Smallholders deserve more credit – in every sense of the word
By Bindu Ananth*, Chair of Dvara Trust and a member of the Syngenta Foundation Board.
Smallholders are a crucial pillar of agriculture. That is particularly true in developing regions. The FAO estimates that there are about 608 million smallholders around the world. In Asia and Sub-Saharan Africa, they make up 90 percent of farmers and produce 80 percent of their continents’ locally produced food.
Most of these smallholders still lack access to numerous critical tools and services. Those include inputs that can increase productivity and income, leading to economic and social benefits. For inputs, however, smallholders also need access to finance. Today, many are unable to get the loans they need – not only for inputs, but also to finance activities such as harvesting, processing, marketing, and transport.
A recent study estimates that smallholders in Asia, Africa, and Latin America would currently need nearly $170 billion per year in credit. That demand is largely unmet and still growing. There are lots of reasons for this gap. Here are three that I would particularly emphasize:
Financial institutions (FI) are often unwilling to lend to smallholders. They are deterred by risks related to agriculture. Some are more obvious, like swings in the weather and in crop prices. But there are also political risks: A recurring example is pressure to waive farmer loans, particularly at election time.
FI's cost structure makes it challenging to provide small-value loans in remote locations. They can increase their service coverage through ‘banking correspondents’. Typically, however, agent networks are not yet dense enough in rural areas.
There has been very little product innovation aimed at smallholders. Even where financial services are available — whether from traditional lending institutions or from traders and agricultural processors— they tend to be relatively costly and with rigid terms. These do not meet farmers’ needs.
To take better advantage of new and expanding market opportunities, smallholders need affordable financial services. This requires a diverse mix of FI, with appropriate standards and oversight for each type. Commercial banks can provide strong balance sheets and risk management capabilities. Non-bank FI, such as financial cooperatives and microfinance institutions, can offer rural reach and local knowledge. Alternative delivery platforms, like agents and mobile banking, can increase the financial inclusion of more isolated clients.
The Indian agricultural credit landscape: growing formalization but uneven progress
The agri-credit system in India has made steady progress in the last decades. This is largely a result of a significant policy focus on agricultural credit. The Reserve Bank of India requires all banks to allocate 40% of their net credit every year to specific sectors, the dominant of which is agriculture.
The share of institutional credit has increased commensurately. From only 10% in 1951, it increased to 64 % by 2013 (All India Debt and Investment Survey, AIDIS). In 2019, it reached 74 percent. As a share of agricultural GDP, institutional agri-credit rose from about 16% in the early 1980s to 42% in 2017. Farmers’ formal finance primarily comes from commercial banks, followed by cooperatives and regional rural banks.
Risks in agricultural credit continue to be high, however. At nearly 10%, gross non-performing assets in agriculture are the highest among all sectors. Risk management has improved, for example, thanks to weather insurance and commodity futures markets, but far more is required. There are also significant regional disparities in credit access: Central and Eastern India lag behind.
Many elements are in place for rapid progress
There is clearly a need for new approaches. These must increase access while minimizing risks to the banking system. New opportunities are already apparent. They include expansion of the sector through new entrants such as Small Finance Banks. The rise of agri-tech firms is opening new channels for smallholders. India has also invested strongly in digital infrastructure, making it easier to offer digital credit to previously under-served segments of the population.
Syngenta Foundation’s focus in India
The Syngenta Foundation and its partners are among the many organizations driving to improve the financial inclusion of Indian smallholders. The Foundation’s local team knows that tackling this complex challenge requires a combination of approaches. Its strategy, therefore, addresses a wide range of issues.
A key example is risk reduction. On the one side, the Foundation and its partner's design blended finance products. These aim to cover weather and price risks, but also mortality, for example. Risk protection of this type builds lenders’ confidence. It is accompanied by the promotion of group or value chain financing. Group credit and/or assured market links both increase the likelihood of repayment. A valuable addition to risk-reduction and confidence-building comes from the scorecards developed to assess borrowers’ creditworthiness.
Another important thrust is cost control. Here, the Syngenta Foundation promotes aggregation of credit demand. Operating in local clusters brings economies of scale for lenders. In parallel, greater use of digital technologies increases FI reach and lowers the cost per customer.
Vitally, however, the Foundation also looks at the demand side. Smallholders are another focus of attention. To ease credit access, for example, the Indian team helps farmers with standardization and templates for financial products. This approach makes it as simple as possible to submit a loan application and have it speedily processed. Drawing on 40 years experience of working with smallholders, the Foundation does not stop there. On-farm and off, the promotion of lucrative smallholder activities remains a key focus. Better income enables farmers to repay their loans reliably.
That’s the situation today. But the work continues! Syngenta Foundation India recently studied the country’s agri-financing ‘landscape’. The research involved in-depth interviews with farmers and consultations with agri-finance practitioners. The preliminary results point to three major levers for increasing farmers’ access to finance: Aggregation, Digital Tools & Technology, and Partnerships & Collaboration.
The study shows the importance of the existing community-based collectives. Self-help groups and Farmer Producer Organizations strengthen smallholders’ empowerment, links to markets, and access to finance. Digital solutions offer considerable additional potential for overcoming barriers still faced by farmers, notably in accessing appropriate finance. Interventions by partnerships between value-chain actors and supporting institutions provenly pave the way to sustainable livelihood improvements.
The study also examines innovative business models, new financial services, and cutting-edge technologies that have worked in India and other low- and middle-income countries. These include agriculture value-chain finance, risk mitigation and reduction, term, and asset-based finance, finance blended with special, targeted concessions and support, and agri-tech models. Their success varies: Indian farmers’ needs, preferences, education, exposure to technology, and purchasing power differ widely. To work at scale here, such models need customizing to meet the characteristics of specific groups, such as women. They can then have the positive impact on smallholders’ lives that I and so many other people would love to see.
*Read our recent interview with Bindu.