The Hindu Business Line : Going rural with smart finance

In explaining how the financial capital of London will serve the wider interests of European farmers, the city's Lord Mayor noted: "In the new liberalising world, farmers need to be savvy enough to use market tools to weather downturns and reassert themselves in the marketplace without the support of subsidies. We call it smart finance. The farmer that is smart on finance as well as on fields and food is the farmer that survives."

This is true for India as well, and the financial capital of Mumbai is well-placed to drive development in the Indian hinterland. It is only when the main financial institutions of the country bridge the urban-rural divide, and offer farmers tools which empower and allow them to manage market volatility, can farmers truly expect to enter into a virtuous cycle of growth. The futures exchange, together with its ecosystem partners for spot trading and collateral management, provides many of the tools that farmers and financiers require to manage and weather price shocks.

Improving Rural reach

Several banks are impatiently awaiting permission from the relevant authorities to start building these price risk management instruments into the financial products they offer in the countryside — it is smart finance not just for the farmers, but also for the banks.

Like any other form of insurance, price risk management will protect both farmers and banks from adversities — in this case, price falls that hurt a farmer's ability to pay back his loan. But while government permission is awaited, it is worthwhile revisiting some of the other tools that financiers can use to improve rural reach and, in particular, bring best international practices to India.

The second Green Revolution

A second Green revolution has started in the country, characterised by a broad reorganisation of agricultural value chains made possible by advances in information and communication technology and evolving consumer demands. The benefits of this revolution will be huge for farmers and consumers.

Farmers will be able to plant those crops for which consumers are ready to pay good prices. Much of the current large waste in the marketing and distribution system will be eliminated, and with it, the margin between the prices that farmers receive and that which consumers pay, will come down to international levels. Consumers will be able to buy high quality food products at an affordable cost.

However, not all farmers will benefit — for a truly inclusive growth, many farmers will need some form of empowerment. Good access to finance is a crucial part of this. Existing financing modes do not give most farmers access to the levels of finance they need to make a structural change in the way they produce. The new value chains being created provide an opportunity for change — but only for those who know how to leverage these value chains to implement new financing structures.

Successful models exist and merit serious consideration by all banks and agro-corporates. With smart finance, lending to agriculture does not need to be tantamount to accepting a large risk of distressed loans. Indian farmers are able to unlock much additional value from their landholdings. But they need to be empowered — by smart financiers and smart financial institutions.

(The author is Joint Managing Director, MCX.)

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