Platform to Create Shared Value in Agribusiness

Platform to Create Shared Value in Agribusiness
Key Issues and Solutions in Agri-finance Analysis of questionnaire responses and interviews of bank and agribusiness leaders on agri-finance January 29, 2013 Agri-finance Collaboration Meet

Table of contents Bank and company priorities by type of collaboration
Key issues and solutions in agri-finance Key issues and solutions in value chain and warehouse receipt financing Key issues and solutions in building BC networks with agro- dealers Meeting agenda Background

Banks and companies responding to the questionnaire
Axis Bank HDFC Bank ICICI Bank SBI Yes Bank Companies Coromandel ITC Mother Dairy StarAgri

A. Bank and company priorities
by type of agri-finance collaboration

Banks view warehouse receipt financing, value chain financing and agro-dealer networks as means to reduce costs and risk and increase outreach in agri-finance Mechanism, business model Promise in reducing risks Promise in reducing costs, increasing profitability Promise in achieving major outreach Direct lending to farmers by bank branch staff Lending to farmers in collaboration with value chain agribusinesses and/or strong producer organizations Lending using distribution systems of input supply companies, agro-dealers as BCs or BFs Providing warehouse receipt financing directly to farmers Offering crop or weather insurance to farmers as agent for/ in collaboration with insurance companies Five participating banks responded to the questionnaire H: High M: Medium L: Low 5

Financial institutions
Crop and weather insurance for farmers are considered important to banks and agribusinesses Importance of crop and/or weather insurance to banks and to agribusinesses Banks 1 2 3 4 5 6 7 8 9* 10 * Average score for all five banks Main changes needed to make crop and/or weather insurance accessible to farmers: Changes needed Financial institutions Crop Insurance premium should be reduced SBI Government support required for the sector Crop Insurance Premium for small and medium farmers should be borne by respective state government SBI, ICICI Claim settlement efficiency needs to improve ICICI, HDFC Crop insurance should be customized, flexible and bundled with the loan Axis 6

Banks are interested in pursuing a range of agri-finance collaborations with value chain agribusinesses, agro- input suppliers and dealers, and storage companies. Areas Banks Axis HDFC ICICI SBI YES Value chain financing with agribusinesses Value chain financing with producer organizations BC models with agro-dealers Financing of agro-entrepreneurs Financing of working capital Financing of fixed investments Warehouse receipt financing Crop or weather insurance 7

Companies are interested in pursuing collaborations with banks in a range of areas
Coromandel ITC Mother Dairy StarAgri Bank financing of farmers in company’s value chains for working capital Bank financing of farmers for fixed investment requirements Use of company agro-dealer system to provide farmers with ag credit as bank BFs or BCs Financing of strong agro-dealers in company’s distribution network Financing of agro-entrepreneurs which are value chain integrators Financing of company’s working capital requirements Warehouse receipt financing for farmers Warehouse receipt financing for traders 8

B. Key issues and solutions in agri-finance

Key issues in agri-finance
High costs Small loan size makes agri-lending expensive. HDFC Bank, SBI, ICICI Bank Customer assessment, issues in selection. HDFC Bank, Yes Bank High transaction costs with cash collections. HDFC Bank, ICICI Bank Profitability, particularly in lending to small farmers. HDFC Bank Cash-based transactions cumbersome. HDFC Bank Issues of cost, productivity and ROE on manpower for agri-lending. Axis Bank Add-on costs charged to farmers, e.g. bribes, procurement fees. Axis Bank Limited branch outreach. Axis Bank, Yes Bank, ICICI Bank Need to check end use of loans. ICICI Bank High risks Agri-finance lending is risky, weather and market risks. HDFC Bank, Axis Bank, Yes Bank, ICICI Bank Tendency for defaulters to infect agri portfolio in the area. SBI Fraud, loan default. HDFC Bank Difficulties with tangible collateral, mortgage and title documents. HDFC Bank, SBI, Yes Bank Low claim settlement efficiency. HDFC Bank Overall cons-traints Lack of investment credit. SBI Private banks are at competitive disadvantage due to interest rate subsidies, subventions for public banks. Axis Bank, Yes Bank Farmers’ unfavorable perception of private versus public sector banks. Axis Bank Corporate inertia, layers. HDFC Bank

Key solutions in agri-finance
Reducing costs and improving efficiency LT strategies to collaborate with corporates and farmers, particularly value chain financing, for cost-effective outreach. HDFC Bank, SBI, Yes Bank Strong IT enabled services to reduce costs, turnaround time. SBI, Axis Bank, ICICI Bank However, some banks have found that IT solutions do not significantly reduce human intervention, required for due diligence. Yes Bank Ensuring improved turnaround time. HDFC Bank Reduce collection costs with corporates deducting from farmer payments. HDFC Bank Reducing risks Have a strong MIS on client repayments and sales to enable timely action on repayment issues. HDFC Bank, SBI Building effective overall strategy Work with all three models: value chain financing, agro-dealers as BCs, warehouse receipt financing. SBI Progressive bank management. HDFC Bank, ICICI Bank Build own field force as well as with intermediaries. Yes Bank Consider subventions for private banks or remove for public banks. Yes Bank

C. Key issues and solutions in value chain and warehouse receipt financing

Issues and solutions in value chain financing
Key issues in value chain financing Unstable corporate value chains, lack of loyalty of farmers to corporate value chains. HDFC Bank, SBI Inadequate number of stable value chains. SBI Solutions in value chain financing Identify collaborators with reach, experience, brand/reputation, intent, goal congruence, building exclusive relationships. Axis Bank, Yes Bank Ensure corporate involvement in procurement. HDFC Bank Corporates should reward quality to ensure net returns to farmers. HDFC Bank Agribusinesses to provide sales and credit history of farmers in value chains. SBI Banks should offer payments services to monitor the cash flows between farmers and corporations. SBI Create and train dedicated bank teams for corporate value chains. HDFC Bank Need better training and trust-building with all stakeholders. SBI Target and master each link in the value chain, to facilitate later moves to other parts. Yes Bank Strategy for farmer acquisition from value chains of multiple corporates, with plans to fund them on “total basis”. HDFC Bank, ICICI Bank

On value chain financing, banks want companies to provide procurement history. Both consider distinct value proposition and shared MIS important. Banks would like the agribusiness to share risk and subtract loan repayments from payments to farmers. Banks Companies The agribusiness with the value chain of farmers needs to be able to provide the farmer’s track record showing regular sales to the company over the past three years. The bank and agribusiness need to build a shared MIS to facilitate repayments and early warning in the event that a farmer leaves the value chain. The agribusiness should be providing distinctive combination of inputs, advice, procurement services and prices to establish a stable value chain with farmers. The agribusiness should be willing to take a portion of the risk of non-repayment by farmers recommended for financing by the agribusiness The agribusiness should get involved in collecting repayments when it procures material from the farmer, if the value chain is stable and mature. Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 14

Both banks and agribusinesses think financial services beyond loans, specialized bank staff, weather insurance and payment systems are important in value chain financing collaborations. Banks Companies The bank should make available other financial services to good agri-finance customers to help them build income and assets, and mitigate risks. The agribusiness should have stable relationships with at least 1,000 and ideally over 10,000 farmers, to justify bank’s time and expense to establish VC relationships. The bank should provide a loan officer or BC on the corporate premises or nearby to facilitate transactions for the farmers Normally, the bank should be involved in payment processes between the corporation and the farmers to track cash flows. The bank should ensure that participating farmers have weather or crop insurance to remove or reduce this area of risk. Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 15

Key lessons in providing value chain financing to farmers in collaboration with agribusinesses
Bank Strength of value chain is most important factor to reduce risk Number of commodities covered under value chain financing needs to be increased Root level interaction should be there Modernisation of Inputs to generate better results for the farmers at same cost HDFC Rewarding quality – increase profit to farmers Quick turnaround time is extremely important for farmers Axis Identification of proper collaborator-reach and qualified manpower, intent and goal congruence Better to first concentrate and understand one part of the value chain and then move to the other level Seasonality and peak requirements are there. For example in March the balance sheet of businesses might be highly leveraged but in September it might not be.

Solutions in warehouse financing
Emphasize warehouse receipt financing which has lower risks than value chain financing or financing through agro-dealers. Yes Bank Create value chain through warehouse receipt financing and leverage this relationship to provide crop or weather insurance to farmers. ICICI Bank

In loose value chain financing relationships, the FI performs most functions, relying on procurement track records and non-financial services of the agribusiness. Buyer / Trader Conditions for loose value chain financing to work Farmers have track record of steady sales to agribusinesses or buyers. Prices adequate and stable, for bank to assess cash flow, capacity to pay. Useful if agribusiness or buyer provides technical services, access to quality inputs, quality control. Traders almost never provide such services. Crop Payment Bank Loan Farmer Loan repayment Roles of each key actor: Risk and risk mitigating measures: Bank assumes all risk, appraises loans, disburses and collects. Useful if focus on promising, high value commodities and if agribusiness/buyer provides data on procurement history from individual farmers in value chain. Risk of non-repayment, with agribusiness, buyer not directly involved in loan and repayment process. Risk of bank losing interest—relatively high cost, high risk model unless with established, progressive medium sized farmers. Useful to get agribusiness or buyer to provide procurement history to bank. Useful to engage agribusiness in productivity building measures, and in process of moving from loose to tight value chains. 18

In tight value chain relationships, risks of side-selling are lower and the agribusiness assumes more functions, reducing costs to the financial institution. Agribusiness / Buyer Conditions for tight value chain arrangements to work: Loan repayment Agribusiness has tight, stable relationships with a substantial number of farmers e.g. over 1,000 ideally over 10,000 to justify value chain financing with bank Agribusiness has developed strong, differentiated value proposition based on services, price and procurement arrangements—if not contracts—to protect against side selling. Crop Payment Pre-harvest loan Bank Farmer Loan repayment Roles of each key actor: Risk and risk mitigating measures: Agribusiness performs many functions in the loan cycle, normally including: data bases on procurement, screening farmer borrowers, and collecting repayments from the procurement amounts. Agribusiness provides complementary services to build productivity, quality of farmer output. Bank assumes all risks, does loan appraisal and normally direct disbursements. Risk of participating farmers: side-selling to avoid repayment, linked to agribusiness procurement. Risk mitigating instruments: focus on high value commodities and agribusinesses/buyers providing strong value to farmers e.g. price for quality, inputs, TA, quick payment. Lend to farmers with at least two years of steady supply to the agribusiness/buyer, representing at least 70% of farmer’s cash crop sales 19

Warehouse receipt financing
Conditions for the model to work: Farmers (or traders) derive strong price benefits from waiting to sell crops and from storage. Secure warehouses, including cold storage and CA storage units exist in the geography in which small farmers are concentrated. Buyer / trader Repayment Bank Produce Receipt Finance Harvest produce Warehouse Farmers Warehouse receipt Roles of each key actor: Risk and risk mitigating measures: Bank provides the farmer or trader with warehouse receipts against crops stored in warehouse. Warehouse operator provides secure storage, insurance. Farmer provides harvest produce for storage, until decides to sell at higher price. Risks of theft, spoilage Risk of mismanagement by warehouse operators Risk that price at sale lower than loan+interest. Risk mitigating instruments: insurance and solid credit and risk management, experience in commodity lending, ability to assess instruments, collateral managers, warehouses. Source: IFC and Agri-Finance. Creating Opportunity Where It’s Needed Most

Repayment out of amounts procured Loan for aggregators and farmers
Agri-finance with aggregators can involve direct finance for aggregator operations and value chain type arrangements for financing small farmers. Conditions for the model to work: Cooperative / Agro-entrepreneur If producer organizations solid, legal financial structures with strong track record in marketing products, providing technical services to farmer members, and borrowing for cooperative activity and on behalf of farmer members. If agro-entrepreneur, solid organizations with strong sales channels to buyers, agribusinesses, retailers—with established procurement and TA links with smaller producers. Repayment out of amounts procured Loan for aggregators and farmers Loan repayment Loan, cash and in-kind Farmers Bank Roles of each key actor: Risk and risk mitigating measures: Strong aggregators borrow for own operations and serve as wholesaler or agent on loans to farmer members, cutting costs to bank. Aggregator often provides productivity enhancing, quality control, processing, storage and transport roles Bank appraises aggregator, and if aggregator an agent, bank appraises farmer member borrowers. Risks that the cooperative or agro- entrepreneur will not repay loan for own operations or loans on behalf of farmers—due to poor management, mismanagement. For all but the strongest aggregators, with impeccable financials and track records, bank can use aggregator for origination and complementary services, but bank should lend directly to farmers in the network. 21

D. Key issues and solutions in building
BC networks with agro-dealers

Key issues in BC networks
Agro-dealer model reduces risks, not costs to the bank. As a result, banks focus on medium and large farmers. HDFC Bank, Axis Bank Margins paid to agro-dealers increase cost and reduce profits to the bank. Yes Bank Insistence by agro-dealers on cash transactions increases costs, requires proximity. Yes Bank. Proper training of agro-intermediaries is costly. Yes Bank Agro-dealers of companies are widely dispersed. Yes Bank Corporates lack influence, power over dealers, meaning direct engagement by bank. HDFC Bank Heavy past investment in agri-finance through agro-dealers, but with very bad experience. Difficult to align motivations, incentives with bank. ICICI Bank

Solutions in BC networks
Leverage business history, relationships of dealers with farmers to reduce risks. Yes Bank Ensure effective cash logistics mechanisms and prompt payouts. HDFC Bank, ICICI Banks need to pursue dealer relationships directly. HDFC Bank Corporate to optimize input supply for improved results at affordable costs. HDFC Bank Ensure clarity in margin sharing and effective incentive systems for bank, agro-dealers and farmers. SBI, ICICI Bank Select strong dealers using clear criteria. SBI Need better training and trust-building with all stakeholders. SBI Collaborate with experienced intermediaries to reduce training costs. Axis Bank Seek dealers with a substantial base of farmer customers, but recognize that larger dealers require higher margins. Yes Bank Consider use of fertilizer companies, NBFCs, irrigation and FMCG companies to increase cost effective distribution. Axis Bank Use handheld IT devices to transfer information for verification in real time. Axis Bank Limit bank involvement to due diligence and credit assessment with other transactions performed by BCs. Axis Bank Begin by making loans for agri-inputs only, paying the suppliers directly with no cash payments to farmers. Axis Bank Ask BCs to share NPA risks. Axis Bank

Several banks and companies are interested in building agri-finance collaborations using agro-dealer networks Interested in pursuing collaboration with agro-dealers as BCs and BFs? Banks Yes No AXIS,YES,SBI ICICI Companies Yes No Coromandel, Mother Dairy, StarAgri, ITC (eChoupal) Primary motivations of pursuing these collaborations Motivations Banks Companies Axis HDFC ICICI SBI YES Coromand. ITC Mother D. StarAgri Reducing costs Reducing risks Increasing outreach Providing farmers inputs, advice, markets and finance 25

Banks and companies judge that shared objectives, clear margin sharing arrangements, and strong agro-dealer selection criteria to be key to successful BC and BF collaborations Banks Companies Clarity in shared objectives from outset. Clear margin sharing arrangements for bank, company, dealer. Strong selection criteria to get agro-dealers with high volumes, strong motivation and capacity to originate and screen agricultural clients. Strong rural distribution system of input company, with clear commitment to scale up once piloted Strong connections between input company and agro-dealers through own stores, franchising or dominant or exclusive selling arrangements. Strong history of training. Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 26

Banks and input companies see incentives linked to origination and repayments, finding agro-dealers with the time and willingness, strong IT, and integrity of the parties to be key to solid agri-finance through dealers Banks Companies Strong incentives to the agro-dealer on loan origination and loan repayments, to align incentives. Agro-dealers with the time and willingness to engage in financial services based on clear value proposition by the bank to agro-dealer Strong technical IT support provided by the bank, company or third party to enable electronic data entry and links to CBS. Strong brand and integrity of the bank, company and participating agro-dealers. Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 27

Input companies consider strong training, measures to streamline operations, top management commitment and shared MIS to be important for successful agro-dealer BC networks Banks Companies Strong training and follow up systems by the bank and partner company to reinforce the capabilities of the agro-dealer as BC. Strong shared MIS to enable timely tracking and trouble shooting by the bank and company. Interest by the company and agro-dealers in providing services beyond loan origination eg, disbursements, collections, insurance Strong measures to streamline operations and cut transaction costs further, needed for banks to make smaller ag loans Strong top management commitment by partner company to ensure continued commitment, if senior or middle management transitions occur. Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 28

Banks do not see buy-back, patience with piloting, geographical focus, dealer agro-knowledge or value add to farmers as important. Companies see these elements as quite important. Banks Companies Companies and agro-dealers prepared to buy back commodities—to reduce repayment risks Willingness by both bank and company to spend one to two years piloting the arrangement, to get it right, before scaling up. Location in area where the financial institution intends to concentrate agri-finance operations. Agro-dealers with strong agro knowledge in key commodity groups, ideally agri graduates Agro-dealers with strong track record of providing a range of value adding inputs to small and medium sized farmers Four banks and four companies responded to the questionnaire H: High M: Medium L: Low 29

Key lessons in providing financing to farmers through agro-dealers, traders, small processors
Bank Agro-dealers try to exploit the bank by providing fake data Very difficult to keep control on dealers and traders Improves client selection Processors and storage units often have no direct relationships with famers Quick turnaround time is extremely important for farmers Identification of proper collaborator-reach and qualified manpower, intent and goal congruence It is a slow, gradual process. Difficult to work with dispersed agro- dealers. Agro-dealers to most business in cash and insist that the banks do the same. Hence proximity is an issue

Desired collaboration with
Banks are looking for collaborations with input supply and value chain companies to reduce costs and risks in agri-finance, and to help farmers get what they need to succeed Banks Desired collaboration with Tata Chemicals Rallis Haryali Kisan Bazaar Sugar mills Nestlé Amul FMCG companies including Cadbury, Marico, P&G, HUL Sugar companies Open to all companies listed Godrej Agrovet Coromandel Jain Irrigation Mahindra & Mahindra 31

Input supplier / agro-dealer
In designing banking correspondent agent relationships with agro-dealers, the FI needs to be actively engaged in training, ICT, and initial loan appraisals. Conditions for the model to work: Input suppliers need to have strong rural distribution networks of agro-dealers. Works best if input suppliers can collaborate to ensure supply and financing of improved seed, fertilizer, plant protection. Agro-dealers need to be solid, respected, with strong understanding of who are solid, progressive farmers. Need strong, shared MIS and ideally internet based payments. Input supplier / agro-dealer Inputs Funds Bank Farmers Loan repayment Roles of each key actor: BC Risk and risk mitigating measures: Bank does appraisal of farmers, provides farmers loans, provided in kind from agro- dealers. Bank takes full credit risk. Input supplier/agro-dealer provides inputs, advice and ideally loan origination, screening support. Agro-dealers can become BC agents acting for the bank in WC loans-doing origination, screening, loan doc, disbursing, collecting. Risk of non-repayment, no procurement tie-up. Risk that inputs only will not be adequate financing for farmers, limiting yields Mitigate risks by building strong training of agro-dealers to provide value adding advice and identify strong borrowers, with incentives based on farmer loan repayments to the bank. 32

E. Meeting agenda

Meeting agenda 10:00 to 10:45 Presentation by ESP of questionnaire responses and IIMA interviews on agri-finance 11:05 to 12:20 Meetings of individual companies and banks Time Room A Room B Room C Room D Room E 11:05 to 11:20 Coromandel BASIX Jain Irrigation IDBI Bank Mother Dairy SBI StarAgri ICICI Bank UPL HDFC Bank 11:20 to 11:35 Coromandel BASIX 11:35 to 11:50 11:50 to 12:05 12:05 to 12:20 12:20 to 1:00 Discussion of main lessons on building effective agri-finance collaborations, and key Platform actions to support bank and company initiatives.

F. Background

Strategies, issues and solutions being built by: HDFC Bank SBI
Background Strategies, issues and solutions being built by: HDFC Bank SBI Axis Bank Yes Bank ICICI Bank Key competitors Statistics on agricultural lending Implications of new priority sector lending regulations for agri-finance Please fix formatting

Strategies, issues and key success factors in agri-finance. HDFC Bank
Current strategy on agri-business collaborations Agricultural lending of total portfolio = 10% - Current NPA = 2.5% of the loan portfolio. Expensive and risky nature of stand-alone agri-loans Lack of loyalty of farmers to corporate value chains Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on “total basis”. Post-tie-up monitoring mechanism for sales, reduction of collection costs etc. Creation and training of dedicated teams to address the corporate value chains. Key issues in agri-lending Key success factors Cash-based cash flow Fraud, loan default Customer assessment Inaccurate mortgage documents Issues in customer selection High transaction costs of cash collection Profitability—particularly in lending to smaller farmers Low claim settlement efficiency Issues of “vested interests and inertia between various layers of corporate”. Long term strategies for collaborative connection and operation with farmers Progressive management Ensuring attractive, prompt dealer payouts. Ensuring effective cash logistics mechanisms. Ensuring improved turnaround time. Ensuring corporate involvement at the procurement level.

Lessons learned Reward quality – to increase net returns to farmers
Lack of influence, power of companies over dealers – need for banks to pursue dealer relationships. Need for input optimisation– for improved yields at same costs to farmers. Ensuring involvement of buyer organisations to combine inputs and methods to get quality and increase profits. Experience with agro-dealer networks operations: Restricting to medium and large farmers due to high transaction costs Agro-dealer model reduces risks, not costs

Key issues and success factors in agri-lending State Bank of India
Current strategy on agri-business collaborations Individual farmers. SBI plans to focus more on getting to individual farmers rather than middlemen in its value chain, warehouse receipt and direct financing operations. Increasing outreach. Financial inclusion will be a major part of the growth strategy with increased emphasis on value chain collaborations Reducing costs. Cost reduction, through collaborations and lower cost distribution will be key in increasing outreach in a cost effective way. Portfolio: Working capital loan, including KCC = Rs.7.84 mn. Fixed investment loan = Rs.2.14 mn. Crop or weather Loan = Rs.0.77 mn Key issues in agri-lending Key success factors Related to costs: Small loan size Inadequate number of stable value chains Lack of investment credit Related to risks: Absence of tangible collateral Spread of defaulters in an area Related to collaborations: Unstable value chains Restricted direct agriculture lending areas Working with all three models: value chain financing, agro-dealers as BCs, warehouse receipt financing. Strong relationship with farmers by very deep reach through different value-chains.

Key issues and success factors in agri-lending State Bank of India
Lessons learned Agribusinesses should provide sales and credit history of the farmers in their value chains Banks should monitor the cash flows between farmers and corporations by offering payments services as a way of tracking risk, enabling timely action Having a strong MIS is key to track repayments and take remedial action, for portfolio quality Clarity in margin sharing agreement between bank, agro-dealers and farmers essential Important to select strong dealers with clear selection criteria Need better training and trust-building with all stakeholders Strong IT enabled services should be offered

Strategy, issues and success factors in agri-finance – Axis Bank
Current strategy on agri-business collaborations Total agricultural lending portfolio is 9%, 7% to farmers directly AXIS bank is collaborating with experienced intermediaries to avoid training costs and simultaneously increase outreach. Also AXIS bank is using technology to reduce turnaround time. Tri-party arrangements with FMCG companies and Irrigation companies in Karnataka and Maharashtra Arrangements with fertilizer companies to use their distribution network, NBFCs as manpower to source loans, hand held IT devices to transfer information for verification through SFTP in real time AXIS Bank only involved in due diligence and credit assessment Currently only loans for agriculture inputs directly paid to businesses, no cash as of now Sugarcane farming: Bank pays farmers for produce, companies get credit period Key issues in agri-lending Key success factors Loan repayment risks high Limited branch outreach Competitive disadvantage due to interest subsidies by scheduled banks Manpower- productivity and ROE issues Farmer perception of private vs. public sector banks Add-on costs to farmers e.g. bribes, fees Related to collaborations: Identifying collaborators with reach, qualifications, intent and goal congruence BCs must accept terms of sharing NPA risks Identifying collaborators and setting up a system that takes care of the three parties. Technology to reduce manpower costs. Reducing turnaround time

Lessons from current agri-business collaborations
Lessons learned Collaborations do not reduce risks to desired extent. Disbursement of cash through intermediaries Technology can go a long way in reducing costs and achieving minimal turnaround time Collaborating with NBFCs reduces work for bank and also eliminated training needs AXIS Bank committed to agri-finance: would continue to target the agricultural sector even without PSL requirements to almost the same extent Interest rate subsidies by public sector banks, paid for by GOI, makes it extremely difficult to compete for the same set of farmers. Government should provide same incentive to private banks.

Challenges and success factors in the agro-business collaborations and
agri-lending – Yes Bank Current strategy on agri-business collaborations Building own field force as well as building lending with intermediaries Have tie ups with cooperative banks and PSU banks to extend network s up Tied up with co-operative banks and public sector banks Criteria for selecting collaborators include: experience, relationship, brand, exclusivity The larger the dealer, more farmers in his network but require higher margins Working Capital Loans = 40% of the Agri-lending portfolio. Term Loans= 60% of Agri-Lending portfolio Key issues in agri-lending Key success factors Branch outreach Loan recovery Due diligence of farmers Estimation of credit limits for a farmer Lack of proper documents Building own field force Related to collaborations: Dealer collaboration is challenging because dealers of a company are dispersed Increased costs due to margin paid to them Insistence on banks to handle cash because dealers/traders do mainly cash business Proper training of intermediaries is costly Developing a wide network through collaboration to improve the quality of loans and hence reduce repayment risks. Targeting and mastering each link in the value chain one by one is more efficient This page is weak and inconsistent. Moving to more or less reliance on own field force vs. Intermediaries. What do the points at the top on current strategy mean? Very unclear.

Key lessons from collaborations history
Lessons from current agri-business collaborations Key lessons from collaborations history Yes Bank prefers collaborations to increase outreach. Yes Bank finds that collaborations with local intermediaries help in reducing risks due to more reliable information about the farmers Reduced risks- Business history and mutual dependence of dealers with farmers makes lending to farmers less risky One link at a time – Understand and cater to one part of the value chain first, making moves to other parts later safer and easier. Value chain model and agro-dealers model have the same costs and warehouse receipt financing has the lowest risk Technology can be of limited use. It can lubricate operations but cannot reduce human intervention required for due diligence while setting up an account Interest rate subvention makes it extremely difficult to compete with PSU banks for the same set of farmers, Government should provide this incentive to private banks as well

Key issues and success factors in agri-finance – ICICI Bank
Current strategy on agri-business collaborations Previously company invested heavily through agro-dealers, but have very bad experience. Bank ready to provide working capital and fixed investment support to agri-businesses. Strategy for farmer acquisition from value chains of multiple corporates and plans to fund them on “total basis”. Creation of value chain through warehouse receipt financing and leveraging that relationship to provide crop or weather insurance to farmers Key issues in agri-lending Key success factors Related to cost: Small loan sizes, high fixed cost Issues of reach, low density of farmers High transaction costs, including need to handle cash directly Related to risk: Difficult to predict weather Lack of credit history of farmers Difficult to find out end use of loans Related to collaborations: Turning small loan portfolio into a profitable one Credibility of dealers. Ensuring effective cash logistics mechanisms to handle cash Ensuring timely payments by farmers. Designing an effective incentive system for dealers Strong and result oriented relationship with rural value chains. Progressive management team

Current strategy and key lessons
Lessons learned Need to work on automatization of field work – for improvements of results at same costs to farmers. Lack of influence and power of companies on dealers—very difficult to align incentives. Need to check end use of loans. Ensuring involvement of banks representatives for yearly evaluation of assets.

Importance as competitor
Major competitors Competitors Importance as competitor What do well Axis HDFC ICICI SBI Yes Private commercial banks 7 8 10 Target only large farmers Have higher reach with same products Scheduled commercial banks 6 9 Strong network in rural area Manpower Interest subvention Only for retail financing Cooperative financial institutions 4 1 Crop loans Deep rural penetration Connection with farmers Traders, small processors, agro- dealers Receivable financing Bonding with farmers Private agribusinesses providing loans directly 5 Relationship, flexibility Muthoot , Manappuram Gold loans Very low turnover time Good reach 47 High competition Medium competition Low competition

Historical performance under lending to total agriculture
Lending to total agriculture sector This is presented as a percentage of Adjusted Net Bank Credit Without 4.5% cap on indirect agriculture lending Source: RBI

Trends in NPAs in agriculture sector
Source: RBI

Implications of the new priority sector lending regulations for commercial banks
Key issues/challenges with the new regulations Bank Actions that banks are taking to comply with the new requirements Food processing and trader financing have moved out of priority lending sector More emphasis on individual farmers and to increase the limits of working capital loan beyond INR 2 Crores Limits beyond INR 2 crores to corporate sector (in value chain) is now considered as indirect agri-finance and not priority sector lending Food processing is out of priority sector Company had previously invested heavily on food processing units, now planning to change its focus as per new regulation No consideration for agri logistic issues/ transport infrastructure Meeting the set goals with limited infrastructure in agri. sector looks to be a distant target. Only focused on crop output rather than considering complete value chain Company trying to transfer its previous value chain lending to core farming, and hence incurring additional expenses in this transformation Bea, This and the next slide slide need to be redone. .. Focus on issues overall and action by each bank. Very repetitive this way

Implications of the new priority sector lending regulations for commercial banks
Key issues/challenges with the new regulations Bank Actions that banks are taking to comply with the new requirements Cannot lend to agribusinesses as part of priority sector. Entire 13.5 % of assets to be lent directly to farmers. Arrangements with fertilizer companies to use their infrastructure Partnership with NBFC’s to use their manpower, distribution channels. Current Axis is at around 9% which includes 2% to corporate. Hence a gap of 6.5% to be filled for PSL requirements NBFC’s source loan. Bank just does credit assessment and due diligence Reaching farmers directly is a challenge especially when we are competing against PSU banks who have much better reach to cater to the same set of farmers Yes Bank is trying to build own field force because that gives flexibility of intermediaries Yes Bank has tied up with cooperative banks and PSUs

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