Platform to Create Shared Value in Agribusiness Key Issues and Solutions in Agri-finance Analysis of questionnaire responses and interviews of bank and

Platform to Create Shared Value in Agribusiness

Key Issues and Solutions in Agri-finance

Analysis of questionnaire responses and interviews of bank and agribusiness leaders on agri-finance

January 29, 2013Agri-finance Collaboration Meet

Table of contents

A. Bank and company priorities by type of collaboration

B. Key issues and solutions in agri-finance

C. Key issues and solutions in value chain and warehouse receipt financing

D. Key issues and solutions in building BC networks with agro-dealers

E. Meeting agenda

F. Background

Banks and companies responding to the questionnaire

Banks• Axis Bank • HDFC Bank• ICICI Bank• SBI• Yes Bank

Companies• Coromandel• ITC• Mother Dairy• StarAgri

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A. Bank and company priorities by type of agri-finance collaboration

Banks view warehouse receipt financing, value chain financing and agro-dealer networks as means to reduce costs and risk and increase outreach in agri-finance

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Mechanism, business modelPromise in

reducing risks

Promise in reducing costs, increasing

profitability

Promise in achieving major

outreach

Direct lending to farmers by bank branch staff

Lending to farmers in collaboration with value chain agribusinesses and/or strong producer organizations

Lending using distribution systems of input supply companies, agro-dealers as BCs or BFs

Providing warehouse receipt financing directly to farmers

Offering crop or weather insurance to farmers as agent for/ in collaboration with insurance companies

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Five participating banks responded to the questionnaireH: High M: Medium L: Low

Crop and weather insurance for farmers are considered important to banks and agribusinesses

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Importance of crop and/or weather insurance to banks and to agribusinesses

Main changes needed to make crop and/or weather insurance accessible to farmers:

Banks 1 2 3 4 5 6 7 8 9* 10

Changes needed Financial institutions

Crop Insurance premium should be reduced SBI

Government support required for the sectorCrop Insurance Premium for small and medium farmers should be borne by respective state government

SBI, ICICI

Claim settlement efficiency needs to improve ICICI, HDFC

Crop insurance should be customized, flexible and bundled with the loan Axis

* Average score for all five banks

Banks are interested in pursuing a range of agri-finance collaborations with value chain agribusinesses, agro- input suppliers and dealers, and storage companies.

AreasBanks

Axis HDFC ICICI SBI YES

Value chain financing with agribusinesses

Value chain financing with producer organizations

BC models with agro-dealers

Financing of agro-entrepreneurs

Financing of working capital

Financing of fixed investments

Warehouse receipt financing

Crop or weather insurance

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Companies are interested in pursuing collaborations with banks in a range of areas

AreasCompanies

Coromandel ITC Mother Dairy StarAgriBank financing of farmers in company’s value chains for working capitalBank financing of farmers for fixed investment requirements

Use of company agro-dealer system to provide farmers with ag credit as bank BFs or BCs Financing of strong agro-dealers in company’s distribution network

Financing of agro-entrepreneurs which are value chain integrators

Financing of company’s working capital requirements

Warehouse receipt financing for farmers

Warehouse receipt financing for traders

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B. Key issues and solutions in agri-finance

Key issues in agri-finance

Key issues in agri-finance

High costs

• Small loan size makes agri-lending expensive. HDFC Bank, SBI, ICICI Bank• Customer assessment, issues in selection. HDFC Bank, Yes Bank• High transaction costs with cash collections. HDFC Bank, ICICI Bank• Profitability, particularly in lending to small farmers. HDFC Bank• Cash-based transactions cumbersome. HDFC Bank• Issues of cost, productivity and ROE on manpower for agri-lending. Axis Bank • Add-on costs charged to farmers, e.g. bribes, procurement fees. Axis Bank• Limited branch outreach. Axis Bank, Yes Bank, ICICI Bank• Need to check end use of loans. ICICI Bank

High risks

• Agri-finance lending is risky, weather and market risks. HDFC Bank, Axis Bank, Yes Bank, ICICI Bank

• Tendency for defaulters to infect agri portfolio in the area. SBI• Fraud, loan default. HDFC Bank• Difficulties with tangible collateral, mortgage and title documents. HDFC Bank,

SBI, Yes Bank• Low claim settlement efficiency. HDFC Bank

Overall cons-traints

• Lack of investment credit. SBI• Private banks are at competitive disadvantage due to interest rate subsidies,

subventions for public banks. Axis Bank, Yes Bank• Farmers’ unfavorable perception of private versus public sector banks. Axis Bank• Corporate inertia, layers. HDFC Bank

Key solutions in agri-finance

Solutions in agri-finance

Reducing costs and improving efficiency

• LT strategies to collaborate with corporates and farmers, particularly value chain financing, for cost-effective outreach. HDFC Bank, SBI, Yes Bank

• Strong IT enabled services to reduce costs, turnaround time. SBI, Axis Bank, ICICI Bank

• However, some banks have found that IT solutions do not significantly reduce human intervention, required for due diligence. Yes Bank

• Ensuring improved turnaround time. HDFC Bank• Reduce collection costs with corporates deducting from farmer payments.

HDFC Bank

Reducing risks

• Have a strong MIS on client repayments and sales to enable timely action on repayment issues. HDFC Bank, SBI

Building effective overall strategy

• Work with all three models: value chain financing, agro-dealers as BCs, warehouse receipt financing. SBI

• Progressive bank management. HDFC Bank, ICICI Bank• Build own field force as well as with intermediaries. Yes Bank• Consider subventions for private banks or remove for public banks. Yes

Bank

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C. Key issues and solutions in value chain and warehouse receipt financing

Issues and solutions in value chain financing

Key issues in value chain financing

• Unstable corporate value chains, lack of loyalty of farmers to corporate value chains. HDFC Bank, SBI

• Inadequate number of stable value chains. SBI

Solutions in value chain financing

• Identify collaborators with reach, experience, brand/reputation, intent, goal congruence, building exclusive relationships. Axis Bank, Yes Bank

• Ensure corporate involvement in procurement. HDFC Bank• Corporates should reward quality to ensure net returns to farmers. HDFC Bank• Agribusinesses to provide sales and credit history of farmers in value chains. SBI• Banks should offer payments services to monitor the cash flows between farmers

and corporations. SBI• Create and train dedicated bank teams for corporate value chains. HDFC Bank• Need better training and trust-building with all stakeholders. SBI• Target and master each link in the value chain, to facilitate later moves to other

parts. Yes Bank• Strategy for farmer acquisition from value chains of multiple corporates, with plans

to fund them on “total basis”. HDFC Bank, ICICI Bank

On value chain financing, banks want companies to provide procurement history. Both consider distinct value proposition and shared MIS important. Banks would like the agribusiness to share risk and subtract loan repayments from payments to farmers.

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4The agribusiness with the value chain of farmers needs to be able to provide the farmer’s track record showing regular sales to the company over the past three years.

The bank and agribusiness need to build a shared MIS to facilitate repayments and early warning in the event that a farmer leaves the value chain.

The agribusiness should be providing distinctive combination of inputs, advice, procurement services and prices to establish a stable value chain with farmers.

The agribusiness should be willing to take a portion of the risk of non-repayment by farmers recommended for financing by the agribusiness

The agribusiness should get involved in collecting repayments when it procures material from the farmer, if the value chain is stable and mature.

Banks Companies

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Four banks and four companies responded to the questionnaireH: High M: Medium L: Low

Both banks and agribusinesses think financial services beyond loans, specialized bank staff, weather insurance and payment systems are important in value chain financing collaborations.

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The bank should make available other financial services to good agri-finance customers to help them build income and assets, and mitigate risks.

The agribusiness should have stable relationships with at least 1,000 and ideally over 10,000 farmers, to justify bank’s time and expense to establish VC relationships.

The bank should provide a loan officer or BC on the corporate premises or nearby to facilitate transactions for the farmers

Normally, the bank should be involved in payment processes between the corporation and the farmers to track cash flows.

The bank should ensure that participating farmers have weather or crop insurance to remove or reduce this area of risk.

Banks Companies

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Key lessons in providing value chain financing to farmers in collaboration with agribusinesses

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Key lessons Bank

Strength of value chain is most important factor to reduce risk

Number of commodities covered under value chain financing needs to be increased

Root level interaction should be there

Modernisation of Inputs to generate better results for the farmers at same cost HDFCRewarding quality – increase profit to farmers

Quick turnaround time is extremely important for farmers

AxisIdentification of proper collaborator-reach and qualified manpower, intent and goal congruence

Better to first concentrate and understand one part of the value chain and then move to the other level

Seasonality and peak requirements are there. For example in March the balance sheet of businesses might be highly leveraged but in September it might not be.

Solutions in warehouse financing

Solutions in warehouse financing

• Emphasize warehouse receipt financing which has lower risks than value chain financing or financing through agro-dealers. Yes Bank

• Create value chain through warehouse receipt financing and leverage this relationship to provide crop or weather insurance to farmers. ICICI Bank

In loose value chain financing relationships, the FI performs most functions, relying on procurement track records and non-financial services of the agribusiness.

• Bank assumes all risk, appraises loans, disburses and collects.

• Useful if focus on promising, high value commodities and if agribusiness/buyer provides data on procurement history from individual farmers in value chain.

• Risk of non-repayment, with agribusiness, buyer not directly involved in loan and repayment process.

• Risk of bank losing interest—relatively high cost, high risk model unless with established, progressive medium sized farmers.

• Useful to get agribusiness or buyer to provide procurement history to bank. Useful to engage agribusiness in productivity building measures, and in process of moving from loose to tight value chains.

Conditions for loose value chain financing to work

Roles of each key actor: Risk and risk mitigating measures:

• Farmers have track record of steady sales to agribusinesses or buyers.

• Prices adequate and stable, for bank to assess cash flow, capacity to pay.

• Useful if agribusiness or buyer provides technical services, access to quality inputs, quality control. Traders almost never provide such services.

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Buyer / Trader

Bank FarmerC

rop

Pay

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Loan

Loan repayment

In tight value chain relationships, risks of side-selling are lower and the agribusiness assumes more functions, reducing costs to the financial institution.

• Agribusiness performs many functions in the loan cycle, normally including: data bases on procurement, screening farmer borrowers, and collecting repayments from the procurement amounts.

• Agribusiness provides complementary services to build productivity, quality of farmer output.

• Bank assumes all risks, does loan appraisal and normally direct disbursements.

• Risk of participating farmers: side-selling to avoid repayment, linked to agribusiness procurement.

• Risk mitigating instruments: focus on high value commodities and agribusinesses/buyers providing strong value to farmers e.g. price for quality, inputs, TA, quick payment.

• Lend to farmers with at least two years of steady supply to the agribusiness/buyer, representing at least 70% of farmer’s cash crop sales

Conditions for tight value chain arrangements to work:


• Agribusiness has tight, stable relationships with a substantial number of farmers e.g. over 1,000 ideally over 10,000 to justify value chain financing with bank

• Agribusiness has developed strong, differentiated value proposition based on services, price and procurement arrangements—if not contracts—to protect against side selling.

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Agribusiness / Buyer

Bank FarmerC

rop

Pay

men

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Pre-harvest loan

Loan repayment

Loan repayment

Warehouse receipt financing

Source: IFC and Agri-Finance. Creating Opportunity Where It’s Needed Most

• Bank provides the farmer or trader with warehouse receipts against crops stored in warehouse.

• Warehouse operator provides secure storage, insurance.

• Farmer provides harvest produce for storage, until decides to sell at higher price.

• Risks of theft, spoilage • Risk of mismanagement by warehouse

operators• Risk that price at sale lower than

loan+interest. • Risk mitigating instruments: insurance and

solid credit and risk management, experience in commodity lending, ability to assess instruments, collateral managers, warehouses.

• Farmers (or traders) derive strong price benefits from waiting to sell crops and from storage.

• Secure warehouses, including cold storage and CA storage units exist in the geography in which small farmers are concentrated.

Conditions for the model to work:


Buyer / trader

Warehouse Farmers

Pro

du

ce

RepaymentBank

Harvest produce

Warehouse receipt

Re

ce

ipt

Fin

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Agri-finance with aggregators can involve direct finance for aggregator operations and value chain type arrangements for financing small farmers.

• Strong aggregators borrow for own operations and serve as wholesaler or agent on loans to farmer members, cutting costs to bank.

• Aggregator often provides productivity enhancing, quality control, processing, storage and transport roles

• Bank appraises aggregator, and if aggregator an agent, bank appraises farmer member borrowers.

• Risks that the cooperative or agro-entrepreneur will not repay loan for own operations or loans on behalf of farmers—due to poor management, mismanagement.

• For all but the strongest aggregators, with impeccable financials and track records, bank can use aggregator for origination and complementary services, but bank should lend directly to farmers in the network.

• If producer organizations solid, legal financial structures with strong track record in marketing products, providing technical services to farmer members, and borrowing for cooperative activity and on behalf of farmer members.

• If agro-entrepreneur, solid organizations with strong sales channels to buyers, agribusinesses, retailers—with established procurement and TA links with smaller producers.



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Cooperative / Agro-entrepreneur

Bank

Farmers

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Loan, cash

and in-kindRepaym

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amounts procured

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D. Key issues and solutions in building BC networks with agro-dealers

Issues in BC networks

Key issues in BC networks

• Agro-dealer model reduces risks, not costs to the bank. As a result, banks focus on medium and large farmers. HDFC Bank, Axis Bank

• Margins paid to agro-dealers increase cost and reduce profits to the bank. Yes Bank

• Insistence by agro-dealers on cash transactions increases costs, requires proximity. Yes Bank.

• Proper training of agro-intermediaries is costly. Yes Bank

• Agro-dealers of companies are widely dispersed. Yes Bank

• Corporates lack influence, power over dealers, meaning direct engagement by bank. HDFC Bank

• Heavy past investment in agri-finance through agro-dealers, but with very bad experience. Difficult to align motivations, incentives with bank. ICICI Bank

Solutions in BC networks

Solutions in BC networks

• Leverage business history, relationships of dealers with farmers to reduce risks. Yes Bank

• Ensure effective cash logistics mechanisms and prompt payouts. HDFC Bank, ICICI • Banks need to pursue dealer relationships directly. HDFC Bank• Corporate to optimize input supply for improved results at affordable costs. HDFC Bank• Ensure clarity in margin sharing and effective incentive systems for bank, agro-dealers

and farmers. SBI, ICICI Bank• Select strong dealers using clear criteria. SBI• Need better training and trust-building with all stakeholders. SBI• Collaborate with experienced intermediaries to reduce training costs. Axis Bank• Seek dealers with a substantial base of farmer customers, but recognize that larger

dealers require higher margins. Yes Bank• Consider use of fertilizer companies, NBFCs, irrigation and FMCG companies to

increase cost effective distribution. Axis Bank• Use handheld IT devices to transfer information for verification in real time. Axis Bank• Limit bank involvement to due diligence and credit assessment with other transactions

performed by BCs. Axis Bank• Begin by making loans for agri-inputs only, paying the suppliers directly with no cash

payments to farmers. Axis Bank• Ask BCs to share NPA risks. Axis Bank

Several banks and companies are interested in building agri-finance collaborations using agro-dealer networks

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Banks

Yes No

AXIS,YES,SBI ICICI

Interested in pursuing collaboration with agro-dealers as BCs and BFs?

Motivations Banks Companies

Axis HDFC ICICI SBI YES Coromand. ITC Mother D. StarAgri

Reducing costs

Reducing risks

Increasing outreach Providing farmers inputs, advice, markets and finance

Primary motivations of pursuing these collaborations

Companies

Yes No

Coromandel, Mother Dairy, StarAgri, ITC

(eChoupal)

Banks and companies judge that shared objectives, clear margin sharing arrangements, and strong agro-dealer selection criteria to be key to successful BC and BF collaborations

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Clarity in shared objectives from outset.

Clear margin sharing arrangements for bank, company, dealer.

Strong selection criteria to get agro-dealers with high volumes, strong motivation and capacity to originate and screen agricultural clients.

Strong rural distribution system of input company, with clear commitment to scale up once piloted

Strong connections between input company and agro-dealers through own stores, franchising or dominant or exclusive selling arrangements. Strong history of training.

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Banks and input companies see incentives linked to origination and repayments, finding agro-dealers with the time and willingness, strong IT, and integrity of the parties to be key to solid agri-finance through dealers

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Strong incentives to the agro-dealer on loan origination and loan repayments, to align incentives.

Agro-dealers with the time and willingness to engage in financial services based on clear value proposition by the bank to agro-dealer

Strong technical IT support provided by the bank, company or third party to enable electronic data entry and links to CBS.

Strong brand and integrity of the bank, company and participating agro-dealers.

Banks Companies

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Input companies consider strong training, measures to streamline operations, top management commitment and shared MIS to be important for successful agro-dealer BC networks

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Strong training and follow up systems by the bank and partner company to reinforce the capabilities of the agro-dealer as BC.

Strong shared MIS to enable timely tracking and trouble shooting by the bank and company.

Interest by the company and agro-dealers in providing services beyond loan origination eg, disbursements, collections, insurance

Strong measures to streamline operations and cut transaction costs further, needed for banks to make smaller ag loans

Strong top management commitment by partner company to ensure continued commitment, if senior or middle management transitions occur.

Banks Companies

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Banks do not see buy-back, patience with piloting, geographical focus, dealer agro-knowledge or value add to farmers as important. Companies see these elements as quite important.

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Companies and agro-dealers prepared to buy back commodities—to reduce repayment risks

Willingness by both bank and company to spend one to two years piloting the arrangement, to get it right, before scaling up.

Location in area where the financial institution intends to concentrate agri-finance operations.

Agro-dealers with strong agro knowledge in key commodity groups, ideally agri graduates

Agro-dealers with strong track record of providing a range of value adding inputs to small and medium sized farmers

Banks Companies

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Key lessons in providing financing to farmers through agro-dealers, traders, small processors

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Key lessons Bank

Agro-dealers try to exploit the bank by providing fake data

Very difficult to keep control on dealers and traders

Improves client selection

Processors and storage units often have no direct relationships with famers

Quick turnaround time is extremely important for farmers

Identification of proper collaborator-reach and qualified manpower, intent and goal congruence

It is a slow, gradual process. Difficult to work with dispersed agro-dealers.

Agro-dealers to most business in cash and insist that the banks do the same. Hence proximity is an issue

Banks are looking for collaborations with input supply and value chain companies to reduce costs and risks in agri-finance, and to help farmers get what they need to succeed

Banks Desired collaboration with

•Tata Chemicals •Rallis •Haryali Kisan Bazaar •Sugar mills •Nestlé•Amul

• FMCG companies including Cadbury, Marico, P&G, HUL • Sugar companies

• Open to all companies listed

• Godrej Agrovet• Coromandel• Jain Irrigation• Mahindra & Mahindra• Tata Chemicals

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In designing banking correspondent agent relationships with agro-dealers, the FI needs to be actively engaged in training, ICT, and initial loan appraisals.

• Bank does appraisal of farmers, provides farmers loans, provided in kind from agro-dealers. Bank takes full credit risk.

• Input supplier/agro-dealer provides inputs, advice and ideally loan origination, screening support.

• Agro-dealers can become BC agents acting for the bank in WC loans-doing origination, screening, loan doc, disbursing, collecting.

• Risk of non-repayment, no procurement tie-up. • Risk that inputs only will not be adequate

financing for farmers, limiting yields • Mitigate risks by building strong training of

agro-dealers to provide value adding advice and identify strong borrowers, with incentives based on farmer loan repayments to the bank.

• Input suppliers need to have strong rural distribution networks of agro-dealers.

• Works best if input suppliers can collaborate to ensure supply and financing of improved seed, fertilizer, plant protection.

• Agro-dealers need to be solid, respected, with strong understanding of who are solid, progressive farmers.

• Need strong, shared MIS and ideally internet based payments.



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Input supplier / agro-dealer

Bank Farmers

Fu

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s

Inputs

Loan repayment

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E. Meeting agenda

Meeting agenda

10:00 to 10:45 Presentation by ESP of questionnaire responses and IIMA interviews on agri-finance

11:05 to 12:20 Meetings of individual companies and banks

12:20 to 1:00 Discussion of main lessons on building effective agri-finance collaborations, and key Platform actions to support bank and company initiatives.

Time Room A Room B Room C Room D Room E

11:05 to 11:20Coromandel BASIX

Jain IrrigationIDBI Bank

Mother DairySBI

StarAgriICICI Bank

UPLHDFC Bank

11:20 to 11:35CoromandelHDFC Bank

Jain IrrigationBASIX

Mother DairyIDBI Bank

StarAgriSBI

UPLICICI Bank

11:35 to 11:50CoromandelICICI Bank

Jain IrrigationHDFC Bank

Mother DairyBASIX

StarAgriIDBI Bank

UPLSBI

11:50 to 12:05CoromandelSBI

Jain IrrigationICICI Bank

Mother DairyHDFC Bank

StarAgriBASIX

UPLIDBI Bank

12:05 to 12:20CoromandelIDBI Bank

Jain IrrigationSBI

Mother DairyICICI Bank

StarAgriHDFC Bank

UPLBASIX

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F. Background

Background

1. Strategies, issues and solutions being built by: • HDFC Bank• SBI• Axis Bank• Yes Bank• ICICI Bank

2. Key competitors

3. Statistics on agricultural lending

4. Implications of new priority sector lending regulations for agri-finance

Strategies, issues and key success factors in agri-finance. HDFC Bank

Key success factorsKey issues in agri-lending

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Current strategy on agri-business collaborations

• Agricultural lending of total portfolio = 10% - Current NPA = 2.5% of the loan portfolio. • Expensive and risky nature of stand-alone agri-loans • Lack of loyalty of farmers to corporate value chains • Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on

“total basis”. • Post-tie-up monitoring mechanism for sales, reduction of collection costs etc. • Creation and training of dedicated teams to address the corporate value chains.

• Cash-based cash flow • Fraud, loan default• Customer assessment• Inaccurate mortgage documents• Issues in customer selection • High transaction costs of cash collection• Profitability—particularly in lending to

smaller farmers • Low claim settlement efficiency • Issues of “vested interests and inertia

between various layers of corporate”.

• Long term strategies for collaborative connection and operation with farmers

• Progressive management• Ensuring attractive, prompt dealer payouts. • Ensuring effective cash logistics

mechanisms. • Ensuring improved turnaround time.• Ensuring corporate involvement at the

procurement level.

Lessons learned

Lessons learned

• Reward quality – to increase net returns to farmers

• Lack of influence, power of companies over dealers – need for banks to pursue dealer relationships.

• Need for input optimisation– for improved yields at same costs to farmers. Ensuring involvement of buyer organisations to combine inputs and methods to get quality and increase profits.

• Experience with agro-dealer networks operations:

• Restricting to medium and large farmers due to high transaction costs

• Agro-dealer model reduces risks, not costs

Key issues and success factors in agri-lending State Bank of India

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Related to costs:• Small loan size• Inadequate number of stable value chains • Lack of investment credit

Related to risks:• Absence of tangible collateral • Spread of defaulters in an area

Related to collaborations:• Unstable value chains• Restricted direct agriculture lending areas

• Working with all three models: value chain financing, agro-dealers as BCs, warehouse receipt financing.

• Strong relationship with farmers by very deep reach through different value-chains.


• Individual farmers. SBI plans to focus more on getting to individual farmers rather than middlemen in its value chain, warehouse receipt and direct financing operations.

• Increasing outreach. Financial inclusion will be a major part of the growth strategy with increased emphasis on value chain collaborations

• Reducing costs. Cost reduction, through collaborations and lower cost distribution will be key in increasing outreach in a cost effective way.

• Portfolio:Working capital loan, including KCC = Rs.7.84 mn. Fixed investment loan = Rs.2.14 mn. Crop or weather Loan = Rs.0.77 mn

Key issues and success factors in agri-lending State Bank of India

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Lessons learned

• Agribusinesses should provide sales and credit history of the farmers in their value chains

• Banks should monitor the cash flows between farmers and corporations by offering payments services as a way of tracking risk, enabling timely action

• Having a strong MIS is key to track repayments and take remedial action, for portfolio quality

• Clarity in margin sharing agreement between bank, agro-dealers and farmers essential

• Important to select strong dealers with clear selection criteria

• Need better training and trust-building with all stakeholders

• Strong IT enabled services should be offered

Strategy, issues and success factors in agri-finance – Axis Bank

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• Loan repayment risks high• Limited branch outreach • Competitive disadvantage due to interest

subsidies by scheduled banks • Manpower- productivity and ROE issues• Farmer perception of private vs. public

sector banks • Add-on costs to farmers e.g. bribes, feesRelated to collaborations:• Identifying collaborators with reach,

qualifications, intent and goal congruence• BCs must accept terms of sharing NPA risks


• Total agricultural lending portfolio is 9%, 7% to farmers directly• AXIS bank is collaborating with experienced intermediaries to avoid training costs and

simultaneously increase outreach. Also AXIS bank is using technology to reduce turnaround time.

• Tri-party arrangements with FMCG companies and Irrigation companies in Karnataka and Maharashtra• Arrangements with fertilizer companies to use their distribution network, NBFCs as manpower to

source loans, hand held IT devices to transfer information for verification through SFTP in real time• AXIS Bank only involved in due diligence and credit assessment• Currently only loans for agriculture inputs directly paid to businesses, no cash as of now• Sugarcane farming: Bank pays farmers for produce, companies get credit period

• Identifying collaborators and setting up a system that takes care of the three parties.

• Technology to reduce manpower costs.

• Reducing turnaround time

Lessons from current agri-business collaborations

42

Lessons learned

• Collaborations do not reduce risks to desired extent. Disbursement of cash through intermediaries

• Technology can go a long way in reducing costs and achieving minimal turnaround time

• Collaborating with NBFCs reduces work for bank and also eliminated training needs

• AXIS Bank committed to agri-finance: would continue to target the agricultural sector even without PSL requirements to almost the same extent

• Interest rate subsidies by public sector banks, paid for by GOI, makes it extremely difficult to compete for the same set of farmers. Government should provide same incentive to private banks.

Challenges and success factors in the agro-business collaborations and agri-lending – Yes Bank

43


• Branch outreach• Loan recovery • Due diligence of farmers• Estimation of credit limits for a farmer• Lack of proper documents• Building own field force

Related to collaborations:• Dealer collaboration is challenging because

dealers of a company are dispersed• Increased costs due to margin paid to them• Insistence on banks to handle cash because

dealers/traders do mainly cash business• Proper training of intermediaries is costly

• Developing a wide network through collaboration to improve the quality of loans and hence reduce repayment risks.

• Targeting and mastering each link in the value chain one by one is more efficient


• Building own field force as well as building lending with intermediaries • Have tie ups with cooperative banks and PSU banks to extend network s up Tied up with co-operative

banks and public sector banks • Criteria for selecting collaborators include: experience, relationship, brand, exclusivity• The larger the dealer, more farmers in his network but require higher margins • Working Capital Loans = 40% of the Agri-lending portfolio. • Term Loans= 60% of Agri-Lending portfolio

Lessons from current agri-business collaborations

44

Key lessons from collaborations history

• Yes Bank prefers collaborations to increase outreach. Yes Bank finds that collaborations with local intermediaries help in reducing risks due to more reliable information about the farmers

• Reduced risks- Business history and mutual dependence of dealers with farmers makes lending to farmers less risky

• One link at a time – Understand and cater to one part of the value chain first, making moves to other parts later safer and easier.

• Value chain model and agro-dealers model have the same costs and warehouse receipt financing has the lowest risk

• Technology can be of limited use. It can lubricate operations but cannot reduce human intervention required for due diligence while setting up an account

• Interest rate subvention makes it extremely difficult to compete with PSU banks for the same set of farmers, Government should provide this incentive to private banks as well

Key issues and success factors in agri-finance – ICICI Bank

45


Related to cost:• Small loan sizes, high fixed cost• Issues of reach, low density of farmers• High transaction costs, including need to handle

cash directly

Related to risk:• Difficult to predict weather• Lack of credit history of farmers• Difficult to find out end use of loans

Related to collaborations:• Turning small loan portfolio into a profitable one• Credibility of dealers. Ensuring effective cash

logistics mechanisms to handle cash• Ensuring timely payments by farmers. Designing

an effective incentive system for dealers

• Strong and result oriented relationship with rural value chains.

• Progressive management team


• Previously company invested heavily through agro-dealers, but have very bad experience. • Bank ready to provide working capital and fixed investment support to agri-businesses.• Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on

“total basis”. • Creation of value chain through warehouse receipt financing and leveraging that relationship to

provide crop or weather insurance to farmers

Current strategy and key lessons

46

Lessons learned

• Need to work on automatization of field work – for improvements of results at same costs to farmers.

• Lack of influence and power of companies on dealers—very difficult to align incentives.

• Need to check end use of loans. Ensuring involvement of banks representatives for yearly evaluation of assets.

Major competitors

47

CompetitorsImportance as competitor

What do wellAxis HDFC ICICI SBI Yes

Private commercial banks 7 8 10

• Target only large farmers• Have higher reach with same

products

Scheduled commercial banks 10 6 7 9

• Strong network in rural area• Manpower • Interest subvention• Only for retail financing

Cooperative financial institutions 9 8 4 1

• Crop loans• Deep rural penetration • Connection with farmers

Traders, small processors, agro-dealers

7 7 8 7 9• Receivable financing • Bonding with farmers

Private agribusinesses providing loans directly

10 5 4 • Relationship, flexibility

Muthoot , Manappuram Gold loans

8• Very low turnover time • Good reach

High competition Medium competition Low competition

Historical performance under lending to total agriculture

48

This is presented as a percentage of Adjusted Net Bank Credit Without 4.5% cap on indirect agriculture lending

Lending to total agriculture sector

Source: RBI

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.00%

5.00%

10.00%

15.00%

20.00%

Pvt BanksPSB

Trends in NPAs in agriculture sector

49

Source: RBI

2007 2008 2009 2010 20110.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1.65%

2.54%

1.89%

2.25%2.36%

3.17%3.32%

1.92%

2.25%

3.49%

Pvt Banks PSB

Implications of the new priority sector lending regulations for commercial banks

50

Key issues/challenges with the new regulations

BankActions that banks are taking to

comply with the new requirements

Food processing and trader financing have moved out of priority lending sector More emphasis on individual

farmers and to increase the limits of working capital loan beyond INR 2 Crores

Limits beyond INR 2 crores to corporate sector (in value chain) is now considered as indirect agri-finance and not priority sector lending

Food processing is out of priority sector

Company had previously invested heavily on food processing units, now planning to change its focus as per new regulation

No consideration for agri logistic issues/ transport infrastructure

Meeting the set goals with limited infrastructure in agri. sector looks to be a distant target.

Only focused on crop output rather than considering complete value chain

Company trying to transfer its previous value chain lending to core farming, and hence incurring additional expenses in this transformation

Implications of the new priority sector lending regulations for commercial banks

51

Key issues/challenges with the new regulations

BankActions that banks are taking to

comply with the new requirements

Cannot lend to agribusinesses as part of priority sector. Entire 13.5 % of assets to be lent directly to farmers.

Arrangements with fertilizer companies to use their infrastructure

Partnership with NBFC’s to use their manpower, distribution channels.

Current Axis is at around 9% which includes 2% to corporate. Hence a gap of 6.5% to be filled for PSL requirements NBFC’s source loan. Bank just does

credit assessment and due diligence

Reaching farmers directly is a challenge especially when we are competing against PSU banks who have much better reach to cater to the same set of farmers

Yes Bank is trying to build own field force because that gives flexibility of intermediaries

Yes Bank has tied up with co-operative banks and PSUs

Documents

Platform to Create Shared Value in Agribusiness Key Issues and Solutions in Agri-finance Analysis of questionnaire responses and interviews of bank and