A farmer stands to gain when she has the choice of whom to sell to and when to sell. Ideally, a farmer would sell when she needs immediate cash at the time of harvest, store the rest during the inter-crop period, and sell as and when the price suits her.

Money is structurally made by producers by storing (and storing only) their harvested crop to capture better prices. Therefore, access to storage is the prime determinant of profitability. In India, the financial position of farmers is so weak that without credit they cannot afford to store and capture the price increase. Thus, credit here is the other crucial determinant of profitability insofar as it enables storage. 

Availing credit 

The government has been raising banks credit targets for the farm sector every year intending to double farmers’ income. However, even when banks provided agriculture credit worth $168 billion in 2018-19, 50 per cent of this credit went to medium and large farmers. Of all the farmers in India, only 30 per cent avail credit from formal sources, while 50 per cent of small and marginal farmers are unable to borrow from any source.

Constraints related to institutional design and delivery mechanisms largely contribute to the absence of sustainable rural financial markets and institutions. This leaves over 10 crore farmers dependent on informal channels, exposing them to exorbitant interest rates as they fulfil their credit needs each cropping season.

Another challenge associated with agricultural credit has been its end-use. 30-40 per cent of the loans farmers receive get diverted to their healthcare needs, marriages, education costs and other non-agriculture usages, thereby further impacting efficiency in agricultural activities. 

Holistic solutions 

It is here that the role of new-age technology-driven agtech players finds relevance.

Agtechs can challenge existing systems and create economies of scale with holistic solutions and data-driven methodologies.

With over 1.4 crore farmers having adopted various agtech solutions, there is a clear possibility for innovative technologies to solve the problems of scale and profitability.

Big data tools allow institutions to target credit more precisely, thereby reaching better borrower pools and expanding access to uncollateralised credit.

Fintechs can now not only mitigate risks on unwanted diversification, but also track the usage of these funds. The growth of the cashless economy and financial technology (FinTech) is generating new ways to target and collateralise credit, price, manage risks, and organise agricultural value chains. 

Digitisation of farms with an integrated plan to create electronic balances for commodities will enable the creation of agri stacks, building the much-needed transparency in value chains. Not only will this ensure seamless facilitation of credit, but also help de-link farmers from non-institutional sources where they are compelled to borrow at steep interest rates. 

WRS as trade facilitator 

The warehouse receipt system (WRS) adopted by various agritechs has the potential not only to improve access to institutional credit but also to work as a trade facilitator for farmers.  

Collateralisation of agricultural produce with a legal backing in the form of negotiable warehouse receipt (NWR) would lead to an increase in the inflow of credit to rural areas, reduce the cost of credit (due to increased certainty of recovering credit by the bank) and would spur other related activities, like standardization, grading, packaging, and insurance services in the agricultural sector.

Agri fintech players also play a key role in imparting financial literacy for the marginalised. This is especially relevant for women in agriculture as they face unique challenges: limited control and ownership over assets such as land and their inability to post hard collateral for loans. Mobile money, biometric identification, and the blockchain — can also help in generating financial inclusion.

Collaborative models 

These key initiatives spearheaded by new-age agritechs and fintechs open up an unprecedented opportunity for collaboration between them and traditional lenders such as Banks and NBFCs.

Agtechs can act as business correspondents for banks facilitating deeper and swifter credit underwriting and on-boarding. Co-lending is yet another avenue for deepening credit to the agriculture sector.

These collaborative models not only help increase the reach of agri-credit but also make it extremely efficient in terms of interest rates.

Such models hold the promise of leveraging key strengths of the participating entities. Banks offer their low-cost capital, while agfintechs bring in their tech-enabled expertise to reach, evaluate and service the credit needs of the unserved agri-stakeholders.

Financial inclusion is a prerequisite to ensure social cohesion along with the three Es- employment, economic growth and empowerment.

An empirical analysis of the relationship between financial inclusion and development shows that the Index of Financial Inclusion (IFI) and the Human Development Index (HDI) tend to move in the same direction.

With agtech startups making finance available and accessible, while monitoring and encouraging its appropriate use, the goal of achieving higher indexes in financial inclusion and human development for rural India is surely attainable. 

(The writer is MD, Arya.ag. Views are personal) 

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