Empowered lives.

Resilient nations.

POLICY PAPER

Financing for
Farmer Producer Organisations (FPOs)
 POLICY PAPER

Financing for
Farmer Producer Organisations (FPOs)

ACCESS Development Services*

Empowered lives.
Resilient nations.

*The paper has been put together by Monika Khanna and Ram Narayan Ghatak of ACCESS Development Services. It draws from a
background paper drafted jointly by Dr. Venkatesh Tagat and Mr. Muralidharan Thykat, Director (Financial Access to FPOs &
SMEs) Catalyst Management Services (P) Ltd, with research assistance from Anirudh Tagat, Consultant Research Analyst, RBI
Endowment Unit, Institute of Rural Management, Anand.
 CONTENTS
Abbreviations.......................................................................................................................................... 3

Executive Summary.............................................................................................................................. 4

I. Introduction..................................................................................................................................... 5

II. FPO Policy Landscape................................................................................................................. 7

III. Financing the FPOs....................................................................................................................... 9

A. Incubation and Early Stage................................................................................................. 9

B. Emerging and Growing Stage............................................................................................19

C. Matured Stage (Business Expansion)..............................................................................11

IV. Recommendations.......................................................................................................................13

Bibliography............................................................................................................................................16

2 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

ABBREVIATIONS
DAC Department of Agriculture and Cooperation, Ministry of
Agriculture, Government of India
DPIP District Poverty Initiative Project
FAO Food and Agriculture Organization of the United Nations
FIG Farmers Interest Group
FPO Farmer Producer Organization
FWWB Friends of Womens World Banking India
GDP Gross Domestic Product
KfW Kreditanstalt fr Wiederaufbau
NABFINS NABARD Financial Services Ltd.
NGOs Non-Governmental Organizations
PO Producer Organization
PODF Producer Organization Development Fund
PRODUCE Producer Development and Upliftment Corpus
RKVY Rashtriya Krishi Vikas Yojana
RRB Regional Rural Bank
SFAC Small Farmers Agribusiness Consortium
SHG Self-Help Group
UPNRM Umbrella Program for Natural Resources Management

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 3

 EXECUTIVE SUMMARY
Co llectivizing farmers into
Producer Organizations (POs)
has been considered as one of the
sustainability, there is an urgent need
to reorient the funding ecosystem to
support the newly formed FPOs.
way to overcome the challenges faced
by the small and marginal farmers. This paper, further explores the
This approach is demonstrating the financing requirements of the FPOs
potential to be more successful in based on their stages in the life-
breaking farmers dependency on cycle. Stages of the FPOs are broadly
intermediaries, and enabling them categorized into three phases:
access better markets (inputs and Incubation and Early Stage
output). In the last decade, efforts Emerging and Growing Stage
have been made towards creating Matured Stage (Business
and strengthening POs and thus Expansion)
strengthening their position in the
mainstream value chain/s. Over the In each of the stage of the FPO, the
years, there has been a growing interest financial needs were found to be
in promoting an enabling environment different. In early stages, financial need
for the FPOs. Several initiatives have of the FPOs revolves around the cost
been taken by the Government, Apex of mobilizing farmers, registration cost,
financial institutions such as NABARD, cost of operations and management,
private donor organizations, financial training, exposure visits etc. Mostly
institutions and many other institutions the need is met thorough the grant
to support the growth of the FPOs and support. Later in the emerging and
facilitate their emergence as successful growing stage, FPOs need working
business enterprises. capital to run their businesses. As the
FPOs move towards expanding their
Under the 12th Five Year Plan of the businesses, POs need term loans are
Government of India, promotion and needed to set up processing units,
strengthening of FPOs has been processing/grading/sorting yards,
one of the key strategies to achieve storage godowns, cold storage,
inclusive agricultural growth. In the transport facilities, etc.
last three years, the growth of the
FPOs has witnessed a big spurt in Further, this policy paper attempts
the formation of FPOs. Given this to examine the issues relating to
rapid growth of the FPOs, the issue financing the FPOs, and offers some
of access to credit - linking the FPOs recommendations to initiate discussion
to reliable and affordable sources and debate by the policymakers,
of financing to meet their working financiers and practitioners to evolve
capital, infrastructure development consensus to design appropriate
and other needs - has assumed center policies, financial products, and
stage. As the FPOs strive to achieve governance and management
practices.

4 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

I INTRODUCTION

In dia had over 138 million farm

holdings as per the Agricultural
Census, 20111. Of this, about 92.8 million
Limited investment capacity of these
small farms is also an area of great
concern. Access to critical inputs
were marginal farm holdings i.e. having such as quality seeds, fertilizers,
individual operational land holding irrigation water, power and credit
of less than 1 hectare while another have created a hugely disabling
about 24.8 million were small farm ecosystem for the small farms. Most
holdings with individual operational farms do not have access to consumer
land holding size less than 2 hectares. market and therefore are forced to
Therefore, the marginal and small sell their produce to the numerous
farm holdings together accounted intermediaries operate in the market.
for a whopping 85.0 percent of the This reduces their profit margin,
total farm holdings in India in 2010-112. making the farming business, in most
However, their share in the countrys cases, a non-viable one. Therefore,
total operated area was only 44.6 at one hand, we have ever increasing
percent. On a national average, the size prices of agricultural inputs, and on the
of operational land holding of each other, profit margin of the farms are
farm varied from 0.39 hectare in the not increasing proportionately, leading
case of the marginal farm holdings to to a situation of crisis where the small
1.42 hectares for small farm holdings farms struggle to survive. The spate
to 17.38 hectares in the case of the of farmer suicides in different parts of
large farm holdings, which worked out the country only epitomizes this crisis.
to 1.15 hectares for all farm holding Market oriented reforms have largely
groups taken together. Such is the been unable to reach the agricultural
predominance of small farms in Indian sector regulated processing, market
agriculture. As per estimates, about 1.5 and distribution continue to stifle most
to 2.0 million new marginal and small agricultural value chains and market.
farms are being added every year due Several laws and policies that govern
to continued land fragmentation3. the agricultural sector today have lost
their relevance long back demanding
Indian agriculture, therefore, is a small their repeal sooner than later4. Thus,
farm activity. A large majority of them the agricultural sector needs an urgent
are dependent on monsoon to raise overhaul of governance to ensure
their crops. Being small farms they agricultural growth keeps pace with
have natural disadvantage to achieve the overall growth of the economy,
scale to justify high investment. guarantee food security of the nation

1
Government of India, Agricultural Census, 2011.
2
Government of India, Agricultural Census, 2011.
3
NAC Draft Document 2012-13 by the Working Group
4
The World Bank Working Paper on Agricultural Reforms in India, 2006.

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 5

 and assure enhanced livelihood for the of Agriculture and Cooperation,
people engaged in farming. Ministry of Agriculture, Government of
India) and NABARD, have emerged as
As the small farms struggle to get the driving force in supporting and of
access to inputs, market and credit FPOs. The Approach Paper to the 12th
they need a level playing field to be Five Year Plan reiterates its focus on
able to compete with other market aggregating the produce of the small
players in equal terms. Due to factors and marginal farmers through FPOs,
beyond their control and absence enabling them to reach large and high
of institutions to safeguard their value markets to realize better price
interests, they are unable to integrate for their produce.
with the agricultural value chains, fight
the risks and vulnerabilities such as Furthermore,many donor organizations
commodity price volatility, crop failure, are focusing on formation and
insect pest-attacks etc. on their own. strengthening of producer companies
Considering the legal environment and (POs) as a key element of their
political sensitivity of the agricultural development strategies. The Ford
sector, there is a gradual recognition Foundation has placed a grant of
that one of the ways to overcome the USD 690,0005 with the Client Fund
challenges as described above, could of Rabobank Foundation to provide
be to collectivize the farmers into guarantee to the Indian Financial
Producer Organizations (POs) - be they Institutions who would lend to FPOs.
are producer companies, cooperatives Even, many bilateral and international
or, any other form. The approach is organizations and financial institutions
considered to be helpful in integrating are taking keen interest in developing
the farmers directly, through their the ecosystem for growth of the FPOs/
institutions (producer companies/ POs.
cooperatives), to market, for both,
Traditionally, FPOs/POs were
inputs and output. The approach
organized mostly under the co-
envisions collective processing and
operative structure. However, due
marketing whereas production is
to various legal obstacles and low
largely left to the individual small
efficiency, the government support
farms, as they too, are considered
to the cooperatives has declined
to have some unique advantages to
over the years, and gave birth to
raise productivity, increase income
producer companies with regulatory
through diversification and high
framework similar to that of
value agriculture. The initial results
companies while retaining the unique
also, have been quite encouraging to
elements of cooperative businesses.
catch the attention of many public
Though FPOs/POs include producer
and private sector organizations to set
companies and cooperatives, this
up more number of Farmer Producer
paper attempts to examine the
Organizations (FPOs). This interest is
issues relating to financing the FPOs,
primarily based on the premise that
particularly the producer companies,
FPOs give small farmers bargaining
and offers some recommendations
power in the market place, enable
to initiate discussion and debate
cost-effective delivery of extension
by the policymakers, financiers and
services, and empower the members
practitioners to evolve consensus to
to influence the policies that affect
design appropriate policies, financial
their livelihoods. In recent years, SFAC
products, and governance and
(Society promoted by the Department
management practices.

5
https://www.rabobank.com/en/about-rabobank/rabobank-foundation/rabobank-foundation-news/2013/
Partnership_Ford_Foundation_and_Rabobank_Foundation.html

6 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

II FPO POLICY LANDSCAPE

Du ring the last couple of years,

there has been a growing
interest in promoting an enabling
witnessed a big spurt in the formation
of FPOs. With large scale promotion
of FPOs, the Government of India
environment for the FPOs. Several has initiated the following policies
initiatives have been taken by the to create an enabling ecosystem to
Government, the Apex financial strengthen the FPOs.
institutions such as NABARD, private
donor organisations, financial The Government has issued the
institutions and many other institutions National Policy and Process
to support the growth of the FPOs and Guidelines for Farmer Producer
facilitate their emergence as successful Organizations in March 2013, laying
business enterprises. SFAC particularly the framework for mobilization
was mandated by the Government to of FPOs with a dedicated source
support formation of FPOs. SFACs of funding from the RKVY
initiative, started in 2011-12 under programmes.
two Central Government Schemes
- the National Vegetable Initiative It also launched the Equity
for Urban Clusters (NVIUC) and the Grant and Credit Guarantee Fund
Integrated Development of 600,000 Scheme for FPOs in January,
pulses villages in rainfed areas - has 2014, enabling the FPOs to access
since expanded its scope, and includes a grant up to INR 10.00 lakh to
Special FPO projects being taken up double members equity and seek
by some State Governments under the collateral-free loan up to INR 1.00
Rashtriya Krishi Vikas Yojana (RKVY0 crore from banks, which in turn can
funds and the National Demonstration seek 85 percent cover from the
Projects under the National Food Credit Guarantee Fund.
Security Mission (NFSM).
All major centrally sponsored
Under the 12 Five Year Plan of the
th schemes of the Department of
Government of India, promotion and Agriculture and Cooperation
strengthening of FPOs has been one of (DAC) have incorporated special
the key strategies to achieve inclusive provisions for promotion and
agricultural growth. In the last three development of FPOs during the
years, the growth of the FPOs has 12th Plan.

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 7

 SFAC has been designated as a Accordingly, NABARD launched its
central procurement agency to INR 2,000 crore Food Processing
undertake price support operations Fund in November 2014 where
under the Minimum Support Price FPOs will be one of the recipients.
(MSP) programmes for pulses and
oilseeds and it will operate only In line with these initiatives, the DAC
through FPOs at the farm gate. announced 2014 as the Year of the
Farmer Producer Organizations.
The Union Budget, 2014- Till October 2014, SFAC organized
15 proposed to supplement 238,139 farmers into Farmer Interest
NABARDs Producers Organisation Groups (FIGs), in turn, to federate into
Development Fund with a sum of 218 registered FPOs and 19 more are
INR 200 crore which will be utilised in the pipeline. To add to this, SFAC
for building 2,000 FPOs across the is promoting 150 new FPOs in West
country over the next two years. Bengal and Madhya Pradesh.

8 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

III FINANCING THE FPOS
Gi ven this rapid growth of the
FPOs, the issue of access to
credit - linking the FPOs to reliable and
through the various systems and
processes, including most importantly
governance, for self- management.
affordable sources of financing to meet
their working capital, infrastructure In the past a few NGOs were promoting
development and other needs - has FPOs to leverage scattered donor
assumed center stage. As the FPOs funding. In the recent years, after
strive to achieve sustainability, there is SFACs push - to address the challenges
an urgent need to reorient the funding facing the small farmers in terms of
ecosystem to support the newly access to investment, technology and
formed FPOs based on the stages in markets and to act as a nodal agency to
their life-cycles. The life-cycle stages coordinate with the State Governments,
are broadly categorized into three civil society, private sector, financial
phases and in each of these phases, the institutions, resource persons and
needs are found to be very different as with a range of other stakeholders
showed in the figure below. to enhance production, productivity

MATURED STAGE (BUSINESS

EXPANSION)
Debt Capital
EMERGING & GROWING STAGE Term loans
Equity Financing
Working Capital
INCUBATION & EARLY STAGE and profitability of the small farmers
Grant Support for training,
exposure & system
- there have been significant efforts
development. made by apex government institutions,
multilateral and bilateral organizations
and other players.
A. Incubation and Early Stage NABARD has been financing FPOs since
2011 under the Producer Organisation
At this stage, the financial need of
Development Fund (PODF). Prior to
the FPOs revolves around the cost of
the setting up of PODF, NABARD was
mobilizing farmers, registration cost,
funding producer collectives under
cost of operations and management,
the Umbrella Program for Natural
training, exposure visits etc.
Resources Management (UPNRM),
Accordingly, the agencies engaged
bilaterally funded by KfW/GIZ and
in promotion of FPOs require grant
NABARD. The other donors in this
support to set up FPOs, take them
space were the World Bank to support

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 9

 the District Poverty Initiative Program Equity Financing Given the limited
(DPIP), Rabobank Foundation, Sir investment capacity of the small and
Ratan Tata Trust, Ford Foundation and marginal farmers, limited contributions
HIVOS and many others are made by individual farmers to
raise the FPOs equity which often
Despite the above said initiatives in cannot sustain the operations of the
terms of grant support to incubate FPOs. In order to augment the equity
FPOs, many promoting institutions base of the FPOs, the Union Budget,
face the challenges in strengthening 2013-14 announced major initiatives
the FPOs already set up. Some of by providing matching equity grants
the challenges faced by both the and INR 50 crore was sanctioned and
promoting institutions and the FPOs implemented since 2013-14 onwards.
include: The scheme is known as the Equity
Grant Fund and is managed by SFAC.
Most projects funded by Currently, the scheme qualifies Famer
donors are limited to 24 to Producer Companies (FPCs). The
36 months life cycle. The Equity Grant Fund enables eligible
experience of most promoting FPCs to receive a grant equivalent in
institutions supports that amount to the equity contribution of
there is a need to provide their shareholder members in the FPC,
handholding support to FPOs thus enhancing the overall capital base
for a minimum period of 5 to of the FPC. The Scheme supports the
7 years so as to initiate their nascent and emerging FPCs, which
business operations. have paid up capital not exceeding INR
30 lakh as on the date of application.
Currently, start-up risks are
not covered in FPO promotion Working Capital As soon as
programmes. Unlike the promotional grant support ends,
traditional livelihood projects, promoting institutions face challenges
the FPOs are business entities to meet up the operational expenses of
and so, are vulnerable to the FPOs. In most cases it is found that
market factors/fluctuations. the FPOs hardly reach the breakeven
point to achieve commercial viability.
FPOs cannot access As the FPOs begin early stage business
international fund as they do activities such as bulk purchase of
not have FCRA exemption, inputs, they need working capital.
thereby making promoting Though the FPOs, at this stage, are
institutions play a critical role expected to generate their own funds,
for fund support. it takes anywhere between four to
five years for them to stabilise their
B. Emerging and Growing activities so as to be able to raise funds
Stage to continue with their activities. The
FPOs dealing with commodities such
Once FPOs are incubated with grant as pulses and oilseeds - which can be
support from promoting institutions, stored - stabilise faster as compared
there are 3 ways to raise fund to meet to those that deal with perishables
their working capital and investment such as fresh vegetables and fruits. It
need. They include - Equity Financing, is said that credit capital can also be
Credit Capital and Debt Financing. obtained from potential buyers who
give a grace period before the amount

10 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

is due or interest is charged. Even, quality improvement along the value
the producers who sell their produce chain of the produce. For example,
to the FPCs do not hesitate in giving the FPOs dealing with pulses would
credit period to the FPC if convinced require loan for small dal mill, cotton
about the soundness of the business ginning units for the FPOs in cotton
idea. In practice, most FPOs struggle growing areas, decorticators in ground
to get such credit facilities. nut and so on. This will also serve to
incentivize innovation in the value
It is no wonder that without chain from the FPOs and their farmer-
access to credit, the FPOs cannot members
realize their full potential. To meet
credit requirement of the FPOs, Term loans are required to build
the Livelihood and Micro finance infrastructure that the FPOs want to
Promotion Fund (LAMP FUND) was develop, when they feel the need to
established in 2001 with contribution create the facilities of their own in
of INR 20 lakhs from Indian Grameen order to move up the value chain. Term
Services, a BASIX group of company. loans are typically needed to set up
Currently there are a few other players processing units, processing/grading/
who are active in this space such as sorting yards, storage godowns, cold
the ProCIF program of Hivos that tries storage, transport facilities, etc.
to collaborate by focusing on credit as
a critical intervention. The programme At present, most formal financial
implementation is managed by institutions provide short-term loans
creating an ecosystem to make the in the form of crop loans to the
producer companies credit ready. farmers and working capital limits
As the FPO progresses from being for marketing of crops. In addition, a
a start-up entity to a more mature few banks have been providing term
organisation, they build themselves loans for investment in agriculture. In
trade-ready and have a track record the case of the FPOs, it is necessary
to attract finance from formal financial that the banks recognise the need for
institutions and commercial banks. The mixture of short term working capital
other examples to provide working and term loans to enable FPOs plan
capital are FWWB, Maanviya Holding their business development activities.
(Oikocredit), NABFINS, Ananya A few commercial banks have been
Finance etc. Some commercial banks funding agribusiness companies for
who offer similar financial assistance procurement of raw material but rarely
to FPOs are ICICI Bank, Union Bank do they include FPOs.
of India, Canara Bank, Vijaya Bank,
Ratnakar Bank etc. These are very few Accordingly, the RBI included financing
and exceptional cases where financing to FPOs up to INR 2 crore under Direct
has happened on the merit of the case. Agriculture finance under the Priority
Sector Lending (PSL) and loans up
C. Matured Stage (Business to5 crore to FPCs were considered to
be included under Indirect Agriculture
Expansion)
finance. The Credit Guarantee Fund,
As the FPOs move towards expanding set up as per 2013-14 Union budget
their businesses, they need finance announcement, is expected to provide
for quality improvement in products/ Credit Guarantee Cover to eligible
services. Here, finance is required for lending institutions to enable them to

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 11

 provide collateral free credit to FPCs loans to mature FPOs at market rates
by minimizing their lending risks in to cover both operation and working
respect of loans not exceeding INR 1 capital requirements. In this initiative,
crore. Caspian Debt Fund, a part of Caspian
Impact Investments partnered with
To promote agro-processing, NABARD ProCIF. The ticket size of loan ranged
set up a fund of INR 2000 crore to from INR 50 lakh to INR 3 crore per FPO.
make credit available to designated The FPOs can also avail warehouse
Food Parks. Among other entities, receipt finance. As part of the revised
the FPOs are also entitled to avail PSL guidelines, loans to farmers
loans from this fund for establishing up to INR 50 lakh against pledge/
designated Food Parks and setting hypothecation of agricultural produce
up of individual food/agro processing (including warehouse receipts) for
units in the designated Food Parks6. a period not exceeding 12 months, is
included as direct lending under the
Other initiatives include the debt fund PSL. However, not many FPOs are able
component of ProCIF which provides to benefit from the scheme due to
varied reasons.

https://www.nabard.org/pdf/Food_Processing_Fund_guidelines_11_Nov_2014_MOFPI.pdf
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12 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

IV RECOMMENDATIONS

Th ere have been many discussions

and working groups with
select group of experts to who are
2. Advocacy with Banks: Despite
RBIs directive to banks on financing
of FPOs, their response can best be
actively engaged in addressing the described as lukewarm in meeting
issues in financing the FPOs7. Based credit needs of the FPOs. Many
on their suggestions, the following branches of banks are unaware of
recommendations are being made. the policies regarding FPOs and
they need to be educated. It is
1. FPOs Advocacy by SFAC & recommended that NABARD and
NABARD: As has been discussed SFAC may take lead in educating
earlier, there is need to promote the banks for financing the FPOs.
FPOs on a scale like the SHG The awareness should start at state
movement. The SHGs got level and district level forums such
prominence because of NABARDs as State Level Bankers Committee
continuous support of the concept (SLBC) and District Consultative
and coordinating with Government Committee (DCC) meetings held
agencies to create an enabling by banks. Applications from FPOs
policy environment. Similarly to the banks could be reviewed at
for FPOs, it will be necessary to these meetings to assess progress
take up advocacy not only with in implementation.
different government agencies
but also with banks and other 3. Role of Regional Rural Banks
financial institutions. SFAC and (RRBs) on financing FPOs: As most
NABARD are already engaged FPOs are located in rural areas and
with SFAC taking the lead bulk of financing requirements are
particularly in working with the going to be for working capital,
State Governments but the work the RRBs could play a pivotal role
with the banking sector needs in financing the FPOs. The RRBs
momentum and hence, NABARD could provide working capital such
has a much bigger role to play. as cash credit facility, crop loans to
farmers, SHGs loans to FIGs/SHGs

7
Working group discussions of the erstwhile National Advisory Council; Roundtable discussions held by
SFAC and FWWB on 12th July 2012 (The Hindu, 2013); First FPO Working Group Meeting held at IIM
Bangalore organized by IIM-B, NABARD and Access Development Services on 5th April 2014 and Second
FPO Working Group Meeting organized by ACCESS Development Services on 26 September 2014 at
Delhi.

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 13

 for raising crops and such other catering to the sector). RBI and
agricultural needs directly as they NABARD could jointly take a view
have location advantage being on the creation of new banking
close to the FPOs. It will be good entity in the light of the Nachiket
if NABARD makes appropriate Mor committee recommendations.
policies for RRBs to extend
working capital finance as well as 6. Early stage funding: NABARD/
term loans to FPOs. SFAC may earmark separate fund
for early stage nurturing of FPOs
4. Interest subvention for FPOs: to meet both capacity building
Presently crop loans are available and mentoring needs which are
for farmers at 7 percent for loans grant based and operational
up to INR 3 lakhs. With the interest expenses as well as other business
subvention scheme the interest needs such as value chain studies
gets even lower for the farmers and business plans which could be
who repay the loan promptly. met out of soft loans.
Since the FPOs are owned by
small and marginal farmers, the 7. Guarantee Fund: The current
scheme could be extended to Credit Guarantee Fund is set up to
the FPOs as well, especially for guarantee loans provided by Banks
the start-up FPOs who need such and RRBs up to 75 percent to 85
support. percent of loans sanctioned to
the FPOs. This is especially meant
5. Agri-Business Bank in India: The to encourage banks to provide
expert committee at the IIM-B collateral free loans up to INR 1
(Indian Institute of Management, crore. There should however be a
Bangalore) roundtable8 felt that Guarantee Fund to cover lending
there is no bank dedicated to to other legal forms of FPOs and
do agriculture lending in India, producer companies beyond INR 1
while such specialised banks crore.
exist in other countries in the
world (including other Asian 8. Research & Development Fund:
countries like China, Philippines There is need for a number of
etc). Agriculture lending by research/studies relating to FPOs
banks is seen as a part of the in respect of their operations,
priority sector lending to be met market access and finance. The
as a statutory obligation rather need for ratings of FPOs on the
than a business opportunity. This lines of SHG rating would improve
is because the opportunity in credit worthiness of the FPOs.
contrast to manufacturing and There are a number of such
services sector, agriculture is initiatives around the globe and
characterised by high seasonality, it will be useful to document such
price volatility, long lead times work and build knowledge.
and complex value chains. As a
consequence, loan products for 9. Price risk cushion fund: Price risk
this sector needs to be designed is a major impediment and a high
appropriately otherwise the risk that FPOs will face especially
agribusiness sector will not take when they purchase from farmers,
off (which justifies why some store and sell. This happens when
countries have specialised banks there is a glut in the market and

8
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14 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

 sometimes the price falls even it is suggested to develop a
lower than the purchase price. In rating tool for the FPOs and rate
such situation there needs to be a the functioning of the FPOs on
mechanism to cover price risk so activities such as governance,
that the FPOs do not bear such management, risks mitigation, and
shocks in the early stages of their sustainability. Based on the score
development. received by the FPO, credibility
with investors and formal financial
10. Taxation Currently agri-process- institutions could be established.
ing VAT is paid on the entire value.
There is need to put forth an ar- 13. Boosting Warehouse Receipt
gument for such tax to be paid on Financing - It is important to
True Value Added, so on 10% (or highlight the role of the collateral
for the purchaser to pay purchase managers in ensuring the quality
tax) with the Ministry of Finance. of the farm produce is market
standard because quality is an issue
11. Corporate Social Responsibility that makes dealing in agricultural
To work with Ministry of Corporate produce so cumbersome. They
Affairs to include funding of FPOs also have an important role to play
as a legitimate CSR activity. in finding buyers/market players at
right price from the FPOs.
12. Development of FPO Rating Tool
Amidst the spur in promotion of With the above changes, it would
the FPOs over the last decade, be possible that the FPOs will
there is a need to differentiate have a better ecosystem to grow
the well-functioning and credit transforming the rural areas,
worthy business entities/FPOs. creating more jobs and making
On the lines of the rating tool the growth of the country more
for the microfinance institutions, inclusive.

FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs) 15

 BIBLIOGRAPHY

Go vernment of India (2013a):

State of Indian Agriculture
2012-13. (New Delhi: Ministry of
The Hindu (2013). Advisory Council
Urges Govt To Promote Farmer
Producer Organisation, Jan 30, 2013.
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16 FINANCING FOR FARMER PRODUCER ORGANISATIONS (FPOs)

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