SBI
• Inadequate number of stable value chains. SBI
Solutions in value chain financing
• Identify collaborators with reach, experience, brand/reputation, intent, goal
congruence, building exclusive relationships. Axis Bank, Yes Bank
• Ensure corporate involvement in procurement. HDFC Bank
• Corporates should reward quality to ensure net returns to farmers. HDFC Bank
• Agribusinesses to provide sales and credit history of farmers in value chains. SBI
• Banks should offer payments services to monitor the cash flows between farmers
and corporations. SBI
• Create and train dedicated bank teams for corporate value chains. HDFC Bank
• Need better training and trust-building with all stakeholders. SBI
• Target and master each link in the value chain, to facilitate later moves to other
parts. Yes Bank
• Strategy for farmer acquisition from value chains of multiple corporates, with plans
to fund them on “total basis”. HDFC Bank, ICICI Bank
On value chain financing, banks want companies to provide
procurement history. Both consider distinct value proposition and
shared MIS important. Banks would like the agribusiness to share risk
and subtract loan repayments from payments to farmers.
Banks
The agribusiness with the value chain of
farmers needs to be able to provide the
farmer’s track record showing regular sales
to the company over the past three years.
The bank and agribusiness need to build a
shared MIS to facilitate repayments and early
warning in the event that a farmer leaves the
value chain.
The agribusiness should be providing
distinctive combination of inputs, advice,
procurement services and prices to establish
a stable value chain with farmers.
The agribusiness should be willing to take a
portion of the risk of non-repayment by
farmers recommended for financing by the
agribusiness
The agribusiness should get involved in
collecting repayments when it procures
material from the farmer, if the value chain is
stable and mature.
Companies
H
4
H
M
0
M
L
0
L
H
M
3
2
M
2
1
0
H
3
M
1
L
0
2
H
0
M
1
M
L
1
L
H
2
M
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
3
0
H
L
0
H
L
1
H
L
4
M
0
L
0
1
0
1
3
H
1
M
1
L
2
14
Both banks and agribusinesses think financial services beyond
loans, specialized bank staff, weather insurance and payment
systems are important in value chain financing collaborations.
Banks
The bank should make available other
financial services to good agri-finance
customers to help them build income and
assets, and mitigate risks.
The agribusiness should have stable
relationships with at least 1,000 and ideally
over 10,000 farmers, to justify bank’s time
and expense to establish VC relationships.
The bank should provide a loan officer or BC
on the corporate premises or nearby to
facilitate transactions for the farmers
Normally, the bank should be involved in
payment processes between the corporation
and the farmers to track cash flows.
The bank should ensure that participating
farmers have weather or crop insurance to
remove or reduce this area of risk.
H
Companies
H
2
M
1
M
L
1
L
H
1
H
M
L
1
H
1
M
1
3
0
1
L
H
1
H
2
2
M
L
L
0
H
2
M
1
M
2
L
3
1
0
1
M
2
L
1
1
H
1
H
2
M
1
M
2
L
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
2
L
0
15
Key lessons in providing value chain financing to
farmers in collaboration with agribusinesses
Key lessons
Bank
Strength of value chain is most important factor to reduce risk
Number of commodities covered under value chain financing needs to be
increased
Root level interaction should be there
Modernisation of Inputs to generate better results for the farmers at same
cost
HDFC
Rewarding quality – increase profit to farmers
Quick turnaround time is extremely important for farmers
Identification of proper collaborator-reach and qualified manpower, intent
and goal congruence
Better to first concentrate and understand one part of the value chain and
then move to the other level
Seasonality and peak requirements are there. For example in March the
balance sheet of businesses might be highly leveraged but in September
it might not be.
Axis
16
Solutions in warehouse financing
Solutions in warehouse financing
• Emphasize warehouse receipt financing which has lower risks than value chain
financing or financing through agro-dealers. Yes Bank
• Create value chain through warehouse receipt financing and leverage this
relationship to provide crop or weather insurance to farmers. ICICI Bank
In loose value chain financing relationships, the FI performs most
functions, relying on procurement track records and non-financial
services of the agribusiness.
Bank
Loan
Payment
Crop
Buyer / Trader
Farmer
Conditions for loose value chain financing to work
• Farmers have track record of steady sales to
agribusinesses or buyers.
• Prices adequate and stable, for bank to assess cash
flow, capacity to pay.
• Useful if agribusiness or buyer provides technical
services, access to quality inputs, quality control.
Traders almost never provide such services.
Loan repayment
Roles of each key actor:
Risk and risk mitigating measures:
• Bank assumes all risk, appraises
loans, disburses and collects.
• Useful if focus on promising, high
value commodities and if
agribusiness/buyer provides data on
procurement history from individual
farmers in value chain.
• Risk of non-repayment, with agribusiness, buyer not
directly involved in loan and repayment process.
• Risk of bank losing interest—relatively high cost, high
risk model unless with established, progressive medium
sized farmers.
• Useful to get agribusiness or buyer to provide
procurement history to bank. Useful to engage
agribusiness in productivity building measures, and in
process of moving from loose to tight value chains.
18
In tight value chain relationships, risks of side-selling are lower and
the agribusiness assumes more functions, reducing costs to the
financial institution.
Bank
Pre-harvest
loan
Payment
Crop
Agribusiness /
Buyer
Farmer
Loan repayment
Conditions for tight value chain arrangements to
work:
• Agribusiness has tight, stable relationships with a
substantial number of farmers e.g. over 1,000 ideally
over 10,000 to justify value chain financing with bank
• Agribusiness has developed strong, differentiated
value proposition based on services, price and
procurement arrangements—if not contracts—to protect
against side selling.
Roles of each key actor:
Risk and risk mitigating measures:
• Agribusiness performs many functions in
the loan cycle, normally including: data
bases on procurement, screening farmer
borrowers, and collecting repayments from
the procurement amounts.
• Agribusiness provides complementary
services to build productivity, quality of
farmer output.
• Bank assumes all risks, does loan appraisal
and normally direct disbursements.
• Risk of participating farmers: side-selling to avoid
repayment, linked to agribusiness procurement.
• Risk mitigating instruments: focus on high value
commodities and agribusinesses/buyers
providing strong value to farmers e.g. price for
quality, inputs, TA, quick payment.
• Lend to farmers with at least two years of steady
supply to the agribusiness/buyer, representing at
least 70% of farmer’s cash crop sales
19
Warehouse receipt financing
Conditions for the model to work:
Repayment
Warehouse
Receipt
Bank
Harvest
produce
Finance
Produce
Buyer / trader
•
Farmers (or traders) derive strong price benefits
from waiting to sell crops and from storage.
•
Secure warehouses, including cold storage and
CA storage units exist in the geography in which
small farmers are concentrated.
Farmers
Warehouse receipt
Roles of each key actor:
•
•
•
Bank provides the farmer or trader with
warehouse receipts against crops stored
in warehouse.
Warehouse operator provides secure
storage, insurance.
Farmer provides harvest produce for
storage, until decides to sell at higher
price.
Source: IFC and Agri-Finance. Creating Opportunity Where It’s Needed Most
Risk and risk mitigating measures:
•
•
•
•
Risks of theft, spoilage
Risk of mismanagement by warehouse
operators
Risk that price at sale lower than loan+interest.
Risk mitigating instruments: insurance and
solid credit and risk management, experience
in commodity lending, ability to assess
instruments, collateral managers, warehouses.
Agri-finance with aggregators can involve direct finance for
aggregator operations and value chain type arrangements for
financing small farmers.
Conditions for the model to work:
• If producer organizations solid, legal
financial structures with strong track record
in marketing products, providing technical
services to farmer members, and borrowing for
cooperative activity and on behalf of farmer
members.
• If agro-entrepreneur, solid organizations
with strong sales channels to buyers,
agribusinesses, retailers—with established
procurement and TA links with smaller
producers.
Loan
repayment
Loan for
aggregators
and farmers
Cooperative /
Agro-entrepreneur
Farmers
Bank
Roles of each key actor:
•
•
•
Strong aggregators borrow for own operations
and serve as wholesaler or agent on loans to
farmer members, cutting costs to bank.
Aggregator often provides productivity
enhancing, quality control, processing, storage
and transport roles
Bank appraises aggregator, and if aggregator an
agent, bank appraises farmer member borrowers.
Risk and risk mitigating measures:
•
•
Risks that the cooperative or agroentrepreneur will not repay loan for own
operations or loans on behalf of farmers—due to
poor management, mismanagement.
For all but the strongest aggregators, with
impeccable financials and track records,
bank can use aggregator for origination and
complementary services, but bank should lend
directly to farmers in the network.
21
D. Key issues and solutions in building
BC networks with agro-dealers
22
Issues in BC networks
Key issues in BC networks
• Agro-dealer model reduces risks, not costs to the bank. As a result, banks focus on
medium and large farmers. HDFC Bank, Axis Bank
• Margins paid to agro-dealers increase cost and reduce profits to the bank. Yes Bank
• Insistence by agro-dealers on cash transactions increases costs, requires proximity.
Yes Bank.
• Proper training of agro-intermediaries is costly. Yes Bank
• Agro-dealers of companies are widely dispersed. Yes Bank
• Corporates lack influence, power over dealers, meaning direct engagement by bank.
HDFC Bank
• Heavy past investment in agri-finance through agro-dealers, but with very bad
experience. Difficult to align motivations, incentives with bank. ICICI Bank
Solutions in BC networks
Solutions in BC networks
• Leverage business history, relationships of dealers with farmers to reduce risks. Yes
Bank
• Ensure effective cash logistics mechanisms and prompt payouts. HDFC Bank, ICICI
• Banks need to pursue dealer relationships directly. HDFC Bank
• Corporate to optimize input supply for improved results at affordable costs. HDFC Bank
• Ensure clarity in margin sharing and effective incentive systems for bank, agro-dealers
and farmers. SBI, ICICI Bank
• Select strong dealers using clear criteria. SBI
• Need better training and trust-building with all stakeholders. SBI
• Collaborate with experienced intermediaries to reduce training costs. Axis Bank
• Seek dealers with a substantial base of farmer customers, but recognize that larger
dealers require higher margins. Yes Bank
• Consider use of fertilizer companies, NBFCs, irrigation and FMCG companies to
increase cost effective distribution. Axis Bank
• Use handheld IT devices to transfer information for verification in real time. Axis Bank
• Limit bank involvement to due diligence and credit assessment with other transactions
performed by BCs. Axis Bank
• Begin by making loans for agri-inputs only, paying the suppliers directly with no cash
payments to farmers. Axis Bank
• Ask BCs to share NPA risks. Axis Bank
Several banks and companies are interested in
building agri-finance collaborations using agro-dealer
networks
Interested in pursuing collaboration with agro-dealers as BCs and BFs?
Banks
Yes
AXIS,YES,SBI
Companies
No
Yes
ICICI
Coromandel, Mother
Dairy, StarAgri, ITC
(eChoupal)
No
Primary motivations of pursuing these collaborations
Motivations
Banks
Axis
HDFC ICICI
Companies
SBI
YES
Coromand.
ITC
Mother D.
StarAgri
Reducing costs
Reducing risks
Increasing outreach
Providing farmers
inputs, advice,
markets and finance
25
Banks and companies judge that shared objectives, clear
margin sharing arrangements, and strong agro-dealer selection
criteria to be key to successful BC and BF collaborations
Banks
Companies
H
Clarity in shared objectives from outset.
4
Strong selection criteria to get agro-dealers
with high volumes, strong motivation and
capacity to originate and screen agricultural
clients.
Strong rural distribution system of input
company, with clear commitment to scale up
once piloted
Strong connections between input company
and agro-dealers through own stores,
franchising or dominant or exclusive selling
arrangements. Strong history of training.
4
M
0
M
0
L
0
L
0
H
Clear margin sharing arrangements for bank,
company, dealer.
H
4
H
2
2
M
0
M
L
0
L
H
3
M
L
1
0
H
2
M
1
L
1
H
2
0
L
0
H
2
M
2
0
H
M
1
M
L
1
L
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
3
M
L
H
0
1
3
0
26
Banks and input companies see incentives linked to origination and
repayments, finding agro-dealers with the time and willingness, strong
IT, and integrity of the parties to be key to solid agri-finance through
dealers
Banks
Strong incentives to the agro-dealer on loan
origination and loan repayments, to align
incentives.
Agro-dealers with the time and willingness to
engage in financial services based on clear
value proposition by the bank to agro-dealer
Strong technical IT support provided by the
bank, company or third party to enable
electronic data entry and links to CBS.
Strong brand and integrity of the bank,
company and participating agro-dealers.
H
2
Companies
H
M
1
M
L
1
L
H
2
2
1
0
H
3
M
1
M
0
L
1
L
0
H
M
2
0
L
2
H
2
H
M
0
L
0
H
M
1
M
L
1
L
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
4
2
1
0
27
Input companies consider strong training, measures to streamline
operations, top management commitment and shared MIS to be
important for successful agro-dealer BC networks
Banks
Strong training and follow up systems by the
bank and partner company to reinforce the
capabilities of the agro-dealer as BC.
Strong shared MIS to enable timely tracking
and trouble shooting by the bank and
company.
Interest by the company and agro-dealers in
providing services beyond loan origination
eg, disbursements, collections, insurance
Strong measures to streamline operations
and cut transaction costs further, needed for
banks to make smaller ag loans
Strong top management commitment by
partner company to ensure continued
commitment, if senior or middle
management transitions occur.
Companies
H
1
H
M
1
M
0
L
0
L
2
3
H
1
H
2
M
1
M
2
L
L
2
0
H
1
H
M
1
M
L
H
1
M
1
L
1
M
1
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
1
0
H
2
H
L
L
2
2
3
M
0
L
0
H
3
M
2
L
1
0
28
Banks do not see buy-back, patience with piloting, geographical
focus, dealer agro-knowledge or value add to farmers as
important. Companies see these elements as quite important.
Banks
Companies and agro-dealers prepared to buy
back commodities—to reduce repayment
risks
Willingness by both bank and company to
spend one to two years piloting the
arrangement, to get it right, before scaling
up.
Location in area where the financial
institution intends to concentrate agrifinance operations.
Agro-dealers with strong agro knowledge in
key commodity groups, ideally agri
graduates
Agro-dealers with strong track record of
providing a range of value adding inputs to
small and medium sized farmers
H
Companies
1
M
0
L
3
H
1
M
0
L
3
H
M
2
L
L
3
H
2
M
2
L
L
0
2
2
M
L
2
L
0
1
2
1
H
0
M
2
M
L
2
L
Four banks and four companies responded to the questionnaire
H: High M: Medium L: Low
1
H
0
M
H
0
M
0
H
2
H
1
M
H
1
3
0
29
Key lessons in providing financing to farmers
through agro-dealers, traders, small processors
Key lessons
Bank
Agro-dealers try to exploit the bank by providing fake data
Very difficult to keep control on dealers and traders
Improves client selection
Processors and storage units often have no direct relationships with
famers
Quick turnaround time is extremely important for farmers
Identification of proper collaborator-reach and qualified manpower,
intent and goal congruence
It is a slow, gradual process. Difficult to work with dispersed agrodealers.
Agro-dealers to most business in cash and insist that the banks do the
same. Hence proximity is an issue
30
Banks are looking for collaborations with input supply and
value chain companies to reduce costs and risks in agrifinance, and to help farmers get what they need to succeed
Banks
Desired collaboration with
•
•
•
•
•
•
Tata Chemicals
Rallis
Haryali Kisan Bazaar
Sugar mills
Nestlé
Amul
•
•
FMCG companies including Cadbury, Marico, P&G, HUL
Sugar companies
•
Open to all companies listed
•
•
•
•
•
Godrej Agrovet
Coromandel
Jain Irrigation
Mahindra & Mahindra
Tata Chemicals
31
In designing banking correspondent agent relationships
with agro-dealers, the FI needs to be actively engaged in
training, ICT, and initial loan appraisals.
Conditions for the model to work:
•
Input supplier /
agro-dealer
Funds
•
•
Farmers
Bank
•
Input suppliers need to have strong rural
distribution networks of agro-dealers.
Works best if input suppliers can collaborate to
ensure supply and financing of improved seed,
fertilizer, plant protection.
Agro-dealers need to be solid, respected, with
strong understanding of who are solid, progressive
farmers.
Need strong, shared MIS and ideally internet based
payments.
Loan repayment
Roles of each key actor:
Risk and risk mitigating measures:
•
•
•
•
•
Bank does appraisal of farmers, provides
farmers loans, provided in kind from agrodealers. Bank takes full credit risk.
Input supplier/agro-dealer provides inputs,
advice and ideally loan origination, screening
support.
Agro-dealers can become BC agents acting
for the bank in WC loans-doing origination,
screening, loan doc, disbursing, collecting.
•
Risk of non-repayment, no procurement tie-up.
Risk that inputs only will not be adequate
financing for farmers, limiting yields
Mitigate risks by building strong training of
agro-dealers to provide value adding advice and
identify strong borrowers, with incentives based on
farmer loan repayments to the bank.
32
E. Meeting agenda
33
Meeting agenda
10:00 to 10:45
Presentation by ESP of questionnaire responses and IIMA interviews
on agri-finance
11:05 to 12:20
Meetings of individual companies and banks
Time
12:20 to 1:00
Room A
Room B
Room C
Room D
Room E
11:05 to 11:20
Coromandel
BASIX
Jain Irrigation
IDBI Bank
Mother Dairy
SBI
StarAgri
ICICI Bank
UPL
HDFC
Bank
11:20 to 11:35
Coromandel
HDFC Bank
Jain Irrigation
BASIX
Mother Dairy
IDBI Bank
StarAgri
SBI
UPL
ICICI Bank
11:35 to 11:50
Coromandel
ICICI Bank
Jain Irrigation
HDFC Bank
Mother Dairy
BASIX
StarAgri
IDBI Bank
UPL
SBI
11:50 to 12:05
Coromandel
SBI
Jain Irrigation
ICICI Bank
Mother Dairy
HDFC Bank
StarAgri
BASIX
UPL
IDBI Bank
12:05 to 12:20
Coromandel
IDBI Bank
Jain Irrigation
SBI
Mother Dairy
ICICI Bank
StarAgri
HDFC
Bank
UPL
BASIX
Discussion of main lessons on building effective agri-finance
collaborations, and key Platform actions to support bank and company
initiatives.
F. Background
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Background
1. Strategies, issues and solutions being built by:
• HDFC Bank
• SBI
• Axis Bank
• Yes Bank
• ICICI Bank
2. Key competitors
3. Statistics on agricultural lending
4. Implications of new priority sector lending regulations
for agri-finance
Strategies, issues and key success factors
in agri-finance. HDFC Bank
Current strategy on agri-business collaborations
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Agricultural lending of total portfolio = 10% - Current NPA = 2.5% of the loan portfolio.
Expensive and risky nature of stand-alone agri-loans
Lack of loyalty of farmers to corporate value chains
Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on
“total basis”.
Post-tie-up monitoring mechanism for sales, reduction of collection costs etc.
Creation and training of dedicated teams to address the corporate value chains.
Key success factors
Key issues in agri-lending
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Cash-based cash flow
Fraud, loan default
Customer assessment
Inaccurate mortgage documents
Issues in customer selection
High transaction costs of cash collection
Profitability—particularly in lending to
smaller farmers
Low claim settlement efficiency
Issues of “vested interests and inertia
between various layers of corporate”.
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Long term strategies for collaborative
connection and operation with farmers
Progressive management
Ensuring attractive, prompt dealer payouts.
Ensuring effective cash logistics
mechanisms.
Ensuring improved turnaround time.
Ensuring corporate involvement at the
procurement level.
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Lessons learned
Lessons learned
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Reward quality – to increase net returns to farmers
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Lack of influence, power of companies over dealers – need for banks to pursue
dealer relationships.
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Need for input optimisation– for improved yields at same costs to farmers.
Ensuring involvement of buyer organisations to combine inputs and methods to
get quality and increase profits.
•
Experience with agro-dealer networks operations:
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Restricting to medium and large farmers due to high transaction costs
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Agro-dealer model reduces risks, not costs
Key issues and success factors in agri-lending
State Bank of India
Current strategy on agri-business collaborations
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Individual farmers. SBI plans to focus more on getting to individual farmers rather than middlemen in its
value chain, warehouse receipt and direct financing operations.
Increasing outreach. Financial inclusion will be a major part of the growth strategy with increased
emphasis on value chain collaborations
Reducing costs. Cost reduction, through collaborations and lower cost distribution will be key in
increasing outreach in a cost effective way.
Portfolio:
Working capital loan, including KCC = Rs.7.84 mn.
Fixed investment loan = Rs.2.14 mn.
Crop or weather Loan = Rs.0.77 mn
Key success factors
Key issues in agri-lending
Related to costs:
• Small loan size
• Inadequate number of stable value chains
• Lack of investment credit
Related to risks:
• Absence of tangible collateral
• Spread of defaulters in an area
•
Working with all three models: value chain
financing, agro-dealers as BCs, warehouse
receipt financing.
•
Strong relationship with farmers by very
deep reach through different value-chains.
Related to collaborations:
• Unstable value chains
• Restricted direct agriculture lending areas
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Key issues and success factors in agri-lending
State Bank of India
Lessons learned
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Agribusinesses should provide sales and credit history of the farmers in their value chains
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Banks should monitor the cash flows between farmers and corporations by offering
payments services as a way of tracking risk, enabling timely action
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Having a strong MIS is key to track repayments and take remedial action, for portfolio quality
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Clarity in margin sharing agreement between bank, agro-dealers and farmers essential
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Important to select strong dealers with clear selection criteria
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Need better training and trust-building with all stakeholders
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Strong IT enabled services should be offered
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Strategy, issues and success factors in
agri-finance – Axis Bank
Current strategy on agri-business collaborations
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Total agricultural lending portfolio is 9%, 7% to farmers directly
AXIS bank is collaborating with experienced intermediaries to avoid training costs and
simultaneously increase outreach. Also AXIS bank is using technology to reduce turnaround time.
Tri-party arrangements with FMCG companies and Irrigation companies in Karnataka and Maharashtra
Arrangements with fertilizer companies to use their distribution network, NBFCs as manpower to source
loans, hand held IT devices to transfer information for verification through SFTP in real time
AXIS Bank only involved in due diligence and credit assessment
Currently only loans for agriculture inputs directly paid to businesses, no cash as of now
Sugarcane farming: Bank pays farmers for produce, companies get credit period
Key success factors
Key issues in agri-lending
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Loan repayment risks high
Limited branch outreach
Competitive disadvantage due to interest
subsidies by scheduled banks
• Manpower- productivity and ROE issues
• Farmer perception of private vs. public
sector banks
• Add-on costs to farmers e.g. bribes, fees
Related to collaborations:
• Identifying collaborators with reach,
qualifications, intent and goal congruence
• BCs must accept terms of sharing NPA risks
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Identifying collaborators and setting up a
system that takes care of the three parties.
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Technology to reduce manpower costs.
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Reducing turnaround time
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Lessons from current agri-business
collaborations
Lessons learned
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Collaborations do not reduce risks to desired extent. Disbursement of cash through
intermediaries
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Technology can go a long way in reducing costs and achieving minimal turnaround time
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Collaborating with NBFCs reduces work for bank and also eliminated training needs
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AXIS Bank committed to agri-finance: would continue to target the agricultural sector
even without PSL requirements to almost the same extent
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Interest rate subsidies by public sector banks, paid for by GOI, makes it extremely
difficult to compete for the same set of farmers. Government should provide same
incentive to private banks.
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Challenges and success factors in the
agro-business collaborations and
agri-lending – Yes Bank
Current strategy on agri-business collaborations
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Building own field force as well as building lending with intermediaries
Have tie ups with cooperative banks and PSU banks to extend network s up Tied up with co-operative
banks and public sector banks
Criteria for selecting collaborators include: experience, relationship, brand, exclusivity
The larger the dealer, more farmers in his network but require higher margins
Working Capital Loans = 40% of the Agri-lending portfolio.
Term Loans= 60% of Agri-Lending portfolio
Key success factors
Key issues in agri-lending
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Branch outreach
Loan recovery
Due diligence of farmers
Estimation of credit limits for a farmer
Lack of proper documents
Building own field force
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Developing a wide network through
collaboration to improve the quality of loans
and hence reduce repayment risks.
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Targeting and mastering each link in the
value chain one by one is more efficient
Related to collaborations:
• Dealer collaboration is challenging because
dealers of a company are dispersed
• Increased costs due to margin paid to them
• Insistence on banks to handle cash because
dealers/traders do mainly cash business
• Proper training of intermediaries is costly
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Lessons from current agri-business
collaborations
Key lessons from collaborations history
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Yes Bank prefers collaborations to increase outreach. Yes Bank finds that
collaborations with local intermediaries help in reducing risks due to more reliable
information about the farmers
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Reduced risks- Business history and mutual dependence of dealers with farmers makes
lending to farmers less risky
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One link at a time – Understand and cater to one part of the value chain first, making
moves to other parts later safer and easier.
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Value chain model and agro-dealers model have the same costs and warehouse receipt
financing has the lowest risk
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Technology can be of limited use. It can lubricate operations but cannot reduce human
intervention required for due diligence while setting up an account
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Interest rate subvention makes it extremely difficult to compete with PSU banks for the
same set of farmers, Government should provide this incentive to private banks as well
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Key issues and success factors in agrifinance – ICICI Bank
Current strategy on agri-business collaborations
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Previously company invested heavily through agro-dealers, but have very bad experience.
Bank ready to provide working capital and fixed investment support to agri-businesses.
Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on
“total basis”.
Creation of value chain through warehouse receipt financing and leveraging that relationship to provide
crop or weather insurance to farmers
Key success factors
Key issues in agri-lending
Related to cost:
• Small loan sizes, high fixed cost
• Issues of reach, low density of farmers
• High transaction costs, including need to handle
cash directly
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Strong and result oriented relationship
with rural value chains.
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Progressive management team
Related to risk:
• Difficult to predict weather
• Lack of credit history of farmers
• Difficult to find out end use of loans
Related to collaborations:
• Turning small loan portfolio into a profitable one
• Credibility of dealers. Ensuring effective cash
logistics mechanisms to handle cash
• Ensuring timely payments by farmers. Designing
an effective incentive system for dealers
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Current strategy and key lessons
Lessons learned
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Need to work on automatization of field work – for improvements of results at
same costs to farmers.
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Lack of influence and power of companies on dealers—very difficult to align
incentives.
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Need to check end use of loans. Ensuring involvement of banks representatives for
yearly evaluation of assets.
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Major competitors
Importance as competitor
Competitors
Axis
Private commercial
banks
Scheduled
commercial banks
Cooperative financial
institutions
Traders, small
processors, agrodealers
Private
agribusinesses
providing loans
directly
Muthoot ,
Manappuram Gold
loans
High competition
HDFC
7
10
SBI
8
6
9
7
ICICI
7
10
Yes
10
7
• Target only large farmers
• Have higher reach with same
products
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Strong network in rural area
Manpower
Interest subvention
Only for retail financing
8
4
1
• Crop loans
• Deep rural penetration
• Connection with farmers
8
7
9
• Receivable financing
• Bonding with farmers
4
• Relationship, flexibility
5
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8
Medium competition
What do well
Low competition
Very low turnover time
Good reach
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Historical performance under lending to total
agriculture
Lending to total agriculture sector
 This is presented as a percentage of Adjusted Net Bank Credit
 Without 4.5% cap on indirect agriculture lending
20.00%
15.00%
Pvt Banks
10.00%
PSB
5.00%
0.00%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: RBI
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Trends in NPAs in agriculture sector
4.00%
3.49%
3.50%
3.32%
3.17%
3.00%
2.54%
2.50%
2.25% 2.25%
2.36%
1.89% 1.92%
2.00%
1.65%
1.50%
1.00%
0.50%
0.00%
2007
2008
2009
Pvt Banks
2010
2011
PSB
Source: RBI
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Implications of the new priority sector lending
regulations for commercial banks
Key issues/challenges with the new
regulations
Food processing and trader financing have
moved out of priority lending sector
Limits beyond INR 2 crores to corporate
sector (in value chain) is now considered
as indirect agri-finance and not priority
sector lending
Bank
Actions that banks are taking to
comply with the new
requirements
More emphasis on individual
farmers and to increase the limits
of working capital loan beyond INR
2 Crores
Food processing is out of priority sector
Company had previously invested
heavily on food processing units,
now planning to change its focus
as per new regulation
No consideration for agri logistic issues/
transport infrastructure
Meeting the set goals with limited
infrastructure in agri. sector looks
to be a distant target.
Only focused on crop output rather than
considering complete value chain
Company trying to transfer its
previous value chain lending to
core farming, and hence incurring
additional expenses in this
transformation
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Implications of the new priority sector lending
regulations for commercial banks
Key issues/challenges with the new
regulations
Cannot lend to agribusinesses as part of
priority sector. Entire 13.5 % of assets to be
lent directly to farmers.
Bank
Actions that banks are taking to
comply with the new requirements
Arrangements with fertilizer
companies to use their infrastructure
Partnership with NBFC’s to use their
manpower, distribution channels.
Current Axis is at around 9% which
includes 2% to corporate. Hence a gap of
6.5% to be filled for PSL requirements
Reaching farmers directly is a challenge
especially when we are competing against
PSU banks who have much better reach to
cater to the same set of farmers
NBFC’s source loan. Bank just does
credit assessment and due diligence
Yes Bank is trying to build own field
force because that gives flexibility of
intermediaries
Yes Bank has tied up with cooperative banks and PSUs
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