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I. Introduction

In the context of Indian agriculture, a large majority of farmers are dependent on monsoon to raise their crops. Being small farms, they have a natural disadvantage to achieve scale to justify the high investment. Limited investment capacity of these small farms is also an area of great concern. Access to critical inputs such as quality seeds, fertilisers, irrigation water, power and credit has created a hugely disabling ecosystem for the small farms. Most farms do not have access to the consumer market and therefore are forced to sell their produce to the numerous intermediaries operating in the market. This reduces their profit margin, making the farming business, in most cases, a non-viable one.

Considering the legal environment and political sensitivity of the agricultural sector there is a gradual recognition that one of the ways to overcome the challenges as described above could be to collectivise the farmers into Producer Organisations (POs), be it producer companies, cooperatives or any other form.

Over the years, there has been a growing interest in promoting an enabling environment for the FPOs. Several initiatives have been taken by the Government, Apex financial institutions such as National Bank for Agriculture and Rural Development (NABARD), Small Farmers Agribusiness Consortium (SFAC), private donor organisations, donors, bilaterals/multilaterals, foundations and many other institutions have come forward to support the growth of the FPOs and facilitate their emergence as successful business enterprises.

Promotion and strengthening of FPOs have been one of the key strategies of Government of India to achieve inclusive agriculture growth. Given this rapid growth in the number of FPOs, the issue of access to credit, linking the FPOs to reliable and affordable sources of financing to meet their working capital, infrastructure development and other needs has assumed center stage. Successive Union Budgets have greatly emphasised on the need to promote and sustain FPOs to overcome the challenges faced by small farmers in India.

As the FPOs strive to achieve sustainability, there is an urgent need to reorient the small and marginal farmers across India in terms of National and State policies with regard to FPOs through various schemes, government initiatives, provisions under the schemes, financial needs based on their stages of the lifecycle, modes of finance, subventions etc.

This module presents a compilation of schemes, policies, state-specific provisions, financial support available for FPOs which can help farmers, practitioners, bankers and other stakeholders to further strengthen the FPO movement in India.

II. FPO Policy Landscape

During the last couple of years, there has been a growing interest to promote FPOs. Several initiatives have been taken by the Government of India (GoI), apex financial institutions such as NABARD, SFAC, bilateral and multilateral agencies, private organisations, financial institutions and others to support the growth of the FPOs and facilitate their emergence as successful business enterprises.

NABARD has been financing FPOs since 2011 under the Producer Organisation Development Fund (PODF). Prior to the setting up of PODF, NABARD was funding producer collectives under the Umbrella Programme for Natural Resource Management (UPNRM), bilaterally supported by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and KfW. World Bank and Asian Development Bank (ADB) is also supporting different state governments to promote FPOs. The other agencies in this space are Rabobank Foundation, Sir Ratan Tata Trust, and many others.

SFAC has been mandated by the Government to support the formation of FPOs. SFAC’s initiative was started in 2011-12 under two Central Government Schemes (CGS):

  • the National Vegetable Initiative for Urban Clusters (NVIUC) and
  • the Integrated Development of 600,000 pulses villages in rainfed areas

These two schemes have since expanded its scope and include special FPO projects being taken up by some State Governments under the Rashtriya Krishi Vikas Yojana (RKVY) funds and the National Demonstration Projects under the National Food Security Mission (NFSM). It has initiated other schemes like Equity Grant and Credit Guarantee Fund Scheme and Venture Capital Assistance Scheme.

Under the mandate of GoI, promotion and strengthening of FPOs has been one of the key strategies to achieve inclusive agricultural growth. With large scale promotion of FPOs, the GoI has initiated the following policies to create an enabling ecosystem to strengthen the FPOs.

III. Stages of the FPOs VIZ Requirement of Funds

IV. Different Sources of Finance of Finance for FPOs

Finance for FPOs can be arranged from the following sources.

  1. Own resources: The reserve and surpluses of previous years are the source for personal financing. However, in case of a new PC this opportunity will not be there.
  2. Suppliers’ credit and advance payment from buyers: Suppliers’ credit can be obtained from credit companies or from potential buyers and sellers. The producers who sell their products to the PO can also sell on credit. PO can get partial payment in advance from the prospective buyers. It can get agriculture inputs from the agro dealers on the conditions of payment after sales. But mostly this type of finance is not available for start-up businesses or a new venture.
  3. Grant support: The PC being a small holders’ organisation may seek capital support and other assistance from the Government under certain government schemes. Two major initiatives to support FPOs are:
    1. support to the equity base of FPOs by providing matching equity grants.
    2. setting up of a CGF to provide cover to banks which advances loan to FPOs without collateral has been announced by GoI. The Schemes are implemented by SFAC.
  4. NABARD also provides grant support under PODF to FPOs details of which are described under its schemes. Funding are also available from the Department of Rural Development and Panchayats, Ministries of Agriculture and Cooperation or Horticulture or Food Processing, GoI and or state Governments under various schemes like National Horticulture Mission (NHM) and State Horticulture Mission (SHM), SFAC. World Bank, bilateral/ multilateral donor agencies and corporates under Corporate Social Responsibility (CSR) may be other possible source of funds/grants from POs. The POs will have to develop a financially viable business plans for the purpose.

  5. Debt financing: This is the most preferred way of financing a new business. Here, it is a direct obligation to pay the interest on the money lent by the financier. The biggest advantage is that the financier does not have control over the business as opposed to equity financing. The rate of interest charged is an important point to be noted here. However, it is not easy to raise debt financing for a producers’ company without collateral and margin.
  6. Equity financing: Given the limited investment capacity of the small and marginal farmers, limited contributions are made by the individual farmers to raise the FPOs’ equity which often cannot sustain the operations of the FPOs. In order to augment the equity base of the FPOs, the Union Budget, 2013-14 announced major initiatives by providing matching equity grants and INR 50 crore was sanctioned and implemented since 2013-14 onwards. The scheme is known as the Equity Grant Fund (EGF) and is managed by the SFAC. The EGF enables eligible FPCs to receive a grant, equivalent in amount to the equity contribution of their shareholder members in the FPC. Thus, enhancing the overall capital base of the FPC. The scheme supports the nascent and emerging FPCs, which have paid up capital not exceeding INR 30 lakh as on the date of application.
  7. Working Capital: To meet the credit requirement of the FPOs, there are very few players who are active in this space. This poses a critical challenge for the FPOs. As the FPO progresses from being a start-up entity to a more mature organisation, they build themselves as trade-ready and have a track record to attract finance from formal financial institutions and commercial banks. Financial Institutions like NABARD Financial Services Limited (NABFINS), Friends of Women’s World Banking (FWWB), Ananya Finance etc. provide support to the FPOs. Some commercial banks who offer similar financial assistance to FPOs are ICICI Bank, SBI, UCO bank, Union Bank of India, Canara Bank, Vijaya Bank, Ratnakar Bank etc.
  8. Term Loan: The Reserve Bank of India (RBI), included financing to FPOs up to INR 2 crore under Direct Agriculture Finance under the Priority Sector Lending (PSL) and loans amounting to INR 5 crore to FPCs were considered to be included under Indirect Agriculture Finance. The CGF’s (set up as per the 2013-14 Union Budget) provides Credit Guarantee Cover to eligible lending institutions to enable them to provide collateral- free credit to FPCs by minimising their lending risks in respect of loans not exceeding INR 1 crore.

To promote agro-processing, NABARD has set up a fund of INR 2000 crore to make credit available to designated food parks. Among other entities, the FPOs are also entitled to avail loans from this fund for establishing designated food parks and setting up of individual food/agro processing units in the designated food park.

The FPOs can also avail warehouse receipt finance. As part of the revised PSL guidelines, loans to farmers up to INR 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months is included as direct lending under the PSL. However, not many FPOs are able to benefit from the scheme due to varied reasons.

 

V. Schemes & Policy Initiatives

Section A - NABARD and NABKISAN Sponsored Schemes

NABARD set up its own corpus of funds through PODF in 2011 with an initial sum of INR 50 crore. The fund supports formation and financing POs by adopting a flexible approach to meet the needs of producers. Any registered PO viz PC (as defined under Sec 581 A in part IXA of Company’s Act 1956), Producers Cooperatives, registered Farmer Federations, MACS (Mutually Aided Cooperative Society), industrial cooperative societies, other registered federations, PACS, etc. set up by producers are eligible under the fund.

Considering the success of financing to POs/PACS in terms of improved access to inputs, affordable credit, better price realisation by members by building scale and enhanced skill development of farmers, NABARD created its own subsidiary NABKISAN Finance Ltd. for meeting the credit requirements of FPOs by adopting a flexible approach based on life cycle needs, while it continues to provide promotional support towards capacity building, market linkages and other incubation services. The scope of this fund has been further enhanced during 2017- 18 to provide need-based grant assistance to those FPOs also which are financed by the Commercial Banks, Cooperative Banks and Regional Rural Banks.

Section B - Schemes under Small Farmers Agribusiness Consortium (SFAC)

Department of Agriculture and Cooperation and Farmers Welfare (DAC&FW), Government of India launched a pilot programme for promoting member-based FPOs during 2011- 12, in partnership with state governments, which was implemented through the SFAC.SFAC is supporting FPOs through empanelled Resource Institutions (RIs), which provide various inputs of training and capacity building and linking these bodies to input suppliers, technology providers 
and market players. SFAC is also monitoring the project on behalf of DAC&FW and the states and reporting on its progress.

  1.  SFAC is an exclusive society focused on increasing incomes of small and marginal farmers through aggregation and development of agribusiness.
  2.  SFAC has pioneered the formation and growth of FPOs/FPCs, which is now being implemented across the length and breadth of the country. SFAC is progressing towards establishing an ecosystem for FPOs/FPCs to make them sustainable and viable in the long run.
  3. SFAC offers schemes like Equity Grant and Credit Guarantee Fund Scheme to FPCs to improve availability of working capital and development of business activities.
  4. SFAC promotes development of small agribusiness through its VCA Scheme for value added processing and marketing linkages.

SFAC is also implementing the National Agriculture Market Electronic Trading (eNam) platform. The purpose is to provide for a single unified market for agricultural products with much higher price discovery for farmer.

Section C - Centrally Sponsored Schemes

Central Ministries of Government of India like Dept. Of Agriculture and Farmers Welfare, Ministry of Food Processing have also come up with their respective schemes for promotion and support to Farmer Producer Organisations.

As a strategy for implementation of various activities, the National Food Security Mission has also focused on promotion of FPOs to augment food production especially on its designated food crops.

The union budget 2019 has announced formation of 10,000 new FPOs, to ensure economies of scale for farmers over the next five years

Section - D National and State policies for the promotion of FPO

Apart from the National FPO policy, different State Governments have also come up with their FPO policies and support mechanisms for organising and strengthening farmers in their respective states. The policies are aimed at providing direction, incentives and subsidies for development and nurturing of FPOs. These policies would help promote collective farming for credit mobilisation, better adoption of technology and to facilitate effective forward and backward linkages. Some of the state policies and support for FPOs have been documented on following pages.

Refferences

  1. Producer Organisation Development Fund (PODF) – NABARD Operational Guidelines -2018
  2. Policy paper on Financing of Farmer Producer Organisations-Access and UNDP
  3.  Guidelines of SFAC ‘Equity Grant and Credit Guarantee Scheme’- SFAC website
  4.  Financing of FPOs- NABKISAN website (https://www.nabkisan.org/products.php)
  5.  Rashtriya Krishi Vikas Yojana: Operational Guidelines for Remunerative Approaches for Agriculture and Allied sector Rejuvenation (RKVY-RAFTAAR)
  6. Operational Guidelines of Re-Vamped National Food Security Mission (NFSM)
  7. Operational Guidelines of Operation Greens under Ministry of Food Processing Industries
  8.  Guidelines of National Policy for Promotion of Farmer Producer Organisations
  9.  Odisha Farmer Producer Organisations (FPOs) Policy, 2018 10. Website of Centre of Excellence (CoE) For Farmer Producer Organizations
  10.  Website of http://cms.tn.gov.in/sites/default/files/go/agri_e_ms_164_ap4_2017.pdf
  11. Guidelines of Punjab FPO promotion policy
  12. Agriculture Development Policy, Govt of Kerala
  13.  Rythu Kosam-Andhra Pradesh Farmer Producer Organisations Promotion Policy –2016 Operational Guidelines
  14. https://www.thehinducentre.com/incoming/article26090809.ece/BINARY/Policy%20Report%20No.%2027-%20(1). pdf
  15.  http://krishi.maharashtra.gov.in/Site/Upload/Pdf/PoCRA_PIP.pdf
  16.  https://enam.gov.in/web