How Do We Fund Our Farmer Producer Organizations?

Farmer Producer Organizations (FPOs) in India are in need of urgent credit in an organised, institutional form. Here are five suggestions on how that can be done. 

This article seeks to address supply-side issues in financing of Farmer Producer Organizations (FPOs) in India. The growing importance of producer companies (and more generally, farmer collectives) is best seen in the context of the predominance of smallholder agriculture in India. Understandably, there are several constraints in terms of access to technology, credit, and markets – there has been extensive evidence to show that organizing marginal and small farmers into producer organizations can be fundamental in overcoming such constraints. However, most of the studies are either qualitative or empirical analyses of specific POs or specific states, offering only minor implications for national-level policy.

Among the major agencies that have been involved in promoting and developing FPOs, the National Bank for Agricultural and Rural Development (NABARD) and the Small Farmers’ Agribusiness Consortium (SFAC) [a part of the Department of Agriculture and Cooperation at the Ministry of Agriculture] are vital. Both NABARD and SFAC, along with more recent initiatives by non-governmental organizations (NGOs), have been instrumental in extending holistic support to new and existing FPOs in various forms (including, but not limited to, credit). NABARD initiated the Producer Organisation Development Fund (PODF) and SFAC has set up nearly 250 FPOs since commencing operations (both since 2011).

In light of the recent policy announcement for Producers Development and Upliftment Corpus (PRODUCE) of Rs. 200 crore for promoting POs, it is worth investigating the various financing models that may be optimal for ensuring successful set-up and growth of FPOs. One such example is the District Poverty Initiatives Project of the World Bank and the State Government of Madhya Pradesh, that has had limited success in promoting a long-term role for FPOs in improving farmer livelihoods. The role of civil society organizations (essentially NGOs) may also provide support for FPOs that are independent of government. Organisations such as Hivos, Rabobank Foundation, Sir Ratan Tata Trust, Ford Foundation, and Axis Bank Foundation among several others are currently part of this effort. While such organizations may not have the same impact as public-funded programs such as PRODUCE, they often provide novel solutions to designing producer collectives.

It was only in 2012 that POs were recognized as a separate category under private companies (to the extent that they are seen as a hybrid between private companies and cooperatives), and there has been extensive policy suggestions on the most efficient structure for FPOs. We therefore seek to explore the various stages of the life cycle of a typical FPO and assess the scope for funding at each of these stages.

(a) Providing comprehensive Early Stage funding

In addition to promotional costs, there needs to be substantial funding for early stages. Working capital requirements are most critical for FPOs once they begin early stage activities such as bulk purchase of inputs, since the share capital of FPOs is unlikely to be enough.

(b) Designing appropriate loan products

Agriculture is characterized by high seasonality, high price volatility, long lead times, and complex value chains. The loan products for this sector therefore need to be worked out appropriately. There are two-levels at which loan products need to be tailored for FPOs: (a) at the level of the farmer-member; and (b) at the FPO-level. For farmer-members, there can be Kisan Credit Cards for facilitating funding requirements at the time of initial production, and term loans for further developmental activities. At the level of the FPO, there can be products that enable effective service provision to members: support for hiring of machinery/tools etc. Given the experience with Hivos, incubation finance is an option that can be explored here.

(c) Encouraging Value Chain Financing under Priority Sector Lending

In addition to working capital loans to finance aggregation of produce from members, loans can be given to FPOs for quality improvements along the value chains of the produce. For example, FPOs dealing with pulses would require loans for small dal mills, to cotton ginning units for FPOs in cotton growing areas, decorticators in ground nut and so on. This will also serve to incentivize innovation in the value chains from POs and their farmer-members.

(d) Warehouse Receipts-based Lending and Price Risk Mitigation

Existing experiences point towards benefits from employing PACS for better lending practices. Warehouses certified by the Warehouse Development and Regulatory Authority (WDRA), managed separately, can issue negotiable warehouse receipts, which can in turn be used by farmers for obtaining loans from banks, PACS, and other cooperative banks.

(e) Setting up a Dedicated Agri-Business Bank

A debatable issue, setting up a dedicated agri-business bank was one of the recommendations of the round table conference on FPOs held at IIM Bangalore in April 2014. During the initial policy-making stages, there were also suggestions that SFAC or NABARD could set up a dedicated NBFC for taking care of the financial needs of the agri-business sector.  However, given the rural branch network of commercial banks, Regional Rural Banks, and cooperative banks, they have a potential business opportunity for financing FPOs here.

In line with these suggestions, there are some broad policy pointers worth concluding this article with. First, The RBI guidelines on priority sector lending by banks already mention FPOs. This needs to be broadened to include “agri-input supply, agro-machinery rental/operation, agri-processing, packing, storage and transport units” owned by FPOs into the ambit of agricultural priority sector lending. Second, there is a need to promote FPOs on a scale similar to the SHG movement. SHGs got became prominent because of NABARD’s continuous nurturing of the concept and coordinating with various Government agencies to create an enabling policy environment. Third, the lack of engagement with RRBs that have extensive rural networks compared to commercial banks has been a problem area. Regional Rural Banks could play a pivotal role in financing FPOs. The RRBs could directly provide operational working capital limits such as cash credit facility, crop loans to farmers, SHG loans to FIGs/SHGs for raising crops and such other agricultural needs.

In many ways, POs form a core part of the strategy to lift small and marginal farmers out of poverty and enhance their competitiveness in agricultural markets. If we consider this as the story of a ‘second Green Revolution’, it can only become reality if measures that promote sustainable and inclusive agricultural development are taken within the available resources. Producer Organisations potentially offer a unique path towards achieving this, and therefore should be promoted and supported effectively.

Venkatesh Tagat is an independent consultant and retired Chief General Manager at the National Bank for Agricultural and Rural Development (NABARD). Anirudh Tagat is Research Author, Department of Economics, Monk Prayogshala, Mumbai. This article draws on a report submitted to ACCESS Development Services. The authors are grateful to Muralidharan Thykat for his input.