A proper mix of instruments, risks and rewards

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A proper mix of instruments, risks and rewards
FINANCIAL SERVICES TO POOR FARMERS
By N V Ramana Group CEO, BASIX
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Requirement of a range of Financial Services

• Lets talk beyond credit
• Crop insurance
• Weather Insurance
• Future Price Option Price Hedging
• Insurance needs for price difference between
  contractual price market price ( for Farmers
  and Processors)
• Leasing for farm equipments
• Money transfer
• Savings

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Risks in Financing Agriculture

• High dependence on weather
• Low and unstable crop yields
• Difficulty in selling harvests
• Price fluctuations
• Drought, Floods, Diseases

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CONSTRAINTS IN FINANCING Bankers point of view

• Lack of ease of addressing issues that affect a
  common man
• Banks have always feared the uncertainty about
  the repayment capacity of poor, whose incomes are
  subject to numerous vulnerabilities
• Banks are not interested to provide small farmers
  with crop cultivation loans as they cannot
  mortgage their land
• High per unit cost of delivering financial
  services to the poor
• Small loan sizes
• The high frequency of transactions
• The large geographical spread
• The heterogeneity of borrowers, and
• Lack of knowledge and awareness of the products
  and services
• In the absence of reliable credit information and
  costly monitoring, banks fear a high default risk.

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MFI CONSTRAINTS IN FINANCING

• Domain of banking sector- RRB/CCB
• Cross subsidy of interest rate
• High risk perception
• Inappropriate products and procedures
• Inadequate outreach of distribution channels
• Distorted financial behaviour among target group

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CONSTRAINTS IN FINANCING CUSTOMER POINT OF VIEW

• In many Banks/FIs, there is
• Borrower-unfriendly products and procedures,
• Inflexibility
• High transaction costs
• numerous visits to bank
• long wait of time
• payment of extra-legal money for the approval of
  loan
• Time-consuming process
• The requirement of a minimum balance and charges
  levied, although accompanied by a number of free
  facilities, deter a sizeable section of
  population from opening/maintaining bank accounts.

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Challenges.

• Needs aggregation of a large number of customers
  for reducing transaction costs
• Inadequacy of infrastructure influencing the
  credit absorption capacity
• Need for innovations in products and delivery
  processes to make access convenient and
  affordable
• Identification and adoption of appropriate
  technology
• Repeated pleas for loan waiver

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Redefining the Strategy!

• Creating Sustainable Livelihoods.
• Reducing Costs for borrowers
• Offering ATM-enabled credit cards convertible to
  smart cards with a view to reduce transaction
  costs and improve customer service.
• The use of inappropriate financial products
  inhibits marginal farmers economic efforts, and
  can lead to over-indebtedness.
• Money for productive purposes is not just enough.
• Need of wider range of services and more flexible
  contracts.
• Cash flow-based lending.
• Investments in technology solutions and product
  development is more effective than subsidising
  interest rates.
• Introduction of negotiable warehousing receipt
  system.
• Appropriate business facilitator and business
  correspondent models for increasing the outreach.

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Livelihood aspects of Microfinance

• Beyond Microcredit Insurance, Savings, Money
  transfers, Commodity derivatives.
• Process of social intermediation and building
  social capital.
• A solution for coming out of poverty with
  dignity.
• A necessary but not a sufficient condition for
  livelihood promotion.

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Crop lending to Livelihood Financing

• Repayments are not linked to loan use.
• Saving mechanisms provided.
• Loan terms and conditions are adjusted to
  accommodate cyclical cash flows and bulky
  investments.
• To suit diversified portfolio of livelihoods.
• Membership-based organisations can facilitate
  rural access to financial services and be viable
  in remote areas.
• Contractual agreements reduce price risks,
  enhance production quality and help guarantee
  repayments.
• Area-based index insurance can protect against
• the risks of agricultural lending.

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One way forward - BASIX initiatives and experience

• Providing a package of Livelihood Services
  (including Financial Agri Development Services)
• Utilization of group-specific lending
  methodologies to increase repayments
• Portfolio limits and standard operating
  procedures that mitigate BASIXs aggregate risk
• Recovery as per cash flow
• Insuring customers risks to reduce BASIXs own
  risk
• Collaborative Polygon
• Producers Groups for mutual gains
• Thereby attracting a greater amount of mainstream
  capital and human resources into the neglected
  sector

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Inputs for facilitating penetration of Financial
Services

• Active Banking infrastructure
• Intermediation by Community Based Organisations
  and Micro Finance Institutions
• Leveraging Information technology for
• Improving efficiency
• Reducing transaction costs and
• Delivering multiple services
• E.g. e-Sagu, STEMS

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STEMS not Branches!

• In the existing model we did business through
• Branches (Units).
• Now, we propose to do it through
• STEMS Single Terminal Enabling Multiple
  Services
• Bundling of products, thereby reducing Cost of
  delivery of each service.
• A wider network for livelihood promotion
  providing with integration of micro-finance,
  business development and institutional
  development services, using the information and
  communication technology extensively.

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BASIX AS A NEUTRAL AGGREGATOR IN THE COTTON
VALUE CHAIN
BASIX
BANK
Warehouse Receipt

• LFS
• Credit,Savings,Insurance

Loan

• Ag/BDS
• Seed treatment, Border crops, Trap crops and
  erecting bird perches in the field, Pheromone
  traps, Tricho cards, Use of Neem oil, Use of NPV,
  Need based sprayings

Farmers
NCMSL Godowns
Ginning
Formed into Producer group/MACS
Farmers
Farmers

• IDS
• Formation and Strengthening of producer Groups

Pressing unit- Conversion to Bales
Lint
MCX Trading Platform
Assured Price
Seeds, Fertilisers, Pesticides
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SUMMING UP

• Requires an orchestration of different types and
  sources of finance
• Bundling up of products for reduction in costs to
  customer
• Financial services as one part of a holistic
  approach in which all aspects of sustainable
  livelihood promotion are integrated and
  complement one another.

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THANK YOU
nvramana_at_basixindia.com
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Role of MFIs promoting Livelihoods

• Community organisation.
• Mass mobilization.
• Linking the community institutions with
  Crop-related developmental programmes of other
  agencies.
• Providing hand-holding support to growers.
• Creating awareness of the importance of
  micro-credit within the Crop growers and local
  processing groups.
• Functioning as financial intermediary.
• Providing micro enterprise development support.

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Business Model

• STEMS will be run by trained and authorised
  Operators, who will eventually own the STEMS.
  S/he will be provided a loan for the STEMS
  infrastructure by BASIX. Various services will
  be provided by specialist agencies through the
  STEMS
• Financial services
• Savings, money transfers ICICI Bank
• Life Insurance AVIVA, ICICI Prudential
• Livestock Insurance Royal Sundaram, ICICI
  Lombard
• Weather insurance ICICI Lombard
• Credit (up to Rs 10,000) by BASIX group of
  companies
• Commodity trading - NCDEX
• Business Development Services
• Input supply Fertiliser and seed companies like
  NFCL
• Commodity sales ITC e-choupal
• Retail consumer products - HLL E-Shakti
• Consumer durables bicycles, TVs on hire
  purchase by TI Cycles, Philips
• Internet Kiosk services (e-mail, word-processing,
  rail/bus/Tirupati ticket booking, computer
  training, matrimonial, photo) by the Operator.
• Institutional Development Services
• Strengthening of Self-help group and Cooperatives
  with accounting, rating and registration packages
• E-ducation and training, such as by Azim Premjee
  Foundation, NIIT
• E-governance applications respective state and
  district administrations

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Mitigating Commodity price risk by Using
Commodity Derivatives

• Migrating farmers to cropping patterns based on
  futures prices on the Exchange platforms
• Bringing the warehousing and grading/standards
  infrastructure.

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