Microfinance and technological innovations in Agri startups. A Sharing of Thoughts on the Possibilities.

 Microfinance and technological innovations in Agri startups. A Sharing of Thoughts on the Possibilities.

Dinesh K Kapila

(Published in the BIRD Journal, The Microfinance Review, Volume XVII, Number 1 (January – June 2025 Issue)

Theme – Microfinance by its very design offers flexibility and can be utilized for a broad range of possibilities).

Our object in the construction of the State is the greatest happiness of the whole, and not that of any one class. So said Plato centuries ago. And hence, the philosophical underpinnings of developmental initiatives including microfinance. And hence, the thought of reaching... Out to all segments of society for hassle free credit. This is a bit of a complex issue as there is so much happening in this sector already.  We have to calibrate our thoughts to study the opportunities or areas which can be tapped for a closer association or the mode to do so. Here I am sharing a series of thoughts so to say on this sector, be it the SHG BLP Mode or the recourse through MFIs. This has largely crystallised from an online interaction by me with practitioners at a major institution.    

While in service, I would often say, or maybe feel, that while we review a large amount of data at the various formal fora as regards lending by banks, cooperatives,    commercial, RRBs, small finance banks - but there is a gap. The data of lending by MFIs or by NBFCs to the bottom of the pyramid. There are even listed NBFCs which cater to this segment as a separate vertical alongside other verticals. That is the gap. They have a considerable stake in the game now, especially on the lending side. If I remember my data approximately, If Haryana had rupees hundred odd crore disbursed by banks under the SHG Bank Linkage Program, the outstanding of MFIs was about rupees eleven hundred crore. And a similar situation, if I remember, was there in Punjab too. This was so advised by the then Northern Region Vice President of the concerned Association. We therefore need to start with the realization of this fact and then twenty plus years ago, as regard SRTOs, I remember the market was essentially captured by the NBFCs rather than by the banks. Again that data eluded us largely.   

Over the last twenty odd years, the NBFCs have emerged as a major source of lending in rural areas due to a better outreach than even RRBs and their lower  cost model of functioning. Presently, many keen observors opine  that about 20% of rural credit needs are met by NBFCs with good technological support, close linkages with the rural clientele and infrastructure.
PSLCs were introduced to support such banks which could not meet PSL targets and were forced to place low-cost funds with NABARD and SIDBI then.

Now if we take up microfinance and we are looking at say the agriculture sector exclusively, can it be extending credit to beekeepers. It could be lending to small entrepreneurs engaged in small services for agriculture. Requiring small doses of credit, regularly.  The essentiality is to look at it from that point of view, the activity, its scale, its potential, the demand and viability. And staying with this thought, in Himachal Pradesh, I would notice that the gap exists in holdings versus PM Kisan beneficiaries and KCCs issued. This gap is there. It's sort of consistently constant. Land holdings are small and say, a segment of the farmers who are owners of small land holdings – holdings are measured in bighas there - would get access to just about Rs. 25, 000 to Rs. 50,000 maximum as per the scale of finance as bank credit for crop loans. The average would be around Rs 25000/-. This is considered an insufficient or not worthy of the effort to obtain funding through the KCCs by some farmers and then some Bankers in the field at times also view it from this prism.

Can microfinance leverage technology to reach out to these scattered holdings at an affordable cost? The same status, sort of, prevails in Kashmir and other hill states. This is food for thought for us. What about vegetable farmers or small farmers in Punjab leasing in small parcels of land for an additional income, but unable to raise the required funding? Can the regularity of the process supplant the need for formal records, including for land.

Can microfinance consider potential here? Is there a potential? Technology plus agreements with banks (as their extension) plus extension for technological inputs plus at an affordable cost could be a pathway. These are the thoughts I would like to share. After all, we are identifying the gaps and then how to bridge them here. We can stay on the traditional modes or regions or segments or can start exploring more such areas. Just to add, tenant and marginal farmers are another vital segment to tap, along with extension if possible, but the pricing of the credit is also very important.

Now, another thought, agriculture expansion by itself is not enough to conquer poverty. So let us think, agriculture plus rural non farm sector would be the runway with Agritech cum Fintech as the productivity enhancer. Privately held and competitive agriculture and a vibrant agribusiness are both to fire in tandem for economic progress. Family farms and non farm enterprises provide ample remunerative opportunities and employment opportunities for men and women both. I would say for microfinance, this is an ideal opportunity. For both the segments, treating them as a whole and tapping the segment, which would not only be targeting the just at the bottom only, maybe a scale above that, and facilitate their upward mobility. Technology, has to be logically integrated into this approach and platform.

When we say microcredit or microfinance, I trust all know the definition,  purpose, intent and the regulations and a good reading of the SHG concept and the JLG concept would be in order. It's necessary to understand the evolution and the mode and then the emergence of MFIs. Any practitioner, and especially a young entrant, must absorb intrinsically the thought and the process which led to the institutionalization of MFIs, as also the SHG Bank Linkage Program.

We tend to get focused on targets and get locked into the process. But we must know the background, the history, and how it has led up to this point. Microfinance is people first. Always. Even the technology one has to innerstand, I would say, not understand, but innerstand this. It's people first, who are off the socio economic charts largely, being grouped together for access to hassle free credit. And do not equate it with poverty elevation per se. But access to credit first and the inculcation of the habit of savings. Absorb this spirit and understand empowerment along with dignity in lending and recovery, this is very important. Practitioners must take delight in the process of empowerment, it motivates and encourages. When I would meet members of SHG in a patriarchal setting and observe their success and delight, the self confidence itself was a revelation. The same goes for young artisans engaged in varied trades, the process is the same.   

Now we can explore agripreneurship through microfinance and technology and startups for socioeconomic development. We have climate change, reduced quality of water, nutrient deficiency, carbon deficiency, farm energy requirements, lack of biodiversity, fragmenting holdings, changing trade dynamics, et cetera. These are quite well known to us.

Agri startups with their targeted resources and services can achieve commercial success in a win win situation aligned with the MFIs. Add extension and handholding to financial options exercised by the MFIs. And it can lead to higher productivity and higher income. Skilled manpower of the MFIs, along with the skilled manpower of agri startups, and the power of technology, accessed through digitization, can they address the missing links in the agri value chain?  This is one area which we have to carefully consider. For purveying products, technology, and services to agripreneurs, farmers, and consumers. The area of service, for example, commercial accounting systems through service providers in rural areas and even in semi urban areas remains a gap. Can we tap that with microfinance and its reach, which extends to a lot of such places and regions?

Then incubation centers and entrepreneurship programs, be it, drones, beekeeping, polyhouses, equipment for precision farming, growing high value vegetables  and the like. At times, in my view mostly, the requirements for credit may be small to start with of the ideation equipped entrepreneurs, this is one sector. The would be entrepreneurs at the incubation centers or the would be entrepreneurs need capital to build up and experiment and then scale up through other sources. This would be in tandem with other agencies and funders but seems an area to explore.

Could there be a microfinance opportunity here? Could the incubation centers be tapped accordingly? Explored at least. And more important, there are many Centers of Excellence opened up by various State Governments in many states and even the GOI. I know at least this is there in Haryana, Punjab, and some other states. Can the trainees at such centers be interacted with for opportunities for microfinance plus agri tech? This can be thought of. The requirements per head could be on the lower side but they could be grouped up too. Even in service, I have honestly advised small entrepreneurs / agripreneurs at Centres of Excellence to approach MFIs and NBFCs for credit, as normally it would be sanctioned and disbursed as processing was faster.

FPOs are another opportunity for an entry point. For supplementing credit needs, if any, as the FPO scales up and their members specifically may need credit, access to E-markets. and the NCDEX, etc. Can startups, incubation centers, accelerators, microfinance companies all join up and align their goals with the government and its agencies for the areas or sectors as above or for facilitating access to technology for smarter and more scientific farming and rural enterprises. This could be in Climate Change, insurance per se in the broader sense, cleantech and storage, logistics, cold chains.  

Higher productivity is the objective. So these are some areas which can be thought of as we go along. There is a serious line of thought which says that though the adoption of agrotech is a little limited as of now, this will only increase and maybe cover 50 percent of farmers By 2030 or 2035. Such farmers and rural enterprises  would be comfortable with agritech or farmtech or low cost tech solutions and therefore the costing,  adoption, digitisation and access to curated content and personalized solutions may need to evolve, can micro finance align and coordinate with agri startups along this thought process.

Important, I stress this, we have to remember, farmers and ruralites need a physical touch, a comfort level even while we remain focused on technology and its application. Trust has to be built. MFIs have a presence at the local level. Can a partnership evolve with agri startups focused around this? I normally advise agri startups that they must have a physical backup or rather presence on the ground, even if it's satellite based crop insurance. Have a person on the ground to guide and coordinate. He / she may not make financial commitments. This matters. Messages on smartphone, short and crisp,  created to be just the screen size or just a scroll down on cropping patterns, weather patterns, productivity, best practices, success stories, advisories can be coordinated, readable and in the local language and on a real time basis. This can be the add on.

And why only micro finance. It has to be micro insurance and insurance also. It's up to the FPOs and agri startups, as entry points in the beginning, but this would be a logical pathway, MFIs have the reach to push this. Insurance or micro insurance, and even I would say, Suraksha Bima Yojana, JJ Bima Yojna, Atal Pension Yojana. need to be inculcated in the rural areas.

Agritech, plus FinTech, plus Rural Tech. There is a sort of blurring of boundaries per se. Common to all, Before any venture, We have to conduct extensive pilots across different crop settings, climatic zones, and harvesting seasons to test them and to build its relevance. Also local moneylenders. I have blogged on one such person called Atma Ram. Kindly see at https://dkkviews.blogspot.com. See how they function and build linkages. Meet up with agri universities too and large corporations – they need a route to reach out too and in case of corporates, even the FMCG companies.

Corporates or Agritech exploring for markets, care and caution is the key. We know the blowback which happened in the farm laws case. We have to reach out and calibrate each step and initiative by being cautious about not raising expectations, which cannot be met. And at the same time, assuring that productivity parameters would increase due to the pilot already taken up and its grounding after testing.

The technological possibilities we have discussed. These are the areas where MFIs and Agritech can combine, provided the cost of the technology is lowered with innovation to an extent that the small and marginal farmers can also adopt the same or maybe rent the same. The cost is important, innovation must centre around the cost aspect, say, precision farming having sensors which are as effective as in the developed nations but at a much reduced cost We will remain a price sensitive market. This is the fact of the matter.   

And then it's not all technology, traceability, carbon credits, precision farming, we need plain simple interventions. In processes and business models to and if we have to go the technological way, which we have to, And have the reach even physically to build a comfort with technology.

Now coming back to the SHG BLP and JLGs and the banking aspect. The SHG BLP ultimately had one aspect where it faltered at times, the tri junction of having an NGO plus a bank plus the group, which caused a coordination issue and then the dependency syndrome was there. The SHG business is also a small component as compared to the total branch business at many commercial banks, especially say in Punjab, Haryana. So the incentive to the branch manager was also not to the extent as envisaged. for lending to SHGs. It continues and at a consistent pace but the degree of impact varies. Then the  deeply ingrained patriarchy in northwest India. And these are the areas which became barriers.

A very relevant program taken up across India was the digitization of SHGs by NABARD. It used technology successfully and involved a considerable amount of data collection and training. A sidelight and learning point, I found the smartphones a barrier. If the wife gave the number of the husband, as not all have smartphones or feature phones, the savings and transactions were known to the husband. Many a times, the husbands really did not know when  everything was written only in a register kept with the group leader about the actual transactions, savings, etc. This loss of privacy could be tough in a patriarchy. Plus again, the dependency syndrome that in case we withdrew, the movement would die out or the updating of records would become a problem. The willingness to own the programme is somewhat a gray area. Then there were also field results, also had field realities also intervened in terms of updating of data, plus the movement of animators to the various villages as groups could be scattered and also members, non updating of data registers, and what was there actually on the mobile being recorded, and sometimes apathy at banks.

I'm informing this just to bring out that when MFI step in, these are the areas which have to be taken care of if they start aligning with agri startups and also bring in the extension element to bring about technological innovation.

One important aspect for all MFI practitioners and agri tech practitioners, when they explore areas for innovation and taking up, they must read up on government programs, budgetary allocations, central and state schemes. This is a must. This will also indicate the direction of investments to be undertaken and how to undertake them and whether any innovation is possible in that sector and also how to dovetail their own efforts and initiatives with the government programs.

Coming to one more point, lending, payments, banking, taxation, fintechs are revolutionizing financial inclusion and digital financial adoption. They have the ability to reach the marginalized markets at the grassroots level. They have a customer first approach. Now, this part of the fintech, and the microfinance, and the agritech, if this process can be integrated, of working closely and aligning the goals closely, and also working as appropriate with public and private sector banks, it can be a game changer provided costs are lowered. This could bring about a considerable increase in credit velocity in rural areas and the non farm sector. Fintechs are undertaking innovations through the smartphones and QR codes, voice code, voice modes, etc. But what is required is, again, pricing model has to be such that It hastens the pace of adoption and the acceptance of the mode of transactions and the comfort level.

As regards FPOs, the issues are, Fractured supply lines, optimum capacity utilization, benefits of technology, improving processes in the field. We need to enhance technology and enhance output by technology. It reduces in turn the input cost, enhances the profits of farmers. The FPOs present an opportunity to reach out, provided the FPO itself is working on the lines as envisaged under the guidelines. Extension by digital tools and connectivity and the realization that digital technology has injected transparency has to be brought out across FPOs.

At one major start up, I advised that centralizing accounts of FPOs, their maintenance, updating and auditing, even planning / coordinating the agenda and minutes would focusing on would free up time and resources for better supply of inputs, extension, buy back of the produce and tie ups with processors and warehouses. Credit in small doses was also factored in. Recovery was by a lien on the value of the produce sold to processors. As the Government moves to strengthen PACS, maybe this can be explored  through that mode too. Another start up used a KCC Based model, where the loans disbursed to individuals were offset by the payouts at sales in real time.     

 And lower the cost of technology, to reiterate, the better would be the adaption, adoption and the adapting ability of the small and marginal farmer. Digital technology can be upstream inputs and processes, and it can be post harvest and value addition downstream. We have the PMJDY, the Jan Dhan Yojana, uh, UPI, etc. All these are driving innovation, but still there is a hesitancy as regards technological adoption, primarily due to the cost factor. This is one factor which we have to think of.

Is it the cost of credit and the cost of technology and its adoption? These are two fundamental concerns to sum up. And is credit for consumption purposes a fit. Some start ups and fintechs backed by investors have experimented with this but at a small scale. Microfinance can be used for a variety of purposes starting or expanding a business to buy inputs or to pay for a lease for a small farm expanding a business to repairing houses or for health care.

But in case we can have a fruitful association as envisaged, it can lead to higher productivity and much higher social economic development in the rural areas. Which would of course have a greater impact on the nation's economy as a whole.

Dinesh K Kapila, Chief General Manager (Retd), NABARD.

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