Can Startups Play a Crucial Role in Improving Agri-financing? Lack of timely and adequate credit is the biggest challenge faced by Indian farmers
By S Shanthi
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The credit-to-GDP ratio in agriculture has been much lower than other sectors. Estimates say that despite all the schemes, 40-45 per cent of farm households still need access to credit. This lack of financing opportunities in the sector has crippled the sector. That is why, in the recent budget, the Finance minister announced that the credit target will be increased to INR 20 lakh crore, up 11.11 per cent with a focus on animal husbandry, dairy, and fisheries.
Why is credit such a big challenge in agriculture? Farmers have two sources of credit, institutional sources such as co-operative societies, regional rural banks, micro finance and National Bank for Agricultural and RuralDevelopment (NABARD) for long-term credit and non-institutional sources such as local moneylenders.
While the high-risk involved in farming often reduces the access to credit in the first case, the latter puts farmers in never-ending cycles of debt as the interest rates offered by local moneylenders are often exorbitant.
Agri-fintech startups such as Samunnati, PayAgri, Jai Kisan, Arya.ag are trying to resolve this issue using technology.
According to a recently-launched Inclusive Finance India report, Venture Capital invested approx $ 2.5 billion in agri financing in the last 36 months and will continue to gain interest in the coming years.
The report further states that the combination of policy, investments, catalytic capital, blended finance and innovations has the potential to solve climate challenges facing Indian agriculture. Government, policymakers, industry, funds, investors and startups have to work together to build long-term and ever-lasting solutions to make Indian agriculture climate resilient and sustainable.
"For years, experts have spoken about multiple bottlenecks in the agriculture sector, particularly for smallholder farmers; however, the trend is slowly changing. The growth of agritech has been significant in helping address critical issues in agriculture through solutions for farmers to improve access to market linkages, farm inputs and financial services," said Radhika Agashe, Executive Director of Access Development Services, a national livelihoods support organization.
While tech undoubtedly can help resolve the current situation, but challenges in the sector are plenty. Experts say that often, these startups have a good idea from the supply side on how to reach out to the farmers with no operational cost powered by technology solutions, but the reality of actually lending and recovering at a farm household is a more challenging proposition for the startups. Thus, only a handful are operating in the agri financing space.
"Today, when we look at the landscape, 3-4 companies that started operations in the last five-six years do a reasonable job of reaching out to smallholder farmers. The rest provide services to other mainstream institutions but don't carry out either lending or observing credit risks," said N Srinivasan, a development finance and livelihoods expert.
He believes that startups with the use of technology can do better analytics and predict customer behaviour which is a critical input in reducing credit risk & improve the quality of loan underwriting.
"The recent technology involving AI & ML has excellent potential for application in sectors such as farming because of the widespread small-ticket businesses scattered throughout the country. This is not easy for financial institutions to manage if they adopt other physical means. Despite priority sector obligation, banking only reaches massively to smallholder farmers and remote areas because of this. Technology cuts down the physical barrier in outreach, but it remains to be seen whether technology can successfully recover defaulters' dues," he added.
Further, farmers are yet to get out the informal credit loop because of the familiarity with the lenders. It takes time for startups to even enter the farmers ecosystem. According to a report by Rabo Foundation, ThinkAg and MicroSave Consulting, out of the 124 million small and marginal farmers, constituting 86.2 per cent of the farming community, only 36 million borrow from formal sources.
"Climate-linked financing and insurance products need a lot of integration of technology for these models to scale. There is a need to build a strong public ecosystem and policy support for climate-solving agritech startups like the kind of interventions we see in other climate risk-related areas such as electric vehicles, mobility and pollution-tech," said Hemendra Mathur, Venture Partner, Bharat Innovation Fund, and Co-founder, ThinkAg.
On other hand, startups are also competing with leading stream players such as banks and larger NBFCs. "Having top-shelf technologies would help them with a competitive edge in the initial stages. When they scale up, they require greater access to equity and credit. At this stage, startups think about becoming service providers to larger financial institutions through co-lending structures & agency arrangements," said Srinivasan.
But, even at this stage, this segment is also one of the least funded within agritech, it becomes difficult to scale. "The regulatory load on NBFCs is much higher than that of mere service providers, so a startup that intends to become a financial institution must evaluate its options reasonably soon. Whether it would like the course and, if so, where will it raise money from, or its equity investors have large pocket and patience," he said.
