1. Engaging Rural India through CSCs
version 0.3
Rahul Bhargava
e-Sourcebook: ICT for Ag
Drivers
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How?
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Common Service Centres
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Proposed Methodology
Methodology
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1.1
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Background
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Collateral Management in Agriculture Finance in India
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International Finance Corporation: Global Warehouse Finance Program
Rural India Demographics, 2005
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Agricultural marketing structure
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Notes on international rural retail trends
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Wednesday 24th April, 2013
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Background
Collateral Management in Agriculture Finance in India
AgriFin (April 2013) — This article was contributed by Vivek Thoopal, Head of Business
Development (Collateral Management), National Collateral Management Services Limited
(NCMSL), For additional information, please contact the author at: vivekthoopal@gmail.com
The Indian agri-commodity market, being highly fragmented, is characterized by a
large number of participants including farmers, several layers of aggregator, processors
and traders. Before the advent of professional Collateral Management entities, access to
finance and consequentially holding capacity for the above entities was difficult due to
poor balance sheet quality and credit history. While banks were keen to identify lending
opportunities within this segment to meet their priority segment obligations, a high level
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2. FT
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of non-performing assets and heavy supervisory costs dissuaded their efforts. Moreover
the flow of credit remained skewed in favor of the developed and urban pockets.
Over the past 8 years collateral management services have brought about a transformation by allowing banks to almost ignore the borrower’s financial strength and
rely solely upon the warehouse receipt issued by the agency. This form of lending by
banks is in contrast to the traditional lending in the form of working capital, with credit
facility based on the balance sheet of the borrowing entity, and is more secure due to
the collateral manager’s services. The current collateral management processes in India
are rudimentary but effective and more importantly in line with the domestic market
practices. The collateral manager after a survey enters into a lease agreement and takes
custody of the storage facility containing the commodities. The collateral manager guarantees the quality and quantity of the agri based collateral, provides price information
required for margin call and aids in disposal of the commodities, if necessary. The
collateral manager also ensures that the commodities are adequately insured for natural
calamities and burglary, though these risks are not underwritten by the collateral agency.
The loans against agri-collaterals are typically short term (8 months to 1 year), selfliquidating, and one of the most secure products in a bank’s portfolio. For the borrowers
the willingness of a collateral manager to provide services in a variety of storage facilities,
including the godown in his backyard (field warehousing), makes this the easiest method
of procuring low cost finance.
The greatest challenge in providing these services arise from the logistics complexities of securing numerous warehouses spread across the remote parts of the country.
Currently NCMSL is one of the two major collateral management companies in India.
The company manages commodities of over $1.5 billion through 900 bank branches
across 18 states and 3500 storage structures. It was also the first private company to
issue a negotiable warehouse receipt, allowed under the Warehouse (Development &
Regulation) Act, 2007. However, very few warehouses are registered with the warehouse
authority, as required by the act which is still in a nascent stage of implementation. Extensive risk profiling, audit planning, and manpower management is required to ensure
the security of the collateral especially due to the thin margins involved. As the industry
remains manpower intensive, key risks to a collateral management agency remains the
vulnerability of the personnel deputed to supervise the storage, inflow and outflow of
commodities. Several levels of audit based on the risk profile of godowns are deployed
to mitigate the above risk. Collateral management in India is unique in several respects.
The idea of a specialized structured solution for a large client has been adapted as a
retail product catering to the agriculturists and caters to even loans as low as $2000 for
the marginal farmers. The client base is predominantly small ticket with an average
loan size of approximately $40,000. Of course, at the other end of the spectrum loans of
up to $10 million are facilitated through this product. But, of the approximately 35,000
borrowers who use NCMSL’s collateral management services, less than 10% avail large
ticket finance.
Borrower’s profile varies by commodity, but is usually small or medium enterprise/entity. For instance, financing against paddy is availed by processors, mustard
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3. 1.2
International Finance Corporation: Global Warehouse Finance Program
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AgriFin (April 2013) — This article was contributed by Makiko Toyoda, Senior Trade Finance
Officer, International Finance Corporation. For additional information, please contact the author
at: mtoyoda@ifc.org
Agricultural commodities are stored in warehouses before shipment, and in most
cases, farmers need to sell their production earlier than they desire to meet their urgent
financial needs. Warehouse financing is a secured lending technique that allows farmers
access to finance secured by commodities deposited in warehouses. It is especially
beneficial for farmers and small- and medium-sized entrepreneurs, who are often unable
to secure borrowing requirements due to lack of sufficient conventional loan collateral.
Warehouse financing allows banks to shift risk from borrowers’ fixed assets to the
commodities that farmers produce. It also allows farmers to enhance income by having
more flexibility in timing sales to protect against price seasonality.
The IFC’s Global Warehouse Finance Program (GWFP), established in late 2010, aims
to increase working capital financing to farmers and agriculture players by leveraging
their own production. The Program supports the agriculture sector by providing banks
with liquidity and/or risk coverage for assets that are backed by warehouse receipts or
equivalent (such as Collateral Management Agreement or Stock Monitoring Agreement).
According to a market study conducted by IFC in 2009 which covered 15 countries
worldwide, the availability of warehouse financing is between zero and seven percent of
financing needed in less developed emerging markets. The GWFP was established to
address that gap and to build capacity among local financial institutions to provide this
type of financing.
Under this Program, IFC offers a short-term loan to a bank, which will in turn use the
funds to lend to farmers, cooperative unions, aggregators, exporters or traders against
warehouse receipts or equivalent. IFC can also provide guarantee up to 50 percent
of short-term loans extended to those agriculture borrowers by a bank. To date, IFC
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seed by traders, and chili by producers. Irrespective of the borrower’s profile, collateral
management fees are usually paid by the financial institutions. In that sense the collateral
manager acts as an agent of the financial institution.
Technology plays an important role in the management of the thinly spread structures. The system not only ensures that the issuance and release of the warehouse
receipt are centralized but also keeps all relevant personnel updated in real time on
the status of the collateral. Collateral management in India has witnessed tremendous
growth and acceptability in recent time. The initial thrust was driven by the Reserve
Bank of India’s (India’s central bank) regulations which require 18% of a bank’s loans be
directed towards the agriculture sector. The product, which started around the year 2004
and employed by 2 new private sector banks, is now being used by about 40 financial
institutions to disburse loans of over $5 billion. This figure is expected to grow four-fold
and reach $20 billion within the next five years.1
1 http://agrifinfacility.org/collateral-management-agriculture-finance-india
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4. Rural India Demographics, 2005
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“Over 750 million consumers, 74% of India’s one billion plus population, [12 % of world’s
population,] live in 6.27 lakh villages. The size of rural market is estimated to be Rs.
3500 billion, of which agricultural products are valued at Rs. 2500 billion, 71.43 %. The
FMCG market accounts for 14.29% and agricultural inputs and equipments for 12.86%.
The market size of durables is estimated to be just 1.43% of the total rural market size in
India.
“There have been proposals for cumulative investments of over Rs. 720 billion in
food and agro-processing industry. The number of middle income and above households
in the rural areas [are estimated to] grow from 80 million to 111 million by 2007. The
absolute size of the rural market is expected to be twice that of urban India. Trend
analysis of statistics [of] rural marketing of FMCG companies shows that there are high
rates of growth in rural areas compared to growth rates [in] urban areas.
“India’s rural market is [thought to be a ‘sleeping giant’] given the vast potential. The
rural market environment has changed. So has the rural consumer. The rural consumer
is becoming [quality and price] conscious. Rural markets are not confined to marketing
of agricultural inputs and agro-products. They are expanding to encompass marketing
of agricultural produce, agro-products, agricultural inputs, non-farm products, FMCG
and durables, services, etc. Almost all the MNCs and corporates are responding to the
changing environment.”3
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has financed soy beans, maize, grain, wheat, rice, sugar, vegetable oil, coffee, cocoa,
cashew nuts, cotton, sesame seeds, sunflower seeds and oil, among others, in countries
such as Burundi, Rwanda, Senegal, Cote d’Ivoire, Togo, Benin, Ghana, Guinea Conakry,
Cameroun, Nigeria, Tanzania, Guinea Bissau, Kenya, Ethiopia, Mozambique, Mali,
Angola, The Gambia, Paraguay, Brazil, Guatemala, Colombia, Peru, Egypt, Kazakhstan,
Ukraine, Bosnia, Montenegro, Moldova, Croatia, Russia, Indonesia, and Vietnam. The
Program is expected to reach up to 208,600 farmers across emerging markets in all
regions and contribute to food security for 7.5 million people by 2016.
To showcase an example from Latin America, IFC helped one bank in Paraguay
increase its support to local exporters of soybeans, corn, and wheat. IFC signed a shortterm debt agreement with Sudameris under GWFP in 2011 to provide $15 million to
expand access to finance for local farmers and small- and medium-sized entrepreneurs
in the agribusiness sector, in which Paraguay has a strong competitive advantage. In
2012, Sudameris increased their agricultural portfolio by 60 percent in less than a year
due to GWFP’s intervention.2
2 http://agrifinfacility.org/warehouse-finance-warehouse-receipt-systems
3 Singh,
Awadhesh Kumar. Rural Marketing : Indian Perspective. New Age International, 2005.
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5. 1.4
Agricultural marketing structure
Saxena (1997)4 proposed the following agricultural marketing structure:
Local Markets: Where farmers (who produce in small quantity and are economically
weak) can conveniently sell (to purchasers), often to middlemen. The middlemen
then sell it to district or central market. These are called ‘grower’s markets’ or
‘primary markets’.
Central/Regional Markets: Where facilities of processing, storage and grading are available. These markets are professional in nature. Buyers of different states and
countries visit these markets. From here the produce is transported for marketing
in different parts of the country or abroad.
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Sea-Board Markets: Established at seaports, where exporters purchase turm products
brought from local or regional markets. They have the needed facilities of processing and packaging, and arrange shipment of these products to other countries.
Facilities for importing agricultural goods are also available here.
Wholesale Markets: Farm products are often purchased in bulk and storage, to be sold
to retailers at an opportune time (at higher profits). The operating scale of these
markets is smaller than that of the central markets.
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District Markets: Where huge quantities of agricultural commodities are assembled
from local markets. After processing, these are transported to the central/regional
markets or sold to consumer markets.
Retail Markets: Including small distribution centres or shops in different areas of cities,
towns and villages, where agricultural produce is sold to consumers who purchase
in small qualities any time they need it. Generally, retail-selling prices are slightly
higher than the wholesale prices, because the retailer would earn some profit for
the services rendered (Figures 1 and 2).
Figure 1: Agricultural Marketing
Influencing Factor and Contributors Rural marketing strategies and support activities — Government policies and incentives— Co-operatives, involvement and
assistance — Rural Indian — Inputs from Banks and Financial Institutions — Technological training and research — Socio-economic and Political forces — Rural
market development
Marketing of Inputs Fertilizers — Seeds — Plant Protection Chemicals — Agro Feeds
— Poultry Feeds — Cattle — Daily necessities of Life — Electricity — Diesel —
Farm Machinery and implements — Pumps — Tractors — Tools and Tackles —
FMCG — Consumer Durables
4 Saxena, Anjila (1997), ‘Problems and Prospects of Agricultural Marketing’, In: Rural Marketing: Thrust
and Challenges/edited by Samiuddin et al., National Publishing House, Jaipur, pp. 198–208.
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6. Marketing of Output, Trade in India Cereals — Pulses — Oilseeds — Sugar — Cotton
— Vegetables — Fruits — Milk — Copra and Products — Eggs — Fish — Processed
Food — Poultry — Rural Craft — Tea and Coffee — Spices — Tobacco — Cashew
— Marine Products — Meat and Meat Products — Natural Rubber
Marketing of Output, External Trade Rice — Wheat — Processed food — Poultry —
Milk — Vegetables — Fruits and processed foods — Milk products — Rural Craft
— Tea and Coffee — Spices — Tobacoo — Cashew — Marine Products — Meat
and Meat Products — Natural rubber
Figure 2: Agriculture Marketing (Rural Market-Output)
Flowers Roses — Jasmine — Aromatic Plants — Others
Spices Cashew nuts — Arecanuts — Medicinal Plants — Other Horticulture
Products
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Vegetables Potatoes — Brinjals — Green Leaf — Onions — Cabbage — Cauliflower
— Pea — Tomato — Chillies — Others
Fruits Mango — Grapes — Oranges — Banana — Citrus — Apple — Guava —
Litchi — Papaya — Pineapple — Sapota — Others
Food grains Wheat — Rice — Dals — Jawar — Bajra — Maize — Others
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Horticulture Items
Oil seeds Groundnut — Sunflower — Coconut — Soyabean — Rapeseed & Mustard —
Castor
Fibre Produce Cotton — Jute — Mesta
Beverage Items Tea — Coffee — Tobacco
Cash Items Sugarcane — Natural Rubber
Animal Products Milk — Fish — Eggs — Poultry — Wool — Meat — Animal Hides —
Sericulture — Others
1.5
Notes on international rural retail trends
“[Low-income] consumers are still attracted to large supermarkets, creating opportunities
for large retail chains to meet the needs of these groups. However, this group’s needs
are met largely by small retailers, who do this well. In comparison, large supermarket
chains fail in key areas in the minds of these consumers.”
“Relatively large distances have to be travelled to get [supermarkets], which requires
investing time and money in transportation. There is a perceived lower quality in the
perishable categories, and higher-end prices – even if that perception is not in line with
reality in most cases. In addition, emerging consumers complain of the ‘cold treatment’
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7. e-Sourcebook: ICT for Ag
2.1
Drivers
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by employees when they buy at large retailers – they value personal relationships and
emotional closeness when they buy.
“Although the opportunity is large, the buying habits of emerging consumers involve
economic challenges for retailers. The buying behavior of this group is characterized
by a small average ticket, composed of low-margin products; it is self-restricted and
has a low conversion to impulse buying, with a focus on promotions designed to
generate traffic which may mean lower returns on investment promotion. Therefore,
the simple expansion of the value proposition and the formats of the major chains to
cover the issue of geographic proximity will certainly have a negative effect on financial
performance; retail ers will experience lower gross margins and higher costs. In addition,
the investment to build or supplement local networks to increase coverage may provide
inadequate or negative returns.5
Thesis: The impact of big box retailing on the future of rural SME retail businesses: a case
study of the South Taranaki district Stockwell, Donald http: // aut. researchgateway. ac.
nz/ handle/ 10292/ 763
Tabukeli M. Ruhiiga. The Wholesale-Retail Sector and Changes in Consumer Market
Response in Rural South Africahttp: // www. krepublishers. com/ 02-Journals/ JSS/
JSS-29-0-000-11-Web/ JSS-29-1-000-2011-Abst-PDF/ JSS-29-1-091-11-1318-Ruhiiga-T-M/
JSS-29-1-091-11-1318-Ruhiiga-T-M-Tt. pdf
1. Low-cost and pervasive6
2. Adaptable and affordable tools
3. Advances in data storage and exchange
4. Democratization of Info, Open Access, Social Media
2.2
How?
1. Concentrate on Demand, not Technology: focus on need for better and timely
market information, better access to financial services, timely and appropriate crop
and disease management advice, links to ag value chains.
2. Require farmers’ engagement from the start, including in planning and design
3. Don’t ignore ancillary needs for investment in human capacity, community participation or infrastructure
5 Creando
Valor para los Consumidores Emergentes en Retailing, The Coca Cola Retailing Research
Council Latin America, Booz Allen Hamilton, 2003
6 http://www.ictinagriculture.org/sites/ictinagriculture.org/files/
ICTinAgriculturee-Sourcebook_0.pdf
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8. 4. Mix of appropriate technologies, radio with call-in, can be most cost effective
5. Focus on affordable access and use
6. Awareness of differential impact, including gender and social differences in access
and use
7. Create an enabling environment for infrastructure investment, business models,
services and applications.
Common Service Centres
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“Common Services Centers (CSC) are proposed to be the delivery points for Government,
Private and Social Sector services to rural citizens of India at their doorstep . The
CSC Scheme is envisaged to be a bottom-up model for delivery of content, services,
information and knowledge, that can allow like–minded public and private enterprises –
through a collaborative framework – to integrate their goals of profit as well as social
objectives, into a sustainable business model for achieving rapid socioeconomic change
in rural India.
“As on 31st December 2012, a total of 99,247 CSCs are operational in thirty three
States/UTs. 100% CSCs have been rolled out in ten States (Arunachal Pradesh, Chandigarh, Gujarat, Kerala, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Sikkim &
Tripura). More than 70% of the rollout has been completed in twelve States (Assam,
Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Maharashtra, Puducherry, Punjab,
Rajasthan, Uttar Pradesh, Uttaranchal and West Bengal). In about four States (Andhra
Pradesh, Jammu & Kashmir, Lakshadweep and Orissa) implementation of CSCs have
crossed the half way mark.
“The State Governments like Andhra Pradesh, Assam, Bihar, Gujarat, Haryana,
Jharkhand, Kerala, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West
Bengal have issued Government Orders / Notifications to the various departmental
heads / District Level authorities/ Stakeholders for use of CSC to deliver various G2C
Services. The various G2C Services offered are: Agricultural services, RTI Services,
NREGA MIS Data Entry service, Postal Products, Land Records, Issuance of Birth and
Death Certificates, Utility Services, Electoral Services, Transport Services, Grievances,
e-District Services, etc. Financial Inclusion has started in the States of Andhra Pradesh,
Jammu & Kashmir, Madhya Pradesh, Meghalaya, Maharashtra, Tripura and Uttar
Pradesh.
“As on 31st December 2012, States have reported that 85,928 CSCs are connected
out of which 27,697 CSCs are connected through BSNL, 23,505 CSCs are connected via
VSATs, 17,541 CSCs are using Data Cards and 17,185 are using Connectivity through
other technology like WLL and GPRS.
“As on 31st December 2012, Online Monitoring Tool (OMT) has been installed/
registered in 73,122 CSCs covering twenty seven States and user ID has been created/
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9. commissioned for 114,358 CSCs.”7
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Proposed Methodology
4.1
Methodology
Both primary and secondary sources will be used to gather information. These will
include,
Key informant interviews Senior managers and officials with the Government, academics, civil society and NGOs who are knowledgeable about efforts being undertaken and their strategic value
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Limited survey of field personnel and beneficiaries To gather representative statistics
where none are available via representatives
Limitations and expectations Budgetary and time constraints will limit the number
of field visits, surveys and interactions possible. It is possible and likely that
Government organisations may have suggestions on methodology.
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Review of the literature To capture the broader context and provide a frame of reference for the case studies. Also for stocktaking of existing activities in the Indian
context and desk review.
7 http://deity.gov.in/content/common-services-centers
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