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Primary Agriculture Credit Societies (PACS) as candidates for investment by Impact Investors

Author: Mr. Emanuel Murray (Senior Advisor Caspian Impact Investment)

Primary Agricultural Credit Societies (PACS) have been at the forefront of the Indian Agri and Rural Economy for over a hundred years, and are an integral part of the rural credit system. Their overall performance however has been uneven, but there have been several outstanding examples of PACS that provide financial services and are the first choice of customers, in preference to Commercial Banks & Rural Banks that may be also present and offering similar services. What makes these institutions unique and special is their Community ownership, and thereby local connect & understanding that translates into a personal touch that goes beyond a transactional relationship. This gives cooperatives an unmatched edge over alternate financial services delivery channels. It is for the institutions to be able to capitalise on this “Social Capital” to build their business.

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-