Monday, March 2, 2015

Funding Mechanism for Farmer Producer Organizations

Progressing with previous discussion of FPO:Public Policy & Value Chain Development, we are looking into credit accessibility of Farmer Producer Organizations (FPOs). India is successful despite of the government because of the entrepreneurship,energy and ingenuity of the Indian people. Our smallholder farmers not as marginal recipients of charity instead as customer entrepreneurs. Even with the linking of small and marginal farmers to FPOs, the question of reliable and affordable sources of financing for capital requirement of Infrastructure and operation always lingers for the farmers. There is always issue of access to credit in agrarian sector. There are many donor agencies like International foundations, Domestic Foundations, Business related CSR and government schemes for financing credit to FPOs. But search for such donors with big pocket for solving problem is an elusive and unsustainable way.

Formal financial institutions (FIs) are wary of lending to these bodies, largely due to the absence of collective land titles (for collateralization) and credit tool for customer assessment. For a nascent FPO, FI’s require collateral and three year balance sheets. That sums up tragedy of the situation. There are proposed funds coming up for the support of FPOs. I am enlisting them as per my knowledge. But the author is not legally liable with the information provided here. This is collected through various online sources and workshops.


1. Equity Guarantee Fund- The Equity Grant Fund enables eligible FPOs to receive a grant equivalent in amount to the equity contribution of their shareholder members in the FPO, thus enhancing the overall capital base of the FPO. The Scheme shall address eligible FPOs, which have paid up capital not exceeding Rs. 30 lakh as on the date of application. Equity Grant shall be a cash infusion equivalent to the amount of shareholder equity in the FPO subject to a cap of Rs. 10 lakh per FPO.

2. Sectoral Fund- Under NRLM, there is provision that states agencies (SRLM) develop partnerships with major government programmes and build synergies to address different dimensions of poverty and deprivation. Every Producer Organization will receive Sectoral Fund (SF) up to Rs. 20 Lac, in two installments, to invest in value chain development for livelihood promotion. The first installment of SF will be given to the PO within two months of its formation (mini. 100 members) with minimum paperwork. This installment can be up to Rs. 5 Lac. On completion of the establishment phase, the PO will submit a Business Strategy Report to RRLP together with a requisition for release of next installment. The second installment can go up to a maximum of Rs. 15 lac.

Loan Product:

1. With Collateral- NABARD has created a dedicated corpus to provide loans to producer organizations. Yet, NABARD demands FPO to offer collateral (15%of  loan amount) at the interest rate of 10.5~ 11.5 %. There is clear impact on collateral offered over the interest rate. Since, most of FPOs are formed by small and marginal farmers, they lack collateral.

2. Without Collateral- Interest computation on daily principal outstanding of drawn amount. Flexibility to use the funds only when required thereby leading to huge savings on interest cost of (13.5-14.5) %. The agency (mostly NBFC) will take 1% upfront processing fee and SFAC will charge 0.85% of guarantor fees. There is NO collateral required for the loan. Though setting up of Credit Guarantee Fund, SFAC has enabled few credit institutions to provide collateral free credit to FPOs by minimizing their lending risks in respect of loans not exceeding Rs. 100.00 lakhs. The lending institution shall be bound to comply with such directions as SFAC may deem fit to issue from time to time, for facilitating recoveries of the guaranteed account, or safeguarding its interest as a guarantor.

3. Warehouse Receipt Finance- It seems a feasible option when the working capital crunch is over. FPO is targeting in commodities like Soya bean, Cotton (including bales), Mustard, Maize, Wheat, Sugar, Paddy, Cashew, Castor, Chilli and Turmeric only.

All the grant and loan appraisal process is designed with various parameters depending on policies of FI's. They all focus on high representation of women in membership as well as in Board of Directors(BoDs). Hence, a small step in the direction of empowerment of women is taken. Thus enabling women participation increases chance of wealth ownership and leadership. Structural discrimination of Women, Dalits, and Adivasis can be prevented by giving voices in such forum linking business with social change.

It is right time for financial institutions to come up with innovative financial products targeted at FPOs. On banking parameters if not adopted, FPO policy can't be scaled up. The transformation of FPO can only happen in phases from Grants, Soft loans and then linkage to mainstream banking institutions. Banking institutions and the rural community have a lot of ground to cover for implementing FPO policy on the ground. Even with so much of changing policies, FPO model deserve tax holidays in initial years to build surplus and reserves. Taxation policy of FPO (30%), insurance and, license issues are more complex topics to be discussed in upcoming blog posts.

Sources ---
1) Equity Grant and Credit Guarantee Fund Scheme For Farmer Producer Companies
2) Financing and supporting Producer Organisations
3) Project Implementation Plan(PIP) Manual of Rajasthan Grameen Ajeevika Vikas Parishad (RGAVP)

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This Blog is meant purely as a personal diary of a rural manager in making. It exists to record information, experiences and opinions about various issues encountered in the line of duty. Any person, institution and organization mentioned here doesn't assume any liability for its contents. This is not a deliberate attempt to defame anyone. And if you have actually read all that is written in the blog and aren't mad at me, then thanks for your time and patience !


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