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Financing Agricultural Value Chain

Financing Agricultural Value Chain. Gopal Naik Center for Public Policy Indian Institute of Management Bangalore. Types of firms and financing. Financing ‘formal’ vs ‘informal’ sector Interest in ‘formal’ sector High value agricultural projects Integrated projects

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Financing Agricultural Value Chain

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  1. Financing Agricultural Value Chain Gopal Naik Center for Public Policy Indian Institute of Management Bangalore

  2. Types of firms and financing • Financing ‘formal’ vs ‘informal’ sector • Interest in ‘formal’ sector • High value agricultural projects • Integrated projects • But, informal sector dominates the agricultural sector

  3. Constraints in financing ‘informal’ sector • Cost of credit is high • Transaction cost is high • Small amount transaction • ‘process’ constraints • Default rate is high • Higher risk • Natural factors • Poor management practice • Weak risk cover • Policy uncertainties • Poor institutional support

  4. Common Marketing Channel for Commodities Coops E X P O R T Processing Exporters Producers Primary Wholesalers CA Secondary Wholesalers B Distributors Semi- Wholesalers B Retailers B Consumers

  5. Problems in the current value chain • High cost • Quality loss is high • Anonymity of buyers and seller • Absence of grading • Number of times packing, unpacking and handling done is high • Handled by unskilled people • Quality orientation is low • Time requirement is high • Wastage is high • Inadequate information

  6. Overcoming constraints • Reduce transaction cost • Group financing (SHG mode) • Joint liability group • Farmers club • Credit rating • Incentive schemes – KCC • Increase credit limit • Reduce interest rate • Encourage financing through contract farming • Bundle services • Form - input supplies/output marketing • Time/space – loan melas

  7. Reduce risk • Institutional support - facilitating structured commodity financing • Legal/policy support • Contract farming • Grades and standards • Appropriateness • Institutional mechanism • Infrastructural support • Network of warehouses • Grading system • Warehouse receipt system • Tradable warehousing system • Futures contract

  8. Futures contract Legal support FCR Act Institutional support Independent regulator Development support – efficient spot market Regulated market Electronic exchanges Warehouse receipt system Futures Market development Options Market development Participation of financial institution in derivatives market

  9. Key requirements Changes in APMC Act Changes in FCR Act Grades and Standards Tradable Warehouse receipt system Institutional support Market development

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