FinTech in Agriculture Sector
We have reviewed the Agritech sector closely and present our main takeaways below. The note captures:
- The gaps in a traditional yet key sector in India along with critical challenges faced by companies solving for the said gaps
- Critical success factors required to succeed
- New age solutions by startups
- Competitive Landscape in Agri financing
Gaps in a traditional yet key sector in India along with critical challenges faced by companies solving for the
- The agri and allied sector contributes USD 368 billion to the economy and has around 55% of the population depending on it for livelihood/ employment.
- Only 30% of all farmers borrow from formal sources, while ~50% of small and marginal farmers are unable to borrow from any source
- Banks provided agriculture credit worth USD 168 billion in FY18-19; however, 50% of the credit was offered to medium and large farmers
- NPA % in Agri and allied sector is around 7-9%
- The short and long-term credit gap for farmers in developing countries is estimated at about $170 billion per year (ISF, 2019). Smallholder farmers are often at the bottom of the economic pyramid, yet they are most likely to need access to financial services
Breakup of Types of Farmers
Challenges in offering credit to small and marginal farmers
|High cost of servicing and risks involved|| Difficult-to-reach remote areas|
High acquisition and servicing cost for small and marginal farmers
Perceived high risk of default
|Difficult to verify reliable information|| Difficult and uneconomical to gather and verify farm-level and farmer-level data|
Limited visibility on financial information like cash flows and credit history
Limited expertise to verify or estimate or do both on the income from alternate sources
|Risks related to policy and environment||Farm loan waiver by state governments* affects the culture of credit among farmers|
Perception of higher NPA under PSL, particularly agriculture
Critical Success Factors required to Succeed
Proximity – Fintech would explore getting banking to the doorstep and finger tips (ibanking).
Accessibility – Knowing the fact that the unbanked population could also be uneducated and mostly use thumb impressions. Biometric technology like fingerprint and iris scanner are making banking services accessible to many first-time users.
Alternative Credit Underwriting – Unbiased lending decisions based on facts and data. Credit underwriting model which analyses over 50-100 alternate data points to determine the creditworthiness of a farmer as no financial records are available.
Use of Funds – Leveraging technology by providing wallets or cards that can only be used to directly pay for inputs or other resources related to agriculture only.
Financial Literacy – Financial literacy programs to ensure that individuals are aware of new FinTech options, able to interact with systems and compare prices.
Local Language Support – Rural population usually communicate in local language, Application and services available in local language and use of AI for voice banking.
Financial Products – Unlike traditional lenders who tend to focus on crop loans or agricultural input loans, startups focus on smallholder farmer needs and design appropriate financial products that are not collateralised.
Timely Credit – Technological disruption, including the delivery of credit and micro-credit to people in rural regions using a large network of business correspondents, to try and make sure that the time taken for the delivery is as less as it gets and is done straight to their account.
Influencers Network – Working closely with input providers which have existing relationships with local farmers and are trusted by them.
Collection Process – Digital + Physical collection process with flexibility for monthly payments and lump sum payment at the time of sales of output. Working closely with farmer organisations to ease the collection. Use of an AI collection algorithm capable of predicting repayment behavior of clients several weeks in advance.
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