Re-engineering financial inclusion in agriculture is key to promoting inclusive growth

Ramesh S Arunachalam

Proper financing of agriculture must enable and facilitate a wide range of innovative solutions that will strengthen the primary producer that is critical for fighting poverty in Bharat

Click Here To READ More

Inclusive Finance As The Backbone For Inclusive Growth: Some Critical Issues for Policy Makers, Central Bankers, Donors and Other Stakeholders…

Ramesh S Arunachalam

Rural Finance Practitioner

Inclusive growth has always been seen as the imperative for achieving the equity and equality objectives. While that point is well taken, the experience of the last few years and especially during the global financial crisis suggests that inclusive growth is perhaps essential to even sustain the overall growth momentum. There are several good reasons[i] as to why a REAL inclusive growth paradigm will facilitate this in a rapidly emerging economy like India (and other similar environments). Read On…

First, in many of the emerging market economies like India, a huge proportion of the population (over 60% at least) is based in rural areas, where agriculture is the primary source of livelihood. And any further (substantial) increase in demand for manufactured goods and services will have to come primarily from this large rural population[ii], which mainly depends on agriculture and allied sectors. And barring a couple of years (2005/6), by and large, the performance and growth of agriculture has been rather indifferent.

Indeed, what has become more apparent with this kind of skewed growth is the dualistic nature of the Indian economy - where the gaps are indeed deepening and widening across various sections of the society. The classic manifestation of these gaps and the failure of the economy to re-adjust and ensure equitable economic opportunities for wealth creation, especially in relation to the work and inputs, can hardly go unnoticed –one manifestation is suicides by small and marginal farmers, at the grass-roots. That several farmers have committed suicide in the last few years tells us that the causes of these problems are not short-term – they are, mainly due to serious structural weaknesses in livelihoods systems of low-income people that require urgent and systematic attention.

Why is this happening? What are the consequences in a country like India, where over 60% of the population is engaged in agriculture and related activities? The key point to note here is that this case of farmer suicides is neither a cotton specific problem nor a paddy crop germane issue. Rather, it concerns, fundamental problems[iii] associated with one of India’s largest livelihood sectors, agriculture and allied activities – a sector where over 600 million people and a majority of India’s low income and poor[iv] people earn their living. More importantly, it is a sector without whose produce/products, we can neither eat nor survive in the long run. Therefore, without question, agriculture and allied areas as sectors and the low income people dependent on it for their livelihoods must be “included” in the overall growth paradigm. That is an urgent imperative in India today…

Second, as noted above, from the perspective of supply-side management, growth in agriculture is very vital for keeping manufacturing prices under check, ensuring food security and keeping inflation under control. India knows this better from its own experience of the last few years. Price stability is not merely important as an anti poverty measure but also as an instrument to ensure stable and sustained growth. Again, the lessons of the last 5 years should not be forgotten and especially, with regard to prices of essential food items as well as from a food security perspective. That the farmers who grew these commodities hardly got returns/rewards commensurate with their effort, investment and risks taken can hardly go unnoticed and this again point to very fundamental weakness in the structural aspects concerning agriculture and low income livelihood systems.

Third, higher growth in agriculture and rural areas coupled with demographic dividend (i.e. growing proportion of population in the working age group of 15-65) should result in a rise in the savings level, which, in turn, should facilitate financing the increasing level of investments required to maintain the overall momentum with regard to growth. This is again a very crucial aspect and the role of local and small savings should not be discounted in any serious measure. Its potential to support inclusive growth is phenomenal and appropriate incentives must be provided in this regard to encourage local/small savings as a resource alternative in the new growth paradigm

Fourth, the limitations on increasing production and productivity in agriculture are forcing people to migrate to urban areas and this results in increased population pressure in urban areas as well as larger numbers of urban poor. And this burgeoning urbanization has several important consequences for low income people, who tend to migrate and live in slums. As an NSSO survey revealed (a few years ago), nearly 40 per cent of farmers claimed that would like to quit farming, if they have the option to do so. Unfortunately, there is little option for them except moving into urban slums[v].

Thus, in reality, migration to urban areas primarily implies greater growth of urban slums, which hold a lower quality of life for the poor, many of whom have migrated from rural areas in search of better livelihoods. This growth of urban slums, typically, is associated with greater unemployment for the poor living there, harsh living conditions, enhanced crime, greater negative impact on health and several aspects including environmental degradation[vi]. Therefore, the major point to be noted is that the infrastructure in urban areas is simply not enough to cater to the growing needs of these migrants. Huge and appropriate investments are therefore needed in housing, sanitation, water, lighting and power, solid and other waste management, education, health, and so on and so forth. Therefore, we need “inclusive and enabling investment” in the above areas to deal with the huge and increasing numbers of low-income population in urban areas. This also calls for a paradigm shift in urban planning which must also become more inclusive.

Fifth, in countries such as India, the growth process is essentially knowledge-based and primarily services led. These new growth areas that continue to have a lot of potential going forward. Hence, the requirement of skilled labour is rather huge in comparison to the current levels of availability. Therefore, in order to ensure availability of adequate supply of labour skilled to tackle opportunities in new growth areas mentioned above, we also need huge enabling and inclusive investments in areas such as practical education and skill development – so that the vast majority of people who have the latent potential but cannot afford these services – are facilitated to gain access to such practical skills and knowledge, and thereby perform to their potential.

Last but not the least, whenever we talk of rural areas, the sector that comes first to our mind is agriculture. However, there is the (unorganized and informal) non-farm sector which continues to play an increasingly role in absorbing a large numbers of rural people. Make no mistake – taken together, this non-farm sector and value added agriculture enterprises (MSME) sector have huge potential for growth but this again requires investment in “inclusive infrastructure and enabling mechanisms” for ensuring easier/quicker access to assets, skills, appropriate technology, wide range of vulnerability reducing financial services (including credit for post harvest and post production) and fair linkage to various markets and other market development infrastructure (both private sector and government procurement). Without question, such efforts can make these hitherto excluded sectors, an expanding base for wealth creation and generation in a competitive manner in rural areas

Therefore, to reiterate, it is critical to ensure that growth takes place in: (a) agriculture, allied and non-farm sectors as well as secondary and services (enabling) sectors in rural areas; and (b) amongst urban poor so that they have a better quality of life and opportunities for sustainable livelihoods/wealth creation and thereafter, they also serve as a growing market for the goods and services produced by the expanding industrial sector including those produced by various kinds of MSMEs. However, this growth cannot be mere dumping of goods and/or provision of services in rural areas or among the urban poor. It has to be responsible growth and delivered in an ethically sound and transparent manner and this is one of the most important lessons from the present Indian micro-finance crisis/growth story. Otherwise, all the gains will be lost…and we will still be at square one...

To summarise, it is clear that inclusive growth is very necessary for sustainable development and equitable generation of wealth and prosperity. However, achieving this inclusive growth is the biggest challenge in a democratic country like India as it translates to the concern of integrating 600 million people living in rural India and several million living in urban slums into the mainstream economy and facilitating them to create wealth and better quality of life at the grass-roots. And that is a task in which a new paradigm of inclusive finance must take the lead in and show the way forward such that sustainable growth and wealth creation opportunities are available to all excluded sections of the society and in all neglected sectors of the economy and parts of the country.

And this requires that we let go off our narrow conceptualization of inclusive financial services and broaden the paradigm to ensure that financial services play a very vital role in addressing two critical supply-side issues: (i) by creating an effective and fair ecosystem for delivery of a wide range of (financial and related) services to facilitate productive and enabling investment in largely excluded but employment impacting sectors such as agriculture, value added agriculture, MSMEs etc as well as hitherto excluded (geographic) areas and for enabling low income and excluded people (living in rural India and urban slums) to realize their latent untapped potential; and (ii) by driving large scale investment in inclusive infrastructural facilities and enabling mechanisms like watersheds, irrigation, rural/urban reconstruction, social infrastructure such as health care, education and sanitation and the like.

Without question, mere credit[vii] to low-income people can do very little for inclusive growth as has been consistently argued by many proponents of the narrow inclusive finance paradigm. Only a new, braod and enabling paradigm of inclusive finance as mentioned above can help usher in an era of real inclusive growth in India…

Have A Nice Day!

---

[i] This post draws from several resources including: Inclusive growth – the role of banks in emerging economies by Mrs Usha Thorat and other web based resources as well as papers by this author

[ii] And this issue becomes even more critical when one considers the fact that the average monthly per capita consumption expenditure (MPCE) in urban areas in India is near double that of rural areas. And in some States (like in Central or Eastern India), these disparities are even more glaring.

[iii]  “Farming is both a way of life and the principal means of livelihood to 65 per cent of India's population of 110 crore, Our farm population is increasing annually by 1.84 per cent, The average farm size is becoming smaller each year and the cost-risk-return structure of farming is becoming adverse, with the result that farmers are getting increasingly indebted. Marketing infrastructure is generally poor, particularly in perishable commodities. The support systems needed by farmers, like research, ex-tension, input supply and opportunities for assured and remunerative marketing are in various stages of disarray. Small farmers are forced to borrow money from money-lenders at high rates of interest, since less than 60 per cent of the credit requirements of farmers is met by institutional sources.” (Dr M S Swaminathan, Chairperson, National Commission on Farmers, 2006).

[iv] Despite significant progress made by India during the last decade or so, about 30 – 35% of the total population still lives below the poverty line.

[v] INDIA has always been considered a country that lives in its villages. But increasingly rural Ind1a is moving towards the town and the City. The 2001 Census established that almost one- third of India's population, an estimated 285 million people, lived in urban areas. By 2020, half the country's population is expected to be city-based.

[vi] In fact, as the data suggest, almost 50% of country’s population and a large majority of the poor are likely to reside in urban slums in India by 2020. And Noted environmentalist Chandrasekar confirms the above trends and summarises the issues with rapid urbanisation, “Although on paper all cities have some kind of development plan, the actual development follows no particular pattern except that dictated by expediency, patronage and privilege. As a result, every city in India is the epitome of urban chaos - lacking in adequate water and sanitation, affordable housing, all weather roads, decent public transport and clean air. Cities generate wealth but increasingly Indian cities have become home to the urban poor. Every city is marked by the informal settlements where the poor are forced to live without access to basic services like water and sanitation. City administrations are unable to check the flow of poor people into the city and have failed to build affordable housing where the poor can live. As a result, in some cities like Mumbai, for instance, half the population lives in slums. And in Maharashtra, India's most urbanised State, 61 cities and towns have slum populations that together makeup over 27 per cent of the total urban population and a third of the total population of the State. Indeed, the slum has now become an inescapable part of the Indian urbanscape” (The Hindu,).

[vii] Several factors like market imperfections and other factors (like poor infrastructure and production practices etc) severely constrain these low income people in their efforts to build sustainable livelihoods and enhance their economic security - as a result of fragile livelihoods, they often go through a cycle of being financially included and excluded at various times.  The key point is that, in the absence of other infrastructure and mechanisms, the use of loans by poor and vulnerable people renders them into greater debt.

Value Chain Finance, Rural/Agriculture Enterprise Development and Inclusive Growth: Some Practical Lessons for Policy Makers, Central Bankers, Donors[i] and Other Stakeholders…

Ramesh S Arunachalam

Rural Finance Practitioner

Value chain finance has become a buzzword and you hear it everywhere today in the development field and especially, in the agriculture sector – which has long been the primary economic activity in many countries in Sub-Saharan Africa as well as Asia. However, ensuring financial access for SUCCESSFUL agriculture production and rural enterprises development has always proved difficult. Often cited constraints are: (1) high transaction costs for both (borrower) producers/enterprises and lenders; (2) high risks faced by both of them and especially covariance risk for agriculture; (3) lack of reliable production/financial data and other information with regard to rural households engaged in agriculture and rural enterprises; and (4) financial products ill suited to the cash flows and livelihoods of the borrowers.

In fact, given the above, the last decade has seen value chain finance being promoted as “THE” approach to promoting access to finance for agriculture and rural enterprises. It is certainly not new and has had many previous avatars. And often times, value chain finance is introduced in a very narrow sense, without a broader understanding of the specific sector and this leads to minimal impact and ultimately, value chain finance is seen as a fringe activity. There have been numerous attempts in Asia and Africa, where a naïve introduction of a “special” value chain finance effort has been lost and never to be tried again…I try to capture some salient issues and lessons from value chain failures (I believe that failures teach us more than successes), without naming the specific projects/attempts…Read on

Let us first get a working definition of value chain finance (VCF) – VCF is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product (s) to market (s). Such a definition mandates relationships and commensurate exchanges between value chain stakeholders through vertical and horizontal linkages as well as coordination/cooperation and competitive mechanisms. This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services independent of other stakeholders.

Given the above broader perspective, experience suggests that the first necessary aspect while getting into value chain finance is to ask what is really expected of it? That is very critical. And accordingly, the most practical step would be to identify constraints and gaps that could potentially limit the sector’s capacity to generate the desired objectives, which, among others things, could include: a) vulnerability reduction for primary producers; b) better and stable returns to various chain actors; c) productivity increases in the chain; d) higher employment generation across the chain and the like. This can be done by asking questions such as the following:

Input Systems:

1. In general, what can be said about the input supply system in the entire chain?
2. Do the small, marginal and other primary producers and/or other chain actors have adequate access to quality inputs at reasonable prices?
3. If not, what are the gaps in input systems and how can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?

Data and Information Systems:

1. What can be said with regard to timely availability of reliable and valid production data and market/other information throughout the entire chain, for the various stakeholders?
2. What are the gaps in information across the chain that needs to be addressed? Can value chain finance help in improving availability and flow of quality (reliable and valid) information? If so, what must it specifically do to facilitate this? Can the intervention be practically scaled up after the pilot?

Production Systems:

1. How is primary production organised in the chain? 
2. What can be said about the producers? What about their characteristics in terms of being marginal, small, medium and large producers and which of them dominates the chain in terms of various criteria - absolute number, production quality, relative power etc?
3. How and where is produce aggregated?
4. What about access to finance and BDS for primary producers and others in the chain?
5. What can be said about product quality, good practices and access to innovative technology, standards and certification in production for primary producers and others? How is new and innovative technology transferred from lab to land?
6. What is the level of (horizontal) cooperation, coordination and competition between primary producers and with other actors in the chain?
7. What is their relative (individual and collective) power of primary producers, in comparison to other stakeholders in the chain?
8. How efficient and fair are the price and terms setting mechanisms across the chain and especially from a perspective of the primary producers?
9. What about access to various markets (local, national, regional, and global) and market opportunities for the primary producers and others?
10. What about access to governmental procurement for various stakeholders including primary producers?
11. What are the gaps in production systems in the chain and can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?

Post Production Systems:

1. What systems and arrangements exist for bulking and post-harvest handling?
2. What is the level of (vertical) coordination, cooperation and competition across stakeholders in the value chain? How efficient and fair are these, especially for the primary producers?
3. Who controls the post production infrastructure and what are the consequences for the primary producers and other stakeholders in the chain?
4. What can be said about product quality, good practices and access to innovative technology, standards and certification in post production activities in the chain?
5. How is new and innovative technology transferred from lab to factory?
6. What about access to finance and BDS for post production activities in the chain?
7. What about access to various markets (local, national, regional, and global) and market opportunities for the various stakeholders?
8. What about access to governmental procurement for various stakeholders involved in post production?
9. What are the gaps in post production systems in the chain and can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?

This apart, the regulatory environment at the local, national, regional and international levels need to be factored and analysed while looking at gaps and constraints in the value chain.

Thus, value chain finance should not be merely viewed as enhancing access to finance for primary producers in a chain but rather, it must be seen as a broader intervention that can: (a) help create better and enabling infrastructure in the chain; (b) enhance competition among various stakeholders and increase choice within the chain; (c) reduce vulnerability of producers (marginal, small and primary producers) and increase their staying/bargaining/negotiating power vis-à-vis other actors in the chain; (d) act as a catalyst and stimulate access to productivity enhancing technology and practices; (e) facilitate small/marginal and other primary producers to get better returns/rewards through better access to BDS including markets; (f) enable product, process, functional and channel improvement/upgrading in the chain, which is very critical and taken up later as an exclusive post; and/or (f) address other constraints and the like. In practice, such a broader outlook with regard to VCF is likely to enable achievement of the larger development objectives such as ensuring inclusive growth in a more effective manner…

Have A Nice Day!

---

[i] Compiled from various resources and also personal experiences. The resources are far too many to acknowledge here…but these are gratefully acknowledged…

Enterprise Promotion in Agriculture and Rural Value Chains: The Key to Poverty Reduction and Inclusive Growth in Agrarian Economies…

Ramesh S Arunachalam

Rural Finance Practitioner

We have had a lot of hype over the last few years with regard to tackling poverty, inclusive growth and the like. Miro-finance and financial inclusion are two such instruments that have been talked about widely across the globe as well as in India. Unfortunately, many efforts in these domains have missed two important aspects with regard to predominantly agrarian economies like India. First, they have tended to ignore agriculture (almost completely) and often made the argument that concerted efforts need to be made to enable low income people to leave agriculture and pursue other livelihoods. Second, where they have attempted to tackle issue of enterprise and/or livelihood promotion, they have done it in piece meal fashion. As a result, even in a fast growing economy like India, we continue to discuss - access to very basic services - basic issues that were debated as far back as in 1952, post independence…

Let me be more specific…

First, let us take micro-finance and financial inclusion – by and large, these have targeted consumption lending and/or provision of small production loans to a wide range of people apart from opening of no frills accounts, many of which lie dormant. Even when some of these efforts have targeted micro-enterprise or livelihood finance, the larger ecosystem, required for enterprises (and especially rural and agricultural enterprises) to succeed, has been inadequate. As a result, many of the people who have been included have tended to get excluded and thereby we see them flow through a cycle of inclusion[i] and exclusion as diagrammed in Figure 1, which is self explanatory. And often times, when these people get excluded, at best, they either go back to the informal money lender or at worst, they attempt drastic solutions including suicides as was seen in AP last year.

Second, is the MSME strand of work in India, which is implemented through various institutions including SIDBI, whose Rural Industries Program (RIP) is perhaps one of the best known Indian efforts at promoting enterprises. While this approach has done all that it can to facilitate enterprise promotion and help ground enterprises, the access to finance component, which was to come through commercial banks (via a linkage program) has been rather weak. Also, the focus of much of SIDBI’s work has been on the traditional manufacturing sector and there are two major issues with such programs: a) they have not targeted value added agriculture and/or rural enterprises in any significant measure; and b) while they have intended to create a larger ecosystem for success of enterprises, the actual realised strategies on the ground are very different and the required ecosystem, is more often than not, weak. As a result, as personally seen during my years of exposure to SIDBI’s RIP and thereafter, a large number of the enterprises have withered away and not survived

In summary, there are four major lessons from the above that deserve emphasis and these are described below

First, for poverty to be tackled in environments like India which are predominantly agrarian, economic growth must be inclusive not only in terms of including low income people who have been left out but also in respect of sectors like agriculture (which are home to a large number of such excluded people) which have not been cared for and integrated appropriately in the larger economy. And the best way to do this is to work in agriculture value chains with potential and develop them in a systematic and comprehensive manner.

Second, inclusion of the disadvantaged people and excluded sectors cannot be piecemeal. Most certainly, mere access to finance or other essential non-financial services alone (on an either or basis) will not help - as in reality, a larger enabling ecosystem comprising of access to a wide range of financial and non-financial services is simultaneously required. In other words, anything short of a comprehensive facilitating ecosystem will result in the excluded people being forced in and out of the larger system – and inclusive growth and poverty reduction will remain primarily as elusive dreams and intended strategies, that sound great on paper but with no serious impact on ground

Third, such an enabling ecosystem will be effective, if and only if, it lends strong support to:

• The creation of an enterprise culture (rooted in their survival skills) among the excluded and disadvantaged people. In addition, there is a need to provide them access to all necessary information/advocacy required to help them achieve their entrepreneurial visions;
• The process of business start-up and survival through simultaneous access to a range of appropriate financial and non-financial services including Infrastructure, Technology, Skills, Finance, General BDS, Product Quality and Certification, Markets for the various enterprises promoted by these excluded people;
• The process of growth and scaling up of enterprises through access to customized BDS and other services required for enabling them to tap a range of local, national, regional and international markets (including governmental procurement in these markets); and
• The creation of a strong but enabling regulatory environment with widespread stakeholder support.

 The various aspects are diagrammed in Figure 2 hereafter

The above are some lessons from experience for India for policy makers in India and other countries who seek to use micro-finance, financial inclusion and enterprise promotion as a means to promote inclusive economic growth and alleviate/reduce poverty. And I hope that the National Rural Livelihoods Mission (NRLM) and other efforts like DFID’s PSIG (Poorest States Inclusive Growth Program), take note of these and ensure that they address the relevant issues at hand in a comprehensive and holistic manner rather than piecemeal fashion. And make no mistake, unless that is done, neither can access to finance nor access to non-financial services, by themselves and individually, bring about the desired results – in terms of poverty alleviation and inclusive growth - in any significant measure….

Have A Nice Day!

---

[i] In fact, as a Dear Colleague (Ajay Tankha) often remarks, as much as 55 million loans and 35 million people were supposedly included through IRDP and other programs during its near two decades of operation.

Challenges That Low Income People Face in Rural and Agriculture Livelihood Systems: Issues To Consider While Developing Value Chain Finance Interventions

Ramesh S Arunachalam

Rural Finance Practitioner

As noted in a companion post, value chain finance (VCF) is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product (s) to market (s). This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services, independent of other stakeholders. We adopt the braoder definition here...

In this post, we look at constraints[i] that low income people face in agro and rural enterprises that need to be considered while developing value chain finance interventions:

·         Challenge # I:  Transport Cost to Bring Product to Markets: Many of these low income people live in remote rural areas or high population low-income urban areas, from where accessing markets is somewhat difficult. Generally, transport costs add a further element to pricing and they seriously limit the competitiveness of the product or service while hampering physical access to the market place and the opportunity to trade locally. Access to affordable and reliable transport is therefore very critical

·         Challenge # II: Lack of Access to Market Intelligence and Such Information: For many marginal producers, small scale vendors and rural enterprises, their trading is acknowledged only as part of the informal sector; consequently it is invisible, under-reported and un-recorded for the most part.  As a consequence, many of them are not registered and therefore have not declared themselves as economic entities and hence, are not recognized as users of market and such information. For example, as vendors or producers or rural enterprises for several years, they would have used their own innate intelligence to recognize trends, but these are un-recorded and part of an oral tradition that does not allow for any type of true and representative trend analysis. In the case of some produce, there are marketing information sources, but the producers are neither aware nor able to consult and use these. In this global economy that is increasingly not adequate.  Hence, access to disaggregated market categories and market information is very critical.

·         Challenge # III: Inability to Use Market Information in Production: Without data and information there is little opportunity for the small producers and/or rural enterprises to develop the market trend analysis skills. Further, the skill of using market intelligence information in product development and production planning is also not developed.  In addition, without the requisite baselines to create a database and maintain it, it is virtually impossible to generate analysis and trend statements to support business advisory services for these entrepreneurs. The key is therefore to strengthen producer registration and enterprise recording systems, while training producers in the use of marketing information in formal production planning. Facilitating the development of Business Development Services (BDS) providers is also critical.

·         Challenge # IV:  Product Cost and Quality: The limited market potential within a limited population generates limited sales that do not stimulate bulk purchasing.  Input costs are high and consequently the final product price is not always competitive.  Product quality also remains undependable and uncertain. Also, micro/small entrepreneurs and such rural enterprises generally use household grade equipment, implements and utensils in production.  Experience indicates that the production environment limits the ability to scale up production to commercial quantities. As a result, customers are forced to find suppliers of better quality.  The sole trader or small rural enterprise is faced with a double dilemma often – production is a time consuming operation and she/he has little time for marketing. The demands for quality assurance and the emergence of more competitive producers has also eroded these markets. Local purchasers as well as those involved in preparing produce for export have complained of inconsistent supplies of the albeit high quality produce (especially, rural handicrafts), difficulty to contact the supplier, and inadequate returns policies by the suppliers.  Suppliers complain of their inability to provide credit to their purchasers. Therefore, developing a local quality assurance certification system which linked with strengthened producer registration/enterprise recording systems and improved capability to use of marketing information in formal production planning and the use of Business Development Services (BDS) for operations should help producers/rural enterprises improve product quality and service provision.

·         Challenge # V: Capital for Cost Effective Production Operations: Many of the small and micro entrepreneurs have limited access to finance and mostly from either MFIs, SHGs, cooperatives or informal sector financiers. Banks are a rarity. The limitation of traditional micro-credit in supporting livelihood and productions systems of low income people are well known and need no further emphasis. The alternative is to go to banks but most of these enterprises lack collateral to access the capital for improvements that enhance access to better market linkages and/or improve production.  The credit application process is intimidating.  Because of poor production and market records, some have little basis for completing the credit application process, and are not able to corroborate details about the business. Lack of literacy is another aspect in this situation.  Thus, micro and such rural enterprises lack confidence in a credit system that tends not to favour the small-scale producer.  Their operations are considered high risk.  As they are credit shy, they have no credit rating as well.  The key would be to develop financial services that are responsive to the peculiarities of their production and livelihood systems – the formal or alternative financial sector need to be incentivised to serve small producers and rural enterprises for their livelihoods. Providing mere consumption loans as in micro-finance is insufficient.

·         Challenge # VI:  Inputs for Production: Inputs are increasingly costly and their availability is also not stable and this is another aspect that affects small producers and such rural enterprises. There are huge imperfections in the input markets

·         Challenge # VII:  Prevalence of Undesirable Marketing Practices: There are some undesirable marketing practices among small producers and these are:

Ø      Inconsistent supply and quality within a given period;

Ø      Lower quality produce being offered at prices equivalent to higher quality produce;

Ø      Poor handling and packaging of produce; 

Ø      Limited variety of produce offered;

Ø      In-adequate information on projected supplies available to the purchaser; and 

Ø      Lack of appreciation of and adherence to the purchasing and delivery norms.

The above challenges - in the daily livelihood situations and production of low income people engaged in agriculture and rural enterprises - if not comprehensively addressed, will render any value chain finance intervention sub-optimal in terms of utility and impact. In fact, these challenges are a source of opportunity for Value Chain Finance (VCF) interventions as well in terms of the kind of initiatives to support…in the respective chains...

Have A Nice Day!

---

[i] Compiled from various resources and also personal experiences. The resources are far too many to acknowledge here…but I am grateful to all of them...

Micro-Finance Agents in Tamilnadu: A New Class of Local Financial Intermediaries at the Grass-Roots?

Ramesh S Arunachalam

Rural Finance Practitioner

I have been travelling in my home state of Tamilnadu and of course, apart from doing my work, I have also been interacting with micro-finance clients, MFIs and staff, agents, bankers, SHGs, JLGs and other stakeholders involved in micro-finance. Here is what I found…Read on…and much of this is on record…

Micro-finance agents, created by MFIs are still active in many districts in Tamilnadu and I, in fact, met a few agents in the last 10 days, who were using repayments collected from clients (and not paid back to MFIs) for further intermediation amongst the people at fairly high rates of interest (excess of 30% in many cases). Some of these agents have also formed themselves into small NGOs/trusts/societies and are trying to access funds for financial intermediation from various sources including MFI funds, politicians, banks funds…and other sources…They are clearly becoming a new class of financial intermediaries at the local level but with no institutional and/or individual accountability…

An interesting incident was mentioned by one stakeholder and confirmed by women in the field…Three Andhra MFIs operating in Tamilnadu apparently had not paid staff their salary for some months after the MFI crisis in AP and some of the key staff along with agents collected money from clients (without giving receipts) and were now using the same money (running into several crores of Rupees, 1 Crore Rs = 10 Million Rs and 46 Rs = 1 US $) as capital for financial intermediation at the local level. The same is being rotated at the local level at much higher rates of interest. The same stakeholder confirmed that as many of the MFIs are not aware of several of their last mile clients (end user clients), they also could not directly collect the repayments from the clients. This also has very serious implications for KYC norms and the traceability of the money at the grass-roots…some thing that I have been crying hoarse for some time now…

Several clients also claimed to have paid a huge fee to agents in anticipation of a future loan from MFIs – which agents had said that they would disburse after the elections (scheduled for April 13^th 2011 in Tamilnadu) got over. In fact, one group of clients stated that nearly 800 people had paid between Rs 700 – Rs 1000 as fees to an agent (Kamala) in Salem district to get loans of Rs 25000 – Rs 40000 each from various MFIs, after the elections. Assuming an average fee of Rs 850, this works out to more than 1/2 a million rupees in upfront fees paid to the agent

Coercive repayment is also said to continue and a middle aged client said that staff of one MFI took away her child in the morning in Feb 2011 and returned the child only after she was able to make the weekly instalment payment at night by pledging her ration card (for a fee and for use by another client to get a loan from another MFI) and also selling her rice/rations at a distress price. Still others confirmed that staff have now started sleeping in the villages (and sometimes outside the homes of clients) at night, if they could not collect money from the clients during the day.

I also met a few centre leaders who said that they are breaking up old JLGs and forming new ones at the instance of one MFI, so that loans could be provided to these so called newly acquired clients and not old older clients in other JLGs. Overall, the practices at the ground level do not seem desirable with regard to client acquisition, client preparation and the like and this is such a fundamental and critical issue…

Very interestingly, the micro-finance agents also claimed to be working with the SHG – Bank Linkage model, by taking groups to banks for the 1^st linkage. One of them said that they received no commission from the banks but received between 7 – 10% from group members for getting the group a first loan of Rs 50000

Agents also confirmed that bankers are now actively calling them in to help them meet their various targets, including those pertaining to financial inclusion. To reconfirm some of these aspects, I met several bank managers in the same areas and two managers candidly said that since they lacked sufficient staff and were being pushed on targets, they started relying on the agents for bringing in the groups to meet the various targets

One of them even had an interesting observation…the groups brought in by agents typically paid off their first loan within 1 year whereas the loan term was around three years and then, they took the 2^nd loan of 4 times the savings – many of these groups accumulate as much as between Rs 30000 – Rs 40000 and therefore receive a 2^nd loan of Rs between Rs 120000 – Rs 160000 (46 Rs = 1 US Approximately). Managers also confirmed that several groups do not repay the 2^nd loans and that, many of the members migrate to other areas and are not traceable. One manager even said that Rs 40 Lakhs (Rs 4 million) is likely to be written off in the future as the members are not traceable

Yet another startling fact was brought up the managers and they said that Rs 50000 first loan taken is not used towards any income generating activity and that this money sans the commission paid to the agents was used as the corpus for a local chit run by the group members, who divided the interest profit amongst themselves…

Clearly, as far as I can see the burgeoning growth of micro-finance and financial inclusion initiatives, have indeed led to the development of an entire new set of intermediaries – agents – who are best described as a new class of money lenders, especially because of their overall coercive behaviour, the harsh terms that they offer and the strong arm strategies that they employ for collection…I can see some parallels with agents used for personal loans in India, that turned out to be disastrous for many banks

Therefore, it is about time that we as practitioners, begin to introspect with integrity, on what is working on the ground, why or why not and what can be done to salvage the various micro-finance and financial inclusion innovations in India…Otherwise, much of our efforts of several decades could be sadly lost…

I know that many of the proponents of the models may become defensive and try to argue Y versus X and so on. My humble plea to them is to refrain from doing that and rather, take practical steps to enable a serious Nation-wide reality check (conducted by a neutral set of people from Civil Society, with no vested interest or stake) with regard to the micro-finance (MFIs and SHGBLP Models), financial inclusion and other initiatives and the extent to which the ground situation is rapidly deteriorating. In my opinion, I have no hesitation in saying that the current growth, practices and direction of the various micro-finance, financial inclusion and related initiatives is not as was originally desired/planned and if unchecked, these could result in serious damage to the low income economy in India in terms of credit culture, economic transformation and the like…So there is a lot at stake indeed

Make no mistake, the cancer is spreading and spreading very fast and before, it consumes much of the low income economy in urban and peri urban and completely destroys the credit culture, let us do something to salvage the situation. People at the grass-roots need and have a right to access finance and other basic services and therefore, throwing out these initiatives is not the solution. We as a country, need to get the delivery of financial and other services to low income people right and for that, we need to introspect with integrity and not be defensive…

Among other things, this immediately calls for a national strategy and policy on access to finance for low income people, a single supervisory micro-finance authority (created by an Act of Parliament) which understands the nuances and has the wherewithal for SUPEVISING micro-finance and such initiatives, and the creation of a larger ecosystem with enabling services that will help low income people to start, nurture and scale up urban and rural enterprises and livelihoods in a sustainable manner…so that inclusive growth becomes a reality as envisaged by the Government of India

I hope the senior practitioners and all other stakeholders will start on this in full earnest…

Have a Nice Day!

Looking Beyond the Indian Micro-Finance Crisis: Re-Engineering the Financial Inclusion Paradigm…PART II

Ramesh S Arunachalam

Rural Finance Practitioner

Let us set the record straight in terms of some of the happenings in the financial inclusion space…

As noted in the earlier companion post, the mere delivery of credit and more of this standard credit (for consumption and/or small production needs) is not very useful, always. Further, the no frills accounts that often lie dormant, are also not the real solution. While a lot has happened, the financial inclusion paradigm however needs some re-engineering and that is the subject of this post…

Apart from suggestions mentioned in PART I, in my opinion - the focus of financial inclusion first needs to be re-engineered towards ensuring delivery of quality credit that will reduce risk and vulnerability of low income clients and give them more choices - through alternative channels that afford lower costs, have greater trust and high levels of mutual acceptance. Quality credit would therefore necessitate a greater focus on post harvest and/or postproduction financing for agriculture and other sectors that provide (or can provide) significant livelihoods opportunities for low-income people. In other words, among other things, this would call for financing of agriculture produce/other products[i] marketing – a very critical aspect for small/marginal producers as it has the potential to enhance choices for them in terms of buyers etc. Of course, here, the existing relationships would need to be better understood if financial products are to be developed and delivered through appropriate channels[ii].  

Second, the focus of financial inclusion must also be re-engineered such that the delivery of financial services are used to strategically to drive higher rewards, better remuneration and greater power down the value chain as shown later in Figure 3 – otherwise, it will be of limited use. And again, as said before, to achieve this, one needs to better understand existing relationships, particularly in post harvest and post production marketing situation in different value chains. An example of driving power down the value chain is the delivery of finance through a simple warehouse receipt mechanism as diagrammed in figure 2 below. While there have been attempts to do the same in India, large-scale frauds in small pilots have proved to be a deterrent. These should not however force us to abandon this excellent vulnerability reducing financial service that has worked rather well in other contexts:

Thus, financial inclusion must be re-engineered to emphasize delivery of financial services that can enhance the competition among middlemen and other buyers, who buy products/produce/labour from small producers. This would translate to financing marketing of agricultural produce, other products (including handicrafts) and labor of small scale producers[iii] and it can happen in a variety of ways (through various types of aggregators and channels). Some examples are given below:

a)      Enhancing Competition Among Buyers: Direct financing of middlemen and other intermediate buyers of produce/products[iv] so that small producers have greater choice of buyers and incentivising these middlemen to procure at better prices/rates;

b)      Risk and Vulnerability Reducing Mechanisms: Warehouse receipt and similar financing for other products whereby the small producer can store their produce/products, pledge the same, receive a loan and sell when the prices are higher. An example is leasing for urban vendors whereby they can store their produce on a daily basis at a cold storage facility and not sell their perishable item at a throw away price at the end of the day, just because they have no place to store it safely and being a perishable, it could get spoilt;

c)      Creation of Post Harvest Competitive Mechanisms: Financing of other post harvest mechanisms including special depots for auction so that small producers have choices – this has happened a lot in small scale marine fisheries and SIFFS has very successfully used auctions to help the fisher folk get better prices

d)      Other Strategies: Financing of small scale producers who use labor for their livelihood through an innovative mechanism like virtual livelihoods exchange, with appropriate aggregators etc

So, the challenge of reducing risk and vulnerability of all small producers is a key one and for this the financial inclusion paradigm must, among other things:

F     View People as producers of goods and services as against People as mere clients and borrowers

F     Provide a range of risk and vulnerability reducing financial services (based on value chains analyzed for their distribution of power and vulnerability) as opposed to mere credit for consumption and small production

F     Offer cash flow and business cycle based financing as against rigid fixed-term loans currently offered, and

F     Enhance the bargaining/staying power of small producers through value added financial services as opposed to merely offering financial services as part of the traditional access to finance paradigm

“Hence, a new paradigm[v] is required where financial products, mechanisms and instruments can be used to:

F     Reduce risk/vulnerability[vi] in the existing livelihoods of low income people, arising from various market imperfections – examples include urban vendor leasing, warehouse receipt financing, pro-poor value chain financing etc

F     Help create strong safety and security nets[vii] for these low income clients

F     Enable these low income clients to pursue diversified/migratory livelihoods where required

F     Facilitate re-inclusion of these low income people (who were once included but subsequently excluded because of fragile livelihoods), and

F     Create risk management mechanisms[viii] to ensure that they continue to stay financially included, in the context of their fragile livelihoods.

All of this mandates that the financial inclusion paradigm becomes an integral part of the overall livelihoods framework where financial services are - used to reduce risk and vulnerability and enhance staying/bargaining power of all kinds of producers and – therefore, viewed more as a means for livelihood security rather than as an end in themselves. And enhancing the staying power of small producers will result in their having better bargaining capacity which, in turn, will mean that they can negotiate better with market elements and get a return or price, that is due to them.

This is a very critical issue as otherwise, we will see finance being primarily used for funding consumption or making small production loans. This is fine but one which cannot guarantee anything beyond mere access to a loan or a financial service and certainly not, the long standing financial inclusion - that we are all aspiring to achieve - a very necessary but not sufficient condition for India’s inclusive growth strategy to succeed on the ground…

---

[i] Like handicrafts etc

[ii] Of course, this would need to be validated specifically for a context, product and partner but these are general suggested arrangements.

[iii] Some of these would apply to fisheries as well, where post harvest financing would be very critical. Much of the same would be applicable for tangible goods and here again, the focus would be to create a good supply of post-production financing and creating competition among buyers of produce/products made by small scale producers. Likewise, in the case of labor, innovative financing mechanisms like a livelihood finance exchange using the web could be explored.

[iv] BASIX tried this in the initial years but again we need to study why it could not be scaled up and thereafter try and create an environment for the success of such mechanisms

[v] Sourced with adaptation from Arunachalam “UNDP Financial Inclusion Strategy in 7 Focus States: Strategic Consideration and Suggestions, UNDP” (2007)

[vi] Weather and crop insurance are gaining ground. Contract farming schemes exist but are not producer oriented

[vii] Some innovations exist here for health as well as life coverage but much work is necessary in the nature of product design and also distribution. Micro-pension schemes are also available.

[viii] Post harvest loans in fisheries/agriculture and warehouse receipts are examples of such products.