By Mr M.Srikanth
It is simple. Everything in business, including agriculture, boils down to ‘finance’. As
small holders in India also face other problems like climate change, lack of infrastructure
facilities, presence of middlemen, severe competition, and volatile prices in the market place,
the concept of Farmer Producer Organizations (FPOs) has emerged as a viable solution and
make agriculture as a sustainable agri-business.
The FPOs are the new-age entities to engage in agri-businesses right from ‘farm to
fork’ to unleash the power of collectivization of small and marginal farmers. However, the
farmers are yet to reap the benefits of FPOs mainly due to absence of remunerative market
linkages for the agricultural produce, negligible processing of farm produce and value addition,
poor infrastructure facilities, low capital base, lack of skilled human resources, non-compliance
with the statutory guidelines, lack of business strategy, low credit availability due to non
investment grade, free riding of the members, etc. Out of all these challenges, access to
finance is one of the major constraints of the FPOs in India
As per the available data, only half of the cultivators in India have ‘free access to
finance’ i.e., availability of institutional credit, low interest rate, and collateral free loans.
Further, adequacy of the loan amount, proximity to bank/financial institution, and timeliness of
credit can’t be taken for granted. Till September 30, 2024 a total number of 44,458 FPOs
were formed across India, according to Tata Cornell Institute for Agriculture and Nutrition. It
may be noted that there existed only 9,201 FPOs in India till 2019; however, 35,257 FPOs
were formed since 2020, a four-fold increase in just five years, mainly due to policy push.
Further, 60.59 per cent of the FPOs (26,938) are active and comply with the regulatory
guidelines. However, only 34.76 per cent of the FPOs (15,455) submitted their financial
statements to the Ministry of Corporate Affairs, Government of India. The data also show that
only 2,334 FPOs (5.25%) obtained loans from banks and financial institutions indicating their
creditworthiness. As such, there is a huge scope for formal credit linkages of majority of the
FPOs (94.75%).
As per a research study of NIRDPR (2022), less than or equivalent to 40 per cent of
the farmer members in the five sample States (Telangana, Karnataka, Odisha, Uttar Pradesh,
and West Bengal) avail agricultural value chain activities from the FPOs. Hardly one tenth of
the sampled FPOs found to be commercially viable and financially sustainable. There were only 11 per cent of the FPOs which had equity capital of Rs.10 lakh or more, which is an indicator of their low capacity to mobilize (formal) finance. Generally, the farmers see the FPO
as a government project and therefore do not see the need for putting in their own money. On
the other hand, banks/FIs are not willing to finance the FPOs for want of collateral security
and credit history, absence of farmer-level data and lack of standardized grading and
assessment models for the FPOs. In a study conducted on the FPOs in Central India, it was
observed that the FPOs formed by the farmers themselves, without any external support either
from the Government agencies or from the NGOs, are fairly successful in their business
operations perhaps due to social capital and deep engagement of the communities.
According to NAFPO Report, 2023, 2,683 FPOs (around 11% of total FPOs in the
country) received financial assistance of Rs.686 crore in FY 2022-23 from various Non-Banking
Financial Companies (NBFCs). However, average ticket size of the loan was Rs.25.57 lakh,
which is very low, as far as value chain activities are concerned. Samunnati is the market leader
(75%) in the FPO lending business. This is followed by NABKISAN which extended loans to
700 FPOs to the tune of Rs. 140 crore (20.41%) during the FY2023. It is noticed that the FPOs
receive loans from the NBFCs at a higher rate of interest, often @18-24% per annum, for their
seasonal procurement operations. It is worth mentioning here that loans up to Rs. 2 crore for
the FPOs (including loans up to Rs. 50 lakh for warehouse receipts) are covered under the
Priority Sector Lending as per the guidelines of Reserve Bank of India. Hence, there is a great
scope for credit enhancement of the FPOs from formal sources.
In view of the above, the following points (demand and supply side) may be
implemented to foster credit linkages with banks/FIs:
- The FPOs have to adopt ‘fit and proper’ criteria to select right people for the board of directors from the perspective of good governance; here, the Federations have a key role to play by handholding the FPOs in the corporate governance domain
- The FPOs need to leverage entire value chains by engaging in processing of agri-produce and marketing through value addition (ex: Sahyadri and VAPCOL)
- The FPOs need to go for mechanization of agriculture through capital formation to enhance production and productivity
- The FPO Federations have to impart training and capacity building to the FPO office bearers in respect of market intelligence, business plan & strategy, supply-chain management, finance & accounts, ESG (Environmental Sustainability, Corporate Social Responsibility and Corporate Governance), risk management, human resources & leadership development, etc
- The FPOs have to maintain proper books of accounts by attracting the talented human resources from the next generation of the farmers like Chartered Accountants and Company Secretaries; by complying with the statutory guidelines, the FPOs may explore the option of listing on a special stock exchange (on the lines of SME Exchange) in order to strengthen their capital base; they can also approach the government nodal agencies for obtaining matching equity grants through statutory compliance
- The FPOs may leverage certain government schemes namely Agri-Infrastructure Fund, PM Matsya Sampada Yojana, Mission for Integrated Development of Horticulture, National Livestock Mission, National Bee Keeping and Honey Mission, Sub Mission on Agricultural Mechanization, National Mission on Edible Oils, etc. to tap capital subsidies, and other financial incentives like interest subvention
- The FPOs may capitalize on disruptive technologies like artificial intelligence, machine learning, internet of things and block chain to reduce costs and improve productivity as well as authenticity of their agri-produce, thereby doubling of the farmers’ income; here, the Federations have to play a catalytic role in dissemination of knowledge and technology transfer
- The FPOs need to focus on exports by complying with Codex Alimentarius (related to food production, safety, and quality) norms of the importers/World Health Organization/Food and Agricultural Organization, etc. in order to enhance their footprint in the international markets
- Banks/FIs may rely on ‘JAM – JanDhan, Aadhar, and Mobile - trinity’ to track individual credit score apart from developing proper credit assessment models to sanction loans to the FPOs in a pragmatic manner; also, these banks/FIs have to think of skilling/upskilling/re skilling of the field officers to meet the targets under priority sector lending especially for the FPO segment
- Banks/FIs may develop suitable financial products for the FPOs based on the latter’s business model, risk appetite, financial standing, credit track record, etc
- Banks/FIs may obtain either letter of comfort from the Federations or enter into tri-partite agreement with FPO Federations, while financing the FPOs; while structuring the financial arrangement, Mahagrapes Model, Maharashtra or AMUL Model, Gujarat may be studied for deriving key insights
- Banks (endowed with low cost funds) may opt for co-lending with NBFCs (known for aggressive marketing skills and last mile connectivity) to supplement and complement each other’s strengths
In sum, the Federations should work on the structural issues, by taking a cue from the
Self-Help Group Bank Linkage Programme, to enhance the credit linkages of the FPOs to
make them commercially viable and financially sustainable. By and large, we have missed the
bus on cooperatives. But, we can’t afford to miss the FPO bus, driven by the Federation
engine.
The writer is Director, Centre for Agri-Business Management, MANAGE, Hyderabad. Views are personal
