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The Indian agriculture market is estimated to be worth INR 18,367 billion (2019). Currently, India ranks within the world’s five largest producers of over 80% of agricultural items, including many cash crops. Easy availability of credit is a major driver of the Indian agriculture industry. Many farmers and agribusinesses do not have access to timely and suitable credit leading to lower production and productivity. Moreover, a large part of the farming community is trapped in poverty.

Here are 5 ways in which the right credit facilities will empower the agri-community to prosper –

1. Increase in production and productivity

Due to farmers’ financial constraints, they are unable to invest in farm activities. With credit facilities, tie-ups with technology partners and product development partnerships, the agri-ecosystem can implement modern techniques in farming, use high-yielding seeds and implement modern pest control methods and fertilizers. Other activities in the agricultural value chain like storage, manufacturing of inputs and equipment, distribution, and marketing will get a boost too, leading to improvement in quality and quantity of production.

2. Improvement of finances for FPOs

Small farms face constraints like procuring inputs and equipment at reasonable prices, lack of bargaining power, and realising better value for their produce. Small producers can collectively form a Farmer Producer Organisation (FPO). They can utilise scale for better bargaining power and selling power. Agri-finance players provide loans at different stages. They give credit for FPOs’ incubation, expansion of FPOs, and quality improvement and innovation to matured FPOs. This unlocks value for all stakeholders in the agri-community.

3. Promotion of financial inclusion

Financial products and credit processes designed to match the needs of small and marginal farmers will allow them to invest in their farms, improve production, and participate in sales and distribution processes that are favourable to them. Micro-credit of different tenures will help agri-allied labourers and small agricultural processing companies to develop micro-busines activities better. Expanding access to affordable financial products and services for rural populations will lead to their financial inclusion.

4. Engaging youth in agriculture

The fragmented and disorganised nature of activities in the agriculture sector and the seemingly low perception of economic advancement in agriculture keeps the youth away. Innovative credit solutions for agriculture and small businesses will encourage the youth to look at agriculture and related activities in a positive light. With start-up capital, financing for producing and marketing innovative products, and promotion of e-business, they can be encouraged to take up agriculture as a career, and the agri-community will grow.

5. Value chain financing

The agricultural sector has many players in the value chain – producers, agri-input dealers, equipment manufacturers, agri-processing companies, and distributors. Lack of finance to any of these players hurts the agriculture value chain. Agri-finance players who have in-depth knowledge of the business cycle can support them by meeting their financial needs and removing operational obstacles. Timely and accessible financial solutions enable the entire agricultural value chain to be cost-efficient, maximise product value, and become globally competitive.

Expansion of financial access to key stakeholders in the agricultural value chain augments production, enhances productivity, reduces poverty, and triggers a balanced regional development.

The agriculture sector contributes significantly to the Indian economy in terms of revenue and employment. It makes for around 16% of the Indian GDP and 41.49 percent of the workforce employment. But farming and related commercial activities are tough. It requires labour, supplies, land, and equipment. It also faces risks like vagaries of weather, shrinking farm sizes and pest infestation.

Limited finances to manage these factors and mitigate risks, make it even more challenging. Agri-financing provides credit for the smooth functioning of all activities and organisations in the farming sector. But it is important to identify the right agri-financing partner.

Here are some factors to consider before taking an agri-finance loan-

1. Understanding of the Agri Business:

A lending partner who understands the unique challenges of the agri sector can provide the right credit solution. A financier who recognises the risks of the business and suggests steps to manage the risks should be preferred over a lender who is interested in just lending and the repayment. Choose a partner who extends credit in terms of financing, consultation for referrals, partnerships, and fulfilling your business objectives.

2. Flexible repayment options:

Agriculture is dependent on seasons and weather conditions. Check if the finance company offers flexible repayment options. Some options beneficial for agri-businesses and farmers are-

  • Repayment tenure in-line with the harvesting season or when products are ready for sale.
  • Loans with an initial grace period.
  • Flexibility in making full or partial prepayments with zero or minimal penalty.

A lender who is forward-looking and is flexible to provide finances for the evolving needs of an agribusiness will be a good fit in your overall business plan.

3. Innovative financing solutions:

Traditional loan solutions may not always suit farmers and agri-businesses. Agriculture is transforming, which means there are new processes and technology requirements. An agri-finance company that understands the agricultural value chain and the business interests of the stakeholders involved is the key. The focus should be on empowering the agri ecosystem with customised credit solutions.

Some firms provide financing against warehouse receipts. Others offer inbuilt weather-based insurance. Microfinancing against a variety of collateral and credit guarantee schemes are other solutions. Borrowers should study these lines of credit and select the one that is most suitable for their requirements.

4. Easy processing and documentation:

It is advantageous to partner with agri-finance players who understand the business cycle and provide better value in terms of ease of processing and speedy disbursals. The loan eligibility criteria and documentation should be easily manageable. Loan documentation should be transparent so that it elucidates the rights and responsibilities of both parties. It is also crucial to look for a customer support line for queries and service requests.

5. Interest rate:

Compare the interest rate on the loans offered by various financial institutions and choose the one with the most attractive interest rate provided the other terms and conditions of the loan are befitting. A lower interest rate means the cost of the loan is lower and, therefore, a lesser debt burden. But some loans with a lower interest rate may have steeper processing fees or a higher penalty for default. Look for attractive interest rates but do remember to check other expenses.

The agri-financing sector is seeing a paradigm shift with new players entering the market. They aim to simplify the financing journey with solutions based on traditional wisdom and tech-driven insights. It important to choose an agri-financing partner wisely.