Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Thursday, April 7, 2011

Analysing Innovative Financing Opportunities Through Value Chain Financing[1]: A Practical Example From The Small Scale Marine Fisheries Export Supply Chain…

Ramesh S Arunachalam
Rural Finance Practitioner

In this post we look at analysing innovative financing opportunities through value chain financing using a practical example from the small scale marine fisheries export supply chain

As the simple small scale fisheries export supply chain (margin) data indicates, “the fishers are price takers since the price of fish moves from the international market via the exporter to the lowest actor in the chain – the fishers. The fishers are also the risk bearers; they bear all fishing expenditures and assume the risk of a poor catch. Fishers are also the primary group affected by government regulations such as annual fishing bans. Besides, fishing is a full-time profession, and fishers do not have any alternate source of income generation.”

The Fisheries Export supply chain, in general in India, comprises of:

As noted earlier in this blog, finance alone cannot make a significant dent into poverty reduction, especially for capture fisheries. It can however play a very critical role in Capture Fisheries - which is witnessing a down ward trend in catch, profitability, returns to fishers etc - by innovative financing. This can be done by lowering input costs through making finance available to intermediaries/Producer Organisations at the same cost as had by exporters of marine products and/or cash flow based financing. Thus, finance can serve to alleviate the plight of fishers/reeling under the impact of higher inputs, higher cost and lower output prices. Along with poor price, the following aspects have made life very difficult for fishers: (1) Rising input (2) Higher input cost (3) lower outputs

“In fact, if you look closely at the Governmental Agency support (like MPEDA), “Export promotion agencies concentrate on assisting exporters.  With a population of approximately 1.5 million fishers in India compared to barely 1,200 exporting units with .05 million workers in India, central government outlays in India clearly favour exporters over fishers. A study of the incentive and promotion schemes of MPEDA reveals that among 40 schemes listed, only one is targeted at fishers. It provides for a maximum of 30 per cent investment assistance, subject to a Rs.50,000 cap for equipment installation in mechanized fishing vessels. On the other hand, exporters receive assistance for promoting exports, hygiene and sanitation, research and development, and acquisition of machinery. Thus, in the complete supply chain, exporters receive most subsidies and government assistance including finance, while fishers appear to receive the least.”

Although export promotion and related expenditure may be justified because of the likely trickle-down effects, the investment on downstream players, namely the fishers, has to be certainly increased. This again represents a huge opportunity for appropriate innovative financial interventions

This is where FINANCE can play a major role and extending packing (incentivised working capital already available to exporters) credit to producer organisations is a strategy worth examining as part of Priority Sector Financing by the RBI. These working capital/other loans must be provided at the same incentivised ‘packing credit’ interest rates to producer organisations – especially, if the produce is traceable as going to exports (Deemed Exports). NABARD could also refinance such loans on a priority basis

“Also, fishers and other workers at the bottom of the chain are not trained in fish hygiene and handling methods. However, the state of goods handling and hygiene within exporting firms is adequate. Further, most ports lack adequate hygiene facilities and in general all ports are in a poor state of sanitation and hygiene. Most-constructed ports are also inadequately equipped, in terms of facilities at landing centres namely, clean water, clean ice, clean elevated display platforms” Soft loan financing (at concessional Interest Rates) for such infrastructure and capacity building as above may also be considered as priority sector lending and encouraged by RBI.

Also, from the above analysis, it is also clear that further value can be added by financing infrastructure for cold storage/wholesaling /transport and other vulnerability reducing mechanisms that can help fishers get post harvest loans and/or reduce the perishability risk.  And as the marketing process is also inefficient with several layers of intermediaries – facilitating consolidation of intermediaries or by-passing one/two of them could lead to more value for fishermen, more stability in their cash flows, and quicker turn around in accounts receivable. Thus, commercial banks could finance innovative approaches to reducing the length of the value chain, especially through producer organisations like SIFFS and others.

So, there is a clear need to look closely at most, if not all value chains from a primary producer perspective and re-engineer financing arrangements to enable and facilitate a wide range of innovative financing solutions that can reduce the vulnerability of the primary producer…That is very critical if poverty is to be tackled and inclusive growth is to become the order of the day…

[1] Adapted from various resources cited in UNTRS/FAO Study (2008) and primary data collected therein

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