How NBFC-Fintech Collaboration Can Drive Financial Inclusion In The Agricultural Sector

From building assets and securing working capital to mitigating risks and addressing health issues, access to financial services is crucial for farmers. Sadly, the current scenario in India highlights a glaring problem: the credit-to-GDP ratio in the agriculture sector has remained significantly lower compared to other sectors. 

Despite the implementation of various schemes, an estimated 40-45% of farm households still lack access to credit. This dearth of financing opportunities has severely hindered the growth and development of the sector. Small and marginal farmers bear the brunt of this predicament. Their limited land holdings render them unable to achieve economies of scale or invest in crucial farm mechanisation and technology that could enhance productivity. 

Amidst the numerous challenges confronting them, farmers find themselves with just one viable recourse — Farmer Producer Organisations (FPOs). These organisations provide a means of consolidation, disregarding the limitations of individual land titles. Through collective planning for production, procurement and marketing, FPOs enhance the value of their members’ produce. By joining forces, farmers can bolster their negotiation power and bridge the chasm resulting from financial exclusion.

Collaboration Among Stakeholders To Enhance Financial Inclusion

Currently, the majority of FPOs are in their early stages and require collaboration from stakeholders, including the fintech sector and NBFCs, for capital, infrastructure and vital market connections. Farmers have diverse needs for specialised loans, equipment financing and insurance. 

However, lending to small farmers is fraught with challenges, such as high costs and loan default risks. Gathering farm-level data and credit history is also difficult for NBFCs and financial institutions. Collaboration between NBFCs and fintechs is crucial to overcoming these obstacles.

Fintech and agritech startups leverage technology by introducing farm management platforms, mobile banking apps and digital payment systems. This empowers NBFCs with valuable insights into the agricultural landscape and individual farmers, enabling seamless loan disbursement and tailored financial products. As a result, interest rates for loans have dropped significantly, reaching as low as 12-18% compared to the 24-60% prevalent in the informal credit system in rural parts of India.

This convergence of stakeholders in technological integration yields numerous benefits: simplified financial transactions, streamlined record-keeping, reduced transaction costs, real-time data access and extended effective financial services to even the remotest areas of our agricultural landscape, thus bringing about much-needed financial inclusion.

Impact Of Financial Inclusion On FPOs 

With affordable credit, loans and investment capital at their disposal, FPOs can expand operations, enhance productivity and embark on new initiatives. Additionally, financial inclusion empowers FPOs with the working capital necessary for seamless day-to-day operations, enabling them to optimise cash flow, meet timely payments to farmers and seize market opportunities. 

Furthermore, financial inclusion empowers FPOs to invest in value-added activities such as processing, packaging, and branding. This strategic move enhances the profitability of their agricultural produce and unlocks access to formal markets, buyers and supply chains, resulting in increased sales volumes and improved price realisation.

Beyond the financial benefits, embracing financial inclusion serves as a robust shield against risks inherent in agricultural uncertainties, market fluctuations and natural disasters. By effectively managing risks and securing insurance coverage, FPOs bolster their stability and resilience.

The instrumental support of financial institutions and development organisations is crucial to the success of FPOs. Through training programmes, workshops and mentoring, these entities equip FPOs with essential business skills, financial literacy, governance structures and effective marketing strategies.

Building A Stronger Financial Ecosystem

Even after a consistent push from the government and RBI for financial inclusion in India for the last many years, India is still far behind in terms of providing access to financial products to the bottom of the pyramid. 

Banks with sufficient liquidity have limited bandwidth and resources to go the extra mile to underwrite applications, process loans, and collect repayments. Consequently, the majority of the funds allocated to the banks under priority sector lending still go under-utilised. On the other hand, many startups operating as NBFCs and MFIs lack funds at affordable prices but have established the network and capabilities to deliver to the last mile. 

 It is very important that these organisations work collaboratively, leveraging each other’s strengths, to address the financial inclusion problem in India. In this context, the government’s announcement of co-lending programmes that will spur collaboration between banks and NBFCs is a welcome step.