Value Chain Financing in Agriculture
Source: Flickr, Michael Foley

In coming decades the demand for food in India and globally is expected to increase significantly. In order to meet this demand, Indian agricultural value chains will need to grow rapidly requiring significant investment. India is experiencing a gradual transformation in its approach to financing agriculture with the advent of value chain financing where banks and financial institutions are increasingly willing ­­to finance the value chains. In this context, there a need to assess the various approaches to agricultural value chain (AVC) financing in India and whether the financial systems in India are prepared to support the growth of modern agro-food value chains.

A recent paper in Agricultural Finance Review analyses the various AVC financing approaches and tools in India. The paper provides an analytical overview of eight case studies of Indian agricultural AVC financing examples based on which it develops a number of policy recommendations.

Adequate financing for AVC is crucial to their development because adequate finance promotes specialization and enhances productivity through allowing access to modern technology and supports the increasing transformation and commercialization of agriculture. AVC development can also contribute to growth and reduce poverty by creating economic opportunities along the value chain.

One of the case studies covered is the financing of coleus tubers (otherwise known as Chinese potatoes) by the State Bank of India (SBI) which involves bank lending at four levels. At the farmer level, the SBI provides loans based on cultivation requirements. Second, at the aggregator or collecting agent level. Third, at the exporter level, and the fourth at the importer level to meet their costs. Finance is available in the form of term loan and working capital. The paper notes that the SBI finances similar endeavours for cut flowers and seaweed. The paper highlights that the ability to finance across an entire value chain allows a bank (or other financial entity) to undertake detailed risk analyses ensuring that the value chain can provide an economic return on investment.

Another case study covered is the financing of the cashew nuts value chain by the Vasundhara Agri-Horti Producer Company (VAPCOL). VAPCOL is a farmer producer company whose members produce and process cashews which are then sold to wholesale traders. In the production stage, finance is provided for investment of smallholders either from the cooperative or a bank. In the storage, processing, packaging and branding stage at VAPCOL level, finance is provided by banks. In the marketing stage, finance is also provided by banks. This case study highlights that financing for value chains in India is available from external (bank) and internal (from the cooperative) sources. 

From the 8 case studies covered the study highlights a number of findings.  One finding is that producers can have access to finance in two broad approaches: internal financing and external financing. Internal financing is provided by those actors in the value chain that have a stake in the output or in the produce. However, the limitation to internal financing in a value chain is the limited potential for growth and expansion of the value chain and all its participants are equally constrained in terms of access to a larger pool of financial resources from outside the chain. External financing refers to financing that originates from actors outside of the value chain (such as banks). The paper argues that external financing is quite significant for the success of value chains as it generally provides actors with access to more resources and increases accountability among actors participating in the value chain. Moreover the paper argues that agricultural value chain financing, as opposed to financing one area of the value chain, is attractive for banks in India as it provides them with a better understanding of the risks across the value chain.

Based on these case studies the paper summarizes a number of broad policy recommendations In conclusion. First, the study recommends that Governments should focus on creating an enabling policy and regulatory environment and providing the necessary support services (such as infrastructure) in order to facilitate value chain investments. Second, the study highlights that financing interventions should be directed into production, processing and marketing highlighting that there is a tendency to focus solely on investment in production capacity whereas investing in processing and marketing is crucial to expanding the value chain. Third, the case studies show that banks generally make short-term investments, the paper argues that there is a need for more diversified and longer term loans that finance investments in farming equipment and machineries, transportation, storage, mills and processing facilities.

The full study can be accessed here

By Bas Paris

Photo credit:Flickr, Michael Foley