The agriculture sector in India faces significant disparities in lending, particularly in the emerging agrotech space. While institutional credit has surged to a record high of ₹25.10 lakh crore through the Kisan Credit Card (KCC) initiative, many smallholder farmers, especially those in remote regions, still struggle to access adequate financial support.
During his keynote address at the International Research Conference hosted by the College of Agricultural Banking (CAB), Pune, RBI Deputy Governor Swaminathan Janakiraman highlighted five critical solutions to promote financing for sustainable agriculture in India.
Janakiraman highlighted the critical role of adequate and timely funding aimed at creating a robust financial ecosystem that supports sustainable agriculture and ensures that smallholder farmers are well-integrated into the national and global agricultural economy. These also include the role of Farmer Producer Organisations (FPOs), value-chain financing, warehouse funding, and technology adoption.
- Role of FPOs: Encouraging FPOs to enhance farmer collaboration, improve access to technology, and provide better market opportunities.
- Value Chain Financing: Providing credit for all stages of agriculture, from input procurement to market access, to reduce risks and improve efficiency.
- Warehouse Financing: Supporting farmers by financing storage facilities, enabling better price realization through distress sales avoidance.
- Technology Adoption: Facilitating the integration of technology in agriculture to improve sustainability and productivity.
- Policy Initiatives: Promoting policy frameworks that encourage sustainable agriculture and align financial incentives to help smallholder farmers.
“Technology adoption in agriculture offers immense potential to boost productivity and sustainability. Expanding irrigation infrastructure, promoting micro-irrigation systems, and encouraging farm mechanisation can significantly increase farm income and improve efficiency. “
The Lending Disparities in Agrotech
Despite the growth in institutional credit, regional disparities persist, leaving farmers in underdeveloped areas with limited access to financing. Traditional financial institutions often hesitate to extend loans to smallholders and agrotech startups due to perceived risks. This has created an uneven playing field, where large-scale farms and industrial agriculture ventures often secure better financial terms, leaving smaller, resource-constrained farmers behind. Agrotech startups, critical for modernizing the sector, are similarly underserved by traditional financing mechanisms.
Read More: Agrotech: Can It Serve Both Industrial Giants and Small Farmers Alike?
Fragmented Credit Access: Many small-scale farmers in rural areas rely on informal sources of credit, which often come with higher interest rates and exploitative terms. These farmers find it difficult to secure loans from formal institutions, as banks tend to prioritize larger agricultural ventures, leaving a significant gap in funding for smallholders. Despite the growing potential in the agrotech sector, traditional lenders remain hesitant to back smaller players, particularly those focused on sustainable practices or niche technology-driven models.
Risk Perception: Financial institutions often view agricultural lending as a high-risk area due to unpredictable returns, dependence on seasonal factors, and a lack of security against loans. As a result, many agrotech startups and small farmers struggle to secure the necessary funding to incorporate modern farming techniques, including those powered by agrotech solutions.
Limited Fintech Penetration: While fintech companies are stepping in to offer credit solutions, penetration is still low in rural India. The absence of digital infrastructure in many areas creates a significant barrier to accessing financial technology solutions for credit and insurance.
Improving Credit Accessibility
The RBI Deputy Governor emphasized the importance of improving credit accessibility by supporting Farmer-Producer Organisations (FPOs) and ensuring that these collectives can leverage financing to adopt new technologies. With over 24,000 FPOs established by 2023, these groups can enhance creditworthiness by offering collateral, improving farm productivity, and reducing transaction costs for banks. Government programs like KCC must expand to include newer technologies, ensuring that even smaller farmers have access to the necessary financial tools to invest in agrotech.
Digital Platforms for Lending: Digital lending platforms and agrotech startups must collaborate to bridge the gap between banks and small farmers. Fintech-driven digital credit platforms could offer real-time loan approvals, based on alternative credit assessments, such as farm productivity and crop yield data gathered through technology like satellite imaging and IoT sensors.
Government Subsidies and Support: Policies that incentivize banks to provide more credit to the agriculture sector and particularly to agrotech players can play a crucial role. Government-backed credit guarantee schemes can reduce risk for lenders and ensure that more funds reach smallholders who are adopting modern farming methods.
Farmer Producer Organizations (FPOs): Encouraging small farmers to organize into FPOs can significantly improve their creditworthiness. FPOs have better negotiating power and collective resources, making them attractive to lenders who would otherwise avoid small, individual farmers.
Incorporating Value-Chain Financing
One of the most effective ways to bridge the credit gap in agriculture is through value-chain financing, which links every stage of agricultural production— from input supplies to market access. This ensures that credit is tied to the entire lifecycle of agricultural production rather than being limited to just input procurement. By integrating credit into the broader value chain, it enhances efficiency and reduces risks for both farmers and financial institutions.
Swaminathan Janakiraman’s five-point proposal called for integrating technology, promoting sustainable practices, and encouraging more investment in agriculture infrastructure, particularly storage facilities and logistics. By doing so, the value chain will become stronger, allowing small farmers to benefit from consistent access to finance and helping to address the long-standing issues of underfunding.
Value-chain financing integrates credit into every step of the agricultural process, from production to post-harvest activities. This financing model considers the entire chain of production and enables farmers to receive loans based on their expected returns, considering partnerships with buyers, input suppliers, and processors. The key benefits include:
Buyer-Seller Contracts: Financing linked to buyer contracts ensures that farmers have a ready market for their produce, thus reducing the risk for financial institutions.
Input Credit: Farmers can access credit for inputs like seeds, fertilizers, and technology at the start of the production cycle. This credit is often repaid once the produce is sold, creating a more sustainable and scalable credit model.
Supply Chain Partnerships: Leveraging partnerships between agrotech firms, FPOs, and processors ensures that financing is distributed across the value chain. These partnerships provide greater stability and visibility, reducing risks for lenders and ensuring more credit is available for farmers.
Agrotech Sector to Reach Its Full Potential
Adequate and timely funding is key to driving sustainable agriculture in India. Addressing lending disparities through FPOs and value-chain financing models can significantly improve credit accessibility in the agrotech sector, paving the way for a more inclusive and resilient agricultural economy.
A more inclusive credit system, focused on smallholder farmers and innovative startups, will not only drive growth in sustainable agriculture but also significantly contribute to India’s economic development. Sustainable agriculture, supported by technology and financing, has the potential to revolutionize farming practices in India and ensure food security for future generations.