Why Farmer Producer Organisations (FPOs) have challenges in accessing debt, or rather, what challenges lenders face in extending debt to FPOs
Author: Mr. Emanuel Murray (Senior Advisor Caspian Impact Investment)
Over the last few months, a Team of us at Caspian (https://www.caspian.in/) were trying to understand the FPOs Debt Market a little better, and to do that, we interacted with actors across the chain; apex promoting organisations, FPO promoting institutions, some FPOs, service providers to FPOs like warehousing & commodity managers and buyers including corporates.
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-