Client Sensitive Products Rather Than Interest Rate Subsidies or Loan Waivers Can Help Further Cause of Real Financial Inclusion in Agriculture

Ramesh S Arunachalam

Rural Finance and MSME Practitioner

Even as the search for a micro-finance law to enhance financial inclusion continues, there are very small things, which if done, can stablise the inclusion of large number of low income people (farmers) and prevent them from getting excluded again.

Let me start with an example and I hope that all commercial banks and (any) MFIs involved in this space attempt to redress the same. I also hope that the RBI looks into this issue so that the tripartite contract farming products become more sensitive to the needs of the low income clients and are indeed fair to them

Let us take the case of sugarcane farming (while the problems mentioned here affect all farmers, the effect on marginal/small producers is much higher as they do not have diversified sources of income), which illustrates the need for available livelihood financial products to be made more client sensitive and responsive. Sugarcane financing is typically undertaken through contract farming in India, with tripartite agreements between banks/MFIs, sugar factories and clients.

For arguments sake, let us say that a marginal sugarcane farmer has 1 acre of land and normally, 35000 sugarcane setts (seeds) can be planted in this area. Assuming a germination of 60%, the farmer will have to gap fill the remaining 40% setts again, if he/she is to get a decent yield. Population is the key to getting a good yield but to maintain population, the farmer has to gap fill and often unilaterally bear the cost. And more often than not, for a variety of reasons beyond the farmer’s control, the setts supplied do not germinate fully.

For example, 35000 setts are typically planted in an acre. Each sett has 2 eyes and this makes it 70,000 eyes in 1 acre of land. Each eye grows to become a shoot weighing approximately 1 kilo in 11/12 months, depending on the variety. If 70,000 eyes germinate (100% germination) and each of them reaches 1 kilo in 11/12 months, then the farmer gets a yield of 70 tonnes per acre. If there is 60% germination, then the yield is 42 tonnes per acre (70000 setts x 60% germination x 1 kilo = 42 tonnes) and so on. Therefore maintaining the sugar sett population, at a high and optimal level, is very crucial to getting a good yield.

As part of the arrangement in contract farming, the farmer gap fills the sugar cane setts (in case of poor germination) and he/she bears the cost of poorly germinating seeds, which is typically added to the loan. Thus, the farmer bears the burden despite the fact that poor germination often occurs because of poor setts supplied by the sugar factory {mainly due to supply of more than mature setts or immature setts or setts from a ratoon (2^nd cycle) sugarcane crop and often caused by factors beyond the farmer’s control}.

Please note the fact that the cost of gap filling is always invariably borne by the small producer, even if poor seeds (setts) have been supplied by the sugar factory. The sugar factory is the key player here because it decides which farmer’s crop will go for seed, when it will be cut and supplied and the like. Therefore, under the tripartite arrangements, the onus for quality of setts (seeds) are almost entirely that of the sugar factory.

Likewise, there are many other instances in sugarcane cultivation, where the small producer is hit quite badly and there are several examples of other problems given below:

• Supply of poor fertilizer and related inputs by factory,
• Delays in supply of fertilizer which means that the farmer may have to apply the same at an inappropriate time,
• Cane cutting by factory when the sugarcane is overripe (beyond 12 months),
• The cut cane being allowed to lie on the ground and lose moisture and sugar content as a result of which there is considerable weight loss and consequent yield and revenue loss for the small farmer (This is a serious problem for small producers as the contractors arranged by the sugar factory for transporting the cane from the farmer’s field to the sugar factory insist on bribes/bata and “Bakshish” to lift the cane. If producers do not comply, they leave the cut cane to dry in the field and this can seriously reduce the yield and return for the farmers.).

While several other problems can be listed, the larger point is just a simple one – the financial product is simply not sensitive to the needs of the small farmer and it perhaps even penalizes him/her for the ‘wrong doing’ of other parties. Poor seed supplied by the sugar factory could cause lower germination but gap filling cost is always that of the farmer. The machines in the sugar factory could have been stopped (due to failure/fault) and as a result, the cane of the small farmer cannot be unloaded and thus, not weighed at all – there are many cases, where the small farmer has lost almost 50% of weight and resultant revenue because of lorries not being weighed for 3/4 days.

Now, despite all these (human-made) odds, the small farmer/producer has to repay the loan with interest. And if they cannot, they (This is true for all types of small producers including silk weavers in Kanchepuram or Malda/Murshidabad, different kinds of artisans across India, fishers in the south Indian peninsula and several others) become ‘untouchables’ and get excluded from the formal system – often never to get re-included again and left to the mercy of the ‘infamous’ money lenders

And often times, MFIs/Banks use the joint liability group mechanism to ensure that the loan gets paid by guarantors, even if the yield from the sugarcane crop is not sufficient to cover the loan. In some ways, the above financing arrangement is outrageous as it penalizes the small producer for mistakes of other parties in the arrangement which reduce yield and revenue.

The fair thing to do would be ensure sharing of the risk and also such costs among the three parties – producer, sugar factory and financier – this will enable alignment of incentives and ensure that there is congruence in all actions and inputs.

Similar analysis can be provided for other kinds of small producers – the key lesson here is that finance (livelihood or micro-credit), as it currently exists, is not at all fair to the client or producer. Hence, finance must focus on fair and quality servicing and attempt to be sensitive to the client needs and design and deliver products that are fair and useful to them. More of improper finance could only be disastrous and this is one of the main reasons as to why we see a cycle of inclusion and exclusion among low income clients and newer programs being initiated time and again, from days of the erstwhile IRDP.

As a beginning, the RBI must take up the cause of low income sugarcane farmers who perhaps number several million in number in India – a single client sensitive financial product would ensure that a large number of low income people are indeed prevented from getting excluded here. And the same analysis to ensure fairness to clients can be initiated with a variety of crop related financial products for low income people. These rather than any interest rate subsidy or subvention or loan waiver would serve the cause financial inclusion better.

Cheers

Have a Nice Day!