AVCF Seminar - Jottings and Thoughts – And Notes - For the Panel discussions – BY PUSA KRISHI - ICAR
By Dinesh K Kapila, CGM (Retd), NABARD, Mentor, Writer. SVP / Chairman Society for the Blind / Institute for the Blind, Chandigarh. Thank You to PUSA KRISHI. Particularly Mani M. Dr Akriti Sharma.
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Now as regards financing. Presently there is a dis
jointness. Its decidedly unequal and asymmetrical when we consider the present
scenario of farmers and the markets, the organized sector and the formal
financial sector. Asymmetry on information, knowledge and markets as also in the
terms of trade, size and access to finance.
My observation - unless the farmer gets a higher share –
reflected in higher incomes – all other factors staying the same - - why should
he associate or even participate. And
this is the test of the AVC – The equity and net gain.
The aim is to be effective and efficient and more
productive in yields including seed development and extension and then along
the chain from inputs to outputs, storage and / or processing and
transportation. But The farmer has to
genuinely feel an integral part of the process, with a say, a genuine role. The
intent and focus should be in setting up partnerships and not just a market -
like a rate contract with confirmed minimum buying quantity and price and
support in the crop diversity and yield enhancement – establish relationships
with a deep commercial understanding.
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Are FPOs and FPCs and Coops one way to integrate value
chains. As an integral part of the agri value chain. So as to facilitate
financing. Certainly it is the preferred
option. But the financier tends to appraise with caution as the risks are not
understood and more important the entire value chain and it’s links could be
opaque or very complex. FPOs are also presently evolving in maturity and in
developing commercial acumen, an understanding of markets, the intricacies of
commercial negotiations, more to the point - balance sheets are still maturing
in a sustainable consistent manner. Hence Financing by banks is a challenge.
NBFCs may finance but then the costs go up and states are not yet ready to
invest in funding vehicles to facilitate investments.
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A AVC certainly creates more awareness and transparency
if it’s a truly collaborative effort and promotes a finer understanding of
risks, trends in pricing, impact of weather, demand at the consumer level,
logistics etc, but the catch word is collaboration.
But we have to create the future, as Peter
Drucker said, the only way to predict
the future is to create it. A supply chain by definition will be
initially challenging financially but if well conceived and handholded with
patience it certainly can grow exponentially. It requires a development
oriented approach with a hands off commercial association alongside. Even the
IT industry which brought in IoT or even the block Chain as basic tools
took time for the results to materialize - lots of industries backed off and
later jumped on the bandwagon. A viable ACF Model which lends itself to
financing at scale will necessarily have to evolve from a developmental
approach coupled with the private
players and the FPCs.
We in this sector have to rework our mindset from a
mindset of scarcity and a orientation of catering to beneficiaries to a mindset
of upgrading farmers to be an integral part of Agri Value Chains and bringing
about a Collaborative supply chain development - farmers have
the skills, and finance provides the means and the organized sector the
technology, inputs, logistics etc . One
point – the larger logistics players seeking to make an entry have to realise
their financing and funding has to be of a lower order, the markets are not
large say in Honey etc.
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Value chain finance offers an opportunity to expand
financing for agriculture, improve efficiency and repayments in financing, and
strengthen or consolidate linkages among participants in value chains. It can
improve quality and efficiency in financing agricultural chains by:
• Identifying the financing needed to
strengthen the chain; • Tailoring financial products to suit the needs of the
participants in the chain; • Reducing financial transaction costs through the
direct discounting of loan payments at the time of product sale; and • Using value chain linkages and knowledge
of the chain to mitigate risks to the chain and its partners.
This is the concept, the effort lies in grounding it effectively. We falter here.
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We know the significance of supply networks and
logistics for the macroeconomy in general and agriculture in particular. We
have had the disrupted supply networks and logistics during the covid 19
pandemic and its subsequent hangover though lately we seem to be coming out of
it. There have been varied Measures taken by Central and State Governments,
Industry Associations, Developmental agencies etc so as to ensure seamless
supply networks and reduce the cost of logistics for a steady income, reduced
volatility in income, output and employment and enhanced profits and
profitability. In case of the Indian industry, the cost of logistics
is about 13 % as stated though contrary views are there but the global best
practice is 8 %. I am trying to find out similar data for agriculture. It
should be higher certainly as rural markets are fragmented.
Roadmap for the future- how to improve things. Apart
from listing various measures, there is a necessity for coordinated and concerted
measures with a sense of urgency because of the magnitude of this issue and its
implications for economic growth, structural transformation, regional balance
and distributive equity.
The Pre Requisites
a. Infrastructure development - Government areas like Roads, irrigation
canals, some private investment - storage facilities, cold chains, irrigation
canals.
b. Use of tech - From IoT devices to cameras/drones for monitoring to
smart farming ( what crops to grow when and what yields to expect), rain
monitoring, disease/pest monitoring.
c. Fund availability- micro loans, crop loans, investment credit, credit
with maybe interest based on crop and yield profile, productivity enhancement
support
d. B 2 B or B to C linkages - how to assist through market info systems,
fair pricing, movement of produce.
e. Train the farmer - invest in teaching them productivity enhancing,
crop yield based farming to diversify, soil and environment learning,
understanding finance and markets. Embed concepts of effective coops and FPCs.
f. A farmer fails with a couple of bad / low yields / prodn - so how to reduce the risk - maybe risk
management through insurance, yield understanding.
G. Potential investors and start ups should know inside out the margins,
markets, trade discounts, terms of trade of every sub sector.
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The Other aspects.
1. Each node of Agri value chain of a particular agri commodity is
important . As such even a minor activity and each stakeholder associated with
that activity must not be ignored . ( A chain is as strong as its weakest link
). As such , NBFC is a better equipped source-link than a formal bank outlet ,
in so far as outreach is concerned.
2. Therefore , capital adequacy norm for financing Agri value chain
should be modified for NBFC by factoring into geographical factors. However,
NPA norms should not be tampered with to accommodate borrowers with a weak
socio economic profile.
3. Each State Government should have it's own Credit Enhancement Fund or
assign it to a central agency like NABARD exclusively for financing Agri value
chain by regulated entities. Its administrative unit should be manned by a
committee of domain experts , not government functionaries. Credit flow and at
an affordable cost.
4. Private Sector companies may be allowed to invest in NBFC without
voting rights but with minimum return guarantee for funding Agri Chain
portfolio of that NBFC.
5. Alternatively SEBI & RBI should together engineer a pooled fund
from corporates for investing in NBFCs for financing Agri Value Chain through an
overseeing committee appointed by GoI in consultation with RBI & SEBI.
There has to be an element of concession
initially to kickstart the process.
6. The lending should be independent of priority sector prescriptions,
that is, finance each link as per its need and for that particular time slot
only. Every aspect cannot be under priority
sector guidelines.
7. Rural Finance is grappling with same old issues as
before…. Only thing that has changed is digitalisation….The transformation of payment systems with UPI and QR has transformed or
led to it in rural India too But there is no UPI movement and moment in lending
space And The agri lending versus rural lending difference and appraisal skills
wide gulf
8. ACF Financing involves not just inputs, production,
grading, packing, processing, but also financing warehousing and sub warehouses
and the related transport and retail outlets and embedding efficiency and
stocking up optimally. Its complex. It has to be locally centred.
9. Can Viable FPCs be a part of the process. From
provision of inputs to outputs - supplying outputs to Processors and Warehouses
and enable Assist farmers in diversification – even agro/food tourisms, value
addition through shorter term crops.
Higher order extension by both the Govt and Pvt sector.
10. We have all the prerequisites,
clear titles, banks, markets, a growing economy with aspirations, corporates,
coops and FPOs, what we lack is putting them together in collaboration for
mutual benefit. And a feel for the farmer, that I have to stress.
11. What works – financing farmers
in consonance with a processor’s target, extension services and need for
inputs, set off with the bank when the proceeds are received. This works.
12. Any technology should
lead bring efficiency and should improve margins with concepts of
sustainability. It should be looked through the prism of user’s perspective. It
should benefit People, Profit and Planet.
13. Do not under rate
the cost of logistics and movement of products and services.
Massive distrust issues with any city
wala ( though they have reasons) - till the farmer learns to trust and grow and
the processor / anchor implicitly agrees to see him as a partner till the
exponential growth starts, always will be a non starter.
A donor agency has to handhold all the
way with grant support – through the initial crucial period.
Examples - Vyas Kamdhenu Bilaspur HP a must see – can google
it
- Hatsun Group
Apple in Kashmir – Saffron – huge price
diffrentials, lack if irrigation, processing, lack if reefer vans
Let’s talk about of use of IoT and BC in AVC having
impact on People( mainly farmers, technology services providers, Retailer or
other market players and consumers). It is already proved that the use of tech
leads to reduced cost of production by lowering input cost to crop production
and efficient crop management the gains to farmers will be the motivating
factor, however, 86 % farmers are in SF/MF
category are not capable to spend on acquiring these technologies. If these
costs to be added in input costs, it will lead to making Indian farming
uncompetitive and may lead to higher cost to final consumers. Farmers will
definitely adopt it if tech costs can be addressed by a third party. This third
party can be a technology service provider who can provide these technology
free of costs to farmers and use the data of improved cropping practices for
its gain. However, it needs a legislative support by making him owner of this
data and using this data for financial gains to manage the cost of technology
by selling data for secondary use for research and development, improving crop
practices through better predictive modellings, earn green/carbon credits against
efficient farm practices etc etc.
One model can be input subsidy/ PLI by Government for
use of BC and IoT in AVC. However, without the efficient management, it will
lead nowhere. So many startup’s are coming in the area of Agriculture sector.
However, without legislative support in terms of data use, transparent land
leasing policies, contract farming, efficient framework of green/carbon credit,
there is still a factor of uncertainties in success. If the introduction of
technology, which will initially brings in additional cost (both caped and
open), will not lead to additional income/savings (Profits) especially to TSPs
and in general to each node of entire value chain up from farmers/ producers to
consumers, it will never get its potential adoption/ .
Technology will bring efficiency and sustainability in
operations at all level and will ultimately lead to climate smart operations.
These technologies will address pricing/coatings both at output and input level
very effectively. There is an urgent need of making AVC technologically driven
for addressing both quality and quantitative issues in Agriculture commodities.
Startup’s have a greater role to play with policy support of Government and
Government led institutions.
AFFORDABILITY of THE CUSTOMER – A Key consideration if
we factor in Technology into costing. Niche markets go only that far. This is a concern even if our
economy is growing. Plus do Agri Value Chains drive in higher farmer/s incomes
and customer affordability – both, while not impacting adversely profitability
of the collaborating links.
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Logistics – The
logistics sector is currently looking for answers to supply chain and logistics
market issues since rural India has an unrealized potential of over $100
billion. Roughly 70% of the country's economic activity is concentrated in
rural areas. The modern Indian village is a good example of a strong,
developing consumer community. Rising crop prices, land sales to developers,
crop rotation, a focus on exports, the return of young people from the
countryside to their hometowns, government initiatives like MNREGA, and higher
wages for farm labourers are providing Indians in rural and small towns with
disposable surpluses. In rural areas, however, there are still a number of
problems with distribution and penetration. Farmers in India only receive
roughly 30% of retail prices, as opposed to the 70% received stated to be by
farmers in industrialised countries. Thus, it is vital to establish a
distribution model that works in rural areas and delivers a competitive
advantage.
According to projections, even in 2050, about
60% of India's population will still be concentrated in rural areas. In the
years 2040 to 1950, 800 million people will reside in rural India, creating the
scale and the markets necessary for the success of supply chains for
commodities. So, it is necessary to transform rural India into a collection
of advanced vibrant activity centers. For this transformation process to be
successful, innovations in every layer - products, processes, business models,
and service models - are essential. Companies need to be reimagined using
high-tech tools that can affordably give services and employment to millions of
rural residents.
The concept of rural logistics
encompasses transport, distribution, storage, material handling, and the
packaging of goods in rural areas, as well as the flow of information and funds
in support of rural production and consumption. Rural logistics encompasses
more than just the outbound flow of agricultural products from rural areas. It
includes the movement of agricultural inputs and consumer products into rural
areas, as well as the movement of light industrial goods produced in villages.
Rural logistics also carries a regional connotation, as it focuses on logistics
activities in administrative regions at or below the county level, among them
county-level cities, autonomous county-level administrative units, townships,
and villages. Rural logistics development is an important part of the
modernization of the agriculture sector.
Rural logistics flows consist of (i) the
highly seasonal and cyclical outbound flows of farm products, (ii) inbound
flows of agricultural inputs that are also seasonal and cyclical, but precede
the outbound flows of farm products by weeks or months; (iii) a steady inbound
flow of consumer staples and durables; and (iv) a steady outbound flow of light
industrial goods. Because the flows are nonsynchronous, and because the
shipments differ in their weights, sizes, and in the nature of
their cargoes, it can be very difficult
to achieve fast vehicle turnaround times, high-load transports, and a reduction
of empty backhauls. Temporary storage facilities, good cargo information
platforms, and intelligent network management are key drivers in balancing the
cargo flows. There is a shortage of electronic
payment systems in rural locations, so rural trade is still based on “cash and
carry.” Few modern trading channels such as online auctions can be found in
rural areas, and farmers have difficulty accessing important information such
as spot market prices and supply-and-demand forecasts. These serious problems
lead to high transportation costs, relentless competitive pressure, and the
inability to scale up or to afford equipment. This leads to poor service
quality and compromises safety and sustainability. overview of recommendations.
The fluctuation in freight charges, though,
does not have a significant impact on the freight volume because it constitutes
only a small portion of the total goods price. If the fluctuation is steady,
the charges are passed down the distribution chain to the consumer. When the
cost fluctuations are short term, companies rearrange production and shipping
schedules to tide over the same. Having said that, in sectors like agriculture
and mining where transportation costs are a significant cost component, freight
volumes have a direct relationship with freight costs.
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Governments and donor agencies do not need to be fully
versed in value chain finance instruments. However, it is important that they
(a) understand the benefits and risks of the different financial instruments
to the various participants within the value chain and (b) ensure that
adequate mechanisms are in place to permit and govern their application.
A number of key innovations have played an important role
in the growing application of AVCF. Process innovation has helped
develop business models, as well as improve contract-farming systems, commodity
exchange linkages and other aspects of value chain operations. Financial
innovations include the growing use of interlinked
supplier-buyer-producer-bank financial arrangements to reduce cost and risk.
Building on these value chain linkages can greatly reduce the need for cash
payments and transactions that increase financing costs. Technological
innovations include the application of information and communication
technologies in mobile banking, mobile technical support, electronic networks,
etc. and improved management information systems to accommodate tailored
financial services – all of which have made AVCF much more feasible. Policy
innovations, which have reoriented extension services towards prioritizing
and strengthening value chains and investing in supportive infrastructure, are
also important.
Supporting innovation is an important role
for development agencies. However, it should not focus undue attention on the
latest technologies and untested ideas but rather on all types of innovation
that reduce costs and risks and improve services.
Recommendations for the design and
implementation of agricultural value chain finance
Have clear development goals
The development goals of the government and/or
development agency must be clear before decisions can be made about the target
group, region or sector, and value chain-specific considerations.
Use a development approach
Seek to maximize returns to society as a whole and to the
priority target groups and regions in particular. Thus, important
considerations in designing value chains and value chain finance interventions
include governance, power relationships among actors in the chain, control and
sustainability of the chain, and the main beneficiaries of the intervention. A
targeted effort is needed to include smallholder producers and poorer
households in integrated value chains.
Identify initiatives with a strong business
case
The underlying industry sector must be competitive if
interventions are to be sustainable. Within a competitive sector or subsector,
the most competitive value chains and niches must be identified. Avoid
interventions where the prospect of
long-term sustainability cannot be demonstrated.
Acquire deep domain knowledge about the
value chain Before considering financial interventions, consider non-financial
alternatives
• Ensuring contacts with microfinance institutions (MFIs)
and other financial institutions.
• Holding workshops, bringing stakeholders together to
investigate whether solutions can be found within ordinary business
relationships (e.g. supplier finance).
• Providing technical assistance to producer
organizations or lead actors in the chain to help them meet the requirements of
viable, sustainable chain operations (including related financial services).
• Facilitation of linkages with exporters (or importers
in target market countries) that would demonstrate the availability of
well-established market outlets to financiers and provide sufficient
value-added potential at the local level.
Avoid crowding out the private sector and
other ongoing initiatives with grants
In a similar vein, donors should be very careful to avoid
distorting financial markets through grant-funded interventions. Donors should
finance only gaps and then only as a temporary, start-up measure.
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EAXAMPLE Remember
the Start up route with Centralised MIS A start up –
30 FPOs with a grant support of three
years but not to the handholding agency. A developmental mode yet commercial in
thought and action. Focus – on single, maximum two product FPOs. Design – by
intent – within the FPO – same product cycle. Input by the start up, extension
by the start up, KVK, Processor, tie up for weather insurance, tie up with the
lead banker. Ready to experiment with
JLGs to supplement bank credit for crop loan. Or enhancing credit support from
banks by a clear demonstration of the value
chain. Own brand name and trying to build a common identity and spirit.
Produce being acquired and transported to processors seamlessly. Factoring in
GOI Schemes for AIF, Food Processing etc. at a later stage, funding from the
processor or the start up. Central MIS Accounting Monitoring
of proceedings etc
Use a step-wise approach
Grant finance may be used in the start-up phase to fund
the development of value chain activities, but thereafter, VCF must move
towards a sustainable form of local debt financing. Ongoing services to chain
actors must be paid out of revenue from value added within the chain if they
are to be sustainable. The project/programme should plan for the transition
from donor support to commercially supported services, with defined milestones
and a clear timeline.
Create conditions for synergy between grant
and debt finance
Consult local financial institutions early in the chain
development process to ensure that the programme invests in promising value
chains and subsectors and with partners that FSPs recognize as creditworthy
Use agricultural value chain finance to
build or strengthen actors’ creditworthiness
It may start with embedded finance (e.g. processors
financing farmers’ operations), enabling actors to develop a track record of
financial responsibility and competitiveness, which in turn opens up
opportunities for external financing. Farmers’ financing by a processing firm
(embedded finance) may be a very good solution in a situation where no external
financing is available. However, financing may be better when separated and
left to specialized financial institutions.
Agricultural value chain finance strategies
and models must be flexible
Promote the development of promising value
chain finance strategies and business models
Support design driven by value chain actors
Creating a successful value chain is an act of
entrepreneurship. While a donor/financier can play a supporting role, a value
chain strategy is more robust if developed by a leading actor within the chain.
In designing and assessing interventions, it is critical to understand where
the initiative originates. In a producer-driven initiative, the main challenge
is to turn ad hoc marketing or a supply chain into a value chain (i.e. to
adjust supply to demand in a new market). In a buyer-driven model, the challenge
is to identify competitive production areas and tailor products to buyers’
needs. Sometimes a facilitator (NGO, government, technical agency) links
producers and buyers in a chain. Whatever the entry point, a vital
characteristic of a promising value chain approach is that a leading chain
actor is prepared to invest time and resources in building relationships
between suppliers (primary producers) and buyers. Sharing information and
building trust are good indicators of mutual interest; without this, VCF should
not be considered.
Value chain actors have easier access to
information about other value chain participants than outsiders do,
particularly the willingness and ability of potential
Preferably start with the inputs side,
margins are higher,, can be negotiated, the produce side is subject to a lot of
variables. This could be a pathway.
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Recommendations for partner selection and
facilitation
Select promising partners
“This is what we produce.” Developing a value chain
requires someone with an entrepreneurial spirit to venture into new products or
crops. Therefore, the success of a VCF strategy hinges on selecting the right
partners. Rather than waiting for partners to apply for funding, a more
proactive approach may be needed in scouting for promising partners and
subsectors. This may require scouting and reconnaissance studies by the donor
prior to partner selection.
Identify an effective lead partner in value
chain finance
An active player in the chain, such as a farmers’
marketing organization or a processing company, can take the lead in
streamlining the value chain, thus providing a degree of chain governance. Such
a party can also play a role by providing embedded financing to suppliers,
and/or establishing a working relationship with an FSP to finance producers and
input suppliers.
Finance efficiently
Costs and risks can be lowered by providing financing
through the strongest actor or actors in the chain. Financing the stronger,
less risky agribusinesses – most often those near the end of the chain – lowers
the financial costs associated with risk protection. Donor agencies and
governments should not demand the direct financing of smallholders if there are
more efficient and effective ways to finance them.
Safeguard both the connections and the
distinction between financial services and value chain development
Financial service providers, be they MFIs, credit
cooperatives or banks, rarely finance all parts of value chains on their own.
And finance alone is often not enough; value chain interventions are often
required to link primary producers (farmers) to high-value markets. This
invariably involves turning a local supply chain into a value chain that meets
the demands of these new markets. While the development and finance aspects are
closely linked, it is prudent to clearly separate the two. The nature of the
two fields of intervention differs, with value chain development focusing on
the creation of appropriate marketing channels and linkages and VCF focusing on
the sustainable provision of financial services.
Work towards a clear separation of roles
Value chain development depends on a range of value chain
actors, facilitators, financial service providers and other support. These
roles should be clearly defined, especially in emerging value chains where
their functions are not yet institutionally separated. If the finance function
is performed by a chain actor, such as a farmers’ marketing cooperative,
attention should be paid to separating them in terms of institutional capacity,
governance and accounting. Another reason for a clear demarcation of roles is
the need to build capacity without threatening the viability of the actors
concerned. An MFI or bank cannot be expected to assume responsibility for
capacity-building and chain organization, even though these interventions are
vital for risk mitigation. These functions are better exercised by a chain
facilitator with a designated budget and intervention programme. A donor or
financier can play a guiding role in this respect.
Facilitate linkages between local financial
institutions and leaders in value chains
Development agencies that are searching for ideas to
promote VCF can facilitate negotiations between leading chain actors and
financial institutions and provide training and technical assistance to both.
Financial institutions that are not yet active in AVCF need help understanding
value chains and how to manage the risks associated with lending to the
agricultural sector.
Involve financiers in risk mitigation
measures
There are many ways in which banks or MFIs can be
involved in risk mitigation measures. In general, if all trade transactions
pass through the financial institution concerned, this will provide real-time
information on chain performance and boost institutional confidence in supporting the chain.
Production risks: These arise from a variety of factors
(input supplies, lacking or late credit, low quality standards, improper
storage and packing, weather risks, diseases, etc.).
Supply risks: This refers to situations where producers
(farmers) may not honour their contractual supply obligations. A commonly
observed problem in contract farming is “side-selling,” which derails the
built-in repayment mechanisms for farm credits.
Finance risks: These relate to the non-repayment of credit
provided to farmers, other producers or other value chain actors. This risk is
borne by the FSP or the chain agent acting as retail-finance provider for
farmers/other actors or by both.
Marketing risks: These relate to the inability to sell on
time, in the right quantities and/or at an acceptable quality standard.
This includes the short- and long-term market situation
and the use or absence of marketing contracts.
Risk mitigation measures
By employing a comprehensive chain approach that looks
beyond the borrower to the health of the chain, the financing institution is
better informed about the capacity of the chain partners and linkages,
including producers’ capacity to ensure adequate supply in terms of
quantity and quality. The financing
agency can also finance and manage financial transactions for various actors in
the chain (e.g. input suppliers, storage facilities, trade) and appropriate
insurance.
Strong producer organizations (farmers’ cooperatives)
and/or group solidarity systems (mutual guarantees based upon savings) provide
some assurance that contracts will be honoured and the risks of “side-selling”
minimized. Reliable supply allows for collateralization through warehouse
receipts in which the FSP becomes a party. Non-repayment of credit to chain
actors can be greatly reduced by incorporating a lead actor considered trustworthy.
Such actors help instill and ensure accountability. Arrangements of this type
are strengthened when a lead actor (co-signatory) is able to absorb risks (e.g.
through its equity capital or member savings) and when contingency arrangements
are in place to deal with unavoidable risks (such as crop failure). Providing
financing
through a tripartite arrangement not only improves the
efficiency of credit delivery, but minimizes the risk of non-performing loans.
Fixed contracts through out the chain help stabilize turnover, especially when
dependence on one market can be avoided. Sales or export agreements are a
strong asset in negotiations with financiers, especially when they are also financing
other agribusinesses within the value chain. In niche markets, such as
fair-trade channels, the buyer relationship can significantly reduce marketing
risks, even for small-producer groups. Product standards and ertification can
also reduce risks.
Recommendations for capacity-building and facilitation
support
Build the capacity of small-scale producers
and other weak partners in the chain to support growth towards maturity in the
value chain
Building the capacity of weaker members of the value
chain may also involve increasing the understanding and capacity of stronger
partners so that they can become chain participants. There are two important
steps in the evolution of a value chain involving smallholder farmers. First,
farmers must be linked effectively to more attractive markets, which requires
their ability to produce to exact product specifications (inclusion barrier).
Second, there must be a transition towards sustainable local finance delivery
(access barrier). A donor can play an important role in facilitating evolution
towards sustainable VCF by supporting the array of interventions needed to
develop the chain. The success of evolution in VCF is measured by the degree to
which it is provided by local MFIs and formal financial
Type of risk
Price risks: These arise from fluctuations in market
prices in the period between, for example, the time a farm contract is signed
and the delivery date. These risks are borne by producers/farmers or the buying
chain actor, depending on the type
of contract.
Climate risks: These relate to shocks produced by weather,
such as droughts or floods. Weather shocks can trap farmers and households in
poverty, but the risk of shocks also limits farmers’ willingness to invest in
measures that might boost their
productivity and improve their economic situation.
Risk mitigation measures
Direct linkages to the end-consumer markets can promote
fair and relatively stable prices. Information technology can be used to
minimize price risks. Contractual arrangements should be transparent to help
the FSP assess risks.
Forward contracting and futures are examples of more
advanced price-stabilization mechanisms in VCF. Agricultural insurance,
including weather index insurance, has shown potential to help smallholders,
FSPs and input suppliers manage low- to medium-frequency covariate risks such
as drought or excess rainfall. Farmers can buy insurance as part of a package
(e.g. credit and other financial services, technology, agricultural
information) or, occasionally, as a stand-alone product.
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A main reason
for poor productivity is the absence of automation in logistics. India is a
country that has a high amount of available labour but struggles for capital
investment. Unorganized players in the sector increasingly choose labour over
technology because it is cheaper compared with investing in a forklift or
hand-held computers. There are delays from the customer end as well,
which can increase the costs. Improvement in turnaround time at the shipper,
warehouses and factories can also help improve cost productivity. For example,
in a trip, approximately 2 days are spent in managing loading and unloading due
to inefficiencies at the recipient’s end. This signifies that about 25%-30% of
the average trip duration can be optimized to improve truck revenue
productivity.
Because the
sector is unorganized and is a technology laggard, there is no consistent way
to maintain supply chain visibility and reduce the wait times. There is also no
consistent effort from the shippers to improve the efficiencies either – in the
turnaround times of trucks during loading / unloading or in quick & timely
payments. They tend to accept this as part of the business, even if the
compensation they receive does not even cover their EMIs.
But if companies
invest in technologies such as warehouse automation, real-time tracking,
data-driven insights to optimize cost and usage of machine learning and AI, it
can help reduce the need for human resources. This, in turn, can optimize cost
and efficiency, across supply chain channels.
One good thing that came out of the pandemic is that it
has accelerated the adoption of technology. The logistics sector is undergoing
a transformation and consolidation, organizing the highly fragmented industry.
Organizations are better prepared for disruptions with new and efficient
protocols at the plants. Companies are adopting digital technologies to be more
resilient and agile in the face of disruptions. Late deliveries, lack of
visibility and control, and manual errors have pushed organizations for technology
adoption like never before.
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The term “value chain finance” refers to the flows of
funds to and among the various links within a value chain. It relates to any or
all of the financial services, products and support services flowing to and/or
through a value chain to address the needs and constraints of those involved in
that chain, be it to obtain financing, or to secure sales, procure products,
reduce risk and/or improve efficiency within the chain. It refers to both
internal and external forms of finance:
• Internal value chain finance is financing that takes
place within the value chain, such as when a supplier provides credit to a
farmer or when a lead firm advances funds to a market intermediary.
• External value chain finance is financing from outside
the chain made possible by value chain relationships and mechanisms; for
example, when a bank issues a loan to a farmer based on a contract with a
trusted buyer or a warehouse receipt from a recognized storage facility.
This definition of value chain finance does not include
conventional agricultural financing from financial institutions such as banks
and credit unions to actors in a chain unless there is a direct link with the
value chain as noted above.
Definition of key terms
• Value chain: The actors (private and public, including
service providers) and the sequence of value-adding activities involved in
bringing a product from production to the end-consumer. In agriculture they can
be thought of as a “farm-to-fork” set of inputs, processes and flows (Miller
and da Silva, 2007).
• Value chain analysis: Assessment of the actors
and factors that influence the performance of an industry and relationships
among participants to identify the main constraints to the increased
efficiency, productivity and competitiveness of an industry and how these
constraints can be overcome (Fries, 2007).
• Value chain finance: Financial services and
products flowing to and/or through value chain participants to address and
alleviate constraints to growth (Fries, 2007).
It should be noted that AVCF is not a development goal,
but rather a means of achieving other social and economic goals. AVCF is a
financial approach and set of financial instruments that can be applied for
agricultural and agribusiness financing. AVCF can facilitate increased
financial access and lower agricultural costs
and financing risks.
Business models
The strategy for developing or strengthening value chains
depends on the business model. The term “business model” in value chains refers
to the way value is added within a network of producers, suppliers and
consumers. The business model includes the drivers, processes and resources of
the entire value chain system, even if the system is composed of multiple
enterprises. The business model concept is linked to business strategy (the
process of business model design) and business operations. If value chain finance
is to be successful, the value chain must be viewed as a single structure, with
the model of this structure providing a framework for further analysis.
A value chain is not an entire sector or subsector. It
involves a specific group of interrelated producers and other actors who supply
a particular end market. The relationship between buyers and sellers can
be described through various types of linkages along a continuum:
• An instant or spot market, where producers come to sell
their commodities and where prices fluctuate; this is the most risky in terms
of setting market price;
• A contract to produce and buy, known more generally as
contract farming; • A long-term, often informal, relationship characterized by
trust or interdependency;
• A capital investment by one of the buyers for the
benefit of the producer, characterized by high levels of producer credibility
and dependence; and
• Full vertical integration.
Category Instrument
-
Product financing • Trader
credit • Input-supplier finance • Marketing and wholesale company finance •
Lead-firm financing
n Receivables financing • Trade-receivables
finance • Factoring • Forfaiting
-
Physical-asset collateralization
• Warehouse receipts finance • Repurchase agreements (repos)
• Financial leasing (lease–purchase) Risk mitigation
products • Insurance • Forward contracts
• Futures Financial enhancements • Securitization
instruments
• Loan guarantees • Joint-venture finance
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The World Bank has ranked
India 38 out of 139 countries in its LPI rankings table for 2023, an
improvement of six places from the ranking of 2018. “The kind of investment
that India is making in both physical and digital infrastructure….all that is
creating an enabling environment where we will start getting good and credible
data, on the basis of which, we can do data-based planning and ultimately data
based policy making as well,” Secretary in the Department for Promotion
of Industry and Internal Trade (DPIIT) said while releasing the framework.
Reducing logistics costs
is one of the top three policy priorities that can transform India into a
manufacturing hub and the report supports this initiative, President of
Confederation of Indian Industry R Dinesh said. And grow the economy.
.
freight charges
have skyrocketed over the past two years. Input prices such as fuel prices and
toll charges as well as shortages in truck availability have further increased
costs.
One of the main
reasons behind these additional costs is the highly fragmented nature of the
industry. The Indian logistics sector operates in an ecosystem where the
majority is made up of small fleet owners and the rest are a non-optimal number
of organized players. Most organized players in the industry restrict
themselves to the metropolitan regions or the special economic zones. The tier
2 and tier 3 cities that generally have the vast majority of fragmented
MSMEs and home and cottage industry players are serviced by local unorganized
logistics providers.
With the
pandemic lockdowns and the issues in the aftermath, there was a demand-supply
mismatch across the country, leading to the fluctuation in freight charges. The
number of trucks available at any given time at any shipping point went down.
The short supply led to an increase in trucking costs, as much as 30% in some
cases. This primarily affected the northeast and southern regions of the
country. Seasonality of agricultural produce and disruptions caused due to
monsoons or cyclones also contributed to cost fluctuation.
The increase in
costs and disruptions affected supply chains across the country, resulting in
production delays, increased overheads, late deliveries, and lost sales.
Manufacturing companies are forced to relook at their supply chains and
transportation partners and make changes to bring stability and resilience to
their operations.
Technology
enablement transforming unorganized logistics
Another way
technology can help the sector is through collaboration. A smaller size
logistics company can integrate their systems with ease with a larger company.
They can even offer their customers real-time visibility, whether related to
inventory or shipments. If this collaboration and sharing of technology can be
done over a large part of the logistics sector, India has the potential to
surge ahead of many other peer economies and quite possibly even developed
economies.
Tech-enabled
transport companies, who are fundamentally technology-driven, and have features
like real-time tracking and high-quality customer service, are finding favor
with more manufacturing companies. Organizations are increasingly favouring
technology-enabled organized players to entrust their transportation with.
Through technology, organizations are able to have better visibility and
control over their operations which in turn results in mitigation of logistics
costs in the long term.
Organized
logistics is the way forward
The Indian
logistics industry is still largely disorganised, which makes it even less
robust when there is a major impact such as a pandemic. Considering the role
logistics plays in the country’s economy, it is imperative that small and even
the tier 2 and tier 3 city players become organised. This ensures the industry
is less fragmented and more resistant to any mitigating factors it may have to
face.
For that, logistics companies will need to embrace
technological solutions to help with becoming a more organised sector, even if
it means collaborating with a bigger player. Government policies will also be
needed to ensure the logistics industry has enough flexibility to manoeuvre
itself out of any crisis it may have to face in the future.
models and technologies that
might be applicable in rural settings. The world economy has undergone a
radical transformation in the last two decades. Fundamentally, the development
of internet services, telephony, jet jets, fax machines, global computers,
television, and satellite broadcasting has resulted in a major reduction in
geographic and cultural distances. This shrinkage of distance has permitted
companies to widen substantially their geographical markets as well as their
supplier sources. India has the potential to supply the globe with food. It has
the arable land, all the seasons for producing all kinds of fruits and
vegetables, and a functioning agribusiness system, albeit it still requires
significant improvement. The supply chain is by far the biggest issue the
Indian agricultural sector is now dealing with. In India, 51% of the land is
cultivable. It features a wide range of meteorological conditions, active river
systems, and different agricultural and social customs. They are all crucial resources
that support development in rural areas. Many agricultural products, including
vegetables, fruits, milk, animal husbandry, and others, are placed among the
top 5 in India. Yet, the income derived from these resources falls short of its
full potential. The food processing sector, despite the growing importance of
processed goods, is still only 1.6% in India, compared to 65-75% in Thailand
and Brazil. The wastage that goes into the Agri-produce is about 30%. Farmers
are unable to obtain profitable rates for their produce due to the low quality
and supply-driven nature of agriculture.
· There are 6.1 lakh villages in rural
India, which covers an area of 3.2 million square kilometers and is home to 700
million people. · In rural India, there is a substantial
market for putting up last-mile distribution networks valued at close to 53
billion US dollars. · Just 42% of the country's total
disposable income is earned by urban Indians, who make up 41% of the middle
class in India. The primary goal of the IRSN (Integrated Rural Supply Chain
Network) is to efficiently develop a service or product, manufacture it, and
then deliver it to clients in the best possible condition more quickly. IRSN
is essentially a strategic alliance of numerous independent businesses that
operate in various locations. It is a crucial fusion of three elements: a
financial network, an IT network, and a logistics network tasked with the
effective processing and transfer of commodities, money, and information. The
logistics network guarantees efficient material flow among partners with the
primary objective of lowering lead times & material handling costs. The IT
network essentially functions as a secure Extranet that facilitates
communication and information integration across the business, potentially
resulting in more data driven and effective business decision-making as well as
more efficient logistics. The third financial network oversees proper
connection and communication between numerous stakeholders, including funding,
credit rating agencies, and insurance companies. This is what may be called an
ideal rural supply-demand-financial chain, but the sad reality is that the
Indian supply chain is now in a very dismal situation.
The level of supply-chain intermediation
is very high, as products from small-scale farmers have to go through brokers
in both the origin and destination wholesale markets just to build economical
shipping lots. Small shipment sizes, along with low rural traffic density,
means that rural transporters are unable to reap enough profits to grow. Due to
poor profit margins, violations of regulations (e.g., illegal overloading) are
common among rural transport operators, creating a situation in which “bad carriers
drive out good carriers Government policies concerning transportation,
commerce, farm supply, and marketing need to be integrated. During
implementation, a leading role should be given to local governments. There
should be improved standards and specifications for commodity circulation,
information platforms, equipment and technology, and business operations
related to agriculture. uninterrupted
cold-chain transport and in-transit temperature-monitoring capabilities. The
role of markets should be strengthened, with private enterprises as the main
driver in creating logistics information platforms and mobile applications. The
government should promote interconnectivity among logistics information
platforms and enterprise information systems to effectively link various
players in the supply chain. strengthen
rural Logistics infrastructure. The government and the private sector should
cooperate in developing logistics parks with comprehensive functions pertaining
to agricultural product circulation, processing, storage, transport, and
distribution. They should also cooperate in the construction of supporting
logistics parks (cargo hubs) with circulation, processing, storage, transport,
and distribution functions. And they should strengthen the overall planning and
construction of logistics parks (cargo hubs) and postal logistics distribution
centers, with the aim of intensively integrating the logistics resources of the
transport and postal sectors. Finally, they should strengthen the
interconnectivity between existing logistics parks and agricultural production
bases, agricultural product wholesale markets and distribution nodes, and
agricultural input distribution centers, as well as postal distribution
centers, in order to upgrade the effectiveness of rural logistics.
The government should support private
sector development of low-cost rural logistics terminals to consolidate
shipments of agricultural products brought in by farmers, and to distribute
consumer goods and nonlocally produced food to the villagers. These rural
logistics centers could serve as nodes connecting village-level roads to
county-level and regional roads. They could also facilitate the aggregation of
farm products into batches large enough to transport cost-effectively
Farm Logistics Cost Reduction
The Government has taken a number of
steps to reduce the distribution logistic cost in farming. The Government has
implemented the policy for reimbursement of freight subsidy for distribution of
subsidized fertilizers through coastal shipping or/and inland waterways. In
order to make timely availability of certified/quality seeds at affordable
price to the farmers of hilly/remote areas of North-Eastern States including
Sikkim, Himachal Pradesh, Jammu & Kashmir, Uttarakhand and hilly areas of
West Bengal, Transport Subsidy on Movement of Seeds is provided under
Sub-Mission on Seeds & Planting Material (SMSP).
As per Union Budget Announcement,
2018-19, Government has announced for development and upgradation of existing
rural haats into Gramin Agricultural Markets (GrAMs). This will provide farmers
facility to make direct sale to consumers and bulk purchasers which will reduce
the logistic cost. The Government is providing support to farmers for
development of agricultural marketing infrastructure in the country through the
scheme of “Agricultural Marketing Infrastructure (AMI)”, which is a sub-scheme
of Integrated Scheme for Agricultural Marketing (ISAM). Under AMI Scheme,
Refrigerated Van as a transport vehicle is eligible for subsidy assistance for
Integrated Value Chain (IVC) projects.
Mission for Integrated Development of
Horticulture (MIDH) provides assistance for development of post harvest
management and marketing infrastructure such as cold storage facilities,
ripening chamber, pack houses, reefer vehicles to farmers to improve marketability
of their produce. Further, in order to develop the infrastructure in farming
sector including that of distribution logistics, the Government is implementing
Rashtriya Krishi Vikas Yojana-Remunerative Approaches for Agriculture and
Allied Sector Rejuvenation (RKVY-RAFTAAR) Scheme.
Government has introduced National
Agriculture Market (e-NAM) scheme wherein trading of agriculture and
horticulture commodities is carried out by transparent price discovery method
for produce of farmers through competitive online bidding system. A logistic
module has been provided on e-NAM platform to provide efficient logistic
facility for inter-mandi and inter-state trade on e-NAM platform.
The Government has formulated and
released model Agricultural Produce and Livestock Contract Farming &
Services (Promotion & Facilitation) Act, 2018 which will facilitate
reduction in supply chain for optimizing logistics.
This information was given in a
written reply by the Union Minister of Agriculture and Farmers Welfare Shri
Narendra Singh Tomar in Rajya Sabha today.
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