In recent years, Financial Institutions (FIs), including NBFCS that operate primarily in rural areas, have created a niche in lending to the agriculture sector. These FIs, that serve a large majority of the small and marginal farmers, provide products and services that include affordable access to finance, market linkages, and technical assistance to enhance farm productivity and infrastructure that can change the financial future of a farmer household. However, there are some key limitations faced by FIs in lending to the agri-last mile.

The cost of debt and operating cost for FIs, especially NBFCs, lending to agriculture sector is high that pushes the cost of credit to the end user. Reliance on commercial sources such as debt markets, equity markets and funding lines from commercial banks also increases the cost of funds. Raising debt of various maturities is a challenge given the underdeveloped nature of debt markets specifically for FIs. Securitisation of underlying ‘Priority Assets’ to banks is not always feasible given the restriction on minimum holding period and on maximum differential (8%) over base rate of investing institution. The products offered by many FIs are priced above this range.

Another major challenge that FIs face is the lack of access to government institution risk mitigation schemes. FIs today are lending in higher-risk borrower categories such as farmer producer companies, agri-enterprises, aggregators etc. Many credit risk mitigation schemes, such as Refinance Scheme of Micro Units Development and Refinance Agency Ltd. (MUDRA), NABARD’s refinancing schemes and interest subvention and concessional loans against negotiable warehouse receipts, etc; SIDBI and SFAC credit guarantee schemes, are only available to commercial banks, RRBs, NCDCs and/or institutions recognised by NABARD. FIs who primarily cater to the financial needs of the agri last mile are not covered for various lending risks; therefore cost of credit remains high.

FIs and NBFCs cannot extend or help avail some of the key government-backed schemes such as the Pradhan Mantri Kisan SAMPADA Yojana, The Pradhan Mantri Fasal Bima Yojana (PMFBY) and Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) to their last mile agri-customers. The schemes can only be channelled through RRBs, NABARD and other public sector banks to the farmers, which not only limits the coverage of these schemes but also limits the scope of operation of the FIs. There is a scope to address these challenges and further increase financing to the last mile and mitigate risks if alternative and new lending vehicles are explored by the government.

Lending from Commercial Banks to Financial Institutions, primarily NBFCs, to be classified as Priority Sector Lending (PSL).

Financial Institutions, primarily NBFCs that operate in large rural markets, have a huge opportunity to offer working capital loans in the agriculture sector if their cost of capital is brought down, resulting in lower interest rates that can be passed on to the end users. A method to achieve this would be to classify bulk loans from Commercial Banks to FIs and NBFCs as Priority Sector Lending. This can help achieve the following:

Release of large volume of credit from the banking system to FIs would improve the availability of funding from diverse sources; and competition would drive down borrowing costs of the FIs that would in turn transmit to lower end-user interest rates. Banks would be able to participate in bulk lending to the core ‘priority’ sectors- towards meeting their sub-targets on advances to small and marginal farmers, advances to weaker sections and MSMEs. As per an RBI notification dated July 12, 2018, direct lending to non-corporate farmers under PSL is only 11.99% of the overall ANBC of the banking system. Foreign banks with more than 20 branches that are not able to focus on PSL sectors other than exports in their ordinary course of business can provide credit to FIs and NBFCs who have advanced rural network.

A key outcome of the above would be accurate targeting of the priority sub-sectors, whereby FIs would be able to share requisite documentation evidencing satisfaction of PSL criteria for the originated / hypothecated loan assets. This move by the Centre would ensure a shift in focus on the end user by channelling pools of capital through various lending vehicles.

FIs need access to refinance, credit guarantee schemes of organisations such as NABARD, SFAC and SIDBI

FIs, more specifically NBFCs, have significant portion of their exposure to agriculture last mile. The Centre’s schemes and instruments such as credit guarantee, matching equity grant, that are primarily provided to farmers by NABARD, SFAC, SIDBI through commercial banks and subsidiary NBFCs, should be extended to FIs. This will reduce FI risk and improve their lending to farmers, FPOs and agriculture sector players.

Debt refinance schemes of NABARD are available to Commercial Banks and select NABARD-subsidiary NBFCs. This provides the beneficiary financial institutions access to substantially cheaper sources of capital. If the scope is broadened to include all FIs, including NBFCs to be at par to benefit from the refinance schemes, this would facilitate lending at more affordable costs to the end-user.