Just two decades ago, providing credit to low income people was seen as unviable in India. The scale and the reach that Microfinance as a model achieved, amply demonstrated the ability to replicate an approach that made small credits available to excluded markets as well as households. However these excluded households are not operating in vacuum but are dependent on the value chain of the economic activity that they are engaged in. And if that value chain happens to be Agri and Allied activities then the challenge of these households to access formal financial services becomes even more pronounced given that there is no focused intervention to cater to this segment. Their financial needs are generally too large for microfinance, but too small for commercial banks. This gap hampers growth and limits agricultural development.
Agricultural value chain actors need access to finance to develop their businesses. For example, take smallholder farmers with fragmented land holdings. Smallholder farmers have very restricted access to markets and lack access to warehouses or storage facilities to store their harvest. Consequently, they are strained to sell their surplus produce during the harvest season, when the prices are low. Intermediaries (traders) who can invest their capital as well as have storage space and time, again take advantage of smallholders’ limitations: they accumulate agricultural harvest at very low prices and sell them during the most beneficial market conditions. In addition, farmers face enormous difficulties in obtaining credit for their agricultural activities because of the lack of financial services in rural areas.
Despite various efforts of stakeholders in this area, there continues to be huge demand-supply mismatches in financing these value chains and enterprises. Traditionally informal sources have been the main source of internal and external finance for Agriculture value chains and MSMEs. Because of the fractured supply chains and broken market linkages, enterprises in the agri – value chains run the risk of underutilization on investments made, keeping prospective financiers at a distance. But all the above challenges can be dealt with by leveraging relationships between suppliers & buyers and financial institutions can play a critical role in making these value chains more proficient.
When it comes to financing Value chains and the MSMEs operating in these chains, there is a need for a new approach – Samunnati is close enough to the actors of the value chain to verify cash flows and income flows of the enterprise and finance them through financing relationships across the value chain. These relationships can be structured by trapping information and cash related to payments in the value chain, instead of only collateral based approach.