India-based Samunnati Financial Intermediation and Services Pvt Ltd., a recent addition to the responsAbility portfolio, provides financing for agricultural value chains. This is how its efficient and scalable business model works.
Samunnati is a fast-growing agriculture value chain finance institution based in India. It lends to the entire spectrum of agriculture players, from small retail (farmers) to larger SME borrowers.
Unmet demand = market opportunity
In India, agriculture value chain financing is a large addressable market opportunity with headroom for growth, as the current competitive landscape including banks and Non Bank Financial Institutions (NBFC) are not completely servicing the market.
Most financing providers tend to focus on one particular element of the value chain, e.g. farmers or milk processors. Because of the strong interdependencies within the value chain, all actors require access to financing, to guarantee overall growth.
The value chain financing model
In response to this need, Samunnati provides loans to various players in the agriculture value chain, from agriculture SME loans to smaller retail loans. This financing approach requires an in-depth understanding of a specific agricultural value chain. Below is the example of dairy.
The dairy value chain
The value chain lending approach bases its lending decisions based on ‘social capital’ as well as ‘trade capital’.
Social capital: one business guarantees other businesses’ loans. This group lending mechanism, well known in microfinance, facilitates the decision of whether to lend or not.
Trade capital: a business’ record of transactions of buying/selling goods. This type of record supports the decision of how much to lend.
Risk mitigation + collateral
The value chain focus results in a deep understanding of the financial requirements of the players across the chain. In addition, it allows the financing partner to develop assessment data, risk mitigation measures and collateral secured through the trade relationships between the players.
Besides utilizing the buyer-seller relationship to efficiently access multiple new clients in one go, the business model also uses an effective payment mechanism: deduction at source. Farmers receive their loans from an aggregator who simply deducts the amount due for credit from its payment for milk.
The model explained: how value chain financing works
The parties involved
In the case of a dairy value chain the financing provider first approaches a large dairy company to get a list of its suppliers on district level. These suppliers, aggregators of milk, typically collect milk from 50-200 farmers and supply the milk to chilling plants.
How the financing works
The aggregator identifies farmers it would guarantee for and receives secured loans. The aggregator then provides small ticket loans to the individual farmers for financing the purchase of cattle
Who benefits – and how
By purchasing additional cattle the farmer has more milk to sell.
The aggregator receives more milk from the farmer and increases its turnover.
The dairy company receives more milk from the aggregator and increases its turnover.
Increased dairy production meets rising demand and adds to food security for society.
By cost-efficiently accessing new clients the financing partner increases its quality portfolio.
In addition, the company provides financing solutions to Farmer Producer Organizations (FPOs) or Consumer Based Organisations (CBOs). saFPOs are farmer owned organizations that leverage the collective size of small farmers to provide various services such as inputs, loans, infrastructure, offtake etc. Repayments on loans to farmers, directly or indirectly, are deducted at source at the FPO level. Key products offered to FPOs include:
Samunnati financial services pvt ltd.: development impact
Samunnati was founded with a vision to enhance the value of all players across the agriculture value chain by providing financial intermediation, market linkages as well as advisory services. The agriculture value chain in India, on the producer side, consists mainly of small and marginal farmers. The aim is to grow the entire value chain, improving the living standards of all.
Agriculture is the principal source of livelihood for over 50% of the Indian population while only contributing 17% of the Indian GDP. By financing smallholder farmers and agricultural companies, Samunnati positively impacts livelihoods in rural India. Because of lack of institutional credit in other parts of the value chain, as well as lack of market linkages, farmers are compelled to sell soon after harvest, leading to lower incomes than is the potential. Samunnati helps meet the market need by going to aggregator producer companies, that allows farmers to receive collective benefits through better price realisations, access to formal credit and technical know-how.
Number of smallholder farmers financed (Direct): approx. 15,000 (as on Dec, 2017)
Loans to smallholder farmers: USD 21 m
Samunnati Financial Services offers secure jobs in an inclusive environment with good working conditions and, in doing so, contributes to sustainable economic growth. By enabling agricultural value chains to grow, Samunnati furthermore contributes to the creation of employment, especially in rural India.
Number of employees: 210
Healthy ecosystem & resource security
By enabling agricultural value chains to grow, Samunnati Financial Services contributes to an increase in food production which results in food security for growing populations.
Markets & infrastructure
It is estimated that only 30% of the total agriculture demand in India is met by institutional credit. As banks require land as a collateral for lending, they tend to focus on crop loans or agricultural input loans. Most Non Banking Financial Institutions act as captive financial institutions focused on equipment, commodity and warehousing loans. The agriculture sector has not been able to utilize this credit effectively due to rigid nature of products, credit appraisal and disbursement. By targeting entire value chains to grow, Samunnati Financial Services contributes to building market infrastructure in the agricultural sector.