Mr. Nandan Nilekani, Cofounder of Infosys, highlights the need to enhance state capacity via people, processes, and technology. He advocates incentives for decisive actions, the need to foster continuous learning, and citizen-centric process design for anytime-anywhere access to services. He provides examples of technological interventions, such as Aadhaar and UPI, which facilitate national benefit portability and streamlined tax payments that drive efficiency. Mr. Nilekani stresses transparent government processes and citizen-facing services, which can ensure accessibility and efficiency for all stakeholders and mark strides toward effective governance.
Enhancing state execution capacity: Insights and strategies by Iqbal Dhaliwal
In his interview, Mr. Iqbal Dhaliwal, Global Executive Director of MIT’s Abdul Latif Jameel Poverty Action Lab, discusses five bottlenecks that hinder state execution capacity: hiring challenges, role clarity, training adequacy, incentives, and data-driven decision-making. He encourages several steps to overcome these challenges. These include ways to implement competency mapping, promote lifelong learning, and strengthen accountability measures. He stresses the importance of using technology and investments in human resource management to bolster efficiency. Mr. Dhaliwal uses attendance improvements in rural health centers as an example to highlight the complexities of system design and implementation.
Addressing India’s public financial management challenges: Insights and advocacy by Anupam Kulshrestha
Mr. Anupam Kulshreshtha, who once was the Deputy CAG of India, talks to us about ways to address India’s PFM challenges in the context of fiscal federalism-related complexities and bureaucratic obstacles. Though PFMS implementation has improved payment regulations, issues linked to integration remain. Mr. Kulshrestha advocates for JIT funding and emphasizes enhancing accountability mechanisms and data integrity. The separation of accounting and auditing functions within the CAG’s department ensures integrity, yet the reformation of accounting cadres poses administrative hurdles. He highlights the importance of proactive audit measures essential to sound policy formation and governance efficacy.
Ajay Shah on reinventing governance: Accountability and organizational reform
Dr. Ajay Shah, Cofounder of the XKDR Forum, talks to us about ways to achieve effective governance. He discusses politicians’ engagement with citizens and systemic issues and stresses electoral accountability. Dr. Shah notes that an entrepreneurial spirit and managerial approaches are essential to confront challenges. He emphasizes organizational efficiency in governance and urges transparency and decentralized measurement. He also proposes that policymaking should incrementally integrate digital tools and prioritize foundational organizational functions, such as HR and finance, to ensure effective governance in India.
Empowering female smallholder farmers with gender-responsive agri-finance solutions
Grace is a smallholder farmer in Uganda whose cultivation depends on seasonal rainfall. She relies solely on her half-acre land for income, while unpredictable weather limits her productivity. Grace would be able to transform her agricultural practice if she had access to an agricultural loan. She could then buy an irrigation pump and start cultivation all year round. This would improve her crop production and potentially increase her yield by 50%. However, banks are unwilling to lend to her because she lacks a land title. Countless women like Grace continue to face an uphill battle to access formal finance to transform their agricultural livelihoods.
Agriculture is Uganda’s largest source of employment. It employs 66% of the population. Women like Grace contribute 72% of the agricultural labor force. Yet, female farmers have less access to productive assets, which include financial services. The World Bank estimates that the reduction of gaps in access to assets for female farmers can lead to a 20 to 30% yield increase per household.
Access to agricultural finance and its use are low in Uganda. Only 11% of the population borrows for agriculture. MSC conducted research on smallholder farmers in Uganda to understand the challenges they face when they access credit. The study found that high interest rates and lack of collateral are common issues, especially in areas where land ownership depends on informal customs and traditions. This limitation restricts their access to financial services and full participation in the agricultural value chain. Additionally, the limited presence of financial institutions in certain regions further restricts farmers’ access to financial services.
The seasonal nature of agriculture also poses challenges for farmers as it leads to income irregularities for them. As a result, they struggle to repay loans regularly. Smallholder farmers can earn as much as USD 7,568 in the harvest months and as little as USD 54 in the lean months, which highlights their financial constraints. Some respondents cited challenges with monthly charges on financial accounts, which are difficult to manage due to agriculture’s seasonal income patterns.
As noted above, land ownership among women is often informal, which leads to limited control over land transactions. Women own smaller plots of land, which range from 0.5 to 1 acre.
Additionally, men are the primary decision-makers in agricultural and household matters, which can limit women’s autonomy in the choice of crops, farming techniques, and access to financial services. Figure 1 shows this disparity. It is an extract of findings from three towns in Uganda based on MSC’s study. It shows that male smallholder farmers manage larger plots of land. In contrast, female farmers mainly engage in farming activities on smaller plots. This gender-based distribution highlights the need for interventions to address these inequalities and empower women in agriculture.
Financial inclusion for female smallholder farmers is not limited to access to credit. It also involves the design of products that address their unique challenges and empower them economically. The figure below shows some key implications in the design of credit products specifically for female smallholder farmers, which MSC identified during our recent study.
Recommendations to change the status quo
Promote gender equality in land ownership: Government agencies and policymakers should implement policies that promote gender equality in land ownership and ensure secure land rights for women. Additionally, support programs should facilitate women’s access to land rental agreements and promote gender-inclusive rental practices. In Rwanda, the land tenure regularization program ensured women’s land rights and increased productivity and income for female farmers.
Grant access to legal titles: Advocate for legal reforms that grant female smallholder farmers secure land ownership rights and access to legal titles. The land titling project was one such initiative that positively impacted Peru. It improved women’s access to land titles and enhanced their economic security and decision-making power.
Increase access to digital channels: Financial institutions and lenders should develop initiatives that provide training and resources to help female farmers overcome digital barriers and use technology for agricultural credit. myAgro, a social enterprise in West Africa, has significantly enhanced its engagement with female farmers, who now represent 65% of its clients. The organization offers a savings program that empowers smallholder farmers to afford essential agricultural inputs, such as seeds and fertilizers, through a prepaid scratch card system.
Enhance women’s participation in decision-making processes: Stakeholders should establish programs that empower women to participate in decision-making processes, provide training on marketing strategies, and promote gender equality in agricultural organizations. The FAO has established Dimitra Clubs in Africa, which are community-driven platforms in several African countries. These countries include Burundi, Burkina Faso, Central African Republic, the Democratic Republic of the Congo, Kenya, Madagascar, Mali, Malawi, Mauritania, Niger, and Senegal. These clubs empower rural communities, particularly women, through enhanced participation in community life and decision-making processes. Africa has 600 Dimitra Clubs, and 60% of the members in these clubs are women.
Segment female smallholder farmers: The segmentation of female smallholder farmers into subgroups should be a fundamental step in the design process and the development of such gender-tailored products. This segmentation reveals the nuanced similarities and differences among women and informs product uptake and usage patterns. One Acre Fund focuses on smallholder farmers, many of whom are women. Its programs often tailor support to the unique challenges faced by female farmers. It recognizes that women may have different levels of access to land and resources than men. This tailored support implicitly involves segmentation, which acknowledges and addresses the specific barriers that female farmers face.
Conclusion
The market demand for gender-responsive agri-finance credit signals a growing interest to address gender disparities within the agricultural sector. Moreover, the research planning, implementation, and prototype design processes must consider gender. Qualitative research methodologies, such as human-centered design (HCD) or MSC’s Market Insights for Innovation and Design, enhance the efficient design of impactful solutions and cater to the diverse needs of female smallholder farmers.
Collaboration among banks, FinTechs, MFIs, and development partners is essential to seize opportunities to improve female smallholder farmer’s access to credit. MSC’s support to such institutions has been pivotal in the development of credit products tailored to empower female farmers. Through such tailored solutions, women like Grace would no longer need to depend on the vagaries of unpredictable weather and look forward to a better and more secure future.
Unlocking access to formal credit for farmer producer companies (FPCs): Lessons from JEEViKA’s work in Bihar
Credit is an important driver that fuels the growth of business enterprises. MSC’s diagnostic study of FPCs in Bihar also highlights access to capital as a vital factor that sustains FPCs. FPCs raise capital in two ways—equity raised through members and external debt. Smallholder farmers are the majority shareholders of FPCs, so their equity contribution is typically low. Moreover, poor capitalization of FPCs in India compels them to seek debt to fuel their expansion. However, FPCs struggle to access credit, which also hinders their growth. In Bihar, only 11% of FPCs applied for institutional credit from banks or non-banking financial companies (NBFCs), and only 9% received approval for their credit applications.
FPCs have huge potential despite the poor credit flow. The estimated size of this segment is around INR 6 billion (USD 72 million) and is projected to grow rapidly, given the thrust from the central government and many state governments. Various institutions, banks, and NBFCs provide credit to FPCs. However, FPCs receive most of the credit from three to four NBFCs only.
JEEViKA-promoted FPCs were also in a similar bind. They could not expand their business due to the lack of affordable working capital. The JEEViKA state team identified this challenge and undertook a focused effort with MSC’s technical support. This effort sought to address the lack of access to formal finance for operations. We undertook various activities over 12 months. This led to a substantial push on credit provision for FPCs, and eight JEEViKA-promoted FPCs raised INR 55.4 million (~USD 600,000) in debt from three commercial banks and two NBFCs. The loans included a mix of warehouse receipt finance, cash credit loans for working capital, and term loans to set up a processing unit.
This blog shares the lessons and approaches that JEEViKA took to overcome the barriers FPCs face when they access credit.
Why do commercial banks hesitate to lend to FPCs?
Banks typically assess creditworthiness based on factors, such as business plans, audited financial statements, and mobilized share capital. As a result, FPCs focus much of their technical advice and capacity-building initiatives on these aspects to get credit from banks. However, our experience shows that these factors are critical but not sufficient on their own. One of the reason is a majority of the FPCs formed in India are in their nascent stage and as a result the financial statements look weak. Local branch managers and regional credit appraisal teams are accountable for loan sanctions and repayments and often make the banks’ credit decisions. FPCs must ensure they are comfortable signing the loan agreement. Following are some additional factors that affect banks’ credit decisions:
What approaches did JEEViKA-promoted FPCs take to access commercial finance?
With the above insights, the JEEViKA team took the following strategies to ease barriers and enable the FPCs to access commercial bank credit:
1. Used warehouse receipt financing as an entry point: Financing against stored produce represents the most practical means for an FPC to obtain institutional credit. FPCs typically lack assets to offer as collateral as most are new and small, have limited business transactions, and lack credit history. Additionally, their board of directors and promoters often have limited net worth.
Our experience indicates that warehouse receipt financing (WRF) and invoice discounting are effective products that can help FPCs establish credit relations with formal institutions. Warehouse receipt financing is provided against produce stored in accredited warehouses, which makes it particularly beneficial for FPCs that need temporary storage.
Three JEEViKA-promoted FPCs initiated formal mainstream finance through loans against warehouse receipts worth INR 10 million (~USD 125,000) , INR 15 million (~USD 188,000), and INR 10 million (~USD 125,000) to store 2,193 MT of maize, 250 MT of lentils, and 500 MT of maize and wheat, respectively. After they sold their produce, they repaid the loan amount in full and repeated this cycle in the following season. This process helped the FPCs show the reliability of their business operations and establish creditworthiness. After two cycels of WRF, all three of them eventually got access to cash credit facilitity of commercial banks to finance their working capital needs.
2. Kept documents ready: JEEViKA identified the documents needed for working capital and term loans and ensured that the FPCs kept these updated. Any additional requests for documentation were tracked centrally, and FPCs ensured to respond on time. Timely response to queries also adds to the FPC’s professionalism and builds the confidence of the bank credit staff. Table 1 shows that the bank asked for around 16 documents for a working capital loan.
Table 1: List of documents required by a commercial bank for a cash credit loan to an FPC
3. Engaged with bankers to educate them on the business status: Under the guidance of the state office, JEEViKA-promoted FPCs actively engaged with their bankers and provided detailed insights into their business, which included sales turnover, margins, market partnerships, and growth potential. CEOs received soft skills training to enhance their confidence and communication abilities. This proactive approach built trust and showcased the CEOs’ competency to bank branches and credit managers. Additionally, JEEViKA discovered that local branch managers were unfamiliar with lending rules for FPCs. This feedback prompted JEEViKA to relay the information to commercial banks’ regional offices to ensure the dissemination of suitable lending guidelines to branch teams.
4. Used central programs, such as PMFME and AIF, for term loans: Central programs, such as the Pradhan Mantri Formalisation of Micro Food Processing Enterprises (PMFME) and the Agriculture Infrastructure Fund (AIF), can help FPCs secure term loans. Under pressure to show progress in these government-backed initiatives, banks are more inclined to extend credit to entities that align with the programs’ objectives. FPCs can proactively ensure that their business models and documentation meet the eligibility criteria to tap into these programs effectively. Two JEEViKA promoted FPCs secured term loans of a combined USD 175,000 for setting up of a wheat flour and mustard oil processing units under the PMFME scheme by developing robust business plans. Their applications for subsidy were approved by the Department of Industries, Government of Bihar and this in turn convinced the banks to process their term loan applications.
Access to credit is a critical missing piece for FPCs to scale up their services. Operational, financial, and business sustainability are critical to ensure bank linkage for early-stage FPCs. However, FPCs can also adopt softer approaches to overcome the barriers to access to formal finance. These approaches include the demonstration of the key management person’s competency and business competency, the development of credit relationships with non-banks, sound partnerships for market linkages, and the use of government programs.