The FPO Round-Table Agri Business Banking in : Opportunities and Challenges IIM Bangalore April 5, 2014 CONTENTS

ABBREVIATIONS ...... 3 EXECUTIVE SUMMARY ...... 4 INTRODUCTION ...... 5 KEY RECOMMENDATIONS MADE AT THE ROUND-TABLE ...... 6 KEY DISCUSSION POINTS ...... 7 1. Policy Change ...... 7 2. Suitable Business Models ...... 7 3. Need for Research ...... 8 4. Loans and Finance for FPOs ...... 9 5. Equity Grant Fund (EGF) and Credit Guarantee Fund (CGF) Schemes ...... 10 6. Assessing the Health of FPOs and Rating ...... 12 7. Capacity Building ...... 13 8. Soft Funding and Pilot by SIDBI ...... 13 OTHER KEY DISCUSSION POINTS ...... 15 SHARING OF EXPERIENCES ...... 16 1. BASIX ...... 16 2. FWWB ...... 16 3. IIM Ahmedabad ...... 17 4. NABARD ...... 17 5. NABFINS ...... 18 6. Origo Commodities ...... 19 7. ...... 19 WAY FORWARD ...... 20 ANNEXURE 1: PROGRAMME SCHEDULE ...... 21 ANNEXURE 2: LIST OF PARTICIPANTS ...... 22 ANNEXURE 3: RECOMMENDED POLICY CHANGES ...... 24

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ABBREVIATIONS

ADM Archer Daniels Midland BAAC Bank for Agriculture and Agricultural Co-operatives CGF Credit Guarantee Fund CRISIL Credit Rating Information Services of India Limited CSR Corporate Social Responsibility DFID Department for International Development EGF Equity Grant Fund FPC Farmer Producer Company FPO Farmer Producer Organisation FSS Farmers' Service Societies FWWB Friends of Women's World Banking GDC German Development Cooperation GIZ Gesellschaft für Internationale Zusammenarbeit IIM Indian Institute of Management IRMA Institute of Rural Management, Anand KfW Kreditanstalt für Wiederaufbau LAMP Fund Livelihood and Micro Finance Promotion Fund M-Cril Micro Credit Rating International Ltd. MFI Micro Finance Institution NABARD National Bank for Agriculture and Rural Development NABFINS NABARD Financial Services Ltd NBFC Non Banking Financial Company NDDB National Dairy Development Board NFDB National Farmer Development Board PACS Poorest Areas Civil Society PSIG Poorest States Inclusive Growth RBI Reserve SFAC Small Farmers’ Agribusiness Consortium SFMC SIDBI Foundation for Micro Credit SIDBI Small Industries Development Bank of India SPV Special Purpose Vehicle TABCO Thai Agri Business Company UPNRM Umbrella Programme for Natural Resource Management VAT Value Added Tax

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EXECUTIVE SUMMARY

The idea of organizing a Round-Table to discuss Agribusiness Banking in India, particularly in the context of Farmer Producer Organisations or FPOs, has been in discussion ever since the has given a thrust to the promotion of FPOs through the Small Farmers‟ Agribusiness Consortium (SFAC) in 2012. Through SFAC, over 350 FPOs are proposed to be promoted in the next few years. Given the several challenges that FPOs are expected to face as they strive to achieve sustainability, ACCESS Development Services and IIM Bangalore jointly organized a One-Day Round-Table on April 5, 2014, to identify the expected challenges and draw out a roadmap for these organisations. The Round-Table was supported by

NABARD and was attended by key “by invitation” stakeholders.

To set the tone of the discussion, Prof. G Ramesh, Chairman, Centre for Public Policy at IIM Bangalore started his welcome address by highlighting the new demands emerging in the agriculture and agribusiness sectors and a weak, skeptical response from banks in providing lending support to FPOs. At the same time, it was noted that only a very few cases of sustainable FPOs are being reported from the field. He emphasized on the need to look for mechanisms to address these issues and challenges. In addition to the national level initiatives by apex institutions like NABARD and SFAC, peripheral efforts made by Rabobank, HIVOS, Ford Foundation, etc. were also discussed; but these, by no account, seemed to be large enough to meet the diverse and 1. Prof. G Ramesh, CPP, complete requirements of FPO financing. Hence, it was deemed important to IIM Bangalore bring together a Working Group to come up with concrete ideas on how to improve this funding ecosystem in the country and to strengthen the FPO institutional capacity and steer it towards sustainability.

The Round-Table was attended by a small select group of informed experts to explore these issues. Current challenges were discussed and a view was taken on the prevailing policy environment and operational impediments and the growth trajectory of FPOs. Experiences in India and other countries were shared on innovative financial products in meeting agri-financing needs, with bankers sharing their experience of working in the agri-business sector. Lastly, it was attempted to bridge the policy – practice gap by discussing ideas to pilot new financial products for start-ups, advocating changes in the existing policy structure, fostering innovations in agribusiness financing through collaborative programs between apex organisations like NABARD, SIDBI and SFAC and scaling up of existing efforts by these institutions.

Ten concrete recommendations were drafted by the group, as points to take forward jointly to a working committee at NABARD, the RBI and the Ministry of Finance, as required. These policy recommendations are aimed towards creating a more cohesive and conducive environment for FPOs in the country and to bring more investments and support to the agri-business sector at large.

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INTRODUCTION

The Agriculture sector continues to be the single largest employment and livelihoods provider in India. Several studies have highlighted opportunities for improvement in productivity, processing, and building effective value chains. Banking support is vital for realizing the full potential of this sector. Much of agri- financing in India has traditionally focused on downstream financing of farming inputs like seed, fertilizer, pesticide, loans for farm equipment, and for enhancing productivity. However the focus on upstream financing for agribusinesses has been relatively low. Reports have highlighted the inefficiency of value chains, low levels of investments in primary and secondary processing, and high levels of post-harvest 2. Vipin Sharma, ACCESS loss and waste. Meanwhile, increasing customer demand for value added, processed Development Services commodities, including processed food have not been fully exploited. There is also

increasing import of such commodities in India.

There is still no dedicated Agribusiness Bank in India though many have started agri divisions. There are legal and structural issues that Indian banks face while lending, such as lending to only a particular type of institution that does not include FPOs. NABARD, as the apex bank is engaged in refinancing and does not do direct lending. SIDBI as another apex bank focuses only in financing enterprises that are engaged in processing activities. In contrast, while there are specialized banks for housing, small and medium enterprises and so on, there may be a need for such dedicated banks as nearly all existing banks for agri-business fall short of the required priority sector lending targets to direct agriculture.

Agri-lending, as part of the Priority Sector lending guidelines by the RBI, is seen as a statutory requirement, rather than as a business opportunity. However in contrast to manufacturing and the services sector, agriculture is characterized by high seasonality, high price volatility, long lead times, and complex value chains. The loan products for this sector also need to be worked out appropriately otherwise the downstream agribusiness sector will not take off. In contrast, there are specialized banks for agri-lending in other countries. They offer a wide variety of custom-made loan products for farmers and for agribusinesses, to meet their agri-finance and post-harvest needs. This is true not only in the west (United States, Europe, Australia), but also in Asian countries like China and the Philippines. It is worthwhile to look at the possibility of setting up an apex financial institution to facilitate flow of funds and deliberate on what the institutional nature of this entity should be.

The Round-Table explored these issues of agribusiness banking in India, including opportunities and policy changes that may be required. It is hoped, that the deliberations of the Round-Table and the recommendations made will lead to some change in the way agribusiness lending is done in the country.

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KEY RECOMMENDATIONS MADE AT THE ROUND-TABLE

1. Including FPOs under Direct Agriculture, Priority Sector lending – Tweaking the RBI circular to include all types of FPOs as farmer organisations and include „agri-processing units‟ into the ambit of priority sector lending. This is expected to bring forth about INR 1000 crores to the sector. 2. Comprehensive Early Stage Funding – NABARD may consider supporting FPOs for different types of needs at the early stage. All funds can be given through a single window or it can be a single fund for the following purposes: a. Equity enhancement – This is already being offered by SFAC in terms of matching the farmers‟ equity of minimum INR 10 Lakh, with INR 10 Lakh equity grant. b. Grant fund – For capacity building, staffing, basic infrastructure and office expenses c. Loan fund – To give directly to FPOs through window or through organisation such as Ananya Finance, LAMP fund etc. d. Guarantee fund – SFAC is offering up to 85% guarantee for loans to FPOs worth INR 1 crore. NABARD may consider setting up a guarantee fund beyond this. e. Research fund – Fund for documentation/research and to build knowledge in the field. f. IT fund – Fund for support on information technology applications such as warehouse management, price discovery etc. g. Price Risk Cushion fund – the purpose of this fund would be to offer a downside cover to FPOs who are using warehouse receipts for the first or second time. In the event the price of what they warehoused falls during the storage period, this fund would make up the loss by paying at least the same price as was prevailing on the day of storage. The fund would encourage FPOs to use warehouse receipt finance more extensively. 3. Creation of FPO Support Fund – NABARD may earmark funds from the interest differential fund as follows: In the 1st year INR 200 crore and increasing steadily to INR 2000 crore by the 5th year. 4. Pilot by SIDBI – SIDBI should use their soft funding under the DFID – PSIG project to run a few pilots with hand-picked 8 – 12 FPOs in the states of UP, , MP and , that address a range of issues from capacity building to finance. SIDBI to possibly collaborate with NABARD on the same. 5. Transformation of SFAC – SFAC could be transformed into a full-fledged Development Finance Institution (DFI) for FPOs. 6. Warehouse Receipts based Lending – Tightly couple lending against warehouse receipts. 7. Taxation – Currently agri-processing VAT is paid on the entire value. There is need to put forth an argument for such tax to be paid on „True Value Added‟, so on 10% (or for the purchaser to pay purchase tax) with the Ministry of Finance. 8. Tax Deduction – Work with the Ministry of Finance (CBDT – JS, TPL) to make investments in or expenditure on FPOs as a tax deductible expense. 9. CSR – Work with MCA to include funding of FPOs as a legitimate CSR activity. 10. New Financial Institution – Create a brand new financial institution, a specialized Agri-bank, possibly an NBFC, for value addition work, with INR 500-1000 crores equity to fund FPOs and collectives and lobby for the same with the Finance Minister.

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KEY DISCUSSION POINTS

1. Policy Change

Policy directions lead to catalytic shifts in the ecosystem and bring about huge changes in the funding environment for the sector. The Round-Table was an effort to identify areas and issues around which policy shifts are required to be made.

Four specific areas were identified and strongly recommended:

a. Bringing necessary modifications in RBI‟s existing priority sector circular, Clause no. III, 1.1.2 to include Producer Companies and Farmer Producer Organisations along with PACS, FSS and LAMPS in the clauses for direct loans to agriculture. b. Inclusion of agri-logistics and agri-processing under direct agriculture lending in the above clause. c. The possibilities of a Guarantee Fund for bank loans to agriculture, which requires a substantial corpus from the Government. d. Also, the need for SFAC to make loans to all agri-collectives and not only to SFAC promoted FPOs so as to expand its benefits to other forms of producer collectives.

Chairman, NABARD, who had a scheduled meeting with Governor, RBI on April 17, 2014, assured to get these suggestions examined within NABARD and to take them up with the Governor.

Specific modifications in priority sector guidelines were recommended and drafted, (as given in Annexure 3), to bring about significant changes in the funding environment for FPOs. Transformation of SFAC into a full-fledged Development Finance Institution (DFI) for FPOs

2. Suitable Business Models

Among the key discussions at the Round-Table, the most important pertained to the appropriate business model needed that will respond best to the diverse financial needs of FPOs. Commercial Banks are not able to fulfill this need for FPOs as they want to make loans which are secured and low risk, and on the other hand, users/farmers like banking services that are friendly.

Policy change was recommended, but it was realized that unless a separate dedicated institution or an SPV (Special Purpose Vehicle) is established, efforts to tweak policy or existing institutions will not be enough to bring about transformative change in lending to FPOs. Vipin Sharma, CEO, ACCESS Development Services, stressed on the need for a new generation apex organization, dedicated to the diverse financial-service requirements of FPOs.

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Hence, a separate new-generation lending institution, institutionalised as an apex NBFC was seen as a good idea. The broad view of the Group was that it will be important to underpin this national level entity with a capital base of about INR 500 – 1000 crores as the current and potential requirements are huge and the small efforts of LAMP Fund, FWWB or Rabobank kind of institutions are highly inadequate. Also, it was proposed that this entity should include, as a part of its mandate, capacity building, asset augmentation, research & development efforts, rating and marketing alike.

a. It was discussed that this corpus will need to be put in by an apex organisation and the ideal solution, as suggested by Prof. Sriram, would be to have an SFAC type of arrangement within NABARD. b. However, Prof. Sriram commented that such a large corpus contribution can only come from the Government, and considering the current time when elections are in course, it seems that the best time to lobby for the same will be in June, post formation of the new Government with the Finance Minister. Hence, there is merit in giving the idea of this new entity to the Government and the next finance minister who will be looking for such ideas in the new term.

Need for a separate financial institution was brought out, possibly an NBFC/SPV, with INR 500- 1000 crores equity to fund FPOs and collectives NABARD to earmark funds from the interest differential fund under RIDF to create an FPO Support Fund by lending at lower rates

3. Need for Research

Brij Mohan, former Executive Director, SIDBI, gave the example of MFIs which, in the early 2000s, were not recognized as a good proposition for financing. However, over a period of time, based on good recovery and a track record established, the sector has grown significantly, attracting high volumes of debt and equity. He said that, in the case of FPOs too, this was a good way to start, but it is important to invest in these institutions and build their track record. Also, there is need to spend more time in building the ecosystem for these organisations. He mentioned that it is easy to convince banks to give loans when there is success story in hand and simply being genuine and having good intentions is not enough. The sector thus needs to invest in building the track record of FPOs and documenting the same.

Harsh Bhanwala, Chairman NABARD strongly expressed the need to create such documentation and research on FPOs as it is needed to generate interest for commercial banks to invest in this sector. Also, such research will help talk about agribusiness 3. Harsh Bhanwala, models, which will only come up in the next 3 – 5 years as operationally viable Chairman NABARD structures. Very little of such research is currently available.

He also expressed readiness to consider proposals for such research from various institutions such as the Indian Institute of Management (IIM).

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NABARD to provide funds for research to build knowledge in the sector and experiences in FPO promotion

4. FPO Round-table, IIM Bangalore

4. Loans and Finance for FPOs

Prof. Sankar Datta summarized the problem that FPOs face in receiving loans by saying that most agricultural commodities have a much longer working capital cycle, and this issue is compounded in the case of FPOs, as an FPO cannot raise capital from anyone other than producer members. Therefore, their ability to generate external capital is low. Banks are uncomfortable providing large working-capital loans that are required by FPOs. Additionally, the mutuality clause which makes FPOs profits taxable, is pushing many FPOs (as in the case of co-operatives) to pass on its profit as bonus which reduces tax burden but doesn‟t allow for much capital formation; And if capital is low, with 1 vote per person, they will very soon reach a capital ceiling and working capital finance will be very difficult.

Prof. Trilochan Sastry, IIM Bangalore, informed from his experiences that working capital requirements of FPOs are very high, particularly when they expand into post- harvest processing and other downstream activities. Prof. Sastry said he was looking for innovative ideas to solve the problem of mobilizing such large sums of working capital. He went on to say that the working capital model is fraught with danger for any commodity, which has high volatility, when looking at the cost of storage. He suggested that storage should be handled by a central organisation for 4-5 FPOs together.

5. Prof. Trilochan Sastry, He informed that currently, agri-processing VAT is paid on the entire value and went IIM Bangalore on to explain the same by informing that this is because when an FPO purchases from the farmer-member, there is no VAT as farmers are exempt from tax. But when the FPO carries out value addition, it should pay VAT only on the value added and not on the entire

9 value as is currently being demanded by the Income Tax Authorities. There is need to put forth an argument for such tax to be paid on „True Value Added‟, with the Ministry of Finance.

It was suggested that specific „policy changes‟ need to be made to solve the problem of working capital loans. He said that farmers will never be able to raise such capital and there will always be a problem of capital adequacy which is a major constraint for them. Prof. Sastry stated that India is the only country where, in a producer company, non-member equity is not allowed. He suggested that:

a. 25% share capital be allowed from external sources, with some categorization, as it will significantly attract more funding from banks b. To come out of the problem of capitalization, FPOs should be able to come out of VAT as for example in Andhra Pradesh, 5% VAT is killing its farmers, which is payable despite losses. c. Between bankers and RBI, a way of lending should be sorted out, to be able to provide warehouse finance to not only individual farmers but to FPOs as well, which are ultimately only an aggregation of farmers. Thus there is a need for cash flow based lending, and not lending on current norms. d. A National Farmer Development Board (NFDB) should be established on the lines of NDDB. This should have a corpus of at least INR 1000 crores, and be a mission driven organization like NDDB. This organisation should be a single window promoter of FPOs, and promote, establish, train, educate (through grants), give loans to FPOS to invest in value adding activities, and build brands.

NABARD to create a Loan Fund so it can finance FPOs either directly or through organisation such as Ananya Finance, LAMP fund etc. The need to put forth a proposal for tax to be paid by „True VAT‟ Tweak investments in or expenditure on FPOs as a tax deductible expense Tightly couple lending against warehouse receipts

5. Equity Grant Fund (EGF) and Credit Guarantee Fund (CGF) Schemes

Vijay Mahajan, Chairman, BASIX, pointed out that it is important to recognize the fact that most FPOs are relatively new. Out of 150 FPOs supported by BASIX, 60 are less than 1 month old, and of the remaining 90, only 9 have crossed a turnover of INR 1 crore. This is very similar to the experience of other promoting organisations such as ACCESS as well.

The announcements made by the Government in the 2013 – 14 Budget viz. the Equity Grant Fund and the Credit Guarantee Fund Schemes which are yet to be operationalized, were discussed in this regard. They were however said to come with caveats and not very helpful in promoting scalability.

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a. The EGF scheme enables eligible FPCs1 to receive a grant equivalent in amount to the equity contribution of their shareholder members, thus enhancing the overall capital base of the FPC. The Scheme shall address nascent and emerging FPCs, which have paid up capital not exceeding INR 30 Lakh as on the date of application. The FPC shall be allowed to draw the Equity Grant in a maximum of two tranches (within a period of 2 years of the first application) subject to the cap of INR 10 Lakh per FPC, provided and to the extent that it is able to raise additional Member Equity to qualify for the matching grant within the overall ceiling of INR 10 Lakh. b. M V Ashok, CGM NABARD pointed out that the CGF has been set up 6. Manoj Rawat, Ratnakar Bank with the primary objective of providing a Credit Guarantee Cover to eligible Lending Institutions to enable them to provide collateral free credit to FPOs by minimizing their lending risks in respect of loans not exceeding INR 1 crore. The Fund only covers FPOs with a minimum of 500 members, but if one talks about increasing scalability, this number needs to go down to 100.

Talking about guarantee, however, pointed out that one has to face the reality that there are a large number of FPOs that are still new and scalability will come eventually. He shared the example of 4 FPOs in Gujarat, which have done business of over INR 50 – 60 crores. In total, FPOs total marketing has crossed INR 110 crores which is creditable for the sector considering it is new. So, it is important to build it step by step, instead of saying that large agri-processing organisations such as Bunge and ADM are needed.

There was a unanimous view that it is important to bring together farmers for economies of scale, and basic infrastructure doesn‟t come with small amounts such as INR 50 Lakh or 1 crore. Manoj Rawat, Ratnakar Bank stated that small farmers are at the receiving end as bankers are more inclined towards working with

and providing loans to larger farmers.

Dr. Bhanwala also mentioned that it is too early to talk about scalability of FPOs. He wondered if one can think about alternate instruments to look at guarantees differently. In the current situation it is very important to look at the promoting organizations and support them, and NABARD is ready to help these organisations.

NABARD has set up a scheme called the “Producers Organization Development Fund”, to tackle the issues of non-availability of timely credit, capacity building of producers and strengthening of FPOs and market tie- ups. It provides support in the form of grant and loans, or a combination of these. In addition to this, NABARD, with support from German Development Cooperation (GDC) through KfW and GIZ, has launched the Umbrella Programme on Natural Resources Management (UPNRM) programme which offers new loan-based financial products that combine loans and grants to support pro-poor and community- oriented projects. The eligible agencies or channel partners to receive such funding will be State Governments, Banks, Corporate Houses (including Producer Companies), MFI‟s and NGOs.

1 FPC‟s are interchangeable with FPOs, where FPC means, Farmer Producer Company and FPO meaning Farmer Producer Organizations, includes other farmer collectives as well.

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Aloysius Fernandez, Chairman NABFINS highlighted the problem of the paper work required to get a guarantee from SFAC. He speculated that perhaps only 3 FPOs in the country would be competent enough to cope with that kind of paperwork. Training is required for the same as well.

Need for simplifying and customizing processes for application for loans in view of the requirement of the FPOs as per their life cycle needs. NABARD to consider setting up a guarantee fund beyond that created by SFAC, that offers up to 85% guarantee for loans to FPOs worth INR 1 crore.

6. Assessing the Health of FPOs and Rating

Many of the participants expressed concern about the system of assessing the health of FPOs. It was suggested that a Rating Tool should be introduced for promoting organisations as well for the FPO as an organization to benchmark their operations and build their credibility. It is therefore important to evolve systems for credit rating of FPOs. Two ideas were discussed in this regard:

a. A risk-sharing arrangement between commercial bankers and SIDBI, 7. Dr. V Tagat, which would have dual appraisal and insured debt NABARD b. Promotion of rating and requesting all SMEs in the market to be rated by independent agencies like CRISIL, as rated organisations are considered more comfortable to work with.

Dr. Alok Misra from M-Cril shared that SIDBI, through SFMC supported M-Cril in creating rating for MFIs. M-Cril has already done 5 ratings for FPOs, some for SFAC, and some for FWWB. He suggested that there needs to be policy funding for rating just like SIDBI took the lead for rating for MFIs, NABARD can take the lead for FPO Rating. Mr. Brij Mohan, said that this needs to be done for not more than 200 organisations and therefore FPOs may be willing to get the rating done themselves based on the accrued and motivational benefits.

It was recommended that FPOs should be rated as an organization, and there is need to set up a Rating Support Fund with NABARD. As the market develops, the same can transform into a user- pays model.

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7. Capacity Building

The experts discussed the need for training and capacity building for FPOs, to make them more sustainable and marketable. Also, in conformity of the views of Dr. Bhanwala, it was recommended to view the need for building capacity of capacity builders, especially FPO promoting organisations. To extend support for such kind of capacity building initiatives, Dr. Bhanwala suggested drawing from the pool of resources of reputed institutions such as the IIMs.

In this regard, Dr. Fernandez added that unless a culture that marketing can drive production is inculcated, much change wouldn‟t happen. It is important to look at how much has been invested in marketing, and how much in value-additional marketing.

Two important points were brought forward:

a. How existing FPOs are at various stages of their life-cycle and have no funds to take off. These FPOs can‟t be left high and dry, once the initial 3 years of support are over and have need for management support post that period. It was suggested that NABARD could take over from SFAC, after their support ends. b. When talking about a grant fund which would provide such training and capacity building, it was realized that no commercial bank would be ready to provide the same, unlike NABARD which gives both loans and grants. It was discussed, that such a large fund, to the tune of INR 100 – 500 crores can only be provided by the Government.

The need to create a breed of professionals who can be placed with FPOs and make them evolve to sustainable levels. There is also need for a Grant Fund from the Government to provide such training and capacity building.

8. Soft Funding and Pilot by SIDBI

Mr. Singhwan, CGM, SIDBI, informed that they were mandated to be involved only in value addition agricultural activities such as processing. Most FPOs, he added, are involved in downstream, not upstream activities making it difficult for SIDBI to find FPOs that it can work with. Value addition, he said, improves the viability of the organisation being funded.

Mr. Brij Mohan talked about the PSIG (Poorest States Inclusive Growth) program that SIDBI is implementing with funding from DFID, and mentioned that it has huge resources available for the 4 states of Uttar Pradesh, Bihar, and Odisha. Mr. Singhwan offered that 8. Brij Mohan and K.S. Singhwan, under PSIG, SIDBI can undertake a few pilots with 8 – 10 FPOs with SIDBI their soft funding and assess the managerial strength of these producer

13 organisations as a part of the programme.

Mr. Brij Mohan wondered if there was a possibility of SIDBI and NABARD collaborating on these pilots considering a higher willingness in SIDBI to work in the 4 states mentioned.

It was recommended that SIDBI should use their soft funding to conduct a pilot in the 4 states of U.P, Bihar, M.P. and Odisha with 8 – 10 FPOs.

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OTHER KEY DISCUSSION POINTS

1. A need to acknowledge that organisations like LAMP Fund, FWWB which have the agility and ability to support FPOs should receive some top up support from NABARD.

2. In the context of warehouse receipts, the Gramin Bhandar Yojna Scheme to be extended to warehouses as well.

3. The importance of establishing a FPO champion institution, as today, other than SFAC, there is no single champion for FPOs. It was felt that NABARD is best poised to lead and take a sole position on FPO promotion given its apex position and strength, as at this initial point, it is important for the Apex to be the leader.

4. It was suggested that storage should be handled by a central organisation for 4-5 FPOs together.

5. It came out from the discussions that India is the only country where, in a producer company, non- member equity is not allowed. It was suggested that if 25% share capital is allowed from external sources, with some categorization, it will attract a lot more funding from banks.

6. The CGF Fund, which only covers FPOs with a minimum of 500 members, needs to bring down the number to 100, if talking about scalability.

9. Discussion Group at the FPO Round-Table

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SHARING OF EXPERIENCES

1. BASIX Mr. Kumaresh, Manager of the Livelihood and Promotion (LAMP) Fund at BASIX, informed the group that BASIX had rigorously put funds in the non-farm and agriculture sector. They had provided funding support to a total of 16 FPOs with the ticket size ranging between INR 5 – 50 Lakh. These FPOs were spread across 8 states, of which 4 had become viable in MP after the intervention of the Government.

Sharing his experience, Mr. Kumaresh mentioned that he had observed that:

a. If the first rotation of business cycle at an FPO was done well, it made it easier for them to enter the market. He informed that in the last one year, BASIX had invested twice in the same FPO, which was doing a business of INR 80 Lakh to 10. Vijay Mahajan, BASIX a crore. b. The three criteria that BASIX looks at for the appraisal of an FPO are: if the first cycle of operations had been done well, who the promoters are and how the FPO has been nurtured by the promoter.

2. FWWB Ms. Vijayalakshmi Das, Chief Executive, FWWB, shared that their organisation‟s experience of lending to FPOs had been positive so far with a 100% repayment rate. Starting with 3 FPOs, they had now gone up to lending to about 30 of them. At the same time, FWWB had evaluated these organisations purely on the basis of financial parameters, and had found their balance sheets viable.

Ms. Das mentioned three key things she had learned from her experience:

a. Any rate of interest cannot be charged on the loans provided to FPOs. She stated that she has seen that 8 – 10% is the maximum rate of interest one can charge an FPO. b. Time and seasonality are very critical for farmers and it is pertinent to make the loans available quickly, otherwise, the FPO starts selling to the money lender. FWWB has decided to lend in every season, and not on a yearly basis. This, she said, 11. Vijayalakshmi Das, is something that commercial banks are perhaps incapable of doing. FWWB c. She mentioned that it is also important to lend with a heart.

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3. IIM Ahmedabad Prof. Sukhpal from IIM Ahmedabad mentioned that:

a. One should not worry about small farmers as the market makes them viable. The issue is that there are plenty of large farmers and one has to figure out how to make them deal with the market. b. IIM-A was planning to publish 25 case studies on FPOs in the next month sharing their experiences and maturity. c. He also gave the example of Thailand where in 1966 the Government established the Bank for Agriculture and Agricultural Cooperatives (BAAC) as a state enterprise under the jurisdiction of the Ministry of Finance. Its primary objective is to enhance social and economic well- 12. Prof. Sukhpal Singh, being of Thailand‟s farming population through financial services in the IIM Ahmedabad form of loans for agricultural production, investment and marketing. BAAC continues to enter into the Government‟s agricultural produce pledging scheme, futures market and crop insurance. The bank creates production and marketing linkage through cooperatives and their apex organization - Thai agribusiness Company or TABCO, a company owned 90% by farmers and 10% by BAAC. This was a part of the national development plan in the 1990s, for farmers to do modern agri-business, not only domestically, but abroad as well.

4. NABARD Dr. Bhanwala shared that NABARD was looking at the FPO sector with a lot of expectations and is already devoting time across this architecture. He said that in the coming 3 years, NABARD is looking at supporting about 2000 FPOs. Dr. Tagat, CGM, NABARD shared a few points from his experience:

13. NABARD Team a. He had observed that FPOs, the so called aggregators, only start with doing input distribution and buying fertilizer together, as the first thing that a farmer wants to do is save money and only later invest. After input distribution, they start looking at aggregation. b. He also found that without professional leadership it is difficult to carry forward the activities as the members are mostly not very productive. c. He shared his observation that in certain commodities, where trade is strong, farmer groups are not appreciated and also in certain farms, only a particular type of quality is needed. Therefore in this sector, different models need to be pursued and each model requires different sort of financing, largely collateral free. d. He also brought out the importance of financing FPOs over a longer period of time, and not just in the initial few years, as it takes them time to set their business plan in motion.

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5. NABFINS Dr. Fernandez, shared three issues faced by FPOs:

a. At least 3 – 4 years of management experience of the groups is required. b. It is important to look at their capacity and exposure to be able to manage the business and manage their ability to handle paper work. c. The importance of providing loans at the right time, as timing is very critical in the farmer‟s case. He mentioned that there‟s definitely risk for bankers in that case, which the top management should take as it cannot be taken by a field level person. 14. Dr. Aloysius Fernandez, d. He brought out the importance of three key strategies: aggregation, NABFINS quality and value addition in the agri-value chain.

Aalsmeer Flower Auction2 is a flower auction, located in Aalsmeer, the Netherlands. It is the largest flower auction in the world. The auction building of the flower auction in Aalsmeer is the largest building by footprint in the world, covering 243 acres. Flowers from all over the world are traded on a daily basis at the Aalsmeer facilities. Around 20 million flowers are sold daily with a 15% increase around special days such as Valentine's Day and Mother's Day. Their flowers are subject to around 30 checks so that they can be graded on a scale (A1, A2 and B). The auction is set up as a Dutch auction in which the price starts high and works its way down. Bidders get only a few seconds to bid on the flowers before they are shipped off to the new owner's business.

Safal3 was established with the objective of facilitating a direct link between Fruit and Vegetable Growers and Consumers thereby achieving its vision of providing quality produce, products and services aimed at delighting the consumers and improve quality of life of farmers and producers by providing them fair & optimum price realization for their produce and the expert guidance, thereby creating a better and meaningful living for all in the society. Without the establishment of a producer company, farmers were attracted to sell their produce to Safal. This was because the farmers realized that Safal was paying for quality, hence bringing about a change in the farmers‟ lifestyle, where they started focusing on quality.

2 Source: www.floralholland.com 3 Source: Safal website www.motherdairy.com

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6. Origo Commodities Mr. Sunoor Kaul, Director, Origo, shared the experience of his organisation which had been able to touch base with 60,000 farmers and monetize commodities up to INR 100 crores in the two states of Andhra Pradesh and . He informed that Origo was able to give farmers a higher price than the market as in the last 2 – 3 years they had been working on aggregation.

Over the past 3 years, he said, Origo had undertaken:

a. Increased farmer awareness in what he should be able to monetize for produce. 15. Sunoor Kaul, b. Built their capacity to be able to do multiple activities such as storage and Origo Commodities finance. c. Most importantly, worked on the farmers‟ marketability

A result of this he said was that farmers were willing to get away from the traditional supply chain and break away from money lending institutions. They were ready to go to PACs and were ready to wait for 6 months to monetize their produce.

7. Rabobank Arindom Datta, Senior Director & Head, Rural and Development Banking at Rabobank, informed that his organization had put in INR 80 – 100 crores of grant money into FPOs. This year, Rabobank was looking at a pipeline of 45 – 50 producer companies. Mr. Datta added a caveat that the bank‟s success in agri-banking is due to the undue advantage of being mandated to not look outside of the agri-sector.

Speaking about his experience he said that:

a. Intention and not policy is needed to do agri-credit. b. Minimum requirement for guarantee was found easier to do through an NBFC structure. c. Key products such as warehouse financing are required. d. He suggested that a silent phenomenon is happening in the background of globalization of Indian agriculture. Sustainable organic crops are where the markets are and there‟s a global demand for them. Retail brands across the world are looking 16. Arindom Datta, at whether Indian farmers are ready to produce such crops. There are billions of Rabobank dollars ready to be invested in the right quantity and quality of crops.

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WAY FORWARD

The Round-Table brought forth various discussions about the issues faced by FPOs through their lifecycle and also the policy changes that can be brought about to solve those problems. There was discussion about the support that SFAC provides in promoting FPOs. Quasi-financing mechanisms like the Equity Grant Fund and the Credit Guarantee Fund Schemes were also discussed. Such support and schemes help FPOs to acquire credit worthiness as they shape themselves as business entities to be able to avail credit linkage in commercial terms as they mature. Hence, the need for a differential approach to agribusiness financing of FPOs, depending on the stage of its growth was brought out.

The discussion was concluded by Mr. Vipin Sharma as he expressed his appreciation on the overwhelmingly rich discussion and for the group to have generated so many ideas and concrete recommendations. He added that to make sense of the deliberations, it is needed to put sustained efforts towards two things:

1. NABARD to set up a FPO Working Group to engage on all the FPO related issues on a continuing basis 2. Further sorting and discussion on the 10 recommendations in the following steps: a. Circulation of the recommendations among all participants b. Tweaking the priority sector guidelines after putting co-signatories and send the same to RBI or to NABARD, before the 17th of April, 2014

17. Dr. Bhanwala paving the way forward

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ANNEXURE 1: PROGRAMME SCHEDULE

Round Table on

Agri Business Banking in India: Opportunities and Challenges

Jointly organized by Center for Public Policy – IIM Bangalore and ACCESS Development Services

Date: April 5, 2014 (Saturday)

Venue: CPP Conference Room, IIM Bangalore

9.20 am – 9.30 am Registration and programme commencement Welcome by Prof G Ramesh 9.30 am – 10.00 am Introducing the theme for the Round Table Discussion Mr. Vipin Sharma and Dr. Bhanwala Session I – Current issues and challenges of agri-business banking in India - 10.00 am – 11.00 am Policy perspective and performance analysis, experiences in India and other countries and sharing of Innovative Prof. Trilochan Sastry Financial Products in meeting agri-financing needs Moderation by Mr. Vijay Mahajan 11.00 am to 11.30 am Open house discussion 11.30 am to 11.45 am Tea/Coffee Break Session II – How Agri-Business Banking is working – 11.45 am to 1.00 pm Views from Bankers and Sharing of experiences Moderation by N.V. Ramana 1.00 pm to 1.30 pm Open House Discussion 1.30 pm to 2.00 pm Lunch Session III – Bridging Policy –Practice Gap: Ideas from the house –What and how to Pilot new 2.00 pm to 3.30 pm Financial Products for start ups Scale Up and better customization of good experiences Doing away with old/obsolete products, processes and practices Moderation by Dr. V Tagat

3.30 pm to 4.00 pm Open House Discussion and Concluding Remarks Vote of Thanks by Mr. Suryamani Roul 4 pm Tea/Coffee

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ANNEXURE 2: LIST OF PARTICIPANTS

Organisation Name Designation

1 Aavishkaar Sushma Kaushik Private Equity & Venture Capitalist

2 ACCESS Development Aditi Elhence Manager Services

3 ACCESS Development Suryamani Roul Senior Vice President Services

4 ACCESS Development Vipin Sharma CEO Services

5 Aditya Birla Group Ajit Ranade Economist and Columnist

6 Ananya Inclusive Finance; Vijayalakshmi Das Chief Executive FWWB

7 Ananya Inclusive Finance; Brij Mohan Chairman; Former Executive Director SIDBI

8 Azim Premji University Sankar Datta Professor

9 BASIX Group Kumaresh Rout Head - LAMP Fund

10 BASIX Group NV Ramana Director on the Board of CTRAN and IGS

11 BASIX Group BL Parthasarathy Managing Director

12 BASIX Group Vijay Mahajan Chairman

13 BASIX Group (Indian Mihir Sahana CEO Grameen Services)

14 Centre for Collective Jacob John Development

15 GIZ Rajeev Sharma Program Manager, NRM

16 IFHD Vinay Tuli Director

17 IIM Ahmedabad Sukhpal Singh Professor

18 IIM Bangalore G Ramesh Professor

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19 IIM Bangalore M.S. Sriram Visiting Faculty, Centre for Public Policy

20 IIM Bangalore Ramana Tadepalli COO, IIMB-CRERI Team

21 IIM Bangalore Trilochan Sastry Professor

22 IIM Bangalore Udit Khare Research Assistant

23 Independent Anup Kumar Consultant

24 Intellecap Atreya Rayaparlou Co-Founder

25 M-CRIL Alok Misra CEO

26 NABARD Harsh Kumar Bhanwala Chairman

27 NABARD M.V. Ashok Chief General Manager

28 NABARD S.A Pandey Chief General Manager

29 NABARD V. Tagat Chief General Manager

30 NABFINS Aloysius Prakash Chairman Fernandez

31 Nucleus Software Vishnu R. Dusad Managing Director & CEO

32 Origo Commodities Sunoor Kaul Director

33 Rabobank Arindom Datta Senior Director & Head, Rural and Development Banking

34 Ratnakar Bank Manoj Rawat Vice President, Agri Business Group

35 Shanders Sriram Chitturi CEO

36 SIDBI K.S Singhwan Chief General Manager

37 Ujjivan Finance Jisha Francis Management Associate

38 Ajay Desai Senior President & Chief Financial Inclusion Officer

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ANNEXURE 3: RECOMMENDED POLICY CHANGES

Changes in clauses that were suggested are:4

1.1.2 Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage) up to an aggregate limit of 2 crore per borrower for the following activities:

(iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, grading and sorting, washing and drying, pre-cooling, packaging, storage and transport to consumer points.

(iv) Loans to farmers‟ organisations registered as a Society under the respective state Societies’ Registration Act, or as a Cooperative under the respective Sate Cooperative Act, or as a Cooperative under the Multistate Cooperative Act, or as a Producer Company under the as Producers’ Companies under the Companies Act, for construction and running of storage facilities (warehouse, market yards, godowns and silos), including cold storage units designed to store agriculture produce/products, irrespective of their location.

2.1.1.1. Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006.

It is further clarified that where a loan is given to a bank for food and agro processing, either directly to individual farmers, or to their self-help groups, joint liability groups, or to a group of farmers registered as a Society under the respective state Societies’ Registration Act, or as a Cooperative under the respective Sate Cooperative Act, or as a Cooperative under the Multistate Cooperative Act, or as a Producer Company under the as Producers’ Companies under the Companies Act, shall be treated as MSE loan, provided the processing unit satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006.

6. Others

6.6. Loans sanctioned by banks either directly to individual farmers, or to their self-help groups, joint liability groups, or to a group of farmers registered as a Society under the respective state Societies’ Registration Act, or as a Cooperative under the respective Sate Cooperative Act, or as a Cooperative under the Multistate Cooperative Act, or as a Producer Company under the as Producers’ Companies under the Companies Act, directly to individuals5 for setting up off-grid solar and other off- grid renewable energy solutions for households, micro-enterprises and irrigation pumpsets and for collectively owned installations like street-lighting, security, irrigation and grid feeding.

4 The phrases in simple text are a part of the original RBI circular. The phrases added in bold are recommendations made by the group. 5 The crossed out text is suggested deletion from the original circular.

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IV Weaker Sections

Priority sector loans to the following borrowers will be considered under Weaker Sections category:-

(m) Loans under categories (a) to (l) above may also be given to such individuals organised in an association registered as a Society under the respective state Societies’ Registration Act, or as a Cooperative under the respective Sate Cooperative Act, or as a Cooperative under the Multistate Cooperative Act, or as a Producer Company under the as Producers’ Companies under the Companies Act.

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