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!

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[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!

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[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!

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[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...

Screening for Financial Investment Opportunities in Primary Value Chains[1]: An Analytical Methodology Using the Small Scale Fisheries Example…

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 India). 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

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…

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

Alternative Financing Opportunities in Primary Value Chains[1]: A Practical Approach for Analysis Using the Small Scale Fisheries Example…

Ramesh S Arunachalam

Rural Finance Practitioner

In one of the earlier replies, suggestions were made that financing the primary producer in a value chain could be reserved for MFIs but this is something that requires careful analysis of the specific chain and tailoring of MFI type credit to those activities in the chain that are suited to be serviced by such MFI credit. And using the fisheries example, this post highlights crucial differences between typical MFI credit and livelihood credit in any value chain and such analysis must always be done by MFIs prior to servicing any primary producer in the value chain

In the case of fisheries, typical micro-credit approaches apply well to financing of vendors/hawkers, etc and perhaps crew of boats (who are coolies and typically do not own assets). Thus, micro-finance is better suited for post harvest financing activity for vendors/small processors. Holistic approaches appear to be more suitable for financing activities in the low income fisheries value chain -- especially for capture fisheries. This integrated approach can be delivered by multi-purpose, large, well networked institutions that can diversify risks across craft types, geographies, etc. The table below highlights major difference between these approaches and MFIs need to do similar analysis whenever they want to service primary producers in different value chains

Hence, supporting fishers in the value chain requires livelihood financing with an integrated approach as has been followed and practiced by SIFFS given in figure 1 below

Figure 1: Financial Intermediation and Development Services

And micro-credit through MFIs can be used to service vendors, hawkers and others. In fact, a range of possibilities exist as has been mapped in figure 2 and similar analysis will have to be done by MFIs for all value chains before they intervene…in the primary production chain…

Figure 2: Simple Fisheries Value Chain and Existing/Potential Financing Service Producers[2]

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

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

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…

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

Using Re-Engineered Value Chain Financing to Enhance Bargaining Power of Small/Marginal Agricultural Producers: A Present Day Imperative…

Ramesh S Arunachalam

Rural Finance Practitioner

1.               As noted in previous posts, the mere delivery of credit and more of this standard credit (for consumption and/or small production needs), as is currently practiced in micro-finance (or as part of the financial inclusion paradigm) is not very useful, always – as low income people in many contexts, like in India, and other such Countries (Uganda and Malawi in Africa) are engaged primarily in agriculture.

2.               The focus would need to be re-engineered towards ensuring delivery of quality credit that will reduce risk and vulnerability of low income clients engaged in agriculture and give them more choices - through alternative channels that afford lower costs, have greater trust and high levels of mutual acceptance.

3.               Quality credit would therefore necessitate a greater focus on post harvest and/or postproduction financing for agriculture and related sectors that provide (or can provide) significant livelihoods opportunities for low-income people.

4.               In other words, among other things, this would call for financing of agriculture produce 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[i].  

5.               Further, the re-engineering must be 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 1– otherwise, it will be of limited use.

6.               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 agriculture value chains.

7.               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:

“Experience from around the world illustrates that warehouse receipts can make a difference to producers. By storing their goods in a reliable warehouse until the price increases while using the goods as loan collateral, producers may access funds before they sell their goods. Warehouse receipts are often administered to producer groups, instead of individuals, which helps the flow of market information. Warehouse receipts also can create price transparency. This empowers producers to make informed sales decisions rather than waiting for “gate” buyers who often offer below-market prices. Producer organizations/Microfinance institutions (MFIs) also have a strong incentive to offer warehouse receipt financing. With this system, their risk is reduced because the system has a built-in use of collateral that can retain a high commercial value and be liquidated quickly.”[ii]

8.               Thus, there must be re-engineering 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 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 in small scale marine fisheries and SIFFS has 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

Thus, to summarise, we need a new APPROACH to financing agriculture value chains and one that is rooted strongly in the practical realities. With all due respect to all that has been achieved, let us face it that the livelihoods of those in agrarian/rural sectors in India especially are in great shambles, even 60 years after independence - the fundamental point being that to build livelihood security of small producers/farmers, there is an imperative need to reduce their vulnerability and risks while at the same time enhancing their bargaining and staying power. And well designed financial services can play an important part in that…

And as an experienced colleague remarked, ‘Irrespective of the sector, small producers are not getting rewards/returns commensurate with their effort put in, investment made, risk taken and value created mainly because their staying and bargaining power is low.  It is therefore very important to try and promote interventions that enhance the staying power of small producers - as then it 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 can surely be attempted by the financial services sector and should pay rich dividends to both the service providers and clients…

Have A Nice Day!

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

[ii] Quoted with adaptation from UNTRS/FAO (2007), Arunachalam Ramesh S et al, “Enhancing Flow of Finance to Small Scale Marine Fisheries” and Bamako 2000: Innovations in Microfinance, Technical Note 5

[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