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Engaging Rural India through CSCsversion 0.3

Rahul Bhargava

Wednesday 24th April, 2013

Background 1Collateral Management in Agriculture Finance in India 1International Finance Corporation: Global Warehouse Finance Program 3Rural India Demographics, 2005 4Agricultural marketing structure 5Notes on international rural retail trends 6

e-Sourcebook: ICT for Ag 7Drivers 7How? 7

Common Service Centres 8

Proposed Methodology 9Methodology 9

1 Background

1.1 Collateral Management in Agriculture Finance in India

AgriFin (April 2013) — This article was contributed by Vivek Thoopal, Head of BusinessDevelopment (Collateral Management), National Collateral Management Services Limited(NCMSL), For additional information, please contact the author at: vivekthoopal@gmail.com

The Indian agri-commodity market, being highly fragmented, is characterized by alarge number of participants including farmers, several layers of aggregator, processorsand traders. Before the advent of professional Collateral Management entities, access tofinance and consequentially holding capacity for the above entities was difficult due topoor balance sheet quality and credit history. While banks were keen to identify lendingopportunities within this segment to meet their priority segment obligations, a high level

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of non-performing assets and heavy supervisory costs dissuaded their efforts. Moreoverthe flow of credit remained skewed in favor of the developed and urban pockets.

Over the past 8 years collateral management services have brought about a trans-formation by allowing banks to almost ignore the borrower’s financial strength andrely solely upon the warehouse receipt issued by the agency. This form of lending bybanks is in contrast to the traditional lending in the form of working capital, with creditfacility based on the balance sheet of the borrowing entity, and is more secure due tothe collateral manager’s services. The current collateral management processes in Indiaare rudimentary but effective and more importantly in line with the domestic marketpractices. The collateral manager after a survey enters into a lease agreement and takescustody of the storage facility containing the commodities. The collateral manager guar-antees the quality and quantity of the agri based collateral, provides price informationrequired for margin call and aids in disposal of the commodities, if necessary. Thecollateral manager also ensures that the commodities are adequately insured for naturalcalamities and burglary, though these risks are not underwritten by the collateral agency.

The loans against agri-collaterals are typically short term (8 months to 1 year), self-liquidating, and one of the most secure products in a bank’s portfolio. For the borrowersthe willingness of a collateral manager to provide services in a variety of storage facilities,including the godown in his backyard (field warehousing), makes this the easiest methodof procuring low cost finance.

The greatest challenge in providing these services arise from the logistics complex-ities of securing numerous warehouses spread across the remote parts of the country.Currently NCMSL is one of the two major collateral management companies in India.The company manages commodities of over $1.5 billion through 900 bank branchesacross 18 states and 3500 storage structures. It was also the first private company toissue a negotiable warehouse receipt, allowed under the Warehouse (Development &Regulation) Act, 2007. However, very few warehouses are registered with the warehouseauthority, as required by the act which is still in a nascent stage of implementation. Ex-tensive risk profiling, audit planning, and manpower management is required to ensurethe security of the collateral especially due to the thin margins involved. As the industryremains manpower intensive, key risks to a collateral management agency remains thevulnerability of the personnel deputed to supervise the storage, inflow and outflow ofcommodities. Several levels of audit based on the risk profile of godowns are deployedto mitigate the above risk. Collateral management in India is unique in several respects.The idea of a specialized structured solution for a large client has been adapted as aretail product catering to the agriculturists and caters to even loans as low as $2000 forthe marginal farmers. The client base is predominantly small ticket with an averageloan size of approximately $40,000. Of course, at the other end of the spectrum loans ofup to $10 million are facilitated through this product. But, of the approximately 35,000borrowers who use NCMSL’s collateral management services, less than 10% avail largeticket finance.

Borrower’s profile varies by commodity, but is usually small or medium enter-prise/entity. For instance, financing against paddy is availed by processors, mustard

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seed by traders, and chili by producers. Irrespective of the borrower’s profile, collateralmanagement fees are usually paid by the financial institutions. In that sense the collateralmanager acts as an agent of the financial institution.

Technology plays an important role in the management of the thinly spread struc-tures. The system not only ensures that the issuance and release of the warehousereceipt are centralized but also keeps all relevant personnel updated in real time onthe status of the collateral. Collateral management in India has witnessed tremendousgrowth and acceptability in recent time. The initial thrust was driven by the ReserveBank of India’s (India’s central bank) regulations which require 18% of a bank’s loans bedirected towards the agriculture sector. The product, which started around the year 2004and employed by 2 new private sector banks, is now being used by about 40 financialinstitutions to disburse loans of over $5 billion. This figure is expected to grow four-foldand reach $20 billion within the next five years.1

1.2 International Finance Corporation: Global Warehouse Finance Program

AgriFin (April 2013) — This article was contributed by Makiko Toyoda, Senior Trade FinanceOfficer, International Finance Corporation. For additional information, please contact the authorat: mtoyoda@ifc.org

Agricultural commodities are stored in warehouses before shipment, and in mostcases, farmers need to sell their production earlier than they desire to meet their urgentfinancial needs. Warehouse financing is a secured lending technique that allows farmersaccess to finance secured by commodities deposited in warehouses. It is especiallybeneficial for farmers and small- and medium-sized entrepreneurs, who are often unableto secure borrowing requirements due to lack of sufficient conventional loan collateral.Warehouse financing allows banks to shift risk from borrowers’ fixed assets to thecommodities that farmers produce. It also allows farmers to enhance income by havingmore flexibility in timing sales to protect against price seasonality.

The IFC’s Global Warehouse Finance Program (GWFP), established in late 2010, aimsto increase working capital financing to farmers and agriculture players by leveragingtheir own production. The Program supports the agriculture sector by providing bankswith liquidity and/or risk coverage for assets that are backed by warehouse receipts orequivalent (such as Collateral Management Agreement or Stock Monitoring Agreement).According to a market study conducted by IFC in 2009 which covered 15 countriesworldwide, the availability of warehouse financing is between zero and seven percent offinancing needed in less developed emerging markets. The GWFP was established toaddress that gap and to build capacity among local financial institutions to provide thistype of financing.

Under this Program, IFC offers a short-term loan to a bank, which will in turn use thefunds to lend to farmers, cooperative unions, aggregators, exporters or traders againstwarehouse receipts or equivalent. IFC can also provide guarantee up to 50 percentof short-term loans extended to those agriculture borrowers by a bank. To date, IFC

1http://agrifinfacility.org/collateral-management-agriculture-finance-india

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has financed soy beans, maize, grain, wheat, rice, sugar, vegetable oil, coffee, cocoa,cashew nuts, cotton, sesame seeds, sunflower seeds and oil, among others, in countriessuch as Burundi, Rwanda, Senegal, Cote d’Ivoire, Togo, Benin, Ghana, Guinea Conakry,Cameroun, Nigeria, Tanzania, Guinea Bissau, Kenya, Ethiopia, Mozambique, Mali,Angola, The Gambia, Paraguay, Brazil, Guatemala, Colombia, Peru, Egypt, Kazakhstan,Ukraine, Bosnia, Montenegro, Moldova, Croatia, Russia, Indonesia, and Vietnam. TheProgram is expected to reach up to 208,600 farmers across emerging markets in allregions and contribute to food security for 7.5 million people by 2016.

To showcase an example from Latin America, IFC helped one bank in Paraguayincrease its support to local exporters of soybeans, corn, and wheat. IFC signed a short-term debt agreement with Sudameris under GWFP in 2011 to provide $15 million toexpand access to finance for local farmers and small- and medium-sized entrepreneursin the agribusiness sector, in which Paraguay has a strong competitive advantage. In2012, Sudameris increased their agricultural portfolio by 60 percent in less than a yeardue to GWFP’s intervention.2

1.3 Rural India Demographics, 2005

“Over 750 million consumers, 74% of India’s one billion plus population, [12 % of world’spopulation,] live in 6.27 lakh villages. The size of rural market is estimated to be Rs.3500 billion, of which agricultural products are valued at Rs. 2500 billion, 71.43 %. TheFMCG market accounts for 14.29% and agricultural inputs and equipments for 12.86%.The market size of durables is estimated to be just 1.43% of the total rural market size inIndia.

“There have been proposals for cumulative investments of over Rs. 720 billion infood and agro-processing industry. The number of middle income and above householdsin the rural areas [are estimated to] grow from 80 million to 111 million by 2007. Theabsolute size of the rural market is expected to be twice that of urban India. Trendanalysis of statistics [of] rural marketing of FMCG companies shows that there are highrates of growth in rural areas compared to growth rates [in] urban areas.

“India’s rural market is [thought to be a ‘sleeping giant’] given the vast potential. Therural market environment has changed. So has the rural consumer. The rural consumeris becoming [quality and price] conscious. Rural markets are not confined to marketingof agricultural inputs and agro-products. They are expanding to encompass marketingof agricultural produce, agro-products, agricultural inputs, non-farm products, FMCGand durables, services, etc. Almost all the MNCs and corporates are responding to thechanging environment.”3

2http://agrifinfacility.org/warehouse-finance-warehouse-receipt-systems3Singh, Awadhesh Kumar. Rural Marketing : Indian Perspective. New Age International, 2005.

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1.4 Agricultural marketing structure

Saxena (1997)4 proposed the following agricultural marketing structure:

Local Markets: Where farmers (who produce in small quantity and are economicallyweak) can conveniently sell (to purchasers), often to middlemen. The middlementhen sell it to district or central market. These are called ‘grower’s markets’ or‘primary markets’.

District Markets: Where huge quantities of agricultural commodities are assembledfrom local markets. After processing, these are transported to the central/regionalmarkets or sold to consumer markets.

Central/Regional Markets: Where facilities of processing, storage and grading are avail-able. These markets are professional in nature. Buyers of different states andcountries visit these markets. From here the produce is transported for marketingin different parts of the country or abroad.

Sea-Board Markets: Established at seaports, where exporters purchase turm productsbrought from local or regional markets. They have the needed facilities of pro-cessing and packaging, and arrange shipment of these products to other countries.Facilities for importing agricultural goods are also available here.

Wholesale Markets: Farm products are often purchased in bulk and storage, to be soldto retailers at an opportune time (at higher profits). The operating scale of thesemarkets is smaller than that of the central markets.

Retail Markets: Including small distribution centres or shops in different areas of cities,towns and villages, where agricultural produce is sold to consumers who purchasein small qualities any time they need it. Generally, retail-selling prices are slightlyhigher than the wholesale prices, because the retailer would earn some profit forthe services rendered (Figures 1 and 2).

Figure 1: Agricultural Marketing

Influencing Factor and Contributors Rural marketing strategies and support activi-ties — Government policies and incentives— Co-operatives, involvement andassistance — Rural Indian — Inputs from Banks and Financial Institutions — Tech-nological training and research — Socio-economic and Political forces — Ruralmarket development

Marketing of Inputs Fertilizers — Seeds — Plant Protection Chemicals — Agro Feeds— Poultry Feeds — Cattle — Daily necessities of Life — Electricity — Diesel —Farm Machinery and implements — Pumps — Tractors — Tools and Tackles —FMCG — Consumer Durables

4Saxena, Anjila (1997), ‘Problems and Prospects of Agricultural Marketing’, In: Rural Marketing: Thrustand Challenges/edited by Samiuddin et al., National Publishing House, Jaipur, pp. 198–208.

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Marketing of Output, Trade in India Cereals — Pulses — Oilseeds — Sugar — Cotton— Vegetables — Fruits — Milk — Copra and Products — Eggs — Fish — ProcessedFood — Poultry — Rural Craft — Tea and Coffee — Spices — Tobacco — Cashew— Marine Products — Meat and Meat Products — Natural Rubber

Marketing of Output, External Trade Rice — Wheat — Processed food — Poultry —Milk — Vegetables — Fruits and processed foods — Milk products — Rural Craft— Tea and Coffee — Spices — Tobacoo — Cashew — Marine Products — Meatand Meat Products — Natural rubber

Figure 2: Agriculture Marketing (Rural Market-Output)

Horticulture Items

Flowers Roses — Jasmine — Aromatic Plants — Others

Spices Cashew nuts — Arecanuts — Medicinal Plants — Other HorticultureProducts

Vegetables Potatoes — Brinjals — Green Leaf — Onions — Cabbage — Cauliflower— Pea — Tomato — Chillies — Others

Fruits Mango — Grapes — Oranges — Banana — Citrus — Apple — Guava —Litchi — Papaya — Pineapple — Sapota — Others

Food grains Wheat — Rice — Dals — Jawar — Bajra — Maize — Others

Oil seeds Groundnut — Sunflower — Coconut — Soyabean — Rapeseed & Mustard —Castor

Fibre Produce Cotton — Jute — Mesta

Beverage Items Tea — Coffee — Tobacco

Cash Items Sugarcane — Natural Rubber

Animal Products Milk — Fish — Eggs — Poultry — Wool — Meat — Animal Hides —Sericulture — Others

1.5 Notes on international rural retail trends

“[Low-income] consumers are still attracted to large supermarkets, creating opportunitiesfor large retail chains to meet the needs of these groups. However, this group’s needsare met largely by small retailers, who do this well. In comparison, large supermarketchains fail in key areas in the minds of these consumers.”

“Relatively large distances have to be travelled to get [supermarkets], which requiresinvesting time and money in transportation. There is a perceived lower quality in theperishable categories, and higher-end prices – even if that perception is not in line withreality in most cases. In addition, emerging consumers complain of the ‘cold treatment’

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by employees when they buy at large retailers – they value personal relationships andemotional closeness when they buy.

“Although the opportunity is large, the buying habits of emerging consumers involveeconomic challenges for retailers. The buying behavior of this group is characterizedby a small average ticket, composed of low-margin products; it is self-restricted andhas a low conversion to impulse buying, with a focus on promotions designed togenerate traffic which may mean lower returns on investment promotion. Therefore,the simple expansion of the value proposition and the formats of the major chains tocover the issue of geographic proximity will certainly have a negative effect on financialperformance; retail ers will experience lower gross margins and higher costs. In addition,the investment to build or supplement local networks to increase coverage may provideinadequate or negative returns.5

Thesis: The impact of big box retailing on the future of rural SME retail businesses: a casestudy of the South Taranaki district Stockwell, Donald http: // aut. researchgateway. ac.

nz/ handle/ 10292/ 763

Tabukeli M. Ruhiiga. The Wholesale-Retail Sector and Changes in Consumer MarketResponse in Rural South Africahttp: // www. krepublishers. com/ 02-Journals/ JSS/JSS-29-0-000-11-Web/ JSS-29-1-000-2011-Abst-PDF/ JSS-29-1-091-11-1318-Ruhiiga-T-M/

JSS-29-1-091-11-1318-Ruhiiga-T-M-Tt. pdf

2 e-Sourcebook: ICT for Ag

2.1 Drivers

1. Low-cost and pervasive6

2. Adaptable and affordable tools

3. Advances in data storage and exchange

4. Democratization of Info, Open Access, Social Media

2.2 How?

1. Concentrate on Demand, not Technology: focus on need for better and timelymarket information, better access to financial services, timely and appropriate cropand disease management advice, links to ag value chains.

2. Require farmers’ engagement from the start, including in planning and design

3. Don’t ignore ancillary needs for investment in human capacity, community partici-pation or infrastructure

5Creando Valor para los Consumidores Emergentes en Retailing, The Coca Cola Retailing ResearchCouncil Latin America, Booz Allen Hamilton, 2003

6http://www.ictinagriculture.org/sites/ictinagriculture.org/files/

ICTinAgriculturee-Sourcebook_0.pdf

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4. Mix of appropriate technologies, radio with call-in, can be most cost effective

5. Focus on affordable access and use

6. Awareness of differential impact, including gender and social differences in accessand use

7. Create an enabling environment for infrastructure investment, business models,services and applications.

3 Common Service Centres

“Common Services Centers (CSC) are proposed to be the delivery points for Government,Private and Social Sector services to rural citizens of India at their doorstep . TheCSC Scheme is envisaged to be a bottom-up model for delivery of content, services,information and knowledge, that can allow like–minded public and private enterprises –through a collaborative framework – to integrate their goals of profit as well as socialobjectives, into a sustainable business model for achieving rapid socioeconomic changein rural India.

“As on 31st December 2012, a total of 99,247 CSCs are operational in thirty threeStates/UTs. 100% CSCs have been rolled out in ten States (Arunachal Pradesh, Chandi-garh, Gujarat, Kerala, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Sikkim &Tripura). More than 70% of the rollout has been completed in twelve States (Assam,Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Maharashtra, Puducherry, Punjab,Rajasthan, Uttar Pradesh, Uttaranchal and West Bengal). In about four States (AndhraPradesh, Jammu & Kashmir, Lakshadweep and Orissa) implementation of CSCs havecrossed the half way mark.

“The State Governments like Andhra Pradesh, Assam, Bihar, Gujarat, Haryana,Jharkhand, Kerala, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and WestBengal have issued Government Orders / Notifications to the various departmentalheads / District Level authorities/ Stakeholders for use of CSC to deliver various G2CServices. The various G2C Services offered are: Agricultural services, RTI Services,NREGA MIS Data Entry service, Postal Products, Land Records, Issuance of Birth andDeath Certificates, Utility Services, Electoral Services, Transport Services, Grievances,e-District Services, etc. Financial Inclusion has started in the States of Andhra Pradesh,Jammu & Kashmir, Madhya Pradesh, Meghalaya, Maharashtra, Tripura and UttarPradesh.

“As on 31st December 2012, States have reported that 85,928 CSCs are connectedout of which 27,697 CSCs are connected through BSNL, 23,505 CSCs are connected viaVSATs, 17,541 CSCs are using Data Cards and 17,185 are using Connectivity throughother technology like WLL and GPRS.

“As on 31st December 2012, Online Monitoring Tool (OMT) has been installed/registered in 73,122 CSCs covering twenty seven States and user ID has been created/

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commissioned for 114,358 CSCs.”7

4 Proposed Methodology

4.1 Methodology

Both primary and secondary sources will be used to gather information. These willinclude,

Review of the literature To capture the broader context and provide a frame of refer-ence for the case studies. Also for stocktaking of existing activities in the Indiancontext and desk review.

Key informant interviews Senior managers and officials with the Government, aca-demics, civil society and NGOs who are knowledgeable about efforts being under-taken and their strategic value

Limited survey of field personnel and beneficiaries To gather representative statisticswhere none are available via representatives

Limitations and expectations Budgetary and time constraints will limit the numberof field visits, surveys and interactions possible. It is possible and likely thatGovernment organisations may have suggestions on methodology.

7http://deity.gov.in/content/common-services-centers

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