Pathways to enhancing access to finance for smallholder farmers through FPOs

In India, smallholder farmers constitute a staggering 86 per cent of the total farming population and they face numerous challenges, particularly in accessing finance from formal financial institutions due to myriad reasons including their limited land holdings, lack of financial history and many more.

As a result, they have no choice but to resort to informal credit sources. Currently, only about half of the smallholder farmers have access to credit from institutional sources and most of them remain underserved or unserved.

In recent years, the concept of Farmer Producer Organizations (FPOs) has emerged as a pivotal phenomenon in transforming the lives of millions of smallholder farmers. Recognising their potential impact, the government has initiated a scheme to promote 10,000 FPOs.

These collectives aim to improve access to finance for their member farmers by harnessing the power of collectivization.

While serving the FPOs and addressing their challenges is critical, it is essential to understand that FPOs are not magic bullets as they too face limitations similar to struggling start-ups, including organisational capacity, financial acumen, funding sourcing, and strategic planning.

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Diversified funding

To ensure the survival and growth of FPOs, it is crucial to first support them with capacity building and training, especially on business planning, financial management and decision-making skills for the Board of Directors and the CEO.

Additionally, traditional funding sources should be supplemented with alternative capital from CSR foundations, philanthropies, HNIs, private equity, venture capital, and social impact-driven investor groups with due care taken to uphold the FPOs’ autonomy.

By securing diversified funding, FPOs can build equity, expand their market presence, and invest in essential infrastructure. This will enable them to meet market demands and improve the livelihoods of their members.

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Further, digital technology and fintech have the potential to revolutionise the lending landscape and enhance the efficiency of how FPOs access and utilise funding.

Credit-linked capital subsidy schemes and interest subvention programs can be channelised through FPOs and Customised financial solutions for different stages of an FPO’s growth like crop insurance, contract farming, and warehouse receipt financing can be made available, mitigating lending risks and improving affordability.

These not only enable FPOs’ access to finance but also foster transparency, accountability, and scalability.

On the demand side, by embracing these innovative tools, FPOs can streamline credit qualification processes, reduce paperwork, and improve data-driven decision-making by the institutional financial sources.

Digital platforms like Trade Receivables Discounting System (TReDS), an institutional mechanism set up in order to facilitate the discounting of trade receivables, can be of great help and increasingly, many FPOs across the country are getting benefitted.

Recently, an FPO from Tamil Nadu, supported by Samunnati, did a transaction of ₹3.5 crore through this platform, the first of its kind at this scale for an FPO. FPOs can leverage AI-based technologies widely for example, to assess crop growth and produce quality, monitor storage conditions.

Maintaining real-time digital records

Besides, FPOs can also maintain real-time digital records for loan applications for their member farmers, which can help improve their overall creditworthiness over time.

By analysing factors such as weather patterns, farmer and farm-specific data, fintech companies can work with FPOs to accurately assess risks and help them access insurance tailored to the unique needs of their farmer members at fair premiums.

Making FPOs as the POS or business correspondents to sell a wide range of financial products and services will go a long way toward achieving financial inclusion.

All these cannot be accomplished without collaboration between the public sector, government, academia, and private players, which is essential for building a robust ecosystem that supports the growth of FPOs.

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Symbiotic partnerships for example, co-lending arrangements between traditional banks and NBFCs, can lead to developing innovative products and solutions by leveraging mutual synergies, expertise, and resources for enhanced last-mile reach and serviceability under the Priority Sector Lending (PSL) obligations.

Besides access to finance for FPOs, partnerships can also enable knowledge sharing, mentorship, and market linkage.

To fully unlock the potential of FPOs in improving access to credit for farmers, comprehensive capacity-building support is essential. It is imperative to go beyond initial assistance and provide continuous training and support throughout the FPOs’ lifecycle.

This ensures that FPOs are equipped with the necessary knowledge to effectively manage credit-related processes and foster sustainable growth.

Having a standardised evaluation system also promotes transparency and accountability in measuring the impact of capacity-building efforts.

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Finance literary skills

There also has been a concerted effort from FPOs to equip farmers with financial literacy skills, including understanding loan terms, managing credit responsibly, and adopting best practices for repayment.

It is also time for a holistic review of existing policy and regulatory frameworks including Priority Sector Lending guidelines, recognising the role of agri-focused NBFCs particularly to make their cost of capital more affordable.

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Also, policies around promotion and governing FPOs to create an environment that fosters their survival and growth must be revisited holistically. Presently, the success rate of registered FPOs remains disappointingly low, despite all the well-intended efforts.

To address this issue, it is vital to identify the factors contributing to the success of some FPOs and disseminate these key learnings among others so that by adopting best practices and understanding the elements that lead to success, other FPOs can emulate.

Collaboration among the stakeholders is pivotal in bridging the gap between the financial institutions and smallholder farmers to improve the financial stability and enhance their overall socio-economic well-being of the latter.

Therefore, a more inclusive and equitable financial landscape can be achieved, where smallholders have equal opportunities to thrive and contribute to the country’s agricultural growth through FPOs as the vehicles.

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