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Introduction to Agriculture Value Chain Financing in India:

Value chain finance (VCF) VCF is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product(s) to market(s). Such a definition mandates relationships and commensurate exchanges between value chain stakeholders through vertical and horizontal linkages as well as coordination/cooperation and competitive mechanisms. This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services independent of other stakeholders. Value chain finance can contribute to meeting the growing need for agricultural finance and investment in response to greater consumer demands for more processed or value added products. Traditionally, most regular banks and microfinance institutions have avoided rural finance since this is perceived as risky and costly, with cash flow requirements that are irregular and difficult to manage. Banks shy away from the high transaction costs and risks related to agriculture such as crop failure, diseases and market fluctuations. Also the lack of physical collateral is a restriction, and the risk of political interference that can damage the repayment behaviour of the rural clientele is high. The aim of this note is to understand the: 1) Different nodes in value chain, and 2) The potential to finance these nodes.

Looking at value chains

Unpredictable weather, dodgy infrastructure, volatile prices, low status, little support: despite all these problems, millions of farmers, traders, service providers and other micro-entrepreneurs still manage to deliver fresh food every day to urban consumers, export produce to distant markets, and stay in business. That reflects their resilience, creativity and huge entrepreneurial potential. That potential becomes fully clear if we look at the value chains that link farm production to rural trading and other sectors of the economy. These chains show that farmers do not operate in isolation, but are part of a wider system. The small scale businesses of asset-poor farmers at the beginning of the chain are intimately connected with larger businesses of traders, food processors and supermarket chains at the end. Below is an example of a simple value chain:

Figure 1: A simple value chain A value chain refers to the entire system of production, processing and marketing of a particular product, from inception to the finished product. A value chain consists of a series of chain actors, linked together by flows of products, finance, information and services.

Chain Nodes:
Chain actors:
The chain actors are the individuals or organizations that produce the product, or buy and sell it. In Figure 1, the farmer produces dried coffee cherries and sells them to the trader in exchange for cash. A processor who roasts the beans for a trader in return for a fee, but who does not become the owner of the product, is not a chain actor, but is a service provider or chain supporter.

Figure 2: Value Chain actors, supporters and context.

Chain supporters:
Flows of finance, information and services are not limited to the actors within a chain. Often other individuals and institutions are involved, surrounding the chain actors. We call these chain supporters (Figure 2). Chain supporters may provide various financial services to the chain actors. These supporters include government agencies, moneylenders, savings and credit groups, microfinance institutions, banks, equity funds, and so on. Chain supporters may also provide a wide array of non-financial services: input supplies, farm labour, transport, grading, processing, storage, packaging, advertising, research, training, advice, organization, and so on.

Chain context
The chain actors and supporters operate within a context that includes the larger economy, currency exchange rates, government economic policy, and governance, tax, regulatory and legal frameworks. This context may help the performance of the chain, for example by promoting a transparent, stable macroeconomic policy. Or it may hinder it by imposing restrictions or allowing corruption to flourish. The context may also include influence by advocacy movements (for example NGOs that work on environmental or social issues) and by social structures (for example traditional hierarchical structures in a community).

The potential to finance these nodes:

Input suppliers
These provide farmers with seeds, chemicals, fertilizer and equipment, plus perhaps training or in-kind credit (such as a loan of fertilizer). Various types of input suppliers exist: big foreignowned firms, large national companies, small-scale local retailers, farmer groups, cooperatives or public bodies all with different financial needs.

Farmers, their families and hired workers manage the crops or animals, and are involved in postharvesting practices and marketing. During the production season, they often lack working capital to buy seeds and other inputs, or to hire workers to plough the land, sow, irrigate, weed and harvest the crop and to care for the animals. In addition, few farmers have investment capital to buy equipment such as ploughs or draught animals, or to invest in irrigation, terracing or farm

buildings. So the farmers finance needs include loans to pre-finance the crop, and prompt cash payment for their crops after harvest (or even beforehand).

Farmer organizations
Cooperatives and farmers associations have been one way of delivering credit to farmers, with loans often tied to farm inputs and machinery. However, like other semi-formal institutions, coops suffer from flawed administrative controls, lack of independent decision-making, inflexibility and high administrative costs. Apart from such loans, co-ops face various other financial needs. They need to cover their administrative costs.

The traders need working capital to optimize their turnover and keep transaction costs down. They also need longer-term investment capital so that they can buy a vehicle, build a warehouse, or pay for equipment to weigh or grade a product.

Small-scale processors may also lack the working capital they need to buy bulked products from a farmer group or trader. They often lack the money to invest in equipment, leading to losses, lowering quality, and pushing up the cost of processing. They typically need access to mediumterm loans and the ability to lease equipment. Commercial banks are becoming involved in lending to such processors.

Wholesalers and exporters

Wholesalers often manage credit relations in two directions: they provide money to trusted traders so they can buy on their behalf, and they may provide products to retailers on credit, expecting to be paid after the retailer has sold the goods. In this way, wholesalers often act as a bank for other actors in the chain.

Financial Assistance Schemes:

In India largely the financial assistance is provided by the Central and State Government institutions. The key financing institutions for this purpose can be identified as Banks, National Cooperative Development Cooperation, Ministry of Food Processing Industries (MOFPI), Agricultural and Processed Food Products Export Development Authority (APEDA), Ministry of Agriculture, National Horticulture Board. A) Following are some of the financial assistance schemes designed by APEDA:

1) Scheme for market development: The scheme has been formulated largely for packaging development, to conduct surveys, studies, consultancy and data base up gradation, for export promotion and market development. 2) Scheme for infrastructure development: Establishment of common infrastructure facilities by APEDA or any other Government or Public Sector agency like Airport Authority of India or Port Trust etc. Assistance for purchase of specialised transport units for animal products horticulture and floriculture sector. Assistance to exporters//producers/growers/Cooperative horticulture and floriculture sector. 3) Schemes for Quality Development: Assistance of installing quality management, quality assurance and quality control systems such as ISO series, HACCP, TQM, KOSHER,BRC,GAP, Organic Certification and ERP based traceability etc. including consultancy, quality improvement and certification etc. 4) Schemes for research and development: Assistance for technology development through R & D efforts with research institution under Government/Public Sector. 5) Transport assistance scheme 6) Inland Transport Assistance Scheme for North East Region of India 7) Marketing development assistance scheme B) The following are financial assistance schemes designed by the Ministry of Food Processing Industries: 1) Mega food parks scheme: The primary objective of the MFPS is to provide adequate/excellent infrastructure facilities for food processing along the value chain from the farm to market. It will include creation of infrastructure near the farm, transportation, logistics and centralized processing centers. The main feature of the scheme is a cluster based approach. The scheme will be demand driven, pre marketed and would facilitate food processing units to meet environmental, safety and social standards. 2) Scheme for upgradation of the quality of street food: The Ministry of Food Processing Industries is taking initiatives to ensure that the hygiene and quality of food that is consumed in the streets is not compromised. At the same time it is organization and federations for

essential to see that the concerns associated with the street food vendors are also addressed. 3) Scheme for modernization of abattoir: Has a budget provision of 32.5 crs to set up 10 abattoirs. 4) Scheme for R&D: MFPI extends financial assistance as grant in aid to various institutions/universities, public funded organisations, and recognized R&D labs, in public and private sectors to promotre demand driven R&D in the field of food processing sector for product and process development and improved packaging. 5) During 11th Five Year Plan the Ministry is planning to provide assistance for setting up of about 270 FPTCs, organize 750 EDPs and facilitating need based professional development training programs. In addition about 55

Universities/Colleges/Institutions would be assisted for creating infrastructure facilities for degree/diploma courses in food processing. C) Under NCDC, financial assistance is provided for the following purposes: 1) Margin money to raise working capital finance (100% loan) 2) Strengthening of share capital base of societies (100% loan) 3) Working capital to regional/state level marketing federations (100% loan). 4) Term loan for creation of infrastructural facilities like godowns, cold storages, equipment financing, purchase of transport vehicles, boats and other tangible assets 5) Term and investment loan for establishment of new, modernisation/

expansion/rehabilitation/diversification of agro-processing industries. 6) Subsidy for preparation of project reports/feasibility studies etc. D) The following schemes are provided by the National Horticulture Board: 1) Development of Commercial Horticulture through Production Management of Horticulture Crops 2) Capital Investment Subsidy Scheme for construction/ expansion/ modernization of Cold Storages/Storages of Horticulture Produce 3) Technology Development and Transfer for promotion of Horticulture 4) Market Information Service for Horticulture Crops 5) Horticulture Promotion Service and Post Harvest

References: 1) http://www.microfinancegateway.org/p/site/m/template.rc/1.26.7854/ 2) http://nhb.gov.in/ 3) http://mofpi.nic.in/ContentPage.aspx?CategoryId=1269 4) http://mofpi.nic.in/guidelines/hrd_policy.pdf 5) http://www.apeda.gov.in/apedawebsite/trade_promotion/Financial_Assistance_Schemes. htm 6) KIT and IIRR. 2010. Value chain finance:Beyond microfinance tor rural entrepreneurs.