Obtaining timely and adequate financing is one of the most crucial requirements for farmers. But these demands remain largely unmet in India as the current financial system is unable to meet the needs of smallholder farmers, due to crop failures, pest attacks or adverse weather conditions.
Indian agro-fintech startups have played a key role in bridging this gap. Financial inclusion being the most crucial for this sector, rural fintech should also become a major investment theme in the agro-technological space.
The Union budget 2021, presented to Parliament today, announced the raising of the agricultural credit target to INR 16.5 Lakh Cr in fiscal year 2021-22 from INR 15 Lakh Cr during the previous exercise. The budget also focuses on increasing agricultural credit targets for fisheries, dairies and livestock. What does this mean for Indian agro-fintech startups?
Will the increase in the credit target help agro-Fintech startups?
“The agricultural credit target has steadily increased. It is good that the government recognizes the need for credit in this area. Agro-fintech startups can play a crucial role with this allocation; they can democratize it by providing credit to a large number of farmers using technology, ”says Hemendra Mathur, venture capital partner at Bharat Innovation Fund and co-founder of ThinkAg.
If out of 15 Cr farmers, five Cr get this credit, agro-fintech companies can potentially include more beneficiaries, say six Cr farmers, he explains. “Startups can facilitate the process of integrating farmers. They can easily perform their KYC, verification and download of documents to help the financial institutions concerned, ”he notes.
The target was set in the budget, but there is still no clarity on its implementation. “Although the details of the implementation are not yet clear, with improved credit there will surely be more liquidity in the market. This will have a very positive impact on the sector, ”says Santosh Kumar Singh, director of agriculture, energy and climate change at Intellecap, a consultancy that helps organizations improve business competitiveness.
SWAMITVA program and other things to remember for startups
In addition, Finance Minister Nirmala Sitharaman has proposed to expand the SWAMITVA program to all states / UTs in FY 22, which can have a large positive impact on the ecosystem. Earlier this year, the government launched the SWAMITVA program under which a registry of rights is granted to village owners. As part of this program, around 1.80 Lakh landowners in 1,241 villages have received maps so far.
Smartphone penetration in rural India has increased from 9% in 2015 to 25% in 2018. But the wave of smartphones has mainly been used for watching videos or chatting instead of enabling digital transactions. This is why digital transaction data, which can be relied on for credit scores, is missing.
Thus, the collection of land registers becomes crucial for rural fintech, and this program should make the process transparent. “When lending startups provide loans, it will become easier to check land records and grant loans against them. This will lead to fintech innovations and give farmers easier access to credit, ”adds Singh of Intellecap.
Budget fails agro-digital infrastructure and OPS
While agro-fintech startups have been able to benefit farmers to a large extent, growth in this segment may remain slow unless the government pushes towards digital infrastructure, experts say.
Access to digital data and transactions in the agricultural supply chain will also improve the integration of financing solutions. However, little has been done in this area and the budget does not mention it, says an expert on the condition of anonymity.
In October 2020, the Indian government suggests about his plans to create an agristack to help farmers access various agricultural programs. This would act as a common data infrastructure involving all farmers as well as the details of the land registers. Ashish Kumar Bhutani, Deputy Secretary of the Union Agriculture Ministry and CEO of Pradhan Mantri Fasal Bima Yojana (PMFBY), said: “This will serve as a one-stop-shop for data, including access to funding through farmers, startups and researchers to develop new applications so that the benefits reach the grassroots. “
If the government can develop this, it can be a game-changer for fintech startups. “This data will provide easy access to information when a banker wants to know the income potential of a farmer and the risk of debt involved. This is where the government should be putting a lot of effort. No one can create it on a scale like government because it involves an element of constant validation, ”says one expert who does not wish to be named.
The unavailability of customer data, the prevalence of informal credit and cash repayments are the main obstacles that have made agro-fintech the least funded segment. This is why out of the more than 1000 agritech startups in India, only a handful operate in the field of agrofinancing.
In addition, the budget also failed to mention agricultural producer organizations (OPF). Several agro-fintech startups, including Sammunati and SAgri, are working with FPOs to reach farming communities, as it helps them mitigate the risks posed by individual farmers.
According to a national paper titled Agricultural Producer Organizations (OPF): Status, Problems and Suggested Policy Reforms, around 6,000 FPOs are now operational in the country. Most of them were put in place under various central and state government initiatives, such as the Small Farmers’ Agribusiness Consortium (SFAC), NABARD and others, during the 8-10 last years.
The idea is to create an organized community for farmers from the same geography to mobilize for minimum subsidies, inputs and other benefits. However, the number of FPOs would be lower than what was mentioned in the document. The startups expected some measures to boost these FPOs to run smoothly, but they were not mentioned in the budget speech.
Given this scenario, the target of 10,000 FPO already set in the Union budget 2019-2020 seems ambitious. “Farmers may generally lack the skills to run a business and an ecosystem is needed with the active participation of state governments. As such an ecosystem does not currently exist and may require deliberations by multiple stakeholders, the government may have withheld from such promises, ”said Ankur Bansal, co-founder and director of BlackSoil.
Financing possibilities in agricultural and livestock infrastructure
The focus of the budget on related fields such as dairy products, animal husbandry and infrastructure creation, however, have been well received by startups. The FM announced that the government would focus on increasing credit flows for livestock, dairies and fisheries. He also proposed substantial investments to develop modern fishing ports and landing centers, starting with Kochi, Chennai, Visakhapatnam, Paradip and Petuaghat, which will be developed as hubs of economic activity.
“Traditionally, funds have been clubbed and allocated, and there has been no demarcation of allocations, especially to aquaculture and animal husbandry. Therefore, the special attention given to livestock and aquaculture is a welcome initiative, ”says Prasanna Manogaran, founder of Aqgromalin, an agritech start-up that focuses on aquaculture.
“But we have to observe the vehicle for the delivery of these funds and how it will reach the last mile,” he adds.
In addition, the government announced an increase in the allocation to the Rural Infrastructure Development Fund from INR 30,000 to INR 40,000 and an increase in the Agricultural Infrastructure and Development Cess (AIDC) on a few points. This is also seen as a positive development for startups in the post-harvest finance segment.
“Increased infrastructure at the farm level will allow the storage of produce by smallholder farmers and FBOs instead of distress selling. This storage can be used for financing. Good storage facilities encourage banks and NBFCs to lend against stored products, ”says Prasanna Rao, CEO and co-founder of Arya, a post-harvest agro-tech company.
In addition, a good infrastructure also encourages more buyers to source from markets close to the farm. This opens up other value chain financing opportunities like invoices and invoice discounts, ”he notes.
Overall, the budget was well received by the agro-fintech startup ecosystem. However, some believe the government should have come up with more SOPs to support and promote startups in the space, given the fact that there are a lot of new startups in the agriculture space that are making a significant contribution to the sector.
“Government support in terms of funding (patient capital) and debt and a favorable policy would have helped startups to develop their activities. Such initiatives would have attracted more investors to the space, which is necessary for the recovery and development of the sector. The government should have allocated funds to the FPOs for capacity building. This is an area where FPOs need a lot of control, ”says Rajeev G. Kaimal, co-founder and managing director of payAgri, a startup that works with aggregate farmers and provides them with commercial and financial links.