Options in financing an agri-business
Mar 13 2012, 16:56 | By Infomedia18
the government has included food processing in the definition of priority sector lending for banks.
Image: SME Mentor
It is believed that a productive agriculture sector is crucial to ensure food security, social inclusiveness and keeping inflation under control. To harness the true potential of the agro-based industry, there is a need to invest in modernisation, new technology and food processing, to make value-added products, expand exports and business, etc.
However, due to the complex structure of the food industry and long gestation period, access to funds is quite a challenge. Considering this, the government decided to include food processing in the definition of ‘priority sector lending for banks’.
According to Dr KG Karmakar, managing director of Nabard, “Inclusion of food and agro-based processing sector under priority sector lending for bank finance is a major step forward aimed at enhancing the credit flow for the sector.”
Prasad Gopalan, head of agri-business (Asia), International Finance Corporation (IFC), said for IFC, agri-business is a priority because of its contribution to food security and poverty reduction in rural areas. “We combine investments and advisory services to help the private sector address higher demand in an environmentally-sustainable and socially-inclusive way, he said, adding, “Our work with Jain Irrigation has demonstrated the impact of inclusive models in terms of productivity improvements, enhanced income for farmers and improved water efficiency. These are important results that align to our inclusive growth and poverty reduction agenda.”
In 2006-07, a separate window was created in Nabard, to provide refinance for loans disbursed to food processing segment especially agro-processing infrastructure, market development, and follow-up initiatives thereafter resulted in increased refinance assistance for the sector. “The refinance support extended by Nabard in this respect amounts to 1,310 crore during 2006-10 period,” observed Karmakar.
The cold storage sector got a credit-linked subsidy schemes (Ciss) of the Government of India for cold storage, rural godown and agri-market infrastructure that have strengthened post-harvest linkage and raw material base for processing units and resulted in credit flow to the sector. “The cumulative bank loan extended under Ciss for cold storage, rural godown and agri-market infrastructure have touched 5,422 crore,” disclosed Karmakar.
Apart from this, the initiatives of the Ministry of Food Processing Industries (MoFPI) during the XI Five-Year Plan period, like schemes for technology upgradation/ establishment/ modernisation of food processing facilities, mega-food parks, integrated cold chain development, etc. have also facilitated credit flow to this sector.
“The growth in ground-level credit flow for agriculture and allied activities from 1,80,486 crore in 2005-06 to 3,66,919 crore in 2009-10 has contributed towards strengthening the raw material base for food processing,” added Karmakar.
Meeting the requirements
The financial requirements of agribusiness industry vary from company to company. Gopalan said, “Generally, most financing needs fall under working capital, equity capital or long-term debt financing. Working capital is especially crucial for many agribusiness firms – given the seasonality of production, the needs to finance the crop cycle - and to hold inventories. This can be addressed through various instruments including bank loans or commodity-based financing such as warehouse receipts.”
In addition to these, many agricultural companies are exposed to weather and price risks. “They may require specific structured financing/risk management products to mitigate these risks, such as traditional crop insurance or weather index insurance. The development of efficient risk markets (commodity futures and options) is another important component of risk management for the sector,” opined Gopalan.
According to Narendranath Mishra, head of agri, microfinance & rural banking, Development Credit Bank Ltd (DCB), the financial requirements of companies involved in agriculture can be divided into following categories:
Procurement: Seeds, agrochemicals, farm machinery, etc. These inputs either assist growing or harvesting.
Banks cater to the agri-business customers’ requirements through term loans, working capital loans, crop loans, project loans, warehouse receipt-based finance and farm equipment loans.
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