Value chain

Finance as a meta-need of the Indian agricultural value chain

It is no exaggeration to say that money greases the wheels of the global economy and that credit represents a significant portion of the total money supply in any economy. In India, unfortunately, the availability of credit is limited.

According to BIS studies, India’s bank credit to GDP ratio at 56% (as of 2020) lags considerably behind the G20 and other emerging economies. This absence of credit is felt very keenly in the Indian agricultural sector.

It is useful to think of the grain value chain as composed very largely of five distinct stacks. The first is the pre-harvest stack involving crop growth – including inputs, insurance, labor and harvesting. Once harvested, the crop moves into the infrastructure stack where it is transported to a warehouse, aggregated, checked for quality and safely stored.

When the time is right, the goods move to the third pile – the commodities trade, where the goods are sold and finally shipped to a processing unit. In the fourth stack – the processed trade – raw material is processed into finished goods, which are then sold to a wholesaler and shipped to its distribution center.

In the final stack – distribution and retail – processed products move down the distribution chain, eventually reaching the final consumer.

Different models

The funding need is pervasive in every stack of this value stream, although the exact shape of the need and the solution model will vary.

In the pre-harvest stack, the farmer usually lacks funds to pay for the necessary inputs, labor, insurance and harvesting equipment, so he usually needs access to pre-harvest credit. harvest to finance the production cycle. Many farmers do not have access to formal pre-harvest credit despite government programs.

Many start-ups are working closely with farmers, some of which are bringing digitization and better visibility and tracking of data around farms and farmers, but they have not yet reached scale, and there is a clear need. actors who will connect the banks to the latter. farmers in a secure and transparent way to increase liquidity and access to credit.

Critical ability

Next – the Infra stack. In agriculture, since supply occurs at the same time but demand is spread evenly (for the most part) throughout the year, supply exceeds demand at harvest time and prices fall. Once the harvest finds its way to storage, continued demand drives the price up over time until the next harvest. So the ability to store the raw material is essential – the longer you store, the better the price. And the person with access to the most capital will be able to store the longest without breaking the bank and therefore make the most returns.

Since the farmer usually does not have access to this type of capital and must repay the pre-harvest loan at harvest time, he usually does not have the luxury of keeping the product and is usually forced to sell at harvest. when prices are lowest. By the time the merchandise arrives at the warehouse, it has usually already changed hands once or twice. In fact, the very reason the grain value chain has so many intermediaries is due to an acute need for capital at each stage of the supply chain that requires multiple changes of ownership to someone who has just a little more capital.

The model the industry uses for financing in this stack to enable storage without cash shortages is warehouse receipt financing (WRF), i.e. a loan against the commodity. Companies such as, in addition to providing farmers with access to affordable storage directly, also provide WRF from their own books as well as other lenders, bringing lender and borrower together securely. , often bringing formal credit to some places for the first time. .

Need better access

In the next two stacks, as goods move from trader to processor to wholesaler, the need arises for supply chain finance. The credit period at each stage is closely related to the time it takes for the buyer in that stack to sell the processed products and convert them into cash, and often buyers have to pay suppliers before they receive credit themselves. money from their buyers.

This makes access to credit here again essential to the well-being of the company, affecting its ability to pay its suppliers and manage its assets effectively. There are several models currently prevalent in the industry for providing this supply chain finance to buyers along the chain, but again, scope is the issue. Not everyone who needs it gets it.

These issues are not new, they are all very well recognized by all stakeholders including government, banks, corporations, agribusiness majors and start-ups, and the models used at every stage are quite mature when functional. What is still needed, however, is improved access for the myriad marginalized smallholders and other entities. The need of the hour is to identify the exact gaps – in trust or otherwise – that are causing access failure, and build a model to resolve those gaps and bring everyone together in a secure and mutually beneficial way. .

(The author is Chief, Chief Strategy Officer,

Karthik Sundararaman, Chief, Chief Strategy Officer,

Karthik Sundararaman, Chief, Chief Strategy Officer,

Published on

January 26, 2022