While several efforts have been made in the past, and continue to be made by the Government and Cooperative leaders, there are fundamental limitations in the institutions that could possibly be overcome by support from Impact investors. These include:
Equity limitation – Since Coops are member-owned institutions, and the members are farmers & coop institutions, their ability to contribute to the Capital of the Institution is limited.
Credit Limitations – Both because of limited capital and limited avenues to borrow, the Coop Institutions have limited suite of products that can be offered. Add to this the limitation on mobilising low cost funds as deposits, since the deposits of coops are not insured unlike deposits with banks.
Sectoral limitations – Even though there may not be mandated limitations on the sectors to which lending can be done by Coops, they are limited by resources, capability, cost and systems and processes.
Geographic Area Limitations – Coops are also limited by their geographic area limitations and a form of understanding not to encroach into the area of operation of another coop.
However, for all practical purposes, Coops are banks and have the capacity to offer almost all the services a bank can offer, including money transfers & on-line operations, if they enter into a partnership with a bank and become a BC.
Impact Investors see several positives in such community-based institutions such as; a larger and well connected member base, good understanding of the local socio-economic factors, and the ability to leverage their longstanding presence & goodwill to provide the full suite of financial services and beyond to the local clients and the community.
While present statutes may bar infusion of equity by an Impact Investor in such institutions, there could be support in the form of Tier II Capital, that could strengthen the Capital base of the coop and give it a Capad to leverage both deposits and borrowings to fuel credit growth.
Deposits would be the preferred route for growth considering that they are more stable and generally less expensive as compared to borrowings.
While credit growth could be in the agri space, there is scope to diversify lending, including enterprises finance and microfinance.
Equally, there could be scope to transform these well running institutions into Multiservice Institutions that go beyond the role of mere financial services.
What would an Impact Investor look for in taking an investment decision?
· An overall positive Business environment where political risk is insulated by an active and vibrant member base
· Governance in the institution being reasonably robust to ensure separation between the Board and the day-to-day management and strong oversight from the Board.
· An overall entrepreneurial spirit and environment in the area where the PACS operates, with business growth opportunities
· A credit culture that promotes credit and repayment
Investors who would explore such opportunity may wish to apart from a business opportunity, see the scope for getting commitment of the authorities that regulate the coops that their functional autonomy is ensured and no restrictions are imposed on their scope to do business.
What would an Impact investor expect while investing?
1. A Scalable business - Basically a capital multiplier, that triggers economic activity that leads to overall prosperity.
2. Sustainability – The ability to not only cover costs, but generate returns for investors.
3. Impact – The ability to enable the benefits to percolate to the socially and economically disadvantaged.
Primary Agriculture Cooperative Societies-
Almost everyone we spoke to agrees that FPOs is a good idea for aggregation of input demand and output supply for farmers. They also agree that given a choice, they would prefer dealing with farmer collectives because it adds a Social Impact dimension to the work they do.
As of now, there are four major lenders to the FPOs, all NBFCs, and then there are others like us who also have a small FPO portfolio. While the performance of the FPO portfolio of NBFCs has been fairly good in terms of collections, and portfolio quality, growth has been slow in terms of both number of FPOs that were funded and the quantum of credit flow to the FPOs. I would not like to go into the numbers here, but make some general observations on why lending to FPOs has been challenging. The points I make are neither unique nor comprehensive, but as someone who has spent long years in rural credit can say, are clear impediments:
First, the credit requirements are too small to be meaningful for a lender remotely located to look at.
Second, the margins in some of the businesses done by FPOs are too small (4-5%) to be funded through credit.
Third, the duration for which the credit is required is too small, to even cover the fixed costs that will be incurred in processing the loan.
Fourth, the poor equity base limits the capacity of the FPO to leverage debt.
Fifth, most FPOs transact business without coverage of insurance while handling the physical produce, a standard requirement of lenders
Sixth, some lenders do not continue their credit relation with an FPO after a year or two without explaining why. This makes other lenders wary.
Finally (Final only for this narration, and by no means exhaustive), FPOs trying their hand at on-lending to farmers is scary. FPOs neither have the wherewithal nor the capital to manage on-lending, even as some lenders are eager to offload their credit risk on FPOs.
Anybody with a good understanding of the Rural Credit market will recognize that it is banks with a local physical presence, the experience in handling small ticket loans, and having the ability to offer revolving credit (CC limit) who are best suited to finance FPOs.
Why Farmer Producer Organization-
The idea both amazed and amused me.
First let me explain my amazement:
Having worked in NABARD and involved in some ways in setting-up the SHG infrastructure in India foundation up, our hypothesis even while conceiving the program was that the poor, irrespective of their income levels had the propensity to save (knowing that they would have emergencies and aware that they are not credit worthy) and save they do, in different ways, in non-financial forms like gold, livestock etc. and were waiting for the right financial savings vehicle. SHGs have been able to be make that happen.
The long-held notion that the poor are “born in debt, live in debt and die in debt” has been proving wrong, as SHGs are turning net financial surplus entities. This is both a cause to celebrate as a matter of concern. The concern is whether the entrepreneurial spirit or the opportunities are inadequate, or the environment unfavourable for the poor to have bigger dreams and plans for deploying financial resources?
Coming to amusement,
SHG being an informal, unregistered entity, it becoming a lender to a company is unbelievable. Putting it in a little exaggerated way, it is like a landlord taking a loan from his servant. But it has already happened, is happening.
As long as the money being lent is from the savings of the members of the SHG, I see no issue in on-lending, if it is done after meeting in full the credit needs of the group members, and with the informed consensus of all the members. It is money that belongs to the poor, and this lending is exposing money to high risk.
However, in case the SHG is receiving concessional funding with any form of support from the government in the nature of subvention, it is intended for the exclusive use of the SHG and its members, and on-lending is prohibited. If such a fact comes to light, it will bar them from such benefits in future.
The real reason for a point like this coming up in the first place is the failure of the institutional credit delivery system. It is like saying since the bank pays 3 to 5% per annum interest on my deposits with them, and on-lends my money to my friend or neighbor at 15% per annum, why can’t we just transact directly and let the earnings stay with us?
India has followed the multi-agency approach to lending, and if all the agencies put together are unable to extend credit for genuine needs for agricultural operations of farmers, it presents a sad commentary. SHGs financing farmer members of FPOs is one of those ‘jugad’ solutions that is going to take us nowhere.
For more on this subject with thoughts from practitioners, experts and thinkers, please look-up my LinkedIn post on the subject at: https://www.linkedin.com/feed/update/urn:li:activity:6790669120393375744/
Self Help Group as Lenders-