2014 GAP Report® – Agricultural Financial Services

Indian agriculture’s excellent growth potential is imperiled by an underdeveloped financial infrastructure. Leading financial firms are working with agricultural businesses to develop a more robust lineup of financing options and risk management instruments for producers, processors and others businesses along the value chain.

NON-BANKING FINANCING COLLABORATION

While production loans for Indian farmers have picked up in recent years, they still meet only a fraction of the need. Loans for processing equipment and other capital investments continue to be scarce. In response, some input dealers and offtake buyers provide financing to farmers through an entire production cycle, or give inputs and technical assistance in lieu of financing. An emerging solution for stimulating expansion throughout the agricultural value chain is for nonbank entities to attract equity investors and work with farmers and agribusiness in developing special financial packages.

In 2011, India’s first nonbank finance company was incorporated in Mumbai. Sustainable Agro- commercial Finance Ltd. (SAFL) is supported by Jain Irrigation Systems Limited (JISL) and the International Finance Corporation (IFC). It was established to provide a variety of financing options to small farmers and to promote growth throughout the value chain. All of the loans have socio-economic development objectives and some are designed specifically to reduce the environmental footprint of agriculture by advancing sustainable practices.173

SAFL provides small business loans to farmers to meet financing needs for up to one year at a time. Farmers can receive loans for micro-irrigation equipment, which are not limited to products manufactured by JISL systems, and the payment term is up to five years. Third party financing is also available in cases where a farmer has a contract to sell to a processor or trader and the loan can be provided through the buyer rather than directly to the farmer.

For those who have a strong credit history, larger agricultural project loans are offered for a maximum period of five years to finance expansion of operations and income. Examples include small dairy sheds, greenhouses, nurseries, small farm equipment, biogas generators, cattle and fruit orchards. To encourage investment in renewable energy, loans of up to five years are also available for procurement and installation of solar panels for hot water systems, water pumps and lighting.

Expansion of SAFL and the establishment of more agribusiness-financial firm collaborations could fuel a new agricultural revolution for economic growth.

HELPING INDIAN FARMERS MANAGE RISK

Severe threats from drought, insufficient monsoon rain, heavy rains or pests can destroy crops and livestock and ruin a farmer’s livelihood. Agricultural risk management plays a crucial role as part of a broad strategy to provide food, preserve jobs and enable farm families to stay involved in agriculture and land management. Failure to manage risk can result in low farm productivity or neglect to develop land that could be useful in agricultural production.

Weather risks pose the most severe shocks to agricultural producers and can result in catastrophic losses for entire regions and communities. More than half of Indians174 are employed in agriculture, but agricultural insurance penetration (defined as agricultural insurance premiums as a percentage of agricultural value added) is estimated at only 0.19 percent, leaving most farmers exposed to significant risk.175

The historical evidence shows that, on a global basis, the most effective agricultural risk management strategies are both market-based and government-supported and include elements of risk prevention, risk-control and financing.176 Traditional indemnity insurance used in developed country markets to protect agricultural producers in case of weather-related loss is more difficult and costly to administer in developing country contexts where there are many smallholder farmers, little recorded information about a farmers’ production practices and yields, and limited penetration of formal financial services into rural areas.

The Government of India’s crop insurance program (National Agricultural Insurance Scheme, or NAIS), which was established in the 1970s, strained government budgets and did not settle claims quickly. In 2010, India partnered with private sector insurers and reinsurers to pilot a modified crop insurance program (MNAIS), which will generate more benefits to farmers by extending coverage to both sowing/planting risk and post- harvest losses resulting from natural calamities, pests and disease. It also increases the minimum indemnity level from 60 percent to 80 and 90 percent, based on more precise calculations of threshold yield.

Another innovative insurance program is the Weather Based Crop Insurance Scheme (WBCIS). Weather insurance was launched in 2003 as an innovative risk management tool for Indian agriculture. The government provided subsidies to make WBCIS cost effective and gave the market a boost.

Index-Based Insurance is an approach tailored for developing country farmers and businesses in the agricultural value chain. In India, government owned insurer Agriculture Insurance Company of India Limited (AICI) and about nine other private insurers provide two types of index-based crop insurance products, and are reinsured by international reinsurers like Swiss Re: area-yield insurance (NAIS and MNAIS), which bases a payout on the shortfall between a current yield relative to an average historical yield, and weather- based insurance (WBCIS), which bases a payout on triggers — such as high temperatures, low temperatures or excess, deficit rainfall — that create catastrophic crop loss. These products rely on geographically-tied data for weather and prices in order to determine accurately the nature of the losses.

The use of financial institutions and banks is also an important part of the insurance system, as insurance companies operate in partnership with banks to collect premiums and to pay out for losses. A major challenge in scaling up these programs lies in the large number of rural farmers across India who do not participate in formal banking systems, estimated at approximately 60 percent of the population.177 These unbanked farmers are hard to reach with a number of services that can help them improve productivity, access lower-cost loans and participate in risk management programs.

For farmers who participate in index-insurance programs, an approach is being piloted that combines timely risk warning messages and advice via mobile phones in advance of severe weather events.


TABLE OF CONTENTS

The Global Agricultural Imperative

India at a Crossroads

Producing More with Less

The Global Agricultural Productivity (GAP) IndexTM

Measuring Agricultural Productivity Growth in India

Policies that Promote Sustainable Food & Agricultural Systems

India’s Agricultural Value Chain

Cultivating Prosperity through Stronger Agricultural Value Chains

Tailoring Technologies for All Farmers

Public-Private Partnerships Make Farming Profitable for Low-Income Communities

Expanding the Roles, Options and Incomes of Women in Agriculture

Research and Collaboration Improve Productivity and Economic Growth

The Poultry Revolution Picks up Pace

The New White Revolution

Aquaculture — The Blue Revolution

Boosting Micronutrient Intake

Water Use Efficiency and Management

From Field to Fork: Strengthening Value Chains to Boost Productivity and Reduce Food Loss

Agricultural Financial Services

Endnotes