Agri Supply Chain: The Role of Local Banks - unctad.orgunctad.org/sections/wcmu/docs/c1EM32p19.pdf · One stop financial solutions ... •Tie-up with research institutes/ service

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

UNCTAD Expert Meeting

"Enabling small commodity producers in developing countries to reach global markets"

Organized by UNCTAD Commodities Branch

Email: [email protected], Web: http://r0.unctad.org/commodities/

11 - 13 December 2006

Agri Supply Chain: The Role of Local Banks

by

Mr. Brahmanand Hegde

Head of Products & Credit, Rural Banking Group ICICI Bank

The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

Agri Supply Chain -Role of Local Banks : India

December 12, 2006Geneva

Agenda

Introduction to ICICI Bank and Rural Banking

Indian Agriculture Supply Chain Indian Agriculture Supply Chain

ICICI Bank- Agriculture Supply Chain Initiatives ICICI Bank- Agriculture Supply Chain Initiatives

Agenda




Largest Pvt. Sector Bank in India- Rs. 2823 bn asset size

Large capital base- Rs. 334 bn; market cap of Rs. 507 bn

Largest consumer credit lender - Rs. 1000 bn retail portfolio

Over 17 mn customer accounts; 640 branches

One stop financial solutions provider

Large talent pool & dedicated research team

Presence in 17 countries; first Indian bank on NYSE

ICICI Bank Today…

Correspondent Network

Credit Franchisees

Kiosks Branches

Fast and Timely Payments to Farmers / Supply Chain Partners

New generation bank Harnessing

technology to offer cost efficient financial

transactions

The vanguard of novel rural financing

Corporate internet banking

Option

Rural ATMs

MFI partners

2003-042003-04 2004-052004-05

42 Bn

63 Bn

Through comprehensive financial services

Savings –MFs,

bonds,

Savings –MFs,

bonds,

Production Credit

Production Credit

Commodity based

funding

Commodity based

funding Investment

Credit Investment

Credit Farmers

Insurance –life & non

life

Insurance –life & non

life

•Co-branded biometric cards•Tie-up with research institutes/ service providers for customized information to farmers

Adopting a multi-pronged rural banking strategy

Integrating the supply chainIntegrating the supply chain

Creating new delivery channels

Creating new delivery channels

Use of technologyUse of technology

Innovating new productsInnovating new products

Mitigationof risks

Customer convenience

Quick TAT

EasyBanking

Elements of strategy Facilitate

Value added productsValue added products

Increased

customer base

Increased

customer base

Lower

costs

Lower

costs

Customer

satisfaction

Customer

satisfaction

Leads to

Agenda


Indian Agriculture Supply Chain


Current status :Broken links in agri chain-India

Production Supply chain Processing Marketing

Poor extension Quality inputs Low productivityNon demand linked production

Lack of storage Poor transportation High wastages Multiple intermediaries

Low processing Lack of qualityPoor returnsLow capacity utilization

Poor infrastructureLack of grading No linkages Non transparency in prices

Each segment working in an isolated manner resulting in multiplelosses across the value chain

Each segment working in an isolated manner resulting in multiplelosses across the value chain

Need for integrated supply networks

Input Infrastructure

Distribution,Retailing &

Export

Production & Harvesting

Processing Infrastructure

Market segmentation, consumers demand & low cost strategy -driving factors for supply chain collaboration

Key characteristic of successful supply chain : efficiency, flexibility, innovation, responsiveness

Key characteristic of successful supply chain : efficiency, flexibility, innovation, responsiveness

An integrated supply chain provides access to knowledge, technology, finance , markets: leading to shared benefits

In the present era of globalization & privatization Competition no longer between firms but between supply chainsEfficiencies of scale and scope the “buzzword”

Integrated supply chain- finance perspective

Leads to shift in the risk profile

Shifting of some of the risks to third party Shifting of some of the risks to third party

Credit risk Credit risk Performance risk Performance risk

Unknown risks to calculated risksUse of partner infrastructure for

servicing the farmer Access to unbanked clientele

Collateral of good as it moves along the chain than at a point

Structuring of product around payment from trader/ company

Efficient supply chain results in risk reduction & enhances credit flow Efficient supply chain results in risk reduction & enhances credit flow

Provides an alternative viable model not based on borrower’s credit risk but on the borrower’s position in the supply chain.

Integrated supply chain- farmer perspective

Short term and long term benefits to the farmer

Associated benefits of integrationReduction in product losses in transportation & storageIncrease in sales Tracking and tracing to the source Better control on quality Shared risks among players in the chain

Technology Technology Capital Capital

Markets Markets

Upgrading as chainactor

Upgrading as chainactor Developing partnerships /

ownershipDeveloping partnerships /

ownershipAdding value through vertical integration

Adding value through vertical integration

Organized supply chains : critical factors

Potential to organize producers & ensure their independence

Potential to organize producers & ensure their independence

Must lead to social as well as

economic benefits

Must lead to social as well as

economic benefits

Not in areas already profitable

which need no external stimulus

Not in areas already profitable

which need no external stimulus

Business must be viable Business must be viable

Each actor must be efficient to collaborate in the chainEach actor must be efficient to collaborate in the chain

Selecting the right chain

Where small scale producers have some comparative advantages

Where small scale producers have some comparative advantages

Products with high growth potential of market

Products with high growth potential of market

Products with lack of alternativeviable models

Products with lack of alternativeviable models

Products linked to use of natural resources

Products linked to use of natural resources

Which products likely to be successful

Trust and transparency Joint planning and control

Shared leadership Continued value proposition

Agenda



ICICI Bank- Agriculture Supply Chain Initiatives

Getting insight into sector specific characteristics

Developing thorough understanding of supply

chain

Identifying key risks and mitigants

In depth Sector

Analysis

Understanding evolution of global and domestic industry

Product for targeted SME cluster

Opportunities to penetrate the supply chain

Identification of retail opportunity

Value chain analysis : ICICI way

Inputs Inputs Crop/Processing Crop/Processing

Allied Activities

Allied Activities Rural InfraRural Infra

Elements of agribusiness strategy: ICICI Bank

Infrastructure Development

Customizedsolutions

Value addition

Influencing regulatory &

policy changes

Integration of value chain

Our initiatives in agri supply chain

Bringing the partners together for shared gains

Interlinking farmers with the markets Interlinking farmers with the markets

Raw material / capacity building/ quality/ infrastructure

Addressing supply chain gaps Addressing supply chain gaps

Creating marketsProviding Technological and delivery options

Creating value chains where none exists Creating value chains where none exists

Local optimas than global optimas

Professional intermediation at key transaction points Professional intermediation at key transaction points

Interlinking farmers with markets Up gradation within the chain

- Ensure basic assets to improve production, processing & marketing

- Improve farm management skills

- Improve understanding of markets, chain, competition & demands

- Promote & Strengthen farmer’s organization

Facilitating corporate tie ups- DSCL/HKK

Commodity based funding

Partnering in the value chain – Poultry

Trapping the cash flows – Jatropha

Addressing supply chain gaps

Strengthening weak links in the chain- Investment in R& D/ Extension , value added facilities

- Improving information systems

- Instilling professional management and operations

Facilitating extension – Agriwatch/ICRISAT

Funding for creation of facilities- cold storages

Funding for creation of warehouses

Impacting livelihoods: Interse agreements

Creating value chains where none exists

Make business partnership model for farmer- Continuous learning and innovation

- Empowerment; facilitate chain cooperation- Innovating on products and delivery mechanisms

Comprehensive coverage from scratch – SEWA

Building livelihood for producers- Sandhi

Network companies for untouched areas

Technology for payments – card based

Intermediation at key transaction points

Entire supply chain intervention may not be desired by farmers

Intervening in the entire supply chain not a feasible option in

all locations/all crops

Real unlocking of values possible through professional intermediation at key transaction points in the value chain

Ensures higher output value with greater sharing of benefits by the farmers ( pays only for what he desires ; no common costs)

Leveraging corporate linkages- NCDEX/NCMSL

Intermediation for price discovery –Safal

Funding for distributed generation – Desi power

Reaching Global Scale and Potential

Fix complete chains

Fix complete chains

Fix chains

Create tailored, end-to-end solutions for crops: from “farm-gate to consumer-plate”

Ensure market-linked

changes

Ensure market-linked

changes

Grow what consumers will eat in future (local and export)

Innovate to ensure customer value (not just convenience)

States to focus on few chains and have global aspirations

Bullet approach to an “integrated” approachBullet approach to an “integrated” approach

Production focus to marketing focus Production focus to marketing focus

Public Private Partnership

Public Private Partnership

Farmer-government-private sector collaboration to optimise resource allocation/risk mitigation

Catalyse change by crafting distinct roles for each stakeholder

Stand Alone to webs of alliance Stand Alone to webs of alliance

Thank You

Facilitating Farmer- Corporate Tie Ups

Inputs

Creating a closed loop of credit, extension services & output off-takeCreating a closed loop of credit, extension services & output off-take

Loan for pass through to farmer

Produce

Procurement

Extension service/advice

Repayment of loan with interest

Hariyali Kissan Kendra

DSCL

Interlinking farmers with markets


Farmer/VLA

Farmer/VLA

Warehouse/Cold storageWarehouse/Cold storage

3. Lodge receipt

Commodity processor

Commodity processor

1. Depositsproducts

2. Issue receipt BankBank

7. Offtake guarantee

M& C Agent M& C Agent

4. Provide Credit

5. Reimbursement of the loan amount

6. RecoveryCommitment

…through Warehouse Receipt Finance

Day 1

Day 45 - 60

Sells Day Old Chick, Feed, Medicine

Credit Assistance

Sells Fully Grown Birds

Repays the loan with interest

Pays the Balance amount

Day 2 - 45

Provides veterinary supportConstant monitoring

Corporate Risk Sharing

Poultry Feed Co.

Poultry Feed Co.

Poultry Feed Co.


… funding allied activities


Money Out Flow

Escrow of Receivables

Jatropha cultivation Jatropha cultivation Oil SeedOil Seed OilOilOil Expeller

UnitOil Expeller Unit

Oil refinery

Unit

Oil refinery

Unit

Bio DieselBio Diesel

Consumers

Consumers

Mon

ey O

ut F

low

Money

Out

Flow

Receivables

By ProductsBy Products

… through cash trapping mechanisms


Agri WatchAgri Watch

Godrej Agrovet

ICICI BANK LTD

ILRI/ICRISAT ILRI/ICRISAT

Extension Extens

ion

NGO’s & Farmers

… through professional extension


ICICI Bank acts as a catalyst for the integration of players in the value chain

ICICI Bank acts as a catalyst for the integration of players in the value chain

These initiatives have increasedrealizations by 30%

These initiatives have increasedrealizations by 30%

Desai Cold StorageBanana (Middle East)

Mangoes (U.K)

Vegetables (U.K. / Mumbai)

Exports

- Grading/Packing

- Ripening

- Cold Storage

InfrastructureFarmer

Finance facility

… through integration & creation of value chain infrastructure

3rd party w/house

3rd party w/house

ICICI BankICICI Bank

(1) Provides loan

(2) Builds w/house

(4) FCI, farmers,

Corp. store produce

(3) Farmer financing

(5) Pays monthly rentals

(6) Pays 3rd party after deducting loan dues

(5) Pays monthly rentals


… structured funding for small warehouses


Group of 5 Farmers(Inter-se Agreement )

Farmers invest in plantations and supply timber to company on

harvesting

ICICI Bank Ltd Tribal/ Marginal farmer

Paper company

To raise plantations ICICI Bank finances

input costs and labourcosts (support

livelihood)

Company repays loan out of payables to

farmer and pays the balance to farmer

Provides inputs & technical support

• Term loans for 5 to 7 years

• Loans upto Rs. 50,000 Without primary security

• Term loans for 5 to 7 years

• Loans upto Rs. 50,000 Without primary security

… interse arrangement for livelihood financing


FarmersFarmers

Micro finance facility

Production credit,Consumption creditand partly investment credit

On lending

Funding against commodities

Commodity Hedging by farmers through

Rural Housing

Supply Chain Funding

Kiosks

Trade Facilitation Center (Retail Chain)

SEWASEWA

… addressing comprehensive requirements

Large Scale Buyers/

Exporters/ Retailers

Large Scale Buyers/

Exporters/ Retailers

Artisans/ NGOs/ Aggregators

CollatesRequirements

Arrange Finance

For raw material/mechanization

Invest in finishing/

Packaging capability

Quality mgmt

Market

Fair terms of tradefor both sides


… putting together the handicraft piece For livelihood promotion


endeavor to…With support from through…

Trusts

Venture Capital

Citizen sectorOrganizations

Financial Institutions

Micro Finance Institutions

Government Agencies

Build missing market linkages for livelihood efforts of poor

Demonstrate market based solution for poverty

Link the demand for livelihood enhancing products and services for the poor to the scaled economic capacity of the poor

Community mobilization efforts

Understanding the need & an appropriate solution model

Investing in key infrastructure

Localized efforts on modern management

Fair terms of trade for both sides

With the focus on Well being & Wellness of India’s Poor

… network companies in areas of high potential but currently low banking


Tobacco farmer issued a card

Limit set on card on the basis of inputs availed by farmer & production needs

Farmer has access to funds through cash dispenser

Excess funds instantly swept to deposit account of farmer

Tobacco sale proceeds offset against the loan availed

… technology solutions for reducing transaction time and costs


For Creation of accredited Warehousesperforming more than mere storage function

Commodity Multi-Link

Point (CMP)

Market informationMarket

information

SellerSellerBuyerBuyer

FinanceFinance

Testing and Certification

Testing and Certification

Farmer, Cooperative,Trader, Wholesaler,Importer

Prices, Arrivals,Crop size

Speed, Quantum, Price

Speed, Cost

Processors, Exporters,Consumers, Wholesalers

Commodity Multi Link Points

Commodity Multi Link Points

**


Farmer AssociationsFarmer Associations

VACVAC

Terminal MarketTerminal Market

ConsumerConsumer

Cash and Carry StoresCash and Carry Stores

Electronic Auctions

Quality Incentivisation

Transparent Pricing Mechanism-Helps farmers in aligning production with market requirements

Transparent Pricing Mechanism-Helps farmers in aligning production with market requirements

Incentivisation for Quality-Grading at different levelsIncentivisation for Quality-Grading at different levels

Flexibility to sell to multiple buyers/ less dependency Flexibility to sell to multiple buyers/ less dependency

**

… helping create private markets


Small Biomass Project

MNES Subsidy

Equity

Project Finance

Local NGO/Cooperative

revenues

Selling of Co2Savings

Local Industries/Micro-enterprises

Supply to

Grid

D.E.S.I Power

Funding distributed generation

**

… Fuelling power requirements in rural areasthrough funding distributed generation

Documents

Agri Supply Chain: The Role of Local Banks - unctad.orgunctad.org/sections/wcmu/docs/c1EM32p19.pdf · One stop financial solutions ... •Tie-up with research institutes/ service