If one sector has invariably encountered a finance shortage, it is agriculture. The gap between what is received and what is needed has been widening. No doubt, the government recognises it. Despite the recognition of such a stark issue, it has been seven decades since the problem has been continuing unabated.
Banks did not like financing agriculture because of the risks and uncertainties. Our country’s agriculture sector is subject to the vagaries of nature. Erratic precipitations, the lopsided irrigation system, and the magnitude of shocks like droughts and floods have made farmers’ life precarious and magnified their exposure and vulnerabilities. Banks never like such uncertainties.
But it is not just the climatic problems and natural disasters. Uncertainties come in other forms too. For example, the market is never stable. Variation in rainfall affects the level of production. Hence, the supply in the market also changes. Every year we see cases of skyrocketing prices of crops and vegetables. Someday it is onion, some other day it is tomato or potato.
To add to the above problems, we have loan waiver policies issued from time to time. There are price regulations and trade restrictions. The crux of the matter is that agriculture is not the comfort zone for the financers. Under such circumstances, the farmers suffer. Also, there are not many entrepreneurs who venture into agriculture enterprises. No wonder there are few takers for core agri-startups. Most agri-startups are related to the application of information technology, like app-based aggregation.
One way to deal with such a financing shortage is to change the mode of finance. Instead of only debt or equity, we can have a mix of them. There are also possibilities of blending it with grants and concessional loans. We call it “blended finance”.
When entrepreneurs start a business, they put their own money into it. That is called equity. But equity contribution is not always sufficient to initiate a business. One needs other forms of finances also. While equity financing is feasible, equity does not provide a guaranteed return; instead, a risk premium is attached to such financing. Hence, one can take debt to avert the risk of equity. In equity financing, one receives a dividend when there is a profit, which is also not guaranteed. In short, equity financiers bear the risk of the business along the stages. Debt financiers have less chance of taking the risk upon finance. While they are guaranteed a constant return, they are also subject to risks of business failure.
Grants come to the fore to reduce such a risk. With a small grant, one can start a business, and once such a business shows some success, it is easier to attract additional finance in the form of debt or equity. Theoretically, a mix of grants, debt, and equity, blended finance, can be used to solve a slew of problems of agricultural financing. An estimate suggests that blended finance has the potential to plug an annual financing gap to the extent of USD 2.5 trillion in emerging or developing economies. If such is the potential, every bank and every financier should support and encourage blended financing mechanisms. It should become a mainstream product of financial institutions. But that does not happen. Financial institutions, usually do not like such a blended finance structure.
A recent study of an integrated fish farming project in Odisha (Mainstreaming Blended Finance, published in Journal of Rural Studies, May 6, 2022) received financial support from NABARD, the apex refinancing agency of India. Additionally, the project received concessional loans, a smaller grant, and contributions by farmers, which can be compared to equity. The total project cost was about INR 50 million. The project was a success in terms of returns to the farmers and recovery of the loans. But the banks hardly followed such financing models.
Internationally, too, such blended finance structure has become popular. Smallholders in Ghana accessed blended finance facilities to procure high quality seedlings of export-oriented crops and Nigeria fish farmers used it for meeting the income shock and food security. There are several such examples. The potential is high, but we need to be careful of the factors that hinders such a facility to be followed commercially.
It requires multi-agencies collaborations and a lead agency to manage it. Unfortunately, our financial institutions are neither trained nor oriented in managing such complex-looking transactions. The study mentioned above says that many bankers, during the consultation, admitted that they appreciated the power of blended finance, wanted to join the bandwagon, and even lead such initiatives. But their hands are tight because of strict financing protocols. If blended finance becomes a mainstream product, government support and clear policy directions are necessary. It has proven its mettle and is considered the most feasible and effective approach to financing risk-prone agriculture in India. If all agriculture financing agencies come together and make a rule, implementation becomes easier and taking care of financial shortages is a possibility. Let’s give it a try. Indian farmers and Indian agriculture need it.
Prof Pradeep Mishra is faculty of Rural Management at XIM University Bhubaneswar. Prof Kushankur Dey is faculty and Chairman of Centre for Management of Agriculture at IIM Lucknow.
