How AgriTech Startups Can Fix The Broken Agriculture Credit Market

As per a report submitted by the RBI to the Parliamentary Standing Committee on Agriculture, only 42.2% of agricultural credit disbursed in 2016-17 went to small and marginal farmers. Small and marginal farmers constitute over 85% of the total 120 Mn farming population in India.

This startling fact portrays a clear picture that the current agri-credit market is broken, which results in farm distress. Govt. of India’s ambitions Kisan Credit Card (KCC) schemes look good on paper, but the ground realities are far different. Through KCC, a farmer can avail INR 3 lakh loan on 1-acre plot at a low-interest rate of 4% pa. However, given the limited manpower, banks have no mechanism to monitor the utilization of the loan.

In most cases, farmers divert these loans into non-agriculture activities like marriage, house construction, or buying motorcycles. I have personally met individuals who avail KCC loans due the low-interest rates and loan the amount further at higher interest rates (as high as 50%) to others people in their villages.

Amid rising non-performing assets (NPAs) in the banking sector, mainly on account of corporate loan defaults, banks are not enthusiastic to lend to farmers. Successive loan waivers by various state governments for political mileage are adding fuel to the fire.

The current agri-lending scenario in the country is stifling agriculture growth.

Why Does A Farmer Need Credit?

Farmers have a very erratic cash flow. They receive a sum of money at the end of the crop cycle (five month), but have numerous expenses (personal and agricultural), which they incurred during the five months period.

To give you a perspective, imagine in place of receiving monthly salary, you receive a sum of money at the end of 5^th month of your work. Most people would need warren buffer financial planning skills to survive through the months, let alone plan for the next five months.

Similarly, farmers require credit at different time intervals to cover input costs (seeds, fertilizers, medicines, machinery, irrigation, etc) they incur during the crop cycle. In case they struggle to find money to apply the inputs, their productivity gets affected.

Various studies have shown that farm productivity of small and marginal farmers can be increased by 35-50% if farmer’s right quality of input is applied at the right time. For which they require a constant line of credit.

Agritech startups can play a vital role in solving this massive challenge and double farm incomes. Rise in smartphone adoption is playing a vital role in lowering the serviceability costs of offering credit to farmers. However, I am of the opinion that banks alone will never be able to solve the credit problem in agriculture.

Commercial lending is very different from agriculture lending, due to the complexity of the product offering. Agritech companies have a huge opportunity to plug lending gap.

A few companies and startups have been experimenting in this space. YES Bank has piloted a fintech solution that uses geotagging of farmlands for remote monitoring and evaluation of loans. AgroStar & Adani Capital ltd partnered to offer a unique data-driven loan product. Apart from traditional credit checks, the product offering works on legacy primary data captured by AgroStar to offer loans to farmers. farMart is also piloting a “Farming-as-a-Service” subscription-based lending product with ArthImpact called Agriculture Service Financing (ASF).

Technologies like satellite imagery, the blockchain, and AI will surely make a dent in the agri-lending space which is ripe for disruption. Financial institutions which experiment and partner with agritech startup for developing alternative lending products will have a long-term competitive advantage over others as the credit market is looking to diversify its lending portfolio as it is already fed up lending huge amounts to few individuals.