The three-part problem statement for unlocking agri-credit in India

Access to credit, for making capital investments and managing working capital, are critical aspects of enterprises’ growth and viability across industries and sectors. In India’s agricultural ecosystem, however, only half of all farmers are financed and among them, only 59% are serviced by formal institutions while the rest tap into informal streams of financing. This outlines significant scope and potential for stakeholders – public and private banks, NBFCS, AgFinTech and other AgTech startups – to develop and saturate India’s agricultural ecosystem with financial products that enable farmers to avail their due share of price and income.

Three dimensions of the agri-credit challenge

In order to do this, ecosystem stakeholders need to solve for 3 challenges:

Data: Agri-credit providers need to access relevant streams of static and dynamic data regarding assets, activity, and income, in order to make their lending decisions. Most farmers do not have recorded financial histories and many also don’t have the relevant documentation in place. Adapting to this low information context by identifying and collecting alternate (proxy) data points is critical to unlock a flow of (low-value) agri-credit, which can help farmers directly and to build a recorded credit history.

We [at Jai Kisan] try to look at it [farmer data] from 3 perspectives, one – their financial data which they may or may not have; two – their transaction data which is proprietary to us; 3 – partner level data – what is a partner [other value chain players] able to share with us. For financial data, for those who don’t have any, we try to scrub any data we are able to access from their devices – sms’, schemes coming in etc

Arjun Ahluwalia, Founder & CEO, Jai Kisan

While generating data is one part of the challenge, for banks and NBFCs attempting to make lending decisions based on data received from multiple sources, integrating data streams without losing information and context is another significant hurdle.

Our partnerships give us the data access and data reliability which we can use to assess risk. Now, the challenge is, each of them have their own kinds of data so how do we standardize that across the board? That’s where things like the AgriStack can play a big role.

Nagaraj Subrahmanya, Chief Risk Officer, Avanti Finance

Shared digital public infrastructure, in terms of both – foundational data (such as land and identity records) as well as shared protocols for interoperability, is under development and is envisioned to provide key pieces of the ecosystem’s data puzzle.

The idea is to have a set of entities created in this architecture – information providers and information users and enable any use case to be orchestrated through this [standardized] data grid.

Vijay Vujjini, CTO, Centre for Digital Public Infrastructure (CDPI)

Product Innovation: There is currently a dearth of relevant financial offerings catering to farmers and other value chain players in Indian agriculture. Apart from KCC [Kisan Credit Card], a majority of these are EMI-based. A key aspect of this is developing products specifically for farmers where repayment structures align with farmers’ cash flows. Existing offerings largely adhere to a cookie-cutter, one-size- fits-all, monthly repayment cycle.

Another lens through which stakeholders are viewing this is as a shift from ‘product-centric’ to a ‘client-centric’ approach. The idea being that, rather than developing a specific product that customers (in this case – farmers) are supposed to adopt, financial institutions can look at it as approving a line of credit, broken into short and long term, that can then take the form of a farm equipment loan, a KCC or a working capital credit etc. However, this can be hard to quickly action for some financial institutions, particularly large banks.

The way banks are structured – the way though process is, the way the business runs, the way the back end runs – is all product linked. Today customers are looking at who can give me a dosage of credit which is agnostic of the product which looks at my income stream and my indebtedness and delivers to me.

Ramaswamy Gopalakrishnan, EVP and Head – Agri,
Gold and Farm Mechanisation, Bharat Banking, Axis Bank

‘Supply chain’ for AgFinancing: This refers to the last-mile connectivity required to acquire, service and collect from farmers. The costs associated with this can be prohibitively high, running upto 5 -10% of the loan value at loan ticket sizes of INR 20k – 30k, which is the typical credit requirement for small holder farmers in India. For a KCC product with entirely physical acquisition and collection models, this yields a negative expected risk adjusted rate of return. While this outlines the opportunity for digitized solutions to come in and lower these costs, AgFinTech startups’ experience suggests that bringing such solutions directly to farmers may yet be too tall a proposition.

When we started, myself and a lot of my [AgTech founder] counterparts had the audacious goal of going directly to the farmer. We realized that that is extremely hard as the CAC [customer acquisition cost] is too high and to be able to collect back from them is extremely complicated because of the nuances of the value chain. So, a lot of us have moved towards building the right kind of trust frameworks to be able to get to the farmer.

Arjun Ahluwalia, Founder & CEO, Jai Kisan

For farmers, their local and frequent touchpoints are their dealers and/or arthiyas, who, in turn, interact with corporates. So a lot of AgTech startups today are working with corporates, drilling deeper into the value chain to work with dealers or suppliers, with solutions that can trickle down and impact the lives of farmers. This provides startups relief on their CAC but also creates a trust base with farmers that can be leveraged to work with them directly in the future.

Solution ecosystem and the need for ‘hard’ partnerships

So far, AgFinTech (and other AgTech startups), backed by financial institutions, have been the key stakeholders attempting to deploy technology enabled solutions to close India’s agri-credit. However, this has entailed them trying to solve for all the 3 aspects of the problem statement simultaneously – developing last-mile digital and agent network to source and collect on loans, building applications and tech stacks to capture relevant data, and also trying to innovate on product offerings. This, however, is unlikely to be a financially viable model.

I think solving for all these three together will be unviable for the AgFinTechs to do themselves. [Doing so] will lead to overall business non- viability, so it will not become scalable and sustainable and eventually that entire cost will get passed on to the end user or the farmer. What we need is ‘harder’ partnerships with banks where AgFinTechs focus more on the supply chain and getting the last mile connected, and banks can take the role of product innovation which needs a significant boost and the government along with the private sector can play the role of building the data stack.

Himanshu Bansal, Vice President, Regional Head – APAC,
Community Pass, Digital and financial Inclusion, Mastercard

Promising paths forward

KCC, among existing agri-credit product offerings, stands out as having the potential to create a disproportionate impact. Currently, the average outstanding, at a large public sector bank, for a KCC is INR 1.6 lakh – 1.7 lakh, while INR 3 lakh is the limit the government prescribes. However, this scenario leaves wide gaps at both ends with – subventions at this level (at low interest rates linked with KCC) not being a viable business vertical for banks and many smallholder farmers around the country needing even smaller lines of credit for their working capital needs.

That said, given its significant potential to penetrate the agri-credit gap in India, some relevant factors ecosystem stakeholders need to focus or iterate on going forward are:

Structure: Developing mechanisms to mandate the use of KCC products for income generation activities only will be a key contributor to its efficacy.

Communication: Currently, KCC products are sold to farmers like they are welfare products. Clearer communication with farmers about KCC being a loan product of whose the repayment patterns can impact farmers’ credit worthiness going forward, is critical.

Quality of leads: Lead generation, including the capture of relevant data, as well as the scoring and lending decision process is significant cost of the KCC process. Ensuring a high quality of leads will therefore be a pertinent aspect of its financial viability.

[With KCC] an important point is the approval rate – if you’re only approving 20% of the applications, it becomes more of a disservice. Around 60 – 65% is the level at which the ability to do [KCC] at scale and with profitability comes in.

Ramaswamy Gopalakrishnan, EVP and Head – Agri,
Gold and Farm Mechanisation, Bharat Banking, Axis Bank

Pricing: Though KCC as a financial offering was introduced with the idea of it being a lower costs product, designed specifically for farmers to affordably access – the appropriate interest rate level that is able to provide such relief without rendering the entire proposition unviable, is a critical balance that policymakers and financial service providers will need to be able to strike.

Even if you were to digitize your KCC process, lending at 8-9% it will still never be a commercially viable business line. Maybe we should think about solutions where you are able to lend to these farmers at more commercially viable rates (maybe 12-13%). I don’t think the farmers will mind that as long as the banks can come in much more forcefully.

Himanshu Bansal, VP, Regional Head – APAC, Community Pass, Digital and financial Inclusion, Mastercard

Measuring efficacy in a broader context: While the bottom-line earnings from KCC products is an obvious and critical aspect in assessing its efficacy, measuring its impact as a gateway product towards the broader goal of unlocking AgFinancing for currently under-financed farmers and other agri value chain players, will also be crucial to consider.

The reason KCC is included in priority sector lending is so that a farmer can be brought up the curve and given a term loan in the future. The problem is – do we actually track it – the growth of a farmer graduating from a KCC product into a term loan product? No, we do not.

Arjun Ahluwalia, Founder & CEO, Jai Kisan

Looking ahead, incremental progress in solving this historically intractable challenge of AgFinancing will depend on ecosystem stakeholders’ ability to effectively leverage technology solutions, tailor their approaches to smallholder farmers’ unique mindset and challenges, unite and collaborate in ‘hard’ partnerships and assess interventions in a broad and holistic context.

This article summarizes insights emerging from a panel discussion hosted at ThinkAg’s Harvesting Tomorrow Summit 2023. The panel, titled – “Bankrolling Progress: Unlocking farmer and value chain financing through digitization” was contributed to by:

Arjun Ahluwalia, Founder & CEO, Jai Kisan
Himanshu Bansal, VP, Regional Head - APAC, Community Pass, Digital and financial Inclusion, Mastercard
Nagaraj Subrahmanya, Chief Risk Officer, Avanti Finance
Ramaswamy Gopalakrishnan, EVP and Head – Agri, Gold and Farm Mechanisation, Bharat Banking, Axis Bank
Sanjeev Nautiyal, Independent Director, LIC & Deputy Managing Director Financial Inclusion & Micro Markets (Retired)
Vijay Vujjini, CTO, Centre for Digital Public Infrastructure (CDPI)

THINKAG HARVESTING TOMORROW SUMMIT