Ramesh S Arunachalam
Rural Finance Practitioner
Before undertaking any financing activity with regard to primary products in a value, it is critical to ask some fundamental questions and that should help isolate financing opportunities. This post uses the example of small scale fisheries value chain to illustrate such imperative analysis as only then, can appropriate finance interventions be designed. While I use the example of the small scale fisheries value chain to illustrate the various aspects, the same method and approach can be used in other primary value chains and I will provide another mainstream example from an agriculture value chain tomorrow
Some of the fundamental and basic questions that need to be asked are given below and I also try and highlight some possible financial solutions and opportunities (not exhaustive by any means):
Is There Variability in The Primary Product?: For example, there is huge variability in catch across fishers/geographies, etc and the variable and cyclical income of fishermen is indeed a major issue. This has tremendous implications for design of loan products and especially, the repayment schedule
Can Producers Demonstrate Savings Potential?: Fishermen are generally unable to generate cash savings and traditionally they have been conditioned to spend all their earnings and rely on borrowings for any emergencies or additional expenditure. Part of the reason for this is also because they lack access to good savings products. This provides an opportunity for promoting financial literacy with regard to savings and also delivering appropriate savings products tailored to the daily and unpredictable (sometimes huge) cash flows of the fisher folk.
What is the Impact of Seasonality on Production?: The fish stock is perceived to move from one place to another seasonally and hence, catch would depend on the season. A good season in one place could normally lasts for 6 to 7 months, and the remaining months may constitute a lean season. And most importantly, cash flow varies with the season and further, the value of catch depends on the type of fish catch, a fact influenced by environmental changes within the sea as well as on the coast. This has implications for designing repayment holidays as well as other financial products like savings that can enable fishers to take care of themselves in the lean seasons.
What About the Impact of Perishability?: Fish is a highly perishable commodity. Very strong output linkages and storage facilities are a must for getting a good price for the catch, as it is a highly perishable commodity. Salvage value goes down quite quickly with time. This presents great opportunity for post harvest and related financing for various stakeholders.
What About the General Risk in the Specific Livelihood?: Fishing is generally a high-risk business. Lives and assets are at high risk during fishing. This has implications for design of insurance and risk mitigation products.
What About the Assets and Depreciation?: A fairly high rate of depreciation applies to fishing equipment. Boats and other equipment depreciate quite fast. They need to be replaced within 3 – 5 years or seven years at the maximum. This has implications for asset re-financing, leasing and the like.
What About the Investment Level in the Business?: As the cost of fishing equipments is very high, it is also prohibitively costly to buy these equipments. The small fishermen generally work in groups where one person owns the equipments and remaining invest through labor. As per informal estimates per boat there are three to four small fishermen dependent on it. Ratio of owners to workers (coolies) is 1:4 or so and so, it is high investment with diminishing returns today due to overcrowding and unsustainable practices (too many fishers chasing too little fish in the sea, especially post Tsunami interventions in
). If many fishers lack the wherewithal to buy equipments, can other financial alternatives like special leasing arrangements be designed? This has a lot of implications including financing the production of low cost technology (outboard motors or alternatives), special nets and the like India
What About the Issue of Migration?: There has been a tendency for small fishermen to migrate to other areas in search of the better fish catch for longer periods of time and especially during lean seasons. This has implications for collection of repayments during the lean seasons when fisher folk migrate and this calls for tie-ups with other similar organisations for repayment collections.
What is the Impact of Technological Changes?: The bigger fishermen (using trawlers) continuously invest in technology upgradation (GPS, improved nets and improved storage mechanisms) and hence get a better catch as compared to small fisherman using traditional methods and equipments. They generally go for deep-sea fishing by leveraging their technological strength and hence reducing the variability/seasonality associated with the business. In some ways, the presence of these trawlers causes numerous hardships for the low income fisherfolk. This has a number of implications including creation of specialised disincentives for trawler production by the larger financial sector regulator (for example, RBI). Likewise, ensuring the transfer of new communication technology to fishers could provide a great financing opportunity for financial institutions.
Is the Livelihood An Exclusive One?: Most of the fishermen exclusively depend on fishing for their livelihoods. They generally do not have other supporting livelihood activities to fall back on during lean season or during any major calamity. This makes them more of a credit risk as also a very vulnerable group. This is a very critical aspect and needs to be seriously considered so that financing can enable other family members (women especially) to get involved in alternative livelihoods including vending.
What About Environmental Risks in the Livelihood?: Due to continuous degradation of environment, fish catch along the coastline is dwindling. This is evident from the fact fishermen need to travel farther and farther out from the coast to catch fish. This increases both risks and expenses. Management of open-access resources require careful attention. Again, creation of specialised disincentives for trawler production by the larger financial sector regulator (for example, RBI) and provision of appropriate financial services to encourage environmentally sound production could be considered.
What About Input Costs?: Fishing today has become cost intensive – output per unit of investment is rather low and same output can be got with less investment. However, Government subsidies are slowly increasing the investment in fishing. Example: subsidies for engines spur fishers to go for high-investment engines. The subsidy component sometimes generates corrupt practices. Example: a fisher shows some one else’s engine or boat and claims a subsidy. The increasingly intensive nature of fishing is also making it less attractive economically. This again has implication for removing distorting mechanisms and for example, may provide opportunities for financing access to a range of low cost appropriate technologies for the small producers.
Thus, the above kind of analysis must be done for all primary producer value chains that MFI or alternative financial institutions desire to get into and special attention must be paid to the uniqueness of the concerned primary production activity before attempting any financing. This will enable the wider financial sector to provide financing directly to the primary producers as well as financing to related enabling sectors that reduce the vulnerability of small producers and facilitate them to participate in larger economic development…