Agri-lending apt for fintechs?

In the recent past, the agriculture space has seen the emergence of a large number of fintech, or technology-enabled lending firms and an increasing investor interest in them. As is common in India, any sign of a new opportunity attracts people in droves, and same is the case here. A common factor in the pitches of all such fintechs is their estimate of the market size (see Table).

While it is difficult to challenge NSSO data, over-reliance on macro numbers projected from a sample survey is fraught with risks. According our estimates as professionals who have worked extensively in the rural credit space and based on our field work and bank branch-level study, typically rural bank branch staffers would have an extremely good rapport with the people in their catchment area, and would have covered all ‘eligible farmers’ under the popular Kisan Credit Card (KCC) programme.

Who, then, are the ineligible farmers? These include people with defective land titles, squatters on government lands, oral lessee farmers, defaulters to banks, absentee landlords and land in possession of urban dwellers for investment, as also cultivators who produce largely for home consumption, with low to no marketable surplus. There is also a not-so-small number who are non-borrowers by choice.

If we add-in the data of farmers having KCCs issued by banks of 69.5 million (as per a GOI report of 2019) with the number of microfinance clients taking credit for agriculture (microfinance data for MFIs, not including lending by banks to SHGs) which is 45 million, the gap of unserved farming households shrinks dramatically.

Agricultural credit, like any credit, performs one of three functions: (i) smoothen uneven and seasonal cash flows; in technical jargon discounting future cash flows; (ii) generate new cash flows through returns from investing in assets, acquiring inputs or technology, or (iii) refinance high-cost debt.

Beyond these three functions, credit cannot generate capacity to service the debt.

The concern to enhance credit flow to farmers is not new, and has been there since pre-Independence times. From promoting cooperative credit institutions to the introduction of the Lead Bank scheme, and the establishment of NABARD and RRBs, all had the underlying objective of enhancing credit flow to farmers and rural areas.

Agricultural credit may not really be the most attractive market segment, as its capacity to be an economic multiplier is limited. Also, the market is really not so easy to navigate, as is evident from the way Small Finance Banks (SFBs) that have been licensed for over two years now have taken limited exposure in farmer finance, in spite of having the reach, the field force, and the unserved agri clients in a way overlapping with microfinance clients.

Technologies such as geo tagging land parcels and remote monitoring of crop status can help, but the cost of doing this while pricing farm credit is also a key factor. With the prime customers already served by banks, and fintechs front loading their costs (which from MFIs’ experience could be 8-10 per cent), these sub-prime customers will get loans priced at around 20 per cent per annum, which needs to be referenced against their ability to pay. Also, lending through non-bank channels will exclude such borrowers from schemes such as of interest subvention.

On the other hand, credit flow to non-farm rural enterprises offers an immense opportunity. The gross estimate of the credit gap for MSMEs is ₹20-25 trillion (as per RBI reports), although the split of this between urban and rural is unavailable. As per our estimates, less than 10 per cent of rural enterprises actually enjoy a credit facility of some form.

This segment, if funded, has the power to unlock the latent entrepreneurial potential of the new generation young Indians in rural areas, generate jobs, and ignite rural prosperity on a scale greater than the farm sector, and is an area worth exploring by fintechs. Lending in this space, apart from getting a deeper understanding of it, would require fintechs to broaden their analytics tool.

In short, fintechs are best suited in agriculture financing as analytics providers to banks (like the recent tie-up of Skymet with SBI), with the lending happening from banks, to enable affordable credit to farmers, while at the same time fintechs can explore solutions to deliver credit to the largely untapped rural non-farm enterprises market that will have the ability to absorb much larger quantum of debt and also afford the cost of such credit.

The writers work with Caspian Impact Investments, an NBFC based in Hyderabad

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