What would it take to foster a measurable increase in the availability of agriculture finance to small and medium farmers?  Panayotis N. Varangis from the International Finance Corporation explored some answers to this question when he spoke at IFMR on “Innovations in Agriculture Finance and Weather Index Insurance”. We bring you some of the thoughts he shared on making agriculture finance more accessible to small and medium farmers.

Agriculture finance, especially to small and medium farmers, is riddled with risks and challenges. Some of the broad categories of risk include -

• Climate change risk – exposure to variations in weather patterns
• Production/yield risks due to natural hazards
• Market and price risk
• Collateral limitation in the form of weaker and riskier security
• Government interventions weakening local rural credit culture

Many programs take the safe way out and end up lending to large farmers. A more robust way to lend to small and medium farmers is to explore existing delivery channels that focus on small and medium farmers and promote products that mitigate these risks. This is an appropriate time for the lending institutions to take a step back and re- visit the lending strategy.

While it is not necessary to abandon the traditional method of lending, it makes good sense to adopt an integrated approach of judiciously combining the old and the new methods of lending.

It is also important to learn from the existing projects to identify success factors, replicate and scale up. Many a time all it takes is designing a sub-component in an existing project than having to start something totally new. Existing channels that connect the small farmers should be identified to build financial capabilities. Lending institutions can leverage these existing linkages in the agriculture supply chain by connecting with participants such as input suppliers, commodity procurement agencies, and farmer groups.

Agri-lending is a challenging task and identifying risks and devising mitigants requires a lot of work with ears close to the ground. There has to be collaborative participation in the system and existing linkages have to be leveraged to the fullest possible extent. A comprehensive solution can be worked out only by bringing together different stakeholders and participants.

How to expand and reach scale?

1. Map opportunities – Identify opportunities in the commodity supply chain/breadbaskets and design projects around them.
2. Implement projects – Identify key components of success from existing projects, scale up and replicate, map further opportunities for the sector/region
3. Capacity building and knowledge sharing – Integrate small farmers into the financial system, including working with producer organizations and leverage farmer capacity building in productivity & standards (e.g. finance investments for new technologies)
4. Leverage and replicate – Complement existing initiatives, apply lessons learned/best practices from projects and consider providing incentives (e.g. financing and/or risk sharing at initial stages to demonstrate sustainable new financing approaches/products)

Some important levers for Financial Institutions to increase agriculture lending are

• Loan product design
• Tools to identify and manage risks
• Delivery channels to reach small farmers
• Financial literacy – awareness and training

A recently held regional forum on agriculture finance in Zambia had participants from local banks, producer organizations, input suppliers, NGOs, international organizations, donors, and consulting firms. The participants were asked to point out one change each that, according to them, would bring about effective agri-lending. The 5 winning ideas that emerged were –

• Develop a system of private sector mechanized service providers in rural areas: lead farmer/entrepreneur leases equipment to provide services to surrounding small farmers
• Invest in irrigation systems—community-based , owned and managed
• Develop a franchise model of community based storage facilities, provide real time market information, potential input demand aggregation
• Create private sector led agri-lending training centers for bank staff and farmers
• System of profiling of producer groups on their governance, financial management and performance—profiles that can be used by banks for lending to them

 Like these ideas or have an idea to take agriculture finance to small farmers? Voice your thoughts, we want to hear it.

For a company of Google’s stature that has reached the scale it has, and still regard itself to be an Internet start-up is both admirable and inspiring. One of the biggest draws of what makes Google special is its culture which its “Ten things we know to be true” principles encapsulate and in essence form the core of all its actions.

To give a peek into this culture, Mr. Sridhar Seshadri, Head Online Sales, Google India, gave a seminar talk at our office on the topic.

Kicking off his talk by discussing the company’s philosophy, he highlighted that relentless focus on the user with continuous improvement on the product offering is a basic essential to what they do. A case in point is Search, its core offering, which though enjoys tremendous market share, it dedicates significant amount of energy in bettering it by the day. Also with a belief that great just isn’t good enough; it constantly pushes the innovation envelope by anticipating what the user would want and solves a problem that they cannot articulate.

To a question on attracting great talent, he pointed out that Google sets very high standards when it comes to hiring people. Typically a potential employee interacts with 6-12 people from diverse functions before he gets on board; the process though elaborate, eventually pays off. In line with this, he stressed the role of HR, and how crucial it is for it to be proactive in thinking from an employee perspective in terms of facilities, design etc, in addition to its routine of course.

The 20% time off (called Innovation Time off) for employees to pursue projects that interest them, he felt, has been a good motivation technique and been the source of some of its popular offerings like Gmail, Google News, Google Talk, Google Earth, Chrome etc.

His talk included live examples and touched upon an array of subjects from its Chrome OS to its philanthropy work at Google.org. Clearly the knowledge that we had gained through his talk has given us a lot of food for thought as we proceed on our path towards enabling financial inclusion.

The seminar also marked the launch of the SPARK series – Informal sessions held every Friday by different speakers sharing their knowledge on diverse topics. The intent being to understand and appreciate the different dots that exist within the IFMR ecosystem, and have the Spark series as the channel where the dots connect.

Spark series for April kicks off on 9th April 2010.

Professor Ajay Shah of National Institute of Public Finance and Policy (NIPFP) visited IFMR recently, where he spoke about ‘Financial Distribution with Consumer Protection and Scalability’ at IFMR Business School and also visited Pudhuaaru KGFS, Thanjavur.

Prof. Shah emphasized that the distribution of sophisticated financial products with consumer protection is a problem and this problem is not typical to India, rather it is a worldwide phenomenon. He cited various examples of pension schemes, mutual fund and insurance products to highlight the fact that a typical consumer does not understand the fees/charges of financial services because of non-transparent and complicated tariff structures. For example, in India people hardly understand the charges and fees of mutual fund and insurance companies, as a result, consumers have to face bad outcomes many times.

Addressing the question of how to scale up the distribution of financial products while protecting consumers, he calls attention to the fact that there is a need to address the problems prevailing in policy as well as in practices. In the past, some of the government policies have not been conducive due to which scaling up of financial services had been restricted. One example was the nationalization of banks that stifled the competition in the banking sector. Similarly, by allowing customers to do transactions with other banks’ ATMs, the incentive of the banks to install ATMs in new (excluded) areas was undermined. Also, foreign banks are highly regulated in our country. Looking at these examples it seems that when government policies themselves restrict financial institutions to expand their services, addressing the problem of financial exclusion is not easy in near future.

Technological innovations in financial distribution are a key to achieve scalability, which Prof. Shah emphasized by saying that at this point, we have to think high tech – this is the only way to get scalability. In finance we do not need huge infrastructure, and to drive down the cost of financial management it is much less expensive than building any other infrastructure, such as roads, and hence we should encourage IT intensive solutions. For instance, mobile technology is a great example of driving down the cost. He supported the expansion of mobile banking, however, I believe it is prone to several types of frauds and therefore we first need a foolproof system to protect consumers before promoting mobile banking.

Taking on the government policy of fixed pricing for financial services and wages, he emphasized that India is a heterogeneous country and therefore the same price point system should not be practiced. Prices of financial services should be hyper local. He strongly argued that we should not standardize the prices and wages, and prices should be benchmarking local conditions/characteristics.

Financial distribution is all about handling risk and cash flow at the consumer and firm level. The poor struggle with so many risks in day-to-day life that the risk in financial services becomes trivial for them and they can let it go. Therefore, public policy response to protect the poor becomes crucial. Overall, Prof. Shah emphasized that financial distribution is possible with both scalability and consumer protection, and we don’t really have to compromise on one to ensure the other. I believe many of the points raised by Prof. Shah during the seminar are very relevant to financial inclusion, and offer several take away lessons for policy makers and practitioners to work on enhancing financial inclusion in our country.

Next day, he visited the Pudhuaaru KGFS where we discussed about the various services being delivered through the presence of KGFS in remote rural areas.  While he appreciated our work, he also gave several valuable suggestions in some of our work areas. For example, on the insurance services we are providing, he suggested that we should conduct a high quality actuarial study of some households analyzing the risk for life, health etc. to build a world-class actuarial database, and then bid to insurance companies. This will give insurance companies an authentic database based on which they can price their products.  Some other suggestions were regarding the mapping of KGFS branch data and innovations in some of our products.  Certainly, these suggestions would help us in refining our work at KGFS.

Picture from left: Anita Sharma, Prof. Ajay Shah, Gurunath N, Anil SG and Sagar Thakar

We could see some parallels in Prof. Shah’s views and our principles of high quality origination. At IFMR Trust, we also believe in delivery of high quality financial services at the front end and trying to demonstrate high quality origination through KGFS model using latest technology in remote rural areas.

Indeed, both the seminar and the PKGFS visit by Prof. Shah were full of enthusiasm and learning for all of us.

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Anita Sharma from IFMR Trust, Advocacy, contributed to this post.

On January 29, 2010, IFMR hosted a seminar by renowned social worker and Ramon Magsaysay Award winner, Padmashri Deep Joshi.  He is a postgraduate from MIT who had got back to India to work towards poverty alleviation and is the co-founder of PRADAN.

The seminar started with welcome remarks and introduction of speakers by Madhukar, with Bindu then delivering the opening address by giving a brief about IFMR and its work.

From left: Bobby Srinivasan, Bindu Ananth, Deep Joshi

Mr. Deep Joshi commenced his presentation on the topic Removing Poverty: Role of HR & POs. The topic adds relevance to the present Indian scenario that faces an imbalance between urban and rural development.

He defined poor people in terms of ‘Person’, ‘Place’ & ‘Position. Talking about poor people as ‘Person’, he indicated about social groups who are historically and structurally isolated and excluded from the society. These groups lack ‘self-efficacy’ and are stranded due to structural changes in society, economy and polity. Likewise he gave similar contexts to define the poor in terms of Place and Position.

He also presented a few shocking data on poverty in India – As per the Tendulkar committee (2009), 41% of population in rural India lives below the poverty line. He supported the figures with more data on the poorest states in India stating that the “poor “ are heterogeneous and explained about the kinds which are ‘Declining poor’, ‘Coping poor’ and ‘Dynamic poor’. He outlined that by understanding the kind of poor, strategies are to be framed, his model of a strategy:

In terms of Human resources and the approach towards the poor, he insisted on the enhancement of self-efficacy through human capital that works on being empathetic, promotes inter-dependence, treating them as citizens rather than as clients or beneficiaries and finally building relationships.

On the role of people’s organization, he highlighted the need to learn from and with peers and also to aim for scale economies so that their services could reach to a larger population. He also emphasized upon working for constructive collectives and to be working against tragedy of the commons.

Audience in rapt attention

Finally, he outlined the important aspects that act as roadblocks to development. In this context he felt that the prevalence of complexity in understanding rural India curtails the understanding of the concept of “development”. He ended his speech by pointing out that rural–oriented course and institutes like IRMA are scarce in India when compared to the prominence given to IITs and IIMs.

His talk was filled with many real life examples that were vivid and simple. These examples and insights were derived from his work with Ford Foundation’s project on international case studies that are to be published soon.

Teams interacting with Deep Joshi

Later, IFMR Ventures & IFMR Rural Finance teams had a chance to talk about their work during separate sessions with him. He carefully listened and appreciated different works of the teams and gave valuable advice.

At the formal close of seminar, Anu Valli gave the vote of thanks, and Deepthi Reddy on behalf of the IFMR Ecosystem presented a memento to Padmashree Deep Joshi. To conclude, Padmashri Deep Joshi is truly a visionary and it was a privilege to have him amongst us.

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Priyanka, Intern, Human Capital Team and Madhukar, IFMR Ventures, CAFNE Team contributed to this post.