It isn’t too much of a stretch to say that money greases the wheels of the global economy, and credit is a major part of the total money supply in any economy. In India, unfortunately, the availability of credit is limited.

According to BIS studies, the bank credit to GDP ratio of India at 56 per cent (as of 2020) substantially lags G20 and other emerging economies. This absence of credit makes itself felt very keenly in India’s agricultural sector.

It is useful to think of the grain value chain as comprised very broadly of five distinct stacks. The first is the pre-harvest stack involving growing the crop - including inputs, insurance, labour 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 commodity moves into the third stack – raw commodity commerce, where the goods are sold and ultimately shipped to a processing unit. In the fourth stack - processed commerce – the raw commodity is transformed to finished goods, which is then sold to a wholesaler and shipped to their distribution centre.

In the final stack – distribution and retail - processed goods move down the distribution chain, ultimately reaching the end consumer.

Varying models

The need for financing is ubiquitous across every single stack in this value chain, though the exact form of the need and the solution model vary.

In the pre-harvest stack, the farmer typically lacks funds to pay for the inputs, labour, insurance and harvesting equipment required, so she typically needs access to pre-harvest credit to fund the production cycle. Many farmers lack access to formal pre-harvest credit in spite of government programmes.

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There are many start-ups working closely with farmers, some of which are bringing digitalisation and better data visibility and tracking around farms and farmers, but these are yet to attain scale, and there is a clear need for players that will connect banks to these 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 all at once but demand is spread evenly (for the most part) through the year, supply overwhelms demand at the time of harvest, and prices drop. Once the crop finds its way to storage, continuing demand drives the price back up over time till the next harvest. Thus, the ability to store the raw commodity is critical – the longer you store, the better the price. And the person with access to the most capital will be able to store longest without hurting for cash and therefore make the most returns.

Since the farmer typically doesn’t have access to this kind of capital and has to repay the pre-harvest loan at the time of harvest, she usually does not have the luxury of holding on to the commodity and is typically forced to sell at harvest when prices are lowest. By the time the commodity gets to the warehouse it typically has 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 necessitates multiple changes of ownership to someone that has just a little more capital.

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

Need for improved access

In the next two stacks, as the goods move from the trader to the processor and then the wholesaler, the need is for supply chain financing. The credit period at each stage is tightly linked to how long it takes the buyer in that stack to sell the processed goods forward and convert it to money, and often buyers need to pay suppliers before they receive money themselves from their buyers.

This makes access to credit here again critical to the wellbeing of the company, impacting its ability to pay its suppliers and run assets efficiently. There are multiple models currently prevalent in the industry to provide this supply chain financing to buyers across the chain, but again, reach is the problem. Not everyone that needs it gets it.

These problems aren’t new, they are all very well recognised by all stakeholders, including the government, banks, corporates, agribusiness majors and start-ups, and the models being used at each stage are fairly mature where they are functional. What is still needed, however, is improved access to the innumerable marginalised smallholders and other entities. The need of the hour is identifying the exact gaps - in trust or otherwise - that cause access to break down, and building a model to solve these gaps and bring everyone together in a secure and mutually beneficial manner.

(The writer is Head, Chief Strategy Officer, Arya.ag)

Karthik Sundararaman, Head, Chief Strategy Officer, Arya.ag

Karthik Sundararaman, Head, Chief Strategy Officer, Arya.ag

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