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NCML as party for market linkages

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  • 1. Engaging Rural India through CSCs version 0.3 Rahul Bhargava e-Sourcebook: ICT for Ag Drivers 7 How? 7 7 Common Service Centres 8 Proposed Methodology Methodology 9 1 1.1 FT Background 1 Collateral Management in Agriculture Finance in India 1 International Finance Corporation: Global Warehouse Finance Program Rural India Demographics, 2005 4 Agricultural marketing structure 5 Notes on international rural retail trends 6 D RA c Copyright 2013 Rahul Bhargava Wednesday 24th April, 2013 9 Background Collateral Management in Agriculture Finance in India AgriFin (April 2013) — This article was contributed by Vivek Thoopal, Head of Business Development (Collateral Management), National Collateral Management Services Limited (NCMSL), For additional information, please contact the author at: vivekthoopal@gmail.com The Indian agri-commodity market, being highly fragmented, is characterized by a large number of participants including farmers, several layers of aggregator, processors and traders. Before the advent of professional Collateral Management entities, access to finance and consequentially holding capacity for the above entities was difficult due to poor balance sheet quality and credit history. While banks were keen to identify lending opportunities within this segment to meet their priority segment obligations, a high level 1 3
  • 2. FT D RA c Copyright 2013 Rahul Bhargava of non-performing assets and heavy supervisory costs dissuaded their efforts. Moreover the flow of credit remained skewed in favor of the developed and urban pockets. Over the past 8 years collateral management services have brought about a transformation by allowing banks to almost ignore the borrower’s financial strength and rely solely upon the warehouse receipt issued by the agency. This form of lending by banks is in contrast to the traditional lending in the form of working capital, with credit facility based on the balance sheet of the borrowing entity, and is more secure due to the collateral manager’s services. The current collateral management processes in India are rudimentary but effective and more importantly in line with the domestic market practices. The collateral manager after a survey enters into a lease agreement and takes custody of the storage facility containing the commodities. The collateral manager guarantees the quality and quantity of the agri based collateral, provides price information required for margin call and aids in disposal of the commodities, if necessary. The collateral manager also ensures that the commodities are adequately insured for natural calamities and burglary, though these risks are not underwritten by the collateral agency. The loans against agri-collaterals are typically short term (8 months to 1 year), selfliquidating, and one of the most secure products in a bank’s portfolio. For the borrowers the willingness of a collateral manager to provide services in a variety of storage facilities, including the godown in his backyard (field warehousing), makes this the easiest method of procuring low cost finance. The greatest challenge in providing these services arise from the logistics complexities of securing numerous warehouses spread across the remote parts of the country. Currently NCMSL is one of the two major collateral management companies in India. The company manages commodities of over $1.5 billion through 900 bank branches across 18 states and 3500 storage structures. It was also the first private company to issue a negotiable warehouse receipt, allowed under the Warehouse (Development & Regulation) Act, 2007. However, very few warehouses are registered with the warehouse authority, as required by the act which is still in a nascent stage of implementation. Extensive risk profiling, audit planning, and manpower management is required to ensure the security of the collateral especially due to the thin margins involved. As the industry remains manpower intensive, key risks to a collateral management agency remains the vulnerability of the personnel deputed to supervise the storage, inflow and outflow of commodities. Several levels of audit based on the risk profile of godowns are deployed to mitigate the above risk. Collateral management in India is unique in several respects. The idea of a specialized structured solution for a large client has been adapted as a retail product catering to the agriculturists and caters to even loans as low as $2000 for the marginal farmers. The client base is predominantly small ticket with an average loan size of approximately $40,000. Of course, at the other end of the spectrum loans of up to $10 million are facilitated through this product. But, of the approximately 35,000 borrowers who use NCMSL’s collateral management services, less than 10% avail large ticket finance. Borrower’s profile varies by commodity, but is usually small or medium enterprise/entity. For instance, financing against paddy is availed by processors, mustard 2
  • 3. 1.2 International Finance Corporation: Global Warehouse Finance Program FT AgriFin (April 2013) — This article was contributed by Makiko Toyoda, Senior Trade Finance Officer, International Finance Corporation. For additional information, please contact the author at: mtoyoda@ifc.org Agricultural commodities are stored in warehouses before shipment, and in most cases, farmers need to sell their production earlier than they desire to meet their urgent financial needs. Warehouse financing is a secured lending technique that allows farmers access to finance secured by commodities deposited in warehouses. It is especially beneficial for farmers and small- and medium-sized entrepreneurs, who are often unable to secure borrowing requirements due to lack of sufficient conventional loan collateral. Warehouse financing allows banks to shift risk from borrowers’ fixed assets to the commodities that farmers produce. It also allows farmers to enhance income by having more flexibility in timing sales to protect against price seasonality. The IFC’s Global Warehouse Finance Program (GWFP), established in late 2010, aims to increase working capital financing to farmers and agriculture players by leveraging their own production. The Program supports the agriculture sector by providing banks with liquidity and/or risk coverage for assets that are backed by warehouse receipts or equivalent (such as Collateral Management Agreement or Stock Monitoring Agreement). According to a market study conducted by IFC in 2009 which covered 15 countries worldwide, the availability of warehouse financing is between zero and seven percent of financing needed in less developed emerging markets. The GWFP was established to address that gap and to build capacity among local financial institutions to provide this type of financing. Under this Program, IFC offers a short-term loan to a bank, which will in turn use the funds to lend to farmers, cooperative unions, aggregators, exporters or traders against warehouse receipts or equivalent. IFC can also provide guarantee up to 50 percent of short-term loans extended to those agriculture borrowers by a bank. To date, IFC D RA c Copyright 2013 Rahul Bhargava seed by traders, and chili by producers. Irrespective of the borrower’s profile, collateral management fees are usually paid by the financial institutions. In that sense the collateral manager acts as an agent of the financial institution. Technology plays an important role in the management of the thinly spread structures. The system not only ensures that the issuance and release of the warehouse receipt are centralized but also keeps all relevant personnel updated in real time on the status of the collateral. Collateral management in India has witnessed tremendous growth and acceptability in recent time. The initial thrust was driven by the Reserve Bank of India’s (India’s central bank) regulations which require 18% of a bank’s loans be directed towards the agriculture sector. The product, which started around the year 2004 and employed by 2 new private sector banks, is now being used by about 40 financial institutions to disburse loans of over $5 billion. This figure is expected to grow four-fold and reach $20 billion within the next five years.1 1 http://agrifinfacility.org/collateral-management-agriculture-finance-india 3
  • 4. Rural India Demographics, 2005 FT 1.3 “Over 750 million consumers, 74% of India’s one billion plus population, [12 % of world’s population,] live in 6.27 lakh villages. The size of rural market is estimated to be Rs. 3500 billion, of which agricultural products are valued at Rs. 2500 billion, 71.43 %. The FMCG market accounts for 14.29% and agricultural inputs and equipments for 12.86%. The market size of durables is estimated to be just 1.43% of the total rural market size in India. “There have been proposals for cumulative investments of over Rs. 720 billion in food and agro-processing industry. The number of middle income and above households in the rural areas [are estimated to] grow from 80 million to 111 million by 2007. The absolute size of the rural market is expected to be twice that of urban India. Trend analysis of statistics [of] rural marketing of FMCG companies shows that there are high rates of growth in rural areas compared to growth rates [in] urban areas. “India’s rural market is [thought to be a ‘sleeping giant’] given the vast potential. The rural market environment has changed. So has the rural consumer. The rural consumer is becoming [quality and price] conscious. Rural markets are not confined to marketing of agricultural inputs and agro-products. They are expanding to encompass marketing of agricultural produce, agro-products, agricultural inputs, non-farm products, FMCG and durables, services, etc. Almost all the MNCs and corporates are responding to the changing environment.”3 D RA c Copyright 2013 Rahul Bhargava has financed soy beans, maize, grain, wheat, rice, sugar, vegetable oil, coffee, cocoa, cashew nuts, cotton, sesame seeds, sunflower seeds and oil, among others, in countries such as Burundi, Rwanda, Senegal, Cote d’Ivoire, Togo, Benin, Ghana, Guinea Conakry, Cameroun, Nigeria, Tanzania, Guinea Bissau, Kenya, Ethiopia, Mozambique, Mali, Angola, The Gambia, Paraguay, Brazil, Guatemala, Colombia, Peru, Egypt, Kazakhstan, Ukraine, Bosnia, Montenegro, Moldova, Croatia, Russia, Indonesia, and Vietnam. The Program is expected to reach up to 208,600 farmers across emerging markets in all regions and contribute to food security for 7.5 million people by 2016. To showcase an example from Latin America, IFC helped one bank in Paraguay increase its support to local exporters of soybeans, corn, and wheat. IFC signed a shortterm debt agreement with Sudameris under GWFP in 2011 to provide $15 million to expand access to finance for local farmers and small- and medium-sized entrepreneurs in the agribusiness sector, in which Paraguay has a strong competitive advantage. In 2012, Sudameris increased their agricultural portfolio by 60 percent in less than a year due to GWFP’s intervention.2 2 http://agrifinfacility.org/warehouse-finance-warehouse-receipt-systems 3 Singh, Awadhesh Kumar. Rural Marketing : Indian Perspective. New Age International, 2005. 4
  • 5. 1.4 Agricultural marketing structure Saxena (1997)4 proposed the following agricultural marketing structure: Local Markets: Where farmers (who produce in small quantity and are economically weak) can conveniently sell (to purchasers), often to middlemen. The middlemen then sell it to district or central market. These are called ‘grower’s markets’ or ‘primary markets’. Central/Regional Markets: Where facilities of processing, storage and grading are available. These markets are professional in nature. Buyers of different states and countries visit these markets. From here the produce is transported for marketing in different parts of the country or abroad. FT Sea-Board Markets: Established at seaports, where exporters purchase turm products brought from local or regional markets. They have the needed facilities of processing and packaging, and arrange shipment of these products to other countries. Facilities for importing agricultural goods are also available here. Wholesale Markets: Farm products are often purchased in bulk and storage, to be sold to retailers at an opportune time (at higher profits). The operating scale of these markets is smaller than that of the central markets. D RA c Copyright 2013 Rahul Bhargava District Markets: Where huge quantities of agricultural commodities are assembled from local markets. After processing, these are transported to the central/regional markets or sold to consumer markets. Retail Markets: Including small distribution centres or shops in different areas of cities, towns and villages, where agricultural produce is sold to consumers who purchase in small qualities any time they need it. Generally, retail-selling prices are slightly higher than the wholesale prices, because the retailer would earn some profit for the services rendered (Figures 1 and 2). Figure 1: Agricultural Marketing Influencing Factor and Contributors Rural marketing strategies and support activities — Government policies and incentives— Co-operatives, involvement and assistance — Rural Indian — Inputs from Banks and Financial Institutions — Technological training and research — Socio-economic and Political forces — Rural market development Marketing of Inputs Fertilizers — Seeds — Plant Protection Chemicals — Agro Feeds — Poultry Feeds — Cattle — Daily necessities of Life — Electricity — Diesel — Farm Machinery and implements — Pumps — Tractors — Tools and Tackles — FMCG — Consumer Durables 4 Saxena, Anjila (1997), ‘Problems and Prospects of Agricultural Marketing’, In: Rural Marketing: Thrust and Challenges/edited by Samiuddin et al., National Publishing House, Jaipur, pp. 198–208. 5
  • 6. Marketing of Output, Trade in India Cereals — Pulses — Oilseeds — Sugar — Cotton — Vegetables — Fruits — Milk — Copra and Products — Eggs — Fish — Processed Food — Poultry — Rural Craft — Tea and Coffee — Spices — Tobacco — Cashew — Marine Products — Meat and Meat Products — Natural Rubber Marketing of Output, External Trade Rice — Wheat — Processed food — Poultry — Milk — Vegetables — Fruits and processed foods — Milk products — Rural Craft — Tea and Coffee — Spices — Tobacoo — Cashew — Marine Products — Meat and Meat Products — Natural rubber Figure 2: Agriculture Marketing (Rural Market-Output) Flowers Roses — Jasmine — Aromatic Plants — Others Spices Cashew nuts — Arecanuts — Medicinal Plants — Other Horticulture Products FT Vegetables Potatoes — Brinjals — Green Leaf — Onions — Cabbage — Cauliflower — Pea — Tomato — Chillies — Others Fruits Mango — Grapes — Oranges — Banana — Citrus — Apple — Guava — Litchi — Papaya — Pineapple — Sapota — Others Food grains Wheat — Rice — Dals — Jawar — Bajra — Maize — Others D RA c Copyright 2013 Rahul Bhargava Horticulture Items Oil seeds Groundnut — Sunflower — Coconut — Soyabean — Rapeseed & Mustard — Castor Fibre Produce Cotton — Jute — Mesta Beverage Items Tea — Coffee — Tobacco Cash Items Sugarcane — Natural Rubber Animal Products Milk — Fish — Eggs — Poultry — Wool — Meat — Animal Hides — Sericulture — Others 1.5 Notes on international rural retail trends “[Low-income] consumers are still attracted to large supermarkets, creating opportunities for large retail chains to meet the needs of these groups. However, this group’s needs are met largely by small retailers, who do this well. In comparison, large supermarket chains fail in key areas in the minds of these consumers.” “Relatively large distances have to be travelled to get [supermarkets], which requires investing time and money in transportation. There is a perceived lower quality in the perishable categories, and higher-end prices – even if that perception is not in line with reality in most cases. In addition, emerging consumers complain of the ‘cold treatment’ 6
  • 7. e-Sourcebook: ICT for Ag 2.1 Drivers FT 2 D RA c Copyright 2013 Rahul Bhargava by employees when they buy at large retailers – they value personal relationships and emotional closeness when they buy. “Although the opportunity is large, the buying habits of emerging consumers involve economic challenges for retailers. The buying behavior of this group is characterized by a small average ticket, composed of low-margin products; it is self-restricted and has a low conversion to impulse buying, with a focus on promotions designed to generate traffic which may mean lower returns on investment promotion. Therefore, the simple expansion of the value proposition and the formats of the major chains to cover the issue of geographic proximity will certainly have a negative effect on financial performance; retail ers will experience lower gross margins and higher costs. In addition, the investment to build or supplement local networks to increase coverage may provide inadequate or negative returns.5 Thesis: The impact of big box retailing on the future of rural SME retail businesses: a case study of the South Taranaki district Stockwell, Donald http: // aut. researchgateway. ac. nz/ handle/ 10292/ 763 Tabukeli M. Ruhiiga. The Wholesale-Retail Sector and Changes in Consumer Market Response in Rural South Africahttp: // www. krepublishers. com/ 02-Journals/ JSS/ JSS-29-0-000-11-Web/ JSS-29-1-000-2011-Abst-PDF/ JSS-29-1-091-11-1318-Ruhiiga-T-M/ JSS-29-1-091-11-1318-Ruhiiga-T-M-Tt. pdf 1. Low-cost and pervasive6 2. Adaptable and affordable tools 3. Advances in data storage and exchange 4. Democratization of Info, Open Access, Social Media 2.2 How? 1. Concentrate on Demand, not Technology: focus on need for better and timely market information, better access to financial services, timely and appropriate crop and disease management advice, links to ag value chains. 2. Require farmers’ engagement from the start, including in planning and design 3. Don’t ignore ancillary needs for investment in human capacity, community participation or infrastructure 5 Creando Valor para los Consumidores Emergentes en Retailing, The Coca Cola Retailing Research Council Latin America, Booz Allen Hamilton, 2003 6 http://www.ictinagriculture.org/sites/ictinagriculture.org/files/ ICTinAgriculturee-Sourcebook_0.pdf 7
  • 8. 4. Mix of appropriate technologies, radio with call-in, can be most cost effective 5. Focus on affordable access and use 6. Awareness of differential impact, including gender and social differences in access and use 7. Create an enabling environment for infrastructure investment, business models, services and applications. Common Service Centres FT “Common Services Centers (CSC) are proposed to be the delivery points for Government, Private and Social Sector services to rural citizens of India at their doorstep . The CSC Scheme is envisaged to be a bottom-up model for delivery of content, services, information and knowledge, that can allow like–minded public and private enterprises – through a collaborative framework – to integrate their goals of profit as well as social objectives, into a sustainable business model for achieving rapid socioeconomic change in rural India. “As on 31st December 2012, a total of 99,247 CSCs are operational in thirty three States/UTs. 100% CSCs have been rolled out in ten States (Arunachal Pradesh, Chandigarh, Gujarat, Kerala, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Sikkim & Tripura). More than 70% of the rollout has been completed in twelve States (Assam, Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Maharashtra, Puducherry, Punjab, Rajasthan, Uttar Pradesh, Uttaranchal and West Bengal). In about four States (Andhra Pradesh, Jammu & Kashmir, Lakshadweep and Orissa) implementation of CSCs have crossed the half way mark. “The State Governments like Andhra Pradesh, Assam, Bihar, Gujarat, Haryana, Jharkhand, Kerala, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal have issued Government Orders / Notifications to the various departmental heads / District Level authorities/ Stakeholders for use of CSC to deliver various G2C Services. The various G2C Services offered are: Agricultural services, RTI Services, NREGA MIS Data Entry service, Postal Products, Land Records, Issuance of Birth and Death Certificates, Utility Services, Electoral Services, Transport Services, Grievances, e-District Services, etc. Financial Inclusion has started in the States of Andhra Pradesh, Jammu & Kashmir, Madhya Pradesh, Meghalaya, Maharashtra, Tripura and Uttar Pradesh. “As on 31st December 2012, States have reported that 85,928 CSCs are connected out of which 27,697 CSCs are connected through BSNL, 23,505 CSCs are connected via VSATs, 17,541 CSCs are using Data Cards and 17,185 are using Connectivity through other technology like WLL and GPRS. “As on 31st December 2012, Online Monitoring Tool (OMT) has been installed/ registered in 73,122 CSCs covering twenty seven States and user ID has been created/ D RA c Copyright 2013 Rahul Bhargava 3 8
  • 9. commissioned for 114,358 CSCs.”7 4 Proposed Methodology 4.1 Methodology Both primary and secondary sources will be used to gather information. These will include, Key informant interviews Senior managers and officials with the Government, academics, civil society and NGOs who are knowledgeable about efforts being undertaken and their strategic value FT Limited survey of field personnel and beneficiaries To gather representative statistics where none are available via representatives Limitations and expectations Budgetary and time constraints will limit the number of field visits, surveys and interactions possible. It is possible and likely that Government organisations may have suggestions on methodology. D RA c Copyright 2013 Rahul Bhargava Review of the literature To capture the broader context and provide a frame of reference for the case studies. Also for stocktaking of existing activities in the Indian context and desk review. 7 http://deity.gov.in/content/common-services-centers 9