Cultivating Growth: Agricultural Finance in India

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Agricultural finance in India is currently facing a crisis of high-interest rates leading to higher debt percentages, lack of insurance financing for risk mitigation and unreported capital flows. Understanding these gaps will lead to the achievement of bigger opportunities and objectives such as increasing farmers’ income, promoting resource efficiency, enhancing business opportunities and enabling food security. 

Actors across the value chain (from input suppliers to exporters/wholesalers) have different financial needs, leading to the emergence of pivotal entry points for formal financial actors. Input suppliers require working capital for R&D, Sales Optimisation, Transportation, and Maintenance. Producers including farmers and FPOs have varying credit needs for market linkage, farm mechanisation and other operations. Aggregators, processors, and distributors require credit for storage, warehousing and distribution and exporters/wholesalers require credit for business registration and optimisation. 

Actors such as private entities, philanthropic funders and the government enable financing mechanisms within the agriculture value chain and also provide financial assistance outside the value chain for startups and other agricultural companies. Private Actors include commercial banks, non-banking financial institutions and fintech startups investing in agricultural finance. Philanthropic funders comprise international foundations, domestic foundations, CSRs, multilaterals and bilaterals, each investing their capital with larger goals of capacity building, sustainability food security and nutrition. The government is involved through a set of techniques, mechanisms and investment in public schemes, policies and programmes. 
Challenges across the value chain can be categorised differently for demand-side value chain players and financial institutions. A major challenge faced by the demand side is high-interest rates from NBFCs and formal financial institutions. This, combined with complex credit application procedures, results in 40% of agricultural households in India still borrowing from informal institutions. To facilitate credit access in India, agricultural finance needs to be made more accessible to small and marginal farmers, and less complex with strong credit delivery mechanisms.

Supply-side challenges are more complex. Philanthropic funders see lower profitability rates in the agriculture sector, making it less attractive for them to fund agricultural operations. Limited access to credit histories of small and marginal farmers also make it less attractive for commercial banks to extend credit. 

Upcoming trends such as blended finance models, tech and innovation in agriculture and increased capital flows towards innovative models have the potential to change the landscape of agricultural finance in India. 

Contributors: Shivangi Sharma, Arushi Bhatt and Eliza Gupta

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